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For further information
about SSE, please contact:
Scottish and Southern Energy plc
Corporate Affairs
Inveralmond House
200 Dunkeld Road
Perth PH1 3AQ
UK
T: +44 (0)1738 456000
E: info@sse.com
www.sse.com
Follow the latest news
from SSE on Twitter at:
www.twitter.com/sseplc
Registered in Scotland No. 117119
STOCK CODE 008234
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aim to minimise the impact on our environment. The papers chosen –
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100% recovered waste respectively and conform to government
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mixed sources grade. Both the paper mill and printer involved
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The printer is also registered as a Carbon Neutral company.
Scottish and Southern Energy plc
Annual Report 2010
Introduction to SSE
01
What SSE does
02
How SSE provides energy
Directors’ report
04
05
06
Key performance indicators
Principal assets
Chairman and Chief Executive
Questions and answers
Strategic overview
Financial overview
Performance indicators
Business overview
Corporate governance
Chairman’s introduction
The SSE team
Risk management
How the Board works
Audit Committee
Risk and Trading Committee
Nomination Committee
Safety, Health and Environment
Advisory Committee
Remuneration Report – Introduction
Remuneration Report – At a glance
Remuneration Report – Remuneration
explained
Remuneration Report – Remuneration
in detail
Other statutory information
08
11
16
20
47
47
48
52
56
60
62
63
64
65
66
67
72
75
Financial statements
77
78
79
80
81
83
85
85
94
97
98
Independent auditors’ report
Consolidated income statement
Statement of comprehensive income
Balance sheets
Statement of changes in equity
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
remeasurements
99
100
101
102
103
104
108
109
110
113
115
117
117
118
118
118
119
119
123
124
125
125
129
133
146
148
149
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. Biological assets
13. Investments
14. Subsidiary undertakings
15. Acquisitions and disposals
16. Inventories
17. Trade and other receivables
18. Cash and cash equivalents
19. Trade and other payables
20. Current tax liabilities
21. Construction contracts
22. Loans and other borrowings
23. Deferred taxation
24. Provisions
25. Share capital and reserves
26. Retirement benefit obligations
27. Employee share-based payments
28. Financial instruments and risk
29. Related party transactions
30. Commitments and contingencies
31. Post balance sheet events
Shareholder information
150
151
Shareholder information
Glossary
* 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.
Designed and produced by Tayburn Corporate
01
Scottish and Southern Energy
Annual Report 2010
What SSE does
Introduction to SSE
Directors’ report
Financial statements
Shareholder information
SSE’s core purpose is to provide the
energy people need in a reliable
and sustainable way.
Its strategy is to deliver sustained
real growth in the dividend payable
to shareholders through the efficient
operation of, and investment in, a
balanced range of market-based
and economically-regulated
businesses in energy production,
storage, distribution, supply and
related services, mainly in the UK
and Ireland.
This Annual Report sets out what
SSE achieved in 2009/10 and its
plans for 2010/11 and beyond.
Dividend – pence per share
’10 70.0
’09 66.0
’08 60.5
’07 55.0
’06 46.5
’05 42.5
’04 37.7
’03 35.0
’02 32.4
’01 30.0
’99 25.7
’00 27.5
80
70
60
50
40
30
20
02
Scottish and Southern Energy
Annual Report 2010
How SSE provides energy
Generation
Supply
Fuel Production
and Storage
Energy
Services
Networks
Market based
Gas-fired power
Wind power
Electricity supply
Gas production
Gas storage
Electricity transmission
Coal-fired power
Hydro power
Gas supply
Utility solutions
Street-lighting
Electricity distribution
Biomass power
Emerging technologies
Home services
Metering
Telecom networks
Gas distribution
Generation
Supply
Fuel Production
Energy
and Storage
Services
Networks
Market based
03
Introduction to SSE
Directors report
’
Financial statements
Shareholder information
Economically regulated
Gas-fired power
Wind power
Electricity supply
Gas production
Gas storage
Electricity transmission
Coal-fired power
Hydro power
Gas supply
Utility solutions
Street-lighting
Electricity distribution
Biomass power
Emerging technologies
Home services
Metering
Telecom networks
Gas distribution
04
Scottish and Southern Energy
Annual Report 2010
Key performance indicators
Dividend – pence per share
’08
60.5
’07
55.0
’06
’05 46.5
’04 42.5
’03 37.7
35.0
’02
32.4
’01
30.0
’00
27.5
’99
25.7
Dividend – composition
’10
’09 70.0
66.0
Interim 30% (21.0p)
Final 70% (49.0p)
Dividend cover – times
Adjusted earnings per share* – pence
2010
2009
2008
2007
2006
1.57
1.57
1.73
1.68
1.61
2010
2009
2008
2007
2006
110.2
108.0
105.6
92.5
74.7
Adjusted profit before tax* – £m
Operating profit by business – £m
2010
2009
2008
2007
2006
1,290.1
1,253.7
1,229.2
1,079.3
873.9
Generation and Supply
Energy networks
Gas storage
Telecoms
Contracting, Connections and Metering
2008
2009
2010
711.1
832.0 896.0
544.4
584.2 599.5
50.9
14.3
68.7
42.7
15.5
74.8
41.8
16.4
80.2
Capital expenditure – £m
Capital expenditure 2009/10 – %
2010
2009
2008
2007
2006
810.3
663.4
502.1
1,315.2
1,279.8
Thermal generation 11
Renewable generation 51
Power systems 25
Gas storage 4
Other 9
Safety, sustainability and teamwork
Total Recordable Injury Rate – per 100,000 hours worked
Power station CO2 emissions – grams per kWh
Reportable environmental incidents
Number of employees
2006
2007
2008
2009
2010
N/A
622
0
N/A
555
0
N/A
0.16
0.14
496
491
494
1
1
2
12,287 13,427 16,892 18,795 20,177
80
70
60
50
40
30
20
Principal assets
05
Introduction to SSE
Introduction to SSE
Directors’ report
Directors’ report
Financial statements
Financial statements
Shareholder information
Shareholder information
Generation capacity – MW
Generation capacity – composition %
2010
2009
2008
2007
2006
11,330
10,740
10,530
10,017
10,015
Gas/oil 40
Coal/biomass 39
Renewable 21
Energy customer numbers – millions
Energy customer numbers – composition %
2010
2009
2008
2007
2006
9.35
9.10
8.49
7.75
6.70
Household electricity (GB) 55
Household gas (GB) 38
Business sites (GB) 5
Household/business (Ire) 2
Networks regulated asset value – £bn
Networks regulated asset value – %
2010
2009
2008
2007
2006
4.9
4.7
4.5
4.2
4.1
SHEPD 17
SEPD 35
SHETL 8
SGN (50% share) 40
Gas storage capacity – million cubic metres
Gas storage capacity – composition %
2010
2009
2008
2007
2006
400
325
325
325
325
Aldbrough 19
Hornsea 81
Other assets and contracts
Telecoms network (owned and leased) – km
Contracting order book – £m
Out-of-area networks in operation
Water inset appointments
2006
2007
2008
2009
2010
7,500 7,500 8,000 10,300 11,200
87
19
95
24
N/A
N/A
99
33
1
101
115
47
2
53
5
06
Scottish and Southern Energy
Annual Report 2010
Chairman and Chief Executive
Questions and answers
In SSE, the Chairman (Lord Smith of
Kelvin, below right) is responsible for
the operation of the Board, ensuring
it works effectively. The Chief Executive
(Ian Marchant, below left) is responsible
for the management of the business,
implementing the strategy and policies
agreed by the Board. Here they answer
key questions about SSE’s performance
and plans for the future.
How would you sum up SSE’s
performance in 2009/10?
Robert k It was business as usual, in that
the Company delivered a 2.9% increase in
adjusted profit before tax* and the Board
is recommending a 6.1% increase in the
full-year dividend. Since it was formed in
1998, SSE has achieved 11 successive years
of increasing profits and dividend. That’s
quite a track record to build on in the future.
Ian k Solid. As well as turning in a sound
financial performance, we continued to
lead the sector in customer service in both
energy supply and electricity distribution.
Our power stations and electricity networks
performed well. Most encouragingly of all,
our safety performance was the best ever
in SSE’s history. We want to make it better
still, and safety will continue to be a big
priority in 2010/11.
What was the rationale for the new
dividend targets for 2010/11 onwards?
Ian k In the half-year results in November
2009, we said that our priority in setting
new dividend targets would be to make
sure that they are realistic and attainable,
thereby giving shareholders the fullest
possible confidence in their achievability.
That’s what our targets for dividend growth
are designed to do. We believe that a target
of annual real dividend growth of at least
2% in each of the three years to March 2013
is the right way forward.
You’ve always said dividend growth
is supported by investment, and SSE’s
capital and investment expenditure
is now well over £1bn a year. Are you
confident of the Company’s ability to
manage investment on this scale?
Robert k Confident, yes; complacent, no.
The SSE team has managed a wide range
of capital investment projects over the last
few years and delivered major new assets.
That said, some projects have taken
longer than expected and there have
been difficulties at others. So we have
no grounds for complacency. The positive
thing, however, is that capital investment
is an area in which SSE has now built up
significant experience and capability. That’s
what gives me confidence for the future.
07
Introduction to SSE
Directors’ report
Financial statements
Shareholder information
No two years are the same. Do any
particular risks stand out for 2010/11?
Robert k Like any responsible Board,
we take risk management very seriously.
We have a pretty low appetite for risk and
would never regard ‘boring’ as a negative
tag to be shaken off; quite the reverse.
More specifically as a Board we’ll again
be keeping a close eye on the investment
programme because of its scale and
significance for the future.
Ian k 2010/11 will obviously be influenced
by the uncertain economic outlook.
However, SSE is in the business of
providing something – energy – that
people need, rather than want. We also
set great store by having a balanced
range of market-based and economically-
regulated businesses. So the economic
risk is manageable and doesn’t threaten
our big priorities.
As we look at things in 2010, much of the
focus for SSE’s sector is already on 2020
and the stretching EU and UK targets for
renewable energy and carbon emissions
reductions. What part do you think SSE
can play over the next decade in
achieving those targets?
Robert k I take a very hard-headed view
of this. The world’s natural resources
are being used up at an unsustainable
rate. That’s why we have to make rapid
progress in reducing dependency on
carbon, and a successful SSE, capable of
financing and delivering major investment
programmes over the next decade and
beyond, should be in a prime position to
help in the transition towards a lower-
carbon economy.
Ian k We’ll help customers transform
the way they consume energy. We’ll also
invest in low-carbon energy production
and better ways of distributing energy.
We are very well-placed, having already
made significant commitments to, and
investments in, electricity generation,
energy networks, supply and services.
We have a low-carbon vision for SSE,
and we’re working hard to realise it.
Ian k The assets we are developing are
intended to last for decades and any
short-term difficulties obviously have to
be seen in that context. We do continually
evaluate our investment programme and
have no doubt that the value needed to
support our new dividend growth targets,
and sustained real growth over the long
term, is being created.
Did the Board review SSE’s strategy in
2009/10 and, if so, what was the outcome?
Robert k We did have lengthy discussions
on strategy, to make sure that sustained
annual real growth in the dividend, which
is our first responsibility to shareholders,
is deliverable. Those discussions
confirmed that our strategy – operating
and investing in a range of market-based
and economically-regulated energy
businesses – is right for the future.
Are you confident about the Company’s
ability to finance investment on the scale
that’s likely to be necessary over the
next few years?
Ian k Yes. SSE is a well-financed company
with a strong balance sheet, which is
carefully maintained. We’ve also shown
that we will move quickly to take the right
financing options, including bonds, loans
and, should new investment or acquisition
opportunities arise, equity.
Robert k Maintaining a strong balance
sheet is one of SSE’s key financial
principles the Board sticks to. Another
is making sure that investments are
well-founded. They should be capable of
earning returns above the cost of capital
and they should enhance earnings and
contribute to dividend growth.
Are dividends being paid and investments
being financed by keeping household
energy prices higher than they need to be?
Ian k No. Unit prices started coming down
in March last year and we followed that
up with another package of changes this
March. Household bills are also coming
down because all the energy efficiency
investment we’ve made in recent years is
now really working, with gas consumption
falling over the last few years. That is the
sustainable way forward, in every sense.
Energy bills are controversial and so is
Executive remuneration. The Association
of British Insurers has said that Executive
Directors’ remuneration should be
designed to ‘contribute to the creation
of sustainable long term value’. Do you
think that is the case at SSE?
Robert k Yes, without a doubt. SSE’s team
of Executive Directors are obviously well-
paid but they are certainly not over-paid.
They have all been with the Company since
it was formed in 1998, and they are clearly
delivering sustainable long-term value.
Under their leadership, SSE has increased
profits and dividends every year, while
improving service to customers and
investing in the country’s energy future.
Does SSE have strength in depth
among its employees?
Ian k As Executive Directors, Colin Hood,
Gregor Alexander, Alistair Phillips-Davies
and I all depend on the excellent work
done by the rest of the management
team and everyone else throughout SSE.
I might be the captain, but I’m only one
member of an experienced, committed
and talented team and it’s a privilege to
work with them. This is an organisation
that is built to last, and I believe we have
the strength in depth to make sure it will.
Employee issues, Executive
remuneration and energy bills would
often be tagged ‘corporate responsibility’
issues. How does SSE handle the
corporate responsibility agenda?
Robert k I’ve been involved with many
companies over the years, and I’ve also
done some work with the likes of Scottish
Business in the Community, and I have
to say I like the SSE approach. There is no
corporate responsibility division. It’s not
an add-on. It’s up to the Board and every
employee to deliver responsible business
practice every day. This approach is
supported by a very strong set of core
values and I think it works well.
Ian k We’ve taken the integrated approach
a step further this year, and decided not to
produce a separate Corporate Responsibility
Report. There is a lot of information on our
Company website, but the basic principle
is that this Report should set out SSE’s
approach to, and performance in, business
and should in itself enable people to judge
whether SSE is a responsible company.
What are SSE’s big priorities for 2010/11?
Ian k The same as every other year:
safe working; excellent customer service;
well-run power stations and energy
networks; good progress on major capital
investment projects; and cost efficiency.
Robert k I’d just like to add that the fact
SSE’s priorities are no different this year
from last is a strength. It’s when they start
changing that you have to worry!
08
Scottish and Southern Energy
Annual Report 2010
Strategic overview
Purpose, strategy and principles
SSE’s core purpose is to provide the energy
people need in a reliable and sustainable
way. In line with this, its strategy is to deliver
sustained real growth in the dividend
payable to shareholders through the efficient
operation of, and investment in, a balanced
range of market-based and economically-
regulated businesses in energy production,
storage, distribution, supply and related
services, mainly in the UK and Ireland.
Implementation of this strategy continues
to be founded on SSE’s well-established
financial principles. These principles are the:
k effective management of core
businesses;
k maintenance of a strong balance sheet;
k rigorous analysis to ensure
investments are well-founded and,
where appropriate, innovative;
k deployment of a selective and
disciplined approach to acquisitions; and
k use of purchase in the market of the
Company’s own shares as the
benchmark against which financial
decisions are taken.
It is the application of these principles
which supports the fulfilment of SSE’s
first responsibility to shareholders: the
delivery of sustained real dividend growth.
SSE’s strategy provides it with three key
advantages:
k while energy is at their core, SSE
has a diverse range of businesses;
k within those businesses, SSE has
a diverse range of assets; and
k to add to those assets, SSE has a
diverse range of investment options.
than do other companies with less
diversity within their business model.
Delivery against purpose, strategy
and principles
The Board is recommending a final
dividend of 49p per share, making a
full-year dividend of 70p, an increase of
6.1% on the previous year. The full-year
dividend payment for 2009/10 is covered
1.57 times by SSE’s adjusted profit after
tax and is double the dividend per share
paid seven years ago, in 2002/03.
The first full-year dividend was paid by
SSE in 1999, so the recommended full-year
dividend increase of 6.1% represents the
eleventh successive above-inflation dividend
increase since then. SSE is one of just seven
FTSE 100 companies to have delivered
better-than-inflation dividend growth every
year during this period, and ranks fourth
amongst that group in terms of compound
annual growth rate over that time.
This real growth in the dividend, sustained
since SSE was formed, has been supported
by growth in SSE’s main business areas,
achieved as a result of operational efficiency,
investment and, in some cases, acquisition:
k through investment and acquisition,
the Regulated Asset Value (RAV) of
SSE’s energy networks businesses has
doubled in five years, to over £4.9bn;
k also through investment and
acquisition, the capacity of SSE’s
power stations has almost doubled
in six years, to 11.3GW; and
k as a result of effective operation
of core businesses, the number of
customer accounts to which SSE
supplies energy has doubled in eight
years, to over 9.3 million.
SSE is the only energy company listed
on the London Stock Exchange that owns
and operates economically-regulated
businesses, such as electricity networks,
and market-based businesses, such as
electricity generation and energy supply,
in the UK. This means it is able to pursue
operational, investment or acquisition
opportunities throughout the electricity
and gas sector to achieve consistently the
levels of profitability required to support
sustained real dividend growth.
It also means that SSE is able to derive
stable and more predictable levels of
profit from some of its activities and
more variable levels from others (which,
in turn, have greater potential for growth).
As a result of this balance, SSE has
greater resilience to risks associated
with shorter-term trends or issues
within its sector or the wider economy
This, allied to SSE’s expansion in
contracting, connections, metering, gas
storage and other businesses makes SSE
the biggest and broadest-based energy
company in the UK and the fastest-
growing energy company in Ireland.
Future environment
The need to secure energy to heat
and power homes, organisations and
businesses, and the need to safeguard
the environment for future generations,
means the framework within which energy
companies operate is, and will remain, a
major public policy issue in the UK and
Ireland and in the EU as a whole.
The context for energy policy in the UK
and Ireland, SSE’s principal areas of
operation, is set by the EU 2020 Climate
and Energy Package, adopted in April
2009, and the EU Renewable Energy
Directive, which came into force in May
2009. The Directive requires Member
States to deliver on average 20% of their
final energy consumption by 2020 using
renewable energy sources. The UK target
is that 15% of all energy (electricity,
heat and transport) should come from
renewables by 2020. This target is the
most challenging of any EU Member State
because, to achieve it, around 30% of the
electricity consumed in the UK will have to
come from renewable sources, compared
with just 5.5% at present; for Ireland a
similar step-change in renewable energy
output will be necessary.
In February 2010, the second report of the
UK Industry Taskforce on Peak Oil & Energy
Security, of which SSE is a member, was
published. Called ‘The Oil Crunch’, the
report said ‘it seems inevitable that global
demand will move to a point where it
consistently exceeds supply. The effect
must be a structural increase in oil prices,
coupled with the prospects of oil shortages
and a consequent increase in market
volatility. The only questions are “how soon
and by how much?”’. At the same time,
some analysis suggests that natural gas
produced from shale could become an
increasingly important source of energy
over the next decade.
In addition, the period to 2020 will see:
k the closure of a number of coal- and oil-
fired power stations by 2015, under the
EU’s Large Combustion Plant Directive;
k many nuclear power stations reaching
the end of their design lives, with
a number of advanced gas-cooled
reactor (AGR) stations scheduled
to close from 2014 onwards;
k the age and relative efficiency of
a number of older gas-fired power
stations becoming an increasingly
significant issue; and
k the growing use of electricity to meet
heat and transport needs so that its
share of total energy demand
increases significantly.
In July 2009, Ernst & Young estimated that
£199bn of investment is needed by 2025
to meet the UK’s energy goals. In October
2009, the UK energy regulator, Ofgem,
published a comprehensive review of
Britain’s energy supplies which concluded
that investment of up to £200bn is needed
to secure energy supplies and meet carbon
emissions targets (excluding UK Continental
Shelf gas production). It updated its review
in February 2010 and stated that ‘the risks
to gas security of supply remain high in
the latter half of this decade’.
09
Introduction to SSE
Directors’ report
Financial statements
Shareholder information
Dividend – pence per share
2010
2005
70.0
42.5
Networks regulated asset value – £bn
2010
2005
2.5
4.9
Power station capacity – GW
2010
2005
11.3
9.9
the EU Climate and Energy Package and
Renewable Energy Directive, the prospect
of an ‘oil crunch’, the requirement to
safeguard energy supplies and the
introduction of smart meters will mean
the following priorities will feature in its
business activities:
k Generation: developing new capacity
to produce electricity in a sustainable
way that supports the transition to a
lower-carbon economy;
k Supply: helping to keep electricity and
gas bills as affordable as possible by
offering ways to enable and encourage
customers to be more efficient in their
use of energy;
k Fuel Production and Storage: securing
gas supplies to meet future energy
needs and helping maintain dependable
supplies by providing more storage
capacity for the UK, as imports of
gas rise;
k Networks: ensuring the distribution
of energy remains reliable through
investment in networks, as sources and
use of electricity and gas change; and
k Services: meeting customers’
requirements for energy products
and services that are needed for the
transition to a lower-carbon economy.
As the UK becomes increasingly dependent
on imports of energy, and as the need for
action to replace its ageing infrastructure
and to de-carbonise its economy continues
to intensify, the importance and value of
efficient electricity generation and energy
storage, distribution, supply and services will
all increase. SSE, as the broadest-based
energy company in the UK and the fastest-
growing energy company in Ireland, is in a
good position to help provide the services
and infrastructure that energy customers in
the UK and Ireland will need and thus secure
continuing, sustained real dividend growth.
Outlook for 2010/11 and beyond
The economic outlook for 2010/11 continues
to be uncertain. In this context, SSE offers
three key advantages, enabling it to deliver
a consistent financial performance:
k
k
k
its core purpose is to provide energy,
which is something that people need,
rather than want;
its strategy of maintaining a balanced
range of economically-regulated and
market-based energy businesses
reduces the risk associated with any
particular business activity and
provides a broad platform from which
to maintain sustained real dividend
growth; and
its over-riding financial goal – sustained
real dividend growth – is straightforward
and moderate.
Taking account of the current and
future environment and its impact on the
energy sector in the UK and Ireland, SSE’s
operational priorities during 2010/11 are to:
k carry out all work in a safe and
responsible manner, with a lower
Total Recordable Injury Rate;
k deliver maximum efficiency
throughout all business activities;
k maintain and build on sector-leading
performance in all aspects of
customer service, from energy
supply to energy networks;
The coming decade will also see, in Great
Britain, the installation of smart meters
in every home, to allow the quantity and
value of electricity and gas used by the
customer to be continuously monitored
and to ensure that information about its
use and cost is available to the customer
and exchanged with the supplier through
two-way electronic communications.
The new UK government has agreed to
implement a programme of measures
to fulfil its ambitions for a ‘low-carbon
and eco-friendly economy’. It has agreed
to seek to increase the target for energy
from renewable sources, subject to the
advice of the Climate Change Committee.
It also proposes to establish an emissions
performance standard that will prevent
coal-fired power stations being built
unless they are equipped with sufficient
carbon capture and storage (CCS) to meet
an emissions performance standard. SSE
is confident it will be able to continue to
work with MPs from all parties to ensure
UK energy policy can deliver secure,
affordable and lower-carbon energy.
Economic development
Investment on the scale required
demonstrates how the transition to a low-
carbon economy represents a substantive
opportunity to create jobs in the UK and
Ireland. For example, in October 2009,
SSE selected Glasgow as the location for
its new Centre of Engineering Excellence
for Renewable Energy, in partnership with
the University of Strathclyde. This will
lead to the creation of around 300 skilled
professional ‘green’ jobs over the next
three years. Already, SSE directly employs
over 800 people in the development or
operation of projects or programmes
to reduce the carbon dioxide impact of
energy production and consumption.
The Offshore Valuation Group, an informal
collaboration of government and industry
organisations, concluded, in May 2010,
that the rapid development of the UK’s
offshore resource – using fixed wind,
floating wind, tidal stream, tidal range and
wave technologies – could ‘generate the
electricity equivalent of one billion barrels
of oil per year, or the same as the average
annual output of UK North Sea oil and gas
over the past four decades’. It estimates
that the supply chain necessary to achieve
this would have annual revenues of
over £60bn in 2050 and could employ
around 145,000 people in manufacturing,
installation, operations and maintenance.
Priorities for SSE
SSE welcomes the focus on sustainability
and security in energy, and believes that
10
Scottish and Southern Energy
Annual Report 2010
Strategic overview (continued)
k
increase the total number of
energy supply and home services
customer accounts across the Great
Britain and Ireland markets, while
supporting progress towards
increased energy efficiency;
k ensure power stations maintain a
high level of availability to generate
electricity in response to customers’
needs and market conditions; and
k focus on cost control and customer
relationship management to sustain its
energy services businesses through the
current period of economic uncertainty.
Its investment priorities are to:
k deliver additional assets in renewable
energy, electricity networks and gas
storage which contribute to secure
and lower-carbon supplies of energy;
k meet other key milestones in its
investment programme in generation,
electricity networks and gas storage;
and
k take forward the additional options that
it has identified for investment from the
middle of this decade onwards.
The delivery of a strong operational
performance and the achievement of its
investment priorities should enable SSE
to discharge its first responsibility to
shareholders: to deliver its full-year
dividend target.
Future dividend
According to Capita Registrars Dividend
Monitor, published in February 2010,
dividend payments by UK companies fell by
15% in 2009, compared with the previous
year. As Capita said: ‘Dividends matter.’
Dividends have always mattered to
SSE, as the delivery of above-inflation
increases in every year since it was
formed demonstrates. In the period to
2003, dividend growth was supported
principally by efficient operations:
securing the synergies arising from
the original merger of Scottish Hydro
Electric and Southern Electric in 1998.
In the subsequent period, it continued
to be supported by efficient operations,
some capital investment and principally by
acquisitions which were successful because
they were founded on SSE’s key financial
principle for deal-making: discipline.
This period culminated in the acquisition
of Airtricity in February 2008, one of the
stated objectives of which was to ‘provide
SSE with a major new range of investment
opportunities from which to secure
dividend growth over the next decade’,
adding to established opportunities in
renewable energy, thermal generation,
electricity networks and gas storage.
Following the general decline in UK dividend
payments in 2009, SSE remains acutely
aware of the importance of sustained real
growth in the dividend. It is also mindful
of the need to ensure that any future
dividend targets are realistic, attainable
and consistent with financing future
investment in assets which, in turn,
will provide the additional cash flows
to support further dividend growth.
Against this background, and taking
account of the breadth of operational
and investment opportunities that exist
throughout its business, SSE’s new target
is to deliver annual increases in the
dividend of at least 2% more than Retail
Price Index (RPI) inflation in each of the
three years to March 2013, with sustained
real growth thereafter. For this purpose,
inflation is defined as the average annual
rate across each of the 12 months to
March. SSE believes that these targets
can be achieved while maintaining a
dividend cover consistent with its
established range.
Assuming inflation of 2.8% (the average
rate in the five years to March 2010)
over each of the next three years, the
achievement of these above-inflation
targets will mean SSE’s full-year dividend
per share in 2013 will reach at least 80p,
which is more than three times the first
dividend it paid, in 1999.
Throughout this three-year period, SSE
will be undertaking a major programme
of investment in assets which, in turn,
will earn revenue to support sustained
real dividend growth in the period from
2013 onwards.
Safety and environment
While SSE’s first responsibility to
shareholders is to deliver sustained
real growth in the dividend, it will only
be able to achieve this if it exercises a
wider corporate responsibility to others,
such as customers and employees, on
whom its success ultimately depends.
It seeks to do this by maintaining a
strong emphasis on its six core values,
the ‘SSE SET’ of Safety, Service, Efficiency,
Sustainability, Excellence and Teamwork.
In particular, SSE believes that the
effective management of safety issues
is a barometer of effective management
of all operational issues.
In 2009/10, SSE’s safety performance was as
follows (comparisons with the previous year):
k the Total Recordable Injury Rate,
which includes lost-time, reportable
and medical treatment injuries, was
0.14 per 100,000 hours worked,
compared with 0.16;
k the Accident Frequency Rate (lost-time
and reportable injuries) was 0.03 per
100,000 hours worked, compared with
0.07; and
k the total working days lost from injury
was 73, down from 361.
SSE’s target for any given year is zero
environmental incidents which result
in it being served with a formal statutory
notice by a government environment
protection agency. There were two such
incidents in 2009/10: fuel spills at Havant
and Tummel Bridge. In November 2009,
SSE was fined £20,000 under the Water
Environment (Controlled Activities)
(Scotland) Regulations 2005 and the
Water Environment and Water Services
(Scotland) Act 2003 following an
escape of diesel from a holding tank
at its Loch Carnan power station on
Uist in November 2008.
Risk management
SSE’s overall business model, and strategy
and culture, is designed with risk firmly
in mind. It has:
k a clear and moderate financial goal –
sustained real growth in the dividend;
k a well-established strategy based on
a balanced range of economically-
regulated and market-based energy
businesses;
k a business model which features
diversity of assets within those
businesses, thereby limiting the
value and extent of, and exposure
to, any single risk;
k a limited appetite for, and tolerance
of, business risk;
k a commitment to effective
identification, monitoring and
management of risks; and
k a clear and transparent decision-
making process.
On Board decision-making, specific
findings from the independent review of
SSE Board effectiveness, carried out in
the autumn of 2009 by Independent Audit
Ltd, included ‘a remarkable consensus
of opinion’ on the following:
k there is ‘an open, informal
atmosphere which encourages
everyone to contribute’;
k discussion is ‘rigorous’; and
k the Executive Directors ‘respond
positively and constructively
to challenge’.•
Financial overview
11
Introduction to SSE
Directors’ report
Financial statements
Shareholder information
Financial results for 2009/10
These results for the year to 31 March
2010 are reported under International
Financial Reporting Standards, as adopted
by the EU. SSE’s focus has consistently
been, and remains, 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.
This ‘adjusted profit before tax*’ was first
adopted as a key performance indicator
by SSE in 2005/06, and it has been applied
consistently since then. It reflects the
underlying profits of SSE’s business and
the basis on which it is managed and avoids
the volatility introduced by IAS 39. The table
below reconciles SSE’s reported profit
before tax to its adjusted profit before tax*.
IAS 39 requires companies to record
certain forward commodity contracts
that are deemed to be derivative financial
instruments at ‘fair value’. At 31 March
2010, there was a net derivative financial
liability in SSE’s balance sheet arising from
IAS 39 of £985.1m, before tax, compared
with a net liability of £1,423.6m, before tax,
at 31 March 2009.
The liability principally relates to some
forward commodity purchase contracts
for gas, coal, oil, carbon and wholesale
electricity that SSE, like all major energy
suppliers, has to enter into to ensure that
the future requirements of its customers
are met. IAS 39 requires SSE to record
these contracts at their ‘fair value’. This
involves comparing their contractual price
against the prevailing forward market price
at the financial year end. At 31 March 2010
the average contractual price was higher
than the market price (in other words,
’out of the money’), albeit by a smaller
amount than at the same time last year,
leading to a smaller liability.
Thus the movement on derivatives under
IAS 39 of £399.8m shown in the table
below and on the face of the income
statement is primarily due to a reduction
in the ‘out of the money’ position on
commodity contracts between 31 March
2009 and 31 March 2010. SSE sets out
these movements in fair value separately,
as remeasurements, as they do not
reflect the underlying performance of
the business and the extent of the actual
profit or loss arising over the life of the
contracts giving rise to this liability will
not be determined until they unwind; for
around 50% of the total energy volume,
this will be over the next 12 months.
Adjusted profit before tax* in 2009/10
Adjusted profit before tax* rose by 2.9%,
from £1,253.7m to £1,290.1m. This is
moderate growth, consistent with the
objective which SSE set out in its Annual
Report 2009. SSE’s adjusted profit before
tax reflects four key steps forward in its
Generation and Supply business in 2009/10,
compared with the previous year:
k The installation of flue gas
desulphurisation (FGD) equipment
in early 2009 meant there were no
related restrictions on running hours
at Fiddler’s Ferry and Ferrybridge
power stations.
k The return to service in June 2009
of Medway power station, following a
15-month unplanned outage, meant
the availability of SSE’s gas-fired
power stations to generate electricity
was significantly better.
k There was an increased number
of customer accounts to which SSE
Profit before tax
Reported profit before tax
Movement on derivatives (IAS 39)
Exceptional items
Tax on JVs and Associates
Interest on convertible debt
Adjusted profit before tax*
Adjusted current tax charge
Adjusted profit after tax*
Reported profit after tax
Number of shares for basic and
adjusted EPS (million)
Adjusted EPS*
Basic EPS
March 10
£m
1,638.6
(399.8)
–
51.3
–
1,290.1
(274.1)
1,016.0
1,235.5
921.9
110.2p
134.0p
March 09
£m
53.3
1,262.1
(102.7)
40.4
0.6
1,253.7
(300.4)
953.3
112.3
883.0
108.0p
12.7p
March 08
£m
1,083.8
162.9
(32.8)
10.7
4.6
1,229.2
(317.2)
912.0
873.2
863.2
105.6p
101.1p
supplies electricity and gas in the
Great Britain and Ireland markets
(600,000 more in April 2009 than
in April 2008).
k A better balance between the cost
of energy procured and the cost
of energy supplied was achieved
following the energy supply losses
sustained during the previous financial
year to protect customers from the
worst effects of exceptionally high
wholesale prices.
At the same time however:
k output of renewable energy was
much lower than expected because
of the unusually dry, cold and still
weather conditions experienced during
the winter of 2009/10 and the loss
of output from the Glendoe hydro
electric scheme;
k the achieved price of electricity
produced from renewable sources
was lower; and
k although the output of electricity from
gas- and coal-fired power stations
was higher, the difference between the
cost of the primary fuel and the price
of the electricity generated from it (the
‘spark’ and ‘dark’ spread respectively)
was lower.
Adjusted profit before tax* for 2010/11
SSE’s emphasis is on adjusted profit
before tax* on a full-year, as opposed to
half-year, basis and since it was formed
in 1998 it has delivered 11 successive
increases in adjusted profit before tax*.
Adjusted profit before tax* is an important
measure of performance in any given year.
In SSE’s view, however, adjusted profit
before tax* is not an end in itself and SSE
does not have the goal of maximising
profit in any single year or over any
particular period. It takes a longer-term
view and believes that profit is a means
to an end: sustained real growth in the
dividend, the delivery of which is its first
responsibility to shareholders.
SSE’s adjusted profit before tax* in any
single year will always be determined
by issues such as:
k the availability of its gas- and coal-
fired power stations to generate
electricity;
k the output of renewable energy
from its hydro electric stations
and wind farms;
k the impact of the weather on energy
production and consumption;
k the actual underlying level of
energy consumption;
12
Scottish and Southern Energy
Annual Report 2010
Financial overview (continued)
2010 at a glance:
Investment and
capital expenditure
Thermal generation
investment – £m
146.2
2009 – 216.2
Renewable generation
investment – £m
666.6
2009 – 525.6
Electricity networks
investment – £m
334.5
2009 – 314.6
Gas storage
investment – £m
46.3
2009 – 55.4
Total investment and
capital expenditure* – £m
1,315.2
2009 – 1,279.8
Share of SGN capital expenditure/
replacement expenditure – £m
206.4
2009 – 191.4
* Including some not specified above.
k the interaction between wholesale
prices for energy and fuel and the
prices for the electricity and gas
charged to customers; and
k the timely commissioning of
new assets.
In terms of 2010/11, SSE believes that
its balanced range of market-based and
economically-regulated energy businesses,
and the diversity of opportunities within
those businesses, will deliver a level of
adjusted profit before tax* capable of
supporting the achievement of its new
full-year dividend target.
Adjusted earnings per share*
To monitor financial performance over the
medium term, SSE continues to focus on
adjusted earnings per share* because it
has the straightforward benefit of defining
the amount of profit after tax that has
been earned for each Ordinary Share
and so reflects a clear view of underlying
financial performance. In 2009/10, SSE’s
adjusted earnings per share* were 110.2p,
compared with 108.0p in the previous year.
Dividend
Final dividend for 2009/10
SSE cannot emphasise enough that its first
responsibility to shareholders is to deliver
sustained real growth in the dividend. The
Board is recommending a final dividend
of 49p per share, compared with 46.2p
in the previous year, an increase of 6.1%.
This will make a full-year dividend of 70p,
which is:
k an increase of 6.1% compared
with 2008/09;
k a real-terms increase of 5.6%,
based on the average annual rate of
inflation in the UK between April 2009
and March 2010, which exceeds the
target of 4%;
k the 11th successive real-terms above-
inflation dividend increase since the
first full-year dividend of 25.7p paid
by SSE in 1998/99;
k double the dividend paid in 2002/03,
since when there has been compound
annual growth of 10.4%; and
k covered 1.57 times by SSE’s adjusted
profit after tax.
Dividend target for 2010/11 and beyond
Its newly-adopted targets mean SSE is
aiming to deliver an increase in the full-
year dividend of at least 2% more than
inflation in 2010/11. The same target
is in place for 2011/12 and 2012/13, with
sustained real growth thereafter also
being targeted.
Scrip Dividend Scheme
A resolution will be put to shareholders
at the Annual General Meeting to
propose the introduction of a Scrip
Dividend Scheme. The proposed Scrip
Dividend Scheme is intended to replace
the current dividend reinvestment plan.
It will give shareholders the option to
receive new fully paid Ordinary Shares
in the Company in place of their cash
dividend payments.
Investment and
capital expenditure
Introduction
In March 2008, SSE announced it was
undertaking a five-year capital investment
programme for the period to March 2013
projected to total around £6.7bn – one of
the biggest currently being undertaken in
the UK by a FTSE 100 company. In keeping
with its financial principle that investments
should be ‘well-founded’, SSE believes that
projects within the programme will achieve
returns which are greater than the cost of
capital, enhance earnings and contribute
to dividend growth.
The principal focus of the investment
programme is renewable energy, the
requirement for which is underpinned
by statute at EU and Member State level.
At the same time, significant investment
is also taking place in thermal generation,
electricity networks and in a number
of other areas, such as gas storage. In
addition to its core investment programme,
SSE – through its 50% stake in Scotia
Gas Networks (SGN) – is also making
a significant investment in regulated
gas networks.
All of this investment is in line with SSE’s
core purpose: to provide the energy people
need in a reliable and sustainable way.
It will support the maintenance and
development of assets which are of
strategic significance in the context of the
energy trends identified in the EU 2020
Climate and Energy Package and Ofgem’s
analysis of the UK’s energy supplies
published in October 2009. SSE’s
investment programme is, therefore,
well-founded, in accordance with its
financial principles, and it will deliver:
k a significantly enhanced asset base
in key businesses;
k additional fuel for electricity
production in the form of renewable
sources of energy; and
k additional cash flows and profits, which
will support future dividend growth.
13
Introduction to SSE
Directors’ report
Financial statements
Shareholder information
Capital expenditure – £m
2010
2009
2008
2007
2006
810.3
663.4
502.1
1,315.2
1,279.8
Capital expenditure 2009/10 – %
Thermal generation 11
Renewable generation 51
Power systems 25
Gas storage 4
Other 9
Renewable energy capital
expenditure – £m
666.6
525.6
2010
2009
2008
132.8
2007 92.7
2006
105.6
Underlying interest cover – times
2010
2009
2008
2007
2006
6.3
6.5
11.7
11.0
9.2
Some of SSE’s projects took longer to
complete than the original (often ambitious)
timetable suggested and there have been
difficulties at others, such as the Glendoe
hydro electric scheme. Understanding
project risk (including construction),
implementing best project management
practice, processes and systems,
together with a rigorous ‘lessons learned’
programme, has helped SSE ensure the
delivery of current and future projects.
The development of proven contracting
strategies and the selection of experienced
delivery partners all form part of an
integrated and carefully-governed
management system, ensuring that value is
delivered from the investment programme.
These features are at the heart of the
way SSE takes forward its investment
programme, which is managed by an
experienced team, the members of which
recognise that it is most important to invest
sufficient time and resources during the
development phase of the project.
SSE remains committed to constructing
robust assets, capable of generating
Investment in 2009/10
2009/10 represented the second year of
SSE’s five-year investment programme,
and capital and investment expenditure
(excluding SGN) totalled £1,315.2m,
building on the expenditure of £1,279.8m
in the previous year. During 2009/10:
k the investment of £146.2m in thermal
generation included SSE’s 50% share of
the development of the new Combined
Cycle Gas Turbine (CCGT) power
station at Marchwood, which became
operational in December 2009, on time
and on budget at less than £500/kW;
k the investment of £666.6m in
renewable generation included SSE’s
50% share (£244.9m) of the investment
at Greater Gabbard offshore wind
farm, and £60m in Walney;
k the investment of £46.3m in gas
storage included £26.6m invested in
the new facility at Aldbrough, which
takes the total invested by SSE in this
development to £207.9m; and
k the investment of £334.5m in
electricity networks took the total for
the 2005-10 Distribution Price Control
period to £1.29bn.
A total of £1.1bn has been invested by SSE
in assets which were still largely under
construction at 31 March 2010, including
its share of the cumulative investment
in Greater Gabbard (£455.5m).
In addition, SSE’s 50% share of SGN’s
capital and replacement expenditure was
£206.4m, compared with £191.4m in the
previous year. SGN’s total capital investment
in 2009/10 was £168.1m, taking the amount
so far for the 2008-13 gas Distribution
Price Control period to £525.3m.
Management of investment programme
SSE’s programme of investment in
major new assets got under way with the
development and construction of Hadyard
Hill which, in 2006, became the first wind
farm in the UK to generate 100MW of
electricity. Since then, SSE has developed
other new assets, such as Marchwood,
the UK’s first new gas-fired power station
for five years, and the UK’s first new
gas storage capacity for four years, at
Aldbrough. It has also completed the
installation of flue gas desulphurisation
equipment at Fiddler’s Ferry and
Ferrybridge power stations, thereby
making it possible for electricity generation
to continue at those locations beyond 2015.
Nevertheless, the transition from
efficient operator of energy assets to also
being a developer of significant energy
infrastructure has presented challenges.
14
Scottish and Southern Energy
Annual Report 2010
Financial overview (continued)
revenue on a reliable basis and delivering
value in the long term. The management
of the project portfolio will not be
sacrificed in the interests of short-term
concerns. SSE keeps the economic
evaluation of its investment programme
under continuous review and remains
confident that significant value is being
created, based on actual project delivery
and on the most up-to-date project costs
and schedules.
Future investment priorities
in 2010/11 and beyond
SSE expects its capital and investment
expenditure will be around £1.7bn during
2010/11 as significant projects such as the
Clyde, Griffin and Greater Gabbard wind
farms and the Aldbrough gas storage
facility continue to make progress and
as other major developments, such as
the replacement of the Beauly-Denny
transmission line, get under way.
Around 75% of SSE’s 2008-13 investment
programme is relatively low risk, involving
well-established technologies such as
onshore wind farms, thermal power
stations and electricity networks.
SSE constantly monitors its five-year
investment programme, to make sure
that it is taking advantage of the best
opportunities to invest and that the best
projects are prioritised – and all at the
optimum time. This was demonstrated
by its decision to delay projects previously
included in its 2008-13 programme in order
to include within it the 367MW Walney
offshore wind farm, in which it acquired
a 25.1% stake in December 2009. A
significant factor in the decision to include
Walney in the investment programme was
the phased and performance-related
nature of the total cash consideration
and construction costs.
The main components of risk involved in
any individual investment decision – market,
technology and construction – are all very
carefully considered within the investment
appraisal process and risk premia are
applied to the expected rate of return
where appropriate. The need to maintain
diversity within the programme is also
a factor in investment decision-making.
That part of SSE’s 2008-13 investment
programme which is deemed to be higher
risk – around 25% – involves technologies
such as offshore wind farms and gas
storage and is generally undertaken
in partnership with other experienced
developers in order to mitigate the
higher risks. This illustrates the care
with which decisions are taken, to ensure
they are consistent with SSE’s financial
principles, targeting returns which are
risk-adjusted, greater than the cost of
capital, enhance earnings and contribute
to dividend growth.
£5.29bn at 31 March 2010 compared
with £4.82bn at 31 March 2009.
Financial management
and balance sheet
Treasury policy
SSE’s operations are generally 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 2010,
after taking account of interest rate swaps,
75.1% of SSE’s borrowings were at fixed
or inflation-linked rates.
Borrowings are mainly made in both
Sterling and Euro to reflect the underlying
currency denomination of assets and
cashflows within SSE. All other foreign
currency borrowings are swapped back
into Sterling.
The United Kingdom remains SSE’s main
area of operation, although business
activities in the Republic of Ireland are
also substantial. 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.
SSE’s policy is to hedge all material
transactional foreign exchange
exposures through the use of forward
currency purchases and/or derivative
instruments. Indirect foreign exchange
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
On an unadjusted basis, SSE’s net debt
was £5.4bn at 31 March 2010, compared
with £5.1bn at 31 March 2009. There
were outstanding liquid funds of £109m
at 31 March 2010 relating to power
purchase agreements and wholesale
energy transactions, the majority of which
was reconciled and settled in April 2010.
On an adjusted basis, therefore, including
these liquid funds, SSE’s net debt was
The adjusted net debt of £5.29bn results
in a Net Debt/EBITDA ratio of around
2.9 on 31 March 2010 (excluding SGN).
Strong cash flow from operations,
including effective management of working
capital has helped to keep the increase
in adjusted net debt to a lower level than
expected, as have the adjustments to SSE’s
investment programme following the
acquisition of a 25.1% stake in the Walney
offshore wind farm. In summary while
capital and investment expenditure was
£1.3bn, the increase in adjusted net debt
was limited to £470m.
Borrowings and facilities
The objective for SSE is to maintain a
balance between continuity of funding and
flexibility, with debt maturities staggered
across a broad range of dates. Its average
debt maturity as at 31 March 2010 was
11.0 years, compared with 11.8 years at
31 March 2009.
SSE’s debt structure remains strong, with
around £4.9bn of medium- to long-term
borrowings in the form of issued bonds,
European Investment Bank debt and long-
term project finance and other loans. Less
than £100m of medium- to long-term
borrowings will mature in the year to
31 March 2011. The balance of SSE’s
adjusted net debt is financed with short-
term commercial paper and bank debt.
Financing investment
SSE’s investment programme is supported
by its carefully-maintained balance sheet,
which remains one of the strongest in the
utility sector, in line with its established
financial principles. Its corporate credit
ratings are now ‘A-’ (Standard & Poors) and
‘A3’ (Moody’s). In line with the trend across
the energy and utility sectors, and with the
revisions to their ratings criteria which the
agencies chose to make, they were both
downgraded in 2009, having been on
‘negative watch’ following the acquisition
of Airtricity in 2008. Nevertheless, they
remain consistent with securing funding
at a reasonable cost.
SSE’s balance sheet position means it is
comparatively well-placed to raise finance
and in a position to pay interest at lower
rates than would otherwise be the case.
This is demonstrated by its success in
securing new funding and facilities totalling
£4.8bn between July 2008 and March 2010,
despite the very difficult market conditions
experienced by all borrowers during that
time. This included, during 2009/10:
15
Introduction to SSE
Directors’ report
Financial statements
Shareholder information
k new committed bank facilities totalling
£1bn, which mature in June 2012, to
replace an existing £650m facility
which had been due to mature in
November 2009;
k a nine-year, £500m sterling bond
with a coupon of 5%, issued by SSE
in September 2009; and
k a £400m loan facility from the European
Investment Bank to help finance the
development of renewable energy
schemes in the UK and Ireland.
SSE’s five-year investment programme for
the period to March 2013 is, therefore, well-
financed. It will, however, move quickly to
take the right financing options, including
bonds, loans and, should new investment
or acquisition opportunities arise, equity.
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
2009/10 were £335.9m, compared with
£287.7m in the previous year.
The average interest rate for SSE,
excluding JCE/Associate interest, during
the year was 5.35%, compared with 5.25%
for the previous year. Based on adjusted
interest costs, underlying interest cover
for 2009/10 was 6.3 times (excluding
interest related to SGN), compared with
6.5 times in 2008/09; including interest
related to SGN it was 5.6 times.
Excluding shareholder loans, SGN’s
net debt at 31 March 2010 was £3.1bn,
and within the adjusted interest costs of
£292.4m, the element relating to SGN’s net
finance costs was £63.0m (compared with
£86.5m in the previous year), after netting
loan stock interest payable to SSE. Its
contribution to SSE’s adjusted profit before
tax* was, therefore, £120.7m, compared
with £94.0m in the previous years.
Convertible bond maturity and
authority to purchase own shares
SSE’s 3.75% Convertible Bond, which
had an initial nominal value of £300m,
matured on 24 October 2009.
During 2009/10, SSE did not purchase
any of its own shares for cancellation. The
Directors will, however, seek renewal of
their authority to purchase in the market
the Company’s own shares at the Annual
General Meeting on 22 July 2010, and this
remains a benchmark against which
financial decisions are taken.
Pensions
In line with the IAS 19 treatment of
pension scheme assets, liabilities
Finance costs
Reported net finance costs
add/(less)
Share of JCE*/Associate interest
Interest on convertible debt
Movement on derivatives
Adjusted net finance costs
Return on pension scheme assets
Interest on pension scheme liabilities
Finance lease interest
Notional interest arising on discounted provisions
Adjusted interest costs**
March 10
£m
265.3
March 09
£m
134.3
107.1
–
(36.5)
335.9
100.7
(127.5)
(13.2)
(3.5)
292.4
128.2
(0.6)
25.8
287.7
135.3
(130.1)
–
(5.1)
287.8
* Jointly Controlled Entities. ** Adjusted finance income and costs for interest cover calculation.
Tax charge
Reported tax charge/(credit)
add back:
Share of JCE/Associate tax
less:
Deferred tax
Tax on exceptional items and certain remeasurements
Adjusted current tax charge
March 10
£m
403.1
51.3
(69.4)
(110.9)
274.1
March 09
£m
(59.0)
40.4
(39.5)
358.5
300.4
and costs, pension scheme liabilities
of £720.3m are recognised in the balance
sheet at 31 March 2010, gross of deferred
tax. This represents an increase in net
liabilities of £446.8m compared with the
position at March 2009, principally due to
the reduction in the discount rate applied
to future liabilities.
During 2009/10, employer cash
contributions amounted to:
k £44.2m for the Scottish Hydro Electric
scheme; and
k £66.0m for the Southern Electric
scheme.
Employer cash contributions include
the deficit repair contributions for the
Scottish Hydro Electric scheme and the
Southern Electric scheme of £29.5m
and £38.8m respectively.
As part of the electricity Distribution
Price Control for 2005-2010, it was
agreed that allowances equivalent to the
regulated business’ share of deficit repair
contributions in respect of the Southern
Electric scheme should be included in
price controlled revenue. The Price Control
for 2010-2015 maintains this commitment
to fully fund the regulated business’
share of deficit repair contributions for
both the Southern and now the Scottish
Hydro Electric pension schemes, with an
incentive around ongoing pension costs.
Tax
To assist the understanding of SSE’s tax
position, the adjusted current tax charge
is calculated as shown in the tax charge
table (left).
The effective adjusted current tax rate,
based on adjusted profit before tax*,
was 21.2%, compared with 24.0% in the
previous year, on the same basis. The
impact of SSE’s higher capital expenditure
programme and the changes introduced
in Budget 2007 and 2009 have had, and will
continue to have, a positive impact on the
effective current tax rate. The reported tax
charge is £403.1m, compared with a tax
credit of £59m in the previous year. This
reflects the deferred tax associated with
the derivatives mark-to-market position.
SSE’s contribution to government
revenues in the UK, including Corporation
Tax, Employers’ National Insurance
Contributions and Business Rates totalled
£474.6m during 2009/10, compared with
£484.9m in the previous year. The total
includes joint ventures and associates.•
16
Scottish and Southern Energy
Annual Report 2010
Performance indicators
Financial overview
SSE’s first responsibility to shareholders is to deliver
sustained real growth in the dividend. See Financial
overview on pages 11 to 15.
Adjusted profit before tax* – £m
Adjusted earnings per share* – pence
Dividend per share – pence
Capital expenditure – £m
Adjusted net debt – £bn
Average debt maturity – years
Underlying interest cover – times
Dividend cover – times
Generation and Supply operating profit* – £m
Power Systems operating profit* – £m
Southern Electric Power Distribution operating profit* – £m
Scottish Hydro Electric Power Distribution and Transmission operating profit* – £m
Scotia Gas Networks operating profit* (SSE share) – £m
Gas storage operating profit* – £m
Telecoms operating profit* – £m
Contracting, Connections and Metering operating profit* – £m
Generation
SSE owns 11,330MW of capacity for generating
electricity in the UK and Ireland and is investing
around £4bn in capacity between 2008-13.
See Generation on pages 21 to 30.
2008
1,229.2
105.6
60.5
810.3
3.7
8.6
11.7
1.73
711.1
382.9
232.7
150.2
161.5
50.9
14.3
68.7
2009
108.0
66.0
2010
1,253.7 1,290.1
110.2
70.0
1,279.8 1,315.2
5.3
11.0
6.3
1.57
896.0
415.8
256.9
158.9
183.7
41.8
16.4
80.2
4.8
11.8
6.5
1.57
832.0
403.7
243.3
160.4
180.5
42.7
15.5
74.8
Change
+2.9%
+2.0%
+6.1%
+2.8%
+10.4%
-6.8%
-3.1%
0.0%
+7.7%
+3.0%
+5.6%
-0.9%
+1.8%
-2.1%
+5.8%
+7.2%
Assets
Gas- and oil-fired generation capacity – MW
Coal-fired generation capacity (inc biomass co-firing) – MW
Total thermal generation capacity – MW
Total conventional hydro capacity – MW
Total pumped storage – MW
Total wind farm capacity – MW
Total dedicated biomass capacity – MW
Total renewable (inc pumped storage) generation capacity – MW
Total electricity generation capacity – MW
Operations
Gas-fired power station availability – %
Gas-fired power station thermal efficiency – %
Coal-fired power station availability – %
Coal- and biomass-fired power station thermal efficiency – %
Power station water consumption – million cubic metres
Hydro storage – % of maximum water for generation
Wind farm availability – %
Positive
Neutral or Not Applicable
Negative
2008
2009
2010
Change
4,500
4,000
8,500
1,050
300
600
80
2,030
10,530
4,510
4,010
8,520
1,150
300
690
80
2,220
10,740
4,590
4,370
8,960
1,150
300
840
80
2,370
11,330
95
49
91
36
2.9
73
96
76
51
89
35
2.9
73
96
94
49
92
35
2.8
52
97
+1.8%
+9.0%
+5.2%
0.0%
0.0%
+21.7%
0.0%
+6.8%
+5.5%
+23.7%
-3.9%
+3.4%
0.0%
-3.4%
-28.8%
+1.0%
17
Introduction to SSE
Directors’ report
Financial statements
Shareholder information
2008
2009
2010
Change
18.2
12.0
30.2
368
33
3,518
1,702
389
110
4,050
381
15.3
7.8
23.1
267
148
3,316
1,656
953
765
5,182
273
15.4
11.5
26.9
218
136
3,016
1,456
1,007
854
5,013
395
22.7
496
37,125
0.903
39,643
0.964
19.3
491
17,318
0.441
21,046
0.536
23.1
494
14,848
0.323
27,121
0.591
+0.7%
+47.4%
+16.4%
-18.3%
-8.1%
-9.0%
-12.1%
+5.7%
+11.6%
-3.3%
+51.3%
+19.7%
+0.6%
-14.3%
-26.8%
+28.9%
+10.3%
246.2
132.8
216.2
525.6
146.2
666.6
-32.4%
+26.8%
2008
2009
2010
Change
4.90
3.15
0.40
8.45
40
8.85
235
8.73
18
N/A
N/A
N/A
367
200
1.86
N/A
70
0.03
0.22
5.10
3.50
0.45
9.05
50
9.10
330
9.43
22
N/A
504
191
518
237
2.32
58
72
0.02
0.07
5.17
3.54
0.45
9.16
190
9.35
410
9.76
21
374
542
274
613
233
3.16
58
90
0.02
0.02
+1.4%
+1.1%
0.0%
+1.2%
+280.0%
+2.7%
+24.2%
+3.5%
-4.5%
N/A
+7.5%
+43.5%
+18.3%
-1.7%
+36.2%
0.0%
+25.0%
0.0%
-71.4%
Output
Gas- and oil-fired output – TWh
Coal-fired output (inc biomass co-firing) – TWh
Total output from thermal power stations – TWh
– including ROC-qualifying co-firing output – GWh
Dedicated biomass – GWh
Conventional hydro – GWh
– including ROC-qualifying hydro output – GWh
Wind energy (UK) – GWh*
Wind energy (RoI) – GWh*
Total output of renewable energy – GWh
Total output from pumped storage – GWh
Emissions
Power station CO2 emissions – million metric tonnes
Power station CO2 emissions – grams 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
Investment
Thermal generation – £m
Renewable generation – £m
* Including output from joint ventures and associates.
Supply
SSE supplies electricity and gas to 9.35 million customers
in the competitive energy supply markets in Great Britain
and Ireland. See Supply on pages 31 to 35.
Customer numbers
Electricity customer accounts (GB domestic) – millions
Gas customer accounts (GB domestic) – millions
Energy customers (GB business sites) – millions
Total GB energy customer accounts – millions
All-island energy market customers (Ireland) – 000s
Total energy customer accounts – millions
Home Services customer accounts – 000s
Total customer accounts (GB and Ireland) – millions
Operations
Calls received from customers – millions
Complaints/referrals to Energy Ombudsman
Referrals to Consumer Direct
Homes insulated under the Carbon Emissions Reduction Target – 000s
Customers registered on Priority Services Register – 000s
Customers with tailor made payment plans – 000s
Customers with loyalty plans – millions
Customers paying by direct debit or standing order – %
Domestic/small business customer aged debt – £m
Electricity disconnections – per 1,000 customers
Gas disconnections – per 1,000 customers
18
Scottish and Southern Energy
Annual Report 2010
Performance indicators (continued)
Networks
SSE owns three regional electricity networks and has a
50% stake in two regional gas networks in Great Britain.
See Networks on pages 37 to 43.
Assets
Electricity networks Regulated Asset Value – £bn
Gas network Regulated Asset Value (SSE share) – £bn
Total Regulated Asset Value of energy network assets – £bn
Southern Electric Power Distribution mains in commission – km
Scottish Hydro Electric Power Distribution mains in commission – km
Scottish Hydro Electric Transmission mains in commission – km
Total electricity mains in commission – km
Scotia Gas Networks mains in commission – km
Telecoms network – km
Operations
Electricity distributed – TWh
Southern Electric Power Distribution average customer minutes lost
Southern Electric Power Distribution customer interruptions per 100 customers
Scottish Hydro Electric Power Distribution average customer minutes lost
Scottish Hydro Electric Power Distribution customer interruptions per 100 customers
Gas distributed – TWh
Uncontrolled gas escapes attended within one hour – %
Telecoms operational faults fixed within Service Level Agreements – %
Investment
Electricity networks capital expenditure – £m
SGN capital/repair expenditure (SSE share) – £m
Services
SSE provides a range of energy-related services to
industrial, commercial and public sector customers
in the UK and Ireland. See Services on pages 43 to 46.
