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Scottish and Southern Energy plc
Annual Report 2011
The stunning photograph
used on the cover of this year’s
Annual Report was taken at
SSE’s Drumderg wind farm in
Perthshire by award-winning
photographer Toby Smith.
Last year SSE commissioned Toby
to take a series of photographs
of its renewable energy projects
across Scotland. The photographs
form a collection known as
‘The Renewables Project’, and
are now in use on SSE’s website,
www.sse.com, and on display in
its office buildings. The Renewables
Project has also since featured in
a range of publications including
a special feature in National
Geographic magazine.
Contents
Overview
01
02
05
06
08
Introduction
The energy sector in Great Britain
The energy sector in Ireland
SSE – a balanced range of
energy businesses
Chairman and Chief Executive
Questions and answers
Strategy
10
Why invest in SSE?
Group performance
16
17
Key performance indicators
Financial overview
Segmental performance
23
23
29
29
43
Economically-regulated businesses
Energy networks
Market-based businesses
Generation and Supply
Other energy and utility services
Corporate governance
47
Chairman’s introduction to
SSE corporate governance
Board of Directors
The SSE team
How the Board works
Risk management
Audit Committee
Risk and Trading Committee
Nomination Committee
Safety, Health and Environment
Advisory Committee
Remuneration Report
Introduction
At a glance
Remuneration explained
Remuneration in detail
Other statutory information
48
50
52
56
60
62
63
64
65
65
66
67
72
75
Financial statements
78
79
80
81
82
84
86
86
95
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. Reclassification of comparative
amounts
3. Segmental information
4. Other operating income and expense
5. Exceptional items and certain
remeasurements
6. Directors and employees
7. Finance income and costs
8. Taxation
9. Dividends
10. Earnings per share
11. Intangible assets
12. Property, plant and equipment
13. Biological assets
14. Investments
15. Subsidiary undertakings
16. Acquisitions, disposals and
held for sale assets
17. Inventories
18. Trade and other receivables
19. Cash and cash equivalents
20. Trade and other payables
21. Current tax liabilities
22. Construction contracts
23. Loans and other borrowings
24. Deferred taxation
25. Provisions
26. Share capital
27. Reserves
28. Hybrid capital
29. Retirement benefit obligations
30. Employee share-based payments
31. Financial instruments and risk
32. Related party transactions
33. Commitments and contingencies
34. Post balance sheet events
96
99
100
101
102
103
105
105
106
110
111
112
115
117
119
120
120
120
121
121
121
124
125
126
126
126
127
130
135
149
150
151
Shareholder information
152
Shareholder information
The Directors’ Report is set out on pages 6 to 76.
*Unless otherwise stated, this Annual Report describes adjusted operating profit before exceptional
items, remeasurements arising from 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, remeasurements arising from 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, remeasurements arising from IAS 39 and deferred tax.
Designed and produced by Tayburn
01
Introduction
Scottish and Southern Energy
Annual Report 2011
Overview
Strategy
Group performance
Segmental performance
Corporate governance
Financial statements
Shareholder information
Dividend per share – pence
2011
2010
2009
2008
2007
75.0
70.0
66.0
60.5
55.0
Operating profit by business
2010/11 – %
Generation and Supply 53
Energy networks 39
Energy and utility
solutions 8
Energy customers – millions
2011
2010
2009
2008
2007
9.65
9.35
9.10
8.49
7.75
Capital expenditure 2010/11 – %
Thermal generation 9
Renewable generation 54
Power systems 23
Gas storage 4
Other 10
Our work
SSE is involved in the generation,
transmission, distribution and supply
of electricity, the production, storage,
distribution and supply of gas and in the
provision of other energy-related services.
Our values
In carrying out its work, SSE is guided
by its core values, the ‘SSE SET’ of Safety,
Service, Efficiency, Sustainability, Excellence
and Teamwork.
“SSE’s core purpose is to provide the
energy people need in a reliable
and sustainable way. In fulfilling
this purpose, SSE requires the support
of shareholders, to whom this report
is addressed.
It summarises SSE’s performance
in 2010/11 and its plans for 2011/12
and beyond. Plans for the future are of
central importance. Providing energy
is a long-term activity, and SSE is a
company that plans for the long term.
SSE is a straightforward company with
straightforward priorities. It provides
vital services to customers, invests
in essential energy assets and pays
dividends to shareholders every year.
In this report, SSE accounts for its
performance against those priorities
and it is on this that it should be judged.”
Lord Smith of Kelvin
Chairman
Scottish and Southern Energy
Annual Report 2011
02
The energy sector in Great Britain
Gas and electricity
SSE in electricity
SSE is involved in the generation,
transmission, distribution and
supply of electricity.
The majority of SSE’s operations are
in England, Scotland and Wales, where
most parts of the energy sector have
been privatised for at least two decades.
1
ElEctricity GEnEration
USinG TURbinES TO COnvERT EnERGy
FROm GAS, Oil, COAl, wATER And wind
TO GEnERATE ElECTRiCiTy
2
ElEctricity transmission
USinG hiGhER vOlTAGE linES And CAblES
TO TRAnSmiT ElECTRiCiTy FROm GEnERATinG
PlAnT TO ThE diSTRibUTiOn nETwORk
3
ElEctricity DistriBution
USinG lOwER vOlTAGE linES And CAblES
TO diSTRibUTE ElECTRiCiTy TO hOmES,
wORkPlACES And OThER PREmiSES
4
ElEctricity supply
RETAilinG ElECTRiCiTy TO hOUSEhOld,
SmAll bUSinESS And indUSTRiAl And
COmmERCiAl CUSTOmERS
Reflecting its island status, Great Britain’s
energy (ie electricity and gas) sector is
largely free-standing with the exception
of some electricity interconnection with
Ireland and mainland Europe and some
gas pipelines from mainland Europe and
to Ireland (see the map on page 4).
Around 34 million homes, offices and
businesses are connected to the electricity
network in Great Britain and around 22
million to the gas network. Total electricity
consumption in Great Britain in 2010 (the
latest for which information is available)
was 325TWh and total gas consumption
was 606TWh.
have a single, GB-wide system operator –
National Grid operates the GB electricity
and gas systems.
The companies operating these networks
are the subject of economic regulation
through a Price Control set by Ofgem
which sets for periods of five (in the
future, eight) 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.
The stated goal of the UK government’s
energy policy is to achieve secure, affordable
and low-carbon energy in the years and
decades ahead.
The sector is split between activities which are
economically-regulated (energy transmission
and distribution networks) and activities which
are market-based (energy production and
retailing). Companies which operate in both
parts of the sector must adhere to rules to
maintain legal separation and confidentiality,
under the Utilities Act 2000.
Economic regulation of networks
As the Great Britain energy regulator, Ofgem,
puts it, energy transportation (transmission
and distribution) networks are ‘natural
monopolies – there is no realistic means
of introducing competition’. There are four
types of energy network:
kkelectricity transmission (three networks
in GB) – high voltage electricity wires
and cables;
kkelectricity distribution (14 networks in GB)
– lower voltage wires and cables delivering
electricity to customers’ premises;
kkgas transmission (one network in GB) –
high pressure gas pipelines; and
kkgas distribution (eight networks in GB) –
lower pressure pipes delivering gas to
customers’ premises.
Distribution networks are owned and operated
by the same company. Transmission networks
It also sets the framework for the capital
investment they are able to make in
maintaining and upgrading the networks.
The networks each have a Regulatory Asset
Value (RAV), which represents:
kkthe price paid for them when they were
privatised; plus
kkallowed capital expenditure; less
kkannual depreciation.
The RAV is indexed to the Retail Price Index.
Companies cannot charge network users
more than is allowed under the Price
Control. 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.
45%
of gas
used in 2009/10 in the UK was
imported. This is expected to
increase to around 70% in 2020.
03
Overview
Strategy
Group performance
Segmental performance
Corporate governance
Financial statements
Shareholder information
SSE in gas
SSE is involved in the production,
storage, distribution and
supply of gas.
1
Gas proDuction
USinG PlATFORmS TO ExTRACT nATURAl GAS,
FROm FiEldS SUCh AS ThOSE in ThE
nORTh SEA, FOR USE OnShORE
2
Gas storaGE
USinG CAvERnS TO STORE UndER GROUnd
lARGE vOlUmES OF nATURAl GAS FOR
USE AT A FUTURE dATE
3
Gas DistriBution
USinG PiPES TO diSTRibUTE GAS FROm
ThE TRAnSmiSSiOn nETwORk TO hOmES,
wORkPlACES And OThER PREmiSES
4
Gas supply
RETAilinG GAS TO hOUSEhOld,
SmAll bUSinESS And indUSTRiAl
And COmmERCiAl CUSTOmERS
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.
The current Price Controls are due to
run until:
kk31 March 2013 (electricity transmission,
gas transmission and distribution); and
kk31 March 2015 (electricity distribution).
For subsequent Price Controls, Ofgem is
using its new RIIO (Revenue = Incentives
+ Innovation + Outputs) model, which is
designed to secure greater stakeholder
engagement in, and deliver an outputs-led
approach to, energy network regulation.
Electricity and gas markets
In line with its island status, around 99% of
the electricity consumed by UK customers
is generated in the UK. At 31 March 2011,
there were 24 electricity generators with
more than 100MW of capacity operating
in Great Britain. In total there was around
85GW of installed capacity.
In the year 2009/10, around 45% of the
gas used in the UK by customers and
by electricity generators was imported,
via pipelines from European gas fields,
the England-Belgium pipeline or liquefied
natural gas terminals. This is set to increase
significantly in the years ahead, as production
of gas from the North Sea declines.
The production of electricity and gas for
customers in Great Britain is a market-based
activity with wholesale markets in which:
kk producers (generators), retailers (or
suppliers), large users, National Grid
Electricity Transmission Ltd and other
energy traders buy and sell electricity
like any other commodity. It can be
purchased through bilateral contracts
of various lengths and through trading
in the market; and
kk producers, shippers, retailers (or
suppliers), electricity generators, large
gas users, National Grid Gas plc and
other energy traders buy and sell gas
like any other commodity. As with
electricity, gas (natural or liquefied
natural) can be purchased through
bilateral contracts of various lengths
and through trading in the market.
It is part of Ofgem’s responsibility to licence
electricity generation and to make sure that
electricity and gas markets are competitive.
The markets are designed to maintain
a downward pressure on the cost of
electricity and gas, for the benefit of
customers, and to encourage greater
diversity in the supply of fuels in order
to enhance energy security. There are also
related markets for coal, oil and carbon
dioxide emissions allowances required
for electricity generation.
Gas storage
Unlike electricity, gas can be stored in
large-scale facilities such as under ground
caverns. Customers of these facilities can
have gas injected or withdrawn, according to
their needs, which means they can manage
their gas portfolio more effectively and the
country benefits from greater gas security.
Electricity and gas retailing
In the retail electricity and gas markets,
customers are free to choose their retailer
(or supplier). It is the responsibility of the
retailer to procure the electricity and gas
customers 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.
At 31 March 2011, there were six electricity
and gas suppliers in Great Britain with a
market share each of more than 5%. Across
Europe, only the markets in Slovenia and
Denmark have a larger number of suppliers
with a market share of more than 5%.
Ofgem is responsible for licensing the
supply of electricity and gas and also
scrutinises retail prices for electricity and
gas and the overall effectiveness of the
retail energy market. The outcome of its
most recent review was announced in
March 2011 and concluded that ‘further
action is needed to make energy retail
markets in Great Britain work in the
interests of consumers’. It outlined
initial proposals for consultation.
Other energy and utility services
Companies, including energy retailers,
provide other energy-related services, such
as the design, installation and maintenance
of electrical and gas systems and facilities.
Ofgem is not involved in regulating or
scrutinising the provision of such services,
although providers are subject to other
laws and regulations, especially in respect
of safety.
Scottish and Southern Energy
Annual Report 2011
04
The energy sector in Great Britain (continued)
Gas and electricity
Physical energy links between mainland Europe, Great Britain and Ireland
This map shows the energy
interconnection between
Great Britain and Ireland
and between Great Britain
and mainland Europe.
ELECTRICITY INTERCONNECTOR
IN USE
ELECTRICITY INTERCONNECTOR
UNDER CONSTRUCTION
GAS PIPELINE
LIQUID NATURAL GAS IMPORT TERMINAL
Perth
Edinburgh
SCOTLAND-NORTHERN
IRELAND PIPELINE
DATE ESTABLISHED: 1996
LENGTH OF LINK: 135km
CAPACITY: 8mcm
North Sea
MOYLE INTERCONNECTOR
DATE ESTABLISHED: 2001
LENGTH OF LINK: 63km
CAPACITY: 500MW
Belfast
SCOTLAND-REPUBLIC OF
IRELAND PIPELINE
DATE ESTABLISHED: 1993
LENGTH OF LINK: Approx 200km
CAPACITY: 26mcm
Dublin
Irish Sea
EAST-WEST INTERCONNECTOR
DATE ESTABLISHED: Estimated 2012
LENGTH OF LINK: 261km
CAPACITY: 500MW
BACTON-BALGZAND LINE
DATE ESTABLISHED: 2006
LENGTH OF LINK: 235km
CAPACITY: 46mcm
BRIT NED INTERCONNECTOR
DATE ESTABLISHED: 2011
LENGTH OF LINK: 260km
CAPACITY: 1,000MW
Cardiff
London
English Channel
ENGLAND-FRANCE
INTERCONNECTOR
DATE ESTABLISHED: 1986
LENGTH OF LINK: 70km
CAPACITY: 2,000MW HVDC
BACTON-ZEEBRUGGE
INTERCONNECTOR
DATE ESTABLISHED: 1998
D
L
LENGTH OF LINK: 230km
CCC
CAPACITY: 58-74mcm
The energy sector in Ireland
Gas and electricity
Since 2008, SSE has had significant
operations in Ireland, including electricity
generation and energy supply. Large
parts of the sector remain state-owned.
The energy market in Ireland is split over
two political and regulatory jurisdictions –
the Republic of Ireland (ROI) and Northern
Ireland (NI). At the same time it has a
common electricity wholesale market.
As in GB, Ireland has limited interconnection
consisting of:
kkthe 500MW Moyle interconnector;
kkthe Scotland-Northern Ireland gas
pipeline; and
kkthe Scotland-Republic of Ireland
gas pipeline.
An additional 500MW interconnector is
under construction between Dublin and
Wales, which is scheduled to come on
stream in 2012.
In ROI, state-owned Bord Gáis owns the
gas transmission and distribution networks
and maintains and develops the network
Gaslink, a ring-fenced business within Bord
Gáis, and operates the transmission system.
Regulated by the CER the current price
control runs until 2012.
In NI the gas market is in the early stage of
development. Two companies Firmus Energy,
a subsidiary of Bord Gáis, and Phoenix
Natural Gas own and operate separate
distribution networks, regulated by NIAUR.
There is likely to be considerable change
in ROI with the new government indicating
its intent to restructure the transmission
network assets under a single, state owned,
holding company.
Ireland is hugely dependent on fossil fuel,
over 90% of which is imported. Ireland has
very limited gas storage. However, a new
gas production field is being developed off
the West Coast.
Both governments have set a target of 40%
renewable electricity to be delivered by 2020.
Currently there is around 14% renewables
installed, mainly hydro and wind. With
largely untapped offshore resources
Ireland has a significant opportunity
to be an exporter of renewable energy.
Economic regulation of networks
Electricity and gas markets
Across ROI and NI there is a common
wholesale electricity market; the Single
Electricity Market (SEM). This market
operates with dual currencies (euro and
sterling) and dual support mechanisms
for renewable energy (ROCS and REFIT).
In 2009 the SEM controlled over 6,000MW
of fully dispatchable generation and
supplied over 30TWh, costing just under
€2bn. The retail market continues to
operate as two separate markets with
2.1 million customers in the Republic of
Ireland and 0.8 million in Northern Ireland.
The Commission for Energy Regulation (CER)
and the Northern Ireland Utility Regulator
(NIAUR) regulate the electricity and natural
gas markets in Ireland and NI respectively.
The island consumes approximately 73TWh
of gas annually of which around two thirds
is used in power generation. The majority of
gas consumed is imported. The governments
The state owned (ROI) Electricity Supply
Board (ESB) owns and operates the
distribution network and the transmission
network in ROI and NI. Similar to GB, these
assets are regulated through Price Controls
set by CER and NIAUR for five-year periods.
The current price controls in ROI will run
until 2015 for electricity and 2012 for gas.
The electricity Transmission System
Operators (TSO) in ROI and NI are EirGrid
plc and SONI Ltd, respectively. SONI is a
wholly-owned subsidiary of EirGrid plc.
Ireland and Northern Ireland
fuel mix (combined) 2009 – %
Solid fuels 21
Oil 3
Gas 62
Renewables/other 14
05
Overview
Strategy
Group performance
Segmental performance
Corporate governance
Financial statements
Shareholder information
and Regulatory Authorities are currently
developing an all-island gas market. Gas
prices in Ireland tend to be set by the UK
wholesale price.
Electricity and gas retailing
At 31 March 2011 there were four main
electricity and gas suppliers operating
in ROI and NI.
Despite competitive business markets in
ROI and NI for a number of years, domestic
switching in electricity and gas has been a
recent phenomenon. SSE’s retail brand in
Ireland, Airtricity, has been a significant
contributor to the development of domestic
competition across the Island. ROI now has
the highest switching rate across Europe
at 21% in 2010 (Q4) with over 450,000
customers joining Airtricity in 18 months.
This has allowed the regulator to deregulate
the incumbent electricity supplier from April
2011, with gas likely to follow thereafter.
In line with these changes the Regulatory
Authorities will transition from tariff
regulation to market monitoring.
Over
85% of
electricity
generated in Ireland comes
from fossil fuels, of which
over 90% is imported.
There is likely to be considerable change in
the electricity and gas generation and retail
sector as the new ROI government policy is
likely to indicate the disposal of semi-state
assets including those in the energy sector.
Other energy and utility services
Both governments are placing increasing
emphasis on energy efficiency and fuel
poverty. These will be key issues for the
sector over the coming year.
06
SSE – a balanced range of energy businesses
Scottish and Southern Energy
Annual Report 2011
ssE
Economically
rEGulatED
marKEt-BasED
EnErGy
nEtWorKs
GEnEration
anD supply
Electricity Distribution
and transmission
Gas Distribution
Generation
supply
£3.21bn
Regulated
asset value
£2.15bn
Regulated asset
value (SSE share)
11.29GW
10 million
Generating capacity
Customer accounts
07
Overview
Strategy
Group performance
Segmental performance
Corporate governance
Financial statements
Shareholder information
SSE’s strategy is to deliver sustained real growth
in the dividend payable to shareholders through
the efficient operation of, and investment in,
a balanced range of economically-regulated
and market-based energy-related businesses.
This balance, and the broad range of activities that
flow from it, means SSE has a strong and diverse
group of energy assets and businesses from which to
secure the revenue to support future dividend growth.
otHEr EnErGy anD
utility sErVicEs
Gas production
Gas storage
contracting, utility
solutions and metering
telecoms
12
440mcm
Fields in production
Storage capacity
£98m
SSE contracting
order book
11,200km
Network
Scottish and Southern Energy
Annual Report 2011
08
Chairman and Chief Executive
Questions and answers
In SSE, the Chairman, Lord Smith of
Kelvin, is responsible for the operation
of the Board, ensuring it works effectively.
The Chief Executive, Ian Marchant, is
responsible for the management of the
business, implementing the strategy
and policies agreed by the Board.
Here they answer questions about SSE’s
performance and plans for the future.
Lord Smith of Kelvin Chairman (left)
Ian Marchant Chief Executive (right)
It looks like 2010/11 was another
challenging year for SSE. Was it?
Robert k Yes, it was a challenging year –
but let’s keep things in perspective. SSE’s
adjusted profit before tax* has continued
to grow and passed the £1.3bn mark for the
first time. It’s now 50% higher than it was
five years ago. A key financial question for
the Board is whether the dividend target can
be met while keeping dividend cover around
the established range. Once again, it was.
Ian k We had to handle things including
higher than forecast wholesale gas prices
and lower than expected output of renewable
energy, and they helped push down slightly
operating profit in Generation and Supply. At
the same time, our regulated energy networks
businesses did well. That’s why we have a
balanced business model. It makes us more
resilient, meaning we can deliver reasonable
financial results and annual dividend growth
even when the going is a bit tougher.
Can SSE continue to grow
the dividend and finance
the investment in energy
infrastructure that will be
needed over the next decade?
Ian k Yes. We have plans to invest between
£1.5bn and £1.7bn a year in the period up
to 2015. These plans are consistent with our
financial principles and are designed to avoid
any need to issue new equity. Forecasts
for investment by the energy sector over the
next decade point to some very big numbers
indeed – but investment opportunities
shouldn’t be confused with investment
obligations. While there are plenty of
opportunities, it’s up to us which ones we
pursue. Discipline will be our watchword.
We’re now seeing results, with significant
new assets being commissioned over the
next couple of years. One of the key criteria
for individual investment decisions, and for
the shape of the investment programme
overall, will always be whether we can
manage individual projects effectively.
Robert k You have to get this the right way
round: it’s not about sacrificing dividends
to help finance investments – we expect
returns from investments to help finance
dividends. We always remember that
dividends are not some kind of abstract
concept. Shareholders rely on them for their
own financial well-being, and we should
never forget that.
A year ago, you said you were
‘confident’ about SSE’s ability
to manage large capital projects.
Has your confidence been borne
out by events over the past year?
Robert k I believe it has. It would be wrong to
suggest it has been plain sailing all of the way,
but good progress is being made – both in
terms of projects currently under construction
and in terms of building up the resources and
skills needed to manage the projects that will
come into construction in the next few years.
Ian k Our capital and investment spend
has almost trebled in just five years and
we have had to move quickly to make sure
we have everything needed to support it.
Does that help explain the
number of projects you seem to
have shelved or scaled back over
the past year and why you turned
your back on some acquisition
opportunities?
Ian k Yes it does. As for acquisitions, if your
business plan depends on them, you’ve got a
problem because eventually you’ll be forced
to pay too much for something. Acquisitions
should only ever be optional extras and
that’s what they are in SSE.
Robert k What the past year has again shown
is the self-discipline in SSE. The Board doesn’t
believe in doing things for so-called ‘strategic’
reasons, so even if potential investments or
acquisitions appear to have some business
logic, we won’t pursue them if the financial
returns are not there. It’s as simple as that.
Do you worry that the energy
sector is becoming more
difficult to operate in, with more
intervention from regulators and
politicians, like Ofgem’s energy
09
Overview
Strategy
Group performance
Segmental performance
Corporate governance
Financial statements
Shareholder information
It’s actually in the interests of both customers
and suppliers that prices should be more
stable than they have been in the past few
years. The reality is, however, that energy is
now a global commodity for which there is
rising global demand. It’s affected by issues
like political uncertainty in the Middle East
or March’s dreadful events in Japan. We do
everything we can to moderate the impact
of volatile global energy markets on our
customers, and we’ll continue to do that,
but there is only so much upward pressure
on energy prices that a supply business can
withstand. The positive news is that all the
energy efficiency investment that’s been
made over the past few years is starting to
bring down people’s energy consumption.
This means they’re paying less for their
energy than they otherwise would.
Robert k It’s easy to attach negative labels
to big companies, but one of the things that
impresses me about SSE is the day-to-day
work of the customer service teams who are
dedicated to helping vulnerable customers
and other people whose circumstances
mean they might be struggling to pay for
their electricity and gas. The people in
those teams are first class – professional,
committed and caring.
SSE’s financial objective, strategy
and business model are very
familiar to people who have been
following the Company over the
years. Do you ever worry that SSE
could become too set in its ways
and unable to cope with the pace
of change in the energy sector?
Robert k The SSE fundamentals have
remained the same, particularly the
commitment to real dividend growth,
and I’m glad they have. That doesn’t mean
it’s operating in some kind of time warp.
The Company is actually very innovative
and forward-looking and, on key issues like
decarbonisation and reducing dependency
on fossil fuels, really ‘gets it’. It’s the SSE
way, however, just to get on with delivering
things and not make a song and dance
about them.
Ian k Sticking to the fundamentals is
important. That said, performance has
to be improved constantly if a business
is to survive in the long term. That’s why
innovation has become a big thing in SSE.
It’s part of our Excellence value and it’s
innovation with a purpose – to deliver
business improvements for the long term.
We know that ‘long term’ means a very
different energy sector from the one we
operate in now, and we’re building towards
it all the time.
How significant are the
changes in Executive Directors’
responsibilities and the formation
of a new Management Board?
Robert k Colin Hood is retiring later this
year after an outstanding career in the
energy sector, culminating in nine years’
excellent service as SSE’s Chief Operating
Officer. Main Board-level responsibilities will
be divided between Ian, Gregor Alexander
and Alistair Phillips-Davies. They are
supported by the new Management Board
and by other senior executives throughout
the business. SSE has a very able and
experienced management team and there
is terrific strength in depth, that extends
through the whole team of employees,
who do an excellent job.
Ian k I agree with Robert about the strength
of the team. The people in it are constantly
being challenged and developed to make
sure SSE will continue to be successful as
the sector changes over the next few years.
Is SSE sticking with its approach
of not publishing a separate
Corporate Responsibility Report?
Ian k Yes. A year ago we took the view that
the content of the Annual Report should
enable people to judge whether SSE is a
responsible company, and we still believe
that. A business should be designed so
that everyone is expected to do their job
in a responsible way. To put it another
way, it’s not about managing corporate
responsibility, but about managing your
corporation responsibly. That’s our goal in
SSE, and we maintain a set of core values –
like Safety and Service – against which the
management team, me included, is judged
every year.
Robert k First on the list of those values
is safety. It’s the first item on the agenda for
Board meetings, and the most important one.
What are SSE’s top priorities
in 2011/12?
Ian k I can refer to the answer I gave to a
similar question in the Annual Report last
year, because it’s the same: safe working;
excellent customer service; well-run power
stations and energy networks; good
progress on major capital investment
projects; and cost efficiency.
Robert k Continuity and consistency are
really important. As a long-term business,
SSE should have long-term priorities that
transcend any one year, and that’s exactly
what we have.
retail market review and the
UK government’s Electricity
Market Reform?
Robert k I understand completely why
regulators and politicians take a close
interest in energy. It’s essential to the
well-being of individual people and the
successful functioning of society as a whole.
If regulators and politicians make decisions
for the right reasons, and after they’ve given
a fair and reasonable opportunity for people
to express their views, you have to respect
them and the job they do.
Ian k I agree. Political and regulatory
interventions are a fact of energy life. There
was some pretty lurid language used when
Ofgem published its retail market review
proposals in March, but you have to look
beyond that. What matters is that the review
results in reforms which genuinely help
customers and the competitive market in
general. As for Electricity Market Reform,
it’s hugely complex, but I’m optimistic we’ll
end up with a package of reforms that will
encourage investment in the types of
generation we’ll need in the future.
How did you feel when SSE
was called ‘shameless’ or
‘cold-hearted’ for putting up
household energy prices?
Ian k Of course I didn’t like it, but I accept
that criticism goes with the territory.
10
Why invest in SSE?
Scottish and Southern Energy
Annual Report 2011
Dividend
SSE has delivered above-inflation dividend
increases every year since it was formed in
1998 – one of only six FTSE 100 companies
to have done so.
Diversity
SSE is the only company listed on the
London Stock Exchange with a balanced
mix of economically-regulated and market-
based energy businesses.
Discipline
SSE’s commitment to above-inflation dividend
growth is supported by the application of
a series of financial principles, including
a strong balance sheet.
Delivery
SSE is focused on delivery of annual
dividend growth, sector-leading service to
customers and value-adding investments
in new energy assets.
SSE’s principal financial objective
is to deliver annual above-inflation
increases in the dividend. To do
this, it operates and invests in a
range of energy-related businesses,
setting great store by diversity.
In doing this, it exercises discipline
through adherence to a series
of well-established financial
principles and prioritises delivery
in everything from cost control
to constructing new assets.
SSE has a balanced business,
preparing for a decade of
change in energy
Set out below are some of the developments
that will affect the energy sector over the
next decade and beyond and when they are
set to take effect. SSE is actively preparing
for the changes that these developments
will bring.
SSE has interests in electricity generation,
transmission, distribution and supply and
in gas production, storage, distribution
and supply, and so this period of change
will affect every part of its business.
The EU Energy Commissioner,
Günther Oettinger, has said that Europe’s
energy sector is ‘on the threshold of an
unprecedented period of change’.
With its balanced business model and
commitment to core values such as efficiency,
sustainability and excellence, SSE believes
it is well-placed to make the most of the
opportunities that change will bring.
Key
development rEnEWaBlE HEat
2011
2012
GrEEn DEal
incEntiVE
2013
pHasE 3 of Eu Emissions
traDinG scHEmE
nEW ElEctricity
transmission pricE
control (riio-t1)
nEW Gas DistriBution
pricE control (riio-G1)
2010
main impact
First part of a phased
rollout designed to increase
rapidly renewable sources
of heat in Gb.
Forecast implementation
of new energy efficiency
framework for Gb, with
the ‘Green deal’ finance
mechanism and new Energy
Company Obligation (ECO).
in Phase 3 of EU ETS, all
carbon dioxide emissions
allowances for electricity
generators will be auctioned.
Carbon price support
introduced in Uk.
RiiO-T1 will set for an
eight-year period the
allowed revenues electricity
transmission companies
in Gb can collect.
RiiO-G1 will set for an
eight-year period the
allowed revenues gas
distribution companies
in Gb can collect.
11
Overview
Strategy
Group performance
Segmental performance
Corporate governance
Financial statements
Shareholder information
1. Strategy designed for dividend growth
SSE’s core purpose is to provide the energy
people need in a reliable and sustainable
way. In fulfilling this purpose, SSE requires
the support of the shareholders who have
invested in its shares, and it believes their
investment should be remunerated through
the payment of dividends, for four key reasons:
kk receiving and reinvesting dividends is the
biggest source of an investor’s return
over the long term;
kk dividends provide income for those
investors who do not wish to reinvest
them;
kk dividend targets provide a transparent
means with which to hold management
to account; and
kk a long-term commitment to dividend
growth demands a disciplined, consistent
and long-term approach to operations,
investments and acquisitions.
As a result of this, SSE’s strategy is to
deliver sustained real growth in the dividend
payable to shareholders through the efficient
operation of, and investment in, a balanced
range of economically-regulated and market-
based businesses in energy production,
storage, distribution, supply and related
services, mainly in the UK and Ireland.
The delivery of annual above-inflation
increases in the dividend paid to shareholders
is a clear, measurable and practical goal
which sets the long-term financial context for
SSE’s operational and investment decisions.
Financial discipline underpinning
dividend growth
The requirement on SSE to maintain
a disciplined, consistent and long-term
approach to management is underpinned
by a series of financial principles:
kk maintenance of a strong balance sheet,
evidenced by commitment to the criteria
for a single A credit rating;
kk rigorous analysis to ensure investments
are well-founded and achieve returns
greater than the cost of capital;
kk deployment of a selective and disciplined
approach to acquisitions, which should
enhance earnings per share over the
medium and long term; and
kk use of the economics of purchasing the
Company’s own shares in the market as
the benchmark against which financial
decisions are taken.
The application of these principles supports
the fulfilment of SSE’s first financial
responsibility to shareholders: the delivery
of sustained real dividend growth.
Delivering dividend growth –
a twelfth successive increase
For 2010/11, the Board is recommending
a final dividend of 52.6p per share, making
a full-year dividend of 75p, an increase of
7.1% on the previous year. The full-year
dividend is covered 1.5 times by SSE’s
adjusted profit after tax* and is more than
double the dividend per share paid eight
years ago, in 2002/03. The recommended
full-year dividend increase of 7.1% represents
the twelfth successive above-inflation dividend
increase since SSE paid its first full-year
dividend in 1999. SSE is one of just six 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. Of the 50 companies which have
been FTSE 100 constituents since 1998 SSE
is ranked eighth for Total Shareholder Return.
Targeting further
dividend increases
According to Capita Registrars Dividend
Monitor, published in February 2011,
dividend payments by UK companies fell
by 3.3% in 2010. This followed a 15% fall
in 2009. As Capita said: ‘Dividends are too
often overlooked as a component of company
return … A company’s value depends, most
fundamentally of all, on the ability of the firm
to make money and return it to shareholders.
Ultimately, dividends are the principal way
in which corporate profits are distributed.’
Dividends are certainly not overlooked at SSE,
as is evidenced by the fact its key financial
objective is the delivery of sustained annual
above-inflation increases in the dividend paid
to shareholders. SSE’s targets are to deliver:
kka full-year dividend increase of at least
2% more than Retail Price Index (RPI)
inflation for 2011/12;
kka full-year dividend increase of at least 2%
more than RPI inflation for 2012/13; and
kkannual RPI-plus dividend increases
thereafter.
In this context, 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 around its established range.
2014
nEW ElEctricity marKEt
arranGEmEnts
2015
nEW ElEctricity
DistriBution pricE
control
larGE comBustion
plant DirEctiVE (lcpD)
DEaDlinE
2020
DEaDlinE for Eu
rEnEWaBlE EnErGy
tarGEts
2020
DEaDlinE for Eu
Emissions rEDuction
tarGEts
2023
inDustrial Emissions
DirEctiVE DEaDlinE
Following Uk government
consultations on Electricity
market Reform, new
arrangements are forecast
to be implemented.
The new price control will set
for an eight-year period the
allowed revenues electricity
distribution companies in
Gb can collect.
large combustion plants
such as power stations
must close if they have not
opted in to and complied
with the lCPd.
The Uk and ireland are
required to meet 15% and
16% respectively of their
energy requirements from
renewable sources.
The Uk and ireland
are required to achieve
reductions of 34% and 40%
respectively in emissions of
greenhouse gases, compared
with 1990 levels.
large combustion plants
such as power stations
must close if they have not
complied with limits on
emissions of nitrogen oxides.
12
Why invest in SSE? (continued)
Scottish and Southern Energy
Annual Report 2011
2. Diversity maintained for dividend growth
SSE is unique among companies listed on
the London Stock Exchange in owning and
operating a balanced group of economically-
regulated energy businesses, such as
electricity networks, and market-based
energy businesses, such as electricity
generation and energy supply. It is thus
able to pursue operational, investment and
acquisition opportunities throughout the
electricity and gas sector to help achieve
the levels of profitability required to support
sustained real dividend growth.
This is because SSE is able to derive:
kk stable and relatively predictable levels
of profit from its economically-regulated
energy networks; and
kkmore variable levels of profit, but also
greater potential for growth, from its
market-based businesses such as
Generation and Supply.
As a result of this balance, SSE has greater
resilience to risks associated with shorter-
term trends or individual issues within its
sector or the wider economy than do other
companies which have less diversity within
their business model.
Moreover, SSE’s strategy of maintaining a
balanced range of economically-regulated
and market-based energy businesses
provides a broad platform from which
to maintain sustained real dividend growth.
This breadth is illustrated by the fact that:
kkwhile energy is at their core, SSE
has a diverse range of businesses;
kkwithin those businesses, SSE has
a diverse range of assets; and
kkto add to those assets, SSE has a
diverse range of investment options.
These businesses, assets and investment
options are almost entirely in Great Britain and
Ireland. This means SSE is able to focus closely
on issues, giving greater experience, analysis
and focus to the identification, consideration
and management of issues and opportunities.
It has, therefore, diversity with depth.
3. Delivering dividend growth in the future
The context for delivering future dividend
growth is set by the EU Climate Change
and Renewable Energy Package which
aims to achieve by 2020:
kka reduction of at least 20% in the levels
of greenhouse gas emissions across the
EU, compared with 1990 levels; and
kkan increase to at least 20% of all energy
consumption to be generated from
renewable sources.
In addition, the EU has a non-binding target
to achieve a 20% reduction in energy
consumption by 2020.
Against this background, the new UK
government published its Annual Energy
Statement in July 2010. Its goal is to support
the transition to a ‘secure, low-carbon,
affordable’ energy system in the UK and
mobilise commitment to ambitious action
on climate change internationally.
In its Programme for a National
Government, the new government of the
Republic of Ireland said in March 2011
that ‘we will publish a Climate Change Bill
which will provide certainty surrounding
government policy and provide a clear
pathway for emissions reductions, in line
with negotiated EU 2020 targets’.
The European Commission adopted, in
November 2010, a ‘strategy for competitive,
sustainable and secure energy’. It said that
Europe’s energy sector is on the threshold
of ‘an unprecedented period of change…
to diversify existing resources and replace
equipment and to cater for challenging and
changing energy requirements’.
Sector developments to be
faced over the next decade
Against this background, a large number
of issues in the energy sector will have to
be faced over the next decade. They include:
kk a likely surge in the global demand
for energy as emerging economies
industrialise;
kk a potential plateau in oil production as
a result of which supply will be unable
to keep pace with demand;
kk a greater understanding of the output,
potential cost and environmental impact
of shale gas;
kk the closure of a number of coal- and oil-
fired power stations by 2016, under the
EU’s Industrial Emissions Directive;
kk the end of the design life of many
nuclear power stations, with a number
of advanced gas-cooled reactor (AGR)
stations scheduled to close;
kk the impact of the increasing age and
relative inefficiency of a number of
gas-fired power stations;
kk the increasing requirement for renewable
sources of energy in response to legally-
binding targets set for Member States
under the EU Renewable Energy Directive;
kk the requirement for flexible electricity
generation capacity to respond to
variations in output from renewable
energy;
kk implementation of potentially significant
reforms to the Great Britain wholesale
electricity and retail energy markets;
kk continued downward pressure on energy
consumption, with the possible EU
adoption of legally-binding energy
efficiency targets;
kk the digitisation of energy supply
following the roll-out of smart meters
to all customers in Great Britain;
kk the implementation of the RIIO (Revenue
= Incentives + Innovation + Output)
model for economic regulation of
energy networks;
kk an upgrading of transmission and
distribution networks to accommodate
new, and more decentralised, sources
of electricity;
kk increasing interconnection between
electricity systems; and
kk significant regulatory and political
scrutiny of all aspects of the energy
sectors in Great Britain and Ireland
and at EU level.
SSE believes that the scale and significance
of these issues are, in themselves, very good
reasons for it to maintain a balanced and
diverse range of energy businesses, so it
can exploit opportunities and manage risks.
More broadly, it believes that energy, as
something which people need rather than
want, will become increasingly valued,
in the broad sense of the word. This means
that SSE’s strategy – the efficient delivery
of operations and investments – should
enable it to deliver above-inflation dividend
increases in the decade ahead.
13
Overview
Strategy
Group performance
Segmental performance
Corporate governance
Financial statements
Shareholder information
The SSE approach
DiVErsity
DisciplinE
DEliVEry
range of networks
involved in five economically-regulated
networks in electricity transmission
and distribution and, through SGn,
gas distribution.
range of market businesses
involved in Generation (with a diverse
portfolio of generating plant) and Supply
plus other energy and utility services.
profit from networks
38.9% of operating profit derived
from economically-regulated energy
networks businesses in 2010/11.
profit from market businesses
53.4% of operating profit derived
from Generation and Supply and 7.7%
from other energy and utility services
in 2010/11.
investment in networks
£328.5m invested in electricity
distribution and transmission networks
in 2010/11; plus 50% of SGn’s capital/
replacement expenditure was £199.7m.
investment in market businesses
£784.4m invested in renewable energy,
£126.5m invested in other generation
plant and £52.6m invested in gas
storage in 2010/11.
focus on core markets
businesses, assets and investment
options almost entirely in markets
in Great britain and ireland.
asset optimisation
disposals of non-core assets
or assets in non-core markets
undertaken in order to retain
operational and financial focus.
single a credit rating
Commitment to a strong balance
sheet and the criteria for a single
A credit rating.
Defined scale of investment
investment of between £1.5bn and
£1.7bn per annum planned in each
of the years to march 2015.
strong debt structure
investment well-financed with
average debt maturity of 10.6 years
and £4.9bn of debt in medium-
to long-term borrowings.
capital programme governance
implementation of new large capital
project governance framework,
supported by retention of external
Project management Partner.
networks quality of service
Top-ranking electricity distribution
network for five-year performance
in customer interruptions and
customer minutes lost.
Growing raV
Effective investment in economically-
regulated businesses taking
Regulated Asset value past £5bn
for first time.
more onshore wind
An additional 90mw of new onshore
wind capacity commissioned in
2010/11.
large capital projects on course
Clyde, Griffin, Gordonbush, walney,
Greater Gabbard and Aldbrough
all scheduled for completion by
end of 2012.
more customers
310,000 (net) additional customer
accounts achieved across markets
in Great britain and ireland.
service leadership
leadership in customer service
in energy supply confirmed in a
succession of independent surveys.
DEliVErinG tWElVE
yEars of continuous
DiViDEnD GroWtH
75.0
pence per
share
99
25.7
00
27.5
01
30.0
02
32.4
03
35.0
04
37.7
05
42.5
06
46.5
07
55.0
08
60.5
09
66.0
10
70.0
11
75.0
80
70
60
50
40
30
20
14
Why invest in SSE? (continued)
Scottish and Southern Energy
Annual Report 2011
Delivery priorities for SSE
SSE believes that these ‘challenging and
changing energy requirements’ mean the
following priorities should feature in its
business activities:
kkNetworks: delivering upgraded
electricity transmission networks and
operational efficiency and innovation in
electricity and gas distribution networks
as they respond to the decarbonisation
and decentralisation of energy;
kk Generation: investing in the new
capacity for renewable energy that will
be needed in the transition to a lower-
carbon economy while maintaining
diversity in the type of assets owned
and the type of fuels used, to generate
electricity to support security of supply;
kkSupply: evolving from the simple
retailing of electricity and gas to the
provision of a broader range of smarter
products and services consistent with
the long-term decarbonisation of energy
production and consumption;
kkGas Production: securing medium- and
long-term gas supplies to meet future
energy needs;
kkGas Storage: reinforcing the security
of energy supplies by providing storage
capacity, as UK imports of gas rise; and
kkEnergy and utility services: providing
key services for private and public sector
organisations as they seek to install or
upgrade existing energy and utility
infrastructure.
As the energy company with the broadest
range of operations in the UK and the
fastest rate of growth in Ireland, SSE is
well-placed to capitalise on the variety of
operational and investment opportunities
that are presenting themselves in the energy
sector, without being over-exposed to risks
associated with any of them.
Delivery depends on safe
and sustainable working
While SSE’s first financial responsibility to
shareholders is to deliver above-inflation
increases in the dividend, it will only be
able to achieve this if it exercises a wider
corporate responsibility. 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 (see page 58).
