SSE Annual Report 2008 | Quarterlytics

FY2008 Annual Report · SSE

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Answering
the right
questions

Scottish and Southern Energy plc
Annual Report 2008

SSE’s core purpose is to provide the energy
people need in a reliable and sustainable way.

The right questions

SSE’s 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 and utility businesses.
Over the next decade, many key questions will
be asked of companies in the energy sector.
SSE addresses these questions in this report.

How do we respond to rising global
energy demand?

pg 6-7

SSE’s priority is to maintain a diverse
portfolio of efficient power stations and
avoid dependency on any single primary
fuel source. This diversity, with a growing
emphasis on renewable energy, also enables
SSE to manage the risks associated with
primary fuel procurement at times of volatile
and rising energy prices.

How do we help customers save energy?

pg 14-15

SSE encourages its customers to reduce
their consumption of energy through
initiatives including: the UK’s first energy
tariff designed to reward reduced energy
consumption; and trials of smart meters
and real-time displays which enable
customers to track their energy use.

How do we ensure our networks
are reliable?

pg 20-21

SSE targets investment to benefit the
greatest number of customers through
initiatives including: automating switching
devices to help restore power more quickly
when there are interruptions; and replacing
open wire overhead conductors with covered
wires that are more resilient to adverse
weather conditions.

How do we secure energy supplies
for customers?

pg 30-31

SSE recognises the UK’s growing
dependence on imports of gas – and the
resulting risk to the security of energy
supplies, given gas is used for generating
electricity as well as heating homes, offices
and businesses. To address this, SSE is
investing further in developing large-scale
gas storage facilities, which will be
strategically important to the UK.

01 Contents

01
Providing Energy

Chairman’s Statement

Chief Executive’s Statement

02
Business Statement

Overview

Generation and Supply

1. Overview

2. Generation

3. Energy Supply

Networks

4. Overview

5. Electricity Networks

6. Gas Networks

7. Telecoms Networks

Energy-Related Services

8. Overview

9. Contracting, Connections and Metering

10. Energy and Home Services

11. Gas Storage

Financial Overview

12. Investment and Capital Expenditure

13. Financial Management and Balance Sheet

Corporate Responsibility

Key Performance Indicators

Performance Indicators

Scottish and Southern Energy Annual Report 2008

03
Directors’ Report

Corporate Governance Report

1. Organisation and Structure

2. Board Effectiveness

3. Board Committees

4. Audit Committee

5. Remuneration Committee

6. Nomination Committee

7. Risk Committee

8. Executive Committee

9. Health, Safety and Environmental

Advisory Committee

10. Accountability, Risk Management

and Internal Control

11. Key Risks and the Control Environment

12. Going Concern

13. Communication with Shareholders

and Major Stakeholders

04
Directors’ Biographies and Responsibilities

Remuneration Report

05
Independent Auditors’ Report

Consolidated Income Statement

Balance Sheets

Statements of Recognised
Income and Expense

Cash Flow Statements

Notes on the Financial Statements

1. Significant Accounting Policies

2. Segmental Information

3. Other Operating Income and Expense

4. Exceptional Items and Certain

Re-measurements

5. Directors and Employees

6. Finance Income and Costs

7. Taxation

8. Dividends

9. Earnings Per Share

10. Intangible Assets

11. Property, Plant and Equipment

12. Investments

13. Subsidiary Undertakings

14. Acquisitions and Disposals

15. Inventories

16. Trade and Other Receivables

17. Cash and Cash Equivalents

18. Trade and Other Payables

19. Current Tax Liabilities

20. Construction Contracts

21. Loans and Other Borrowings

22. Deferred Taxation

23. Provisions

24. Share Capital

25. Reserves

26. Retirement Benefit Obligations

27. Employee Share-Based Payments

28. Financial Instruments and Risk

29. Related-Party Transactions

30. Commitments and Contingencies

31. Analysis of Net Debt

06
Shareholder Information

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100

103

116

117

118

119

Directors

Financial
Calendar

Sir Robert Smith
Chairman
Ian Marchant
Chief Executive
Gregor Alexander
Finance Director
Nick Baldwin
Non-Executive Director
Richard Gillingwater
Non-Executive Director

Colin Hood
Chief Operating Officer
René Médori
Non-Executive Director
Alistair Phillips-Davies
Energy Supply Director
Susan Rice CBE
Non-Executive Director
Sir Kevin Smith CBE
Non-Executive Director

Annual General Meeting
24 July 2008
Ex dividend date
20 August 2008
Record date
22 August 2008
Final dividend payable
26 September 2008
Interim announcement
12 November 2008

*Unless otherwise stated, this Annual Report
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. In addition, it 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.

Scottish and Southern Energy Annual Report 2008

01 Providing Energy

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1. Energy Supply
SSE supplies electricity and gas to
8.45 million customers within the UK’s
competitive electricity and gas supply
market, with growth continuing in the new
financial year. This makes it the second
largest supplier of energy in the UK.

2. Water Supply
SSE’s subsidiary, SSE Water (SSEW), will
become the first new company to offer
both water and sewerage services since
privatisation in 1989. This followed the
granting of an ‘inset’ appointment to SSEW.

3. Home Services
SSE supplies a wide range of electrical and
gas appliances and a range of maintenance
and protection services for customers’ gas
and electrical systems and a full range of
gas and electrical installation services. Its
shield gas boiler, central heating and wiring
protection service has 70,000 customers.

4. Energy Services
SSE provides bespoke energy solutions
featuring on-site or off-site dedicated wind
turbines, solar thermal systems, solar
photovoltaic systems and ground-source
heat pumps. Its Energy Services division
operates and maintains site-wide energy
infrastructures of this kind that improve
environmental performance over
conventional alternatives.

5. Electricity Networks Management
SSE’s objective in electricity networks is to
ensure that they are managed as efficiently
as possible, including maintaining tight
controls over operational expenditure and
effectively delivering capital expenditure,
so that the number and duration of power
cuts experienced by customers is kept to
a minimum.

6. Contracting
SSE’s Contracting business 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.

7. Telecoms
SSE Telecom and Neos Networks operate
an 8,000km UK-wide telecoms network,
providing services to other telecoms
providers, companies and public sector
organisations.

8. Electricity Networks Infrastructure
SSE is responsible for around 127,000km
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.

Scottish and Southern Energy Annual Report 2008

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9. Onshore Wind
SSE owns and operates around 600MW
of onshore wind farm capacity in Scotland,
Northern Ireland and the Republic of Ireland
and has consent to build another 400MW in
various locations. Its Hadyard Hill wind farm
in South Ayrshire was the first in the UK to
generate over 100MW of electricity.

10. Offshore Wind
SSE has consent to build a 288 megawatt
(MW) offshore wind farm in Germany and
is to construct a 504MW offshore wind farm
at Greater Gabbard in the outer Thames
Estuary. On completion, it is expected to be
the largest offshore wind farm in the world.

11. Hydro
SSE’s total output from its hydro electric
stations (excluding pumped storage) during
2007/08 was 3,518GWh. This compares
with 3,767GWh in the previous year, which
was the fourth highest on record. The
construction of what will be SSE’s second
largest conventional hydro electric station
at Glendoe, near Loch Ness, is now entering
its final phase.

12. 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 1.8km below the
surface, creating 325 million cubic metres
(mcm) of gas storage capacity.

13. Gas Networks
SSE holds 50% of the equity of Scotia Gas
Networks plc, which owns and operates the
Scotland and the Southern gas distribution
networks. The networks comprise some
74,000km of gas mains, delivering gas to
around 5.7 million industrial, commercial
and domestic customers.

14. Generation Portfolio
SSE owns around 10,500MW of electricity
generation capacity, including its share
of joint ventures and associates. This makes
it the second largest electricity generator
across the UK and Ireland. The capacity
comprises 4,500MW of gas- and oil-fired
capacity, 4,000MW of coal-fired capacity
(with biomass ‘co-firing’ capability), and
over 2,000MW of renewable capacity.

Scottish and Southern Energy Annual Report 2008

01 Chairman’s Statement

SSE’s core purpose
is to provide the energy
people need in a reliable
and sustainable way.

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Sir Robert Smith Chairman

Scottish and Southern Energy delivered
very good operational and financial results
in 2007/08, a challenging year for the sector in
which many key questions were asked about
the sustainability, reliability and affordability
of energy. The maintenance of our policy of
responsible pricing helped us to gain 700,000
additional electricity and gas customers,
making us the UK’s second largest energy
supplier. Our power stations performed well,
as did our electricity networks, enabling us
to contribute significantly to the security
and reliability of the UK’s energy supplies.

Investment
Securing future supplies and tackling
climate change are the twin goals of energy
policy in the UK, Ireland and throughout
the European Union, and our expanding
programme of investment reflects this.
It should enable us to create value for
shareholders to complement the value
enhancement which flows from continually
improving our day-to-day operations. We
will continue to focus on our energy and
infrastructure related businesses in the
UK and, following the recent acquisition
of Airtricity, in Ireland. That acquisition also
provides us with the scope to build on our
UK-leading position in renewable energy
to develop an international business
in this increasingly critical area.

Customers
SSE’s core purpose is to provide the energy
people need in a reliable and sustainable way,
and I am pleased that our energy distribution
businesses and our energy supply business,
on which millions of households up and down
the country rely, performed well. Clearly,
as global demand for energy soars, the price
paid by customers is higher than anyone

would like. Nevertheless, customers to whom
SSE supplies energy have the assurance of
our responsible pricing policy: we will
continue to seek to be the last, or one of the
last, of the major suppliers to put up prices
if we have to and the first, or one of the first,
to bring them down if we can.

Responsibility
Shareholders expect companies not simply
to be profitable, but to be responsible in how
those profits are made. SSE’s core activities
clearly have an environmental impact, but
it is one which we are working to reduce
significantly. I am therefore pleased that
we have set ourselves a new and more
challenging target of reducing the carbon
intensity of electricity generated at power
stations in which we have an ownership or
contractual interest, by 50% by 2020. We will
report on progress against this new target
in next year’s Annual Report.

People
Responsible companies are the ones which
prosper in the long-term, and SSE is a
company that is built to last. It is staffed
by an exceptional team of people, who have
discernible pride in and passion for their
organisation. This pride and passion strikes
me and the non-Executive Directors whenever
we meet anyone from the company and is
something with which we, in turn, are very
proud to be associated.

One of those Directors, Sir Kevin Smith,
has decided to step down from the Board
after four years of service and so will not
be seeking re-election at the Annual General
Meeting in July. Sir Kevin’s long experience
in industry has given him an excellent insight
into the issues facing SSE and the company

has benefited greatly from his outstanding
contribution to the work of the Board.

Dividend
We are also proud to be associated with
SSE’s track record of dividend growth. The
Board is recommending a final dividend of
42.4p, making a full-year dividend of 60.5p,
an increase of 10.0% on last year. The quality
of the SSE team, the extensive investment
opportunities (added to by the acquisition
of Airtricity) and the ongoing scope for
continuing improvement in operational
performance give us the means to maintain
our track record of dividend growth in the
next decade. Delivering that dividend growth,
delivering our investment programme and
delivering excellent service to customers are
our key priorities in 2008/09 and will remain
so in the years ahead.

Challenges
The years ahead will be challenging, and
ones in which energy companies will have
to demonstrate that they have the right
answers to the key questions about the
reliability and sustainability of energy
supplies. SSE long ago recognised that the
production and consumption of energy would
change, and has taken steps in anticipation
of that. It is, therefore, very well placed to
meet the challenges of the next decade.

01 Chief Executive’s Statement

Scottish and Southern Energy Annual Report 2008

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SSE’s values are:
safety, service, efficiency,
sustainability, excellence
and teamwork.

Ian Marchant Chief Executive

Purpose and Strategy
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 and
utility businesses.

companies in the energy sector. How are
they responding to climate change? How are
they responding to rising global demand for
energy as supplies of oil and gas deplete?
How are they helping to secure energy
supplies and make them more reliable?
How are they helping customers to use less
energy? SSE believes these are the right
questions and that its strategy and priorities
are delivering the right answers.

Within this strategic framework, SSE will
continue to focus on enhancing and creating
value for shareholders from its energy and
infrastructure-related activities in the UK
and Ireland and from the development of
an international renewable energy business.

Implementation of the strategy will continue
to be founded on SSE’s well-established
financial principles. These principles are:
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.

Future Environment
This strategy and these principles have
been shown to be robust in a wide variety of
financial and operational conditions and have
led to SSE becoming the UK’s broadest-based
energy company. SSE will continue to adhere
to them in the future.

That future will be different. Over the next
decade, key questions will be asked of

The days of meeting an unchecked
demand for energy through monolithic
carbon-intensive power stations are
coming to an end. Increasingly the
emphasis will be on energy efficiency,
renewables, cleaned up fossil fuel plant
and micro generation. SSE is active in all
of these areas and preparing for this
profound change.

SSE’s primary focus for shareholders will
be on delivering sustained real growth in
the dividend, and the changing nature of
energy production is why the acquisition
of Airtricity should help to maintain its track
record of growth during the second decade
of this century. So, too, should the scale
of the investment opportunities which that
acquisition and SSE’s established businesses
and new ventures have created.

Priorities for 2008/09 and Beyond
For this reason, SSE’s continuing focus
during 2008/09 will be on the efficient and
timely delivery of investments in renewable
energy, other electricity generation,
electricity and gas networks and gas storage.
The value created from these investments
will be complemented by the identification
and delivery of enhanced operational
performance in the management of power

stations and the operation of electricity
and gas networks and in SSE’s other
energy-related services.

As SSE’s investment programme, expected
to be around £1.3bn in 2008/09, gathers pace,
the growth in its modern and diverse asset
base should continue, reinforcing its position
as the UK’s broadest-based energy company.
This, in turn, should enable SSE to maintain
its track record of dividend growth in the
second decade of this century as should
continuing profit growth based on continuous
improvements in operations from which
customers will benefit. Through ongoing
responsible pricing and sector-leading
service delivery, SSE expects its number
of customers to continue to grow.

In uncertain financial times, there is one
question being posed by many investors:
which companies provide an unambiguous
commitment to, and focus on, sustained
real dividend growth, backed up by a track
record of having delivered it in the past
and the means to deliver it in the future?
SSE believes that is the right question, and
that, with its commitment to sustained real
dividend growth, it is one of those companies.
In line with that, its priority for 2008/09 is to
deliver its target of at least 4% real growth
in the dividend payable to shareholders.

Scottish and Southern Energy Annual Report 2008

The right question

The International Energy Agency (IEA) said in November 2007 that it believed that by 2030
global demand for energy could be more than 50% above current levels. At the same time,
those resources are limited: known reserves of oil are expected to last only to around the
middle of this century; and the amount of gas is also finite. Reserves of coal, the most
carbon-intensive of the main fossil fuels, are believed to last for at least another two
centuries. The right question for SSE is – how is it responding to rising global demand
for energy so it is able to provide the energy people need in a sustainable way?

HOW DO WE RESPOND
TO RISING GLOBAL
ENERGY DEMAND?

SSE’s priority as an electricity generator is to maintain a diverse portfolio of efficient power
stations and avoid dependency on any single primary fuel source. This diversity also enables
SSE to manage the risks associated with primary fuel procurement at times of volatile and
rising energy prices.

In May 2007, the Energy White Paper pointed out that the UK will need substantial investment
in new generation capacity over the next two decades. It also pointed out that the UK’s diverse
generation mix avoids exposure to the risks associated with heavy dependency on a single fuel
or technology type, helps to maintain secure supplies of energy and provides the country’s
electricity system with the flexibility to accommodate variations in demand and to respond
to changes in fossil fuel prices.

To meet these objectives, SSE is investing in a number of fossil-fuelled, renewable and
energy-technology projects including: constructing a new 840 megawatt (MW) CCGT power
station at Marchwood near Southampton; proposing a 470MW extension to the existing
CCGT Barking power station near Dagenham; planning an additional CCGT power station;
extending the life of Fiddler’s Ferry and Ferrybridge coal-fired power stations by fitting flue
gas desulphurisation (FGD) equipment; building a new 100MW hydro station at Glendoe near
Loch Ness; acquiring Airtricity and Slough Heat and Power, the UK’s largest dedicated
biomass facility; and investing in a range of emerging technologies.

Key to responding to rising global energy demand is renewable energy. As the EU
Commissioner for Energy stated ‘In a time of growing oil prices and climate change
concerns, renewable energy sources is an opportunity that we cannot miss. This will help
to reduce our carbon dioxide emissions and strengthen our security of supply’. Against this
background, SSE is seeking to enhance and create value for shareholders from the
development of an international business focusing on renewable energy.

Rannoch hydro electric power station

Scottish and Southern Energy Annual Report 2008

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£3.0bn investment in onshore wind, offshore
wind and hydro electric schemes in the UK
and Ireland, and in renewable energy in
new markets and technologies over the
next five years.

Highlight
Airtricity
In addition to its obvious environmental
credentials, renewable energy also
significantly reduces SSE’s exposure to
escalating prices for fossil fuels for the
straightforward reason that – in the case
of hydro and wind – the fuel used to generate
electricity is indigenous and free.

Following the acquisition of Airtricity in
February 2008, and a review of its renewable
generation projects, SSE now expects to have
around 4,000MW of renewable generation
capacity in the UK and Ireland in 2013,
doubling in five years its renewable capacity
in those countries. SSE expects its portfolio
in 2013 will comprise: 1,500MW of hydro
electric schemes; around 2,000MW of
onshore wind farms; over 250MW of offshore
wind farms; and around 250MW of waste-
to-energy and biomass developments.

10.5 gigawatts (GW)
of electricity generation
capacity, including its
share of joint ventures,
making SSE the second
largest electricity
generator in the UK.

Scottish and Southern Energy Annual Report 2008

02 Business Statement Overview

Financial Results for 2007/08
These results for the year to 31 March 2008
are reported under International Financial
Reporting Standards, as adopted by the EU.
SSE’s focus is on profit before tax before
exceptional items, the impact of International
Accounting Standards IAS 32 and IAS 39 and
after the removal of taxation on profits from
jointly-controlled entities and associates
(adjusted profit before tax*). The following
table reconciles SSE’s reported profit before
tax and its adjusted profit before tax.

March 08 March 07
£m

£m

Reported Profit before Tax 1,083.8
Movement on derivatives

1,132.0

(IAS 39)

Exceptional items
Tax on JVs and Associates
Interest on convertible debt

164.1
(65.2)
41.9
4.6

(54.5)
(33.6)
31.8
3.6

Adjusted Profit before Tax* 1,229.2
Adjusted current tax charge (317.2)

1,079.3
(282.6)

Adjusted Profit after Tax*

Reported Profit after Tax
Number of shares for basic
and adjusted EPS (million)

Adjusted EPS*
Basic EPS

912.0

873.2

863.2
105.6
101.1

796.7

830.5

860.9
92.5
96.5

Adjusted Profit Before Tax*
Adjusted profit before tax* grew by 13.9%,
from £1,079.3m to £1,229.2m. While there
was increased profitability in all parts of SSE,
the most significant growth continues to be
achieved in Generation and Supply. This
reflects the successful development and
deployment of SSE’s diverse and flexible
electricity generation portfolio, which now
comprises around 10,500MW of capacity,
and the sustained increase in the number
of energy supply customers, which totalled
8.45 million on 31 March 2008. Significant

2002
32.4

2001
30.0

1999
25.7

2000
27.5

2004
37.7

2003
35.0

SSE’s first responsibility to shareholders is to
deliver sustained real growth in the dividend.
At 60.5p, the recommended full-year dividend
is 10% higher than in the previous year.

growth was also achieved in Scotia Gas
Networks, thereby helping SSE to maintain
the balance in profitability between its
regulated and non-regulated activities.

As previously stated, SSE’s emphasis is on
adjusted profit before tax* on a full-year, as
opposed to six-monthly, basis and its interim
results in any financial year should always
be viewed in light of that. This is because
interim results are more likely to fluctuate,
with unusual variations or exceptional
circumstances. The majority of SSE’s
adjusted profit before tax in 2007/08 was
delivered in the first six months; in 2008/09,
SSE expects the reverse to be the case.

Exceptional Items
There were three exceptional items. First, in
Budget 2007, the UK government announced
a reduction in the main Corporation Tax rate
from 1 April 2008, from 30% to 28%, and
accordingly SSE has restated its deferred
tax provisions. A £32.4m credit has been

What are Values?

During 2006/07, Scottish and Southern
Energy adopted the ‘SSE SET’ of values:
safety; service; efficiency; sustainability;
excellence; and teamwork. These values
are in support of SSE’s core purpose,
which is to provide the energy people
need in a reliable and sustainable way.

As Jim Collins and Jerry Porras put it in
their book, Built to Last: Successful Habits
of Visionary Companies, values should be
‘an organisation’s essential and ensuring
tenets, not to be compromised for financial
gain or short-term expediency’.

SSE believes that the only sustainable
competitive advantage which any company
has is its reputation. By adhering to these
values, SSE believes it will maintain trust,
goodwill and respect among customers,
shareholders and employees and so they
are central to its long-term ambitions
and success.

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2007
55.0

2006
46.5

2005
42.5

10%

recognised in relation to SSE’s share of joint
ventures and associates and is therefore
reported in profit before tax, which is adjusted
accordingly. A further £55.4m has been
released by SSE, which is included in the
headline tax charge. The second exceptional
item was a foreign exchange loss of £22.2m
on the unhedged proportion of Euro debt
raised for the acquisition of Airtricity. The
third exceptional item was a £55.0m gain
before tax on the disposal of SSE’s telecoms
sites assets in August 2007.

Adjusted Earnings Per Share*
To monitor financial performance over
the medium-term, SSE continues to focus
on adjusted earnings per share*, which
increased by 14.2%, from 92.5p to 105.6p.

Final Dividend
SSE’s first responsibility to shareholders is to
deliver sustained real growth in the dividend.
The Board is recommending a final dividend
of 42.4p, compared with 39.9p in the previous
year, an increase of 6.3%. This will make a
full-year dividend of 60.5p, compared with
55p last year, an increase of 10.0%.

The expected full-year dividend in respect
of 2007/08, of 60.5p, compares with 35.0p for
2002/03, an increase of 72.9% in five years.
This represents a compound annual growth
rate during that period of 11.6%.

The full-year dividend payment to
shareholders for 2007/08 is covered 1.73
times by SSE’s adjusted profit after tax*,
compared with 1.68 times in the previous year.

Future Dividend
SSE’s target remains the delivery of at least
4% annual real growth in the dividend paid
to shareholders in respect of 2008/09 and
2009/10. The acquisition of Airtricity in
February 2008, and the investment
opportunities it yields, are expected to
help SSE maintain this track record of
dividend growth well into the second
decade of this century.

02 Business Statement Generation and Supply
1. Overview 2. Generation

Scottish and Southern Energy Annual Report 2008

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OVERVIEW

k Operating profit* up 12.7% to £724.2m

Introduction
SSE owns around 10,500 megawatts (MW)
of electricity generation capacity, including
its share of joint ventures and associates.
This makes it the second largest electricity
generator across the UK and Ireland.
The capacity comprises almost 4,500MW
of gas- and oil-fired capacity, 4,000MW of
coal-fired capacity (with biomass ‘co-firing’
capability), and over 2,000MW of renewable
(hydro, wind and dedicated biomass)
capacity. This gives SSE diversity in fuels
and, as a result, greater optionality in the
overall management of its power stations.

As at 31 March 2008, SSE supplied energy to
8.45 million customers within Great Britain’s
competitive electricity and gas supply market,
with growth continuing in the new financial
year. This makes it the second largest
supplier of energy in the UK, and the fastest
growing. Its responsibility to those customers
is to procure the electricity and gas they need
and to arrange for it to be distributed to them
through the relevant networks. Under the
British Electricity Trading and Transmission
Arrangements (BETTA) wholesale gas and
wholesale electricity are transacted like
any other commodity in a fully-competitive
market. 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.

Under its integrated Generation and Supply
business model, SSE’s power stations and
fuel supply contracts are used to support
performance in electricity supply, mainly
through using flexibility and optionality to
respond to customer demand and market
conditions. 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.

In January 2008, Ofgem ‘confirmed that
Britain’s competitive market in energy is
working’. A month later, however, it launched
an investigation into the markets in electricity
and gas for households and small businesses,
using its powers under the Enterprise Act
2002. While it has stated it has ‘no clear
evidence’ of failure of the market, it is carrying
out the investigation in response to ‘public
concern’. Ofgem expects to reach initial
conclusions by September 2008. In SSE’s
view, Ofgem’s original belief that there is
no clear evidence of failure of the market is
correct; indeed, the market is very competitive
and provides customers with an excellent
degree of choice across all aspects of
electricity and gas supply.

In April 2008, Ofgem launched another
investigation, into SSE and Scottish Power
Limited, under section 18 of the Competition
Act 1998 and Article 82 of the EC Treaty.
It said its decision was based on a formal
complaint alleging abuse of an alleged
dominant position in the electricity
generation sector at times of constraint
on the Great Britain transmission system,
as well as informal enquiries. SSE is
co-operating fully with Ofgem. It remains
confident that its actions in electricity
generation have always been consistent
with the operation of a competitive market
and believes that this process can be
brought to a speedy conclusion.

Performance Overview
Operating profit* in Generation and Supply
rose by 12.7%, from £642.6m to £724.2m,
contributing 52.3% of SSE’s total operating
profit during the year. Total revenue for
Generation and Supply was £14.26bn, which
accounted for 89% of SSE’s total revenue
in 2007/08, of which £5.61bn was in relation
to sales of electricity and gas to industrial,
commercial and domestic customers.
The financial performance of Generation
and Supply has been reported excluding
the impact of IAS 39 re-measurements
because SSE does not believe this represents
underlying business performance.

During 2007/08, SSE generated 45.8
terrawatt-hours (TWh) of electricity, including
power stations in which it has ownership or
contractual interest. In addition, Airtricity’s
wind farms produced 0.8TWh of electricity
during 2007/08, including 0.15TWh after its
acquisition by SSE in February 2008. SSE also
purchased 9.9TWh of electricity via long-term
contracts with other generators, including
British Energy. In the year, it supplied
28.2TWh of electricity to its domestic and
small business customers and 27.5TWh
was supplied under contract to industrial and
commercial customers. Any net balances were
traded 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 almost
four million in the number of energy supply
customers over the past six years, following
its sustained policy of responsible pricing.

GENERATION

k Gas-fired power station availability 95%;

coal station availability 91%

k Acquisition of Airtricity Holdings Ltd
k Acquisition of Slough Heat and Power Ltd
k Operating/consented onshore wind farm
capacity passed 1,000MW mark, with
increase of 150MW since January 2008

k Operating renewable energy capacity

passed 2,000MW mark

k Operating/consented renewable energy

capacity passed 3,000MW mark
k New target for operating renewable
energy capacity of 4,000MW by 2013
k Consent granted for extension to Barking

Power Ltd

k New target adopted to reduce carbon
intensity of power generated by 50%
by 2020

Generation Objectives
In May 2007, the Energy White Paper
pointed out that the UK will need substantial
investment in new generation capacity over
the next two decades. It also pointed out
that the UK’s diverse generation mix avoids
exposure to the risks associated with heavy
dependency on a single fuel or technology
type, helps to maintain secure supplies of
energy and provides the country’s electricity
system with the flexibility to accommodate
variations in demand and to respond to
changes in fossil fuel prices.

The same points apply to SSE’s portfolio. Its
key objectives in Generation are to ensure that
it has a diverse portfolio of power stations,
available to generate electricity and support

SSE is the second
largest electricity
generator across
the UK and Ireland
with 4,500MW of
gas- and oil-fired
capacity, 4,000MW
of coal capacity and
over 2,000MW of
renewable capacity.

2008

2007

2006

2005

2004

10.5

10.0

9.9

5.8

2nd largest

Scottish and Southern Energy Annual Report 2008

02 Business Statement Generation and Supply continued
2. Generation (continued)

10
>

security of supply, with the maximum possible
efficiency, in response to customer demand
and market conditions, while complying fully
with all safety standards and environmental
regulations. It is this diversity which enables
SSE to manage the risks associated with
primary fuel procurement at a time of
volatile and rising prices.

In support of these objectives, SSE completed
the acquisition of Airtricity in February 2008
for a final enterprise value of £1,349.1m. The
acquisition was the largest completed by SSE
since its formation in 1998. It is designed,
amongst other things, to further balance
SSE’s electricity generation portfolio, reduce
its exposure to volatile commodity prices for
fossil fuels and provide a major new range
of investment opportunities from which to
secure growth over the next decade.

At the same time, SSE’s investment in
Generation will go beyond renewable energy.
It will continue to examine opportunities
across all aspects of Generation to ensure
it has optionality in plant technology, timing
of investment and construction and scale
of development.

To support future and current assets, SSE
has also established an Engineering Centre
to provide both an effective long-term asset
management and investment planning
capability across its Generation portfolio and a
platform for the future growth of the portfolio.

Gas-fired Generation – Operations
Good performance in BETTA is dependent on
plant availability to generate electricity. During
2007/08, 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,
the same as in the previous year.

During 2007/08, SSE extended its power
purchase agreements with Seabank Power
Limited, in which it also has a 50% stake. The
agreements were due to expire in 2009 and
2011, but have now been extended to 2018,
with the option of a further extension to 2023.
The new contracts represent a significant
milestone in the long-term development
of SSE’s portfolio.

Gas-fired Generation – Investment
With its high thermal efficiency, relatively low
cost and short construction times, combined
cycle gas turbine (CCGT) technology is set to
remain the benchmark technology for some
years to come. Work on the construction of
Marchwood Power Ltd’s new 840MW CCGT
plant in Southampton is now well under way.
Marchwood Power is a joint venture between
SSE and ESBI International, in which SSE
will have 50% of the equity (£43m) and 50%
of the debt (£160m) – of which £55m was
invested by 31 March 2008. All of the station’s
output, however, will be contracted to SSE.
With a net thermal efficiency in excess of
58%, it will be one of the most efficient in the
UK. As it was procured before the upsurge in
capital costs seen in the electricity generation
sector over the past two years, it will also be
one of the best value new power station
developments under way in the UK.

The 22km high pressure gas pipeline
between Lockerley and Marchwood has now
been installed, and the next key milestone
will be the installation of the first gas turbine
generator, which is expected to take place
shortly. The plant therefore remains on
course to be completed and in commercial
operation in time for the winter of 2009/10.

In December 2007, consent was given under
Section 36 of the Electricity Act 1989 to
Barking Power Ltd for the extension of the
existing CCGT power station at Dagenham.

What is Safety?

We believe that all accidents are
preventable, so we aim to do everything
safely and responsibly, or not at all. This
means we believe all of our work can and
should be carried out without any harm
to employees, contractors, customers
or any other people.

Moreover, we recognise that achieving
high standards of health and safety helps
achieve high standards of business
performance and supports our other
values, such as service, efficiency
and teamwork.

During 2007/08, the number of lost time
and reportable accidents within SSE was
0.04 per 100,000 hours worked and the
number of serious, or potentially serious,
road traffic accidents involving employees
driving company vehicles was 0.18 per
100 vehicles. This is too many accidents
and our ultimate goal continues to be
injury-free working.

The proposed extension will provide a further
470MW to the existing 1,000MW capacity.
SSE has a 30.4% stake in Barking Power Ltd
and so the extension would effectively add
around 140MW to its portfolio of generation
assets. A decision on whether to proceed
with the extension is likely to be made during
2009, following a tender for the plant and
construction work and final agreement on
offtake arrangements and financing.

SSE had identified the potential to substitute
existing plant at its Peterhead power station
with new state-of-the-art equipment,
increasing the modern CCGT capacity at
Peterhead to the station’s effective grid limit
of 1,520MW. The front-end engineering design
(FEED) study is now completed and SSE has
decided not to proceed with this particular
project at this time, partly because of the
onerous nature of the transmission charges
that would apply to it.

Nevertheless, SSE is actively seeking to
identify an option for an additional CCGT
plant, either at one of its existing power
station sites or an alternative ‘brown field’
site. Future investment decisions of this kind
will have to reflect the likely impact of the
EU’s legally-binding target of 20% for the
proportion of all energy to be derived from
renewable sources by 2020. As the amount of
electricity generated from renewable sources
increases, gas-fired and coal-fired power
stations are likely to run at lower load factors
than has historically been the case and will
have to be increasingly flexible. At the same
time, the value inherent in the flexibility of
SSE’s power stations should increase. These
factors will have to be considered when
investment decisions are made.

Coal and Biomass Generation – Operations
The Ferrybridge and Fiddler’s Ferry power
stations, each with a capacity of almost
2,000MW, achieved 91% of their maximum
availability to generate electricity, excluding
planned outages, during 2007/08, compared
with 92% in the previous year. This slight
reduction reflects an increase in two-shift
operation of the plant and integration work
with the Flue Gas Desulphurisation (FDG)
projects currently running at both stations.

The stations can also ‘co-fire’ fuels from
renewable sources (biomass), thus displacing
fossil fuels and reducing the impact of carbon
emissions resulting from their operation,
using direct injection technology. The
resulting electricity output qualifies for
Renewable Obligation Certificates (ROCs).
During the year, their output qualifying for
ROCs was 368GWh, compared with 741GWh
in the previous year. This reflects outages
relating to the installation of FGD equipment
and difficulties relating to the ‘bioswirl’
facility at Ferrybridge.

There have been issues with respect to these
co-firing facilities, including the fact that the

Scottish and Southern Energy Annual Report 2008

11
>

availability of the biomass fuel (principally by-
products from other processes) has proved to
be lower than expected, so SSE recognised an
impairment charge of £12.2m in respect of the
original expenditure on the co-firing facilities.

At the same time, however, the new facilities
mean that SSE is now the UK’s leading user
of biomass co-firing. In January 2008, the
UK government announced decisions to
‘band’ the Renewables Obligation, so that,
from 1 April 2009, electricity output resulting
from co-firing will receive 0.5 ROCs per MWh.
This compares with the 0.25 ROCs originally
proposed. The cap on such co-firing will be
retained, so that electricity suppliers can
only meet up to 10% of their Renewables
Obligation from this technology.

Coal and Biomass Generation – Investment
Although CCGT will be the benchmark
technology in the coming years, it is clear
that coal-fired electricity generation will
remain a key part of the UK’s energy mix
for many years to come, albeit within
appropriate environmental constraints.
As the UK Secretary of State for Business
put it in March 2008, fossil fuels will continue
to play an important role in ensuring the
flexibility of the electricity generation system,
‘with coal a key source of that flexibility as
we increase the proportion of renewable
energy in our electricity mix’.

The Large Combustion Plant Directive
(LCPD) aims to reduce acidification,
ground level ozone and particles to below
the Emission Limit Value thresholds for
sulphur dioxide, nitrogen oxides and dust
from plants including power stations. In line
with that, SSE has opted in to the Directive
all of the capacity at Fiddler’s Ferry and half
of the capacity at Ferrybridge and so is
installing FGD equipment at the stations
in an investment expected to total around
£225m. By making them compliant with
the LCPD emissions levels, the stations’
contribution to the security of the UK’s
energy supplies is being extended and SSE
will continue to have the country’s most
diverse electricity generation portfolio.

Although progress in recent months has
been slower than expected, the installation
of FGD at both stations is expected to be
completed, as originally envisaged, during
this year. To achieve that, SSE is working
very closely with the main contractor to
improve performance through to the end
of the project. In line with that, construction
activities are now well-advanced and the first
units at both sites are now scheduled to
begin hot commissioning in late summer.

The LCPD actually came into effect on
1 January 2008 and, in the meantime, SSE has
an agreement with the Environment Agency
to enable it to operate Fiddler’s Ferry for
1,270 hours to 15 September 2008 and also
Ferrybridge for 1,270 hours to 15 September

2008, under a derogation from Article 5 of
the LCPD. As a result, the stations operated
with a lower than usual load factor in the
early months of 2008.

In order to comply with the LCPD after 2015,
SSE will have to install advanced nitrogen
oxide abatement equipment at Fiddler’s
Ferry and at the capacity at Ferrybridge fitted
with FGD. This will require a substantial
investment, but it is unlikely to commence
before 2011/12 and the first stage is included
in SSE’s expected capital expenditure for
the next five years.

In view of the ongoing role for coal-fired
electricity generation in the UK, SSE believes
that there may be a need to replace the
capacity (1,000MW) at Ferrybridge which is
scheduled to close in 2015. Having discounted
‘retrofit’ options in the autumn of 2007, it is
currently developing options for a new 800MW
unit at the site using the Supercritical Boiler
technology. The high temperatures and
pressures which feature in this technology
deliver a significant increase in thermal
efficiency, from a typical 35% for existing plant
to around 45%, thereby delivering a significant
reduction in the carbon dioxide emissions
per kilowatt-hour of electricity produced.

Any plant would be made ‘capture ready’,
enabling it to be fitted with carbon capture
and storage (CCS) equipment. SSE has a long-
standing and active interest in developments
in CCS and, following the launch of the UK
government’s CCS competition in November
2007, submitted in March 2008 an outline
project proposal to operate by 2012 a post-
combustion plant fitted to 50-100MW of an
existing sub-critical coal unit at Ferrybridge
power station. This would allow the necessary
design and operational knowledge to be
developed to enable commercial-sized units
(300-400MW of flue gas treatment) to be
offered on a commercial basis on an earlier
timetable than proposals based on installation
to new Supercritical plant which is unlikely
to be available before 2015. SSE believes
its proposal provides an achievable and
important step in the technological
development of CCS.

Plant construction lead times for coal-fired
(and gas-fired) generation are lengthening
as the global demand for power generation
equipment continues to heighten, and that
global demand could have a significant
impact on the price of such equipment. This,
allied to the volatile nature of commodity
prices for coal and gas, makes investment
decisions in these areas increasingly
complex. At the same time, it supports the
value of existing assets and assets already
under development, including those which
rely on renewable sources to produce energy.

Coal and Biomass Generation – Sustainability
The overall sustainability of SSE’s coal-fired
power stations will be further enhanced upon

the completion of the plasterboard factory
being developed at Ferrybridge by Lafarge
Plasterboard Ltd and the ash separation
plant being developed at Fiddler’s Ferry
by RockTron Limited.

Creating around 70 new jobs, the Lafarge
factory at Ferrybridge will use the source
of gypsum produced as a result of FGD,
process it and despatch it from the site
as plasterboard. The factory is expected
to be operational later this year.

Over a period of up to 25 years, the RockTron
plant at Fiddler’s Ferry will remove and
process all fresh ash produced by the power
station, and much of that currently stored
in lagoons at the site, up to a total of around
800,000 tonnes per annum. The ash will be
processed into its constituent parts which
become marketable products, with the
largest volume being used as cement
substitutes. Without processing, ash
disposal would begin to attract landfill duty
and associated environmental liabilities.
The plant is expected to be operational
before the end of 2008.

EU Emissions Trading Scheme
Phase II of the EU Emissions Trading
Scheme (EU ETS) started on 1 January 2008.
Across its electricity generation portfolio
(taking account of contractual shares), SSE
received 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. In addition,
the Environment Agency has confirmed that
Marchwood Power Ltd has an allocation of
five million tonnes reserved to it from when
it is commissioned to the end of Phase II.

SSE does not believe such allocations
represent any kind of ‘windfall’. Before the
introduction of EU ETS on 1 January 2005,
power stations could emit carbon dioxide
free of charge. After that date, they had to
operate within tighter emissions limits.
Where those limits have had to be breached
– often to ensure the stability of the country’s
electricity system – electricity generators,
including SSE, have had to purchase permits
to emit carbon dioxide.

In other words, EU ETS represents an
additional – and, over the long-term, growing
– cost for electricity generators, and is not a
‘windfall’. It is expected to grow on the basis
that the UK government and the EU remain
convinced that a price for carbon that
reflects the environmental costs of electricity
production and consumption is the best
means of encouraging investment in
low- and zero-carbon technologies.

In line with this, in January 2008, the EU
set out proposals for the EU ETS after 2012.

Scottish and Southern Energy Annual Report 2008

02 Business Statement Generation and Supply continued
2. Generation (continued)

12
>

It suggested that all of the carbon dioxide
emissions allowances for electricity producers
should be auctioned. The proposals are
subject to approval by the EU Council of
Ministers and the European Parliament
and so they have some way to go before
they are adopted policy for implementation.

In 2007/08, emissions of carbon dioxide
from SSE’s power stations and from the
contracted output share of emissions from
power stations in which it has a contractual
relationship totalled 22.7 million tonnes,
compared with 25.8 million tonnes in the
previous year. It purchased carbon dioxide
emissions allowances totalling 6.7 million
tonnes in 2007/08, beyond that provided
under the National Allocation Plan.

Under the Clean Development Mechanism
(CDM) established under Article 12 of the
Kyoto Protocol, companies can meet their
carbon emissions reduction targets by
purchasing Carbon Emissions Reduction
Certificates (CERs) from CDM-approved
carbon reduction projects in the
developing world.

During 2007/08, SSE entered into agreements
with companies in China and Brazil to
purchase around three million CERs over a
period of up to five years. The CERs relate to
wind farms and hydro schemes and therefore
mirror SSE’s strategy in the UK. While the
large majority of SSE’s investment in reducing
carbon emissions will continue to be in the
UK, it will continue to seek opportunities
to expand its activities in this area.

Renewable Energy – Overview
Tackling climate change and securing future
supplies are the twin goals of energy policy in
the UK, Ireland and throughout the European
Union (EU). In line with that, the EU’s adoption
of a legally-binding target of 20% for the
proportion of all energy to be derived from
renewable sources by 2020, supported by a
draft Directive, will clearly lead to a dramatic
increase in the amount of renewable energy
that will be required by that date. The EU
targets currently mean the UK will have to
increase its renewable energy proportion
of all energy demand from 1.3% to 15%.
For Ireland, the increase is from 3.1% to 16%.
In practice, this is likely to mean that around
40% of the countries’ electricity requirements
will have to be met from renewable sources.

experience of operating in a number of
countries, as well as providing greater
diversity within its renewable energy portfolio.

Following the acquisition of Airtricity, and
the ongoing development of its own portfolio
of projects, SSE now owns and operates
over 2,000MW of capacity for generating
electricity from renewable sources,
comprising: over 1,350MW of capacity in
hydro electric schemes (including pumped
storage); around 600MW of wind farms; and
the UK’s largest dedicated biomass energy
facility at Slough (80MW). Of this capacity,
260MW is in the Republic of Ireland, with
the remainder being in the United Kingdom.

Looking ahead, the expected completion
of onshore and offshore wind farm
developments and the Glendoe hydro electric
scheme should increase SSE’s renewable
energy capacity in the UK and Ireland to over
2,500MW by the end of 2010 and to 4,000MW
by the end of 2013.

As well as its obvious environmental
credentials, renewable energy also
significantly reduces SSE’s exposure to
escalating prices for fossil fuels for the
straightforward reason that – in the case of
hydro and wind – the fuel used to generate
electricity is indigenous and free.