Contracting, connections and metering
New electrical connections
New gas connections
Out-of-area networks in operation
Contracting order book (year end) – £m
Meters read once a year – %
Meters read twice a year – %
Gas storage
Net capacity – mcm
Customer nominations met – %
Positive
Neutral or Not Applicable
Negative
2008
2009
2010
Change
2.89
1.82
4.71
76,269
46,662
4,913
2.73
1.75
4.48
75,747
46,454
4,913
2.97
1.97
4.94
77,004
46,859
4,913
127,114 127,844 128,776
73,799
73,995
73,705
11,200
10,300
8,000
42.9
67
66
72
69
169.3
97.5
98
42.9
66
64
75
76
173.5
98.6
98
42.1
65
61
74
76
163.0
97.9
98
264.4
189.5
314.6
191.4
334.5
206.4
+2.8%
+8.2%
+4.9%
+1.0%
+0.4%
0.0%
+0.7%
-0.3%
+8.7%
-1.9%
-1.5%
-4.7%
-1.3%
0.0%
-6.0%
-0.7%
0.0%
+6.3%
+7.8%
2008
2009
2010
Change
42,800
8,200
33
99
95
81
36,000
7,300
47
101
95
77
24,300
6,700
53
115
95
79
-32.5%
-8.2%
+12.8%
+13.9%
0.0%
+2.6%
325
100
325
100
400
100
+23.1%
0.0%
19
Introduction to SSE
Directors’ report
Financial statements
Shareholder information
2008
2009
2010
Change
N/A
0.18
0.35
0.04
N/A
0.16
0.37
0.50
0.07
361
0.14
0.34
0.31
0.03
73
2
42,189
30,299
8,282
1
27,931
27,120
6,979
1
31,179
24,070
5,461
102,070 105,557 105,234
5.5
23
4
13,421
9,542
473
13,921
690
205.2
40.7
150.5
6.1
26
4
14,931
9,393
500
13,178
701
207.8
37.1
154.2
6.7
21
4
14,530
8,265
489
8,285
496
181.7
31.2
156.5
16,892
15,777
41
11.9
6.03
74/26
88/12
0
38
18,795
18,196
38
11.5
5.89
74/26
87/13
0
38
20,177
19,308
39
8.7
5.31
73/27
88/12
0
42
906
873
1,779
1,162
1,001
2,163
1,980
1,410
3,390
-12.5%
-8.1%
-38.0%
-57.1%
-79.8%
0.0%
+11.6%
-11.2%
-21.7%
-0.3%
-9.8%
-11.5%
0.0%
-10.1%
+1.6%
-5.4%
+5.6%
-1.6%
-1.2%
+9.7%
-2.4%
+7.3%
+6.1%
+2.6%
-24.3%
-9.8%
N/A
N/A
0.0%
+10.5%
+70.4%
+40.9%
+56.7%
3.7
60
4.4
88
3.7
109
-15.9%
+23.9%
1,024
4,270
1,037
4,029
1,233
4,438
+18.9%
+10.1%
Safety, sustainability and teamwork
In addition to service, efficiency and excellence,
SSE measures its performance against its other
core values – safety, sustainability and teamwork.
Safety
Total Recordable Injury Rate per 100,000 hours worked
Blameworthy serious/potentially serious road traffic incidents per 100 vehicles
Total Recordable Injury Rate per 100,000 hours worked (Contractors)
Accident Frequency Rate HSE reportable/lost time
Working days lost from injury
Sustainability
Power station IPC/IPPC breaches
Oil leaked – litres
Waste produced by offices and depots – tonnes
Waste sent to landfill from offices and depots – tonnes
Water consumption in principal offices – cubic metres
Water consumption in principal offices – cubic metres per whole time equivalent
Energy consumption in principal offices – GWh
Energy consumption in principal offices – MWh per WTE
Distance travelled on SSE business – km per WTE
Business flights
Business flights per 1,000 employees
Business rail journeys
Business rail journeys – per 1,000 employees
Operational vehicles business travel – million km
Company cars business travel – million km
Average emissions from Company and operational vehicles – grams/km
Teamwork
Employees – headcount
Employees – monthly average
Employees – average age
Turnover of employees – %
Absence from work per employee – days
Gender split – all employees – male/female
Gender split – Leadership Group – male/female
Breaches of equal opportunities legislation
Employees in Share Incentive Plan – %
Community
Funds set aside for community benefit – £000s
Funds set aside for charitable causes – £000s
Total charitable and community donations – £000s
Research and development
Research and development – £m
Committed investment in clean-tech ventures (cumulative) – £m
Suppliers
New suppliers
Suppliers for more than three years
20
Scottish and Southern Energy
Annual Report 2010
Business overview
Generation
and Supply
Introduction
SSE owns just over 11,300MW of capacity
for generating electricity, a net increase
of 600MW since 1 April 2009. The large
majority (over 10,850MW) of this capacity
is in Great Britain in which total capacity
is around 83,000MW, including the
capacity to import from France. The
remainder (450MW) is in Northern Ireland
and the Republic of Ireland, where there
is an all-island Single Electricity Market,
of around 10,000MW, which is separate
from the market in Great Britain.
SSE’s total capacity includes its share
of joint ventures and associates and
comprises around:
k 4,590MW of gas- and oil-fired capacity;
k 4,370MW of coal-fired capacity (with
biomass co-firing capability); and
k 2,370MW of renewable (hydro, wind
and dedicated biomass) capacity.
This balance between coal- and gas-fired
generation capacity, and the balance
between fossil fuel and renewable sources
of energy, avoids dependency on a single
technology or commodity and gives SSE the
greatest diversity in fuels for generating
electricity among UK generators. As a
result, SSE has significant optionality in
the management of its power stations.
It is this diversity and the optionality that
goes with it which enable SSE to manage
the risks inevitably associated with
primary fuel procurement. Management
of these risks is also assisted by the
fact that SSE is the largest generator of
electricity from renewable sources across
the UK and Ireland.
SSE’s diverse electricity generation assets
are balanced by its electricity and gas
supply customer base. As at 31 March
2010, SSE supplied energy to 9.16 million
customer accounts in Great Britain and
190,000 accounts in Northern Ireland
and the Republic of Ireland, making it:
k the second largest supplier within
Great Britain’s competitive electricity
and gas supply market, which has
around 51 million domestic and
business accounts in total; and
k the fourth largest supplier in the Irish
all-island energy market, which has
around 3.1 million accounts in total.
SSE’s responsibility as supplier to
customers is to procure the electricity
and gas they need, arrange for it to be
distributed to them through the relevant
networks, provide the associated services
such as metering and billing and promote
the efficient use of energy.
Wholesale gas and wholesale electricity
are transacted like any other commodity
in a competitive market. SSE purchases
the gas and some of the electricity it
needs to supply customers via bilateral
contracts of varying lengths and through
trading in the wholesale markets. To
ensure customers’ requirements are
‘hedged’, energy is sourced up to two
years or more in advance of it actually
being used. SSE also buys gas, coal, oil
and biomass to use in the production of
electricity from its power stations, as well
as carbon dioxide emissions allowances.
SSE’s long-term power purchase
agreements with Barking Power Ltd (in
which it has a 30.4% stake) and Derwent
Cogeneration Ltd (in which it has a 49.5%
stake) are due to expire in September 2010.
The current contract, under which British
SSE seeks to maintain a well-balanced
portfolio of assets, contracts and
customers, and over recent years its
growth in power station capacity has
been similar to its growth in energy
customer numbers. This balanced,
integrated business, featuring a diverse
range of assets, has, therefore, value
that goes beyond the sum of its parts.
Energy supplied SSE with 5TWh (terrawatt
hours) of electricity during 2009/10 and will
supply 5TWh during 2010/11 (arranged
as part of SSE’s acquisition of the Swalec
energy supply business in 2000) ends in
March 2011. In order to provide continuing
long-term stability to the energy portfolio,
further contractual arrangements have
been agreed. These include the 15-year
tolling agreement with Marchwood Power
Ltd which commenced in 2009.
SSE’s Trading and Risk Management
team is responsible for its participation in
wholesale markets for electricity and gas,
as well as markets for coal, oil and carbon
dioxide emissions allowances. Through
analysis of generation plant availability,
customer demand and its contractual
position SSE can assess, and therefore
manage, its exposure to market prices.
In summary, SSE assesses Generation
and Supply as a single value chain
within a vertically-integrated business.
This means its power stations and fuel
supply contracts are used to support
performance in electricity (and, by
extension, energy) supply. As the UK
Treasury and Department of Energy
and Climate Change said in March 2010:
‘Vertical integration offers several
benefits, including lower risk from
wholesale electricity price volatility,
economies of scale and price smoothing.’
Against this background, SSE seeks
to maintain a well-balanced portfolio of
assets, contracts and customers, and over
recent years its growth in power station
capacity has been similar to its growth in
supply customer numbers. This balanced,
integrated business, featuring a diverse
range of assets, has, therefore, value that
goes beyond the sum of its parts – not
least because its exposure to particular
commodity price outcomes is reduced.
Generation and Supply
performance overview
Operating profit* in Generation and Supply
was £896.0m, compared with £832.0m in
the previous year, contributing 55.1% of
SSE’s total operating profit* in 2009/10. The
main differences between 2009/10 and the
previous year are set out under ‘Adjusted
Profit Before Tax’ above. (SSE reports
the underlying financial performance
of Generation and Supply excluding the
impact of IAS 39 remeasurements which
are unrealised as it continues to believe
that this does not represent underlying
business performance.)
Total revenue for Generation and Supply
was £20.5bn, which accounted for 91%
21
Introduction to SSE
Directors’ report
Financial statements
Shareholder information
k legally-binding targets for renewable
energy and carbon dioxide emissions
support the value of renewables
and will require sustained major
programmes of investment; and
k the growth in capacity for generating
electricity from renewable sources
will have an impact on how gas-
and coal-fired capacity operates
on a day-to-day basis. The value
of established and flexible capacity
is likely to be reinforced.
The extent of the investment required
in electricity generation, and the high
up-front costs associated with the low-
carbon technologies which the investment
is needed to deliver, will require the public
policy framework in the UK to evolve over
the next few years, with interventions to
support those low-carbon technologies.
SSE is open-minded about the precise
nature of these interventions, as long
as existing low-carbon investments are
safeguarded and the investment climate
remains positive. It believes that the
progressive decarbonisation of its
electricity generation portfolio means it
is well-placed if the cost associated with
carbon dioxide emissions increases.
Generation objectives
In this context, SSE’s key objectives
in Generation, covering operations
and investment, remain relevant and
appropriate. The operational objectives
are to:
k comply fully with all safety standards
and environmental requirements;
k ensure power stations are available
to generate electricity as and when
required by customer demand and
market conditions; and
k operate power stations efficiently
to achieve the optimum conversion
of primary fuel into electricity.
SSE’s investment objectives in Generation
cover both existing and new power-
producing plant. They are to:
k maintain a diverse portfolio of
k
power stations, with the flexibility
to respond to customer demand
and market conditions;
invest in developments supported
by EU Member States’ financial
frameworks (such as the UK’s
Renewables Obligation) to help ensure
legally-binding targets for renewable
energy in 2020 can be met; and
k develop and pursue a diverse range
of options for adding to its portfolio
of power stations, and thus support
security of supply.
of SSE’s total revenue in 2009/10, of
which £8.2bn was in relation to sales
of electricity and gas to industrial,
commercial and domestic customers.
Electricity generated and supplied
During 2009/10, SSE generated
47.2TWh of electricity, including
power stations in which it has a part-
ownership or contractual interest.
It also purchased 5.6TWh of electricity
through long-term contracts with other
generators. In the year, it supplied
32.7TWh of electricity to its domestic
and small business customers and
27.0TWh was supplied under contract
to industrial and commercial customers.
Net balances were traded in the
wholesale electricity market.
Generation
SSE’s target is to reduce
by 50% the carbon
dioxide intensity of
electricity produced at
power stations in which
it has an ownership
or contractual interest
over the period from
2006 to 2020.
Average electricity usage per GB
household customer of SSE fell from
4,748kWh in 2008/09 to 4,540kWh in
2009/10 and gas usage fell from 598
therms to 558 therms.
k Gas-fired power page 22
k Coal- and biomass-fired power page 23
k Hydro power page 26
k Wind power page 27
k Emerging technologies page 29
Consolidated segmental statement
Ofgem has introduced a requirement
on electricity generators and suppliers
to publish a Consolidated Segmental
Statement showing revenue, costs and
profits from electricity generation and
electricity and gas supply activities. This
statement must be published no later
than six months after the end of the
financial year (ie by 30 September 2010)
and will be accompanied by a narrative
on the assumptions used to determine
income and cost.
This assumption-based approach is
necessary, because the requirement
to produce such a statement will not
have any significant impact on SSE’s
long-standing approach of managing
its generation and supply activities as
a single value chain. The presentation of
Generation and Supply in SSE’s financial
statements will not change.
From a wider point of view, companies
adopting an integrated approach to
generation and supply are most likely to
be able to deliver the level of investment
needed in generation in the UK and
Ireland because the risks associated
with such large-scale and long-term
investments are mitigated by the income
earned from supplying electricity and
gas to customers.•
Context
Over the next decade, around 20GW
of the UK’s capacity for generating
electricity (largely coal, oil and nuclear)
is scheduled to close because of its age
or its inability to comply with higher
environmental standards. In July 2009,
the UK government’s Low Carbon
Transition Plan included a projection of
possible shares of electricity generated
from different sources in 2020, based
on energy demand estimated at 370TWh:
k Renewables: 31% (up from 6%)
k Gas: 29% (down from 45%)
k Coal: 22% (down from 32%)
k Nuclear: 8% (down from 13%)
k Other sources such as CHP: 10%
(up from 3%)
All of this has five major implications
for electricity generation over the next
10 years:
k a balance of fuels used within the
UK’s generation portfolio will remain
critical in providing security of supply,
through allowing diversity of primary
energy sources;
k the need for the UK to maintain a
reasonable margin between electricity
generation capacity and electricity
demand will reinforce the value of
existing and available power-
producing plant;
k the UK will have to provide replacement
capacity for conventional and nuclear
generation plant which is expected
to retire;
22
Scottish and Southern Energy
Annual Report 2010
Business overview (continued)
2010 at a glance:
Electricity generation
capacity
Gas and oil
generation – MW
4,590
2009 – 4,510
Coal and biomass
generation – MW
4,370
2009 – 4,010
Hydro generation – MW
1,450
2009 – 1,450
Wind generation – MW
840
2009 – 690
Dedicated biomass
generation – MW
80
2009 – 80
Total generation
capacity – MW
11,330
2009 – 10,740
In achieving these objectives, SSE’s target
is to reduce by 50% the carbon dioxide
intensity of electricity produced at power
stations in which it has an ownership or
contractual interest, over the period from
2006, the first full year after it acquired
coal-fired power stations, to 2020. This
will be achieved through a combination
of more electricity being produced from
renewable sources and from cleaner
fossil fuels such as gas, and less being
produced from coal, the most carbon-
intensive fuel.
(Fife, Keadby, Medway and Peterhead)
achieved 94% of their maximum
availability to generate electricity,
excluding planned outages, compared
with 76% availability in the previous year.
This reflected the return to service of
Medway power station in June 2009,
following a 15-month unplanned outage.
The new power station at Marchwood
(see below) achieved 100% availability
between the time it became commercially
available in December 2009 and the end
of March 2010.
The amount of electricity generated
by SSE at gas-fired power stations in
which it has an ownership or contractual
interest was 32.1TWh in 2009/10
(including 15.4TWh from wholly-owned
stations), compared with 28TWh in the
previous year (including 15.3TWh from
wholly-owned stations).
During 2009, SSE’s Engineering Centre
completed a detailed review of the way
that SSE’s power-producing assets are
managed. The review was supported
by external engineering advisers. It
confirmed that the asset management
of SSE’s power station plant, and the
underpinning engineering judgements,
are at, or above, expected industry
standards. At the same time, it identified
some potential improvements in the
execution of maintenance.
Against this background, SSE has
designed and implemented an updated
model for managing its generation assets,
with four key stages:
k asset scoping and monitoring;
k asset life management;
k engineering strategy development,
including risk management; and
k advanced planning and execution,
with detailed works and investment
planning taking place prior to the
implementation of any programme
of planned outages.
The adoption of a consistent approach
in the management of its assets, which
have different characteristics and which
have been developed, acquired or
upgraded over a number of years, plus
other steps, such as the acquisition
of strategically-significant spare parts
for generating plant to mitigate major
failures, and the ongoing development
of the Engineering Centre itself, including
its Equipment Performance Centre,
should help SSE ensure its generation
assets deliver on a consistent basis levels
of availability that meet both market and
sustainability requirements.
Gas-fired generation – operations
SSE owns 4,590MW of gas- and oil-fired
electricity generation capacity, including
its share of joint ventures.
Although the total installed capacity
of Peterhead power station is 1,840MW,
its maximum level of access to the
transmission network at any one time is
now 1,180MW, the same as the station’s
Unit One capacity, following the release
of 344MW of electricity Transmission
Entry Capacity (TEC) rights at the station
in March 2010 to reduce Transmission
Network Use of System (TNUoS) charges.
Only 1,180MW has, therefore, been
included in the overall capacity total
for SSE’s gas-fired power stations. The
balance, in the station’s Unit Two, allows
Peterhead to provide replacement
generation capacity when Unit One
is undergoing outages.
Electricity generation plant remains
exposed to significant operational costs.
Costs include high and volatile TNUoS
charges in the northern part of the
country, business rates, maintenance
and insurance. As the changes at
Peterhead demonstrate, SSE monitors
closely these costs in the context of the
income which generation plant is able
to earn and takes action to make sure
that plant is able to operate economically
over the medium term.
Good performance in Generation and
Supply is dependent, first and foremost,
on plant at power stations being available
to generate electricity as and when
required by customer demand and market
conditions. During 2009/10, SSE’s principal
wholly-owned gas-fired power stations
23
Introduction to SSE
Directors’ report
Financial statements
Shareholder information
Total generation capacity – MW
2010
2009
2008
2007
2006
11,330
10,740
10,530
10,017
10,015
Generation capacity – composition %
Gas/oil 40
Coal/biomass 39
Renewable 21
but reflects the short-term fall in demand
for electricity following the economic
downturn in the UK). This demonstrates
that SSE has flexibility in the timing and
nature of the development – flexibility it
has already used to delay by around a year
the proposed development of the first
phase of the power station.
In addition, SSE has identified other
options for additional CCGT capacity.
These include:
k the potential development of new
capacity at Keadby power station.
SSE has effective consent to develop
710MW of capacity at Keadby and in
April 2009 it secured an agreement to
connect a new 850MW power plant to
the electricity transmission network
from 2016; and
k the creation of additional capacity at
Barking Power Ltd, in which SSE has
a 30.4% stake. Barking has consent to
develop a new 470MW CCGT, which –
if constructed – would effectively add
around 140MW to the portfolio of gas-
fired generation assets owned by SSE.
In April 2010, BG Group announced it
had reached an agreement to sell its
50% interest in Seabank Power Limited,
which operates the 1,140MW CCGT near
Bristol in which SSE has the other 50%
interest. SSE has pre-emption rights in
respect of BG Group’s interest in Seabank
Power Limited, which it does not expect
to exercise.
Coal and biomass generation –
operations
During 2009/10, SSE generated
11.5TWh of electricity at its coal-fired
power stations at Fiddler’s Ferry and
Ferrybridge, compared with 7.8TWh in the
previous year. The stations achieved 92%
of their maximum availability to generate
electricity, excluding planned outages,
compared with 89% in the previous year.
The increase in output reflects the
removal, in the early part of 2009, of
the constraints on running hours at the
stations imposed by Article 5(1) of the
Large Combustion Plant Directive (LCPD),
following hot commissioning of flue gas
desulphurisation (FGD) equipment. The
equipment has been installed to cover all
of the capacity at Fiddler’s Ferry and half
of the capacity at Ferrybridge (3,000MW
in total), making it possible for it to remain
operational beyond 2015 (subject to
emerging policy under the proposed
Industrial Emissions Directive). The other
1,000MW of capacity at Ferrybridge was
opted out of the LCPD and so operates
under restrictions on its ability to generate
electricity and must close in 2015.
Gas-fired generation – investment
Ofgem’s ‘Project Discovery – Energy
Market Scenarios’, published in October
2009, highlighted that Britain will face
significant levels of gas imports, in
particular for gas-fired power plants
to replace lost nuclear and coal-fired
generation capacity, and that this will
increase the country’s exposure to
uncertainties in the global gas market.
To avoid over-dependence on a single fuel,
SSE operates a diverse generation portfolio
and actively develops a diverse range of
options to add to it. At the same time,
CCGT continues to be the benchmark
technology in generation, making a
growing contribution to meeting the UK’s
electricity requirements, because of its
relatively low costs, short construction
time and high thermal efficiency. With a
carbon intensity around half that of coal-
fired power stations, investment in CCGT
assists in the transition to lower-carbon
electricity generation.
The 840MW CCGT plant in Southampton
developed by Marchwood Power Ltd, a
50:50 joint venture between SSE and ESB
International, became available for full
commercial operation in December 2009,
making it the UK’s first new gas-fired
power station for five years. All of the
station’s output is contracted to SSE.
With a net thermal efficiency in excess
of 58%, Marchwood is one of the most
efficient gas-fired power stations in the
UK. SSE’s total investment in Marchwood
was around £180m, comprising equity and
debt, reflecting the fact the plant was
procured before the significant increase
in costs experienced in the electricity
generation sector in 2007 and 2008. With
a construction cost of less than £500/kW,
it was a particularly well-timed and well-
founded investment.
In May 2009, SSE acquired Abernedd
Power Company Limited from BP
Alternative Energy. Abernedd has applied
for consent to construct and operate a
new CCGT power station, with a capacity
of over 800MW, on a brownfield site in
Baglan Bay in South Wales, where there
is already in place electricity transmission,
gas and water infrastructure for the first
phase of the power station. The total cash
consideration will be determined by the
progress of the development. Subject
to planning consent being secured, SSE
has decided to schedule construction
of the new power station with a view
to generation plant first becoming
operational in around 2015 (which is
slightly later than originally envisaged,
24
Scottish and Southern Energy
Annual Report 2010
Business overview (continued)
The installation of FGD equipment means
that the power stations are able to use
higher-sulphur coal mined in the UK. As
a result, in April 2009, SSE entered into
an agreement with UK Coal under which
it will obtain 3.5 million tonnes of deep-
and surface-mined coal from Great Britain,
including Kellingley Colliery in West
Yorkshire, to provide fuel for Ferrybridge
power station up to 2015. This should
be enough to meet around 15% of the
station’s requirements during that period.
In addition, SSE has advanced a secured
loan to UK Coal, on which interest is
payable, to be repaid by 2014.
The stations co-fire fuels from renewable
sources (biomass) in order to displace
fossil fuels. During the year, their output
qualifying for ROCs (Renewable Obligation
Certificates – see below) was 218GWh,
compared with 267GWh in the previous
year (included within the above total for
the stations as a whole). This follows
the change on 1 April 2009, since when
electricity output resulting from co-firing
receives 0.5 ROCs per MWh, compared
with 1.0 ROC per MWh previously.
Electricity suppliers can now meet up
to 12.5% of their Renewables Obligation
from this technology.
Coal and biomass generation –
investment
In August 2009, SSE acquired Uskmouth
Power Company Limited, the owner and
operator of the 363MW Uskmouth coal-
fired power station near Newport, South
Wales for a total cash consideration of
£27m (including £10m of cash and
working capital balances). Uskmouth
comprises three independent power
generating units, each with 121MW of
capacity. The power station dates from the
1960s and was substantially refurbished
in 2000, including having FGD equipment
fitted. It routinely operates on a two-shift
basis to help meet shorter-term power
requirements. Following the acquisition,
around 100 people employed at the station
joined SSE. The integration of Uskmouth
into SSE’s portfolio of power generating
assets went well. Its availability was 96%
following completion of an outage that
was extended because of the need to
secure spare parts.
The LCPD also requires reduced
emissions of nitrogen oxides. SSE has
already invested £31m to install SOFA
(Separated Overfire Air) and BOFA
(Boosted Overfire Air) equipment at the
stations to reduce such emissions. From
2016 limits on emissions of nitrogen
oxides from power stations will be
tightened significantly. As a result, SSE
is undertaking a front-end engineering
design (FEED) study, which it expects
to complete next year, into options for
installing Selective Catalytic Reduction
(SCR) technology at Fiddler’s Ferry. The
alternative to fitting SCR is to operate the
station within limits required under a
derogation from the LCPD’s requirements.
SSE has applied for consent to install the
SCR technology at Fiddler’s Ferry under
Section 36 of the Electricity Act 1989. Its
analysis of the issues around installing
SCR will also take into consideration
the progress of the draft EU Industrial
Emissions Directive, which the European
Commission has proposed in order to
overhaul seven existing pieces of legislation
on industrial emissions, including the
LCPD, into a single directive. As a result,
it does not expect to take a decision on
installing SCR until 2011.
Coal and biomass generation –
decarbonisation
Coal is a critically important fuel for the
UK, because of its flexibility, its availability
and because it reduces reliance on
imported gas. Existing coal-fired power
stations still have a crucial role to play in
maintaining secure supplies of electricity,
but it is clear that that role will have to
change if legally-binding carbon dioxide
emissions targets are to be met. In
October 2009, the UK’s Committee on
Climate Change re-stated its previous
SSE certainly believes that no new
coal-fired power stations should be built
without full carbon dioxide abatement
and that no coal-fired power stations
without such abatement should be
allowed to operate beyond 2030.
recommendation that ‘there can be no
role for conventional coal generation
in the UK beyond the early 2020s’. SSE
certainly believes that no new coal-fired
power stations should be built without
full carbon dioxide abatement and that
no coal-fired power stations without such
abatement should be allowed to operate
beyond 2030.
In April 2010 it secured consent from
Wakefield District Council to develop
at Ferrybridge the UK’s biggest carbon
dioxide capture trial facility. The £21m
trial will be carried out in collaboration
with Doosan Babcock and Vattenfall and
will demonstrate the carbon dioxide
capture element of carbon capture
and storage (CCS) technology. In March
2009, it secured £6.3m of funding from
the UK Department of Energy and
Climate Change, the Technology
Strategy Board and Northern Way.
Construction work is expected to start
later this year, with the trial itself
commencing in 2011 and running
through to the end of 2012.
The scale of the project, equivalent to
5MW of coal-fired power generating
capacity producing 100 tonnes of carbon
dioxide per day, bridges the gap between
the various laboratory-scale trials that are
under way and the larger-scale projects
envisaged by the UK government. The
significance of the project therefore lies
in its scale and its ability to demonstrate:
the operational characteristics of capture
plant on an actual power station; and
the performance of the amine solvent
on real flue gas.
Coal and biomass generation – recycling
The development by Lafarge Plasterboard
Ltd of a plasterboard factory at Ferrybridge
has been completed. The plant is
operational and using the gypsum
produced on site as a result of FGD as
its main raw material in the production
of plasterboard.
The ash separation plant developed at
Fiddler’s Ferry by RockTron (Widnes)
Ltd is now operational. It removes and
processes all fresh ash produced by the
power station, and much of that currently
stored in lagoons at the site, turning it
into constituent parts which become
marketable mineral products, with the
largest volume being initially used as
cement substitutes.
SSE now has 49.9% of the equity in
RockTron (Widnes) Ltd, a subsidiary
of RockTron Ltd, enabling it to secure
a share of the income from the ash
25
Introduction to SSE
Directors’ report
Financial statements
Shareholder information
Power station CO2 emissions – grams per kWh
2010
2009
2008
2007
2006
494
491
496
555
622
Renewable generation capacity – MW
2010
2009
2008
2007
2006
2,370
2,220
2,030
1,518
1,390
Renewable energy capacity –
composition %
Wind 36 (840MW)
Hydro 61 (1,450MW)
Biomass 3 (80MW)
extensive programme of investment
in energy from renewable sources,
including the acquisition in December
2009 of a 25.1% stake in the Walney
offshore wind farm development,
demonstrates its financial commitment
to a lower-carbon future.
Since 2000, the Carbon Disclosure Project
(CDP) has, on behalf of institutional
investors, ‘challenged the world’s largest
companies to measure and report their
carbon emissions; integrating the long-
term value and cost of climate change
into their assessment of the financial
health and future prospects of their
business’. In 2009, CDP received the
highest response rate to date. SSE
secured a score of 78%, the same as
in 2008, missing the Carbon Disclosure
Leadership Index by just 1%.
Renewable energy – overview
Tackling climate change and securing
future supplies remain the two main goals
of energy policy in the UK, Ireland and
the EU. Against this background, the EU
Renewable Energy Directive imposes
legally-binding targets on Member
States, specifying the proportion of all
energy consumption that must be met
by renewable energy sources by 2020.
The national target for the UK is 15%
(compared with 2.25% achieved in 2008)
and for the Republic of Ireland it is 16%.
In practice, this is likely to mean that
around one third of the countries’
electricity requirements will have
to be met from renewable sources.
Amongst other things, decarbonising
the production of electricity through
investment in renewable sources of
energy will help to reduce dependence
on imported gas.
The Renewables Obligation (RO) has
been the UK’s main support scheme for
electricity generated from renewable
sources since 2002. Under the RO,
generators receive Renewable Obligation
Certificates (ROCs) for electricity
generated from eligible renewable sources
and electricity suppliers are required to
source an increasing proportion of their
separation plant, in addition to the
benefits which result from avoiding
the environmental liabilities associated
with ash production and storage.
EU Emissions Trading Scheme
Phase II of the EU Emissions Trading
Scheme (EU ETS) began on 1 January
2008. Across its electricity generation
portfolio (taking account of contractual
shares), SSE now has an allocation of
18.9 million tonnes of carbon dioxide
emissions allowances per calendar year,
including the allowances for Marchwood
and Uskmouth. Its emissions allowances
requirement for 2009/10, beyond those
allocated under EU ETS, was 4.9 million
tonnes. This compares with 2.5 million
tonnes in the previous year. During
2009/10, the price of allowances ranged
from around €11.50 to around €15.50
per tonne. From 2013, all of the carbon
dioxide emissions allowances for
electricity producers will be auctioned.
Emissions of carbon dioxide
In 2009/10, emissions of carbon dioxide
from power stations in which SSE has
an ownership or contractual interest
totalled 23.1 million tonnes, compared
with 19.3 million tonnes in the previous
year, reflecting the increase in the
amount of electricity generated from
thermal power stations following the
unusually low level in the previous year.
Assuming it displaced electricity produced
from coal-fired power stations, the output
of SSE’s wind farms and conventional
hydro electric schemes (see below)
saved around 4.5 million tonnes of
carbon dioxide in 2009/10. SSE’s carbon
emissions data is externally verified by
a UK Accreditation Service (UKAS)
accredited organisation.
SSE’s target is to reduce the amount
of carbon dioxide per kilowatt-hour of
electricity generated at plant in which it
has an ownership or contractual interest
by 50%, between 2006, the first full year
after it acquired coal-fired power stations,
when it was around 600g/kWh, and 2020.
On this basis, its carbon intensity in
2009/10 was 494g/kWh, compared with
491g/kWh in the previous year, reflecting
the greater thermal content of SSE’s
electricity fuel mix.
The decisions SSE takes and the
investments it makes are influenced by
this target. For example, since 2005/06, it
has invested over £65m in carbon dioxide
efficiency improvements, or to facilitate
the burning of carbon neutral fuels such
as biomass, at its coal-fired power
stations. More fundamentally, SSE’s
26
Scottish and Southern Energy
Annual Report 2010
Business overview (continued)
electricity from eligible renewable sources;
in 2009/10, the proportion was:
k 0.097 ROCs per MWh (or 9.7%)
of electricity supplied in England,
Wales and Scotland; and
k 0.035 ROCs per MWh (or 3.5%) of
electricity supplied in Northern Ireland.
In 2010/11 it is 0.111 ROCs per MWh of
electricity supplied in England, Wales and
Scotland and 0.0427 ROCs in Northern
Ireland. The effect of this is to encourage
the necessary investment in electricity
generation from renewable sources by
enhancing the value of the output.
A number of changes to the RO
were introduced on 1 April 2010.
Key changes were:
k an extension of the life of the RO
to at least 2037;
k an increase in the level of ‘headroom’
between the proportion of renewable
electricity required by the RO and the
expected level of output; and
k an increase in the ROCs earned on
output from all offshore wind farm
projects accredited between April
2010 and March 2014, from 1.5 to 2.0.
(The Walney and Greater Gabbard
offshore wind farms are expected
to be fully accredited in 2011 and
2012 respectively.)
The effect of these changes is to provide
developers and investors with greater
long-term certainty about, and confidence
in, the financial support for electricity
generated from renewable sources.
In the Republic of Ireland, the Renewable
Energy Feed In Tariff (REFIT) scheme is
used to support renewable energy by
providing a guaranteed price for output
and a 15% rebate (subject to a cap) on
suppliers’ purchase of REFIT energy.
SSE has 2,370MW of commissioned
renewable energy capacity in the UK
and Ireland, comprising hydro electric
schemes (including pumped storage),
wind farms and a dedicated biomass
facility at Slough, an increase of 150MW
during the year. Of this, 1,050MW qualify
for ROCs (including dedicated biomass).
Total output from all of SSE’s conventional
hydro electric schemes, wind farms and
its dedicated biomass plant was 5,013GWh
during 2009/10, compared with 5,182GWh
in 2008/09. This was over 10% lower than
expected because of the unusually dry
and still weather conditions experienced
in the winter of 2009/10.
Looking ahead, SSE has set itself the
target of owning 4,000MW of renewable
energy capacity in the UK and Ireland
that is either commissioned or under
construction by the end of 2013. The
achievement of this milestone will mean
SSE is making a significant contribution
to the achievement of the 2020 targets
for renewable energy and carbon dioxide
emissions in the UK and Ireland. It is also
making comprehensive plans to build on
its 2008-13 programme of investment in
renewable energy in the subsequent years.
Moreover, in addition to the clear
environmental benefits associated with
harnessing their power, water and wind are
key sources of free and indigenous primary
energy which reduce SSE’s exposure to
volatile prices for fossil fuels, especially gas,
sources of which are in decline but which
will be in huge demand from growing,
populous economies across the world.
Hydro generation – operations
SSE owns and operates just over 1,450MW
of capacity in hydro electric schemes,
including the 300MW pumped storage
facility at Foyers, on Loch Ness.
Total output from the conventional
hydro electric schemes was 3,016GWh
during 2009/10, compared with 3,316GWh
during the previous year. As at 31 March
2010, the amount of water held in SSE’s
reservoirs which could be used to
generate electricity was 52% of the
maximum, compared with 73% in the
previous year. The unusually cold weather
experienced from December to March,
with prolonged spells of sub-zero
temperatures, resulted in the amount
of water running off into reservoirs being
much less than normal.
In order to encourage long-term
investment to maintain smaller schemes,
the output of refurbished hydro electric
stations with capacity of up to 20MW
qualifies for ROCs, as does the output
from all stations commissioned after
2002. SSE has just over 500MW of capacity
in this category. Of the total hydro output
in 2009/10, 1,456GWh qualified for ROCs,
compared with 1,656GWh in the previous
year. Assuming average run off of water
into SSE’s reservoirs during the year, the
ROC-qualifying output from hydro
generation is expected to be almost
1,500GWh in 2010/11.
In August 2009, SSE identified a blockage
caused by a fall of rock near the top of the
tunnel carrying water from the reservoir
to the power station at the 100MW Glendoe
hydro electric scheme, thus stopping
operations at the station. The repair
will require the construction of two new
tunnels: one around 900 metres, to divert
water around the blockage; and a second,
shorter, access tunnel. The tunnelling
work will be carried out using the drill
and blast method. BAM Nuttall has been
retained as the contractor for this work,
which is under way. Nevertheless, the
extent of the repair work is such that
electricity generation is unlikely to
resume before the summer of 2011.
Hydro generation – investment
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. Since the Renewables Obligation
was introduced in April 2002, SSE has
invested around £450m in refurbishing
and developing hydro electric schemes in
Scotland. Investment in this area totalled
£4.6m during 2009/10.
Hydro electric schemes which use
impounded water to generate electricity
have an important part to play in meeting
peak demand and also complement the
growing, but variable, amount of output
from wind farms. Against this background,
SSE has submitted to Scottish Ministers an
application for consent to develop a 60MW
pumped storage scheme as part of its
152MW Sloy power station, near Loch
Lomond. This means that, in addition to
electricity produced from water collected
and held in the Loch Sloy reservoir, Sloy
would generate electricity using water
pumped from Loch Lomond to the reservoir.
In an average year, Sloy produces around
120GWh of electricity and adding to it a
pumped storage facility would allow it to
store an additional 100GWh of electricity
in a typical year to help meet peak
demand. SSE currently expects that
developing a pumped storage facility at
Sloy will require investment of over £30m.
In addition, SSE is proposing to develop
two new large-scale pumped storage
hydro electric schemes at Coire Glas at
Loch Lochy and Balmacaan at Loch Ness.
In October 2009, it asked the Scottish
Government for its formal opinion on
27
Introduction to SSE
Directors’ report
Financial statements
Shareholder information
(onshore wind, offshore wind, hydro
and dedicated biomass) in operation,
under construction or with consent for
development in the UK and the Republic
of Ireland.
Not included within this total is the
foreshore lease that SSE holds to develop
in excess of 500MW at the fully-consented
Arklow Bank site in the Irish Sea. The
timing of future developments at Arklow
Bank will be dependent upon, amongst
other things, the extent of financial
support for offshore wind farms available
from the Irish government.
In December 2009, SSE and DONG Energy
announced an agreement to form a 50:50
joint venture to develop three offshore
wind farms in the Dutch sector of the
North Sea with a total capacity of just over
1,000MW, which SSE previously had the
entire right to develop. As a result, SSE
also now has around 800MW of offshore
wind farm capacity with consent for
development in northern Europe,
including the Dutch sector of the North
Sea. This agreement, and that to acquire
Walney, demonstrated SSE’s flexible
approach to the development of its wind
energy capacity, with acquisitions and
disposals both being considered to
optimise the overall portfolio.
Wind generation – investment approach
While capacity, as measured by
megawatts, is of central importance in
on- and offshore wind farm development,
there are four other critical factors which
help determine the electricity output
from that capacity and thus the value
of any development:
k site selection;
k wind analysis carried out by a
specialist team;
k site optimisation to maximise output,
including turbine layout; and
k turbine selection to match turbine
characteristics with wind conditions
and ensure reliability.
of their maximum availability to generate
electricity, compared with 96% in the
previous year. Their average load factor
was lower than expected, at just over 26%,
compared with 29% in the previous year,
due to the unusually still weather conditions
experienced in the winter of 2009/10.
Wind generation – investment overview
When SSE entered into the agreement
to acquire Airtricity (which has since been
re-named SSE Renewables for renewable
energy development) in January 2008, the
combined business had just over 870MW
of onshore wind farm capacity in operation,
in construction or with consent for
development in the UK and Ireland. This
capacity now totals 1,780MW, comprising:
k 840MW in operation;
k 790MW in construction or
pre-construction; and
k 150MW with consent for development.
SSE has also submitted for approval by
the relevant planning authorities in the UK
and Ireland proposals for onshore wind
farms with a total capacity of 1,400MW.
Beyond this, SSE has around 2GW of
onshore wind farm capacity development
opportunities in the pre-planning phase
in the UK and Ireland and over 3GW under
development in mainland Europe.
In addition to its onshore capacity,
SSE has offshore wind farm capacity in
operation or under construction totalling
almost 350MW, comprising:
k a 50% stake in the 10MW Beatrice
offshore wind farm in the Moray Firth;
k a 50% share of the 500MW Greater
Gabbard development now under
construction in the outer Thames
Estuary; and
k a 25.1% share of the 367MW Walney
offshore wind farm now under
construction in the Irish Sea.
All of this means that SSE now has
3,660MW of renewable energy capacity
Onshore wind capacity – MW
2010
2009
2008
2007
160
2006 40
840
690
600
the scope of the environmental impact
statement that would accompany planning
applications for the schemes, currently
planned to be submitted during 2012.
Construction is unlikely to start before
2014 at the earliest, and progress of the
schemes (and other such developments)
will be dependent upon a satisfactory
public policy and regulatory framework,
including TNUoS charges.
They would be the first brand new pumped
storage schemes to be developed in Great
Britain since work began on the Dinorwig
scheme in Wales in 1974. Subject to final
agreements and design, it is envisaged
that the proposed schemes would each
have an installed capacity of between
300MW and 600MW; and each would be
able to produce in excess of 1,000GWh of
electricity in a typical year to help meet
peak demand.
In both cases, the upper reservoirs would
be large, enabling electricity generation
to continue for longer periods, without the
need to pump water from the loch below,
than is the case for other pumped storage
schemes in Great Britain. Both schemes
would require the construction of a dam
to impound water and create the upper
reservoirs, but it is currently envisaged
that water pumping and electricity
generation at both developments will
be carried out under ground, thereby
avoiding any visual impact in the Great
Glen itself.
Wind generation – operations
As at 31 March 2010, SSE owns and
operates 840MW of onshore wind farm
capacity in the UK and Ireland, compared
with 690MW at 31 March 2009. Of the 2010
total, 370MW is in the Republic of Ireland.
SSE also has 2MW of onshore wind farm
capacity in Portugal.
Output from SSE’s portfolio of wind farms
in 2009/10 was (comparison with previous
year in brackets):
k 1,007GWh in the UK, (953GWh); and
k 854GWh in the Republic of Ireland,
(765GWh).
On average, the turbines at SSE’s wind
farms in the UK and Ireland achieved 97%
28
Scottish and Southern Energy
Annual Report 2010
Business overview (continued)
SSE has an experienced wind energy
development team comprising over 250
people with the specialist skills to make
sure that these factors are rigorously
applied so that the electricity output
from the wind farm capacity it develops
is maximised.
Onshore wind investment projects
The principal projects within SSE’s
onshore wind farm construction portfolio
are Clyde (350MW), in South Lanarkshire,
and Griffin (156MW), in Perthshire:
k Clyde: Work at the site is continuing,
following the resolution of the
secondary, and some of the primary,
radar-related issues associated
with the consent granted for the
development. The wind farm is being
developed in three sections, with the
appointments of the remaining lead
contractors for each of the three
sections expected to be finalised this
year. Clyde is expected to have a load
factor of around 35% and produce over
1,000GWh of electricity in a typical year.
The first section of the development
should be completed by the end of 2011
and the development as a whole in
2012. Its total construction cost is
expected to be around £500m.
k Griffin: Pre-construction work is well
under way at the site, in which SSE
now has a 100% stake. The annual
output is expected to be around
400GWh. Its construction cost is
expected to be around £200m and
it should be completed in 2012.
SSE has a total of 14 wind farm projects
currently under construction and expects
a total of over 100MW of onshore wind
farm capacity currently under construction
to be commissioned during 2010/11.
In addition to the timely completion of
construction work, the commissioning
of wind farm developments is dependent
on their ability to connect to the electricity
network. This has been identified as one
of the key barriers to new renewable
energy across the UK and Ireland.
SSE is pursuing other options for the
development of its onshore wind farm
portfolio and will shortly ask the Scottish
Government for its formal opinion on the
scope of the environmental statement that
would accompany the planning application
for a 67 turbine extension to the Clyde
wind farm.
Offshore wind investment projects
SSE has a stake in two major wind farms
under construction off the coast of the UK:
Greater Gabbard (500MW; 50%; in
partnership with RWE npower renewables
through Greater Gabbard Offshore Winds
Limited); and Walney (367MW; 25.1%; in
partnership with DONG Energy):
k Greater Gabbard: Following the initial
delay in commencing foundation
installation, good progress has been
made and half of the 140 turbine
foundation monopiles and almost
one third of the transition pieces have
now been installed, as has the first of
two transformer platforms. Greater
Gabbard Offshore Winds Limited
expects to resolve satisfactorily,
as part of the normal contractual
process, the claim it has received for
additional costs relating to foundation
monopiles. Commissioning of the
onshore sub-station is well-advanced
and installation of the first export
cable, inter-array cables and turbines
is under way. Greater Gabbard is
expected to have a load factor of over
40% and produce around 1,900GWh
of electricity in a typical year, of which
SSE will take 50%. The wind farm is
expected to require a total investment
by SSE of around £650m, excluding
connection to the electricity grid.
The development remains on course
to be completed in 2012.
k Walney: SSE acquired its 25.1% stake
in Walney from DONG Energy, which
retains a 74.9% stake, for a total
consideration of up to around £39m,
of which around £17m is subject to the
operational performance of the wind
farm. As a shareholder in the project,
SSE will pay its pro rata share of the
construction costs (just under £250m)
with payments being made when
each phase of the wind farm is
commissioned. Walney will be
constructed in two phases, each
totalling 183.6MW. Construction
of the first phase is now under way,
with the first monopiles installed and
construction of the second phase
scheduled to start in the spring of
2011. The wind farm is therefore
expected to enter commercial
operation in two phases: during the
first half of 2011 and towards the end
of 2011. DONG Energy is leading the
construction and operation of the wind
farm. The wind farm is expected to
have an average load factor of around
43% and produce around 1,300GWh
of electricity in a typical year. SSE
and DONG Energy will market the
output of the wind farm in proportion
to their equity stakes. Excluding the
connection to the Great Britain
electricity network, the cost of
constructing Walney is expected to
total just under £1bn. DONG Energy
has provided SSE with financial
guarantees relating to the final
capital cost of the project and its
timely completion.
In December 2009, the UK government
announced that 2.0 ROCs will be earned
by the output of all offshore wind projects
accredited between April 2010 and March
2014, an increase from 1.5 ROCs, and this
was confirmed by Parliamentary Order
in April 2010.
Offshore wind future opportunities
SSE believes that the Greater Gabbard
and Walney projects give it a strong
offshore wind construction portfolio for
the next few years. Beyond that, other
options are being developed. In May 2010,
SSE and RWE npower renewables secured
rights from The Crown Estate to develop
a 500MW wind farm close to the existing
Greater Gabbard development. A planning
application is expected to be submitted to
the Infrastructure Planning Commission
by 2011, with a decision expected in 2012.
A grid connection for the project was
secured with National Grid in 2009, to be
potentially available from October 2015.
In addition, SSE is a member of two
consortia which have secured development
partner status from The Crown Estate
in Round 3 of its UK offshore wind farm
development programme:
k Forewind, formed by SSE, RWE
npower renewables, Statoil and
Statkraft, has been awarded
development partner status for the
9GW offshore wind farm proposed for
Dogger Bank, 125km from the coast
of Yorkshire; and
k Seagreen, formed by SSE and Fluor
Corporation, has been awarded
development partner status for the
proposed 3.4GW offshore wind farm
proposed for the Firth of Forth, 25km
from the coast of Fife.
SSE’s capacity share of the two proposed
wind farm developments totals around
4GW. Over the next few years, both
consortia will be working closely with The
Crown Estate to undertake site-specific
surveys, secure grid connections and
work with stakeholders before bringing
forward applications to build the wind
farms. As a result, construction work
would not begin until 2015 at the earliest.
SSE has also been awarded exclusive
rights from The Crown Estate to develop
offshore wind farms at locations in
29
Introduction to SSE
Directors’ report
Financial statements
Shareholder information
Scottish territorial waters (including
two where it is in partnership with other
specialist developers) with a total capacity
of over 2GW, of which its share is 1.7GW.
Their development is subject to site-
specific consultations and environmental
impact assessments, statutory consents
and satisfactory completion of the
Strategic Environmental Assessment
for offshore wind announced by the
Scottish Government in October 2008.
Fluor Limited and SSE have decided
against taking the proposed Bell Rock
development any further. This is a result
of existing and ongoing radar activity in
the area for which mitigation has been
examined and no solution found.
SSE believes that harnessing the power
of offshore wind will enable the UK to
generate significant amounts of low-
carbon energy from a totally renewable
source and therefore meet the country’s
energy security and climate change
objectives. Its success in the Round 3 and
Scottish territorial waters processes adds
to its options for developing its generation
portfolio in the longer term. The strength
of those options in offshore wind is
reinforced by its:
k partnerships with other developers,
in line with its drive to minimise the
inevitable risks involved in projects
of this kind and to maximise the
development potential of the sites; and
k focus on establishing a strong supply
chain for offshore wind developments
through, for example, participation
in the Carbon Trust’s Offshore
Wind Accelerator, a research and
development initiative to reduce
costs, and investment in Burntisland
Fabrication Ltd (BiFab) (see ‘Emerging
Technologies’ below).
SSE’s priority in offshore wind for the next
three years is the successful completion
and commissioning of Greater Gabbard and
Walney. The opportunities secured through
the Round 3 and Scottish territorial waters
processes are for development in the
second half of this decade.
Wind generation – businesses
and communities
Energy price certainty and environmental
targets continue to drive businesses’
demand for wind turbines sited on
their premises and there is significant
community interest in the potential for
wind energy to help meet sustainable
energy needs and bring local benefits.
SSE’s first consented community wind
turbine will be erected later this year for
the Sanday Development Trust on the
Orkney island of Sanday. A further 50MW
of projects are nearing readiness for
submission to the relevant planning
authorities and 450MW of projects are
currently in development.
Wind generation investment –
Continental Europe
In addition to its wind and hydro
investments in the UK and Ireland, SSE has
options to invest in renewable energy in
Europe, principally Portugal, Scandinavia,
Italy, Germany and the Netherlands
where there are particular opportunities
for growth in renewables. Any investment
will involve working with partners and will
largely be on an equity basis, with non-
recourse or project-specific debt typically
expected to account for around 75% of the
total cost of the investment. At the same
time, SSE continues to believe that the
scope for the development of its existing
businesses in the UK and Ireland is very
substantial, and investments there will
continue to be prioritised.
Emerging technologies – marine energy
SSE has a 47.8% stake in Aquamarine
Power, which in September 2009
successfully completed the first round
of its fundraising to raise £10m from
investors in the UK and Ireland. This
followed the successful deployment of a
full scale demonstrator of Aquamarine’s
300kW Oyster wave energy converter at
its testing berth at the European Marine
Energy Centre (EMEC) in Orkney. Testing
is expected to take up to two years.
Aquamarine expects to have a fully
commissioned, commercially available
wave farm in place by 2014.
In March 2010, SSE was awarded
exclusive rights to develop 400MW of
wave and tidal energy at four sites in
the Pentland Firth and Orkney Waters
and a further 400MW with its partners,
Aquamarine Power and OpenHydro.
The award was part of the world’s first
commercial leasing programme for wave
and tidal energy generation projects,
undertaken by The Crown Estate.
Over the next few years, SSE and its
partners will be working closely with The
Crown Estate and other stakeholders before
bringing forward applications to construct
the wave and tidal energy developments.
The vast majority of construction work is
not expected to begin until after 2015.
As the leading generator of renewable
energy in the UK, SSE is committed
to building on its existing renewable
portfolio by developing viable wave and
tidal sites using industry-leading marine
technologies. It will now work closely with
statutory bodies, local communities and
The Crown Estate to take forward this
significant opportunity.
Alternative energy – operations
SSE’s plant at Slough has a current
generating capacity of 80MW and remains
the UK’s largest dedicated biomass energy
facility. During 2009/10, it produced 136GWh
of electricity qualifying for ROCs, compared
with 148GWh during the previous year. The
output from dedicated regular biomass
plants attracts 1.5 ROCs per MWh.
Alternative energy – investment
Experience of managing the plant at
Slough has given SSE a platform from
which to invest in biomass and other
alternative fuels such as those derived
from waste. In line with its approach of
developing a number of options for the
site, SSE has submitted an application
for consent to develop for a multi-fuel
combined heat and power (CHP) facility
at Ferrybridge.
The reliability of fuel sources is a key
issue in alternative energy. The proposed
multi-fuel CHP facility would use a range
of fuel sources, which could include
biomass, waste-derived fuels and wood
products, to generate 108MW of electricity
and to provide heat to the Ferrybridge site.
It would be compliant with the Waste
Incineration Directive. The development is
currently estimated to require investment
of around £350m and SSE expects to take
a decision on whether to proceed with it
in the course of the next year.
In addition, the acquisition of the three-
unit power station at Uskmouth gives SSE
further options for the development of
new lower-carbon generation assets
alongside the existing generation assets.
Alternative energy – biogas
In May 2010, SSE agreed to invest a
net £11.3m to allow the construction
of Scotland’s largest biogas plant at the
former landfill site at Barkip in North
Ayrshire. The deal made SSE the first
energy company in the UK to commit to the
construction and operation of an anaerobic
digestion biogas plant of this type. The
Barkip site will be capable of processing
30
Scottish and Southern Energy
Annual Report 2010
Business overview (continued)
around 80,000 tonnes of waste annually,
producing enough gas to generate up to
2MW of electricity. The new project will
enable SSE to gain experience in owning
and operating this technology, which it
believes could offer opportunities beyond
on-site electricity generation, including
connection to the gas distribution network
in the future.
Alternative energy – Forth Energy
Forth Energy, the joint venture between
SSE and Forth Ports PLC created in
2008, has prepared proposals for the
development of dedicated biomass power
stations at four of Forth Ports’ sites in
Scotland. It is undertaking consultations
on the proposals and intends to seek
consent during the course of this year
to build the plants. The plants are
proposed for Dundee, Leith, Rosyth
and Grangemouth. Their total installed
capacity would be around 400MW and
they could also produce heat to be used
at other facilities at the Forth Ports’ sites
and, potentially, other neighbouring sites.
Emerging technologies – SSE Ventures
In 2007, SSE set up SSE Ventures (SSEV)
to develop and grow its portfolio of
investments in small and medium-sized
businesses offering renewable, sustainable
and energy efficiency-enhancing products
and services. These include Aquamarine
Power and RockTron (Widnes) Ltd (see
above) and Smarter Grid Solutions Ltd
(see below).
In addition to the financial support offered,
SSEV works in close partnership with
investee companies to help their products
or services make progress towards full
commercial viability. Participation in
emerging technology developments helps
SSE to anticipate, be at the forefront of,
and adapt to, the changes in energy
production and consumption that are
likely to occur over the next decade.
For example, in April 2010, SSE purchased
a 15% stake in Burntisland Fabrications Ltd
for a total consideration of £11m. In addition
to the equity stake, SSE has secured an
agreement with BiFab for the supply of at
least 50 jacket substructures annually to
support SSE’s offshore wind developments.
BiFab is an established fabricator of
structures and equipment for the oil and
gas industry which has recently extended
its expertise into the fabrication of jacket
substructures suitable for offshore
wind developments. BiFab has already
attracted government support to develop
a new manufacturing facility for offshore
wind jacket substructures.
SSE’s investment will be used to further
develop this facility and this is expected
to expand BiFab’s capabilities to a total
annual capacity of up to 130 units. The
investment follows BiFab’s successful
delivery of jackets for the Greater Gabbard
offshore wind project.
Through equity and loans, and including the
BiFab investment, SSEV has invested or
committed to invest a total of £120m in a
variety of emerging technologies since it
was formed and now holds direct or indirect
stakes in a total of 36 companies. In total,
these companies employ over 1,000 people.
Nuclear power
It is expected that the total capacity of the
UK’s nuclear power stations will fall by over
7,000MW by 2020, even if advanced gas-
cooled reactor (AGR) stations are allowed
by the Nuclear Installations Inspectorate to
operate for five years beyond their existing
planned closure dates. History suggests
that the performance and reliability of
nuclear power stations with extended
lives tends to deteriorate.
These question marks do not apply to
modern nuclear power stations, which
Malcolm Wicks MP said in his August
2009 review of energy security represent a
proven, low-carbon generation technology
which could benefit security of energy
supply by increasing the diversity of the
fuel mix and reducing reliance on gas
imports. He suggested that nuclear power
should provide some 35%-40% of the
country’s electricity after 2030.
SSE believes that some participation
in new nuclear power stations may
make sense in view of its commitment
to a diverse generation portfolio and
complements its core investment in
renewable sources of energy.
During 2009, a consortium of GDF Suez SA,
Iberdrola SA and SSE, in which SSE has a
25% stake, secured an option to purchase
from the Nuclear Decommissioning
Authority land for the development of new
nuclear power generating plant adjacent
to Sellafield in Cumbria, for a total cash
consideration that could reach £70m.
The consortium now intends to prepare
detailed plans for developing new nuclear
power plant at the site with a total capacity
of up to 3.6GW. These plans will be
prepared in consultation with the safety
authorities and local stakeholders and
will be submitted for consideration by the
relevant planning authorities, with the aim
of being able to begin construction of the
first new reactor around 2014. On this
basis, the new power station would
not be commissioned before 2020.
Generation priorities for 2010/11
and beyond
SSE’s key operational objectives in
Generation during 2010/11 are the
same as in any given year:
k comply fully with all safety standards
and environmental requirements;
k ensure those power stations are
available to generate electricity as and
when required in response to customer
demand and market conditions; and
k operate power stations efficiently to
achieve the optimum conversion of
primary fuel into electricity.
During 2010/11, SSE expects to invest
over £1bn in maintaining and upgrading
existing generation assets and in
developing new assets. Its investment
priorities in 2010/11 are to:
k complete asset maintenance and
refurbishment programmes on time
and on budget;
k meet key milestones in new asset
development, including completion of
another 100MW of onshore wind farm
capacity and first electricity generation
at Greater Gabbard; and
k make progress in developing the
diverse range of investment options
it has created for the second half of
this decade.
In the five years between 2008 and 2013,
SSE currently expects that its investment
across its entire generation portfolio will be
over £4bn, including investment in existing
assets. This investment programme is
designed to abate the environmental
impact of existing assets and extend their
working lives and to deliver new assets,
principally in renewable energy but also
thermal generation. All of this will support
security of energy supply.
This focus on good operational performance
and on effective investment is designed to
give SSE a balanced and growing portfolio
of efficient electricity generation assets,
with a diminishing environmental impact,
in which its exposure to fossil fuel price
volatility is increasingly diluted.
SSE will also actively seek to maintain
optionality and diversity in the future
development of its generation portfolio so
that it remains on course to reduce by 50%
the carbon dioxide intensity of electricity
produced at power stations in which it
has an ownership or contractual interest,
over the period from 2006 to 2020.•
31
Introduction to SSE
Directors’ report
Financial statements
Shareholder information
Supply
A sustainable supply
business is one which
provides the energy
and related products
and services that people
actually need in the
higher-unit price, lower-
carbon environment
expected in the future.
k Electricity supply page 31
k Gas supply page 31
k Home services page 35
Context
The Great Britain energy regulator, Ofgem,
states on its website that: ‘Competition
in the retail energy markets has brought
considerable benefits to industrial,
commercial and domestic customers since
it was introduced. Allowing customers to
choose the supplier of their choice keeps
the pressure on costs and promotes greater
choice of tariffs and services for customers.’
This was endorsed by the UK Treasury
and the UK Department of Energy and
Climate Change, who stated in March
2010 that: ‘In principle, competitive
markets should provide the best outcome
for consumers. The liberalisation of Great
Britain’s market has delivered increased
choice in tariffs and services and the
ability to switch supplier.’ It added that the
UK’s electricity switching rate per annum
is the highest in Europe and the highest
of any sizeable competitive energy market
in the world. Over the last five years,
more energy and gas customers switched
supplier than in any other UK consumer
services sector of a comparable size,
apart from car insurance.
As part of its market monitoring role,
Ofgem publishes periodic reports on
developments in the domestic retail
market and conducts investigations
and consultations into the performance
of the domestic and the non-domestic
markets. As retail competition develops the
regulatory framework is kept under review.
Ofgem published its most recent ‘Electricity
and Gas Supply Market Report’ in February
2010, which reiterated a key point from its
Energy Supply Probe in 2008: ‘The Probe
highlighted that the energy supply
businesses of the Big 6 act as a hedge
for the electricity generation businesses…
Generally we found that the top priority of
the vertically integrated energy businesses
was to deliver profits from the business as
a whole and that, as part of this, suppliers
accepted that changing wholesale prices
may lead to profit shifting from upstream
to downstream and vice versa.’
Ofgem’s February 2010 Report also
noted ‘the declining trend in domestic
average gas consumption since 2005’.
This reflects the fact that obligations on
energy suppliers to help customers make
energy savings have been in place since
1994. In July 2009, it was announced that
the current energy efficiency scheme,
the Carbon Emissions Reduction Target
(CERT), would be extended to 2012 and
that smart meters should be installed
in every home by 2020. In addition, the
Community Energy Saving Programme
(CESP) came into effect on 1 September
2009. It requires gas and electricity
suppliers and electricity generators
to deliver energy-saving measures to
domestic customers in specific low
income areas of Great Britain.