Safety comes first in every sense. SSE
believes that the effective management
of safety issues is a barometer of effective
management of all operational and
investment-related activities. In 2010/11
its Total Recordable Injury Rate per 100,000
hours fell from 0.14 to 0.12. SSE’s ultimate
goal is injury-free working and its Safety
Management System is designed to achieve
this by focusing on the five ‘Ps’ of:
kkPolicy;
kkPeople;
kkProcesses;
kkPlant; and
kkPerformance.
In addition, and in keeping with its
commitment to sustainability, SSE’s
target for every year is zero environmental
incidents which result in it being served with
a formal statutory notice by a government-
sponsored environment protection agency.
There were no such incidents during
2010/11. More broadly, SSE’s sustainability
priorities are to:
kkreduce emissions of greenhouse
gases, especially carbon dioxide;
kkfacilitate customers’ carbon dioxide
reductions;
kkuse resources efficiently and with
the minimum possible waste; and
kkavoid pollution and improve
environmental practice.
4. Outlook for 2011/12 and beyond
The economic outlook for the UK and Ireland
in 2011/12 continues to be uncertain, and
the global nature of energy markets means
that SSE, like every other company in the
sector, has to be prepared to manage the
energy consequences of exceptional and
unpredictable events such as the political
upheaval in the Middle East and the March
2011 earthquake and tsunami in Japan.
kk optimise the management of its portfolio
of energy assets and contracts;
kk ensure power stations maintain a high
level of availability to generate electricity
in response to customers’ needs and
market conditions;
kk maintain and build on sector-leading
performance in the quality of service
with high standards delivered to energy
supply customers;
Against this uncertain background, and with
its strategic focus on efficiency in operations
and investment, SSE’s core operational
priorities during 2011/12 are to:
kk improve the standards of service
delivered to energy supply customers
and build on its sector-leading
performance;
kk carry out all work in a safe and
responsible manner, with a lower
Total Recordable Injury Rate;
kk maintain strong cost control throughout
all business activities;
kk distribute electricity and (through Scotia
Gas Networks) gas with the minimum
possible interruptions to supplies;
kk demonstrate innovation in the
management of electricity and
gas networks;
kk develop and sustain long-term
relationships and contracts with key
customers of its other energy and utility
services; and
kk work with the UK government
and Ofgem to secure a stable and
competitive framework for electricity
generation and energy supply.
SSE’s investment priorities are to
support sustainable earnings and
dividend growth by:
kk commissioning new assets in renewable
energy, electricity networks and gas
storage which contribute to the diversity
of its portfolio;
kk meeting other development and
construction milestones in its
investment programme;
kk taking forward the wide range of
additional options that it has identified
for investment from the middle of this
decade onwards, especially in electricity
generation; and
kk preparing for the transformation of
energy supply, characterised by the
forthcoming roll-out of smart meters
in Great Britain.
The delivery of a strong operational
performance and the achievement of its
investment priorities should enable SSE
to discharge its first financial responsibility
to shareholders: to deliver its targets for
annual dividend growth.
15
Overview
Strategy
Group performance
Segmental performance
Corporate governance
Financial statements
Shareholder information
How did we perform against the priorities set for 2010/11?
safEty
customErs
assEts
What we said
Carry out all work in a safe and responsible
manner, with a lower Total Recordable injury
Rate (TRiR).
How we did in 2010/11
TRiR reduced from 0.14 per 100,000 hours
worked to 0.12. dangerous/potentially
dangerous road traffic accidents reduced
from 0.34 per 100 Company vehicles to 0.31.
(See page 64.)
What we said
increase the total number of energy supply and
home services customer accounts across Great
britain and ireland while supporting progress
towards increased energy efficiency.
How we did in 2010/11
Total customer accounts increased by 310,000 to
over 10 million. SSE-funded insulation installations
(excluding diy) took place in 193,000 homes
throughout Great britain. (See pages 39 to 42.)
What we said
deliver additional assets in electricity
generation, electricity networks and
gas storage.
How we did in 2010/11
90mw of new wind farm capacity commissioned,
£400m (net) added to networks’ Regulated
Asset value and 40mcm of gas storage all
delivered. (See page 35 and 44.)
EfficiEncy
GEnEration
What we said
deliver maximum efficiency throughout
all business activities.
How we did in 2010/11
Additional cost savings were achieved
during 2010/11 and there were specific
operational improvements in areas such
as credit management.
sErVicE
What we said
maintain and build on sector-leading
performance in all aspects of customer service,
from energy supply to energy networks.
How we did in 2010/11
leadership maintained in key independent
studies of service performance in energy
supply (see page 41) and most successful
company in electricity networks in ‘keeping
the lights on’ (see pages 23 and 24).
What we said
Ensure power stations maintain a high level of
availability to generate electricity in response
to customers’ needs and market conditions.
How we did in 2010/11
Availability to generate electricity declined to
88% at SSE’s gas-fired power stations and 84%
at its coal-fired stations. wind farm availability
was unchanged at 97%. (See pages 29 to 38.)
otHEr EnErGy
BusinEssEs
What we said
Focus on cost control and customer relationship
management to sustain energy services businesses
through the period of economic uncertainty.
How we did in 2010/11
Total operating profit from Contracting, Utility
Solutions and metering rose by 10.3% year-on
year, with important steps for the long-term
future taken in areas such as Utility Solutions.
(See pages 43 to 46.)
proJEcts
What we said
meet other key milestones in the investment
programme in generation, electricity networks
and gas storage.
How we did in 2010/11
Almost all key projects remain on, or close
to, the schedule set out in the Annual Report
2010, and a new large Capital Project
Governance Framework has been introduced.
(See pages 20 and 57.)
options
What we said
Take forward additional options for investment
from the middle of this decade onwards.
How we did in 2010/11
A broad range of options for future investment
has been developed and retained across
electricity generation and networks, energy
supply and gas storage. (See pages 23 to 46.)
aDJustED profit
BEforE tax* rosE
By 1.6% in 2010/11
1,310.1
£m
07
1,079.3
08
1,229.2
09
1,253.7
10
1,290.1
11
1,310.1
80
70
60
50
40
30
20
16
Key performance indicators
Scottish and Southern Energy
Annual Report 2011
Dividend per share – pence
Dividend 2010/11 composition – %
interim 30 (22.4p)
Final 70 (52.6p)
99
00
11
05
25.7 27.5 30.0 32.4 35.0 37.7 42.5 46.5 55.0 60.5 66.0 70.0 75.0
09
08
07
06
01
02
04
03
10
Dividend cover – times
Adjusted earnings per share* – pence
2011
2010
2009
2008
2007
1.50
1.57
1.57
1.73
1.68
2011
2010
2009
2008
2007
112.3
110.2
108.0
105.6
92.5
Adjusted profit before tax* – £m
Operating profit* by business – £m
2011
2010
2009
2008
2007
1,310.1
1,290.1
1,253.7
1,229.2
1,079.3
Generation and Supply
Energy networks
Energy and utility solutions
2009
832.0
584.2
133.0
2010
896.0
599.5
138.4
2011
882.8
642.3
130.1
Capital expenditure and investment – £m
Capital expenditure and investment 2010/11 – %
2011
2010
2009
2008
2007
1,443.7
1,315.2
1,279.8
Thermal generation 9
Renewable generation 54
Power systems 23
Gas storage 4
Other 10
810.3
663.4
Energy customer numbers – millions
Networks regulated asset value – £bn
2011
2010
2009
2008
2007
9.65
9.35
9.10
8.49
7.75
2011
2010
2009
2008
2007
5.3
4.9
4.7
4.5
4.2
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
2007
n/A
555
0
2008
n/A
496
1
2009
0.16
491
1
2010
0.14
494
2
2011
0.12
504
0
13,427
16,892
18,795
20,177
20,249
80
70
60
50
40
30
20
Financial overview
Financial overview
Performance indicators
2009
2010
2011 Change
investment and capital expenditure
Thermal generation
Renewable generation
Gas storage
Electricity networks
Other
Total investment and capital expenditure
50% of SGN capital/replacement expenditure
financial management and balance sheet
Adjusted net debt and hybrid capital – £bn
Average debt maturity – years
Underlying interest cover (excluding SGN)
Shares in issue at 31 March – millions
Shares in issue (weighted average) – millions
216.2
525.6
55.4
314.6
168.0
1,279.8
191.4
4.822
11.8
6.5
920.4
883.0
146.2
666.6
46.3
334.5
121.6
126.5
784.4
52.6
328.5
151.7
1,315.2 1,443.7
199.7
206.4
5.292
11.0
6.3
923.1
921.9
5.891
10.6
7.3
936.9
927.6
-13.5%
+17.7%
+13.6%
-1.8%
+24.8%
+9.8%
-3.2%
+11.3%
-3.6%
+15.9%
+1.5%
+0.6%
focus on adjusted profit before tax*
These results for the year to 31 March 2011
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, remeasurements
arising from 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:
kkreflects the underlying profits of SSE’s
business;
kkreflects the basis on which it is managed;
and
kkavoids the volatility that arises from IAS 39.
The table (right) reconciles SSE’s reported
profit before tax to its adjusted profit before
tax* and sets out the position after tax and
in respect of adjusted earnings per share*.
increasing adjusted profit before tax*
in 2010/11
Adjusted profit before tax* rose by 1.6%,
from £1,290.1m to £1,310.1m. The increase
in adjusted profit before tax* is mainly
attributable to growth in Energy Networks
as a result of:
kk changes in the price of electricity units
distributed following the introduction
of the new Price Control for 2010-15;
kkincreased allowed revenue in respect of
the electricity transmission network; and
kkthe continued focus on efficiency and
cost control in the networks businesses.
At the same time, however, adjusted profit
before tax* was constrained by the following
issues in Generation and Supply:
kk the lower than expected output of
renewable energy from SSE’s hydro
electric schemes and wind farms,
including that qualifying for Renewable
Obligation Certificates, due to relatively
dry and still weather conditions;
profit before tax
adjusted profit before tax*
Movement on derivatives (IAS 39)
Exceptional items
Tax on JCEs and Associates
Interest on convertible debt
reported profit before tax*
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
17
Overview
Strategy
Group performance
Segmental performance
Corporate governance
Financial statements
Shareholder information
kkthe higher than forecast wholesale
gas prices;
kkthe underlying reduction of almost 2.5%
in electricity consumption by household
customers in the GB market; and
kkthe increase in some costs in
Generation, such as operations,
maintenance and business rates.
The financial performance of Other Energy
and Utility Services (Gas Production; Gas
Storage; Contracting, Utility Solutions and
Metering; and Telecoms) was mixed. There
was, for example, the decline in the price
attained for Standard Bundled Units of gas
storage capacity. At the same time, however,
the expansion in recent years of SSE’s
metering activities, along with strong
performance in particular areas such as
lighting services, supported profitability.
movement on derivatives (ias 39)
At 31 March 2011, there was a net derivative
financial asset in SSE’s balance sheet
arising from IAS 39 of £438.8m, before tax,
compared with a net liability of £985.1m,
before tax, at 31 March 2010. These
balances principally relate to some of the
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
2011 the average contractual price was lower
than the market price (in other words, ‘in the
money’). The market price rose particularly
significantly towards the end of the financial
year in response to developments in the
march 11
£m
1,310.1
1,423.3
(625.0)
3.3
–
2,111.7
1,310.1
(268.2)
1,041.9
1,504.5
927.6
112.3p
162.2p
March 10
£m
1,290.1
399.8
–
(51.3)
–
1,638.6
1,290.1
(274.1)
1,016.0
1,235.5
921.9
110.2p
134.0p
March 09
£m
1,253.7
(1,262.1)
102.7
(40.4)
(0.6)
53.3
1,253.7
(300.4)
953.3
112.3
883.0
108.0p
12.7p
18
Financial overview (continued)
Scottish and Southern Energy
Annual Report 2011
Middle East and Japan. The actual value
of the contracts will be determined as
the relevant commodity is used to meet
customers’ energy needs. For around
60% of the total energy volume, this will be
over the next 12 months. As a result, SSE
believes movement in fair value of contracts
is not relevant to the financial year in
question, in this case 2010/11.
The movement on derivatives under IAS 39
of £1,423.3m shown in the table on the
previous page and on the face of the Income
Statement is primarily due to the contrast
between the ‘in the money’ position at
31 March 2011 and the ‘out of the money’
position that existed on 31 March 2010,
when the average contractual price was
higher than the prevailing forward market
price. SSE sets out these movements in fair
value separately, as remeasurements, as
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.
Exceptional items
The pre-tax exceptional item of £625.0m
relates to impairment and other charges
against the value of some electricity
generation plant. Almost all of the total
is non-cash and is mainly due to:
kk the expiry of certain tolling
arrangements at SSE’s associate
investments, Barking Power Ltd and
Derwent Cogeneration Ltd, and to low
‘spark’ spreads associated with gas-
fired generation;
kk the impact of low spark spreads and
a reduced economic life attributable to
the Keadby and Medway power stations;
kk the new Industrial Emissions Directive-
related restrictions on running hours at
SSE’s Fiddler’s Ferry and Ferrybridge
power stations from 2015, and the
stations’ probable closure in 2023, in
accordance with the terms of the IED; and
kk a range of issues relating to the operation
and continuing rationalisation of SSE’s
portfolio of renewable and sustainable
energy developments, such as the SSE
Mineral Solutions (formerly RockTron
(Widnes) Ltd) plant at Fiddler’s Ferry,
and development assets in Germany,
which were disposed of during 2010/11.
Delivering adjusted profit before tax*
in 2011/12
SSE’s emphasis is on adjusted profit before
tax* on a full-year, as opposed to half-year,
basis. Since it first reported full-year results
in 1999 it has delivered 12 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 financial
responsibility to shareholders.
SSE’s adjusted profit before tax* in any
single year will always be determined
by issues such as:
kkthe availability of its gas- and coal-fired
power stations to generate electricity;
kkthe performance of assets in gas
production and gas storage;
kkthe output of renewable energy from its
hydro electric stations and wind farms;
kkthe impact of the weather on energy
production and consumption;
kkthe actual underlying level of
customers’ energy consumption;
kkthe interaction between wholesale
SSE does not have the goal of
maximising profit in any single year.
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 financial
responsibility to shareholders.
prices for energy and fuel and the prices
for the electricity and gas charged to
customers; and
kkthe timely commissioning of new assets.
In terms of 2011/12, SSE believes that
its balanced range of market-based and
economically-regulated energy businesses,
and the diversity of opportunities within
those businesses, should deliver a level
of adjusted profit before tax* capable of
supporting the achievement of its principal
financial objective, a full-year dividend
increase of at least 2% more than RPI
inflation, while maintaining dividend
cover around the established range.
SSE will provide an update on its financial,
operational and investment progress during
2011/12 when it presents its results for the
six months to 30 September 2011. It does
not, however, expect to provide an outlook
for adjusted profit before tax* in 2011/12
before the publication of its Interim
Management Statement in early 2012,
not least because its principal financial
objective is dividend growth.
increasing adjusted earnings per share*
in 2010/11
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 2010/11, SSE’s adjusted
earnings per share* were 112.3p, based
on 927.6 million shares, compared with
110.2p, based on 921.9 million shares,
in the previous year.
Dividend
increasing the final dividend for 2010/11
SSE’s first financial responsibility to its
shareholders is to remunerate their
investment through the delivery of
sustained, above-inflation increases in
the dividend. The Board is recommending
a final dividend of 52.6p per share, compared
with 49p in the previous year, an increase
of 7.3%. This will make a full-year dividend
of 75p, which is:
kk an increase of 7.1% compared with
2009/10;
kk a real-terms increase of 2.2%, based on
the average annual rate of RPI inflation
in the UK between April 2010 and March
2011, which exceeds the target of 2%;
kk the twelfth successive above-inflation
dividend increase since the first full-
year dividend of 25.7p paid by SSE
for 1998/99;
19
Overview
Strategy
Group performance
Segmental performance
Corporate governance
Financial statements
Shareholder information
Capital expenditure and investment – £m
2011
2010
2009
2008
2007
1,443.7
1,315.2
1,279.8
810.3
663.4
Capital expenditure and investment 2010/11 – %
Thermal generation 9
Renewable generation 54
Power systems 23
Gas storage 4
Other 10
Renewable energy capital expenditure – £m
2011
2010
2009
2008
2007
132.8
92.7
784.4
666.6
525.6
Underlying interest cover – times
2011
2010
2009
2008
2007
7.3
6.3
6.5
11.7
11.0
kk double the dividend paid in 2002/03,
since when there has been compound
annual growth of 10%; and
kk covered 1.5 times by SSE’s adjusted
profit after tax*.
targeting further dividend increases
in 2011/12 and beyond
SSE is aiming to deliver an increase in the
full-year dividend of at least 2% more than
RPI inflation in 2011/12. The same target is
in place for 2012/13, with sustained annual
real growth thereafter also being targeted.
scrip Dividend scheme option
for shareholders
At the Annual General Meeting in July
2010, SSE’s shareholders approved the
introduction of a Scrip Dividend Scheme,
to give them the option to receive new fully
paid Ordinary Shares in the Company in
place of their cash dividend payments.
Scrip dividend take-up was as follows:
kkSeptember 2010: 30,841 shareholders
elected to receive the final dividend of
49p per share, in respect of 172,173,451
Ordinary Shares, in the form of Scrip
dividend. This resulted in the issue of
7,524,682 new Ordinary Shares, fully
paid, an increase of 0.82% on the issued
share capital at the dividend record date
of 30 July 2010; and
kkMarch 2011: 30,482 shareholders
elected to receive the interim dividend
of 22.4p per share, in respect of
275,550,234 Ordinary Shares, in the
form of Scrip dividend. This resulted
in the issue of 5,264,873 new Ordinary
Shares, fully paid, an increase of
0.57% on the ordinary issued share
capital at the dividend record date
of 28 January 2011.
This had the effect of reducing by £146.1m
the amount of dividends paid in cash during
2010/11. The total number of shares in issue
at 31 March 2011 was 936.9 million.
Investment and
capital expenditure
investing for sustained dividend growth
SSE’s capital and investment expenditure
totalled £1,443.7m, building on the
expenditure of £1,315.2m in the previous
year. During 2010/11:
kk the investment of £52.6m in gas storage
included £29.4m invested in the new
facility at Aldbrough, which takes the
total invested by SSE in this development
to £237.3m; and
kk the investment of £328.5m in electricity
networks included £28.6m on works
related to the upgrade of the Beauly-
Denny transmission line.
Including investment of £165.4m in 2011,
SSE’s cumulative investment in Greater
Gabbard is now £538m, excluding
transmission costs.
SSE is committed to constructing robust
assets, from which revenue can be generated
on a reliable basis and which support future
dividend growth. This entails rigorous scrutiny
and control of the costs of large capital
projects but also a clear focus on the return
which completed projects will generate.
In line with this, SSE keeps the economic
evaluation of its investment programme
under continuous review and remains
confident that significant value is being
created from its capital and investment
expenditure programme, based on actual
project delivery and on the most up-to-date
project costs and schedules.
In addition to its own capital and investment
expenditure programme, SSE effectively
has a 50% interest in Scotia Gas Networks’
capital and replacement expenditure, through
its 50% equity share in that business. SGN
is self-financing and all debt relating to it
kk the investment of £126.5m in thermal
generation included work at Peterhead
power station to enhance its ability to
operate on a ‘two shift’ basis;
kk the investment of £784.4m in renewable
generation included SSE’s share of the
investment at Greater Gabbard and
Walney offshore wind farms;
A total of £1.5bn has been invested by SSE
in assets which were still largely under
construction at 31 March 2011, including
its share of the cumulative investment
in Greater Gabbard (£538m, excluding
transmission costs). The majority of these
assets will make some contribution to SSE’s
earnings in 2011/12.
20
Financial overview (continued)
Scottish and Southern Energy
Annual Report 2011
In November 2010, SSE announced
that it expects that its investment
and capital expenditure will be in
the range of £1.5bn to £1.7bn in
each of the five years to March 2015.
Capital and investment expenditure
is expected to be around £1.7bn
during 2011/12.
is separate from SSE’s balance sheet.
Nevertheless, it is a very substantial
business which gives SSE, through its 50%
stake, a major interest in gas distribution.
In 2010/11, a 50% share of SGN’s capital
and replacement expenditure was £199.7m,
compared with £206.4m in the previous year.
SGN’s total capital investment in 2010/11
was £142.7m, taking the amount so far for
the 2008-13 gas Distribution Price Control
period to £668.0m.
future investment priorities
in 2011/12 and beyond
In November 2010, SSE announced that
it expects that its investment and capital
expenditure will be in the range of
£1.5bn to £1.7bn in each of the five years
to March 2015. Capital and investment
expenditure is expected to be around
£1.7bn during 2011/12.
There are four main categories in SSE’s
investment and capital expenditure plans
to March 2015:
kkeconomically-regulated electricity
distribution expenditure plus essential
maintenance of other assets;
kkeconomically-regulated expenditure
on electricity transmission upgrades;
kkexpenditure that is already committed
to development of new assets such as
wind farms; and
kkexpenditure that is not yet committed
but which could be incurred to support
the development of new assets.
Around one third of the potential total
spend over the four years to 2015 is in the
uncommitted category and the majority of
the uncommitted spend would be incurred
towards the end of the period. It will only
be incurred if it is consistent with SSE’s
financial principles.
A programme with these principles, this
shape, and on this scale, is designed to
allow SSE to maintain the development of
a balanced and diverse range of assets to
support sustained, above-inflation dividend
growth while remaining consistent with the
criteria for a single A credit rating without the
need to issue new shares. Each individual
investment decision will be made:
kkin line with SSE’s financial principles;
kk in the context of SSE’s commitment to
maintaining a diverse range of assets
within its economically-regulated and
market-based businesses; and
kk in the light of developments in public
policy and regulation.
SSE’s investment programme will deliver:
kk a significantly-enhanced asset base in
key businesses, including economically-
regulated electricity networks;
kkadditional fuel for electricity in the form
of renewable sources of energy; and
kkadditional cash flows and profits to
support future dividend growth.
During the same period SGN, in which
SSE has a 50% stake, will also be making
a significant investment in economically-
regulated gas distribution networks.
Delivering investment efficiently
Central to SSE’s strategy is efficient
investment in a balanced range of
economically-regulated and market-
based energy businesses. This means
that investments should be:
kk consistent with SSE’s financial principles
and so should achieve returns which are
greater than the cost of capital (with a
risk premium applied to the expected
rate of return from individual projects
where appropriate), enhance earnings
and contribute to dividend growth; and
kk governed, developed, approved and
executed in an effective manner,
consistent with SSE’s Large Capital
Project Governance Framework which
is, in itself, regularly updated.
In October 2010, to help ensure the effective
implementation of this framework, and in
keeping with its long-standing approach
of retaining specialist contractors to assist
with major developments, SSE appointed
KBR, a leading engineering, procurement
and construction company, as Project
Management Partner to help maintain
the processes, systems and skills needed
to deliver large capital projects and to act
as SSE’s ‘critical friend’ in this area.
KBR teams have now been established
alongside SSE teams and are supporting
a range of individual projects as well as
contributing to overall project management
and reporting. As a result, KBR is
supplementing and complementing the
work done by SSE’s four in-house specialist
large capital projects teams which cover:
kkonshore renewable energy developments;
kkoffshore renewable energy developments;
kkthermal generation developments
(including SSE’s interests in nuclear
power); and
kkelectricity transmission upgrades.
These teams were augmented in 2010/11
to increase further SSE’s capacity to
manage major projects, and ensuring
there is enough senior management and
other types of resource in place to support
the delivery of the projects will remain a
key priority for SSE.
Financial management
and balance sheet
maintaining a prudent treasury policy
SSE’s operations and investments are
generally financed by a combination of:
kkretained profits;
kkbank borrowings;
kkbond issuance; and
kkcommercial 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
21
Overview
Strategy
Group performance
Segmental performance
Corporate governance
Financial statements
Shareholder information
kkstrong operating cash flow through
improved working capital management
particularly in reducing energy customers’
aged debt and in SSE Contracting.
As the table below sets out, adjusted net
debt excludes finance leases and includes
outstanding liquid funds that relate to
power purchase agreements and wholesale
energy transactions. Hybrid capital is
accounted for as equity within the Financial
Statements but has been included within
SSE’s ‘Adjusted net debt and hybrid capital’
to aid comparability.
net debt is financed with short-term
commercial paper and bank debt.
Ensuring investment is well-financed
SSE believes that maintaining a strong
balance sheet, evidenced by a commitment
to the criteria for a single A credit rating,
is a key financial principle. Its corporate
credit ratings are now:
kk‘A-’, with a ‘stable’ outlook (Standard &
Poors; reaffirmed in June 2010); and
kk‘A3’ with a ‘stable’ outlook (Moody’s;
reaffirmed in July 2010).
Shortly after the end of the financial year,
in April 2011, SSE received proceeds of
£178.4m relating to the sale of its equity
interest in three onshore wind farms.
SSE is committed to maintaining financial
diversity and will move quickly to take the
right financing options, including issuing
new bonds and loans. During 2010/11 it:
and forward rate agreements being used
to achieve the desired out-turn interest
rate profile. At 31 March 2011, after taking
account of interest rate swaps, over 70%
of SSE’s borrowings were at fixed rates.
Borrowings are mainly made in Sterling
and Euro to reflect the underlying currency
denomination of assets and cash flows
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:
kkprocurement contracts;
kkfuel and carbon purchasing;
kkcommodity hedging and energy trading
operations; and
kklong-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.
managing net debt and
maintaining cash flow
SSE’s adjusted net debt and hybrid capital
was £5.891bn at 31 March 2011, compared
with £5.292bn at 31 March 2010. This was
lower than expected because of:
a strong debt structure through
medium- and long-term borrowings
SSE’s objective 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 2011 was 10.6 years,
compared with 11.0 years at 31 March 2010.
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. In
addition, in September 2010, SSE issued
hybrid capital of £1.16bn (see table below
and ‘Ensuring investment is well-financed’
below). The balance of SSE’s adjusted
net debt is financed with short-term
commercial paper and bank debt. SSE’s
adjusted net debt includes cash and cash
equivalents totalling £476.9m.
kklower than forecast capital expenditure;
kklower cash dividend payments because
of the Scrip dividend scheme; and
Just over £100m of medium-to-long-term
borrowings will mature in the year to 31
March 2012. The balance of SSE’s adjusted
adjusted net debt
Loans and borrowings
Cash and cash equivalents
unadjusted net debt
less:
Finance leases
Add outstanding liquid funds
adjusted net debt
add: Hybrid capital
adjusted net debt and hybrid capital
march 11
£m
(5,606.4)
476.9
(5,129.5)
March 10
£m
(6,047.0)
261.7
(5,785.3)
372.2
28.1
384.4
108.7
(4,729.2)
(5,292.2)
(1,161.4)
(5,890.6)
–
(5,292.2)
kk signed an amendment agreement with
banks to extend its main revolving credit
facilities (£1bn) by three years, to 2015,
and reduce their price by around £5m
per annum. The facilities are expected
to remain for the foreseeable future,
undrawn, and SSE’s liquidity position
is very strong; and
kk launched an issue of hybrid capital,
a financial instrument which brings
together features of both debt and equity
and is perpetual and subordinate to all
senior creditors. The dual tranche issue
comprised £750m and €500m and has
an all-in funding cost to SSE of around
5.6% per annum. There is no fixed
redemption date but SSE may, at its sole
discretion, redeem all, but not part of,
these bonds at their principal amount
on 1 October 2015 or 1 October 2020 or
any subsequent coupon payment date.
The hybrid capital issue in sterling was the
first ever by a UK-listed company outside
the financial services sector, and the launch
was the first ever by a utility company which
is not state-owned. It provides another
source of attractively-priced funding for SSE
to complement its already well-financed
investment programme.
Indeed, the well-financed nature of SSE’s
investment programme has resulted in
some external analysis suggesting that
its commitment to the criteria for a single
A credit rating could result in it missing
out on opportunities to increase earnings.
SSE believes, however, that it has sufficient
financial flexibility to pursue the best
opportunities to increase earnings. At the
same time, it also believes that history – most
recently the ‘credit crunch’ – demonstrates
how companies with a commitment to the
long term must be disciplined when
managing their balance sheets and
cautious in financing their activities.
interest payable to SSE. Its contribution
to SSE’s adjusted profit before tax* was,
therefore, £96.4m, compared with £120.7m
in the previous year.
Southern Electric and Scottish Hydro
Electric schemes would be included in
price controlled revenue, with an incentive
around ongoing pension costs.
22
Financial overview (continued)
Scottish and Southern Energy
Annual Report 2011
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 2010/11 were
£342.8m, compared with £335.9m in the
previous year.
There was no charge for hybrid debt interest
during the year. In future, any charge will be
presented within dividends and reflected
within adjusted earnings per share*.
The average interest rate for SSE, excluding
JCE/Associate interest, during the year
was 5.43%, compared with 5.35% for the
previous year. Based on adjusted interest
costs, SSE’s underlying interest cover was
(previous year’s comparison in brackets):
kk7.3 times, excluding interest related
to SGN (6.3 times); and
kk5.7 times, including interest related
to SGN (5.6 times).
Excluding shareholder loans, SGN’s net debt
at 31 March 2011 was £3.16bn, and within
the adjusted interest costs of £290.5m, the
element relating to SGN’s net finance costs
was £90.4m (compared with £63.0m in the
previous year), after netting loan stock
contributing to employees’
pension schemes
In line with the IAS 19 treatment of
pension scheme assets, liabilities and
costs, pension scheme liabilities of £668.6m
are recognised in the balance sheet at
31 March 2011, gross of deferred tax.
This represents a decrease in net liabilities
of £51.7m compared with the position at
31 March 2010, principally due to deficit
repair contributions made to schemes.
During 2010/11, employer cash
contributions amounted to:
kk £48.5m for the Scottish Hydro Electric
scheme, including deficit repair
contributions of £29.5m; and
kk £58.1m for the Southern Electric
scheme, including deficit repair
contributions of £38.8m.
As part of the electricity Distribution Price
Control for 2010-15, it was agreed that
allowances equivalent to economically-
regulated businesses’ share of deficit
repair contributions in respect of the
net finance costs
Reported net finance costs
add/(less):
Share of JCE1/Associate interest
Exceptional charges
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 costs2
1 Jointly Controlled Entities.
2 Adjusted finance income and costs for interest cover calculation.
tax charge
Reported tax charge
add back:
Share of JCE1/Associate tax
less:
Deferred tax
Tax on exceptional items/certain remeasurements
adjusted current tax charge
march 11
£m
256.1
March 10
£m
265.3
139.9
(8.8)
(44.4)
342.8
141.9
(150.2)
(39.7)
(4.3)
290.5
march 11
£m
607.2
(3.3)
(83.3)
(252.4)
268.2
107.1
–
(36.5)
335.9
100.7
(127.5)
(13.2)
(3.5)
292.4
March 10
£m
403.1
51.3
(69.4)
(110.9)
274.1
Tax
To assist the understanding of SSE’s tax
position, the adjusted current tax charge
is calculated as shown in the table below.
The effective adjusted current tax rate, based
on adjusted profit before tax*, was 20.5%,
compared with 21.2% in the previous year, on
the same basis. The impact of SSE’s higher
capital expenditure programme and the
changes introduced in Budget 2007 have
had, and will continue to have, a positive
impact on the effective current tax rate.
The Emergency Budget in June 2010 and
Budget 2011 announced a series of annual
reductions in the UK Corporation Tax rate
for future years. The deferred tax balance
has been remeasured to reflect the first of
these rate reductions (from 28% to 26%) and
the effect of this has been disclosed as an
exceptional item. The deferred tax balances
for future years will be remeasured as each
subsequent rate reduction is enacted.
Budget 2011 also included an increase in
Supplementary Corporation Tax, which has
had an impact on SSE’s recently-acquired
gas production assets, the effect of which has
also been disclosed as an exceptional item.
The reported tax charge for 2010/11 is
£607.2m, compared with a tax charge of
£403.1m in the previous year. The increase
reflects the deferred tax associated with the
mark to market movements on derivatives,
and the impairment of fixed assets.
SSE’s cash contribution to government
revenues in the UK, including Corporation
Tax, Employers’ National Insurance
Contributions and Business Rates, totalled
£507.5m during 2010/11, compared with
£474.6m in the previous year. The total
includes joint ventures and associates.
Economically-regulated businesses
Energy networks
Energy networks
Performance indicators
assets
Electricity network Regulated Asset Value (RAV) – £bn
Gas network RAV (share) – £bn
Total RAV of energy network assets – £bn
Electricity network capital expenditure – £m
Gas network capital/replacement spend (share) – £m
operations
SEPD customer minutes lost
SEPD customer interruptions
SHEPD customer minutes lost
SHEPD customer interruptions
SEPD/SHEPD performance-based revenue – £m
SGN uncontrolled gas escapes attended within
one hour
SGN gas mains replaced – km
Volume
SEPD electricity units distributed – TWh
SHEPD electricity units distributed – TWh
SGN gas volume transported (Scotland) – TWh
SGN gas volume transported (Southern) – TWh
2009
2010
2011 Change
2.89
1.82
4.71
314.6
191.4
66
64
75
76
18.0
98.6
951
2.97
1.97
4.94
334.5
206.4
65
61
74
78
24.0
3.21
2.15
5.36
328.5
199.7
64
64
78
74
16.3
+8.1%
+9.1%
+8.5%
-1.8%
-3.2%
-1.5%
+4.9%
+5.4%
-5.1%
-32.1%
97.9
1,062
97.2
1,102
-0.7%
+3.8%
34.4
8.5
58.6
114.9
33.7
8.4
55.2
107.8
33.6
8.5
55.8
110.4
-0.3%
+1.2%
+1.1%
+2.4%
a balanced group of energy
network companies
SSE has an ownership interest in five
economically-regulated energy network
companies:
kkScottish Hydro Electric Transmission
(100%);
kkScottish Hydro Electric Power
Distribution (100%);
kkSouthern Electric Power Distribution
(100%);
kkScotland Gas Networks (50%); and
kkSouthern Gas Networks (50%).
The electricity networks transmit and
distribute electricity to around 3.5 million
businesses, offices and homes via almost
130,000km of overhead lines and under
ground cables and the gas networks distribute
gas to around 5.7 million homes, offices and
businesses via 75,000km of gas mains.
kk £2.15bn for gas distribution (ie 50% of
the businesses’ total RAV of £4.3bn).
SSE is the only energy company in the UK
to be involved in electricity transmission,
electricity distribution and gas distribution.
Together, these lower-risk economically-
regulated natural monopoly businesses,
featuring RPI inflation-linked revenue,
provide a financial backbone and
operational focus for SSE and balance
its activities in the competitive Generation
and Supply markets.
focus on operational and
investment efficiency
The aim of economic regulation is to attract
investment in electricity and gas networks
and encourage companies to operate them
as efficiently as possible. Against this
background, SSE’s objectives in energy
networks are to:
SSE estimates that the total Regulatory
Asset Value (RAV) of its economically-
regulated ‘natural monopoly’ businesses
is now over £5.36bn, comprising:
kk£515m for electricity transmission;
kk£2.70bn for electricity distribution; and
kkcomply fully with all safety standards
and environmental requirements;
kkensure that they are managed as
efficiently as possible, including
maintaining tight controls over
operational expenditure;
kkprovide good performance in areas
23
Overview
Strategy
Group performance
Segmental performance
Corporate governance
Financial statements
Shareholder information
such as reliability of supply, customer
service and innovation and thus earn
additional incentive-based revenue
under the various Ofgem schemes;
kk deliver efficient and innovative capital
expenditure programmes, so that the
number and duration of power cuts and
gas supply interruptions experienced by
customers is kept to a minimum, and so
that there is adequate capacity to meet
demand on the electricity system;
kk increase the RAV of the networks
businesses and so secure increased
revenue from them; and
kk engage constructively with the
regulator, Ofgem, to secure regulatory
outcomes that meet the needs of
customers and investors.
financial performance in energy networks
Operating profit* in energy networks
increased by 7.1%, from £599.5m to
£642.3m, contributing 38.9% of SSE’s
total operating profit*. This comprised:
kk £455.5m in electricity networks,
compared with £415.8m in the previous
year; and
kk £186.8m representing SSE’s share of
the operating profit* for SGN, compared
with £183.7m in the previous year.
Electricity Distribution
and Transmission
performance in southern Electric
power Distribution
In Southern Electric Power Distribution
(SEPD) in 2010/11:
kkoperating profit* increased by 11.9%
to £287.4m;
kkelectricity distributed fell by 0.1TWh
to 33.6TWh;
kk the average number of minutes of
lost supply per customer was 64, down
from 65;
kk the number of supply interruptions per
100 customers was 64, up from 61; and
kk performance-based additional income
of £10.8m is expected to be earned,
compared with the final out-turn of
£15.8m in the previous year.
The increase in operating profit follows
changes in the price of units distributed
under the electricity Distribution Price
Control for 2010-15, plus a continued
focus on efficiency and cost control and
some benefit from the ‘over-recovery’ of
allowed income. Performance in respect of
customer interruptions was ahead of the IIS
targets set by Ofgem under its Interruptions
Incentive Scheme (IIS), which gives financial
benefits to distribution network operators
that deliver good performance for
Scottish and Southern Energy
Annual Report 2011
24
Economically-regulated businesses (continued)
Energy networks
SSE has undertaken a fundamental
review of all of the processes around
operating and capital expenditure,
looking at every step in the value chain,
in order to secure the maximum possible
outputs from any expenditure.
customers. Performance-based income
covers a number of issues, including the
quality of service provided to customers
and innovation.
performance in scottish Hydro Electric
power Distribution and scottish Hydro
Electric transmission
In Scottish Hydro Electric Power Distribution
(SHEPD) and Scottish Hydro Electric
Transmission (SHETL) in 2010/11:
kkoperating profit* increased by 5.8%
to £168.1m;
kkelectricity distributed increased by
0.1TWh to 8.5TWh;
kkthe average number of minutes of lost
supply per customer was 78, up from 74;
kkthe number of supply interruptions per 100
customers was 74, down from 78; and
kkperformance-based additional income
of £5.5m is expected to be earned,
compared with the final out-turn
of £8.2m in the previous year.
The increase in operating profit reflects
changes in the price of units distributed
under the Price Control 2010-15, increased
allowed revenue in respect of the
transmission network and a continued
focus on efficiency and cost control.
Performance in respect of interruptions
was ahead of the IIS targets set by Ofgem.
The position on customer minutes lost was
negatively affected by the severe weather
experienced in the north of Scotland in
early March 2011.
Volume of electricity distributed
The total volume of electricity distributed
by SSE during 2010/11 was 42.1TWh,
unchanged from the previous year. Under
the electricity Distribution Price Control for
2010-15, the volume of electricity distributed
will no longer affect companies’ overall
allowed revenue. This has further reduced
the level of risk associated with energy
networks businesses.
Earning revenue by delivering
a good quality of service
SSE’s two networks earned additional
revenue of £59.4m in nominal prices
in the five years to March 2010 for their
performance in respect of Customer
Interruptions and Customer Minutes Lost.
On this measure, they were ranked first
(SEPD) and fourth (SHEPD) among the 14
electricity distribution companies in Great
Britain. This reflects effective investment
in the automation of the networks and
effective operational responses to electricity
supply interruptions.
operating electricity networks efficiently
Efficiency is one of SSE’s core values and
amongst Ofgem’s explicit purposes in
setting Price Controls is to keep as low as
possible the costs of providing secure and
reliable networks. SSE has a straightforward
operating model, under which the vast
majority of activities are in-house. Under
this model:
kkcustomer-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; and
kknetwork management activities,
such as inspections, maintenance
and investment, are carried out in
Operational Production Groups.
This model gives SSE a strong oversight
of operations and investment, allows
flexibility in responding to changed
circumstances and supports a culture
of efficiency, teamwork and excellence,
including innovation.
investing in electricity networks
and securing growth in their raV
2010/11 was the first year of the electricity
Distribution Price Control for 2010-15. The
new Price Control changed the framework
for operating and capital expenditure to
remove the perceived bias in favour of the
latter and to ensure the delivery of not only
the investment itself but of agreed outputs
from it. The most successful electricity
distribution companies, therefore, will be
those that apply efficiency and innovation to
maximise outputs from agreed expenditure.
In response to this, SSE has undertaken a
fundamental review of all of the processes
around operating and capital expenditure,
looking at every step in the value chain,
in order to secure the maximum possible
outputs from any expenditure. As a result,
it has identified a number of solutions and
interventions for wider deployment in 2010
15 to ensure its success throughout the
Price Control period. This means SSE
has robust and cost efficient network
investment processes that deliver real
value for customers. It has also identified
a number of technological advancements
that are delivering cost savings and
minimising disruption.
For example, use of directional drilling
units, a method of cable installation, is
well established in SSE. The directional
drill burrows under ground holes for cables,
resulting in minimum disturbance to the
highway and thereby reduces disruption
to the public and the costs associated with
ground reinstatement. This has been taken
a stage further with the first use in the
UK for under ground cable replacement
of a ‘wash-over’ drill head, which injects
water at high pressure to loosen soil
around cabling. The old cable can then
be removed and a new one installed along
the same route. The idea was developed and
introduced to SSE by an employee under its
‘Licence to Innovate’ scheme and in 2010/11
reduced open excavations/highway closures
by an estimated 620 days.
Techniques such as these will be more
widely deployed and developed during the
new Price Control. Their deployment, plus
good performance in response to Ofgem’s
enhanced incentive mechanisms in areas
such as customer service, and the headline
allowed weighted average cost of capital,
should enable SSE to achieve the post-tax
real return in excess of 5% which it is
targeting in electricity distribution.
Against this background, capital expenditure
in electricity networks (including transmission
and the Beauly-Denny upgrade – see below)
during 2010/11 was £328.5m. The need for
further significant investment in Great
Britain’s electricity networks, to maintain
and/or replace ageing assets or to provide
additional capacity, is likely to mean SSE
will invest in 2011/12 around:
25
Overview
Strategy
Group performance
Segmental performance
Corporate governance
Financial statements
Shareholder information
kk £250m in its electricity distribution
networks; and
kk £220m in its electricity transmission
network, including around £180m on
upgrades, such as the replacement of
the Beauly-Denny line (around £100m
in the year).
Significant distribution projects include a
£40m project to install new 132kV plant at
Bracknell and Camberley substations and
new 132kV cables between the substations.