Hydro Generation – Operations
Total output from SSE’s hydro electric stations
(excluding pumped storage) during 2007/08
was 3,518GWh. This compares with 3,767GWh
in the previous year, which was the fourth
highest on record, and with the 10-year
average of 3,250GWh. As at 31 March 2008,
the amount of water held in SSE’s reservoirs
which could be used to generate electricity
was 73% of the maximum, compared with
75% on the same date last year, enough
to generate 655GWh of electricity.

The output of refurbished hydro electric
stations with capacity of up to 20MW, and
of all new stations commissioned after 2002,
qualifies for ROCs and SSE has just over
400MW of capacity in this category. Of the
total hydro output in 2007/08, just over
1,700GWh qualified for ROCs. Assuming
average ‘run off’ of water into SSE’s reservoirs
during the year, the ROC-qualifying output
from hydro generation is expected to be
around 1,600GWh in 2008/09.

As the EU Energy Commissioner stated in
January 2008 ‘In a time of growing oil prices
and climate change concerns, renewable
energy sources is an opportunity that we
cannot miss. They will help us to reduce our
carbon dioxide emissions and strengthen our
security of supply’. Against this background,
SSE will seek to enhance and create value
for shareholders from the development of
an international business focusing on
renewable energy. An international business
will provide SSE with the opportunity to gain

In October 2007, and following discussions
with SSE and others, the Scottish Environment
Protection Agency published the Significant
Water Management Issues consultation
report, an intermediate step in the
preparation of the river basin management
plan for Scotland under the Water Framework
Directive. The outcome of this consultation
will help shape the way the water environment
is regulated, and SSE believes that, ultimately,
the Directive can be implemented without
reducing the output of renewable energy.

SSE has 1,356MW
of hydro capacity.
Its 10-year average
output to 31 March
2008 was 3,250GWh.

1,356MW

2008

2007

2006

2005

2004

3,518

3,767

3,054

3,544

2,640

Hydro Generation – Investment
The construction of what will be SSE’s
second largest conventional hydro electric
station at Glendoe, near Loch Ness, is now
entering its final phase. The 960 metre-long
dam is expected to be completed in the
autumn and commissioning of the single
100MW turbine is expected to take place
early in the New Year. It therefore remains
on course for electricity to be generated by
the end of this financial year. At that point,
SSE’s hydro electric capacity, including
pumped storage will reach over 1,450MW.

With an installed capacity of 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 final investment at Glendoe is likely to
be over £140m, of which £128m had been
incurred by the end of March 2008.

In addition to Glendoe, SSE has applied for
consent to build new ‘run-of-river’ hydro
electric schemes near Crianlarich (2.5MW)
and Wester Ross (3.5MW). SSE continues
to believe there is potential to develop a
small number of new, larger hydro electric
schemes in the Highlands, and given the
significance of the recently-adopted EU
targets it is exploring again the scope to
develop at least one of these potential sites
and is currently identifying the site most
likely to overcome the various planning
obstacles and secure consent.

Scottish and Southern Energy Annual Report 2008

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The vast majority of SSE’s hydro electric
stations were built in the 1950s and early
1960s and are the subject of a rolling
programme of investment to prolong their
working life and improve their operational
efficiency, with a total value of around
£15m per annum.

Wind Generation – Operations
SSE’s wind farms at Tangy (now 19MW
following its extension), Spurness (currently
8MW), Artfield Fell (20MW) and Hadyard Hill
(120MW) produced 350GWh of ROC-qualifying
output in 2007/08, compared with 384GWh
in 2006/07.

These wind farms are all in Scotland and,
following its acquisition of Airtricity, SSE
now owns capacity at two other Scottish
wind farms which produced electricity during
2007/08: Ardrossan (12MW); and Braes of
Doune (36MW). It also now owns and operates
two wind farms in Northern Ireland which
produced electricity during the year: Bin
Mountain (9MW); and Tappaghan (19MW).
The total ROC-qualifying output from this
capacity in 2007/08 as a whole was 189GWh,
of which 39GWh was attributable to SSE
following the acquisition of Airtricity.

In addition, SSE’s 10 wind farms in the
Republic of Ireland produced 645GWh of
electricity during 2007/08, of which 110GWh
was attributable to SSE following the
acquisition of Airtricity.

The output from SSE’s wind farms in the
UK and the Republic of Ireland is expected
to be significantly greater in 2008/09 than
in the preceding year based on recently-
constructed wind farms such as Dalswinton
and Drumderg producing power and new
plant currently in construction being
commissioned.

Wind Generation – Investment Overview
Airtricity is now SSE’s renewable energy
development division, and has been combined
with SSE’s existing wind and hydro
development team to provide a significantly
enhanced capability in this vital area.

When it entered into the agreement
to acquire Airtricity in January 2008,
the combined business had 875MW of
onshore wind farm capacity in operation,
in construction or with consent for
development. Since then, consent has been
granted for a number of developments and
construction work has been completed at
some others. As a result, SSE now has almost
1,030MW of onshore wind farm capacity in
these categories, an addition of more than
150MW since January 2008. This means
the pipeline of opportunities in renewable
energy which the acquisition highlighted is
being realised. It also means that SSE now
has over 3,000MW of renewable energy
capacity in operation, under construction
or with consent.

SSE said, when it acquired Airtricity, that it
expected to have over 3,500MW of operating
renewable capacity in the UK and Ireland
in 2013. Following a comprehensive review
of its renewable energy projects, SSE now
expects this to be around 4,000MW. On
this basis, it will double in five years its
renewable energy capacity in the UK and
Ireland. During 2008/09 alone, it will start
construction work at a number of wind
farms in Scotland and elsewhere.

The achievement of this new target is subject
to projects securing all of the necessary
approvals in a timely manner, adequate
electricity network capacity and to the
maintenance of a stable public policy
framework which encourages investment
in renewable energy. Subject to that, SSE
expects its portfolio in 2013 will comprise, in
addition to almost 1,500MW of hydro electric
schemes: around 2,000MW of onshore wind
farms; over 250MW of offshore wind farms;
and around 250MW of waste-to-energy and
biomass developments.

In addition to the above, SSE is now
pursuing onshore and offshore wind farm
developments in Europe and onshore
developments in China which could add
well over 500MW to its renewable energy
portfolio by 2013.

Wind Generation – Investment in the UK
and Ireland
The delivery of an additional 2,000MW of
renewable capacity in the UK and Ireland
by 2013 is likely to require capital investment
of over £2.5bn in onshore wind, offshore wind
and hydro electric schemes over the next five
financial years, with investment currently
expected to peak in 2010/11.

This investment programme includes the
504MW Greater Gabbard offshore wind farm.
Construction work will begin shortly and on
completion it will be the world’s largest
offshore wind farm.

The development of the wind farm was
carried out by Greater Gabbard Offshore
Wind Ltd, a 50:50 joint venture between
Airtricity and Fluor. Having secured the
construction contract, Fluor agreed to sell
its 50% stake in the joint venture to SSE for
£40m in cash in May 2008. SSE intends to
sell 50% of the project equity later this year.

A turbine reservation agreement with
Siemens Wind Power A/S for the supply of
140 3.6MW turbines was secured in 2007 and
both parties subsequently agreed the turbine
supply contract and the five-year service and
warranty contract for the development.

The wind farm will be commissioned in two
phases, with the entire construction scheduled
to be completed in 2011. It is expected to
have a load factor of over 40%, based on
site-specific data collected since 2005.

162

2004 2005 2006 2007 2008

Following the acquisition
of Airtricity, SSE owns
and operates capacity at
wind farms in Scotland,
Northern Ireland and the
Republic of Ireland. It will
shortly begin construction
of the world’s largest
offshore wind farm at
Greater Gabbard in the
outer Thames Estuary.

The development, excluding the connection,
is expected to require investment of around
£1.3bn. SSE will fund its 50% share from
either its balance sheet or through non-
recourse project finance. It also expects
to take 50% of the output of Greater
Gabbard, with the remainder being the
subject of a separate agreement with
another power purchaser.

A major construction project of this kind,
in potentially challenging conditions, is
not without risks but these have been

Scottish and Southern Energy Annual Report 2008

The right question

Highlight
better plan
The structure of energy consumption is going
to change significantly and SSE believes
that customers’ greater awareness of the
need for energy efficiency represents an
opportunity. SSE has launched the better
plan – a unique energy programme which
enables and encourages customers to
commit to using less energy – and financially
rewards 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 including
a monitor that measures customers’
real-time energy consumption.

13 terrawatt-hours
(TWh) of energy-saving
measures provided to SSE
customers as a result of
measures introduced
under the Energy
Efficiency Commitment
during 2007/08.

Scottish and Southern Energy Annual Report 2008

15
>

The UK government’s White Paper published in May 2007 stated that ‘Improving the energy
efficiency of homes can reduce energy bills and help ensure that the most vulnerable can
afford to heat their homes’. Against this background, where everyone has a part to play in
reducing CO2 emissions, the right question is – how does SSE help customers save energy
and reduce their energy bills?

HOW DO WE
HELP CUSTOMERS
SAVE ENERGY?

SSE supplies electricity and gas to 8.45 million customers in the UK and Ireland. Growth
during 2007/08 enabled it to overtake E.ON UK to become the UK’s second largest supplier.

One of the key elements of SSE’s Environment Policy is to ‘focus on encouraging its customers
to consider and implement ways of reducing their consumption of energy’. This is consistent
with the government’s White Paper which said ‘the starting point for our energy policy is
to save energy’. SSE does this through a number of initiatives including: introducing of the
UK’s first energy tariff designed to financially reward reduced energy consumption; and
participating in trials of smart meters and real-time displays which enable customers
to track their energy use.

Under the Energy Efficiency Commitment (EEC), SSE helps its customers to reduce the
energy they use by: providing subsidised A-rated domestic appliances; supplying low energy
lamps (Compact Fluorescent Lamps); and promoting A-rated gas condensing boilers and
home insulation measures. At least 50% of these energy-saving measures are focused on
a priority group of low-income customers in receipt of certain benefits, so it is expected that
EEC will also contribute to the eradication of fuel poverty.

SSE is recruiting qualified Domestic Energy Assessors so it can participate in the UK
government’s Energy Performance Certificates scheme for house sales and commercial
and rented properties. Under the scheme, certificates are commissioned by the seller or their
agent from an accredited energy assessor, who visits the property to collect the relevant
data and who creates the certificate which shows potential buyers or tenants the energy
efficiency of the premises.

One of the challenges faced by SSE, indeed by us all, is persuading people that we can
all make a difference to climate change and energy security through our collective efforts
to reduce energy consumption.

Perth shop

Scottish and Southern Energy Annual Report 2008

02 Business Statement Generation and Supply continued
2. Generation (continued)

16
>

managed through the procurement and
project management strategies which have
been adopted.

The overall investment profile for the next
five years is subject to a number of factors,
including constraints on the supply of wind
turbines and the impact of those constraints
on their procurement. Nevertheless, the
turbine supply position is expected to
improve over the next few years, and SSE’s
enhanced significance as a wind farm
developer following the acquisition of
Airtricity should enable it to secure good
value from suppliers. It is also exploring new
sources for wind turbines, including China.
In line with that, it is working with a Chinese
manufacturer on the introduction of its
turbines into the European market next year.

The target for 2013 does not include the
proposal by SSE and Viking Energy Ltd, the
company established to represent Shetland
Islands Council’s interests in wind farm
development, to develop on Shetland’s
Central Mainland a wind farm with around
600MW of capacity. An application for
consent to build the wind farm is now
expected to be submitted to Scottish
Ministers later this year. It also does not
include the proposal by SSE for a 94MW
wind farm on the Isle of Lewis, which, if
consented, is not expected to be operational
before the end of 2013.

Biomass
In December 2007, SSE completed the
acquisition of Slough Heat and Power from
SEGRO plc for a total cash consideration
of £49.5m. Slough Heat and Power is an
integrated energy business, which includes
a combined heat and power (CHP) plant
with current generating capacity of 80MW.
The CHP plant is the UK’s largest dedicated
biomass energy facility and its main fuel

sources are wood chips, biomass and waste
paper. The site has its own fuel processing
plant, which takes delivery of waste paper
products and converts them into useable fuel.

Part of the plant is contracted under the Non
Fossil Fuel Obligation. It produced 144GWh
of output qualifying for ROCs during 2007/08,
of which 19GWh was attributable to SSE. The
acquisition gives SSE a platform from which
to build up its interest in biomass and waste-
to-energy, which it believes will become
increasingly important over the next decade.

Investment in New Markets
In addition to its wind and hydro investments
in the UK and Ireland, SSE is also expecting
to invest around £500m in renewable energy
in new markets: onshore and offshore wind
farms in Europe (principally Portugal,
Sweden, Italy and Germany where there
are particular opportunities for growth in
renewables); onshore wind farms in China;
waste-to-energy (principally in the UK); and
emerging technologies. This investment
will largely be on an equity basis, with non-
recourse debt expected to account for around
75% of the total cost of the investment.

For example, in April 2008, SSE – through
Airtricity – entered into a 50:50 joint venture
with Gothia Vind which is expected to lead
to the development of new wind farms in
western Sweden. Based near Gothenburg,
Gothia Vind is a specialist wind energy
developer. The joint venture is aiming to
develop around 200MW of wind farm capacity
in western Sweden, with the first wind farm
scheduled to be in operation around 2011.
The development of this capacity is expected
to require equity investment by Airtricity
and Gothia Vind of around €30m each over the
next few years, with non-recourse debt in this
instance expected to account for around 80%
of the total cost of the investment.

What is Service?

We give our customers service we
are proud of and make commitments
that we deliver.

Our belief is that customers will continue
to acquire products and services from
companies that they trust. In other words,
it is not simply the product itself which
matters, but also all of the services
relating to it.

That is why we are introducing a new
Customer Charter, featuring a series
of commitments on quality service, fair
pricing and the environment. The Charter
sets out in straightforward language what
our customers can expect of us and what
we aim to deliver every day.

While the acquisition of Airtricity has extended
the scope of SSE’s renewable energy interests
to continental Europe and to China, thereby
giving it development and operational activity
in new geographical locations, that activity
will remain very focused and disciplined. SSE
will be specific about the new markets which
it is tackling and longer-term developments
will depend upon clearly demonstrated
success in attaining shorter-term goals,
such as those set for 2013.

Investment in Emerging Technologies
As well as investing in technologies
which already have the scale to make a
substantial contribution to meeting energy
needs in the near future, SSE has a range
of investments in emerging technologies.
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.
Participation in emerging technology
developments helps SSE to be at the
forefront of, and to adapt to, the changes
in energy production and consumption that
are likely to occur over the next decade.

Of the emerging technologies, solar is
likely to be critical and SSE has a 12.3%
stake in Solarcentury, the UK’s leading
independent solar photovoltaics company.
SSE is Solarcentury’s preferred installer
and the two companies have been appointed
by the UK Department of Business to supply
and install solar panels on Britain’s public
buildings as part of its £50m Low Carbon
Buildings Programme.

SSE also has a 50% stake in Aquamarine,
the marine energy company which is
developing wave power and tidal power
devices for comprehensive testing at
the European Marine Energy Centre
in Orkney.

In March 2008, SSE and Intelligent Energy
announced the formation of a joint venture
company which will develop clean and
reliable fuel cell-based CHP systems for the
light industrial, commercial and residential
markets in the UK and Ireland. In addition,
in April 2008, SSE acquired a 21% stake in
Logan Energy Limited, in return for £375,000
and goodwill brought to the new business,
which will focus on fuel cell installation
and maintenance.

This was followed in April 2008 by an
agreement to invest up to £15m in cash
for a 20% stake in Geothermal International,
the UK’s leading supplier of ground-source
heating and cooling systems, from existing
shareholders. From being established in 2000,
it has installed over 1,300 ground-source heat
pump systems, amounting to over 90MW of
installed capacity.

3. Energy Supply

Scottish and Southern Energy Annual Report 2008

17
>

Since the start of 2007/08, through equity and
loans, SSE has committed to investing over
£60m in a variety of emerging technologies
designed to deliver secure, reliable and cost-
effective low carbon energy systems, of which
£13.8m was invested by the end of March 2008.

Review of Carbon Intensity Target
In the light of its enhanced renewable
energy capability, SSE has reviewed its target
of reducing the amount of carbon dioxide
per kilowatt-hour of electricity, produced at
power stations in which it has an ownership
or contractual interest, by 20% over the ten
years to 2016. The base year for SSE’s carbon
intensity target is 2005/06, because it was the
first full year after it acquired coal-fired power
stations at Fiddler’s Ferry and Ferrybridge.

SSE is now targeting a reduction in carbon
intensity of 50%, to around 300g/kWh, over
the period from 2005/06 to 2020. As with the
previous target, SSE will report on its progress
against the 50% target each year, and in
2007/08 carbon intensity on this basis was just
under 500g/kWh. The decisions SSE takes and
the investments it makes will be guided by
its new target. Like most long-term targets,
achievement will be influenced to some
extent by circumstances outside its control.

Nuclear Power
SSE’s first responsibility to its customers
is to maintain supplies of energy, in a way
that is compatible with wider climate change
and energy security issues. Of the total
electricity supplied by SSE during 2007/08,
around 15% was derived from nuclear power
stations, which are owned and operated by
other generators.

In its submission to the UK government
consultation on the future of nuclear power
in 2007, SSE said there is value in the UK
making available the nuclear option, along
with a diverse range of other generation
options, provided there is a stable framework
in place for investors and an appropriate
degree of public confidence in all aspects of
nuclear power is maintained. In other words,
it believes that one more tranche of nuclear
power stations will be necessary, but that the
deployment of such power stations should be
minimised through the maximum exploitation
of renewable sources of energy.

Against this background, SSE may work with
other parties to help secure the development
of new nuclear power stations, through
appropriate contractual support or
investment. In practice, however, any
investment is unlikely to be made before the
next decade – and any new nuclear power
stations are unlikely to be commissioned
before the start of the decade after that.

Generation Priorities for 2008/09 and Beyond
During 2008/09, and beyond, 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 is
now supported by an SSE-wide Engineering
Centre, which has been established to provide
an effective long-term asset management,
engineering strategy and investment planning
capability across SSE’s growing range of
electricity generation and gas storage assets.

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 proceed on time
and on budget. 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.

During 2008/09, major questions will
continue to be asked about the sustainability
of electricity production in the UK, Ireland,
the EU and elsewhere. SSE is a major
investor in minimising the environmental
impact of gas- and coal-fired generation
and in renewable energy (especially following
the acquisition of Airtricity) and emerging
technologies and making progress with
these investments will be a central priority
for SSE in 2008/09 and beyond.

Over the five years to 2013, it expects to
invest over £4bn across its entire generation
portfolio, including investment in existing
assets. This investment will be designed to
abate the environmental impact of existing
assets and extend their lives and to deliver
new assets, principally in renewable energy
but also – as in the case of Marchwood –
thermal generation.

As a result, SSE will have a growing, but
balanced, portfolio of electricity generation
assets, with a diminishing environmental
impact and with relatively less exposure
to fossil fuel price volatility.

ENERGY SUPPLY

k Net gain of 700,000 energy supply

customers, to 8.45 million following
responsible pricing policy

k Grown to become UK’s second largest

supplier of electricity and gas

k Only supplier to defer electricity and gas

price rises to end of winter period
k Further reduction, of 27%, in complaints

to energywatch

k Ranked first in uSwitch.com Customer

Satisfaction Report

k Top-ranked supplier of electricity and gas
in JD Power Customer Satisfaction Study

k ‘better plan’ energy efficiency reward

programme for customers launched

k Sector-leading Customer Charter

and new Vulnerable Customers Code
of Practice

k Establishment of presence in the

Irish all-island market, with 38,000
mainly commercial customers
k Launch of new Energy Performance

Certificates business

Energy Supply Objectives
Energy supply in the UK is changing
dramatically, with companies having to
operate in volatile markets, which reflect
depletion of North Sea oil and gas fields,
soaring global demand and competition
for all types of energy and, during 2007/08,
the passing of the $100 per barrel oil
price milestone. All of this culminated
in persistently high wholesale prices for
electricity and gas during 2007/08. These
pressures are compounded by the rising
transmission, distribution and environmental
costs which suppliers have to meet.

The UK’s energy market remains the most
competitive in the EU and G7, according to
a report by the Oxford Economic Research
Associates (OXERA) published in January 2008
which monitored the competitiveness of the
energy market by assessing a range of
factors. In welcoming the report, the UK
Secretary of State for Business said ‘Creating
an open and competitive energy market has
meant that UK consumers have consistently
benefited from amongst the lowest energy
prices in Europe’.

Figures from Ofgem show that the switching
rate for gas and electricity suppliers reached
more than five million in 2007. This was the
highest level of switching for five years. As
the Ofgem Chief Executive stated ‘Suppliers
who don’t offer competitive prices and good
service will lose customers’.

In an industry where switching is
commonplace and the cost of regaining
customers is significant, SSE’s objective is
to grow its Energy Supply business by offering
consistently competitive prices and providing
sector-leading service so that it is able to
retain and gain customers. It also aims to
broaden its relationship with those customers
through the provision of added value products
and services relevant to them and their needs.

Pricing Policy for Domestic Electricity
and Gas Customers
Over the past few years, SSE has adopted
a responsible pricing policy. The policy
means that SSE seeks to be the last, or one
of the last, of the major suppliers to increase
prices if it has to and the first, or one of the
first, to reduce prices if it can. The consistent
application of this policy means that SSE’s
customers have paid an average total of
around £430 less for their electricity and
gas during the last four years than have
customers of the UK’s largest supplier,

Scottish and Southern Energy Annual Report 2008

02 Business Statement Generation and Supply continued
3. Energy Supply (continued)

18
>

British Gas. SSE was the only major
supplier not to introduce a price increase
during 2007/08, although price rises were
implemented on 1 April 2008. It intends
to maintain its responsible pricing policy
going forward.

Customer Numbers
The implementation of its responsible
pricing policy helped SSE achieve a net
gain of 700,000 energy customers during
2007/08, taking the total to 8.45 million as
at 31 March 2008, comprising 5.28 million
electricity customers and 3.17 million gas
customers. Within the total, SSE’s business
customers now cover over 400,000 sites
throughout Great Britain and 1.8 million
customers have ‘loyalty’ products such as
energyplus Argos, which rewards customers
with money-off discount vouchers.

The growth secured during the year enabled
SSE to overtake E.ON UK to become the UK’s
second largest supplier according to the
Datamonitor Market Share Monitor. SSE has
gained almost four million energy supply
customers since the start of 2002, when it
was the UK’s fifth largest supplier.

In addition to electricity and gas customers,
SSE now has 165,000 talk with telecoms
customers and 70,000 shield gas boiler
maintenance customers. This means its total
customer base in Great Britain was almost
8.7 million as at 31 March 2008. It also has
38,000 mainly commercial electricity
customers in the Irish all-island market.

In July 2007, Ofgem published its Domestic
Retail Market Report, which confirmed that
SSE is the UK’s most successful supplier in
terms of the share of the electricity supply
market held by ‘incumbent’ suppliers in the
14 regions of Great Britain. It stated that SSE
had 80% of the electricity customers in the
Scottish Hydro Electric area, 70% of the
customers in the SWALEC area and 62% of
the customers in the Southern Electric area.
The next highest share held by an incumbent
supplier was 61%. This has again confirmed
the value of SSE’s three regional energy
supply brands.

Customer Service Performance
Central to success in a highly-competitive
market such as Energy Supply is maintaining
the highest possible standards of customer
service. Despite the significant growth in
customer numbers, SSE secured during
2007/08 another reduction, of 27% to 615,
in the number of customer complaints
sent to energywatch for resolution. This
compares with 3,400 five years ago in
2002/03. SSE continues to have the lowest
number of complaints sent to energywatch
for resolution and, in September 2007,
it was announced that it had come top
in an energywatch survey of small
business customers’ satisfaction with
their energy suppliers.

2008

2007

2006

2005

2004

SSE has overtaken E.ON
UK to become the UK’s
second largest energy
supplier, having gained
700,000 customers
during the year.

700,000

8.45

7.75

6.70

6.10

5.25

In October 2007, uSwitch.com reported that
SSE was ranked top for customer satisfaction
for the fourth time in a row in its latest
independent Customer Satisfaction Report
and it described SSE as ‘simply the best’.

In the result of the JD Power 2007 UK
Electricity and Gas Customer Satisfaction
Study announced in November 2007, SSE
was ranked the top-performing supplier in
both electricity and gas. This was the first
time one supplier had achieved the top
ranking in both sectors. In electricity, it was
the only supplier to achieve overall customer
satisfaction which was ‘significantly better’
than average; and in gas it was one of just
two suppliers to deliver ‘significantly better’
than average customer satisfaction.

Customer Service Developments
SSE’s objective is to build on its position as
the UK’s leading energy supplier for customer
service, and thereby be in a strong position to
retain and gain customers. In line with that,
it is introducing a new Domestic Energy
Customer Charter, building on the original
Charter which it launched in 2006.

The new Charter maintains the
‘commitment-based’ approach to general
customer enquiries which was central to
the approach contained in the first Charter,
with the emphasis on ensuring that as many
customers as possible have their issues
resolved at the first point of contact. It also
sets out improved standards for responding
to customers’ enquiries and also confirms
SSE’s responsible pricing policy.

Customer service performance is now
supported by the combination, from
September 2007, of telephony and billing
systems so that they now recognise a
customer’s phone number and bring up their
details on the screen in front of the customer
service adviser. This saves an average of
30 seconds per call and adds the equivalent
of around 100 extra people to take calls.

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 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.

Vulnerable Customers
The single biggest contribution which energy
suppliers can make to helping vulnerable
customers is to keep prices as low as
possible for as long as possible, and this
principle is one of the reasons for SSE’s
responsible pricing policy.

SSE also believes that any ‘social’ tariff
offered by suppliers is only meaningful if
it is clearly the lowest-cost tariff that they
make available to any type of customer on
any type of payment plan or sign-up method.
Its energyplus care tariff and package of
services means eligible customers receive at
least a 20% discount from their energy tariff
in addition to other help including benefit
entitlement checks, free energy efficient
appliances and home insulation, where
appropriate. SSE is aiming to make the tariff
available on 100,000 customer accounts by
the end of March 2009.

In April 2008, SSE and the other major
energy suppliers entered into a three-year
agreement with the UK government to offer
increased assistance to the fuel poor and
groups vulnerable to fuel poverty. Under the
agreement, SSE will operate existing and
new schemes with a total value of around
£16m in the first phase, up to 31 March
2009. The UK government has stated that
given the substantial commitment that an
agreement of this kind represents, it will

Scottish and Southern Energy Annual Report 2008

19
>

enabling them to get money off their energy
bills, A-rated electrical and gas appliances
and energy efficiency measures. Around
40,000 customers have already joined the
better plan.

brands, best-in-sector customer service,
responsible pricing policy and range of
value-adding offers to increase further
its number of energy supply customers
in Great Britain.

Energy Performance Certificates
The UK government is progressively
introducing Energy Performance Certificates
(EPCs) for house sales and commercial and
rented properties. The certificates are
commissioned by the seller or their agent
from an accredited energy assessor, who
visits the property to collect the relevant data
and who creates the certificate. Ultimately,
there could be a requirement for up to
7.5 million surveys each year.

Central to this will be the development and
deployment of further improvements to the
level of service offered to customers, leading
to higher standards and fewer complaints.
This will include improvements in SSE’s
ability to communicate electronically with
customers. The successful launch of new
products, sometimes in partnership with
other organisations, will be a key priority.
There will also be a focus on providing
enhanced support for vulnerable customers.

SSE is recruiting qualified Domestic Energy
Assessors to develop a new nationwide
business to provide customers with EPCs
and other related services which will
complement its activities in energy supply,
energy efficiency and energy services. The
launch of the new business is another part
of SSE’s strategy to work with customers to
actively manage their energy consumption.

Ireland
The all-island electricity market comprises
2.6 million customers. There are also
around 750,000 gas customers. Following
the acquisitions of Airtricity and also CHP
Supply Ltd, SSE had just over 38,000 mainly
commercial electricity customers at
31 March 2008. SSE will build on this
customer base to expand its presence
in the commercial sector, begin supplying
electricity to domestic customers and,
in due course, begin supplying gas. With its
experience of competing successfully in the
energy supply market in Great Britain, SSE
believes it is well-placed to make an impact
on the all-island market also.

Energy Supply Priorities in 2008/09
and Beyond
During 2008/09, and beyond, SSE will seek
to capitalise further on its strong regional

SSE’s priority in the Irish all-island market
will be to consolidate and integrate its
recently-acquired supply businesses, thereby
providing the basis from which to grow
customer numbers significantly in the future.

During 2008/09, significant questions will
continue to be asked about the affordability
of electricity and gas, in the context of
intense global competition for energy.
SSE’s response will be to maintain its policy
of responsible pricing, promote energy
efficiency, reinforce the standard of its
customer service and enhance its support
for its most vulnerable customers.

Longer-term, continuing trends in
technology, and customers’ use of it, are
likely to lead to a material change in the
number of energy supply customers who
wish to deal with their supplier online. This,
in turn, means that suppliers will be required
to have the optimum range of products and
tariff structures and, perhaps, affinity
arrangements. Over the next few years, SSE
expects to make significant investment and
progress in each of these areas which, allied
to its long-standing focus on responsible
pricing and customer service, is designed
to deliver continuing long-term growth in
its energy supply business.

energywatch is the
independent gas and
electricity watchdog. It was
established in November
2000 through the Utility
Act to protect and promote
the interests of all gas and
electricity consumers.

2,632

1,981

1,573

840

2004

2005

2006

2007

2008

not expect or ask companies to do more on
social assistance over the period 2008-11.

These schemes will be designed to assist the
fuel poor and those vulnerable to fuel poverty.
They will feature a variety of approaches such
as ‘social’ tariffs, including energyplus care,
charitable donations, bespoke services for
vulnerable customers, work with advocate
organisations and community-based
programmes. In support of this agreement,
SSE has published a Code of Practice for
Vulnerable Customers, following consultation
with consumer and voluntary organisations.

Renewable Energy
In common with all other electricity suppliers,
SSE provides information to its customers
on the fuel mix of their electricity supply.
The intention is that the provision of this
information should enable customers
to make informed choices about the
environmental impact of the electricity
they buy. Based on the latest information
available at 31 March 2008, SSE’s customers
were supplied by a higher proportion of
renewable energy (10.2%) than customers
of any other major supplier. The average
proportion of renewable energy supplied
by the other major suppliers was 4.5%.

Product Marketing
Energy supply remains intensely competitive
and, in addition to responsible pricing and
best-in-sector customer service, product
development and marketing – sometimes
working with other organisations – has an
important part to play in gaining and
retaining customers’ loyalty.

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 8.45 million energy supply
customers, around 1.8 million now have
‘loyalty’ products – an increase of around
one-third during the year.

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.

In short, the structure of energy consumption
is going to change significantly and SSE
believes that customers’ greater awareness
of the need for energy efficiency represents
an opportunity. Against this background, it has
launched the better plan – a unique energy
programme which enables and encourages
customers to commit to using less energy,
supported by the provision of a real-time unit
displaying electricity consumption. The better
plan rewards them for doing so with vouchers

Scottish and Southern Energy Annual Report 2008

The right question

Once produced and gathered, electricity and gas are delivered via overhead lines,
underground cables and pipelines to people who rely on this energy in homes, offices,
businesses, schools and hospitals. Any interruption to the energy supply, no matter how
brief, is considered by many as unacceptable. The right question is – how does SSE make
sure its networks are reliable so that the number and duration of power cuts experienced
by customers is kept to a minimum?

HOW DO WE ENSURE
OUR NETWORKS
ARE RELIABLE?

SSE distributes electricity to over 3.5 million customers in central southern England,
and in the north of Scotland through one transmission and two distribution networks.
The key responsibility of SSE’s electricity networks businesses is to maintain safe and
reliable supplies of electricity. This means networks which do not succumb to random
failures, are able to withstand unusual conditions such as storms and are resilient in the
face of rapid variations in demand for power. In addition, SSE must be able to restore
supplies as quickly as possible in the event of interruptions.

Ofgem’s Distribution Price Control Review for 2005-10 resulted in substantially increased
allowances for capital expenditure to maintain and improve the networks’ performance.
The challenge for SSE is to target this investment so as to benefit the greatest number of
customers through initiatives including: automating switching devices to help restore power
more quickly when there are interruptions; and replacing open wire overhead conductors
with ‘BLX’ and ‘ABC’ covered wires that are more resilient to adverse weather conditions.
During the year, SSE’s capital expenditure on electricity networks was £264.4m, compared
with £204.5m in the previous year.

The other priority for SSE is to ensure that it delivers high levels of service to customers
whose supplies of electricity are interrupted. The quality of service received by customers
from electricity distribution companies is monitored by Ofgem. It focuses on two main types
of quality of service measure: guaranteed standards of performance and output measures
for specific service areas such as the number and duration of power supply interruptions.
In 2007/08, the average SSE distribution customer in the south of England was without
power for a total of 67 minutes; in the north of Scotland, it was 72 minutes.

Looking ahead, Ofgem is undertaking a two-year review of the regulatory regime governing
electricity networks to examine whether the current approach will deliver customers reliable
and well-run networks, with good service at reasonable prices. Reliability, therefore, will
remain the key issue in electricity networks for years to come.

Burghmuir substation

Scottish and Southern Energy Annual Report 2008

21
>

127,000km of overhead
and underground cables
make SSE the UK’s
second largest electricity
network company.

Highlight
Island supplies
SSE is responsible for distributing
electricity to the Scottish Highlands and
Islands. With the exception of Shetland, the
Islands rely on subsea cable connections
to the mainland electricity network. In all,
SSE operates over 450km of subsea cables.
This year has seen the replacement of three
of these cables reinforcing the electricity
supply to islands. In all, over 15km of
subsea cable were replaced at a cost of
£4.5m. In addition, a new 10km subsea
cable has been laid to reinforce the supply
to the island of Mull at a cost of £2m.

£2.7bn is SSE’s estimate of Ofgem’s
valuation of the assets in its electricity
distribution and transmission businesses.

Scottish and Southern Energy Annual Report 2008

02 Business Statement Networks
4. Overview 5. Electricity Networks

22
>

OVERVIEW

k Energy Networks operating profit*

of £544.4m, compared with £471.1m
in the previous year

Networks Introduction
SSE owns Southern Electric Power
Distribution, Scottish Hydro Electric
Power Distribution and Scottish Hydro
Electric Transmission. Under the current
arrangements, 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 index-
linked 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. Ofgem also places specific
incentives on companies to improve their
efficiency and quality of service.

Overall, 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. In electricity, the current
Distribution Price Control runs until 31 March
2010 and the current Transmission Price
Control runs until 31 March 2012.

As at 31 March 2008, SSE estimates that
Ofgem’s valuation of the assets of its
electricity distribution and transmission
businesses, the Regulated Asset Value (RAV),
was £2.7bn, based on Ofgem’s methodology,
including just over £300m for transmission.
On this basis, SSE is the UK’s third largest
electricity distribution company.

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. These companies
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. A new Price
Control for the five years to 31 March 2013
came into effect on 1 April 2008.

SGN estimates that the RAV of the networks
it owns was around £3.5bn, based on
Ofgem’s methodology, as at 31 March 2008.
This makes it the UK’s second largest gas
distribution company. SSE’s share of this
RAV is £1.75bn which, when added to its
electricity network businesses, gives SSE
a total RAV of £4.45bn.

In March 2008, Ofgem announced plans to
review the 20-year old regime governing the
regulation of electricity and gas networks.
The review will examine whether the ‘current
approach will continue to deliver customers

reliable, well-run networks with good
service at reasonable prices amid growing
investment challenges faced by the energy
networks in the future’. Ofgem has stated
that the range of possible recommendations
emerging from the review runs from no
change to substantial change, and that
where change is recommended, there will be
full consultation. Because the review will not
report until 2010, and because any proposed
changes will be subject to consultation, work
on the Distribution Price Control Review for
2010-15 is expected to be unaffected.

After electricity and gas, Telecoms is SSE’s
third networks business; unlike the other two,
it is not the subject of economic regulation.
It operates a national telecoms network for
commercial and public sector customers
which extends to around 8,000km throughout
Great Britain.

Energy Systems Performance Overview
Operating profit* in Energy Systems, including
gas distribution, increased from £471.1m to
£544.4m, contributing 39.4% 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.

During 2007/08, Southern Electric Power
Distribution, Scottish Hydro Electric
Power Distribution, Scottish Hydro Electric
Transmission and SGN all distributed more
units of energy than in the previous year,
which was marked by unusually high
temperatures.

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.

Power Systems Objectives
SSE’s objective in power systems is to
ensure that they are managed as efficiently
as possible, including maintaining tight
controls over operational expenditure and
delivering effective capital expenditure,
so that the number and duration of power
cuts experienced by customers is kept
to a minimum.

Through good performance in areas such
as customer service and innovation, SSE
seeks to earn additional incentive-based
revenue under the various Ofgem-sponsored
schemes. Over time, its objective is to grow
the RAV of the networks businesses and

secure increased revenue from them.
Constructive engagement with the regulator,
Ofgem, during the various Price Control
Reviews, is central to this objective.

ELECTRICITY NETWORKS

k Power Systems operating profit*
of £382.9m, up from £368.0m in
the previous year

k Investment in electricity networks

up 29% to £264.4m

k Additional revenue of £16m earned
under Ofgem’s Quality of Service
and other incentive schemes
k Beauly-Denny Public Inquiry
completed in February 2008

Southern Electric Power Distribution
Southern Electric Power Distribution’s
operating profit* increased by 3.9%, from
£224.0m to £232.7m. During the year, it
distributed 34.2 terrawatt-hours (TWh)
of electricity, compared with 33.9TWh in
the previous year. The positive impact on
profitability of this increase in the number
of units distributed was supplemented
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 during the year was 67,
compared with 72 in the previous year;
and the number of supply interruptions
per 100 customers was 66, compared
with 75 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. This, together with income
earned during 2007/08 under other incentive
arrangements, is expected to lead to SSE
receiving additional revenue totalling £10.5m
during the next two financial years.

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 4.3%,
from £144.0m to £150.2m. In the Scottish
Hydro Electric area, 8.8TWh of electricity
were distributed during the year, compared
with 8.5TWh distributed in the previous year.
As in the Southern Electric area, the positive
impact on profitability of this increase in
the number of units distributed was
supplemented by changes in their price.

The average number of minutes that
customers were without supply during the

Scottish and Southern Energy Annual Report 2008

23
>

4.23

4.06

2.40

2.46

2004 2005 2006 2007 2008

investment. In line with this, SSE expects
to invest almost £300m in its electricity
networks in 2008/09.

Future Transmission Developments
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. In January 2008, the
Scottish Government designated electricity
network reinforcement to support renewable
energy development as one of nine proposed
‘National Developments’ in the draft second
National Planning Framework. Designation
as National Developments in the Framework
establishes these projects as being in the
national interest.

SSE believes 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 its
responsibilities as a licensed transmission
company and is also in the national interest.
A year-long Public Inquiry into the project
was completed in February 2008. The
Scottish Minister for Enterprise, Energy and
Tourism stated in the Scottish Parliament
in September 2007 that Ministers do not
expect to receive the report of the Inquiry
until late 2008 and that a determination is
unlikely before early 2009. It is now likely
that the construction of SSE’s share of the
replacement line will require investment
on excess of £300m.

As the UK Business Council for Sustainable
Energy said in its paper on implementing
the EU renewable energy target in the UK,
the consenting and completion of the
Beauly-Denny rebuild is essential to
releasing the upgrade potential of the
existing Scottish transmission system.
By rebuilding the weakest part of a north
of Scotland transmission ring, it will allow
the other elements to that ring to be
re-conductored and re-insulated (avoiding

The Regulated Asset Value
is Ofgem’s valuation of SSE’s
electricity and gas network
assets (equity share).

£4.45bn

any need for new overhead line routes) to
increase the capability for renewable energy
capacity in the north of Scotland to over
6 gigawatts (GW), compared with around
2.2GW currently connected.

SSE has undertaken a public consultation
exercise on its draft proposals for the
possible development of a new high voltage
electricity transmission cable capable of
accommodating power from wind farms
on Shetland and connecting it to the
existing mainland transmission network
at Blackhillock in Moray.

The Scottish Government is exploring
subsea electricity network options through
two offshore transmission studies: the
Irish Scottish Links on Energy Study and
the North Sea Energy Grid. Before its
acquisition by SSE, Airtricity was an early
advocate of proposals to develop a European
offshore grid to facilitate the export of
renewable energy. SSE is well-placed to
contribute to the development of new grid
options and will continue to work on them
with Scottish Ministers and officials and
other stakeholders.

In September 2007, the European
Commission published its third package
of proposals to further liberalise the EU’s
energy market. The package includes
options for electricity and gas transmission

year was 72, compared with 77 in the
previous year. The number of supply
interruptions per 100 customers was 69,
compared with 79 in the previous year.
Performance in respect of both minutes
lost and interruptions was ahead of Ofgem’s
QSIS targets. This, together with income
earned in 2007/08 under other incentive
arrangements is expected to lead to SSE
receiving additional revenue of £5.5m
during the next two financial years.

Electricity Network Investment
and RAV Growth
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 the efficient delivery of this enhanced
investment programme was one of SSE’s
priorities for 2007/08.

During the year, SSE’s capital expenditure on
electricity networks was £264.4m, compared
with £204.5m in the previous year.

The most significant electricity distribution
project being undertaken by SSE is the
construction of two new underground cable
132kV circuits from Bramley to Basingstoke
in Hampshire, designed to ensure the
electricity network can meet maximum
demand for 650,000 customers served by
the Bramley and Fleet grid supply points.
The 10km route includes 4km of urban
roads, directional drills under rural water
courses and large open cut crossings
through the main railway line cutting in
Basingstoke. It also requires development
work at two substations. The total cost of
the project is over £16m and it is on course
for completion before the end of this year.

The most significant electricity transmission
project on which work is actually getting
under way is the Inverarnan substation,
which will provide 200MW additional export
capacity for electricity generated from
renewable sources in Argyll. This is a joint
project with Scottish Power Transmission.
SSE’s investment is around £12m.

Since the start of the current Distribution
Price Control in April 2005, SSE has invested
£556m in its distribution networks (which
excludes metering) and a further £88m in
its transmission network. It estimates that
the RAV of its distribution and transmission
businesses is now £2.7bn. The expected
total growth in the RAV over the whole of the
2005-10 Distribution Price Control period,
based on Ofgem’s methodology, is forecast
to be almost £500m, taking it to around £3bn
in 2010. This excludes any major transmission

Scottish and Southern Energy Annual Report 2008

02 Business Statement Networks continued
5. Electricity Networks (continued) 6. Gas Networks

24
>

networks: the full ownership unbundling of
transmission from production and supply in
both electricity and gas; or the designation
of an independent system operator (ISO) that
would operate, maintain and develop the
networks, which would make it possible for
existing vertically-integrated companies to
retain network ownership. SSE believes that
the ISO model in Great Britain has worked
well and could be successfully replicated
elsewhere in the EU. Discussions on this
issue are continuing, with a view to EU
governments reaching agreement on
a way forward later this year.