Energy supply objectives
All of this demonstrates that the key
issues in energy supply are prices,
products, customer service and energy
efficiency. Against this background,
SSE’s objective is to retain and gain
energy supply customers by:
k offering consistently competitive
prices over the medium term;
k providing market-leading products
and services to help transform energy
consumption;
k delivering a quality of service that
goes beyond best-in-sector; and
k successfully delivering energy
efficiency schemes.
As consumption of energy changes,
SSE believes that a sustainable supply
business is one which provides the energy
and the related products and services that
people actually need in the higher-unit
price, lower-carbon environment expected
in the future. This is central to retaining
and gaining customers.
Energy supply operations –
customer numbers
SSE supplies electricity and gas in Great
Britain as Southern Electric and SSE
(England), Swalec (Wales), Scottish Hydro
(Scotland) and Atlantic. During 2009/10,
it achieved a net gain of 100,000 energy
supply customer accounts in Great
Britain, taking the total to 9.16 million.
This was the eighth successive year in
which SSE achieved a net gain in energy
supply customer numbers and means it
has more than doubled its total number
in that period. The total comprises:
k 5.17 million domestic electricity
customer accounts;
k 3.54 million domestic gas customer
accounts; and
k 0.45 million business electricity
and gas sites.
Within the total, 3.16 million customer
accounts are for loyalty products such
as energyplus Argos, which rewards
customers with money-off discount
vouchers, and energyplus Pulse, under
which customers are able to support
the British Heart Foundation (which
received £205,000 from SSE in respect
of energyplus Pulse customers during
2009/10, taking the total since the product
was launched to over £1.1m).
The total also includes M&S Energy, a
dual fuel product launched in October
2008 by SSE and Marks & Spencer
(M&S). The product is available to M&S
customers exclusively through M&S’
stores and website, and by 31 March 2010
had attracted 175,000 customer accounts.
During 2009/10, SSE, supplying energy
as Airtricity, increased its customer base
in the all-island electricity market in
Ireland from 50,000 accounts to 190,000.
Of these accounts, 75% are household
and 25% are industrial and commercial.
Energy supply operations –
prices in Great Britain
Over the past few years, SSE has
maintained a responsible pricing
policy, with the objectives of providing
consistently competitive prices over the
medium term and protecting customers
from the full impact of volatile wholesale
prices. The application of this policy
means SSE was the cheapest energy
supplier on average over the five years
to 31 March 2010, compared to all other
major suppliers in the GB market (based
on a standard quarterly or monthly direct
debit dual fuel annualised bill calculated
at the end of every month averaged
across all regions and based on industry
32
Scottish and Southern Energy
Annual Report 2010
Business overview (continued)
2010 at a glance:
Customers
Household gas customers
(GB) – millions
3.54
2009 – 3.50
Household electricity
customers (GB) – millions
17.5
2009 – 5.10
Business energy
customers (GB) – millions
0.45
2009 – 0.45
Home services customers
(GB) – millions
0.41
2009 – 0.33
Energy customers
(Ireland) – millions
0.19
2009 – 0.05
Total customer
numbers – millions
76.9
2009 – 9.43
standard electricity consumption
of 3,300kWh per annum and gas
consumption of 20,500kWh per annum).
SSE introduced a package of changes in
prices for household gas supply from 29
March 2010 under which it cut unit prices,
adjusted the fixed charge element in bills
and removed the extra charges levied on
its single fuel and pre-payment tariffs
compared with standard credit tariffs.
k final consumption of electricity fell
by 6.8%, with domestic use down
by 3.2%; and
k demand for gas was 7.7% lower, with
consumption in the domestic sector
down by 5.4% (provisional estimate).
In spite of progressively colder winters
over the last three years, SSE household
customers reduced their average
usage to:
k 558 therms of gas, compared with
598 therms in the previous year, and
597 therms in 2007/08; and
k 4,540kWh of electricity, compared with
4,748kWh in the previous year, and
4,834kWh in 2007/08.
The effect of these changes on a typical
customer using the industry standard
amount of gas was to reduce SSE’s gas
bills by: 4% or £30 (standard credit/direct
debit); 7% or £56 (single fuel); and 9%
or £70 (pre-payment). The removal of
the extra charges levied on SSE’s gas
pre-payment tariff followed the earlier
removal of the extra charges levied on
its electricity pre-payment tariff.
On a weather-corrected basis, average
household usage of both gas and
electricity reduced in all three years.
As a result of these trends, households
Future trends in energy prices for
are less exposed to the impact of high
domestic customers will depend on
prices than they otherwise would be.
what happens in wholesale electricity
In 2009/10, the reduction in energy
and gas markets, with public policy and
consumption meant household bills were
regulatory decisions on energy production, around 5.5% lower than they would have
been had consumption levels in 2007/08
distribution and consumption also having
been maintained, reducing the average
a significant impact. For example, the
costs associated with the EU ETS, RO and
bill by around £70 per annum.
CERT are all on an increasing trend, as
are the costs of distributing energy. The
UK Energy Act 2010 contains measures,
such as a financial support mechanism
for carbon capture and storage (CCS)
and mandatory social price support,
which will maintain upward pressure
on retail energy prices.
Much more progress is possible. The UK
Committee on Climate Change stated in
October 2009 that ‘energy efficiency in
homes could be improved by 35% by 2020’
with an ambitious programme of improved
insulation, the installation of energy
efficient condensing boilers and major
improvements in electrical appliance
efficiency. SSE believes that achieving
this step change in energy efficiency must
be a key priority over the next decade.
In practice, the competitive supply market
and the exhaustive scrutiny to which
energy suppliers are subject represent
the best means of ensuring that prices
under any scenario are as low as possible. Energy supply operations –
Energy supply operations –
bills in Great Britain
There is a clear distinction between the
price of a unit of energy and the amount
that customers pay for heating and
powering their homes. The sustained
investment in energy efficiency
programmes undertaken in recent
years is delivering a sustained reduction
in the amount of gas being consumed
in Britain’s homes.
In ‘Energy Trends’ in March 2010, the
UK Department of Energy and Climate
Change reported that the UK was one
of just seven of the EU-27 countries to
increase progress on energy efficiency
between 2000 and 2007 compared with
1996-2000. It also showed that in the
UK in 2009, compared with 2008:
payment profiles
A total of 58% of SSE’s domestic
electricity and gas accounts are paid by
direct debit or standing order. A further
11% are paid through pay-as-you-go
(or pre-payment) meters and the balance
are on credit terms and settled by cheque
or other such payment methods. In
September 2009, Ofgem published data
on payment methods which showed that
50% of all electricity customers in Great
Britain and 53% of all gas customers
pay by direct debit.
As at 31 March 2010, the total aged debt
(ie debt that is overdue by more than six
months) of SSE’s domestic and small
business electricity and gas customers
was £90m, compared with £72m in March
2009, an increase of 25%. A bad debt-
related charge to profits of £73m has been
33
Introduction to SSE
Directors’ report
Financial statements
Shareholder information
become ‘deadlocked’ may be taken to the
new Energy Supply Ombudsman. During
2009/10, there were 374 SSE-related
complaints to the Ombudsman, compared
with 183 in the six months following the
launch of the new arrangements in
October 2008.
Although SSE maintained its best-in
sector position in customer service
during 2009/10, it was a year in which
the profile of the energy supply sector
remained very high. In total, SSE’s
energy supply customers in Great
Britain made 21 million calls to the
Company’s teams in Basingstoke, Cardiff,
Cumbernauld, Havant and Perth during
2009/10. These conversations allow SSE
to assess, consider and respond to
customers’ concerns and, over time,
adapt the services and products it
provides accordingly.
SSE measures the performance of
key customer service functions such
as General Enquiries and House Moves
through a Net Promoter Score (NPS).
The most recent results suggest the
NPS ranges from +38% to +54%.
More broadly, SSE recognises that
energy supply in Great Britain is not
well-regarded among customers for
its transparency. In response the UK
government undertook to require energy
suppliers to publish information about
available tariffs in annual statements.
In keeping with its commitment to further
improvements in customer service, and
maintaining its sector-leading position,
SSE has committed to going above this
requirement and publishing information
on all bills. This was welcomed by MPs
from all parties in an Early Day Motion
in the House of Commons in March 2010.
Web and email are now firmly established
as the second most common means of
communication with the Company used
by SSE’s customers. Around 18% of SSE’s
transactions with customers now take
place online and its customers now have
490,000 paperless billing accounts, up
from 287,000 a year before. This, in turn,
indicates that the popularity of e-services
such as paperless billing is likely to
continue to increase rapidly over the
next few years. Enabling customers
to carry out more transactions online
if they choose is now one of SSE’s top
customer service priorities. In line
with that, the capability of its websites
were upgraded during 2009/10 to
create a technical platform to allow the
deployment of enhanced functionality
in the future.
Energy customer numbers – millions
2010
2009
2008
2007
2006
9.35
9.10
8.49
7.75
6.70
Energy customer numbers – composition %
Household electricity (GB) 55
Household gas (GB) 38
Business sites (GB) 5
Household/business (Ire) 2
made. This comprises a £20m increase in
the energy supply bad debt provision and
£53m of debt write-off and compares with
a charge of £35m in the previous year.
As expected, given the general economic
climate, 2009/10 posed significant debt
management challenges, with the volume
of work in this area for SSE’s Customer
Service division increasing. SSE has
sought to manage this situation by taking
a number of steps, including rigorous
assessment of the credit-worthiness
of potential business customers and
making earlier contact with the customer
(business or household) when it becomes
apparent that payments are in arrears, so
that the issues are more manageable from
everyone’s point of view. The work of office-
based credit agents is supplemented by the
work of field-based teams (the number and
geographic coverage of which has been
increased) who work with customers to
resolve debt.
As a result, aged debt among business
customers has been reduced from £15m
to £12m and aged debt levels were on a
reducing trend towards the end of the
financial year. Nevertheless, with the
economic outlook remaining uncertain,
there is a significant risk that aged debt
will remain at a high level in 2010/11.
Energy supply operations –
customer service
SSE’s growth in energy supply has been
achieved while being independently and
consistently recognised as the customer
service benchmark for the rest of the
energy supply industry. To provide
customers with the best possible value
for money, SSE believes that it needs
to provide best-in-sector service and
products, as well as competitive prices
over the medium term.
SSE’s position as the customer service
benchmark for the rest of the energy
supply industry is illustrated by:
k the Customer Satisfaction Report
from www.uSwitch.com, published
in September 2009, in which SSE was
ranked the best energy supplier for the
sixth successive time. www.uSwitch.com
stated: ‘SSE remains the customer
service benchmark for the rest of
the industry.’;
k the JD Power and Associates 2009 UK
Electricity and Gas Supplier Customer
Satisfaction Study, in which SSE’s four
supply brands took four of the top five
places in electricity supply and gas
supply, with its Atlantic brand ranked
first in electricity; and
k the UK Customer Satisfaction Index,
published by the Institute of Customer
Service in January 2010, in which
SSE was the top performer in the
Utilities sector.
Under the Consumer, Estate Agents and
Redress (CEAR) Act 2007, customers who
are unable to resolve issues with their
energy supplier can take them up with
Consumer Direct. Complaints which are
not resolved within eight weeks, or which
34
Scottish and Southern Energy
Annual Report 2010
Business overview (continued)
Domestic customers’ payment methods – %
Direct debit 58
Pre-payment 11
Credit terms 31
Energy supply operations –
energy efficiency
Using energy more efficiently is the
fastest and most cost-effective way
of reducing customers’ energy costs,
sustaining supplies for the long term and
reducing emissions of carbon dioxide. As
an energy supplier, SSE has obligations
under the CERT scheme to deliver energy
efficiency measures to households
throughout Great Britain and in 2009/10
funded the installation of cavity wall
insulation in 146,000 homes and loft
insulation in 128,000 homes (excluding
DIY insulation). This is up from 87,000
homes and 104,000 homes respectively.
In its CERT Annual Report, a review of
CERT in 2008/09, published in August
2009, Ofgem stated that SSE had met half
of its overall carbon emissions reduction
obligation for the three years to 2011. SSE
also achieved the highest level of solid
wall insulation for hard-to-treat properties
among all the obligated energy suppliers.
Complementing CERT, the CESP aims
to deliver energy efficiency measures
on a community basis. The CESP will
promote a ‘whole house’ approach, to
be delivered through the development of
community-based partnerships involving
local authorities and energy suppliers
via a house-by-house, street-by-street
approach. SSE’s first CESP programmes
will begin during 2010/11 at locations
throughout England, Scotland and Wales.
CESP and CERT will require the
commitment of significant resources by
energy suppliers, including SSE, in the
coming years. Nevertheless, SSE supports
the goal of securing substantial savings in
energy bills and reductions in emissions
of carbon dioxide and achieving greater
energy efficiency continues to be the
most sustainable way of achieving this.
Energy supply operations –
vulnerable customers
While any type of poverty, including fuel
poverty, fundamentally results from an
individual or household having insufficient
income, SSE recognises that it has a
significant role to play in reducing its
customers’ energy consumption (and thus
the associated costs) and a role also in
helping those of its customers who struggle
to pay for their basic energy needs.
SSE’s social tariff, energyplus care, gives
eligible dual fuel customers a discount
compared with its standard tariff, as well
as other help including benefit entitlement
checks and free energy efficient appliances
and home insulation. During 2009/10, SSE
implemented a two-tier level of assistance
for fuel-poor customers, featuring a rebate
as well as energyplus care, and thus has
been able to assist a larger number of
customers than would be the case if the
flat rate was maintained. The number of
customer accounts benefiting from these
measures at 31 March 2010 was 155,000,
compared with 103,000 the previous year.
Using energy more efficiently is the
fastest and most cost-effective way
of reducing customers’ energy costs,
sustaining supplies for the long term and
reducing emissions of carbon dioxide.
This fulfilled SSE’s voluntary agreement
with the UK government to operate
schemes with a total value of £22m to
help vulnerable customers in 2009/10.
Under this agreement, SSE’s contribution
will increase to around £27m in 2010/11.
In addition to this, SSE issued credits
worth a total of almost £3.5m in January
2010 to its 280,000 customers using gas
pre-payment meters to assist them during
the coldest part of the year.
The Energy Act 2010 created a statutory
framework for schemes which allow the
Secretary of State for Energy and Climate
Change to require energy suppliers to
support vulnerable customers under the
existing voluntary agreement (see above).
It also set a framework requiring energy
suppliers to provide a specified level of
social price support (direct assistance with
energy bills) to more of the most vulnerable
customers. Further details, including
the nature of the benefit and the eligibility
criteria, will be set out in secondary
legislation after a consultation later this year.
It is SSE’s policy to do all it can to help
customers who may be having difficulties
in paying for the electricity and gas they
use by offering tailor-made payment
arrangements that suit their needs and
their circumstances. In March 2010,
customers with 233,000 electricity and
gas accounts were taking advantage
of these arrangements.
Energy supply operations –
energy products
Energy supply remains intensely competitive
and gaining and retaining customers’ loyalty
is key to long-term success. At a time of
higher energy prices, better plan is at the
centre of the portfolio of products and
services which SSE currently markets.
It offers a variety of incentives to help
customers use less energy and earn credits
as a result. The credits are then applied
as a reduction to customers’ energy bills.
SSE launched better plan towards the
end of 2007 as part of its commitment
to work in partnership with its customers
to help them reduce their energy use
and to create a more sustainable level
of energy consumption. During 2009/10,
customers with an additional 50,000
energy accounts joined better plan,
taking the total to 215,000.
Increasingly, smart technologies will
feature in SSE’s products and it is working
on a number of options for using new
technology to provide customers with
greater control over their energy
consumption and, therefore, its cost.
35
Introduction to SSE
Directors’ report
Financial statements
Shareholder information
Fuel Production
and Storage
The growing demand
in the UK for more gas
storage facilities to
help provide security
of supply of gas means
such facilities have
long-term value,
especially if their cycle
rate is fast enough.
k Gas storage page 36
k Gas production page 36
Overview
It is generally recognised that the UK now
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 to
meet demand from domestic customers,
the increasing number of gas-fired power
stations and other industrial and
commercial users. Imports could be
put at risk by periods of unusually low
temperatures, operational failures in
pipelines delivering gas to the UK,
political disputes in gas-producing
regions or high demand in other parts
of the world.
SSE owns and operates the UK’s largest
onshore gas storage facility near Hornsea
in East Yorkshire, in which around 325
million cubic metres (mcm) of gas can
be stored in a total of nine caverns.
Hornsea accounts for around 7% of the
total gas storage capacity in the UK and
15% of deliverability. With Statoil (UK)
Ltd, SSE is developing another gas
storage facility at nearby Aldbrough,
where an initial 115mcm of capacity
in four caverns is already available for
commercial operation. To form such
caverns, salt deposits around 2km under
ground are leached out by seawater
which, in turn, is replaced (dewatered)
by gas under pressure.
On 31 March 2010, SSE entered into an
agreement with Hess Corporation (UK) to
acquire its natural gas producing assets
in three regions of the North Sea (Everest/
Lomond; Easington Catchment; and
of the recession and in line with the
downturn in sales experienced across
the retail sector, and this prompted
a continuing reorganisation of SSE’s
activities in this area.
Energy supply operations – Ireland
During 2007, SSE identified Ireland
as a market where the skills used in
Great Britain could be successfully
deployed, giving it additional room
for expansion.
In 2009/10, through Airtricity, it increased
its customer base in the all-island
electricity market in Ireland from 50,000
accounts to 190,000 including 10,000
customers in Northern Ireland. Almost
all of these accounts are paid by direct
debit and almost half of them are online
accounts. SSE is now the third largest
energy supplier in the Republic of
Ireland and the fourth largest in the
all-island market.
The profile of Airtricity as a supplier of
energy has been significantly enhanced
by SSE’s acquisition of the assets of ESB
Contracts, the street-lighting business
of ESB (see Street-lighting below). It
currently maintains around 300,000 street
lights in the Republic of Ireland.
Energy supply priorities in 2010/11
During 2010/11, and beyond, SSE will
seek to:
k provide consistently competitive prices;
k
increase the number of customer
accounts across the Great Britain
and Irish all-island markets;
k secure further efficiencies in day-to
day operations, including the ways in
which customers are retained and
gained and the ways in which they
are given the services they need;
k maintain best-in-sector service,
k
including improvements in billing, call
handling times and enhancements to
online and smart services;
increase further the number of
customers on better plan and other
loyalty programmes;
k deliver energy efficiency
improvements, principally through the
CERT and CESP programmes; and
k continue to ensure customers’
energy accounts are well-managed.
In summary, SSE aims to build on
its position as the energy supplier with
the strong regional brands, best-in
sector service, consistently-competitive
pricing policy and range of value-
adding offers to secure another year
of customer growth.•
Energy supply operations –
other products
‘Home services’ is a frequently used
term, which has different meanings
within different organisations. For SSE
it means products and services which
complement the supply of electricity
and gas. SSE offers a range of gas
boiler, central heating and wiring
maintenance and installation products
and services for household customers
across 43 postcode areas covering
around two thirds of its energy supply
customer base.
During 2009/10, it increased its
maintenance customer numbers by
37%, to 158,000, and performed gas and
electric installation and re-wiring work
in 7,000 properties, an increase of 13%.
During 2010/11, SSE will aim to increase
further the number of customers with
energy-related products by expanding
its product and service range, improving
operational productivity and efficiency
and enhancing customer service levels.
The expansion of its home services
activities in this way, with the supporting
infrastructure, systems and processes
that are being developed, will allow SSE
to deploy a comprehensive ‘whole house’
approach to home energy services.
The talk telecoms package, under which
telephone line rental, calls and broadband
services are supplied, now has 252,000
customers, an increase of 32,000 on the
previous year.
The talk package has benefited from
being aligned to, and integrated with,
SSE’s main energy customer systems
and processes and this has allowed it
to grow customer numbers organically
since it was launched in 2003.
In response to the evolving
telecommunications market, SSE
continually reviews the structure of
its telephony products and tariffs and
expects to introduce minimum terms
contracts during 2010/11 to retain and
attract additional customers.
Sales of electrical and gas appliances
have continued to struggle in the light
36
Scottish and Southern Energy
Annual Report 2010
Business overview (continued)
Gas storage capacity – million cubic metres
2010
2009
2008
2007
2006
400
325
325
325
325
Transmission System at a rate of 40mcm
per day, equivalent to the average daily
consumption of eight million homes, and
the ability to have up to 30mcm of gas
per day injected.
SSE still expects its total investment
on the development at Aldbrough to
be around £290m. With its ability to
inject and deliver gas rapidly to meet
fluctuations in demand and supply,
Aldbrough will provide a valuable source
of flexibility to the UK gas market as it
becomes increasingly dependent on
imported gas to meet its energy needs.
SSE and Statoil (UK) Ltd have consent
to increase the storage capacity at the
Aldbrough site beyond that currently
under development. If developed in full,
this would approximately double the
amount of gas that can be stored, to
around 700mcm. SSE expects to take
a final decision on whether and how to
invest in a second phase of development
at Aldbrough by early 2011.
Gas production
In March 2010, SSE entered into an
agreement with Hess Limited to acquire
its natural gas assets and infrastructure
in three regions of the North Sea
(Everest/Lomond; Easington Catchment;
and Bacton).
SSE has agreed to pay a total cash
consideration of US$423m for Hess’
assets, maintaining its commitment
to its financial principle of a disciplined
withdrawn. Aldbrough added £2m
to operating profit in Gas Storage.
Gas storage – investment
The growing demand in the UK for more
gas storage facilities to help provide
security of supply of gas means such
facilities have a long-term value, especially
if their cycle rate (the speed at which gas
can be withdrawn from storage and then
replaced) is fast enough.
SSE’s joint venture with Statoil (UK) Ltd
to develop at Aldbrough what will become
the UK’s largest onshore gas storage
facility made further important progress
during 2009/10, with the first commercial
operations getting under way. Aldbrough
now provides a total of 115mcm of
capacity in four caverns – the first new
gas storage capacity to become available
in the UK for four years. A further 85mcm
of capacity is expected to become
available in the course of 2010/11.
When fully commissioned, currently
expected to be in 2012, it will have the
capacity to inject gas and store up to
370mcm in nine under ground caverns
(of which SSE will own two thirds).
Aldbrough will be the largest onshore
gas storage facility in the UK and have
the capacity to deliver gas to the National
This timely acquisition of natural
gas assets will enable SSE to enter the
upstream gas sector in a measured way
by buying proven and geographically
diverse production assets. These assets
will provide a new source of primary fuel
and a hedge for SSE’s gas generation
and supply activities.
Bacton) for a total cash consideration
of US$423m. The transaction is subject
to the receipt of all necessary partner
and regulatory approvals.
Gas storage – operations
Gas Storage delivered an operating profit*
of £41.8m, during 2009/10, compared with
£42.7m in the previous year, due to lower
differentials between summer and winter
gas prices.
At Hornsea, gas can be injected at a rate
of 2mcm per day and delivered to the
National Transmission System 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
and respond to market opportunities.
During 2009/10, including the critical
period of the UK’s unusually cold winter,
Hornsea maintained its excellent record
of dependability and was 100% available
to customers, except in instances of
planned maintenance. This enabled
storage customers to manage their
gas market risks and respond to gas
trading opportunities.
The new capacity which became available
at Aldbrough during 2009/10 (115mcm
in total – see below) also performed well
during 2009/10, with multiple cycles of
the capacity and significant delivery on to
the National Transmission System during
the cold period early in 2010. Following
the start of commercial operations in
July 2009, 387mcm of gas were injected
in to the new capacity and 401mcm were
37
Introduction to SSE
Directors’ report
Financial statements
Shareholder information
approach to acquisitions. The transaction
is subject to the receipt of all necessary
partner and regulatory approvals.
Networks
The gas resources which SSE is acquiring
total around 3,965 million therms (mth).
The headline transaction price for these
resources is $6.6-barrels of oil equivalent.
Additional, less certain resources of gas
may also be identified through further
exploration. The main production asset
operators are BG Group, BP and Perenco.
SSE currently needs on average around
13.5mth of gas per day to supply its
customers and to fuel its power stations,
and gas from the acquired assets, will
provide around 8% of that initially,
declining over the next 10 years.
While the upstream gas assets represent
the large majority of the transaction,
SSE will also acquire a number of other
assets from Hess, including its 17.7%
equity interest in the Central Area
Transmission System (CATS) pipeline,
which delivers over 10% of the UK’s total
gas demand through a 400km pipeline
from the central North Sea to a processing
terminal in Teesside. The CATS pipeline
is operated by BP.
This timely acquisition will enable SSE
to enter the upstream gas sector in a
measured way by buying proven and
geographically diverse production
assets. These assets will provide a
new source of primary fuel and a hedge
for SSE’s gas generation and supply
activities. The acquisition will also
give SSE involvement throughout the
gas chain – production, transmission,
storage, distribution and supply.
Fuel Production and Storage
priorities in 2010/11 and beyond
SSE’s operational and investment priorities
in Fuel Production and Storage during
2010/11 are to:
k maintain its excellent record of safety
and reliability at Hornsea;
k ensure safe and effective operation
of capacity at Aldbrough;
k maximise the amount of capacity
at Aldbrough that is available for
commercial storage;
k make a decision on whether to proceed
with the Aldbrough extension; and
production assets, in keeping with
k complete the acquisition of gas
its financial principles.•
SSE is the only energy
company in the UK
to be involved in
electricity distribution,
gas distribution and
electricity transmission.
After electricity and gas,
telecoms is SSE’s third
networks business.
k Electricity distribution page 38
k Electricity transmission page 41
k Gas distribution page 42
k Telecom networks page 43
Networks overview
SSE owns three electricity network
companies:
k Scottish Hydro Electric Transmission;
k Scottish Hydro Electric Power
Distribution; and
k Southern Electric Power Distribution.
These networks transmit and distribute
electricity to 3.5 million businesses,
offices and homes via 128,000km of
overhead lines and under ground cables.
SSE also has an equity interest of 50% in,
and provides corporate and management
services to Scotia Gas Networks (SGN)
which, through Southern Gas Networks
and Scotland Gas Networks, owns and
operates the medium and low pressure
networks which deliver gas to 5.7 million
properties in their areas of the UK.
All of these companies are the subject
of economic regulation through a Price
Control set by Ofgem which sets for
periods of five years the index-linked
revenue they can earn, through charges
levied on network users, to cover their
costs and earn a return on their regulated
assets. Ofgem also places incentives on
companies to be more efficient and
innovative and to deliver an enhanced
quality of service.
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 varied.
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,
a new Distribution Price Control started on
1 April 2010 and will run until 31 March 2015
and the current Transmission Price Control
is now expected to run until 31 March 2013.
2009/10 was the second year of the gas
Distribution Price Control for the five
years to 31 March 2013.
As at 31 March 2010, SSE’s estimate
of Ofgem’s valuation of the assets of its
electricity distribution and transmission
businesses (the Regulated Asset Value,
or RAV) was £2.97bn, based on Ofgem’s
methodology, including £405m for
transmission. This gives it around 12%
of the total Great Britain electricity
transmission and distribution RAV.
SGN estimates that the RAV of the
networks it owns was around £3.94bn,
based on Ofgem’s methodology, as at
31 March 2010. This makes it the UK’s
second largest gas distribution company,
with around one quarter of the total Great
Britain gas distribution RAV. SSE’s share
of this RAV is £1.97bn which, when added
to its electricity networks businesses,
gives it a total RAV of £4.94bn, making
it the second largest distributor of energy
in Great Britain.
SSE is the only energy company in the UK
to be involved in electricity distribution, gas
distribution and electricity transmission.
It therefore participates in three price
control reviews in every five years, which
gives it ongoing involvement in, and
extensive experience of, price control
issues in the UK. Together, these
lower-risk economically-regulated
natural monopoly businesses provide
a financial backbone and operational
focus for SSE and balance its activities
in the competitive Generation and
Supply markets.
Moreover, in addition to being relatively
low risk in themselves, the absolute level
of risk in these businesses has been
progressively reduced through the
regulatory process with, for example,
companies’ income no longer being
dependent on the volume of energy
distributed through their networks.
In March 2009, the Presidency of the
EU and Members of the European
Parliament agreed on new rules to
increase competition in the EU’s energy
38
Scottish and Southern Energy
Annual Report 2010
Business overview (continued)
2010 at a glance:
Energy networks
Electricity distribution
(SEPD) RAV – £m
1,705
2009 – 1,660
Electricity distribution
(SHEPD) RAV – £m
858
2009 – 834
Electricity transmission
(SHETL) RAV – £m
405
2009 – 380
Gas distribution
(Southern) RAV* – £m
1,370
2009 – 1,270
Gas distribution
(Scotland) RAV* – £m
598
2009 – 548
Total energy networks
RAV – £bn
9.4
2009 – 4.7
* SSE share (50%).
market by separating the management
of electricity generation companies
from that of transmission operators.
An Independent System Operator (ISO) –
where companies retain ownership of
their transmission networks although
their operation is managed by a separate
independent body (the ISO) – already
operates in Scotland, where SSE’s
transmission network is located.
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 and provides capacity and
bandwidth services for commercial and
public sector organisations and other
communications providers. Its network
now extends to around 11,200km
throughout Great Britain.
Energy networks performance overview
Operating profit* in Energy Networks
increased by 2.6%, from £584.2m to
£599.5m, contributing 36.9% of SSE’s
total operating profit*. This comprised:
k £415.8m in electricity networks,
compared with £403.7m in the
previous year; and
k £183.7m representing SSE’s share
of the operating profit* for SGN,
compared with £180.5m in the
previous year.
Electricity networks
Objectives
SSE’s objectives in electricity networks
are to:
k comply fully with all safety standards
and environmental requirements;
k ensure that they are managed as
efficiently as possible, including
maintaining tight controls over
operational expenditure;
k provide good performance in areas
such as reliability of supply, customer
service and innovation and thus earn
additional incentive-based revenue
under the various Ofgem schemes;
k deliver capital expenditure
programmes so that the number and
duration of power cuts experienced
by customers is kept to a minimum;
k grow the RAV of the networks
businesses and so secure increased
revenue from them; and
k engage constructively with the
regulator, Ofgem.
Southern Electric Power
Distribution operations
In Southern Electric Power Distribution
(SEPD) in 2009/10:
k operating profit* increased by 5.6%
to £256.9m;
k electricity distributed fell by 0.7TWh
to 33.7TWh;
k the average number of minutes of
lost supply per customer was 65,
down from 66;
k the number of supply interruptions
per 100 customers was 61, down
from 64; and
k performance-based additional income
of £15.8m is expected to be earned,
compared with the final out-turn of
£12.0m in the previous year.
The increase in operating profit
reflects changes in the price of units
distributed, which have mitigated the
reduction in volume. 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. Performance-based
income covers a number of issues,
including the quality of service provided
to customers and innovation.
Scottish Hydro Electric Power
Distribution and Scottish Hydro
Electric Transmission operations
In Scottish Hydro Electric Power
Distribution (SHEPD) and Scottish
Hydro Electric Transmission (SHETL)
in 2009/10:
k operating profit* fell from £160.4m
to £158.9m;
k electricity distributed fell by 0.1TWh
to 8.4TWh;
k the average number of minutes of
lost supply per customer was 74,
down from 75;
k the number of supply interruptions
per 100 customers was 76, the same
as the previous year; and
k performance-based additional income
of £8.2m is expected to be earned,
compared with the final out-turn
of £6.0m in the previous year.
39
Introduction to SSE
Directors’ report
Financial statements
Shareholder information
Networks regulated asset value – £bn
2010
2009
2008
2007
2006
4.9
4.7
4.5
4.2
4.1
Networks asset value – %
SHEPD 17
SEPD 35
SHETL 8
SGN (50% share) 40
k network management activities,
such as inspections, maintenance
and investment are carried out in
Operational Production Groups; and
k there is a strong emphasis on work
being in-sourced and carried out by
directly-employed people.
Operations – customer service
reward scheme
In August 2009, SSE received an award of
£200,000 under Ofgem’s Customer Service
Reward Scheme 2008/09 ‘in recognition of
the breadth of its corporate responsibility
programme which was seen to go beyond
core business drivers’.
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.
By earning a return from this investment,
SSE is able to increase its revenue from
the networks and the efficient delivery of
this enhanced investment programme
was one of its priorities for 2009/10.
Investment is focused on renewing
SSE’s networks, which were largely
built in the 1950s and 1960s, and thereby
reducing the number and duration of
power supply interruptions. It is also
geared to providing the infrastructure
to accommodate customers’ demand
for power. Capital expenditure in the
electricity networks during 2009/10
was £334.5m (comprising £274.8m in
distribution and £59.7m in transmission).
In the 2005-10 electricity Distribution
Price Control period, SSE invested
£1,084.8m in its distribution networks
(which excludes metering) and a further
£208.1m in its transmission network.
This represents an 88% increase
compared with the previous Price
Control, 2000-2005.
One feature of the 2005-10 Price
Control that was widely welcomed
was the ability to place under ground
electricity lines which were previously
overhead, to help restore views in
national parks and areas of outstanding
natural beauty. For example:
k
k
in early 2010, SSE engineers removed a
30 metre electricity pylon in Langstone
Harbour as part of a £1.6m project to
remove 700 metres of overhead line
from the harbour and from the road
linking Langstone with Hayling Island
and replacing it with under ground
cabling – the area is a Site of Special
Scientific Interest; and
in the autumn of 2009, SSE placed
under ground 500m of cable to replace
an overhead line at Sligachan on Skye,
thus enhancing the classic view from
Sligachan Bridge towards the Cuillins.
The fall in operating profit follows the
fact that the number of units of electricity
distributed was down compared with the
previous year. In addition, the recovery of
transmission upgrade-related costs has
been delayed to 2010/11. Performance
in respect of both minutes lost and
interruptions was, however, ahead
of Ofgem’s QSIS targets.
Energy volumes
The volume of electricity distributed by
SSE during 2009/10 was 42.1TWh, down
from 42.9TWh in the previous year and the
volume of gas transported by SGN during
the year also fell, by 10.5TWh to 163TWh.
Under the electricity Distribution Price
Control for 2010-15, the volume of
electricity distributed will no longer affect
companies’ income. Only 3.5% of SGN’s
income is volume-related. This further
reduces the level of risk associated with
energy networks businesses.
Operations – power distribution
quality of service
According to Ofgem’s Distribution
Quality of Service Report, published in
December 2009, covering performance
in respect of Customer Interruptions
and Customer Minutes Lost, SSE’s two
networks earned additional revenue of
£46m in nominal prices in the four years
to March 2009 (the most recent period
for which comparative data is available),
making them the two most successful
electricity distribution companies in Great
Britain. This reflects effective investment
in the automation of the networks and
effective operational responses to
electricity supply interruptions.
Operations – cost efficiency
Efficiency is one of SSE’s core values
and amongst Ofgem’s explicit purposes
in setting Price Controls is to keep the
costs of providing secure and reliable
networks as low as possible. As part
of the most recent Price Control review
in December 2009, Ofgem published
analysis which showed SSE continues
to be at the forefront of efficiency for
overall operating costs.
This is based on SSE’s straightforward
operating model, under which the vast
majority of activities are in-house.
Under this model:
k customer-facing activities, such as
restoring power supplies or providing
new connections are managed from a
network of 14 depots in communities
throughout central, southern England
and the north of Scotland;
40
Scottish and Southern Energy
Annual Report 2010
Business overview (continued)
The need for further significant investment
in Great Britain’s electricity distribution
networks, to maintain and/or replace
ageing assets or to provide additional
capacity was a key feature of the electricity
Distribution Price Control for 2010-15
and it allows for total investment of £14bn
in the networks over the next five years.
For SSE, this is likely to mean investment
of around £210m in its distribution
networks in 2010/11.
Distribution Price Control review 2010-15
In December 2009, SSE decided, on
balance, to accept Ofgem’s final proposals
for the electricity Distribution Price Control
for the five years from 1 April 2010 in
respect of Scottish Hydro Electric Power
Distribution and Southern Electric
Power Distribution.
SSE assessed Ofgem’s final proposals
against the combined impact of three
key criteria:
k the scope to earn additional revenue
through operational efficiency and
excellence;
k the treatment of ongoing pension
costs; and
k the allowed return for shareholders
as measured by the weighted average
cost of capital.
On its own, the headline-allowed weighted
average cost of capital contained within
the proposals (4.0%, on a post-tax, real
return on capital basis) would not be
enough to provide an adequate return
on investment in electricity distribution
or transmission. In addition to the cost
of capital, however, Ofgem’s proposals
contained enhanced incentive mechanisms
in areas such as customer service.
They also reduced further the level of
risk associated with energy network
businesses by ensuring that the volume
of electricity distributed will no longer
affect companies’ income.
The overall package should, therefore,
allow SSE, the most efficient operator in
Great Britain, to add to the return it earns
from its electricity distribution assets by
delivering good operational performance
and innovations in network management.
Examples of SSE’s activities which should
support the achievement of a sufficient
return include:
k dynamic line rating that allows the
overhead line network to be operated
to its maximum capacity rather than
to constraints based on design
assumptions;
k protective coatings and enhanced
condition assessments that allow the
life of assets to be extended without
risking performance degeneration;
and
k trench-less cable-laying technology,
which reduces the public disruption
and costs associated with cable-laying.
In addition, SSE will seek to secure a
significant proportion of the new £500m
Low Carbon Network Fund, designed by
Ofgem to support larger-scale trials of
advanced technology, including smart
grids. It will also seek to manage effectively
the new arrangement under which 100% of
support costs are deemed to be expenses
and 85% of network costs are deemed
to be capital, with associated output
measures in place.
Smart grids
SSE and Smarter Grid Solutions Ltd
have commercially deployed smart grid
technology on SSE’s power distribution
network on Orkney, allowing the
connection of 15MW of extra new
renewable energy generation, an increase
of one third, with the potential for this to
grow further. The Orkney Smart Grid is
based on the principle that capacity exists
in real-time on the power distribution grid
due to variation in demand for electricity
and diversity in the output of grid-
connected generators. This innovative
smart grid technology permits greater
numbers of renewable generators to
be connected to the existing electricity
network, in a cheaper and faster way than
traditional means, by allowing generators
to access power network capacity not
normally available under conventional
network planning requirements.
Smart grid technology has the potential to
improve significantly the efficiency of the
electricity distribution and transmission
networks in the UK and this deployment
provides a blueprint for how smart grids
can be used to connect high penetrations of
renewable generation in a cost effective way
and resolve grid congestion as a result. The
connection of similar levels of renewable
generation on Orkney by the conventional
means of network reinforcement would
have cost around £30m, compared with
smart-related costs of less than £1m. In
other words, the total cost of developing
and delivering this innovative solution
has been substantially cheaper and much
faster than the alternatives.
Energy network regulation –
future developments
In January 2010, Ofgem published its
‘Emerging Thinking’ document on the
future of electricity and gas network
regulation. It suggests that the RPI-X
price control mechanism needs to be
changed as it will not be able to cope
with the pace, uncertainty and scale of
change needed to deliver sustainable
energy supplies for customers. The
document’s proposals are designed
to change the focus of regulation from
companies’ costs to looking more at
what companies can deliver in terms of
reliable networks, safety and investment
to support low-carbon generation and
meet the needs of customers.
This approach builds on the electricity
Distribution Price Control 2010-15, and
could amount to a form of contract
between Ofgem and the regulated
network company, with the emphasis
on delivery of certain key outputs.
Ofgem is consulting on its ‘emerging
thinking’ before more ‘concrete and
detailed’ proposals are published in the
summer of 2010.
Electric vehicles
Electric vehicles will be an essential
part of the move towards a low-carbon
transport infrastructure. The next decade
is likely to see a significant uptake of
such vehicles, which some reports have
suggested could reach around 1.5 million
in the UK as early as 2020. They also have
the potential to influence dramatically the
demand profile and quantity of electricity
required by customers, and will impact on
all aspects of SSE’s business, including
electricity distribution.
For this reason, SSE is taking part in
the Technology Strategy Board’s Ultra
Low Carbon Vehicle Demonstration
(ULCVD) project, which consists of eight
consortia bringing over 300 vehicles to
trial. The two consortia in which SSE
is involved are with:
k BMW UK Ltd, Oxford Brookes
University and the South East England
Development Agency: 40 MINI E
vehicles are being trialled by members
of the public, SSE employees and fleet
users in southern England. SSE has
installed 32 Amp domestic charging
facilities at the homes of the drivers,
together with the smart metering
to gather usage data. SSE is also
installing public charging posts
at selected locations; and
k Ford, Strathclyde University and
the London Borough of Hillingdon:
20 prototype electric vehicles are
being introduced and SSE will be
providing the private and public
charging infrastructure.
41
Introduction to SSE
Directors’ report
Financial statements
Shareholder information
When their numbers become significant,
electric vehicles could change greatly the
volume and pattern of electricity demand,
and it is for this reason – in addition to
supporting the low-carbon objectives
behind them – that SSE is so actively
involved in the ULCVD project.
Future transmission developments
Scottish Hydro Electric Transmission
(SHETL) is responsible for operating,
maintaining and investing in the
transmission network in its area, which
serves around 70% of the land mass of
Scotland. As the licensed transmission
company for the area, SSE has to ensure
there is sufficient network capacity for
those seeking to generate electricity from
renewable (and other) sources within it.
Four major developments currently under
way have the potential to transform the
scale and scope of SSE’s electricity
transmission business:
k Knocknagael, Beauly-Blackhillock-
Kintore and Beauly-Dounreay: In
January 2010, Ofgem announced
authorisation of pre-construction
and construction funding for these
three upgrades in the SHETL area,
which form part of the first tranche of
transmission projects to help connect
renewable energy to the electricity
network. These projects have a total
value of almost £200m and should
all be completed by 2014.
k Beauly-Denny: Scottish Ministers
announced in January 2010 that
they have granted consents, with
associated conditions, to install a
400,000 volt overhead electricity
transmission line to replace the
existing 132,000 volt overhead
transmission line between Beauly
and Denny. The existing line will be
dismantled. The final cost of replacing
the Beauly-Denny line can only be
established once analysis of all of
the conditions associated with the
consent has been completed; and full
construction work can only begin once
it is clear that all of the conditions
can be satisfied and Ofgem is able to
confirm the investment is necessary,
efficient and economical. SSE has
concluded it should be able to
undertake preliminary construction
works this year, with a value of around
£50m, with a further four summers
of construction work required to
complete the new line.
k Western Isles: SSE’s proposal for an
electricity transmission connection
between the Western Isles and the
north west of Scotland features,
for the 77km mainland section, an
under ground cable between the west
coast of Sutherland and the Beauly
substation. SHETL submitted to
Scottish Ministers an application for
consent to construct the connection
in October 2008. The connection will
be required to transmit renewable
energy from the Western Isles, and
a significant milestone was reached
in January 2010 when a developer
received approval for a 118MW wind
farm at Eishken.
k Shetland: In July 2009, SHETL
submitted planning applications for
converter stations associated with the
proposed 320km subsea high voltage
direct current (HVDC) transmission
link between the Shetland Islands
and Moray on the Scottish mainland
to accommodate renewable energy
developments in Shetland. It would
also connect properties in Shetland
to the mainland electricity network
for the first time. Related to this,
in December 2009, the European
Commission announced that SSE had
been successful in securing a capital
grant of ¤74m under the European
Energy Programme for Recovery. The
grant is towards the incremental cost
of including an intermediate offshore
HVDC hub off Caithness on the route
of the proposed Shetland link and
increasing the capacity of the southern
section to Moray. The hub is at
the centre of a potential innovative
three-ended ‘Y’ configuration, with
legs from Caithness and Shetland
to accommodate substantial planned
renewable energy developments in
the far north east of Scotland and the
Northern isles.
Looking to the longer term, SSE has
participated in the Electricity Networks
Strategy Group, sponsored by Ofgem
and the UK Department of Energy and
Climate Change and involving all of the
transmission companies in Great Britain.
It has identified a potential need for sub-
sea cable links between Scotland and
England known as ‘bootstraps’. SSE
expects to be a major participant in this
and other transmission developments
over the next decade and beyond.
Electricity distribution and transmission
priorities in 2010/11 and beyond
During 2010/11 SSE’s priorities in
electricity networks are to:
k maintain safe and reliable supplies
of power and to restore supplies as
quickly as possible in the event of
interruptions;
k respond effectively to the new
arrangements in electricity distribution
for allocating costs between support
activities (expenses) and networks
(capital);
k deliver successfully its investment plans
in its electricity distribution networks;
k deploy innovative techniques to
maximise the returns from good
performance in electricity networks; and
k make further progress in upgrading
the transmission network in the
north of Scotland.
Scottish Hydro Electric Transmission
(SHETL) is responsible for operating,
maintaining and investing in the
transmission network in its area. As the
licensed transmission company for the
area, SSE has to ensure there is sufficient
network capacity for those seeking to
generate electricity from renewable
(and other) sources within it.
42
Scottish and Southern Energy
Annual Report 2010
Business overview (continued)
With such significant investment
requirements over the next few years,
not least in providing the infrastructure
to accommodate electricity produced
from renewable sources, the scope
for additional incremental growth in
electricity networks is clear. When
opportunities arise to supplement
that growth through the acquisition
of additional networks, SSE considers
them carefully. It will not, however, depart
from its long-stated financial principle
of deploying a selective and disciplined
approach to acquisitions.
Gas networks
Scotia Gas Networks (SGN) – 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 75,000km
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 the adjusted operating
profit* of SGN was £183.7m in 2009/10,
compared with £180.5m in the previous
year. This is primarily due to two things:
k the impact of the price changes
agreed as part of the five-year Price
Control to March 2013 has been
sustained; and
k underlying operational efficiencies
have been achieved during the year.
A small part of SGN’s operating profit is
derived from the non-regulated activities
of its contracting, connections and
commercial services operations.
In October 2009, SGN successfully issued
two new sterling bonds: a 30-year, £125m
index-linked bond; and a nine-year,
£300m fixed-rate bond.
Scotia Gas Networks – operational
In March 2009, Ofgem published its ‘Gas
Distribution Annual Report for 2007/08’.
It included a top-down regression analysis
of controllable operating costs which
showed that SGN’s two networks are first
and third out of the eight networks in
Great Britain for operating cost efficiency,
compared with seventh and sixth when
they were acquired by SGN in 2005.
One of the conditions in SGN’s licence
to operate is that it should attend at least
97% of uncontrolled gas escapes within
one hour of notification, in 2009/10, 97.9%
were attended within one hour.
During 2009/10, SGN’s gas transportation
volumes were:
k 55.2TWh in Scotland, compared with
58.6TWh in the previous year; and
k 107.8TWh in Southern, compared with
114.9TWh in the previous year.
Only 3.5% of SGN’s transportation income
is volume-related; the remaining 96.5%
is related to the maximum capacity
requirements of its customers.
When SGN acquired its networks in June
2005, National Grid was contracted to
provide it with services with a total value
of £30m per annum. In the five years
since, services have been brought within
SGN, and by the end of 2010/11, it is
After electricity and gas, Telecoms is SSE’s
third networks business. Its origins lie in
the installation, a decade ago, of fibre
optic cable on SSE’s electricity network.
The business combines SSE Telecoms and
Neos Networks and operates a 11,200km
UK-wide telecoms network.
expected that SGN’s remaining service
contracts with National Grid will total
£7m per annum. These contracts cover
transmission services, control and IT
services and emergency call handling.
Scotia Gas Networks – investment
The five-year gas Distribution Price Control,
which began in April 2008, provides the
opportunity for SGN to increase significantly
investment in its gas distribution networks,
thereby reinforcing their safety and reliability
and securing another significant increase
in their RAV. By 2013, SGN estimates that
its total RAV will be around £4.6bn.
During 2009/10, SGN invested £412.8m
in capital expenditure and mains and
services replacement projects, compared
with £382.8m in the previous year. The
majority of the mains replacement
expenditure was incurred 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 2009/10 SGN replaced over
1,050km of its metallic gas mains with
modern polyethylene pipes.
SGN has commenced work on a £21m
project to replace the under-sea gas main
between the south coast mainland and
the Isle of Wight. The project involves the
longest directional drill ever undertaken
(3.9km), going across the Solent between
Lepe and Gurnard. Two tunnels will be
bored to take two 30cm diameter gas
pipes, which will be installed some 30m
to 50m below the seabed.
SGN is committed to making new gas
connections to existing homes that are
not on mains gas as affordable as possible
and is running a new scheme to help
fuel-poor customers. Already over 4,000
acceptances have been received to provide
a mains gas connection to homes under
the new Ofgem-approved scheme. One
of the first communities to benefit was
Rattray in Perthshire where, thanks to an
extension to the gas network, some 300
homes will now have access to mains gas,
giving residents the choice of gas-fired
heating for the first time.
This scheme, along with other initiatives
on carbon monoxide safety and reducing
environmental impacts, helped SGN
secure a £550,000 award from Ofgem
under its first ever discretionary rewards
scheme for the UK’s gas distribution
networks. The scheme, which is judged
by a panel of industry experts, was
established as part of Ofgem’s gas
Distribution Price Control 2008-13.
43
Introduction to SSE
Directors’ report
Financial statements
Shareholder information
Investment will continue to be a top priority
and, in line with that, SGN expects to invest
around £400m in capital expenditure
and mains and services replacement
projects during 2010/11.
Scotia Gas Networks priorities
in 2010/11 and beyond
During 2010/11, SGN’s priorities are to:
k deliver a safe and secure gas supply
to customers;
k deliver to time and budget the 2010/11
mains replacement and capital works
programmes; and
k provide sector-leading customer
service and exceed the standards
of response levels set by Ofgem.
Telecoms networks
Introduction to telecoms
After electricity and gas, Telecoms is SSE’s
third networks business. Its origins lie in
the installation, a decade ago, of fibre optic
cable on SSE’s electricity network. The
business combines SSE Telecoms and
Neos Networks and, following several
acquisitions in recent years, including the
ATLAS Connect fibre network from Scottish
Enterprise in March 2010, it now operates
a 11,200km UK-wide telecoms network.
This network provides capacity and
bandwidth services for companies,
public sector organisations, internet
service providers, application service
providers and other licence operators
and now comprises:
k fibre optic cabling which SSE owns
(5,000km);
k leased lit fibre (2,600km); and
k microwave radio (3,600km).
As a result, SSE is the fourth largest
telecoms network company in the UK.
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 it an important
competitive advantage, especially during
an economic downturn.
To complement its core telecoms network
business, SSE completed the acquisition
of a Fareham-based data centre business
in June 2009.
Services
Telecoms operations
SSE’s combined Telecoms business
achieved an operating profit* of £16.4m
during 2009/10, compared with £15.5m in
the previous year. This reflected principally
increased sales and ongoing cost controls.
Telecoms investment
In 2009/10, SSE undertook capital
expenditure of £25.9m in respect of its
telecoms network, principally focused on
improving network reliability and reach.
The data centre at Fareham was acquired
for £4.85m. It provides capacity for more
than 2,000 racks for the co-location of
IT services within the 80,000 square
feet secure site and 15MW of power in a
resilient and energy efficient environment,
which will include one of the UK’s largest
rooftop solar photovoltaic installations.
The data centre uses a modular design
which allows customers to select the
level of service that they require.
Following the acquisition, a trading
division, SSE Data Centres, was created,
and in October 2009 it was awarded a new
long-term contract to provide Kingfisher
plc with its own dedicated data centre pod
to support IT infrastructure to be migrated
from a number of existing data centres.
The connection between telecoms
networks and data storage is illustrated
by the fact that SSE secured two orders
for bandwidth capacity from Kingfisher
following this agreement. In addition, in
April 2010, a 10-year data storage contract
was signed with Thompson Reuters.
Telecoms priorities in 2010/11
and beyond
SSE’s priorities in Telecoms in 2010/11
are to:
k complete the integration of recently
acquired network assets;
k retain and gain customers for key
services such as capacity and
bandwidth; and
k add to the of number of customers
for its data centre business.
The achievement of these priorities should
enable SSE Telecoms to continue to make
progress towards becoming the UK’s
leading alternative telecoms network.•
-
SSE is aiming to
consolidate its position
among the leading
GB wide electrical and
mechanical contractors
and prepare for the
rapid move to lower-
carbon technologies
that will take place
over the next decade.
k Street-lighting page 44
k Utility solutions page 45
k Metering page 45
Energy-related services overview
As well as being involved in Generation
and Supply, Fuel Production and Storage
and Networks, SSE also provides an
additional range of energy services
which complement its other businesses:
Contracting and Connections (including
utility solutions) and Metering. These are
important services, on which customers
depend, so that their increasingly complex
energy requirements can be met.
Contracting,
Connections
and Metering
Operating profit* in Contracting,
Connections and Metering was £80.2m
during 2009/10, compared with £74.8m
in the previous year.
Introduction to Contracting
SSE Contracting trades principally as
Southern Electric Contracting (SEC)
and has three main areas of activity:
k
industrial, commercial and domestic
mechanical and electrical contracting;
k electrical and instrumentation
engineering; and
k public and highway lighting.
It is one of the largest mechanical and
electrical contracting businesses in the
UK. It operates from over 60 regional
offices throughout Great Britain and also
trades as Swalec Contracting in Wales
and Scottish Hydro Contracting in Scotland.
44
Scottish and Southern Energy
Annual Report 2010
Business overview (continued)
Contracting performance during 2009/10
SSE Contracting continued to make solid
progress during 2009/10, with its order
book ending the year at £115m, despite
the UK’s economic difficulties. The order
book was supported by significant new
contract wins with a number of major
organisations in recent months, including
Southend University Hospital, Murco
Petroleum, British Telecom, Network
Rail and Glasgow Housing Association.
A major proportion of SSE Contracting’s
business is from public sector bodies
and end-user client organisations with
a high degree of repeat business or
long-term contracts. This has put it in a
relatively good position to withstand the
initial effects of the economic downturn.
Given the downturn, during the year, it
focused on:
k pre-sales activity, with careful analysis
of the markets and areas of work it
should prioritise; and
k post-sales control, with a strong
emphasis on controlling costs while
meeting customers’ requirements.
There is clearly a risk that the business’
order book and profitability will be
affected as a result of the cumulative
impact of the continuing economic
uncertainty and the expected constraints
on public expenditure. As a result, cost
control and customer relationships will
remain particularly high priorities for
SSE Contracting during 2010/11.
Contracting – street-lighting
SSE Contracting remains the UK’s
leading street-lighting contractor, and
in 2009/10 retained contracts with 26
authorities to maintain over 1.1 million
lighting columns.
In August 2009, SSE was awarded the
£225m, 25-year South Coast Streetlighting
PFI (Private Finance Initiative) contract,
through its PFI street-lighting entity Tay
Valley Lighting. Under the contract, SSE
Contracting will replace and maintain
250,000 street lights, illuminated signs
and bollards on behalf of Hampshire
and West Sussex County Councils and
Southampton City Council. It took the
number of local authorities with which
SSE has long-term street-lighting
replacement and maintenance PFI
contracts to 10 and the number of
lighting units covered by such contracts
to over 530,000.
Again through Tay Valley Lighting, SSE
has been appointed preferred bidder
on the Nottingham City Council street-
lighting PFI project. The 25-year
contract involves the replacement and
maintenance of around 40,000 columns,
and illuminated signs. Tay Valley Lighting
is actively bidding for a number of other
PFI projects.
In November 2009, SSE acquired the
assets of ESB Contracts Ltd (ESBC),
the street-lighting business of ESB,
for a total cash consideration of €6.4m,
making it Ireland’s leading street-lighting
contractor. ESBC maintained around
300,000 street lights in the Republic
of Ireland. Street-lighting will in due
course become the subject of competitive
tendering by local authorities. Under
SSE’s ownership, the business is known
as Airtricity Utility Solutions and employs
over 100 people, including people who
previously worked with ESBC. Including
Ireland, SSE now maintains around
1.4 million street lights.
Over the last 12 months SSE also acquired
the rights to ‘Mayflower’, an intelligent
management system for controlling
street-lighting from a central location.
The functionality of the system will allow
local authorities to switch lights on and
off and to dim them when there is less
requirement for high lighting levels.
Mayflower already has orders for over
300,000 units.
Contracting – microgeneration
SSE Contracting is also spearheading
SSE’s response to the introduction on
1 April 2010 of Feed-in Tariffs (FiTs) to
encourage householders, communities
and other groups to generate their own
electricity from low-carbon technologies
such as solar PV. The capacity of
installations can be up to 5MW. FiTs
will be followed by the Renewable Heat
Incentive in April 2011.
Microgeneration is a very small market
at the moment, but it is growing fast and
FiTs will provide additional impetus to
this growth. With its technical, contract
management and project management
skills, SSE Contracting is ideally-placed to
provide customers with the services they
need in all aspects of microgeneration
and developing the full array of necessary
services is now under way.
SSE is to become the first utility in the UK
to build and monitor its own development
of zero-carbon homes. The 10-home
development, under construction near
Slough, is being built on land previously
occupied by an SSE office building. The
properties have been designed to achieve
the highest specification for sustainable
building, Code Level 6 in the Code for
Sustainable Homes. The installation of
renewable energy features will be carried
out by SSE Contracting and SSE Utility
Solutions. All new homes built in England
from 2016 onwards must be zero carbon.
In one of the first ever live demonstrations
of what will be needed to achieve highly
energy efficient living, SSE will test the
every-day performance of the technology
installed in the homes, such as a
photovoltaic (solar) roof and a renewable
district heating system. The development
will feature a renewable energy heat
hub, housing five different types of micro-
generation including air and ground source
heat pumps, a biomass boiler and solar
thermal panels. The homes will be fitted
with the latest energy efficient appliances
and SSE will use smart meters to monitor
the energy and water usage of the homes
for 24 months.
The information gleaned will help SSE
understand how householders respond
and adapt to zero-carbon living. It will also
provide SSE and its related companies,
such as those linked with SSE Ventures,
with valuable information to share with
stakeholders such as construction
partners, technology manufacturers
and industry bodies.
Contracting priorities in 2010/11
and beyond
The key priority for SSE Contracting
during 2010/11 is to position itself for
the long term by:
k working safely;
k delivering a high standard of service
to all customers;
k maintaining a strong order book;
k maximising business opportunities
with existing customers;
k adding to its list of street-lighting
contracts; and
k building up opportunities in
microgeneration, including the
zero-carbon homes project.
This, in turn, should enable SSE Contracting
to consolidate its position among the
leading GB-wide electrical and mechanical
contractors and prepare for the rapid
move to lower-carbon technologies that
will take place over the next decade.
45
Introduction to SSE
Directors’ report
Financial statements
Shareholder information
SSE is to become the first utility in the UK to
build and monitor its own development of
zero-carbon homes. In one of the first ever
live demonstrations of what will be needed
to achieve highly energy efficient living,
SSE will test the every-day performance
of the technology installed in the homes,
such as a photovoltaic (solar) roof and
a renewable district heating system.
growth ambitions in this area, although
its market share has been increasing and
it expects this to continue.
Utility Solutions – gas pipelines
SSE is also a licensed gas transporter.
This business installs, owns and operates
gas mains and services on new housing
and commercial developments throughout
the UK. Although at a slower rate than in
previous years, the total number of new
premises connected to its gas networks
has continued to grow, and during 2009/10
it connected a further 6,700 premises,
taking the total number of connections
to more than 66,000. This is despite a
significant number of building sites being
mothballed, and building projects being
deferred, which means the number of gas
connections completed in 2010/11 is likely
to be lower than in the previous year.
Utility Solutions – water
SSE Water (SSEW) is the first new company
to offer both water and sewerage services
since privatisation in England and Wales in
1989. An ‘inset’ appointment is the route by
which one company replaces another as the
appointed water and/or sewerage company
for a specified area. SSE Water was granted
its first inset appointment in October 2007,
had five as at March 2010 and has since
been awarded a sixth. Under these
appointments, SSE will provide water and
sewerage services to over 5,000 properties.
Utility Solutions – energy services
SSE Energy Services provides low-
carbon local energy services, such as the
commercial and domestic heating system
and 4.5MW Combined Heat and Power
(CHP) facility at Woolwich. During 2009/10,
it secured energy services agreements for
local energy infrastructure for a further two
heat networks. It is developing biomass,
heat pump and wind energy solutions for
communities and commercial enterprises.