The project will help to meet demand for
electricity in a key area between the M3 and
M4 motorways and should be completed
in 2014.
making electricity networks smart
Although there is no standard definition,
the European Technology Platform for the
Electricity Networks of the Future defines
smart grids as ‘electricity networks that
can intelligently integrate the behaviour
and actions of all users connected to it –
generators, consumers and those that
do both – in order to efficiently deliver
sustainable, economic and secure
electricity supplies’.
SSE, with Smarter Grid Solutions Ltd, an
associate company, has already deployed
commercially 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 much cheaper and faster
way than traditional means, by allowing
generators to access power network capacity
not normally available under conventional
network planning requirements.
SSE has two other principal projects to
support smart grid developments, working
with a wide range of organisations and
partners:
kk Northern Isles New Energy Solutions
(NINES) in Shetland: NINES features
installing ‘smart’ storage heaters and
hot water tanks in up to 1,000 homes
which can help balance the electricity
network; adding a new electric boiler
to the existing district heating system,
which will be associated with the
proposed medium-scale Gremista wind
farm; deploying new technology on the
network that will allow more small scale
renewable generators to connect to the
network; introducing new commercial
arrangements to encourage businesses
to change the times at which they use
most energy; and installing a 1MW
battery, part-funded by the Department
for Energy and Climate Change, at
Lerwick Power Station; and
kk Thames Valley Vision (TVV) in and
around Bracknell: TVV aims to
demonstrate that applying new
technologies to Bracknell’s network
will provide a lower cost alternative to
redeveloping the substation to meet
increasing electricity demand, with the
potential to significantly reduce costs to
customers. TVV involves: monitoring –
measuring and understanding power
flows and usage patterns; modelling –
taking data produced by monitoring
and applying sophisticated demand
prediction techniques; and managing –
installing network automation and
constraint management systems, energy
storage technologies and automated
demand response to manage network
flows predicted by modelling.
SSE is committed to making sure that both
areas benefit from the ideas put forward. It
is working with Ofgem to ensure sufficient
funding is secured under the Price Control
for 2010-15 to allow NINES to move forward.
SSE aims to finance TVV with sums received
from Ofgem’s Low Carbon Networks Fund;
it will submit a bid for funding in August 2011.
supporting deployment of
electric vehicles (EVs)
Electric vehicles will be an essential part
of the move towards a low-carbon transport
infrastructure. The potential number of EVs
on UK roads is predicted to be over one
million by 2020. One study in 2010 forecast
that EVs will overtake hybrids in UK market
share and will reach a combined total of
over 20% by the end of the decade.
Against this background, SSE has been
a full participant in two EV projects –
the MINI E and the Ford Transit Connect
consortia. These are pioneering trials
to evaluate the psychological, social
and technical aspects of living with
an all-electric vehicle:
kk the MINI E consortium is led by BMW and
includes SSE, Oxford Brookes University,
the South East England Development
Agency (SEEDA), Oxford City Council
and Oxfordshire County Council; and
kk the Ford Transit Connect project is led
by Ford and includes SSE, the University
of Strathclyde and the London Borough
of Hillingdon.
Financial support for both these projects has
come from the Technology Strategy Board.
As part of the projects SSE completed, in
January 2011, the installation of a public
network of over 20 re-charging points in
Oxford and a similar number in Hillingdon.
In a pioneering move to further widen the
availability of such charging points across
the UK, the Oxford and Hillingdon networks
are linked to a new ‘sister’ network in
Milton Keynes, so drivers can charge their
cars in any of these locations. This kind of
interoperability between the two networks
will be crucial as electric cars become more
popular in the decades ahead. SSE had
already installed home charging points for
each driver taking part in the project. It is
planning other public charging points across
central southern England.
SSE is also a major partner in the Mayor of
London’s ambitious ‘SourceLondon’ scheme
to install EV charging points in the capital,
a major adopter of EV technology, and has
already installed EV charging points in more
than 20 NCP car parks as part of this project.
When their numbers become significant, EVs
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 projects such as these.
Electric vehicles will be an essential
part of the move towards a low-carbon
transport infrastructure. The potential
number of electric vehicles on UK roads is
predicted to be over one million by 2020.
Scottish and Southern Energy
Annual Report 2011
26
Economically-regulated businesses (continued)
Energy networks
Networks regulated asset value – £bn
2011
2010
2009
2008
2007
5.3
4.9
4.7
4.5
4.2
Networks asset value 2010/11 – %
ShEPd 10
SEPd 17
ShETl 32
SGn (50% share) 41
upgrading scotland’s electricity
transmission network
Scottish Hydro Electric Transmission
Ltd (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,
SHETL has to ensure there is sufficient
network capacity for those seeking to
generate electricity from renewable
and other sources within it.
A series of major developments have the
potential to transform the scale and scope
of SSE’s electricity transmission business:
kk Knocknagael Substation, Beauly
Blackhillock-Kintore and Beauly-
Dounreay: Ofgem has authorised pre-
construction and construction funding
for these three upgrades in the SHETL
area, which form part of the first phase
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 between 2011 and 2015;
kkBeauly-Denny: Scottish Ministers
granted consents, with associated
conditions, in January 2010, to install a
400kV overhead electricity transmission
line to replace the existing 132kV
overhead transmission line between
Beauly and Denny. The existing line will
be dismantled. Construction works in
line with the £58.8m of initial funding
authorised by Ofgem in September
2010 are well under way. Substantive
progress has also been made in
satisfying conditions associated with
Scottish Ministers’ consent to replace
the line which apply to the SSE section.
Proposals were submitted to Ofgem in
December 2010 for authorisation of the
remainder of SSE’s share of the project
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.
expenditure (around £500m).
Independent consultants appointed
by Ofgem have confirmed that SSE’s
submission represents ‘a prudent
assessment of efficient costs’ and
Ofgem will shortly undertake a
consultation. Subject to that and to
continued progress, full construction
work on the replacement line, including
the erection of new pylons, should begin
later this year, with the replacement
line being completed in 2014;
kkBeauly-Mossford: SHETL has undertaken
public consultations on the proposal to
reinforce the existing 132kV electricity
transmission infrastructure, including
a new substation and a new line to
accommodate a higher capacity. An
application for consent to undertake the
work was submitted to Scottish Ministers
in January 2011. Based on early estimates,
two parts of the project are likely to
require total investment of around £45m;
kkShetland: SHETL has now secured
consent for converter stations
associated with the proposed 320km
subsea/25km onshore under ground
high voltage direct current (HVDC)
transmission link between the Shetland
Islands and Moray on the Scottish
mainland to accommodate renewable
energy developments in Shetland. The
link 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 up to €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 and
could be the first step towards an
offshore ‘super grid’; and
kkWestern Isles: In October 2010, SHETL
concluded that the lack of financial
underwriting from electricity generators
(attributed to the level of transmission
charges) relating to the link from the
Western Isles to the mainland meant it
would not be able to conclude a contract
for the supply of the necessary electricity
cable. As a result, it withdrew its request
to Ofgem for authorisation to make the
investment. The project remains active
and SSE will prepare a new request for
authorisation to invest in the link as soon
as these issues are resolved. In practice,
this is likely to take around one year.
kk the length of time over which assets will
be depreciated, with 20 years for existing
assets and 45 years for new assets;
Based on current estimates (although these
will inevitably be revised) the Shetland and
Western Isles links could require investment
of around £900m.
The charging arrangements for electricity
and gas transmission networks are
currently the subject of an Ofgem
sponsored independent review named
Project TransmiT which was launched in
September 2010. It is designed to ensure
that the framework for transmission
charging promotes security of supply and
a low carbon future, while keeping the cost
of transmission to customers under control.
The outcome of Project TransmiT will have
a bearing on the amount of electricity from
renewable sources that is developed in
Scotland and, therefore, on the way in which
the transmission network is upgraded.
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.
‘Keeping the lights on and
supporting growth’
‘Keeping the lights on and supporting
growth’ was the name given to the public
consultation issued by Scottish Hydro
Electric Transmission Ltd (SHETL) in
February 2011 through which it sought the
views of customers and other stakeholders
on the key activities and investments that
should be included in its business plan for
the new electricity Transmission Price
Control that is due to run for eight years
from 1 April 2013.
The consultation stemmed from Ofgem’s
new RIIO (Revenue = Incentives + Innovation
+ Outputs) model for economic regulation.
RIIO is designed to encourage the efficient
investment and innovation needed to secure
energy supplies and meet environmental
targets while delivering long-term value for
money for customers.
In March 2011, Ofgem published its strategy
for the new electricity Transmission Price
Control (RIIO-T1). The financial package
addressed key issues such as:
kk the allowed cost of equity, with an
indicative range of 6.0-7.2%; and
kk the allowed cost of debt, with the use
of an index for determining companies’
debt costs.
This package represented a step forward
in reaching an acceptable Price Control, but
extensive engagement with Ofgem and other
stakeholders is required to ensure the final
settlement fulfils the objectives that have
been set for it. Transmission companies
such as SHETL are required to develop
business plans by the end of July 2011,
demonstrating how they will ‘meet the
sustainability challenge, fund network
investment and ensure continued safe
and reliable operation of the networks
and high levels of customer service’.
Electricity Distribution
and Transmission
priorities in 2011/12
and beyond
during 2011/12 SSE’s priorities
in electricity networks are to:
kkmaintain safe and reliable supplies of
power and to restore supplies as quickly
as possible in the event of interruptions;
kkrespond effectively to the new
arrangements in electricity distribution
for allocating costs between support
activities (expenses) and networks
(capital);
kkdeliver successfully its investment plans
in its electricity distribution networks;
kkdeploy innovative techniques to maximise
the returns from good performance in
electricity networks;
kkmake further progress in upgrading
the transmission network in the north
of Scotland; and
kkcontinue to work with stakeholders to
secure an acceptable outcome to the new
electricity Transmission Price Control.
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.
27
Overview
Strategy
Group performance
Segmental performance
Corporate governance
Financial statements
Shareholder information
Gas Distribution
performance in sGn
SSE receives 50% of the distributable
earnings from Scotia Gas Networks (SGN), in
line with its equity holding, and also provides
it with corporate and management services.
In SGN in 2010/11:
kkSSE’s share of operating profit was
£186.8m, up from £183.7m in the
previous year;
kkgas transported increased by 3.2TWh
to 166.2TWh; and
kk97.2% of uncontrolled gas escapes
were attended within one hour of
notification, compared with 97.9%
in the previous year.
SGN’s two networks therefore both
achieved the 97% standard for uncontrolled
gas escapes.
The increase in operating profit for SGN
is primarily due to two things:
kkthe impact of the price changes agreed
as part of the five-year gas Distribution
Price Control to March 2013; and
kkunderlying operational efficiencies
achieved during the 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. A small
part of SGN’s operating profit is derived
from the non-regulated activities of its
contracting, connections and commercial
services operations.
operating gas networks efficiently
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 period since,
services have been brought within SGN,
and SGN’s remaining service contracts with
National Grid total £7m per annum. These
Managed Services Agreement contracts
cover transmission services, control and IT
services and emergency call handling, and
the process of bringing them within SGN
is continuing. During 2011/12, it will stop
using National Grid’s Gas Transportation
Management System and replace it with its
new Distribution Network Control System.
investing in gas networks and
securing growth in their raV
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
Scottish and Southern Energy
Annual Report 2011
28
Economically-regulated businesses (continued)
Energy networks
preparing for the new gas
Distribution price control
As with electricity transmission, a new
eight-year Price Control will be introduced
for gas distribution from 1 April 2013 –
RIIO-GD1. SGN has undertaken extensive
consultations with stakeholders to help
determine what should be included in its
business plan for the new Price Control.
In March 2011, Ofgem published its strategy
for the new gas Distribution Price Control
(RIIO-GD1). In addition to the allowed cost of
equity and allowed cost of debt (see ‘Keeping
the lights on and supporting growth’ above)
the financial package included proposals
to refine the depreciation profile, so that it
is entirely front loaded, and to capitalise
all replacement expenditure (only 50%
is capitalised at present).
As in electricity transmission this package
represents a step forward in reaching an
acceptable Price Control, but still requires
extensive engagement with Ofgem and other
stakeholders to ensure the final settlement
fulfils the objectives that have been set for it.
Gas Distribution priorities
in 2011/12 and beyond
during 2011/12, SGn’s priorities are to:
kkdeliver a safe and secure gas supply
to customers;
kkdeliver to time and budget the 2011/12
mains replacement and capital works
programmes;
kkestablish the new distribution network
Control System;
kkcontinue to work with stakeholders to
secure an acceptable outcome to the
new gas distribution Price Control; and
kksupport sustainable developments in
gas distribution.
SGN was awarded £1.1m under Ofgem’s
scheme for rewarding companies for
developing and adopting best practice in
serving the interests of customers, society
and the environment. This was the second
successive year in which SGN secured
the highest award under the scheme.
another significant increase in their RAV.
By 2013, SGN estimates that its total RAV
will be around £4.8bn.
During 2010/11, SGN invested £399.3m in
capital expenditure and mains and services
replacement projects, compared with
£412.8m in the previous year:
kkthe most high profile capital project
is the £21m replacement of the under
sea gas main between the south coast
mainland and the Isle of Wight, which is
nearing completion. The project involves
connecting Lepe and Gurnard through
the longest directional drill ever
undertaken (3.9km). Two tunnels
have been bored, meeting around
40 metres below the seabed, to take
the two 12 inch diameter pipes;
kkthe 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. During 2010/11,
SGN replaced 1,102km of its metallic
gas mains with modern polyethylene
pipes; and
kkSGN is also committed to making new
gas connections to existing homes that
are not on mains gas as affordable as
possible, and is running a new Assisted
Connections scheme, under which
4,700 properties were connected to its
networks during 2010/11. A further 5,000
properties are expected to be connected
in 2011/12.
Investment will continue to be a top priority
for SGN and, in line with that, it expects to
invest around £400m in capital expenditure
and mains and service replacement projects
during 2011/12.
Earning financial rewards for
corporate responsibility
In September 2010, SGN was awarded
£1.1m under Ofgem’s scheme for rewarding
companies for developing and adopting
best practice in serving the interests of
customers, society and the environment.
This was the second successive year in
which SGN secured the highest award
under the scheme. Amongst other things,
the award was in respect of SGN’s ‘Green
Gas’ project, to introduce biomethane from
sewerage into the gas network. The scheme,
which is judged by a panel of industry
experts, was established as part of Ofgem’s
gas Distribution Price Control 2008-13.
making gas networks more sustainable
In March 2011, the UK government launched
the Renewable Heat Incentive ‘to revolutionise
the way heat is generated and used in
buildings’. It will support emerging
technologies and is designed to reduce
dependence on heating from fossil fuels.
SGN has long recognised that renewable
heat is an untapped resource. Working with
a water company and a gas supplier, it began
the delivery and supply of biomethane to 200
homes in Oxfordshire. Under the scheme, the
first of its kind in Britain, sludge is subjected
to the process of anaerobic digestion to
create biogas which, after the removal of
impurities, is fed into the gas distribution
network. It is estimated that biomethane
could account for up to 15% of domestic
gas needs in the UK in 2020.
SGN is now developing this technology so
that larger volumes of biomethane at other
sites can be commissioned into the network
and is progressing around 50 enquiries for
biomethane network entry points from
anaerobic digestion and landfill gas projects
in Scotland and southern England.
Market-based businesses
Generation and Supply
Performance indicators
Generation
assets*
Gas- and oil-fired generation capacity – MW
Coal-fired generation capacity (inc biomass
co-firing) – MW
Renewable generation capacity* (inc pumped
storage) – MW
Total electricity generation capacity – MW
operations
Gas power station availability – %
Coal power station availability – %
Hydro storage – %
Wind farm availability – %
output**
Gas- and oil-fired (inc CHP) – TWh
Coal-fired (inc biomass co-firing) – TWh
Total output from thermal power stations – TWh
Conventional hydro – GWh
Wind energy – GWh
Dedicated biomass – GWh
Total output of renewable energy – GWh
Total output from pumped storage – GWh
Supply
2009
2010
2011 Change
4,510
4,590
4,470
-2.6%
4,010
4,370
4,370
+0.0%
2,220
10,740
2,370
11,330
2,450
11,290
+3.4%
-0.4%
76
89
73
96
26.3
7.8
23.1
3,316
1,861
148
5,182
273
94
92
52
97
31.3
10.7
42.0
3,016
1,444
218
4,678
380
88
84
61
97
29.3
13.6
42.9
2,558
1,653
200
4,411
370
-6.4%
-8.7%
+17.3%
+0.0%
-6.4%
+27.1%
+2.1%
-15.2%
+14.5%
-8.3%
-5.7%
-2.6%
2009
2010
2011 Change
5.17
3.54
0.45
9.16
5.10
3.50
0.45
9.05
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) –
millions
Home services customer accounts (GB) – millions
Total customer accounts (GB and Ireland) – millions
Electricity supplied household average (GB) – kWh
Gas supplied household average (GB) – therms
Complaints to third party organisations (GB)
* Wholly-owned and share of joint ventures. ** Electricity from power stations in which SSE has an
ownership interest (output based on SSE’s contractual share).
0.49 +157.9%
0.42
+2.4%
10.07
+3.2%
4,408
-1.3%
563
+0.9%
1,161
-5.7%
0.19
0.41
9.76
4,465
558
1,231
0.05
0.33
9.43
4,748
598
N/A
-0.2%
+0.8%
-4.4%
+0.0%
5.16
3.57
0.43
9.16
a vertically-integrated business
SSE operates the business of electricity
generation and the supply of electricity and
the supply of gas in Great Britain and Ireland
as a single, vertically-integrated Generation
and Supply business.
This means that SSE seeks to meet the
energy requirements of its customers
through the ownership and operation of
power stations, power purchase agreements
with other generators and fuel supply
contracts, and it is the meeting of the
energy supply requirements of its customers
which is the key determinant of SSE’s
operational and investment decisions in
Generation. Under this model, customers
benefit from lower exposure to wholesale
price volatility and from price stability
through ‘smoothing’.
29
Overview
Strategy
Group performance
Segmental performance
Corporate governance
Financial statements
Shareholder information
As at 31 March 2011, SSE supplied energy to:
kk9.16 million customer accounts in Great
Britain; and
kk490,000 customer accounts in Northern
Ireland and the Republic of Ireland.
Its generation capacity, including its share of
joint ventures and associates, was around:
kk10,800MW in Great Britain;
kk80MW in Northern Ireland; and
kk410MW in the Republic of Ireland.
Overall, SSE seeks to maintain a well-
balanced portfolio of customers, assets
(also including stakes in gas production
assets) and contracts, including longer-
term contracts for purchasing gas and
power purchase agreements. In line with
this, it purchases most of the gas and
some of the electricity it needs to supply
customers via bilateral contracts of
varying lengths and also through trading in
wholesale markets. 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.
Its Energy Portfolio Management team
is responsible for contract management
and for SSE’s participation in wholesale
markets for electricity and gas, as well as
the markets for coal, oil and carbon dioxide
emissions allowances. Through analysis of
generation plant availability (in SSE’s own
portfolio and elsewhere in the market),
customer demand and its contractual
position SSE can assess, and therefore
manage, its exposure to market prices.
The wholesale price of energy can fluctuate
greatly, according to variables such as
physical supply, customers’ demand,
the weather, the availability of delivery
infrastructure and geopolitical issues.
SSE’s approach is designed to hedge its
requirements in a way that minimises its
costs while ensuring its exposure to market
prices is not excessive. Given there are
uncertainties around the volume of energy
that will be required at any particular point,
SSE is unlikely to be fully hedged until close
to the delivery of the energy itself.
This balanced, integrated business features
a diverse range of assets and contracts to
support the supply of energy to customers.
It therefore provides:
kk lower risk from wholesale energy price
volatility through reduced exposure to
any single commodity;
kk greater ability to manage wholesale
energy price volatility and to protect
customers from it; and
Scottish and Southern Energy
Annual Report 2011
30
Market-based businesses (continued)
Generation and Supply
kkmore scope to deliver investment
needed in generation because the risks
associated with large-scale and long-
term investments are mitigated by the
income earned from supplying electricity
and gas to customers.
In March 2011, Ofgem published its findings
and initial proposals from the Retail Market
Review it launched in November 2010.
It confirmed that it ‘expects efficient firms to
make a profit’. At the same time, it said that
‘further action is needed to make energy retail
markets in Great Britain work more effectively
in the interests of consumers’. The proposals
include actions to ‘improve further the
transparency in vertically-integrated utilities’.
Ofgem described its proposals as ‘high-level
and preliminary’ and confirmed that they will
be subject to ‘further rounds of consultation’.
SSE believes that Ofgem’s proposals would
represent significant changes to the energy
market in Great Britain. It believes the
market is fundamentally sound, but is
participating constructively in Ofgem’s
process of consultation and will strongly
support steps which assist customers
and the competitive market in general.
On 10 May 2011, in a case at Guildford Crown
Court, SSE was found guilty on two counts
(out of seven) relating to the use of direct
sales aids in February 2009. The case was
brought by Surrey County Council Trading
Standards. The sales aids in question are not
now in use, and SSE is confident that its sales
processes continue to be fair and responsible.
SSE remains very disappointed with the
verdict and is considering legal options,
which include the possibility of an appeal.
It has 28 days from the jury’s verdict to
launch an appeal.
financial performance in
Generation and supply
Operating profit* in Generation and Supply
fell by 1.5%, from £896.0m to £882.8m.
It contributed 53.4% of SSE’s total operating
profit* in 2010/11. The reasons behind this
performance are set out under ‘Increasing
adjusted profit before tax* in 2010/11’ on
page 17.
Total revenue for Generation and Supply
was £27.2bn, which accounted for 93% of
SSE’s total revenue in 2010/11, of which
£8bn was in relation to sales of electricity
and gas to industrial, commercial and
domestic customers.
Generating and supplying
electricity in Great Britain
During 2010/11, in Great Britain, SSE
(previous year’s numbers in brackets):
kk generated 42.9TWh, based on contracted
output of electricity from all thermal
power stations in which it has an
ownership interest (42.0TWh);
kk generated 3.7TWh, based on contracted
output from renewable sources of energy
in which it has an ownership interest,
including pumped storage (4.0TWh); and
kk purchased 7.4TWh of electricity through
long-term contracts with other
generators (7.7TWh).
During the same period, also in Great
Britain, it:
kk supplied 27.7TWh of electricity to its
industrial and commercial customers; and
kk supplied 29.0TWh to its small business
and household customers.
This means that, during the year, SSE:
kk generated or purchased under long term
contracts the equivalent of over 90% of
the electricity needed to supply all of its
customers; and
kk generated over 150% of the electricity
needed to supply its household and
small business customers.
Any net balances were traded in the
wholesale electricity market, thereby
contributing to its liquidity.
‘profound developments’
in Generation and supply
In its February 2011 report into future energy
scenarios, ‘Signals & Signposts’, Royal
Dutch Shell said that, over the next four
decades, the world’s energy system will see
‘profound developments’. It also said that:
kk there is a ‘step change in energy use’,
as developing nations enter their most
energy-intensive phase of economic
growth, which could see underlying
global demand for energy triple from
its 2000 level by 2050;
kk natural innovation and competition could
spur improvements in energy efficiency
to moderate underlying demand;
kk supply will struggle to keep pace with
demand – by the end of the coming
decade, growth in the production of
easily accessible oil and gas will not
match the projected rate of demand
growth; and
kk even if it were possible for fossil fuels
to maintain their current share of the
energy mix and respond to increased
demand, carbon dioxide emissions
would then be on a pathway that could
severely threaten human well-being.
The UK government’s Annual Energy
Statement 2010 predicted that demand
for electricity in the UK will double over
the next 40 years as a result of the need
to electrify large parts of the heat and
transport sectors. It also said that for this to
have the required impact on emissions, the
electricity being consumed will need to be
almost exclusively from low carbon sources.
The ‘required impact’ refers to the fact that:
kk under the EU Renewable Energy Directive,
the UK has a legally-binding target to
meet 15% of its energy requirements
from renewable sources by 2020 (for
Ireland, it is 16%); and
kk under the Climate Change Act 2008, the
UK is required to achieve a reduction of
34% in emissions of greenhouse gases,
such as carbon dioxide, by 2020
(compared with 1990 levels).
It is in this context that SSE is managing
the operation of, and investment in, its
Generation and Supply business. As well as
being subject to a process of decarbonisation,
the UK energy sector will also become
more decentralised. The introduction of a
Renewable Heat Incentive in the UK, from
July 2011, which will in due course encourage
and support installations down to the
domestic level, is an example of this.
consolidated segmental statement
Ofgem introduced a requirement on
electricity generators and suppliers
to publish a Consolidated Segmental
Statement (CSS) showing revenue, costs
and profits from electricity generation
and electricity and gas supply activities.
SSE published its statement for 2009/10 on
28 September 2010. The CSS required SSE
to report financial information in a different
way from which the Generation and Supply
business is operated. SSE’s next CSS will
be published by 30 September 2011.
Reporting requirements may evolve in the
coming years as part of Ofgem’s proposals
to ‘improve further the transparency in
vertically-integrated utilities’.
31
Overview
Strategy
Group performance
Segmental performance
Corporate governance
Financial statements
Shareholder information
11,290
11,330
10,740
10,530
10,017
Total generation capacity – MW
2011
2010
2009
2008
2007
Generation capacity 2010/11 composition – %
Gas/oil 40
Coal/biomass 39
Renewable 21
kkavoids dependency on a single
technology or commodity;
kkhas significant optionality in the
management of its power stations; and
kkcan manage effectively the risks inevitably
associated with primary fuel procurement.
Management of primary fuel procurement
risks is also assisted by the fact that SSE
is the largest generator of electricity from
renewable sources across the UK and Ireland.
meeting longer-term energy requirements
SSE’s long-term power purchase agreements
with Barking Power Ltd (in which it has a
30.4% stake), Derwent Cogeneration Ltd
(in which it has a 49.5% stake) and British
Energy all expired during 2010/11.
availability in the previous year. The main
reason for the decline in availability was
a generator fault at Keadby, which was
returned to service in early May 2011 after
successful repair work was carried out.
From time-to-time, the stations at
Peterhead, Keadby and Medway have been
required to operate on a flexible ‘two shift’
basis. The requirement to do this is likely to
increase over the medium-term, and further
work is being designed by SSE’s Engineering
Centre to apply modifications to support
more frequent ‘two shifting’ in the future.
In addition, updated long-term gas turbine
maintenance contracts are being entered
into to support more flexible operations at
Keadby and Medway in the future.
In order to provide continuing long-term
stability to the energy portfolio, further
contractual arrangements have been agreed
in recent years. These include the 15-year
tolling agreement with Marchwood Power
Ltd which commenced in 2009 and the
re-negotiated contract for electricity output
from Seabank Power Ltd entered into in 2008.
Marchwood, the 840MW CCGT owned
by Marchwood Power Ltd, a 50:50 joint
venture between SSE and ESB International,
completed its first full financial year of
commercial operation in 2010/11 and
achieved 93% of its maximum availability
to operate during the year. All of the
station’s output is contracted to SSE.
How ssE’s gas-fired power
stations performed
SSE owns 4,470MW of gas- and oil-fired
electricity generation capacity, including
its share of joint ventures but excluding Fife
Power Station (see below). Good performance
in Generation and Supply is dependent on
plant at power stations being available to
generate electricity as and when required
by customer demand and market conditions.
During 2010/11, SSE’s principal wholly-owned
gas-fired power stations (Keadby, Medway and
Peterhead) achieved 88% of their maximum
availability to generate electricity, excluding
planned outages, compared with 94%
The amount of electricity generated by
SSE at gas-fired power stations in which
it has an ownership or contractual interest,
including CHP, was 29.3TWh in 2010/11
(including 13.3TWh from wholly-owned
stations), compared with 31.3TWh in the
previous year (including 15.4TWh from
wholly-owned stations).
All of SSE’s power stations have to be able
to operate economically over the medium
term. The market for smaller gas-fired
generation has become increasingly
difficult. Fife Power Station was loss-making
in 2010/11 and was forecast to remain so,
Generation
principles for management
of ssE’s Generation portfolio
The operation of, and investment in,
SSE’s Generation portfolio is founded
on a series of principles:
kkcompliance: with all safety standards
and environmental requirements;
kkcapacity: to meet the electricity needs of
domestic and small business customers;
kkdiversity: to avoid over-dependency on
particular fuels or technologies;
kkavailability: to respond to customer
demand and market conditions;
kk flexibility: to ensure that changes
in demand for electricity can be
addressed; and
kk sustainability: to deliver a 50% cut in
the carbon dioxide content of electricity
produced.
a diverse Generation portfolio
SSE’s 31 March 2011 portfolio of 11,290MW
of capacity for generating electricity
compares with 11,330MW the year before.
During 2010/11 it:
kk commissioned 90MW of new onshore
wind farm capacity as a result of its
investment programme;
kksold onshore wind farm capacity at
Ardrossan; and
kksuspended operations at 120MW of
gas-fired generation capacity at Fife.
Subsequently, in April 2011, capacity
totalling 96.8MW at three onshore wind
farms in Scotland and Northern Ireland
was sold after the end of the financial
year, in April 2011, for a cash payment
of £178.4m.
In line with the Generation principle
of diversity, SSE currently maintains
a balance between:
kkgas- and coal-fired generation
capacity; and
kkfossil fuel and renewable sources
of energy.
The practical application of this balance
means that SSE’s Generation portfolio
comprised at 31 March 2011:
kk4,470MW of gas- and oil-fired capacity;
kk4,370MW of coal-fired capacity (with
biomass co-firing capability); and
kk2,450MW of renewable (hydro, wind
and dedicated biomass) capacity.
As a result of this, SSE has the greatest
diversity in fuels for generating electricity
among UK generators. This means it:
Scottish and Southern Energy
Annual Report 2011
32
Market-based businesses (continued)
Generation and Supply
SSE has potential options for additional
CCGT capacity at two other power stations:
kkit has effective consent to develop
710MW of capacity at Keadby; and
kkBarking Power Ltd, in which it has a
30.4% stake has consent to develop
new 470MW of capacity.
secure supplies of electricity. Moreover,
the sites they occupy benefit from key
infrastructure such as:
kkelectricity network connections;
kkaccess to water necessary for power
generation operations; and
kkestablished transport links.
particularly when the impact of the very high
transmission access charges that apply in
Scotland are taken into account. As a result,
SSE suspended commercial operations at
the plant in February 2011.
investment options for
gas-fired power stations
The UK government’s ‘Electricity Market
Reform’ consultation document, published in
December 2010, said that gas-fired generation
will ‘continue to play an important role in the
electricity sector – providing vital flexibility to
support an increasing amount of low-carbon
generation and to maintain security of supply’.
In February 2011, SSE secured consent,
under Section 36 of the Electricity Act
1989, for the construction and operation
of a two-unit CCGT power station of up to
870MW at the Abernedd brownfield site in
South Wales. Subsequently, SSE released
Transmission Entry Capacity (TEC) rights
to reduce them to 450MW, and intends to
pursue the development of a single CCGT
unit only – the most economic option in the
context of the development requirements
for a two-unit site and of the medium-term
outlook for gas-fired generation.
An investment decision on the scaled-back
Abernedd project will not be taken until
next year at the earliest and will depend,
amongst other things, on the emerging
shape of the electricity market following the
UK government’s consultation. This means
that the power station, if built, will not be
operational until late 2015. When SSE
acquired Abernedd in May 2009, it was
envisaged that a two-unit, 870MW CCGT
would be developed, with the first unit
becoming operational around 2013.
SSE agrees that CCGT is a cleaner fossil
fuel technology, which has the necessary
flexibility to support security of supplies
as the presence of wind energy on the
electricity system increases, but believes
the right market signals need to be there
if the necessary investment decisions are
to be taken.
How ssE’s coal-fired power
stations performed
SSE owns 4,370MW of coal-fired generation
capacity at three power stations: Fiddler’s
Ferry, Ferrybridge and Uskmouth. The
stations also co-fire fuels from renewable
sources in order to displace fossil fuels.
All of the capacity at Fiddler’s Ferry and
Uskmouth and half of the capacity at
Ferrybridge (over 3,300MW in total) complies
with the EU Industrial Emissions Directive
and so can remain operational beyond 2015
and up to 2023.
During 2010/11, SSE generated 13.6TWh of
electricity at its coal-fired power stations at
Fiddler’s Ferry, Ferrybridge and Uskmouth,
compared with 10.7TWh in the previous year
(excluding Uskmouth, which was acquired
in August 2009). The stations achieved 84%
of their maximum availability to generate
electricity, excluding planned outages,
compared with 92% in the previous year.
Availability at Ferrybridge was affected by a
number of technical issues which emerged
during planned outages and which were
subsequently resolved.
Nevertheless, all of SSE’s coal-fired power
stations demonstrated their ability to
operate flexibly in response to customer
demand and electricity market conditions
during 2010/11. The value of electricity
from coal-fired power stations was
demonstrated following the Japanese
earthquake in March 2011 and the political
upheaval in the Middle East.
looking to the future of
coal-fired power stations
Existing coal-fired power stations still have
a significant part to play in maintaining
All of SSE’s coal-fired power stations
demonstrated their ability to operate
flexibly in response to customer
demand and electricity market
conditions during 2010/11.
During 2010/11, SSE decided against
proceeding with the installation of
Selective Catalytic Reduction (SCR)
technology at Fiddler’s Ferry after it was
confirmed that the EU Industrial Emissions
Directive (IED) means it can operate the
station for 17,500 hours between 2016
and 2023, even if SCR is not fitted to meet
new IED limits on emissions of nitrogen
oxides. SSE does, however, retain the
option of installing Selective non-Catalytic
Reduction technology at Fiddler’s Ferry
if it is economically and environmentally
viable for it to do so.
It is SSE’s belief that no new coal-fired
power generation plant should be built in
the UK without carbon dioxide abatement
and that no coal-fired plant without such
abatement should remain operational
beyond 2030. This is consistent with
the UK Committee on Climate Change’s
recommendation that the UK should commit
to a 60% cut in carbon dioxide emissions by
2030, with ‘radical decarbonisation’ of the
electricity sector.
Future operations at SSE’s coal-fired power
stations, and the associated investment
decisions, will therefore be determined
by three main factors:
kk the need to maintain and improve the
day-to-day performance of the stations
while they are operational;
kk the prospects for the development
of alternative sources of energy; and
kk the continuing UK government
commitment to the development
of CCS technology.
Against this background, SSE’s investment
strategy for Fiddler’s Ferry, Ferrybridge
and Uskmouth is as follows:
kk it is continuing to invest in the operation
and maintenance of the three stations,
with a total of £69.9m invested in the
stations in 2010/11;
kk it is seeking planning consent so it has
the option to develop a multi-fuel facility
at Ferrybridge, using predominantly
refuse-derived fuels from which to
generate around 65MW of electricity;
kk it is developing a project at Uskmouth
to repower a coal-fired generating unit
into a 100MW biomass unit; and
33
Overview
Strategy
Group performance
Segmental performance
Corporate governance
Financial statements
Shareholder information
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 just over 600g/kWh, and 2020.
On this basis, its carbon intensity in
2010/11 was 504g/kWh, compared with
494g/kWh in the previous year, reflecting
the increase in carbon dioxide emissions
described above.
SSE expects to achieve its 2020 target by:
kk reducing output of electricity from
coal-fired power stations;
kk optimising the efficiency with which
primary fuel is converted into electricity
at gas-fired power stations; and
kk increasing significantly the output of
electricity from renewable sources.
More broadly, SSE has joined other energy
companies in Europe in calling for the EU
to adopt a greenhouse gas emissions
reduction target of 25% (up from 20% at
present) as part of a long-term move away
from fossil fuel-based electricity generation
and full decarbonisation by 2050.
ssE’s position in the carbon
Disclosure project (cDp)
In September 2010, SSE was commended
by the CDP, which represents over 500
institutional investors with US$64 trillion in
assets under management, for its approach
to climate change disclosure and for the
action it is taking to reduce global emissions
and mitigate the risks of climate change.
SSE is featured in:
kk the Carbon Disclosure Leadership
Index which highlights the constituent
companies within the FTSE Global
500 which have displayed the most
professional approach to corporate
governance in respect of climate
change disclosure practices; and
kk the Carbon Performance Leadership
Index which highlights those
companies which have demonstrated
commitment to strategy, governance,
stakeholder communications and,
most of all, emissions reduction
in their CDP responses.
renewable energy – overview
The EU Renewable Energy Directive means
that the UK has a legally-binding target
to meet 15% of its energy requirements
from renewable sources by 2020; for Ireland,
the target is 16%. In practice, this means
that over 30% of the countries’ electricity
requirements will have to be met from
kk it is building Europe’s largest post-
combustion carbon dioxide capture trial
at Ferrybridge, in collaboration with
Doosan Babcock and Vattenfall, where
construction work is now well under way
in advance of the trial beginning later
this year (see ‘Making progress on
Carbon Capture and Storage’ below).
making progress on carbon
capture and storage (ccs)
Coal remains a critically important
fuel for the UK, because of its flexibility,
its availability and because it reduces
reliance on imported gas. As a result,
existing coal-fired power stations still have
a crucial role to play in maintaining secure
supplies of electricity but, longer term,
the use of coal to generate electricity
will depend on the extent to which CCS
technology can be applied to abate
carbon dioxide emissions.
Moreover, if long-term targets for reducing
carbon dioxide emissions are to be met,
CCS technology will need to be applied as
widely as possible. The November 2010
decision by the UK government to include
gas-fired generation plant in its CCS
demonstration programme was a clear
recognition of this.
Against this background, SSE has two
CCS projects under way:
kkCoal at Ferrybridge: This project is
Europe’s largest post-combustion
carbon dioxide capture trial. 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. It is due
to become operational later this year; and
kk Gas at Peterhead: The proposed project
will design and develop a full chain,
post-combustion CCS facility which will
be capable of capturing the CO2 from one
385MW combined cycle gas turbine unit.
Current plans are that the CO2 will then
be transported via an existing under
ground pipeline to St Fergus for further
compression and then transported via
an undersea pipeline to an existing gas
reservoir in the North Sea operated by
Shell U.K. Limited that will have ceased
production and is being redeveloped by
CO2 Deep Store. In May 2011, the UK
government announced that the
project is one of seven CCS applications
to the European Investment Bank for
consideration in the next round of the
EU’s New Entrant Reserve scheme to
support CCS and renewable energy
projects across the EU. Up to three
such projects may be supported per
member state.
securing value from ash
at coal-fired power stations
The overall sustainability of coal-fired
power stations has improved in recent
years. In October 2010, having previously
held a 49.9% shareholding, SSE assumed
100% ownership of RockTron (Widnes) Ltd,
now named SSE Mineral Solutions Ltd. It
owns and operates an ash separation plant
at Fiddler’s Ferry, where fresh and stored
ash produced by the power station is
processed into marketable minerals and
materials such as cement substitutes.
Long-term options for the plant are
currently being assessed.
participating in the 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. SSE’s emissions allowances
requirement for 2010/11, beyond those
allocated under EU ETS, was 5.6 million
tonnes. This compares with 4.9 million
tonnes in the previous year. During 2010/11,
the price of allowances ranged from around
€13/tonne to around €17/tonne.
From 2013, all of the carbon dioxide
emissions allowances for electricity
producers will be auctioned. Moreover, in
Budget 2011, the UK government announced
proposals for the introduction of a ‘floor’ for
the price of allowances in the electricity
sector, so that they are around £16/tonne
in 2013, rising to around £30/tonne in 2020
(based on 2009 prices).
tackling emissions of carbon dioxide
In 2010/11, emissions of carbon dioxide
from power stations in which SSE has an
ownership or contractual interest totalled
24.5 million tonnes, compared with
23.1 million tonnes in the previous year,
reflecting increased output from coal-fired
power stations and the first full year of
operation of Marchwood Power Station.
SSE’s carbon emissions data is externally
verified by a UK Accreditation Service
(UKAS)-accredited organisation.
Scottish and Southern Energy
Annual Report 2011
34
Market-based businesses (continued)
Generation and Supply
Power station CO2 emissions – grams per kWh
2011
2010
2009
2008
2007
504
494
491
496
555
Renewable generation capacity – MW
2011
2010
2009
2008
2007
2,450
2,370
2,220
2,030
1,518
Renewable energy capacity 2010/11 composition – %
wind 38
hydro 59
biomass 3
renewable sources, up from around 6.5%
and 14.5% respectively at present.
The drive for additional renewable sources
of energy is supported by public policies
to encourage the necessary investment
by enhancing the value of the output.
The key policies are:
kk the Renewables Obligation in the
UK, under which 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 electricity from eligible renewable
sources; and
kk the Renewable Energy Feed In Tariff
(REFIT) in the Republic of Ireland, which
supports renewable energy by providing
a guaranteed price for output and a 15%
rebate (subject to a cap) on suppliers’
purchase of REFIT energy.
The existence of these schemes is a
practical demonstration of the fact that the
viability of wind energy remains dependent
on government-sponsored financial support.
The UK government’s work on Electricity
Market Reform is explicitly designed to make
sure that low carbon technologies such as
energy from renewable sources ‘become a
more attractive choice for investors’. As a
result, SSE does not detect or foresee any
weakening of public policy commitment to
renewable energy in either the UK or Ireland.
Nevertheless, it remains a key priority for SSE
to avoid dependency on a single generation
technology or related financial support.
increasing capacity for renewable energy
At 31 March 2011, SSE had almost 2,450MW
of commissioned renewable energy capacity
in the UK and Ireland, including its share
of joint ventures, comprising:
kk1,150MW conventional hydro;
kk910MW onshore wind;
kk5MW offshore wind;
kk80MW dedicated biomass; and
kk300MW pumped storage.
Of this, output from over 850MW qualifies
for ROCs, the key financial support scheme
for renewable energy in the UK, with:
kk1.0 ROCs/MWh for qualifying hydro and
onshore wind;
kk1.5 ROCs/MWh for qualifying dedicated
biomass; and
kk2.0 ROCs/MWh for qualifying offshore
wind.
In the year to 31 March 2011, SSE has
commissioned almost 90MW of new
onshore wind farm capacity. It has also
disposed of capacity as follows:
kk in May 2010, it sold its equity interest
(which was 51% on 31 March 2010,
increasing to 100% in April 2010) in the
30MW Ardrossan wind farm to Infinis,
a Terra Firma company, in a transaction
with a total value of £53.8m; and
kk in April 2011 it sold its 100% interest in
three onshore wind farms in Scotland
and Northern Ireland with a total
capacity of 96.8MW, also to Infinis
for a cash payment of £178.4m.
All of the electricity generated from the
capacity disposed of in Scotland is sold
to a third party.