Electricity Distribution and Transmission
Priorities in 2008/09 and Beyond
During 2008/09, and beyond, 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
the implementation of a review of internal
processes and customer-facing operations
that took place during 2007/08. Ofgem has
already stated that encouraging electricity
distribution companies to be ‘more responsive
to the needs of customers’ will be amongst its
key priorities for the forthcoming Distribution
Price Control Review for 2010-15.

will be growth in renewable and small-scale
‘distributed’ generation, which could see
much more generation connecting directly
to the distribution, as opposed to the
transmission, network.

During 2008/09, important questions will
be asked about the reliability of the UK’s
electricity networks and their fitness for
purpose in the context of the need to
accommodate output from renewable energy
schemes. Key priorities for SSE during the
year will include the efficient delivery of the
next phase of the major programme of
investment in the networks. This will be
targeted at upgrading them so as to benefit
the greatest number of customers. It will also
undertake work in advance of what is hoped
to be a successful outcome from the Public
Inquiry into the Beauly-Denny transmission
line proposal. In total, SSE currently expects
to invest around £1.75bn in its electricity
networks over the next five years.

Longer-term, Ofgem’s review of the
regulatory regime for energy networks,
with its focus on the growing investment
challenges, the implications of greater
distributed generation, customer service
and cutting the regulatory burden represent
an opportunity to build on the strengths of
the existing system which SSE, operating at
the efficiency frontier in electricity networks,
should be able to influence and capitalise on.

GAS NETWORKS

Over the next year, detailed work will begin
on the Review, where Ofgem’s other key
priorities include giving companies ‘strong
incentives to help tackle climate change’
and ‘delivering good value for consumers
by ensuring that companies provide secure
and more sustainable networks’. Ofgem
also pointed out that it is likely that there

k Share of SGN’s adjusted operating
profit* up from £103.1m to £161.5m
k SGN capital expenditure up 49% to

£179.8m and replacement expenditure
up 14% to £199.2m

k Improved efficiency ranking
k Agreement on Gas Distribution

Price Control 2008-13

What is Efficiency?

We keep things simple, do the work that
adds value and avoid wasting money,
materials, energy or time. This is vital
when it comes to delivering electricity to
people’s homes, offices and businesses.
We must maintain reliable power supplies
in the most efficient way possible.

That means keeping the number and
length of power cuts to a minimum. During
2007/08 the number of power cuts per
100 customers was 66 in southern England
and 69 in northern Scotland. The average
number of minutes of lost electricity supply
per customer was 67 in southern England
and 72 in northern Scotland.

Our regulator, Ofgem, will be reviewing the
price framework for electricity distribution
between 2010 and 2015. The priority will
continue to be efficiency: delivering good
value for customers by ensuring we
provide secure networks demonstrating
efficiency day-in, day-out.

Scotia Gas Networks – Financial
SGN, in which SSE holds 50% of the equity,
owns and operates the Scotland and the
Southern gas distribution networks. The
networks comprise around 74,000km of gas
mains, delivering gas to around 5.7 million
industrial, commercial and domestic
customers. SSE receives 50% of the
distributable earnings from SGN, in line
with its equity holding, and also provides
it with corporate and management services.

SSE’s share of SGN’s adjusted operating
profit* was £161.5m during 2007/08,
compared with £103.1m in the previous
year. This reflects an increase in the volume
of gas transported, changes in prices for
transporting gas (following the under-
recovery of revenue in 2006/07) and
greater efficiencies yielding a reduction
in operating costs.

Around 23% of SGN’s operating profit was
derived from the non-regulated activities of
its contracting, connections and commercial
services divisions, and these continued to
perform well.

Scotia Gas Networks – Operational
During 2007/08, the gas transportation
volume for SGN’s network in Scotland was
59.5TWh and for its Southern network the
volume was 110TWh. This compares with
57TWh and 105TWh respectively in the
previous year.

SGN’s objective is to be at the frontier
of safety, customer service and efficiency
in gas distribution. In September 2007,
Ofgem published a comparison of
efficiency rankings in which Scotland Gas
Networks was ranked the second most
efficient of the eight distribution networks
and Southern Gas Networks the third. This
compares with seventh and sixth respectively
when the two networks were acquired by
SGN in 2005.

In March 2008, the number of lost-time
injuries in SGN fell to 0.15 per 100,000 hours
worked, compared with 0.21 in March 2007.
The focus on customer service helped SGN
deliver a reduction in the number of
complaints about it sent to energywatch
for resolution of 67%, to 25. The introduction
of new front office management systems,
reducing the total number of systems
from over 50 to 11, has been successfully
completed. This means SGN now has
free-standing systems which are capable
of supporting more efficient deployment of
resources. When SGN acquired its networks
in June 2005, National Grid was contracted
to provide it with services with a total value
of over £40m. Over the last three years,
many of these services have been brought
within SGN and another major contract will
end when SGN’s gas network ‘System
Control’ goes live in two phases, starting
later this year.

Scottish and Southern Energy Annual Report 2008

25
>

for a total consideration of £79m, excluding
working capital, at a gain before tax of
£55m. The assets disposed of contributed
approximately 0.3% of SSE’s profit in
2006/07. The disposal reflected SSE’s
commitment to complete the refocusing of
its telecoms business on network-related,
as opposed to site-related, services.

In line with this, in October 2007, SSE
acquired a 1,100km fibre optic network from
TeliaSonera International Carrier UK Ltd for
a total consideration of £12.5m. The asset
acquired by SSE comprises a duct containing
fibre running between London, Bristol,
Manchester and Leeds plus ten operational
repeater sites. Included in the acquisition are
extensions in seven cities around England.
It provides SSE with owned fibre capacity
throughout the UK, together with local
connectivity that could be integrated into its
existing network. In December 2007, SSE
supplemented this with the acquisition of
160km of telecom duct network within
London. The acquisitions have provided Neos
Networks with one of the most extensive
wholly-owned telecom duct fibre footprints
in the UK.

Neos has upgraded its optical core network
to enable point-to-point services at up to
40 Gigabits per second and has also started
to upgrade its ethernet platform (a frame-
based technology connecting computer
systems to form a network) to provide
customers with high speed, scalable and
flexible connectivity – committing a total
investment of over £8m to be made over
five years. This will support future new
business growth.

Telecoms Priorities in 2008/09 and Beyond
SSE’s priority in Telecoms in 2008/09 is to
complete the integration of assets acquired
during 2007/08 and 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. Longer-term,
its ambition is to become the UK’s leading
alternative telecoms network company.

7. Telecoms Networks

SGN also owns and operates SGN
Connections and SGN Contracting. Amongst
other things, these businesses carry out work
previously done by contractors and give SGN
greater scope to improve the efficiency, and
reduce the cost, of the work it carries out.

It has also established SGN Metering,
which is an Ofgem-accredited Meter Asset
Manager. SGN Metering now owns and
manages a portfolio of around 46,000 gas
meters which it has installed in the Southern
and Scotland network areas and it will own
and manage all new meters fitted. In
February 2008, SGN Metering secured a
£15m per annum contact from National Grid
Metering to deliver domestic metering work
in the Scotland and Southern areas for up
to three years. This was followed by a £3m,
two-year contract to deliver metering work
in the industrial and commercial sector.
These contracts provide streams of work
which can be carried out during the down-
time associated with SGN’s emergency work.

SGN’s approach of in-sourcing work and
the expansion of its gas network and other
activities means it now directly employs
3,750 people, compared with 2,000 when
it acquired its two distribution networks
in June 2005. Its three-year pay and
productivity deal for employees, which
was agreed during 2006/07, has allowed
the introduction of more flexible working
patterns and associated efficiency gains.
These include the removal of restrictive
practices and their replacement by a
consistent framework for terms and
conditions. Work pattern rotas can now
be determined by local management, and
site start and finish provisions have been
introduced to enhance productivity.

Scotia Gas Networks – Investment
During the year, SGN invested £179.8m in
capital expenditure projects, compared with
£120.4m in the previous year. It also invested
£199.2m in mains and services replacement
expenditure works, compared with £174.8m
in the previous year, under the 30:30 mains
replacement programme which was started
in 2002. This requires that all iron gas mains
within 30 metres of homes and premises
must be replaced over a 30-year period, and
in 2007/08, SGN replaced just over 900km
of its metallic gas mains with modern
polyethylene pipes.

Following this investment, SGN estimates
that the RAV of the networks it owns was
around £3.5bn as at 31 March 2008 – which
is significantly above their enterprise value
when they were acquired in June 2005.

The Gas Distribution Price Control for 2008-13
provides the opportunity for SGN to increase
significantly investment in its Scottish and
Southern gas distribution networks, thereby
reinforcing their safety and reliability and
securing another significant increase in their

RAV. By 2013, SGN estimates its RAV will be
around £4.8bn. In line with that, it expects to
invest around £170m in capital expenditure
projects and around £210m in replacement
expenditure works during 2008/09.

Scotia Gas Networks Priorities in 2008/09
and Beyond
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 improve performance
and effectiveness. The successful delivery of
SGN’s gas network ‘System Control’ is a key
priority over the next two years.

TELECOMS NETWORKS

k Operating profit* up 2.9% to £14.3m
(on continuing businesses up 28.4%
to £13.1m)

k Sale of sites assets for £79m total

consideration

k Acquisition of additional fibre optic

and telecom duct network

Introduction to Telecoms
After electricity and gas, Telecoms is SSE’s
third networks business. It combines SSE
Telecom and Neos Networks and operates
an 8,000km UK-wide telecoms network,
providing services to other telecoms
providers, companies and public sector
organisations. This includes 3,240km of fibre
optic cabling which SSE owns; the remainder
is leased fibre and microwave radio.

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.

Telecoms Operations
SSE’s combined Telecoms business achieved
an operating profit* of £14.3m during 2007/08,
an increase of 2.9% (excluding the telecoms
site assets disposed of in August 2007,
operating profit was £13.1m, an underlying
increase of 28.4%).

The improvement in performance during
2007/08 was mainly the result of higher sales
achieved by Neos, and important contracts
were signed with a diverse range of major
organisations, such as AT&T and Carphone
Warehouse. In January 2008, a significant
order was received from Zen Internet, one
of the leading UK internet service providers.

Telecoms Investment
In July 2007, SSE entered into an agreement
with The Wireless Infrastructure Company
Limited, under which it sold its telecoms
sites assets, involving over 220 tower sites,

Scottish and Southern Energy Annual Report 2008

02 Business Statement Energy-Related Services
8. Overview 9. Contracting, Connections and Metering

26
>

OVERVIEW
In addition to being involved in Generation,
Supply and Networks, SSE also provides an
additional range of other energy-related
services which complement its other
businesses: Contracting, Connections and
Metering; Energy and Home Services; and
Gas Storage. These are important services,
on which customers depend, so that their
increasingly complex energy requirements
can be met.

CONTRACTING, CONNECTIONS
AND METERING

k Operating profit* up 7.8% to £55.6m
k Coverage of Contracting business
extended, now with 64 branches
nationwide

k Acquisition of three additional street

lighting PFI contracts

k Further expansion of out-of-area

electricity networks, with 45 in operation
or under construction

k Premises connected to SSE gas
pipelines now above 50,000

k First new water and sewerage company

since privatisation

k Completion of in-sourcing of Metering

work in three areas of the UK

k Installation of smart meters under way
via Energy Demand Reduction Trial

Overview
Contracting, Connections and Metering
delivered operating profit* of £55.6m during
2007/08, compared with £51.6m in the
previous year.

engineering; and public and highway lighting.
Now employing over 4,000 people, it is one
of the largest mechanical and electrical
contracting businesses in the UK. It operates
from 64 regional offices throughout Great
Britain and also trades as SWALEC
Contracting in Wales and Scottish Hydro
Contracting in Scotland.

Contracting Performance During 2007/08
SEC made significant progress against its key
priorities for the year of broadening further
its geographical presence and ensuring
there continues to be good performance in
the long-term contracts which are central
to its ongoing business development.

For a nominal consideration, it acquired Hills
Electrical and Mechanical plc, a business
with an annual turnover of £45m operating
in all parts of the UK. The acquisition
complements SEC’s existing businesses
whilst strengthening its position as a leading
mechanical and electrical contractor. It
expands SEC’s number of branch offices
from 57 to 64, and provides it with a national
business supporting the retail sector.

SEC also acquired Seeboard Trading Limited,
which finances and operates street lighting
maintenance and replacement projects for
three local authorities under the Private
Finance Initiative (PFI). The three local
authorities are the London Borough of
Islington, the London Borough of Ealing
and Dorset County Council. The projects
cover around 90,000 street lighting columns
and they all have at least 20 years to run.

Introduction to Contracting
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

In partnership with the asset finance division
of The Royal Bank of Scotland, SEC already
has PFI contracts to replace and maintain
around 210,000 street lighting columns for
four local authorities in England: Stoke on
Trent City Council; Leeds City Council; and

What is Sustainability?

We aim to operate ethically, taking
the long-term view to achieve growth
while safeguarding the environment.
That is why we actively support ways
of changing the way in which energy
is produced and consumed.

As fossil fuels deplete and as the evidence
about their impact on the earth’s climate
grows, the need to generate more electricity
from renewable sources is going to become
even stronger. The days of meeting an
unchecked demand for energy through
monolithic carbon-intensive power
stations are coming to an end.

We own and operate over 2,000MW of
renewable electricity generation capacity
and aim to double this over the next five
years through a major investment
programme. We believe this major
commitment is right for shareholders,
customers and the environment.

Newcastle City and North Tyneside Councils.
These contracts all have over 20 years to
run and, when combined with the contracts
acquired via Seeboard Trading Limited, mean
SSE’s interests in PFI contracts extends to
300,000 lighting columns.

In addition to the PFI replacement and
maintenance contracts, SSE has contracts
with 22 local authorities in England, Wales
and Scotland to maintain over one million
street lights. It is the largest street lighting
contractor in the UK, and in 2007/08 secured
its first-ever contract in north-west England,
with St Helens Council.

During 2007/08 SEC’s order book exceeded
£100m for the first time. The order book
has been supported by significant contract
wins with a number of leading organisations
such as National Air Traffic Service (NATS)
and the VT Group. To support future growth,
SEC is developing the services it offers to
customers, and during 2007/08 it launched a
new business area for solar and photovoltaic
products. It also recruited almost 200
apprentice electricians during the year
and expects to recruit more apprentices
during 2008/09.

Contracting Priorities in 2008/09 and Beyond
The first priority for SEC in 2008/09 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 complete the integration
of businesses acquired during 2007/08
and secure further increases in its order
book, with a growing focus on emerging
technologies and renewable energy
installation capability. In line with this, a trial
will be launched to promote the installation
of solar and photovoltaic products on to
domestic rooftops. To position itself for
long-term growth, it expects to recruit more
apprentices. That long-term growth should
result, over the next few years, in SEC’s
operations being further extended throughout
Great Britain and, over time, Ireland.

Introduction to Connections
SSE’s national Connections business provides
electricity, gas and water connections and
designs, finances, builds, owns and operates
gas, electricity and telecommunications
networks throughout the country.

Connections Performance During 2007/08 –
Electricity
Continued expansion of its Connections
business was among SSE’s priorities for
2007/08. During the year it completed 42,800
electrical connections, compared with
44,600 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

Scottish and Southern Energy Annual Report 2008

27
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2008

2007

2006

2005

2004

‘Out-of-area’ networks are electricity
networks which SSE owns and
operates outside its Southern
Electric and Scottish Hydro Electric
distribution network operator areas.

manages 33 energised electricity networks
outside these two areas, with development
work ongoing at a number of these, and a
further 12 are under construction, including
Eurocentral and West Prestonpans in
Glasgow, Valleywood and St Davids in Wales
and Castlewood in Nottingham. In total, SSE
has just over 400MW of energised networks
capacity, including 180MW currently under
construction. Key clients are from the UK land
development sector and currently include the
London Development Agency, Laing O’Rourke,
Persimmon and Hammersons. This remains
a relatively new business for SSE, but it
became profitable during 2007/08.

Connections Performance During 2007/08 –
Gas
SSE’s Connections business is also a
licensed gas transporter. Trading as SSE
Pipelines, it installs, owns and operates gas
mains and services on new housing and
commercial developments throughout the
UK. The number of new premises connected
to its gas networks has continued to grow,
and during the year, it connected a further
8,000 premises, taking the total number of
connections to over 53,000. During 2007/08,
it began construction of its biggest pipeline
project to date – to supply up to 1,000 new-
build residential properties at a development
in Bedford.

Water
In October 2007, Ofwat announced that SSE’s
subsidiary, SSE Water (SSEW), will become
the first new company to offer both water
and sewerage services since privatisation in
1989. This followed the granting of an ‘inset’
appointment to SSEW, which allows for one
supplier of water and sewerage services
to be replaced by another for a defined
geographical area, in this case a housing
development near Salisbury. Ofwat said ‘SSE
has a proven track record for its high levels
of customer service. Ofwat expects SSEW
to set a benchmark in the water industry
for similar high levels of customer service’.

SSE is already experienced in designing,
installing and operating multi-utility
infrastructures. The granting of inset
appointments will enable it to provide a
more comprehensive multi-utility solution
to customers in the property development
and house-building sectors, through being
able to install, own, operate and supply water
and sewerage services alongside SSE’s
existing electricity and gas services.

in central southern England and the north of
Scotland and has undertaken a programme
of in-sourcing of meter reading operations
and meter operator work in other parts of
the UK. It supplies, installs and maintains
domestic meters and carries out metering
work in the commercial, industrial and
generation sectors. It also offers data
collection services to the domestic and
SME sectors.

Construction work at the development
near Salisbury began in December, and the
early evidence suggests that the ‘one-stop’
approach to infrastructure installation on
larger sites is a very good way forward for
developers. Once the water infrastructure
is completed, SSE will own and operate the
network, having the same responsibilities
as any other water company: issuing bills;
reading meters; testing water quality and
cleaning blocked sewers.

SSE expects to make further applications for
inset appointments in other areas, and made
a second one – in respect of a development
at Llanilid Park (Valleywood) in Wales – in
February 2008.

Connections Priorities for 2008/09
and Beyond
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. Another key
priority will be the successful completion
of the water installation at Salisbury, securing
other inset appointments and building up the
one-stop approach to infrastructure provision.

Introduction to Metering
SSE’s Metering business provides services
to most electricity suppliers with customers

Metering Performance During 2007/08
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 2007/08,
it collected around 5.8 million electricity
readings and 2.3 million gas readings, up
from 4.3 million and 1.4 million respectively
in the previous year.

SSE’s Metering activities expanded
significantly during 2007/08, with the
in-sourcing of meter reading operations in
south-west England and central and southern
Scotland and meter operator work in south
Wales, resulting in the transfer of 200
employees to SSE. This will take the total
in the Metering business to over 800,
and double its geographic coverage.

During 2008/09, SSE will in-source meter
reading and meter operations work in south-
east England and also meter operator work in
south-west England and central and southern
Scotland. This will result in the transfer of
almost 150 employees to SSE via a mixture
of TUPE transfer and new recruitment.

The ongoing development of SSE’s Metering
business is designed to achieve both
efficiency gains and high standards of service
for SSE’s customers and to support the
energy supply business.

SSE is a the leading participant in the
UK-government sponsored two-year Energy

Scottish and Southern Energy Annual Report 2008

02 Business Statement Energy-Related Services continued
9. Contracting, Connections and Metering (continued) 10. Energy and Home Services

28
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Demand Reduction Project, under which
almost 30,000 SSE customers will be taking
part in energy-saving trials. These include
around 8,000 customers receiving state-of-
the-art smart meters. Ultimately, smart
meters will allow energy suppliers to
communicate directly with their customers,
remove the need for meter readings and
ensure entirely accurate bills with no
estimates, helping customers to reduce
their consumption of energy. The results
of the trials will provide evidence to support
the future roll-out of smart electricity and
gas meters.

The first smart meters were installed in
Perthshire in February 2008. Although some
other high volume roll-outs have occurred
elsewhere in the world, none has attempted
such a level of complexity, using this level of
leading-edge technology. Customers involved
in this trial will be able to manage gas and
electricity usage through a mixture of
in-home remote displays, graphs on bills
and website information.

In March 2008, SSE invested £1m in Onzo
Limited, in return for a 24.5% share of the
business. Onzo is a newly-established
data systems development business,
with specific intellectual property relating
to the development of display devices
that support smart metering systems.
The devices provide real-time information
about energy consumption and have the
potential to provide data down to the
individual appliance level.

In this context, SSE welcomed the decision
by the UK government to include within the
Energy Bill broad enabling powers to support
a national roll-out of smart meters. These
powers should allow a detailed framework for
a roll-out to be developed and implemented
over the next decade.

Metering Priorities in 2008/09 and Beyond
For Metering, the key priority is the successful
completion of the ‘in-sourcing’ of work in
south-east and south-west England and
central and southern Scotland. This will be
another key milestone in SSE’s long-term
objective of building a national metering
business. It is also important that SSE’s
participation in the Energy Demand Research
Project, with its focus on smart metering
technologies, is successful, and during
2008/09 SSE expects to install around
8,000 smart meters as part of it.

ENERGY AND HOME SERVICES

k 115,000 new gas boiler and telecoms
customers, taking total to 235,000

k Product portfolio enhanced with

electrical wiring service

Introduction to Energy and Home 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
which go beyond the meter, helping it to
gain, retain and develop long-term
relationships with customers.

More fundamentally, over time, a new model
is likely to be created whereby homes and
other buildings are developed and designed
so they need as little energy as possible.
Energy services and SSE’s related
investments in emerging technologies
are about preparing for that new model.

Energy Services Performance During
2007/08
Customers are increasingly interested in
managing their own energy use and SSE
provides bespoke energy solutions featuring
on-site or off-site dedicated wind turbines,

What is Excellence?

We strive to get better and smarter and
more innovative because we want to be
the best in everything we do. That means
constantly looking for new ideas to
improve products, processes and services
and finding better ways of working –
all for the benefit of customers.

One leading industry commentator recently
told a group of SSE people that innovation
is ‘a great opportunity, a great challenge
and great fun’. To encourage it, we have a
Licence to Innovate (LTI) scheme, whereby
people are able to research, review, trial
and explore their ideas knowing they have
the full support of the Chief Executive.

During 2007/08, 24 LTIs were successfully
completed – each improving a product,
process or service. These innovations,
and improvements delivered throughout
the organisation every day, all contribute
to the culture of innovation and excellence
which we believe to be a hallmark of SSE.

solar thermal systems, solar photovoltaic
systems and ground-source heat pumps.
SSE’s Energy Services division operates and
maintains site-wide energy infrastructures
of this kind that improve environmental
performance over conventional alternatives.

In addition, business customers of SSE
now have over 50MW of on-site installed
Combined Head and Power (CHP) generation
capacity, generating heat and power in a
single process. Current developments
include The Warren, in south-east London,
where Berkeley Homes Group is building
460 apartments, a nursery unit, primary
care trust and commercial units. Under
the Energy Services Company (ESCO)
Agreement, SSE is responsible for designing
and installing an energy centre, including
a CHP plant. SSE will also undertake all
associated heat, electricity and gas
infrastructure, metering and billing
customer services, long-term operations
and maintenance services and all fuel
procurement requirements.

SSE’s main contractor on this development
is Vital Energi Utilities Ltd, and in October
2007 SSE entered into an agreement to
invest £6m for a 30% share of the business.
Vital Energi specialises in the design, supply
and installation of CHP and District Heating
systems in the commercial, industrial and
residential sectors.

SSE’s home services team offers a range
of maintenance and protection services for
customers’ gas and electrical systems and
a full range of gas and electrical installation
services. Its shield gas boiler, central
heating and wiring protection service is
now almost two years old and had already
attracted 70,000 customers by the end of
March 2008.

This growth is expected to continue and the
number of postcode areas covered by the
service has now reached 43, with a further five
postcode areas due to be added in 2008/09.

The home services offered by SSE also
include the talk with telecoms service, which
now has 165,000 customers and is profitable.
SSE and BT have entered into a partnership
that sees BT become the provider of
integrated voice and broadband services
to SSE for resale to its UK customers. Under
the terms of the three-year agreement,
BT Wholesale will support SSE’s plans to
become a high quality, national provider of
integrated communications services. The
service is expected to launch this summer.

Energy Services Priorities in 2008/09
and Beyond
The market for these home and other energy
services is evolving, but it is one in which
rapid change is likely as – for example –
demand for low- and zero-carbon homes
grows. As the needs of customers become

Scottish and Southern Energy Annual Report 2008

29
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the capacity. On completion of the extension,
SSE would have effective ownership of over
800mcm of gas storage capacity, including
Hornsea. Site preparation work has been
completed and a final decision on whether
to proceed with this development is expected
to be taken during 2008/09.

Gas Storage Priorities in 2008/09 and Beyond
SSE’s priorities in Gas Storage during
2008/09 are to: maintain its excellent record
of reliability at Hornsea; ensure that the
first of the new caverns at Aldbrough are
available for commercial storage; and make
a decision on whether to proceed with the
Aldbrough extension. Longer-term, SSE will
also continue to look for other opportunities
to add to its gas storage capability.

Gas Storage – Investment
The joint venture with Statoil (UK) Ltd to
develop, at Aldbrough, near Hornsea, what
will become the UK’s largest onshore gas
storage facility is continuing to make
progress, albeit at a slower rate than
expected when the development work
started in 2004 and also when the project
was reviewed at the start of 2007/08.

SSE’s investment in Aldbrough, is now
expected to total around £175m, reflecting
the increased length of time required to
complete the development and the significant
inflationary pressures seen throughout the
UK construction industry. 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. 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.

The first three of the nine caverns at
Aldbrough are scheduled to enter commercial
operation in the autumn. The first gas has
been introduced to site and dewatering of
the first caverns will commence shortly.

SSE and Statoil (UK) Ltd have secured
consent from East Riding of Yorkshire
Council to increase the storage capacity at the
Aldbrough site beyond that currently under
development. 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. Construction
of the extension would, therefore, help to
ensure that the UK can meet gas demand
during periods of high energy usage.

SSE would contribute 50% of the cost of the
extension in return for ownership of 50% of

What is Teamwork?

We support and value our colleagues and
enjoy working together as a team in an
open and honest way. Our team includes
over 16,000 people working from more
than almost 200 power stations, depots,
customer service centres, shops and
offices in every part of the UK and,
now, overseas as well.

Working as a team gives us a common
sense of purpose and creates a climate
in which everyone is very open to ideas and
very honest with each other. It encourages
excellence in everything we do on behalf
of our shareholders and our customers.
Teamwork is a key way of assessing
performance within SSE.

With employees becoming shareholders
and customers themselves, we believe
there is a real commonality of interest
between the SSE team, our customers
and our shareholders – on which we’ll
build on in the years ahead.

11. Gas Storage

more complex, SSE’s approach is to provide
a growing range of dependable services and
thereby position itself to be a successful –
and national – provider as the production
and consumption of energy changes over
the next decade.

GAS STORAGE

k Operating profit* of £50.9m compared

with £55.9m in previous year

k First caverns at Aldbrough scheduled
for commercial operation in autumn
k Planning permission secured to double
the size of Aldbrough development to
over 800mcm

Introduction to Gas Storage
It is generally recognised that the UK has
insufficient gas storage. This under capacity
reflects the reliance it was able to place in
past years on gas production from the North
Sea. As North Sea gas declines, UK imports
will continue to increase and this means
there will be a growing reliance on gas
storage facilities to help provide security
of supply. Such facilities therefore have
a long-term value.

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 1.8km 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 respond to market
opportunities. Capacity is sold in Standard
Bundled Units (SBU), 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
£50.9m, compared with £55.9m in the previous
year (which SSE said in its Annual Report 2007
was a high point in gas storage profitability).
The value of, and demand for, gas storage
facilities in the UK has, however, continued
to be high and incidents at the Bacton gas
terminal and the Grangemouth oil refinery
again demonstrated the importance of gas
storage in securing UK energy supplies.

One of SSE’s priorities for 2007/08 was to
ensure that Hornsea maintained its excellent
record of dependability, 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 respond to gas trading
opportunities.

Scottish and Southern Energy Annual Report 2008

The right question

Nine underground caverns at Aldbrough,
the first three of which are expected to
be available for full commercial service
in 2008/09.

Highlight
Aldbrough
In a joint venture with Statoil (UK) Ltd, SSE is
developing what will become the UK’s largest
onshore gas storage facility, at Aldbrough in
Yorkshire. The new facility will have a total
new capacity of 420mcm, of which SSE will
have an ownership interest in 280mcm,
bringing the company’s total gas storage
capacity to 605mcm. 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.

420mcm is the total
capacity of the new
gas storage facility at
Aldbrough in Yorkshire.

Aldbrough gas storage facility

Scottish and Southern Energy Annual Report 2008

31
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The UK relies on gas to provide energy for heating and electricity more than any other
primary source of energy. The Energy White Paper ‘The Energy Challenge’ said that gas-fired
power plants are a key method of electricity generation, generating over one-third of the
UK’s electricity requirement. By 2010, it is estimated that the UK will be 50% dependent on
imported gas, rising to 80% by 2020. The right question is – how is SSE investing to help
secure energy supplies for customers?

HOW DO WE SECURE
ENERGY SUPPLIES
FOR CUSTOMERS?

In an environment where the UK is becoming increasingly dependent in imported gas, there
is clear benefit in reducing that dependency. SSE is doing this by continuing to expand its
diverse portfolio of power stations which, in addition to gas, use coal, biomass, hydro and
wind as their primary sources of energy.

SSE’s newly established Engineering Centre will provide an effective long-term asset
management and investment planning capability across its generation portfolio to provide
a platform to support this growth. For example, SSE is now the UK’s leading user of biomass
co-firing following the completion of enhanced facilities at its Fiddlers’ Ferry and Ferrybridge
power stations. The installation of FGD equipment at these stations will extend their
contribution to the security of the UK’s energy supplies.

In addition to reducing the dependency on gas overall, reducing the risk of short-term
disruption to energy supplies due to supply problems can be limited by large-scale storage
of gas. The UK has a total storage capacity of 3.3 billion cubic metres (bcm), equivalent to
14 days’ supply at average winter gas demand rates.

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 1.8km 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.

SSE faces the challenge of continuing to secure gas supplies as the UK becomes
increasingly dependent on imports. To address this, it is currently developing additional
capacity at nearby Aldbrough and has secured consent for further capacity at the site
beyond that currently under development.

Scottish and Southern Energy Annual Report 2008

02 Business Statement Financial Overview
12. Investment and Capital Expenditure 13. Financial Management and Balance Sheet

32
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INVESTMENT AND CAPITAL EXPENDITURE

Introduction
SSE has a substantial capital and investment
programme, with the objective of upgrading
existing assets and developing new assets
and thereby continuing the ongoing expansion
of the scale and the scope of its activities. It is
a key means by which SSE seeks to generate
future cash flows and enhance and create
value for shareholders. All investments are
expected to achieve returns which are greater
than the cost of capital and are expected to
enhance earnings.

Investment in 2007/08
Capital and investment expenditure
(excluding SGN) totalled £810.3m during
2007/08, including £28.1m in respect of
Marchwood Power Ltd, compared with
£663.4m in the previous year. Including SSE’s
share of SGN’s capital and replacement
expenditure, the total was £1.0bn.

Within its overall total, capital and investment
expenditure of £16.9m was incurred by SSE
through Airtricity after it was acquired in
February 2008. Over 2007/08 as a whole,
Airtricity’s capital and investment
expenditure was around €240m.

Capital expenditure in Power Systems was
£264.4m, compared with £204.5m in the
previous year, in line with the investment
focus described under ‘Electricity Network
Investment’. In addition, there was investment
of £276.5m for growth in Generation during
the year, with the progress of the Marchwood
development, construction work being carried
out at Glendoe hydro electric scheme and
Drumderg wind farm and the installation of
FGD equipment and other work at Fiddler’s
Ferry and Ferrybridge.

As well as Power Systems and Generation,
£40.9m was invested in the ongoing
development of the new gas storage facility
at Aldbrough. Of its expected total investment
of around £175m, SSE has so far invested
£140m at Aldbrough.

Within the total, capital expenditure for
growth, including Marchwood, was £537.2m
during 2007/08. This mainly comprised
electricity generation and gas storage.

Future Investment Priorities in 2008/09
and Beyond
In the five years from April 2003, SSE’s capital
and investment expenditure totalled £2.65bn,
and in the period since its investment in gas
distribution in June 2005, SSE’s share of
SGN’s capital and replacement expenditure
was £453.5m.

SSE’s capital and investment expenditure
will continue to be substantial during
2008/09, at around £1.3bn, and subsequently.
Over the five years to 2013, it is projected to
total around £6.7bn and will be focused on

projects in line with SSE’s core purpose
of providing energy in a reliable and
sustainable way.

denomination of assets and cashflows within
SSE. All other foreign currency borrowings
are swapped back to Sterling.

Around 45% of this investment is expected
to be directed towards renewable energy
developments. In addition, SSE expects to
invest around £1.2bn in gas- and coal-fired
generation, around £1.75bn in electricity
networks and around £600m in a number of
other areas, such as gas storage. The result
of this will be a significantly enhanced asset
base and additional cash flows, which will
support future dividend growth.

FINANCIAL MANAGEMENT
AND BALANCE SHEET

k Net debt up £1.433bn to £3.666bn
k Average debt maturity 8.6 years
k Underlying interest cover of 11.7 times
k Purchase of 16.66 million shares (1.9%
of called-up share capital) for £238.2m

k 24.5 million new shares issued under

3.75% Convertible Bond
k 870.1 million shares in issue

Treasury Policy
SSE’s operations are financed by a
combination of retained profits, bank
borrowings, bond issuance and commercial
paper. As a matter of policy, a minimum of
50% of SSE’s debt is subject to fixed or
inflation-linked rates of interest. Within
this policy framework, SSE borrows as
required on different interest bases, with
derivatives and forward rate agreements
being used to achieve the desired out-turn
interest rate profile.

At 31 March 2008, after taking account
of interest rate swaps, 65.7% of SSE’s
borrowings were at fixed or inflation-linked
interest rates. This fixed-rate component
was unusually low due to the high amount
of short-term debt on the balance sheet,
arising primarily from the acquisition of
Airtricity. In the medium-term, SSE targets
a fixed rate component of around 80-85%.

Borrowings are made in both Sterling and
Euro to reflect the underlying currency

The United Kingdom remains SSE’s main area
of operation, although business activities in
overseas markets – most notably in the
Republic of Ireland – have grown during the
year. Transactional foreign exchange risk
arises in respect of procurement contracts,
fuel and carbon purchasing, commodity
hedging and energy trading operations, and
long-term service agreements for plant. Its
policy is to hedge all material transactional
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.

Translational foreign exchange risk arises in
respect of overseas investments and hedging
in respect of such exposures is determined
as appropriate to the circumstances on a
case-by-case basis.

Net Debt and Cash Flow
As at 31 March 2008, SSE’s net debt
was £3.666bn, compared with £2.233bn
at 31 March 2007, an increase of £1.433bn.
This largely reflects the £1.349bn acquisition
of Airtricity, together with other capital and
investment expenditure undertaken during
the year. Cash generated from operating
activities was over 30% higher than in the
previous year, reflecting increased profitability
and improvement in working capital.

Borrowings and Facilities
SSE’s liquidity policy is to ensure that it has
committed borrowings and facilities equal
to at least 105% of forecast debt over a
rolling 12 month period. On 31 March 2008
it had available undrawn committed bank
borrowing facilities of £1.1bn which mature
in June and November 2009.

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 2008 was

663.4

502.1

383.5

289.7

£6.7bn

2004

2005

2006

2007

2008

SSE’s capital and investment expenditure over the five
years to 2013 is projected to total around £6.7bn, focused
on projects in line with the company’s core purpose of
providing energy in a sustainable and reliable way.

Scottish and Southern Energy Annual Report 2008

33
>

8.6 years, compared with 13.8 years as at
31 March 2007. This year-on-year reduction
in term reflects the unusually high amount
of short-term debt on the balance sheet at
31 March 2008, arising primarily from the
acquisition of Airtricity.

SSE’s debt structure continues to be strong,
with around £2.1bn of medium- to long-term
borrowings in the form of issued bonds,
European Investment Bank debt and
long-term project finance and other loans
relating to Airtricity. A total of 47.1% of SSE’s
borrowings will mature in the 12 months to
March 2009, the majority of which relates
to bank borrowings raised to finance the
acquisition of Airtricity. It is expected that
this debt will be re-financed in the capital
markets during the course of this year.

therefore, £78.8m, compared with £32.5m
in the previous year.

Tax
To assist the understanding of SSE’s tax
position, the adjusted current tax charge
is calculated as follows:

March 08 March 07
£m

£m

Reported tax charge

210.6

301.5

add back:

Share of JCE/Associate tax

10.7

33.8

less:

Deferred tax
Exceptional tax

(31.5)
127.4

(25.6)
(27.1)

Adjusted current tax charge 317.2

282.6

Net Finance Costs
The table below reconciles reported net
finance costs to adjusted net finance costs,
which SSE believes is a more meaningful
measure. In line with this, SSE’s adjusted
net finance costs during 2007/08 were
£154.3m, compared with £151.8m in the
previous year.

The effective adjusted current tax rate, based
on adjusted profit before tax, was 25.8%,
compared with 26.2% 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.

March 08 March 07
£m

£m

Reported net finance costs

(note 6) add/(less)
Share of JCE*/

Associate interest

Interest on convertible

debt

Exceptional foreign

exchange loss

Movement on derivatives

32.8

48.1

127.6

117.9

(4.6)

(3.6)

(22.2)
20.7

–
(10.6)

Adjusted net finance costs

154.3

151.8

Return on pension
scheme assets

Interest on pension
scheme liabilities

Notional interest arising
on discounted provisions

141.4

130.1

(117.4)

(107.2)

(3.6)

(1.4)

Adjusted interest costs**

174.7

173.3

* Jointly Controlled Entities
** Adjusted finance income and costs for interest

cover calculation

The average interest rate for SSE, excluding
JCE/Associate interest, during the year was
5.23%, compared with 5.31% in the previous
year. Based on adjusted interest costs,
underlying interest cover was 11.7 times,
compared with 11.0 times the previous year,
and including interest related to SGN it was
7.9 times (7.1 times in the previous year).

Within the adjusted net finance costs of
£154.3m, the element relating to SGN’s net
finance costs was £82.7m (compared with
£70.6m in the previous year), after netting
loan stock interest payable to SSE. Its
contribution to SSE’s profit before tax was,

The reported tax charge was 19.4%, compared
with 26.6% in the previous year. This reflects
the restatement of the deferred tax position
following the Corporation Tax rate change
introduced in Budget 2007.

SSE’s contribution to government revenues,
including Corporation Tax, Employers’
National Insurance Contributions and
Business Rates totalled £517.1m during
2007/08, compared with £459.5m in the
previous year, an increase of 12.5%. This
includes joint ventures and associates
and compares with dividends paid to
shareholders during the year of £502.8m.

Balance Sheet
In line with its core financial principles, SSE
continues to maintain one of the strongest
balance sheets in the global utility sector.
This gives it significant competitive
advantages, allowing it 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. The tumultuous events
witnessed in global financial markets during
2007/08 have again demonstrated the risks
associated with inappropriately large levels
of debt and have underlined the importance
of maintaining a strong financial profile.

In line with the IAS 19 treatment of pension
scheme assets, liabilities and costs, pension
scheme liabilities of £134.9m and a pension
scheme asset of £85.8m are recognised in
the balance sheet at 31 March 2008, gross
of deferred tax. This means there was a
reduction of £42.8m in net liabilities
compared with the position at March 2007,
from £91.9m to £49.1m.

During 2007/08, employer cash contributions
to the Scottish Hydro Electric scheme
amounted to £13.4m. Contributions to the
Southern Electric scheme, including deficit
repair contributions of £35.5m, amounted
to £60.2m. As part of the Distribution Price
Control for 2005-2010, it was agreed that
allowances for 76% of deficit repair
contributions should be recoverable
via price-controlled revenue.

At 31 March 2008, there was a net liability
arising from IAS 39 of £117.3m, before tax,
compared with a net asset of £45.0m,
before tax, at 1 April 2007.

Purchase of Own Shares and
Convertible Bond Maturity
During 2007/08, SSE purchased 16.66 million
of its own shares for cancellation, which
contributed to the enhanced earnings per
share delivered during the year. The weighted
average price per share (before costs) was
£14.30, with the purchase price ranging from
£13.87 to £14.74. The aggregate consideration
was £238.2m (excluding fees) and the
purchases represented 1.9% of the called-up
share capital of the company.

The Directors of SSE are seeking at the
Annual General Meeting on 24 July 2008
renewal of their authority to purchase, in the
market, the company’s own shares should
it result in an increase in SSE’s earnings
per share and be in the best interests
of shareholders generally. Any shares
repurchased under this authority may be
cancelled or retained as treasury shares
to accommodate requirements for shares
under SSE’s incentive schemes. SSE does
not currently hold any treasury shares. SSE
also has an outstanding 3.75% convertible
bond which matures on 29 October 2009,
which had an initial nominal value of £300m.
To date, holders have exercised their option
to exchange their bonds for ordinary shares
in the company at £9 per share, in respect
of bonds totalling £220.7m of nominal value.
New shares issued as a consequence of these
conversions total 24.5 million. A nominal
value of £79.3m or 26.4% of the original
bond issue, remains outstanding. The total
number of shares in issue at 31 March 2008
was 870.1 million.

Financial Management and Balance Sheet
Priorities in 2008/09 and Beyond
SSE’s financial management and balance
sheet priorities in 2008/09 and beyond are
to adhere to its 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.

Scottish and Southern Energy Annual Report 2008

02 Business Statement Corporate Responsibility

34
>

The results of the Index for 2007, in which
111 companies participated, and which was
the most challenging yet, were published in
May 2008. SSE’s score was 98.0%, compared
with 98.5% 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 99.0%,
compared with 99.5% in the previous year.

Teamwork
On 31 March 2008, SSE employed 16,892
people, an increase of 3,465 on the previous
year. The progress made by SSE is due to the
professionalism, commitment and teamwork
of its employees. For that reason, and to
mark the tenth anniversary of SSE’s
formation in 1998, every person who was
employed by SSE on 31 March 2008, and who
is still in employment on 1 August 2008, will
receive a special award comprising: an offer,
free of charge, of 10 shares in the company;
an online voucher worth £200 for SSE’s retail
business; and an additional day’s holiday.

The acquisitions of Airtricity and Slough Heat
and Power brought to SSE talented teams of
people with skills and knowledge which are
already complementing the well-established
capabilities of the people already in SSE.

Board
Sir Kevin Smith, who joined SSE as a non-
Executive Director in 2004, has decided not
to seek re-election to the Board at this year’s
Annual General Meeting and will step down
from it at the conclusion of the Meeting.
At that point, the Board of SSE will comprise
four Executive Directors and four non-
Executive Directors, plus the Chairman.