The impact of the economic slowdown on
the UK’s construction sector means that
projects to develop new residential CHP
schemes are fewer than was the case two
years ago and SSE is now seeking to
participate in other markets such as
health, education and defence.
Utility Solutions priorities
for 2010/11 and beyond
SSE Utility Solutions increased its
market share during 2009/10 by focusing
on providing good customer service and
because a number of its competitors
operated under significant financial
constraints as a result of the economic
downturn. During 2010/11 its priority
is to build on this increase and further
increase its number of electricity
networks, gas connections, water
and sewerage inset appointments
and energy services agreements.
Introduction to Metering
SSE’s Metering business provides
services to most electricity suppliers with
customers 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 Great
Britain to establish a national metering
business. 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.
Introduction to Connections,
including Utility Solutions
As its name implies SSE’s Connections
business provides electricity connections
for homes, offices and businesses.
Separately, during 2008/09, SSE combined
the following activities to form SSE Utility
Solutions:
k out-of-area embedded electricity
networks (previously known as
‘National Networks’);
k licensed gas transportation
(SSE Pipelines);
k water and sewerage services
(SSE Water); and
k low-carbon local energy (energy
services or ‘ESCo’).
SSE Utility Solutions is, therefore, able
to provide a one-stop solution for multi-
utility infrastructure requirements to
customers in the property development
and house-building sectors. It can design,
construct, own and operate this range of
closely-related services.
Electricity connections
During 2009/10, SSE completed 24,300
electrical connections, compared with
36,000 in the previous year. This was the
third successive year in which the number
of connections completed fell, and the
weakness of the economy means SSE
expects a further decline in 2010/11 –
although the financial impact of any
decline should be partly offset by
connection work relating to wind farms.
Utility Solutions – electricity networks
SSE has continued to develop its portfolio
of electricity networks outside the Southern
Electric and Scottish Hydro Electric Power
Distribution areas. It now owns and
manages 53 energised electricity networks
outside these two areas, with development
work ongoing at a number of these, and a
further 25 are under construction, including
residential and commercial developments
across England, Scotland and Wales.
In total, SSE has 436MW of networks
capacity, including 157MW currently under
construction. Nevertheless, a reduction
in new development activity in the UK
economy has been clearly evident and this
will have an impact on SSE’s shorter-term
46
Scottish and Southern Energy
Annual Report 2010
Business overview (continued)
Out-of-area networks in operation
2010
2009
2008
2007
2006
33
24
19
53
47
Metering performance during 2009/10
In total, SSE owns 3.8 million meters.
During 2009/10 it collected:
k 6.8 million electricity readings,
up from 6.4 million in the previous
year; and
k 3.9 million gas readings, up from
2.6 million.
This increase reflects the fact that SSE
has completed the in-sourcing of its
meter reading and electricity meter
operation services throughout Great
Britain, a year ahead of schedule.
Before the in-sourcing was completed,
SSE relied on a combination its own
employees in central southern England
and the north of Scotland and up to
nine external agencies elsewhere in the
country to read electricity and gas meters
and install and repair electricity meters.
more effective management of customer
data and creates face-to-face contact
between SSE and its customers. It thus
helps in the retention of customers.
Longer term, SSE’s Great Britain-wide
metering team will be able to support the
transition to smart meters which will take
place over the next 10 years and will help
SSE deploy other energy-related services
and products during that time.
Smart metering
Smart metering is an emerging system
that enables the quantity and value of
electricity and gas used by the customer
to be continuously monitored and allows
information about its use and cost to be
available to the customer and exchanged
with the supplier, through two-way
electronic communications. All homes
in Great Britain are expected to have
smart meters by 2020.
In line with its general preference for
services and operations to be carried
out in-house, SSE decided to in-source
metering services in a programme which
started in 2007. This programme has now
been completed and, as a result, SSE’s
metering team now comprises 1,500
directly-employed people working in
all parts of Great Britain. In addition to
securing annual cost savings of at least
£5m, the in-house metering team delivers
more reliable metering services, allows
In early 2010, SSE successfully completed
the first community-wide energy reduction
trials in the UK, helping two communities
achieve a 10% reduction in their electricity
consumption. The trials, part of the
Energy Demand Research Project (EDRP),
involved working with communities to
help them achieve the reduction over
a two-and-a-half-year period.
The EDRP trials are managed by Ofgem,
on behalf of the UK Department of Energy
Smart metering is an emerging system
that enables the quantity and value
of electricity and gas used by the
customer to be continuously monitored
and allows information about its use
and cost to be available to the customer
and exchanged with the supplier.
and Climate Change, and aim to gain an
understanding of how consumers react to
improved information about their energy
consumption. The trials consist of different
elements using different methods to provide
feedback on energy consumption.
SSE was the only energy supplier in the
EDRP to hold trials involving engagement
with entire communities. The trials were
held in North Leigh in Oxfordshire, Alyth
in Perthshire and St Athan in South Wales.
The communities of North Leigh and Alyth
achieved their community-wide 10%
energy reduction and received an award
of £20,000 each from SSE. The trial in St
Athan started later, and is therefore not
due to be completed until later this year,
but good progress is being made.
A variety of measures was available to each
community including smart meters, real-
time display devices (which show energy
use in monetary value), energy efficiency
advice and insulation offers. As well as the
support provided by SSE, the communities
arranged various events locally, designed
to involve the whole community.
The information that has been obtained
during the trials has been and will be
extremely useful and it will be used to help
shape the future of the energy industry.
The primary purpose of the trials was to
understand how people use energy and how
savings can be made when more control
is given to individuals and communities.
Metering priorities in 2010/11 and beyond
For Metering, the key priorities are:
k maximising the number of bills issued
to customers on the basis of an actual
– as opposed to estimated – meter
reading; and
k applying the lessons learned from the
EDRP to inform a full roll-out of smart
meters throughout the country.
SSE believes that there must be radical
changes in the way that energy is produced
and consumed and these energy reduction
trials, which have used a number of
innovative technologies, will assist
customers in reducing their energy
consumption. It strongly supports smart
meters, and the opportunity they provide
to help customers cut their energy
consumption, while reducing the number
of service-based tasks which are largely
administrative and reactive in nature, and
replacing them with more substantive
energy advice, products and services.
They have the potential to help transform
the relationship between customers and
their energy supplier.•
47
Introduction to SSE
Directors’ report
Financial statements
Shareholder information
performance against them is appraised
annually and the most important of them
all – Safety – is the first item on the
agenda for every Board meeting.
Commitment
The commitment of the Directors to the
business of SSE remains undiminished.
The non-Executive Directors devote a
significant amount of time to SSE over
and above attendance at Board and
Committee meetings. During the year
each non-Executive Director visited key
business locations throughout SSE and
had briefings from members of the SSE
team on a range of matters such as credit
management, energy trading and major
projects. Board meetings took place on a
number of SSE sites, including the regional
office in Reading and the customer service
centre at Cumbernauld. I know that all of
the non-Executive Directors value their
association with SSE and with the excellent
team of people employed by the Company.
The entire Board is committed to
supporting SSE during the next phase
of its development. Throughout that time,
we will work together to make sure that
SSE continues to be a responsible, well-
run company with strong corporate
governance.
Lord Smith of Kelvin
Chairman
18 May 2010
Corporate governance
Chairman’s introduction
Lord Smith of Kelvin
Chairman
I am pleased to introduce the Corporate
Governance Report for 2009/10. It explains
our approach to corporate governance in
detail by describing: the SSE team; risk
management and internal control; how
the Board works; and setting out the work
of each of the five Board Committees –
Audit, Risk and Trading, Nomination, Safety,
Health and Environment and Remuneration.
The Board does not regard corporate
governance as a burden but as the best
way of ensuring that SSE is a consistently
successful, well-run and responsible
business, capable of delivering increases
in the dividend payable to shareholders
in the short, medium and long term.
Evaluation
A strong corporate governance framework
is particularly important. In the current
economic business environment it is vital
that the risks to which SSE is exposed
are properly identified and managed.
That is one of the reasons why the Board
decided this year that the evaluation of
its performance should be carried out by
an external party for the first time. This
evaluation paid particular attention to risk
management, and is reported on in more
detail in the following report.
The independent evaluation was a
worthwhile exercise and it is interesting
to note that the proposals for the new
Combined Code on Corporate Governance
now provide that external Board evaluation
should take place at least every three
years. We contributed to the consultation
on the review of the Combined Code
and welcome the changes which have
been proposed.
Values
SSE pays particular attention to the
highest level of governance and strives to
foster a culture that values proper ethical
standards, personal and corporate integrity
and respect for others. We have recently
produced a code of business practice,
‘Doing the right thing’, which brings all
our main policies on responsible practice
together in one place. This has been
distributed to everyone in SSE, and is also
a key part of the induction programme for
everyone joining the Company as a new
employee. There is a lot more information
about SSE’s key policies on issues relating
to responsible business practice on the
SSE website.
More broadly, the SSE SET of core values
– Safety, Service, Efficiency, Sustainability,
Excellence and Teamwork – remain
SSE’s guiding principles. As set out in
the Remuneration Report, employees’
48
Scottish and Southern Energy
Annual Report 2010
Corporate governance (continued)
The SSE team
01
02
03
04
05
06
The Board of Directors
07
01 Lord Smith of Kelvin
02 Alistair Phillips-Davies
03 Thomas Andersen
Ian Marchant
04
05 René Médori
06 Colin Hood
07 Gregor Alexander
08 Richard Gillingwater CBE
09 Lady Rice CBE
10 Nick Baldwin
08
09
10
49
Introduction to SSE
Directors’ report
Financial statements
Shareholder information
René Médori
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
Chairman of the Audit Committee and a
member of the Nomination Committee.
Gregor Alexander
Finance Director
Gregor was appointed Finance Director and
joined the Board in 2002, having previously
been Group Treasurer and Tax Manager.
He has worked in the energy industry
since 1990, when he joined Scottish Hydro
Electric. Gregor is a Director of Scotia Gas
Networks. He is a member of the Risk and
Trading Committee.
Thomas Thune Andersen
Non-Executive Director
Thomas joined the Board as a non-
Executive Director in 2008. He is a non-
Executive Director of Petrofac Plc and
of VKR Holding. He was Chief Executive
of Maersk Oil, a member of the Group
Executive Board AP Moller-Maersk, as
well as director or chairman of a number
of companies within the AP Moller-Maersk
Group, until 2009. He is a member of the
Audit, Nomination, and Safety, Health and
Environment Advisory Committees.
Lord Smith of Kelvin
Chairman
Robert joined the Board as a non-
Executive Director in June 2003 and
became Chairman in January 2005. He
is also: Chairman of the Weir Group plc;
a non-Executive Director of Standard
Bank Group Ltd; Chairman of Glasgow
2014 Ltd, the organising committee for
the Commonwealth Games; Chancellor
of the University of the West of Scotland;
and a member of the Council of Economic
Advisers to the First Minister of Scotland.
Robert is Chairman of the Nomination
Committee and a member of the
Remuneration Committee.
Ian Marchant
Chief Executive
Ian was appointed Chief Executive in 2002,
having been Finance Director since 1998.
He has worked in the energy industry since
1992, when he joined Southern Electric.
He is also: a member of the UK Business
Council for Sustainable Energy; Chairman
of the Scottish Climate Change Business
Delivery Group; Chairman of the 2020
Delivery Group; a member of Ofgem’s
Environmental Advisory Group; a member
of the Energy Research Partnership; a
non-Executive Director of John Wood plc
and Maggie’s Cancer Centres; and became
Chairman of the Engineering Construction
Forum in 2009. Ian is a member of the
Nomination Committee, Risk and Trading
Committee and is Lead Director for the
Environment and Corporate Responsibility.
Colin Hood
Chief Operating Officer
Colin was appointed Chief Operating
Officer in 2002, having joined the Board
as Power Systems Director in 2001. He
has worked in the energy industry since
1977, when he joined Scottish Hydro
Electric. He has Board level responsibility
for Generation, Power Systems, Human
Resources and IT. Colin is a Director
of Scotia Gas Networks and became a
non-Executive Director of FirstGroup plc
in May 2009. He is SSE’s Lead Director
for Health and Safety matters and is
Chairman of the Safety, Health and
Environment Advisory Committee.
Lady Rice CBE
Senior Independent Director
Susan joined the Board as non-Executive
Director in July 2003 and became Senior
Independent Director in 2007. She is
Managing Director of the Lloyds Banking
Group Scotland. Susan is also a non-
Executive Director of 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.
Richard Gillingwater CBE
Non-Executive Director
Richard joined the Board as a non-
Executive Director in May 2007. He is
Dean of Cass Business School and is
non-Executive Chairman of CDC Group
plc and a Senior Independent Director
of Tomkins plc. Richard is a member of
the Audit, Remuneration and Nomination
Committees.
Alistair Phillips-Davies
Energy Supply Director
Alistair was appointed Energy Supply
Director and joined the Board in 2002,
having previously been Energy Trading
Director. He has worked in the energy
industry since 1997, when he joined
Southern Electric. Alistair has Board level
responsibility for Energy Trading, Electricity
and Gas Supply, Energy Efficiency,
Customer Service, Sales, Marketing and
Energy Services. He is Chairman of the
Energy Retail Association and chairs
the Risk and Trading Committee.
Nick Baldwin
Non-Executive Director
Nick joined the Board as a non-Executive
Director in 2006. Previously, he worked in
the energy industry, culminating in being
Chief Executive of Powergen plc. Nick is
a non-Executive Director of the Nuclear
Decommissioning Authority, the Forensic
Science Service and Sanctuary Housing
Group and is Chair of the Public Weather
Service Customer Group. He is also
Chairman of TreeHouse Trust. Nick is
a member of the Audit, Remuneration
and Nomination Committees.
50
Scottish and Southern Energy
Annual Report 2010
Corporate governance (continued)
The SSE team (continued)
On 31 March 2010, SSE employed
20,177 people, an increase of 1,382 on
the previous year. Fundamental to the
Company’s success is the professionalism
and enthusiasm of employees, guided by
SSE’s Teamwork value, which states:
‘We support and value our colleagues
and enjoy working together in an open
and honest way.’
The Board of Directors
The Board is accountable to SSE’s
shareholders for the good conduct of
the Company’s affairs and is collectively
responsible for creating and sustaining
shareholder value through the overall
management of the Company, while
ensuring that a sound system of internal
control and risk management is in place.
‘How the Board Works’ is set out on
pages 56 to 58.
The senior
management team
A total of 31 senior executives and
managers report directly to SSE’s four
Executive Directors. The average length of
service in SSE of these senior executives
and managers is 18 years and their
average age is 46 years.
These senior executives and other
managers, plus the Executive Directors,
are members of SSE’s issue- and
business-specific Leadership Teams,
which meet monthly to oversee the
operational and financial performance
of, and issues facing, the Company. The
issues covered by the Leadership Teams
include: Safety, Health and Environment;
People and Resources; Generation and
Fuel; Electricity Networks; Operational
Excellence; Policy and Regulation; and
Business and Domestic Customers.
Employee issues
The Executive Directors and senior
executives and managers are among the
20,177 people directly employed by SSE
on 31 March 2010. Most of these people
work in the United Kingdom; around 300
are employed in the Republic of Ireland;
and a total of 30 work in mainland Europe
and four in China. Of all employees,
73% are men and 27% are women; a total
of 80% of SSE’s managers, including
Leadership Team members, are men and
20% are women. The average age of
SSE’s employees is 39 years. In 2009/10,
there was a 8.7% turnover of employees,
compared with 11.5% in the previous year.
Participation
SSE believes that there is a commonality of
interest between employees and customers
and shareholders. To reinforce that it:
k encourages employees to become and
remain customers by providing them
with a 10% discount on its prices for
electricity and gas supply, plus
discounts on energy efficiency
installations, central heating and
wiring maintenance and telephone
and broadband services; and
k provides opportunities for employees
to become and remain shareholders
in SSE through a Share Incentive Plan
and a Sharesave Scheme. Employee
participation in these schemes is now
42% and 34% respectively.
Within SSE, employee participation
is encouraged through adherence
to the Company’s Teamwork value.
The appraisal process for employees,
including the senior management team,
specifically evaluates their performance
in Teamwork, along with performance
in respect of SSE’s other core values:
Safety, Service, Efficiency, Sustainability
and Excellence. In keeping with these
values, SSE produced and distributed
to all employees in March 2010 a
comprehensive code of business practice,
‘Doing the right thing’. It highlights,
summarises and complements a range
of ethics-related policies which SSE has
in place. The importance of doing the
right thing was again emphasised by
the UK’s Bribery Act 2010.
In addition to a wide range of internal
communication media and events,
employee participation in SSE is also
encouraged through the Chief Executive’s
Blog, inter-active online forums, division-
and subject-specific employee surveys,
Director-led regional roadshows and
the Licence to Innovate scheme, which
enables employees to research, review
and test-trial new ideas.
Joint Negotiating and
Consultative Committee
SSE benefits from a well-established
Joint Negotiating and Consultative
Committee which includes lay and full-
time representatives from four recognised
trade unions. In February 2008, the
unions’ ballot produced a substantial vote
in favour of SSE’s pay offer for the three
years to 31 March 2011. Discussions
have commenced with the trade unions
on the type of collective agreement that
will support the ongoing growth and
development of the business. Pay
arrangements in SSE’s Contracting
division are in line with national
construction agreements.
Rights
SSE has in place a comprehensive range
of policies to safeguard the interests
of employees and potential employees.
Like all responsible organisations it
has in place an actively-managed equal
opportunities policy, in keeping with the
spirit as well as the letter of the law in
the UK and elsewhere, designed to ensure
fair and equal treatment of employees
and potential employees across the seven
protected grounds (as defined by the UK’s
Equality and Human Rights Commission)
– age, disability, gender, race, religion
and belief, sexual orientation and gender
reassignment. Adjustments are made
to support and train staff who become
disabled during their employment to
enable them to continue and develop
in their role. There were no occasions
during 2009/10 when SSE was found
to have failed to comply with equal
opportunities legislation.
The Equality Act 2010 will harmonise
and extend existing discrimination
law in the UK. SSE intends to take the
opportunity of the revised legislation to
review all of its policies in this area and,
where necessary or desirable, update
them. It has established an Equality
Working Group to help achieve this.
Responsibilities
Along with the rights summarised above,
SSE also believes that employees have
responsibilities, summarised in eight
People Principles, adopted in 2008 and
built around its core value of Teamwork:
k Take all active steps to ensure there
is no intimidation or discrimination.
k Engage in safe, healthy and
environmentally-friendly working
practices.
k Always know and understand what
is expected of you in your job.
k Maintain respect and support for
colleagues at all times.
k Work continuously to improve team
and individual performance.
k Obtain constructive feedback on your
performance from your line manager.
k Receive appropriate training,
development and rewards.
k Know and embrace the Company’s
core values.
Through the application of these
principles, SSE seeks to maintain a positive
51
Introduction to SSE
Directors’ report
Financial statements
Shareholder information
organisational culture and to provide a
fulfilling place for people to work.
Training and development
The skills and competencies of employees
are critical to the energy sector in the UK,
the Republic of Ireland and elsewhere.
SSE needs to ensure the safe and efficient
operation of its businesses and the reliable
provision of services to customers. In
addition, SSE needs to develop new
skills and flexibility to manage new
technologies. It is, therefore, critical
that employees of SSE have the training,
development and work experience they
need to fulfil their potential. In order to
do this, SSE uses a range of delivery
media for training.
During 2009/10, SSE invested £2.2m in
externally-provided training, taking the
total to £7.7m over the last three years.
This helped to deliver training to 3,600
employees during the year, in addition
to the 7,800 people who received formal
in-house training. In the past two years,
SSE has opened new technical and
general training centres at Thatcham and
Perth. These centres enable people to
train in the types of environment in which
they will eventually work, providing a
realistic experience in a safe, controlled
setting. This training is supplemented
by operational awareness days, during
which best-in-class working practices
are demonstrated to employees through
detailed coaching and assessment in
operational environments.
SSE recognises that the continued
success of its business requires the
ongoing development and growth of
employees, as well as the effective
recruitment, retention and development
of talent into its business. As part of this
process, SSE has in place a succession
planning process and offers a range of
development programmes suited to the
needs of school leavers, trainees, trainee
engineers, graduates and apprentices.
In 2009/10, 260 people were recruited
through these schemes.
Innovation, research
and development
The SSE team of people has extensive
knowledge, expertise and know-how.
New ideas, improvements to process
and design and innovation have been
key to SSE’s successes to date and are
fundamental to the Company’s ability
to adapt to the challenges of the future.
The Company’s Excellence value states
that: ‘We strive to get better and smarter
and more innovative and be the best in
everything we do.’
over the next 10, 20 or 40 years.
These range from electricity storage
to developments in social networking.
As a spur to employee participation, idea
generation, continuous improvement and
operational excellence, SSE maintains and
promotes a Licence to Innovate scheme,
under which any employee can suggest
ideas for improving the way SSE operates,
consistent with its core values. People
with ideas with significant potential are
granted a Licence to Innovate, under
which they can spend two months
researching further their proposal.
Subject to the outcome of the research,
the idea may then be piloted prior to
full implementation.
Over 2,000 Licences to Innovate were
issued during 2009/10, of which over 400
were implemented. A number of Licences
have created value in excess of £1m.
Others have contributed to improved
performance in specific areas, such as
driving safety – a critical issue for SSE,
which has 6,000 Company vehicles on
the road in the UK and Ireland.
SSE’s focus on innovation complements
its work in research and development,
where new processes, services, products
and technologies are created, enabling
it to remain a successful company in the
future. During 2008/09, SSE created a
corporate research and development
function, which now works with people
throughout SSE and external organisations
such as the University of Strathclyde, the
University of Reading and KEMA, a leading
authority in energy consulting and testing
and certification. SSE’s focus is on the
following key areas: smart homes;
renewable energy; carbon capture and
storage; customer attitudes and energy
efficiency; appliances; street-lighting;
smart electricity grids; and telecoms.
In total, during 2009/10, SSE invested
£3.7m in research and development
activities. This was in addition to the £12m
which SSE Ventures invested in companies
during 2009/10 which are developing and
deploying renewable, sustainable and
energy efficiency-enhancing products
and services. See page 30.
The horizon of SSE Ventures and
of SSE’s research and development
activities is mainly the next decade,
including influencing current operational
development and deployment activities.
SSE also maintains a long-term outlook
through the work of its Central Research
Unit, which examines in detail issues
which could affect SSE and its customers
Community and
charitable activities
SSE encourages its employees to be
active citizens in the communities in
which they live and work through, for
example, its Into Action scheme. This
matches the contribution of employees
who are either raising money for, or giving
time to, a charity, or who are involved in
running local community or youth sports
groups, up to a limit of £500. Its focus on
safety is reflected in ‘Make it Zero’, which
rewards business units that deliver a full
year without any lost-time or reportable
injuries with a donation to a charity of
the business unit’s choice.
Through these and other schemes, such
as financial support for programmes near
SSE’s wind farms, SSE made payments
of £3.4m to charitable and community
programmes in the UK during 2009/10. It
is building on this during 2010/11 with the
development of a company-wide employee
volunteering programme and further
promotion of and support for the recently
introduced ‘Give As You Earn’ scheme, to
give employees maximum choice in the
cause they support, and facilitate them
doing so in a tax-efficient way.
Corporate responsibility
index
Everyone who is employed by SSE is
expected to demonstrate and deliver
responsible business practice in whatever
they do. As a result, SSE does not have
a separate corporate responsibility
division or committee, believing it is not
an add-on, and should not be treated as
such. This Annual Report is intended to
demonstrate that SSE is a responsible
company, and further information
is provided in its ‘A-Z of Corporate
Responsibility’ at www.sse.com.
Business in the Community’s
Corporate Responsibility Index provides
an authoritative benchmark for companies
to evaluate their 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. In the results for
the Index for 2009, released in April 2010,
SSE retained its Platinum Plus rating.•
52
Scottish and Southern Energy
Annual Report 2010
Corporate governance (continued)
Risk management
SSE’s core purpose is to provide the
energy people need in a reliable
and sustainable way.
Risk management model
Business model
Strategy
Culture
Clear financial goal
Limited appetite for risk
Clear and transparent
decision-making
Risk identification
Risk management
Limited value at risk
Risk monitoring
Risk management
As SSE has previously observed, there
are many definitions of ‘risk management’
but some organisations with apparently
textbook approaches to the issue have
been overwhelmed by fundamental failures
which well-documented systems and
processes appeared powerless to prevent.
Ticking the right boxes is a responsible
thing to do, but it is no substitute for a
more fundamental responsibility on the
part of companies: to ensure their overall
business model and strategy and culture
are designed with risk firmly in mind.
Clear financial goal
SSE has a clear – and moderate –
financial goal: to deliver sustained
real growth in the dividend payable to
shareholders. To attain that goal, it does
not need to seek artificially high rates of
growth in profitability or take operational
or investment decisions which are high
risk. All members of the Board believe
that this goal must not be subverted for
any other financial end.
In their book, ‘Built to Last’, Jim Collins
and Jerry Porras wrote about companies
that do ‘not view business as ultimately
about maximising profitability’. That
is SSE’s view of sustainable business
and it underpins its approach to risk
management in all aspects of its activities.
Strategy
SSE seeks to achieve its financial
goal through the implementation of a
well-established strategy: the efficient
operation of, and investment in, a
balanced range of economically-regulated
and market-based energy businesses.
SSE is the only company listed on the
London Stock Exchange involved in such a
wide range of energy businesses in the UK.
Business model
The practical application of its strategy
means SSE derives income and profit from:
k three separate economically-regulated
activities – electricity transmission,
electricity distribution and gas
distribution;
k electricity production, using a diverse
variety of fuels – gas, oil, coal,
biomass, wind and water;
k energy supply – gas and electricity; and
k other energy-related activities such as
gas storage, contracting, connections,
metering and telecoms.
This means that while they have a
common core – energy – there is balance
and diversity in the sources of SSE’s
income and profit.
Culture
Central to SSE’s approach to risk
management is its core value of
Teamwork, defined as supporting and
valuing colleagues and working together
in an open and honest way. This ensures
a full discussion of the risks and potential
rewards associated with any major
decision – discussion which involves
people because of what they know,
not simply who they are.
Specific findings from the independent
review of SSE Board effectiveness, carried
out in the autumn of 2009 by Independent
Audit Ltd, included ‘a remarkable
consensus of opinion’ on the following:
k there is ‘an open, informal atmosphere
which encourages everyone to
contribute’;
k discussion is ‘rigorous’; and
k the Executive Directors ‘respond
positively and constructively to
challenge’.
Limited appetite for risk
The Teamwork value, combined with other
factors such as the clear, moderate (but
nevertheless fundamentally important)
financial goal of sustained real growth in the
dividend, mean SSE has a limited appetite
for risk. At the same time, its approach
in respect of economically-regulated
businesses, which in themselves are lower-
risk, is more risk-averse than is the case
in other, market-based activities. In these
areas, such as electricity generation, SSE
might consider taking on additional risk
where the risk is very well-understood and
can be mitigated and the potential returns
are clearly attractive (but also credible).
53
Introduction to SSE
Directors’ report
Financial statements
Shareholder information
Risk identification
The Teamwork value, the emphasis on
people’s knowledge rather than status,
and the maintenance of a very experienced
team, complemented by the recruitment
of additional specialist skills where
necessary, are all designed to ensure that
the risks associated with operations and
investments are identified, understood,
recorded, mitigated and monitored.
Limited value at risk
The limited appetite for risk and the
process of risk identification, allied to the
maintenance of a balanced model, in which
diversity of operations and investments is
a key feature, all mean that the extent of
any single risk and the value associated
with it is limited.
Risk monitoring
Risks are monitored by the relevant
business units within SSE, with an overview
provided by the Group Internal Audit
Department for the Audit Committee
meetings held in May and November
of each year and for the Board meeting
held in March. During 2009/10, the Group
Audit function carried out over 60 separate
audits of functions, activities and issues
managed by SSE, providing a large
number of reports to senior management
throughout the year. These include
environmental audits carried out by
SSE’s Group Environmental Auditor.
Each audit report included agreed
management actions to improve the
overall management of risk. The work of
Group Audit complements the work done
by business-specific compliance functions
in areas such as energy trading, domestic
sales, IT and customer service.
Risk management
In summary, SSE’s approach to risk
management is characterised by: the
clarity of its financial goal; its strategy
and business model, which help to limit
the value at risk; its culture and limited
appetite for risk; and its work on risk
identification and risk management.
Clear and transparent decision-making
Such an approach to risk management
still requires one essential feature: clear
and transparent decision-making to make
the overall approach effective, in support
of its clear financial goal.
Risk categories
At its meeting in March 2010, the Board
of SSE reviewed SSE’s principal risk
categories and the effectiveness of SSE’s
system of internal controls. The risks are
set out under six principal categories,
summarised below.
One additional risk is the weather –
particularly its impact on the production and
consumption of energy in the Generation
and Supply business. The extent of this risk
is contained by the diversity within SSE’s
generation portfolio, the further diversity
within its renewable energy portfolio, and
the integrated nature of its generation
and energy supply activities.
No list of risks can ever be totally
comprehensive. Circumstances change
and the unexpected happens so the
extent and materiality of any risk can vary.
Nevertheless, in its ongoing review of risk,
SSE is confident that its assessment of
the principal risk categories is correct
and that its analysis of individual risks
is soundly-based.
Risk categories
Risks in this category
How risk is managed
Strategic risk
This means a risk which could adversely
affect SSE’s ability to achieve its core
financial objective of sustained real
growth in the dividend.
More information
See Strategic Overview on pages
8 to 10
Financial risk
This means a risk which could result
in a material financial loss to SSE or
an inability to meet its obligations.
More information
See Risk and Trading Committee on page
62
and Financial Overview on pages
11 to 15
Risks could arise from issues such as the
impact of climate change and scarcity of
natural resources and commodities, the
emergence of new, so-called ‘disruptive’
technologies, poorly-judged acquisitions
or investments, fundamental weaknesses
in project management or sustained
reputational damage.
SSE manages strategic risk by operating
and investing in a balanced range of
market-based and economically-regulated
energy businesses, thus limiting the value
at risk associated with any single business
issue. Furthermore, its approach to risk
identification, monitoring and management
is applied in detail to individual issues
as they arise, thereby further diluting
strategic risk.
Risks could arise from issues such as
participation in wholesale markets for
gas and electricity and other commodities,
an adverse movement in exchange rates
between sterling and other currencies
or inability to secure short-, medium-
or long-term funding.
SSE has a Risk and Trading Committee
which manages the financial exposures,
operations and internal controls related
to participation in wholesale energy and
commodity markets and to Treasury-
related activities. SSE maintains a
balanced approach to financing its
operations and investments, founded on
maintenance of a strong balance sheet.
54
Scottish and Southern Energy
Annual Report 2010
Corporate governance (continued)
Risk management (continued)
Risk categories
Risks in this category
How risk is managed
This risk applies especially in wholesale
energy and commodity activity and in the
supply of energy to major customers. In
other areas, such as SSE’s economically-
regulated businesses, credit risks are
managed in accordance with industry
standards as set out by Ofgem. Like other
companies, SSE seeks external funding at
an economic rate to finance its activities.
Specific credit risk controls that match
the risk profile of those activities are
applied. SSE does not deliberately seek
exposure to credit risk as a means of
generating profit. SSE also observes a
number of financial principles, including
maintenance of a strong balance sheet.
SSE is active in a number of markets,
including energy supply and energy
services such as contracting. Any
participant in competitive markets
is exposed to risks associated with
competitors’ behaviour and customers’
changing expectations and requirements.
SSE actively monitors, manages and
develops its proposition in all of the
markets in which it takes part and talks
every day to customers to make sure it is
meeting their expectations. It has specific
Leadership Teams comprising managers
tasked with promoting SSE’s position in
the provision of products and services
to households and businesses.
SSE is a complex business and operational
risks range from management of electricity
generation plant and overhead power
lines to safety, health or environmental
issues and compliance with legislation
and regulations.
Operational risks are managed through the
identification of specific risks within each
activity and the development of associated
mitigation plans and deployment of
relevant policies. SSE also prioritises the
development and retention of experienced
employees whose risk management
experience is used. SSE has in place
insurance policies in respect of all major
operational risks.
In SSE’s economically-regulated
businesses, the principal risk arises from
Ofgem’s determination of the Price Control
for electricity distribution and transmission
and gas distribution. In market-based
businesses, the principal risk arises from
the high political profile of electricity
generation and energy supply.
SSE has a Policy and Regulation
Leadership Group to oversee political
and regulatory matters. It maintains a
high level of constructive interaction with
regulators, policy-makers, legislators,
officials and other opinion formers in
the political and legislative process.
Credit risk
This means a risk of default by a contractual
counter-party resulting in failure to settle
or deliver on liabilities or an inability to
finance its operations and investments.
More information
See Financial Overview on pages
11 to 15
and Risk and Trading Committee on page
62
Market risk
This means a risk of major change
arising in one or more of the markets
in which SSE is an active participant.
More information
See Generation and Supply on pages
20 to 35
and Services on pages
43 to 46
Operational risk
This means the risks associated with
the day-to-day operations of SSE, across
all of its business activities, and relating
to processes, systems or people.
More information
See Business Overview on pages
20 to 46
Political and regulatory risk
This means environmental, safety,
regulatory and general legislative and
public policy changes which could affect
any part of SSE’s business.
More information
See Strategic Overview on pages
8 to 10
and Networks on pages
37 to 43
55
Introduction to SSE
Directors’ report
Financial statements
Shareholder information
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 other Executive Directors; and
k undertakes an annual evaluation of
the Board, its Committees and
individual Directors.
The Executive Directors:
k monitor operational and financial
performance of SSE;
k develop and implement SSE strategy,
operational plans, policies, procedures
and budgets;
k assess and control all SSE risks; and
k monitor competitive forces in each
area of operation.
The Internal Audit department:
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;
k ensures that the business units carry
out regular reviews on their internal
controls relating to the key risks;
k monitors the effectiveness of SSE’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 SSE’s key
policies and principles; and
k provides the Audit Committee and
Board with objective assurance
on SSE’s control environment.
The role of the Audit Committee, Risk
and Trading Committee and Safety, Health
and Environment Advisory Committee in
the Group’s system of internal control
and risk management is set out in the
individual committee reports.
Reviewing the system of internal control
and monitoring its effectiveness is
delegated to the Audit Committee and is
reviewed at least annually by the Board.
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 2009
to 18 May 2010 (being the last practical day
prior to the printing 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 Process
Safety, Health and Environment
Advisory Committee
Board
Executive Directors
Business Units
Audit Committee
Risk and Trading Committee
Internal Audit
Internal control
Risk management depends on a strong
system of internal control, which is
fundamental to achieving SSE’s strategic
objectives. The Board is responsible for the
overall system of internal control and risk
management, and it either directly, or
through its committees, sets performance
targets and policies for the management of
key risks facing SSE. The system of internal
control is designed to manage, rather than
eliminate, risk of failure to achieve business
objectives and can provide only reasonable
and not absolute assurance against
material misstatement or loss.
All employees are expected to adhere to
the Company’s business practice and the
SSE values of – Safety, Service, Efficiency,
Sustainability, Excellence and Teamwork –
which are embedded in the culture. Their
consistent application are central to all
activities in SSE. The Teamwork value, the
emphasis on people’s knowledge rather
than status, and the maintenance of a very
experienced team, complemented by the
recruitment of additional specialist skills
where necessary, are all designed to
ensure that the risks associated with
operations are fully understood. Reporting
within the Company is structured so that
the key issues are escalated through the
management team, ultimately to the
Board if appropriate.
The key elements of SSE’s internal control
process are summarised below:
The Board:
k approves the policies, procedures and
framework for the maintenance of a
sound and effective system of internal
control ensuring:
– the provision of quality internal
reporting to the Audit Committee
and other Board Committees by
management and internal audit;
– the provision of quality reporting
by the external Auditors to the
Audit Committee;
– 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
following review by the Audit Committee;
k approves and regularly reviews and
updates SSE’s strategy and business
development;
k reviews performance through a system
of reporting based on annual operating
and capital expenditure budgets;
56
Scottish and Southern Energy
Annual Report 2010
Corporate governance (continued)
How the Board works
The framework of corporate governance
The Board is accountable to the Company’s
shareholders for the good conduct of the
Company’s affairs. This report sets out how
the Company applies the principles of the
Combined Code on Corporate Governance
(the Code) issued by the Financial
Reporting Council in June 2008.
Throughout the year the Company
monitored developments in corporate
governance best practice and participated
in the consultation process on changes to
the Combined Code and Audit Committee
governance. 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.
Combined Code compliance
The Board remains 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 SSE
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.
Memorandum and Articles of Association
The powers of the Directors are
determined by UK legislation and the
Company’s Memorandum and Articles
of Association, which are available on the
Company’s website. Amendments to the
Memorandum and Articles of Association
are being proposed at the Annual General
Meeting in 2010, to reflect the full
implementation of the Companies Act
2006 and the implementation of the
Shareholder Rights Directive in the UK.
An explanation of the changes being
proposed are contained in the Notice
of Annual General Meeting 2010.
Board decisions
A formal list 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
k
statements;
interim dividend payments and
recommendation of final dividends;
k significant changes in accounting
policy and practice;
k the Group’s corporate governance
and system of internal control;
k Board and Committee membership;
k major acquisitions, mergers, disposals
and capital expenditure;
k changes in the capital and structure
of the Group; and
k approval of key policies such as safety,
health and the environment.
the operational and financial performance
of, and issues facing, the Company.
Biographical information on the Chief
Executive is set out on page 49.
Balance of the Board
There are four Executive Directors and five
independent non-Executive Directors, in
addition to the Chairman, Lord Smith of
Kelvin. This gives the Board a good 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 non-Executive Directors:
k scrutinise, measure and review
the performance of management;
k assist in the development of strategy;
k review the Group financial information;
k ensure systems of internal control
and risk management are appropriate
and effective;
k manage the relationship with the
external Auditors; and
The list is reviewed regularly by the Board
and is published on the SSE website.
k review the remuneration of and
succession planning for the Board.
Roles of Chairman and Chief Executive
The roles of the Chairman and the Chief
Executive are separate and clearly defined.
The Chairman:
k
is responsible for the operation,
leadership and governance of the Board
ensuring that the Board operates
effectively whilst providing appropriate
challenge to management; and
k meets with analysts and other
representatives of institutional investors,
and participates in both the interim
and annual results presentations.
The Chairman regularly meets with
managers and employees at locations
throughout the Group.
Biographical information on the Chairman
is set out on page 49.
The Chief Executive:
k
is responsible for the operational
management of SSE’s business; and
implements the strategy and policy
as agreed by the Board.
k
In discharging his responsibilities, the
Chief Executive is advised and assisted
by senior management and a number of
specific Leadership Teams which oversee
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 is
satisfied 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. Lord
Smith of Kelvin 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 Safety, Health and Environment
Advisory Committee. Further details on
the membership and operation of these
Committees are set out on pages 60 to 74.
The Chairman and non-Executive
Directors met during the year without
the Executive Directors being present.
All of the non-Executive Directors have
been appointed for fixed terms of three
57
Introduction to SSE
Directors’ report
Financial statements
Shareholder information
years. Their appointment letters
are available on the SSE website.
Attendance at Board meetings
Board meetings
Board conference
call meetings
Senior Independent Director
Susan Rice is the Senior Independent
Director. She undertook management
visits during the year and also attended
a meeting of the Risk and Trading
Committee. She is available to meet
with major shareholders on request and
attended the City presentation of SSE’s
results. Susan carried out the Chairman’s
performance evaluation, together with
the other non-Executive Directors.
Lord Smith of Kelvin
Gregor Alexander
Thomas Andersen
Nick Baldwin
Richard Gillingwater
Colin Hood
Ian Marchant
René Médori
Alistair Phillips-Davies
Lady Rice
6/6
6/6
6/6
6/6
6/6
6/6
6/6
6/6
6/6
6/6
4/4
4/4
4/4
3/4
4/4
4/4
4/4
4/4
4/4
4/4
Director appointments
In accordance with the Code and the
Company’s Articles of Association,
all Directors are required to retire by
rotation and stand for re-appointment
by shareholders at the first AGM following
their appointment and for re-appointment
at least every three years. Nick Baldwin,
Richard Gillingwater and Alistair Phillips-
Davies will stand for re-appointment at this
year’s AGM. The Board evaluation process
confirmed that the performance of the
Directors standing for re-appointment
continued to be effective and that they
continue to demonstrate commitment in
their respective roles. Biographical details
for all the Directors are set out on page 49.
Attendance at Board and
Board committee meetings
There is normally full attendance at
Board and committee meetings, although
occasionally there may be non-attendance
due to unforeseen circumstances or
prior commitments which could not be
rearranged. If unable to attend a meeting
the Director will provide comments and
feedback to either the Chairman,
Committee Chairman or Company
Secretary, who ensure that the comments
received are raised at the meeting.
The Board has six full Board meetings
during the year. These start with an evening
meeting when the Board is normally given
a presentation by senior management on a
particular business topic. The meeting then
continues the following day and is often
followed by a meeting of one of the Board
Committees such as the Remuneration
Committee or the Health, Safety and
Environmental Advisory Committee.
The table sets out the attendance of the
Directors at these full Board meetings.
In addition, the Board has an Update
Conference Call in the month between
the bi-monthly full Board meetings.
These calls usually last for around one
hour and are used to update the Board
on the business performance and brief
the Board on any current issues. A Board
decision or approval may be required at
the Update Conference Call if the matter
cannot wait until the following Board
meeting. In these circumstances the call
is recorded as an ad hoc Board meeting.
Participation in the four ad hoc Board
meetings is also shown in the table above.
Board effectiveness
Information and professional development
The Directors receive accurate, timely and
clear information, with all Committee and
Board papers being issued for review in
advance of meetings. At each meeting, the
Chief Executive presents an update report
on all aspects of the Group’s business and
the Finance Director presents a report on
financial performance.
During the year, the Board and Board
Committees were kept up to date with
developments through a programme where
briefings are given by Executive Directors
and senior management on their business
areas. Additional specialist briefings and
presentations were given on areas such as
corporate governance, regulation, public
affairs, health and safety, major projects,
and the Company’s major business activities
generally. Separate more informal meetings
were also held with senior management.
On joining the Board, Directors receive a
comprehensive induction course tailored
to their individual requirements which
includes meetings with the Executive
Directors and senior management,
visits to key sites, and meetings with 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 SSE.
All the non-Executive Directors had
individual meetings, briefings and site visits
during the year, separate from the full
schedule of Board meetings. The briefings
focused on subjects where they have specific
knowledge or expertise, such as energy
trading, operational matters and customer
service. The site visits by individual non-
Executive Directors during the year included
major project offices, main customer
service centres, and power stations.
The Board believes that given the
experience and skills of the Directors and
the briefings referred to above, any further
personal training needs can 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 Company’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 to the
other members of the Board, if the Board
so requests. This procedure was not
required to be used during the year.
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 other
members of senior management which
is designed to develop and enhance
individual and Company performance.
Executive Directors’ other directorships
Executive Directors may be invited to
become non-Executive Directors of
other companies. Approval may be given
to accept such invitations recognising
the benefit to the individual and to the
Company. Any such appointments are
included in the biographical information
set out on page 49.
Conflicts of interest
During the year a review of the Board
members’ interests and appointments
58
Scottish and Southern Energy
Annual Report 2010
Corporate governance (continued)
How the Board works (continued)
was carried out by the Company Secretary.
The Board considered and authorised each
Directors’ reported actual and potential
conflicts of interest at the Board meeting
in January 2010. In accordance with the
Company’s Articles of Association and
relevant legislation, each Director abstained
from approval of their own position. The
Board continues to monitor and review
potential conflicts of interest on a regular
basis. The Nomination Committee will keep
under review any conflict or potential conflict
of interest situations authorised by the Board
and determine whether it is appropriate
for such matter to remain so authorised.
Performance evaluation
The Board, the Board committees and
the individual Directors participate in an
annual process of performance evaluation.
The Board evaluation process this year
was carried out by external facilitators,
Independent Audit Ltd. This was the first
time that the Board evaluation had been
carried out by an external party. The
evaluation process involved individual
meetings with each Director, the Company
Secretary and senior managers who have
experience of the Board and committee
meetings. The findings of Independent Audit
were issued to the Board and the senior
managers, and formed the basis of a
presentation and full discussion at the
Board meeting in January 2010. The
Board found the outcome of this external
evaluation very helpful in focusing on certain
areas of the Board and Company business.
In particular, Independent Audit were asked
to look at risk governance, and they had
a number of helpful recommendations
covering matters which could merit further
consideration, such as risk management,
structures and responsibilities. Other
recommendations addressed Board and
senior Executive succession planning, and
more regular meetings of the non-Executive
Directors and Chairman, in the absence
of management. Following their report, a
number of the recommendations are being
taken forward by the Board for further
review. The report of Independent Audit was
however very reassuring about the high
level of Board effectiveness in general.
Directors also participated in detailed
reviews of individual performance which
were carried out in one-to-one meetings
with the Chairman. The process for
evaluating the Chairman involved a separate
meeting of the non-Executive Directors
chaired by the Senior Independent Director.
The Board external review was welcomed
as a constructive exercise, and will be
repeated at regular points in the future.
Board committees
obligations in regard to the identification,
release and control of inside information.
The Board has delegated authority to five
principal committees to carry out certain
tasks as defined in each committee’s
terms of reference. The terms of
reference for all committees are set by
the Board, are reviewed regularly, and are
available on the SSE website. Membership
is determined by the Board, on the
recommendation of the Nomination
Committee and in consultation with
each committee chairman. Minutes
of committee meetings are included on
the agenda of the next Board meeting.
The relationship between the Board, its
committees and the management of the
Company can be summarised as shown
in the table below.
In addition, there are a number of senior
executive Leadership Teams which
assist the Executive Directors in their
responsibilities for the governance
and management of the Group.
Details of each committee, including
membership, meetings, role and activities
in 2009/10, are set out in the committee
reports on pages 60 to 74.
Engagement with
shareholders and
major stakeholders
Disclosure Group
The Disclosure Group comprises the Chief
Executive, Finance Director, Company
Secretary, Director of Corporate Affairs,
Investor Relations Manager and the
Assistant Company Secretary. It provides a
framework for the handling and disclosure
of inside information and other information
of interest to shareholders and the
investment community. The Disclosure
Group meets regularly and assists and
informs decisions concerning the
identification, control and release of inside
information and investor relations activities.
Periodically, it reviews SSE’s disclosure
controls and procedures and ensures that
the relevant individuals are aware of their
Copies of all announcements can be
accessed on SSE’s website.
Relations with shareholders
The Company continued work to develop
an effective dialogue with all shareholders,
based on a mutual understanding of
objectives. The Board believes that this
is fundamental to ensuring that the
Company’s strategy is understood and
that any questions or issues are dealt
with in a constructive way.
The Company maintains regular contact
with institutional shareholders, fund
managers and analysts through a
programme of dialogue, meetings,
presentations, events and site visits led by
the Chief Executive and Finance Director.
The Investor Relations Manager has day-
to-day responsibility for communications
with institutional shareholders. Brokers’
reports and analysts’ briefings are
regularly distributed to Directors. The
Board receives regular reports on the
various issues raised by institutional
shareholders, fund managers and
analysts which allow Directors to form
a view of the priorities and concerns of
the Company’s stakeholders. As part of
the induction programme for Directors,
arrangements are made for analysts to
meet with newly appointed Directors.
The Chairman attended the Company’s
interim and preliminary results
presentations in May 2009 and November
2009. The Chairman also met a number
of major institutional shareholders
during the year to gain a first-hand
understanding of key issues.
Susan Rice, the Senior Independent
Director, is available to shareholders if
they have concerns that contact through
the normal channels has either failed to
resolve or is deemed inappropriate. She
attended the interim results presentation
in November 2009.
SSE’s website contains up-to-date
information for shareholders and other
interested parties including share price
Governance structure
Board of Directors
Audit
Committee
Health, Safety
and Environment
Advisory Committee
Nomination
Committee
Remuneration
Committee
Risk and
Trading
Committee
59
Introduction to SSE
Directors’ report
Financial statements
Shareholder information
SSE provides advice and guidance to
suppliers on an individual basis and to
potential suppliers via the SSE website.
There is an emphasis on encouraging
suppliers and those involved in tender
processes to propose innovative ways
of meeting SSE’s needs in a way that
minimises environmental impact.
In addition to ongoing work to increase the
sustainability of SSE’s supply chain, including
training, recording risks, contract reviews
and close liaison with suppliers, in 2009/10
SSE undertook a number of initiatives to
enhance its performance.
SSE’s Procurement team undertook a
review of almost 70 of the Company’s main
suppliers to ensure that their approach to
corporate responsibility is compatible with
its own. The focus was on issues of bribery
and corruption, labour conditions and
environmental matters and the review
looked most closely at suppliers involved in
the supply of contracted services, including
catering, cleaning and security; the provision
of gas and electricity infrastructure
components; and the supply of clothing,
footwear and personal protective equipment.
SSE has for several years subscribed to
the Verify scheme, which is operated by an
independent company, Achilles. It assesses
the environmental, health and safety and
quality commitment of potential suppliers
and contractors. SSE expects existing and
potential suppliers and contractors to
co-operate fully with the Verify process.
Whilst the Verify scheme is useful, SSE
would like to see it extended to assessing
labour standards and organisations’
approach to eliminating bribery and
corruption. In 2009/10 SSE began work
with Achilles on this with the intention of
having Verify evolved to cover such issues
in the near future.
The Achilles carbon reduction programme
allows suppliers to measure, manage
and report their organisational footprint
via CEMARS (Certified Emissions
Management and Reduction Scheme).
In 2009/10, SSE achieved its target of
encouraging 20 of its main suppliers
to sign up to the scheme. SSE also
successfully completed the process
itself and achieved CEMARS certification.
SSE’s Head of Procurement is the
Chair of the Achilles Carbon Reduction
Steering Group for 2010, indicating SSE’s
commitment to improving measurement
and management of carbon throughout
the supply chain.•
information, announcements and news
releases, investor and analyst presentations,
and a section containing information on
shareholder services. The Company’s Annual
Report and other shareholder circulars
are also published on the SSE website.
Communications with shareholders
Shareholders have a choice on how to
receive their Company communications
such as the Annual Report. The Company
recognises the benefit of electronic
communications and during the year,
contacted relevant shareholders to
encourage them to register for email
communication. As recognition of the
reduced cost and environmental impact
of this form of communication, the
Company, on behalf of shareholders,
makes a donation to the World Wildlife
Fund’s International Forest Programme
for every shareholder that elects for email
communication or receives Company
documentation via the SSE website.
Annual General Meeting
The Company’s AGM will be held at
the Bournemouth International Centre,
Exeter Road, Bournemouth BH2 5BH on
Thursday, 22 July 2010 at 12 noon. Details
of the business to be proposed at the
meeting are contained in the Notice
of Annual General Meeting.
The AGM provides an interesting opportunity
for the Board to communicate with
shareholders and provide an update on the
performance and plans of SSE. 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 asked
to vote on each resolution by a show
of hands. The Chairman announces the
proxy votes cast for each resolution at the
meeting, and the voting results are placed
on the Company’s website following the
meeting, in addition to being announced
to the London Stock Exchange.
Communications with other stakeholders
The Board has a programme of events to
meet with a range of external stakeholders
representing the public sector, investment
community, environmental affairs, and
consumer interests. The purpose of these
events is to explain the Company’s position
on a range of business, policy and public
interest issues and to engage in their views,
suggestions and any areas of concern.
More generally, working with public policy
makers is a vital area for the Company,
given the high profile of energy and
environment-related issues in the UK
and elsewhere. The Company 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;
k submissions to government and
Parliamentary consultations and
inquiries;
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.
The Company’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
framework to enable it to invest in secure
and lower-carbon supplies of energy in
the UK and Ireland.
Supply chain
Other stakeholders include the suppliers
and contractors upon whom SSE depends
for the long-term success of its business.
While the relationships between SSE and
its contractors and suppliers are the
responsibility of the Executive Directors
and the rest of the management team,
the Board recognises that SSE should
promote responsible practices within its
supplier and contractor base. SSE’s aims
in this area are to:
k
integrate human rights, labour,
environmental and ethical considerations
into its main procurement processes;
k raise awareness of human rights,
labour, environmental and ethical
concerns amongst buyers, traders
and suppliers;
k understand where human rights,
labour, environmental and ethical
risks lie in its supply chain; and
identify specific procurement activities
where the risks and/or opportunities
merit further investigation and conduct
such investigations as required.
k
60
Scottish and Southern Energy
Annual Report 2010
Corporate governance (continued)
Audit Committee
René Médori
Audit Committee Chairman
Members and meetings
Membership
René Médori
(Committee Chairman)
Thomas Andersen
Nick Baldwin
Richard Gillingwater
Attendance
at meetings
3/3
2/3
3/3
3/3
The Board has determined that each
member of the Committee is independent
and that the membership meets the
requirements of the Code. In accordance
with the Code, René Médori is identified
as having recent and relevant financial
experience through his position as
Finance Director of a major international
listed company.
The Finance Director, Energy Supply
Director, Head of Group Internal Audit
and the external Auditors normally attend
and report at its meetings. The Company
Chairman also regularly attends Audit
Committee meetings. Senior management
including the Group Treasurer and
Corporate Finance Manager, Group
Financial Controller, Director of Energy
Portfolio Management, Director of
Corporate Affairs and Head of Portfolio
Support may also be invited to present
reports. During the year, the Committee
met privately with the external Auditors,
and separately with the Head of Group
Internal Audit.
The Company Secretary is Secretary
to the Audit Committee.
The Committee has unrestricted access
to Company documents and information
as well as to management and the
external Auditors. The Audit Committee
Chairman reports the outcome of
Committee meetings to the Board.
Role
The Audit Committee assists the
Board in the effective discharge of its
responsibilities for financial reporting
and internal control, together with the
procedures for the identification,
assessment and reporting of risks.
The Audit Committee’s remit, which is
set out in its terms of reference, includes
responsibility for:
k ensuring that the Company’s financial
reports and formal announcements
represent an accurate, clear and
balanced assessment of the
Company’s position and prospects;
k monitoring and reviewing the
effectiveness of the Company’s
accounting systems, internal control
policies and procedures and
risk management systems;
k monitoring and reviewing the
effectiveness of the Company’s
internal audit function;
k monitoring and reviewing 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;
k monitoring and reviewing the
significant risks identified by each
business unit as well as the mitigating
action against those risks;
k monitoring and reviewing the
arrangements by which employees
can in confidence raise concerns
about any possible improprieties
in financial and other matters; and
k reviewing the significant financial
reporting issues and judgments.
Activities in 2009/10
The Audit Committee had three meetings
in the year. The key activities of the
Audit Committee during the year are
set out below:
Financial statements
k reviewed the financial statements in
the 2009 report and accounts and the
interim results. As part of this review
the Committee received from the
external Auditors 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 reports by
Group Internal 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
Internal Audit Plan for the year
ending 31 March 2010;
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 Internal Audit on the Internal
Control Risk Assessment setting out the
Group Risk Map and Residual Risk Map;
k reviewed Post-Investment Appraisal
Reports; and
k received reports under the Group
whistleblowing policy and reviewed
the implementation of this policy.
61
Introduction to SSE
Directors’ report
Financial statements
Shareholder information
removal of the external Auditors. The Audit
Committee considers that the relationship
with the Auditors is working well and
remains satisfied with their effectiveness.
There are no contractual obligations
restricting the Company’s choice of
external auditor. The external Auditors
are required to rotate the audit partners
responsible for the Group and subsidiary
audits every five years and the current lead
partner has been in place for one year.
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 AGM.
René Médori
Chairman
External audit process
k reviewed the effectiveness of the overall
audit process for 2009/10, meeting
with the Auditors and management
separately to identify any areas of
concern in the preparation of the
financial statements;
k reviewed independence and objectivity
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 internal control and key
accounting and audit issues; and
k reviewed recommendations made
by the Auditors in its management
letter and the adequacy of
management’s response.
Independence of Auditors
k reviewed changes in the Audit
team; and
k reviewed the extent of non-audit
services provided by the Auditors
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.
The Audit Committee continued to
monitor the level of non-audit work
undertaken by the Auditors.
The non-audit work awarded during
the year included:
k taxation advice including general
consultancy, acquisitions, disposal
and new markets; and
k accounting due diligence.
Full disclosure of the non-audit fees paid
during the year is made in note 3 to the
Financial Statements.
KPMG Audit Plc has been the external
auditor of the enlarged Group since 1999.
Under its terms of reference, the Audit
Committee has responsibility for
recommending to the Board the
appointment, re-appointment and
energy prices, customer demand
patterns and competitor activity;
k considering new business strategies,
especially those which may signify
a move away from the Company’s
traditional markets and areas
of operation;
k reviewing proposals to update
governance and control arrangements
in line with business strategy and risk
appetite; and
k updating the Committee’s Terms of
Reference and recommending to the
Board their approval and adoption.
Review
The Risk and Trading Committee was
included in the Board evaluation process
undertaken by Independent Audit. It
acknowledged the Committee’s focus on
SSE’s participation in wholesale markets
for electricity and gas and markets for
coal, oil, biomass and carbon dioxide
emissions allowances and on Treasury-
related matters. SSE’s principal risk
categories (see pages 53 to 54) include
financial and credit risks and so the role
of the Risk and Trading Committee in
overall corporate governance within SSE
is very important. The review said that the
Committee’s work was ‘well-regarded’
by those people it interviewed but also
suggested some options for the future,
which are being considered.
Alistair Phillips-Davies
Chairman
62
Scottish and Southern Energy
Annual Report 2010
Corporate governance (continued)
Risk and Trading Committee
k reviewing current and potential future
risks associated with the operation
of SSE’s physical power generation
and gas storage assets;
k assessing conditions in the main
wholesale commodity markets in
which SSE operates, and providing
guidance on trading strategies that
reflect market conditions, financial
exposures and business objectives;
k considering reports on financial risk
exposures that have arisen as a
consequence of changing demand
patterns, plant performance and
commodity prices;
k reviewing reports on counterpart
credit exposures, and approving
mitigating actions where necessary;
k considering reports on wholesale
trading activities and any breaches
of internal limits, controls or policies
that may have occurred;
k within its delegated authorities,
considering requests for approval of
changes to individual trading limits,
counterparty credit limits and
commodity exposure limits;
k considering requests to adopt new
trading products or concepts that
are proposed to mitigate existing
and potential financial or operational
risks; and
k reviewing Group funding, foreign
exchange and interest rate exposure
together with other key financial risks.
The Committee maintains a close
relationship with the Company’s Audit
Committee, its external Auditors and
Executive Directors.
Activities in 2009/10
The Risk and Trading Committee met
12 times during the year. At each meeting
updates were provided by Committee
members and other senior staff on the
status of power generation and gas
storage plant, wholesale market
conditions, commodity exposures,
energy trading strategies, counterparty
credit exposures and key corporate
funding issues including interest rate
movements, foreign exchange exposures
and inflation projections.
Other activities of the Committee during
the year included:
k considering a number of proposals
to adopt new trading products or
strategies to hedge financial or
operational risks;
k approving commercial contracts
within its delegated authority levels;
k reviewing retail tariff setting options
in the context of forecast wholesale
Alistair Phillips-Davies
Risk and Trading Committee
Chairman
Members and meetings
Membership
Alistair Phillips-Davies
(Committee Chairman)
Gregor Alexander
Ian Marchant
Attendance
at meetings
12/12
12/12
12/12
The membership also includes senior
managers from energy trading, electricity
generation, regulation, finance and
treasury. During the year, the Board
Chairman and the Senior Independent
Director each attended a meeting of
the Committee.
The Assistant Company Secretary
is Secretary to the Risk and Trading
Committee.
The minutes of the Risk and Trading
Committee are issued to the full Board
as soon as available after the meeting
and the proceedings are reported at the
following Board meeting.