The net result is that SSE remains on
course to own around 3,500MW of capacity
for renewable energy that is in operation or
under construction in the UK and Ireland by
the end of 2012/13. This will mean SSE is:
kk making a significant contribution to the
achievement of the legally-binding 2020
targets for renewable energy in the UK
and Ireland;
kk harnessing water and wind, which are
free and indigenous sources of primary
energy; and
kk reducing its exposure to volatile prices
for fossil fuels, which are becoming
more difficult to source while also being
in much more demand around the world.
producing electricity from
renewable sources
Total output from all of SSE’s conventional
hydro electric schemes, wind farms and
its dedicated biomass plant was 4,411GWh
during 2010/11, compared with 4,678GWh
in 2009/10. It was around 20% lower than
forecast because of dry and still weather
conditions experienced during the year.
producing electricity from
hydro electric schemes
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. In the last 30 years, electricity
output from conventional hydro electric
schemes has ranged from a high of 3,896GWh
to a low of 2,429GWh. During 2010/11
(previous year’s comparison in brackets):
kk total output from all of SSE’s conventional
hydro electric schemes was 2,558GWh
(3,016GWh); and, within this,
kk total output from SSE’s hydro electric
capacity qualifying for ROCs – just over
500MW – was 1,193GWh (1,456GWh).
As at 31 March 2011, the total amount of water
35
Overview
Strategy
Group performance
Segmental performance
Corporate governance
Financial statements
Shareholder information
kk910MW in operation;
kk710MW in construction or
pre-construction; and
kkover 300MW with consent for
development.
In addition, 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 over
800MW. This includes its share of the
capacity contained in the proposal by Viking
Energy, the joint venture between Viking
Energy Ltd (which is 90% owned by the
Shetland Charitable Trust) and SSE to
develop on Shetland’s Central Mainland
a wind farm with a capacity expected to
be around 450MW.
In addition to its onshore capacity, SSE has
offshore wind farm capacity in operation or
under construction totalling almost 350MW,
comprising:
kk a 50% stake in the 10MW Beatrice
offshore wind farm in the Moray Firth;
kk a 25.1% share of the 367MW Walney
offshore wind farm now under
construction in the Irish Sea; and
kk a 50% share of the 500MW Greater
Gabbard development now under
construction in the outer Thames Estuary.
This means that SSE now has 3,750MW of
renewable energy capacity (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. This excludes the
possible Arklow wind farm scheme off
the east coast of the Republic of Ireland.
maximising electricity
output from wind farms
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:
kksite selection;
kkwind analysis carried out by a
specialist team;
kksite optimisation to maximise output,
including turbine layout; and
kk turbine selection to match turbine
characteristics with wind conditions
and ensure reliability.
SSE has an experienced wind energy
development team comprising more than
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.
held in SSE’s reservoirs which could be used to
generate electricity was 61% of the maximum,
compared with 52% in the previous year.
restoring generation at the
Glendoe hydro electric scheme
In August 2009, SSE identified a blockage
caused by a fall of rock in the tunnel carrying
water from the reservoir to the power station
at the 100MW Glendoe hydro electric scheme,
thus stopping operations at the power station.
The first of the two new tunnels required to
by-pass the blockage in the existing tunnel
has been completed and work on the second
tunnel has progressed beyond the geological
fault zone at the site. This work is being
undertaken by BAM Nuttall.
If good momentum is maintained, the
process of re-filling the reservoir at Glendoe
is expected to begin this winter and electricity
generation should resume in the first half of
2012. Meanwhile, SSE is continuing to make
sure that the contractual and insurance
issues arising from the fall of rock are dealt
with satisfactorily.
options for investment in
hydro electric schemes
Hydro electric schemes which use
impounded water to generate electricity
have an important part to play in meeting
peak demand and also complement the
variable output from the growing number
of wind farms. SSE has developed four main
options for new hydro electric schemes:
kkKildermorie: In September 2010, SSE
received consent to develop a new
7.5MW hydro electric power station near
Ardross in Ross-shire. It will consist of a
new dam and storage reservoir, a buried
pipeline and a semi-buried powerhouse
with associated tailrace. Construction is
likely to begin in the second half of 2012;
kkSloy: In September 2010, SSE secured
from Scottish Ministers 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 will be able to generate
an additional 100GWh of electricity in a
typical year using water pumped from
Loch Lomond to the reservoir. SSE now
expects that developing a pumped storage
facility at Sloy will require investment
of around £40m, and is expecting to
take a final decision on the investment
after it has completed further technical
and engineering studies and considered
the outcome of the UK government’s
consultation on Electricity Market Reform;
kkCoire glas: SSE is proposing to develop a
new large scale pumped storage scheme
at Loch Lochy with an installed capacity
of between 300MW and 600MW and a
capability to produce in excess of
1,000GWh of electricity in a typical year.
A planning application for the scheme is
expected to be submitted during 2012; and
kkBalmacaan: SSE is also proposing to
develop a 300MW-600MW pumped
storage scheme at Loch Ness, with a
similar expected electricity output to
Coire glas. While this project is entirely
independent of Coire glas, it is at a
similar stage, a similar timetable for
submitting a planning application is
envisaged and the two projects are
managed by a single development team.
Construction of Coire glas and/or
Balmacaan would not begin before 2014
at the earliest and, subject to planning
consent, SSE will have the option to build
neither, one or both of the schemes. They
would be the first new pumped storage
schemes to be developed in Great Britain
since work began on the Dinorwig scheme
in Wales in 1974.
Final decisions on these and on other
renewable energy developments will
also depend upon acceptable charging
arrangements being in place for the use of
the transmission network in Great Britain,
an issue which is the subject of the Project
TransmiT review launched by Ofgem in
September 2010.
producing electricity from wind farms
At 31 March 2011, SSE owned and operated
910MW of wind farm capacity and output
during 2010/11 was as follows (previous
year’s comparison in brackets):
kk739GWh in the UK, (615GWh); and
kk914GWh in the Republic of Ireland,
(829GWh).
On average, the turbines at SSE’s wind
farms in the UK and Ireland achieved 97%
of their maximum availability to generate
electricity, the same as in the previous
year. Their average load factor was lower
than expected, at 24%, compared with
26% in the previous year, due to the still
weather conditions experienced during
much of the year.
Developing wind farms
to produce electricity
When SSE entered into the agreement
to acquire Airtricity 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. At 31 March 2011, this
had more than doubled, to over 1,900MW,
comprising around (net):
Scottish and Southern Energy
Annual Report 2011
36
Market-based businesses (continued)
Generation and Supply
Onshore wind capacity – MW
2011
2010
2009
2008
2007
160
910
840
690
600
Building new onshore wind farms
The main projects within SSE’s onshore
wind farm construction portfolio are Clyde
(350MW) in South Lanarkshire, Griffin
(156MW) in Perthshire and Gordonbush
(70MW) in Sutherland:
In addition to Clyde, Griffin and Gordonbush,
SSE has the following onshore wind farm
projects currently under construction or
pre-construction in the UK and Ireland
(MW are SSE’s share):
kkClyde: Consent has been secured
from North Lanarkshire Council for
the development of a permanent new
primary radar facility to provide the
necessary level of coverage for the site,
and construction work on the new facility
has begun. It should become operational
in early 2012. To ensure aviation safety
in the meantime, a temporary solution
is being reached following extensive
discussions involving the Civil Aviation
Authority and NATS (En Route) plc. As a
result, the first generation of electricity
is expected in the next few weeks and
the most advanced of the wind farm’s
three sections, South (130MW), should
still be completed by around the time
of SSE’s six-month financial results
announcement in November. The
wind farm as a whole is on course for
completion in 2012. This is consistent
with the timetable set out in SSE’s Annual
Report 2009. The wind farm is expected
to produce over 1,000GWh of electricity
in a typical year and its total construction
cost is forecast to be over £500m;
kk Griffin: Construction work is well under
way at the site, and the installation of
turbines at the site has started, with
the first electricity being generated
earlier than expected in the first week
of May 2011. The wind farm should be
completed in the spring of 2012. The
electricity output is expected to be
between 350GWh and 400GWh in a
typical year and the construction cost
is expected to be over £200m; and
kkGordonbush: Construction work is
well under way at the site, with turbine
delivery and installation due to begin
later this year. The wind farm should be
commissioned around the end of the
current financial year. The electricity
output is expected to be around 180GWh
in a typical year and its construction cost
is expected to be just over £100m.
kkSlieve Kirk (27MW);
kkCalliacher (27MW);
kkAthea (19MW);
kkGlenconway (19MW);
kkRathcahill (12MW);
kkTiev (10MW);
kkBalmurrie Fell (9MW);
kkTilbury (9MW); and
kkBindoo Extension (6MW).
SSE has also completed the acquisition,
from RES, of a 34 turbine/68-85MW wind
farm project for which consent for
construction has been granted at a site
close to its Keadby power station in North
Lincolnshire. As a result, Keadby has
become SSE’s first consented wind farm
in England. Subject to a final investment
decision, SSE expects to begin construction
of the wind farm during 2012/13, with work
expected to take up to 18 months. Keadby
is expected to be part of SSE’s investment
programme to 2015.
Building new offshore wind farms
SSE is developing Greater Gabbard in
partnership with RWE npower renewables
(through Greater Gabbard Offshore Winds
Limited) and Walney in partnership with
DONG Energy (through Walney (UK)
Offshore Windfarms Ltd) and believes that
partnerships of this kind represent the best
means of managing the risks associated
with offshore wind farms and maximising
the development and construction capability:
kkGreater Gabbard (500MW development;
SSE stake in Greater Gabbard Offshore
Winds Limited – 50%): Over 70% of the
project’s assets are installed. All 140
monopile foundations are in place at
the wind farm and 108 turbines have
been installed. Turbine installation will
resume later this year; in the meantime,
other work at the site will continue,
including subsea cabling. The first
17 turbines have now been energised.
GGOWL remains in a contractual
dispute with Fluor Limited, the principal
contractor for the wind farm, relating
to the need for assurance of the quality
of potentially up to 52 of the turbine
foundations used in the early stages
of development. Despite these issues,
the wind farm remains scheduled to be
completed as planned in 2012, although
there is some potential risk to this
timetable as a result of the GGOWL/
Fluor Limited dispute. The total annual
electricity output is expected to be
around 1,900GWh in a typical year, of
which SSE will take half, and SSE’s
share of the construction cost is
expected to be around £650m
(excluding the cost of connection
to the electricity grid); and
kkWalney (367MW development; SSE stake
in Walney (UK) Offshore Windfarms Ltd –
25.1%): All 51 turbines for the first phase
of the wind farm have been installed
and all the array cables have been put
in place and connected to the turbines.
The first 45 turbines have now been
energised and the whole of phase one
of the wind farm (183.6MW) is expected
to be completed in early summer.
Construction of the second phase of
the wind farm is now under way, with
the wind farm as a whole on schedule
for full commercial operation in 2012.
SSE’s share of the construction cost is
expected to be around £250m (excluding
connection to the electricity grid).
Developing more new offshore wind farms
SSE’s priority for the next year is the
successful completion and commissioning of
Greater Gabbard and Walney. These projects
have given it significant experience of offshore
wind farm development and construction.
SSE believes that harnessing the power of
offshore wind will enable the UK to generate
significant amounts of low-carbon electricity
from a renewable source and therefore help
meet the country’s energy security and
climate change objectives. Against this
background, it intends to maintain an orderly,
phased and continuing programme of
development, with the next two offshore wind
farm projects to be developed taking priority:
kk the 500MW Galloper wind farm,
close to the existing Greater Gabbard
development, a 50:50 partnership with
RWE npower renewables; and
kk the 1,000MW Beatrice wind farm in
the Moray Firth, a 75:25 partnership
with SeaEnergy.
Planning applications in respect of these
developments are expected to be submitted
in the course of 2011/12. Beyond this, SSE
37
Overview
Strategy
Group performance
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Financial statements
Shareholder information
has secured from The Crown Estate rights
for the possible development of additional
offshore wind farm assets later in the
decade with a total potential capacity of up
to 4.8GW (net). SSE’s disciplined approach
to the consideration of the options that such
rights have given it was demonstrated by its
decision, in February 2011, to halt work on
the development of its proposed offshore
wind farm at Kintyre following detailed
environmental studies and consultation
with local stakeholders.
Building a supply chain for offshore wind
Offshore wind farms are a new and
evolving technology, and fulfilling their
potential requires the development of a
sustainable supply chain, including design,
manufacture and installation. Moreover,
they are characterised by high up-front
capital costs, on which it is vital to exert
a downward pressure.
In response to this, SSE has:
kk entered into a joint venture with Marsh
Wind Technology Ltd, the UK subsidiary
of Marsh Global Holdings Ltd, which has
completed the purchase of the Skykon
wind turbine tower manufacturing
and assembly plant at Machrihanish,
Campbeltown, from its Administrators,
in May 2011;
kk formed an alliance of companies,
including Siemens, to collaborate on its
offshore wind programme, with the aim
of securing substantial reductions in the
cost of delivered power, in February 2011;
kk signed a strategic agreement with
Mitsubishi to co-operate on low carbon
energy developments, in July 2010; and
kk acquired a 15% stake in Burntisland
Fabrications (BiFab), the offshore energy
structure fabricator, in April 2010. In
addition to the equity stake, SSE secured
an agreement with BiFab for the supply
of at least 50 jacket substructures
annually to support SSE’s offshore
wind developments.
The energy potential of offshore wind is vast,
and in a resource- and carbon-constrained
world it is potential that needs to be fulfilled
while developing an effective supply chain
and keeping costs as low as possible. SSE
is aiming to do this through these initiatives,
and others such as ongoing participation
in the Carbon Trust’s Offshore Wind
Accelerator, a research and development
initiative to reduce costs.
Establishing an intermediate holding
company for offshore renewable energy
SSE has decided to establish a single
intermediate holding company for all of
its offshore renewable energy assets and
interests (mainly wind), including assets
in operation, under construction or in
development. It will be wholly-owned
by SSE for the foreseeable future and its
establishment will give SSE a company for
the financing of offshore renewable energy
developments. The new company is likely
to be formed during 2011/12.
Developing marine sources of electricity
The UK enjoys major advantages in the
development of marine energy technologies,
with the huge potential resource of marine
energy itself, allied to significant
commitment to the operation and
development of testing facilities. While
marine energy could play some part in
helping to meet renewable energy targets
set for 2020, its longer-term potential is
much more significant and it is in that
context that marine energy developments
should be considered.
SSE has a two-pronged approach to the
development of marine energy technologies
and to fulfilling the potential of marine
energy resources:
kk it has a 43% stake in the wave
energy developer, Aquamarine Power,
following further investment of £2.7m
in November 2010, taking the total
over the past three years to £19.8m.
Aquamarine Power is currently
developing an innovative wave energy
converter, Oyster 2, which is expected
to be deployed during 2011. Its existing
Oyster device has been undergoing sea
trials at the European Marine Energy
Centre in Orkney; and
kk it currently retains exclusive rights from
The Crown Estate to develop 400MW of
wave and tidal energy at sites in the
Pentland Firth and Orkney Waters and a
further 400MW with Aquamarine Power
and OpenHydro. SSE has submitted an
application to National Grid for an
electricity connection relating to three
of these sites and is working closely
with The Crown Estate and other
stakeholders to develop applications
to construct the developments.
Generating electricity from
alternative sources like biomass
SSE’s plant at Slough has a current
generating capacity of 80MW and remains
the UK’s largest dedicated biomass energy
facility. During 2010/11, it produced 200GWh
of electricity from renewable sources,
compared with 218GWh during the previous
year. Qualifying output from dedicated regular
biomass plants attracts 1.5 ROCs per MWh.
looking to the future of alternative energy
The plant at Slough has given SSE practical
experience which it can deploy when
considering investment in biomass and
other alternative fuels such as those
derived from refuse (RDF). Such fuels could
play a very valuable role in securing firm,
controllable generation of electricity from
renewable sources to complement other
more variable sources such as wind. SSE
has developed a diverse range of options
from which to select potential investments
which could deliver up to 250MW of new
alternative energy capacity:
kkthe possible 65MW multi-fuel CHP facility
at Ferrybridge (see ‘Looking to the future
of coal-fired power stations’ on page 32);
kkthe possible re-powering of an entire
coal-fired generating unit at Uskmouth
into a 100MW biomass unit, fuelled
by an industrial grade wood pellet
(see page 32 also); and
kkthe possible re-powering of the Slough
plant into a new 80MW biomass unit.
The creation of RDF for use in electricity
generation is a practical means for
organisations to avoid Landfill Tax, and the
generator is, therefore, paid to take the fuel.
At the same time, the reliability of fuel
sources is often a critical issue in any
The energy potential of offshore wind
is vast, and in a resource- and carbon-
constrained world it is potential that
needs to be fulfilled while developing
an effective supply chain and keeping
costs as low as possible.
Scottish and Southern Energy
Annual Report 2011
38
Market-based businesses (continued)
Generation and Supply
alternative energy development. A major
milestone in the development of the multi
fuel plant at Ferrybridge was achieved in
April 2011 when 3SE, the joint venture
partnership between Shanks and SSE, was
confirmed as preferred bidder for the waste
from Barnsley, Doncaster and Rotherham
Council areas (BDR). After Shanks has
processed the waste, the resultant fuel
will secure, locally, around one fifth of the
overall requirements of the proposed plant.
In addition, Forth Energy, the joint venture
between SSE and Forth Ports PLC, has
now submitted planning applications to
develop dedicated biomass power stations,
with a total capacity of 500MW, at four sites
in Scotland.
In May 2010, SSE took part in a £13.5m
agreement to invest in the construction
of Scotland’s largest biogas plant at a
former landfill site at Barkip in North
Ayrshire. The investment 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 site will be capable of processing
around 75,000 tonnes of waste (such as
food, manures and organic effluent sludges)
annually, producing around 2.5MW of
renewable electricity. It has received its first
loads and has entered the commissioning
phase, after the successful completion of
plant construction.
Biogas developments such as Barkip
have the potential to provide an important
sustainable energy solution, capturing the
energy contained in waste. They offer
opportunities beyond on-site electricity
generation to include connections to the
gas distribution network, an issue that will
be of increasing significance in the future
as changes are made to the source of heat
for buildings in the UK, in line with the
Renewable Heat Incentive. Progress at
Barkip is, therefore, of direct interest
to both SSE and SGN.
investing in new ventures in energy
SSE Ventures (SSEV) was set up in 2007 to
develop and grow a portfolio of investments
in small and medium-sized enterprises
offering renewable, sustainable and energy
efficiency-enhancing products and services.
Amongst other things, investments were
made to help SSE anticipate, be at the
forefront of and adapt to the kind of changes
in energy production and consumption that
are likely to occur over the next decade.
Since its establishment, SSEV has invested
or committed to invest a cumulative total
of £138.4m, including equity and loans in a
total of 40 companies. It is now examining
its strategy to ensure the optimum approach
to investment in these companies in the
years ahead.
Fukushima, which have thrown these issues
into even sharper relief.
a cautious approach to nuclear
power development
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.
Nevertheless, SSE continues to believe
that the development of new nuclear power
stations should be an option for the future.
Its joint venture with GDF Suez SA and
Iberdrola SA, NuGeneration Ltd (NuGen),
in which it has a 25% stake, is developing
plans for a new nuclear power station of
up to 3.6GW on land adjacent to Sellafield
in Cumbria, for which it secured an option
in October 2009.
In November 2010, SSE said in its six-
month financial statement, that: ‘the cost,
development issues and timetable and
operational efficacy of nuclear power
stations all require the greatest possible
scrutiny before a commitment to invest in
new nuclear power stations can be made’.
This was before the devastating events at
These plans will be prepared in consultation
with safety authorities and local stakeholders
and should be submitted for consideration
by the relevant planning authorities, with
the aim of a final investment decision being
taken in the middle of the decade. On this
basis, any new power station would not be
commissioned until 2023 at the earliest.
Generation priorities
in 2011/12 and beyond
SSE’s key operational objective in Generation
during 2011/12 is to be consistent with its
established principles and in particular:
kkcomply fully with all safety standards
and environmental requirements;
kkensure power stations are available to
respond to customer demand and market
conditions; and
kkoperate power stations efficiently to achieve
the optimum conversion of primary fuel into
electricity.
during 2011/12, SSE expects to invest almost
£1bn in maintaining and upgrading existing
generation assets and in developing new assets.
its Engineering Centre supports the process of
asset maintenance and investment. Against this
background, SSE’s investment priorities are to:
kkcomplete asset maintenance and
refurbishment programmes on time
and on budget;
kkmaximise the potential for existing thermal
power stations to operate flexibly;
kkmeet key milestones in new asset
development and construction; and
kkmake progress in developing the diverse
range of investment options it has created
for the second half of this decade.
SSE’s 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 other forms of 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 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.
The future development of its portfolio will
depend to a significant extent on the outcome of
the Uk government’s consultation on Electricity
market Reform. SSE believes a workable
package of reforms can emerge from this
process, based around carbon price support, a
mechanism to reward all electricity capacity that
is available to generate electricity, and continuing
support for the production of electricity from
renewable sources. The Uk government is
expected to publish a white Paper later this year.
39
Overview
Strategy
Group performance
Segmental performance
Corporate governance
Financial statements
Shareholder information
kk3.57 million household gas customer
accounts in GB;
processes and is co-operating fully with the
investigation, which is ongoing.
Supply
ssE’s approach to retaining
and gaining customers
Long-term success in energy supply
depends on the supplier’s ability to retain
and gain customers. SSE aims to do this by:
kkoffering consistently competitive prices
over the medium term;
kkdelivering the highest possible quality
of service; and
kkproviding market-leading products
and services to help transform energy
consumption.
Energy supply has one key characteristic
which makes it different from almost
any other sector: there are specific
requirements on energy suppliers to help
reduce their customers’ consumption of
electricity and gas. This means that
sustainable performance in energy
supply is about delivering services and
adding value to customers in ways which
support this movement towards greater
energy efficiency.
increasing customer numbers
in GB and ireland
SSE supplies electricity and gas in Great
Britain and Ireland as:
kkSouthern Electric and SSE (England);
kkSwalec (Wales);
kkScottish Hydro (Scotland);
kkAtlantic; and
kkAirtricity (Northern Ireland and the
Republic of Ireland).
During 2010/11, it achieved a net gain of
300,000 energy customer accounts in Great
Britain and Ireland, taking the total to 9.65
million. It also achieved a small increase in
the number of home services customers,
taking the total to 420,000. SSE’s customer
accounts therefore totalled 10.07 million
and at 31 March 2011 comprises:
kk 5.16 million household electricity
customer accounts in GB;
kk430,000 business electricity and gas
sites in GB;
kk 490,000 energy accounts in Northern
Ireland and the Republic of Ireland
(90% household and 10% industrial
and commercial); and
kk 420,000 home services customer
accounts, including gas boiler, central
heating and wiring maintenance;
installation products and services;
telephone line rental, calls and
broadband services.
The increase in customer account
numbers was therefore the result of
success in Ireland where, in April 2011,
SSE through Airtricity, passed the 500,000
customer accounts milestone. In contrast,
there was a slight reduction in customer
numbers in Great Britain in the second half
of the year, reflecting the highly competitive
market conditions.
Within the total, 3.05 million customer
accounts in Great Britain are for loyalty
products such as:
kk energyplus Argos , which rewards
customers with money-off discount
vouchers;
kk energyplus Pulse , under which
customers are able to support the
British Heart Foundation (which received
almost £120,000 from SSE in respect of
energyplus Pulse customers during
2010/11, taking the total since the
product was launched to almost £1.3m);
and
kk M&S Energy, available to customers
through M&S’ stores and website.
SSE’s customer growth is partly founded
on telephone and face-to-face sales. Ofgem
introduced new licence conditions to govern
sales processes in 2009 and in September
2010 launched an investigation to ‘establish
whether’ four suppliers, including SSE, are
complying with the licence conditions. SSE
is committed to high standards in its sales
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.
customers’ use of energy
is continuing to decline
On a weather-corrected basis, SSE
household customers have continued to
reduce their use of energy, and on an actual
basis in 2010/11 SSE household customers
used, on average:
kk563 therms of gas, compared with
558 therms in the previous year, and
598 therms in 2008/09; and
kk4,408kWh of electricity, compared with
4,465kWh in the previous year, and
4,748kWh in 2008/09.
As a result of the underlying fall in energy
consumption, households are less exposed
to the impact of high unit prices than they
otherwise would be.
Helping customers use less energy
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
Carbon Emissions Reduction Target (CERT)
scheme to deliver energy efficiency
measures to households throughout
Great Britain and in 2010/11 funded the
installation of cavity wall insulation in 87,000
homes and loft insulation in 106,000 homes
(excluding DIY insulation).
In its CERT Annual Report, a review of
CERT in 2009/10, published in August
2010, Ofgem stated that SSE had met 78%
of its overall carbon emissions reduction
obligation for the three years to 2011. SSE
is the energy supplier which has delivered
the highest share of its CERT obligations
through appliances, via a number of
consumer electronics schemes. These
have the benefit of helping to address
directly demand for electricity.
Complementing CERT, the Community
Energy Savings Programme (CESP) is an
obligation placed on energy suppliers and
electricity generators to make savings in
customers’ homes by helping to install
energy efficiency measures. The programme
is designed to ensure that suppliers work in
the lower income areas and to incentivise a
‘whole house’ approach to energy savings.
SSE’s first CESP programmes got under way
in 2010/11 at locations throughout England,
Scotland and Wales.
CESP and CERT will be superseded by
the ‘Green Deal’ and Energy Company
Obligation (ECO) when they are introduced:
Scottish and Southern Energy
Annual Report 2011
40
Market-based businesses (continued)
Generation and Supply
kk the Green Deal is a new financing
mechanism for customers seeking
to install energy saving measures,
featuring a Golden Rule under which
the expected financial savings arising
from the measures must be equal
to or greater than the costs attached
to the energy bill; and
kk the ECO will replace the obligations
arising from CERT and CESP, with
suppliers expected to focus assistance
on the poorest and most vulnerable
households and the hardest-to-treat
properties, which may not be able to
take advantage of the Green Deal.
The Green Deal and ECO are subjects
of the Energy Bill, which is making its
way through the UK Parliament and are
expected to be implemented, following
extensive secondary legislation, from 2012.
The Secretary of State for Energy and
Climate Change will be responsible for
determining what energy efficiency
measures will be eligible for the Green
Deal, and providing such measures could
represent a significant opportunity for
SSE to market products and services.
Helping vulnerable customers
The UK government has appointed
Professor John Hills to lead an independent
review of fuel poverty. A household is
currently classed as being in fuel poverty
if it would need to spend more than 10%
of its income on fuel to keep their home
warm enough. The review will examine the
definition of fuel poverty and the government
targets relating to it. It is expected to
conclude in 2012.
SSE believes that any type of poverty,
including fuel poverty, results fundamentally
from an individual or household having
insufficient income. Nevertheless, SSE
fulfils two key responsibilities in order to
help those of its customers who struggle
to pay for their basic energy needs:
kk under the voluntary agreement struck
with the UK government in 2008, SSE
operated schemes with a value of around
£28m in 2010/11 to help vulnerable
customers. It introduced a tiered
approach to assistance, featuring its
energyplus Care tariff, rebate tariffs
and other services, and helped around
200,000 customers in the year. This
agreement has now been replaced
by the Warm Home Discount, which
requires energy companies to give
discounts on energy bills to vulnerable
customers; and
kk SSE helps customers who may be having
difficulties in paying for the electricity
and gas they use by offering tailor-made
payment arrangements that suit their
financial and other circumstances. In
March 2011, over 240,000 customers
were taking advantage of these
arrangements.
retail energy bills in Great Britain
SSE increased its prices for household gas
supply by 9.4% on 1 December 2010. Forward
annual wholesale prices for gas rose by over
25% in the period between March 2010, when
SSE previously announced a package of
changes to prices for household gas, and
October 2010, when the price change was
announced. Throughout this time, domestic
gas supply was a loss-making activity for
SSE and its gas supply business, Southern
Electric Gas, has traded at a loss for most
of the past few years.
In November 2010, Ofgem adopted, for
analytical and comparative purposes, a new
typical annual domestic gas consumption
of 16,500kWh, a reduction of 4,000kWh,
following a consistent decline in average
domestic gas consumption levels. This
demonstrated that the co-operation seen
in recent years between energy suppliers,
government, Ofgem, consumer organisations,
and the associated investment, is delivering
a sustained reduction in the amount of gas
being consumed in Britain’s homes.
The distinction between the price of a unit
of energy and the amount customers pay
for heating and powering their homes is
illustrated by the £132 difference between
the cost of 20,500kWh of gas and 16,500kWh.
With greater energy efficiency, households
are less exposed to the impact of high unit
prices than they otherwise would be, because
they are using less energy, and further
improvements in this area remain a top
priority for SSE.
When it published its initial proposals from
its Retail Market Review in March 2011,
Ofgem claimed to have ‘evidence that
energy prices have tended to rise in
response to wholesale cost increases
more quickly than they have fallen with
decreases’. It acknowledged that ‘this
finding is dependent on both the analysis
techniques used, as well as how we assume
suppliers hedge their energy purchases’.
In fact, Ofgem’s analysis on this particularly
sensitive point is flawed because it assumes
a constant level of energy consumption
between 2004 and 2010 when, in fact,
consumption has declined. The analytical
flaw arises because energy suppliers like
SSE recover some of their fixed costs (such
as network costs in gas) through charges
on units of energy used. This means that if
consumption is reduced, some fixed costs are
not recovered by suppliers who, as a result,
have to ensure unit prices are at a level that
enables them to recover fixed costs.
Future trends in energy prices for domestic
customers will ultimately depend on what
happens in wholesale electricity and gas
markets, with public policy and regulatory
decisions on energy production, distribution
and consumption also having a significant
impact. For example, the costs associated
with the EU ETS, RO and CERT are all on
an increasing trend, as are the costs of
distributing energy. Moreover, forward
annual wholesale prices for electricity and
gas have risen by around one quarter and
around one third respectively in the six
months following SSE’s 29 October 2010
announcement of a price increase for
household gas supply.
How people pay their energy bills
A total of 61% of SSE’s domestic electricity
and gas accounts across Great Britain and
Ireland are paid by direct debit or standing
order. A further 12% are paid through pay-
as-you-go (or pre-payment) meters in Great
Britain and the balance (27%) are on credit
terms and settled by cheque or other such
payment methods.
Keeping customers’ energy
debt under control
As at 31 March 2011, 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
in Great Britain and Ireland was £89.2m,
compared with £94.9m in March 2010. A bad
debt-related charge to profits, covering both
provision and write-off, of £47.4m has been
made. This compares with a charge of
£76.1m in the previous year.
The general economic climate meant
2010/11 posed significant debt management
challenges, with the volume of work in this
area for SSE’s Customer Service division
again 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 from analysis 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 who work
with customers to resolve debt.
providing sector-leading
service to customers
SSE’s growth in energy supply has been
achieved while being independently and
41
Overview
Strategy
Group performance
Segmental performance
Corporate governance
Financial statements
Shareholder information
Energy customer numbers – millions
2011
2010
2009
2008
2007
9.65
9.35
9.10
8.49
7.75
Energy customer numbers 2010/11 composition – %
household electricity (Gb) 54
household gas (Gb) 37
business sites (Gb) 4
household/business
(ireland) 5
Domestic customers’ payment methods 2010/11 – %
direct debit 61
Pay-as-you-go 12
Credit terms 27
payment history, submit meter readings
and receive an up-to-date balance on their
account, make secure payments on their
account and other such services.
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.
Developing new energy
products and services
The energy supply market in Great Britain
is evolving from the simple retailing of
electricity and gas to the provision of a
comprehensive range of smarter products
and services, consistent with the long-term
decarbonisation of energy production and
consumption. This process will receive
additional impetus with the introduction
of the Renewable Heat Incentive from July
2011, forthcoming roll-out of smart meters
in Great Britain and the introduction of the
Green Deal.
consumption. By the end of 2010/11, the
number of better plan customer accounts
had increased to 227,000.
Better plan is a practical example of
SSE’s commitment to product and service
innovation in energy supply. It was followed
in the autumn of 2010 by iplan, a new energy
product which delivers smart energy
features to customers, allowing them to
track their energy usage by providing the
real-time and historic information they
need to change the way they use energy,
thus helping to lower their energy costs.
SSE is more than just a retailer of electricity
and gas. It has, for example, developed a
number of products based on solar PV, solar
thermal and air-source heat pumps. This
reflects the fact that while Feed-in Tariffs for
localised electricity generation (introduced
in April 2010) and the phased introduction of
the Renewable Heat Incentive will reinforce
the decline in customers’ electricity and gas
consumption, they are also creating
opportunities for SSE to broaden the range
of products and services it delivers.
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:
kk the UK Customer Satisfaction Index,
published in July 2010, in which SSE
achieved the top ranking in the utility
sector;
kk the Customer Satisfaction Report from
uSwitch.com, published in September
2010, in which SSE was ranked the best
energy supplier for the seventh
successive time;
kk the JD Power and Associates 2010 UK
Electricity and Gas Supplier Customer
Satisfaction Study, published in November
2010, in which three of SSE’s supply
brands occupied the top three places
in the study of electricity suppliers; and
kk the Consumer Focus customer
complaints rankings, published in March
2011, in which SSE again emerged as the
best, being the only company with a four
star rating.
During 2010/11, there were 1,161 SSE-related
complaints to the following third party
organisations: the Energy Ombudsman;
Consumer Focus; and Consumer Direct. This
was a reduction from the 1,231 complaints
in the previous year.
Although SSE maintained its best-in-sector
position in customer service during 2010/11,
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 just over 20 million calls to the
Company’s teams in Basingstoke, Cardiff,
Cumbernauld, Havant and Perth during the
year. These conversations allow SSE to
assess, consider and respond to customers’
concerns and, over time, adapt the services
and products it provides accordingly.
making services available online
Web and email are now firmly established
as the second most common means of
communication with the Company used
by SSE’s customers. Around one third of
SSE’s transactions with customers now
take place online.
Moreover, SSE’s customers in the Great
Britain and Ireland markets now have
1.3 million online accounts, up from just
over 800,000 a year before. Online
customers can view their account and
SSE launched better plan four years
ago 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
Microgeneration is a very small market at
the moment, but it is growing fast. SSE’s
turnover in this area more than trebled
during 2010/11 and milestones achieved
included:
Scottish and Southern Energy
Annual Report 2011
42
Market-based businesses (continued)
Generation and Supply
and deliver energy savings and to enable
the government to establish the Data
Communications Company to manage
smart meter communications; and
kkthe roll-out stage, between 2014 and
2019, during which the meters
themselves will be installed.
In line with its measured and realistic
approach to the roll-out, SSE installed 2,000
gas and electricity smart meters in 1,000
dual fuel customers’ homes in the Midlands
and Southern regional electricity areas
during 2010/11. It plans to build on this with
the installation of up to 10,000 smart meters
during 2011/12 and by making substantive
progress on the necessary IT systems to
support the wider roll-out.
Delivering zero carbon homes
Products and services provided by energy
companies have to change because the
way people consume energy has to change.
People are customers of energy companies,
and so the only sustainable option is for
companies to change also.
In line with this, SSE completed a
development of 10 zero carbon homes on
a brownfield site in Slough in September
2010, when it was opened by the Secretary
of State for Energy and Climate Change.
They feature triple glazing, mechanical
ventilation systems, solar PV tiles, solar
thermal panels and an energy centre
with a biomass boiler and a ground source
heat pump and conform to the highest
specification for sustainable building,
Code 6 in the Code for Sustainable Homes.
The homes are now occupied and
information is being gathered about
how householders adapt and respond to
zero carbon living to help inform future
developments in the decarbonisation
of the energy sector.
Supply priorities in
2011/12 and beyond
with smart metering and other developments,
SSE is moving towards a much more dynamic,
two-way relationship with customers. during
2011/12, and beyond, SSE will seek to build
momentum in this direction and:
kkprovide consistently competitive prices;
kkretain and gain customer accounts across
the markets in Great britain and ireland;
kksecure 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;
kkmaintain the highest standards of
operations, delivering best-in-sector
service, including improvements in billing,
call handling times and enhancements
to online and smart services;
kkdeliver energy efficiency improvements,
principally through the CERT and CESP
programmes;
kkmake substantive preparations for the
roll-out of smart meters and related
developments; and
kkcontinue to develop the energy-related
products and services provided to
customers, including microgeneration
and insulation.
SSE will seek to achieve all of this while
engaging constructively with Ofgem as it takes
forward the findings and initial proposals from
its Retail market Review.
in summary, SSE is aiming to build on its
position as sector leader for the quality of
service provided to electricity and gas
customers and develop a broader, deeper
energy services offering capable of being
geared towards, and targeted at, the needs
of individual customers.
kk the completion, in March 2011, of its first
social housing project for ground-source
heat pumps, in conjunction with
Geothermal International, an investee
company of SSE Ventures;
kk the installation of a solar PV installation
for a housing association in Oxfordshire;
and
kk the alignment of SSE’s domestic solar
PV business with its gas and electrical
installation businesses to achieve
greater synergies and a better-aligned
package of products and services.
In summary, SSE is aiming to build on
its position as the sector leader in service
provision and on the development of
transition products such as iplan by
accelerating the long-term transformation
of its energy supply products and services
that is already under way. This will require
sustained, but disciplined and pragmatic,
investment in systems and processes over
the next few years and SSE is developing
comprehensive plans to do this.
preparing for the roll-out of smart meters
Energy supply in Great Britain will also be
transformed by the installation of 53 million
smart energy meters in 30 million homes
and businesses. They will enable the
quantity and value of electricity and gas
used by the customer to be continuously
monitored and allow information about its
use and cost to be available to the customer
and exchanged with the supplier, through
two-way electronic communications.
As the UK government said in March 2011,
when it published its plans for the national
roll-out, smart meters will deliver a range
of benefits to customers, energy suppliers
and energy network companies:
kk customers will have real-time information
on their energy consumption to help
them control energy use, and thereby
save money and reduce emissions, and
bring an end to estimated bills;
kk energy suppliers will have access to
accurate data for billing, and will be able
to deliver enhanced customer service
and reduced costs; and
kk energy network companies will have
better information with which to manage
and plan current activities and the move
towards smart grids.
SSE supports the two-phase approach to
the smart meter roll-out which has been
adopted, featuring:
kk the foundation stage to enable the
energy industry to build and test all the
systems needed to start the roll-out,
ensure positive customer engagement
Market-based businesses (continued)
Other energy and utility services
Other energy and utility services
Performance indicators
Gas storage customer nominations met – %
Gas storage net capacity – mcm
SSE contracting order book – £m
Out-of-area networks in operation
New gas connections
Meters read – millions
2009
100
325
101
47
7,300
9.0
2010
100
400
115
53
6,700
10.7
2011 Change
100
+0.0%
440
+10.0%
98
-14.8%
74
+39.6%
11,120
+66.0%
13.8
+29.0%
substantial market-based businesses
complementing ssE’s core activities
As well as being involved in Energy
Networks and Generation and Supply, SSE
provides other energy and utility services:
kkGas Production;
kkGas Storage;
kkContracting, Utility Solutions
and Metering; and
kkTelecoms.
The operating profit of this group of
businesses has grown from just over £91m
to £134.7m in the five years to March 2011.
This represents less than 10% of SSE’s
operating profit, and in SSE’s financial
statements they are presented as a single
operating segment, in line with how they
are reviewed by the Board. During 2010/11,
SSE acquired its first gas production
assets. Its other energy and utility services
businesses are substantial in their own
fields. For example:
kkSSE’s onshore gas storage facility
at Hornsea is the largest in the UK;
kkSSE’s contracting business is the second
largest mechanical and electrical
contracting business in the UK; and
kkSSE’s telecoms business is the fourth
largest telecoms network company
in the UK.
As well as being substantial in their own
fields, these businesses give SSE an
important presence in areas of significance
to the UK’s infrastructure requirements:
kk the UK government’s Annual Energy
Statement in July 2010 confirmed the
need for more gas storage capacity;
kk it also confirmed the need to modernise
the UK’s energy infrastructure, with
much greater decentralisation; and
kk telecoms networks are clearly
recognised as being central to the
competitiveness of any economy and the
success of any substantial organisation.
The UK government’s Annual Energy
Statement also stated that indigenous
supplies of oil and gas remain important
and that the UK must ‘maximise economic
production while applying effective
environmental and safety regulations’.
Gas Production
securing upstream supplies of gas
SSE needs on average around 13.5 million
therms of gas per day to supply its
customers and to fuel its power stations.
Its goal is to build up a presence in the
upstream gas sector in a measured way to
provide an additional source of primary fuel
and a hedge for its gas-fired generation
As well as being substantial in their
own fields, other energy and utility
services give SSE an important presence
in areas of significance to the UK’s
infrastructure requirements.
43
Overview
Strategy
Group performance
Segmental performance
Corporate governance
Financial statements
Shareholder information
and gas supply activities. During 2010/11 it:
kk signed, in November 2010, an agreement
with Faroe Petroleum plc, the independent
oil and gas company, to work together
to identify, assess and, where good value
can be obtained, acquire producing oil
and gas assets in the North Sea. It also
subscribed in a placing for just over 5%
of the enlarged share capital of Faroe
Petroleum plc at a cost of around £18m.
The partnership’s combined expertise and
relationships across the market provide
an opportunity to acquire high quality oil
and gas production and benefits from
respective strengths; and
kk completed, in February 2011, the
acquisition from Hess Limited of North
Sea natural gas and infrastructure
assets. Gas delivery from the assets that
are currently in production is expected
to be around 200 million therms in 2011
and, subject to the success and phasing
of development fields, could increase
up to 300 million therms, which would
provide around 6% of SSE’s gas needs.
Production is then forecast to decline
over the next 10 years. The main
production asset operators are BP and
Perenco. The total cash consideration
for the acquisition was £197.2m.
In the two months since SSE acquired
its assets, Gas Production delivered an
operating profit of £4.6m.
The acquisition and agreement represent
SSE’s first steps into the upstream gas
sector, and it hopes to build its presence
in the sector over time – but in a careful,
measured way, consistent with its financial
principles and, therefore, only where fair
value can be secured.
Gas Production priorities
in 2011/12 and beyond
SSE’s priorities in Gas Production in 2011/12
are to:
kk
kk
complete the integration of recently-
acquired gas production assets into its
portfolio; and
pursue further opportunities to secure
upstream gas assets, while adhering
to its key financial principles.
Scottish and Southern Energy
Annual Report 2011
44
Market-based businesses (continued)
Other energy and utility services
Gas Storage
providing capacity to store gas
As production of North Sea gas declines in
the coming years, UK imports will continue
to increase to meet demand from domestic
customers, 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.