Corporate Responsibility Priorities
in 2008/09 and Beyond
SSE’s priorities in 2008/09, and beyond, are to:
manage its principal risks effectively; make
further progress towards its ultimate goal
of injury-free working; avoid environmental
incidents; and make progress towards
securing a reduction in the carbon dioxide
intensity of electricity produced at power
stations in which it has an ownership or
contractual interest; and maintain SSE
as a fulfilling place to work.

Introduction
Shareholders expect companies not simply
to be profitable, but to be responsible in how
those profits are made. For SSE, this means
that its Generation activities should be as
sustainable as possible and that the energy it
supplies should be as affordable as possible.
In addition, its networks should be reliable
and its energy-related services dependable.

Principal Risks
The principal risk factors to which SSE is
potentially exposed were reviewed by the
Board in March 2008. They are: the operation
of assets, equipment and processes; capital
investment risks, in respect of major projects;
financial risks, such as interest rate and
commodity exposure, including a lack of
liquidity in traded markets; the impact of
public policy or regulatory developments
in the areas of energy and the environment;
resource shortages, in terms of people with
the relevant skills and in terms of equipment
and materials, including fossil fuels; the
impact of the weather on SSE’s interests in
the generation of electricity from renewable
sources, in energy supply and in energy
distribution; and an economic slowdown.
The latter risk potentially affects both the level
of business activity and bad debt write-offs.

At a corporate level, SSE seeks to address
these risks by: maintaining the strongest
possible focus on the consistent delivery
of excellence across all aspects of its
operations; rigorous management and
scrutiny of major projects; adhering to
the series of well-defined and established
financial principles set out under ‘Financial
Overview’; strong oversight by a Risk
Committee; full and transparent engagement
with Ministers, elected members and officials
in the relevant executives and legislatures;
upgrading its human resources and
procurement functions to ensure SSE
has access to the best possible people
and equipment; maintaining a variety of
energy production, distribution and supply
businesses, with actively-managed fuel
procurement where appropriate; and
effective credit management.

In summary, SSE’s principal risk
management approach is its fundamental
strategy: operating and investing in a
balanced range of regulated and non-
regulated energy and utility businesses.
This limits both the extent of any single risk
and the value associated with it and the need
to limit the value at risk is at the heart of
SSE’s decision-making processes.

The investigations and reviews being
undertaken by Ofgem, and a number of
UK government policy developments, could
reinforce some perceptions of the extent of
the risk associated with the impact of public
policy or regulatory developments. SSE is
fully engaged with all key stakeholders and
believes that Ofgem and the UK government

fully understand the need for a clear and
stable policy and regulatory framework.
It also believes that, fundamentally, the
framework in the UK is supportive of
SSE’s core purpose of providing energy
in a reliable and sustainable way.

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,
avoiding undue business concentration.

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 2007/08, the number of lost time and
reportable accidents within the company
was 11, or 0.04 per 100,000 hours worked,
compared with 0.05 in 2006/07 and with
0.17 five years ago, in 2002/03. The number
of serious, or potentially serious, road traffic
accidents involving employees driving
company vehicles was 0.18 per 100 vehicles,
compared with 0.29 in 2006/07.

In 2008/09, SSE will report its safety
performance on the basis of the Total
Recordable Injury Rate, as its central
workplace safety indicator.

A significant issue for SSE is process safety –
the engineering and management skills
focused on preventing major incidents arising
from the use of, amongst other things, fossil
fuels. Its approach in this area has been
comprehensively reviewed in the light of the
report of the Baker Panel into the BP incident
at Texas City published in early 2007.

SSE’s target for any given year is zero
reportable environmental incidents. There
was one such incident during 2007/08.
In January 2008, the Environment Agency
served an enforcement action on SSE for
failure to make sufficient progress on an
agreed programme of improvements at its
Smurfit Townsend Hook CHP plant in Kent.

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.

02 Key Performance Indicators

Adjusted Profit Before Tax* – £m

2008

2007

2006

2005

2004

1,229.2

1,079.3

873.9

732.1

611.9
>

Scottish and Southern Energy Annual Report 2008

35
>

Operating Profit* – £m

2006

2007

2008

Generation and Supply

Energy Systems

Gas Storage

Telecoms

Contracting, Connections and Metering

444.8

470.6

27.3

13.2

50.4

642.6

471.1

55.9

13.9

51.6

Dividend – pence

Dividend – composition

60.5

55.0

Interim 30% (18.1 pence)

Final 70% (42.4 pence)

46.5

42.5

27.5

30.0

25.7

32.4

35.0

37.7

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008
>

724.2

544.4

50.9

14.3

55.6
>

Energy Customer Numbers – million

>
Energy Customer Numbers – composition

2008

2007

2006

2005

2004

Electricity 62% (5.28 million)

Gas 38% (3.17 million)

8.45

7.75

6.70

6.10

5.25
>

Capital Expenditure – £m

Capital Expenditure – %

Renewable Generation

Thermal Generation

Power Systems

Telecoms

Gas Storage

Other

Total

132.8

Renewable Generation 16

246.2

Thermal Generation 30

264.4

Power Systems 33

37.9

Telecoms 5

40.9

Gas Storage 5

88.1

Other 11

810.3
>

Corporate Responsibility

Lost Time and Reportable Accidents

Complaints to energywatch

Customer Minutes Lost – SEPD

Customer Minutes Lost – SHEPD

2004

2,632

2005

1,981

2006

1,573

2007

840

2008

615

Scottish and Southern Energy Annual Report 2008

02 Performance Indicators

FINANCIAL OVERVIEW

Adjusted profit before tax* – £m

Adjusted earnings per share* – pence

Dividend per share – pence

Capital expenditure – £m

Net debt – £bn

Underlying interest cover – times

Dividend cover – times

GENERATION AND SUPPLY

Generation and Supply operating profit* – £m

Electricity generation capacity – MW

Electricity generated – TWh

Energy generation capacity – renewable – MW

Electricity generation capacity qualifying for ROCs – hydro and wind – MW

Hydro storage – % of maximum water for generation

Power station availability – hydro output – GWh

Gas-fired power station availability – %

Gas-fired power station thermal efficiency – %

Coal and biomass-fired power station availability – %

Coal and biomass-fired power station thermal efficiency – %

Power station water consumption – million cubic metres

Power station CO2 emissions – million metric tonnes

Power station CO2 emissions – kilograms per kWh

Power station SO2 emissions – metric tonnes

Power station SO2 emissions – grams per kWh

Power station NOx emissions – metric tonnes

Power station NOx emissions – grams per kWh

Electricity supplied – TWh

Energy customer numbers – millions

Electricity customers – millions

Gas customers – millions

Talk customers – thousands

Gas boiler customers – thousands

Complaints to energywatch

Electricity disconnections per 1,000 customers

Gas disconnections per 1,000 customers

ENERGY SYSTEMS

Power Systems operating profit* – £m

Power Systems capital expenditure – £m

Regulatory Asset Value – £bn

Southern Electric Power Distribution operating profit* – £m

Scottish Hydro Electric Power Distribution and Transmission operating profit* – £m

Electricity distributed – TWh

Southern Electric Power Distribution customer minutes lost

Southern Electric Power Distribution interruptions – per 100 customers

Southern Electric Power Distribution mains in commission – km

Scottish Hydro Electric Power Distribution customer minutes lost

= Positive

= Neutral or Not Applicable

= Negative

36
>

2006

2007

2008

change

873.9

1,079.3

1,229.2

74.7

46.5

92.5

55.0

502.1

663.4

2.17

9.2

1.61

2.23

11.0

1.68

105.6

60.5

810.3

3.67

11.7

1.73

+13.9%

+14.2%

+10.0%

+22.1%

+64.6%

+6.4%

+3.0%

444.8

642.6

724.2

+12.7%

10,015

10,017

10,542

44.0

1,516

566

51.6

1,518

568

45.8

2,036

748

3,054

3,767

3,518

+5.2%

-11.2%

+34.1%

+31.7%

-2.7%

-6.6%

0.0%

-0.6%

-1.1%

-0.6%

+29.6%

-20.3%

-10.1%

-26.9%

-16.9%

-10.1%

+2.1%

+9.4%

+9.0%

+6.7%

+13.2%

+70.1%

-26.8%

+0.0%

+4.0%

+29.3%

+3.1%

+3.9%

+4.3%

+1.4%

-6.9%

-12.0%

+1.2%

-6.5%

+218.2%

50.4

36.2

3.49

25.21

0.620

49.5

36.1

3.18

25.88

0.555

64,967

50,776

1.596

1.086

49,180

44,120

1.208

0.944

49.9

6.70

4.47

2.23

N/A

1,573

0.02

0.20

367.9

172.1

2.5

226.1

141.8

43.8

50.9

7.75

4.95

2.80

840

0.03

0.22

368.0

204.5

2.6

224.0

144.0

42.4

49.2

35.9

4.12

22.72

0.496

37,125

0.903

39,643

0.964

55.7

8.45

5.28

3.17

165

615

0.03

0.22

382.9

264.4

2.7

232.7

150.2

43.0

74,300

74,832

75,747

Scottish and Southern Energy Annual Report 2008

37
>

Scottish Hydro Electric Power Distribution interruptions – per 100 customers

2006

2007

2008

change

-12.7%

Scottish Hydro Electric Power Distribution mains in commission – km

45,586

46,221

46,454

Scottish Hydro Electric Power Distribution transmission mains in commission – km

Scotia Gas Networks operating profit* (SSE share) – £m

Scotia Gas Networks capital expenditure – £m

Scotia Gas Networks repair expenditure – £m

Scotia Gas Networks mains in commission – km

Scotia Gas Networks units distributed – TWh

Scotia Gas Networks Regulatory Asset Value – £bn

GAS STORAGE

Gas Storage operating profit* – £m

Customer nominations met – %

TELECOMS

Telecoms operating profit* – £m

Operational faults fixed within Service Level Agreements – %

Project delivery on standard projects – %

CONTRACTING, METERING AND CONNECTIONS

Contracting, Connections and Metering operating profit* – £m

New electrical connections – thousands

New gas connections – thousands

Out-of-area networks in operation

Contracting order book peak – £m

Meters read once a year – %

Meters read twice a year – %

SAFETY

Lost time and reportable accidents

Lost time and reportable accidents – per 100,000 hours worked

Serious or potentially serious road traffic accidents

Serious or potentially serious road traffic accidents – per 100 vehicles

Injury-free business units

Scotia Gas Networks lost time accidents

4,913

102.7

109.2

123.6

4,913

103.1

120.4

174.8

73,617

73,661

185.3

2.9

27.3

100

162.3

3.2

55.9

100

13.2

13.9

50.4

42.9

7.9

87.2

N/A

0.08

0.28

51.6

44.6

9.2

95.4

95.1

78.7

0.05

0.29

Scotia Gas Networks lost time accidents – per 100,000 hours worked

0.28

0.21

4,913

161.5

179.8

199.2

73,705

169.5

3.5

50.9

100

14.3

55.6

42.8

8.2

107.2

95.4

80.8

0.04

0.18

0.15

ENVIRONMENT

Non-power station CO2 emissions – tonnes

Breaches of IPC/IPPC

Oil leaked – litres

Waste produced – offices and depots – tonnes

Waste sent to landfill – offices and depots – tonnes

Water consumption in principal offices – cubic metres

Water consumption in principal offices – cubic metres per whole time equivalent (WTE)

Energy Consumption in operational buildings – GWh

Energy consumption in principal offices – GWh

Energy consumption in principal offices – MWh per WTE

Distance travelled on SSE business – million km

Distance travelled on SSE business – km per WTE

Business flights

Business flights – per 1,000 employees

17,019

16,687

16,534

27,941

28,380

10,217

31,761

25,052

7,787

42,189

30,299

8,282

135,421

133,822

109,167

11.0

34.8

28.3

5.1

194.49

15,855

8,079

659

10.4

34.2

31.1

4.9

198.51

15,416

9,311

693

7.4

27.7

32.6

4.6

212.63

13,864

7,897

467

+0.5%

+0.0%

+56.6%

+49.3%

+14.0%

+0.1%

+4.4%

+9.4%

-8.9%

+0.0%

+2.9%

+4.3%

-2.0%

+7.8%

-4.0%

-10.9%

+37.5%

+12.4%

+0.4%

+2.6%

0.0%

-20.0%

-31.6%

-37.9%

+9.1%

-38.1%

-28.6%

-0.9%

0.0%

+32.8%

+20.9%

+6.4%

-18.4%

-28.9%

-18.9%

+4.9%

-6.1%

+7.1%

-10.1%

-15.2%

-32.6%

Scottish and Southern Energy Annual Report 2008

02 Performance Indicators continued

Business flights – million km

Business rail journeys

Business rail journeys – per 1,000 employees

Business rail journeys – million km

Operational vehicles business travel – million km

Company cars business travel – million km

MARKETPLACE

EEC energy savings – GWh

Homes insulated – thousands

Low energy lamps subsidised – thousands

Energy efficient appliances subsidised – thousands

Customers registered for Priority Services Register – thousands

Customers with tailor made payment plans – thousands

Customers on loyalty plans – millions

New suppliers

Suppliers for more than three years

WORKPLACE

Employees – headcount

Employees – monthly average

Average age of employees – years

Absence from work per employee – days

Turnover of employees – annual %

Gender split – all employees – male/female

Gender split – managers – male/female

Employees in Share Incentive Plan – %

COMMUNITY

Employees in receipt of Into Action

Employees participating in Quids In

Community benefit paid – £thousands

Charitable donations – £thousands

Research and development – £m

38
>

2008

7.36

change

-20.2%

9,706

+281.4%

4,891

7,125

13,789

2006

6.97

1,511

123

0.56

2007

9.22

2,545

189

0.86

153.80

156.90

33.18

31.52

200

410

24.8

219.9

235.6

0.84

1,085

N/A

12,287

12,124

6.37

13.3

76/24

90/10

303

892

349

507

1.4

229

560

23.4

297.8

229.0

1.34

1,112

5,626

13,427

13,053

6.01

13.8

75/25

89/11

278

943

292

685

6.3

633

2.83

168.91

31.38

+234.9%

+229.1%

+7.7%

-0.04%

+93.5%

-12.2%

201

9,100 +1,525.0%

19.8

367.1

200.0

1.86

1,024

4,270

16,892

15,777

6.03

11.9

74/26

84/16

-15.4%

+23.3%

-12.7%

+38.8%

-7.9%

-24.1%

+25.8%

+20.9%

+2.5%

+0.3%

-13.8%

N/A

-13.6%

502

1,375

906

873

3.7

+80.6%

+45.8%

+210.1%

+27.4%

-41.3%

03 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 Business
Statement on pages 8 to 34 and the
Corporate Governance Report on pages
41 to 47 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 45 and 46 of the Corporate
Governance Report;

k Review of the development and

performance of the business – included
in the Business Statement on pages
8 to 34; and

k Performance indicators – pages 35 to 38.

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
Susan Rice
Sir Kevin Smith

Richard Gillingwater was appointed as
a non-Executive Director on 25 May 2007
and David Payne retired on 26 July 2007.

Colin Hood, Ian Marchant, René Médori
and Sir Robert Smith retire by rotation at
the Annual General Meeting and, being
eligible and in accordance with the Articles
of Association, all offer themselves for
re-election. Sir Kevin Smith will also retire
as a non-Executive Director on 24 July 2008.

Biographical details for all Directors are set
out on pages 48 and 49. Details of the service
contracts for Colin Hood and Ian Marchant,
and the letters of appointment for René
Médori and Sir Robert Smith, all of whom
are standing for re-election are set out in
the Remuneration Report on pages 52 and 53
respectively. The interests of the Directors
in the ordinary shares of the company
at 31 March 2008 are set out in the
Remuneration Report on page 54.

Resolution 2 to be proposed at the Annual
General Meeting seeks shareholders’
approval of the Remuneration Report.

Directors’ Insurance and Indemnities
The Directors have the benefit of the
indemnity provision contained in the
company’s Articles of Association. The
Directors of the company have been granted
a qualifying third party indemnity provision
which 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
for its Directors and Officers.

Results and Dividends
The Group profit attributable to shareholders
for the financial year amounted to £872.9m.
The Directors recommend a final dividend
of 42.4p per ordinary share which, subject
to approval at the Annual General Meeting,
will be payable on 26 September 2008 to
shareholders on the register at close of
business on 22 August 2008. With the interim
dividend of 18.1p per ordinary share paid on
25 March 2008, this makes a total dividend
of 60.5p per ordinary share.

Share Capital
Details of the company’s authorised and
issued share capital at 31 March 2008,
which includes options granted under the
Group’s employee share option schemes, are
detailed in notes 24 and 27 to the Financial
Statements. Each ordinary share of the
company carries one vote at general
meetings of the company.

Annual General Meeting
The 19th Annual General Meeting of the
company will be held on 24 July 2008 at
12 noon at the Bournemouth International
Centre, Exeter Road, Bournemouth BH2 5BH.
The Notice of Annual General Meeting
together with full explanations of business
to be conducted is set out in the separate
shareholder circular.

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

Barclays

43,048,546

4.95

Legal & General

Group plc

39,198,734

4.50

Scottish and Southern Energy Annual Report 2008

39
>

Research and Development
Research and development is fundamental
to the company’s ability to change and adapt
to the challenges of the future, and in 2007/08
a number of strategic parts of SSE’s R&D
programme were successfully implemented.
These included the appointment of R&D
Coordinators in each of the main business
areas, improved R&D governance,
identification of key R&D funding sources,
and the development of strategic research
partnerships with leading UK research
institutes. The company has also continued to
take an active role in the UK Energy Research
Partnership, as well as building relationships
with UK and EU Research Councils.

During 2007/08 the company invested
£3.7m in a number of innovative research
and demonstration projects including clean
coal technologies, carbon capture and
storage, and novel fuel processing
techniques. Other projects have focused
on climate change, energy efficiency,
energy storage and advanced renewable
energy technologies. One of the largest
R&D projects commissioned in 2007 was
the Energy Demand Research Project which
is jointly funded by SSE and the government,
to enhance the understanding of how
customers react to improved information
on energy consumption.

SSE Power Distribution has continued to
take an active role in the Ofgem Innovation
Funding Incentive for both distribution and
transmission and has commissioned R&D
projects addressing asset management,
security of supply and active network
management.

Employees
The number of staff directly employed by
the Group at 31 March 2008 was 16,892.

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 38% and 37% respectively. The
company recognises that its continuing
success is closely linked to the performance,
skills and individual commitment of its
employees. As part of the 2007 employee
award, all eligible employees were awarded
20 free shares.

The company places a strong emphasis on
employee communication and involvement.
An employee newspaper is published and
distributed to employees. Participation and
engagement is encouraged through team
meetings, briefings and the intranet where
employees are informed of the latest
company news from recent media coverage
and about developments within the business.

Scottish and Southern Energy Annual Report 2008

03 Directors’ Report continued

40
>

The Chief Executive regularly communicates
with employees through his blog and receives
feedback, in addition to live on-screen
question and answer style ‘webchats’.
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.

The company has in place an extensive
range of policies to safeguard the interests
of its 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, gender, sexual orientation, 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 2008
(see www.scottish-southern.co.uk).

Creditor Payment Policy
It is the company’s policy that payment terms
are agreed at the outset of a transaction
and are adhered to; 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
42 days at 31 March 2008.

Donations
Charitable donations amounted to £873,000
(2007 – £685,000). There were no payments
for political purposes.

The company is not aware of any agreements
between shareholders that may result in
restrictions on the transfer of securities
and/or voting rights.

The rules governing the appointment
of Directors is set out in the Corporate
Governance Report on pages 41 to 47.
The company’s Articles of Association may
only be amended by a special resolution
at a general meeting of shareholders.

The company is not aware of any significant
agreements to which it is party that take
effect, alter or terminate upon a change of
control of the company following a takeover.

The company is not aware of any contractual
or other agreements which are essential to
its business which ought to be disclosed in
this Directors’ Report.

Auditors
Upon the recommendation of the Audit
Committee and approval of the Board,
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 each Director is
aware, there is no relevant audit information
of which the company’s Auditors are unaware;
and each Director has taken all the steps
that ought to have been taken as a Director
to make himself or herself aware of any
relevant audit information and to establish
that the company’s Auditors are aware
of that information.

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.

By Order of the Board

Vincent Donnelly
Company Secretary
28 May 2008

Additional Information
Where not provided elsewhere in the
Directors’ Report, the following provides
the additional information required to be
disclosed by Part 7 of the Companies Act
1985 as amended.

There are no restrictions on the transfer
of ordinary shares in the capital of the
company other than certain restrictions
which may from time to time be imposed
by law (for example, insider trading law).
In accordance with the Listing Rules of
the Financial Services Authority, certain
employees are required to seek the approval
of the company to deal in its shares.

Employees who participate in the Share
Incentive Plan whose shares remain in
the scheme’s trust give directions to the
trustees to vote on their behalf by way
of a Form of Direction.

03 Corporate Governance Report
1. Organisation and Structure

Scottish and Southern Energy Annual Report 2008

41
>

Dear Shareholder

The Board’s principal objective is to ensure
that the Group delivers its strategy whilst
ensuring that this is carried out within a
sound framework of corporate governance.
The Board believes that strong corporate
governance enhances shareholder value
and this report sets out how the governance
framework is implemented across the Group.

David Payne retired at the 2007 Annual
General Meeting after nine years of service
on the Board. David’s background in energy
and perceptive understanding of complex
issues made him an outstanding Director.

I am pleased that we were able to appoint
Richard Gillingwater as a non-Executive
Director in May 2007. Richard has brought
a wealth of experience and knowledge to the
Board having held a number of appointments
in the City of London. His appointment
complements very well the contributions
of the other Directors. After these changes,
the Board continued to have four Executive
Directors and five independent non-Executive
Directors in addition to myself as Chairman.

Sir Kevin Smith, who joined SSE as a non-
Executive Director in 2004, has decided not
to seek re-election to the Board at this year’s
Annual General Meeting and will step down
from it at the conclusion of the Meeting.
During his time with us, Kevin has made
an invaluable contribution, not least in
supporting the work of the Health, Safety
and Environmental Advisory Committee of
the Board. After Kevin steps down, the Board
of SSE will comprise four Executive Directors
and four non-Executive Directors, in addition
to myself as Chairman.

During the year the Board continued to
visit new and existing operational sites.
These visits took in the length and breadth
of the country from Glendoe in the North of
Scotland, which will be the first large-scale
hydro electric power station in 50 years, to
new facilities on the South coast of England.
The Directors also met a wide range of
stakeholders as well as investors and
analysts at the annual and interim
results presentations.

We have just completed our Board and
committee performance evaluation. The
evaluation process highlighted some areas
where improvements could be made but
overall the conclusion was that the Board
continues to function well.

Sir Robert Smith
Chairman
28 May 2008

The Framework of Corporate Governance
The Board is accountable to the company’s
shareholders for the good conduct of the
company’s affairs. The following information
sets out how the principles contained in the
Financial Reporting Council’s Combined
Code on Corporate Governance (the Code)
are applied by the company.

Throughout the year the company monitors
developments in corporate governance best
practice. Due regard is also given to the policy
guidelines of organisations representing
major institutional investors. In addition,
internal procedures are regularly reviewed
and updated by the Board and the various
Board committees.

k changes to the Group’s capital

structure; and

k key policies.

The schedule is reviewed regularly by the
Board and is published on the company’s
website (www.scottish-southern.co.uk).

Roles of Chairman and Chief Executive
The roles of the Chairman and the Chief
Executive are separate and clearly defined.

The Chairman is responsible for the
operation, leadership and governance of the
Board, ensuring that it operates effectively
whilst providing appropriate challenge to
management.

Combined Code Compliance
The Board continues to be committed
to ensuring that the highest standards
of corporate governance are maintained.
The Board confirms that the company has,
throughout the period under review,
complied with all provisions set out
in Section 1 of the Code.

ORGANISATION AND STRUCTURE

Role of the Board
The Board is collectively responsible for
creating and sustaining shareholder value
through the overall management of the
Group whilst ensuring that a sound system
of internal control and risk management
is in place.

The Directors are fully briefed in advance
of 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 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 business reports and
presentations from senior management.

Board Decisions
A formal schedule of matters is specifically
reserved to the Board for its decision,
including:

k Group strategy;
k annual budget;
k approval of interim and final financial

statements;

k significant changes in accounting policy

and practice;

k Board and committee appointments
and related governance matters;
k major acquisitions, mergers, disposals

and capital expenditure;

During the year, the Chairman met
regularly with senior managers. Although
not a member, he regularly attends the Audit
Committee meetings. External engagements
included meetings with analysts and other
representatives of institutional investors,
and he participated in both the interim and
annual results presentations. Biographical
information on the Chairman is set out on
page 48.

The Chief Executive is responsible for the
day to day management of Group business
and the implementation of strategy and
policy as agreed by the Board. In discharging
his responsibilities, the Chief Executive is
advised and assisted by senior management
and a number of specific management
committees from throughout the Group’s
businesses. Biographical information on the
Chief Executive is set out on page 48.

Balance of the Board
The Board consists of five non-Executive
Directors, in addition to the non-Executive
Chairman, Sir Robert Smith, and four
Executive Directors. This gives the Board
an appropriate balance of independence and
experience, ensuring that no one individual or
group of individuals has undue influence over
the Board’s decision-making. The composition
of the Board and its committees is regularly
reviewed to ensure that this balance and mix
of skills and experience is maintained.

Non-Executive Directors
The responsibilities of the non-Executive
Directors include to:

k scrutinise, measure and review the
performance of management;

k assist in the development of strategy;
k review the financial information;
k ensure systems of internal control

and risk management are appropriate
and effective;

k manage the relationship with the external

Auditor; and

k review the remuneration of and

succession planning for the Board.

Scottish and Southern Energy Annual Report 2008

03 Corporate Governance Report continued
1. Organisation and Structure (continued) 2. Board Effectiveness

42
>

Independence and Experience
of Non-Executive Directors
The Board has assessed the independence
of the non-Executive Directors against the
criteria set out in the Code and has concluded
that they are all independent in character and
judgement. In line with the recommendations
of the Code, at least half the Board, excluding
the Chairman, are independent non-Executive
Directors. Sir Robert Smith was also
independent when appointed Chairman.

The non-Executive Directors are chosen
for their wide range of skills and experience.
Their continuing independence of judgement
is confirmed in the annual Board performance
evaluation process. Non-Executive Directors
serve on the Board committees of Audit,
Nomination and Remuneration, and one
serves on the Health, Safety and
Environmental Advisory Committee.
Further details on the membership and
operation of these committees are set
out on pages 43 to 46.

The Chairman and non-Executive Directors
met during the year without the Executive
Directors being present. The non-Executive
Directors met without the Chairman present.

All of the non-Executive Directors have
been appointed for fixed terms of three
years. Appointment letters are available
on the company’s website (www.scottish-
southern.co.uk).

Senior Independent Director
Susan Rice was appointed Senior Independent
Director on 26 July 2007 on the retirement
of David Payne. She is available to meet
with major shareholders on request and she
attended the city presentation of the Group’s
half-year results. In January 2008 she
carried out the Chairman’s performance
evaluation, together with the other non-
Executive Directors.

Director Elections
The company requires all Directors to stand
for election by shareholders at the first
Annual General Meeting (AGM) following
appointment. In addition, all Directors are
required to retire by rotation and stand for
re-election at least every three years. Colin
Hood, Ian Marchant, René Médori and Sir
Robert Smith will stand for re-election at this
year’s AGM. Sir Kevin Smith intends to retire
from the Board at the AGM this year. The
Board evaluation process confirmed that the
performance of the Directors standing for re-
election continue to be effective and that they
continued to demonstrate commitment in
their respective roles. In addition, Sir Robert
Smith as Chairman and René Médori as a
non-Executive Director, have the appropriate
experience, knowledge and independence
to scrutinise effectively the performance
of management. Biographical details for all
the Directors are set out on pages 48 and 49.

Attendance at Board and Board
Committee Meetings
Non-attendance at Board and committee
meetings is rare, although may arise due
to unforeseen circumstances or prior
commitments which could not be rearranged,
as in the case of Sir Kevin Smith during
2007/08. Where a Director is unable to attend
a meeting he or she provides comments and
feedback to either the Chairman, Committee
Chairman or Company Secretary, who
ensure that the comments received are
raised at the meeting.

The attendance of Directors at Board
meetings and at meetings of the six principal
committees during 2007/08 is set out in
Table A below.

BOARD EFFECTIVENESS

Information and Professional Development
The Directors receive accurate, timely and

clear information, with all committee and
Board papers being issued in advance of
meetings. On joining the Board, Directors
receive a comprehensive induction course
tailored to their individual requirements
which includes meetings with the Executive
Directors and the senior management
team, visits to key sites, and meeting key
stakeholders. It also covers a review of the
Group’s governance, policies, structure and
business including details of the risks and
operational issues facing the Group.

During the year, the Board and Board
committees are kept up-to-date with
developments. This generally follows a
forward programme where briefings are
given by Executive Directors and the senior
management team on developments in their
business area. Additional specialist briefings
were given on areas such as Directors’
duties, corporate governance, regulation,
health and safety, and financial reporting
standards. Separate more informal meetings
were also held with the senior management
team. The non-Executive Directors have
individual meetings, briefings and site visits.
The briefs focus on subjects where they have
specific knowledge or expertise, such as
energy trading, operational matters and
customer service.

The Board believes that given the experience
and skills of the Directors and the briefings
referred to above, any further personal
training needs should be left to the
discretion of the individual. The company
makes the necessary resources available
should any Director request training.

There is an agreed procedure for Directors
to be able to take independent professional
advice, if necessary, at the Group’s expense.
The prior approval of the Chairman is required
where such advice is likely to exceed £10,000.
Any advice obtained shall be made available

Table A – Attendance at Meetings

Board
8 meetings

Audit
Committee
3 meetings

Nomination
Committee
2 meetings

Remuneration
Committee
5 meetings

Executive
Committee
12 meetings

Risk
Committee
13 meetings

8
8
8
8
8
8
8
3
8
8
6

–
–
3
3
–
–
3
1
–
–
–

2
–
–
–
–
2
2
1
–
1
2

5
–
–
3
–
–
–
1
–
5
4

–
12
–
–
12
12
–
–
12
–
–

–
13
–
–
–
12
–
–
13
–
–

Health, Safety and
Environmental
Advisory
Committee
3 meetings

–
–
–
–
3
–
–
–
–
–
3

Sir Robert Smith
Gregor Alexander
Nick Baldwin
Richard Gillingwater*
Colin Hood
Ian Marchant
René Médori
David Payne**
Alistair Phillips-Davies
Susan Rice
Sir Kevin Smith

* Richard Gillingwater was appointed to the Remuneration Committee on 26 July 2007.
** David Payne retired as a non-Executive Director on 26 July 2007 and attended all relevant meetings up to his retirement.

3. Board Committees 4. Audit Committee

Scottish and Southern Energy Annual Report 2008

43
>

to the other members of the Board, if the
Board so requests.

BOARD COMMITTEES

All Directors have access to the advice
and services of the Company Secretary.

The company continues to operate advanced
performance coaching for some of the
Executive Directors and for members of
the senior management team which is
designed to develop and enhance individual
and Group performance.

Performance Evaluation
The Board, the Board committees and the
individual Directors undergo an annual
process of performance evaluation. The
senior management team also participates
in a performance evaluation programme.

During the year the Chairman conducted the
performance evaluation of the Board. Each
Director completed detailed questionnaires
which had been developed since the previous
year’s evaluation. The questionnaires covered
the Board and committee processes, their
effectiveness and where improvements
could be made. Reports were produced
on the key findings and the Chairman of
the Board and the committee Chairmen
reported these findings to the Board
meeting in March 2008 for discussion.
Directors also completed detailed
questionnaires on individual performance
which formed the basis of the one-to-one
meetings with the Chairman. The process
for evaluating the Chairman was managed
by the Senior Independent Director which
involved a separate meeting of the non-
Executive Directors chaired by the Senior
Independent Director.

Following the review, the Directors have
concluded that the Board and its committees
operate effectively, continued to set clear
objectives and focussed on the correct
areas. Each of the Directors continued to
make an effective contribution to the work
of the Board and was well informed and
demonstrated full commitment to his
or her duties. Some areas for improvement
were identified and these will be taken
forward in 2008.

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.

During the year, the Board had six principal
committees. The terms of reference for all
committees are reviewed regularly and are
available for inspection on the company’s
website (www.scottish-southern.co.uk).

AUDIT COMMITTEE

The Audit Committee assists the Board in
the effective discharge of its responsibilities
for financial reporting and internal control.
It acts independently of the Executive
Directors.

In the discharge of its duties the Committee:

k ensures that the company’s financial

reports represent an accurate, clear and
balanced assessment of the company’s
position and prospects;

k ensures the efficiency and monitors the

effectiveness of the company’s operations
and internal control and risk management
functions; and

k reviews the objectivity and independence
of the external Auditors taking into
consideration the scope of their work
and fees paid for both audit and non
audit services.

The Committee has unrestricted access to
company documents and information as well
as to employees of the company and the
external Auditors. The Audit Committee
Chairman reports the outcome of meetings
to the Board.

Membership and Meetings
The members of the Audit Committee during
the year and at the date of this report are set
out in Table B below.

The Deputy Company Secretary is Secretary
of the Audit Committee.

All members of the Committee are
independent non-Executive Directors.
Membership is determined by the Board,
on the recommendation of the Nomination
Committee and in consultation with the
Audit Committee Chairman. Its terms of
reference are set by the Board and are
reviewed regularly.

In terms of the Code, at least one member
of the Committee must have recent and

relevant financial experience and all
Committee members are expected to be
financially aware. René Médori has recent
and relevant financial experience through
his position as Finance Director of a major
international listed company.

The Committee normally asks the Finance
Director, Head of Group Audit and the external
Auditors to attend its meetings. Senior
management including the Group Treasurer,
Group Financial Controller, Head of Energy
Trading and Head of Portfolio Support may
also attend to present reports.

The Audit Committee had three meetings
during the year.

Activities in 2007/08
During the year the Audit Committee
undertook the following in order to discharge
its responsibilities:

Financial Statements
k reviewed the financial statements in
the 2007 report and accounts and the
interim results. As part of this review
the Committee received from the Auditor
KPMG Audit Plc a report on their audit
of the annual report and accounts and
their review of the interim results; and
k reviewed the annual and interim results

announcements.

Control Environment and Risk Management
k received six-monthly reviews by Group
Audit setting out the audit programme,
its progress against the programme, the
results of key audits and other significant
findings, the adequacy of management’s
response and the timeliness of resolution
of actions;

k reviewed and agreed the Group Audit

Plan for the year ending 31 March 2008;
k received six-monthly reports from Energy
Trading and Treasury setting out strategy,
market developments, any significant
risks and the controls in place to mitigate
these risks;

k received six-monthly reviews from

Group Audit on the Internal Control Risk
Assessment setting out the Group Risk
Map and Residual Risk Map both of which
had been reviewed by the Executive
Committee; and

k received the annual Post-Investment
Appraisal Report and Independent
Project Review.

Table B – Members of the Audit Committee

Name

Role

René Médori
Nick Baldwin
Richard Gillingwater
David Payne

Committee Chairman and non-Executive Director
Non-Executive Director
Non-Executive Director
Non-Executive Director

Date of appointment/resignation

Appointed June 2003
Appointed November 2006
Appointed May 2007
Retired July 2007

Scottish and Southern Energy Annual Report 2008

03 Corporate Governance Report continued
4. Audit Committee (continued) 5. Remuneration Committee 6. Nomination Committee

44
>

External Audit Process
k reviewed the effectiveness of the overall
audit process for 2007/08, meeting with
the Auditor and management separately
to identify any areas of concern in the
preparation of the financial statements;

k reviewed and agreed the terms of

appointment, areas of responsibility,
associated duties and scope of the audit
as set out in the engagement letter for
the forthcoming year;

k reviewed and agreed the audit fees,
fees for non-recurring work and the
regulatory reporting fee;

k reviewed key accounting and audit

issues; and

k reviewed recommendations made by the
Auditor in its management letter and the
adequacy of management’s response.

Independence of Auditor
k reviewed the extent of non-audit services
provided by the Auditor in accordance
with the established policy where:
– a competitive tender process is required
where non-audit fees exceed a threshold
of £30,000 for general advice and
£75,000 for tax-related advice;

– the Committee must be satisfied that
the work was best handled by the
Auditors because of their knowledge
of the Group; and

– the Committee must be satisfied that

the objectivity and independence of the
Auditors was not affected by the work
k reviewed changes in the Audit team; and
k recommend to the Board that the Auditor

be reappointed.

responsibilities, operation and effectiveness,
the conclusions of which were agreed and
reported to the Board at its meeting in
March 2008.

REMUNERATION COMMITTEE

Role
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.

Membership
The members of the Remuneration
Committee who held office during the year
and at the date of this report are set out
in Table C below.

Activities in 2007/08
During the year the Remuneration
Committee met five times.

Full details of Directors’ remuneration,
general policy and developments during
the year are given in the Remuneration
Report set out on pages 50 to 56. The
Company Secretary is Secretary to the
Remuneration Committee.

Full disclosure of the non-audit fees paid
during the year is made in note 3 to the
Financial Statements.

Evaluation
The annual evaluation was conducted by
the Committee of its composition, role and

Evaluation
The annual evaluation was conducted by
the Committee of its composition, role and
responsibilities, operation and effectiveness,
the conclusions of which were agreed and
reported to the Board at its meeting in
March 2008.

Table C – Members of the Remuneration Committee

Name

Role

Susan Rice
Richard Gillingwater
Sir Robert Smith
Sir Kevin Smith
David Payne

Committee Chairman and non-Executive Director
Non-Executive Director
Board Chairman
Non-Executive Director
Non-Executive Director

Table D – Members of the Nomination Committee

Name

Sir Robert Smith
René Médori
Susan Rice
Sir Kevin Smith
Ian Marchant
David Payne

Role

Committee and Board Chairman
Non-Executive Director
Non-Executive Director
Non-Executive Director
Chief Executive
Non-Executive Director

NOMINATION COMMITTEE

Role
The Nomination Committee reviews the
structure, composition and balance of the
Board and leads the process for Board
appointments. Before an appointment is
made the Committee evaluates the skills,
knowledge and experience of the Board
to ensure that any new appointment
complements these qualities. Candidates
from a wide range of backgrounds are
considered and as part of the process for
identifying suitable candidates, the Committee
utilises the assistance of a professional
search firm. The Committee reviews
membership of all Board committees.

The Committee also reviews succession
planning and leadership needs in the course
of its work taking into account the risks and
opportunities facing the company, and from
this identifies the skills and expertise
required from the Board and senior
management team.

Membership
The members of the Nomination
Committee who held office during the year
and at the date of this report are set out
in Table D below.

The Company Secretary is Secretary to the
Nomination Committee.

Members do not take part in discussions
about their own appointment. The Board
Chairman would not chair the meeting when
it is dealing with the appointment of his
successor. In this case the meeting would
be chaired by a non-Executive Director
elected by the remaining members.

Activities in 2007/08
During the year the Nomination Committee
met twice.

Date of appointment/resignation

Appointed November 2006
Appointed July 2007
Appointed November 2006
Appointed November 2004
Retired July 2007

Date of appointment/resignation

Appointed January 2005
Appointed November 2006
Appointed November 2007
Appointed November 2004
Appointed October 2002
Retired July 2007

7. Risk Committee 8. Executive Committee 9. Health, Safety and Environmental Advisory Committee
10. Accountability, Risk Management and Internal Control

Scottish and Southern Energy Annual Report 2008

45
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The Audit Committee, which:
k assists the Board in the effective

discharge of the responsibilities for
financial reporting and internal control,
acting independently of management;
k ensures financial reports and formal

announcements represent an accurate,
clear and balanced assessment of the
Group’s position and prospects;

k reviews and ensures the effectiveness
of operational and internal controls, the
reliability of the information and accounting
systems, and the implementation of
established policies and procedures;
k monitors and reviews the effectiveness
of the internal audit function through
regular reports from the internal
audit department;

k reviews the significant risks identified
by each business unit as well as the
mitigating action against those risks;
k maintains a close relationship with the

external Auditors; and

k reviews the arrangements by which
employees can in confidence raise
concerns about any possible improprieties
in financial and other matters.

The Executive Directors, who:
k monitor operational and financial

performance of the Group;

k develop and implement Group strategy,
operational plans, policies, procedures
and budgets;

k assess and control all Group risk; and
k monitor competitive forces in each areas

ACCOUNTABILITY, RISK MANAGEMENT
AND INTERNAL CONTROL

The Board considers risk management
and the system of internal control to be
fundamental to achieving the Group’s strategy.

The system of internal control is the Board’s
overall responsibility. Reviewing the system
and monitoring its effectiveness is delegated
to the Audit Committee and is reviewed at
least annually by the Board.

The system of internal control is designed
to manage rather than eliminate the risk
of failure to achieve business objectives and
can provide only reasonable and not absolute
assurance against material misstatement
and loss.

The Board and the Audit Committee have
reviewed the effectiveness of the internal
control system in accordance with the Code
for the period from 1 April 2007 to the date of
approval of this Annual Report. No significant
failings or weaknesses have been identified.
However, had there been, the Board confirms
that appropriate action would have been taken.

Internal control is maintained through an
organisation structure with clearly defined
responsibilities, authority levels and lines
of reporting. The key elements of the
Group’s internal control process are
summarised below:

The Board, which:
k approves the policies, procedures

of operation.

and framework for the maintenance of
a sound and effective system of internal
control ensuring:
– the provision of quality internal reporting

by the Audit Committee and other
Board committees, management
and internal audit;

– the provision of quality reporting from

the external Auditors;

– compliance with the Turnbull Guidance

on Internal Control; and

– compliance with statutory and

regulatory obligations.

k reviews the significant risks identified
by each business unit as well as the
mitigating action against those risks
after review by the Audit Committee;

k approves and regularly reviews and
updates the Group’s strategy and
business development;

k reviews performance through a system
of reporting based on annual operating
and capital expenditure budgets; monthly
reviews against actual results, analysis
of variances and evaluation of key
performance indicators;

k receives regular reports from the Chief
Executive, the Finance Director and
the Executive Directors; and
k undertakes an annual evaluation
of the Board, its committees and
individual Directors.

The Risk Committee, which:
k supports the Audit Committee and

management in managing risks and
exposure in Energy Trading and Treasury;

k ensures that risk exposure is managed

appropriately;

k sets and approves risk management
polices and trading strategies;

k ensures the effectiveness of operations

and internal controls; and

k ensures risks inherent in business

activities are understood and managed.

The Health, Safety and Environmental
Advisory Committee, which:
k together with the Audit Committee and
management, ensures that the health,
safety and environmental policy
statements are being adhered to;
k sets health, safety and environmental

targets for the Group; and

k monitors the performance of the Group

against these targets.