Role
The Risk and Trading Committee’s role is
to support the Board’s risk management
responsibilities by reviewing the strategic,
market, credit, operational and liquidity
risks and exposures arising from the
Company’s energy trading, generation
and treasury operations. The Committee
provides direction on strategies to
mitigate these risks in accordance with
financial objectives, risk appetite and
control requirements set by the Board.
In addition to reviewing the wider business
and economic environment in which SSE
operates, the main responsibilities of the
Committee include:
63
Introduction to SSE
Directors’ report
Financial statements
Shareholder information
complements these qualities. Candidates
from a wide range of backgrounds are
considered and the selection process will
generally involve interviews with a number
of candidates, using the services of a
professional search firm specialising
in Board level recruitment.
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.
Activities in 2009/10
The Nomination Committee had one
meeting during the year, and reviewed
the Board structure, succession planning,
committee membership and Directors’
conflicts of interest.
Lord Smith of Kelvin
Chairman
Corporate governance (continued)
Nomination Committee
Lord Smith of Kelvin
Nomination Committee Chairman
Members and meetings
Membership
Lord Smith of Kelvin (Committee
and Board Chairman)
Thomas Andersen
Nick Baldwin
Richard Gillingwater
René Médori
Lady Rice
Ian Marchant
Attendance
at meetings
1/1
1/1
1/1
1/1
1/1
1/1
1/1
The Committee is chaired by the Chairman
of the Company and its membership
comprises of all the non-Executive
Directors and the Chief Executive.
The Board Chairman would not chair
the meeting when it was dealing with any
matter concerning the chairmanship of
the Board. In this case the meeting would
be chaired by a non-Executive Director
elected by the remaining members.
Members of the Committee do not take
part in discussions when their own
performance or when their continued
appointment is being considered.
The Company Secretary is Secretary
to the Nomination Committee.
Role
The Nomination Committee’s role is to
review the leadership needs of the Board
and senior management, with a view to
ensuring SSE’s continued ability to
compete effectively in the marketplace.
The Nomination Committee’s remit,
which is set out in its terms of reference,
includes responsibility for:
k reviewing the structure, size and
composition of the Board and
its committees and making
recommendations to the Board
on any desired changes;
k reviewing the succession plans
for the Executive Directors;
k making recommendations to the
Board on suitable candidates to fill
vacancies for non-Executive Directors
and Executive Directors;
k ensuring that the procedure for
appointing new Directors is rigorous
and transparent and that appointments
are made on merit and against objective
criteria for purpose; and
k reviewing potential conflicts of interest
of Directors.
Before an appointment is made the
Committee evaluates the skills,
knowledge and experience of the Board
to ensure that any new appointment
64
Scottish and Southern Energy
Annual Report 2010
Corporate governance (continued)
Safety, Health and Environment Advisory Committee
safe working conditions. SSE’s Safety
Management System focuses on five ‘Ps’:
work. A healthy, committed workforce
is clearly central to business success.
k Policy: defining how things get done
in SSE;
k People: helping employees to act safely;
k Processes: managing risks and
delivering safe systems of work;
k Plant: maintaining the integrity
of plant and equipment; and
k Performance: managing and
improving SHE performance.
Safety performance
During 2009/10, SSE’s Lost Time/
Reportable Injury Rate was 0.03,
compared with 0.07 in the previous year.
Its Total Recordable Injury Rate (TRIR),
covering lost-time, reportable and
medical treatment injuries, was 0.14 per
100,000 hours worked, compared with
0.16 in the previous year. This translated
into 73 working days lost as a result of
injuries across SSE, down from 361 in the
previous year – making it SSE’s best-ever
year for safety performance. The objective
is to make performance better still.
The number of dangerous or potentially
dangerous road traffic accidents involving
SSE employees driving Company vehicles
was 0.34 per 100 vehicles, compared with
0.37 the year before.
Contractors’ safety performance
The safety of contractors working on SSE
sites is largely the responsibility of their
employers, but SSE works actively with
its contractors in increasing their safety
standards. For this group, the TRIR was
0.31 per 100,000 hours worked, compared
with 0.5 in the previous year.
The construction and operation of wind
farms offshore presents new challenges
and risks to SSE. Significant progress
has been achieved to establish the best
possible safe working procedures to
manage these activities.
Colin Hood
Safety, Health and Environment
Advisory Committee Chairman
Members and meetings
Membership
Colin Hood
(Committee Chairman)
Thomas Andersen
Attendance
at meetings
3/3
3/3
The membership also comprises certain
senior executives, namely the Group
Services Director, Director of Generation
and the Group Safety, Health and
Environment Manager. The Chief
Executive also attends when required.
The Assistant Company Secretary is
secretary to the Committee.
The Safety, Health and Environment
Advisory Committee has three main
responsibilities. They are to:
k ensure that SSE’s health and safety
policy and environment policy
statements are adhered to;
k set safety, health and environmental
targets for improved performance; and
k monitor safety, health and
environmental performance in SSE.
In exercising these responsibilities, the
Committee focuses on SSE’s Safety and
Sustainability values:
k we believe all accidents are
preventable, so we do everything safely
and responsibly, or not at all; and
k we operate ethically, taking the long-
term view to achieve growth while
safeguarding the environment.
Health and Safety Executive
Judith Hackett, Health and Safety
Executive Chair, spoke at SSE’s
conference on safety for contractors in
October 2009. Her theme was that a fully
integrated health and safety system needs
employee involvement and engagement,
competent and relevant expert advice
and guidance – and strong leadership.
The Committee endorses this view.
Policy
People in SSE have many different working
environments – from full-scale industrial
processes to offices. One thing is the
same, however: everyone’s role in achieving
Health promotion
SSE’s Health and Well-being Action Plan
provides the basis for workplace health
programmes and initiatives, all designed
to help employees be in good shape for
SSE’s policy is to deal with all sickness
absence in a sympathetic and constructive
way, helping people make a speedy return
to health and to work by seeking and
acting on medical advice. During 2009/10,
the average number of days of absence
from work was 5.31, compared with 5.89
in the previous year.
Environmental management
SSE’s main environmental impact is
generally regarded as emissions of carbon
dioxide from electricity generation (see
page 17). At the same time, many of the
Company’s day-to-day operations take place
in areas which are environmentally sensitive.
The Committee’s priority is to make sure
that the five ‘Ps’ apply to environmental
management and that negative impacts – in
particular, pollution to the local environment
– are prevented. SSE’s duty to protect the
environment starts when work is first
planned at any particular site and continues
until SSE clears up that site and leaves it.
The key target in any single year is to
ensure there are no environmental
incidents which result in SSE receiving an
enforcement notice from the Environment
Agency or the Scottish Environment
Protection Agency. There were two such
incidents during 2009/10. In November
2009, SSE was fined £20,000 following an
escape of diesel from a holding tank at
the Loch Carnan power station on Uist
in November 2008.
Good environmental stewardship involves
on-site energy efficiency and management
of waste, and SSE has specialist managers
responsible for these areas. The goal of the
waste management policy is to minimise
waste and the unnecessary use of natural
resources by re-using and recycling
materials. During 2009/10, 5,461 tonnes
of waste were sent from SSE’s offices
and depots for disposal at landfill sites,
a fall of 21.75%.
Priorities for 2010/11
The Committee’s priorities for 2010/11
remain to:
k support progress towards SSE’s
ultimate goal of injury-free working;
k promote the health and well-being
of people working for SSE; and
k ensure effective environmental
management throughout SSE.
Colin Hood
Chairman
Corporate governance (continued)
Remuneration Report – Introduction
a review of external benchmarks within the
UK and within Europe, with an assessment
of the various elements of the bonus
and long-term incentive. It is always the
Remuneration Committee’s goal to ensure
that the shareholders are receiving value
for money.
SSE’s Remuneration Committee
understands the external environment
in which the Company operates. The
Committee endorses a key point made
by the Investment Committee of the
Association of British Insurers (ABI) last
December – that performance-related
remuneration should seek to reward
business performance ‘in line with
corporate strategy which should aim at
sustainable, long-term value creation’.
Sustainable
Sustainable is an important word used
frequently at SSE. It refers to that part of
our strategic focus which is on sustainable
energy. It encompasses our corporate
commitment to customers; our aim is to
keep these relationships for the long term.
It includes as well our commitment to
deliver sustained real growth in the
shareholder dividend, a principal source
of an investor’s long-term return.
SSE is one of just seven companies in the
FTSE 100 to have delivered above-inflation
increases in the dividend every year since
the foundation year in 1998. Additionally,
SSE ranks fourth amongst FTSE 100
companies in terms of compound annual
growth rate in dividend over that same
period. Throughout this time, the four
Executive Directors held either Board or
senior management positions, and have
led the Company to these achievements.
Their total Board service is 38 years with
total Company service of over 80 years
which includes their stewardship of the
predecessor companies Southern Electric
and Scottish Hydro Electric.
Lady Rice CBE
Remuneration Committee
Chairman
Remuneration is an area of great
sensitivity and plays a critical role in
the sustained, long-term growth of the
dividend and the success of any business.
The reputation of a company, the morale
of its employees, the ongoing support of
its shareholders and the enthusiasm of
its customers, can all be shaped to some
extent by the strength of its remuneration
policy. The Remuneration Committee is
determined that SSE should have as
robust a remuneration policy as possible.
The spotlight in 2009/10 focussed on
executive remuneration across the
corporate world with reports and new
guidance, mainly for financial services
companies. To the extent that these offered
a different framework for best practice, we
assessed SSE remuneration policy against
these guidelines. As SSE evolves and grows
as a business, embarking on major capital
investment programmes, we wanted
to be sure that the remuneration policy
continues to be fit for purpose, so we
also initiated a major review of nearly
all aspects of executive remuneration.
Review
Important factors in this review included
the linkages between remuneration for
Executive Directors, other senior executives
and managers and other employees.
Moreover, we explored new ways of
comparing SSE’s Executive Directors’
performance to their peers, such as relative
performance of the Company in relation to
the money invested through remuneration
in the Executive Director team. We also
tested the external benchmarks typically
used for comparisons.
The review comprised a detailed survey
of Executive Directors and some others to
understand their views about remuneration,
SSE’s Remuneration Committee believes
that sustained performance over the
medium and long term counts more than
performance in any single year, which
may be affected by unusual or exceptional
issues. Sustained performance is what
the Executive Directors continue to deliver
and we take pride in this record.
Performance
At the same time, and at a time of
extraordinary economic challenge, SSE
delivered growth in adjusted profit before
tax as well as in the dividend. Performance
in strategic objectives such as safety
performance and customer service
strengthened again. The performance
65
Introduction to SSE
Directors’ report
Financial statements
Shareholder information
in all those operational areas which link
to the Company’s core values is set out
on pages 20 to 46 of this Report.
The Executive Directors are committed
to adding to the 11 successive years
of above-inflation dividend growth by
continuing to provide the energy people
need in a reliable and sustainable way –
the Company’s core purpose.
Principles
The Committee is governed by the
principles of the Company’s remuneration
policy and, in particular, by the importance
of reinforcing the culture and the teamwork
essential to delivering the long-term growth
and sustainability of SSE. This reduces any
chance of misguided incentives leading
to inappropriate risk-taking – one of the
key objectives of the Committee.
The Committee considered a range
of reports and analyses of executive
remuneration which confirmed that this
year’s package of salaries, benefits and
bonuses remains below relevant median
market levels, consistent with our practice
over many years. The Committee also
confirmed that remuneration for the
Chairman and non-Executive Directors
is also below market median.
Long-term
The Committee and the Executive
Directors welcome the accountability
regarding executive remuneration in
companies listed on the London Stock
Exchange. Indeed, accountability is a
key part of the culture at SSE.
The Remuneration Report clearly
sets out our agenda in 2009/10 and it
demonstrates that SSE remuneration
is integral to the Company’s purpose,
strategy and values. Most importantly,
the Committee believes that it represents
good value for shareholders over the long
term. In 2010/11, we will complete the
strategic review of remuneration by
determining whether the long-term
incentive plan is appropriately aligned
to the Company’s future strategic plans.
In the course of this year’s review, a
number of shareholders were consulted
who have already given views on the
long-term incentives as well as other
aspects of remuneration. I will
welcome such feedback in the future
and welcome feedback now on this
Remuneration Report or remuneration
issues more generally.
Lady Rice CBE
Chairman
66
Scottish and Southern Energy
Annual Report 2010
Corporate governance (continued)
Remuneration Report – At a glance
What are the principles of the SSE Executive Remuneration Policy?
k Attract and retain Executive Directors who run the Company effectively for the benefit of shareholders, customers and employees.
k Adopt a competitive and practical approach to total remuneration which meets shareholder expectation.
k Reinforce the culture and teamwork to deliver the long-term growth and sustainability of the business.
k Set Total Remuneration Policy at levels which promote the long-term development of the business and reward individuals in line
with performance.
What is SSE’s Total Executive Remuneration Policy?
Summary of remuneration policy
Fixed remuneration
Variable remuneration
Base salary
Short-term – annual
Long-term – 3 years
Pension – final salary
Benefits in kind –
car, private medical
Annual Bonus Plan 75% maximum cash
–
and 25% deferred shares
Linked to individual and team performance,
corporate, financial and operational measures
Performance Share Plan (PSP) – 3 years
50% linked to relative FTSE 100 TSR, 50%
adjusted annual EPS growth RPI 3%-9%
Minimum shareholding requirement equal to 100% Base Salary
How is the remuneration package structured?
Total Remuneration Policy (% each component element)
Target
36%
Stretch
27%
13%
18%
33%
9%
26%
38%
Base salary/BIK
Pension
Bonus
PSP
Base salary includes 1% benefits in kind – a car allowance and private medical plan. The pension element is the average of each
Executive Director’s present value of providing a single year of pension. Target performance comprises annual bonus awarded at target
level (ie 50% base salary) and, for the PSP, an actuarial assumption that 62.5% of shares under award will vest. Stretch performance
is based on a bonus of 100% of base salary with demanding targets being met. PSP is calculated based on 150% of salary.
What were the Executive Directors paid in the year ending 31 March 2010?
Ian Marchant
Colin Hood
Gregor Alexander
Alistair Phillips-Davies
Base salary
£000s
Benefits
£000s
840
630
483
483
19
17
16
16
Bonus
£000s
372
279
214
214
Total
£000s
1,231
926
713
713
Total (2009)
£000s
1,207
908
699
699
Corporate governance (continued)
Remuneration Report – Remuneration explained
67
Introduction to SSE
Directors’ report
Financial statements
Shareholder information
Executive Directors’ salary and incentive plans 2009/10
Performance measure
Purpose – link to strategy
Policy and decisions
Base salary
Reflects market data, role, business and
individual performance measured against
SSE’s strategy as set out on pages 8 to 10
of this Report.
Short term – Annual Bonus
The Annual Bonus is determined by the
Remuneration Committee’s assessment
of the performance of SSE during the year,
based on three key areas.
The performance targets are clearly linked
to SSE’s strategy in three key ways: financial
performance; teamwork; and personal
objectives relating to the Company’s priorities.
Financial performance (60%)
Group financial performance is measured
by adjusted profit before tax, which reflects
the underlying profits of SSE’s business.
Teamwork (20%)
Teamwork is measured by performance
against the ‘SSE SET’ of core values:
Safety; Service; Efficiency; Sustainability;
Excellence; and Teamwork. Performance
against these values is assessed through
SSE’s appraisal process.
Financial performance (60%)
Adjusted profit before tax is a key means
of achieving SSE’s first responsibility to
shareholders: sustained real growth in
the dividend.
Teamwork (20%)
SSE believes it will only be successful
financially if it exercises a wider corporate
responsibility to others, such as customers
and employees, on whom its success
ultimately depends. Its core values
summarise this approach.
Personal objectives (20%)
In keeping with its Teamwork value,
and to avoid setting Executive Directors
potentially conflicting personal objectives,
SSE believes personal objectives should
form a part of the Annual Bonus. They are
designed to support achievement of SSE’s
strategy and reinforce its values.
Long term – Performance Share Plan
For awards granted in 2007 performance
is measured against the following two
elements over a three-year period.
Total Shareholder Return (TSR)
k 100% vests at or above 75th percentile
k 25% vests at median
k straight-line basis between median
and 75th percentile
k no vesting of award if median
performance not achieved
Adjusted Earnings per Share (EPS)
k 100% vests where EPS is 9% above RPI
k 25% vests where EPS is 3% above RPI
k straight-line basis between 3% and 9%
above RPI
k no vesting if EPS minimum growth
of RPI +3% is not achieved
Personal objectives (20%)
Personal objectives set during the year
include: management of political and
regulatory issues (Ian Marchant); major
project construction (Colin Hood); financing
to support investment programme (Gregor
Alexander); and energy trading and fuel
procurement (Alistair Phillips-Davies).
The two elements of TSR and EPS
reflect relative and absolute measures
of performance.
The relative TSR measure is dependent
on SSE’s relative long-term share price
performance and dividend return (sustained
real growth is SSE’s first responsibility
to shareholders). Further vesting of this
element requires the Remuneration
Committee to be satisfied with SSE’s
underlying financial performance.
Adjusted EPS is used to monitor SSE’s
performance over the medium term because
it is straightforward: it defines the amount
of profit after tax that has been earned for
each Ordinary Share.
Following the annual review in November
2009, the decision on any change was
deferred until March 2010, when the salary
for the Chief Executive was left unchanged,
and the salary of the other three directors
was increased by 2.5%.
59% awarded
Maximum award of up to 100% of base
salary: 75% in cash (non-pensionable);
25% compulsorily deferred into shares
which only vest, subject to continued service,
after three years.
Financial performance (max 60%)
During 2009/10, SSE delivered a 2.9%
increase in adjusted profit before tax –
resulting in a target payment of 50%
of maximum.
Teamwork (max 20%)
Safety: Total Recordable Injury Rate
improved. Service: Top-ranking performance
in principal independent surveys.
Efficiency: Top-ranking performance in
electricity distribution measured by Ofgem.
Sustainability: Additional 150MW of
renewable energy capacity in operation.
Excellence: Sector leadership shown
in key areas, eg establishment of Centre
of Excellence in Renewable Energy.
Teamwork: Independent Board review
confirmed Executive Directors work very
well together. The Committee awarded an
above target payment of 80% of maximum.
Personal objectives (max 20%)
Overall, the Remuneration Committee
concluded that progress was made in each
of these areas during 2009/10 and that
individually and collectively the Executive
Directors delivered good performance
during the year – resulting in an above
target payment of 65% of maximum.
16.19% awarded
Maximum award of 150% of base salary each
year. Awards are released to the extent
performance conditions are met.
TSR (max 50%)
Out-turn below 50th percentile of the
FTSE 100, 0% of TSR element awarded.
EPS (max 50%)
Out-turn growth at 3.6% per annum,
32.4% of EPS element awarded.
68
Scottish and Southern Energy
Annual Report 2010
Corporate governance (continued)
Remuneration Report – Remuneration explained (continued)
Agenda 2009/10
Regular items
May
Directors Remuneration Report.
Approval of Performance Share Awards, Vesting and
New Awards. Approval of the Annual Bonus awards.
September
–
Other items
Company remuneration methodology.
Strategic Review. Review and confirmation
of Short-Term Incentive targets. Emerging
Remuneration trends. Utility Company
comparator group review.
November
February
March
Review of Total Remuneration Policy for Executive Directors. Executive
Director Salary Review Policy. External regulatory environment.
Long-Term Incentive Review. Strategic
review update.
–
Bonus and Share Awards.
Review of Directors – Senior Executives Salaries and Total
Remuneration. Chairman’s Remuneration Review. SSE Group 2010
salary increase policy. Approval of the 2009/10 Bonus awards.
Establishment of the 2010/11 Bonus Performance targets.
Employment Contracts. Talent
Management. Long-Term Incentive
review. Utility Company remuneration.
Strategic Review update.
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.
This report sets out the Company’s policy
on Executive Directors’ remuneration
for the year ended 31 March 2010 and
complies with the regulations made under
the Companies Act 2006. The report will
be presented at the AGM on 22 July 2010
for approval and shareholders will be able
to ask questions on the report at the AGM.
How the Remuneration
Committee works
Members and meetings
Membership
Attendance
at meetings
Lady Rice (Committee Chairman)
Nick Baldwin
Richard Gillingwater
Lord Smith of Kelvin
5/5
5/5
5/5
5/5
Informal consultation takes place outwith
the scheduled meetings as necessary.
Terms of reference
k sets the total remuneration policy
on behalf of the Board;
k approves the detailed remuneration
terms of the Executive Directors
including their service contracts and
the impact on senior management
remuneration across the organisation;
k approves the remuneration of the
Chairman;
k approves the design and performance
targets of incentive schemes;
k grants awards under the Company’s
Long-term Incentive Plans; and
k monitors the total remuneration of the
Senior Executives below Board level.
Advisors
k The Chief Executive and the Director
of Human Resources advised the
Committee on matters relating to
the appropriateness of awards for
the Executive Directors and Senior
Executives although they were not
present for discussions on their
own remuneration.
k In addition the Director of Human
Resources advised on HR strategy
and the application of policies across
the organisation.
k The Company Secretary advised the
Committee on corporate governance
guidelines.
k Deloitte, Towers Watson and People
Innovation Ltd (all appointed by the
Committee) provided market information
drawn from published surveys and
advice on appropriate awards of
bonuses, long-term incentives, and
comparator group pay and performance.
k Bank of America Merrill Lynch provided
advice on shareholder views and, Ernst
and Young provided financial policy
updates. They were appointed by the
Committee for these services.
Total Remuneration
Policy
Total Remuneration Policy is integral to
overall HR Strategy and the SSE values
are supported in the objectives, plan
design and application of the policy.
What was new in 2009/10?
In addition to the customary items of the
Remuneration Agenda, the Committee
discussed the following:
k Strategic Review of Executive
remuneration in SSE;
k Investment Return on Executive Director
Remuneration for shareholders;
k Senior Executive Total Remuneration;
k talent management; and
k employment contracts.
During the year, the Committee completed
a strategic review of the remuneration
policy to assess its appropriateness
and the extent to which objectives and
principles of the policy are being met.
The Board, the Executive Directors and
selected Senior Managers participated,
with the results discussed at a dedicated
meeting in September and subsequently.
The principles
The core principles of the Company’s
remuneration policy are outlined in
the ‘At a Glance’ section as shown on
page 66 together with policy details and
diagrams which illustrate the degree
of stretch in the target and maximum
values of the packages.
The policy comprises base salary, benefits
including a defined benefit pension plan,
and both short-term incentive and long-
term incentive plans. The current short-
and long-term incentive plans are shown
in the chart on page 67.
Total Remuneration Policy
The Executive Directors’ total remuneration
policy is to remain below median of the
FTSE 20-50 excluding financial services.
69
Introduction to SSE
Directors’ report
Financial statements
Shareholder information
SSE’s policy is to retain Executive
Directors who are motivated by the
long-term success of the Company, rather
than short-term remuneration. For peer
group comparison, the Committee takes
account of total remuneration in specific
UK Utility companies and their reported
financial results.
This reflects SSE culture in which
Executive Directors and Senior Managers
are motivated by developing the Company
for the future, and explains why long-term
growth and sustainability of the business
are of such importance when determining
remuneration policy.
Certain institutional shareholders were
consulted on the implications of some
changes proposed for tax efficiency
purposes to bonus and deferred bonus
payment dates for the year ending 2009/10
only. The Committee decided to permit
relevant employees to accelerate part
of the short-term incentive payment to
March and the Deferred Bonus Shares
due to mature in June 2010. The Deferred
Bonus Shares do not have performance
criteria and will be retained at least until
their maturity date.
The balance of fixed and
variable remuneration
Taking into account the SSE business
profile, the Remuneration Committee
believes that around 50% of the total
remuneration should be performance-
related, increasing up to 66% for
exceptional performance as shown
in the table on page 66. The Committee
believes that this overall remuneration
structure is reasonable and rewards
performance sufficiently without causing
undue risk taking.
Senior executives, managers
and employees
The Committee is aware of the importance
of an appropriate relationship between
the remuneration levels of the Executive
Directors, senior executives, managers
and other employees within the Group.
There are a number of senior
executives just below Board level who
have a significant influence on Group
performance. Full details of their total
remuneration, benchmarked to the
relevant market place using the same
methodology as for the Executive
Directors, were reviewed by the
Committee. The conclusion was the
remuneration package is sufficiently
attractive to reward this key group
of executives and is consistent with
the overall policy approach.
Base salary
The Committee is mindful of the
remuneration increases for the different
groups of employees and considers other
relevant external indices such as RPI or
CPI in the process of reviewing base
salary for the Executive Directors.
The Committee conducted its regular
review of salaries for Executive Directors
in November 2009 and deferred its
decision until March 2010. It considered
the following factors in the light of recent
market and governance trends:
k Total remuneration and basic salary,
when benchmarked where relevant
to FTSE 20-50 excluding Financial
Services, are behind market median
for the Executive Directors.
k The Executive Directors have
delivered again a strong financial
performance with significant
results to shareholders in a difficult
trading year as dividend growth has
exceeded inflation for the eleventh
consecutive year.
k Other salary reviews in the Group
included the main collective
agreement award of 3.25%.
Management salaries increased
by an average of 3%.
Taking into account these points, the
Committee recommended a salary increase
for the Executive Directors of up to 2.5%.
The Chief Executive elected not to accept
a salary increase for the current year.
Any salary increase will be effective from
1 April 2010, fifteen months since the
previous increase in January 2009.
Executive Directors’ salaries 2010/11
Ian Marchant
Colin Hood
Gregor Alexander
Alistair Phillips-Davies
£840,000
£645,750
£495,075
£495,075
Current incentive plans
Short-term incentive –
Annual Bonus Plan
The purpose of the Annual Bonus
Plan is to reward Executive Directors’
performance during the year, based on an
analysis of financial results, teamworking
and personal objectives. Performance
is considered in the context of targets
set in each of the areas at the start
of the financial year. In addition, the
Remuneration Committee considers
Executive Directors’ management of,
and performance in, all of the business
issues that arose during the year.
For 2009/10, the total Annual Bonus paid to
the Executive Directors was 59% of salary,
compared with 60% in the previous year and
with the maximum payable of 100%. Around
half of the bonus was payable in respect
of financial performance and around half in
respect of teamworking and performance
against personal objectives. ‘Executive
Directors’ salary and incentive plans
2009/10’, on page 67, sets out performance
metrics used in the assessment of the
Annual Bonus for 2009/10.
For 2010/11, the structure of the Annual
Bonus will remain the same as in 2009/10.
The maximum bonus payable will be
100% of salary, split between financial
performance (60%), teamworking (20%)
and personal objectives (20%). In any
single year, it is expected that the Annual
Bonus paid will be around 50% of
Executive Directors’ salary for on-target
performance. The Annual Bonus is paid
75% in cash, and 25% deferred into shares
which vest after three years, subject to
continued service.
Long-term incentives –
Performance Share Plan
The Performance Share Plan is the main
scheme to reward Executive Directors
and other senior executives over a three-
year period for the continued profitable
growth of SSE as measured, up to
2009/10, by Earnings per Share and
the Total Shareholder Return compared
to the FTSE 100.
In 2006, awards were equivalent to 100%
of salary for the Executive Directors and
this out-turn in 2009 was reported last
year. Since 2007, awards equivalent to
150% of salary have been made to
Executive Directors and at lower rates
to other senior executives. It is planned
that for the next year PSP Awards should
be on a similar basis.
Awards will be released after three years
subject to the meeting of demanding
performance conditions relating to the
Company’s relative total shareholder
return (TSR) performance and the
Company’s adjusted EPS growth. Further
details of the performance targets are in
the table on page 67.
The TSR performance measure is
dependent on the Company’s relative long-
term share price performance within the
FTSE 100 bringing a market perspective
to the plan. The 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
70
Scottish and Southern Energy
Annual Report 2010
Corporate governance (continued)
Remuneration Report – Remuneration explained (continued)
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
demanding target for maximum vesting in
light of the regulatory regime applicable
to the Company. Further details of this
scheme are set out on page 67.
The first PSP award made in 2006 vested
in full in May 2009 as both elements of
the performance condition (relating to
TSR and EPS performance respectively)
were met. TSR out-turn was in the upper
quartile of the FTSE 100 and EPS growth
was 10.7% above inflation per annum.
Achievement of these performance
conditions was independently verified.
The 2007 award will vest shortly after the
preliminary announcement of results for
2009/10 in May 2010. The TSR out-turn
was below median for FTSE 100 so this
part of the PSP will not vest. EPS growth
was 3.6% above inflation per annum, and
accordingly 32.4% of the EPS element in
the 2007 award will vest.
The Remuneration Committee has
reviewed the performance criteria of the
PSP. It is anticipated that for awards in
2010/11 there will be four performance
criteria of 25% each as follows: relative
TSR performance compared to FTSE 100;
relative TSR performance compared to
a dedicated peer group of UK and other
European utilities; EPS growth of RPI plus
2% (threshold vesting) to 8% (full vesting);
and Dividend per share growth of RPI plus
2% (threshold vesting) to 6% (full vesting).
The Remuneration Committee considered
that the added criteria were appropriate
when rebalancing the mix of performance
criteria in that TSR performance
compared to a dedicated peer group
of UK and other European utilities (the
MSCI Europe Utilities) provided a sector
emphasis (whilst continuing to bring
a market perspective to the plan) and
the Dividend per share growth target
reflected the Company’s objective to
deliver strong real dividend growth in the
future (while maintaining a dividend cover
consistent with its established range).
The Committee will review all targets
to ensure that they remain both relevant
and stretching in line with the prevailing
business and economic environment,
when considering future awards.
Pensions policy
Pension Plan membership is a very
important part of the remuneration
strategy because of the long-term
goals and horizons of the business
coupled with the need to build long-
term commitment to the Company
from employees key to the success
of the Company. Consequently it is SSE
remuneration policy to invest for the
future pay of each employee once
their working life is completed. Each
employee is encouraged to join the
relevant plan.
Full details of the Executive Directors’
pension plans can be found in Table B
of the audited information on page 72.
SSE TSR performance: 31 March 2005 to 31 March 2010
200
180
160
140
120
100
80
SSE
FTSE 100
Mar 05
Mar 06
Mar 07
Mar 08
Mar 09
Mar 10
The graph above charts the cumulative TSR (Total Shareholder Return) of SSE since 1 April 2005,
compared to the FTSE 100 Index over the same period. The Company is a member of the FTSE 100
and it was considered to be the most relevant benchmark for comparison purposes. For the
purposes of defining the constituents of the FTSE 100, companies removed from the FTSE as a
result of a business transaction will be valued at the date of removal and then indexed to the FTSE
100 annual out-turn. Those companies acquired by another FTSE constituent will be disregarded
as the acquiring company is a FTSE 100 participant.
All the Executive Directors remain
members of either the Southern Electric
Pension Scheme or the Scottish Hydro
Electric Pension Scheme and their plan
membership predates their Board
appointments. These are both funded
final salary pension schemes and the
terms of these schemes apply equally
to all members.
The Directors’ service contracts provide
for a possible maximum pension of two
thirds final salary at age 60. In relation
to Executive Directors who are subject to
the scheme-specific salary cap (which
mirrors the provisions of the previous HM
Revenue and Customs cap arrangements)
the Company provides top-up (unfunded)
arrangements which are designed to
provide an equivalent pension on
retirement at age 60 to that which they
would have earned if they had not been
subject to the salary cap.
Overall 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 same time
as the Directors, the following provisions
relating to leaving the Company apply:
k For retirement through ill-health an
unreduced pension based on service
to expected retirement is paid.
k In the event of any reorganisation or
redundancy an unreduced accrued
pension is paid to a member who is
aged 50 or above, with at least five
years’ service or, for a member who
has not yet reached that age, it will
be payable with effect from 50.
k From the age of 55, a scheme member
is entitled to leave the Company and
receive a pension, reduced for early
payment, unless the Company gives
consent and funds this pension being
paid on an unreduced basis.
Previous HM Revenue & Customs limits
have ceased to apply to benefits provided
by the pension schemes. If a member’s
accrued fund exceeds the new lifetime
allowance (LTA), the benefits payable by the
scheme from that excess will be subject to
a higher rate of income tax. The Company
is maximising the use of the new allowance
thereby providing Executive Directors
with more of their existing benefits via
registered schemes. In the case of Colin
Hood, who was not subject to the previous
earnings cap but is now limited by the
LTA, further accrual is via an unfunded
arrangement. There are no arrangements
to compensate members for any change
in their personal tax liability.
71
Introduction to SSE
Directors’ report
Financial statements
Shareholder information
Service contract key items
Provision
Detailed terms
k 12 months by either Company or Director
Notice period
Retirement date k Age 60
Termination
payment
k
k
Up to 12 months salary (excluding any bonus or other enhancement)
Payment in lieu of notice in staged payments subject to the
Executive gaining new employment
No special change of control provisions
Obligation on departing Executives to mitigate loss
Salary, pension and benefits
Company car or cash allowance
Participation in bonus scheme, employee share schemes
and Executive incentive plans
Private Health Insurance
Remuneration
k
k
k
k
k
k
Non competition k During employment and for six months after leaving
Contract dates k All four contracts dated 11 March 2005
Length of service
Ian Marchant
Gregor Alexander
Colin Hood
Alistair Phillips-Davies
Industry service
Length of Board service
18
19
32
13
14 years*
7 years
9 years
8 years
* Including two years as Finance Director of Southern Electric plc.
k The long service award scheme which
purchases 10, 20, 30, 40 or 50 shares
on behalf of an employee on the
occasion of the employee reaching
10, 20, 30, 40 or 50 years’ service
respectively with the Group.
Funding of share schemes and dilution
Shares are purchased in the market to
satisfy the exercise of awards under the
Deferred Bonus Plan, the Performance
Share Plan, and the Share Incentive Plan.
The Company’s Sharesave Scheme uses
unissued shares to satisfy the exercise of
share options. As at 31 March 2010, there
were approximately 4.6 million share
options outstanding under this scheme, and
if all the outstanding options were exercised
this would amount to 0.5% of the issued
share capital of the Company at that date.
Service contracts
It is the Company’s policy that
Executive Directors should have service
contracts with the Company which can
be terminated on 12 months’ notice given
by either party.
The current Executive Directors’ service
contracts contain the key items shown
in the table above.
The Company may at its discretion
terminate any Executive Director’s
contract by making a payment in lieu
of notice equal to the basic salary which
would have been received during the
notice period (excluding any bonus and
any other emolument referable to the
employment). Payment may be made in
staged payments, and will either reduce
or cease completely where the departing
Executive Director gains new employment.
If an Executive Director retires or is
made redundant, the PSP shares will
be reduced to reflect the point during the
three year performance period when the
Director leaves. If the Executive Director
leaves for any other reason, PSP share
awards will lapse.
In the event of a change of control of the
Company, performance in the PSP will be
measured to that date and will normally
be scaled down to the period prior to the
change of control.
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 are retained
by the Director.
Share ownership policy
Employee share ownership is a key part of
total Remuneration policy and is designed
to help maintain long-term commitment
and business understanding, offering the
opportunity to benefit from any growth in
shareholder value.
k The interests of the Executive
Directors and other senior executives
are closely aligned with those of other
shareholders. The Performance Share
Plan, the deferral of 25% of the Annual
Bonus award and employee share
schemes facilitate this alignment.
k The Executive Directors and certain
other senior executives are required
to maintain a shareholding equivalent
to one year’s salary which is built up
within a reasonable timescale. Consent
to sell shares is not normally given
(unless in exceptional circumstances
or to fund a connected tax liability) until
this level of shareholding is reached.
k It is also expected that all non-Executive
Directors should hold a minimum of
2,000 shares in the Company.
The percentage shareholdings of the
Executive Directors against the guidelines
are shown below.
Directors’ shareholdings as
percentage of annual salary
Ian Marchant
Colin Hood
Gregor Alexander
Alistair Phillips-Davies
% of salary
286
221
191
210
Based on a share price at 31 March 2010
of £11.01.
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:
k The Sharesave Scheme which allows
employees options to acquire shares
using the proceeds of a monthly savings
contract of up to £250 per month.
Exercise of the options is not subject to
satisfaction of any performance target.
The option price is set at a discount
maximum of 20% to market value.
k The Share Incentive Plan (the SIP)
which allows employees to allocate
part of their pre-tax salary to purchase
shares up to a maximum of £125 per
month. Participants receive two free
matching shares monthly for each
share purchased up to a maximum
of six free shares.
72
Scottish and Southern Energy
Annual Report 2010
Corporate governance (continued)
Remuneration Report – Remuneration in detail
In 2009/10 Ian Marchant held a non-
Executive Director position with the John
Wood Group plc, and received £44,000 in
fees; and Colin Hood accepted a position
as non-Executive Director of FirstGroup
plc, and received £39,500 in fees.
Non-Executive Directors
k The non-Executive Directors have
letters of appointment, and are
appointed for fixed terms of three
years, subject to retirement by rotation
and re-appointment at AGMs.
k They do not participate in the Bonus
Scheme, Deferred Bonus Plan, any of
the share option schemes, or contribute
to any Group pension scheme although
as indicated above are required to hold
2000 Company shares.
k The fees of the independent non-
Executive Directors are agreed by
the Board, with the non-Executive
Directors concerned not participating
in this process.
k The fees are reviewed against companies
of similar size and complexity. To be
consistent with wider remuneration
policy, fees are set at below median.
k The non-Executive Directors do not
receive any additional fees for
Committee Membership, only for
Chairmanship of the Committees.
Reasonable travelling and other
expenses are paid for costs incurred
in the course of their duties.
The fees for the year ending 31 March
2010 are listed below:
Board
Audit Committee Chairmanship
Remuneration Committee
Chairmanship
Senior Independent Director
Company Chairman
£52,500
£12,000
£10,000
£10,000
£332,000
The basic Board fee was increased
to £54,000 and the Chairman fee was
increased to £340,812 from 1 April 2010.
The Auditors are required to report on the information contained in Tables A, B and D.
Table A – Directors’ remuneration excluding LTIP and pension information
Executive Directors
Ian Marchant
Gregor Alexander
Colin Hood
Alistair Phillips-Davies
Non-Executive Directors
Thomas Andersen – Appointed 1 January 2009
Nick Baldwin
Richard Gillingwater
René Médori
Lady Rice
Lord Smith of Kelvin (Chairman)
Former Directors
Sir Kevin Smith – Retired 24 July 2008
Salary/fee
£000s
Bonuses
£000s
Benefits
£000s
2010
840
483
630
483
52
52
52
64
72
332
–
3,060
372
214
279
214
–
–
–
–
–
–
–
1,079
19
16
17
16
–
–
–
–
–
–
–
68
Total
£000s
1,231
713
926
713
52
52
52
64
72
332
2009
Total
£000s
1,207
699
908
699
13
50
50
62
70
321
–
4,207
17
4,096
Notes
In addition to the annual cash bonus amount for this year, Ian Marchant, Gregor Alexander, Colin Hood and Alistair Phillips-Davies
will be awarded £124k, £71k, £93k and £71k respectively in the form of deferred shares in respect of the bonus due to them for
2009/10. These share awards will not be made until June 2010 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 in June 2013.
Table B – Directors’ pension information
Accrued benefit
Years of
industry
service
At 31 March
2010
£000s
Increase in year
including
inflation
£000s
Increase in year
excluding
inflation
£000s
At 31 March
2010
£000s
At 31 March
2009
£000s
Transfer value of accrued benefit
Increase less
Directors’
contributions
£000s
Increase in year
excluding
inflation
£000s
Ian Marchant
Gregor Alexander
Colin Hood
Alistair Phillips-Davies
18
19
32
13
349
198
336
147
31
16
31
16
31
16
31
14
5,683
3,038
6,891
2,154
3,972
2,242
5,500
1,552
1,692
778
1,374
584
484
163
562
196
73
Introduction to SSE
Directors’ report
Financial statements
Shareholder information
Members of the scheme have the option to pay additional voluntary contributions; neither the contributions nor the resulting benefits
are included in the table above. 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 linked to the UK
Retail Price Index.
The following is information relating to the Directors’ pensions of Colin Hood, Ian Marchant and Alistair Phillips-Davies, as participants
in the 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.
(ii) 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.
(iii) 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).
(iv) 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’ share interests
Gregor Alexander
Thomas Andersen
Nick Baldwin
Richard Gillingwater
Colin Hood
Ian Marchant
René Médori
Alistair Phillips-Davies
Lady Rice
Lord Smith of Kelvin
31 March 2010
31 March 2009
Shares held
Shares under
option
Shares held
Shares under
option
85,917
2,000
2,244
2,000
129,376
218,500
2,050
94,631
4,904
22,600
161,936
–
–
–
211,984
281,166
–
162,220
–
–
46,128
2,000
2,119
2,000
28,308
142,204
2,050
31,625
4,632
22,600
151,576
–
–
292,664
276,370
–
186,150
–
–
Notes
From 31 March 2010 to 18 May 2010, the following changes to the interests of Directors took place:
Under a standing order for reinvestment of an ISA, on 5 April 2010 Gregor Alexander acquired 13 shares.
The Register of Directors’ Interests (which is open to shareholders’ inspection) contains full details of Directors’ shareholdings
and options to subscribe for shares.
Table D (page 74) shows the interests of the Executive Directors in awards granted under the Deferred Bonus Scheme (DBS),
Deferred Bonus Plan 2006 and the Performance Share Plan (PSP) and in options granted under the ShareSave Scheme during
the year ended 31 March 2010.
74
Scottish and Southern Energy
Annual Report 2010
Corporate governance (continued)
Remuneration Report – Remuneration in detail (continued)
Table D –Directors’ long term incentive plan interests
Ian Marchant
Colin Hood
Gregor Alexander
Alistair Phillips-Davies
Share plan
DBS
DBP 20065
DBP 2006
DBP 2006
PSP3
PSP2
PSP
PSP
Sharesave
Sharesave
DBS4
DBS
DBS
DBS
DBS
DBP 20065
DBP 2006
DBP 2006
PSP3
PSP2
PSP
PSP
Sharesave
Sharesave
DBS
DBP 20065
DBP 2006
DBP 2006
PSP3
PSP2
PSP
PSP
Sharesave
Sharesave
Sharesave
DBS4
DBS
DBS
DBP 20065
DBP 2006
DBP 2006
PSP3
PSP2
PSP
PSP
Sharesave
Date of
award
06/06/06
08/06/07
10/06/08
02/06/09
27/07/06
26/07/07
10/06/08
02/06/09
01/10/04
01/10/08
11/07/02
02/07/03
20/07/04
30/06/05
06/06/06
08/06/07
10/06/08
02/06/09
27/07/06
26/07/07
10/06/08
02/06/06
01/10/05
01/10/07
06/06/06
08/06/07
10/06/08
02/06/09
27/07/06
26/07/07
10/06/08
02/06/09
01/10/04
01/10/05
01/10/09
20/07/04
30/06/05
06/06/06
08/06/07
10/06/08
02/06/09
27/07/06
26/07/07
10/06/08
02/06/09
01/10/05
Normal
exercise period
(or vesting date)
No. of shares
under award as at
1 April 2009
Option
exercise
price
Additional
shares awarded
during the year6
No. of
No. of shares
shares released under award at
31 March 2010
during the year
06/06/09-06/06/16
08/06/10
10/06/11
02/06/12
May 2009
May 2010
May 2011
May 2012
01/10/09-31/03/10
01/10/11-31/03/12
11/07/05-11/07/12
02/07/06-02/07/13
20/07/07-20/07/14
30/06/08-30/06/15
06/06/09-06/06/16
08/06/10
10/06/11
02/06/12
May 2009
May 2010
May 2011
May 2012
01/10/10-31/03/11
01/10/10-31/03/11
06/06/09-06/06/16
08/06/10
10/06/11
02/06/12
May 2009
May 2010
May 2011
May 2012
01/10/09-31/03/10
01/10/10-31/03/11
01/10/14-31/03/15
20/07/07-20/07/14
30/06/08-30/06/15
06/06/09-06/06/16
08/06/10
10/06/11
02/06/12
May 2009
May 2010
May 2011
May 2012
01/10/10-31/03/11
622p
1274p
886p
1306p
622p
886p
1042p
46,081
11,962
9,709
54,142
75,313
77,670
1,051
442
16,108
19,116
25,249
26,079
33,446
8,598
7,087
40,607
56,485
58,253
1,492
144
23,311
6,518
5,493
28,301
42,364
44,661
630
298
16,211
17,386
23,311
6,588
5,463
28,301
42,364
44,661
1,865
886p
10,730
107,302
8,047
80,476
6,169
61,698
1,253
6,169
61,698
46,0817
11,9628
54,142
1,0519
16,1088
19,1168
25,2498
26,0798
33,4468
8,5988
40,607
23,3117
6,5188
28,301
6309
16,2117
17,3867
23,3117
6,5888
28,301
9,709
10,730
75,313
77,670
107,302
442
7,087
8,047
56,485
58,253
80,476
1,492
144
5,493
6,169
42,364
44,661
61,698
298
1,253
5,463
6,169
42,364
44,661
61,698
1,865
1. Shares which are released under the DBS, DBP 2006, and PSP attract additional shares in respect of the notional reinvestment of dividends. In addition to the shares
released under DBS and DBP 2006, as indicated in the table above, the following shares were realised arising from such notional reinvestment of dividends: Ian Marchant –
7,852 shares, Colin Hood – 36,800 shares, Gregor Alexander – 4,040 shares, Alistair Phillips-Davies – 10,926 shares. In addition to the shares released under the PSP, as
indicated in the table above, the following shares were realised arising from such notional reinvestment of dividends: Ian Marchant –7,040 shares, Colin Hood – 5,280 shares,
Gregor Alexander – 3,678 shares, Alistair Phillips-Davies – 3,678 shares.
2. The performance conditions applicable to awards under the PSP since 2007 are described on page 67.
3. The 2006 award under the PSP was subject to a slightly different target in that full vesting would occur after three years for EPS growth of RPI plus 8% and TSR at or
above 75th percentile, and 30% of the award vesting for the median performance for TSR and EPS growth of RPI plus 3%.
4. The DBS was the Company’s main long-term incentive arrangement prior to the introduction of the PSP in 2006. Vesting of shares was dependent on continued service
over a three year period. The number of shares placed under option under the DBS depended on meeting financial and non-financial performance criteria in the
financial years preceding the award, and therefore no further performance condition applies to the vesting of DBS options.
5. Since 2007, 25% of annual bonus payable to Executive Directors and Senior Managers has been satisfied as a conditional award of shares under the DBP 2006. Vesting of shares
is dependent on continued service over a three year period. In view of the linkage to annual bonus, no further performance condition applies to the vesting of DBP 2006 awards.
6. The market value of a share on the date on which these awards were made was 1174p.
7. The market value of a share on the date on which these awards were realised was 1130p.
8. The market value of a share on the date on which these awards were realised was 1111p. The vesting date of 10 June 2010 for the awards granted in 2007 was
accelerated, with the consent of the Committee, to March 2010.
9. The market value of a share on the date this option was exercised was 1158p.
The closing market price of the shares at 31 March 2010 was 1101p and the range for the year was 1039p to 1198p. Awards granted during the year were granted under
the DBP 2006 and the PSP. Options were granted under the Sharesave scheme. The aggregate amount of gains made by the Directors on the exercise of share options
and realisation of awards during the year was £5,832,166.48 (2009 – £840,423.00). No options or awards lapsed in the year.
This report was approved by the Board and signed on its behalf by:
Lady Rice CBE Remuneration Committee Chairman, 18 May 2010
Corporate governance (continued)
Other statutory information
75
Introduction to SSE
Directors’ report
Financial statements
Shareholder information
Principal activities
Scottish and Southern Energy plc is
the holding company of the Group. Its
subsidiaries are organised into the main
businesses of:
k electricity generation, transmission,
distribution and supply;
k gas storage, distribution and supply;
k electrical and utility contracting;
k home services, supplying a wide range
of electrical and gas appliances and
complementary products; and
k telecommunications.
Business review
The Company is required to set out a fair
review of the business of the Group and
a description of the principal risks and
uncertainties facing the Group (known
as a Business Review). The Business
Review is required to set out a balanced
and comprehensive analysis of the
development and performance of the
Group’s business during the financial year
ended 31 March 2010 and of the position
of the Group at the end of that financial
year. The information that fulfils these
requirements, and is deemed to be the
Directors’ Report, is contained within
pages 4 to 76 of this Annual Report.
Directors
The Directors during the year and at the
date of this report are:
Executive
Ian Marchant, Chief Executive
Gregor Alexander
Colin Hood
Alistair Phillips-Davies
Non-Executive
Lord Smith of Kelvin, Chairman
Thomas Andersen
Nick Baldwin
Richard Gillingwater
René Médori
Lady Rice
Nick Baldwin, Richard Gillingwater
and Alistair Phillips-Davies retire by
rotation at the AGM and, being eligible,
and in accordance with the Articles
of Association, will offer themselves
for re-appointment.
Biographical details of all Directors are
set out on page 49. Details of the service
contract for Alistair Phillips-Davies and
the letters of appointment for Nick Baldwin
and Richard Gillingwater are set out in the
Remuneration Report on pages 71 and 72.
The interests of the Directors in
the Ordinary Shares of the Company
at 31 March 2010 are set out in the
Remuneration Report on page 73.
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 remains 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 £1,235.3m. The Directors
recommend a final dividend of 49p per
Ordinary Share which, subject to approval at
the AGM, will be payable on 24 September
2010 to shareholders on the Register of
Members at close of business on 30 July
2010. With the interim dividend of 21p per
Ordinary Share paid on 26 March 2010,
this makes a total dividend of 70p per
Ordinary Share.
Going concern
After making enquiries, the Directors
have a reasonable expectation that the
Company and the Group have adequate
resources to continue in operational
existence for the foreseeable future. The
Group expects to issue further debt in the
capital markets during 2010/11 to meet
its funding requirements. The Financial
Statements are therefore prepared on
a going concern basis. Further details
of the Group’s liquidity position and going
concern review are provided in note 28.
Share capital
Details of the Company’s authorised and
issued share capital at 31 March 2010,
which includes options granted under the
Group’s employee share option schemes,
are set out in notes 25 and 27 to the
Financial Statements.
Annual General Meeting
The 21st AGM of the Company will be
held on 22 July 2010 at 12 noon in the
Bournemouth International Centre, Exeter
Road, Bournemouth BH2 5BH. The Notice
of Annual General Meeting 2010, which
contains full explanations of the business
to be conducted at the AGM, is set out
in a separate shareholder circular.
Substantial shareholdings
At 18 May 2010, the following interests
in the issued Ordinary Share capital
of the Company have been disclosed
in accordance with the requirements
of the UK Listing Authority’s Disclosure
and Transparency Rules:
Entity
Capital Research
and Management
Company
Legal & General
Group Plc
Norges Bank
Number
of shares* Percentage*
46,267,405
5.02%
36,673,080
27,941,614
3.97%
3.03%
* At date of disclosure by relevant entity.
Since the date of disclosure to the
Company, the interests of the
shareholders listed above may have
increased or decreased. No requirement
to notify the Company of any increase
or decrease would have arisen unless
the holding moved up or down through
a whole number percentage level.
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 number
of suppliers’ days represented by trade
creditors was 38 days at 31 March 2010.
Accounting policies, financial
instruments and risk
Details of the Group’s accounting
policies, together with details of financial
instruments and risk, are provided at
notes 1 and 28 to the Accounts.
Additional information
Where not provided elsewhere in the
Directors’ Report, the following provides
the information required to be disclosed
by Section 992 of the Companies Act 2006.
Each Ordinary Share of the Company
carries one vote at general meetings
of the Company.
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 schemes’ trusts give directions to the
trustees to vote on their behalf by way
of a Form of Direction.
76
Scottish and Southern Energy
Annual Report 2010
Corporate governance (continued)
Other statutory information (continued)
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 are set out in the Corporate
Governance Report on page 57. 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.
Details of any post balance sheet events
are provided at note 31 to the accounts.
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 AGM.
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 in his duty 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.
By Order of the Board
Vincent Donnelly
Company Secretary
18 May 2010
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 IFRSs as adopted by the EU and applicable
law and have elected to prepare the parent company financial
statements on the same basis.
Under company law the Directors must not approve the financial
statements unless they are satisfied that they give a true and fair
view of the state of affairs of the Group and parent company and of
their profit or loss for that period. 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 adequate accounting
records that are sufficient to show and explain the parent company’s
transactions and 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 2006. They have 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 regulations, the Directors are also
responsible for preparing a Directors’ Report, Directors’
Remuneration Report and Corporate Governance Statement
that complies 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.
We confirm that to the best of our knowledge:
k the financial statements, prepared in accordance with the
applicable set of accounting standards, give a true and fair
view of the assets, liabilities, financial position and profit
or loss of the Company and the undertakings included
in the consolidation taken as a whole; and
k the Directors’ Report includes a fair review of the
development and performance of the business and the
position of the issuer and the undertakings included in the
consolidation taken as a whole, together with a description
of the principal risks and uncertainties that they face.
For and on behalf of the Board
Ian Marchant
Chief Executive
18 May 2010
Gregor Alexander
Finance Director
Independent auditors’ report
to the members of Scottish and Southern Energy plc
7777
IntrIntroduction
oduction ttoo SSSESE
DirDirectectororss’’ rreport
eport
Financial ssttatatements
Financial
ements
SharShareholder
eholder infinformation
ormation
We have audited the financial statements of Scottish and Southern Energy plc for the year ended 31 March 2010 set out on pages
78 to 149. The financial reporting framework that has been applied in their preparation is applicable law and International Financial
Reporting Standards (IFRSs) as adopted by the EU and, as regards the parent company financial statements, as applied in accordance
with the provisions of the Companies Act 2006.
This report is made solely to the Company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006.
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 auditors’ 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
As explained more fully in the Directors’ Responsibilities Statement set out on page 76, the Directors are responsible for the
preparation of the financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit the
financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards
require us to comply with the Auditing Practices Board’s (APB’s) Ethical Standards for Auditors.
Scope of the audit of the financial statements
A description of the scope of an audit of financial statements is provided on the APB’s website at www.frc.org.uk/apb/scope/UKP.
Opinion on financial statements
In our opinion:
k
k
k
k
k
the financial statements give a true and fair view of the state of the Group’s and of the parent company’s affairs as at 31 March 2010
and of the Group’s profit for the year then ended;
the Group financial statements have been properly prepared in accordance with IFRSs as adopted by the EU;
the parent company financial statements have been properly prepared in accordance with IFRSs as adopted by the EU and as
applied in accordance with the provisions of the Companies Act 2006; and
the financial statements have been prepared in accordance with the requirements of the Companies Act 2006 and, as regards
the Group financial statements, Article 4 of the IAS Regulation.
Opinion on other matters prescribed by the Companies Act 2006
In our opinion:
k
the part of the Directors’ Remuneration Report to be audited has been properly prepared in accordance with the Companies Act
2006; and
the information given in the Directors’ Report for the financial year for which the financial statements are prepared is consistent
with the financial statements.
Matters on which we are required to report by exception
We have nothing to report in respect of the following:
Under the Companies Act 2006 we are required to report to you if, in our opinion:
k adequate accounting records have not been kept by the parent company, or returns adequate for our audit have not been received
from branches not visited by us; or
the parent company financial statements and the part of the Directors’ Remuneration Report to be audited are not in agreement
with the accounting records and returns; or
k
k certain disclosures of Directors’ remuneration specified by law are not made; or
k we have not received all the information and explanations we require for our audit.
Under the Listing Rules we are required to review:
k
k
the Directors’ statement, set out on page 75, in relation to going concern; and
the part of the Corporate Governance Statement relating to the Company’s compliance with the nine provisions of the June 2008
Combined Code specified for our review.
John Luke (Senior Statutory Auditor)
For and on behalf of KPMG Audit Plc, Statutory Auditor
Chartered Accountants
Saltire Court
20 Castle Terrace
Edinburgh
EH1 2EG
18 May 2010
78
Scottish and Southern Energy
Annual Report 2010
Consolidated income statement
for the year ended 31 March
Revenue
Cost of sales
Gross profit
Operating costs
Other operating income
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)
Note
2
3
13
2
6
6
7
9
9
9
8
2010
2009
Before
exceptional
items and certain
remeasurements
£m
Exceptional
items and certain
remeasurements
(note 4)
£m
Before
exceptional
items and certain
remeasurements
£m
Exceptional
items and certain
remeasurements
(note 4)
£m
Total
£m
Total
£m
21,550.4
(19,504.8)
2,045.6
(683.7)
–
–
432.2
432.2
–
–
21,550.4
(19,072.6)
2,477.8
(683.7)
–
25,424.2
(23,552.7)
1,871.5
(576.5)
–
–
(1,291.7)
(1,291.7)
–
102.7
25,424.2
(24,844.4)
579.8
(576.5)
102.7
1,361.9
432.2
1,794.1
1,295.0
(1,189.0)
106.0
264.1
(107.1)
–
(50.1)
106.9
1,468.8
203.2
(432.0)
1,240.0
(292.2)
947.8
–
–
4.1
(1.2)
264.1
(107.1)
4.1
(51.3)
2.9
109.8
435.1
–
(36.5)
398.6
(110.9)
1,903.9
203.2
(468.5)
1,638.6
(403.1)
287.7
1,235.5
246.4
(128.2)
–
(39.3)
78.9
1,373.9
209.7
(369.8)
1,213.8
(300.6)
913.2
–
–
3.8
(1.1)
2.7
(1,186.3)
–
25.8
(1,160.5)
359.6
(800.9)
246.4
(128.2)
3.8
(40.4)
81.6
187.6
209.7
(344.0)
53.3
59.0
112.3
947.6
0.2
287.7
–
1,235.3
0.2
913.2
–
(800.9)
–
112.3
–
134.0p
133.9p
110.2p
£618.5m
12.7p
12.8p
108.0p
£551.9m
The accompanying notes are an integral part of these financial statements.