This is why gas storage capacity is
important, and will remain so even though
liquefied natural gas (LNG) has recently
helped to diversify sources of gas in the
UK and thereby had a negative financial
impact of gas storage.
Gas storage delivered an operating profit*
of £23.7m during 2010/11, compared with
£41.8m in the previous year. Profitability
has been affected by a decline in the price
achieved for Standard Bundled Units of
capacity. This, in turn, reflects a reduction
in the differentials between forward summer
and winter gas prices, reflecting the
increased availability of LNG.
SSE has an ownership interest in two major
gas storage facilities in East Yorkshire:
kk the UK’s largest onshore gas storage
facility, at Hornsea, 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; and
kk the UK’s newest onshore gas storage
facility, at Aldbrough, which SSE is
developing with Statoil (UK) Ltd. An
initial 170mcm of capacity in six caverns
is already available for commercial
operation. The capacity at the Aldbrough
development is divided between SSE
and Statoil (UK) Ltd on a two thirds/
one third basis.
To form caverns such as those at Aldbrough
and Hornsea, salt deposits around 2km
under ground are leached out by seawater
which, in turn, is replaced (dewatered) by
gas under pressure. Leaching of all nine
caverns at Aldbrough has now been
completed, which should allow the final
three caverns to be ready for operation by
the summer of 2012 and SSE’s forecast total
investment for the development remains
around £290m.
When fully commissioned, Aldbrough will
ultimately have the capacity to inject gas
and store around 330mcm in nine under
ground caverns (of which SSE will own two
Gas storage capacity – million cubic metres
2011
2010
2009
2008
2007
440
400
325
325
325
thirds). It will have the capacity to deliver
gas to the National Transmission System
at a rate of up to 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 and Statoil (UK) Ltd have consent
to increase the storage capacity at the
Aldbrough site beyond that currently under
development but concluded during 2010 that
an investment decision on the development
should be deferred while the UK government
develops its policy on gas security.
making sure storage capacity is available
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.
During 2010/11, Hornsea maintained its
good 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 capacity which became available at
Aldbrough also performed well during
2010/11, its first full year of commercial
operation.
Gas Storage priorities
in 2011/12 and beyond
SSE’s operational and investment priorities
in Gas Storage during 2011/12 are to:
kkensure safe and effective operation of
capacity at hornsea and Aldbrough; and
kkcomplete construction work at Aldbrough.
Contracting, Utility Solutions
and Metering
overall performance in contracting,
utility solutions and metering
Operating profit* in Contracting, Utility
Solutions and Metering was £88.5m during
2010/11, compared with £80.2m in the
previous year, reflecting in particular the
contribution from SSE’s in-sourced Metering
business (see below).
a leading mechanical and electrical
contracting business
SSE Contracting has three main areas
of activity:
kkindustrial, commercial and domestic
mechanical and electrical contracting;
kkelectrical and instrumentation
engineering; and
kkpublic and highway lighting services.
It is one of the largest mechanical and
electrical contracting businesses in the UK.
It operates from regional offices throughout
Great Britain.
sustaining ssE contracting through
economic uncertainty
While SSE Contracting has continued
to make solid progress during 2010/11,
its order book ended the year at £98.3m,
compared with £115m in 2010 and
£101m in 2009. This reflects economic
uncertainty in the UK. Nevertheless,
the order book features a number of
important new contracts with customers
as diverse as Frimley Park Hospital and
Dartford Tunnel.
A major proportion of SSE Contracting’s
business has historically come from
public sector bodies and end-user client
organisations with a high degree of repeat
business or long-term contracts. In line
with this, PriDE, the joint venture company
between SSE Contracting and Interserve
Defence Ltd, has signed a £108m, two-year
extension to its South East Regional Prime
Contract with the Defence Infrastructure
Organisation. The contract will now run
to March 2014.
45
Overview
Strategy
Group performance
Segmental performance
Corporate governance
Financial statements
Shareholder information
With public sector budgets being curtailed
following the UK Spending Review in
October 2010, SSE Contracting is
encouraged by the increasing number of
enquiries from the private sector. It is also
focusing on post-sales control, particularly
in terms of costs, and maintaining strong
customer relationships, with careful
analysis of the markets and areas of work
it should prioritise. The structure of the
business is also being kept under review,
with, for example, some rationalisation
of depots being undertaken.
maintaining leadership in lighting
services provision
SSE Contracting remains the UK’s and
Ireland’s leading street-lighting contractor.
It has:
kkcontracts with 24 local authorities in
England, Wales and Scotland to maintain
over 600,000 lighting units;
kkcontracts with 28 local authorities in
the Republic of Ireland to maintain over
275,000 lighting units, through Airtricity
Utility Solutions; and
kkcontracts with 12 local authorities,
under the Private Finance Initiative, and
through the wholly-owned subsidiary
Tay Valley Lighting Ltd, to replace and
maintain over 600,000 lighting units.
The PFI contracts include the 25-year
contract awarded by Knowsley Metropolitan
Council in April 2011 for the maintenance of
over 24,000 lighting columns, traffic bollards
and traffic signs and for the replacement of
more than 70% of these during the initial
four-year investment period.
Under the contract, the innovative
‘Mayflower’ Central Management
System technology will be installed on all
illuminated apparatus. Mayflower is owned
by SSE and the technology enables variable
light control, fault detection and energy
consumption measurement to be
undertaken from a central location, allowing
the local authority to manage lighting levels
and therefore energy consumption,
throughout the contract.
Including PFI and maintenance contracts
in Great Britain and the Republic of Ireland,
SSE now maintains almost 1.5 million
lighting units. A public tender process for
street light maintenance in Northern Ireland
will begin in 2012.
providing comprehensive utility solutions
SSE provides a comprehensive range of
utility solutions. It designs, builds, owns,
operates and maintains cable and pipe
networks for delivering electricity, gas,
water, heat and telecommunications to
Out-of-area networks in operation
2011
2010
2009
2008
2007
74
53
47
33
24
existing and new commercial and residential
developments in England, Wales and
Scotland. It is, therefore, able to provide
a one-stop solution for multi-utility
infrastructure requirements to customers
in the development and construction sectors.
kkElectricity Networks: in the summer of
2010, SSE signed a contract which will
result in the development of its 100th
embedded electricity network outside
the areas served by its economically-
regulated subsidiaries Scottish Hydro
Electric Power Distribution and Southern
Electric Power Distribution. SSE now
owns and operates 74 energised
electricity networks of this kind. A
further 14 are under construction and
contracts have been signed for the
development of an additional 29, taking
the total to 117. In total, SSE has 740MW
of network capacity, including almost
300MW of existing demand and 440MW
of connections to be completed;
kkGas Pipelines: SSE is also a licensed
gas transporter, installing, owning and
operating gas mains and services on new
housing and commercial developments
throughout the UK. The total number
of new premises connected to its gas
networks has continued to grow, and
during 2010/11, it connected a further
11,120 premises, taking the total number
of connections to over 78,000;
kkWater: SSE Water (SSEW) is the first
new company to offer both water and
sewerage services since privatisation
in England and Wales in 1989, and
its establishment will enable SSE to
provide, over the long term, a more
comprehensive multi-utility solution to
customers in the property development
and house-building sectors, through
being able to install, own, operate and
supply water and sewerage services
alongside its existing electricity and gas
services. An ‘inset’ appointment is the
route by which one company replaces
another as the appointed water and/or
sewerage company for a specified area.
SSEW now has nine such appointments
and provides, or has secured contracts
to provide, water and sewerage services
to over 15,000 properties in England and
Wales; and
kkHeat: SSE uses a range of sustainable
technical solutions, including Combined
Heat and Power (CHP) generation,
biomass boilers and ground- and air-
source heat pumps and combines these
with community heating schemes where
appropriate. For example, in August
2010, it secured a contract to adopt,
own and operate the new heat network
for two adjacent sites totalling 750 plots
in the London Borough of Hackney.
maintaining a national metering business
SSE’s Metering business provides services
to most electricity suppliers with customers
in central southern England and the north
of Scotland. Previously, SSE relied on a
combination of 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
SSE supplies, installs and maintains
domestic meters and carries out
metering work in the commercial,
industrial and generation sectors.
It also offers data collection services.
Scottish and Southern Energy
Annual Report 2011
46
Market-based businesses (continued)
Other energy and utility services
meters and install and repair electricity
meters. Following the successful completion
of a programme of in-sourcing in March
2010, it undertakes meter reading
operations and meter operator work in all
other parts of Great Britain. 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.
In total, SSE owns 3.8 million meters.
During 2010/11, the first full year after
the completing of in-sourcing, it collected:
kk8.4 million electricity readings, up from
6.8 million in the previous year; and
kk5.4 million gas readings, up from
3.9 million.
This increase reflects the completion,
during 2009/10, of the in-sourcing of
its meter reading and electricity meter
operation services throughout Great
Britain. Longer-term, SSE’s Great Britain-
wide metering team will be able to support
the transition to smart meters which will
take place in the coming decade and will
help SSE deploy other energy-related
services and products during that time
(see ‘Preparing for the roll-out of smart
meters’ on page 42).
Contracting, Utility
Solutions and Metering
priorities in 2011/12
and beyond
SSE’s priorities in Contracting, Utility Solutions
and metering are to:
kkdeliver a high standard of service to all
customers;
kkfocus on strong cost control and maintaining
and developing customer contacts;
kkincrease the number of contracts secured
across all activities; and
kkhelp prepare for the roll-out of smart
meters.
SSE’s telecoms business 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.
Telecoms
operating one of the uK’s
largest telecoms networks
The origins of SSE’s Telecoms business
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 a number of
acquisitions and 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:
telecoms’ financial performance
SSE’s combined Telecoms business
achieved an operating profit* of £17.9m
during 2010/11, compared with £16.4m.
The year was characterised by a challenging
environment for sales in respect of the
network, which made tight control on
operating costs especially important.
The Telecoms business undertook capital
expenditure of £34.7m in 2010/11, focused
on improving network reliability and reach
and on the Fareham data centre.
kk
kk
kk
fibre optic cabling which SSE owns
(5,000km);
leased lit fibre (2,600km); and
microwave radio (3,600km).
As a result, this 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’s Fareham-based data centre
provides capacity for more than 1,200 racks
for the co-location of IT services within the
80,000 square feet secure site and 10MW
of power in a resilient and energy efficient
environment. During the summer of 2010,
what is believed to be the UK’s largest
commercial solar PV installation was placed
on the roof of the data centre. Customers for
the data centre include Thomson Reuters
and Kingfisher.
Telecoms priorities
in 2011/12 and beyond
SSE’s priorities in Telecoms in 2011/12 are to:
kkretain and gain customers for key services
such as capacity and bandwidth; and
kkadd to the 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.
Chairman’s introduction to SSE corporate governance
47
Overview
Strategy
Group performance
Segmental performance
Corporate governance
Financial statements
Shareholder information
Lord Smith of Kelvin
Chairman
I am pleased to introduce the corporate
governance report for 2010/11. It explains
our approach to corporate governance in
detail by describing the SSE team, how the
Board works, risk management and internal
control and the work of each of the Board
Committees. The Committees for the year
reported on were Audit, Risk and Trading,
Nomination, Safety Health and Environment,
and Remuneration.
The Board’s approach to corporate
governance is key to running SSE as a
successful, responsible and sustainable
business capable of delivering increases
in the dividend payable to shareholders
in the short, medium, and long term.
distributed throughout the Group and is
part of the induction programme for new
recruits. The SSE set of core values of
Safety, Service, Efficiency, Sustainability,
Excellence and Teamwork remain our
guiding principles. Safety is the overriding
value, and it is addressed at every Board
meeting as the first item on the agenda.
commitment
The non-Executive Directors devote time
to SSE over and above attendance at Board
and Committee meetings. During the year
each non-Executive Director is expected to
visit key business locations in the Group and
receives briefings from members of the SSE
management team on a range of matters.
This year’s corporate governance report
sets out in detail the arrangements in place.
However I would like to draw particular
attention to some specific points.
Lastly, I was pleased that SSE won the
2010 PwC Building Public Trust Award
for Executive Remuneration Reporting
in the FTSE 100.
Lord Smith of Kelvin
Chairman
19 May 2011
new corporate governance code
The Board has been fully briefed on
the changes in the new UK Corporate
Governance Code. The new code covers
in particular annual re-appointment of
Directors, Board diversity, external
evaluation, greater emphasis on risk,
and clear explanation of business model
and strategy. We welcome these changes
and are committed to complying.
changes to the Board
As part of our planned and continuing
refreshment of the Board, I am pleased to
welcome two new non-Executive Directors
to the Board – Jeremy Beeton and Katie
Bickerstaffe. They bring specific experience
which will be invaluable as the Company
undertakes major capital projects and faces
the challenges of changes in the domestic
customer market.
Nick Baldwin resigned as a non-Executive
Director on 1 April 2011 on his appointment
as Chair of the Office for Nuclear Regulation.
The Board benefitted greatly from his breadth
of experience in the energy sector and we
wish him well in his new role.
Board evaluation
Our Board evaluation process this year
built on the external independent evaluation
report carried out last year. We will carry
out a further external evaluation within the
next two years.
Ethics and values
We have reviewed and updated our ethics
policy in light of the enactment of the
Bribery Act 2010. SSE remains committed
to the highest standards of business
conduct and expects all its employees to
act accordingly. The new policy has been
48
Board of Directors
Scottish and Southern Energy
Annual Report 2011
The Board of Directors
02
03
01
04
09
the Board of Directors
01 lord Smith of kelvin
02 lady Rice CbE
03 Gregor Alexander
04 ian marchant
05 René médori
06 Colin hood
07 Alistair Phillips-davies
08 Thomas Thune Andersen
09 Richard Gillingwater CbE
10 Jeremy beeton (from 1 July 2011)
11 katie bickerstaffe (from 1 July 2011)
06
05
07
10
The Management Board
01
04
02
05
the management Board
01 david Franklin
02 Rob mcdonald
03 Jim mcPhillimy
04 mark mathieson
05 Paul Smith
06 Alan young
07 John morea (in attendance)
ian marchant, Colin hood, Gregor
Alexander and Alistair Phillips-davies are
also members of the management board.
06
08
11
03
07
49
Overview
Strategy
Group performance
Segmental performance
Corporate governance
Financial statements
Shareholder information
The Board of Directors
Hiscox Ltd. Richard is a member of the Audit,
Remuneration and Nomination Committees.
The Management Board
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; and Chancellor of the University of the
West 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 Scotland 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 Group
plc and Maggie’s Cancer Centres; and became
Chairman of the Engineering Construction Forum
in 2009. Ian is a member of the Nomination
Committee and the Risk and Trading Committee.
He has Board-level responsibility for energy
networks, regulation and corporate affairs
and is Lead Director for the environment.
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 SSE’s
large capital projects and is SSE’s Lead Director
for Health and Safety matters and is Chairman
of the Safety, Health and Environment Advisory
Committee. Colin is a Director of SGN and became
a non-Executive Director of FirstGroup plc in May
2009 and non-Executive Director of Southern
Water in early 2011.
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
Lloyds Banking Group Scotland. Susan is also a
non-Executive Director of the Court of the Bank
of England, where she chairs the Audit and Risk
Committee, and of Scotland’s Futures Forum. She
chairs the Boards of the Edinburgh International
Book Festival and the Edinburgh Festivals Forum.
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
Alistair Phillips-Davies
Generation and Supply Director
Alistair was appointed Generation and
Supply Director in December 2010 after taking
responsibility for Generation Operations; previously
he was Energy Supply Director since joining the
Board in 2002. He has worked in the energy
industry since 1997, when he joined Southern
Electric. Alistair has Board level responsibility
for generation, energy trading, electricity and
gas supply, energy efficiency, customer service,
sales, marketing and energy services. He chairs
the Risk and Trading Committee.
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. He has Board-level responsibility
for finance, human resources, IT, procurement and
other Group services. He is also the sponsoring
Board member for SSE’s business development
in Ireland. Gregor is a Director of SGN, and 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 January 2009. He is the Chairman of
Lloyd’s Register Group, Vice Chairman of the VKR
Holding Group (VELUX) and a non-Executive Director
of Petrofac Plc. He was CEO of Maersk Oil and he
is a member of the Audit, Nomination, and Safety,
Health and Environment Advisory Committees.
Jeremy Beeton
Non-Executive Director
Jeremy will join the Board as non-Executive
Director in July 2011. He is the Director General
of the UK Government Olympic Executive. He was
previously Principal Vice President of Bechtel Ltd,
where he had responsibility for the management
and delivery of Bechtel’s worldwide civil engineering
projects infrastructure and aviation business lines.
Katie Bickerstaffe
Non-Executive Director
Katie will join the Board as non-Executive
Director in July 2011. She is currently Group
People, Marketing and Property Director
of DSG international plc, a role she has held since
June 2008. Katie was previously Managing Director
of Kwik Save, and Group Retail Director and Group
HR Director at Somerfield. Her earlier career
included roles at Dyson, PepsiCo and Unilever.
David Franklin is Managing Director, Energy
Portfolio Management. He joined SSE in 1990 and
is responsible for SSE’s participation in wholesale
markets for electricity and gas and markets for
coal, oil and carbon dioxide emissions allowances.
Rob McDonald is Managing Director, Regulation
and Strategy. He joined SSE in 1997 and is
responsible for regulation, energy economics,
legal services, new ventures and strategy.
Jim McPhillimy is Managing Director, Group
Services. He joined SSE in 1995 and is responsible
for the Group’s corporate services including
safety, human resources, IT and procurement.
Mark Mathieson is Managing Director, Networks.
He joined SSE in 1988 as a graduate trainee and is
responsible for SSE’s electricity networks, lighting
services and telecoms businesses.
Paul Smith is Managing Director, Generation.
He joined SSE in 1998 and is responsible for all
of SSE’s operational generation and gas storage
businesses, which includes coal, gas, hydro and
all operational onshore and offshore wind.
Alan Young is Managing Director, Corporate
Affairs. He joined SSE in 2001 and is responsible
for corporate communications, public affairs,
community programmes and research and
development.
John Morea attends meetings of SSE’s
Management Board. He has 27 years’ industry
experience and is the Chief Executive Officer of
SGN, which owns and operates gas distribution
networks in Scotland and southern England and
in which SSE has a 50% stake.
Ian Marchant, Colin Hood, Gregor Alexander
and Alistair Phillips-Davies are also members
of the Management Board.
The Board of SGN
SSE is entitled to appoint four out of the eight
Directors on SGN’s Board (reflecting its 50%
shareholding in SGN). The SSE employees who
serve on the Board of SGN are: Colin Hood, Chief
Operating Officer; Gregor Alexander, Finance
Director; Rob McDonald, Managing Director,
Regulation and Strategy; and Jim McPhillimy,
Managing Director, Group Services. When Colin
Hood steps down from the Board of SGN later
this year, he will be replaced by Natalie Bruce,
SSE’s Head of Metering.
50
The SSE team
Scottish and Southern Energy
Annual Report 2011
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 52 to 55.
The Management Board
The Management Board is the group
of Executive Directors and other senior
executives which is responsible for
implementing strategy and policy as agreed
by the Main Board and for the operational
management of all of SSE’s businesses. Of
the 53 senior managers who report directly
to members of the Management Board,
11 are women; and of the 45 members of
the four Committees of the Management
Board, 12 are women.
Other employees
The Executive Directors and senior executives
and managers are among the 20,249 people
directly employed by SSE on 31 March 2011.
Most of these people work in the United
Kingdom; around 500 are employed in the
Republic of Ireland; and 18 work in mainland
Europe. Of all employees, 73% are men and
27% are women. The average age of SSE’s
employees is 39 years. In 2010/11, there was
a 9.5% turnover of employees, compared
with 8.7% in the previous year.
participation
SSE believes that there is a commonality of
interest between employees and customers
and shareholders. To reinforce that it:
kk 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;
kk 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
44% and 35% respectively; and
kkprovides opportunities for employees to
be involved in its ‘Community at Heart’
employee volunteering scheme, which
aims to give 20,000 days of employee
time to assisting worthwhile projects
within the communities that SSE serves.
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
in April 2011 an updated code of business
practice, ‘Doing the right thing’. It highlights,
summarises and complements a range of
ethics-related policies which SSE has in
place. It takes account of recent legislation
such as 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.
Employee engagement
SSE recognises the value in retaining an
engaged workforce and has started to run
an annual survey of employee engagement
with the Company and what it is trying to
achieve. The results of the 2010 survey,
which were shared with all employees,
showed that SSE has a workforce committed
to meeting business needs and that a large
number of employees see their longer term
future with SSE. As expected, a number of
actions arose from the survey, and these
are being implemented.
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 April 2011, SSE and the JNCC
made a joint announcement stating that both
parties have reached, in principle, agreement
on a three-year package, featuring pay
increases, performance pay, flexible working
patterns, job stability, family-friendly working
policies and an additional day’s holiday.
They have also reached agreement on the
establishment of Joint Business Committees,
complementing the work of the JNCC by
focusing on issues that affect particular
parts of SSE. Subject to acceptance of the
offer, which is the subject of a full ballot
of members, it is expected that salary
adjustments will be processed in July 2011
and backdated to April 2011.
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 characteristics, as defined in the
Equality Act 2010 – sex, race, religion or belief,
disability, pregnancy and maternity, sexual
orientation and gender reassignment. The
Employment Equality (Age) Regulations
2006 have now been incorporated into the
Equality Act 2010. There were no occasions
during 2010/11 when SSE was found to have
failed to comply with legislation on equality.
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:
kkTake all active steps to ensure there
is no intimidation or discrimination;
kkEngage in safe, healthy and
environmentally-friendly working
practices;
kkAlways know and understand what
is expected of you in your job;
kkMaintain respect and support for
colleagues at all times;
kkWork continuously to improve team
and individual performance;
kkObtain constructive feedback on your
performance from your line manager;
kkReceive appropriate training,
development and rewards; and
kkKnow and embrace the Company’s
core values.
Through the application of these
principles, SSE seeks to maintain a positive
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
51
Overview
Strategy
Group performance
Segmental performance
Corporate governance
Financial statements
Shareholder information
Suppliers and contractors
SSE depends upon an extended team,
of suppliers and contractors, upon whom
it relies for the long-term success of its
business. It aims to promote responsible
practices within its supplier and contractor
base. SSE’s aims in this area are to:
kk ensure safe working by contractors
operating on sites for SSE;
kk integrate human rights, labour,
environmental and ethical considerations
into its main procurement processes;
kk raise awareness of human rights, labour,
environmental and ethical concerns
amongst buyers, traders and suppliers;
kk understand where human rights, labour,
environmental and ethical risks lie in its
supply chain; and
kk identify specific procurement activities
where the risks and/or opportunities
merit further investigation and conduct
such investigations as required.
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.
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.
The Achilles carbon reduction programme
allows suppliers to measure, manage and
report their organisational footprint via
CEMARS (Certified Emissions Management
and Reduction Scheme). By the end of
2010/11, SSE had successfully encouraged
seven of its main suppliers to sign up to the
scheme. SSE also successfully completed
the process itself and again achieved
CEMARS certification.
SSE’s Director of Procurement is the Chair
of the Steering Group of the Achilles Carbon
Reduction Programme, indicating SSE’s
commitment to improving measurement
and management of carbon throughout the
supply chain. During 2011/12, SSE expects
to complete a series of reviews on the
approach to corporate responsibility of
key suppliers falling within higher risk
categories such as personal protective
equipment, other workwear, catering
and security, especially those which have
a high labour intensity.
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 2010/11, SSE invested £1.54m
in externally-provided training, taking the
total to £6.3m over the last three years.
This helped to deliver training to 4,900
employees. In addition, SSE employs almost
100 people in its Training and Development
teams and extensive in-house training was
given to a large number of employees during
the year. SSE has 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.
SSE recognises that the continued success of
its business requires the ongoing development
of employees, as well as the effective
recruitment, retention and development of
talented people into its business. As part of
this process, SSE has in place a succession
planning process that is supported by a
detailed set of development options for
individuals. In addition, SSE offers a range
of structured development programmes
suited to the needs of school leavers,
trainees, trainee engineers, graduates
and apprentices. In 2010/11, 100 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.’
As a spur to employee participation, idea
generation, continuous improvement and
operational excellence, SSE maintains
and promotes a systematic approach to
implementing ideas that add value. This
is through the 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 1,800 Licences to Innovate were issued
during 2010/11, of which over 300 were
implemented. A number of Licences have
created value of around £45m. Others have
contributed to improved performance in
specific areas, such as safety, service and
sustainability. In Generation, for example, a
Licence to Innovate resulted in a temporary
technical solution being applied to a turbine
issue at a hydro electric scheme which
allowed a full outage to be deferred until
the summer months, allowing the scheme
to continue generating electricity during
the wetter winter months.
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.
SSE’s corporate research and development
function prioritises actionable projects
focused on ‘the day after tomorrow’ which
can be delivered by employees, working
with external organisations. The projects
are focused on two key areas: offshore wind
energy; and energy usage. In total, during
2010/11, and working with partners, SSE
initiated research and development projects
with a value of almost £10m.
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 over the next 10,
20 or 40 years. These range from electricity
storage to developments in communication
methods in energy demand management.
Community and
charitable activities
SSE encourages its employees to be active
citizens in the communities in which they
live and work. In April 2010 it launched its
‘Community at Heart’ employee volunteering
programme. During the year almost 5,000
employees took part in the scheme,
providing practical help to 320 separate
community and charitable groups.
SSE’s 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 community programmes near
its wind farms, SSE set aside over £5.2m
for charitable and community programmes
in the UK during 2010/11.
During 2010/11 SSE expects to develop
plans for new visitor facilities at some of
its major sites, with enhanced educational
links to partnership schools.
52
How the Board works
Scottish and Southern Energy
Annual Report 2011
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 explains how
the Company applies the principles of the
Combined Code on Corporate Governance
(the 2008 Code) issued by the Financial
Reporting Council in June 2008.
The Board confirms that the Company
has, throughout the period under review,
complied with all provisions set out in
Section 1 of the 2008 Code.
In May 2010, the Financial Reporting Council
issued the UK Corporate Governance Code,
which will apply in place of the 2008 Code
to accounting periods beginning on or after
29 June 2010. The Board has agreed that
each Director shall be subject to annual
re-appointment with effect from the 2011
Annual General Meeting (AGM).
Organisation and structure
role of the Board
The Board is collectively responsible to the
Company’s shareholders for the long-term
success of the Group and for its overall
strategic direction, its values and its
governance. It provides the leadership
necessary for the Group to meet its business
objectives whilst ensuring that a sound
system of internal control and risk
management is in place.
articles of association
The powers and duties of the Directors
are determined by legislation and by the
Company’s Articles of Association, which
are available on the SSE website. The
Articles of Association provide that the
Company may change its name by
resolution of the Directors. The Directors
intend to change the Company name to
SSE plc later in the year.
Board decisions
A formal list of matters is specifically
reserved to the Board for its decision,
including:
kkGroup strategy;
kkannual budget;
kkapproval of interim and final financial
statements;
kkinterim dividend payments and
recommendation of final dividends;
kksignificant changes in accounting
policy and practice;
kkthe Group’s corporate governance
and system of internal control;
kkBoard and Committee membership;
kkmajor acquisitions, mergers, disposals
and capital expenditure;
kkchanges in the capital and structure
of the Group; and
kkapproval of key policies such as safety,
health and environment.
The list is reviewed regularly by the Board
and is published on the SSE website.
The Board also has overall responsibility
for risk management, which is reported
in detail on pages 56 to 59.
roles of chairman and chief Executive
The roles of the Chairman and the Chief
Executive are separate and clearly defined.
The Chairman:
kk is responsible for the operation,
leadership and governance of the Board
ensuring that the Board operates
effectively whilst providing appropriate
challenge to management;
kk identifies individual Director training
needs and conducts the performance
evaluation; and
kk meets with shareholders, analysts and
other representatives of institutional
investors, and participates in both the
interim and annual results presentations
and AGM.
The Chairman regularly meets with
managers and employees at locations
and key sites throughout the Group.
The Chief Executive:
kk leads the other Executive Directors and
the management team in the day-to-day
running and operations of the Group;
kk implements the strategy and policy as
agreed by the Board; and
kk represents the Company to external
stakeholders, including shareholders,
customers, suppliers, regulatory and
government authorities, and the
community.
In discharging his responsibilities, the Chief
Executive is advised and assisted by the
Management Board and its Committees
which oversee the operational and financial
performance of, and issues facing, the
Company. The Management Board was set
up in January 2011, and its role is explained
on page 54.
Biographical information on the Chairman
and Chief Executive are set out on page 49.
Balance of the Board
The composition of the Board and its
Committees is regularly reviewed to ensure
that the balance and mix of skills and
experience is maintained.
As announced on 9 December 2010, Colin
Hood will stand down as an Executive
Director later in the year. On 1 April 2011,
Nick Baldwin resigned from his position as
non-Executive Director. On 27 April 2011,
it was announced that Jeremy Beeton and
Katie Bickerstaffe would be joining the
Board on 1 July 2011. Full biographical
details are set out on page 49.
After all of these changes have taken
place, the Board will comprise the
Chairman, three Executive Directors and
six independent non-Executive Directors.
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.
non-Executive Directors
The non-Executive Directors are chosen
for their wide range of skills and experience.
Each non-Executive Director is appointed
for a fixed term of three years. This term
may then be renewed by mutual agreement.
The non-Executive Directors appointment
letters are available on the SSE website.
The non-Executive Directors:
kkscrutinise, measure and review the
performance of management;
kkassist in the development of strategy;
kkreview the Group financial information;
kkensure systems of internal control
and risk management are appropriate
and effective;
kkthrough the Audit Committee, review
the relationship with the external
Auditors; and
kkreview the remuneration of and
succession planning for the Board.
The Chairman and non-Executive Directors
met twice during the year without the
Executive Directors being present.
senior independent Director
Lady Rice is the Senior Independent
Director. She is available to meet with major
shareholders on request and attended the
City presentation of SSE’s results. She also
undertook management visits during the
year. Lady Rice carried out the Chairman’s
performance evaluation, together with the
other non-Executive Directors and with
input from the Executive Directors.
Director independence
The Board considers that the Chairman
was independent on appointment and all
non-Executive Directors are independent
for the purposes of the 2008 Code. The
continuing independent and objective
judgment of the non-Executive Directors
was confirmed in the annual Board
performance evaluation process.
53
Overview
Strategy
Group performance
Segmental performance
Corporate governance
Financial statements
Shareholder information
The Board evaluation process also
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
ensures that the comments received
are raised at the meeting.
The Board has six scheduled Board
meetings during the year. These start with
an evening meeting when the Board is often
given a presentation by senior management
on a particular topic. Occasionally the
evening is used for meetings with external
stakeholders. 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 Safety, Health and Environment Advisory
Committee. In addition to the scheduled
meetings the Board has six update
conference calls which are held in the
months between the bi-monthly scheduled
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 scheduled
Board meeting. In these circumstances the
decision of the Board is recorded by written
resolution or minute. The table sets out the
attendance of the Directors at the scheduled
Board meetings.
attendance at Board meetings
Board meetings
Lord Smith of Kelvin
Gregor Alexander
Thomas Thune 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
Board effectiveness
information and professional development
The Directors receive detailed financial and
operational information to allow them to
monitor effectively the performance of the
business. Board and Committee papers are
issued for review in advance of meetings.
At each Board 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. The Board also receives
regular updates on the progress and
performance of investments and other
decisions made by it.
During the year, the Board and 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.
Meetings, briefings and site visits were
arranged for the non-Executive Directors
during the year. The briefings covered
subjects such as operational activities
and major projects, and the visits included
wind farms and other major projects sites.
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.
The Board believes that given the experience
and skills of the Directors and the briefings
and induction process 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 the cost of 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 Directors’
interests and appointments was carried
out by the Company Secretary. The Board
considered and authorised each Director’s
reported actual or potential conflicts of
interest at the Board meeting in January
2011. 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.
performance evaluation
The Board, its Committees and the
individual Directors participate in an annual
evaluation of performance.
The Board evaluation process this year
was carried out by internal questionnaire
and individual meetings. This followed and
built on the approach taken in the previous
evaluation programme which last year was
carried out by an external party and which
was fully explained in the 2010 Annual
Report. The Board was updated regularly
during the year on progress with the
recommendations made in the external
report. This year the outcome of the
questionnaire and meetings was reported
at the Board meeting held in January 2011.
The matters considered at the Board
meeting included the process for risk
oversight, succession planning
arrangements throughout the Group,
and the key performance indicators
which are reported to the Board.
The Directors also participated in detailed
reviews of individual performance which
were carried out in separate meetings with
the Chairman. The process for evaluating
the Chairman was managed by the Senior
Independent Director which involved a
separate meeting with the non-Executive
Directors and included feedback from the
54
How the Board works (continued)
Scottish and Southern Energy
Annual Report 2011
Executive Directors. The review concluded
that the Board and the Committees were
operating effectively. Each of the Directors
continued to make an effective contribution
to the work of the Board and its
Committees, was well informed and
demonstrated full commitment to their
duties. The Board was satisfied that the
performance evaluation process identified
the main areas for further review and the
external evaluation process will be repeated
every three years as recommended by the
UK Corporate Governance Code.
Board committees
During the year, there were five principal
Board committees. The terms of reference
of these 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
Board committee meetings (apart from the
Remuneration Committee minutes) are
included on the agenda, and reported at,
the next Board meeting.
Details of each Board Committee, including
membership, meetings, role and activities
in 2010/11, are set out in the committee
reports on pages 60 to 74.
management Board
Following a review of the management
structure within SSE, a Management
Board was set up in January 2011. The
Management Board is responsible for
implementing policy and strategy set by the
Board and for the operational management
of all SSE’s businesses. The Risk and
Trading Committee now reports to the
Management Board. The Management
Board comprises the four Executive
Directors and six Senior Executives
representing the key areas of the business.
The Chief Executive Officer of Scotia Gas
Networks attends meetings of the
Management Board. The Management
Board meets monthly and the minutes of
the meeting are distributed to the Directors
for information. The Company Secretary is
Secretary of the Management Board.
The relationship between the Board, its
Committees and the management of the
Company is summarised as shown in the
table below.
Engagement with shareholders
and major stakeholders
Disclosure and Governance committee
The Company’s Disclosure and Governance
Committee is responsible for overseeing the
Company’s framework for the identification,
release and control of announcements and
other information of interest to shareholders
and the investment community. The
Committee assists in developing the investor
relations strategy and reviews and implements
governance developments. The Disclosure
and Governance Committee comprises the
Chief Executive, Finance Director, Company
Secretary, Managing Director Corporate
Affairs, Head of Investor Relations and the
Assistant Company Secretary. The Disclosure
and Governance Committee meets when
required and had seven meetings in the year.
relations with shareholders
The Company continued to develop an
effective dialogue with all shareholders,
Governance structure (from 1 april 2011)
Board of Directors
Audit
Committee
Safety, Health
and Environment
Advisory Committee
Nomination
Committee
Remuneration
Committee
Management
Board
Risk and Trading
Committee
Safety, Health
and Environment
Committee
Business
Development
Committee
Disclosure and
Governance
Committee
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 Head of Investor
Relations 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 2010 and November 2010. The
Chairman meets major institutional
shareholders from time-to-time to gain
a first-hand understanding of key issues.
Lady 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 2010.
SSE’s website contains up-to-date
information for shareholders and other
interested parties including share price
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 of how to receive
their Company communications such as the
Annual Report. The Company recognises
the benefit of electronic communications
and encourages shareholders to receive
electronic 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.
55
Overview
Strategy
Group performance
Segmental performance
Corporate governance
Financial statements
Shareholder information
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.
kk ongoing dialogue with Ministers and
officials in government, including the
devolved administrations in the UK;
kk submissions to government and
Parliamentary consultations and
inquiries;
kkmeetings with, and briefings of, elected
members of all parties in legislatures;
kkengagement with local authority elected
members and officials;
kkactive participation in relevant trade
associations and bodies; and
kk 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.
annual General meeting
The Company’s AGM will be held at the
Perth Concert Hall, Mill Street, Perth PH1
5HZ on Thursday, 21 July 2011 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 opportunity for the
Board to communicate with shareholders
and provide an update on the performance
and plans of the Company. All Directors
attend the AGM and shareholders are
invited to ask questions and to meet with
the Directors and senior managers both
before and after the meeting.
communications with other stakeholders
The Directors have 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 discuss the Company’s position
on a range of business, policy and public
interest issues and to learn more about their
views, hear their suggestions and address
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:
kkconstructive engagement with Ofgem,
which is responsible for promoting
competition, wherever appropriate, and
regulating the monopoly companies which
run the gas and electricity networks;
56
Risk management
Scottish and Southern Energy
Annual Report 2011
risk management model
Balanced Strategy
Teamwork Culture
Risk Management
Structure
Risk Management
Risk Averse
Appetite
Risk Monitoring
and Governance
Limits and Controls
Risk management
The Board of SSE acknowledges its clear
responsibility for risk management.
Whilst good risk governance is a
responsible approach, the more
fundamental methodology followed
by SSE is to ensure the overall business
model, strategy, and culture are designed
with risk firmly in mind.
electricity distribution and gas
distribution;
kkelectricity generation, using a diverse
variety of fuels – gas, oil, coal, biomass,
wind and water;
kkenergy supply – gas and electricity,
plus other home services; and
kkother energy-related activities
such as gas storage, gas production,
contracting, utility solutions, metering
and telecoms.
clear and balanced business strategy
SSE has a clear strategic 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. The Board believes that this
dividend goal must not be subverted for
any other financial end.
SSE’s view is that a sustainable business
requires a clear approach to risk management
in all aspects of its activities.
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 facilitates 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.
SSE seeks to achieve its strategic 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.
These businesses operate almost entirely in
the UK and Ireland. This means SSE is able
to focus closely on issues, giving greater
experience, analysis and focus to the
identification, consideration and
management of risks.
The practical application of its strategy
means SSE derives income and profit from:
limited appetite for risk
The Teamwork value, combined with other
factors such as the clear, moderate (but
nevertheless fundamentally important) goal
of sustained real growth in the dividend, mean
SSE has adopted 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).
kk three separate economically-regulated
activities – electricity transmission,
Some examples of the risk averse
approach are:
kk energy trading – levels of exposure are
strictly monitored through sophisticated
models and clear reporting limits;
kk major project construction – the
Company has put in place a detailed
governance process for all its large
capital projects;
kk the Company has a strict approach to
acquisitions, and sets high hurdle rates
for expected returns;
kk in treasury and funding matters, there is
a clear and prudent approach to liquidity
levels, and a mix of maturities and
currencies; and
kk insurances are in place for all relevant
major internal risks, while maintaining
an appropriate balance with self
insurance where appropriate.
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 Audit Department for
the Audit Committee meetings held in May
and November of each year. The Board
reviewed all aspects of risk management
and internal control at its meeting in March
2011. At that meeting, the Board held a
specific review of the developments within
the Company during the year to ensure good
risk management; it revisited the approach
to risk appetite; and considered the
management structure to ensure proper
controls are in place. It was also agreed that
this strategic review of risk should be held
twice each year in future.
Following the March 2011 meeting, the
Board undertook a further review of the
Company’s principal risks and approved the
list set out opposite at its May 2011 meeting.
During 2010/11, the Group Audit
department 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.
Group Audit reviews complement the work
done by business-specific compliance
functions in areas such as Energy Trading,
Energy Efficiency, Domestic Sales, IT and
Customer Service.
57
Overview
Strategy
Group performance
Segmental performance
Corporate governance
Financial statements
Shareholder information
risk
How risk is managed
Principal risks
safety management
regulatory change
legislative change
The Safety, health and Environment Advisory Committee of the board is responsible for ensuring
SSE’s health and safety policy is adhered to. The newly-established management board also has
a Safety Committee.
An experienced Regulation department manages SSE’s relationships and interface with Ofgem,
Ofwat, Ofcom and energy regulators in other jurisdictions.
An experienced Policy and Public Affairs team manages SSE’s relationships and interface with
government ministers and officials, legislators and other policy-makers.
Energy portfolio management
The board approves levels of exposure which are strictly monitored through sophisticated models
and clear reporting limits. The management board has a Risk and Trading Committee.
asset and plant management
A Central Engineering Team is well-established. Asset life assessment and risk-based management are
applied. Regular testing, review and update of major incident handling processes takes place. Capital
spending and maintenance regimes are maintained. The Risk and Trading Committee provides oversight.
networks management
information security
supply chain failure
treasury management
credit management
pension liabilities
sector developments
Significant upgrade and refurbishment programmes are designed to prevent network failures. business
continuity plans, supported by contingency sites and regular testing, are established throughout the
Company. Clearly prepared and rehearsed approaches are in place for external relations aspects of
emergency incidents and situations.
The Company has in place an information Protection Programme which covers all of its operations.
Resilient systems and data centres are in place and there is regular testing.
The diverse business model avoids over reliance on specific supply chains. The Sustainability value
ensures a long-term view is taken. well established procurement and fuel procurement teams ensure
varying supply chains are identified and counterparty exposures monitored.
The Risk and Trading Committee is required to approve any major changes to treasury policy or
objectives. Periodic reporting of treasury activity to Audit Committee also takes place. Strong internal
controls are maintained and independent reviews take place.
There is Executive director level representation at debt steering group meetings. Ongoing credit
monitoring and reporting are supported by credit management teams throughout the Company.
There are periodic formal valuations of pension schemes and contributions supported by continual
monitoring of scheme investments and valuations. Performance of investment managers is reviewed
regularly by pension boards of trustees.
There is a strong external focus to ensure developments are anticipated, including Strategy, business
development and SSE ventures. A foresighting capability is maintained through a Policy and Research
team which includes Research and development.
major capital projects management
development and implementation of SSE’s large Capital Project Governance Framework is designed to
ensure projects are governed, developed, approved and executed in an effective manner. The Framework
itself is regularly reviewed and updated.
transformation projects management
The Company works with experienced advisers and suppliers and implements a strong governance
and assurance framework for all aspects of major change programmes.
compliance management
wide-ranging consultation and review of all relevant regulatory, legal and accounting frameworks
take place. Regulation, Compliance and Group Audit teams develop and monitor compliance processes.
crisis management
succession planning
resource management
Corporate crisis policy and procedure issued and updated annually. There is Executive training and
regular test exercises are undertaken.
The nomination Committee of the board is responsible for reviewing the leadership needs of senior
management and succession plans for the Executive directors.
integrated Group Services function to ensure optimum resource management, including Finance, hR,
iT and Facilities management and Property maintenance, deployment and development of resources
is in response to business needs.