The Internal Audit Department, which:
k works with the business units to develop
and improve risk management tools and
processes in their business operations;
k ensures that business risks are identified,
managed and regularly reviewed and that
the key risks are reported to the Audit
Committee and Board;

Following the retirement of David Payne, the
committee recommended the appointment
of Susan Rice as the Senior Independent
Director. This appointment was made on
26 July 2007. The committee also reviewed
the membership of Board committees,
and succession planning.

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 13 times during the
year to review and manage the operational
and financial risks and exposures in
Energy Trading, Generation, and Treasury.
A member of the company secretariat team
is Secretary to the Risk Committee.

EXECUTIVE COMMITTEE

The Executive Committee comprised all
the Executive Directors and other senior
managers. The Chairman was Ian Marchant.
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 was a member of
and Secretary to the Executive Committee.

Since the year end, the Executive Committee
has been replaced by several more business
specific leadership teams.

HEALTH, SAFETY AND ENVIRONMENTAL
ADVISORY COMMITTEE

The Health, Safety and Environmental
Advisory 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 non-Executive Director, Sir Kevin Smith,
with Ian Marchant attending as appropriate.
The Deputy Company Secretary is Secretary
to the Committee.

Scottish and Southern Energy Annual Report 2008

03 Corporate Governance Report continued
10. Accountability, Risk Management and Internal Control (continued) 11. Key Risks and the Control Environment
12. Going Concern 13. Communication with Shareholders and Major Stakeholders

46
>

k ensures that the business units carry out
regular reviews on their internal controls
relating to the key risks;

k monitors the effectiveness of the Group’s
system of internal control through the
distribution of reports and, where
appropriate, action plans to senior
managers, Directors, the Audit
Committee and external Auditors;
k monitors adherence to the Group’s key

policies and principles; and

k provides the Audit Committee and Board
with objective assurance on the Group’s
control environment.

KEY RISKS AND THE CONTROL
ENVIRONMENT

The Business Statement considers risk in the
context of the current business environment.
The key risks and the control environment
which generally apply are considered below.

Treasury Risk
The Board reviews and agrees policies
for addressing risks in respect of interest
rates, foreign exchange, liquidity and credit.
If either fuel or plant are contracted in
foreign currency, it is the Group’s policy to
hedge material purchases through foreign
currency swaps and forward rate contracts.

Energy Trading Risk
The 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.

Operational Risk
Mechanical or process failure in the licensed
operations could be significant. Operating
risk is addressed through the identification
of key operational risks and the development
of mitigation plans by each business unit. The
Group also focuses on seeking operational
excellence and on maintaining the highest
standards of safety and quality.

Regulatory and Governmental Risk
The Group is exposed to economic regulation
and Government policy. The Executive
Directors and management respond to
developments and where appropriate engage
with the industry regulators, government
ministers and officials and other key bodies
to ensure any risks are mitigated.

Financial Risk
The Group’s performance is reviewed by the
Board and the Executive Committee. There
is a comprehensive financial review cycle,
which includes an annual budget approved
by the Board, review of monthly variances
against budget and regular review of forward
looking and historic key performance
indicators. Clear authorisation levels also
exist and there is proper segregation of
accounting duties.

Investment Risk
There is a formal authorisation procedure
for all investments with clear guidelines on
appraisal techniques and success criteria.
The Audit Committee reviews investments
through the Post-Investment Appraisal
process.

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 STAKEHOLDERS

Annual General Meeting
The company’s Annual General Meeting
(AGM) gives an opportunity for the Board
to communicate with shareholders. It gives
shareholders the opportunity to be briefed
by management on the performance of the
Group. All Directors attend the AGM and
shareholders are invited to ask questions
and to meet with the Directors and senior
managers both before the meeting and
following the conclusion of the formal
part of the meeting.

At the AGM, shareholders are advised of
the proxy votes cast for each resolution and
a report is placed on the company’s website
following the meeting, in addition to being
announced to the London Stock Exchange.

Institutional Shareholders
The Board encourages and seeks to build
up a mutual understanding of objectives
between the Group and institutional
shareholders, fund managers and analysts.
It believes that this is fundamental to ensuring
that the Group’s strategy is understood and
that any questions or issues are dealt with
in a constructive way.

Company Communications
Following the introduction of the
Companies Act 2006 shareholders now
have a choice on how to receive their
company communications such as the
annual report. A letter from the Chairman
was sent to shareholders as part of the
dividend mailing in March 2008 asking
shareholders to elect:

The Executive Directors follow an ongoing
programme of dialogue, meetings,
presentations and site visits. The Investor
Relations team has day-to-day responsibility
for managing communications with
institutional shareholders.

The Board receives reports on significant
discussions with shareholders allowing
Directors to form a view of the priorities
and concerns of the company’s stakeholders.
Brokers’ reports and analysts’ briefings are
distributed to Directors.

An internal Disclosure Group ensures all
appropriate communications are made to the
London Stock Exchange and shareholders.
Copies of all announcements can be
accessed from the company’s website
(www.scottish-southern.co.uk).

The Chairman attended the company’s
interim and preliminary results
presentations in May 2007 and November
2007. Susan Rice who was appointed
Senior Independent Director in July 2007
also attended the interim results
presentation in November.

As part of the induction programme,
arrangements are made for major
shareholders to meet with newly
appointed Directors.

Private Shareholders
The Board is equally interested in the
concerns of private shareholders and, on
its behalf the Company Secretary oversees
communication with these investors.

k to receive email notification of company
communications, view documentation
online and lodge their proxy over the
internet;

k to receive written notification of the

availability of company communications
on the website; or

k to continue to receive paper copies
of company communications.

Following this programme, an additional
10,000 shareholders chose to receive all their
communications electronically. As recognition
of the reduced environmental impact that
this form of communication entails the
company, on behalf of shareholders, will
make a donation of £20,000 to the World
Wildlife Fund’s (WWF’s) International
Forest Programme. The company now
communicates with 41,000 shareholders
electronically. In addition, over 260,000
shareholders chose to receive written
notification of the electronic availability of
future communications and the company will
make a further donation in excess of £65,000
to WWF’s International Forest Programme.

The previous electronic communications and
shareholding merger programmes resulted
in over 39,000 native species trees being
planted in SSE woodlands.

Dividend Reinvestment Plan
The company runs a dividend reinvestment
plan which allows shareholders to reinvest
cash dividends in further shares to build up
their stake in the company. Details can be
obtained from the company’s website or by
calling the shareholder helpline number.

Scottish and Southern Energy Annual Report 2008

47
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k submissions to government and

Parliamentary consultations and inquiries
(which are generally publicly available);
k meetings with, and briefings of, elected
members of all parties in legislatures;
k engagement with local authority elected

members and officials;

k active participation in relevant trade

associations and bodies; and
k discussions and work with non-

governmental organisations and other
relevant organisations such as charities.

SSE’s objective is to ensure that it is able
to perform its core purpose of providing
the energy people need in a reliable and
sustainable way. Its principal public policy
goal at present is to ensure that there is in
place a policy and regulatory framework
which is compatible with the delivery of the
legally-binding EU targets for renewable
energy in 2020.

Investor Centre
Shareholders can also access Investor
Centre, a free internet-based service
provided through the company’s registrar
allowing shareholders online access to:

k view their shareholdings;
k update their details;
k manage their share portfolio; and
k make use of the registrar’s share

dealing service.

Company’s Website –
www.scottish-southern.co.uk
To ensure that shareholders have access
to as much information as possible, the
company’s website contains a wide range
of information about the Group, including:

k Media centre contains a financial

overview of the Group, press releases
and project news.

k Investor centre contains annual
and interim reports, shareholder
presentations, regulatory and news
announcements; share price information.

k Corporate Responsibility contains
the Governance section, including
the Articles of Association, Schedule
of Matters Reserved to the Board,
committee terms of reference and
the letters of appointment of the
non-Executive Directors.

Shareholder Helpline Number –
0845 143 4005
A telephone helpline is available that
provides a point of contact directly to the
company’s registrars for shareholders on
issues such as dividends, change of details
and duplicate share certificates.

Other Stakeholders
In November 2007, the Board met with a
range of external stakeholders representing
the public sector, investment community,
environmental affairs, and consumer
interests. The purpose was to hear their
views, suggestions and any concerns, and
also to explain the Group’s position on a range
of business, policy and public interest issues.

More generally, working with public policy
makers is a vital area for SSE, given the high
profile of energy- and environment-related
issues in the UK and elsewhere.

SSE engages with stakeholders in seven
main ways:

k constructive engagement with Ofgem,
which is responsible for promoting
competition, wherever appropriate, and
regulating the monopoly companies which
run the gas and electricity networks;
k ongoing dialogue with Ministers and
officials in government, including the
devolved administrations in the UK;

Scottish and Southern Energy Annual Report 2008

04 Directors’ Biographies and Responsibilities

48
>

MAKING ENERGY
BETTER

1. Nick Baldwin (55)
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, a non-Executive Director of the Forensic Science
Service and Chair of the Public Weather Service Customer
Group. He also serves on the Advisory Board of Climate
Change Capital Limited and is Chairman of Worcester
Community Housing Limited. He is a member of the
Audit Committee.

2. René Médori (50)
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 Anglo Platinum 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.

3. Gregor Alexander (45)
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 for
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 and Chairman
of The Group of Scottish Finance Directors. He is a member
of the Risk Committee.

4. Susan Rice CBE (62)
Non-Executive Director
Susan joined the Board as a non-Executive Director in
July 2003. She is Chairman and Chief Executive of Lloyds
TSB Scotland plc, having previously been Managing
Director, Personal Banking, for the Bank of Scotland.
Susan is a non-Executive Director to the Court of the
Bank of England and chairs the Board of the Edinburgh
International Book Festival along with several other
organisations. Susan chairs the Remuneration Committee
and is a member of the Nomination Committee.

5. Alistair Phillips-Davies (40)
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.

6. Ian Marchant (47)
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 a member and former Chairman
of the United Kingdom Business Council for Sustainable

Energy, Chairman of the Scottish Climate Change Business
Delivery Group, and 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 a non-Executive Director
of John Wood Group PLC. He is a member of the Risk and
the Nomination committees and is lead Director for the
Environment and Corporate Responsibility.

7. Richard Gillingwater (51)
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 plc and Tomkins plc.
He has held senior appointments in the City, including at
Kleinwort Benson, BZW and Credit Suisse. 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 and the Remuneration committees.

8. Sir Robert Smith (63)
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.

Scottish and Southern Energy Annual Report 2008

49
>

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.

9. Colin Hood (53)
Chief Operating Officer
Colin joined the Board of Scottish and Southern Energy
as Power Systems Director in January 2001, and became
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 was Chairman of Scotia Gas Networks
plc during 2007/08, and a member of the Forum for
Renewable Energy Developments in Scotland. Colin
is Chairman of the Health, Safety and Environmental
Advisory Committee and is the lead Director for Health
and Safety matters. He has Board level responsibility for
Generation, Power Systems, Customer Service, People,
IT and Contracting.

10. Sir Kevin Smith CBE (53)
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 a Fellow of the Royal Aeronautical
Society, a Companion of the Chartered Management
Institute and a past President of The Society of British
Aerospace Companies Ltd. He is a member of the Health,
Safety and Environmental Advisory Committee, the
Nomination and the Remuneration committees.

Scottish and Southern Energy Annual Report 2008

04 Remuneration Report

50
>

Dear Shareholder

I am pleased to introduce the Remuneration
Report for this year, 2007/08.

This is my first full year as Chairman of the
Remuneration Committee, and we have taken
the opportunity to review the approach to
reporting. So that it is easier to understand,
the report has a new layout which gives more
detail on the operation of the Committee and
the structure of the remuneration package.
I hope you will find these changes helpful.

Following the introduction of the new
Performance Share Plan in 2006 and an
amendment last year, the Committee is
satisfied that the remuneration package
for our Directors and senior Executives
is appropriate. Therefore no significant
changes are proposed this year. The
Committee is aware of the need to keep
a watching brief on the market trends for
remuneration. The Executive Directors are
a strong team who have performed well,
and potentially this could make them
attractive to other organisations. Managing
their reward structure effectively is an
important part of managing the company’s
assets and shareholders’ interests.

This Remuneration Report – like that of all
other quoted companies – will rightly attract
a great deal of scrutiny. To be balanced and
objective, however, that scrutiny must take
account of three key factors.

First, the remuneration of Executive Directors
in quoted companies is effectively subject to
shareholder approval by a resolution at the
Annual General Meeting. There is, therefore,
a transparency and accountability that is
absent in other types of company.

Second, the responsibilities of Executive
Directors and other senior managers in SSE
are increasingly wide ranging and complex.
SSE has, and must retain, an excellent
leadership team which is fully capable of
discharging those responsibilities for the
benefit of shareholders and customers.
This is in keeping with the sound approach
to talent management which SSE seeks
to adopt throughout its operations.

Third, SSE’s policy on remuneration is
responsible: it is clearly related to the delivery
of a high standard of performance in critical
areas such as safety, the environment and
customer service.

As part of the Board evaluation process, the
effectiveness of the Remuneration Committee
was reviewed. The results of this review
indicate that the Committee continues
to operate effectively.

Susan Rice
Chairman, Remuneration Committee
28 May 2008

The following is the report of the Board of
Directors in compliance with the Directors’
Remuneration Report Regulations 2002.
The report sets out the company’s policy
on Executive Directors’ remuneration for
the year ended 31 March 2008 and, so far
as is reasonable, for subsequent years.
Any changes in policy for years after 2008
will be described in future Remuneration
Reports which will continue to be subject
to shareholder approval.

The Role of the Remuneration Committee
The Remuneration Committee’s members
are Susan Rice, who chairs the Committee,
Richard Gillingwater, Sir Robert Smith and
Sir Kevin Smith. Biographical details of the
current Committee members are given
on pages 48 and 49. Richard Gillingwater
joined the Committee on 26 July 2007,
and David Payne stepped down from the
Committee on that date on his retirement
from the Board. The Committee met on
five occasions.

Under its Terms of Reference (published in
the Corporate Governance section of the SSE
website at www.scottish-southern.co.uk)
the Committee is responsible for:

k setting the overall remuneration policy

on behalf of the Board;

k approving the detailed remuneration
terms of the Executive Directors
including their service contracts;
k approving the remuneration of the

Chairman;

k approving the design and performance
targets of incentive schemes; and
k granting awards under the company’s

Long Term Incentive Plans.

The Remuneration Committee regularly
consults the Chief Executive, Ian Marchant,
who attends and assists the Committee in
respect of those Directors reporting to him,
although he is not present when his own
remuneration is under discussion.

In addition, the Director of Human
Resources, Graham Juggins, and SSE’s
Senior Executive Remuneration Adviser,
Jane Williams, provided information and
advice on 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, provided information
to the Committee on developments in
corporate governance guidelines as they
affect the Remuneration Committee.
During the year the Committee received
advice and views from Towers Perrin
and from its brokers Merrill Lynch,
as part of a general review of remuneration
policy. Both Towers Perrin and Merrill
Lynch were appointed by the company
on behalf of the Committee.

During the year, the Committee meetings
covered the following topics:

k Executive Directors’ and Chairman’s

salary review;

k bonus target setting and awards;
k awards under the Performance

Share Plan;

k review of the Remuneration Report; and
k review of overall remuneration policy,

including the operation of the
Performance Share Plan and
its performance criteria.

The Board as a whole reviews the fees of the
non-Executive Directors, whilst ensuring that
no Director is involved in decisions on their
own pay.

The Remuneration Committee’s
composition, responsibilities and operation
comply with Section B of the Corporate
Governance Code. In forming remuneration
policy, the Committee has given full
consideration to the best practice
provisions set out in the Code.

The Principles of the Remuneration Policy
The company’s remuneration policy is to:

k retain and attract Executive Directors who
are able to run the company effectively
for the benefit of shareholders and
customers; and

k adopt a competitive and practical

approach to overall remuneration which
meets the expectations of shareholders.

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 against
the company’s core values of safety, service,
efficiency, sustainability, excellence and
teamwork.

Given the nature of the company’s
business, the Committee believes that
around half of the total remuneration
should be performance-related, with up to
two-thirds where performance is exceptional.
The Committee is satisfied that the overall
remuneration structure is set at levels which
are reasonable and appropriate to reward
performance sufficiently.

Other Senior Executives
There are a number of Senior Executives
below Board level who have a significant
influence on the performance of the Group.
The Committee remains fully aware of the
need to ensure there is an appropriate
relationship between Executive Director
remuneration, and the levels of remuneration
of other Senior Executives within the Group.
The Committee considers remuneration
levels of Senior Executives when reviewing
remuneration of the Executive Directors

Scottish and Southern Energy Annual Report 2008

51
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and is satisfied that an appropriate
remuneration and benefits structure exists
to recognise and retain its key executives.

the company’s management team need
to be prudently recognised through the
remuneration package.

Outside Appointments
Executive Directors are entitled to accept
a non-Executive appointment outside the
company with the consent of the Board, as
such appointments can enhance Directors’
experience and value to the company. Any
fees received can be retained by the Director.
In 2007/08 Ian Marchant held a non-Executive
Director position with John Wood Group plc,
and received £40,000 in fees.

Share Ownership Policy
Share ownership is encouraged throughout
the Group. In addition the Committee
believes that the interests of the Executive
Directors and other Senior Executives
should be closely aligned with those of
shareholders. The Share Option schemes
and Incentive Plans provide considerable
alignment. The company has also 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, to 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.
Table C on page 54 contains the current
shareholdings of the Directors.

Current Salaries
In addition to individual performance,
the Committee takes account of pay levels
in companies that are in related business
sectors, of similar size principally in the
FT-SE100, some specific comparisons in
the utilities sector, and also general survey
data. The Committee acknowledges that SSE
operates predominantly in the UK with a
growing portfolio of overseas renewable
development opportunities which increased
in the current year with the acquisition
of Airtricity.

The Committee decided that salaries should
increase for three key reasons. First, in line
with the retention objective, it is important
to recognise consistent high achievement
over the past few years. This, in turn, means
considering what it would cost to attract
other Executive Directors of similar calibre.
Second, while the remuneration of Executive
Directors of SSE should generally be below
the median for FT-SE100 companies, it
should not be allowed to fall too far below
that median. Third, SSE has increased
significantly in scale, scope and complexity
in each of the past five years, including
2007/08. The growing demands on Executive
Directors and other senior members of

In line with this, the Executive Directors’
salary increases with effect from 1 January
2008 was in the range 11%-14%. The current
base salary levels for the Executive Directors
are as follows: Ian Marchant £800,000; Gregor
Alexander £460,000; Colin Hood £600,000;
and Alistair Phillips-Davies £460,000.

Current Incentive Arrangements
Annual Bonus Scheme
The maximum bonus level is 100% of base
salary and for 2007/08 comprised 60% for
corporate financial performance, 20% for
personal objectives and 20% for teamwork. 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 maximum corporate financial 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.
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 Group safety performance;
k customer service;
k delivery of investment opportunities;
k generation plant availability;
k innovation and sustainable development;
k achievement of customer growth targets;
k financial and working capital

management; and

k development and delivery of new market

opportunities.

The teamwork targets are designed to deliver
overall objectives for the Group in areas
such as:

k Group-wide performance on safety;
k business development;
k customer growth; and
k effective leadership and commitment

to company values.

The company’s performance in all these
areas is described in the Chief Executive’s
Statement and the Business Statement on
pages 8 to 34 of this Annual Report. The
majority of personal 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 2007/08 was based on
performance relative to measures and targets
set at the beginning of the year, including
teamwork targets as described above.

The corporate financial performance
of profit before tax outturned at just over
104% of budget, and the bonus paid for
this element 44%. The personal objectives
and teamwork objectives were assessed
by the Committee. Whilst the majority
of individual targets were met, such as
customer growth and complaint reduction
there was still scope for improvement in
areas such as renewable consents and lost
time and reportable accidents. The range
of payments for the personal element was
therefore 14%-16%, against a maximum
possible of 20%. The teamwork element
of the bonus was 15% out of a maximum
possible of 20%.

For 2008/09, the bonus remains 60% for
corporate financial performance, 20%
based on teamwork within the Executive
team including performance in Service and
Safety, and 20% for individual objectives.
The bonuses are non-pensionable.

Long Term Incentives
Performance Share Plan (PSP)
Under the PSP, the maximum value of share
awards made to Executive Directors each
year is 150% 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
FT-SE100 companies. For full vesting, the
company’s TSR must be at or above the 75th
percentile over the three-year performance
period. 25% 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 period commencing in
2007/08, full vesting will occur if the annual
growth in adjusted EPS is equivalent to 9%
above RPI per annum. If the annual growth
in adjusted EPS is equivalent to 3% above
RPI per annum, 25% of the shares will vest

Scottish and Southern Energy Annual Report 2008

04 Remuneration Report continued

52
>

with vesting on a straight-line basis between
3% and 9% 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 these
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 PSP. 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 9% 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. The Committee believed that for
2007/08 this target range struck the right
balance between being stretching at the top
end, and being achievable and motivational
at the lower end. Different vesting levels may
be set in future years for the TSR or EPS
elements in order to ensure that the target
remains sufficiently stretching. There will
be no retesting of either the TSR or EPS
performance measures.

For awards under the PSP granted in 2006,
the maximum value of awards was 100% of
salary, with full vesting after three years for
EPS growth of RPI plus 8% and TSR at or
above 75th percentile, and 30% of the award
vesting for median performance for TSR
and EPS growth of RPI plus 3%.

Total Shareholder Return

300

250

200

150

100

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:

managers, was 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.

(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 (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
as part of a company-wide agreement.

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 2007/08.

(d) There is a long service award scheme
whereby 10, 20, 30, 40 or 50 shares are
purchased on behalf of an employee on
the occasion of the employee reaching
10, 20, 30, 40 or 50 years’ service
respectively with the Group.

If a participant resigns voluntarily in the
three years following award, all outstanding
awards lapse. The shares under award can
normally vest after three years, but can vest
earlier in certain exceptional circumstances
such as retirement or redundancy.

The Deferred Bonus Scheme has been
superseded by the PSP which was approved
at the Annual General Meeting in July 2006.

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:

k the Executive Directors are employed

under service contracts with the company
each dated 11 March 2005;

k 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 incentive plans;

k 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; and
k 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.

Previous Long-Term Incentive Scheme
The Deferred Bonus Scheme, which applied to
Executive Directors and a selection of senior

The company may at its discretion elect to
terminate any Executive Director’s contract

TSR Performance Graph
The graph to the left charts the cumulative
TSR of the company since 1 April 2003
compared to the FT-SE100 Index over the
same period. The company is a member
of the FT-SE100 index, and this was
considered to be the most relevant index
for comparative purposes.

Mar 03

Mar 04

Mar 05

Mar 06

Mar 07

Mar 08

SSE

FT-SE100

Scottish and Southern Energy Annual Report 2008

53
>

Directors concerned not participating in this
process. The fees are reviewed against
companies of similar size and complexity.
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 Bonus
Scheme, any of the share option schemes,
or contribute to any Group pension scheme.
The standard fee during the year was £45,000.
The Chairman of the Audit Committee
received an additional fee of £12,000, the
Chairman of the Remuneration Committee
received an additional fee of £10,000, and
the Senior Independent Director received
an additional fee of £10,000.

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.

Pensions
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 & 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 through
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 is via an unfunded
arrangement. There are no arrangements
to compensate members for any change
in their personal tax liability.

Non-Executive Directors
The remuneration of non-Executive Directors,
apart from the company Chairman, is agreed
by the Board annually, with the non-Executive

Remuneration in Detail
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
René Médori
Richard Gillingwater (1)
David Payne (2)
Susan Rice
Sir Kevin Smith
Sir Robert Smith (Chairman)

(1) Appointed to the Board on 25 May 2007.
(2) Retired from the Board 26 July 2007.

Salary/fee
£000

Bonuses
£000

Benefits
£000

740
419
555
419

45
57
38
24
62
45
293

450
255
328
253

–
–
–
–
–
–
–

2,697

1,286

18
15
16
15

–
–
–
–
–
–
–

Total
2008
£000

1,208
689
899
687

45
57
38
24
62
45
293

Total
2007
£000

1,210
656
894
659

24
47
0
69
42
42
266

4,047

3,909

In addition to the annual cash bonus amount for this year, Ian Marchant, Gregor Alexander, Colin Hood and Alistair Phillips-Davies will be
awarded £150k, £85k, £110k and £84k respectively in the form of deferred shares in respect of the bonus due to them for 2007/08. These
share awards will not be made until June 2008 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.

Scottish and Southern Energy Annual Report 2008

04 Remuneration Report continued

Table B – Retirement Benefits
Details of Directors’ retirement benefits are as follows:

54
>

Years of
industry
service

At 31 March
2008
£000

Increase in year
including
inflation
£000

Accrued benefit

Increase in year
excluding
inflation
£000

At 31 March
2008
£000

At 31 March
2007
£000

Transfer value of accrued benefit

Increase
less Directors’
contributions
£000

Increase in
year excluding
inflation
£000

16
Ian Marchant
17
Gregor Alexander
Colin Hood
30
Alistair Phillips-Davies 11

273
155
271
110

39
29
34
23

30
24
25
20

3,503
1,799
5,181
1,253

3,356
1,548
3,999
1,002

130
234
1,165
234

446
287
401
280

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 HM Revenue & Customs 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 RPI.

The following is information relating to the Directors’ pensions of Colin Hood, Ian Marchant and Alistair Phillips-Davies, as participants
in the HM Revenue & Customs 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
Richard Gillingwater
Colin Hood
Ian Marchant
René Médori
Alistair Phillips-Davies
Susan Rice
Sir Kevin Smith
Sir Robert Smith

31 March 2008

Shares held

Shares under
option

1 April 2007

Shares held

Shares under
option

32,630
2,024
2,000
27,967
119,178
2,000
31,353
4,423
2,000
22,600

120,508
0
0
227,324
223,656
0
136,026
0
0
0

21,589
2,000
0
26,710
94,785
2,000
31,116
4,254
2,000
15,800

87,837
0
0
162,097
172,266
0
87,074
0
0
0

From 31 March 2008 to 28 May 2008, the following changes to the interests of Directors took place:

k Under the Share Incentive Plan, on 30 April 2008, Ian Marchant, Colin Hood, Gregor Alexander and Alistair Phillips-Davies each acquired

14 shares.

k Under a standing order for reinvestment of a PEP, Ian Marchant acquired one share on 2 April 2008.

Scottish and Southern Energy Annual Report 2008

55
>

A further analysis of the Directors’ shares under option as at 31 March 2008, and options granted and exercised during the year, is set out below.

The Register of Directors’ Interests (which is open to shareholder inspection) contains full details of Directors’ shareholdings and options
to subscribe for shares.

Table D – Directors’ Share Options

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
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

Awarded
during
year

–
11,962
75,313

144
8,598
56,485

–
6,518
42,364

–
6,588
42,364

Options
exercised

606
39,937
–

–
–
–

–
18,350
–

–
–
–

Market
price at
time of
exercise
(pence)

–
14.30
–

–
–
–

–
14.30
–

–
–
–

Options at
31 March
2008

1,051
93,150
129,455

1,636
128,596
97,092

2,628
47,215
70,665

1,865
63,496
70,665

Weighted
average
option price
per share
(pence)

622
#

923
#

613
#

886
#

Normally
exercisable

10/09-03/10
07/08-06/17
07/09-07/10

10/10-03/11
07/06-06/17
07/09-07/10

10/08-03/11
07/08-06/17
07/09-07/10

10/10-03/11
07/07-06/17
07/09-07/10

# £1 per grant. No price was paid for the award of any option.

Shares exercised under the Deferred Bonus Scheme included the following arising from dividend reinvestment: Ian Marchant – 4,658 shares,
Gregor Alexander – 2,139 shares.

The closing market price of the shares at 31 March 2008 was 1403.5p and range for the year was 1679.5p to 1378.5p. The options granted
during the year were granted under either the Deferred Bonus Scheme, the Savings-related Scheme, or the PSP.

The aggregate amount of gains made by Directors on the exercise of share options during the year was £838,837 (2007 – £777,337). Under
the Deferred Bonus Scheme, the aggregate value of the shares placed in trust for Directors in the year to 31 March 2008 was £486,305
(2007 – £1,433,053). Under the PSP, the aggregate value of the shares placed in trust for Directors in the year to 31 March 2008 was £3,104,983
(2007 – £1,844,969). The aggregate amount of gains made by the highest-paid Director, Ian Marchant was £576,432 (2007 – £408,876).

This report was approved by the Board and signed on its behalf by:

Susan Rice
Remuneration Committee Chairman
28 May 2008

Scottish and Southern Energy Annual Report 2008

05 Independent Auditors’ Report to the members of Scottish and Southern Energy plc 56
>

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 2008 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 49.

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 Director’s Report includes that specific information presented in the Chief Executive’s
Statement that is cross referenced from the Business Review 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 2006 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 2008 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 2008;

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 Directors’ Report is consistent with the financial statements.

KPMG Audit Plc
Chartered Accountants
Registered Auditor
Edinburgh
28 May 2008

05 Consolidated Income Statement for the year ended 31 March

Scottish and Southern Energy Annual Report 2008

57
>

2008

2007

Revenue
Cost of sales

Gross profit
Operating costs
Other operating income

Before
exceptional
items and certain
re-measurements
£m

Exceptional
items and certain
re-measurements
(note 4)
£m

15,256.3
(13,509.8)

1,746.5
(605.7)
0.1

–
(187.8)

(187.8)
–
55.0

Note

Total
£m

15,256.3
(13,697.6)

1,558.7
(605.7)
55.1

11,867.1
(10,247.7)

1,619.4
(557.5)
–

Before
exceptional
items and certain
re-measurements
£m

Exceptional
items and certain
re-measurements
(note 4)
£m

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

Operating profit
Finance income
Finance costs

Profit before taxation
Taxation

Profit for the year

Attributable to:
Equity holders of the parent
Minority interest

Basic earnings per share (pence)
Diluted earnings per share (pence)
Adjusted earnings per share (pence)

Dividends paid in the year (£m)

2
6
6

9
9
9

1,140.9

(132.8)

1,008.1

1,061.9

242.6
(127.6)
–
(41.9)

73.1

1,214.0
202.6
(233.9)

1,182.7
(306.8)

875.9

875.6
0.3

–
–
4.2
31.2

35.4

(97.4)
–
(1.5)

(98.9)
96.2

(2.7)

(2.7)
–

169.2
(117.9)
–
(31.8)

19.5

1,081.4
193.4
(230.9)

1,043.9
(276.4)

767.5

767.5
–

242.6
(127.6)
4.2
(10.7)

108.5

1,116.6
202.6
(235.4)

1,083.8
(210.6)

873.2

872.9
0.3

101.1p
101.0p
105.6p

£502.8m

The accompanying notes are an integral part of these financial statements.

–
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
–

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
92.5p

£411.3m

Scottish and Southern Energy Annual Report 2008

05 Balance Sheets as at 31 March

Assets
Property, plant and equipment
Intangible assets:

Goodwill
Other intangible assets

Investments in associates and jointly controlled entities
Other investments
Investments in subsidiaries
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
Translation reserve
Retained earnings

Total equity attributable to equity holders of the parent
Minority interest

Total equity

58
>

Consolidated

Company

Note

2008
£m

2007
£m

10
10
12
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
25

6,334.3

5,042.1

659.0
256.9
917.8
6.0
–
–
85.8
43.1
318.9

293.2
12.9
702.3
4.1
–
–
128.1
66.0
54.5

8,621.8

6,303.2

340.9
251.2
3,400.3
255.3
1,106.5

5,354.2

13,976.0

1,847.6
3,601.9
220.8
9.5
1,229.4

6,909.2

2,073.6
967.3
490.1
107.3
134.9
313.3

4,086.5

10,995.7

2,980.3

435.1
315.7
22.0
3.9
2.3
25.4
2,175.6

2,980.0
0.3

2,980.3

177.7
214.1
2,266.7
56.1
452.9

3,167.5

9,470.7

474.8
2,340.4
199.2
8.0
351.9

3,374.3

1,803.8
923.7
327.7
104.4
220.0
120.9

3,500.5

6,874.8

2,595.9

431.0
99.1
13.7
14.6
(10.5)
–
2,048.0

2,595.9
–

2,595.9

2008
£m

–

–
–
516.9
–
2,137.8
1,772.7
85.8
–
–

4,513.2

–
–
2,429.2
104.2
1.1

2,534.5

7,047.7

1,696.3
3,580.2
9.0
–
–

5,285.5

612.6
9.6
–
–
–
–

622.2

5,907.7

1,140.0

435.1
315.7
22.0
3.9
7.1
(21.1)
377.3

1,140.0
–

1,140.0

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

1,139.4
–

1,139.4

These financial statements were approved by the Board of Directors on 28 May 2008 and signed on their behalf by:

Gregor Alexander
Finance Director

Sir Robert Smith
Chairman

05 Statements of Recognised Income and Expense for the year ended 31 March

Scottish and Southern Energy Annual Report 2008

Gains/(losses) on effective portion of cash flow hedges (net of tax)
Transferred to income statement on cash flow hedges (net of tax)
Losses on net investment hedge (net of tax)
Actuarial (loss)/gain on retirement benefit schemes (net of tax)
Exchange difference on translation of foreign operations

Jointly controlled entities and associates:
Share of (losses)/gains on effective portion of cash flow hedges (net of tax)
Share of actuarial gain/(loss) on retirement benefit schemes (net of tax)

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
Minority interests

Consolidated

Company

2008
£m

11.6
8.0
(21.1)
(18.7)
46.5

(6.8)
16.4

35.9
873.2

909.1

908.8
0.3

909.1

2007
£m

(22.6)
–
–
33.2
–

5.5
(1.4)

14.7
830.5

845.2

845.2
–

845.2

2008
£m

18.0
–
(21.1)
(43.3)
–

–
–

(46.4)
571.7

525.3

525.3
–

525.3

59
>

2007
£m

(14.0)
–
–
12.3
–

–
–

(1.7)
415.8

414.1

414.1
–

414.1

Scottish and Southern Energy Annual Report 2008

05 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
Exchange loss in relation to foreign investment
Finance costs
Finance income
Share of jointly controlled entities and associates
Income from investments in subsidiaries
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
(Decrease) in provisions
Charge in respect of employee share awards (before tax)
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
Payment for consortium relief
Net cash from operating activities

Cash flows from investing activities
Purchase of property, plant and equipment
Purchase of software and other intangibles
Deferred income received
Proceeds from sale of property, plant and equipment
Loans to jointly controlled entities
Purchase of Airtricity (note 14)
Purchase of Slough Heat and Power (note 14)
Purchase of businesses and subsidiaries (note 14)
Cash acquired in purchases
Investment in Marchwood Power (note 12)
Loans repaid by jointly controlled entities
Loans repaid by associates
Increase in other investments
Net cash from investing activities

Cash flows from financing activities
Proceeds from issue of share capital
Repurchase of ordinary share capital for cancellation
Dividends paid to Company’s equity holders
Employee share awards share purchase
New borrowings
Borrowings acquired in purchases
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
Effect of foreign exchange rate changes
Cash and cash equivalents at the end of year (note 17)

Consolidated

Company

2008
£m

873.2
210.6
167.1
22.2
233.9
(202.6)
(108.5)
–
(44.4)
267.8
32.5
(15.1)
(25.9)
(616.0)
725.5
(6.4)
10.8
(65.3)
0.4

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

1,459.8

1,140.4

35.1
–
61.2
(108.6)
(283.6)
(7.6)

1,156.3

(798.8)
(16.9)
8.9
100.6
(5.6)
(1,302.2)
(49.5)
(16.2)
597.3
–
10.8
–
(14.5)

(1,486.1)

2.2
(237.0)
(502.8)
(12.4)
2,275.1
(543.0)
(466.6)

515.5

185.7

48.4
185.7
9.0

243.1

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

2008
£m

571.7
(2.4)
1.6
22.2
207.9
(191.7)
–
(609.3)
(13.4)
–
–
–
–
(779.0)
990.1
–
–
–
–

197.7

–
979.3
124.9
(201.3)
(289.3)
(7.6)

803.7

–
–
–
–
–
(1,302.2)
–
–
–
–
–
–
–

(1,302.2)

2.2
(237.0)
(502.8)
(12.4)
1,696.4
–
(349.5)

596.9

98.4

5.8
98.4
–

104.2

60
>

2007
£m

415.8
(5.0)
4.0
–
201.0
(212.0)
–
(403.8)
(11.6)
–
–
–
–
(442.9)
645.6
–
–
–
–

191.1

–
216.8
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

05 Notes on the Financial Statements for the year ended 31 March 2008
1. Significant Accounting Policies

Scottish and Southern Energy Annual Report 2008

61
>

1. SIGNIFICANT ACCOUNTING POLICIES

General information
Scottish and Southern Energy plc (the Company) is a company domiciled in Scotland. The address of the registered office is given on the
back cover. The Group’s operations and its principal activities are set out in the Business Statement at pages 8 to 34. The consolidated
financial statements for the year ended 31 March 2008 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 28 May 2008. 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, financial instruments classified as available for sale and the
assets and liabilities of the Group pension scheme. The Directors believe the financial statements present a true and fair view. The financial
statements of the Group and Company are presented in pounds Sterling. Operations and transactions conducted in currencies other than
pounds Sterling are included in the consolidated financial statements in accordance with the Group’s foreign currencies accounting policy
included on page 63.

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 areas involving a higher level of judgement
or estimation are summarised at page 68.

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. Certain re-measurements are re-measurements
arising on certain commodity, interest rate and currency contracts which are accounted for as held for trading or as fair value hedges in
accordance with the Group’s policy for such financial instruments. This excludes commodity contracts not treated as financial instruments
under IAS 39 which are held for the Group’s own use requirement.

The following accounting standards and interpretations have been adopted by Group from 1 April 2007:

k IFRS 7 Financial Instruments: Disclosures
k IFRIC 8 Scope of IFRS 2 Share Based Payments
k IFRIC 9 Reassessment of Embedded Derivatives
k Amendment to IAS 1 Presentation of Financial Statements – Capital Disclosures
k IFRIC 10 Interim Financial Reporting and Impairment
k IFRIC 11/IFRS 2 Share Based Payments – Group and Treasury Transactions

There was no significant impact on the financial statements arising from the adoption of these standards.

The following published standards and interpretations are not yet effective and have not been early adopted by the Group:

k IFRIC 12 Service Concession Arrangements
k IFRIC 13 Customer Loyalty Programmes
k IFRIC 14/IAS 19 The Limit on a Defined Benefit Assets, Minimum Funding Requirements and their Interaction
k IFRS 8 Operating Segments
k Amendment to IAS 1 Presentation of Financial Statements – A Revised Presentation
k Amendments to IAS 23 Borrowing Costs
k Amendments to IAS 27 Consolidation and Separate Financial Statements
k Amendments to IFRS 3 Business Combinations

The impact of these new standards has not been fully analysed and this will be assessed in future accounting periods.

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 of carrying values has been made.

Scottish and Southern Energy Annual Report 2008

05 Notes on the Financial Statements for the year ended 31 March 2008 continued 62
>
1. Significant Accounting Policies (continued)

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.

The special purpose entities referred to relate to entities in which the Group has a 50% shareholding but whose activities the Group is deemed
to control under SIC-12 Consolidation – Special Purpose Entities.

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. 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.

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. Unread energy sales are estimated using historical consumption patterns taking account of industry volume reconciliation processes.

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 in 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 revenue. For one-off services, such as connections, revenue is recognised at the date
of service. Revenue from fixed-fee service contracts is recognised over the life of the contract, in relation to the benefit received by the customer.

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.

Scottish and Southern Energy Annual Report 2008

63
>

Leases
The determination of whether an arrangement contains a lease is dependent on whether the arrangement relates to use and control of
a specific asset. Leases are classified as finance leases if the arrangement transfers substantially all the risks and rewards of ownership
to the lessee. All other leases are categorised as operating leases.

(i) Operating lease obligations

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.

(ii) Finance lease obligations

Assets held under finance leases are capitalised and held as part of property, plant and equipment. The accounting policy for such
arrangements is described on page 64.

Foreign currencies
The consolidated financial statements are presented in pounds Sterling, which is the functional currency of the Company and the Group’s
presentational currency. Each entity in the Group determines its own functional currency and items included in the financial statements
of each entity are measured accordingly.

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
items is taken to the income statement with the exception of exchange gains or losses on foreign currency borrowings that provide a hedge
against a net investment in a foreign entity. These are taken against the hedge reserve to the extent that the hedge is effective. Non-monetary
assets that are measured in terms of historical cost in a foreign currency are translated at the historic rate at the date of transaction.

For the purpose of presenting the consolidated financial statements, the assets and liabilities of the Group’s foreign operations are translated
into pounds Sterling at the balance sheet closing rate. The results of these operations are translated at the average rate in the relevant period.
Exchange differences on retranslation of the opening net assets and the results are transferred to the translation reserve, a separate component
of equity, and are reported in the statement of recognised income and expense.

Finance income and costs
Finance income comprises interest receivable on funds invested and expected 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 loan less capitalised interest.

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.

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.

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 Group’s right to receive payments is established.

Scottish and Southern Energy Annual Report 2008

05 Notes on the Financial Statements for the year ended 31 March 2008 continued 64
>
1. Significant Accounting Policies (continued)

Accounting policies continued

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. 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.

(ii) Leased assets

Leases where the Group assumes substantially all the risks and rewards of ownership are classified as finance leases.

Assets held under finance leases are recognised as part of the property, plant and equipment 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.

(iv) Depreciation

Depreciation is charged to the income statement to write off cost, less residual values, on a straight line basis over the estimated useful
life of the asset. 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
Wind generation assets
Power stations
Overhead lines, underground cables and other network assets
Gas storage facilities
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
25
20 to 60
40 to 80
25 to 50
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.

It is the Group policy to capitalise qualifying 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.

Scottish and Southern Energy Annual Report 2008

65
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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 excluding non-current
assets (or disposal groups) that are classified as held-for-sale, which are recognised and measured at fair value less costs to sell. 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 as deferred income and does not subsequently
re-value the intangible asset. Carbon emissions 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 with gains or losses arising on re-measurement being recognised in the income statement.
The intangible asset is surrendered at the end of the compliance period reflecting the consumption of the economic benefit and is
de-recognised at its original value. As a result, no amortisation is booked but an impairment charge may be recognised should the
carrying value exceed market 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 Ofgem. 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.

(iv) Development wind assets

Costs capitalised as development wind intangibles represent the costs incurred in bringing individual wind farm projects to the consented
stage. Costs associated with reaching the consent stage include options over land rights, planning application costs and environmental
impact studies. These may be costs incurred directly or as part of the fair value exercise on acquisition of a controlling interest in a
project. Development wind assets are not amortised until the asset is substantially complete and ready for its intended use. The asset
is subject to impairment testing on an annual basis until this time. At the time the project is confirmed, the carrying value of the project
is transferred to property, plant and equipment as assets under construction. Amortisation is over the expected useful life of the related
operational asset. The asset is derecognised on disposal, or when no future economic benefits are expected from their use.