Statement of comprehensive income
for the year ended 31 March
Profit for the year
(Loss)/gain on effective portion of cash flow hedges
Taxation on cashflow hedges
Effective net investment hedge
Taxation on net investment hedge
Actuarial losses and other equity movements on retirement benefit schemes
Taxation on actuarial losses and other equity movements on defined benefit pension schemes
Exchange difference on translation of foreign operations
Jointly controlled entities and associates:
Share of (loss)/gain on effective portion of cash flow hedges
Share of taxation on cashflow hedges
Share of actuarial losses on retirement benefit schemes
Share of taxation of actuarial losses on retirement benefit schemes
Net share from jointly controlled entities and associates
Other comprehensive income
Total comprehensive income for the period
Attributable to:
Equity holders of the parent
Minority interest
79
Introduction to SSE
Directors’ report
Financial statements
Shareholder information
Consolidated
2010
£m
1,235.5
(26.6)
2.1
(24.5)
(47.2)
13.2
(34.0)
(508.8)
142.5
(366.3)
2009
£m
112.3
22.9
(6.4)
16.5
(142.9)
40.0
(102.9)
(278.9)
78.1
(200.8)
0.4
221.7
(30.0)
19.1
(10.9)
(82.1)
23.0
(59.1)
(70.0)
(494.4)
4.4
(1.2)
3.2
(53.2)
14.9
(38.3)
(35.1)
(100.6)
741.1
11.7
740.9
0.2
741.1
11.7
–
11.7
80
Scottish and Southern Energy
Annual Report 2010
Balance sheets
as at 31 March
Assets
Property, plant and equipment
Biological assets
Intangible assets:
Goodwill
Other intangible assets
Investments in associates and jointly controlled entities
Investments in subsidiaries
Other investments
Trade and other receivables
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
Consolidated
Company
Note
2010
£m
2009
£m
11
12
10
10
13
14
13
17
23
28
10
16
17
18
28
22
19
20
24
28
22
23
19
24
26
28
25
8,204.2
4.4
726.3
288.2
1,037.3
–
9.2
–
157.1
466.3
7,232.2
–
724.0
253.0
918.7
–
18.3
–
100.1
449.2
10,893.0
9,695.5
213.3
272.5
5,018.8
261.7
1,468.3
7,234.6
213.9
366.7
5,659.6
295.9
1,537.7
8,073.8
18,127.6
17,769.3
903.7
4,064.5
216.9
6.5
2,020.7
7,212.3
5,143.3
624.0
324.5
83.2
720.3
899.0
7,794.3
1,060.1
4,364.9
254.6
13.8
2,451.0
8,144.4
4,336.1
594.7
426.0
60.2
273.5
959.5
6,650.0
15,006.6
3,121.0
14,794.4
2,974.9
461.5
857.5
22.0
–
(16.2)
113.4
1,686.6
3,124.8
(3.8)
3,121.0
460.2
835.3
22.0
0.8
19.6
146.6
1,492.7
2,977.2
(2.3)
2,974.9
2010
£m
–
–
–
–
473.9
2,172.1
–
3,456.1
116.9
47.5
6,266.5
–
–
2,428.0
99.7
56.6
2,584.3
8,850.8
815.6
2,619.3
4.0
–
45.2
3,484.1
3,341.4
–
–
–
251.1
82.8
3,675.3
7,159.4
1,691.4
461.5
857.5
22.0
–
21.0
–
329.4
1,691.4
–
1,691.4
2009
£m
–
–
–
–
456.9
2,154.2
–
2,066.9
32.7
–
4,710.7
–
–
3,465.7
135.1
178.1
3,778.9
8,489.6
916.4
2,635.5
–
–
130.8
3,682.7
2,868.5
–
–
–
–
–
2,868.5
6,551.2
1,938.4
460.2
835.3
22.0
0.8
43.3
–
576.8
1,938.4
–
1,938.4
These financial statements were approved by the Board of Directors on 18 May 2010 and signed on their behalf by:
Gregor Alexander
Finance Director
Lord Smith of Kelvin
Chairman
Scottish and Southern Energy plc, Registered No: SC117119
Statement of changes in equity
for the year ended 31 March
81
Introduction to SSE
Directors’ report
Financial statements
Shareholder information
Consolidated
Reconciliation of movement in reserves
Share
capital
£m
Share
Capital
premium redemption
reserve
£m
account
£m
Equity
reserve
£m
Hedge Translation
reserve
reserve
£m
£m
Retained
earnings
£m
Minority
interest
£m
Total
£m
At 1 April 2009
460.2
835.3
22.0
0.8
19.6
146.6
1,492.7
(2.3) 2,974.9
Profit for the year
Effective portion of changes in fair
value of cash flow hedges (net of tax)
Effective net investment hedge
(net of tax)
Exchange differences on translation
of foreign operation
Actuarial gains on retirement benefit
schemes (net of tax)
Jointly controlled entities and
associates:
Share of change in fair value of
effective cash flow hedges
Share of actuarial losses on retirement
benefit schemes (net of tax)
Total comprehensive income for
the period
Dividends to shareholders
Convertible bond converted to equity
Issue of shares
Credit in respect of employee
share awards
Investment in own shares
Current and deferred tax recognised
in equity in respect of employee
share awards
–
–
–
–
–
–
–
–
–
0.9
0.4
–
–
–
–
–
–
–
–
–
–
–
–
15.8
6.4
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
At 31 March 2010
461.5
857.5
22.0
Company
Reconciliation of movement in reserves
Share
capital
£m
–
–
–
–
–
–
–
–
–
(0.8)
–
–
–
–
–
1,235.3
0.2
1,235.5
–
(24.5)
–
–
–
(34.0)
(0.4)
0.8
–
–
–
–
–
(366.3)
(10.9)
–
–
–
–
(59.1)
–
–
–
–
–
–
(24.5)
(34.0)
0.4
(366.3)
(10.9)
(59.1)
(35.8)
(33.2)
809.9
0.2
741.1
–
–
–
–
–
–
–
–
–
–
–
–
(618.5)
–
–
17.9
(15.8)
0.4
(1.7)
–
–
(620.2)
15.9
6.8
–
–
–
17.9
(15.8)
0.4
(16.2)
113.4
1,686.6
(3.8) 3,121.0
Share
Capital
premium redemption
reserve
£m
account
£m
Equity
reserve
£m
Hedge
reserve
£m
Retained
earnings
£m
Total
£m
At 1 April 2009
460.2
835.3
22.0
0.8
43.3
576.8
1,938.4
Profit for the year
Effective portion of changes in fair value of cash flow
hedges (net of tax)
Actuarial gains on retirement benefit schemes (net of tax)
Total comprehensive income for the period
Dividends to shareholders
Convertible bond converted to equity
Issue of shares
Increase in investment in subsidiaries
Investment in own shares
–
–
–
–
–
0.9
0.4
–
–
–
–
–
–
–
15.8
6.4
–
–
–
–
–
–
–
–
–
–
–
At 31 March 2010
461.5
857.5
22.0
–
–
–
–
–
(0.8)
–
–
–
–
–
575.9
575.9
(22.3)
–
(22.3)
–
–
–
–
–
21.0
–
(206.9)
369.0
(618.5)
–
–
17.9
(15.8)
(22.3)
(206.9)
346.7
(618.5)
15.9
6.8
17.9
(15.8)
329.4
1,691.4
82
Scottish and Southern Energy
Annual Report 2010
Statement of changes in equity (continued)
for the year ended 31 March
Consolidated
Reconciliation of movement in reserves
Share
capital
£m
Share
Capital
premium redemption
reserve
£m
account
£m
Equity
reserve
£m
Hedge Translation
reserve
reserve
£m
£m
Retained
earnings
£m
Minority
interest
£m
Total
£m
At 1 April 2008
435.1
315.7
22.0
3.9
2.3
25.4
2,175.6
0.3
2,980.3
Profit for the year
Effective portion of changes in fair
value of cash flow hedges (net of tax)
Effective net investment hedge
(net of tax)
Exchange differences on translation
of foreign operation
Actuarial gains on retirement benefit
schemes (net of tax)
Jointly controlled entities and
associates:
Share of change in fair value of
effective cash flow hedges
Share of actuarial losses on retirement
benefit schemes (net of tax)
Total comprehensive income for
the period
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
Dividends to shareholders
Convertible bond converted to equity
Issue of shares
Credit in respect of employee
share awards
Investment in own shares
Current and deferred tax recognised
in equity in respect of employee
share awards
–
3.5
21.6
–
61.6
458.0
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
At 31 March 2009
460.2
835.3
22.0
Company
Reconciliation of movement in reserves
Share
capital
£m
–
–
–
–
–
–
–
–
–
(3.1)
–
–
–
–
0.8
–
16.5
–
–
–
(102.9)
(2.4)
224.1
112.3
–
–
–
–
–
(200.8)
3.2
–
–
–
–
(38.3)
17.3
121.2
(126.8)
–
–
–
–
–
–
–
–
112.3
16.5
(102.9)
221.7
(200.8)
3.2
(38.3)
11.7
–
–
–
–
–
–
–
–
–
–
–
–
(551.9)
–
–
14.3
(15.8)
(2.7)
(2.6)
–
–
(554.5)
62.0
479.6
–
–
–
14.3
(15.8)
(2.7)
19.6
146.6
1,492.7
(2.3) 2,974.9
Share
Capital
premium redemption
reserve
£m
account
£m
Equity
reserve
£m
Hedge
reserve
£m
Retained
earnings
£m
Total
£m
At 1 April 2008
435.1
315.7
22.0
3.9
7.1
356.2
1,140.0
Profit for the year
Effective portion of changes in fair value of cash flow
hedges (net of tax)
Actuarial gains on retirement benefit schemes (net of tax)
Total comprehensive income for the period
Dividends to shareholders
Convertible bond converted to equity
Issue of shares
Credit in respect of employee share awards
Investment in own shares
–
–
–
–
–
3.5
21.6
–
–
–
–
–
–
–
61.6
458.0
–
–
–
–
–
–
–
–
–
–
–
At 31 March 2009
460.2
835.3
22.0
–
–
–
–
–
(3.1)
–
–
–
0.8
–
852.0
852.0
36.2
–
36.2
–
–
–
–
–
–
(78.0)
774.0
(551.9)
–
–
14.3
(15.8)
36.2
(78.0)
810.2
(551.9)
62.0
479.6
14.3
(15.8)
43.3
576.8
1,938.4
Cash flow statements
for the year ended 31 March
83
Introduction to SSE
Directors’ report
Financial statements
Shareholder information
Consolidated
Company
Note
2010
£m
2009
£m
2010
£m
2009
£m
Cash flows from operating activities
Profit for the year after tax
Taxation
Movement on financing and operating derivatives
Finance costs
Finance income
Share of profit/loss of jointly controlled entities and associates
Income from investment in subsidiaries
Pension service charges less contributions paid
Depreciation and impairment of assets
Amortisation and impairment of intangible assets
Impairment of inventories
Release of provisions
Release of deferred income
Decrease/(increase) in inventories
Decrease/(increase) in receivables
(Decrease)/increase in payables
Increase in provisions
Charge in respect of employee share awards (before tax)
Profit on disposal of property, plant and equipment
Profit on disposal of 50% of Greater Gabbard Offshore Winds
Loss/(profit) on disposal of fixed asset investment
Cash generated from operations
Dividends received from jointly controlled entities
Dividends paid to minority investment holders
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 other intangible assets
Deferred income received
Proceeds from sale of property, plant and equipment
Proceeds from disposal of 50% of Greater Gabbard Offshore Winds
Purchase of 50% of Greater Gabbard Offshore Winds
Proceeds from sale of fixed asset investment
Other loans to jointly controlled entities
Purchase of businesses and subsidiaries
Cash acquired in purchases
Investment in jointly controlled entities and associates
Loans and equity repaid by jointly controlled entities
Increase in other investments
Net cash from investing activities
13
15
1,235.5
403.1
(395.7)
432.0
(203.2)
(109.8)
–
(88.8)
356.4
22.2
3.0
(7.1)
(15.2)
97.2
914.3
(486.8)
5.9
17.9
(5.7)
–
0.1
2,175.3
23.7
(1.7)
–
102.5
(341.4)
(307.7)
–
1,650.7
(995.0)
(4.2)
18.7
40.2
–
–
0.9
(336.4)
(67.8)
9.7
(61.8)
34.5
(1.1)
(1,362.3)
112.3
(59.0)
1,265.9
369.8
(209.7)
(81.6)
–
(49.3)
315.9
14.4
8.2
(47.5)
(16.7)
(127.7)
(2,048.3)
958.0
4.7
14.3
(1.7)
(102.7)
(2.2)
317.1
39.8
(2.6)
–
74.4
(219.2)
(255.5)
(0.4)
(46.4)
(1,172.2)
(37.5)
24.8
3.8
308.5
(40.0)
2.4
(262.0)
(28.4)
0.1
(64.4)
79.7
(12.5)
(1,197.7)
575.9
(0.6)
44.9
235.6
(259.7)
–
(577.5)
(44.2)
–
–
–
–
–
–
(161.3)
119.4
–
–
–
–
–
(67.5)
–
–
577.5
223.0
(206.4)
(300.6)
–
226.0
–
–
–
–
–
–
–
–
–
–
(17.0)
–
–
(17.0)
852.0
(40.8)
(37.5)
447.0
(256.9)
–
(970.7)
(14.5)
–
–
–
–
–
–
(1,508.9)
(538.0)
–
–
–
(2.2)
(2,070.5)
–
–
970.7
192.2
(348.2)
(255.3)
(0.4)
(1,511.5)
–
–
–
–
–
–
2.4
–
(2.1)
–
–
60.0
–
60.3
84
Scottish and Southern Energy
Annual Report 2010
Cash flow statements (continued)
for the year ended 31 March
Cash flows from financing activities
Proceeds from issue of share capital
Dividends paid to Company’s equity holders
Employee share awards share purchase
New borrowings
Borrowings acquired in purchases
Repayment of borrowings
Net cash from financing activities
Consolidated
Company
Note
2010
£m
2009
£m
2010
£m
2009
£m
6.8
(618.5)
(15.8)
1,338.3
–
(1,035.3)
(324.5)
479.6
(551.9)
(15.8)
3,203.1
–
(1,835.3)
1,279.7
6.8
(618.5)
(15.8)
1,299.7
–
(916.6)
(244.4)
479.6
(551.9)
(15.8)
3,266.5
–
(1,696.3)
1,482.1
Net (decrease)/increase in cash and cash equivalents
(36.1)
35.6
(35.4)
30.9
Cash and cash equivalents at the start of year
Net (decrease)/increase in cash and cash equivalents
Effect of foreign exchange rate changes
Cash and cash equivalents at the end of year
18
18
293.6
(36.1)
(5.0)
252.5
243.1
35.6
14.9
293.6
135.1
(35.4)
–
99.7
104.2
30.9
–
135.1
The accompanying notes are an integral part of these financial statements.
Notes on the financial statements
for the year ended 31 March
85
Introduction to SSE
Directors’ report
Financial statements
Shareholder information
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 Directors’ Report on pages 6 to 46. The consolidated
financial statements for the year ended 31 March 2010 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 408 of the Companies Act 2006 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 18 May 2010. The financial statements have been prepared in
accordance with International Financial Reporting Standards and its interpretations as adopted by the European Union (adopted IFRS).
Going concern
The Directors consider that the Group has adequate resources to continue in operational existence for the foreseeable future and has
sufficient short-term and medium-term facilities to meet its funding requirements for 2010/11. In addition, the Group expects to issue
further debt in the capital markets in 2010/11. The Financial Statements are therefore prepared on a going concern basis. Further
details of the Group’s liquidity position and going concern review are provided in note 28 of the Financial Statements on page 138.
Basis of measurement
The financial statements of the Group and the Company are prepared on the historical cost basis except for derivative financial
instruments, biological assets and the assets of the Group pension schemes which are stated at their fair value, and the liabilities
of the Group pension schemes which are measured using the projected unit credit method. 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.
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 pages 93 and 94.
Exceptional items and certain remeasurements
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 remeasurements 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
remeasurements are remeasurements 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 where held for the Group’s own use requirements.
Standards, amendments and interpretations
The following accounting standards, amendments and interpretations have been adopted by the Group from 1 April 2009:
k
k
k
IFRS 7 ‘Financial Instruments – Disclosures’ (amendment) is effective for accounting periods beginning on or after 1 January 2009.
The amendment requires enhanced disclosures about fair value measurement and liquidity risk. In particular, the amendment
requires disclosure of fair value measurements by level of a fair value measurement hierarchy. As the amendment only results
in additional disclosures, there is no impact on the Group’s reported results.
IFRS 8 ‘Operating Segments’, effective for annual periods beginning on or after 1 January 2009, replaces IAS 14, Segment
Reporting and requires operating segments to be identified on the basis of internal reports about components of the Group that
are regularly reviewed by the chief operating decision maker, which has been identified as the Board. The adoption of IFRS 8 has
led to a change in the segmental information disclosed, but has had no impact on the Group’s reportable segments or on the
reported results or financial position of the Group. Further information can be found in note 2.
IAS 1 (Revised) ‘Presentation of Financial Statements’ is effective for annual periods beginning on or after 1 January 2009.
The revised standard prohibits the presentation of income and expense in the statement of changes in equity, requiring non-
shareholder changes in equity to be presented separately from shareholder changes in equity. All non-shareholder changes
in equity are required to be presented in a performance statement. IAS 1 (Revised) permits a choice as to whether to present
a single performance statement (being a Statement of Comprehensive Income) or two statements (being an Income Statement
and a Statement of Comprehensive Income). The Group has elected to present two statements. Other changes introduced by
the revised standard include a requirement to give the Statement of Changes in Equity equal prominence to the other Primary
Statements. These Financial Statements have been prepared under the revised disclosure requirements.
86
Scottish and Southern Energy
Annual Report 2010
Notes on the financial statements (continued)
for the year ended 31 March
1. SiGNifiCANT ACCOuNTiNG POLiCiES (continued)
k
IFRS 2 (Amendment) ‘Share-based Payments – Vesting Conditions and Cancellations’, is effective for annual periods beginning
on or after 1 January 2009. This amendment restricts the definition of ‘vesting conditions’ to a condition that includes an explicit
or implicit requirement to provide services. Any other conditions are non-vesting conditions which have to be taken into account
to determine the fair value of the equity instruments granted. In the case that the award does not vest as the result of a failure
to meet a non-vesting condition that is within the control of either the entity or the counterparty, this must be accounted for as
a cancellation. The main impact of this amendment for the Group arises from cancellations by employees of contributions to the
Group’s Sharesave schemes; in the event of a cancellation the Group must recognise immediately the amount of the expense
that would have otherwise been recognised over the remainder of the vesting period. We have reviewed our Share Based
Payments for the amendment and concluded that it has an immaterial impact on previously reported results and balances.
k
IFRIC 12, ‘Service concession arrangements’, is effective for accounting periods ending on or after 29 March 2009. This amendment
applies to contractual arrangements whereby a private sector operator participates in the development, financing, operation
and maintenance of infrastructure for public sector services, for example, under private initiative (PFI) contracts. The Group has
contracts with various local authorities under PFI arrangements. These contracts qualify for accounting under IFRIC 12. The
adoption of IFRIC 12, which applies retrospectively, did not have a material impact on previously reported results and balances.
The following amendments to existing standards and interpretations were also effective for the current period, but the adoption of
these amendments to existing standards and interpretations did not have a material impact on the Financial Statements of the Group:
k
k
k
k
k
k
IAS 23 (Amendment), Borrowing Costs;
IAS 39 (Amendment), Financial Instruments: Recognition and Measurement – Reclassification of Financial Assets;
IFRS 1 (Amendment), First-time adoption of IFRS, and IAS 27 (Amendment), Presentation of Financial Statements – Puttable
financial instruments and obligations arising on liquidation;
IFRIC 9 (Amendment), Re-assessment of Embedded Derivatives, and IAS 39 (Amendment), Financial Instruments: Recognition
and Measurement;
IFRIC 13, Customer Loyalty Programmes; and
IFRIC 15, Agreements for the Construction of Real Estate.
At the date of authorisation of these Financial Statements, the following standards, amendments to existing standards and interpretations
issued by the IASB and IFRIC, which have not been adopted in these Financial Statements, were in issue but not yet effective:
k
k
k
k
k
k
IFRS 3 (Revised), Business Combinations, effective for annual periods beginning on or after 1 July 2009;
Improvements to IFRSs (2009), effective for annual periods beginning on or after 1 July 2009 (or later);
IFRS 2 (Amendment), Share Based Payment – Group Cash-settled Share-based Payment Transactions, effective for annual
periods commencing on or after 1 January 2010;
IAS 27 (Revised), Consolidated and Separate Financial Statements, effective for annual periods beginning on or after 1 July 2009;
IFRIC 16, Hedges of Net Investment in a Foreign Operation; and
IFRIC 18, Transfers of Assets from Customers, effective for annual periods beginning on or after 31 October 2009.
The above have not been early adopted by the Group and the impact of adopting these standards and amendments to existing
standards is currently being assessed.
Additionally, the following standards, amendments to existing standards and interpretations, which were also in issue at the date
of authorisation of these Financial Statements but not yet effective and have not received EU endorsement have not therefore been
adopted by the Group in these Financial Statements:
k
k
k
IFRIC 17, Distributions of Non-cash Assets to Owners, effective for annual periods beginning on or after 1 July 2009;
IAS 39 (Amendment), Financial Instruments: Recognition and Measurement – Eligible Hedged Items, effective for annual periods
beginning on or after 1 July 2009; and
IFRIC 19, Extinguishing Financial Liabilities with Equity Investments, effective for annual periods beginning on or after 1 July 2010.
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 currently 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.
87
Introduction to SSE
Directors’ report
Financial statements
Shareholder information
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.
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 comprises sales to retail end-user customers including an estimate of the value of electricity and gas
supplied to customers between the date of the last meter reading and the year end. Revenue on energy sales also includes monies
received from the electricity and gas balancing markets in the UK and other wholesale market energy sales. Unread energy sales
are estimated using historical consumption patterns taking account of industry volume reconciliation processes. Revenue associated
with business interruption insurance claims is recognised as revenue in the income statement only when it is virtually certain that
the claim will be successful.
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 in respect of major connections and capital grants have been
recorded as deferred income and released to the income statement over the estimated life of the related assets.
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.
88
Scottish and Southern Energy
Annual Report 2010
Notes on the financial statements (continued)
for the year ended 31 March
1. SiGNifiCANT ACCOuNTiNG POLiCiES (continued)
(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 89.
Minimum lease payments are apportioned between the finance charge and the reduction of the outstanding liability. The finance
charge is allocated to each year during the lease term in order to produce a constant periodic rate of interest on the remaining
balance of the liability.
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 or exchange gains or losses incurred as part
of a qualifying cash flow hedge. Exchange gains or losses on net investment hedges are taken against the consolidated translation
reserve, a separate component of equity, to the extent 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 and are reported in the statement of recognised income and expense. Exchange differences on foreign currency borrowings,
foreign exchange contracts or foreign currency swaps used as part of a hedge against net investment in a foreign entity are transferred
to the translation reserve.
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 and finance leases, 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.
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Introduction to SSE
Directors’ report
Financial statements
Shareholder information
Dividends
Dividend income is recognised on the date the Group’s right to receive payments is established.
Property, plant and equipment
(i) Owned assets
Items of property, plant and equipment are stated at cost less accumulated depreciation and impairments. The cost of self-
constructed assets includes the cost of materials, direct labour and other directly attributable costs. 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 their estimated
useful lives. Depreciation policy, useful lives and residual values are reviewed at least annually, for all asset classes to ensure
that the current method is the most appropriate. The estimated useful lives are as follows:
Hydro civil assets
Power stations
Wind farm developments
Overhead lines, under ground 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
20 to 60
20 to 25
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
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 and the costs recorded as costs of disposal. 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.
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.
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Scottish and Southern Energy
Annual Report 2010
Notes on the financial statements (continued)
for the year ended 31 March
1. SiGNifiCANT ACCOuNTiNG POLiCiES (continued)
Biological Assets
Biological assets, such as living trees, are measured at their fair value less estimated point of sale costs. The valuation of forest
assets is based on discounted cash flow models whereby the fair value of the biological asset is calculated using cash flows from
continuous operations, that is, each forest asset is split into an appropriate grouping based on the maturity and/or type of trees.
An expected future volume of Timber that will be produced from each of these groups is then derived. The expected volume is used
to apply a market value to the groups of trees based on the market value of Standing Timber. These market values are discounted
based on the time to full maturity to appropriately value each grouping.
Periodic changes resulting from growth, felling prices, discount rate, costs and other premise changes are included in operating
profit on the income statement.
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 and impairment testing
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, liabilities and contingent liabilities of a subsidiary, associate or jointly controlled entity at the date
of acquisition.
Following initial recognition, goodwill is measured at cost less any accumulated impairment losses. Goodwill is reviewed for
impairment at least on an annual basis.
For the purpose of impairment testing, goodwill is allocated to those cash-generating units expected to benefit from the
combination’s synergies. The cash-generating units used for goodwill impairment testing purposes are the operating units
one level below the Group’s segmental businesses or are the segments themselves. The cash-generating units are therefore
representative of how goodwill was recognised but do not represent business segments as reported to management.
If the carrying amount of the cash-generating unit exceeds its recoverable amount, an impairment charge will be recognised
immediately in the income statement and will not be subsequently reversed. The recoverable amount is the higher of the
cash-generating unit’s fair value less costs to sell and its value-in-use. The impairment charge will initially be adjusted
against the goodwill allocated to the cash-generating unit. Thereafter, the remaining assets of the cash-generating unit
will be written-down proportionately.
Goodwill may also arise upon investments in jointly-controlled entities and associates. Such goodwill is recorded within the
carrying amount of the Group’s investment and any impairment loss is included within the share of result from jointly-controlled
entities and associates.
On disposal or closure of a previously acquired business, any attributed goodwill will be included in determining the profit or loss
on disposal.
(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 CO2 (‘carbon’) emissions trading.
The Group recognises carbon allowances granted in a period at nominal value (nil value). Carbon allowances purchased are
recorded at cost within intangible assets. A liability is recognised when the level of emissions in any compliance period exceed
the level of allowances held and this is recorded as a current liability. Up to the level of allowances held the liability is measured
at the cost of purchased allowances. When the carbon emission liability exceeds the carbon allowances held, the net liability is
measured at the anticipated settlement price. Movements in the market value of the liability are recognised in operating profit.
Forward carbon contracts are measured at fair value with gains or losses arising on remeasurement 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 derecognised at its carrying value. As a result, no amortisation is booked but an impairment charge
may be recognised should the carrying value exceed market value. Where allowances granted are used to settle a liability
relating to a previous period, a creditor balance is recorded for the increased liability in the current period.
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Introduction to SSE
Directors’ report
Financial statements
Shareholder information
Under the Renewable Obligations Certificates (ROCs) scheme, certificates obtained from own generation are awarded by a third
party, Ofgem. Self-generated certificates are recorded at market value and purchased certificates 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. The intangible asset is surrendered at the end of the compliance
period reflecting the consumption of economic benefit. As a result no amortisation is recorded during the period.
(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 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 point that the project
reaches the consent stage and is approved by the Board, 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 brands 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
Impairment testing
The carrying amounts of the Group’s assets, other than inventories or deferred tax, are reviewed for impairment whenever events
or changes in circumstances indicate that the carrying amount may not be recoverable. If there is evidence of impairment, the
recoverable amount, being the higher of the fair value less costs to sell and the value-in-use of the asset, is estimated to determine
the extent of any such impairment. For goodwill and other intangible assets with an indefinite life or which are not ready for use, the
test for impairment is carried out annually. For financial assets measured at amortised cost the impairment is measured as the
difference between the asset’s carrying amount and the present value of estimated future cash flows discounted at the financial
asset’s original effective interest rate.
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 other directly attributable costs.
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 comprehensive income. 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.
92
Scottish and Southern Energy
Annual Report 2010
Notes on the financial statements (continued)
for the year ended 31 March
1. SiGNifiCANT ACCOuNTiNG POLiCiES (continued)
(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
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 charge related to the equity shares in the Company awarded under the share schemes is treated as an increase in the cost
of investment held by the Company in the subsidiary companies of 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.
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
hedge 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 remeasurement 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 being recorded through the income statement.
A derivative classified as a fair value hedge recognises gains and losses from remeasurement 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. When hedged cash flows result in the recognition of a non-financial asset or liability, the associated gains or losses
previously recognised in equity are included in the initial measurement of the asset or liability. For all other cash flow hedges,
the gains or losses that are recognised in equity are transferred to the income statement in the same period in which the hedged
cash flows affect the income statement.
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 remeasurement being recognised in the income statement in cost of sales.
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Introduction to SSE
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Financial statements
Shareholder information
(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 in a manner similar to effective cash flow hedges. Any gain or
loss on the effective portion of the hedge is recognised in equity, in the translation reserve, and 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 issued a convertible bond which represented debt that could be converted to share capital at the option of the holder,
where the number of shares issued did not vary with changes in their fair value. This was accounted for as a compound financial
instrument, net of transaction costs. The equity component of the convertible bond was 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 did not have a conversion option. The interest expense recognised in the income statement was
calculated on initial recognition 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. Incremental costs directly attributable to the issue of new shares are shown
in equity as a deduction from the proceeds received.
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 and vary according to asset lives but are expected
to fall in the period up to 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 for 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.
94
Scottish and Southern Energy
Annual Report 2010
Notes on the financial statements (continued)
for the year ended 31 March
1. SiGNifiCANT ACCOuNTiNG POLiCiES (continued)
(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. Value in use calculations requires the estimation
of future cash flows to be derived from the respective CGUs and to select and an appropriate discount rate in order to calculate
their present value. The fair values less costs to sell methodology used for the wind farms CGUs also requires the discounting
of cash flows from the projects within the respective CGUs. The estimation of the timing and value of underlying projected cash
flows and the selection of appropriate discount rates involves management judgement. 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 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) Exceptionals and remeasurements
The criteria for identifying what constitutes an exceptional item are outlined in note 1 Exceptional items and certain
remeasurements.
2. SEGMENTAL iNfORMATiON
The Group has adopted IFRS 8 Operating Segments in the financial statements. IFRS 8 requires operating segments to be identified
on the basis of internal reports about components of the Group that are regularly reviewed by the chief operating decision maker in
order to allocate resources to the segment and to assess its performance. In the Group’s case the chief operating decision maker
has been identified as the Board. In contrast, the predecessor Standard (IAS 14 ‘Segment Reporting’) required an entity to identify
two sets of segments (business and geographical), using a risks and rewards approach. Following the adoption of IFRS 8 the Group’s
reportable segments have not changed.
The Group’s operating segments are therefore those used internally by the Board to run the business and make strategic decisions.
The operating segments are also the Group’s reportable segments.
The Group’s operating 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), the generation and supply of electricity and sale of gas
in Great Britain and Ireland (Generation and Supply) and other businesses. In addition to this the Group’s 50% equity share in Scotia
Gas Networks plc, a business which distributes gas in Scotland and the South of England (refer to note 13), is included as a separate
segment where appropriate due to its significance.
The types of products and services from which each reportable segment derives its revenues are:
Segment
Geographical location Description
Power Systems
UK
Transmits and distributes electricity to over 3 million businesses, offices and homes.
Generation and Supply Great Britain,
Ireland and
Europe
The Group views this as a single value chain within a vertically-integrated business.
It generates and supplies electricity to domestic, commercial and industrial customers
in Great Britain and Ireland. In addition it also supplies gas to customers in the same
locations. Generation is provided by a portfolio of thermal power stations and from
renewable sources of energy.
Other businesses:
Contracting
UK and Ireland
Connections
Metering
Gas Storage
Telecoms
UK
UK
UK
UK
Mechanical and electrical contracting services, public and highway lighting and electrical
and instrumentation engineering.
Electricity and gas connections for homes, offices and businesses, out-of-area electricity
networks, licensed gas transportation and water and sewerage services.
Supplies, installs and maintains electricity meters and provides data collection services.
Develops, owns and operates under ground onshore gas storage facilities.
Provides network capacity, data centre and bandwidth services to customers.
95
Introduction to SSE
Directors’ report
Financial statements
Shareholder information
The measure of profit used by the Board is adjusted operating profit, which is before exceptional items, the impact of IAS 32 and 39
and after the removal of taxation and interest on profits from jointly controlled entities and associates.
Analysis of revenue, operating profit, assets and other items by segment is provided below. All revenue and profit before taxation
arise from operations within Great Britain, Ireland and mainland Europe.
(a) Revenue by segment
Power Systems
Scotland
England
Generation and Supply
Retail
Wholesale and trading
Other
Other businesses
Total revenue
Intra-segment revenue (i)
External revenue
2010
£m
309.1
473.5
782.6
8,234.4
12,000.3
216.4
20,451.1
1,173.9
22,407.6
2009
£m
292.1
450.9
743.0
8,516.5
15,409.4
440.7
24,366.6
1,077.2
26,186.8
2010
£m
105.5
212.2
317.7
–
12.0
7.8
19.8
519.7
857.2
2009
£m
104.1
204.1
308.2
8.2
–
20.7
28.9
425.5
762.6
2010
£m
203.6
261.3
464.9
2009
£m
188.0
246.8
434.8
8,234.4
11,988.3
208.6
20,431.3
654.2
8,508.3
15,409.4
420.0
24,337.7
651.7
21,550.4
25,424.2
(i) Intra-segment revenue is derived from use of system income received by the Power Systems businesses from Generation and Supply, provision
of Contracting, Metering and Connections services, use of Gas Storage facilities, Telecoms infrastructure charges, internal heat and light charges
and other Corporate services. All are provided at arm’s length basis.
Revenue within Generation and Supply includes retail sales from energy supply customers, wholesale and trading revenue and other
sales. Wholesale and Trading revenue includes revenues from generation plant output and the gross value of all wholesale power and
gas sales including settled physical and financial trades. These are entered into to optimise the performance of the generation plants
and to support the energy supply business. Purchase trades are included in cost of sales.
Revenue from the Group’s investment in Scotia Gas Networks (SSE share being: 2010 – £373.5m; 2009 – £365.7m) is not recorded
in the revenue line in the income statement.
External revenue split by geographic location is as follows:
UK
Europe
(b) Operating profit by segment
2010
2010
£m
21,123.2
427.2
21,550.4
2009
£m
25,045.7
378.5
25,424.2
Power Systems
Scotland
England
Scotia Gas Networks
Energy Systems
Generation and Supply
Other businesses
Unallocated expenses (ii)
Segment Result
reported to the
Board (i)
£m
158.9
256.9
415.8
183.7
599.5
896.0
140.3
1,635.8
(9.8)
1,626.0
Before
exceptional
items and certain
JCE/Associate
share of interest
Exceptional
items and certain
and tax (i) remeasurements remeasurements
£m
£m
£m
–
–
–
(130.5)
(130.5)
(26.5)
(0.2)
(157.2)
–
(157.2)
158.9
256.9
415.8
53.2
469.0
869.5
140.1
1,478.6
(9.8)
1,468.8
–
–
–
2.4
2.4
432.7
–
435.1
–
435.1
Total
£m
158.9
256.9
415.8
55.6
471.4
1,302.2
140.1
1,913.7
(9.8)
1,903.9
96
Scottish and Southern Energy
Annual Report 2010
Notes on the financial statements (continued)
for the year ended 31 March
2. SEGMENTAL iNfORMATiON (continued)
Power Systems
Scotland
England
Scotia Gas Networks
Energy Systems
Generation and Supply
Other businesses
Unallocated expenses (ii)
2009
Segment Result
reported to the
Board (i)
£m
Before
JCE/Associate exceptional items
and certain
remeasurements
£m
share of interest
and tax (i)
£m
Exceptional
items and certain
remeasurements
£m
160.4
243.3
403.7
180.5
584.2
832.0
134.1
1,550.3
(8.9)
1,541.4
–
–
–
(146.3)
(146.3)
(20.9)
(0.3)
(167.5)
–
(167.5)
160.4
243.3
403.7
34.2
437.9
811.1
133.8
1,382.8
(8.9)
1,373.9
–
–
–
3.9
3.9
(1,190.2)
–
(1,186.3)
–
(1,186.3)
Total
£m
160.4
243.3
403.7
38.1
441.8
(379.1)
133.8
196.5
(8.9)
187.6
(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 Limited interest includes loan stock interest payable to
the consortium shareholders. The Group has accounted for its 50% share of this, £33.8m (2009 – £33.6m), as finance income (note 6).
(ii) Unallocated expenses comprise corporate office costs which are not directly allocable to particular segments.
The Group’s share of operating profit from jointly controlled entities and associates has been recognised in the Generation and Supply
segment other than that for Scotia Gas Networks Limited, which is recorded in a separate segment, and PriDE (South East Regional
Prime), which is recognised in Other businesses (£0.9m before tax; 2009 – £1.4m before tax).
(c) Assets
Power Systems
Scotland
England
Scotia Gas Networks (i)
Energy Systems
Generation and Supply
Other businesses
Corporate and unallocated
Less: inter-segment
2010
£m
2009
£m
1,757.5
2,660.2
4,417.7
422.4
4,840.1
1,621.7
2,479.6
4,101.3
424.5
4,525.8
16,023.0
1,845.2
12,028.3
34,736.6
(16,609.0)
16,069.8
1,640.8
12,763.6
35,000.0
(17,230.7)
18,127.6
17,769.3
Segment assets consist of property, plant and equipment, goodwill, other intangible assets, financial assets (operating derivatives)
and receivables. Unallocated assets include pension assets, deferred tax assets, financial assets (financing derivatives), investments
and cash and cash equivalents.
(i) The asset balance represents the Group’s net investment in Scotia Gas Networks Limited. The Group’s share of the capital additions in Scotia Gas
Networks Limited is not included within Property, Plant and Equipment.
(d) Capital expenditure
Power Systems
Scotland
England
Scotia Gas Networks (iii)
Energy Systems
Generation and Supply
Other businesses
Corporate and unallocated
Capital additions to
Intangible Assets
(note 10)
2010
£m
2009
£m
–
–
–
–
–
484.7
–
1.6
486.3
–
–
–
–
–
351.3
–
2.4
353.7
Capital additions does not include assets acquired in acquisitions or assets acquired under finance leases.
(e) included within operating profit
Power Systems
Scotland
England
Generation and Supply
Other businesses
Corporate and unallocated
Depreciation/impairment
on Property, Plant and
Equipment (note 11)
2010
£m
48.5
79.7
128.2
182.4
47.8
–
356.4
2009
£m
45.2
75.2
120.4
142.7
52.8
–
315.9
97
Introduction to SSE
Directors’ report
Financial statements
Shareholder information
Capital additions to
Property, Plant and
Equipment (note 11)
2010
£m
135.8
198.7
334.5
–
334.5
487.9
164.8
–
987.2
2009
£m
128.9
185.7
314.6
–
314.6
757.6
218.6
–
1,290.8
Amortisation/impairment
of Intangible Assets
(note 10)
2010
£m
2009
£m
–
–
–
15.8
2.6
3.8
22.2
–
–
–
4.8
5.5
4.1
14.4
The Group’s share of Scotia Gas Networks Limited depreciation (2010 – £53.1m; 2009 – £52.1m) and amortisation (2010 – nil; 2009 – nil)
is not included within operating costs.
3. OThER OPERATiNG iNCOME AND ExPENSE
Group operating costs can be analysed thus:
Distribution costs
Administration costs
2010
£m
220.5
463.2
683.7
2009
£m
205.3
371.2
576.5
98
Scottish and Southern Energy
Annual Report 2010
Notes on the financial statements (continued)
for the year ended 31 March
3. OThER OPERATiNG iNCOME AND ExPENSE (continued)
Group operating profit is stated after charging (or crediting) the following items:
Depreciation and impairment of property, plant and equipment (note 11)
Impairment of inventories (note 16)
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/(gain) on disposal of fixed asset investments
Impairment of intangible assets (note 10)
Amortisation of brand costs (note 10)
Amortisation of intangible assets (note 10)
Auditors’ 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
2010
£m
356.4
3.0
3.7
271.2
(15.2)
(5.7)
0.1
13.1
1.0
8.1
2010
£m
0.2
0.7
0.9
0.2
0.1
2009
£m
315.9
8.2
4.4
220.6
(16.7)
(1.7)
(2.2)
2.2
1.1
11.1
2009
£m
0.2
0.6
0.8
0.4
0.4
Tax service fees incurred in the year were £0.2m (2009 – £0.4m). In addition to the amounts shown above, the auditors received
fees of £0.06m (2009 – £0.04m) for the audit of the Scottish Hydro Electric Pension Scheme. Other service fees include fees incurred
in relation to potential acquisitions and work in relation to regulatory accounts and returns required by Ofgem. A description of the
work of the Audit Committee is set out on pages 60 and 61 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 REMEASuREMENTS
(i) Exceptional items
In the previous financial year, the Group disposed of 50% of its equity shareholding in Greater Gabbard Offshore Winds Limited (GGOWL)
to npower renewables Limited, the UK fully owned subsidiary of RWE Innogy GmbH for a total cash consideration of £308.5m.
GGOWL was originally a jointly controlled entity between Airtricity, acquired by SSE in February 2008, and Fluor International Limited.
In May 2008, SSE acquired Fluor’s 50% stake for a cash consideration of £40.0m, while stating its intention to dispose of it later in the year.
The total proceeds on disposal was £308.5m, which comprised £165.6m reimbursement of 50% of the capital costs already incurred
in developing the project and £142.9m in relation to the 50% of the equity. The gain on sale recognised was £102.7m, which has been
disclosed separately in the income statement as an exceptional item. While no tax charge was recognised in relation to the gain on
disposal, a tax credit was recognised on the reversal of deferred tax related to the derecognition of fair value items deemed to have
been part of the costs of disposal (£5.7m).
(ii) Certain remeasurements
Certain remeasurements arising from IAS 39 are disclosed separately to aid understanding of the underlying performance of the Group.
This category includes the movement on derivatives as described in note 28.
(iii) Taxation
The Group has separately recognised the tax effect of the exceptional items and certain remeasurements summarised above.
99
Introduction to SSE
Directors’ report
Financial statements
Shareholder information
2010
£m
–
–
432.2
(36.5)
2.9
398.6
398.6
–
–
(110.9)
(110.9)
2009
£m
102.7
102.7
(1,291.7)
25.8
2.7
(1,263.2)
(1,160.5)
5.7
5.7
353.9
359.6
287.7
(800.9)
Consolidated
2010
£m
574.9
53.8
17.9
37.9
684.5
(87.4)
597.1
2009
£m
530.1
48.0
14.3
35.4
627.8
(79.9)
547.9
Consolidated
Company
2010
Number
20,177
2009
Number
18,795
2010
Number
4
2009
Number
4
These transactions can be summarised thus:
Exceptional items
Gain on disposal of share in Greater Gabbard Offshore Winds (note 15)
Certain remeasurements
Movement on operating derivatives
Movement on financing derivatives
Share of movement on derivatives in jointly controlled entities (net of tax)
Gain/(loss) before taxation
Exceptional items
Taxation on other exceptional items
Taxation on certain remeasurements
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
The 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
Consolidated
Company
2010
Number
2,088
9,007
6,150
2,063
2009
Number
2,045
8,536
5,714
1,901
19,308
18,196
2010
Number
2009
Number
–
–
–
4
4
–
–
–
4
4
The costs associated with the employees of the Company, who are the executive Directors of the Group, are borne by Group companies.
No amounts are charged to the Company.
100
Scottish and Southern Energy
Annual Report 2010
Notes on the financial statements (continued)
for the year ended 31 March
5. DiRECTORS AND EMPLOYEES (continued)
(ii) Directors’ remuneration and interests
Information concerning Directors’ remuneration, shareholdings, options, long term incentive schemes and pensions is shown in the
Remuneration Report on pages 65 to 74. 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
2010
2009
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
Foreign exchange translation of monetary
assets and liabilities
Total finance income
finance costs:
Bank loans and overdrafts
Other loans and charges
Interest on pension scheme liabilities
Accretion of convertible debt component
Notional interest arising on discounted provisions
Foreign exchange translation of monetary
assets and liabilities
Finance lease charges
Less: interest capitalised (i)
Total finance costs
Changes in fair value of financing derivative assets
or liabilities at fair value through profit or loss
Net finance costs
Finance income
Finance costs
Net finance costs
Before
exceptional items
and certain
remeasurements
£m
Exceptional
items and certain
remeasurements
£m
Before
exceptional items
and certain
Exceptional
items and certain
remeasurements remeasurements
£m
£m
100.7
3.5
33.8
20.1
35.1
10.0
203.2
(49.9)
(284.1)
(127.5)
–
(3.5)
–
(13.2)
46.2
(432.0)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
Total
£m
100.7
3.5
33.8
20.1
35.1
10.0
203.2
(49.9)
(284.1)
(127.5)
–
(3.5)
–
(13.2)
46.2
135.3
9.4
33.6
14.6
16.8
–
209.7
(149.9)
(132.9)
(130.1)
(0.6)
(5.1)
(2.4)
–
51.2
Total
£m
135.3
9.4
33.6
14.6
16.8
–
209.7
(149.9)
(132.9)
(130.1)
(0.6)
(5.1)
(2.4)
–
51.2
(369.8)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(432.0)
(369.8)
–
(36.5)
(36.5)
–
25.8
25.8
(228.8)
(36.5)
(265.3)
(160.1)
25.8
(134.3)
203.2
(432.0)
–
(36.5)
203.2
(468.5)
209.7
(369.8)
–
25.8
209.7
(344.0)
(228.8)
(36.5)
(265.3)
(160.1)
25.8
(134.3)
(i) The capitalisation rate applied in determining the amount of borrowing costs to capitalise in the period was 6.62% (2009 – 5.46%).
Recognised in equity
(Losses)/gains on effective portion of cash flow hedges (i)
Share of jointly controlled entity/associate (losses)/gains on effective portion of cash flow hedges (i)
(i) Before deduction of tax.
2010
£m
(26.6)
(30.0)
(56.6)
2009
£m
22.9
4.4
27.3
101
Introduction to SSE
Directors’ report
Financial statements
Shareholder information
2010
£m
2009
£m
(265.3)
(134.3)
(33.8)
(73.3)
(107.1)
–
36.5
(335.9)
(100.7)
127.5
3.5
13.2
(292.4)
2010
2009
Before
exceptional items
and certain
remeasurements
£m
Exceptional
items and certain
remeasurements
£m
(33.6)
(94.6)
(128.2)
0.6
(25.8)
(287.7)
(135.3)
130.1
5.1
–
(287.8)
Total
£m
298.6
(10.1)
288.5
Adjusted net finance costs are arrived at after the following adjustments:
Net finance costs
(add)/less:
Share of interest from jointly controlled entities and associates:
Scotia Gas Networks loan stock
Other jointly controlled entities and associates
Accretion of convertible debt component
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
Finance lease charges
Adjusted finance income and costs for interest cover calculations
7. TAxATiON
Analysis of charge recognised in the income statement:
Before
exceptional items
and certain
Exceptional
items and certain
remeasurements remeasurements
£m
£m
Current tax
UK corporation tax
Adjustments in respect of previous years
Total current tax
Deferred tax
Current year
Adjustments in respect of previous years
Total deferred tax
277.4
(19.1)
258.3
32.2
1.7
33.9
–
–
–
110.9
–
110.9
Total
£m
277.4
(19.1)
258.3
143.1
1.7
144.8
298.6
(10.1)
288.5
13.8
(1.7)
12.1
–
–
–
(359.6)
–
(345.8)
(1.7)
(359.6)
(347.5)
Total taxation charge/(credit)
292.2
110.9
403.1
300.6
(359.6)
(59.0)
The charge/(credit) 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/(loss) before tax
Tax on profit/(loss) on ordinary activities at standard UK corporation
tax rate of 28% (2009 – 28%)
Tax effect of:
Expenses not deductible for tax purposes
Non taxable income
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
Effect of enhanced reliefs and incentives
Other items
Group tax charge/(credit) and effective rate
2010
£m
1,638.6
(109.8)
1,528.8
428.1
7.6
(2.3)
(0.2)
(17.4)
(9.8)
–
(2.4)
(0.5)
403.1
2010
%
28.0
0.5
(0.2)
–
(1.1)
(0.6)
–
(0.2)
–
26.4
2009
£m
53.3
(81.6)
(28.3)
(7.9)
3.7
(34.4)
0.3
(11.8)
(9.1)
(1.5)
–
1.7
(59.0)
2009
%
28.0
(13.1)
121.5
(1.1)
41.7
32.2
5.3
–
(6.0)
208.5
102
Scottish and Southern Energy
Annual Report 2010
Notes on the financial statements (continued)
for the year ended 31 March
7. TAxATiON (continued)
The adjusted current tax charge is arrived at after the following adjustments:
Total taxation charge/(credit)
Effect of adjusting items (see below)
Total taxation charge/(credit) on adjusted basis
(add)/less:
Share of current tax from jointly controlled entities and associates
Exceptional items
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:
2010
£m
403.1
–
403.1
15.8
–
(110.9)
(33.9)
274.1
2010
%
26.4
4.8
31.2
1.2
–
(8.6)
(2.6)
21.2
Profit before tax
(add)/less:
Exceptional items and certain remeasurements
Share of tax from jointly controlled entities and associates
Accretion of convertible debt component
Adjusted profit before tax
Tax (credit)/charge recognised directly in equity
Relating to:
Pension scheme actuarial movements
Cash flow and net investment hedge movements
Share based payments
2009
£m
(59.0)
–
(59.0)
11.9
5.7
353.9
(12.1)
300.4
2010
£m
1,638.6
(398.6)
50.1
–
1,290.1
2009
%
208.5
(213.2)
(4.7)
1.0
0.5
28.2
(1.0)
24.0
2009
£m
53.3
1,160.5
39.3
0.6
1,253.7
2010
£m
2009
£m
142.5
(15.3)
0.4
(157.4)
(78.1)
(34.5)
2.7
(109.9)
All tax recognised directly in equity is deferred tax other than £nil (2009 – £(0.5)m) current tax relating to employee share awards.
8. DiviDENDS
Amounts recognised as distributions from equity:
Final dividend for the previous year of 46.2p (2009 – 42.4p) per share
Interim dividend for the current year of 21.0p (2009 – 19.8p) per share
2010
£m
425.1
193.4
618.5
2009
£m
370.0
181.9
551.9
Proposed final dividend for the current year of 49.0p (2009 – 46.2p) per share
452.3
425.2
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 for the previous year, £425.1m (46.2p, 2009 – 42.4p), was declared on
21st May 2009, approved at the Annual General Meeting on 23rd July 2009 and was paid to shareholders on 25th September 2009.
An interim dividend for the current year, £193.4m (21.0p, 2009 – 19.8p), was paid on 26th March 2010.
103
Introduction to SSE
Directors’ report
Financial statements
Shareholder information
9. EARNiNGS PER ShARE
Basic earnings per share
The calculation of basic earnings per share at 31 March 2010 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 2010. 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 certain remeasurements as described in note 4.
Basic
Exceptional items and certain remeasurements (note 4)
Basic excluding exceptional items and certain remeasurements
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 remeasurements
Diluted excluding exceptional items and certain remeasurements
(i) Earnings attributable to equity holders of the parent.
The weighted average number of shares used in each calculation is as follows:
For basic and adjusted earnings per share
Effect of exercise of share options
Effect of dilutive convertible debt
For diluted earnings per share
Year ended
31 March
2010
Earnings (i)
£m
1,235.3
(287.7)
947.6
33.9
34.3
–
134.0
(31.2)
102.8
3.7
3.7
–
1,015.8
110.2
1,235.3
–
–
1,235.3
(287.7)
947.6
134.0
–
(0.1)
133.9
(31.2)
102.7
Year ended
31 March
2010
Earnings
per share
pence
Year ended
31 March
2009
Earnings (i)
£m
Year ended
31 March
2009
Earnings
per share
pence
112.3
800.9
913.2
12.1
27.4
0.6
953.3
112.3
1.2
–
113.5
800.9
914.4
12.7
90.7
103.4
1.4
3.1
0.1
108.0
12.7
0.1
–
12.8
90.5
103.3
31 March 2010
Number of
shares
(millions)
31 March 2009
Number of
shares
(millions)
921.9
0.4
922.3
0.7
923.0
883.0
0.8
883.8
1.7
885.5
104
Scottish and Southern Energy
Annual Report 2010
Notes on the financial statements (continued)
for the year ended 31 March
10. iNTANGiBLE ASSETS
Consolidated
Cost:
At 1 April 2008
Prior year acquisitions
Additions
Acquisitions
Transfer to property, plant and
equipment (note 11)
Disposals
Exchange adjustments
At 31 March 2009
Additions
Acquisitions (note 15)
Transfer to property, plant and
equipment (note 11)
Disposals
Exchange adjustments
At 31 March 2010
Aggregate amortisation and impairment:
At 1 April 2008
Charge for the year
At 31 March 2009
Charge for the year
At 31 March 2010
Carrying amount:
At 31 March 2010
At 31 March 2009
At 1 April 2008
Allowances
and Development
Wind farm
assets developments
(iii)
£m
(ii)
£m
Brands
(iv)
£m
Other
intangibles
(v)
£m
–
–
–
–
–
–
–
–
0.5
36.5
–
–
–
222.7
1.1
33.3
147.9
(213.0)
–
28.3
220.3
13.3
12.5
(11.7)
–
(7.3)
11.4
–
–
–
–
–
0.4
11.8
–
–
–
–
–
47.3
8.8
2.4
–
–
–
1.3
59.8
1.6
2.0
–
–
–
37.0
227.1
11.8
63.4
1,295.3
Total
£m
1,085.7
11.1
353.7
169.9
(213.0)
(260.4)
89.2
1,236.2
486.3
69.5
(11.7)
(461.5)
(23.5)
Goodwill
£m
certificates
(i)
£m
659.0
1.2
–
22.0
–
(17.4)
59.2
724.0
–
18.5
–
–
(16.2)
726.3
–
–
–
–
–
145.3
–
318.0
–
–
(243.0)
–
220.3
470.9
–
–
(461.5)
–
229.7
(6.4)
–
(6.4)
(10.0)
(16.4)
–
–
–
–
–
(2.0)
(2.2)
(4.2)
(3.1)
(7.3)
726.3
724.0
659.0
213.3
213.9
138.9
37.0
–
–
219.8
216.1
220.7
(3.7)
(1.1)
(4.8)
(1.0)
(5.8)
6.0
7.0
7.7
(18.8)
(11.1)
(29.9)
(8.1)
(38.0)
(30.9)
(14.4)
(45.3)
(22.2)
(67.5)
25.4
29.9
28.5
1,227.8
1,190.9
1,054.8
2010
£m
213.3
726.3
288.2
2009
£m
213.9
724.0
253.0
1,227.8
1,190.9
The Company does not hold intangible assets.
Intangible assets have been analysed as current and non-current as follows:
Current
Non-current:
Goodwill
Other
105
Introduction to SSE
Directors’ report
Financial statements
Shareholder information
(i) Allowances and Certificates
Allowances and Certificates consist of purchased carbon emissions allowances and generated or purchased renewable
obligations certificates (ROCs).
(ii) Development assets
Development costs relate to the design, construction and testing of thermal and renewable generation sites and 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 or at cost 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). At the point a project
is no longer expected to reach the consent stage, the carrying amount of the project is impaired. The acquisitions in the year
includes all items in note 15.
(iv) Brands
Included within brands are the acquired brands of Atlantic Electric and Gas and the Airtricity supply brand used in Ireland. The
Group has assessed the economic life of brands to be 10 years and the brands are being amortised over this period. The charge
is reported as part of operating costs.
(v) Other intangible assets
Included within other intangible assets are customer lists, contracts, application software license fees, software development work,
software upgrades and purchased PC software packages. Amortisation is over the shorter of the contract term or five years.
impairment review of goodwill
Goodwill is allocated to those cash-generating units (CGUs) expected to benefit from the respective business combination
for impairment testing purposes. Certain goodwill valuations have changed in the current year following retranslation.
A summary of the goodwill allocated to CGUs and the Group’s operating segments is presented below:
Cash-generating unit
Ireland wind farms
UK wind farms
European wind farms
UK Supply
UK Generation
Gas Storage
Other (i)
Operating Segment
Generation and Supply
Generation and Supply
Generation and Supply
Generation and Supply
Generation and Supply
Other Businesses
Other Businesses
2010
£m
160.3
232.0
24.4
187.0
50.5
58.7
13.4
726.3
2009
£m
164.4
241.0
24.3
187.0
40.0
56.2
11.1
724.0
(i) Represents goodwill balances across a number of business units. The amount of goodwill allocated to these units is not significant compared to
the aggregate carrying value of the business units or the aggregate value of goodwill held by the Group. The conclusion of the impairment tests
conducted is that no impairment is required.
The recoverable amount of the UK Supply, UK Generation, Gas Storage and Other CGUs is determined by reference to value-in-use
calculations. These calculations use, as a starting point, pre-tax cash flow projections based on the Group’s five year business model
as approved by the Board. The Group’s business model is based on past experience and reflects the Group’s view of markets, prices,
risks and its strategic objectives. Commodity prices used are based on observable market data and, where this is not available, on
internal estimates. The recoverable amount of the wind farm CGUs is based on the fair value less costs to sell methodology. The basis
applied has been deemed appropriate as it is consistent with the way in which the economic value of the individual CGUs are assessed
by management and would be by other market participants. The method applied is to determine fair value by assessing the discounted
pre-tax cash flows expected to be earned by the individual wind farm projects within the respective CGUs. The three identified CGUs
(Ireland wind farms, UK wind farms, European wind farms) share many of the same risk factors and are discounted accordingly.
106
Scottish and Southern Energy
Annual Report 2010
Notes on the financial statements (continued)
for the year ended 31 March
10. iNTANGiBLE ASSETS (continued)
The key assumptions used for the main value-in-use calculations are as follows:
Cash-generating unit
All wind farms (onshore and offshore)
UK Supply
UK Generation (excluding wind)
Gas Storage
2010
Discount rate
(%)
2009
Discount rate
(%)
9.5%-11.5% 10.0%-12.0%
12.2%
10.5%
11.0%
10.2%
10.8%
10.8%
2010 and 2009
Cash flow
projection
period (years)
25
5
15
20
Management have determined the pre-tax cash flows of each CGU based on past performance and its expectations of market
development. Further detail on how the cash flow projections have been derived is included in the specific commentaries. The
discount rates used are pre-tax nominal and reflect specific risks attributable to the relevant operating segments. The discount
rates used have been benchmarked against externally published rates used by comparable quoted companies operating in the
respective market sectors. The inflation rates used in estimating future income and expenditure are based on publicly available
forecasts for the areas of operation of the CGU and internal estimates. These have been set at 2.5% for all territories. The
recoverable amount derived from the value-in-use calculation is compared to the carrying amount of each CGU to determine
whether the respective CGUs require to be impaired.
Specific comments on the key value-in-use and fair value less costs to sell calculations for the main CGUs and the results
of the tests conducted follow:
All wind farm CGus
For goodwill impairment testing purposes, all wind farm CGUs were established following the acquisition of the Airtricity group
in 2008. In order to assess the respective recoverable amounts against an appropriate carrying value, goodwill has been allocated
to the main geographic regions in which the business operates. The established CGUs (Ireland, UK, rest of Europe) are then assessed
by considering the specific market attributes of those regions. Currency cash flows are set at the exchange rate at the time the
impairment test is conducted. Aside from these specific market factors, the basis of review of the respective CGUs is identical.
Wind farm projects have an estimated useful life of up to 25 years and it is considered appropriate by management to assess the
carrying amount against cash flow projections covering this period. The Ireland and UK wind CGUs include wind farms in operation
and all CGUs include projects in the construction phase or in the development portfolio phase. These development projects are those
which have not received consent or have not concluded all environmental or planning studies and as a consequence the associated
cash flows have been probability adjusted.
Cash inflows for all projects are based on expected generation output from projects based on wind studies and past experience
and are valued at forward power prices based on market information, where available, continuing government support for wind
ROCs and internal model assumptions.
Cash outflows are based on planned capital expenditure and expected maintenance costs. The power prices and costs of operation
are the most significant distinguishing factors in the respective CGU regions. Growth is based on the expected output of the
respective wind farms at their available operational capacity over their life cycle.
Outcome of tests
The recoverable amounts of all wind farms CGUs exceeded the respective carrying values at the time of the impairment test.
While cash flow projections are subject to inherent uncertainty, reasonably possible changes in the key assumptions applied
in assessing the fair value less costs-to-sell would not cause a change to the conclusion reached.
107
Introduction to SSE
Directors’ report
Financial statements
Shareholder information
uK Supply
Goodwill carried in relation to the acquisition, in 2001, of Swalec is attributed to the Group’s UK retail electricity and gas supply
business CGU. The Group manages its’ UK Generation and Supply activities as one integrated business but for the purposes of
the value-in-use calculation only, the projected cash flows of the Supply business are considered independently. This is reliant on
judgement being applied in relation to the margin being earned by the Supply business. The margin assumed is based on current
contractual terms and historic gross margin percentages earned. Revenues are based on the expected market share derived from
the market share at the time of the approval of the business model adjusted for forecasted growth. Growth in customer numbers
is anticipated at around 2.6% per annum over the forecast period and cash outflows associated with increased customer service
are incorporated accordingly. This growth rate is supported by reference to both past performance and management expectation.
Margins also take account of forward wholesale energy price curves for both electricity and gas. The CGU excludes the Airtricity
supply business in Ireland, which did not have goodwill attributed to it in any event.