Developing corporate arrogance
board oversight and practical application, including through the performance appraisal process, of the
‘SSE SET’ of core values: Safety, Service, Efficiency, Sustainability, Excellence and Teamwork.
58
Risk management (continued)
Scottish and Southern Energy
Annual Report 2011
Risk is also the subject of specific
regular reports to the Management Board,
which was established in January 2011
(see page 54 for more information on the
Management Board).
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
As stated on page 56, the Board reviewed
SSE’s principal risk categories and the
effectiveness of SSE’s system of internal
controls between March and May 2011.
The risks are set out on the previous page.
There are three additional risks that are
not specified but which could potentially
affect a large number of areas of activity:
geopolitical developments; the weather;
and reputation.
kk geopolitical developments could have an
impact on a number of SSE’s activities,
such as energy portfolio management or
the construction of large capital projects
through supply chain impacts. In view of
this, SSE’s balanced and diverse business
model, which is designed amongst other
things to avoid dependence on any single
technology or fuel, is a key means of
seeking to ensure the impact of
developments over which SSE can
ssE sEt of values to manage risk
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.
have no control is, in practice, limited;
kk the weather could have an 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. It could also
have an impact on the operation of
energy networks, and management of
this risk is factored into the operational
planning of these networks; and
kk SSE believes that the most effective way
to manage risks to its reputation is to
manage effectively the risks set out on
page 57. Corporate reputation is very
important for a long-term business
such as SSE, but seeking to manage
‘reputation’, rather than the substance
of the issues which determine a
company’s reputation, could lead to
short-term behaviours or actions which
have negative long-term implications.
For this reason, SSE does not specify
‘reputation’ as a risk to be managed.
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.
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.
SAFETY
We believe all accidents are
preventable, so we do everything
safely and responsibly or not at all.
SERVICE
We give our customers service
we are proud of and make
commitments that we deliver.
EFFICIENCY
We keep things simple, do the work
that adds value and avoid wasting
money, materials, energy or time.
TEAMWORK
We support and value our colleagues
and enjoy working together as a team
in an open and honest way.
EXCELLENCE
We strive to get better, smarter and
more innovative and be the best in
everything we do.
SUSTAINABILITY
We operate ethically, taking the
long-term view to achieve growth
while safeguarding the environment.
59
Overview
Strategy
Group performance
Segmental performance
Corporate governance
Financial statements
Shareholder information
internal control process
Board of Directors
Audit
Committee
Management
Board
Risk and Trading
Committee
Safety, Health and
Environment Advisory
Committee
Group Audit
Business Units
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 2010 to 19 May 2011 (being the
last practical day prior to the printing of
this Annual Report). The Board confirms
that appropriate action would have been
taken to address any significant failings
or weaknesses identified; however, no
intervention has been required.
operational plans, policies, procedures
and budgets;
kkassesses and controls all SSE risks;
kkmonitors competitive forces in each
area of operation;
kk receives and reviews reports from its
four committees including the Risk
and Trading Committee and the Safety,
Health, and Environment Committee; and
kk receives and reviews regular presentations
and reports from all the main Group
businesses.
the Group audit department:
kk works with the business units to develop
and improve risk-management tools and
processes in their business operations;
kk ensures that business risks are identified,
managed and regularly reviewed and that
the key risks are reported to the Audit
Committee and Board;
kk ensures that the business units carry out
regular reviews on their internal controls
relating to the key risks;
kk 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;
kk monitors adherence to SSE’s key
policies and principles; and
kk provides the Audit Committee and
Board with objective assurance
on SSE’s control environment.
role of committees
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.
All employees are expected to adhere to
the Company’s code of business practice
and the SSE values of – Safety, Service,
Efficiency, Sustainability, Excellence and
Teamwork – which are embedded in the
culture. (See page 58 for full definitions).
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
and financial reporting processes are
summarised below:
the Board:
kk 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 Group 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,
kk reviews the significant risks identified
by each business unit as well as the
mitigating action against those risks
following review by the Audit Committee;
kk determines the nature and extent of the
significant risks it is willing to take in
achieving its strategic objectives;
kk approves and regularly reviews and
updates SSE’s strategy and business
development;
kk reviews performance through a system
of reporting based on annual operating
and capital expenditure budgets;
monthly reviews against actual results;
analysis of variances and evaluation
of key performance indicators;
kk receives regular reports from the Chief
Executive, the Finance Director and
the other Executive Directors; and
kkundertakes an annual evaluation of the
Board, its Committees and individual
Directors.
the management Board:
kkmonitors operational and financial
performance of SSE;
kkdevelops and implements SSE strategy,
60
Audit Committee
Scottish and Southern Energy
Annual Report 2011
René Médori
Audit Committee Chairman
members and meetings
Membership
René Médori
(Committee Chairman)
Thomas Thune Andersen
Nick Baldwin
Richard Gillingwater
Attendance
at meetings
3/3
3/3
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 2008 Code. René
Médori is identified as having recent and
relevant financial experience through his
position as Finance Director of a major
international listed company.
effectiveness of the Company’s
internal audit function;
kk 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;
kk monitoring and reviewing the significant
risks identified by each business unit as
well as the mitigating action against
those risks;
kk monitoring and reviewing the
arrangements by which employees
can in confidence raise concerns about
any possible improprieties in financial
and other matters; and
kk reviewing the significant financial
reporting issues and judgments.
The Finance Director, Generation and Supply
Director, Head of Group Internal Audit and
the external Auditors normally attend and
report at Audit Committee meetings. The
Company Chairman also regularly attends
Audit Committee meetings. Senior
management including the Group Treasurer,
Group Financial Controller, Managing
Director, Energy Portfolio Management,
Managing Director, Corporate Affairs and
Director 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.
activities in 2010/11
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
kk reviewed the financial statements in
the 2010 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
kk reviewed the annual and interim results
announcements.
The Company Secretary was Secretary
to the Audit Committee during the year.
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:
kkensuring that the Company’s financial
reports and formal announcements
represent an accurate, clear and
balanced assessment of the Company’s
position and prospects;
kkmonitoring and reviewing the
effectiveness of the Company’s
accounting systems, internal control
policies and procedures and risk
management systems;
kkmonitoring and reviewing the
Control environment and risk management
kk 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;
kk reviewed and agreed the Group Internal
Audit Plan for the year ending 31 March
2012;
kk 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;
kk received six-monthly reviews from Group
Internal Audit on the Internal Control
Risk Assessment setting out the Group
Risk Map and Residual Risk Map;
kk reviewed Post-Investment Appraisal
Reports; and
kk received reports under the Group
whistleblowing policy and reviewed
the implementation of this policy.
External audit process
kk reviewed the effectiveness of the overall
audit process for 2010/11, meeting with
the Auditors and management
separately to identify any areas of
61
Overview
Strategy
Group performance
Segmental performance
Corporate governance
Financial statements
Shareholder information
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
concern in the preparation of the
financial statements;
kk 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;
kk reviewed and agreed the audit fees,
fees for non-recurring work and the
regulatory reporting fee;
kk reviewed internal control and key
accounting and audit issues; and
kk reviewed recommendations made
by the Auditors and the adequacy
of management’s response.
Independence of Auditors
kkreviewed changes in the Audit team; and
kk 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:
kktaxation advice including general
consultancy, acquisitions and disposals;
kkaccounting due diligence; and
kkregulatory accounts.
Full disclosure of the audit and non-audit
fees paid during the year is made in note 4
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 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
audit every five years and the current lead
partner has been in place for two years.
62
Risk and Trading Committee
Scottish and Southern Energy
Annual Report 2011
kk reviewing proposals to update
governance, control arrangements and
insurance in line with business strategy
and risk appetite; and
kk 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.
With effect from 1 April 2011, the Risk and
Trading Committee reports through the
Management Board. The minutes of the
meeting continue to be issued to the full
Board as soon as available after the meeting.
Alistair Phillips-Davies
Chairman
kk 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;
kk considering reports on financial risk
exposures that have arisen as a
consequence of changing demand
patterns, plant performance and
commodity prices;
kk reviewing reports on counterpart credit
exposures, and approving mitigating
actions where necessary;
kk considering reports on wholesale trading
activities and any breaches of internal
limits, controls or policies that may
have occurred;
kk within its delegated authorities,
considering requests for approval of
changes to individual trading limits,
counterparty credit limits and
commodity exposure limits;
kk considering requests to adopt new trading
products or concepts that are proposed
to mitigate existing and potential financial
or operational risks; and
kk 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 2010/11
The Risk and Trading Committee met
13 times during the year. At each meeting
updates were provided by Committee
members and other senior staff on the
status of: power generation; gas production
and gas storage; major projects; wholesale
market conditions; commodity exposures;
energy trading strategies; counterparty
credit exposures; and key corporate funding
issues including interest rate movements
and foreign exchange exposures.
Other activities of the Committee during
the year included:
kk considering a number of proposals to
adopt new trading products or strategies
to hedge financial or operational risks;
kk approving commercial contracts within
its delegated authority levels;
Alistair Phillips-Davies
Risk and Trading Committee Chairman
members and meetings
Membership
Alistair Phillips-Davies
(Committee Chairman)
Gregor Alexander
Ian Marchant
Attendance
at meetings
13/13
13/13
12/13
The membership also includes:
kkthe Managing Director, Energy Portfolio
Management;
kkthe Managing Director, Generation;
kkthe Managing Director, Regulation
and Strategy; and
kk other senior managers from energy
trading, electricity generation, major
projects, finance and treasury.
The Assistant Company Secretary is
Secretary to the Risk and Trading Committee.
During the year, two non-Executive Directors
– Thomas Andersen and Richard Gillingwater
– attended a meeting of the Committee.
role
The Risk and Trading Committee’s role is
to support the Company’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:
kk reviewing current and potential future
risks associated with the operation of
SSE’s physical power generation, and
gas production and gas storage assets;
kk reviewing retail tariff setting options in
the context of forecast wholesale energy
prices, customer demand patterns and
competitor activity;
kk considering new business strategies,
especially those which may signify
a move away from the Company’s
traditional markets and areas of
operation;
Nomination Committee
63
Overview
Strategy
Group performance
Segmental performance
Corporate governance
Financial statements
Shareholder information
members and meetings
Membership
Lord Smith of Kelvin
(Committee and Board Chairman)
Thomas Thune Andersen
Nick Baldwin
Richard Gillingwater
René Médori
Lady Rice
Ian Marchant
Attendance
at meetings
selection process will generally involve
interviews with a number of candidates,
using the services of a professional search
firm specialising in Board level recruitment.
2/2
2/2
2/2
2/2
1/2
2/2
2/2
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.
Lord Smith of Kelvin
Nomination Committee Chairman
activities in 2010/11
The Nomination Committee had two
meetings during the year. The Committee
assessed the roles required for future non-
Executive Director positions, and appointed
an external search firm, which was used to
identify suitable candidates for the two non-
Executive Director roles announced on 27
April 2011 and referred to on page 49. The
Nomination Committee also reviewed Board
Committee membership, and the Directors’
conflicts of interest.
Lord Smith of Kelvin
Chairman
The Committee is chaired by the Company
Chairman and its membership comprises
of all the non-Executive Directors and the
Chief Executive.
The Company Chairman would not chair
the meeting if 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:
kk reviewing the structure, size
and composition of the Board
and its committees and making
recommendations to the Board
on any desired changes;
kk reviewing the succession plans
for the Executive Directors;
kk making recommendations to the Board
on suitable candidates to fill vacancies
for non-Executive Directors and
Executive Directors;
kk 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
kk 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 complements these
qualities. Candidates from a wide range
of backgrounds are considered and the
64
Safety, Health and Environment Advisory Committee
Scottish and Southern Energy
Annual Report 2011
kkPolicy: defining how things get done;
kkPeople: helping employees to act safely;
kkProcesses: managing risks and
delivering safe systems of work;
kkPlant: maintaining the integrity of plant
and equipment; and
kkPerformance: managing and improving
SHE performance.
to help employees be in good shape for work.
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 2010/11, the average
number of days of absence from work was
5.38, compared with 5.31 in the previous year.
safety performance
By SSE’s standards, safety performance
during 2010/11 was mixed, with progress in
some areas being offset by setbacks in others
(previous year’s performance in brackets):
kk the Lost Time/Reportable Injury Rate
was 0.04 (0.03);
kk the Total Recordable Injury Rate (TRIR),
covering lost-time, reportable and
medical treatment injuries, was 0.12
per 100,000 hours worked (0.14);
kk the total number of working days lost
as a result of injuries occurring in
2010/11 was 171 (73); and
kk the number of dangerous or potentially
dangerous road traffic accidents involving
SSE employees driving Company vehicles
was 0.31 per 100 vehicles (0.34).
By many other standards, however, this was
a good safety performance. For example, the
number of working days lost was the second
lowest in the last six years. SSE’s goal,
however, is injury-free working and until
that is achieved and maintained the
Company will not be satisfied.
contractors’ safety performance
The safety of contractors working on SSE
projects and sites is fundamentally the
responsibility of their employers, but SSE
works closely with its contractors in increasing
their safety standards. For this group, the
TRIR was 0.12 per 100,000 hours worked,
compared with 0.31 in the previous year.
This was, however, overshadowed by the loss
of the lives of two employees of contractors
to SSE. Loss of life in such circumstances
has a devastating effect on families, friends
and colleagues and is the starkest possible
reminder of why safety is, and must be,
the top priority for SSE and its contractors.
Amongst the safety-related issues on
which SSE is working with contractors, the
construction and operation of wind farms
offshore is particularly important because
they present new challenges and risks. SSE
is actively working with a group of other
leading developers to set and implement
the best possible safe working procedures.
Health promotion
SSE’s Health and Well-being Action Plan
provides the basis for workplace health
programmes and initiatives, all designed
Environmental management
SSE’s main environmental impact is
generally regarded as emissions of carbon
dioxide from electricity generation (see
page 33). The CEMARS (Certified Emissions
Measurement and Reduction Scheme)
standard adopted by Achilles is the world’s
first internationally-accredited greenhouse
gas certification scheme to ISO14065 and, in
March 2011, SSE was notified by Achilles that
it had again received the CEMARS standard.
Many of the Company’s day-to-day operations
take place in environmentally sensitive areas.
The priority is to make sure that the five ‘Ps’
apply to environmental management and that
negative impacts such as pollution to the
local environment are prevented. SSE’s duty
to protect the environment starts when work
is first planned at a 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
an environment regulator such as the
Environment Agency. There were no such
incidents during 2010/11. Good environmental
stewardship involves on-site energy efficiency
and management of waste, and SSE has
specialist managers responsible for these
areas. A key goal is to minimise waste and
unnecessary use of natural resources by
re-using and recycling materials. During
2010/11, 4,639 tonnes of waste were sent
from SSE’s offices and depots for disposal
at landfill sites, a fall of over 20%.
priorities for 2011/12
The priorities are to:
kksupport progress towards SSE’s
ultimate goal of injury-free working;
kkpromote the health and well-being
of people working for SSE; and
kkensure effective environmental
management throughout SSE.
The progress towards injury-free working will
be supported by three specific initiatives on:
kksafe working offshore;
kkall employees’ safety-related behaviours;
and
kkmanagement of ‘leading’ safety indicators.
Colin Hood
Chairman
Colin Hood
Safety, Health and Environment
Advisory Committee Chairman
members and meetings
Membership
Attendance
at meetings
Colin Hood (Committee Chairman)
Thomas Thune Andersen
3/3
3/3
The membership also comprises certain
senior executives, namely:
kkthe Managing Director, Group Services;
kkthe Managing Director, Generation; and
kkthe 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:
kk ensure that SSE’s health and safety
policy and environment policy
statements are adhered to;
kkset safety, health and environmental
targets for improved performance; and
kkmonitor safety, health and
environmental performance in SSE.
In exercising these responsibilities, the
Committee focuses on SSE’s Safety and
Sustainability values:
kk we believe all accidents are preventable,
so we do everything safely and
responsibly, or not at all; and
kk we operate ethically, taking the long-
term view to achieve growth while
safeguarding the environment.
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
safe working conditions. SSE’s Safety
Management System focuses on five ‘Ps’:
Remuneration Report
Introduction
65
Overview
Strategy
Group performance
Segmental performance
Corporate governance
Financial statements
Shareholder information
the need to maintain a balance between
this strategy while still keeping employees
motivated. It is also part of the strategy that
remuneration principles apply Company-
wide, and that reward is viewed in the
context of the economic environment as
well as alongside sectoral benchmarks.
Benchmarks are useful if they prompt debate
about whether our remuneration strategy
and our position are right for the business
and where we want to take it in the future.
While we continue to look at the energy
companies in the UK, they are few in number,
so we have now added the MSCI list of energy
companies in Europe and refer to Deloitte’s
Complexity Index as well, to provide broader
relevant benchmarks. That is also why we
benchmark against FTSE 20-50 companies
excluding financial services which share
many characteristics with SSE.
Given the current economic background,
and despite strong financial and operational
performance last year, it was decided not to
increase the base salaries of the Executive
Directors, which remain below market
median for FTSE 20-50 companies
(excluding financial services). The terms
of the Annual Bonus Plan were unchanged,
and the terms of the Performance Share
Plan which, following consultation, now
include an element relating directly to SSE’s
primary financial objective – sustained
growth in dividend – are as set out in last
year’s Remuneration Report. This objective
is also reflected in the long-term incentive
plan for the new Management Board.
a long-term business
A feature of SSE, and an illustration of
the long-term nature of the business, is
the fact that the Executive Directors have
all held either Board or senior management
positions with the Company since it was
formed in 1998. Their total Board service
is 42 years with total Company service of
86 years, including their stewardship of the
predecessor companies Southern Electric
and Scottish Hydro Electric.
Their personal commitment to SSE is strong
as is their leadership of the Company – SSE
is one of just six FTSE 100 companies to
have delivered above-inflation dividend
growth every year since 1998, the year it was
formed. Any objective analysis of Executive
Director remuneration must also reflect that
leadership and commitment.
At the same time, SSE has developed
genuine strength amongst its other senior
managers, a number of whom now sit on
the newly-formed Management Board. The
Remuneration Committee has continued
to look closely at the linkages between
Executive Directors’ remuneration and that
of other senior executives, managers and
employees. It was in this context that the
Committee approved a scheme designed to
retain the members of the new Management
Board over the next five years. It recognises
that they now carry broader responsibilities
than other senior managers, and we are
confident that each of them understands
what they must do to contribute to long-
term dividend growth.
a high profile issue
Remuneration is a high profile issue, and
rightly so. The Remuneration Committee
and the Executive Directors welcome the
transparency and accountability which the
public expects and which the Remuneration
Committee endorses. The Committee
continues to look for ways in which reward
leads to behaviours which support the
culture and values of SSE throughout the
organisation.
The Committee believes that the Directors
are fairly remunerated, and above all, that
through remuneration they are recognised.
We continue to test performance targets
each year and believe they are robust and
that the Company has set targets which
reflect equivalent stretch over the years,
even though those targets may change
according to the Company’s activities
or the economic environment.
We link reward to risk as well as to
performance, and specifically to the time
horizon of the major risks in the business.
Reward needs to reflect both the prudence
and the dynamism which are balanced
within SSE and everyone who works for
the Company must be crystal clear about
what is expected of them.
If the Remuneration Committee had five
balancing objectives this year, they would
be: to develop the Company’s reputation,
contribute to its business results, enable
stakeholder agreement to remuneration
policy, link compensation to performance
plus risk, and provide leadership so that
reward is aligned through the organisation.
Balance is a hallmark of a dynamic and
productive organisation. Balance is also a
hallmark of a strong remuneration approach
– the balance between short-term and
long-term, between the individual and the
collective, between the tactical and the
strategic. The Remuneration Committee
believes it has achieved that balance and
will be vigilant to ensure it continues to do
so in the future.
Lady Rice CBE
Chairman
Lady Rice CBE
Remuneration Committee Chairman
a matter of balance
At SSE, the notion of balance runs
throughout the business. We balance a
range of market-based and economically-
regulated businesses. We try to maintain a
well-balanced portfolio of assets, contracts
and customers, to balance fossil fuel and
renewable sources of energy, to balance
independence and experience on the
Board. Balance is also fundamental
to remuneration policy at SSE.
We see remuneration as being about a
balance between supporting the Company’s
over-riding financial goal – sustained real
growth in the dividend – while keeping
employees engaged in the short-term. It’s
about doing what’s right for the business –
which requires a long-term view – and
understanding this in the context of the
energy sector today.
Reward by definition reflects the
responsibility and contribution of the
individual. At SSE, teamwork is one of the
essential elements on which individuals
are rewarded, creating another aspect of
balance. Reward also has to make sense
in the context of companies similar to SSE
even while it supports SSE’s own unique
business plans.
a year of consolidation
SSE’s remuneration policy was reviewed in
2009/2010 against new guidelines and best
practice. This year has been a time to let
recent changes bed in as well as to complete
that review. The Committee stayed close to
the concerns of shareholders and other
stakeholders, to the guidance of government
for instance on pensions, and to the views of
the executives. We will continue to welcome
shareholder feedback in the future and
indeed now on any aspect of this Report.
The remuneration strategy is to reward the
Executive Directors below market median;
the same is also true for non-Executive
Directors. The Committee is sensitive to
Scottish and Southern Energy
Annual Report 2011
66
Remuneration Report (continued)
At a glance
What are the principles of the SSE
Executive Remuneration Policy?
kk Attract and retain Executive Directors
who run the Company effectively for the
benefit of shareholders, customers and
employees.
kk Adopt a competitive and straight forward
approach to total remuneration which
meets shareholder expectation.
kk Reinforce the culture and teamwork
to deliver the long-term growth and
sustainability of the business.
kk Set Total Remuneration Policy at
levels which promote the long-term
development of the business and reward
individuals in line with performance.
What was new in 2010/11?
kk The Performance Share Plan has two
new measures: dividend per share
growth and TSR performance relative
to the MSCI European utility companies
index. This is in addition to relative TSR
based on the FTSE 100 and EPS. Each of
the four performance criteria represent
25% of the grant. Dividend growth is
SSE’s key financial objective and the
MSCI is the relevant sector focus across
Europe. These new criteria were set out
in the Remuneration Report in 2010 and
adopted after consultation with key
stakeholders.
kk The Committee approved a one-off LTI
five-year plan for the new Management
Board which will vest in 2016 subject
to performance. This plan will not apply
to the Executive Directors.
kk With the changing fiscal and government
approaches to pension, the Committee
reviewed the potential impact of these
changes on a number of long-serving
senior managers. It approved an option
for some of these employees to reduce
or limit future accrual in exchange for a
cash allowance. This was done on a cost
neutral basis and these employees were
provided with independent financial
advice. This approach did not impact
Executive Directors whose pension
arrangements remain unchanged.
Remuneration glossary of terms
STI – Short Term Incentive or Bonus
LTI – Long Term Incentive
PSP – Performance Share Plan
BIK – Benefits in Kind
MSCI – Morgan Stanley Capital Index
TSR – Total Shareholder Return
EPS – Earnings Per Share
What is SSE’s Total Executive Remuneration Policy?
summary of remuneration policy
Fixed remuneration
variable remuneration
base salary
short-term – annual
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
long-term – three years
Performance Share Plan
(PSP) – 3 years
25% linked to relative FTSE 100
TSR, 25% mSCi Eur. Utilities,
25% dividend Growth, 25%
adjusted annual EPS growth
minimum shareholding requirement equal to 100% base Salary
How is the remuneration package structured?
total remuneration policy (% each component element)
Target
38%
Stretch
26%
14%
19%
29%
10%
26%
38%
Base salary/BIK
Pension
Bonus
PSP
kk Base salary includes 1% to cover benefits in kind namely a car allowance and private
medical plan.
kk The pension element is the average of the present value of providing a single year of
pension for the Executive Directors.
kk Target performance comprises annual bonus awarded at target level (ie 50% of base
salary) and, for the Performance Share Plan, an assumption that 50% of shares under
award will vest.
kk Stretch performance is based on a bonus of 100% of base salary with exceptional targets
being met and the Performance Share Plan is calculated based on the maximum grant
at 150% salary which gives a range between 48% – 64% in variable pay to recognise
exceptional performance.
What were the Executive Directors paid for the year ending
31 March 2011?
Base salary
£000s
Benefits
£000s
Cash bonus
£000s
total
£000s
Total (2010)
£000s
Ian Marchant
Colin Hood
Gregor Alexander
Alistair Phillips-Davies
Total Remuneration
840
646
495
495
2,476
19
17
16
16
68
378
291
223
223
1,115
1,237
954
734
734
3,659
1,231
926
713
713
3,583
During 2010/11, Executive Directors also received shares vesting from the Performance
Share Plan. Details are set out in Table D on page 74.
Remuneration Report (continued)
Remuneration explained
67
Overview
Strategy
Group performance
Segmental performance
Corporate governance
Financial statements
Shareholder information
Executive Directors’ salary and incentive plans 2010/11
performance measure
Base salary
purpose – link to strategy
policy and decisions
Reflects market data, role, business and
individual performance measured against
SSE’s strategy as set out on pages 10 to 15.
Following the annual review in March 2011 the
salary for the Chief Executive and the three
Executive Directors remained unchanged.
short term – annual Bonus
60% awarded
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.
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 (60%)
Group financial performance is measured
by adjusted profit before tax, which reflects
the underlying profits of SSE’s business.
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.
Financial performance (max 60%)
During 2010/11, SSE delivered a 1.6% increase
in adjusted profit before tax – resulting in a
target payment at 50% of maximum.
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 performance
management process.
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.
Teamwork (max 20%)
Safety: Total Recordable Injury Rate again
improved but below stretch target. Service:
Rated number one in almost all key independent
surveys. Efficiency: Additional cost savings
achieved during the year and other efficiencies
secured in specific areas such as credit
management. Sustainability: Renewable energy
development and smart home project goals
achieved. Excellence: Culture of innovation
reinforced with diverse successes such as
the hybrid bond issue and zero carbon homes
development. Teamwork: It is clear to all of
the non-Executive Directors that the Executive
Directors continue to perform strongly as a team
with no evidence of a culture of individualism
within SSE. All of this resulted in an above-target
payment of 75% of the maximum.
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.
Personal objectives (20%)
Personal objectives set during the year include:
management of political and regulatory issues
(Ian Marchant); generation availability (Colin
Hood); improving working capital management
(Gregor Alexander); and energy trading risk levels
and fuel procurement (Alistair Phillips-Davies).
Personal objectives (max 20%)
Overall, the Remuneration Committee
concluded that progress was made in each of
these areas during 2010/11 and that individually
and collectively the Executive Directors delivered
strong performance during the year – resulting
in an above target payment of 75% of maximum.
long term – performance share plan 2008-2011
0% awarded
For awards granted in 2008 performance is
measured against the following two elements
over a three-year period.
The two elements of TSR and EPS reflect
relative and absolute measures of performance.
Total Shareholder Return (TSR)
kk100% vests at or above 75th percentile
kk25% vests at median
kkstraight-line basis between median and
75th percentile
kkno vesting of award if median performance
not achieved
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 financial responsibility to shareholders).
Further vesting of this element requires the
Remuneration Committee to be satisfied with
SSE’s underlying financial performance.
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 median of FTSE 100 so 0%
TSR element awarded; the graph on page 70
reflects performance over a five-year period.
Adjusted Earnings per Share (EPS)
kk100% vests where EPS is 9% RPI
kk25% vests where EPS is 3% above RPI
kkstraight-line basis between 3% and 9%
above RPI
kkno vesting if EPS minimum growth
of RPI +3% is not achieved
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.
EPS (max 50%)
Out-turn growth below the EPS minimum growth
target RPI+3% so 0% of EPS element awarded.
Scottish and Southern Energy
Annual Report 2011
68
Remuneration Report (continued)
Remuneration explained
remuneration agenda 2010/11
Regular items
Other items
May
November
February
March
Directors Remuneration Report.
Approval of Performance Share Targets and 2010 Grants.
Approval of Vesting Awards.
Review of Total Remuneration Policy for Executive Directors
and Chairman. External governance environment. Review
STI and LTI performance results.
Review of Directors and Senior Executives Salaries and
Total Remuneration. Chairman’s Remuneration Review.
Establishment of the 2010/11 Bonus Performance targets.
Performance Share Plan Forecast Results.
Long-term Incentive Review.
Review of new Management Board contract and salary
levels. Salaries were increased only for the roles which
contained a significant increase in responsibility and
scope. Approval of new one-off five-year LTI plan 2011-2016
for the Management Board excluding Executive Directors.
Overview of succession issues for remuneration purposes.
Changes to the implementation of pension policy.
Application of new FSA remuneration code. Update
on shareholder communications.
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 2011 and complies
with the regulations made under the
Companies Act 2006. The report will be
presented at the AGM on 21 July 2011 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
Lady Rice (Committee Chairman)
Nick Baldwin
Richard Gillingwater
Lord Smith of Kelvin
Attendance
at meetings
4/4
4/4
4/4
3/4
Informal consultation takes place outwith
the scheduled meetings as necessary.
terms of reference
kk sets the total remuneration policy on
behalf of the Board;
kk approves the detailed remuneration terms
of the Executive Directors including their
service contract and the impact on senior
management remuneration;
kkapproves the remuneration of the
Chairman;
kkapproves the design and performance
targets of incentive schemes;
kkgrants awards under the Company’s
Long-term Incentive Plans; and
kk reviews the total remuneration of the
Management Board and other Senior
Executives below Board level.
advisors
kk 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;
kk in addition the Director of Human
Resources advised on HR strategy
and the application of policies across
the organisation;
kk the Company Secretary advised the
Committee on corporate governance
guidelines;
kk Deloitte LLP provided market information
drawn from published surveys and advice
on appropriate awards of bonuses, long-
term incentives, and comparator group
pay and performance. Deloitte LLP were
appointed by the Committee; and
kk Bank of America Merrill Lynch provided
advice on shareholder views. They were
appointed by the Committee for these
services.
Total Remuneration Policy
Total Remuneration Policy is integral
to overall HR Strategy and the SSE set of
core values are supported in the objectives,
plan design and application of the policy.
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:
kkbase salary;
kkbenefits, including a defined benefit
pension plan;
kka short-term incentive plan; and
kka long-term incentive plans.
The current short- and long-term incentive
plans are shown in the chart on page 66.
total remuneration policy
Remuneration policy for Executive Directors
is to remain below median of the FTSE 20-50
excluding financial services. For peer group
comparison, the Committee takes account
of total remuneration in specific UK listed
companies in related sectors and their
reported financial results. SSE’s goal is to
retain Executive Directors who are motivated
by the long-term success of the Company,
rather than short-term remuneration.
This policy and goal reflect 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.
kk The Committee reviews regularly
the total compensation, including
pensions, of the Chief Executive and
the Executive Directors compared to
FTSE benchmarks to make sure that
the Company is not disadvantaged by
the current position nor are there any
adverse consequences stemming from
the long service of the leadership team.
69
Overview
Strategy
Group performance
Segmental performance
Corporate governance
Financial statements
Shareholder information
kk A number of institutional shareholders
were consulted on the implications of
the changes to the Performance Share
Plan measures and other aspects of the
Total Remuneration Policy as part of a
regular dialogue between shareholders
and the Remuneration Committee.
kk During the year the Committee
discussed succession issues across
a broader spectrum of management
levels and takes account of these
factors when making any remuneration
decisions both in the interests of the
Company and the individuals.
kk As a matter of policy the Committee takes
account of any changing or increasing
responsibilities when determining the
appropriate remuneration.
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 around two thirds for exceptional
performance as shown in the table on page
66 as this 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. As outlined on
page 54, this year has seen the appointment of
the Management Board reporting to the Chief
Executive which consists of operational and
functional Managing Directors. The Committee
received and approved a paper which
benchmarked their total remuneration to the
relevant marketplace and introduced a new,
one-off five-year LTI 2011-2016 featuring the
key measure of dividend growth. The Executive
Directors will not participate in this scheme.
There is a wider group of Senior Executives
who have a significant influence on Group
performance. The Committee seeks
assurance that there is a consistency
of approach to remuneration and that
remuneration is of sufficient value to attract
and retain key executives for the longer term.
Base salary
The Committee is mindful of the remuneration
of different groups of employees and
considers wider internal pay arrangements
and other relevant external indices such as
inflation in the process of reviewing base
salary for the Executive Directors.
2011. It considered the following factors in the
light of recent market and governance trends:
kktotal remuneration and basic salary,
when benchmarked where relevant to
FTSE 20-50 excluding Financial Services,
remain behind market median for the
Executive Directors;
kkthe Executive Directors continue to
deliver a strong financial performance
with significant results to shareholders
in a difficult trading year as dividend
growth has exceeded RPI inflation for
the twelfth consecutive year; and
kkmanagement and Collective Agreements.
Despite continued solid performance, after
taking careful consideration of all factors, the
Committee decided not to increase salaries
for the Executive Directors including the
Chief Executive for the year 2011/12.
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, team working 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 2010/11, the total Annual Bonus paid to
the Executive Directors was 60% of salary,
compared to 59% 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
team working and performance against
personal objectives. ‘Executive Directors’
salary and incentive plans 2010/11’, on page
67, sets out performance metrics used in the
assessment of the Annual Bonus for the year.
For 2011/12, the structure of the Annual
Bonus will remain the same as in 2010/11.
The maximum bonus payable will be 100%
of salary, split between:
kkfinancial performance (60%);
kkteam working (20%); and
kkpersonal 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.
The Committee conducted its regular review
of salaries for Executive Directors in March
For the Management Board and other
Senior Executives, the Committee approved
the introduction of a safety modifier to
any STI awards as safety is of paramount
importance to SSE. This modifier applies
to team working and personal objectives.
This modifier does not apply to the
Executive Directors’ short-term bonus,
which already takes account of the
Company’s safety performance.
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 2010/11, by Earnings
per Share and the Total Shareholder Return
compared to the FTSE 100. Since 2007,
awards equivalent to 150% of salary have
been granted to Executive Directors and
at lower rates to other Senior Executives.
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 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.
The 2007 PSP award vested in May 2010.
The TSR out-turn was below median for
FTSE 100 so this part of the PSP award
did not vest. EPS growth was 3.6% above
inflation per annum, and accordingly 32.4%
of the EPS element in the 2007 award
vested. The overall award was 16.2%.
The 2008 PSP award will vest shortly after
the announcement of the preliminary results
in May 2011. It is envisaged that the TSR
out-turn will be below median so this part of
the PSP will not vest. EPS growth was 1.1%
below inflation per annum which is below
the minimum of RPI plus 3%. Therefore this
award will lapse this year. Achievement of
this performance criterion is independently
reviewed each year by the auditors.
Scottish and Southern Energy
Annual Report 2011
70
Remuneration Report (continued)
Remuneration explained
changes to performance
share plan 2010 awards
As outlined in last year’s Remuneration Report,
the Committee approved a number of changes;
from the 2010/11 award, there are now four
performance criteria of 25% each as follows:
kkrelative TSR performance compared
to FTSE 100;
kkrelative TSR performance compared to
a dedicated peer group of UK and other
European utilities;
kkEPS growth of RPI plus 2% (threshold
vesting) to 8% (full vesting); and
kkdividend per share growth of RPI plus
2% (threshold vesting) to 6% (full vesting).
TSR performance compared to a dedicated
peer group of UK and other European
utilities (the MSCI Europe Utilities) thereby
provides sector emphasis and market
perspective to the plan.
The Dividend per share growth target reflects
the fact that the Company’s core financial
objective is to deliver continued real dividend
growth in the future whilst maintaining a
dividend cover around the established range.
The reasons for the two new measures are
that the Committee believes that these new
criteria provide a focus on the performance
of SSE’s wider competitive group, its key
financial goals and the level of dividend paid.
For these reasons, the Committee intends
to discuss with shareholders and other
stakeholders the application of these criteria
to the 2009 Performance Share Plan award,
which is due to vest in 2012. More broadly,
the Committee will continue to review all
targets for relevance and stretch in line
with the financial forecasts and prevailing
business and economic environment.
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.
kk 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.
kk The Executive Directors and certain
other Senior Executives are required
to maintain a shareholding equivalent
to one year’s salary 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.
kk It is also expected that all non-Executive
Directors should hold a minimum of
2,000 shares in the Company.
kk As reported on page 50, 44% of SSE
employees are members of the Share
Incentive Plan.
kk 35% of employees are members of the
Share Save Scheme.
Directors’ shareholdings as percentage
of annual salary
Ian Marchant
Colin Hood
Gregor Alexander
Alistair Phillips-Davies
2011
% salary
2010
% salary
338
270
230
256
286
221
191
210
Based on a share price at 31 March 2011 of £12.61.
all-employee share schemes
Executive Directors are eligible to
participate in the Company’s all-employee
share schemes on the same terms as other
ssE tsr performance: 31 march 2006 to 31 march 2011
160
140
120
100
80
60
SSE
FTSE 100
Mar 06
Mar 07
Mar 08
Mar 09
Mar 10
Mar 11
The graph above charts the cumulative TSR (Total Shareholder Return) of SSE since 1 April 2006,
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.
employees. These schemes comprise:
kk 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;
kk 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; and
kk 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 2011, there
were approximately 6 million share options
outstanding under this scheme, and if all
the outstanding options were exercised this
would amount to 0.64% of the issued share
capital of the Company at that date.
pensions policy
Pension planning is an important part
of the remuneration strategy because it
is consistent with the long-term goals and
horizons of the business. Each employee is
encouraged to join the relevant pension plan.
In response to recent government and fiscal
changes, the Company has provided cash
allowance options in exchange for reduced
accrual at no extra cost to the Company.
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
Executive Directors, the following provisions
relating to leaving the Company apply:
kk for retirement through ill-health an
unreduced pension based on service
to expected retirement is paid;
kk 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
71
Overview
Strategy
Group performance
Segmental performance
Corporate governance
Financial statements
Shareholder information
service contract key items
Provision
Detailed terms
Notice period
Termination
payment
Remuneration
kk
12 months by either Company or Director
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
kk
kk
kk
kk
kk
kk
kk
kk
Non competition
kk
During employment and for six months after leaving
Contract dates
kk
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
19
20
33
14
15 years*
8 years
10 years
9 years
* Including two years as Finance Director of Southern Electric plc.
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 reflect
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.
In 2010/11 Ian Marchant held a non-
Executive Director position with the John
Wood Group plc, and received £45,000 in
fees; and Colin Hood held a position as
non-Executive Director of FirstGroup plc,
receiving £45,000 in fees and accepted a
position in Southern Water Services Ltd
and received £16,667 in fees.
Non-Executive Directors
kk 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.
kk 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
2,000 Company shares.
kk The fees of the independent non-
Executive Directors are agreed by
the Board, with the non-Executive
Directors concerned not participating
in this process.
kk The fees are reviewed against companies
of similar size and complexity. To be
consistent with wider remuneration
policy, fees are set at below median.
The non-Executive Directors do not
receive any additional fees for Committee
Membership, only for Chairmanship of the
Committees. Reasonable travelling and
other expenses for costs incurred in the
course of their duties are reimbursed.
fee history
Board
Audit Committee
Chairmanship
Remuneration Committee
Chairmanship
Senior Independent
Director
Company Chairman
2011
£000s
2010
£000s
54
12
10
52
12
10
10
341
10
332
From April 1 2011, the fees for the roles
of Committee Chair have both increased
by £2,000 per annum to £14,000 for the
Audit and to £12,000 for the Remuneration
Committee Chairmen.
has not yet reached that age, it will
be payable with effect from 50; and
kkfrom 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.
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 from the age of 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 from
the age of 60 to that which they would have
earned if they had not been subject to the
salary cap. There are no arrangements to
compensate members for any change in
their personal tax liability.
Full details of the Executive Directors’
pension plans can be found in Table B
of the audited information on page 72.
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.
Scottish and Southern Energy
Annual Report 2011
72
Remuneration Report (continued)
Remuneration in detail
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 Thune Andersen
Nick Baldwin
Richard Gillingwater
René Médori
Lady Rice
Lord Smith of Kelvin (Chairman)
salary/fee
£000s
cash bonuses
£000s
Benefits
£000s
2011
840
495
646
495
54
54
54
66
74
341
378
223
291
223
–
–
–
–
–
–
19
16
17
16
–
–
–
–
–
–
total
£000s
1,237
734
954
734
54
54
54
66
74
341
2010
Total
£000s
1,231
713
926
713
52
52
52
64
72
332
3,119
1,115
68
4,302
4,207
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
£126,000, £74,250, £97,000 and £74,250 respectively in the form of deferred shares in respect of the bonus due to them for 2010/11. These
share awards will not be made until June 2011 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 2014.
table B – Directors’ pension information
Years of
industry
service
at 31 march
2011
£000s
19
20
33
14
369
213
355
161
Increase in year
including
inflation
£000s
Accrued benefit
Increase in year
excluding
inflation
£000s
at 31 march
2011
£000s
At 31 March
2010
£000s
Transfer value of accrued benefit
Increase less
Directors’
contributions
£000s
Increase in year
excluding
inflation
£000s
20
15
19
14
4
5
3
7
6,191
3,545
7,267
2,394
5,683
3,038
6,891
2,154
490
489
358
222
305
60
274
187
Ian Marchant
Gregor Alexander
Colin Hood
Alistair Phillips-Davies
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. 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.
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.
73
Overview
Strategy
Group performance
Segmental performance
Corporate governance
Financial statements
Shareholder information
(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).
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 Thune Andersen
Nick Baldwin
Richard Gillingwater
Colin Hood
Ian Marchant
René Médori
Alistair Phillips-Davies
Lady Rice
Lord Smith of Kelvin
31 march 2011
31 March 2010
shares held
shares under
option
Shares held
Shares under
option
90,504
2,000
2,387
2,000
138,659
225,773
2,050
100,703
5,216
22,600
193,304
–
–
–
250,056
334,522
–
191,738
–
–
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
–
–
notes
From 31 March 2011 to 19 May 2011, the following changes to the interests of Directors took place:
Under a standing order for reinvestment of an ISA, on 6 April 2011 Gregor Alexander acquired 13 shares.
Under the Share Incentive Plan, on 3 May 2011, Ian Marchant, Colin Hood, Gregor Alexander and Alistair Phillips-Davies each acquired 15 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 Plan 2006 and the Performance
Share Plan (PSP) and in options granted under the Sharesave Scheme during the year ended 31 March 2011.