(v) 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
Customer lists
Contracts

Years

10
5
5
Shorter of contract term or 5

Scottish and Southern Energy Annual Report 2008

05 Notes on the Financial Statements for the year ended 31 March 2008 continued 66
>
1. Significant Accounting Policies (continued)

Accounting policies continued

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 or not ready for use, 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
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 cost 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.

The change related to the equity shares in the Company awarded under the share schemes is treated as in increase in the cost
of investment held by the Company in the subsidiary companies in the Group.

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.

Scottish and Southern Energy Annual Report 2008

67
>

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
affects profit or loss.

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 affects profit or loss. 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 in cost of sales.

(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) Net investment hedges

Hedges of net investments in foreign operations are accounted for similarly to cash flow hedges. Any gain or loss on the effective portion of
the hedge is recognised in equity, any gain or loss on the ineffective portion of the hedge is recognised in the income statement. On disposal
of the foreign operation, the cumulative value of any gains or losses recognised directly in equity is transferred to the income statement.

(v) 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.

(vi) 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.

(vii) Trade receivables

Trade receivables do not carry any interest and are measured at cost less an appropriate allowance for irrecoverable receivables.

(viii) 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.

(ix) Share capital

Ordinary shares are accounted for as equity. Costs associated with the issue of new shares are deducted from the proceeds of issue.

Scottish and Southern Energy Annual Report 2008

05 Notes on the Financial Statements for the year ended 31 March 2008 continued 68
>
1. Significant Accounting Policies (continued) 2. Segmental Information

Accounting policies continued

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.

Decommissioning costs
The estimated cost of decommissioning at the end of the useful lives of certain assets is reviewed periodically. Provision is made for the
estimated cost of decommissioning. Decommissioning dates are uncertain but are expected to be between 2008 and 2035. A corresponding
decommissioning asset is recognised and is included within property, plant and equipment. Changes in these provisions are recognised
prospectively. The unwinding of the discount on the provision is included in finance costs and the depreciation of the asset is straight-line
over the expected useful life of the asset.

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. The value of scheme assets is impacted by the asset ceiling test which restricts the surplus that can be recognised to assets
that can be recovered fully through refunds or reductions in future contributions.

(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. Energy commodity contracts are classified as either derivative contracts under IAS 39
or as contracts for the Group’s own use requirements. Only IAS 39 derivatives are accounted for on a fair value basis. More detail on this
is included in note 28.

(vi) Exceptional and re-measurements

The criteria for identifying what constitutes an exceptional item are outlined in note 1 Use of estimates and judgements.

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 and Ireland
(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 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 overleaf. All revenue and profit before taxation
arise from operations within Great Britain and Ireland.

Scottish and Southern Energy Annual Report 2008

69
>

(a) Revenue by segment

Power Systems
Scotland
England

Generation and Supply
Other businesses

Total revenue

2008
£m

2007
£m

Intra-segment revenue (i)
2008
2007
£m
£m

External revenue

2008
£m

2007
£m

283.6
434.0

717.6
14,263.0
1,017.8

15,998.4

270.4
407.4

677.8
10,977.9
859.4

12,515.1

108.4
194.6

303.0
13.1
426.0

742.1

99.1
189.6

288.7
15.4
343.9

648.0

175.2
239.4

414.6
14,249.9
591.8

15,256.3

171.3
217.8

389.1
10,962.5
515.5

11,867.1

(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 at arm’s length.

Revenue from the Group’s investment in Scotia Gas Networks (SSE share being 2008 – £361.2m; 2007 – £297.3m) is not recorded in the revenue
line in the income statement.

(b) Operating profit by segment

2008

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

150.2
232.7

382.9
161.5

544.4
724.2
124.7

1,393.3
(9.8)

1,383.5

Adjusted
£m

144.0
224.0

368.0
103.1

471.1
642.6
125.2

1,238.9
(7.8)

1,231.1

JCE/Associate
share of interest

Before
exceptional
items and certain
and tax (i) re-measurements
£m

£m

–
–

–
(139.3)

(139.3)
(29.9)
(0.3)

(169.5)
–

(169.5)

150.2
232.7

382.9
22.2

405.1
694.3
124.4

1,223.8
(9.8)

1,214.0

2007

Exceptional
items and certain
re-measurements
£m

–
–

–
30.3

30.3
(182.7)
55.0

(97.4)
–

(97.4)

JCE/Associate
share of interest
and tax (i)
£m

Before
exceptional
items and certain
re-measurements
£m

Exceptional
items and certain
re-measurements
£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

–
–

–
3.8

3.8
94.9
–

98.7
–

98.7

Total
£m

150.2
232.7

382.9
52.5

435.4
511.6
179.4

1,126.4
(9.8)

1,116.6

Total
£m

144.0
224.0

368.0
(15.3)

352.7
710.4
124.8

1,187.9
(7.8)

1,180.1

(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 includes loan stock
interest payable to the consortium shareholders. The Group has accounted for its 50% share of this, £35.4m (2007 – £35.8m), as finance
income (note 6).

(ii) Unallocated expenses comprise corporate office costs which are not directly allocable to particular segments.

Scottish and Southern Energy Annual Report 2008

05 Notes on the Financial Statements for the year ended 31 March 2008 continued 70
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2. Segmental Information (continued)

Primary reporting format – business segments continued

(b) Operating profit by segment continued
The Group’s share of operating profit from jointly controlled entities and associates has been recognised in the Generation and Supply
segment other than that for Scotia Gas Networks plc, which is recorded in a separate segment, and PriDE (South East Regional Prime),
which is recognised in Other businesses (£1.0m before tax; 2007 – £1.4m before tax).

Power Systems
Scotland
England

Scotia Gas Networks (iii)

Energy Systems

Generation and Supply
Other businesses
Corporate and unallocated

Less: inter-segment

Segment assets (i)

Segment liabilities (ii)

2008
£m

1,495.2
2,335.4

3,830.6
501.1

4,331.7

12,514.7
1,843.9
9,910.7

2007
£m

1,363.8
2,202.9

3,566.7
438.8

4,005.5

9,398.2
1,203.7
6,907.5

2008
£m

931.8
1,461.2

2,393.0
–

2,393.0

11,624.1
1,429.5
10,174.1

2007
£m

898.4
1,446.0

2,344.4
–

2,344.4

7,996.1
742.5
7,836.0

28,601.0
(14,625.0)

13,976.0

21,514.9
(12,044.2)

9,470.7

25,620.7
(14,625.0)

10,995.7

18,919.0
(12,044.2)

6,874.8

(i) Segment assets consist of property, plant and equipment, goodwill, other intangible assets, inventories, financial assets (operating
derivatives) and receivables. Unallocated assets include pension assets, deferred tax assets, financial assets (financing derivatives),
investments in joint ventures and associates, investments in subsidiaries and cash and cash equivalents.

(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.

(d) Capital expenditure

Power Systems

Scotland
England

Scotia Gas Networks (i)

Energy Systems

Generation and Supply
Other businesses
Corporate and unallocated

Less: inter-segment

Capital additions to
intangible assets
(note 10)

2008
£m

2007
£m

–
–

–

218.5
3.4
10.7

232.6
–

232.6

–
–

–

349.3
–
3.7

353.0
–

353.0

Capital additions
to property, plant
and equipment
(note 11)

2008
£m

100.0
164.4

264.4
–

264.4

351.9
165.9
–

782.2
–

782.2

2007
£m

73.9
130.6

204.5
–

204.5

299.6
126.8
–

630.9
–

630.9

(i) The Group’s share of the capital additions in Scotia Gas Networks plc is not included within Property, Plant and Equipment.

Capital additions does not include assets acquired in acquisitions.

(e) Included within operating profit

Power Systems
Scotland
England

Generation and Supply
Other businesses
Corporate and unallocated

Less: inter-segment

Scottish and Southern Energy Annual Report 2008

71
>

Depreciation/
impairment on property,
plant and equipment
(note 11)

Amortisation/impairment
of intangible assets
(note 10)

2008
£m

40.5
68.8

109.3

118.2
40.3
–

267.8
–

267.8

2007
£m

38.3
63.8

102.1

99.1
36.5
–

237.7
–

237.7

2008
£m

–
–

–

28.5
–
4.0

32.5
–

32.5

2007
£m

–
–

–

54.8
–
2.4

57.2
–

57.2

The Group’s share of Scotia Gas Networks plc depreciation (2008 – £46.0m; 2007 – £39.9m) and amortisation (2008 – nil; 2007 – nil)
is not included within operating costs. Property, plant and equipment impairment charges of £12.2m (2007 – £13.9m) are included within
Generation and Supply. The impairment charge relating to granted carbon allowances of £25.2m (2007 – £53.9m) has nil impact on the
income statement (note 10).

Secondary reporting format – geographical segments
The Group operates in two main geographical areas:

Revenue – external
Total assets (i)
Capital expenditure (ii)
Expenditure on intangible assets (iii)

(i) Based on location of assets.

UK
£m

15,183.4
12,785.6
778.1
230.1

2008

Europe
£m

72.9
1,190.4
4.1
2.5

Total
£m

15,256.3
13,976.0
782.2
232.6

UK
£m

11,867.1
9,470.7
630.9
353.0

2007

Europe
£m

–
–
–
–

Total
£m

11,867.1
9,470.7
630.9
353.0

(ii) Capital Expenditure on property, plant and equipment (note 11) based on location of assets.

(iii) Capital Expenditure on other intangible assets (note 10) based on location of assets.

Scottish and Southern Energy Annual Report 2008

05 Notes on the Financial Statements for the year ended 31 March 2008 continued 72
>
3. Other Operating Income and Expense 4. Exceptional Items and Certain Re-measurements

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
Impairment of wind development asset (note 10)
Amortisation of brand costs (note 10)
Amortisation of intangible assets (note 10)

2008
£m

214.6
391.1

605.7

2008
£m

267.8
–
3.7
268.9
(15.1)
(65.3)
0.4
2.0
1.1
4.2

2007
£m

203.6
353.9

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 as this has been offset by an equal reduction
in the related carbon emissions liability (note 10).

Auditor’s remuneration

Statutory audit services – audit of the Group’s accounts
Statutory audit of subsidiary accounts

Audit of parent and subsidiary entities

Tax services
Other services

2008
£m

0.2
0.4

0.6

0.1
0.9

2007
£m

0.2
0.2

0.4

–
0.2

Tax service fees incurred in the year were £0.1m (2007 – £0.03m). In addition to the amounts shown above, the auditors received fees of £0.03m
(2007 – £0.03m) for the audit of the Scottish Hydro-Electric Pension Scheme. Statutory audit of subsidiary accounts includes £0.2m in relation
to Airtricity. Other service fees include fees incurred in relation to the disposal of the telecoms sites assets and work in relation to regulatory
accounts and returns required by Ofgem. The majority of the fee related to the disposal of the telecoms sites assets and in accordance
with policy this was the result of a competitive tender. This fee also included an element related to the success, in proceeds terms, of the
transaction. Proceeds totalled £79m including a profit of £55m. A description of the work of the Audit Committee is set out on page 45 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
During the year, the Group disposed of telecoms sites assets to the Wireless Infrastructure Company Limited, for a total potential consideration
of £79.0m. The gain recognised on this disposal is £55.0m. This gain has been disclosed separately in the income statement.

The Group incurred an unhedged translation loss of £22.2m on Euro-denominated debt held in relation to the acquisition of Airtricity Holdings
Limited (see note 14). This has been recognised as exceptional following the Group’s decision to restructure the borrowings associated
with this element of the acquisition in order to match Sterling exposures with Sterling funding. As a consequence this translation loss
is a non-recurring item.

In previous years, the Group financial statements included net dividends received in relation to the administration of TXU Europe Energy Trading
Limited which had been placed into administration in 2002 (2007 – £33.0m). In addition to this, in previous years, the Group recognised its
share of the net dividend from the administration of TXU Europe Energy Trading Limited received by an associate company, Barking Power
Limited, separately within share of operating profit from jointly controlled entities and associates (2007 – £0.9m before tax).

(ii) Certain re-measurements
Certain re-measurements arising from IAS 39 are disclosed separately to aid understanding of the underlying performance of the Group.

5. Directors and Employees

Scottish and Southern Energy Annual Report 2008

73
>

(iii) Taxation
The Group has separately recognised the tax effect of the exceptional items and certain re-measurements summarised above. In addition
to this, the Group has also separately disclosed the effect of the announced change in the base corporation tax rate of 30% to 28%, which
is effective from 1 April 2008. This has an impact on any temporary differences which exist at 1 April 2008 (note 7).

These transactions can be summarised thus:

Exceptional items
Distributions from TXU administrator (net of tax in associates)
Disposal of telecoms sites assets (note 11)
Share of change in UK corporation tax rate in jointly controlled entities and associates
Exceptional loss on translation

Certain re-measurements
Movement on operating derivatives
Movement on financing derivatives
Share of movement on derivatives in jointly controlled entities (net of tax)

(Loss)/profit before taxation

Exceptional items
Effect of change in UK corporation tax rate on deferred tax liabilities and assets
Taxation on other exceptional items

Taxation on certain re-measurements

Taxation

Impact on profit for the year

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

2008
£m

–
55.0
32.4
(22.2)

65.2

(187.8)
20.7
3.0

(164.1)

(98.9)

55.4
(9.9)

45.5
50.7

96.2

(2.7)

2008
£m

433.1
38.9
10.8
36.3

519.1
(60.9)

458.2

2007
£m

33.6
–
–
–

33.6

61.3
(10.6)
3.8

54.5

88.1

–
(9.9)

(9.9)
(15.2)

(25.1)

63.0

Consolidated

2007
£m

369.0
35.5
6.8
34.3

445.6
(48.3)

397.3

Consolidated

Company

2008
Number

16,892

2007
Number

13,427

2008
Number

2007
Number

The monthly average number of people employed by the Group (including Executive Directors) during the year was:

Power Systems
Generation and Supply
Contracting, Connections and Metering
Other businesses and corporate services

2008
Number

1,938
7,047
5,312
1,480

15,777

Consolidated

2007
Number

1,863
5,335
4,648
1,207

13,053

Company

2008
Number

2007
Number

–
–
–
4

Scottish and Southern Energy Annual Report 2008

05 Notes on the Financial Statements for the year ended 31 March 2008 continued 74
>
5. Directors and Employees (continued) 6. Finance Income and Costs

(ii) Directors’ remuneration and interests
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.

Information concerning Directors’ remuneration, shareholdings, options, long term incentive schemes and pensions is shown in the
Remuneration Report on pages 50 to 55. 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.

6. FINANCE INCOME AND COSTS

Recognised in income statement

2008

2007

Before
exceptional
items and certain
re-measurements
£m

Exceptional
items and certain
re-measurements
£m

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)
Notional interest arising on discounted provisions
Foreign exchange translation of monetary

assets and liabilities

Less: interest capitalised (ii)

141.4
4.9

35.4
10.8
10.1

202.6

(52.5)
(81.2)
(117.4)
(4.6)
(3.6)

2.1
23.3

–
–

–
–
–

–

–
–
–
–
–

(22.2)
–

Total
£m

141.4
4.9

35.4
10.8
10.1

202.6

(52.5)
(81.2)
(117.4)
(4.6)
(3.6)

(20.1)
23.3

Total finance costs

(233.9)

(22.2)

(256.1)

Changes in fair value of financing derivative
assets or liabilities designated at fair value
through profit or loss

–

20.7

Net finance costs

Finance income
Finance costs

Net finance costs

(31.3)

202.6
(233.9)

(31.3)

(1.5)

–
(1.5)

(1.5)

20.7

(32.8)

202.6
(235.4)

(32.8)

Before
exceptional
items and certain
re-measurements
£m

Exceptional
items and certain
re-measurements
£m

130.1
3.8

35.8
9.5
14.2

193.4

(34.0)
(98.2)
(107.2)
(3.6)
(1.4)

13.5

(230.9)

–

(37.5)

193.4
(230.9)

(37.5)

–
–

–
–
–

–

–
–
–
–
–

–

(10.6)

–
(10.6)

(10.6)

(i)

Included within other interest receivable are credits from jointly controlled entities of £46.2m (2007 – £45.3m), including £35.4m
(2007 – £35.8m) in respect of loan stock interest receivable from Scotia Gas Networks plc.

(ii) The capitalisation rate applied in determining the amount of borrowing costs to capitalise in the period was 5.52% (2007 – 5.42%).

Recognised in equity

Gains/(losses) on effective portion of cash flow hedges (i)
Share of (losses)/gain on effective portion of cash flow hedges (i)

(i) Before deduction of tax.

2008
£m

27.8
(9.7)

18.1

Total
£m

130.1
3.8

35.8
9.5
14.2

193.4

(34.0)
(98.2)
(107.2)
(3.6)
(1.4)

13.5

(230.9)

(10.6)

(48.1)

193.4
(241.5)

(48.1)

2007
£m

(32.3)
7.8

(24.5)

7. Taxation

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
Accretion of convertible debt component
Exceptional foreign exchange translation loss
Movement on financing derivatives

Adjusted finance income and costs
(add)/less:
Return on pension scheme assets
Interest on pension scheme liabilities
Notional interest arising on discounted provisions

Adjusted finance income and costs for interest cover calculations

7. TAXATION

Analysis of charge recognised in the income statement:

2008

Before
exceptional
items and certain
re-measurements
£m

Exceptional
items and certain
re-measurements
£m

315.3
(18.9)

296.4

11.4
–
(1.0)

10.4

13.6
–

13.6

(54.4)
(55.4)
–

(109.8)

Total
£m

328.9
(18.9)

310.0

(43.0)
(55.4)
(1.0)

(99.4)

Current tax
UK corporation tax
Adjustments in respect of previous years

Total current tax

Deferred tax
Current year
Effect of UK corporation tax rate change
Adjustments in respect of previous years

Total deferred tax

Scottish and Southern Energy Annual Report 2008

2008
£m

(32.8)

(127.6)
4.6
22.2
(20.7)

(154.3)

(141.4)
117.4
3.6

(174.7)

2007

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

Total taxation charge

306.8

(96.2)

210.6

276.4

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% (2007 – 30%)

Tax effect of:

Expenses not deductible for tax purposes
Non taxable income
Effect of change of UK corporation tax rate
Impact of foreign tax rates and foreign dividends
Adjustments to tax charge in respect of previous years
Consortium relief not paid for
Utilisation of tax losses

Group tax charge and effective rate

2008
£m

1,083.8
(108.5)

975.3

292.6

5.6
(0.4)
(55.4)
(0.6)
(21.0)
(9.7)
(0.5)

210.6

2008
%

30.0

0.6
–
(5.7)
(0.1)
(2.1)
(1.0)
(0.1)

21.6

9.9
–

9.9

15.2

–

15.2

25.1

2007
£m

1,132.0
(23.9)

1,108.1

332.4

1.5
(6.3)
–
–
(17.1)
(8.9)
(0.1)

301.5

75
>

2007
£m

(48.1)

(117.9)
3.6
–
10.6

(151.8)

(130.1)
107.2
1.4

(173.3)

Total
£m

296.4
(19.9)

276.5

22.3

2.7

25.0

301.5

2007
%

30.0

0.1
(0.6)
–
–
(1.5)
(0.8)
–

27.2

Scottish and Southern Energy Annual Report 2008

05 Notes on the Financial Statements for the year ended 31 March 2008 continued 76
>
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 – current and deferred
Effect of change of UK corporation tax rate
Tax on movement on derivatives
Deferred tax (excluding share of jointly controlled entities)

Adjusted current tax charge and effective rate

The adjusted effective rate is based on adjusted profit before tax being:

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

2008
£m

210.6
–

210.6

20.8
(9.9)
55.4
50.7
(10.4)

317.2

2008
%

21.6
(4.5)

17.1

1.7
(0.8)
4.5
4.1
(0.8)

25.8

2007
£m

301.5
–

301.5

16.0
(9.9)
–
(15.2)
(9.8)

282.6

2008
£m

2007
%

27.2
0.7

27.9

1.5
(0.9)
–
(1.4)
(0.9)

26.2

2007
£m

1,083.8

1,132.0

98.9
41.9
4.6

(88.1)
31.8
3.6

1,229.2

1,079.3

In the year, it was confirmed that the corporation tax rate applicable to the Group’s UK businesses will change from 30% to 28% from
1 April 2008. Temporary differences which exist at 1 April 2008 will reverse at 28% rather than 30%, which was the basis at 31 March 2007.
Consequently, the Group has recognised the following credits in respect of this in the period to 31 March 2008:

Adjustments recognised in Income Statement in respect of Group entities
Adjustments recognised in Equity in respect of Group entities

Share of adjustments recognised in Income Statement in joint ventures and associates
Share of adjustments recognised in equity in joint ventures and associates

Tax charge/(credit) recognised directly in equity

Relating to:
Pension scheme actuarial movements
Cash flow and net investment hedge movements
Share based payments
Convertible bond
Change in UK corporation tax rate

£m

55.4
(0.6)

54.8
32.4
(0.5)

86.7

2007
£m

14.2
(9.8)
(8.8)
–
–

(4.4)

2008
£m

(5.3)
0.9
0.1
(1.8)
(0.6)

(6.7)

All tax recognised directly in equity is deferred tax other than current tax relating to employee share awards £(0.8)m (2007 – £4.0m).

Scottish and Southern Energy Annual Report 2008

8. Dividends 9. Earnings Per Share

8. DIVIDENDS

Amounts recognised as distributions from equity:
Final dividend for the previous year of 39.9p (2007 – 32.7p) per share
Interim dividend for the current year of 18.1p (2007 – 15.1p) per share

Proposed final dividend for the current year of 42.4p (2007 – 39.9p) per share

2008
£m

345.5
157.3

502.8

368.9

77
>

2007
£m

281.3
130.0

411.3

343.9

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, £345.5m (39.9p, 2007 – 32.7p), was declared on 31 May 2007, approved at the Annual
General Meeting on 27 July 2007 and was paid to shareholders on 21 September 2007. An interim dividend, £157.3 (18.1p, 2007 – 15.1p),
was paid on 25 March 2008.

9. EARNINGS PER SHARE

Basic earnings per share
The calculation of basic earnings per share at 31 March 2008 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 2008. All earnings are from continuing operations.

Adjusted earnings per share
Adjusted earnings per share has been calculated by excluding the charge for deferred tax, net finance income relating to pensions,
items disclosed as exceptional, and the impact of IAS 39.

Year ended
31 March 2008
Earnings
£m

Year ended
31 March 2008
Earnings
per share
pence

Year ended
31 March 2007
Earnings
£m

Year ended
31 March 2007
Earnings
per share
pence

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)
Dilutive effect of convertible debt

Diluted
Exceptional items and certain re-measurements

Diluted excluding exceptional items and certain re-measurements

The weighted average number of shares used in each calculation is as follows:

872.9
2.7

875.6

10.4
21.1
4.6

911.7

872.9
9.8
–

882.7
2.7

885.4

For basic and adjusted earnings per share
Effect of exercise of share options

Effect of dilutive convertible debt

For diluted earnings per share

101.1
0.3

101.4

1.2
2.5
0.5

105.6

101.1
1.1
(1.2)

101.0
0.3

101.3

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

31 March 2008
Number of shares
(millions)

31 March 2007
Number of shares
(millions)

863.2
2.0

865.2

8.8

874.0

860.9
1.8

862.7

33.3

896.0

Scottish and Southern Energy Annual Report 2008

05 Notes on the Financial Statements for the year ended 31 March 2008 continued 78
>
10. Intangible Assets

Total

£m

604.5
353.0
(0.2)
(402.4)

554.9
584.9
232.6

(20.4)
(25.3)
33.7

1,360.4

(13.9)
(57.2)

(71.1)
(32.5)

(103.6)

1,256.8

483.8

590.6

2007
£m

177.7
306.1

483.8

16.0
3.7
–
–

19.7
14.2
13.0

–
–
0.4

47.3

(12.2)
(2.4)

(14.6)
(4.2)

(18.8)

28.5

5.1

3.8

2008
£m

340.9
915.9

1,256.8

Goodwill

£m

Allowances and
certificates
(i)
£m

Development
assets
(ii)
£m

Wind farm
developments
(iii)
£m

Brands
(iv)
£m

Other
intangibles
(v)
£m

10. INTANGIBLE ASSETS

Consolidated

Cost:
At 1 April 2006
Additions
Other (note 14)
Disposals

At 31 March 2007
Acquisitions (note 14)
Additions
Transfer to property, plant
and equipment (note 11)

Disposals
Exchange adjustments

At 31 March 2008

293.4
–
(0.2)
–

293.2
344.8
1.1

–
–
19.9

659.0

Aggregate amortisation and impairment:
–
At 1 April 2006
–
Charge for the year

At 31 March 2007
Charge for the year

At 31 March 2008

Carrying amount:
At 31 March 2008

At 31 March 2007

At 1 April 2006

–
–

–

659.0

293.2

293.4

284.7
349.3
–
(402.4)

231.6
–
212.3

–
(23.9)
–

420.0

–
(53.9)

(53.9)
(25.2)

(79.1)

340.9

177.7

284.7

1.4
–
–
–

1.4
–
–

–
(1.4)
–

–

–
–

–

1.4

–
–
–
–

–
223.7
6.2

(20.4)
–
13.2

222.7

–
–

–
(2.0)

(2.0)

220.7

–

9.0
–
–
–

9.0
2.2
–

–
–
0.2

11.4

(1.7)
(0.9)

(2.6)
(1.1)

(3.7)

7.7

6.4

7.3

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
Obligation Certificates (ROCs). 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 nil impact on the income statement.

(ii) Development assets

Development costs relate to the design, construction and testing of renewable generation devices which the Group believes will generate
probable future economic benefits.

(iii) Wind farm developments

Costs capitalised as development wind intangibles including options over land rights represent the costs incurred in bringing individual
wind farm projects to the consented stage. Costs associated with reaching the consent stage include planning application costs and
environmental impact studies. These may be costs incurred directly as part of the fair value exercise on acquisition of a controlling
interest in a project. At the point the development reaches the consent stage and is approved for construction, the carrying value
is transferred to Property, Plant and Equipment (note 11).

(iv) 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. In addition to this, the Airtricity brand used in Ireland has also been included. The Group have
assessed the economic life of brands to be 10 years and the brand is being amortised over this period. The charge is reported as part
of operating costs.

Scottish and Southern Energy Annual Report 2008

79
>

(v) 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. Also included are customer lists and contracts associated
with the acquisitions of CHP Supply Limited, Hills E&M Limited, Seeboard Trading Limited street lighting contracts, and the Supply
business of Airtricity. Amortisation is over the shorter of the contract term or five years.

The Company does not hold intangible assets.

Analysis of goodwill:

Goodwill description

Airtricity
Swalec
Medway
Fiddlers Ferry and Ferrybridge
Slough Heat and Power
Hornsea
Neos
Telia
Connect South West
Eastern Contracting
Harrison Smith (Batley)
Hills E&M

Cash-generating unit

As noted (i)
Supply (ii)
Generation (iii)
Generation (iii)
Generation (iii)
SSE Hornsea Limited (iv)
Neos Networks Limited (v)
SSE Telecommunications Limited (v)
Contracting (vi)
Contracting (vi)
Contracting (vi)
Contracting (vi)

2008
£m

358.2
187.0
22.2
17.7
2.8
56.2
7.8
1.1
0.8
0.9
0.6
3.7

659.0

2007
£m

–
187.0
22.2
17.7
–
56.2
7.8
–
0.8
0.9
0.6
–

293.2

Impairment review of goodwill balances
Goodwill is tested annually for impairment or more frequently if there are indications that amounts may be impaired. The impairment test
involves management’s view of goodwill and its carrying value 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. With the exception
of Airtricity, 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 applied to the cash flows in determining recoverable amounts are derived from the Group’s approved weighted average cost
of capital. The Generation and Supply business segment, is managed and accounted for as an integrated business unit. Management have
reviewed the relevant cash generating units within Generation and Supply for the purpose of impairment testing. Where cash flows have been
extrapolated beyond the period covered by the most recent corporate business model, the basis of so doing is noted.

The key assumptions applied in the value in use calculations used to determine the recoverable amounts for the individual cash generating
units are as follows:

(i) Airtricity

The acquired assets of the Airtricity group included goodwill which was attributable to two cash generating units, Ireland wind farms
(£252.9m) and UK wind farms (£105.3m).

The impairment test on the attributed goodwill for each cash generating unit was based on updated discounted cash flow forecasts
for the Airtricity group extracted from the 25-year acquisition model. The pre-tax discount rates applied were 7.5% for onshore assets
and 10.5% for offshore assets.

(ii) Supply

The impairment test on the carrying value of goodwill relating to Swalec is based on an assessment of the recoverable amount of the
Group’s Electricity and Gas retail supply function. Judgement has necessarily been applied to separate this as a separable cash generating
unit given the integrated nature of the Generation and Supply business. 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 business, factors such as market
demand, customer retention, market share and forward wholesale energy prices are considered. The pre-tax discount rate applied to cash
flows was 7.6%.

Scottish and Southern Energy Annual Report 2008

05 Notes on the Financial Statements for the year ended 31 March 2008 continued 80
>
10. Intangible Assets (continued)

Impairment review of goodwill balances continued

(iii) Generation

The impairment test on the carrying value of goodwill relating to Medway, Fiddler’s Ferry/Ferrybridge and Slough Heat and Power is based
on an assessment of the recoverable amount of the Group’s combined Generation assets excluding wind farm assets, which are dealt with as
separate cash generating units. 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. The pre-tax discount rate applied to cash flows of the Group’s hydro, gas,
biomass and coal plants ranged from 9% to 14.6%.

(iv) 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. The pre-tax discount rate applied to cash flows was 10.4%.

(v) Neos Networks Limited/SSE Telecommunications 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. The discounted cash flow exercise was built around an estimated annual sales growth rate of 10%. The pre-tax discount
rate applied to these cash flows was 10.4%.

(vi) Contracting

The impairment test on the carrying value of goodwill related to the acquisitions of Eastern Contracting, Connect South West, Harrison
Smith (Batley) and, in the current financial year, Hills E&M were based on cash flow projections of the acquiring subsidiary entity,
Southern Electric Contracting, which has successfully integrated these businesses into its operations. The pre-tax discount rate applied
to cash flows was 9%. The carrying value of the goodwill associated with Harrison Smith (Batley) was reassessed as £0.6m in the year
ended 31 March 2007.

In all cases management concludes that the projected cash flows are sufficient to support the carrying value of the recognised goodwill
and the other cost 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 have been considered in determining 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. The pre-tax discount rate applied to the cash flow
forecasts was 7.5%.

Goodwill is allocated to the following business segments:

Generation and Supply
Other businesses

2008
£m

587.9
71.1

659.0

2007
£m

226.9
66.3

293.2

11. Property, Plant and Equipment

11. PROPERTY, PLANT AND EQUIPMENT

Consolidated

Cost:
At 1 April 2006
Additions
New decommissioning provision (i)
Disposals (ii)

At 31 March 2007
Additions
Acquisitions (iii)
Transfer from intangible assets (note 10) (iv)
Disposals (ii)
Exchange rate adjustments

At 31 March 2008

Depreciation:
At 1 April 2006
Charge for the year
Disposals (ii)

At 31 March 2007
Charge for the year (v)
Disposals (ii)

At 31 March 2008

Net book value

At 31 March 2008

At 31 March 2007

At 1 April 2006

Scottish and Southern Energy Annual Report 2008

81
>

Power generation
and gas storage
assets
£m

Land and
buildings
£m

2,690.5
343.1
–
(1.1)

3,032.5
392.8
751.8
20.4
(11.1)
30.7

4,217.1

788.3
102.0
(0.8)

889.5
121.3
(2.7)

1,008.1

3,209.0

2,143.0

1,902.2

95.2
24.4
–
(0.2)

119.4
33.6
–
–
(7.1)
–

145.9

21.5
2.7
–

24.2
2.8
–

27.0

118.9

95.2

73.7

Network
assets
£m

4,336.4
242.2
–
(4.5)

4,574.1
324.4
–
–
(23.5)
–

4,875.0

1,714.6
116.1
(4.3)

1,826.4
126.8
(9.2)

1,944.0

2,931.0

2,747.7

2,621.8

Vehicles and
miscellaneous
equipment
£m

222.5
21.2
3.3
(13.9)

233.1
31.4
4.8
–
(8.4)
–

260.9

173.6
16.9
(13.6)

176.9
16.9
(8.3)

185.5

75.4

56.2

48.9

Total
£m

7,344.6
630.9
3.3
(19.7)

7,959.1
782.2
756.6
20.4
(50.1)
30.7

9,498.9

2,698.0
237.7
(18.7)

2,917.0
267.8
(20.2)

3,164.6

6,334.3

5,042.1

4,646.6

(i) The net book value of generation and gas storage assets includes decommissioning costs with a net book value of £25.0m, (2007 – £20.3m).
In the year to 31 March 2008, the net book value of decommissioning costs related to office and computer equipment was increased by £0.2m
to £3.5m (2007 – £3.3m). This arises from the Group’s obligations under the EU Waste Electrical and Electronic Equipment (WEEE) directive.

(ii) Assets disposed include those assets which have been replaced after damage or obsolescence in the year.

(iii) Assets acquired in business combinations include the operational and under construction wind farm assets of Airtricity and the combined

heat and power biomass generation asset at Slough Heat and Power.

(iv) Represents the carrying value of wind farm development assets transferred from intangible assets (note 10) which have reached the

consent stage and have been approved for construction.

(v)

Included within the charge for the year are impairment charges against Generation assets of £12.2m (2007 – £13.9m). These impairments
were made following identification of indications of impairment and a subsequent review of the projected cash flows associated with the
assets. 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 £67.9m (2007 – £47.0m) and
short leasehold £nil (2007 – £nil). Generation assets comprise generating stations and related plant and machinery and include all hydro
civil assets. Cumulative interest capitalised for the Group, included in the cost of tangible fixed assets amounts to £68.0m (2007 – £44.7m).

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
Corporate land and buildings

2008
£m

842.9
88.0
34.2

965.1

2007
£m

454.7
56.9
16.7

528.3

Scottish and Southern Energy Annual Report 2008

05 Notes on the Financial Statements for the year ended 31 March 2008 continued 82
>
11. Property, Plant and Equipment (continued) 12. Investments

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. Also included was the cost of acquired assets
under construction of £187.5m (2007 – £nil) in relation to the Airtricity group.

Included within property, plant and equipment are the following assets held under finance leases:

Cost
At 1 April 2006 and 31 March 2007

At 31 March 2008

Depreciation
At 1 April 2006
Charge for the year

At 31 March 2007
Charge for the year

At 31 March 2008

Net book value

At 31 March 2008

At 31 March 2007

At 1 April 2006

Network
assets
£m

Vehicles and
miscellaneous
equipment
£m

5.1

4.3
0.2

4.5
0.2

4.7

0.4

0.6

0.8

7.0

5.8
0.2

6.0
0.2

6.2

0.8

1.0

1.2

The Company does not hold any property, plant or equipment.

12. INVESTMENTS

(a) Associates and joint ventures

Scotia Gas Networks

Other Jointly
Controlled Entities

Associates

Investment
£m

Shareholder
loans
£m

Investment
£m

Shareholder
loans
£m

Investment
£m

Shareholder
loans
£m

Consolidated
Share of net assets/cost
At 1 April 2006
Initial equity investment
Increase in shareholder loans
Repayment of shareholder loans
Dividends received
Share of (loss)/profit after tax
Share of other reserves adjustments

At 31 March 2007
Acquisitions (note 14)
New equity investments
Increase in shareholder loans
Repayment of shareholder loans
Dividends received
Share of (loss)/profit after tax
Share of other reserves adjustments
Exchange rate adjustments

At 31 March 2008

168.1
–
–
–
–
(15.3)
4.1

156.9
–
–
–
–
–
52.6
9.6
–

219.1

286.9
–
18.0
(23.0)
–
–
–

281.9
–
–
–
–
–
–
–
–

281.9

62.4
5.0
–
–
(21.5)
17.3
–

63.2
119.7
5.8
–
–
(19.5)
33.8
–
4.1

207.1

103.4
–
5.5
(10.8)
–
–
–

98.1
–
–
5.6
(10.8)
–
–
–
–

92.9

81.5
–
–
–
(1.2)
21.9
–

102.2
–
8.1
–
–
(15.6)
22.1
–
–

116.8

0.8
–
–
(0.8)
–
–
–

–
–
–
–
–
–
–
–
–

–

Total
£m

12.1

10.1
0.4

10.5
0.4

10.9

1.2

1.6

2.0

Total
£m

703.1
5.0
23.5
(34.6)
(22.7)
23.9
4.1

702.3
119.7
13.9
5.6
(10.8)
(35.1)
108.5
9.6
4.1

917.8

Scottish and Southern Energy Annual Report 2008

Company
Share of net assets/cost
At 1 April 2006
Increase in shareholder loans
Repayment of shareholder loans

At 31 March 2007 and 31 March 2008

Scotia Gas Networks plc

Investment
£m

Shareholder
loans
£m

Other Joint Ventures
and associates

Investment
£m

Shareholder
loans
£m

235.0
–
–

235.0

286.9
18.0
(23.0)

281.9

–
–
–

–

–
–
–

–

83
>

Total
£m

521.9
18.0
(23.0)

516.9

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, 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 2008
Holding %

31 March 2007
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 (v)
England and Wales
Marchwood Power Limited (i)
Scotland
Braes of Doune Limited (vi)
Republic of Ireland
Midas Energy Limited (vi)
England and Wales
Greater Gabbard Offshore Winds Limited (vi)
Scotland
St John’s Hill Limited (vi)
Scotland
IE CHP (UK and Eire) Limited (iv)
Scotland
Aquamarine Power Limited (i)

Associates
Barking Power Limited (i)
Derwent Cogeneration Limited (i)
Vital Holdings Limited (iv)
Insource Energy Limited (iv)
Onzo Limited (iv)

England and Wales
England and Wales
England and Wales
England and Wales
England and Wales

50
50
50
50
50
50
50
50
50
50

30.4
49.5
30
33.3
24.5

50
50
50
50
–
–
–
–
–
–

Defence estates contractor
Electricity generation
Investment in gas networks
Electricity generation
Wind generation
Wind generation
Wind development
Wind development
Fuel cell power systems
Marine energy conversion

30.4
49.5
–
–
–

Electricity generation
Electricity generation
Efficient energy provision
Energy and waste management
Energy displays

Jointly controlled operations (unincorporated)
Aldbrough
Beatrice

England
Scotland

66.7
50

Development of gas storage facility
Development of offshore wind farm facility

Location of
operations

31 March 2008
Holding %

31 March 2007
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 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 Group Limited
(iii) Shares held by SSE Seabank Investments Limited
(iv) Shares held by SSE Venture Capital Limited
(v) Shares held by Scottish and Southern Energy plc
(vi) Shares held by Airtricity Holdings Limited (or subsidiaries)

At 31 March 2008, the Group had invested £16.1m in Marchwood Power Limited. In addition to this, the Group had provided an interest-bearing
loan of £44.5m to Marchwood Power, which is reported in Other receivables (note 16).

Scottish and Southern Energy Annual Report 2008

05 Notes on the Financial Statements for the year ended 31 March 2008 continued 84
>
12. Investments (continued)

(a) Associates and joint ventures continued
The material significance of the Scotia Gas Networks plc 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:

2008

2007

Before
exceptional
items and certain
re-measurements
£m

Exceptional
items and certain
re-measurements
£m

323.0
(165.4)
(70.8)

86.8
(42.4)

44.4

22.2

–
8.4
–

8.4
52.4

60.8

30.4

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

Total
£m

323.0
(157.0)
(70.8)

95.2
10.0

105.2

Total
£m

206.3
(130.3)
(71.6)

4.4
(34.9)

(30.5)

52.6

(19.1)

3.8

(15.3)

Operating profit
Finance costs: excluding loan stock
Finance costs: interest on loan stock

Profit/(loss) before tax
Taxation

Profit/(loss) for the year

SSE share of profit/(loss)

As an investor, Scottish and Southern Energy plc received £35.4m (2007 – £35.8m) 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 2008

31 March 2007

Non-current
assets
£m

4,764.2

4,483.6

Current
assets
£m

161.8

93.0

Current
liabilities
£m

Non-current
liabilities
£m

(609.2)

(513.1)

(3,878.6)

(3,750.1)

The financial statements of the Group’s other jointly controlled entities and associates can be summarised as follows (100%):

Jointly controlled entities
31 March 2008

31 March 2007

Associates
31 March 2008

31 March 2007

(b) Other investments

At 1 April 2006
Additions in the year
Disposals

At 31 March 2007
Additions in the year

At 31 March 2008

Current
assets
£m

147.6

110.6

137.6

288.8

Non-current
assets
£m

Current
liabilities
£m

Non-current
liabilities
£m

Revenues
£m

Profit after tax
£m

443.3

361.3

468.2

538.4

(214.6)

(180.8)

(74.7)

(135.3)

(231.7)

(183.2)

(192.4)

(365.5)

Solarcentury
£m

Sigma
Sustainable
Energy Fund
£m

1.0
2.0
–

3.0
1.1

4.1

–
0.5
–

0.5
0.8

1.3

313.4

211.9

292.4

453.1

Other
£m

2.2
0.3
(1.9)

0.6
–

0.6

57.0

34.6

62.0

68.4

Total
£m

3.2
2.8
(1.9)

4.1
1.9

6.0

13. Subsidiary Undertakings

13. SUBSIDIARY UNDERTAKINGS

Details of the principal subsidiary undertakings are as follows:

SSE Services plc (i)
SSE Energy Supply Limited (i)
Airtricity Holdings Limited (i)
SSE Telecommunications Limited (i)
SSE Generation Limited (i)
Tay Valley Lighting (Stoke on Trent) Limited (i)
Tay Valley Lighting (Newcastle and North Tyneside) Limited (i)
Tay Valley Lighting (Leeds) Limited (i)

Medway Power Limited (ii)
Keadby Generation Limited (ii)
Slough Heat and Power Limited (ii)

Scottish Hydro-Electric Transmission Limited (iii)
Scottish Hydro-Electric Power Distribution plc (iii)
Southern Electric Power Distribution plc (iii)
S+S Limited (iii)

Southern Electric Contracting Limited (iv)
Seeboard Trading Limited (iv)

Southern Electric Gas Limited (v)
SSE Hornsea Limited (v)

Neos Networks Limited (vi)

Scottish and Southern Energy Annual Report 2008

85
>

Country of
incorporation

2008
Holding %

2007
Holding %

Principal activity

England and Wales
England and Wales
Ireland
Scotland
England and Wales
England and Wales
England and Wales
England and Wales

England and Wales
England and Wales
England and Wales

Scotland
Scotland
England and Wales
Scotland

England and Wales
England and Wales

England and Wales

100
100
100
100
100
50
50
50

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

Finance and IT support services
Electricity supply
Wind farm developer
Telecommunication services
Electricity generation
Contracting services
Contracting services
Contracting services

Electricity generation
Electricity generation
Electricity generation

Transmission of electricity
Distribution of electricity
Distribution of electricity
Electricity connections

Electrical contractor
Contracting services

Gas supply
Gas storage

100

Telecommunication services

The above companies’ shares consist of ordinary shares only. All companies operate in the United Kingdom and the Republic of Ireland.
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 Group Limited
(v) Shares held by SSE Energy Supply Limited
(vi) Shares held by SSE Telecommunications Limited

Investment in subsidiaries

Company
At 1 April 2006 and 31 March 2007
Acquired in the year
Increase in existing investments

At 31 March 2008

Total
£m

777.9
1,349.1
10.8

2,137.8

In the year the Company acquired 100% of the issued share capital in Airtricity Holdings Limited. Details of this acquisition are included
at note 14. The increase in existing investments held by the Company relates to equity shares in the Company awarded to the employees
of the subsidiaries of the Group under the Group’s share schemes which are recognised as in increase in the cost of investment in those
subsidiaries as directed by IFRIC 11: IFRS 2 Group and Treasury Share Transactions.