Outcome of test
The recoverable amount of the UK Supply CGU exceeded the respective carrying value at the time of the impairment test. While cash
flow projections are subject to inherent uncertainty, reasonably possible changes in the key assumptions applied in assessing the
value-in-use would not cause a change to the conclusion reached.
uK Generation (excluding wind)
Goodwill recognised on the Group’s acquisition of Fiddler’s Ferry and Ferrybridge (FFF) and Medway is attributed to the UK
Generation portfolio CGU. These plants are operated as part of the integrated Generation and Supply business segment. For the
purpose of the value-in-use calculation only, the projected cash flows of the main UK Generation plants have been considered as an
independent CGU. The plants included in this CGU include all gas, coal and hydro generation plants but excludes cash flows from
contract energy plants, combined heat and power plants and embedded generation plants, as these plants operate independently
of the main generation production portfolio.
Assumptions on market prices are made by reference to forward market prices and published market estimations, where available,
and to internal model inputs beyond the observable period. Prices forecast include wholesale power prices and input costs such as
wholesale gas prices, coal and oil prices as well as carbon emissions costs. Forecasts of availability and efficiency are based on
management expectation and past performance. Historic average temperatures and rainfall have been assumed. The period of the
cash flow projections applied is between 5 and 10 years but it should be noted that the assets which are the basis of the review have
remaining useful economic lives of between 15 and, in the case of hydro civil assets, 100 years. The discount rates applied have been
standardised at a pre-tax nominal rate of 10.8%, compared with 10.5% in the prior year. Growth has been assumed to follow the
expected operational availability of the plants within the CGU over the period noted.
Outcome of test
The recoverable amount of the main UK Generation CGU exceeded its carrying value at the time of the impairment test. While cash
flow projections are subject to inherent uncertainty, reasonably possible changes in the key assumptions applied in assessing the
value-in-use would not cause a change to the conclusion reached.
Gas Storage
Goodwill was recognised on the acquisition of the Hornsea gas storage facility in 2002/03. Initial cash flow projections are based
on gross margins expected to be achieved in the period of the five year business model. Beyond this period, cash flows have been
extrapolated at a growth rate lower than the long-term growth rate of the economy for a further period of 15 years, which takes the
CGU toward the end of its expected economic life. This longer period more accurately reflects the long-term infrastructure nature
of these assets and the returns that can be expected to be earned. Assumptions on margin for the business plan period are based
on expected demand for gas storage and take into account published and projected gas wholesale prices, planned capital expenditure
required to maintain the value of the facility and estimated operating costs.
Outcome of test
The recoverable amount of the gas storage CGU exceeded its carrying value at the time of the impairment test. While cash flow
projections are subject to inherent uncertainty, reasonably possible changes in the key assumptions applied in assessing the
value-in-use would not cause a change to the conclusion reached.
108
Scottish and Southern Energy
Annual Report 2010
Notes on the financial statements (continued)
for the year ended 31 March
11. PROPERTY, PLANT AND EquiPMENT
Consolidated
Cost:
At 1 April 2008
Prior year acquisitions
Additions
Transfer from Intangible Assets (note 10) (iii)
Disposals
Disposal of 50% of Greater Gabbard (iv)
Exchange rate adjustments
At 31 March 2009
Additions
Recognition of finance leases (vi)
Acquisitions (note 15) (ii)
Transfer from Intangible Assets (note 10) (iii)
Disposals
Exchange rate adjustments
At 31 March 2010
Depreciation:
At 1 April 2008
Charge for the year
Disposals
Exchange rate adjustments
At 31 March 2009
Charge for the year (v)
Disposals
Exchange rate adjustments
At 31 March 2010
Net book value
At 31 March 2010
At 31 March 2009
At 1 April 2008
Power
generation and
gas storage
assets
£m
Land and
buildings
£m
Vehicles and
Network miscellaneous
equipment
£m
assets
£m
4,217.1
(4.2)
813.9
213.0
–
(397.4)
124.8
4,967.2
531.5
387.8
6.4
11.7
(67.9)
(35.2)
145.9
–
65.4
–
–
–
–
211.3
29.2
–
7.3
–
–
–
4,875.0
–
368.1
–
(3.4)
–
–
5,239.7
387.2
–
7.5
–
(2.2)
–
260.9
–
43.4
–
(9.4)
–
–
294.9
39.3
–
5.2
–
(65.5)
(0.7)
Total
£m
9,498.9
(4.2)
1,290.8
213.0
(12.8)
(397.4)
124.8
10,713.1
987.2
387.8
26.4
11.7
(135.6)
(35.9)
5,801.5
247.8
5,632.2
273.2
11,954.7
1,008.1
156.8
–
11.2
1,176.1
183.8
(46.1)
(3.7)
1,310.1
4,491.4
3,791.1
3,209.0
27.0
4.6
–
–
31.6
5.7
–
–
37.3
1,944.0
137.4
(3.3)
–
2,078.1
145.0
(0.7)
–
185.5
17.1
(7.4)
(0.1)
195.1
21.9
(35.8)
(0.5)
3,164.6
315.9
(10.7)
11.1
3,480.9
356.4
(82.6)
(4.2)
2,222.4
180.7
3,750.5
210.5
179.7
118.9
3,409.8
3,161.6
2,931.0
92.5
99.8
75.4
8,204.2
7,232.2
6,334.3
(i) The net book value of generation and gas storage assets includes decommissioning costs with a net book value of £22.0m, (2009 – £21.8m).
In the year to 31 March 2010 the net book value of decommissioning costs related to office and computer equipment was reduced by £0.6m
to £1.3m (2009 – £1.9m). This arises from the Group’s obligations under the EU Waste Electrical and Electronic Equipment (WEEE) directive.
(ii) In the year to 31 March 2010, assets acquired in business combinations included the coal-fired generation assets at Uskmouth, the network
assets of Atlasconnect Ltd, the data centre assets of Cantono data centre and the operational assets of the ESBC street-lighting business.
(iii) 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.
(iv) On disposal of 50% of the shareholding of Greater Gabbard Offshore Winds, the value of property, plant and equipment expended to the date of
disposal was part refunded by the acquiring joint venture partner, RWE Innogy, and partly equity accounted as the investment in the joint venture
(see note 15).
(v) There were no impairment charges in the year (2009 – £nil).
(vi) Of this total £369.3m relates to the recognition of the power purchase agreement entered into with Marchwood Power Ltd.
Land and buildings is predominantly heritable or freehold. Generation assets comprise generating stations and related plant
and machinery and include all hydro civil assets.
109
Introduction to SSE
Directors’ report
Financial statements
Shareholder information
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
Network assets
Corporate land and buildings
2010
£m
784.0
204.7
1.9
990.6
2009
£m
464.9
124.5
58.3
647.7
Included within the assets in the course of construction is the Group’s share of expenditure on the Aldbrough gas storage facility.
Included within property, plant and equipment are the following assets held under finance leases:
Cost
At 1 April 2008
Disposal
At 31 March 2009
Additions
At 31 March 2010
Depreciation
At 1 April 2008
Charge for the year
At 31 March 2009
Charge for the year
At 31 March 2010
Net book value
At 31 March 2010
At 31 March 2009
At 1 April 2008
Power
generation and
gas storage
assets
£m
Vehicles and
Network miscellaneous
equipment
£m
assets
£m
–
–
–
387.8
387.8
–
–
–
11.3
11.3
376.5
–
–
5.1
(0.1)
5.0
–
5.0
4.7
0.3
5.0
–
5.0
–
–
0.4
7.0
–
7.0
–
7.0
6.2
0.8
7.0
–
7.0
–
–
0.8
Total
£m
12.1
(0.1)
12.0
387.8
399.8
10.9
1.1
12.0
11.3
23.3
376.5
–
1.2
The Company does not hold any property, plant or equipment.
12. BiOLOGiCAL ASSETS
The Group acquired approximately 2,394 hectares of forest land including planted trees during the year. The living trees are accounted
for as biological assets and are disclosed in the table below:
At 1 April
Purchases during the year
At 31 March
2010
£m
–
4.4
4.4
The pre-tax discount rate used in determining the fair value in 2010 was 8.0%. A 2.0% decrease/(increase) in the discount rate would
increase/(decrease) the fair value of biological assets by approximately £0.6m.
No trees were harvested during the year.
The Company does not hold any biological assets.
110
Scottish and Southern Energy
Annual Report 2010
Notes on the financial statements (continued)
for the year ended 31 March
13. iNvESTMENTS
(a) Associates and joint ventures
Consolidated
Share of net assets/cost
At 1 April 2008
Transfer out (i)
Transfer in (ii)
New equity investments
Increase in shareholder loans
Repayment of shareholder loans
Dividends received
Share of profit after tax
Share of other reserves adjustments
Exchange rate adjustments
At 31 March 2009
Transfer (out)/in (iii)
Disposal
New equity investments
Increase in shareholder loans
Repayment of shareholder loans
Conversion of loan to equity
Dividends received
Share of profit after tax
Share of other reserves adjustments
Exchange rate adjustments
Scotia Gas Networks
Other jointly
controlled entities
Associates
Investment
£m
Shareholder
loans
£m
Investment
£m
Shareholder
loans
£m
Investment
£m
Shareholder
loans
£m
219.1
–
–
–
–
–
(45.0)
38.1
(54.6)
–
157.6
–
–
–
–
–
–
–
55.6
(57.8)
–
281.9
–
–
–
–
(15.0)
–
–
–
–
266.9
–
–
–
16.6
(16.6)
–
–
–
–
–
207.1
(38.0)
36.8
25.5
–
–
(14.5)
9.9
19.5
10.8
257.1
(8.6)
(1.0)
16.8
–
–
–
(8.5)
28.9
(14.0)
(6.7)
92.9
–
–
–
22.2
(19.7)
–
–
–
–
95.4
–
–
–
11.4
(17.9)
–
–
–
–
–
88.9
116.8
–
–
13.6
–
–
(25.3)
33.6
–
–
138.7
18.8
–
45.0
–
–
3.2
(15.2)
25.3
–
–
–
–
–
3.0
–
–
–
–
–
–
3.0
–
–
–
46.5
–
(3.2)
–
–
–
–
Total
£m
917.8
(38.0)
36.8
42.1
22.2
(34.7)
(84.8)
81.6
(35.1)
10.8
918.7
10.2
(1.0)
61.8
74.5
(34.5)
–
(23.7)
109.8
(71.8)
(6.7)
At 31 March 2010
155.4
266.9
264.0
215.8
46.3
1,037.3
(i) At 14 May 2008, the Group acquired the 50% of Greater Gabbard Offshore Winds Limited not already carried, for a net consideration of £33.4m,
including cash of £40.0m. At this point, the Group assumed 100% ownership and consequently the carrying value held as investment in jointly
controlled entities was transferred with the entity being fully consolidated in the accounts.
(ii) At 3 November 2008, the Group disposed of 50% of Greater Gabbard Offshore Winds Limited and consequently recognised the remaining fair value
equity investment as investment in jointly controlled entities at that point. The Group also has an interest-bearing loan of £426.9m (2009 – £183.5m)
in the venture.
(iii) Transfers (out)/in represent £8.6m of investment in Aquamarine Limited which has been reclassified as an associate from a joint venture
following a reduction in our shareholding from 50.0% to 47.8%, £10.0m in relation to RockTron (Widnes) Limited, where we have increased our
shareholding from 17.5% to 49.9%, and £0.2m in relation to Smarter Grid Solutions Limited, which has been transferred to associates as the
Group’s shareholding has increased from 12.5% to 29.9%.
Company
Share of net assets/cost
At 1 April 2008
Repayment of shareholder loans
Dividend received
At 31 March 2009
Transferred from other investments
Repayment of shareholder loans
Increase in shareholder loan
New equity investments
At 31 March 2010
Scotia Gas Networks
Other joint ventures
and associates
Investment
£m
Shareholder
loans
£m
Investment
£m
Shareholder
loans
£m
Total
£m
235.0
–
(45.0)
190.0
–
–
–
–
190.0
281.9
(15.0)
–
266.9
–
(16.6)
16.6
–
266.9
–
–
–
–
10.0
–
–
7.0
17.0
–
–
–
–
–
–
–
–
–
516.9
(15.0)
(45.0)
456.9
10.0
(16.6)
16.6
7.0
473.9
The investment in Scotia Gas Networks is disclosed separately to aid understanding of the Group’s financial performance.
111
Introduction to SSE
Directors’ report
Financial statements
Shareholder information
Details of the principal jointly controlled entities, operations and associates are as follows:
Country of
incorporation
31 March 2010
holding %
31 March 2009
Holding % Principal activity
Jointly Controlled Entities
PriDE (SERP) Limited (ii)
Seabank Power Limited (iii)
Scotia Gas Networks Limited (v)
Marchwood Power Limited (i)
Braes of Doune Wind Farm (Scotland)
Scotland
Limited (vi)
Midas Energy Limited (vi)
Republic of Ireland
Greater Gabbard Offshore Winds Limited (vi) England and Wales
IE CHP (UK and Eire) Limited (iv)
Greenway Energy Limited
England and Wales
England and Wales
England and Wales
England and Wales
Scotland
Republic of Ireland
Associates
England and Wales
Barking Power Limited (i)
England and Wales
Derwent Co-generation Limited (i)
Scotland
Aquamarine Power Limited (iv)
England and Wales
Vital Holdings Limited (iv)
England and Wales
Insource Energy Limited (iv)
England and Wales
Onzo Limited (iv)
England and Wales
Geothermal International Limited (iv)
England and Wales
RockTron (Widnes) Limited
Smarter Grid Solutions Limited (iv)
England and Wales
Walney (UK) Offshore Windfarms Limited (vi) England and Wales
50.0
50.0
50.0
50.0
50.0
50.0
50.0
50.0
50.0
30.0
49.5
47.8
30.0
35.0
24.5
20.0
49.9
29.9
25.1
50.0 Defence estates contractor
50.0 Electricity generation
50.0 Investment in gas networks
50.0 Electricity generation
50.0 Wind generation
50.0 Wind generation
50.0 Wind development
50.0 Fuel cell power systems
50.0 Wind Development
30.0 Electricity generation
49.5 Electricity generation
50.0 Marine energy conversion
30.0 Efficient energy provision
33.3 Energy and waste management
24.5 Energy displays
20.0 Ground source heat pump systems
17.5 Ash Separation Plant
12.5 Active Network Management
– Offshore wind development
Location of
operations
31 March 2010
holding %
31 March 2009
Holding % Principal activity
Jointly Controlled Operations
(unincorporated)
Aldbrough
Beatrice
England
Scotland
66.7
50.0
66.7 Development of gas storage facility
50.0 Development of offshore wind farm facility
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 Southern Electric Contracting 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 SSE Renewables Holdings Limited (or subsidiaries)
At 31 March 2010, the Group had invested £40.4m (2009 – £35.8m) in Marchwood Power Limited. In addition to this, the Group had
provided interest-bearing loans of £141.5m (2009 – £123.0m) to Marchwood Power and £426.9m (2009 – £183.5) to Greater Gabbard
Offshore Winds, which are reported in other receivables (note 17).
112
Scottish and Southern Energy
Annual Report 2010
Notes on the financial statements (continued)
for the year ended 31 March
13. iNvESTMENTS (continued)
The material significance of the Scotia Gas Networks Limited 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 Limited, of which the Group has a 50% share, can be illustrated thus:
2010
2009
Before
exceptional items
and certain
Exceptional
items and certain
remeasurements remeasurements
£m
£m
Operating profit
Finance costs: excluding loan stock
Finance costs: interest on loan stock
Profit before tax
Taxation
Profit for the year
367.3
(126.0)
(67.5)
173.8
(67.5)
106.3
–
6.8
–
6.8
(1.9)
4.9
Before
exceptional items
and certain
remeasurements
£m
Exceptional
items and certain
remeasurements
£m
361.0
(173.0)
(67.1)
120.9
(52.4)
68.5
–
10.8
–
10.8
(3.0)
7.8
Total
£m
367.3
(119.2)
(67.5)
180.6
(69.4)
111.2
Total
£m
361.0
(162.2)
(67.1)
131.7
(55.4)
76.3
SSE share of profit
53.2
2.4
55.6
34.2
3.9
38.1
As an investor, Scottish and Southern Energy plc received £33.8m (2009 – £33.6m) in relation to loan stock interest payable to the Group.
The balance sheet of Scotia Gas Networks Limited can be summarised as follows (100%):
Scotia Gas Networks Limited
31 March 2010
31 March 2009
Non-current
assets
£m
5,331.3
5,042.0
Current
assets
£m
271.6
184.2
Current
liabilities
£m
Non-current
liabilities
£m
(672.6)
(262.8)
(4,619.4)
(4,648.0)
The financial statements of the Group’s other jointly controlled entities and associates can be summarised as follows (100%):
Jointly Controlled Entities
31 March 2010
31 March 2009
Associates
31 March 2010
31 March 2009
(b) Other investments
At 1 April 2008
Additions in the year
Disposals in the year
At 31 March 2009
Additions in the year
Transfers to Associates in the year
At 31 March 2010
Current
assets
£m
Non-current
assets
£m
Current
liabilities
£m
Non-current
liabilities
£m
Revenues
£m
Profit
after tax
£m
166.0
122.3
1,179.8
554.6
(135.3)
(1,002.8)
(91.6)
(411.6)
415.3
320.3
188.2
163.9
438.5
453.3
(116.6)
(108.0)
(110.6)
(140.8)
451.2
570.7
Solarcentury
£m
Sigma
£m
RockTron
£m
4.1
–
–
4.1
–
–
4.1
1.3
1.1
–
2.4
0.5
–
2.9
–
10.0
–
10.0
–
(10.0)
–
Other
£m
0.6
1.4
(0.2)
1.8
0.6
(0.2)
2.2
68.8
21.7
74.6
99.6
Total
£m
6.0
12.5
(0.2)
18.3
1.1
(10.2)
9.2
113
Introduction to SSE
Directors’ report
Financial statements
Shareholder information
14. SuBSiDiARY uNDERTAKiNGS
Details of the principal subsidiary undertakings are as follows:
Country of
incorporation
2010
holding %
2009
Holding %
Principal activity
England and Wales
England and Wales
Ireland
Scotland
England and Wales
England and Wales
England and Wales
SSE Services plc (i)
SSE Energy Supply Limited (i)
SSE Renewables Holdings Limited (i)
SSE Telecommunications Limited (i)
SSE Generation Limited (i)
Medway Power Limited (ii)
Keadby Generation Limited (viii)
SSE Renewables Developments (UK) Limited (ix) Northern Ireland
SSE Renewables (Ireland) Limited (iii)
Airtricity Limited (iii)
Airtricity Energy Supply (Northern Ireland) Limited (x) Northern Ireland
Scottish Hydro Electric Transmission Limited (iv) Scotland
Scottish Hydro Electric Power Distribution plc (iv) Scotland
Southern Electric Power Distribution plc (iv)
S+S Limited (iv)
SSE Contracting Group Limited (i)
Southern Electric Contracting Limited (v)
Southern Electric Gas Limited (vi)
SSE Hornsea Limited (vi)
Neos Networks Limited (vii)
England and Wales
Scotland
England and Wales
England and Wales
England and Wales
England and Wales
England and Wales
Ireland
Ireland
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
Finance and IT support services
Electricity supply
100
100
100 Wind farm developer
Telecommunication services
100
Electricity generation
100
Electricity generation
100
100
Electricity generation
100 Wind generation development
100 Wind generation development
100
100
100
100
100
100
100
100
100
100
100
Energy supply
Energy supply
Transmission of electricity
Distribution of electricity
Distribution of electricity
Electricity connections
Holding company
Electrical contractor
Gas supply
Gas storage
Telecommunication services
The above companies’ shares consist of Ordinary Shares only. All companies operate in Great Britain and Ireland. All companies
have accounting periods ending on 31 March.
Shares in the above subsidiaries are held by:
(i) Scottish and Southern Energy plc
(ii) SSE Generation Limited
(iii) SSE Renewables Holdings Limited
(iv) SSE Power Distribution Limited
(v) SSE Contracting Group Limited
(vi) SSE Energy Supply Limited
(vii) SSE Telecommunications Limited
(viii) Keadby Power Limited
(ix) SSE Renewables Holdings (UK) Limited
(x) SSE Renewables Group (UK) Limited
investment in subsidiaries
Company
At 1 April 2008
Increase in existing investments (i)
At 31 March 2009
Increase in existing investments (i)
At 31 March 2010
Total
£m
2,137.8
16.4
2,154.2
17.9
2,172.1
(i) 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.
114
Scottish and Southern Energy
Annual Report 2010
Notes on the financial statements (continued)
for the year ended 31 March
14. SuBSiDiARY uNDERTAKiNGS (continued)
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
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 since the Group bears the majority of the risks and rewards. 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 share capital of entities which perform 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 (Finance) Limited
Ealing Lighting (Finance) Limited
Islington Lighting (Finance) Limited
Council
Dorset County Council
London Borough of Ealing
London Borough of Islington
Finally, the Group has entered into arrangements to operate services under three new PFI contracts from 1 April 2010. The council
and the contract holder, which are wholly owned, are as follows:
Company
Tay Valley Lighting (Hampshire) Limited
Tay Valley Lighting (Southampton) Limited
Tay Valley Lighting (West Sussex) Limited
Characteristics of the arrangements
Council
Hampshire County Council
Southampton City Council
West Sussex County Council
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 licensed 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 a percentage 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.
15. ACquiSiTiONS AND DiSPOSALS
(a) Acquisitions
In the year, the Group acquired the following companies.
Entity acquired
Country of incorporation
Date of acquisition
Abernedd Power Company Limited (i)
Slieve Divena Wind Farm No 2 Ltd (ii)
Cantono Data Centre (Business) (iii)
Uskmouth Power Company Limited (iv)
Munkflohogen Airtricity Vind AB (ii)
Gaxsjohojden Airtricity Vind AB (ii)
ESBC Streetlighting (Business) (v)
Atlasconnect Limited (iii)
Veddige Vindkraft AB (ii)
England and Wales
Northern Ireland
Unincorporated
England and Wales
Sweden
Sweden
Unincorporated
Scotland
Sweden
20 May 2009
22 May 2009
31 May 2009
13 August 2009
17 September 2009
17 September 2009
30 November 2009
09 March 2010
15 March 2010
115
Introduction to SSE
Directors’ report
Financial statements
Shareholder information
Shareholding
acquired
Provisional
consideration
£m
100%
100%
100%
100%
97%
97%
100%
100%
100%
39.3
7.3
5.8
27.4
1.9
1.2
5.8
0.8
2.3
91.8
The acquired businesses conduct the following activities: (i) thermal generation development, (ii) construction and development
of wind farms, (iii) telecoms services, (iv) thermal power station, (v) street-lighting maintenance contractor.
The provisional book values and fair values of the assets and liabilities acquired were as follows:
Goodwill
Intangible assets
Property, plant and equipment
Cash and cash equivalents
Other net current liabilities
Deferred tax
Net assets
Less: Non controlling interest
Total consideration
Carrying value
of acquired
entities
£m
Fair value of
acquired
entities
£m
4.1
0.5
93.4
9.7
(2.0)
–
105.7
18.5
51.0
26.4
9.7
(21.2)
7.5
91.9
(0.1)
91.8
The non-controlling interest values were calculated by taking a proportionate share of the recognised amounts of the acquiring
companies identifiable net assets at the respective acquisition dates. The total consideration was represented by £67.8m cash,
including fees paid on the Group’s behalf and £24.0m deferred consideration.
No significant profit or loss was recognised from these acquisitions in the period to 31 March 2010.
(b) Acquisitions in the previous year
(i) Greater Gabbard Offshore Winds Limited (GGOWL)
GGOWL was originally a jointly controlled entity between Airtricity, acquired by SSE in February 2008, and Fluor International Limited.
The company was created specifically to develop the Greater Gabbard Offshore wind farm in the outer Thames Estuary. On 14 May
2008, Airtricity Holdings acquired the remaining 50% equity shareholding in Greater Gabbard Offshore Winds Limited (GGOWL) from
Fluor International Limited for cash consideration of £40.0m, increasing its stake from 50% to 100%. Subsequently, on 3 November
2008, Airtricity Holdings sold 50% of its equity shareholding in GGOWL to RWE Npower Renewables Limited, the UK fully owned
subsidiary of RWE Innogy GmbH.
The total proceeds on disposal was £308.5m, which comprised £165.6m reimbursement of 50% of the capital costs already incurred
in developing the project and £142.9m in relation to the 50% of the equity. The gain on sale recognised was £102.7m, which has been
disclosed separately in the income statement as an exceptional item.
116
Scottish and Southern Energy
Annual Report 2010
Notes on the financial statements (continued)
for the year ended 31 March
15. ACquiSiTiONS AND DiSPOSALS (continued)
The transactions can be summarised thus:
Acquisition of 50% on 14 May 2008:
Goodwill
Development assets
Loans
Deferred tax
Net assets
Consideration paid being:
Cash
Loans assumed
Book value of
50% acquired
£m
Fair value
acquired
£m
–
6.6
(6.6)
–
–
9.4
40.0
(6.6)
(9.4)
33.4
40.0
(6.6)
33.4
On acquisition of the second 50%, the wholly owned GGOWL entity was fully consolidated as a subsidiary in the Group. The fair values
previously attributed to jointly controlled entities established on acquisition of Airtricity Holdings were consequently transferred to
development assets. The project achieved consent in the period between full consolidation and part-disposal and as a result the
expenditure incurred at the point of Board approval was transferred from development assets to property, plant and equipment,
including the previously mentioned fair values. Consequently, at the point of disposal, a higher project book value in relation to
property, plant and equipment had been recorded than the proceeds reimbursed by RWE Innogy. This can be summarised thus:
Disposal of 50% on 3 November 2008:
Property, plant and equipment
Goodwill
Loans
Deferred tax
Net assets
50% of value of business disposed of:
Consideration paid for 50% being:
Cash received by Group
Less: contribution to loans
Less: costs of disposal
Net proceeds of disposal
Gain on disposal
Book value
£m
397.4
17.4
(331.2)
(9.4)
74.2
37.1
308.5
(165.6)
(3.1)
139.8
102.7
(ii) Other acquisitions
In the previous year, the Group also acquired the following companies, all of which are involved in the construction and development
of wind farms, with the fair value substantially relating their development potential.
Entity acquired
Country of incorporation
Date of acquisition
Aldeia Velha
Riviera Group
Nextwind S.R.L.
Airtricity Marao SA
Atlantico SA
Limerick West Windfarm Ltd
Griffin Wind Farm Ltd
Slaheny Energy Ltd
Portugal
Portugal
Italy
Portugal
Portugal
Republic of Ireland
Scotland
Republic of Ireland
14 April 2008
26 June 2008
26 June 2008
21 August 2008
14 October 2008
17 October 2008
13 January 2009
20 January 2009
Shareholding
acquired
Provisional
consideration
£m
100 %
60%
60%
90%
90%
100%
89.8%
100%
0.5
1.3
3.2
0.5
–
5.3
42.4
2.4
55.6
The provisional book values and fair values of the assets and liabilities acquired were as follows:
Goodwill
Intangible assets
Property, plant and equipment
Cash and cash equivalents
Other net current liabilities
Deferred tax
Net (liabilities)/assets
Less: Non controlling interest
Total consideration
117
Introduction to SSE
Directors’ report
Financial statements
Shareholder information
Carrying value
of acquired
entities
£m
Fair value of
acquired
entities
£m
–
–
6.1
0.1
(6.7)
–
(0.5)
12.6
69.9
0.1
0.1
(6.7)
(12.6)
63.4
(7.8)
55.6
The non-controlling interest values were calculated by taking a proportionate share of the recognised amounts of the acquiring
companies identifiable net assets at the respective acquisition dates. The total consideration was represented by £37.6m cash
and £18.0m deferred consideration.
No significant profit or loss was recognised from these acquisitions in the period to 31 March 2009.
16. iNvENTORiES
Fuel and consumables
Work in progress
Goods for resale
Less: provisions held
Consolidated
2010
£m
248.9
30.7
2.4
(9.5)
272.5
2009
£m
345.8
27.4
2.5
(9.0)
366.7
The Group has recognised £612.4m within cost of sales in the year (2009 – £504.9m) and have also recognised £3.0m (2009 – £8.2m)
relating to stock write-downs and increases in provisions held. The Company does not hold any inventories.
17. TRADE AND OThER RECEivABLES
Current assets
Retail debtors
Wholesale trade receivables
Other trade receivables
Trade receivables
Amounts owed by subsidiary undertakings
Other receivables
Cash held as collateral
Prepayments and accrued income
Non-current assets
Amounts owed by subsidiary undertakings
Consolidated
Company
2010
£m
2009
£m
2010
£m
2009
£m
596.3
1,381.6
528.3
2,506.2
–
857.5
71.2
1,583.9
5,018.8
883.1
1,978.0
472.2
3,333.3
–
589.0
86.9
1,650.4
5,659.6
–
–
5,018.8
5,659.6
–
–
–
–
1,804.6
623.4
–
–
2,428.0
3,456.1
5,884.1
–
–
–
–
3,052.7
413.0
–
–
3,465.7
2,066.9
5,532.6
Wholesale trade receivables includes a balance of £37.5m (2009 – £190.9m) in relation to contractual balances due from British Energy.
Other receivables includes £141.5m (2009 – £123.0m) receivable from Marchwood Power Limited (note13) and financial assets
totalling £640.5m (2009 – £481.7m). Cash held as collateral relates to amounts deposited on commodity trading exchanges.
Trade receivables and other financial assets are part of the Group’s financial exposure to credit risk as explained in note 28.
118
Scottish and Southern Energy
Annual Report 2010
Notes on the financial statements (continued)
for the year ended 31 March
18. CASh AND CASh EquivALENTS
Bank balances
Call deposits
Cash and cash equivalents
Consolidated
Company
2010
£m
132.7
129.0
261.7
2009
£m
1
1
45.7
50.2
295.9
2010
£m
3.8
95.9
99.7
2009
£m
12.1
123.0
135.1
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.
Cash and cash equivalents (from above)
Bank overdraft (note 22)
Cash and cash equivalents in the statement of cash flows
19. 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)
Consolidated
Company
2010
£m
261.7
(9.2)
252.5
2009
£m
295.9
(2.3)
293.6
2010
£m
99.7
–
99.7
2009
£m
135.1
–
135.1
Consolidated
Company
2010
£m
2009
£m
2010
£m
2009
£m
–
2,161.6
1,207.3
695.6
4,064.5
324.5
4,389.0
–
2,603.6
1,023.0
738.3
4,364.9
426.0
4,790.9
2,569.0
–
50.3
–
2,619.3
2,517.2
–
118.3
–
2,635.5
–
–
2,619.3
2,635.5
(i) Current accruals and deferred income includes customer contributions of £19.5m (2009 – £15.4m) and government grants of £0.6m (2009 – £0.1m).
(ii) Non-current accruals and deferred income includes customer contributions of £251.3m (2009 – £258.0m) and government grants of £6.3m
(2009 – £2.0m).
20. CuRRENT TAx LiABiLiTiES
Corporation tax
Consolidated
Company
2010
£m
216.9
2009
£m
254.6
2010
£m
4.0
2009
£m
–
21. CONSTRuCTiON CONTRACTS
Contracts in progress at balance sheet date:
Amounts due from contract customers included in trade and other receivables (note 17)
Amounts due to contract customers included in trade and other payables (note 19)
Contract costs incurred plus recognised profits less recognised losses to date
Less: Progress billings
119
Introduction to SSE
Directors’ report
Financial statements
Shareholder information
2010
£m
2009
£m
39.3
(21.8)
183.1
(184.0)
(0.9)
41.4
(24.4)
221.9
(231.6)
(9.7)
In the year to 31 March 2010, contract revenue of £460.1m (2009 – £481.9m) was recognised.
At 31 March 2010, retentions held by customers for contract work amounted to £1.6m (2009 – £1.6m). Advances received from
customers for contract work amounted to £4.1m (2009 – £6.4m).
The Company does not hold any construction contracts.
22. LOANS AND OThER BORROWiNGS
Current
Bank overdraft
Other short-term loans
Obligations under finance leases
Non-current
Loans including convertible debt
Obligations under finance leases
Amounts owed to subsidiary undertakings
(i) Borrowings
Consolidated
Company
2010
£m
9.2
882.3
891.5
12.2
903.7
4,771.1
372.2
–
5,143.3
2009
£m
2.3
1,057.7
1,060.0
0.1
1,060.1
4,335.7
0.4
–
4,336.1
2010
£m
–
815.6
815.6
–
815.6
2009
£m
–
916.4
916.4
–
916.4
3,101.2
–
240.2
3,341.4
2,628.3
–
240.2
2,868.5
Borrowing facilities
The Group has an established €1.5bn Euro Commercial Paper programme. Paper can be issued in a range of currencies and is
swapped back into sterling.
During the year the Group entered into a new £900m revolving credit facility along with a £100m bilateral facility, on the same terms
as the revolving credit facility. These facilities, which mature in June 2012, replace a £650m facility which had been due to expire in
November 2009. The new facility will again act as a liquidity backstop to the Group’s commercial paper issuance.
The Group has also entered into a £400m loan facility with the European Investment Bank which can be utilised over a one year
period and can be drawn on a fixed or floating basis with a term of up to 10 years.
In September 2009, the Group issued a new nine year, £500m sterling bond, with a coupon of 5%.
120
Scottish and Southern Energy
Annual Report 2010
Notes on the financial statements (continued)
for the year ended 31 March
22. LOANS AND OThER BORROWiNGS (continued)
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)
Total current
Non-current
Bank loans – amortising (ii)
Bank loans – non-amortising (v)
6.125% Eurobond repayable on 29 July 2013
5.75% Eurobond repayable 5 February 2014
Non-recourse funding (iv)
Between two and five years
Bank loans – non-amortising (v)
Non-recourse funding (iv)
5.000% Eurobond repayable on 1 October 2018
5.875% Eurobond repayable on 26 September 2022
8.375% Eurobond repayable on 20 November 2028
5.50% Eurobond repayable on 19 June 2032
4.625% Eurobond repayable on 20 February 2037
6.25% Eurobond repayable on 27 August 2038
4.454% Index linked loan repayable on 27 February 2044
1.429% Index linked bond repayable on 20 October 2056
Over five years
Fair value adjustment (note 28)
Total non-current
Total
2010
Weighted average
interest rate (vii)
%
2010
face value
£m
2010
fair value
£m
0.50%
6.62%
1.14%
6.22%
6.37%
4.14%
6.13%
5.75%
6.02%
5.79%
5.00%
5.88%
8.38%
5.50%
4.63%
6.25%
4.46%
1.57%
2010
Carrying
amount
£m
9.2
7.7
840.7
33.9
891.5
13.7
596.5
532.7
696.3
137.6
9.2
7.7
841.5
33.9
892.3
13.7
595.2
534.4
700.0
137.5
9.2
8.6
843.1
35.4
896.3
15.4
638.6
594.2
747.4
143.2
1,980.8
2,138.8
1,976.8
312.6
500.0
300.0
500.0
350.0
325.0
350.0
100.3
107.6
325.6
501.5
313.0
664.5
352.4
283.2
382.5
133.4
110.2
312.6
495.3
296.6
492.2
350.2
323.4
345.5
99.6
107.6
2,845.5
3,066.3
2,823.0
–
–
(28.7)
4,826.3
5,205.1
4,771.1
5,718.6
6,101.4
5,662.6
121
Introduction to SSE
Directors’ report
Financial statements
Shareholder information
2009
Weighted average
interest rate (vii)
%
2009
Face value
£m
2009
Fair value
£m
0.50%
8.79%
2.67%
3.75%
5.51%
6.36%
4.93%
6.13%
5.75%
6.10%
3.09%
5.89%
5.88%
8.38%
5.50%
4.63%
6.25%
2.16%
1.52%
2009
Carrying
amount
£m
2.3
88.4
900.8
15.6
52.9
2.3
88.4
904.1
15.9
52.9
2.3
90.3
900.9
19.6
55.8
1,063.6
1,068.9
1,060.0
21.4
603.7
555.1
700.0
144.8
22.7
641.3
579.9
729.0
150.1
21.4
605.2
552.9
695.5
144.8
2,025.0
2,123.0
2,019.8
25.0
309.0
300.0
500.0
350.0
325.0
350.0
100.0
109.0
24.9
326.0
311.0
606.1
319.2
247.5
336.9
105.4
106.0
25.0
309.0
296.3
491.8
350.2
323.4
345.3
99.3
109.0
2,368.0
2,383.0
2,349.3
–
–
(33.4)
4,393.0
4,506.0
4,335.7
5,456.6
5,574.9
5,395.7
Loans and Borrowings
Current
Bank overdrafts (i)
Other short-term loans – amortising (ii)
Other short-term loans – non-amortising (iii)
3.75% Convertible bond repayable on 29 October 2009 (vi)
Non-recourse funding (iv)
Total current
Non-current
Bank loans – amortising (ii)
Bank loans – non-amortising (v)
6.125% Eurobond repayable on 29 July 2013
5.75% Eurobond repayable 5 February 2014
Non-recourse funding (iv)
Between two and five years
Bank loans – non-amortising (v)
Non-recourse funding (iv)
5.875% Eurobond repayable on 26 September 2022
8.375% Eurobond repayable on 20 November 2028
5.50% Eurobond repayable on 19 June 2032
4.625% Eurobond repayable on 20 February 2037
6.25% Eurobond repayable on 27 August 2038
4.454% Index linked loan repayable on 27 February 2044
1.429% Index linked bond repayable on 20 October 2056
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, term loans and EIB debt.
(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 14). 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 2010 and 2014.
(vi) The liability component of the convertible bond is presented separately under IAS 32.
(vii) The weighted average interest rates are as noted. The weighted average interest rates for the Group (including swaps) for the year ended
31 March 2010 was 5.35% (2009 – 5.25%).
Convertible bond
The convertible bond was issued on 29 October 2004 in exchange for £300.0m in cash. The bond entitled holders to convert the bond
into Ordinary Shares at any time up to 24 October 2009 at the applicable conversion share price. With effect from 26 September 2008,
the effective conversion price of the bond changed from £9.00 per Ordinary Share at the date of issue to £8.88 per Ordinary Share.
The conversion price was 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 was at the option
of the bond holder.
122
Scottish and Southern Energy
Annual Report 2010
Notes on the financial statements (continued)
for the year ended 31 March
22. LOANS AND OThER BORROWiNGS (continued)
At 31 March, bond holders had converted the final debt element with a nominal value of £15.9m at the £8.88 per share conversion
price. Conversion took place in the following periods:
Year to 31 March 2007
Year to 31 March 2008
Year to 31 March 2009
Year to 31 March 2010
Total to 31 March 2010
Nominal value of
bond converted
£m
0.1
220.6
63.4
15.9
Number of
shares
11,111
24,512,537
7,081,333
1,792,000
300.0
33,396,981
The net proceeds received from the issue of the bond were 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.
On final conversion of the bond no liability component remained (2009 – £15.6m).
For the purpose of diluted Earnings per Share (EPS), convertible bond interest of £nil (2009 – £1.7m) is added back to earnings
and the weighted average number of diluted shares to be included in the total number of shares was as follows:
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
2010
Number
of shares
2009
Number
of shares
709,719
1,728,352
Minimum lease
payments
Present value of
minimum lease payments
2010
£m
52.8
205.7
537.7
796.2
(411.8)
384.4
2009
£m
0.1
0.3
0.4
0.8
(0.3)
0.5
2010
£m
12.2
57.4
314.8
384.4
2009
£m
0.1
0.3
0.1
0.5
A new finance lease was entered into during the year with Marchwood Power Company Ltd, of which the Group owns 50% of the
Ordinary Share capital. The lease is for use of their main asset, a 840MW Gas powered CCGT Electricity Generating Plant. The Term
of the lease is 15 years with the Group having the option for a further 5 years extension at the end of this period. £6.5m of contingent
rents for Marchwood were included within cost of sales for the period. Contingent rent consists of £/MWh charges for availability
of the plant for energy production and a £/MWh charge for actual ‘nominated’ energy produced.
Of the remaining finance leases held by the Group, the average term of the telecom leases is 7.5 years and the term of the wind farm
lease is 24 years. No arrangements have been entered into for contingent rental payments for these leases.
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.
123
Introduction to SSE
Directors’ report
Financial statements
Shareholder information
23. 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
Fair value
capital gains/(losses)
allowances on derivatives
£m
£m
Convertible
bond
£m
Retirement
benefit
obligations
£m
Share based
payments
£m
Other (i)
£m
Total
£m
Consolidated
At 1 April 2008
Prior year acquisitions
Acquisitions (note 15)
Charge/(credit) to Income Statement
Charge/(credit) to equity
Exchange adjustments
At 1 April 2009
Acquisitions (note 15)
Charge/(credit) to Income Statement
Charge/(credit) to equity
Exchange adjustments
861.1
–
–
24.7
–
1.7
887.5
–
17.2
–
–
(22.5)
–
–
(352.3)
5.2
–
(369.6)
–
113.1
(2.1)
–
At 31 March 2010
904.7
(258.6)
Accelerated
Fair value
capital gains/(losses)
allowances on derivatives
£m
£m
0.6
–
–
(0.2)
–
–
0.4
–
(0.4)
–
–
–
(13.8)
–
–
15.3
(78.1)
–
(76.6)
–
17.4
(142.5)
–
(201.7)
(4.1)
–
–
(0.6)
3.2
–
(1.5)
–
–
(0.4)
–
(1.9)
Convertible
bond
£m
Retirement
benefit
obligations
£m
Share based
payments
£m
Company
At 1 April 2008
Charge/(credit) to Income Statement
Charge/(credit) to equity
At 1 April 2009
Charge/(credit) to Income Statement
Charge/(credit) to equity
At 31 March 2010
–
–
–
–
–
–
–
0.2
10.5
11.8
22.5
(12.6)
(8.7)
1.2
0.6
(0.2)
–
0.4
(0.4)
–
–
24.0
6.3
(30.3)
–
10.2
(80.5)
(70.3)
0.9
–
–
0.9
–
(0.4)
0.5
102.9
(6.2)
12.6
(34.4)
(39.7)
19.2
54.4
(7.5)
(2.5)
(8.6)
(11.4)
24.4
924.2
(6.2)
12.6
(347.5)
(109.4)
20.9
494.6
(7.5)
144.8
(153.6)
(11.4)
466.9
Other (i)
£m
Total
£m
(16.1)
(40.4)
–
(56.5)
7.8
0.4
9.6
(23.8)
(18.5)
(32.7)
5.0
(89.2)
(48.3)
(116.9)
(i) Includes deferred tax on fair value items recognised in business combinations in the prior year. In the previous year, deferred tax recognised
on full acquisition of Greater Gabbard Offshore Winds was derecognised on disposal of 50% of the shareholding.
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/(asset)
Consolidated
Company
2010
£m
624.0
(157.1)
466.9
2009
£m
594.7
(100.1)
494.6
2010
£m
–
(116.9)
(116.9)
2009
£m
–
(32.7)
(32.7)
124
Scottish and Southern Energy
Annual Report 2010
Notes on the financial statements (continued)
for the year ended 31 March
23. DEfERRED TAxATiON (continued)
The deferred tax assets disclosed relate to the Group’s pension scheme liabilities.
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 £nil (2009 – £1.7m). No liability was recognised in respect of these
differences because the Group was in a position to control the timing of the reversal of the temporary differences and it was probable
that such differences would 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 charge of £34.1m (2009 – £1.0m credit).
A deferred tax asset has not been recognised on £35m of trading losses (2009 – £30m) due to uncertainty around the availability
of future profits in the companies concerned.
24. PROviSiONS
Consolidated
At 1 April 2009
Charged in the year
Unwind of discount
Released during the year
Utilised during the year
Acquired
At 31 March 2010
At 31 March 2010
Non-current
Current
At 31 March 2009
Non-current
Current
Onerous energy
contracts Decommissioning
(ii)
£m
(i)
£m
3.7
–
–
(1.4)
(0.5)
–
1.8
1.8
–
1.8
3.7
–
3.7
36.2
2.4
3.3
–
–
16.6
58.5
58.5
–
58.5
36.0
0.2
36.2
Other
(iii)
£m
34.1
4.3
0.2
(5.7)
(3.7)
0.2
29.4
22.9
6.5
29.4
20.5
13.6
34.1
Total
£m
74.0
6.7
3.5
(7.1)
(4.2)
16.8
89.7
83.2
6.5
89.7
60.2
13.8
74.0
(i) The onerous energy contracts provision relates to future losses on specific contracts. These 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 2010, the Group has also increased the provision in relation to its projected decommissioning obligations
under the EU Waste Electrical and Electronic Equipment (WEEE) directive, which passed into law on 2 January 2007, by £0.2m to £3.8m (2009 – £3.6m).
(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.
25. ShARE CAPiTAL AND RESERvES
Company
Allotted, called up and fully paid:
At 1 April 2009
Issue of shares (i)
Conversion of convertible debt to equity (ii)
At 31 March 2010
125
Introduction to SSE
Directors’ report
Financial statements
Shareholder information
Number
(millions)
£m
920.4
0.9
1.8
923.1
460.2
0.4
0.9
461.5
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 0.9 million (2009 – 1.2 million) shares during the year under the savings-related share option schemes, and discretionary
share option schemes for a consideration of £6.8m (2009 – £8.1m).
During the year, on behalf of the Company, the employee share trust purchased 0.9 million shares for a total consideration of £15.8m (2009 –
1.1 million shares, consideration of £15.8m). At 31 March 2010, the trust held 4.3 million shares (2009 – 3.7 million) which had a market value
of £47.7m (2009 – £41.4m).
(ii) During the year, the Company issued a total of 1.8 million shares under the terms of the convertible bond at conversion rate of £8.88 per Ordinary
Share (2009 – 4.1 million and 3.0 million shares at £9.00 and £8.88 per Ordinary Share respectively).
The movement in reserves is reported in the Statement of Changes in Equity which is included as part of the primary statements
on pages 81 and 82.
The capital redemption reserve comprises the value of shares redeemed or purchased by the Company from distributable profits.
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 22).
The translation reserve comprises exchange translation differences on foreign currency net investments offset by exchange
translation differences on borrowings and derivatives classified as net investment hedges under IAS 39.
The profit for the year attributable to shareholders dealt with in the financial statements of the Company was £575.9m (2009 –
£852.0m). As allowed by section 408 of the Companies Act 2006, the Company has not presented its own income statement.
26. RETiREMENT BENEfiT OBLiGATiONS
Defined Benefit Schemes
The Group has two funded final salary pension schemes which provide defined benefits based on final pensionable pay. The schemes
are subject to independent valuations at least every three years. The future benefit obligations are valued by actuarial methods on
the basis of an appropriate assessment of the relevant parameters. The Company operates one of these schemes, being the Scottish
Hydro Electric scheme.
The Group also has an Employer Financed Retirement Benefit scheme and a Group Personal Pension Plan. The Group Personal
Pension Plan operates on a Money purchase basis and has been arranged with Friends Provident. The Company matches employee
contributions up to a specified limit, in most circumstances this is set at 6%. The Company may also provide additional contributions
of 3% after five years’ and a further 3% after ten years’ continuous Company service.
126
Scottish and Southern Energy
Annual Report 2010
Notes on the financial statements (continued)
for the year ended 31 March
26. RETiREMENT BENEfiT OBLiGATiONS (continued)
Pension summary:
Scottish Hydro Electric (Company)
Southern Electric
Scheme type
Defined benefit
Defined benefit
Net actuarial gain/(loss)
recognised in respect of the
pension asset in the Statement
of Comprehensive Income
Net pension liability
2010
£m
(161.6)
(221.4)
(383.0)
2009
£m
(188.4)
(170.6)
(359.0)
2010
£m
(251.1)
(469.2)
(720.3)
2009
£m
–
(273.5)
(273.5)
The Scottish Hydro Electric Pension Scheme net liability of £251.1 (2009 – £nil) is presented after an IFRIC 14 minimum funding
requirement restriction of £256.3m (2009 – £130.5m).
The individual pension scheme details based on the latest formal actuarial valuations are as follows:
Latest formal actuarial valuation
Valuation carried out by
Value of assets based on valuation
Value of liabilities based on valuation
Valuation method adopted
Average salary increase
Average pension increase
Value of fund assets/accrued benefits
Scottish hydro Electric
Southern Electric
31 March 2009
31 March 2007
Hymans Robertson Hewitt, Bacon & Woodrow
£860.0m
£1,189.3m
Projected Unit
£1,101.5m
£1,361.3m
Projected Unit
Inflation curve plus 2.3% pa
2.7%
72.3%
5.2%
3.2%
80.9%
Both schemes have been updated to 31 March 2010 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
2010
At 31 March
2009
5.2%
3.7%
5.5%
3.7%
4.5%
3.0%
6.7%
3.0%
The assumptions relating to longevity underlying the pension liabilities at 31 March 2010 are based on standard actuarial mortality
tables, and include an allowance for future improvements in longevity. The assumptions equivalent to future longevity for members
in normal health at age 65 are as follows:
Currently aged 65
Currently aged 45
At 31 March
2010
Male
At 31 March
2010
female
At 31 March
2009
Male
At 31 March
2009
Female
23
25
24
27
22
24
24
27
The impact on the schemes liabilities of changing certain of the major assumptions is as follows:
Discount rate
Longevity
At 31 March 2010
At 31 March 2009
increase/
decrease in
assumption
0.1%
1 year
Effect on
scheme
liabilities
+/- 1.8%
+/- 3.0%
Increase/
decrease in
assumption
0.1%
1 year
Effect on
scheme
liabilities
+/- 1.6%
+/- 3.0%
127
Introduction to SSE
Directors’ report
Financial statements
Shareholder information
valuation of combined Pension Schemes
Equities
Government bonds
Corporate bonds
Other investments
Total fair value of plan assets
IFRIC 14 liability
Present value of defined benefit obligations
Deficit in the schemes
Deferred tax thereon
Net pension liability
Long-term
rate of
return
expected at
31 March
2010
%
8.0
4.5
5.5
4.1
Consolidated
Company
Long-term
rate of
return
expected at
31 March
2009
%
7.7
4.2
6.7
3.4
value at
31 March
2010
£m
1,063.4
563.4
449.0
222.5
2,298.3
(256.3)
(2,762.3)
(720.3)
201.7
(518.6)
Long-term
rate of
return
expected at
31 March
2009
%
7.7
4.2
6.7
4.3
Long-term
rate of
return
expected at
31 March
2010
%
8.0
4.5
5.5
3.9
Value at
31 March
2009
£m
665.8
576.7
244.3
300.0
1,786.8
(130.5)
(1,929.8)
(273.5)
76.6
(196.9)
value at
31 March
2010
£m
458.7
335.6
201.4
123.1
1,118.8
(256.3)
(1,113.6)
(251.1)
70.3
(180.8)
Value at
31 March
2009
£m
318.2
361.2
94.6
86.0
860.0
(130.5)
(729.5)
–
–
–
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 (losses)/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 gains/(losses)
IFRIC 14 liability
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
Consolidated
Company
2010
£m
2009
£m
2010
£m
2009
£m
(1,929.8)
(1,919.5)
(729.5)
(709.2)
(21.4)
(8.1)
101.6
(127.5)
(777.1)
(21.8)
(8.1)
96.5
(130.1)
53.2
(9.8)
(3.4)
39.1
(48.0)
(362.0)
(8.7)
(3.3)
38.1
(48.0)
1.6
(2,762.3)
(1,929.8)
(1,113.6)
(729.5)
Consolidated
Company
2010
£m
2009
£m
1,656.3
1,870.4
100.7
(101.6)
110.2
8.1
394.1
(125.8)
135.3
(96.5)
71.1
8.1
(412.2)
80.1
2,042.0
1,656.3
2010
£m
729.5
49.9
(39.1)
44.2
3.4
200.4
(125.8)
862.5
2009
£m
795.0
64.7
(38.1)
14.5
3.3
(190.0)
80.1
729.5
Consolidated
Company
2010
£m
21.4
21.4
(100.7)
127.5
26.8
2009
£m
21.8
21.8
(135.3)
130.1
(5.2)
2010
£m
9.8
9.8
(49.9)
48.0
(1.9)
2009
£m
8.7
8.7
(64.7)
48.0
(16.7)
128
Scottish and Southern Energy
Annual Report 2010
Notes on the financial statements (continued)
for the year ended 31 March
26. RETiREMENT BENEfiT OBLiGATiONS (continued)
history of (deficit)/surplus
Total fair value of plan assets
IFRIC 14 liability
Present value of defined
benefit obligation
(Deficit)/surplus in the scheme
Consolidated
Company
2010
£m
2009
£m
2008
£m
2007
£m
2006
£m
2010
£m
2009
£m
2008
£m
2,298.3
(256.3)
1,786.8
(130.5)
2,081.0
(210.6)
2,110.4
–
2,017.3 1,118.8
(256.3)
–
860.0
(130.5)
1,005.6
(210.6)
2007
£m
990.2
–
2006
£m
955.8
–
(2,762.3) (1,929.8) (1,919.5) (2,202.3) (2,211.1) (1,113.6)
(251.1)
(720.3)
(193.8)
(273.5)
(49.1)
(91.9)
(729.5)
(709.2)
(862.1)
(865.6)
–
85.8
128.1
90.2
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 return for each asset class over the actual asset allocation at 31 March 2010.
The actual return on plan assets is as follows:
Actual return on plan assets
history of experience gains and losses
Consolidated
Company
2010
£m
494.8
2009
£m
(276.9)
2010
£m
250.3
2009
£m
(125.3)
Consolidated
Company
2010
£m
2009
£m
2008
£m
2007
£m
2006
£m
2010
£m
2009
£m
2008
£m
2007
£m
2006
£m
Total actuarial (losses) and gains
recognised in the Statement of
Comprehensive Income before
adjustment for taxation
Experience (losses)/gains
on scheme liabilities
Experience gains/(losses)
on scheme assets
(383.0)
(359.0)
185.0
47.4
(14.1)
(161.6)
(188.4)
146.3
17.6
(29.0)
(59.8)
0.8
(50.6)
(7.7)
138.1
(49.7)
–
–
–
–
394.1
(412.2)
(153.4)
27.8
11.5
200.4
(190.0)
(31.2)
(9.7)
134.8
The cumulative actuarial gains and losses recognised in the Statement of Comprehensive Income before adjustment for taxation
since the adoption of IAS 19 is £957.8m losses (2009 – £318.5m).
Defined contribution scheme
The total contribution paid by the Group to defined contribution schemes was £16.5m (2009 – £13.6m).
Employer financed retirement benefit (EfRB) pension costs
The increase in the year in relation to the EFRB was £2.9m (2009 – £2.0m). This is included in other provisions (note 24). In addition to
the movement in the provision, £nil (2009 – £0.2m) was utilised as a result of payments made to the Southern Electric Pension Scheme.
Staff costs analysis
The pension costs in note 5 can be analysed thus:
Service costs
Defined contribution scheme payments
2010
£m
21.4
16.5
37.9
2009
£m
21.8
13.6
35.4
Expected contribution in the year to 31 March 2011
The Group expects to make contributions of £47.8m and £61.0m to the Scottish-Hydro Electric Pension Scheme and the Southern
Electric Pension Scheme in the year to 31 March 2011, respectively.
129
Introduction to SSE
Directors’ report
Financial statements
Shareholder information
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) Savings-related share option schemes (Sharesave)
This scheme gives employees the option to purchase shares in the Company at a discounted market price, subject to the
employees remaining in employment for the term of the agreement. Employees may opt to save between £5 and £250 per month
for a period of 3 or 5 years. At the end of this period, the employees have six months to exercise their options by using the cash
saved (including a bonus equivalent to interest). If the option is not exercised, the funds may be withdrawn by the employee and
the option expires.
(ii) Share incentive Plan (SiP)
This scheme allows employees the opportunity to purchase shares in the Company on a monthly basis. Employees may nominate
an amount between £10 and £125 to be deducted from their gross salary. This is then used to purchase shares (partnership
shares) in the market on the final business day of each month. These shares are then held in trust for a period of 5 years, at
which point they are transferred at no further cost to the employee. These shares may be withdrawn at any point during the
5 years, but tax and national insurance would then be payable on any amounts withdrawn.
In addition to the shares purchased on behalf of the employee, the Company will also match the purchase up to a maximum
of 6 (previously 5) shares (matching shares) per month. Again these shares are held in trust for the five years until they are
transferred to the employee. If an employee leaves during the first three years, or removes his/her partnership shares, these
matching shares are forfeited.
In addition to the above, the following special awards of free shares have been made:
Award made
Free shares per employee
Date at which employee must still be employed
to receive award (in addition to 31 March)
31 March 2005
50
31 March 2007
20
31 March 2008
10
20 August 2005
30 May 2007
1 August 2008
These awards were made to all employees in recognition of their contribution to the success of the Company. Under the
arrangements for the awards, 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 income
tax and national insurance would then be payable on any amounts withdrawn.
(iii) Deferred bonus scheme
This scheme applied to senior managers and executive Directors. Those eligible were awarded shares based on performance
in the year. These shares were purchased shares and 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 by the Trustee using amounts received equivalent to any dividends which would have
been 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 all 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.
(iv) Performance Share Plan
This scheme applies to executive Directors and senior executives. The level of these awards are subject to certain performance
conditions over the three year performance period, which can be summarised as follows:
Award made
Maximum value of award as a % of base salary
Performance conditions
Total shareholder return (50% of award) (i)
26 July 2007
150
10 June 2008
150
30 June 2009
150
Full vesting > 75th percentile > 75th percentile > 75th percentile
median
25% vesting
median
median
Earnings per share (50% of award) (ii)
Full vesting
25% vesting
RPI + 9%
RPI + 3%
RPI + 9%
RPI + 3%
RPI + 9%
RPI + 3%
130
Scottish and Southern Energy
Annual Report 2010
Notes on the financial statements (continued)
for the year ended 31 March
27. EMPLOYEE ShARE-BASED PAYMENTS (continued)
These awards will vest after three years to the extent that certain performance conditions are met.
(i) Total Shareholder Return (TSR) target relative to other FTSE 100 companies over the performance period. Pro rata vesting will take place between
the median and 75th percentile, with no vesting if the minimum target is not met.
(ii) Under the EPS performance condition, pro rata vesting between 3% and the upper level above RPI, with no vesting if 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 £17.9m (2009 – £14.3m) 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) Savings-related share option schemes
The movement in savings related share option schemes in the year were as follows:
Consolidated
As at 31 March 2010
Award date
25 July 2003
16 July 2004
14 July 2005
14 July 2005
11 July 2006
11 July 2006
10 July 2007
10 July 2007
17 July 2008
17 July 2008
30 June 2009
30 June 2009
Option price Outstanding at
start of year
(pence)
Granted
Exercised
Lapsed
Outstanding at
end of year
Date from which
exercisable
562
622
886
886
999
999
1,306
1,306
1,274
1,274
1,042
1,042
6,736
536,374
4,002
1,094,271
363,445
592,440
275,240
536,896
332,998
644,748
–
–
–
–
–
–
–
–
–
–
–
–
576,864
1,156,570
(2,492)
(533,644)
(209)
(8,057)
(342,055)
(256)
–
–
–
–
–
–
(4,244)
(840)
(3,793)
(19,760)
(5,235)
(28,907)
(60,747)
(136,212)
(80,500)
(205,522)
(37,765)
(46,643)
–
1,890
–
1,066,454
16,155
563,277
214,493
400,684
252,498
439,226
539,099
1,109,927
4,387,150
1,733,434
(886,713)
(630,168)
4,603,703
1 October 2008
1 October 2009
1 October 2008
1 October 2010
1 October 2009
1 October 2011
1 October 2010
1 October 2012
1 October 2011
1 October 2013
1 October 2012
1 October 2014
Expiry date (i)
31 March 2009
31 March 2010
31 March 2009
31 March 2011
31 March 2010
31 March 2012
31 March 2011
31 March 2013
31 March 2012
31 March 2014
31 March 2013
31 March 2015
(i) Options may remain exercisable beyond the expiry date due to individuals taking advantage of the right to a payment holiday during the term
of the scheme.