Scottish and Southern Energy
Annual Report 2011
74
Remuneration Report (continued)
Remuneration in detail
table D – Directors’ long term incentive plan interests
Share plan
Date of award
Normal exercise period
(or vesting date)
No. of shares
under award at
1 April 2010
Option
Additional
exercise shares awarded
during the year
price
No. of shares
realised during
the year
No. of shares
under award at
31 March 2011
Ian Marchant
Colin Hood
Gregor Alexander
DBP 20062
DBP 20062
DBP 20062
PSP1
PSP1
PSP1
PSP1
Sharesave
Sharesave
DBP 20062
DBP 20062
DBP 20062
PSP1
PSP1
PSP1
PSP1
Sharesave
Sharesave
DBP 20062
DBP 20062
DBP 20062
PSP1
PSP1
PSP1
PSP1
Sharesave
Sharesave
Sharesave
Alistair Phillips-Davies DBP 20062
DBP 20062
DBP 20062
PSP1
PSP1
PSP1
PSP1
Sharesave
10/06/11
10/06/08
02/06/12
02/06/09
02/06/13
02/06/10
May 2010
26/07/07
May 2011
10/06/08
May 2012
02/06/09
02/06/10
May 2013
01/10/08 01/10/11-31/03/12
01/10/10 01/10/13-31/03/14
10/06/11
10/06/08
02/06/12
02/06/09
02/06/13
02/06/10
May 2010
26/07/07
May 2011
10/06/08
May 2012
02/06/09
02/06/10
May 2013
01/10/05 01/10/10-31/03/11
01/10/07 01/10/10-31/03/11
10/06/11
10/06/08
02/06/12
02/06/09
02/06/13
02/06/10
May 2010
26/07/07
May 2011
10/06/08
May 2012
02/06/09
02/06/10
May 2013
01/10/05 01/10/10-31/03/11
01/10/09 01/10/14-31/03/15
01/10/10 01/10/15-31/03/16
10/06/11
10/06/08
02/06/12
02/06/09
02/06/13
02/06/10
May 2010
26/07/07
May 2011
10/06/08
May 2012
02/06/09
02/06/10
May 2013
01/10/05 01/10/10-31/03/11
9,709
10,730
75,313
77,670
107,302
442
7,087
8,047
56,485
58,253
80,476
1,492
1449
5,493
6,169
42,364
44,661
61,698
298
1,253
5,463
6,169
42,364
44,661
61,698
886p
1306p
886p
1042p
871p
1,865
886p
11,4823
12,2015
1274p
871p
116,7743
4134
8,6123
87,5813
6,6023
67,1453
2834
6,6023
67,1453
9,1505
1,4926
6,8635
2988
6,8635
1,8657
9,709
10,730
11,482
77,670
107,302
116,774
442
413
7,087
8,047
8,612
58,253
80,476
87,581
5,493
6,169
6,602
44,661
61,698
67,145
1,253
283
5,463
6,169
6,602
44,661
61,698
67,145
Shares which are released under the DBP 2006 and PSP attract additional shares in respect of the notional reinvestment of dividends. 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 – 1,900 shares, Colin Hood – 1,425 shares, Gregor Alexander – 1,069 shares, Alistair Phillips-Davies – 1,069 shares.
1. The performance conditions applicable to awards under the PSP since 2007 are described on page 69. The 2007 award under the PSP vested
in respect of 16.2% of the total award.
2. 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.
3. The market value of a share on the date on which these awards were made was 1087p.
4. The market value of a share on the date on which these awards were granted was 1119p.
5. The market value of a share on the date on which these awards were realised was 1087p.
6. The market value of a share on the date on which these awards were exercised was 1125p.
7. The market value of a share on the date on which these awards were exercised was 1181p.
8. The market value of a share on the date on which these awards were exercised was 1219p.
9. This option lapsed on 31 March 2011.
The closing market price of shares at 31 March 2011 was 1261p and the range for the year was 1010p to 1267p. 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 £446,596.65 (2010 – £5,832,166.48).
This report was approved by the Board and signed on its behalf by:
Lady Rice CBE Remuneration Committee Chairman, 19 May 2011
Other statutory information
75
Overview
Strategy
Group performance
Segmental performance
Corporate governance
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:
kkthe generation, transmission,
distribution and supply of electricity;
kkthe production, storage, distribution
and supply of gas; and
kkthe provision of other energy-related
services.
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 2011 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 1 to 76 of this
Annual Report. The management report
for the year, as required by the Disclosure
and Transparency Rules, is incorporated
by reference within the Directors’ 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 Thune Andersen
Nick Baldwin (resigned on 1 April 2011)
Richard Gillingwater
René Médori
Lady Rice (Senior Independent Director)
Jeremy Beeton and Katie Bickerstaffe join
the Board on 1 July 2011.
At the 2011 AGM all of the current
Directors will retire and offer themselves
for re-appointment. As announced on
9 December 2010, Colin Hood will stand down
as an Executive Director later in the year.
Biographical details of all Directors are
set out on page 49. Details of the service
contracts for the Executive Directors and the
letters of appointment for the non-Executive
Directors are set out in the Remuneration
Report on page 71.
The interests of the Directors in the Ordinary
Shares of the Company at 31 March 2011
are set out in the Remuneration Report
on pages 73 to 74.
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 £1,504.5m. The Directors
recommend a final dividend of 52.6p per
Ordinary Share which, subject to approval
at the AGM, will be payable on 23 September
2011 to shareholders on the Register of
Members at close of business on 29 July
2011. With the interim dividend of 22.4p
per Ordinary Share paid on 25 March 2011,
this makes a total dividend of 75p 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
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 31
to the Financial Statements.
share capital
The Companies Act 2006 abolishes the
requirement for a company to have an
authorised share capital and the Articles
of Association as approved and adopted
by the Company’s shareholders at the 2010
AGM reflect this. Details of the Company’s
issued share capital at 31 March 2011,
which includes options granted under the
Group’s employee share option schemes,
are set out in notes 26 and 30 to the
Financial Statements.
authority to purchase shares
The Company was authorised at the 2010
AGM to purchase its own shares within
certain limits. During 2010/11, SSE did
not purchase any shares under this
authority. The Directors will, however,
seek renewal of their authority to purchase
in the market the Company’s own shares
at the AGM on 21 July 2011, and this
remains a benchmark against which
financial decisions are taken.
annual General meeting 2011
The 22nd AGM of the Company will be
held on 21 July 2011 at 12 noon in the Perth
Concert Hall, Mill Street, Perth PH1 5HZ.
The Notice of Annual General Meeting 2011,
which contains full explanations of the
business to be conducted at the AGM, is
set out in a separate shareholder circular.
substantial shareholdings
At 19 May 2011, the 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, as
shown in the table below.
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 39 days at 31 March 2011.
accounting policies, financial
instruments and risk
Details of the Group’s accounting
policies, together with details of financial
instruments and risk, are provided in notes
1 and 31 to the Financial Statements.
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.
substantial shareholdings
Entity
Capital Research and Management Company
Legal & General Group Plc
Number of
shares*
46,267,405
37,426,851
Percentage*
5.02%
3.99%
Nature of
holding
Indirect
Direct
* 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.
76
Other statutory information (continued)
Scottish and Southern Energy
Annual Report 2011
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:
kk
kk
kk
kk
select suitable accounting policies and then apply them consistently;
make judgements and estimates that are reasonable and prudent;
state whether they have been prepared in accordance with IFRS as adopted by the EU; and
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:
kk
kk
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
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
19 May 2011
Gregor Alexander
Finance Director
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.
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 52. 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 in note 34 to the Financial
Statements.
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 is unaware
and each Director has taken all the steps that
ought to have been taken in his or her duty
as a Director to make himself or herself
aware of any relevant audit information and
to establish that the Company’s Auditors
is aware of that information.
By Order of the Board
Vincent Donnelly
Company Secretary
19 May 2011
77
Overview
Strategy
Group performance
Segmental performance
Corporate governance
Financial statements
Shareholder information
Financial statements
Contents
financial statements
78
79
80
81
82
84
86
86
95
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. Reclassification of comparative
amounts
3. Segmental information
4. Other operating income and expense
5. Exceptional items and certain
remeasurements
6. directors and employees
7. Finance income and costs
8. Taxation
9. dividends
10. Earnings per share
11. intangible assets
12. Property, plant and equipment
13. biological assets
14. investments
15. Subsidiary undertakings
16. Acquisitions, disposals and
held for sale assets
17. inventories
18. Trade and other receivables
19. Cash and cash equivalents
20. Trade and other payables
21. Current tax liabilities
22. Construction contracts
23. loans and other borrowings
24. deferred taxation
25. Provisions
26. Share capital
27. Reserves
28. hybrid capital
29. Retirement benefit obligations
30. Employee share-based payments
31. Financial instruments and risk
32. Related party transactions
33. Commitments and contingencies
34. Post balance sheet events
96
99
100
101
102
103
105
105
106
110
111
112
115
117
119
120
120
120
121
121
121
124
125
126
126
126
127
130
135
149
150
151
shareholder information
152
Shareholder information
Scottish and Southern Energy
Annual Report 2011
78
Independent auditors’ report
to the members of Scottish and Southern Energy plc
We have audited the financial statements of Scottish and Southern Energy plc for the year ended 31 March 2011 set out on pages 79 to 151.
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 auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone
other than the Company and the Company’s members, as a body, for our audit work, for this report, or for the opinions we have formed.
respective responsibilities of Directors and auditor
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, and express an opinion
on, 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/private.cfm.
opinion on financial statements
In our opinion:
kkthe 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 2011
and of the Group’s profit for the year then ended;
kkthe Group financial statements have been properly prepared in accordance with IFRSs as adopted by the EU;
kkthe 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
kkthe 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:
kkthe part of the Directors’ Remuneration Report to be audited has been properly prepared in accordance with the Companies Act 2006;
kkthe information given in the Directors’ Report for the financial year for which the financial statements are prepared is consistent with
the financial statements; and
kkinformation given in the Corporate Governance Statement set out on pages 47 to 76 with respect to internal control and risk management
systems in relation to financial reporting processes and about share capital structures 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:
kkadequate 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
kkthe 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
kkcertain disclosures of Directors’ remuneration specified by law are not made; or
kkwe have not received all the information and explanations we require for our audit.
Under the Listing Rules we are required to review:
kkthe Directors’ Report in relation to going concern, set out on page 75;
kkthe part of the Corporate Governance Statement on pages 47 to 76 relating to the Company’s compliance with the nine provisions
of the June 2008 Combined Code specified for our review; and
kkcertain elements of the report to shareholders by the Board on Directors’ remuneration.
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
19 May 2011
Consolidated income statement
for the year ended 31 March
79
Overview
Strategy
Group performance
Segmental performance
Corporate governance
Financial statements
Shareholder information
2011
2010
revenue
Cost of sales
Gross profit
Operating costs
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
Non-controlling interest
Basic earnings per share (pence)
Diluted earnings per share (pence)
Dividends in the year (£m)
Note
3
4
14
3
7
7
8
10
10
9
Before
Exceptional
exceptional items and certain
items and certain remeasurements
remeasurements
(note 5)
£m
£m
Before
exceptional
items and certain
remeasurements
total Restated (note 2)
£m
£m
Exceptional
items and certain
remeasurements
(note 5)
Total
Restated (note 2) Restated (note 2)
£m
£m
28,334.2
(26,094.1)
2,240.1
(886.0)
–
948.8
948.8
–
28,334.2
(25,145.3)
3,188.9
(886.0)
21,550.4
(19,466.3)
2,084.1
(722.2)
–
432.2
432.2
–
21,550.4
(19,034.1)
2,516.3
(722.2)
1,354.1
948.8
2,302.9
1,361.9
432.2
1,794.1
298.8
(139.9)
–
(58.2)
100.7
1,454.8
250.2
(453.1)
1,251.9
(354.8)
897.1
(103.2)
–
5.9
61.5
(35.8)
913.0
–
(53.2)
859.8
(252.4)
607.4
195.6
(139.9)
5.9
3.3
64.9
2,367.8
250.2
(506.3)
2,111.7
(607.2)
1,504.5
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)
2.9
435.1
–
(36.5)
398.6
(110.9)
287.7
897.1
–
607.4
–
1,504.5
–
947.6
0.2
287.7
–
162.2p
162.0p
£659.8m
264.1
(107.1)
4.1
(51.3)
109.8
1,903.9
203.2
(468.5)
1,638.6
(403.1)
1,235.5
1,235.3
0.2
134.0p
133.9p
£618.5m
The accompanying notes are an integral part of these financial statements.
Scottish and Southern Energy
Annual Report 2011
80
Statement of comprehensive income
for the year ended 31 March
profit for the year
other comprehensive income:
Gain/(losses) on effective portion of cash flow hedges
Transferred to assets and liabilities on cash flow hedges
Taxation on cash flow hedges
Exchange difference on translation of foreign operations
Gains/(losses) on net investment hedge
Taxation on net investment hedge
Actuarial losses on retirement benefit schemes
Taxation on actuarial losses on defined benefit pension schemes
Jointly controlled entities and associates:
Share of (loss) on effective portion of cash flow hedges
Share of taxation on cash flow 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, net of taxation
total comprehensive income for the period
attributable to:
Equity holders of the parent
Non-controlling interest
Consolidated
2011
£m
2010
£m
1,504.5
1,235.5
32.3
(7.0)
(5.9)
19.4
(78.3)
4.3
(1.2)
(75.2)
(8.8)
(7.9)
(16.7)
(4.1)
(0.3)
(4.4)
(11.6)
1.8
(9.8)
(14.2)
(26.6)
–
2.1
(24.5)
0.4
(47.2)
13.2
(33.6)
(508.8)
142.5
(366.3)
(30.0)
19.1
(10.9)
(82.1)
23.0
(59.1)
(70.0)
(86.7)
(494.4)
1,417.8
741.1
1,417.8
–
1,417.8
740.9
0.2
741.1
Balance sheets
as at 31 March
assets
Property, plant and equipment
Biological assets
Intangible assets:
Goodwill
Other intangible assets
Equity investments in associates and jointly controlled entities
Loans to associates and jointly controlled entities
Other investments
Investments in subsidiaries
Trade and other receivables
Deferred tax assets
Derivative financial assets
non-current assets
Other intangible assets
Inventories
Trade and other receivables
Cash and cash equivalents
Derivative financial assets
Current assets held for sale
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
Hedge reserve
Translation reserve
Retained earnings
Hybrid capital
total equity attributable to equity holders of the parent
Non-controlling interest
total equity
81
Overview
Strategy
Group performance
Segmental performance
Corporate governance
Financial statements
Shareholder information
Consolidated
Company
Note
12
13
11
11
14
14
14
15
18
24
31
11
17
18
19
31
16
23
20
21
25
31
23
24
20
25
29
31
26
28
2011
£m
8,513.1
4.4
685.3
287.8
760.8
1,124.6
39.6
–
–
161.7
990.1
12,567.4
325.6
217.5
5,068.1
476.9
2,525.5
269.4
8,883.0
21,450.4
446.5
5,078.0
268.2
9.9
2,307.5
8,110.1
5,159.9
1,068.3
304.2
169.2
668.6
769.3
8,139.5
16,249.6
5,200.8
2010
Restated
(note 2)
£m
8,204.2
4.4
726.3
288.2
635.2
970.5
9.2
–
–
157.1
466.3
11,461.4
213.3
272.5
4,450.4
261.7
1,468.3
–
6,666.2
18,127.6
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
15,006.6
3,121.0
468.4
859.8
22.0
(1.2)
38.2
2,652.2
1,161.4
5,200.8
–
5,200.8
461.5
857.5
22.0
(16.2)
113.4
1,686.6
–
3,124.8
(3.8)
3,121.0
2011
£m
–
–
–
–
190.0
1,029.5
18.0
2,318.4
3,661.2
122.1
48.0
7,387.2
–
–
2,285.9
319.1
30.0
–
2,635.0
10,022.2
106.8
2,792.3
22.9
–
15.5
2,937.5
3,756.9
–
–
–
239.8
136.7
4,133.4
7,070.9
2,951.3
468.4
859.8
22.0
19.2
–
420.5
1,161.4
2,951.3
–
2,951.3
2010
Restated
(note 2)
£m
–
–
–
–
207.0
835.3
–
2,172.1
3,456.1
116.9
47.5
6,834.9
–
–
1,859.6
99.7
56.6
–
2,015.9
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
These financial statements were approved by the Board of Directors on 19 May 2011 and signed on their behalf by:
Gregor Alexander
Finance Director
Lord Smith of Kelvin
Chairman
Scottish and Southern Energy plc, Registered No: SC117119
Scottish and Southern Energy
Annual Report 2011
82
Statement of changes in equity
for the year ended 31 March
consolidated
reconciliation of movement in reserves
Share
capital
£m
Share
Capital
premium redemption
reserve
£m
account
£m
Hedge Translation
reserve
reserve
£m
£m
Retained
earnings
£m
Non-
controlling
interest
£m
Hybrid
capital
£m
At 1 April 2010
461.5
857.5
22.0
(16.2)
113.4
1,686.6
(3.8)
Profit for the year
Effective portion of changes in fair value
of cash flow hedges (net of tax)
Transferred to balance sheet on cash flow
hedges (net of tax)
Effective net investment hedge (net of tax)
Exchange differences on translation of
foreign operation
Actuarial losses 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 year
Dividends to shareholders
Scrip dividend related share issue
Issue of hybrid capital
Issue of shares
Transactions with shareholders
Credit in respect of employee share awards
Investment in own shares
Current and deferred tax recognised in
equity in respect of employee share awards
–
–
–
–
–
–
–
–
–
–
6.4
–
0.5
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(6.4)
–
8.7
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
26.4
(7.0)
–
–
–
(4.4)
–
–
–
–
3.1
(78.3)
–
–
–
1,504.5
–
–
–
–
(16.7)
–
(9.8)
15.0
(75.2)
1,478.0
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(659.8)
146.1
–
–
–
9.9
(9.2)
0.6
at 31 march 2011
468.4
859.8
22.0
(1.2)
38.2
2,652.2
–
–
–
–
–
–
–
–
–
–
–
–
–
3.8
–
–
–
–
company
reconciliation of movement in reserves
Share
capital
£m
Share
Capital
premium redemption
reserve
£m
account
£m
Hedge
reserve
£m
Retained
earnings
£m
Hybrid
capital
£m
At 1 April 2010
461.5
857.5
22.0
21.0
329.4
Profit for the year
Effective portion of changes in fair value of cash flow
hedges (net of tax)
Transferred to balance sheet on cash flow hedges (net of tax)
Actuarial losses on retirement benefit schemes (net of tax)
Total comprehensive income for the year
Dividends to shareholders
Scrip dividend related share issue
Issue of hybrid capital
Issue of shares
Increase in investment in subsidiaries
Investment in own shares
Current and deferred tax recognised in
equity in respect of employee share awards
at 31 march 2011
–
–
–
–
–
–
6.4
–
0.5
–
–
–
–
–
–
–
–
–
(6.4)
–
8.7
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
627.3
–
–
(23.8)
603.5
(659.8)
146.1
–
–
9.9
(9.2)
(1.8)
–
–
(1.8)
–
–
–
–
–
–
–
–
–
1,161.4
–
–
–
(659.8)
146.1
1,161.4
9.2
9.9
(9.2)
0.6
–
0.6
468.4
859.8
22.0
19.2
420.5
1,161.4
2,951.3
total
£m
3,121.0
1,504.5
26.4
(7.0)
3.1
(78.3)
(16.7)
(4.4)
(9.8)
1,417.8
(659.8)
146.1
1,161.4
9.2
3.8
9.9
(9.2)
–
–
–
–
–
–
–
–
–
–
–
–
1,161.4
–
–
–
–
–
0.6
1,161.4
5,200.8
total
£m
1,691.4
627.3
(1.8)
–
(23.8)
601.7
–
–
–
–
–
–
83
Overview
Strategy
Group performance
Segmental performance
Corporate governance
Financial statements
Shareholder information
Equity
reserve
£m
Hedge Translation
reserve
reserve
£m
£m
Retained
earnings
£m
Non-
controlling
interest
£m
total
£m
consolidated
reconciliation of movement in reserves
Share
capital
£m
Share
Capital
premium redemption
reserve
£m
account
£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 losses 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 year
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
–
–
–
–
–
–
–
–
–
(0.8)
–
–
–
–
–
–
–
1,235.3
0.2
1,235.5
(24.5)
–
–
(34.0)
(0.4)
0.8
–
–
–
–
–
(366.3)
(10.9)
–
–
–
–
(59.1)
–
–
–
–
–
–
(35.8)
(33.2)
809.9
0.2
–
–
–
–
–
–
–
–
–
–
–
–
(618.5)
–
–
17.9
(15.8)
(1.7)
–
–
–
–
(16.2)
113.4
1,686.6
(3.8) 3,121.0
0.4
–
0.4
(24.5)
(34.0)
0.4
(366.3)
(10.9)
(59.1)
741.1
(620.2)
15.9
6.8
17.9
(15.8)
company
reconciliation of movement in reserves
Share
capital
£m
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 losses on retirement benefit schemes (net of tax)
Total comprehensive income for the year
Dividends to shareholders
Convertible bond converted to equity
Issue of shares
Increase in investment in subsidiaries
Investment in own shares
at 31 march 2010
–
–
–
–
–
0.9
0.4
–
–
–
–
–
–
–
15.8
6.4
–
–
–
–
–
–
–
–
–
–
–
461.5
857.5
22.0
–
–
–
–
–
(0.8)
–
–
–
–
–
575.9
575.9
(22.3)
–
(22.3)
–
–
–
–
–
–
(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)
21.0
329.4
1,691.4
Scottish and Southern Energy
Annual Report 2011
84
Cash flow statements
for the year ended 31 March
cash flows from operating activities
Profit for the year after tax
Taxation
Movement on financing and operating derivatives
Finance costs
Finance income
Share of profit/loss of jointly controlled entities and associates
Income from investment in subsidiaries, jointly controlled entities and associates
Pension service charges less contributions paid
Exceptional impairment of assets
Depreciation of assets
Amortisation and impairment of intangible assets
Impairment of inventories
Release of provisions
Release of deferred income
Decrease in inventories
(Increase)/decrease in receivables
Increase/(decrease) in payables
Increase in provisions
Charge in respect of employee share awards (before tax)
(Profit) on disposal of property, plant and equipment
Loss on disposal of fixed asset investment
Profit on disposal of business and subsidiaries (note 16)
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 sale of fixed asset investment
Proceeds from sale of business and subsidiaries (note 16)
Other loans to jointly controlled entities and associates (note 14)
Purchase of businesses and subsidiaries (note 16)
Cash acquired in purchases
Cash included in disposals
Cash included in assets held for sale
Investment in jointly controlled entities and associates
Loans and equity repaid by jointly controlled entities
Increase in other investments
net cash from investing activities
Consolidated
Company
2011
£m
1,504.5
607.2
(1,417.4)
453.1
(250.2)
(64.9)
–
(68.9)
521.8
496.7
21.5
6.6
(6.0)
(19.6)
48.4
(95.4)
371.3
6.2
9.9
(5.8)
–
(10.2)
2,108.8
81.7
–
–
109.7
(387.1)
(172.6)
(21.2)
2010
Restated
£m
1,235.5
403.1
(395.7)
432.0
(203.2)
(109.8)
–
(88.8)
–
394.9
22.2
3.0
(7.1)
(15.2)
97.2
914.3
(486.8)
5.9
17.9
(5.7)
0.1
–
2,213.8
23.7
(1.7)
–
102.5
(341.4)
(307.7)
–
1,719.3
1,689.2
(1,079.0)
(40.3)
28.5
7.9
–
31.9
(204.4)
(241.3)
–
(5.5)
(23.0)
(176.3)
13.3
(30.4)
(1,718.6)
(1,033.5)
(4.2)
18.7
40.2
0.9
–
(336.4)
(67.8)
9.7
–
–
(61.8)
34.5
(1.1)
(1,400.8)
2011
£m
627.3
15.9
47.3
204.3
(291.1)
–
(601.9)
(48.5)
13.7
–
–
–
–
–
–
(88.3)
(214.3)
–
–
–
–
–
(335.6)
30.0
–
571.9
252.5
(181.9)
(205.8)
(21.2)
109.9
–
–
–
–
–
–
(194.2)
–
–
–
–
(35.1)
–
–
(229.3)
2010
Restated
£m
575.9
(0.6)
44.9
235.6
(259.7)
–
(577.5)
(44.2)
–
–
–
–
–
–
–
100.7
119.4
–
–
–
–
–
194.5
–
–
577.5
223.0
(206.4)
(300.6)
–
488.0
–
–
–
–
–
–
(278.6)
–
–
–
–
(17.0)
16.6
–
(279.0)
85
Overview
Strategy
Group performance
Segmental performance
Corporate governance
Financial statements
Shareholder information
Consolidated
Company
2011
£m
9.2
(513.7)
1,161.4
(9.2)
765.1
(1,187.1)
225.7
2010
Restated
£m
6.8
(618.5)
–
(15.8)
1,338.3
(1,035.3)
(324.5)
2011
£m
9.2
(513.7)
1,161.4
(9.2)
506.7
(815.6)
338.8
2010
Restated
£m
6.8
(618.5)
–
(15.8)
1,299.7
(916.6)
(244.4)
cash flows from financing activities
Proceeds from issue of share capital
Dividends paid to Company’s equity holders
Issue of hybrid capital
Employee share awards share purchase
New borrowings
Repayment of borrowings
net cash from financing activities
net increase/(decrease) in cash and cash equivalents
226.4
(36.1)
219.4
(35.4)
Cash and cash equivalents at the start of year (note 19)
Net increase/(decrease) in cash and cash equivalents
Effect of foreign exchange rate changes
cash and cash equivalents at the end of year (note 19)
252.5
226.4
(7.3)
471.6
293.6
(36.1)
(5.0)
252.5
99.7
219.4
–
319.1
135.1
(35.4)
–
99.7
The accompanying notes are an integral part of these financial statements.
Scottish and Southern Energy
Annual Report 2011
86
Notes on the financial statements
for the year ended 31 March
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 earlier in this Report at pages 6 to 46. The consolidated financial
statements for the year ended 31 March 2011 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 19 May 2011. 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. 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 31 of the Financial Statements on page 140.
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 scheme 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 94 and 95.
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 standards, amendments and interpretations have been adopted by the Group from 1 April 2010:
kk IFRS 3 (revised), Business Combinations. The revised standard applies to business combinations entered into by the Group completing
on or after 1 April 2010. There is no requirement to restate previous business combinations. The revised standard continues to apply
the acquisition method to business combinations but with some significant changes compared with IFRS 3. All payments to purchase
a business are recorded at fair value at the acquisition date, with contingent payments classified as a liability subsequently remeasured
through the income statement. There is a choice on an acquisition by acquisition basis to measure the non-controlling interest in the
acquiree either at fair value or at the non-controlling interest’s proportionate share of the acquiree’s net assets. Pre-existing
relationships require to be recognised and all acquisition-related costs are expensed.
kk As the Group has adopted IFRS 3 (revised), it is required to adopt IAS 27 (revised), Consolidated and Separate Financial Statements,
at the same time. IAS 27 (revised) requires the effects of all transactions with non-controlling interests to be recorded in equity if
there is no change in control and these transactions will no longer result in goodwill or gains and losses. In the financial statements
to 31 March 2011, non-controlling interests of £3.8m were recorded in equity.
kk IFRIC 18, Transfers of Assets from Customers, is effective for transfer of assets received on or after 1 November 2009. This interpretation
clarifies the requirements for agreements in which an entity receives assets from a customer in return for connection to a network or
ongoing access to a supply of goods or services. The contributed assets will be recognised initially at fair value and related revenue will
be recognised immediately, unless there is a future service obligation, in which case revenue is deferred and recognised over the service
period. By adopting this interpretation, the Group recognised £28.5m of revenue in the current financial year which would previously
have been deferred. A compensating depreciation charge has been recognised against the related capital addition. As a consequence,
the adoption of the interpretation did not have a material impact on the Group’s reported performance. The impact of adopting the
interpretation on the previous year’s results is commented upon at note 2.
87
Overview
Strategy
Group performance
Segmental performance
Corporate governance
Financial statements
Shareholder information
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:
kkIFRIC 16, Hedges of Net Investment in a Foreign Operation.
kkIFRIC 17, Distributions of Non-Cash Assets to Owners, effective for annual periods beginning on or after 1 July 2009.
kkImprovements to International Financial Reporting Standards 2009 were issued in April 2009. The effective dates vary standard
by standard but most are effective 1 January 2010.
kkIFRS 2 (Amendment), Share Based Payment – Group Cash-settled Share-based Payment Transactions, effective for annual periods
commencing on or after 1 January 2010.
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 condensed interim statements, were in issue but not yet effective:
kkRevised IAS 24, Related Party Disclosures, issued in November 2009.
kk Amendment to IFRIC 14, Prepayments of a Minimum Funding Requirement issued in November 2009. The amendment corrects an
unintended consequence of IFRIC 14. Without the amendment, entities are not permitted to recognise as an asset some voluntary
prepayments for minimum funding contributions. The amendment is effective for annual periods beginning 1 January 2011.
kkImprovements to International Financial Reporting Standards 2010, issued in May 2010. IAS 39 (Amendment), Financial Instruments:
Recognition and Measurement – Eligible Hedged Items, effective for annual periods beginning on or after 1 July 2009.
kkIFRIC 19, Extinguishing Financial Liabilities with Equity Instruments, effective for annual periods beginning on or after 1 July 2010,
although this has not been endorsed by the EU.
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.
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.
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 production revenue, gas storage facility revenue, the value
of contracted services and facilities provided and goods sold during the year in the normal course of business.
Scottish and Southern Energy
Annual Report 2011
88
Notes on the financial statements (continued)
for the year ended 31 March
1. siGnificant accountinG policiEs (continued)
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 from sales and optimisation trades in physical and financial energy and commodity contracts is recognised gross in the income
statement. 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.
Revenue from the production of natural gas, crude oil and condensates is recognised when title passes to the customer. The Group has
an interest with other producers in jointly controlled operations for the production of such products. Revenue under these arrangements
is recognised based on the entitlement method in reference to the Group’s interest and the relevant production sharing terms. Where there
are differences between the Group’s share of production and the volume sold, an overlift or underlift is recorded (see below).
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 network connections activity from 1 November 2009,
the revenue recognition rules of IFRIC 18 have been applied, whereby income is recognised over the course of completion of the associated
capital works unless there is a future service obligation, in which case revenue is recognised over the service period. 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.
Overlift and underlift
It is often not practical for each participant to receive or sell its precise share of the overall production from a jointly controlled operation
under the contractual offtake arrangements in any given period. These short-term imbalances between cumulative production entitlement
and cumulative sales are referred to as overlift and underlift. An overlift payable, or underlift receivable, is recognised at the balance sheet
date and measured at market value, with movements in the period recognised within cost of sales.
Exploration, evaluation and production assets
The Group uses the successful efforts method of accounting for exploration and evaluation expenditure associated with exploration wells
or ‘prospects’. This expenditure will be capitalised initially within intangible assets and will include licence acquisition costs associated
with the prospects. If the prospects are subsequently determined to be successful on completion of the evaluation period, the relevant
expenditure will be transferred to property, plant and equipment and depreciated on a unit of production basis. If the prospects are
subsequently determined to be unsuccessful on completion of the evaluation period, the intangible asset will be expensed in the period
in which that determination is made.
All field development costs, including rights and concessions related to production activities, are capitalised as property, plant and equipment.
Capitalised costs relate to the acquisition and installation of production assets and facilities and includes specialist engineering, drilling
and technical services costs. These property, plant and equipment assets are depreciated from the commencement of production in the
fields concerned, using the unit of production method, based on the proven and probable reserves of those fields. Changes in these estimates
are dealt with prospectively.
The carrying value of exploration prospects is regularly compared on an individual field basis with the expected discounted future net
revenues associated with the remaining commercial reserves. An impairment loss will be recognised where it is considered that recorded
amounts are unlikely to be fully recovered from the net present value of future net revenues. All exploration and production assets are
reviewed annually for indicators of impairment.
Government grants
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.
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Leases
The determination of whether an arrangement contains a lease is dependent on whether the arrangement relates to use and control of
a specific asset. Leases are classified as finance leases if the arrangement transfers substantially all the risks and rewards of ownership
to the lessee. All other leases are categorised as operating leases.
(i) Operating lease obligations
Payments made under operating leases are recognised in the income statement on a straight-line basis over the term of the lease.
Lease incentives received are recognised in the income statement as an integral part of the total lease expense.
(ii) Finance lease obligations
Assets held under finance leases are capitalised and held as part of property, plant and equipment. The accounting policy for such
arrangements is described on page 90.
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.
Dividends
Dividend income is recognised on the date the Group’s right to receive payments is established. Dividend liabilities are recognised on the
date the Group’s obligation to pay dividends is established.
Scottish and Southern Energy
Annual Report 2011
90
Notes on the financial statements (continued)
for the year ended 31 March
1. siGnificant accountinG policiEs (continued)
Property, plant and equipment
(i) Owned assets
Items of property, plant and equipment are stated at cost less accumulated depreciation and impairments. The cost of self-constructed assets
includes the cost of materials, direct labour and other directly attributable costs. All items of property, plant and equipment are accounted for
under the cost model within IAS 16. The purchase price of an asset will include the fair value of the consideration paid to acquire the asset.
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 with the exception of gas production assets which are depreciated on the Units of Production basis. 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. Depreciation commences following the asset commissioning period and when the asset is available for commercial
operation. The estimated useful lives for assets depreciated on a straight line basis are as follows:
Hydro civil assets
Thermal and hydro power stations including electrical and mechanical assets
Operating wind farms
Overhead lines, under ground cables and other network assets
Gas storage facilities
Other transmission and distribution buildings, plant and equipment
Office buildings
Shop and office refurbishment, fixtures, IT assets, 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
30 to 50
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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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. The excess
of the cost of acquisition over the fair value of the acquired business is represented as goodwill. For combinations taking place from
1 April 2010, contingent consideration classified as a liability will be subsequently remeasured through the income statement under the
requirements of the revised IFRS 3. Pre-existing relationships require to be recognised and all acquisition-related costs are expensed.
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. 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, in relation to the impairment of goodwill, 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 exceeds 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
selling 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.
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.
Scottish and Southern Energy
Annual Report 2011
92
Notes on the financial statements (continued)
for the year ended 31 March
1. siGnificant accountinG policiEs (continued)
(iv) Development assets
Costs capitalised as development intangibles represent the costs incurred in bringing individual projects to the consented stage. These
are principally wind farm developments but will also include other generation or gas storage projects. 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. 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. 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 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.
(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.
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(iii) Equity and equity-related compensation benefits
The Group operates a number of employee share schemes as described in the Remuneration Report and note 30. 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 31.
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 remeasured 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 consolidated 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.
(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.
Scottish and Southern Energy
Annual Report 2011
94
Notes on the financial statements (continued)
for the year ended 31 March
1. siGnificant accountinG policiEs (continued)
(v) Convertible bond
The Group issued a convertible bond which had a liability component, which was accounted for as a compound financial instrument,
net of transaction costs and an equity component, which was calculated as the discounted excess of the issue proceeds over the
present value of the future interest and principal payments. The bond was fully converted at 24 October 2009.
(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.
(x) Hybrid capital
The Group issued hybrid capital in the year ended 31 March 2011. Hybrid capital comprises issued bonds that qualify for recognition as
equity. Accordingly, any coupon payments are accounted for as dividends and are recognised directly in equity at the time the payment
obligation arises. This is because the coupon payments are discretionary and relate to equity. Coupon payments consequently do not
have any impact on the income statement. Coupon payments are recognised in the cash flow statement in the same way as dividends
to ordinary shareholders.
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 net
present value of the estimated cost of decommissioning gas production facilities at the end of the producing lives of fields, and gas storage
facilities and power stations at the end of the useful life of the facilities. The estimates are based on technology and prices at the balance
sheet date. A corresponding decommissioning asset is recognised and is included within property, plant and equipment when the provision
gives access to future economic benefits. Changes in these provisions are recognised prospectively. For offshore wind assets, power
stations and gas storage facilities 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. For gas production facilities the decommissioning asset is amortised using
the unit of production method, based on proven and probable reserves.
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.
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(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 require 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 value 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. Gas production and development assets are assessed under the fair value less costs method for the
respective CGUs. This is deemed more appropriate as it is based on post-tax cash flows arising from each field within the respective
CGUs, which is consistent with the approach taken by management in determining the economic value of the underlying assets.
This is determined by discounting the post-tax cash flows expected to be generated by the CGU, net of associated selling costs,
and takes into account assumptions market participants would use in estimating fair value.
(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) Decommissioning costs
The estimated cost of decommissioning at the end of the useful lives of assets is reviewed periodically. Decommissioning costs in relation
to gas exploration and production assets are based on expected lives of the fields and costs of decommissioning and are currently
expected to be incurred predominantly between 2017 and 2030.
(vi) 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 31.
(vii) Gas and liquids reserves
The volume of proven and probable gas and liquids reserves is an estimate that affects the unit of production depreciation of producing
gas and liquids property, plant and equipment. This is also a significant input estimate to the associated impairment and decommissioning
calculations. The impact of a change in estimated proven and probable reserves is dealt with prospectively by depreciating the remaining
book value of producing assets over the expected future production. If proven and probable reserves estimates are revised downwards,
earnings could be affected by higher depreciation expense or an immediate write-down (impairment) of the asset’s book value.
(viii)Exceptionals and remeasurements
The criteria for identifying what constitutes an exceptional item are outlined in note 1 Exceptional items and certain remeasurements.
2. rEclassification of comparatiVE amounts
The Group’s Investments in Jointly Controlled Entities and Associates were previously disclosed including the value of long-term shareholder
loans. While this represents the substance of the Group’s net investment in its Jointly Controlled Entities and Associates, such interests are
not recorded under the equity method of accounting under IAS 27 and 31 but instead are recorded initially at fair value under IAS 39 and are
subsequently measured at amortised cost. Consequently, all such long-term shareholder loans will be shown separately as non-current
financial assets and not as part of the equity investment in Jointly Controlled Entities and Associates.
In addition to this, the Group holds interest-bearing long-term commercial loans with certain Jointly Controlled Entities (Greater Gabbard
Offshore Winds Limited and Marchwood Power Limited) which were previously recorded as part of current other receivables. These have
been reclassified as non-current financial assets. Note 14 has been restated to show both the equity and loan investments in the Jointly
Controlled Entities and Associates as this is the basis of review used by management. No further restatement has been considered
necessary to aid understanding of the Group’s financial position.
The impact of these changes are as follows:
(i) reclassification of long-term shareholder loans
Investment in Associates and Jointly Controlled Entities
Loans to Associates and Jointly Controlled Entities
Company
Consolidated
Reported
31 March 2010
£m
restated
31 march 2010
£m
Reported
31 March 2010
£m
restated
31 march 2010
£m
473.9
–
473.9
207.0
266.9
473.9
1,037.3
–
1,037.3
635.2
402.1
1,037.3
Scottish and Southern Energy
Annual Report 2011
96
Notes on the financial statements (continued)
for the year ended 31 March
2. rEclassification of comparatiVE amounts (continued)
(ii) reclassification of long-term commercial loans
Current other receivables
Loans to Associates and Jointly Controlled Entities
Company
Consolidated
Reported
31 March 2010
£m
restated
31 march 2010
£m
Reported
31 March 2010
£m
restated
31 march 2010
£m
623.4
–
623.4
55.0
568.4
623.4
857.5
–
857.5
289.1
568.4
857.5
Following the adoption of IFRIC 18, the Group has restated the income statement of the previous year to recognise an increase in the
depreciation of property, plant and equipment of £38.5m and a corresponding reduction in cost of sales. This has also had an impact
on certain cash flow statement classifications.
3. sEGmEntal information
The Group’s operating segments are those used internally by the Board of Directors to run the business, allocate resources and make strategic
decisions. 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), and the generation and supply of electricity and sale of gas in Great
Britain and Ireland (Generation and Supply) and other businesses identified below which are not required to be reported separately. In addition
to this the Group’s 50% equity share in Scotia Gas Networks Limited, a business which distributes gas in Scotland and the South of England
(refer note 14), 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, Utility
Solutions and
Lighting Services
UK
Metering
Gas Storage
UK
Exploration and Production UK
UK
Telecoms
UK and Ireland 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, licenced 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.
Production and processing of North Sea gas and oil and the development of new gas and oil fields.
Provides network capacity, data centre and bandwidth services to customers.
The activities of the acquired Exploration and Production business (note 16) are reported within Other businesses.
The measure of profit used by the Board is adjusted operating profit which is before exceptional items, remeasurements arising from IAS 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.
97
Overview
Strategy
Group performance
Segmental performance
Corporate governance
Financial statements
Shareholder information
(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
2011
£m
356.7
517.2
873.9
8,044.4
18,899.9
222.9
27,167.2
1,219.9
29,261.0
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
2011
£m
111.0
214.1
325.1
–
17.1
15.8
32.9
568.8
926.8
2010
£m
105.5
212.2
317.7
–
12.0
7.8
19.8
519.7
857.2
2011
£m
245.7
303.1
548.8
8,044.4
18,882.8
207.1
27,134.3
651.1
2010
£m
203.6
261.3
464.9
8,234.4
11,988.3
208.6
20,431.3
654.2
28,334.2
21,550.4
(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 services, use of Gas Storage facilities, sale of gas from producing North Sea gas production assets to the Generation and Supply
business, 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 Limited (SSE share being: 2011 – £392.5m; 2010 – £373.5m) is not recorded
in the revenue line in the income statement.
Revenue by geographical location is as follows:
UK
Ireland plus Continental Europe
(b) operating profit by segment
power systems
Scotland
England
Scotia Gas Networks
Energy systems
Generation and supply
other businesses
Unallocated expenses (ii)
2011
£m
27,666.6
667.6
28,334.2
2010
£m
21,123.2
427.2
21,550.4
2011
adjusted
operating profit
Exceptional
reported to the share of interest items and certain items and certain
and tax (i) remeasurements remeasurements
£m
Before
exceptional
Board (i)
£m
JcE/associate
£m
£m
168.1
287.4
455.5
186.8
642.3
882.8
136.8
1,661.9
(9.0)
1,652.9
–
–
–
(150.7)
(150.7)
(47.1)
(0.3)
(198.1)
–
(198.1)
168.1
287.4
455.5
36.1
491.6
835.7
136.5
1,463.8
(9.0)
1,454.8
–
–
–
38.4
38.4
874.6
–
913.0
–
913.0
total
£m
168.1
287.4
455.5
74.5
530.0
1,710.3
136.5
2,376.8
(9.0)
2,367.8
Scottish and Southern Energy
Annual Report 2011
98
Notes on the financial statements (continued)
for the year ended 31 March
3. sEGmEntal information (continued)
2010
Adjusted
operating profit
JCE/Associate
reported to the share of interest
Before
exceptional
items and certain
Exceptional
items and certain
and tax (i) remeasurements remeasurements
£m
£m
£m
power systems
Scotland
England
Scotia Gas Networks
Energy systems
Generation and supply
other businesses
Unallocated expenses (ii)
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
–
–
–
(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
(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, £33.4m (2010 – £33.8m), as finance income (note 7).