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) Limited

Stoke-on-Trent
Newcastle and North Tyneside
Leeds City Council

Scottish and Southern Energy Annual Report 2008

05 Notes on the Financial Statements for the year ended 31 March 2008 continued 86
>
13. Subsidiary Undertakings (continued) 14. Acquisitions and Disposals

Service concession arrangements continued
Under SIC-12 Consolidation – Special Purpose Entities, despite being 50% owned, the Tay Valley Lighting 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.

In addition to these, the Group acquired 100% of the issued share capital of the Seeboard Trading Limited group on 3 March 2008 which
performs similar services under three PFI contracts. The terms of the service concession arrangement are similar to those operated by the
Tay Valley Lighting companies. The council and contract holder within the acquired group are as follows:

Company

Dorset Lighting Limited
Ealing Lighting Limited
Islington Lighting Limited

Characteristics of the arrangements

Council

Dorset County Council
London Borough of Ealing
London Borough of Islington

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 contract holding 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 or to other companies within the Seeboard Trading group 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

(a) Acquisitions

(i) Airtricity
On 15 February 2008, the Company acquired 100% of the issued share capital in Airtricity Holdings Limited (Airtricity) for a combined
consideration of £1,349.1m (€1,801.4m). The principal activity of Airtricity is the development, construction and operation of offshore and
onshore wind generation assets in the UK, the Republic of Ireland and elsewhere in Europe. The acquired group is also a significant supplier
of electricity in Ireland. In addition, Airtricity has wind development opportunities in China.

The total value of the businesses acquired was £1,010.8m (€1,349.7m). This included cash assets of €793.2m including the remaining
proceeds of Airtricity’s disposal of its North American business in late 2007. The transaction was initially funded by a combination of cash
and short term bank borrowings. The consideration was in cash (£1,302.2m) with an element of deferred consideration.

The analysis of assets and liabilities acquired and the fair value of the acquisition is shown overleaf. All intangible assets acquired were
recognised at their respective fair values. The residual over the net assets acquired is recognised as goodwill. The fair values are provisional.

Including the Group’s costs of financing the acquisition, the acquired Airtricity business contributed a net loss after tax of £3.4m in the period
of ownership. On a consistent basis, the net loss to the Group had the acquisition date been 1 April 2007 is estimated to be £40.9m.

The provisional book values and fair values of the assets and liabilities acquired were as follows:

Intangible assets
Property, plant and equipment
Investment in jointly controlled entities
Derivatives and other financial assets
Cash and cash equivalents
Other net current assets/(liabilities)
Loans and borrowings
Deferred tax
Net assets

Goodwill

Total consideration

Scottish and Southern Energy Annual Report 2008

87
>

Carrying value of
acquired entities
£m

Fair value of
acquired entities
£m

62.5
401.4
49.8
(1.9)
594.0
15.3
(517.3)
(3.0)
600.8

228.2
707.0
119.7
13.2
594.0
17.4
(522.3)
(146.4)

1,010.8

338.3

1,349.1

The book values of assets and liabilities have been adjusted to align with the fair value of assets and liabilities acquired. The adjustments
to intangible assets mainly relate to the acquired wind farm development portfolio and the adjustments to property, plant and equipment
relate to the operational and under construction wind farm assets. Goodwill has arisen in relation to the future development potential of
the Airtricity businesses including synergies relating to the purchase. Goodwill also includes recognition of deferred tax on the fair value
adjustments made. Goodwill has been subject to impairment test review (note 10).

(ii) Slough Heat and Power
On 1 January 2008, SSE Generation Limited acquired 100% of the issued share capital in Slough Heat and Power Limited for a provisional
consideration of £48.7m (initial cash £49.5m). The analysis of assets and liabilities acquired and the fair value of the acquisition is shown
below. All intangible assets acquired were recognised at their respective fair values. The residual over the net assets acquired is recognised
as goodwill. The fair values are provisional. Including the Group’s cost of financing the acquisition, the acquired business contributed a net
loss after tax of £2.2m in the period of ownership. On a consistent basis, had the acquisition date been 1 April 2007, the business would have
contributed an estimated profit after tax to the Group of £2.5m.

The provisional book values and fair values of the assets and liabilities acquired were as follows:

Intangible assets
Property, plant and equipment
Other financial assets
Other net current assets/(liabilities)
Deferred tax
Other provisions

Net assets

Goodwill

Total consideration

Carrying value of
acquired entities
£m

Fair value of
acquired entities
£m

–
46.0
–
3.2
(8.7)
(0.9)

39.6

0.1
49.0
16.9
1.8
(16.3)
(5.6)

45.9

2.8

48.7

Goodwill has been subject to impairment test review (note 10).

(iii) Other acquisitions
On 25 January 2008, the Group acquired CHP Supply Limited, an electricity supply business based in the Republic of Ireland for cash
consideration of £2.0m (goodwill £nil). The Group acquired Hills E&M, an electrical contracting company, on 8 February 2008, for cash
consideration of £0.2m (goodwill £3.7m). On 29 February 2008, the Group acquired the street lighting contracting group Seeboard Trading
Limited from EdF Energy for cash consideration of £9.5m (goodwill £nil). On 20 December 2007, the Group acquired the wind farm
development company I&H Brown Toddleburn Limited from I&H Brown for cash consideration of £4.5m (goodwill £nil). No significant
profit or loss was recognised from these acquisitions in the period to 31 March 2008.

Scottish and Southern Energy Annual Report 2008

05 Notes on the Financial Statements for the year ended 31 March 2008 continued 88
>
14. Acquisitions and Disposals (continued) 15. Inventories 16. Trade and Other Receivables 17. Cash and Cash Equivalents
>

(a) Acquisitions continued

(iii) Other acquisitions continued
The provisional book values and fair values of the assets and liabilities acquired in relation to these acquisitions were as follows:

Intangible assets
Property, plant and equipment
Inventories
Cash and cash equivalents
Other net current assets/(liabilities)
Loans and borrowings
Deferred tax
Other provisions

Net assets

Goodwill

Total consideration

Goodwill has been subject to impairment test review (note 10).

15. INVENTORIES

Fuel and consumables
Work in progress
Goods for resale
Less: provisions held

Carrying value of
acquired entities
£m

Fair value of
acquired entities
£m

–
0.9
9.8
3.3
19.5
(25.7)
0.2
–

8.0

2008
£m

224.5
32.6
2.3
(8.2)

251.2

11.8
0.6
9.7
3.3
13.8
(25.7)
0.2
(1.2)

12.5

3.7

16.2

Consolidated

2007
£m

196.5
19.4
6.0
(7.8)

214.1

The Group has expensed inventories of £798.9m in the year (2007 – £766.4m) and have also recognised £3.4m (2007 – £15.3m) 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

2008
£m

–
2,042.2
389.4
968.7

3,400.3

–

3,400.3

Consolidated

Company

2007
£m

–
1,473.9
117.8
675.0

2,266.7

–

2,266.7

2008
£m

2,328.5
–
100.7
–

2,429.2

1,772.7

4,201.9

2007
£m

1,726.5
–
27.8
–

1,754.3

1,783.5

3,537.8

Other receivables includes £44.5m (2007 – £22.0m) receivable from Marchwood Power Limited (note 12). Other receivables include financial
assets totalling £176.0m (2007 – £37.1m).

Trade receivables are part of the Group’s financial exposure to credit risk as explained in note 28.

17. CASH AND CASH EQUIVALENTS

Bank balances
Call deposits

Cash and cash equivalents

Consolidated

Company

2008
£m

125.8
129.5

255.3

2007
£m

17.5
38.6

56.1

2008
£m

0.7
103.5

104.2

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.

18. Trade and Other Payables 19. Current Tax Liabilities 20. Construction Contracts 21. Loans and Other Borrowings

Scottish and Southern Energy Annual Report 2008

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
Trade payables
Other creditors
Accruals and deferred income (i)

Non-current liabilities
Accruals and deferred income (ii)

2008
£m

255.3
(12.2)

243.1

2008
£m

–
2,134.6
910.4
556.9

3,601.9

490.1

4,092.0

Consolidated

Company

2007
£m

56.1
(7.7)

48.4

2008
£m

104.2
–

104.2

Consolidated

Company

2007
£m

–
1,412.2
526.1
402.1

2,340.4

327.7

2,668.1

2008
£m

3,526.7
–
53.5
–

3,580.2

–

3,580.2

(i) Current accruals and deferred income includes customer contributions of £14.9m (2007 – £15.1m) and government grants of £0.1m

(2007 – £0.1m).

(ii) Non-current accruals and deferred income includes customer contributions of £246.9m (2007 – £252.7m) and government grants

89
>
>

2007
£m

5.8
–

5.8

2007
£m

2,570.2
–
3.7
–

2,573.9

–

2,573.9

of £2.1m (2007 – £2.2m).

19. CURRENT TAX LIABILITIES

Corporation tax

20. CONSTRUCTION CONTRACTS

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

Consolidated

Company

2008
£m

220.8

2007
£m

199.2

2008
£m

9.0

2008
£m

32.0
(26.8)

189.1
(202.9)

(13.8)

2007
£m

10.1

2007
£m

28.8
(20.5)

150.3
(152.3)

(2.0)

In the year to 31 March 2008, contract revenue of £403.8m (2007 – £305.9m) was recognised.

At 31 March 2008, retentions held by customers for contract work amounted to £0.9m (2007 – £1.8m). Advances received from customers
for contract work amounted to £4.1m (2007 – £5.9m).

At 31 March 2008, amounts of £nil (2007 – £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.

21. LOANS AND OTHER BORROWINGS

Current
Bank overdraft
Other short-term loans

Obligations under finance leases

2008
£m

12.2
1,835.3

1,847.5
0.1

1,847.6

Consolidated

Company

2007
£m

7.7
466.6

474.3
0.5

474.8

2008
£m

–
1,696.3

1,696.3
–

1,696.3

2007
£m

–
349.5

349.5
–

349.5

Scottish and Southern Energy Annual Report 2008

05 Notes on the Financial Statements for the year ended 31 March 2008 continued 90
>
21. Loans and Other Borrowings (continued)

Non current
Loans including convertible debt
Obligations under finance leases
Amounts owed to subsidiary undertakings

(i) Borrowings

Consolidated

Company

2008
£m

2,073.1
0.5
–

2,073.6

2007
£m

1,803.2
0.6
–

1,803.8

2008
£m

372.4
–
240.2

612.6

2007
£m

580.6
–
240.2

820.8

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 (2007 – £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 2008 the facility was undrawn.

The Group also has a €2.5bn bridge facility, maturing in 2009, and at 31 March 2008, €1.9bn of this facility was drawn down. This facility did
not exist at 31 March 2007.

Analysis of borrowings

Loans and borrowings

Current
Bank overdrafts (i)
Other short-term loans – amortising (ii)
Other short-term loans – non-amortising (iii)
Non-recourse funding (iv)
Airtricity (ix)

Total current

Non-current
Bank loans – amortising (ii)
Bank loans – non-amortising (v)
3.75% Convertible bond repayable on 29 October 2009 (vii)
Non-recourse funding (iv)
Airtricity (ix)

Between two and five years

Bank loans – amortising (ii)
Bank loans – non-amortising (v)
Non-recourse funding (iv)
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
Airtricity (ix)

Over five years

Fair value adjustment (note 28)

Total non-current

Total

2008
Weighted average
interest rate (viii)
%

2008
Face value
£m

2008
Fair value
£m

2008
Carrying amount
£m

6.25
7.72
5.12
6.23
10.86

7.15
5.71
3.75
6.19
9.07

5.69
5.20
6.29
5.88
5.50
4.63
5.29
6.55

12.2
23.4
1,697.0
8.5
107.1

1,848.2

45.6
250.0
79.3
39.4
235.9

650.2

1.4
100.0
50.9
300.0
350.0
325.0
104.0
199.9

12.2
24.4
1,696.3
8.5
107.3

1,848.7

47.6
255.0
123.3
39.4
238.1

703.4

1.5
101.0
50.9
290.8
324.8
260.6
105.9
203.0

12.2
23.4
1,696.3
8.5
107.1

1,847.5

45.6
250.0
76.3
39.4
235.9

647.2

1.4
100.0
50.9
296.1
350.3
323.3
104.0
199.9

1,431.2

1,338.5

1,425.9

–

2,081.4

2,041.9

2,073.1

3,929.6

3,890.6

3,920.6

Scottish and Southern Energy Annual Report 2008

91
>

2007
Weighted average
interest rate (viii)
%

2007
Face value
£m

2007
Fair value
£m

2007
Carrying amount
£m

6.25
7.70
5.56
6.21
7.78

7.43
5.45
3.75
6.21

5.88
5.65
6.42
5.88
5.50
4.63
5.08

7.7
21.4
376.0
9.2
61.5

475.8

64.9
150.0
300.0
36.3

551.2

5.5
200.0
2.9
300.0
350.0
325.0
100.0

7.7
22.6
374.5
9.2
51.0

465.0

68.1
149.5
515.0
36.3

768.9

5.6
200.0
2.9
307.1
358.1
293.6
96.8

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
2.9
295.5
350.3
323.3
100.0

1,283.4

1,264.1

1,277.5

–

1,834.6

(10.4)

2,022.6

(10.4)

1,803.2

2,310.4

2,487.6

2,277.5

Loans and borrowings

Current
Bank overdrafts (i)
Other short-term loans – amortising (ii)
Other short-term loans – non-amortising (iii)
Non-recourse funding (iv)
US$100m repayable on 1 May 2007 (vi)

Total current

Non-current
Bank loans – amortising (ii)
Bank loans – non-amortising (v)
3.75% Convertible bond repayable on 29 October 2009 (vii)
Non-recourse funding (iv)

Between two and five years

Over five years

Fair value adjustment (note 28)

Total non-current

Total

(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 which existed at 31 March 2007 was 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 2008 was 5.23% (2007 – 5.31%).

Scottish and Southern Energy Annual Report 2008

05 Notes on the Financial Statements for the year ended 31 March 2008 continued 92
>
21. Loans and Other Borrowings (continued)

(i) Borrowings continued

(ix) The Airtricity loans and borrowings can be analysed as follows:

Current
Operating wind farms – senior debt
Operating wind farms – junior debt
Construction loans
Other

Non-current
Operating wind farms – senior debt
Operating wind farms – junior debt
Construction loans
Other

Between two and five years

Operating wind farms – senior debt
Operating wind farms – junior debt
Construction loans
Other

Over five years

Total non-current

Total

2008
Weighted average
interest rate
%

2008
Face value
£m

2008
Fair value
£m

2008
Carrying amount
£m

6.28
9.00
5.95
11.81

10.86

6.29
9.00
6.31
10.92

9.07

6.43
9.50
6.36
–

6.55

7.91

8.49

13.8
1.0
3.8
88.5

107.1

60.5
3.1
32.8
139.5

235.9

133.7
9.1
57.1
–

199.9

13.9
1.0
3.9
88.5

107.3

60.6
3.1
34.7
139.7

238.1

133.7
9.1
60.2
–

203.0

13.8
1.0
3.8
88.5

107.1

60.5
3.1
32.8
139.5

235.9

133.7
9.1
57.1
–

199.9

435.8

441.1

435.8

542.9

548.4

542.9

Of the Airtricity loans and borrowings noted above, 58% are project specific, repayable over a period of two to 15 years. Other borrowings
include corporate debt payable over a period of one to two years.

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.

At 31 March, bond holders had converted debt with a nominal value of £220.7m at the £9.00 per share conversion price. Conversion took place
in the following periods:

Year to 31 March 2007
Year to 31 March 2008

Total at 31 March 2008

Nominal value of
bond converted
£m

0.1
220.6

220.7

Number
of shares

11,111
24,512,537

24,523,648

Scottish and Southern Energy Annual Report 2008

93
>

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
Costs of issue

Net proceeds of convertible bond issued
Less: equity component and accreted debt element

Liability component

At
31 March 2008
£m

At
1 April 2007
£m

79.3
(0.3)

79.0
(2.7)

76.3

299.9
(1.4)

298.5
(13.6)

284.9

On partial conversion, a debt element of £208.6m was converted from debt to to equity. The costs of issue of the bond are amortised over
the term of the bond. An additional interest charge of £4.6m (2007 – £3.6m) was recorded.

For the purpose of diluted Earnings per Share (EPS), convertible bond interest of £14.0m (2007 – £15.3m) 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

(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

2008
Number
of shares

2007
Number
of shares

8,809,685

33,322,222

Minimum
lease payments

Present value of minimum
lease payments

2008
£m

0.1
0.4
0.5

1.0

(0.4)

0.6

2007
£m

0.5
0.5
0.6

1.6

(0.5)

1.1

2008
£m

0.1
0.3
0.3

0.7

2007
£m

0.5
0.4
0.2

1.1

The average lease term is 12 to 13 years. For the year ended 31 March 2008, the average effective borrowing rate was 8% (2007 – 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.

Scottish and Southern Energy Annual Report 2008

05 Notes on the Financial Statements for the year ended 31 March 2008 continued 94
>
22. Deferred Taxation

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 2006
Charge/(credit) to

Income Statement

Charge/(credit) to equity

At 1 April 2007
Effect of tax rate change

– Income Statement

Effect of tax rate change – equity
Acquisitions
Charge/(credit) to

Income Statement

Charge/(credit) to equity
Exchange adjustments

At 31 March 2008

897.7

0.3
–

898.0

(60.2)
–
18.5

4.0
–
0.8

861.1

14.0

15.2
(9.8)

19.4

1.7
0.4
(1.0)

(50.7)
7.7
(0.1)

(22.6)

5.1

(1.1)
–

4.0

(0.2)
–
–

(1.4)
(1.8)
–

0.6

(58.1)

16.3
14.2

(27.6)

–
(1.3)
–

20.5
(5.3)
–

(13.7)

(1.4)

1.5
(4.8)

(4.7)

–
0.3
–

(0.3)
0.6
–

(4.1)

Accelerated
capital
allowances
£m

Fair value
gains/(losses)
on derivatives
£m

Convertible
bond
£m

Retirement
benefit
obligations
£m

Share
based
payments
£m

Company
At 1 April 2006
Charge/(credit) to

Income Statement

Charge/(credit) to equity

At 1 April 2007
Exceptional credit relating

to tax rate change

Effect of tax rate change – equity
Charge/(credit) to

Income Statement

Charge/(credit) to equity

At 31 March 2008

–

–
–

–

–
–

–

(6.3)

(1.2)
(6.1)

(13.6)

0.6
–

12.9
0.3

0.2

5.1

(1.1)
–

4.0

(0.2)
–

(1.4)
(1.8)

0.6

27.1

6.0
5.3

38.4

–
(2.6)

6.2
(18.0)

24.0

–

–
–

–

–
0.3

–
0.6

0.9

Other (i)
£m

(24.2)

(7.2)
–

(31.4)

3.3
–
145.0

(16.1)
(9.0)
11.1

102.9

Other (i)
£m

(1.0)

0.1
–

(0.9)

0.1
–

(6.3)
(9.0)

(16.1)

Total
£m

833.1

25.0
(0.4)

857.7

(55.4)
(0.6)
162.5

(44.0)
(7.8)
11.8

924.2

Total
£m

24.9

3.8
(0.8)

27.9

0.5
(2.3)

11.4
(27.9)

9.6

(i)

Includes deferred tax on fair valuation adjustments in business combinations under IAS 12.

Certain deferred tax assets and liabilities have been offset, including the asset balances analysed the tables above. 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

2008
£m

967.3
(43.1)

924.2

2007
£m

923.7
(66.0)

857.7

2008
£m

9.6
–

9.6

2007
£m

27.9
–

27.9

The deferred tax assets disclosed relate to the Group’s pension scheme liabilities.

At the balance sheet date, the Group has unused tax losses of £39.3m (2007 – £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 (2007 – £2.1m). 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 a credit of £10.1m (2007 – £17.5m charge).

23. Provisions 24. Share Capital

23. PROVISIONS

Consolidated
At 1 April 2007
Charged in the year
Unwind of discount
Utilised during the year
Acquired (note 14)
At 31 March 2008

At 31 March 2008
Non-current
Current

At 31 March 2007
Non-current
Current

Scottish and Southern Energy Annual Report 2008

Onerous
energy contracts
(i)
£m

Decommissioning
(ii)
£m

62.6
0.4
2.2
(12.0)
1.2
54.4

53.1
1.3
54.4

61.3
1.3
62.6

29.2
–
1.4
–
0.9
31.5

31.3
0.2
31.5

28.5
0.7
29.2

Other
(iii)
£m

20.6
6.2
–
(0.6)
4.7
30.9

22.9
8.0
30.9

14.6
6.0
20.6

95
>

Total

£m

112.4
6.6
3.6
(12.6)
6.8

116.8

107.3
9.5

116.8

104.4
8.0

112.4

(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 2008, the Group has also increased the provision in relation to its projected
decommissioning obligations under the EU Waste Electrical and Electronic Equipment (WEEE) directive by £0.2m to £3.5m (2007 – £3.3m).

(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.

24. SHARE CAPITAL

Company
Equity: Ordinary shares of 50p each:
Authorised:
At 31 March 2008 and 1 April 2007

Allotted, called up and fully paid:
At 1 April 2007
Issue of shares (i)
Conversion of convertible debt to equity (ii)
Repurchase of shares (iii)
At 31 March 2008

Number
(millions)

£m

1,200.0

600.0

861.9
0.4
24.5
(16.7)
870.1

431.0
0.2
12.2
(8.3)
435.1

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.

(i) The Company issued 351,433 (2007 – 1,651,166) shares during the year under the savings-related share option schemes, and discretionary

share option schemes for a consideration of £2.2m (2007 – £9.2m).

During the year, the Company purchased 833,332 shares (2007 – 702,057) for a consideration of £12.4m (2007 – £8.2m) to be held in trust
for the benefit of employee share schemes. At 31 March 2008, the trust held 2,691,677 shares (2007 – 1,976,506) which had a market value
of £37.8m.

(ii) During the year, the Company issued 24,512,537 shares under the terms of the convertible bond at a conversion rate of £9 per ordinary share.

(iii) The repurchased and subsequently cancelled ordinary shares represent 1.9% of the issued share capital. The total cost of the repurchase,
including expenses, was £239.8m which has been charged against the profit and loss reserve. Of the £239.8m, only £237.0m was paid in
cash, the remainder being accrued at the balance sheet date.

Scottish and Southern Energy Annual Report 2008

05 Notes on the Financial Statements for the year ended 31 March 2008 continued 96
>
25. Reserves

25. RESERVES

Capital
premium redemption
reserve
£m

account
£m

Equity
reserve
£m

Hedge
reserve
£m

Translation
reserve
£m

Retained
earnings
£m

Minority
interest
£m

Total
£m

Consolidated
Reconciliation of movement in reserves
At 1 April 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
Investment in own shares
Current and deferred tax recognised in equity in respect

of employee share awards (note 7)

90.7
–
–
8.4
–

–

–
–
–

–

At 31 March 2007
Profit for the year
Effective portion of changes in fair value of cash flow hedges
Transferred to income and expense on cash flow hedges
Net investment hedge charge to equity
Premium on issue of shares
Repurchase of shares
Convertible bond converted to equity
Exchange differences on translation of foreign investment
Actuarial gains on retirement benefit schemes (net of tax)

99.1
–
–
–
–
2.0
–
214.6
–
–

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
Investment in own shares
Current and deferred tax recognised in equity in respect

of employee share awards (note 7)

–

–
–
–

–

13.7
–
–
–
–

–

–
–
–

–

13.7
–
–
–
–
–
8.3
–
–
–

–

–
–
–

–

14.6
–
–
–
–

–

–
–
–

–

14.6
–
–
–
–
–
–
(10.7)
–
–

–

–
–
–

–

6.6
–
(22.6)
–
–

5.5

–

–
–
–

–

(10.5)
–
11.6
8.0
–
–
–
–
–
–

(6.8)

–

–
–
–

–

–
–
–
–
–

–

–
–
–

–

–
–
–
–
(21.1)
–
–
–
46.5
–

–

–
–
–

–

1,589.6
830.5
–
–
33.2

–

(1.4)

(411.3)
6.8
(8.2)

8.8

2,048.0
872.9
–
–
–
–
(239.8)
–
–
(17.4)

–

16.4

(502.8)
10.8
(12.4)

(0.1)

–
–
–
–
–

–

–
–
–

–

–
0.3
–
–
–
–
–
–
–
–

–

–
–
–

–

1,715.2
830.5
(22.6)
8.4
33.2

5.5

(1.4)

(411.3)
6.8
(8.2)

8.8

2,164.9
873.2
11.6
8.0
(21.1)
2.0
(231.5)
203.9
46.5
(17.4)

(6.8)

16.4

(502.8)
10.8
(12.4)

(0.1)

At 31 March 2008

315.7

22.0

3.9

2.3

25.4

2,175.6

0.3

2,545.2

26. Retirement Benefit Obligations

Scottish and Southern Energy Annual Report 2008

97
>

Equity
reserve
£m

Hedge
reserve
£m

Translation
reserve
£m

Retained
earnings
£m

Total
£m

Capital
premium redemption
reserve
£m

account
£m

Company
Reconciliation of movement in reserves
At 1 April 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
Profit for the year
Effective portion of changes in fair value of cash flow hedges
Net investment hedge charge to equity
Premium on issue of shares
Convertible bond converted to equity
Repurchase of ordinary shares for cancellation
Actuarial gains on retirement benefit schemes (net of tax)
Investment in own shares
Increase in investment in subsidiaries
Dividends to shareholders
Current and deferred tax recognised in equity in respect

of employee share awards

Other movements

At 31 March 2008

90.7
–
–
8.4
–
–

99.1
–
–
–
2.0
214.6
–
–
–
–
–

–
–

13.7
–
–
–
–
–

13.7
–
–
–
–
–
8.3
–
–
–
–

–
–

315.7

22.0

14.6
–
–
–
–
–

14.6
–
–
–
–
(10.7)
–
–
–
–
–

–
–

3.9

3.1
–
(14.0)
–
–
–

(10.9)
–
18.0
–
–
–
–
–
–
–
–

–
–

7.1

–
–
–
–
–
–

–
–
–
(21.1)
–
–
–
–
–
–
–

–
–

575.1
415.8
–
–
12.3
(411.3)

591.9
571.7
–
–
–
–
(239.8)
(43.3)
(12.4)
10.8
(502.8)

(0.1)
1.3

697.2
415.8
(14.0)
8.4
12.3
(411.3)

708.4
571.7
18.0
(21.1)
2.0
203.9
(231.5)
(43.3)
(12.4)
10.8
(502.8)

(0.1)
1.3

(21.1)

377.3

704.9

The profit for the year attributable to shareholders dealt with in the financial statements of the Company was £571.7m (2007 – £415.8m).
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).

The translation reserve comprises exchange differences on foreign currency net investments offset by exchange translation differences
on borrowings and derivatives classified as net investment hedges under IAS 39.

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 Group matches employee contributions up to a specified
limit, in most circumstances this is set at 6%. The Group may also provide additional contributions of 3% after five and ten years’ continuous
service. The Keadby Generation Limited (KGL) pension scheme became part of the Southern Electric pension scheme on 1 February 2006.

Pension summary:

Scottish Hydro Electric (Company)
Southern Electric (incorporating KGL)

Scheme type

Defined benefit
Defined benefit

Net actuarial
gain/(loss) recognised in
respect of the pension
asset in the SoRIE

2008
£m

146.3
38.7

185.0

2007
£m

17.6
29.8

47.4

Net pension
(liability)/asset

2008
£m

85.8
(134.9)

(49.1)

2007
£m

128.1
(220.0)

(91.9)

The Scottish Hydro Electric net asset of £85.8m is presented after of an irrecoverable surplus restriction of £210.6m. The Scheme’s surplus
increased largely due to the increased yield on corporate bonds to such an extent that the Group (and Company) was only able to recognise
the surplus to the extent that it is recoverable.

Scottish and Southern Energy Annual Report 2008

05 Notes on the Financial Statements for the year ended 31 March 2008 continued 98
>
26. Retirement Benefit Obligations (continued)

Defined benefit schemes continued
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 remains in progress and is
due to be completed in the year to 31 March 2009. All schemes have been updated to 31 March 2008 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
in both schemes were:

Rate of increase in pensionable salaries
Rate of increase in pension payments
Discount rate
Inflation rate

At
31 March 2008

At
31 March 2007

5.0%
3.5%
6.9%
3.5%

4.6%
3.1%
5.4%
3.1%

The assumptions relating to longevity underlying the pension liabilities at 31 March 2008 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 based on the weighted average of membership in both schemes are as follows:

Currently aged 65
Currently aged 45

Valuation of combined pension schemes

At
31 March 2008
Male

At
31 March 2008
Female

At
31 March 2007
Male

At
31 March 2007
Female

21
23

23
25

21
22

23
24

Long-term
rate of return
expected at
31 March
2008
%

Consolidated

Long-term
rate of return
expected at
31 March
2007
%

Value at
31 March
2008
£m

Long-term
rate of return
expected at
31 March
2008
%

Value at
31 March
2007
£m

Equities
Government bonds
Corporate bonds
Other investments

Total fair value of plan assets
Irrecoverable surplus
Present value of defined benefit obligation

(Deficit)/surplus in the scheme
Deferred tax thereon

Net pension (liability)/asset

8.0
4.5
6.9
5.6

939.6
481.5
343.0
316.9

2,081.0
(210.6)
(1,919.5)

(49.1)
13.7

(35.4)

8.0
4.5
5.4
5.7

1,253.6
378.6
221.4
256.8

2,110.4
–
(2,202.3)

(91.9)
27.6

(64.3)

Company

Long-term
rate of return
expected at
31 March
2007
%

8.0
4.5
5.4
5.7

Value at
31 March
2008
£m

383.1
268.5
232.3
121.7

1,005.6
(210.6)
(709.2)

85.8
(24.0)

61.8

Value at
31 March
2007
£m

579.3
173.3
98.0
139.6

990.2
–
(862.1)

128.1
(38.4)

89.7

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
Actuarial gains

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)
Irrecoverable surplus

At 31 March

Charges/(credits) recognised

Current service cost (charged to operating profit)
Charged/(credited) to finance costs:
Expected return on pension scheme assets
Interest on pension scheme liabilities

Scottish and Southern Energy Annual Report 2008

Consolidated

Company

2008
£m

2007
£m

(2,202.3)

(2,211.1)

(29.2)
(7.5)
95.0
(117.4)
341.9

(30.3)
(7.7)
89.2
(107.2)
64.8

(1,919.5)

(2,202.3)

2008
£m

(862.1)

(12.1)
(2.8)
36.3
(46.0)
177.5

(709.2)

Consolidated

Company

2008
£m

2007
£m

2,110.4

2,017.3

141.4
(95.0)
73.6
7.5
(156.9)
(210.6)

130.1
(89.2)
61.9
7.7
(17.4)
–

1,870.4

2,110.4

2008
£m

990.2

66.7
(36.3)
13.4
2.8
(31.2)
(210.6)

795.0

Consolidated

Company

2008
£m

29.2

(141.4)
117.4

(24.0)

2007
£m

30.3

(130.1)
107.2

(22.9)

2008
£m

12.1

(66.7)
46.0

(20.7)

Company

99
>

2007
£m

(865.6)

(12.7)
(2.8)
33.7
(42.0)
27.3

(862.1)

2007
£m

955.8

63.4
(33.7)
11.6
2.8
(9.7)
–

990.2

2007
£m

12.7

(63.4)
42.0

(21.4)

History of surplus/(deficit)

Total fair value of plan assets
Irrecoverable surplus
Present value of defined benefit obligation

(Deficit)/surplus in the scheme

2008
£m

2,081.0
(210.6)
(1,919.5)

(49.1)

Consolidated

2007
£m

2006
£m

2005
£m

2,110.4
–
(2,202.3)

2,017.3
–
(2,211.1)

1,651.3
–
(1,878.9)

(91.9)

(193.8)

(227.6)

2008
£m

1,005.6
(210.6)
(709.2)

85.8

2007
£m

990.2
–
(862.1)

128.1

2006
£m

955.8
–
(865.6)

90.2

2005
£m

785.8
–
(686.9)

98.9

Return on assets
As required by IAS 19, the expected return on assets is based on the long-term expectation of returns for each asset class at the beginning of
the year. The return on equities is 3.5% per annum in excess of the yield on government bonds. Historical markets are studied and assets with
higher volatility are assumed to generate higher returns consistent with widely accepted capital market principles. The assumed long-term
rate of return on each asset class is set out within this note. The overall expected rate of return on assets is then derived by aggregating the
expected rate for each asset class over the actual asset allocation at 31 March 2008.

The actual return on plan assets is as follows:

Actual return on plan assets

Consolidated

Company

2008
£m

(12.0)

2007
£m

112.7

2008
£m

35.5

2007
£m

53.7

Scottish and Southern Energy Annual Report 2008

05 Notes on the Financial Statements for the year ended 31 March 2008 continued 100
>
26. Retirement Benefit Obligations (continued) 27. Employee Share-Based Payments

History of experience gains and losses

2008
£m

Consolidated

2007
£m

2006
£m

2005
£m

2008
£m

Total actuarial gains and (losses) recognised
in the Statement of Recognised Income and
Expense before adjustment for taxation

Experience (losses) on scheme liabilities

185.0

(122.2)

47.4

(40.0)

(14.1)

(123.3)

(18.3)

(38.0)

146.3

–

Company

2006
£m

(29.0)

–

2007
£m

17.6

–

2005
£m

6.2

–

The cumulative actuarial gains and losses recognised in the Statement of Recognised Income and Expense, before adjustment for taxation,
since the adoption of IAS 19 is £200.0m (2007 – £15.0m).

Defined contribution scheme
The total contribution paid by the Group to defined contribution schemes was £7.1m (2007 – £4.0m).

Employer financed retirement benefit (EFRB) pension costs
The reduction in the year in relation to the EFRB was £1.1m (2007 – £1.1m increase to the provision) to a total of £6.2m (2007 – £8.0m). This is
included in other provisions (note 23). In addition to the reduction in the provision, £0.6m was utilised as a result of payments made to the
Group defined benefit schemes.

Staff costs analysis
The pension costs in note 5 can be analysed thus:

Service costs
Defined contribution scheme payments

2008
£m

29.2
7.1

36.3

2007
£m

30.3
4.0

34.3

Expected contribution in the year to 31 March 2009
The Group expects to make contributions of £14.0m and £57.0m to the Scottish Hydro Electric Pension Scheme and the Southern Electric
Pension Scheme in the year to 31 March 2009, 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
three or five 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 five years, at which point they are
transferred at no further cost to the employee. These shares may be withdrawn at any point during the five 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 five 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 and 31 March 2007 the Company made a special award of 50 and 20 free shares respectively. These
awards were made to all employees in employment at both 31 March and 20 August 2005 for the 2005 award, and 31 March and 30 May 2007
for the 2007 award, 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 shares based on performance in the year.

Scottish and Southern Energy Annual Report 2008

101
>

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.

This scheme has been replaced by the current Annual Bonus Scheme. Under this scheme, 25% of eligible employees’ annual bonus is deferred
into shares which only vest after three years, subject to continued service. The number of shares awarded is determined by dividing the relevant
pre-tax bonus amount by the share price shortly after the announcement of the results for the financial year to which the bonus relates.

(v) Performance Share Plan

This scheme applies to Executive Directors and senior executives. Those eligible are awarded a maximum value of share awards of up to 150%
of base salary (previously 100%). 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 FT-SE100
companies over the performance period, with full vesting if the Company is above the 75th percentile and 25% (2007 – 30%) vesting if the
Company is at the median, with pro rata vesting between the median and 75th percentile; the remaining 50% of the award is subject to an
Earnings Per Share (EPS) growth target with full vesting occurring if adjusted EPS is 9% (2007 – 8%) above RPI per annum and 25% (2007 –
30%) vesting if adjusted EPS is 3% above RPI per annum with pro rata vesting between 3% and 9% (2007 – 3% to 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 £10.8m (2007 - £6.8m) 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 2008

98,430

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

10 July 2007

2008

2007

2008

2007

2008

2007

2008

2007

2008

2007

Consolidated
Outstanding at the start of the year

Shares
Option price

Granted
Shares
Option price

Forfeited
Shares
Option price

Exercised
Shares
Weighted average price

at date of exercise

805,170 1,469,934
562

562

857,688
622

908,043 1,537,213 1,631,394 1,085,987
999

886

622

–
–

– 1,107,199
–
999

927,313
1,306

(12,328)
562

(36,183)
562

(18,542)
622

(36,652)
622

(44,772)
886

(85,227)
886

(64,327)
999

(21,202)
999

(23,620)
1,306

(6,301)

(628,581)

(287,827)

(13,703)

(5,650)

(8,954)

(3,166)

(10)

(22)

1,523

1,330

1,484

1,248

1,525

1,273

1,526

1,523

1,456

Outstanding at the end of the year

Shares
Option price

786,541
562

805,170
562

551,319
622

Exercisable at the end of the year

857,688 1,486,791 1,537,213 1,018,494 1,085,987
999

886

999

886

622

903,671
1,306

–
–

3,169
562

3,516
622

–
–

–

–
–

25 July 2003

16 July 2004

14 July 2005

11 July 2006

10 July 2007

2008

2007

2008

2007

2008

2007

2008

2007

2008

2007

Company
Outstanding at the start of the year

Shares
Option price

Granted
Shares
Option price

1,700
562

2,287
622

3,655
886

–
–

Outstanding at the end of the year

Shares
Option price

1,700
562

2,287
622

3,655
886

–
–

144
1,306

–
–

Shares
Option price

Grant date

Scottish and Southern Energy Annual Report 2008

05 Notes on the Financial Statements for the year ended 31 March 2008 continued 102
>
27. Employee Share-Based Payments (continued)
>

(ii) Savings-related share option scheme continued
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 for the Group
and the Company are as follows:

Fair value

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

July 2007

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

5 Year

3 Year

5 Year

3 Year

5 Year

1,012p

1,023p

15%
4.1%
4.2%
3 yrs
967p
886p

15%
4.2%
4.2%
5 yrs
967p
886p

1,216p

19%
4.7%
4.8%
3 yrs
1,180p
999p

1,226p

19%
4.7%
4.8%
5 yrs
1,180p
999p

1,593p

25%
5.8%
5.3%
3 yrs
1,460p
1,306p

1,619p

25%
5.7%
5.2%
5 yrs
1,460p
1,306p

Expected price volatility was determined by calculating the historical volatility of the Group’s share price over the previous 12 months.

(iii) Share Incentive Plan

Matching 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

Exercisable at end of year

Consolidated

2008

Weighted
average price
(pence)

750,971
287,023
(26,235)
(17,306)
–

994,453

204,167

1,034
1,506
1,211
1,503
–

1,170

747

2007

Weighted
average price
(pence)

874
1,330
874
1,251
–

1,034

632

527,237
263,772
(20,413)
(19,625)
–

750,971

117,834

Company

2008

Weighted
average price
(pence)

2007

Weighted
average price
(pence)

959
1,507
–
–
–

1,071

747

700
240
–
–
–

940

240

832
1,332
–
–
–

959

632

940
240
–
–
–

1,180

480

The fair value of these shares is not subject to valuation using the Black-Scholes model. However, the fair value of shares granted in the year
is equal to the weighted average price paid for the shares at the grant date as shares are acquired out of the market as at that date to satisfy
awards made under the scheme.

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

Company

2008

Weighted
average price
(pence)

433,300
245,020
(22,860)
(7,230)
–

648,230

965
1,484
1,182
1,503
–

1,161

477,450
–
(22,300)
(21,850)
–

433,300

2007

Weighted
average price
(pence)

2008

Weighted
average price
(pence)

965
–
965
1,218
–

965

200
80
–
–
–

280

965
1,484
–
–
–

1,113

2007

Weighted
average price
(pence)

965
–
–
–
–

965

200
–
–
–
–

200

Of the outstanding options at the end of the year, none were exercisable.

The fair value of these shares is not subject to valuation using the Black-Scholes model. However, the fair value of shares granted in the year
is equal to the weighted average price paid for the shares at the grant date as shares are acquired in the market as at that date to satisfy
awards made under the scheme.

28. Financial Instruments and Risk

(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

Scottish and Southern Energy Annual Report 2008

103
>

Consolidated

Company

2008

2007

2008

2007

600,030
118,276
(2,189)
(141,633)
–

574,484

105,330

Price
(pence)

976
1,455
1,220
1,452
–

1,273

665

525,395
244,423
–
(169,788)
–

600,030

33,727

Price
(pence)

860
1,146
–
1,183
–

976

626

325,147
33,666
–
(58,287)
–

300,526

72,635

Price
(pence)

924
1,455
–
1,434
–

984

665

266,135
126,149
–
(67,137)
–

325,147

19,116

Price
(pence)

784
1,146
–
1,149
–

924

626

The fair value of these shares is not subject to valuation using the Black-Scholes model. However, the fair value of shares granted in the year
is equal to the weighted average price paid for the shares at the grant date as shares are acquired in the market as at that date to satisfy
awards made under the scheme.

(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

2008

2007

2008

2007

Price
(pence)

1,220
1,434
–
–
–

1,347

–
256,554
–
–
–

256,554

Price
(pence)

–
1,220
–
–
–

1,220

151,351
214,183
–
–
–

365,534

Price
(pence)

1,220
1,434
–
–
–

1,345

–
151,351
–
–
–

151,351

Price
(pence)

–
1,220
–
–
–

1,220

256,554
374,013
–
–
–

630,567

Of the outstanding options at the end of the year, none were exercisable.

The fair value of the performance share plan shares is not subject to valuation using the Black-Scholes model. The fair value of shares
granted in the year is equal to the closing market price on the date of grant.

28. FINANCIAL INSTRUMENTS AND RISK

The Group has exposure to the following risks from its use of financial instruments:

k Credit risk
k Liquidity risk
k Commodity risk
k Currency risk
k Interest rate risk

This note presents information about the fair value of the Group’s financial instruments, the Group’s exposure to each of the noted risks,
the Group’s objectives, policies and processes for measuring and managing risk, and the Group’s management of capital. Further qualitative
disclosures are included throughout these consolidated financial statements.