As at 31 March 2009
Award date
25 July 2003
16 July 2004
16 July 2004
14 July 2005
14 July 2005
11 July 2006
11 July 2006
10 July 2007
10 July 2007
17 July 2008
17 July 2008
Option price Outstanding at
start of year
(pence)
Granted
Exercised
Lapsed
Outstanding at
end of year
Date from which
exercisable
562
622
622
886
886
999
999
1,306
1,306
1,274
1,274
786,541
3,516
547,803
359,570
1,127,221
385,885
632,609
309,354
594,317
–
–
–
–
–
–
–
–
–
–
–
358,938
681,826
(775,473)
(3,033)
(3,093)
(350,829)
(4,345)
(3,051)
(1,554)
(288)
–
–
–
(4,332)
(483)
(8,336)
(4,739)
(28,605)
(19,389)
(38,615)
(33,826)
(57,421)
(25,940)
(37,078)
6,736
–
536,374
4,002
1,094,271
363,445
592,440
275,240
536,896
332,998
644,748
4,746,816
1,040,764
(1,141,666)
(258,764)
4,387,150
1 October 2008
1 October 2007
1 October 2009
1 October 2008
1 October 2010
1 October 2009
1 October 2011
1 October 2010
1 October 2012
1 October 2011
1 October 2013
Expiry date
31 March 2009
31 March 2008
31 March 2010
31 March 2009
31 March 2011
31 March 2010
31 March 2012
31 March 2011
31 March 2013
31 March 2012
31 March 2014
As share options are exercised continuously throughout the period from 1 October to 31 March, the weighted average share price
during this period of 1,126p (2009: 1,290p) is considered representative of the weighted average share price at the date of exercise.
The weighted average share price of forfeitures is the option price to which the forfeit relates.
131
Introduction to SSE
Directors’ report
Financial statements
Shareholder information
Company
As at 31 March 2010
Award date
16 July 2004
14 July 2005
10 July 2007
17 July 2008
30 June 2009
As at 31 March 2009
Award date
25 July 2003
16 July 2004
14 July 2005
10 July 2007
17 July 2008
Option price
(pence)
Outstanding at
start of year
Granted
Exercised
Outstanding at
end of year
Date from which
exercisable
622
886
1,306
1,274
1,042
1,681
3,655
144
442
–
5,922
–
–
–
–
1,253
1,253
(1,681)
–
–
–
–
(1,681)
–
3,655
144
442
1,253
5,494
1 October 2010
1 October 2010
1 October 2010
1 October 2011
1 October 2014
Option price
(pence)
Outstanding at
start of year
Granted
Exercised
Outstanding at
end of year
Date from which
exercisable
562
622
886
1,306
1,274
1,700
1,681
3,655
144
–
7,180
–
–
–
–
442
442
(1,700)
–
–
–
–
(1,700)
–
1,681
3,655
144
442
5,922
1 October 2008
1 October 2010
1 October 2010
1 October 2010
1 October 2011
Expiry date
31 March 2010
31 March 2011
31 March 2011
31 March 2012
31 March 2015
Expiry date
31 March 2010
31 March 2010
31 March 2011
31 March 2011
31 March 2012
No options were forfeited in the year. Of the outstanding options at the end of the year, none were exercisable.
The fair value of these share options at the measurement date, calculated using the Black-Scholes model, and the assumptions
made in that model are as follows:
July 2004
July 2005
July 2006
July 2007
July 2008
June 2009
3 Year
5 Year
3 Year
5 Year
3 Year
5 Year
3 Year
5 Year
3 Year
5 Year
3 Year
5 Year
Fair value of option
Expected volatility
Risk free rate
Expected dividends
Term of the option
Underlying price at grant date
Strike price
108p
17%
4.7%
4.6%
3 yrs
699p
622p
117p
17%
4.8%
4.6%
5 yrs
699p
622p
126p
15%
4.1%
4.2%
3 yrs
967p
886p
137p
217p
227p
287p
313p
304p
339p
244p
269p
19%
4.7%
4.8%
3 yrs
35%
25%
15%
2.9%
5.7%
4.2%
4.2%
5.2%
4.2%
5 yrs
5 yrs
5 yrs
967p 1,180p 1,180p 1,460p 1,460p 1,397p 1,397p 1,139p 1,139p
999p 1,306p 1,306p 1,274p 1,274p 1,042p 1,042p
886p
28%
5.0%
4.2%
5 yrs
25%
5.8%
5.3%
3 yrs
28%
4.9%
4.1%
3 yrs
19%
4.7%
4.8%
5 yrs
35%
2.7%
4.1%
3 yrs
999p
Expected price volatility was determined by calculating the historical volatility of the Group’s share price over the previous 12 months.
132
Scottish and Southern Energy
Annual Report 2010
Notes on the financial statements (continued)
for the year ended 31 March
27. EMPLOYEE ShARE-BASED PAYMENTS (continued)
(ii) Share incentive Plan
Matching Shares
Consolidated
Company
2010
2009
2010
2009
Weighted
average price
(pence)
1,248
1,137
1,248
1,125
1,215
1,289
Shares
1,260,376
594,251
(41,145)
(68,258)
1,745,224
655,440
Weighted
average price
(pence)
1,170
1,260
887
1,290
1,248
1,238
Shares
994,453
397,958
(103,503)
(28,532)
1,260,376
334,530
Weighted
average price
(pence)
1,129
1,137
–
–
–
968
Shares
1,300
288
–
–
1,588
800
Weighted
average price
(pence)
1,071
1,260
887
–
1,129
817
Shares
1,180
260
(140)
–
1,300
560
Outstanding at start of year
Granted during the year
Forfeited during the year
Exercised during the year
Outstanding at end of year
Exercisable at end of year
As shares are exercised continuously throughout the year, the weighted average share price during the period of 1,125p (2009 – 1,290p)
is considered representative of the weighted average share price at the date of exercise.
The fair value of shares in the share incentive plan 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 and is based on the 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.
free Shares
Outstanding at start of year
Granted during the year
Forfeited during the year
Exercised during the year
Outstanding at end of year
Exercisable at end of year
Consolidated
Company
2010
2009
Weighted
average price
(pence)
1,205
–
1,205
1,125
1,210
965
Shares
725,729
–
(9,778)
(41,952)
673,999
326,058
Weighted
average price
(pence)
1,161
1,417
1,161
1,290
1,205
965
Shares
648,230
151,440
(23,360)
(50,581)
725,729
362,567
2010
Weighted
average price
(pence)
Shares
2009
Weighted
average price
(pence)
Shares
320
–
–
–
320
200
1,151
–
–
–
1,151
965
280
40
–
–
320
200
1,113
1,417
–
–
1,151
965
As shares are exercised continuously throughout the year, the weighted average share price during the period of 1,125p (2009 – 1,290p)
is considered representative of the weighted average share price at the date of exercise.
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 and is based on the 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.
(iii) Deferred bonus scheme
Outstanding at start of year
Granted during the year
Forfeited during the year
Exercised during the year
Outstanding at end of year
Exercisable at end of year
Consolidated
Company
2010
2009
2010
2009
Weighted
average price
(pence)
1,324
1,174
–
1,121
1,367
1,265
Shares
612,475
153,353
–
(442,923)
322,905
1,750
Weighted
average price
(pence)
1,273
1,545
1,273
1,386
1,324
789
Shares
574,484
167,802
(3,715)
(126,096)
612,475
205,434
Weighted
average price
(pence)
961
1,174
–
1,120
1,349
–
Shares
291,608
31,115
–
(263,856)
58,867
–
Weighted
average price
(pence)
984
1,545
–
1,401
961
789
Shares
316,349
27,752
–
(52,493)
291,608
104,041
The fair value of the deferred bonus 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 and is based on the 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.
133
Introduction to SSE
Directors’ report
Financial statements
Shareholder information
(iv) Performance Share Plan
Outstanding at start of year
Granted during the year
Exercised during the year
Outstanding at end of year
Consolidated
Company
2010
2009
2010
2009
Weighted
average price
(pence)
1,435
1,174
1,174
1,353
Weighted
average price
(pence)
1,347
1,545
–
1,435
Shares
630,567
504,456
–
1,135,023
Weighted
average price
(pence)
1,421
1,174
1,174
1,360
Shares
593,122
311,174
(151,351)
752,945
Shares
1,135,023
714,010
(256,554)
1,592,479
Weighted
average price
(pence)
1,345
1,545
–
1,421
Shares
367,877
225,245
–
593,122
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 closing market price on the date of grant.
28. fiNANCiAL iNSTRuMENTS AND RiSK
This note presents information about the fair value of the Group’s financial instruments, the Group’s exposure to the risks associated
with those instruments, 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 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
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 policies identical to that of the Group,
where applicable. Separate disclosure is provided where necessary.
Before detailing the relevant qualitative and quantitative disclosures in relation to the potential risks faced by the Group, details
on the different categories of financial instrument and the carrying and fair values of each of those categories is provided below.
134
Scottish and Southern Energy
Annual Report 2010
Notes on the financial statements (continued)
for the year ended 31 March
28. fiNANCiAL iNSTRuMENTS AND RiSK (continued)
A. CATEGORiES Of fiNANCiAL iNSTRuMENTS AND fAiR vALuES Of ThOSE ASSETS AND LiABiLiTiES
The fair values of the primary financial assets and liabilities of the Group together with their carrying values are as follows:
2010
Amortised cost
or other (i)
£m
2010
2010
Classified as Total carrying
value
£m
trading (ii)
£m
2010
2009
fair Amortised cost
or other (i)
£m
value
£m
2009
Classified as
trading (ii)
£m
2009
Total carrying
value
£m
2009
Fair
value
£m
financial Assets
Current
Trade receivables
Other receivables
Cash collateral
Cash and cash equivalents
Derivative financial assets
Non-current
Derivative financial assets
financial Liabilities
Current
Trade payables
Bank loans and overdrafts (iii)
Finance lease liabilities
Derivative financial liabilities
Non-current
Loans and borrowings (iii)
Finance lease liabilities
Derivative financial liabilities
2,506.2
640.5
71.2
261.7
–
3,479.6
–
–
–
–
1,468.3
1,468.3
2,506.2
640.5
71.2
261.7
1,468.3
4,947.9
2,506.2
640.5
71.2
261.7
1,468.3
4,947.9
–
–
466.3
466.3
466.3
466.3
466.3
466.3
3,333.3
481.7
86.9
295.9
–
4,197.8
–
–
–
–
–
–
1,537.7
1,537.7
449.2
449.2
3,333.3
481.7
86.9
295.9
1,537.7
5,735.5
449.2
449.2
3,333.3
481.7
86.9
295.9
1,537.7
5,735.5
449.2
449.2
3,479.6
1,934.6
5,414.2
5,414.2
4,197.8
1,986.9
6,184.7
6,184.7
(2,161.6)
(891.5)
(12.2)
–
–
–
–
(2,020.7)
(2,161.6)
(891.5)
(12.2)
(2,020.7)
(2,161.6)
(896.3)
(12.2)
(2,020.7)
(2,603.6)
(1,060.0)
(0.1)
–
–
–
–
(2,451.0)
(2,603.6)
(1,060.0)
(0.1)
(2,451.0)
(2,603.6)
(1,068.9)
(0.1)
(2,451.0)
(3,065.3)
(2,020.7)
(5,086.0)
(5,090.8)
(3,663.7)
(2,451.0)
(6,114.7)
(6,123.6)
(4,799.8)
(372.2)
–
(5,172.0)
28.7
–
(899.0)
(4,771.1)
(372.2)
(899.0)
(5,205.1)
(372.2)
(899.0)
(870.3)
(6,042.3)
(6,476.3)
(4,369.1)
(0.4)
–
(4,369.5)
33.4
–
(959.5)
(926.1)
(4,335.7)
(0.4)
(959.5)
(4,472.6)
(0.4)
(959.5)
(5,295.6)
(5,432.5)
(8,237.3)
(2,891.0)
(11,128.3)
(11,567.1)
(8,033.2)
(3,377.1)
(11,410.3)
(11,556.1)
Net financial liabilities
(4,757.7)
(956.4)
(5,714.1)
(6,152.9)
(3,835.4)
(1,390.2)
(5,225.6)
(5,371.4)
(i) Recorded at amortised cost or loans and receivables.
(ii) IAS 39 financial instruments.
(iii) Includes non-recourse borrowings.
135
Introduction to SSE
Directors’ report
Financial statements
Shareholder information
The fair values of the primary financial assets and liabilities of the Company together with their carrying values are as follows:
2010
Amortised cost
or other (i)
£m
2010
2010
Classified as Total carrying
value
£m
trading (ii)
£m
2010
2009
2009
fair Amortised cost Designated at
fair value (ii)
£m
or other (i)
£m
value
£m
2009
Total carrying
value
£m
2009
Fair
value
£m
financial Assets
Current
Cash and cash equivalents
Amounts owed by subsidiary
undertakings
Derivative financial assets
Non-current
Amounts owed by subsidiary
undertakings
Derivative financial assets
financial Liabilities
Current
Bank loans and overdrafts
Convertible bond
Amounts owed to subsidiary
undertakings
Derivative financial liabilities
Non-current
Eurobonds
Bank loans
Amounts owed to subsidiary
undertakings
Derivative financial liabilities
99.7
–
99.7
99.7
135.1
–
135.1
135.1
1,804.6
–
1,904.3
3,456.1
–
3,456.1
5,360.4
(815.6)
–
(2,569.0)
–
(3,384.6)
(2,858.6)
(271.3)
(240.2)
–
(3,370.1)
(6,754.7)
–
56.6
56.6
–
47.5
47.5
1,804.6
56.6
1,804.6
56.6
1,960.9
1,960.9
3,052.7
–
3,187.8
3,456.1
47.5
3,456.1
47.5
3,503.6
3,503.6
104.1
5,464.5
5,464.5
2,066.9
–
2,066.9
5,254.7
–
178.1
178.1
–
–
–
178.1
3,052.7
178.1
3,365.9
3,052.7
178.1
3,365.9
2,066.9
–
2,066.9
5,432.8
2,066.9
–
2,066.9
5,432.8
–
–
(815.6)
–
(817.3)
–
(900.8)
(15.6)
–
–
(900.8)
(15.6)
(900.8)
(19.6)
–
(45.2)
(2,569.0)
(45.2)
(2,569.0)
(45.2)
(45.2)
(3,429.8)
(3,431.5)
(2,517.2)
–
(3,433.6)
–
(130.8)
(130.8)
(2,517.2)
(130.8)
(2,517.2)
(130.8)
(3,564.4)
(3,568.4)
–
28.7
(2,858.6)
(242.6)
(3,203.1)
(270.2)
(2,381.7)
(280.0)
–
33.4
(2,381.7)
(246.6)
(2,562.9)
(278.6)
–
(82.8)
(240.2)
(82.8)
(240.2)
(82.8)
(54.1)
(3,424.2)
(3,796.3)
(99.3)
(6,854.0)
(7,227.8)
(240.2)
–
(2,901.9)
(6,335.5)
–
–
(240.2)
–
(240.2)
–
33.4
(2,868.5)
(3,081.7)
(97.4)
(6,432.9)
(6,650.1)
Net financial (liabilities)/asset
(1,394.3)
4.8
(1,389.5)
(1,763.3)
(1,080.8)
80.7
(1,000.1)
(1,217.3)
(i) Recorded at amortised cost, available for sale, or loans and receivables.
(ii) IAS 39 financial instruments.
Basis of determining fair value
Certain assets and liabilities designated and carried at amortised cost 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.
136
Scottish and Southern Energy
Annual Report 2010
Notes on the financial statements (continued)
for the year ended 31 March
28. fiNANCiAL iNSTRuMENTS AND RiSK (continued)
B. RiSKS fROM uSE Of fiNANCiAL iNSTRuMENTS
(i) Credit risk
Credit risk is the risk of financial loss to the Group if a customer or counterparty fails to meet its contractual obligations.
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 prior to commencing, and for the duration
of, their contract of supply. Domestic customers’ creditworthiness is reviewed from a variety of internal and external information.
Exposure to credit risk in the procurement of wholesale energy and fuel is managed by reference to agreed transaction credit limits
which are determined by whether the counterparty:
(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 2010,
the Group’s Generation and Supply business had pledged £169.9m (2009 – £221.4m) of cash collateral and letters of credit and had
received £28.6m (2009 – £28.0m) of cash collateral and letters of credit principally to reduce exposures on credit 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.
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 to 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 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
Wholesale receivables
Other
Other businesses
137
Introduction to SSE
Directors’ report
Financial statements
Shareholder information
2010
£m
21.2
21.7
42.9
596.3
1,381.6
355.6
129.8
2,506.2
2009
£m
20.0
35.6
55.6
883.1
1,978.0
225.0
191.6
3,333.3
The Generation and Supply segment accounts for 93.2% (2009 – 92.6%) of the Group’s trade receivables. Trade receivables associated
with the Group’s 9.35 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 biggest customer
balance, due from a wholesale electricity customer (also a wholesale supplier), is less than 9% (2009: 6%) of the total trade receivables.
The ageing of trade receivables at the reporting date was:
Not past due
Past due but not individually impaired:
0 – 30 days
31 – 90 days
Over 90 days
Less: allowance for impairment
Net Trade receivables
2010
£m
2009
£m
2,258.5
3,008.1
153.6
57.9
185.1
2,655.1
(148.9)
2,506.2
192.6
96.0
163.3
3,460.0
(126.7)
3,333.3
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. Those debts which are neither past due nor impaired are considered to be good and are expected to be recoverable.
The Group has other receivables which are financial assets totalling £640.5m (2009 – £481.7m). The Company does not have
trade receivables.
The movement in the allowance for impairment of trade receivables was:
Balance at 1 April
Increase in allowance for impairment
Impairment losses recognised
Recovery of impairment loss previously recognised
Acquired allowance
Balance at 31 March
2010
£m
126.7
81.7
(70.2)
9.5
1.2
148.9
2009
£m
115.7
35.2
(39.9)
15.7
–
126.7
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 receivables 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.
138
Scottish and Southern Energy
Annual Report 2010
Notes on the financial statements (continued)
for the year ended 31 March
28. fiNANCiAL iNSTRuMENTS AND RiSK (continued)
B. RiSKS fROM uSE Of fiNANCiAL iNSTRuMENTS (continued)
(ii) Liquidity risk and Going Concern
Liquidity risk, the risk that the Group will have insufficient funds to meet its liabilities, is managed by the Group’s Treasury function.
The Group can have significant movements in its liquidity position due to movement in commodity price, working capital requirements,
the seasonal nature of the business and phasing of its capital reduction programme.
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.
Short term liquidity is reviewed daily by Treasury while the longer term liquidity position is reviewed on a regular basis by the Board.
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 seek 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. This test was relaxed during the year to March 2009
as a result of the deteriorating conditions in the capital and banking markets in the latter half of 2008. However as a result of £4.8bn
of funds and facilities raised since July 2008 this test is back in place and being adhered to.
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 22, the Group has £20m of uncommitted bank lines
and a £20m overdraft facility.
During the year, the Group entered into a new £900m revolving credit facility which will mature in June 2012 along with a £100m
bilateral facility (on the same terms as the revolving credit facility) which also matures in June 2012. The Group also entered into
a £400m loan facility with the European Investment Bank which can be utilised over a one year period and can be drawn on a fixed
or floating basis with a term of up to 10 years. At the time of signing the accounts, these facilities were all undrawn.
Under the going concern principle, the Group expects to issue medium to long term debt during the year ended 31 March 2011.
In addition, liquidity in the commercial paper market and the availability of undrawn committed bank facilities has enabled the Directors
to conclude that the Group has sufficient headroom to continue as a going concern. In coming to this conclusion the Directors have
taken into account the successful issuance of £2.9bn of medium to long term debt since July 2008, the Group’s credit rating, the
successful renewal and increase of committed bank facilities and current market conditions. The statement of going concern is
included in the Directors’ Corporate Governance report on page 75.
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.
The movement in commodity prices during the year has resulted in a small decrease in the cash amount being posted in respect
of mark-to-market related margin calls on exchange traded positions. As at 31 March 2010, the value of outstanding cash collateral
posted totalled £71.2m (2009 – £86.9m), representing a net cash inflow during the year of £15.7m.
The contractual cash flows shown in the following tables are the contractual undiscounted cashflows under the relevant financial
instruments. Where the contractual cashflows are variable based on a price, foreign exchange rate or index in the future, the
contractual cashflows in the following tables have been determined with reference to the relevant price, foreign exchange rate,
interest rate or index as at the balance sheet date. In determining the interest element of contractual cashflows in cases where the
Group has a choice as to the length of interest calculation periods and the interest rate that applies varies with the period selected,
the contractual cashflows have been calculated assuming the Group selects the shortest available interest calculation periods.
Where the holder of an instrument has a choice of when to redeem, the amounts in the following tables are on the assumption
the holder redeems at the earliest opportunity.
The numbers in the following tables have been included in the Group’s cashflow forecasts for the purposes of considering Liquidity
Risk as noted above.
139
Introduction to SSE
Directors’ report
Financial statements
Shareholder information
The following are the undiscounted contractual maturities of financial liabilities, including interest and excluding the impact
of netting agreements:
Liquidity risk
financial liabilities
Loans and borrowings
Bank overdrafts
Commercial paper and
2010
2010
Carrying Contractual
value cash flows
£m
£m
2010
0-12
months
£m
2010
1-2
years
£m
2010
2-5
years
£m
2010
2009
2009
> 5 Carrying Contractual
2009
0-12
value cash flows months
£m
£m
£m
years
£m
2009
1-2
years
£m
2009
2-5
years
£m
2009
> 5
years
£m
9.2
(9.2)
(9.2)
–
–
–
2.3
(2.3)
(2.3)
–
–
–
cash advances
745.6
281.6
530.9
(745.6)
(296.0)
Bank loans – floating
(851.5)
Bank loans – fixed
Unsecured bonds – fixed 3,639.9 (6,956.7)
–
Convertible bond
(648.9)
Non-recourse funding
–
Fair value adjustment
–
484.1
(28.7)
–
(745.6)
(72.4)
(62.0)
–
(2.8) (220.8)
–
900.8
–
220.0
(60.2) (407.7) (321.6)
520.0
(215.2) (215.2) (1,807.4) (4,718.9) 3,263.7
15.6
506.7
(33.4)
(329.2) (2,581.6) (5,439.1) 5,395.7
–
(51.0) (145.7) (398.6)
–
(53.6)
–
–
–
–
–
–
(904.2)
(238.1)
(622.9)
(6,780.4)
(16.5)
(689.8)
–
(904.2)
(5.9)
(117.8)
(195.8)
(16.5)
(74.5)
–
–
(74.3)
(57.4)
–
–
(132.7)
(25.2)
–
(447.7)
(195.9) (1,843.7) (4,545.0)
–
(405.1)
–
–
(154.2)
–
–
(56.0)
–
(9,254.2) (1,317.0)
(383.6) (2,578.3) (4,975.3)
5,662.6 (9,507.9) (1,158.0)
Finance lease
obligations
384.4
(796.2)
(52.8)
6,047.0 (10,304.1) (1,210.8)
(52.0) (153.7) (537.7)
0.5
(381.2) (2,735.3) (5,976.8) 5,396.2
(0.8)
(0.1)
(0.1)
(0.3)
(0.3)
(9,255.0) (1,317.1)
(383.7) (2,578.6) (4,975.6)
74.2
Derivative financial liabilities
Operating derivatives
designated at fair value 2,738.1 (11,514.2) (8,421.2) (1,870.1) (1,174.8)
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
(179.4)
(198.0)
(101.6)
(14.8)
(58.2)
(15.9)
(74.3)
101.6
(26.2)
(11.9)
(6.1)
(2.0)
(1.2)
(8.0)
(3.3)
(0.1)
39.6
1.1
4.7
(48.1) 3,218.4
(2,892.4) (2,497.0)
(158.3)
(226.0)
(11.1)
(17.4)
79.3
(79.3)
(16.1)
(13.1)
(31.1)
(19.0)
(75.6)
112.3
(112.3)
(5.3)
(5.3)
(14.3)
(87.4)
–
0.3
(21.9)
(20.6)
(0.6)
(0.7)
–
–
0.2
2,919.7 (11,891.4) (8,626.5) (1,950.4) (1,173.4) (141.1) 3,410.5
–
(16.5)
(16.5)
–
–
(3,122.4) (2,555.5)
(177.3)
(272.1)
(117.5)
Other financial liabilities
Trade payables
2,161.6
(2,161.6) (2,161.6)
2,161.6
(2,161.6) (2,161.6)
–
–
–
–
– 2,603.6
– 2,603.6
(2,603.6) (2,603.6)
(2,603.6) (2,603.6)
–
–
–
–
–
–
Total
11,128.3 (24,357.1)(11,998.9) (2,331.6) (3,908.7) (6,117.9) 11,410.3 (14,981.0) (6,476.2)
(561.0) (2,850.7) (5,093.1)
Derivative financial assets
Financing derivatives
Operating derivatives
designated at fair value (1,827.8) 8,200.6 6,930.1 1,175.5
894.9
(1,934.6) 6,734.2 5,780.3
(106.8) (1,466.4) (1,149.8)
(280.6)
(18.5)
(17.5)
(178.1)
(550.6)
(447.3)
(24.4)
(45.6)
(33.3)
119.2
100.7
(24.2) (1,808.8)
(41.7) (1,986.9)
(1,394.0)
(371.8)
(833.9)
(181.8)
(6.5)
(1,944.6)
(819.1)
(858.3)
(227.4)
(39.8)
Net total (i)
9,193.7 (17,622.9) (6,218.6) (1,436.7) (3,808.0) (6,159.6) 9,423.4 (16,925.6) (7,295.3) (1,419.3) (3,078.1) (5,132.9)
(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.
140
Scottish and Southern Energy
Annual Report 2010
Notes on the financial statements (continued)
for the year ended 31 March
28. fiNANCiAL iNSTRuMENTS AND RiSK (continued)
B. RiSKS fROM uSE Of fiNANCiAL iNSTRuMENTS (continued)
The Company has the following liquidity maturity profile:
Liquidity risk
2010
2010
Carrying Contractual
2010
0-12
value cash flows months
£m
£m
£m
2010
1-2
years
£m
2010
2-5
years
£m
2010
2009
2009
> 5 Carrying Contractual
2009
0-12
value cash flows months
£m
£m
£m
years
£m
2009
1-2
years
£m
2009
2-5
years
£m
2009
> 5
years
£m
financial liabilities
Loans and borrowings
Commercial paper and
cash advances
745.6
131.5
209.8
900.8
70.0
Bank loans – floating
Bank loans – fixed
210.0
Unsecured bonds – fixed 2,858.6 (5,060.6) (179.4) (179.4) (1,699.5) (3,002.3) 2,381.7
15.6
Convertible bond
(33.4)
Fair value adjustment
3,916.8 (6,201.1) (1,008.7) (193.6) (1,996.5) (3,002.3) 3,544.7
(745.6) (745.6)
(71.2)
(142.5)
(12.5)
(252.4)
–
(69.6)
(12.5) (227.4)
–
(28.7)
–
(1.7)
–
–
–
–
–
–
–
–
–
–
–
–
–
(904.2)
(72.3)
(264.8)
(4,516.8)
(16.5)
–
(904.2)
(1.9)
(12.5)
(155.6)
(16.5)
–
–
(70.4)
(12.5)
–
–
–
–
–
(239.8)
(155.6) (1,722.0) (2,483.6)
–
–
–
–
–
–
(5,774.6) (1,090.7)
(238.5) (1,961.8) (2,483.6)
Derivative financial liabilities
Interest rate swaps
used for hedging
Interest rate swaps
designated at fair value
89.9
32.3
(32.3)
(9.2)
(9.2)
(13.9)
–
33.4
(33.4)
(7.4)
(7.4)
(18.6)
–
(89.9)
(6.5)
(4.6)
(10.7)
(68.1)
96.8
(96.8)
(4.1)
(4.1)
(12.2)
(76.4)
Forward exchange
contracts held
for hedging
Forward exchange
contracts designated
at fair value
1.1
(3.3)
(2.0)
(1.2)
(0.1)
4.7
(198.0) (179.4)
(58.2)
128.0
(323.5) (197.1)
(73.2)
39.6
14.9
–
–
0.3
(21.9)
(20.6)
(0.6)
(0.7)
0.3
(16.5)
(16.5)
–
–
–
–
(68.1)
130.8
(168.6)
(48.6)
(12.1)
(31.5)
(76.4)
Other financial liabilities
Amounts due to
subsidiary
undertakings
2,569.0
(2,569.0) (2,569.0)
2,569.0
(2,569.0) (2,569.0)
–
–
–
–
– 2,517.2
– 2,517.2
(2,517.2) (2,517.2)
(2,517.2) (2,517.2)
–
–
–
–
–
–
Total
6,613.8 (9,093.6) (3,774.8) (266.8) (1,981.6) (3,070.4) 6,192.7
(8,460.4) (3,656.5)
(250.6) (1,993.3) (2,560.0)
Derivative financial assets
Financing derivatives
Net total
(104.1) (1,466.5) (1,149.8) (280.6)
(178.1)
6,509.7 (10,560.1) (4,924.6) (547.4) (2,000.1) (3,088.0) 6,014.6
(17.6)
(18.5)
(550.6)
(447.3)
(24.4)
(45.6)
(33.3)
(9,011.0) (4,103.8)
(275.0) (2,038.9) (2,593.3)
(iii) 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 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 exposure of the Group’s commodity price risk under IFRS 7. This is a consequence
of the accounting policy which requires that commodity contracts which are designated as financial instruments under IAS 39 should
be accounted for 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, as the overall Group VaR
associated with the Generation and Supply business is monitored for internal risk management purposes and is outside the scope
of IAS 39, these measures are not required to comply with IFRS 7.
141
Introduction to SSE
Directors’ report
Financial statements
Shareholder information
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, as noted, 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 are 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.
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 the balance sheet date assuming that
a reasonably possible change in the relevant commodity price had occurred, 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 IAS 39 financial
instruments remains consistent with those at that point. Excluded from this analysis are all commodity contracts that are not
financial instruments under IAS 39.
2010
2009
Commodity prices
UK gas (p/therm)
UK power (£/MWh)
UK coal (US$/tonne)
UK emissions (€/tonne)
UK oil (US$/bbl)
Reasonably
possible
increase/
decrease in
variable
+/- 6
+/- 6
+/- 11
+/- 2
+/- 10
Base price (i)
59
49
83
13
62
Reasonably
possible
increase/
decrease in
variable
+/-12
+/-10
+/-18
+/-4
+/-15
Base price (i)
44
43
97
14
86
(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
2010
2009
impact on
profit
£m
impact on
equity
£m
Impact on
profit
£m
Impact on
equity
£m
196.0
(196.0)
Nil
Nil
417.4
(417.4)
Nil
Nil
142
Scottish and Southern Energy
Annual Report 2010
Notes on the financial statements (continued)
for the year ended 31 March
28. fiNANCiAL iNSTRuMENTS AND RiSK (continued)
B. RiSKS fROM uSE Of fiNANCiAL iNSTRuMENTS (continued)
The sensitivity analysis provided is hypothetical and is based on the Group’s commodity contracts under IAS 39. This analysis
should be used with caution as the impacts disclosed are not necessarily indicative of the actual impacts that would be experienced.
It should also be noted that these sensitivities are based on calculations which do not consider all interrelationships, consequences
and effects of such a change in those prices.
(iv) 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. All such
exposures are transactional in nature, and relate primarily to procurement contracts, commodity purchasing and related freight
requirements, commodity hedging, long-term plant servicing and maintenance agreements, and the purchase and sale of carbon
emission certificates. 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.
The Group has foreign subsidiary operations with significant euro-denominated net assets. The Group’s policy is to hedge its net
investment in its foreign operations by ensuring the 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.
Significant exposures are reported to, and discussed by, the Risk and Trading Committee on an ongoing basis and additionally form
part of the bi-annual Treasury report to the Audit Committee.
At the balance sheet date, the total nominal value of outstanding forward foreign exchange contracts that the Group has committed to is:
Forward foreign exchange contracts
The Group’s exposure to foreign currency risk was as follows:
2010
£m
2009
£m
1,864.8
1,286.1
Loans and borrowings
Purchase and commodity contract
commitments
Gross exposure
2010
2009
¥m
DKKm
€m
uS$m
¥m
DKKm
€m
US$m
28,000.0
–
1,370.0
210.0 28,000.0
–
1,092.0
97.5
253.4
843.1
627.5
2,818.4
28,253.4
843.1
1,997.5
3,028.4
–
–
181.3
181.3
673.6
1,906.3
1,765.6
2,003.8
Forward exchange/swap contracts
28,253.4
843.1
843.2
1,538.9 28,000.0
181.3
333.9
967.5
Net exposure (in currency)
Net exposure (in £m)
–
–
–
–
1,154.3
1,489.5
1,028.1
980.5
–
–
–
–
1,431.7
1,036.3
1,324.7
724.7
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.
143
Introduction to SSE
Directors’ report
Financial statements
Shareholder information
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
Danish Krone
Yen
Equity
Income Statement
At 31 March
2010
£m
At 31 March
2009
£m
At 31 March
2010
£m
At 31 March
2009
£m
–
58.4
–
–
58.4
–
51.9
–
–
51.9
78.4
23.9
–
–
102.3
58.0
54.1
–
–
112.1
The impact of a decrease in rates would be an identical reduction in the annual charge.
(v) interest rate risk
Interest rate risk derives from the Group’s exposure to changes in the 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 of LIBOR plus a variable margin and cash advances from the European Investment Bank (EIB).
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 fixed-to-floating 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
2010
Carrying
amount
£m
(4,833.6)
(1,090.7)
(5,924.3)
261.7
(110.5)
(5,691.1)
(384.4)
(5,924.3)
2009
Carrying
amount
£m
(4,735.9)
(553.5)
(5,289.4)
295.9
(155.7)
(5,429.1)
(0.5)
(5,289.4)
Following from this, the table below 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 and is stated after the effect of taxation.
144
Scottish and Southern Energy
Annual Report 2010
Notes on the financial statements (continued)
for the year ended 31 March
28. fiNANCiAL iNSTRuMENTS AND RiSK (continued)
B. RiSKS fROM uSE Of fiNANCiAL iNSTRuMENTS (continued)
The sensitivity analysis is indicative only and it should be noted that the Group’s exposure to such market rate changes is continually
hanging. 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
2010
£m
9.9
9.9
2009
£m
6.1
6.1
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.
(vi) Primary 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
Net income statement impact
2010
£m
2009
£m
(3,449.6)
3,881.8
432.2
(3,964.8)
2,673.1
(1,291.7)
456.8
(493.3)
(36.5)
70.5
(44.7)
25.8
395.7
(1,265.9)
(i) Total result on derivatives in the income statement represents the total amounts (charged) or credited to the income statement in respect
of operating and financial derivatives.
(ii) Amounts settled in the year represent the result on derivatives transacted which have matured or been delivered and have been included
within the total result on derivatives.
The net derivative financial assets and (liabilities) are represented as follows:
Derivative financial assets
Non-current
Current
Derivative liabilities
Non-current
Current
Total derivative liabilities
Net liability
2010
£m
2009
£m
466.3
1,468.3
1,934.6
(899.0)
(2,020.7)
(2,919.7)
(985.1)
449.2
1,537.7
1,986.9
(959.5)
(2,451.0)
(3,410.5)
(1,423.6)
145
Introduction to SSE
Directors’ report
Financial statements
Shareholder information
fair value hierarchy
The following table provides an analysis of financial instruments that are measured subsequent to initial recognition at fair value,
grouped into Levels 1 to 3 based on the degree to which the fair value is observable.
k Level 1 fair value measurements are those derived from unadjusted quoted market prices for identical assets or liabilities.
k Level 2 fair value measurements are those derived from inputs other than quoted prices included within level 1 that are
observable for the asset or liability, either directly (ie as prices) or indirectly (ie derived from prices).
k Level 3 fair value measurements are those derived from valuation techniques that include inputs for the asset or liability
that are not based on observable market data.
financial assets
Energy derivatives
Interest rate derivatives
Foreign exchange derivatives
financial liabilities
Energy derivatives
Interest rate derivatives
Foreign exchange derivatives
Loans and borrowings
Level 1
£m
148.3
–
–
148.3
(191.5)
–
–
–
(191.5)
Level 2
£m
Level 3
£m
Total
£m
1,681.4
30.4
74.6
1,786.4
(2,546.6)
(175.9)
(5.8)
28.7
(2,699.6)
–
–
–
–
–
–
–
–
–
1,829.7
30.4
74.6
1,934.7
(2,738.1)
(175.9)
(5.8)
28.7
(2,891.1)
There were no transfers out of level 1 into level 2 and out of level 2 into level 1 during the year ended 31 March 2010.
(vii) 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 to hedge a forecast transaction or cash flow risk generally arising from a change
in interest rates or foreign currency exchange 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
2010
Carrying
amount
£m
2010
Expected
cash flows
£m
2010
0-12
months
£m
2010
1-2
years
£m
2010
2-5
years
£m
2010
> 5
years
£m
2009
Carrying
amount
£m
2009
Expected
cash flows
£m
2009
0-12
months
£m
2009
1-2
years
£m
2009
2-5
years
£m
2009
> 5
years
£m
(7.1)
(7.1)
(3.2)
(2.1)
(1.8)
–
(10.0)
(10.0)
(4.2)
(2.6)
(3.2)
Nil
22.0
(1.1)
(543.5) (485.5)
(2.0)
(3.3)
(11.8)
(1.2)
(19.4)
(0.1)
(26.8)
–
52.2
(0.3)
(556.3)
(21.9)
(489.1)
(20.6)
(10.9)
(0.6)
(23.0)
(0.7)
(33.3)
Nil
20.9
(546.8) (487.5)
(13.0)
(19.5)
(26.8)
51.9
(578.2)
(509.7)
(11.5)
(23.7)
(33.3)
Net investment hedge
The Group’s net investment hedge consists of debt issued in the same currency (€) as the net investment in Airtricity. The hedge
compares the element of the net assets of Airtricity whose functional cash flows are denominated in € to the matching portion
of the € 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 (2010 – £47.2m, 2009 – £142.9m). Gains and losses on the ineffective portion of the hedge are recognised immediately
in the income statement (2010 – £nil, 2009 – £nil).
146
Scottish and Southern Energy
Annual Report 2010
Notes on the financial statements (continued)
for the year ended 31 March
28. fiNANCiAL iNSTRuMENTS AND RiSK (continued)
B. RiSKS fROM uSE Of fiNANCiAL iNSTRuMENTS (continued)
(viii) Capital Management
The Board’s policy is to maintain a strong balance sheet and credit rating so as to maintain investor, creditor and market confidence
and to sustain future development of the business. Details of the capital management objectives, policies and procedures are
included in the Financial Management section of the Business Statement of this report.
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. No share buy-back was made during the year.
On 7 January 2009, the Group conducted a book-built, non-pre-emptive placing of 42.0 million new Ordinary Shares. The shares
were placed at a price of £11.40 each which was within 1% of the average closing price of the shares in the preceding four weeks.
Based on the price, the gross proceeds of the placing were £479.0m, representing approximately 4.8% of the Group’s share capital.
The shares carried the right to the interim dividend paid on 27 March 2009 and carry the right to subsequent dividend.
The placing of shares was one of a series of steps taken which reflects the Group’s flexible and prudent approach to financing
investment. It also enhanced the Group’s future options by providing additional sources of funding for appropriate investment
and acquisition opportunities.
In summary, the Group’s intent is to balance returns to shareholders between correct returns through dividends and long-term
capital investment for growth. In doing so, the Group will maintain its capital discipline and will continue to operate within the correct
economic environment prudently.
29. RELATED PARTY TRANSACTiONS
The immediate parent and ultimate controlling party of the Group is Scottish and Southern Energy plc (incorporated in Scotland).
Balances and transactions between the Company and its subsidiaries, which are related parties of the Company, have been eliminated on
consolidation and are not disclosed in this note. Details of transactions between the Group and other related parties are disclosed below.
(i) Trading 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.
Jointly controlled entities:
Seabank Power Limited
PriDE (South East Regional Prime) Limited
Scotia Gas Networks Limited
Marchwood Power Limited
Greater Gabbard Offshore Winds Ltd
Associates:
Barking Power Limited
Derwent Co-generation Limited
Logan Energy Ltd
Green Highland Renewables Ltd
Vital Holdings Limited
Onzo Limited
Sale of goods
and services
2010
£m
Purchase of
goods and
services
2010
£m
Other
transactions
2010
£m
Sale of goods
and services
2009
£m
Purchase of
goods and
services
2009
£m
Other
transactions
2009
£m
3.0
40.5
54.9
31.5
3.9
2.5
30.6
0.8
0.3
1.1
–
(107.1)
–
(145.0)
(65.7)
–
(135.5)
(96.6)
–
–
(0.6)
(1.0)
7.1
–
–
–
–
15.2
–
–
–
–
(4.9)
5.2
54.3
59.0
–
1.0
0.7
37.4
0.7
0.2
–
–
(82.4)
–
(134.7)
–
–
(177.5)
(94.6)
–
–
–
–
20.7
–
35.0
104.6
–
(0.1)
–
–
–
–
–
The transactions with Marchwood Power Limited, 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 Limited 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. Sales of goods to related parties were made at an arms length price.
147
Introduction to SSE
Directors’ report
Financial statements
Shareholder information
Amounts owed by
related parties
Amounts owed to
related parties
2010
£m
0.3
7.0
–
16.4
–
16.4
2.0
–
–
2009
£m
4.6
6.6
0.2
27.4
0.4
0.1
8.3
–
–
2010
£m
26.0
–
–
1.3
7.0
9.3
9.4
0.1
1.2
2009
£m
23.1
Nil
Nil
0.3
Nil
17.7
9.5
0.1
–
The balances outstanding with related parties at 31 March were as follows:
Consolidated
Jointly controlled entities:
Seabank Power Limited
PriDE (South East Regional Prime) Limited
Greater Gabbard Offshore Winds Limited
Scotia Gas Networks Limited
Marchwood Power Limited
Associates:
Barking Power Limited
Derwent Co-generation Limited
Logan Energy Ltd
Onzo Limited
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.
(ii) Loans to related parties
Loans to associates:
At 1 April
Loans advanced during the year
Loan repayments received
Interest charged
Interest received
At 31 March
Loans to jointly controlled entities:
At 1 April
Loans advanced during the year
Loan repayments received
Interest charged
Interest received
At 31 March
Loans to subsidiaries:
At 1 April
Loans advanced during the year
Loan repayments received
Interest charged
Interest received
At 31 March
2010
£m
25.0
7.7
(1.1)
0.7
(0.7)
31.6
685.9
289.1
(27.4)
53.2
(51.2)
949.6
2009
£m
10.4
14.6
–
1.1
(1.1)
25.0
425.3
286.9
(25.8)
52.8
(53.3)
685.9
1,388.1
1,558.6
–
135.8
(135.8)
2,946.7
1,083.1
330.0
(25.0)
143.8
(143.8)
1,388.1
148
Scottish and Southern Energy
Annual Report 2010
Notes on the financial statements (continued)
for the year ended 31 March
29. RELATED PARTY TRANSACTiONS (continued)
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
2010
£m
3.6
2009
£m
3.5
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
2010
£m
2009
£m
994.5
986.1
Contracted for but not provided capital commitments includes the fixed contracted costs of the Group’s major capital projects.
In practice, contractual variations may arise on the final settlement of these contractual costs. The stated capital commitments
relate to the Group’s own contractual obligations and do not include those of related parties.
(ii) Operating lease commitments
(a) Leases as lessee:
Amount included in the income statement relating to the current year leasing arrangements
Minimum lease payments – power purchase agreement
Other lease payments
2010
£m
229.6
41.6
271.2
2009
£m
198.9
21.7
220.6
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
2010
£m
178.1
374.9
217.7
770.7
41.0
63.0
94.3
198.3
219.1
437.9
312.0
969.0
2009
£m
221.0
483.5
278.2
982.7
23.1
32.3
87.0
142.4
244.1
515.8
365.2
1,125.1
The average power purchase agreement lease term is 7 years.
The obligations under power purchase agreements with various power generating companies are not deemed to qualify as finance
leases under IAS 17.
149
Introduction to SSE
Directors’ report
Financial statements
Shareholder information
(b) Leases as lessor:
The Group previously leased out two combined heat and power plants under finance leases. During the year the Group disposed
of these plants to the lessee resulting in a gain of £0.3m recorded in the Income Statement. Therefore, the future minimum lease
payments are as follows:
Within one year
In second to fifth years inclusive
After five years
2010
£m
–
–
–
–
2009
£m
0.3
1.0
0.5
1.8
During the year ended 31 March 2010 £0.1m was recognised as rental income in the income statement (2009 – £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
The Company and various subsidiaries have provided guarantees on behalf of subsidiary, joint venture and associated undertakings as
follows:
Bank borrowing
Performance of contracts
Purchase of gas
2010
£m
–
2,042.1
60.5
2009
£m
18.3
2,309.0
70.5
Following the acquisition from Fluor International Limited of their 50% stake in Greater Gabbard Offshore Winds Limited in April
2008, the Company entered into guarantees in respect of 100% of the major contracts for this project which is reflected in the above
guarantees. Following the sale of 50% to npower renewables Limited in November 2008, the Company is now indemnified for 50%
of these guarantees.
In addition, unlimited guarantees have been provided on behalf of subsidiary undertakings in relation to five contracts in respect of
performance of work and any liabilities arising. Southern Electric Power Distribution plc and the Company have provided guarantees
to the Southern Group of the ESPS in respect of the funding required by the scheme. Scottish Hydro Electric Power Distribution plc
and the Company have provided guarantees to the Scottish Hydro 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. POST BALANCE ShEET EvENTS
On 31 March 2010, the Group through its wholly-owned subsidiary, SSE E&P UK Limited, has entered into an agreement with Hess
Limited to acquire its natural gas and infrastructure assets in the three regions of the North Sea.
On successful completion the Group expects to pay a total cash consideration of up to US$423m. The transaction is subject to the
receipt of all necessary partner and regulatory approvals, as such the potential acquisition has not been included in the financial
results for the year ended 31 March 2010. The transaction is expected to be concluded during the next financial year.
150
Scottish and Southern Energy
Annual Report 2010
Shareholder information
eCommunications programme
To sign up to our eCommunications
Programme visit www.sse.com/ecomms.
As a thank you we will donate £2 on your
behalf to the World Wildlife Fund’s (WWF)
International Forest Programme.
Keep us informed
Keep us informed of changes to your email
address by visiting www.sse.com/ecomms
and follow the instructions under ‘update
your email address’.
Scrip Dividend Scheme/
Dividend Reinvestment Plan
The Company is proposing the
introduction of a Scrip Dividend Scheme
at the AGM 2010. If this Plan is introduced
the Dividend Reinvestment Plan will be
terminated. Full details available from our
website or on request from the Registrar.
Copy reports
Copies of the Annual Report and Accounts
2010 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.sse.com.
Shareholder enquiries
Share Registrar:
Capita Registrars, Northern House,
Woodsome Park, Fenay Bridge,
Huddersfield HD8 0GA
Telephone: 0845 143 4005
Email: sse@capitaregistars.com
financial calendar
Annual General Meeting
22 July 2010
Ex dividend date
28 July 2010
Record date
30 July 2010
Final dividend payable
24 September 2010
Half year results announcement*
10 November 2010
Website – www.sse.com
The Company’s website contains a wide
range of information including a dedicated
Investor Centre section where you can find
further information about shareholder
services including:
k share price information;
k downloadable shareholder forms;
k view share price, dividend history and
trading graphs;
k elect for eCommunications; and
k telephone and internet share dealing.
* Provisional date.
Glossary
151
Introduction to SSE
Directors’ report
Financial statements
Shareholder information
BOfA
Boosted Over Fire Air: a technology used
in some modern coal-fired power stations
which reduces the amount of nitrogen
oxides produced by forcing air into the
boiler at a higher rate and a higher
position than usual, causing the coal
to burn at a lower temperature than
in traditional plants.
Carbon dioxide (CO2)
One of the so-called ‘greenhouse gasses’
believed to contribute to global warming.
Carbon Disclosure Leadership index
An assessment, undertaken by the Carbon
Disclosure Project which considers the
quality of organisations’ disclosure on
climate change-related issues. Participating
companies complete a detailed survey
which requires information on the
organisation’s climate change-related
strategy and targets and data on emissions.
Carbon Disclosure Project
A not-for-profit organisation representing
top institutional investors which provides
a database of corporate climate change-
related information to support their
investment decisions.
CCGT
Combined Cycle Gas Turbines: turbines
which utilise a more efficient process in
the production of electricity. Waste heat
from the gas-firing process which drives
the first energy-generating turbine is used
to heat water to steam which then drives
a second turbine.
CCS
Carbon Capture and Storage: a means
of mitigating the contribution of fossil
fuel emissions to climate change which
involves capturing carbon dioxide
produced at large sources of emissions,
such as power stations, and storing it
away from the atmosphere. The carbon
dioxide can be extracted either before
or after the fuel is burnt.
CERT
Carbon Emissions Reduction Target: an
obligation placed by the government on
large energy suppliers which requires them
to reduce the amount of CO2 produced as a
result of the energy used by householders in
Great Britain. The aim of the current CERT
program, which is due to run from April
2008 to March 2011, is to deliver measures
that will provide overall lifetime CO2
savings of 154 million tonnes. Under CERT,
suppliers must focus 40 per cent of their
activity on a priority group of vulnerable
and low-income households. These include
those in receipt of certain income and or
disability benefits and pensioners over the
age of 70. There are currently proposals in
place to increase the amount of savings to
185MT of CO2 and extend the time period
of the program to December 2012.
CESP
Community Energy Saving Programme:
part of the government’s Home Energy
Saving Programme. It requires larger gas
and electricity suppliers and electricity
generators to deliver energy saving
measures to domestic consumers in
specific low income areas of Great Britain.
The Department for Energy and Climate
Change (DECC) is responsible for setting
the overall CESP target and the policy
framework and Ofgem is responsible
for administering the programme.
Clean-tech
Products, services, and processes
that harness renewable materials and
energy sources, reduce the use of natural
resources, and cut or eliminate emissions
and wastes.
Consumer Direct
A government-funded telephone and
online service offering information
and advice on consumer issues.
Consumer focus
An organisation set up by the government in
2008 formed by the merger of energywatch,
Postwatch and the National Consumer
Council to represent the interests of
consumers in the UK.
Distribution Price Control Review
A five-yearly review undertaken by industry
regulator Ofgem in conjunction with
licensed electricity distribution operators
to ensure that the operators can earn a
fair return after their efficient capital and
operating costs are taken into account.
The most recent review relates to the Price
Control which applies from 1 April 2010.
Emission Limit values
Limits set by the Large Combustion Plant
Directive relating to the concentrations
of oxides of sulphur and nitrogen and
of particulates emitted by installations
including large fossil-fuelled power
stations. These emissions are measured
real-time actual levels of emissions.
Eu ETS
European Union Emissions Trading
System: an annual scheme which
allocates and facilitates the trading of
greenhouse gas emissions allowances
throughout the EU. Operators of
installations covered by the scheme are
allocated certificates annually by their
government. Operators must ensure that
they have sufficient certificates to cover
their installation’s emissions and have
the option to buy additional certificates
from other operators or to sell surplus
certificates. EU ETS is one of the most
important aspects in Europe’s policies for
meeting its Kyoto Protocol commitments.
Eu Renewable Energy Directive
European legislation which places a legally-
binding commitment on member States
to increase the total proportion of energy
derived from renewable sources 20% by
2020. Each Member State has its own
target which reflects its current renewable
energy provision; the UK’s target is 15%.
All forms of energy usage are covered
by this target, including transport.
fGD
Flue Gas Desulphurisation: the process
of removing sulphur dioxide from the
exhaust flue gases in fossil-fuelled
(primarily coal) power stations. FGD can
remove between 90 and 94% of sulphur
dioxide from flue gases.
Gas storage
The storage of natural gas, usually in
under ground chambers, for release into
the gas network at times of high demand,
or when market prices are high.
Gigawatt (GW)
1,000 megawatts (1,000,000,000 watts).
Gigawatt/hour (GWh)
1,000 megawatt/hours.
integrated Pollution Control (iPC)
and integrated Pollution Prevention
and Control (iPPC)
Systems to control pollution from
industry, enforced by the Environment
Agency and Scottish Environmental
Protection Agency.
Kilovolt (kv)
1,000 volts.
Kilowatt (kW)
1,000 watts.
Kilowatt/hour (kWh)
One unit of electricity.
Large Combustion Plant Directive
European legislation introduced in 2001 to
control emissions of oxides of sulphur and
nitrogen and of particulates from sources
of large quantities of emissions, including
power stations. All newer installations
(licensed from 1987 onwards) must
comply with Emission Limit Values (ELVs),
while older installations can choose either
152
Scottish and Southern Energy
Annual Report 2010
Glossary (continued)
Run-of-river
Hydro electric generation schemes
which utilise the energy from flowing
watercourses, as opposed to water that
has been collected and stored.
SCR
Selective Catalytic Reduction: a method
of converting oxides of nitrogen, which
are associated with acid rain, into inert
nitrogen and water. SCR can be installed
in new build power stations or retro-fitted
to existing facilities.
Security of supply
In the context of electricity supply in
the UK, the degree to which the energy
infrastructure can be relied upon to
generate, transmit and distribute
electricity such that the needs of all
system users are met.
SOfA
Separated Over Fire Air: a technology used
in some modern coal-fired power stations
which reduces the amount of nitrogen
oxides produced by introducing air into the
boiler at a higher point in the combustion
process, causing the coal to burn at a lower
temperature than in traditional plants.
Sulphur dioxide (SO2)
Toxic gasses produced by the combustion
of carbon-based primary fuels by transport
and in power stations (see also NOx).
TRiR
Total Recordable Injury Rate: a recognised
measure of the total number of injuries
per 100,000 hours worked. Injuries in
this context are defined as those which:
are reportable to the Health and Safety
Executive; result in absence from work; or
which require invasive medical treatment
such as stitches.
uK industry Task force on Peak Oil
A group of British companies, including
SSE, whose interests span a wide range
of business sectors. The Task Force aims
to highlight the importance of being
prepared for an oil crunch when the era
of relatively cheap oil extraction ends.
to: comply with ELVs; take part in the
National Emissions Reduction Plan; or
opt out, which requires that installations
operate only for limited hours and close
down by the end of 2015.
Megawatt (MW)
1,000 kilowatts (1,000,000 watts).
Megawatt/hour (MWh)
1,000 units of electricity.
Nitrogen oxides (NOx)
Toxic gasses produced by the combustion
of carbon-based primary fuels by transport
and in power stations (see also SO2).
Offshore Wind Accelerator (OWA)
A research and development initiative
co-funded by the Carbon Trust and five
energy companies, including SSE, which
aims to speed up the rate at which offshore
wind technology develops. This includes
developing new turbine foundations and
installation techniques, improving access
for maintenance, identifying the best way to
lay out offshore wind farms and researching
how to minimise the amount of energy
lost in transmitting energy back to shore.
Ofgem
Office of Gas and Electricity Markets: the
government regulator for the electricity
and downstream natural gas markets in
Great Britain. Its role is to promote choice
and value for current and future gas and
electricity customers. Funding is from
annual licence fees recovered from
licensed network companies.
Peak oil
The point in time at which maximum
global oil production is achieved, prior
to a decline in production.
Pumped storage
A form of electricity generation which
uses the energy stored in water pumped
from a lower level to an elevated reservoir
to generate power. Whilst the process
is a net user of energy, pumped storage
is valuable as it can utilise low cost energy
at times of low demand to raise water to
the upper reservoir and can generate
electricity at very short notice, helping
balance supply and demand.
RAv
Regulated Asset Value, a key building
block of a price control review. It is a
financial construct for providing funds
over a prolonged period and represents
the value upon which companies earn
a regulated return. At the most recent
Distribution Price Control Review (DPCR5)
Ofgem undertook a fundamental review
of which costs are included in the RAV.
From 1 April 2010, 85% of all network
related expenditure will be funded as
‘slow’ money over 20 years through the
RAV. The remaining 15% of network costs
and all business support costs will be
funded as ‘fast’ money, expensed and
funded in the year of expenditure.
REfiT
Renewable Energy Feed In Tariff: a
scheme applicable in the Republic of
Ireland that financially supports suppliers
who purchase renewable energy and
thereby encourages provision of a
guaranteed price to generators.
Regulated businesses
Parts of SSE’s operations which are
subject to regulation by Ofgem or other
industry regulators such as Ofcom.
Renewables Obligation (RO)
The main support scheme for renewable
electricity projects in the UK. Under
the RO electricity suppliers in the UK
are required to source an increasing
proportion of the energy they supply to
customers from renewable sources. The
renewable energy is certified through the
issue of Renewable Obligation Certificates
(ROCs). Suppliers fulfil their obligation
through the presentation of ROCs. If a
supplier has a shortfall in its provision
of renewable electricity, it must pay into
a fund, the proceeds of which are paid
back out to suppliers in proportion to the
ROCs they present. Only certain forms of
renewable energy qualify for this scheme.
Retro-fitting
In the context of sustainable electricity
generation, installing new technologies to
existing plant in order that the plant can
operate more effectively under modern
market conditions. May include equipment
to reduce emissions of oxides of nitrogen
and of sulphur, or to increase the thermal
efficiency of plant, or to capture and store
carbon emissions.
ROCs
Renewables Obligation Certificates:
certificates issued by Ofgem for the
energy generated by eligible renewable
generators in accordance with the
Renewables Obligation.
RPi-x
The basis of Ofgem’s price control
mechanisms in place since 1989, which
ties revenue and expenditure growth to
the retail price index (RPI) minus (or plus)
X percentage points. Currently the subject
of a review by Ofgem which is due to
conclude in late summer 2010.
Introduction to SSE
01
What SSE does
02
How SSE provides energy
Directors’ report
04
05
06
Key performance indicators
Principal assets
Chairman and Chief Executive
Questions and answers
Strategic overview
Financial overview
Performance indicators
Business overview
Corporate governance
Chairman’s introduction
The SSE team
Risk management
How the Board works
Audit Committee
Risk and Trading Committee
Nomination Committee
Safety, Health and Environment
Advisory Committee
Remuneration Report – Introduction
Remuneration Report – At a glance
Remuneration Report – Remuneration
explained
Remuneration Report – Remuneration
in detail
Other statutory information
08
11
16
20
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47
48
52
56
60
62
63
64
65
66
67
72
75
Financial statements
77
78
79
80
81
83
85
85
94
97
98
Independent auditors’ report
Consolidated income statement
Statement of comprehensive income
Balance sheets
Statement of changes in equity
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
remeasurements
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149
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. Biological assets
13. Investments
14. Subsidiary undertakings
15. Acquisitions and disposals
16. Inventories
17. Trade and other receivables
18. Cash and cash equivalents
19. Trade and other payables
20. Current tax liabilities
21. Construction contracts
22. Loans and other borrowings
23. Deferred taxation
24. Provisions
25. Share capital and reserves
26. Retirement benefit obligations
27. Employee share-based payments
28. Financial instruments and risk
29. Related party transactions
30. Commitments and contingencies
31. Post balance sheet events
Shareholder information
150
151
Shareholder information
Glossary
* 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.
Designed and produced by Tayburn Corporate
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For further information
about SSE, please contact:
Scottish and Southern Energy plc
Corporate Affairs
Inveralmond House
200 Dunkeld Road
Perth PH1 3AQ
UK
T: +44 (0)1738 456000
E: info@sse.com
www.sse.com
Follow the latest news
from SSE on Twitter at:
www.twitter.com/sseplc
Registered in Scotland No. 117119
STOCK CODE 008234
In producing this report we have chosen production methods which
aim to minimise the impact on our environment. The papers chosen –
Revive 50:50 Silk and Revive 100 Uncoated – contain 50% and
100% recovered waste respectively and conform to government
requirements for recycled paper. They are also certified as FSC
mixed sources grade. Both the paper mill and printer involved
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The printer is also registered as a Carbon Neutral company.
Scottish and Southern Energy plc
Annual Report 2010