The Board has overall responsibility for the establishment and oversight of the Group’s risk management framework. The Board established
the Risk Committee, a standing committee of the Board comprising three Executive Directors and senior managers from the Generation and
Supply and Finance functions, to oversee the control of these activities. This committee is discussed further in the Directors Report.

The Group’s policies for risk management are established to identify the risks faced by the Group, to set appropriate risk limits and controls, and
to monitor risks and adherence to limits. These policies and the systems used to monitor activities are reviewed regularly by the Risk Committee.

Exposure to the commodity, currency and interest rate risks noted arise in the normal course of the Group’s business and derivative financial
instruments are entered into to hedge exposure to these risks. 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 Company is required to disclose information on its financial instruments and has adopted identical policies to the Group, where applicable.
Separate disclosure is provided where necessary.

(i) Qualitative risk disclosures

Credit risk
Credit risk is the risk of financial loss to the Group if a customer or counterparty fails to meet its contractual obligations.

Scottish and Southern Energy Annual Report 2008

05 Notes on the Financial Statements for the year ended 31 March 2008 continued 104
>
28. Financial Instruments and Risk (continued)

(i) Qualitative risk disclosures continued

Credit risk continued
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, for significant contracts, 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.

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 assessed 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:

(i) holds an investment grade credit rating; or

(ii) can be assessed as adequately creditworthy in accordance with internal credit rules using information from other external credit 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 2008,
the Group’s Generation and Supply business had pledged £135m (2007 – £90m) of cash collateral and letters of credit and had received
£74m (2007 – £27m) of cash collateral and letters of credit principally to reduce exposures on commodity price risk.

Bank credit exposures, which are monitored and reported on daily, are calculated on a mark-to-market basis and 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.

Liquidity risk
Liquidity risk, the risk that the Group will have insufficient funds to meet liabilities, is managed by the Group’s Treasury function.

Treasury 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.

In relation to the Group’s liquidity risk, the Group’s policy is to ensure, as far as possible, that it will always have sufficient liquidity to meet
its liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the
Company’s reputation.

The Group’s approach to managing liquidity is to ensure that the Group has available committed borrowings and facilities equal to at
least 105% of forecast borrowings over a rolling 12 month period. The Group uses a cash flow forecast to monitor its ongoing borrowing
requirements. Typically, the Group will fund any short term borrowing positions by issuing commercial paper or borrowing from uncommitted
bank lines and will invest in money market funds when it has a cash surplus. In addition to the borrowing facilities listed at note 21, the Group
has £75m of uncommitted bank lines and a £20m overdraft facility.

Treasury also manage the Group’s interaction with its relationship banks (defined as those banks that support the Company’s financing
activities through their ongoing participation in the committed lending facilities that are maintained by the Group). These 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.

Commodity risk
The Group’s Generation and Supply business faces exposure to energy commodity price movements and also to physical commodity volume
requirements 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 manage all exposures to commodity risk through volumetric limits and to measure the exposure by use of a Value
at Risk (VaR) model. The exposure is subject to financial limits established by the Board and managed by the Risk Committee and is reported

Scottish and Southern Energy Annual Report 2008

105
>

to the Committee on a monthly basis and to the Board when certain trigger levels are exceeded. Within this approach, only certain of the
Group’s energy commodity contracts are deemed to constitute financial instruments under IAS 39. As a result, while the Group manages
the commodity price risk associated with both financial and non-financial commodity contracts, it is only the fair value of IAS 39 financial
instruments which represents the fair value that represents the exposure of the Group’s commodity price risk under IFRS 7. This follows
because commodity contracts that are financial instruments under IAS 39 are accounted on a fair value basis with changes in fair value
reflected in profit or equity. Conversely, commodity contracts that are not financial instruments under IAS 39 are accounted for as ‘own use’
contracts. As fair value changes in own use contracts are not reflected through profit or equity, these do not represent the IFRS 7 commodity
price risk. Therefore, while the overall Group VaR associated with the Generation and Supply business is outside the scope of IAS 39 is
monitored for internal risk management purposes, these measures are not required to comply with IFRS 7.

Operationally, the economic risks associated with this exposure are managed through a selection of longer and shorter term contracts
for commodities such as gas, electricity, coal and oil, and also the flexibility of the Group’s fleet of generation assets.

Short-term exposures arise 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 aspect of commodity risk is managed through the ability to increase or decrease energy production either in the form of flexible
purchase contracts or assets such as pumped storage generating plant, flexible hydro generating plant, standby oil plant and gas storage.

Longer-term exposures are managed through the Group’s generation plant and longer term contracts (including forwards, futures contracts
and other financial instruments). These, in turn, are used to reduce short-term market exposures.

Certain commodity contracts are entered into primarily for own use purposes to supply to existing customers or to fuel existing power stations.
However, a number of these contracts do not qualify for own use treatment under IAS 39 and are subject to fair value measurement through
the income statement. In addition to this, the Group enters into certain contracts to manage commodity price and volume risk. These are also
subject to fair value measurement through the income statement. Finally, certain other 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. The accounting policies associated with such items explained in note 1.

The consequential commodity risk which derives from these activities 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 Board
and monitored and managed by the Risk Committee. The Group’s exposure to Commodity risk is reported to and monitored by the Risk
Committee and to the Board by exception.

Currency risk
The Group publishes its consolidated financial statements in Sterling but also conducts business in foreign currencies. As a result, it is subject
to foreign currency exchange risk arising from exchange rate movements which will be reflected in the Group’s transaction costs or in the
underlying foreign currency assets of its foreign operations.

The Group’s policy is to use forward contracts, swaps and options to manage its exposures to foreign exchange risk. Most exposure is
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. The policy is
to seek to hedge 100% of its currency requirements arising under all committed contracts excepting commodity hedge transactions, the
requirements for which are significantly less predictable. The policy for these latter transactions is to assess the Group’s requirements
on a rolling basis and to enter into cover contracts as appropriate.

As a consequence of the purchase of Airtricity, the Group has acquired foreign operations with consequent currency exposure issues.
The financing of the acquisition was in Euros and the acquired group has significant Euro-denominated debt balances. The Group’s policy
is to hedge its net investment in Airtricity by ensuring the acquired net assets whose functional currency cash flows are denominated in Euros
are matched by borrowings in Euros. For the acquired net assets whose functional cash flows are in Sterling, the Group will ensure Sterling
denominated borrowings are in place to minimise currency risk. At the balance sheet date, the short term funding in place in relation to the
acquisition had not been refinanced. Consequently, the Group is holding Euro borrowings in relation to net assets with a Sterling functional
currency. The Group has recognised an exceptional translation loss on revaluation of this component of its Euro borrowings. The remaining
component has been recorded as an effective net investment hedge.

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.

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. These practices serve to reduce the volatility of the Group’s financial performance.

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 2008

05 Notes on the Financial Statements for the year ended 31 March 2008 continued 106
>
28. Financial Instruments and Risk (continued)

(ii) Categories of financial assets and liabilities and fair values
The fair values of the primary financial assets and liabilities of the Group together with their carrying values are as follows:

Financial assets
Current
Trade receivables
Other receivables
Cash and cash equivalents
Derivative financial assets

Non-current
Derivative financial assets

Financial liabilities
Current
Trade payables
Bank loans and overdrafts
Derivative financial liabilities

Non-current
Loans and borrowings (iii)
Derivative financial liabilities

Net financial liabilities

(i) Recorded at amortised cost, available for sale, or loans and receivables.
(ii) IAS 39 financial derivatives.
(iii) Includes non-recourse borrowings.

Financial assets
Current
Trade receivables
Other receivables
Cash and cash equivalents
Derivative financial assets

Non-current
Derivative financial assets

Financial liabilities
Current
Trade payables
Bank loans and overdrafts
Derivative financial liabilities

Non-current
Loans and borrowings (iii)
Derivative financial liabilities

Net financial liabilities

2008
Amortised cost
or other (i)
£m

2008
Designated
at fair value (ii)
£m

2008
Total carrying
value
£m

2008
Fair value
£m

2,042.2
176.0
255.3
–

2,473.5

–

2,473.5

2,134.6
1,847.5
–

3,982.1

2,073.1
–

2,073.1

6,055.2

3,581.7

–
–
–
1,106.5

1,106.5

318.9

1,425.4

–
–
1,229.4

1,229.4

–
313.3

313.3

1,542.7

117.3

2,042.2
176.0
255.3
1,106.5

3,580.0

318.9

3,898.9

2,134.6
1,847.5
1,229.4

5,211.5

2,073.1
313.3

2,386.4

7,597.9

3,699.0

2,042.2
176.0
255.3
1,106.5

3,580.0

318.9

3,898.9

2,134.6
1,848.7
1,229.4

5,212.7

2,041.9
313.3

2,355.2

7,567.9

3,669.0

2007
Amortised cost
or other (i)
£m

2007
Designated
at fair value (ii)
£m

2007
Total carrying
value
£m

2007
Fair value
£m

1,473.9
37.1
56.1
–

1,567.1

–

1,567.1

1,412.2
474.3
–

1,886.5

1,813.6
–

1,813.6

3,700.1

2,133.0

–
–
–
452.9

452.9

54.5

507.4

–
–
351.9

351.9

(10.4)
120.9

110.5

462.4

(45.0)

1,473.9
37.1
56.1
452.9

2,020.0

54.5

2,074.5

1,412.2
474.3
351.9

2,238.4

1,803.2
120.9

1,924.1

4,162.5

2,088.0

1,473.9
37.1
56.1
452.9

2,020.0

54.5

2,074.5

1,412.2
465.0
351.9

2,229.1

2,022.6
120.9

2,143.5

4,372.6

2,298.1

Scottish and Southern Energy Annual Report 2008

107
>

The fair values of the primary financial assets and liabilities of the Company together with their carrying values are as follows:

Financial assets
Current
Cash and cash equivalents
Amounts owed by subsidiary undertakings
Derivative financial assets

Non-current
Amounts owed by subsidiary undertakings

Financial liabilities
Current
Amounts owed to subsidiary undertakings

Non-current
Convertible bond
Bank loans
Amounts owed to subsidiary undertakings

Net financial assets

(i) Recorded at amortised cost, available for sale, or loans and receivables.
(ii) IAS 39 financial derivatives.

Financial assets
Current
Cash and cash equivalents
Amounts owed by subsidiary undertakings

Non-current
Amounts owed by subsidiary undertakings

Financial liabilities
Current
Bank loans and overdrafts
Amounts owed to subsidiary undertakings

Non-current
Convertible bond
Bank loans
Derivative financial liabilities
Amounts owed to subsidiary undertakings

Net financial (liabilities)

2008
Amortised cost
or other (i)
£m

2008
Designated
at fair value (ii)
£m

2008
Total carrying
value
£m

2008
Fair value
£m

104.2
2,328.5
–

2,432.7

1,772.7

4,205.4

3,526.7

76.3
296.1
240.2

612.6

4,139.3

66.1

–
–
1.1

1.1

–

1.1

–

–
–
–

–

(1.1)

104.2
2,328.5
1.1

2,433.8

1,772.7

4,206.5

3,526.7

76.3
296.1
240.2

612.6

4,139.3

67.2

104.2
2,328.5
1.1

2,433.8

1,772.7

4,206.5

3,526.7

123.3
290.8
240.2

654.3

4,181.0

25.5

2007
Amortised cost
or other (i)
£m

2007
Designated
at fair value (ii)
£m

2007
Total carrying
value
£m

2007
Fair value
£m

5.8
1,726.5

1,732.3

1,783.5

3,515.8

349.5
2,570.2

2,919.7

284.9
295.7
–
240.2

820.8

3,740.5

(224.7)

–
–

–

–
–

–

–
–
44.9
–

44.9

(44.9)

5.8
1,726.5

1,732.3

1,783.5

3,515.8

349.5
2,570.2

2,919.7

284.9
295.7
44.9
240.2

865.7

3,785.4

(269.6)

5.8
1,726.5

1,732.3

1,783.5

3,515.8

349.4
2,570.2

2,919.6

515.0
307.1
44.9
240.2

1,107.2

4,026.8

(511.0)

Scottish and Southern Energy Annual Report 2008

05 Notes on the Financial Statements for the year ended 31 March 2008 continued 108
>
28. Financial Instruments and Risk (continued)

(ii) Categories of financial assets and liabilities and fair values continued

Basis of determining fair value
Certain assets and liabilities designated and carried at amortised cost or are loans and receivables. For certain current assets and liabilities
their carrying value is equivalent to fair value due to short term maturity.

Assets and liabilities designated at fair value and the fair value of other financial assets and liabilities have been determined by reference to
closing rate market values. This basis has been used in valuing interest rate instruments, foreign currency hedge contracts and denominated
long-term fixed rate debt. Commodity contracts fair values are based on published price quotations.

The fair values are stated at a specific date and may be different from the amounts which will actually be paid or received on settlement of
the instruments. The fair value of items such as property, plant and equipment, internally generated brands or the Group’s customer base
are not included as these are not financial instruments.

(iii) Credit risk
Cash and cash equivalents comprise cash in hand and deposits which are readily convertible to cash. These are subject to insignificant risk
of change in value or credit risk. Derivative financial instruments are entered into cover the Group’s market risks – commodity risk, interest
rate risk, currency risk – and are consequently covered elsewhere in this note.

Trade receivables represent the most significant exposure to credit risk and are stated net of collateral held, letters of credit or other credit
enhancements. The trade receivables total includes an allowance for impairment.

Concentrations of risk
Trade receivables recorded by reported segment held at the 31 March were:

Power Systems

Scotland
England

Generation and Supply

Retail customers
Other

Other businesses

2008
£m

18.6
19.7

38.3

493.5
1,300.8
209.6

2,042.2

2007
£m

12.6
6.5

19.1

519.0
798.7
137.1

1,473.9

The Generation and Supply segment accounts for 87.9% (2007 – 89.4%) of the Group’s trade receivables. Trade receivables associated with
the Group’s 8.45 million electricity and gas customers are recorded in this segment. The Group also has significant receivables associated
with its wholesale activities which are generally settled within 2 to 4 weeks from invoicing. The Group’s exposure to credit risk is therefore
subject to diversification with no exposure to individual customers totalling >10% of trade receivables. The Group’s biggest customer balance,
due from a wholesale electricity customer, is around 5% of the total.

The ageing of trade receivables at the reporting date was:

Not past due
Past due 0-30 days
Past due 31-90 days
Over 90 days

Less: impairment

2008
£m

1,873.8
106.0
61.6
116.5

2,157.9
(115.7)

2,042.2

2007
£m

1,285.5
108.2
64.1
101.4

1,559.2
(85.3)

1,473.9

The Group has past due debt which has not had an impairment allowance set aside to cover potential credit losses. The Group has certain
procedures to pursue customers in significant arrears and believes its impairment policy in relation to such balances is appropriate.

The Group has other receivables which are financial assets totalling £176.0m (2007 – £37.1m).

The Company does not have trade receivables.

Scottish and Southern Energy Annual Report 2008

The movement in the allowance for impairment of trade receivables was:

Balance at 1 April
Increase in allowance for impairment
Impairment losses recognised
Acquired allowance

Balance at 31 March

2008
£m

85.3
69.5
(41.6)
2.5

115.7

109
>

2007
£m

62.8
44.3
(21.8)
–

85.3

At the end of each reporting period a review of the provision for bad and doubtful debts is performed. It is an assessment of the potential
amount of trade debtors which will not be paid by customers after the balance sheet date. This amount is calculated by reference to the age,
status and risk of each receivable.

(iv) Liquidity risk
The following are the contractual liabilities of financial liabilities excluding the impact of netting agreements:

Liquidity risk

Financial liabilities
Loans and borrowings
Bank overdrafts
Commercial paper and cash advances
Bank loans – fixed
Bank loans – fixed
Unsecured bonds – fixed
Convertible bond
Non-recourse funding
Airtricity debt (note 21)

Finance lease obligations

Derivative financial liabilities
Operating derivatives designated at fair value
Interest rate swaps used for hedging
Interest rate swaps designated at fair value
Forward exchange contracts held for hedging
Forward exchange contracts designated at fair value

Other financial liabilities
Trade payables

Carrying
value
£m

Contractual
cash flows
£m

0-12 months
£m

1-2 years
£m

2-5 years
£m

> 5 years
£m

2008

12.2
1,696.3
150.0
270.2
1,073.6
76.3
99.1
542.9

3,920.6
0.6

3,921.2

1,492.3
12.8
24.4
3.8
9.4

1,542.7

2,134.6

(12.2)
(1,706.7)
(187.8)
(331.0)
(2,755.0)
(83.7)
(99.0)
(726.6)

(5,902.0)
(0.6)

(5,902.6)

3,478.0
(12.8)
(24.4)
(88.8)
(46.5)

3,305.5

(2,134.6)

(12.2)
(1,706.7)
(7.8)
(39.0)
(53.4)
(3.0)
(8.6)
(145.9)

(1,976.6)
(0.2)

(1,976.8)

2,881.2
(3.8)
(1.3)
(58.4)
(9.1)

2,808.6

(2,134.6)

–
–
(7.5)
(39.3)
(53.4)
(80.7)
(8.8)
(214.7)

(404.4)
(0.2)

(404.6)

496.8
(3.7)
(1.3)
(21.6)
(4.8)

465.4

–

–
–
(145.9)
(173.0)
(160.6)
–
(30.5)
(117.9)

(627.9)
(0.2)

(628.1)

78.0
(4.2)
(3.8)
(8.8)
(25.2)

36.0

–

–
–
(26.6)
(79.7)
(2,487.6)
–
(51.1)
(248.1)

(2,893.1)
–

(2,893.1)

22.0
(1.1)
(18.0)
–
(7.4)

(4.5)

–

Total

7,598.5

(4,731.7)

(1,302.8)

60.8

(592.1)

(2,897.6)

Derivative financial assets
Operating derivatives designated at fair value
Financing derivatives

(1,389.8)
(35.6)

(1,425.4)

(3,957.9)
(197.3)

(4,155.2)

(3,245.7)
(104.8)

(3,350.5)

(497.3)
(27.6)

(524.9)

(211.0)
(25.4)

(236.4)

(3.9)
(39.5)

(43.4)

Net total (i)

6,173.1

(8,886.9)

(4,653.3)

(464.1)

(828.5)

(2,941.0)

(i) The Group believes the liquidity risk associated with out-of-the-money operating derivative contracts needs to be considered in conjunction
with the profile of payments or receipts arising from derivative financial assets. It should be noted that cash flows associated with future
energy sales and commodity contracts which are not IAS 39 financial instruments are not included in this analysis, which is prepared in
accordance with IFRS 7.

Scottish and Southern Energy Annual Report 2008

05 Notes on the Financial Statements for the year ended 31 March 2008 continued 110
>
28. Financial Instruments and Risk (continued)

(iv) Liquidity risk continued

Liquidity risk

Financial liabilities
Loans and borrowings
Bank overdrafts
Commercial paper and cash advances
Bank loans – fixed
Bank loans – floating
Unsecured bonds – floating
Unsecured bonds – fixed
Convertible bond
Non-recourse funding
Fair value adjustment

Finance lease obligations

Derivative financial liabilities
Operating derivatives designated at fair value
Interest rate swaps used for hedging
Forward exchange contracts held for hedging
Interest rate swaps designated at fair value
Forward exchange contracts designated at fair value

Other financial liabilities
Trade payables

Carrying
value
£m

Contractual
cash flows
£m

0-12 months
£m

1-2 years
£m

2-5 years
£m

> 5 years
£m

2007

7.7
349.5
316.8
150.0
61.5
1,069.1
284.9
48.4
(10.4)

2,277.5
1.1

2,278.6

406.3
15.9
15.6
17.8
15.3

470.9

(7.7)
(351.0)
(395.7)
(199.9)
(61.9)
(2,808.4)
(328.0)
(48.4)
–

(4,201.0)
(1.1)

(4,202.1)

(109.9)
(15.9)
(137.2)
(17.8)
(205.6)

(486.4)

(7.7)
(351.0)
(64.6)
(8.3)
(61.9)
(53.4)
(11.2)
(9.2)
–

(567.3)
(0.5)

(567.8)

(626.0)
(11.9)
(100.7)
(3.9)
(90.1)

(832.6)

1,412.2

(1,412.2)

–
–
(39.0)
(8.3)
–
(53.4)
(11.2)
(9.2)
–

(121.1)
(0.2)

(121.3)

363.3
(0.9)
(22.5)
(0.8)
(32.6)

306.5

–

–
–
(126.7)
(25.0)
–
(160.4)
(305.6)
(27.1)
–

(644.8)
(0.2)

(645.0)

152.8
(2.6)
(13.9)
(2.4)
(46.9)

87.0

–

–
–
(165.4)
(158.3)
–
(2,541.2)
–
(2.9)
–

(2,867.8)
(0.2)

(2,868.0)

–
(0.5)
(0.1)
(10.7)
(36.0)

(47.3)

–

Total

4,161.7

(6,100.7)

(2,812.6)

185.2

(558.0)

(2,915.3)

Derivative financial assets
Operating derivatives designated at fair value
Financing derivatives

(507.4)
–

(507.4)

469.6
–

469.6

509.0
–

509.0

64.9
–

64.9

(104.3)
–

(104.3)

–
–

–

Net total (i)

3,654.3

(5,631.1)

(2,303.6)

250.1

(662.3)

(2,915.3)

Scottish and Southern Energy Annual Report 2008

111
>

The Company has the following liquidity maturity profile:

Liquidity risk

Financial liabilities
Loans and borrowings
Commercial paper and cash advances
Unsecured bonds – fixed
Convertible bond

Derivative financial liabilities
Interest rate swaps used for hedging
Forward exchange contracts held for hedging
Forward exchange contracts designated at fair value

Other financial liabilities
Amounts due to subsidiary undertakings

Total

Liquidity risk

Financial liabilities
Loans and borrowings
Commercial paper and cash advances
Unsecured bonds – fixed
Convertible bond

Derivative financial liabilities
Interest rate swaps used for hedging
Forward exchange contracts held for hedging
Forward exchange contracts designated at fair value

Other financial liabilities
Amounts due to subsidiary undertakings

Carrying
value
£m

Contractual
cash flows
£m

0-12 months
£m

1-2 years
£m

2-5 years
£m

> 5 years
£m

2008

1,696.3
296.1
76.3

2,068.7

20.4
(9.8)
(11.7)

(1.1)

(1,706.7)
(564.4)
(83.7)

(2,354.8)

(20.4)
(202.8)
(130.8)

(354.0)

(1,706.7)
(17.6)
(3.0)

(1,727.3)

(1.0)
(90.8)
(82.1)

(173.9)

3,526.7

(3,526.7)

–
(17.6)
(80.7)

(98.3)

(1.0)
(43.4)
(10.6)

(55.0)

–

–
(52.9)
–

(52.9)

(3.0)
(28.8)
(30.7)

(62.5)

–

–
(476.3)
–

(476.3)

(15.4)
(39.8)
(7.4)

(62.6)

–

5,594.3

(6,235.5)

(5,427.9)

(153.3)

(115.4)

(538.9)

Carrying
value
£m

Contractual
cash flows
£m

0-12 months
£m

1-2 years
£m

2-5 years
£m

> 5 years
£m

2007

349.5
295.7
284.9

930.1

14.0
15.6
15.3

44.9

(351.0)
(582.0)
(328.0)

(1,261.0)

(14.0)
(137.2)
(205.6)

(356.8)

(351.0)
(17.6)
(11.2)

(379.8)

(0.7)
(100.7)
(90.1)

(191.5)

2,570.2

(2,570.2)

–
(17.6)
(11.2)

(28.8)

(0.7)
(22.5)
(32.6)

(55.8)

–

–
(52.9)
(305.6)

(358.5)

(2.1)
(13.9)
(46.9)

(62.9)

–

–
(493.9)
–

(493.9)

(10.5)
(0.1)
(36.0)

(46.6)

–

Total

3,545.2

(4,188.0)

(3,141.5)

(84.6)

(421.4)

(540.5)

Scottish and Southern Energy Annual Report 2008

05 Notes on the Financial Statements for the year ended 31 March 2008 continued 112
>
28. Financial Instruments and Risk (continued)

(v) Commodity risk
The factors which contribute to the Group’s commodity risk are explained on page 104 and 105. The Group’s exposure to commodity price risk
according to IFRS 7 is measured by reference to the Group’s IAS 39 commodity contracts. IFRS 7 requires disclosure of a sensitivity analysis
for market risks that is intended to illustrate the sensitivity of the Group’s financial position and performance to changes in market variables
impacting upon the fair value or cash flows associated with the Group’s financial instruments.

Therefore, the sensitivity analysis provided discloses the effect on profit or loss and equity at 31 March 2008 assuming that a reasonably
possible change in the relevant commodity price had occurred at 31 March 2008 and been applied to the risk exposures in existence at that
date. The reasonably possible changes in commodity prices used in the sensitivity analysis were determined based on calculated or implied
volatilities where available or historical data.

The sensitivity analysis has been calculated on the basis that the proportion of commodity contracts that are treated as financial instruments
under IAS 39 remains consistent with those at that point. Excluded from this analysis are all commodity contracts that are not financial
instruments under IAS 39.

Commodity prices
UK gas (p/therm)
UK power (£/MWh)
UK coal (US$/tonne)
UK emissions (€/tonne)
UK oil (US$/bbl)

2008
Reasonably
possible
increase in
variable

Reasonably
possible
decrease in
variable

+10
+7
+12
+4
+10

-10
-7
-12
-4
-10

Base price (i)

63
59
121
22
100

2007
Reasonably
possible
increase in
variable

Reasonably
possible
decrease in
variable

+6
+4
+7
+3
+7

-6
-4
-7
-3
-7

Base price (i)

39
37
71
17
68

(i) The base price represents the average forward market price over the duration of the active market curve used to calculate the sensitivity

analysis.

The impacts of reasonably possible changes in commodity prices on profit after taxation based on the rationale described are as follows:

Incremental profit/(loss)
Commodity prices combined – increase
Commodity prices combined – decrease

Impact on profit
(£m)

(28.9)
28.9

2008

Impact on equity

Impact on profit

(£m)

(0.8)
0.8

(£m)

(60.9)
60.9

2007

Impact on equity
(£m)

(0.8)
0.8

The sensitivity analysis provided is hypothetical only and should be used with caution as the impacts provided are not necessarily indicative
of the actual impacts that would be experienced. It should be noted that the impacts provided are indicative only and are based on calculations
which do not consider all interrelationships, consequences and effects of such a change in those prices.

(vi) Currency risk

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

The Group’s exposure to foreign currency risk was as follows:

At 31 March 2008

Loans and borrowings
Purchase contract commitments and commodity contracts

Gross exposure

Forward exchange contracts

Net exposure (in currency)

Net exposure (in £m)

2008
£m

916.3

2007
£m

677.7

DKKm

–
241.2

241.2

–

€m

1,115.0
203.6

1,318.6

202.4

1,116.2

888.1

100.0
1,936.6

2,036.6

1,458.9

577.7

290.8

Scottish and Southern Energy Annual Report 2008

At 31 March 2007

Loans and borrowings
Purchase contract commitments and commodity contracts

Gross exposure

Forward exchange contracts

Net exposure (in currency)

Net exposure (in £m)

DKKm

–
–

–

€m

–
245.0

245.0

238.8

6.2

4.2

113
>

250.0
1,146.0

1,396.0

1,090.9

305.1

155.0

This represents the net exposure to foreign currencies, reported in pounds Sterling, and arising from all Group activities. All sensitivity
analysis has been prepared on the basis of the relative proportions of instruments in foreign currencies being consistent as at the balance
sheet date. This includes only monetary assets and liabilities denominated in a currency other than Sterling and excludes the translation
of the net assets of foreign operations but not the corresponding impact of the net investment hedge.

The sensitivity analysis is indicative only and it should be noted that the Group’s exposure to such market rate changes is continually changing.
The calculations are based on linear extrapolations of rate changes which may not reflect the actual result which would impact upon the Group.

A 10% change in foreign currency exchange rates would have had the following impact on profit after taxation, based on the assumptions
presented above:

US Dollars
Euro
DKK

Equity

At
31 March 2008
£m

At
31 March 2007
£m

Income Statement

At
31 March 2008
£m

At
31 March 2007
£m

–
39.8
–

39.8

–
–
–

–

23.3
31.3
–

54.6

12.1
0.4
–

12.5

The impact of a decrease in rates would be an identical reduction in the annual charge. There is no impact on equity as the analysis relates to the
Group’s net exposure at the balance sheet date. Contracts qualifying for hedge accounting are by definition part of the Group’s covered position.

(vii) Interest rate risk
The impact of a change in interest rates is dependent on the specific details of the financial asset or liability in question. Changes in fixed
rate financial assets and liabilities, which account for the majority of cash, loans and borrowings, are not measured at fair value through the
income statement. In addition to this, changes to floating-to-fixed hedging instruments which are recorded under cash flow hedge accounting
also do not impact the income statement. Changes in variable rate instruments and hedging instruments and hedged items recorded under
fair value hedge accounting are recorded through the income statement. The exposure measured is therefore based on variable rate debt
and instruments.

The net exposure to interest rates at the balance sheet date can be summarised thus:

Interest bearing/earning assets and liabilities:

– Fixed
– Floating

Represented by:
Cash and cash equivalents
Derivative financial liabilities
Loans and borrowings
Finance lease obligations

2008
Carrying
amount
£m

(2,381.4)
(1,320.4)

(3,701.8)

255.3
(35.9)
(3,920.6)
(0.6)

(3,701.8)

2007
Carrying
amount
£m

(1,857.6)
(398.6)

(2,256.2)

56.1
(33.7)
(2,277.5)
(1.1)

(2,256.2)

Following from this, the table overleaf represents the expected impact of a change in 100 basis points in short term interest rates at the
reporting date in relation to equity and income statement. The analysis assumes that all other variables, in particular foreign currency rates,
remain constant. An increase in exchange rates would be a change to either the income statement or equity. The assessment is based on
a revision of the fair value assumptions included in the calculated exposures in the previous table.

All sensitivity analysis has been prepared on the basis of the proportion of fixed to floating instruments being consistent as at the balance
sheet date.

Scottish and Southern Energy Annual Report 2008

05 Notes on the Financial Statements for the year ended 31 March 2008 continued 114
>
28. Financial Instruments and Risk (continued)

(vii) Interest rate risk continued
The sensitivity analysis is indicative only and it should be noted that the Group’s exposure to such market rate changes is continually changing.
The calculations are based on linear extrapolations of rate changes which may not reflect the actual result which would impact upon the Group.

Income statement
Equity

2008
£m

13.2
–

13.2

2007
£m

4.0
–

4.0

(viii) Income Statement disclosures
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 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 financing derivatives (i)

Less: Amounts settled (ii)

Movement in unrealised derivatives

2008
£m

135.7
(323.5)

(187.8)

(116.8)
137.5

20.7

2007
£m

(134.5)
195.8

61.3

(117.7)
107.1

(10.6)

Net income statement impact

(167.1)

50.7

(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 derivative financial assets and (liabilities) are represented as follows:

Derivative financial assets
Non-current
Current

Derivative liabilities
Non-current
Current

Fair value adjustment to hedged item (note 21)

2008
£m

318.9
1,106.5

1,425.4

(313.3)
(1,229.4)

(1,542.7)
–

(117.3)

2007
£m

54.5
452.9

507.4

(120.9)
(351.9)

(472.8)
10.4

45.0

Scottish and Southern Energy Annual Report 2008

115
>

(ix) Cash flow hedges
The Group designates contracts which qualify as hedges for accounting purposes either as cash flow hedges or fair value hedges. Cash flow
hedges are contracts entered into hedge a forecast transaction or cash flow risk generally arising from a change in interest rates or foreign
exchange currency rates and which meet the effectiveness criteria prescribed by IAS 39. The Group’s accounting policy on cash flow hedges
is explained in note 1.

The following table indicates the contractual maturities of the expected transactions and the qualifying cash flow hedges associated:

Cash flow hedges

Interest rate swaps:

Liabilities

Forward exchange contracts:

Assets
Liabilities

Cash flow hedges

Interest rate swaps:

Liabilities

Forward exchange contracts:

Assets
Liabilities

Carrying
amount

Expected
cash flows

0-12 months

1-2 years

2-5 years

> 5 years

2008

(5.9)

13.1
(3.4)

9.7

(5.9)

(114.4)
(88.4)

(202.8)

(1.8)

(32.9)
(57.9)

(90.8)

(1.7)

(21.8)
(21.6)

(43.4)

(2.2)

(19.9)
(8.9)

(28.8)

(0.2)

(39.8)
–

(39.8)

Carrying
amount

Expected
cash flows

0-12 months

1-2 years

2-5 years

> 5 years

2007

(5.5)

0.1
15.6

15.7

(5.5)

(5.6)
(131.6)

(137.2)

–

(2.2)
(98.5)

(100.7)

(0.6)

(2.5)
(19.9)

(22.4)

(2.3)

(0.9)
(13.0)

(13.9)

(2.6)

–
(0.2)

(0.2)

Net investment hedge
The Group’s net investment hedges consists of debt issued in the same currency (Euros) as the net investment in Airtricity. The hedge
compares the element of the net assets of Airtricity which functional cash flows are denominated in Euros to the matching portion of the
Euros borrowings held by the Group. This therefore provides protection against movements in foreign exchange rates.

Gains and losses in the hedge are recognised in equity and will be transferred to the income statement on disposal of the foreign operation
(£30.1m, 2007 – nil). Gains and losses on the ineffective portion of the hedge are recognised immediately in the income statement (£22.2m loss,
2007 – nil). The loss recognised in the income statement is considered to be exceptional as Euro debt associated with the net assets of Airtricity
whose functional cash flows are denominated in pounds Sterling has been replaced by pounds Sterling issued debt in the period from the
balance sheet date.

(x) Capital management
The Board’s policy is to maintain a strong balance sheet so as to maintain investor, creditor and market confidence and to sustain future
development of the business.

From time to time the Group purchases its own shares on the market; the timing of these purchases depends on market prices. The use
of share buy-backs is the Group’s benchmark for investment decisions and is utilised at times when management believe the Group’s shares
are undervalued.

There were no changes to the Group’s capital management approach during the year.

Scottish and Southern Energy Annual Report 2008

05 Notes on the Financial Statements for the year ended 31 March 2008 continued 116
>
29. Related-Party Transactions

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 Purchase of goods
and services
and services
2008
2008
£m
£m

Other
transactions
2008
£m

Sale of goods Purchase of goods
and services
and services
2007
2007
£m
£m

Other
transactions
2007
£m

Jointly controlled entities:
Seabank Power Limited
PriDE (South East Regional Prime) Limited
Scotia Gas Networks plc
Marchwood Power Limited

Associates:
Barking Power Limited
Derwent Cogeneration Limited

19.5
39.2
56.0
–

0.7
22.0

(150.6)
–
(106.9)
–

(85.0)
(82.2)

27.0
–
35.3
2.7

0.4
–

8.9
26.2
68.7
–

11.6
45.7

(113.4)
–
(80.3)
–

(139.6)
(68.2)

29.8
–
9.6
2.1

–
–

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.
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

Amounts owed by
related parties

Amounts owed to
related parties

Jointly controlled entities:
Seabank Power Limited
PriDE (South East Regional Prime) Limited
Scotia Gas Networks plc
Marchwood Power Limited

Associates:
Barking Power Limited
Derwent Cogeneration Limited

2008
£m

82.9
0.4
303.7
60.7

0.3
0.1

2007
£m

93.7
3.8
305.0
22.3

–
2.0

2008
£m

57.0
–
0.4
–

7.5
9.5

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.

During the year, the Company entered into the following transactions with its subsidiaries (note 13):

2007
£m

32.5
–
0.6
–

6.7
6.9

2007
£m

–
–
64.7
–
–

2008
£m

–
–
67.6
–
–

858.1

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

30. Commitments and Contingencies

Scottish and Southern Energy Annual Report 2008

117
>

Remuneration of key management personnel
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

2008
£000

3,483

2007
£000

3,419

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:

Amount included in the income statement relating to the current year leasing arrangements
Minimum lease payments
Other power purchase agreement capacity fees
Other lease payments

2008
£m

447.3

2008
£m

173.6
87.5
7.8

268.9

2007
£m

450.8

2007
£m

169.2
61.2
5.4

235.8

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 PPA lease is five years.

2008
£m

211.1
596.9
331.9

1,139.9

16.9
25.1
72.0

114.0

228.0
622.0
403.9

1,253.9

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

The obligations under power purchase agreements with various power generating companies are not deemed to qualify as finance leases
under IAS 17.

Scottish and Southern Energy Annual Report 2008

05 Notes on the Financial Statements for the year ended 31 March 2008 continued 118
>
30. Commitments and Contingencies (continued) 31. Analysis of net debt

(ii) Operating lease commitments continued

(b) Leases as lessor:
The Group leases out two combined heat and power plants under finance leases. The leases typically run for a period of 15 years, with an average
of nine years to run, with an option to renew the lease after that date. None of the leases include contingent rentals.

The future minimum lease payments under non-cancellable leases are as follows:

Within one year
In second to fifth years inclusive
After five years

2008
£m

0.3
1.0
0.8

2.1

2007
£m

0.3
1.0
1.0

2.3

During the year ended 31 March 2008 £0.3m was recognised as rental income in the income statement (2007 – £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.

(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

2008
£m

34.9
437.0
120.5

2007
£m

50.0
379.9
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 Electric
pension scheme in respect of the funding required by the scheme.

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.

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 2007
£m

Decrease in
cash and cash
equivalents
£m

(Increase)/
decrease
in debt
£m

At
31 March 2008
£m

56.1
(7.7)

48.4

(2,287.9)
(1.1)
7.7

(2,281.3)

199.2
(4.5)

194.7

–
–
–

–

–
–

–

(1,632.7)
0.5
4.5

(1,627.7)

255.3
(12.2)

243.1

(3,920.6)
(0.6)
12.2

(3,909.0)

Net debt

(2,232.9)

194.7

(1,627.7)

(3,665.9)

(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 £nil (2007 – £10.4m) of fair value adjustments to borrowings (note 21).

Scottish and Southern Energy Annual Report 2008

119
>

Company Communications
Following the introduction of the Companies
Act 2006 shareholders now have a choice
on how to receive company communications
such as the annual report.

Benefits of eCommunication
k Shareholders will receive email

notification of the availability of the
interim results and have access to annual
reports and company announcements.

k Shareholders can lodge their proxy

A letter from the Chairman was sent to
shareholders as part of the dividend mailing
in March 2008 asking shareholders to elect:

appointments securely over the internet.
k A donation of £2 will be made to WWF’s
International Forest Programme.

k to receive email notification of company
communications, view documentation
online and lodge their proxy over the
internet;

k to receive written notification of the

availability of company communications
on the website; or

k to continue to receive paper copies
of company communications.

eCommunications Programme
Shareholders can help Scottish and Southern
Energy reduce its impact on the environment
and save paper by electing to receive company
communications electronically by joining the
eCommunications Programme.

A donation of £2 will be made to WWF’s
International Forest Programme.

Registering for the
eCommunications Programme
Shareholders can register their email
addresses by visiting the company’s website
www.scottish-southern.co.uk/ecomms
(shareholders will be asked to provide their
Shareholder Reference Number).

Keep us Informed
Where delivery of an email fails, the company
is required to recommence sending paper
copies of documents. Shareholders can help
to avoid this by:

k keeping the company informed of changes

to their email addresses by visiting
www.scottish-southern.co.uk/ecomms
and clicking on the ‘click here’ link
and following the instructions under
‘address change’; and

k regularly clearing out their inboxes.

Multiple Share Accounts
If shareholders receive more than one Annual
Report mailing, this may be due to having
more than one share account due to minor
differences in name and address details.
Shareholders can merge multiple share
accounts by completing a Multiple Share
Account Form. Shareholders can obtain
a form by calling the registrar’s dedicated
shareholder helpline on 0845 143 4005.

A donation of £2 will be made to WWF’s
International Forest Programme for every
merged share account.

06 Shareholder Information

Company’s Website –
www.scottish-southern.co.uk
The company’s website contains a wide
range of information including 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.

Shareholder Services
Scottish and Southern Energy offers a
number of services including:

k elect for eCommunications;
k telephone and internet share dealing

services with ShareGift option;
k merge multiple share accounts; and
k dividend reinvestment plan.

Further information on these services and
other services can be found on the company’s
website at www.scottish-southern.co.uk>
investor centre>shareholder services.

Shareholder Enquiries
Shareholders 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 BS99 6ZY.

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. Online proxies can be checked
and updated up until 12 noon on 22 July 2008
(48 hours prior to the AGM).

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.

120
>

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 2008.
k Corporate Responsibility Report 2008.

Scottish and Southern Energy Annual Report 2008

06 Shareholder Information continued

Financial Calendar
Annual General Meeting
24 July 2008

Ex dividend date
20 August 2008

Record date
22 August 2008

Final dividend payable
26 September 2008

Interim announcement
12 November 2008

The Group’s half-year results will be
published on the company’s website at
www.scottish-southern.co.uk on 12 November
2008, and will detail ex dividend and record
dates for the interim dividend payable in
March 2009. Paper copies of the half-year
results are not distributed to individual
shareholders, although shareholders who
have elected for eCommunications receive
notification of the publication of the half-year
results on the company’s website.

Dividend Reinvestment Plan (DRP)
The DRP is a simple and cost effective
way to build shareholding in the company
by using cash dividends to buy additional
shares. Shareholders can join the DRP by
downloading a Dividend Reinvestment Plan
Mandate Form and the Terms and Conditions
from www.scottish-southern.co.uk>investor
centre>shareholder services>dividend
reinvestment or telephoning the dedicated
shareholder helpline on 0845 143 4005 to
request a form.

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
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.

The value of shares can fall and
shareholders may get back less than
they invest. Shareholders should consult
a professional adviser authorised under
the Financial Services and Markets Act 2000
if they are in any doubt about the suitability
of an investment.

Designed and produced by Tayburn Corporate

Answering
the right
questions

Scottish and Southern Energy plc
Annual Report 2008

S
c
o
t
t
i
s
h
a
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d
S
o
u
t
h
e
r
n
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n
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A
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R
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p
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2
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8

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
and utility businesses.

Shareholders expect companies not simply to be
profitable, but to be responsible in how those profits are
made. For SSE, this means that its Generation activities
should be as sustainable as possible and that the energy
it supplies should be as affordable as possible. In addition,
its networks should be reliable and its energy-related
services dependable.

For further information about
Scottish and Southern Energy, please contact:

Scottish and Southern Energy plc
Corporate Affairs
Inveralmond House
200 Dunkeld Road
Perth PH1 3AQ

+44 (0)1738 456000
T:
E:
info@scottish-southern.co.uk
W: www.scottish-southern.co.uk
Registered in Scotland No. 117119

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