(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 (£1.0m before tax; 2010 – £0.9m before tax).
(c) capital expenditure
power systems
Scotland
England
Scotia Gas Networks
Energy systems
Generation and supply
other businesses
corporate and unallocated
Capital additions to
Intangible Assets (note 11)
Capital additions to Property,
Plant and Equipment (note 12)
2011
£m
2010
£m
–
–
–
–
–
432.7
–
1.3
434.0
–
–
–
–
–
484.7
–
1.6
486.3
2011
£m
216.2
207.9
424.1
–
424.1
560.4
175.0
–
2010
Restated
£m
145.7
227.3
373.0
–
373.0
487.9
164.8
–
1,159.5
1,025.7
Capital additions do not include assets acquired in acquisitions or assets acquired under finance leases. Capital additions to Intangible
Assets includes the purchase of emissions allowances and certificates (2011 – £399.3m; 2010 – £470.9m).
No segmental analysis of assets requires to be disclosed as this is not presented to the Board.
99
Overview
Strategy
Group performance
Segmental performance
Corporate governance
Financial statements
Shareholder information
(d) included within operating profit
Depreciation/impairment on Property, Plant and Equipment (note 12)
Amortisation/impairment
of Intangible Assets (note 11)
power systems
Scotland
England
Generation and supply
other businesses
corporate and unallocated
Before
exceptional
items
2011
£m
Exceptional
charges
2011
£m
108.6
149.3
257.9
175.9
62.9
496.7
–
496.7
–
–
–
442.7
–
442.7
–
442.7
total
2011
£m
108.6
149.3
257.9
618.6
62.9
939.4
–
939.4
2010
Restated
£m
58.4
108.3
166.7
182.4
45.8
394.9
–
394.9
2011
£m
–
–
–
98.9
1.1
100.0
3.7
103.7
2010
£m
–
–
–
15.8
2.6
18.4
3.8
22.2
The Group’s share of Scotia Gas Networks Limited depreciation (2011 – £52.3m; 2010 – £48.3m) and amortisation (2011 – £4.8m; 2010 – £4.8m)
is not included within operating costs. Exceptional impairments of intangible assets of £82.2m were recognised in 2011 (2010 – nil) all relating
to the Generation and Supply segment.
4. otHEr opEratinG incomE anD ExpEnsE
Group operating costs can be analysed thus:
Distribution costs
Administration costs
Group operating profit is stated after charging (or crediting) the following items:
Depreciation of property, plant and equipment (note 12) (i)
Exceptional impairment charges (note 5)
Impairment of inventories (note 17)
Research and development costs
Operating lease rentals (note 33)
Release of deferred income in relation to capital grants and historic customer contributions
(Gain) on disposal of property, plant and equipment
(Gain)/loss on disposal of fixed asset investments
Amortisation of brand costs (note 11)
Amortisation and impairment of intangible assets (note 11) (i)
(i) Does not include exceptional impairment charges.
Auditor’s remuneration
Statutory audit services – audit of the Group’s accounts
Statutory audit of subsidiary accounts
Audit of parent and subsidiary entities
Tax services
Other services
2011
£m
371.1
514.9
886.0
2011
£m
496.7
524.9
6.6
9.0
219.7
(19.6)
(5.8)
(10.2)
0.9
20.6
2011
£m
0.3
0.7
1.0
0.2
0.1
2010
Restated
(note 2)
£m
259.0
463.2
722.2
2010
£m
394.9
–
3.0
3.7
271.2
(15.2)
(5.7)
0.1
1.0
21.2
2010
£m
0.2
0.7
0.9
0.2
0.1
Scottish and Southern Energy
Annual Report 2011
100
Notes on the financial statements (continued)
for the year ended 31 March
4. otHEr opEratinG incomE anD ExpEnsE (continued)
Tax service fees incurred in the year were £0.2m (2010 – £0.2m). Other service fees include fees incurred 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.
5. ExcEptional itEms anD cErtain rEmEasurEmEnts
(i) Exceptional items
In the year to 31 March 2011 the following exceptional items have been recorded:
Impairment of thermal and renewable generation portfolio assets arising from changing market conditions. Exceptional charges have been
recognised in relation to the impairment of goodwill (£42.5m), property, plant and equipment (£442.7m), development intangible assets (£39.7m)
and financial assets (£7.4m). In addition, related net credits of £10.5m have been recognised, including £8.8m relating to finance costs.
These were recognised as a consequence of changing regulatory and economic conditions, in particular, (i) the impact of the Industrial
Emissions Directive on station running hours and useful economic lives at certain plants including the Fiddler’s Ferry and Ferrybridge
power stations; (ii) the consequential impact on the ash remediation plant at Fiddler’s Ferry, (iii) changes in the economic prospects of
certain older, less flexible thermal plants, and, (iv) the decision to concentrate continental Europe wind generation activities on the Sweden
and Netherlands markets.
Impairment of Investments in Associates. Exceptional impairment charges have been recognised in relation to the Group’s investments in
Barking Power Limited and Derwent Cogeneration Limited following the expiry of long-term power purchase agreements at both stations.
In addition, certain other investments have been impaired. The combined impairment charges are £76.3m net of deferred tax.
Changes in UK corporation tax rates. The Emergency Budget on 22 June 2010 announced that the UK corporation tax rate will reduce from
28% to 24% over a period of four years from 2011. The first change from 28% to 27% was substantially enacted in July 2010 and applies from
1 April 2011. The March 2011 Budget further reduced the tax rate from 1 April 2011 to 26%. This was substantively enacted on 29 March 2011.
These changes will reduce the Group’s future current tax charge accordingly. As this rate change has been substantively enacted it has the
effect of reducing the Group’s net deferred tax liabilities recognised at 31 March 2011 by £49.4m. It has not yet been possible to quantify the
full anticipated effect of the announced further 3% rate reduction (the rate now being reduced to 23%) due to legislation not being enacted,
although this will further reduce the Company’s future current tax charge and reduce the Company’s deferred tax liabilities/assets accordingly.
In addition, the March 2011 Budget increased the rate of supplementary corporation tax (SCT) from 20% to 32% and was also substantively
enacted on 29 March 2011. This had the effect of increasing the Group’s deferred tax liabilities and assets in relation to the Group’s
Exploration and Production (E&P) business to which this supplementary tax applies. The impact on the Group’s net deferred tax liabilities
was an increase of £31.7m.
(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 31.
101
Overview
Strategy
Group performance
Segmental performance
Corporate governance
Financial statements
Shareholder information
(iii) taxation
The Group has separately recognised the tax effect of the exceptional items and certain remeasurements summarised above.
These transactions can be summarised thus:
Exceptional items (i)
Impairments and other charges:
Impairment of Generation assets arising from changing market conditions
Impairment of Investments in Associates (share of result, net of tax)
Share of effect of change in UK corporation tax on deferred tax liabilities
and assets of associate and joint venture investments
Certain remeasurements (ii)
Movement on operating derivatives (note 31)
Movement on financing derivatives (note 31)
Share of movement on derivatives in jointly controlled entities (net of tax)
Gain before taxation
Exceptional items
Effect of change in UK corporation tax rate on deferred tax liabilities and assets
Effect of change in UK supplementary corporation tax rate
Taxation on other exceptional items
Taxation on certain remeasurements
taxation
Impact on profit for the year
6. DirEctors anD EmployEEs
(i) staff costs
Staff costs:
Wages and salaries
Social security costs
Share-based remuneration (note 30)
Pension costs (note 29)
Less: capitalised as property, plant and equipment
Employee numbers:
Numbers employed at 31 March
2011
£m
2010
£m
(521.8)
(76.3)
36.3
(561.8)
1,461.8
(44.4)
4.2
1,421.6
859.8
49.4
(31.7)
126.1
143.8
(396.2)
(252.4)
–
–
–
–
–
432.2
(36.5)
2.9
398.6
398.6
–
–
–
–
(110.9)
(110.9)
607.4
287.7
Consolidated
2011
£m
609.4
63.1
9.9
54.6
737.0
(108.6)
628.4
2010
£m
574.9
53.8
17.9
37.9
684.5
(87.4)
597.1
Consolidated
Company
2011
number
20,249
2010
Number
20,177
2011
number
4
2010
Number
4
Scottish and Southern Energy
Annual Report 2011
102
Notes on the financial statements (continued)
for the year ended 31 March
6. DirEctors anD EmployEEs (continued)
The average number of people employed by the Group (including Executive Directors) during the year was:
Power Systems:
Scotland
England
Generation and Supply
Other businesses and corporate services
Consolidated
Company
2011
number
2010
Number
2011
number
2010
Number
791
1,347
9,334
8,794
789
1,299
9,007
8,213
20,266
19,308
–
–
–
4
4
–
–
–
4
4
The costs associated with the employees of the Company, who are the Executive Directors of the Group, are borne by Group companies.
No amounts are charged to the Company.
(ii) Directors’ remuneration and interests
Information concerning Directors’ remuneration, shareholdings, options, long term incentive schemes and pensions is shown in the
Remuneration Report on pages 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.
7. financE incomE anD costs
recognised in income statement
2011
2010
Before
exceptional
Exceptional
items and certain items and certain
remeasurements remeasurements
£m
£m
Before
exceptional
items and certain
Exceptional
items and certain
total remeasurements remeasurements
£m
£m
£m
finance income:
Return on pension scheme assets
Interest income from short term deposits
Other interest receivable:
Scotia Gas Networks loan stock
Other jointly controlled entities and associates
Other receivable
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
Notional interest arising on discounted provisions
Finance lease charges
Foreign exchange translation of monetary assets
and liabilities
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
141.9
2.7
33.4
23.1
49.1
105.6
–
250.2
(58.1)
(247.1)
(150.2)
(4.3)
(39.7)
(13.2)
59.5
(453.1)
–
(202.9)
250.2
(453.1)
(202.9)
–
–
–
–
–
–
–
–
–
(8.8)
–
–
–
–
–
(8.8)
(44.4)
(53.2)
–
(53.2)
(53.2)
141.9
2.7
33.4
23.1
49.1
105.6
–
250.2
(58.1)
(255.9)
(150.2)
(4.3)
(39.7)
(13.2)
59.5
(461.9)
(44.4)
(256.1)
250.2
(506.3)
(256.1)
100.7
3.5
33.8
20.1
35.1
89.0
10.0
203.2
(49.9)
(284.1)
(127.5)
(3.5)
(13.2)
–
46.2
(432.0)
–
(228.8)
203.2
(432.0)
(228.8)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(36.5)
(36.5)
–
(36.5)
(36.5)
(i) The capitalisation rate applied in determining the amount of borrowing costs to capitalise in the period was 5.74% (2010 – 6.62%).
Total
£m
100.7
3.5
33.8
20.1
35.1
89.0
10.0
203.2
(49.9)
(284.1)
(127.5)
(3.5)
(13.2)
–
46.2
(432.0)
(36.5)
(265.3)
203.2
(468.5)
(265.3)
recognised in equity
Gain/(loss) on effective portion of cash flow hedges (i)
Share of jointly controlled entity/associate (loss) on effective portion of cash flow hedges (i)
(i) Before deduction of tax.
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
Exceptional charges
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
8. taxation
Analysis of charge recognised in the income statement:
2011
2010
Before
exceptional
Exceptional
items and certain items and certain
remeasurements remeasurements
£m
£m
Before
exceptional
items and certain
Exceptional
items and certain
total remeasurements remeasurements
£m
£m
£m
current tax
UK corporation tax
Adjustments in respect of previous years
Total current tax
Deferred tax
Current year
Effect of change in tax rates
Adjustments in respect of previous years
Total deferred tax
270.2
(25.0)
245.2
60.8
–
48.8
109.6
–
–
–
234.7
17.7
–
252.4
270.2
(25.0)
245.2
295.5
17.7
48.8
362.0
277.4
(19.1)
258.3
32.2
–
1.7
33.9
–
–
–
110.9
–
–
110.9
Total taxation charge
354.8
252.4
607.2
292.2
110.9
403.1
103
Overview
Strategy
Group performance
Segmental performance
Corporate governance
Financial statements
Shareholder information
2011
£m
32.3
(4.1)
28.2
2010
£m
(26.6)
(30.0)
(56.6)
2011
£m
2010
£m
(256.1)
(265.3)
(33.4)
(106.5)
(139.9)
8.8
44.4
(342.8)
(141.9)
150.2
4.3
39.7
(290.5)
(33.8)
(73.3)
(107.1)
–
36.5
(335.9)
(100.7)
127.5
3.5
13.2
(292.4)
Total
£m
277.4
(19.1)
258.3
143.1
–
1.7
144.8
Scottish and Southern Energy
Annual Report 2011
104
Notes on the financial statements (continued)
for the year ended 31 March
8. taxation (continued)
The charge for the year can be reconciled to the profit per the income statement as follows:
Group profit before tax
Less: share of results of associates and jointly controlled entities
profit before tax
Tax on profit on ordinary activities at standard UK corporation
tax rate of 28% (2010 – 28%)
Tax effect of:
Change in rate of UK corporation tax
Change in rate of UK supplementary corporation tax
Expenses not deductible for tax purposes
Impact of supplementary corporation tax
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
Other items
Group tax charge and effective rate
The adjusted current tax charge is arrived at after the following adjustments:
Total taxation charge
Effect of adjusting items (see below)
Total taxation charge on adjusted basis
(add)/less:
Share of current tax from jointly controlled entities and associates
Exceptional items
Tax on movement on derivatives
Deferred tax (excluding share of jointly controlled entities)
Adjusted current tax charge and effective rate
The adjusted effective rate is based on adjusted profit before tax being:
Profit before tax
(add)/less:
Exceptional items and certain remeasurements
Share of tax from jointly controlled entities and associates
Adjusted profit before tax
Tax charge/(credit) recognised directly in equity
Relating to:
Pension scheme actuarial movements
Cash flow and net investment hedge movements
Share based payments
All tax recognised directly in equity is deferred tax.
2011
£m
2,111.7
(64.9)
2,046.8
573.1
(49.4)
31.7
27.6
2.2
(4.3)
6.4
23.8
(9.0)
5.1
607.2
2011
£m
607.2
–
607.2
23.0
143.8
(396.2)
(109.6)
268.2
2011
%
28.0
(2.4)
1.5
1.3
0.1
(0.2)
0.3
1.2
(0.4)
0.3
29.7
2011
%
29.7
16.6
46.3
1.8
11.0
(30.2)
(8.4)
20.5
2010
£m
1,638.6
(109.8)
1,528.8
428.1
–
–
7.6
–
(2.3)
(0.2)
(17.4)
(9.8)
(2.9)
403.1
2010
£m
403.1
–
403.1
15.8
–
(110.9)
(33.9)
274.1
2011
£m
2010
%
28.0
–
–
0.5
–
(0.2)
–
(1.1)
(0.6)
(0.2)
26.4
2010
%
26.4
4.8
31.2
1.2
–
(8.6)
(2.6)
21.2
2010
£m
2,111.7
1,638.6
(859.8)
58.2
1,310.1
(398.6)
50.1
1,290.1
2011
£m
7.9
7.1
0.6
15.6
2010
£m
(142.5)
(15.3)
0.4
(157.4)
105
Overview
Strategy
Group performance
Segmental performance
Corporate governance
Financial statements
Shareholder information
9. DiViDEnDs
ordinary dividends
Interim – year ended 31 March 2011
Final – year ended 31 March 2010
Interim – year ended 31 March 2010
Final – year ended 31 March 2009
year ended
31 march 2011
total
£m
208.3
451.5
–
–
659.8
settled
via scrip
£m
61.7
84.4
–
–
146.1
pence per
ordinary share
Year ended
31 March 2010
Total
£m
Pence per
Ordinary Share
22.4
49.0
–
–
–
–
193.4
425.1
618.5
–
–
21.0
46.2
The final dividend of 49.0p per Ordinary Share declared in the financial year ended 31 March 2010 (2009 – 46.2p) was approved at the Annual
General Meeting on 22 July 2010 and was paid to shareholders on 24 September 2010. Shareholders were able to elect to receive Ordinary
Shares credited as fully paid instead of the cash dividend under the terms of the Company’s scrip dividend scheme.
An interim dividend of 22.4p per Ordinary Share (2010 – 21.0p) was declared and paid on 25 March 2011 to those shareholders on the Scottish
and Southern Energy plc share register on 28 January 2011. Shareholders were able to elect to receive Ordinary Shares credited as fully paid
instead of the interim cash dividend under the terms of the Company’s scrip dividend scheme.
The proposed final dividend of 52.6p per Ordinary Share is subject to approval by shareholders at the Annual General Meeting and has not
been included as a liability in these financial statements.
10. EarninGs pEr sHarE
Basic earnings per share
The calculation of basic earnings per Ordinary Share at 31 March 2011 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 2011. All earnings are from continuing operations.
adjusted earnings per share
Adjusted earnings per share has been calculated by excluding the charge for deferred tax, items disclosed as exceptional, and the impact
of certain remeasurements as described in note 5.
Basic
Exceptional items and certain remeasurements (note 5)
Basic excluding exceptional items and certain remeasurements
Adjusted for:
Deferred tax (note 8)
Deferred tax from share of jointly controlled entities and associates results
adjusted
Basic
Dilutive effect of convertible debt and outstanding share options
Diluted
Exceptional items and certain remeasurements
Diluted excluding exceptional items and certain remeasurements
(i) Earnings attributable to equity holders of the parent.
year ended
31 march 2011
Earnings (i)
£m
year ended
31 march 2011
Earnings
per share
pence
Year ended
31 March 2010
Earnings (i)
£m
Year ended
31 March 2010
Earnings
per share
pence
1,504.5
(607.4)
897.1
109.6
35.2
1,041.9
1,504.5
–
1,504.5
(607.4)
897.1
162.2
(65.5)
96.7
11.8
3.8
112.3
162.2
(0.2)
162.0
(65.4)
96.6
1,235.3
(287.7)
947.6
33.9
34.3
1,015.8
1,235.3
–
1,235.3
(287.7)
947.6
134.0
(31.2)
102.8
3.7
3.7
110.2
134.0
(0.1)
133.9
(31.2)
102.7
Scottish and Southern Energy
Annual Report 2011
106
Notes on the financial statements (continued)
for the year ended 31 March
10. EarninGs pEr sHarE (continued)
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
11. intanGiBlE assEts
consolidated
31 march 2011
number of
shares
(millions)
31 March 2010
Number of
shares
(millions)
927.6
1.1
928.7
–
928.7
921.9
0.4
922.3
0.7
923.0
Goodwill
£m
Allowances and
certificates
(i)
£m
Development
assets
(ii)
£m
Exploration and
evaluation
expenditure
(iii)
£m
Brands
(iv)
£m
Other
intangibles
(v)
£m
cost:
At 1 April 2009
Additions
Acquisitions (note 16)
Transfer to property, plant and
equipment (note 12)
Disposals
Exchange adjustments
At 31 March 2010
Additions
Acquisitions (note 16)
Transfer to property, plant and
equipment (note 12)
Transfer to assets held for sale (note 16)
Disposals
Exchange adjustments
at 31 march 2011
aggregate amortisation and impairment:
At 1 April 2009
Charge for the year
At 31 March 2010
Charge for the year
Exceptional impairment (note 5)
at 31 march 2011
carrying amount:
at 31 march 2011
At 31 March 2010
At 1 April 2009
724.0
–
18.5
–
–
(16.2)
726.3
3.8
39.9
–
–
–
(42.2)
727.8
–
–
–
–
(42.5)
(42.5)
685.3
726.3
724.0
The Company does not hold intangible assets.
220.3
470.9
–
–
(461.5)
–
229.7
399.3
–
–
–
(287.0)
–
342.0
(6.4)
(10.0)
(16.4)
–
–
(16.4)
325.6
213.3
213.9
220.3
13.8
49.0
(11.7)
–
(7.3)
264.1
29.6
6.4
(3.8)
(10.7)
(0.6)
(11.5)
273.5
(4.2)
(3.1)
(7.3)
(15.1)
(39.7)
(62.1)
211.4
256.8
216.1
Total
£m
1,236.2
486.3
69.5
(11.7)
(461.5)
(23.5)
1,295.3
434.0
96.3
(3.8)
(10.7)
(287.6)
(53.6)
–
–
–
–
–
–
–
–
50.0
–
–
–
–
11.8
–
–
–
–
–
11.8
–
–
–
–
–
–
59.8
1.6
2.0
–
–
–
63.4
1.3
–
–
–
–
0.1
50.0
11.8
64.8
1,469.9
–
–
–
–
–
–
50.0
–
–
(4.8)
(1.0)
(5.8)
(0.9)
–
(6.7)
5.1
6.0
7.0
(29.9)
(8.1)
(38.0)
(5.5)
–
(43.5)
(45.3)
(22.2)
(67.5)
(21.5)
(82.2)
(171.2)
21.3
25.4
29.9
1,298.7
1,227.8
1,190.9
Intangible assets have been analysed as current and non-current as follows:
Current
Non-current:
Goodwill
Other
107
Overview
Strategy
Group performance
Segmental performance
Corporate governance
Financial statements
Shareholder information
2011
£m
325.6
685.3
287.8
2010
£m
213.3
726.3
288.2
1,298.7
1,227.8
(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, including wind
farms, which the Group believes will generate probable future economic benefits. Costs capitalised as development intangibles include
options over land rights, planning application costs, environmental impact studies and other costs incurred in bringing wind farm and
other projects to the consented stage. These may be costs incurred directly or at cost as part of the fair value attribution on acquisition.
At the point the development reaches the consented stage and is approved for construction, the carrying value is transferred to Property,
Plant and Equipment (note 12). At the point a project is no longer expected to reach the consented stage, the carrying amount of the
project is impaired. The acquisitions in the year are summarised in note 16. An exceptional impairment was recognised in the year
in relation to European Wind Farms (£39.7m) and this is commented upon further below and in notes 5 and 12.
(iii) Exploration and evaluation expenditure
The Group’s accounting policies for exploration and evaluation expenditure in relation to exploration wells are explained in note 1.
The assets acquired in the year were from the acquisition of the Hess exploration and production assets (note 16).
(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
Exploration and Production
Other (i)
operating segment
Generation and Supply
Generation and Supply
Generation and Supply
Generation and Supply
Generation and Supply
Other Businesses
Other Businesses
Other Businesses
2011
£m
155.9
199.9
24.3
187.0
10.1
56.2
38.1
13.8
685.3
2010
£m
160.3
232.0
24.4
187.0
52.6
56.2
–
13.8
726.3
(i) Represents goodwill balances across a number of business units primarily Contracting and Telecoms. 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, Exploration and Production 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.
Scottish and Southern Energy
Annual Report 2011
108
Notes on the financial statements (continued)
for the year ended 31 March
11. intanGiBlE assEts (continued)
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.
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
Exploration and Production
2011
Discount rate
(%)
2010
Discount rate
(%)
7.0%-9.0%
8.3%
8.3%
8.3%
8.0%-10.0%
7.0%-9.0%
7.7%
8.3%
8.3%
–
2011 and 2010
Cash flow
projection
period (years)
25
5
15
20
Life of field
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 real 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 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 SSE Renewables (formerly
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
Following the disposal of certain European assets and the exceptional impairment of certain intangible assets following restructuring of the
European wind portfolio (£39.7m), no impairment of the related goodwill balance is required.
The recoverable amounts of the UK and Ireland wind farm 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.
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
109
Overview
Strategy
Group performance
Segmental performance
Corporate governance
Financial statements
Shareholder information
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 acquisitions of the Fiddler’s Ferry and Ferrybridge (FFF), Uskmouth, Abernedd and Medway power
stations and developments was 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. Most of the goodwill was derived from deferred tax temporary
differences on the recognition of the fair value of assets acquired.
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 real rate of
8.3%, in line with the previous year. Growth has been assumed to follow the expected operational availability of the plants within the CGU
over the period noted.
Outcome of test
Following the specific impairment exercises carried out in relation to the thermal generation plant referred to in note 12, all related goodwill
has been written off. This has resulted in a charge of £42.5m. This impairment is part of the exceptional item in note 5.
Following the specific asset impairment adjustments, the recoverable amount of assets included in the main UK Generation CGU exceeded
the 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 test outcome.
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.
Exploration and production
Goodwill was recognised on the purchase of the North Sea gas exploration and production assets in 2010/11 (note 16). Goodwill has been
attributed to three cash generating units being the three main field development areas (Bacton, Easington Catchment Area (ECA) and
Lomond/Everest) and their supporting infrastructure assets. Indications of impairment at asset/field level are investigated separately.
All goodwill was derived from the recognition of deferred tax temporary liabilities.
The impairment test assumptions are based on forward prices of gas or oil, timing of cash flows including capital and abandonment costs,
reserves information and discount rates.
Outcome of test
The recoverable amount of all Exploration and Production CGUs 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 recoverable
amount would not cause a change to the test outcome.
Scottish and Southern Energy
Annual Report 2011
110
Notes on the financial statements (continued)
for the year ended 31 March
12. propErty, plant anD EquipmEnt
consolidated
cost:
At 31 March 2009
Additions
Recognition of finance leases (vii)
Acquisitions (note 16) (iv)
Transfer from Intangible Assets (note 11) (v)
Disposals
Exchange rate adjustments
At 31 March 2010
Additions
Acquisitions (note 16) (iv)
Change in decommissioning asset values
Transfer from Intangible Assets (note 11) (v)
Transfer to Held for Sale
Disposals (iii)
Exchange rate adjustments
at 31 march 2011
Depreciation:
At 1 April 2009
Charge for the year
Disposals
Exchange rate adjustments
At 31 March 2010
Charge for the year
Exceptional impairments (vi)
Transfer to Held for Sale
Disposals (iii)
Exchange rate adjustments
at 31 march 2011
net book value
at 31 march 2011
At 31 March 2010
At 1 April 2009
Power
generation
assets (i)
£m
Gas storage
and production
assets (ii)
£m
Land and
buildings
£m
Vehicles and
Network miscellaneous
equipment (ii)
£m
assets
£m
211.3
29.2
–
7.3
–
–
–
247.8
12.4
19.5
–
–
–
(0.8)
–
5,239.7
425.7
–
7.5
–
(2.2)
–
5,670.7
489.5
–
–
–
–
(0.7)
–
294.9
39.3
–
5.2
–
(65.5)
(0.7)
273.2
50.3
–
–
–
–
(3.1)
–
Total
£m
10,713.1
1,025.7
387.8
26.4
11.7
(135.6)
(35.9)
11,993.2
1,159.5
388.6
32.7
3.8
(253.6)
(77.8)
(72.0)
278.9
6,159.5
320.4
13,174.4
31.6
5.7
–
–
37.3
7.3
–
–
(0.8)
–
2,078.1
183.5
(0.7)
–
2,260.9
279.9
–
–
(0.1)
–
195.1
21.9
(35.8)
(0.5)
180.7
19.0
–
–
(3.1)
–
3,480.9
394.9
(82.6)
(4.2)
3,789.0
496.7
442.7
(48.7)
(17.3)
(1.1)
43.8
2,540.7
196.6
4,661.3
331.2
46.5
–
–
–
(0.8)
–
376.9
52.6
305.2
–
–
–
–
–
734.7
48.4
4.0
(0.1)
–
52.3
14.2
–
–
–
–
66.5
668.2
324.6
282.8
235.1
210.5
179.7
3,618.8
3,409.8
3,161.6
123.8
92.5
99.8
8,513.1
8,204.2
7,232.2
4,636.0
485.0
387.8
6.4
11.7
(67.1)
(35.2)
5,424.6
554.7
63.9
32.7
3.8
(253.6)
(73.2)
(72.0)
5,680.9
1,127.7
179.8
(46.0)
(3.7)
1,257.8
176.3
442.7
(48.7)
(13.3)
(1.1)
1,813.7
3,867.2
4,166.8
3,508.3
(i) Power generation assets comprise thermal and renewable generating stations, related buildings, plant and machinery and include all hydro civil and operating
wind farm assets. Previous accounts included gas storage assets with power generation assets. These are now disclosed separately along with North Sea gas
production assets. The net book value of generation assets includes decommissioning costs with a net book value of £62.3m (2010 – £22.0m). This increase
was offset by a corresponding increase in the level of decommissioning provisions (note 25).
(ii) Gas storage and production assets include decommissioning costs with a net book value of £81.7m (2010 – £6.9m). The decommissioning asset relating to
the office and computer equipment (included in Vehicles and Miscellaneous Equipment) was £3.8m (2010 – £3.8m). This arises from the Group’s obligations
under the EU Waste Electrical and Electronic Equipment (WEEE) directive.
(iii) Assets disposed includes the Ardrossan and Butendiek wind assets (see note 16) and assets which have been replaced after damage or obsolescence in the year.
(iv) In the year to 31 March 2011, assets acquired in business combinations included North Sea gas production assets and the Waterloo Street, Glasgow office
building. In the previous year, business combination acquired assets included coal fired generation assets at Uskmouth, the network assets at Atlasconnect,
Cantono telecom data centre assets and the operational assets of the ESBC Streetlighting business. See note 16.
(v) Represents the carrying value of development assets transferred from intangible assets (note 11) which have reached the consent stage and have been
approved for construction.
(vi) A number of Power Generation assets were impaired due to a combination of the effect of the Industrial Emissions Directive on station running hours
and other economic factors.
111
Overview
Strategy
Group performance
Segmental performance
Corporate governance
Financial statements
Shareholder information
(vii) This relates to the recognition of Marchwood Power Ltd as a finance lease asset.
At the balance sheet date the cumulative amounts capitalised in respect of assets in the course of construction were as follows:
Power Generation assets
Gas storage and production assets
Network assets
Corporate Land and Buildings
Included within property, plant and equipment are the following assets held under finance leases:
2011
£m
647.0
120.4
188.2
5.7
961.3
cost
At 1 April 2009
Additions
at 31 march 2010 and at 31 march 2011
Depreciation
At 1 April 2009
Charge for the year
At 31 March 2010
Charge for the year
at 31 march 2011
net book value
at 31 march 2011
At 31 March 2010
At 1 April 2009
Power
generation
assets
£m
Network
assets
£m
Vehicles and
miscellaneous
equipment
£m
–
387.8
387.8
–
11.3
11.3
18.5
29.8
358.0
376.5
–
5.0
–
5.0
5.0
–
5.0
–
5.0
–
–
–
7.0
–
7.0
7.0
–
7.0
–
7.0
–
–
–
2010
£m
519.6
264.4
204.7
1.9
990.6
Total
£m
12.0
387.8
399.8
12.0
11.3
23.3
18.5
41.8
358.0
376.5
–
The Company does not hold any property, plant or equipment.
13. BioloGical assEts
The Group acquired approximately 2,394 hectares of forest land including planted trees during the previous financial year. The living trees
are accounted for as biological assets and are subject to a fair value reassessment each year.
At 1 April 2009
Purchased in the year
At 1 April 2010 and 31 March 2011
2011
£m
–
4.4
4.4
The pre-tax discount rate used in determining the fair value in 2011 was 8% (2010 – 8%). A 2.0% decrease/(increase) in the discount rate
would increase/(decrease) the fair value of biological assets by approximately £0.6m (2010 – £0.6m). No trees were harvested during the year.
The Company does not hold any biological assets.
Scottish and Southern Energy
Annual Report 2011
112
Notes on the financial statements (continued)
for the year ended 31 March
14. inVEstmEnts
(a) associates and Joint Ventures
consolidated
share of net assets/cost
At 31 March 2009
Transfer (out)/in (i)
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
At 31 March 2010
New equity investments
Increase in shareholder loans
Repayment of shareholder loans
Conversion of loan to equity
Transfer to Held For Sale
Dividends received
Share of profit after tax
Share of other reserves adjustments
Disposal
Exchange rate adjustments
Equity
Loans
SGN
£m
JCEs Associates
£m
£m
157.6
–
–
–
–
–
–
–
55.6
(57.8)
–
155.4
–
–
–
–
–
(30.0)
74.5
(8.9)
–
–
257.1
(8.6)
(1.0)
16.8
–
–
–
(8.5)
28.9
(14.0)
(6.7)
264.0
24.0
–
–
–
(63.7)
(26.5)
56.0
(5.2)
(13.7)
(3.4)
138.7
18.8
–
45.0
–
–
3.2
(15.2)
25.3
–
–
215.8
176.3
–
–
37.0
–
(25.2)
(65.6)
–
–
–
Equity
total
£m
553.4
10.2
(1.0)
61.8
–
–
3.2
(23.7)
109.8
(71.8)
(6.7)
635.2
200.3
–
–
37.0
(63.7)
(81.7)
64.9
(14.1)
(13.7)
(3.4)
760.8
SGN
£m
JCEs Associates
£m
£m
266.9
–
–
–
16.6
(16.6)
–
–
–
–
–
266.9
–
–
–
–
–
–
–
–
–
–
401.9
–
–
–
273.3
(17.9)
–
–
–
–
–
657.3
–
199.8
(13.3)
–
–
–
–
–
–
–
3.0
–
–
–
46.5
–
(3.2)
–
–
–
–
46.3
–
4.6
–
(37.0)
–
–
–
–
–
–
loans
total
£m
671.8
–
–
–
336.4
(34.5)
(3.2)
–
–
–
–
970.5
–
204.4
(13.3)
(37.0)
–
–
–
–
–
–
total
£m
1,225.2
10.2
(1.0)
61.8
336.4
(34.5)
–
(23.7)
109.8
(71.8)
(6.7)
1,605.7
200.3
204.4
(13.3)
–
(63.7)
(81.7)
64.9
(14.1)
(13.7)
(3.4)
266.9
843.8
13.9
1,124.6
1,885.4
at 31 march 2011
191.0
231.5
338.3
Investments in Jointly Controlled Entities (JCEs) and Associates have been presented in a different format (see note 2).
(i) Transfers (out)/in in the previous financial year represented £8.6m of investment in Aquamarine Power Limited which was 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 there was
a subsequent £7.0m increase in stakeholding from 17.5% to 49.9%, and £0.2m in relation to Smarter Grid Solutions Limited, which was transferred
to associates following an increase in the Group’s shareholding from 12.5% to 29.9%.
The investment in Scotia Gas Networks is disclosed separately to aid understanding of the Group’s financial performance.
company
share of net assets/cost
At 31 March 2009
Transfer (out)/in (i)
New equity investments
Increase in shareholder loans
Repayment of shareholder loans
At 31 March 2010
Increase in shareholder loans
Disposal
at 31 march 2011
Equity
Other
JCEs and
SGN Associates
£m
£m
190.0
–
–
–
–
190.0
–
–
190.0
–
10.0
7.0
–
–
17.0
–
(17.0)
–
Equity
total
£m
190.0
10.0
7.0
–
–
207.0
–
(17.0)
190.0
Loans
Other
JCEs and
SGN Associates
£m
£m
266.9
–
–
16.6
(16.6)
266.9
–
–
266.9
306.4
–
–
262.0
–
568.4
194.2
–
loans
total
£m
573.3
–
–
278.6
(16.6)
835.3
194.2
–
total
£m
763.3
10.0
7.0
278.6
(16.6)
1,042.3
194.2
(17.0)
762.6
1,029.5
1,219.5
113
Overview
Strategy
Group performance
Segmental performance
Corporate governance
Financial statements
Shareholder information
Details of the principal jointly controlled entities, operations and associates are as follows:
country of incorporation
31 march 2011
Holding %
31 March 2010
Holding % principal activity
Jointly controlled Entities
Scotia Gas Networks Limited (v)
Greater Gabbard Offshore Winds Limited (vi)
Marchwood Power Limited (i)
PriDE (SERP) Limited (ii)
Seabank Power Limited (iii)
England and Wales
England and Wales
England and Wales
England and Wales
England and Wales
associates
Walney (UK) Offshore Windfarms Limited (vi)
Barking Power Limited (i)
Derwent Co-generation Limited (i)
Aquamarine Power Limited (iv)
England and Wales
England and Wales
England and Wales
Scotland
50.0
50.0
50.0
50.0
50.0
25.1
30.4
49.5
43.2
50.0 Gas distribution networks
50.0 Offshore wind development
50.0 Electricity generation
50.0 Defence estates contractor
50.0 Electricity generation
25.1 Offshore wind development
30.4 Electricity generation
49.5 Electricity generation
47.8 Marine energy conversion
Jointly controlled operations
(unincorporated)
Aldbrough
England
66.7
66.7 Development of gas storage facility
location of operations
31 march 2011
Holding %
31 March 2010
Holding % principal activity
The above companies’ shares consist of Ordinary Shares only except for Aquamarine Power Limited, which has deferred shares. 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. The Group has a number of other joint and associate investments that
are not considered significant in relation to the results or position in these financial statements.
(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)
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 3). The results of Scotia Gas Networks Limited, of which the Group has a 50% share, can be illustrated thus:
2011
2010
Operating profit
Finance costs: excluding loan stock
Finance costs: interest on loan stock
Profit before tax
Taxation
Profit for the year
SSE share of profit
Before
exceptional
Exceptional
items and certain items and certain
remeasurements remeasurements
£m
£m
Before
exceptional
items and certain
Exceptional
items and certain
total remeasurements remeasurements
£m
£m
£m
373.6
(180.9)
(66.7)
126.0
(53.9)
72.1
–
12.8
–
12.8
64.1
76.9
373.6
(168.1)
(66.7)
138.8
10.2
149.0
367.3
(126.0)
(67.5)
173.8
(67.5)
106.3
–
6.8
–
6.8
(1.9)
4.9
Total
£m
367.3
(119.2)
(67.5)
180.6
(69.4)
111.2
36.1
38.4
74.5
53.2
2.4
55.6
Scottish and Southern Energy
Annual Report 2011
114
Notes on the financial statements (continued)
for the year ended 31 March
14. inVEstmEnts (continued)
As an investor, Scottish and Southern Energy plc received £33.4m (2010 – £33.8m) 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 2011
31 March 2010
Non-current
assets
£m
Current
assets
£m
Current
liabilities
£m
Non-current
liabilities
£m
5,603.4
5,331.3
110.3
271.6
(416.6)
(672.6)
(4,914.6)
(4,619.4)
The financial statements of the Group’s other jointly controlled entities and associates can be summarised as follows (100%):
Jointly controlled Entities
31 march 2011
31 March 2010
associates
31 march 2011
31 March 2010
(b) other investments
consolidated
Current
assets
£m
Non-current
assets
£m
Current
liabilities
£m
Non-current
liabilities
£m
Revenues
£m
170.8
166.0
1,430.2
1,179.8
(131.3)
(135.3)
(1,239.6)
1,053.7
(1,002.8)
415.3
Profit
after tax
£m
117.0
68.8
144.9
188.2
277.7
438.5
(62.6)
(116.6)
(44.6)
(110.6)
313.4
451.2
46.9
74.6
Faroe Petroleum
£m
BiFab
£m
Solar Century
£m
Sigma
£m
RockTron
£m
At 1 April 2009
Additions in the year
Transfers to Associates in the year
At 31 March 2010
Additions in the year (i)
at 31 march 2011
–
–
–
–
18.0
18.0
–
–
–
–
11.0
11.0
4.1
–
–
4.1
–
4.1
2.4
0.5
–
2.9
0.3
3.2
10.0
–
(10.0)
–
–
–
Other
£m
1.8
0.6
(0.2)
2.2
1.1
3.3
(i) Additions in the year include equity stakes in Faroe Petroleum plc (5%) and Burntisland Fabrications Limited (‘BiFab’) (15%).
company
At 31 March 2010
Addition in the year
at 31 march 2011
Faroe Petroleum
£m
–
18.0
18.0
Total
£m
18.3
1.1
(10.2)
9.2
30.4
39.6
Total
£m
–
18.0
18.0
115
Overview
Strategy
Group performance
Segmental performance
Corporate governance
Financial statements
Shareholder information
15. suBsiDiary unDErtaKinGs
Details of the principal subsidiary undertakings are as follows:
country of incorporation
2011
Holding %
2010
Holding % principal activity
England and Wales
England and Wales
England and Wales
England and Wales
England and Wales
England and Wales
Ireland
Northern Ireland
Northern Ireland
Ireland
Ireland
SSE Services plc (i)
SSE Energy Supply Limited (i)
SSE Generation Limited (i)
Medway Power Limited (ii)
Keadby Generation Limited (viii)
Southern Electric Gas Limited (vi)
SSE Renewables Holdings Limited (i)
SSE Renewables Holdings (UK) Limited (x)
SSE Renewables Developments (UK) Limited (ix)
SSE Renewables (Ireland) Limited (iii)
Airtricity Limited (iii)
Airtricity Energy Supply (Northern Ireland) Limited (x) Northern Ireland
Scottish Hydro Electric Transmission Limited (iv)
Scottish Hydro Electric Power Distribution plc (iv)
Southern Electric Power Distribution plc (iv)
S+S Limited (iv)
SSE Metering Limited (i)
Southern Electric Contracting Limited (v)
SSE Hornsea Limited (i)
SSE E&P UK Limited (i)
SSE Telecommunications Limited (i)
Neos Networks Limited (vii)
Scotland
Scotland
England and Wales
Scotland
Scotland
England and Wales
England and Wales
Scotland
Scotland
England and Wales
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100 Corporate support services
100 Electricity supply
100 Electricity generation
100 Electricity generation
100 Electricity generation
100 Gas supply
100 Renewables holding company
100 Renewables holding company
100 Wind generation development
100 Wind generation development
100 Energy supply
100 Energy supply
100 Transmission of electricity
100 Distribution of electricity
100 Distribution of electricity
100 Electricity connections
100 Meter reader and operator
100 Electrical contractor
100 Gas storage
– Gas exploration and production
100 Telecommunication services
100 Telecommunication services
The above companies’ shares consist of Ordinary Shares only. All principal subsidiaries operate in Great Britain and Ireland. All companies
have accounting periods ending on 31 March. The Group has other subsidiary undertakings which do not significantly affect the results and
position disclosed in these financial statements. A full list of the subsidiary undertakings will be included in the Company’s annual return.
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 2009
Increase in existing investments
At 31 March 2010
Increase in existing investments (i)
Transfers in (ii)
at 31 march 2011
Total
£m
2,154.2
17.9
2,172.1
13.6
132.7
2,318.4
(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 IFRS 2.
This also includes an additional £3.8m paid in relation to the acquisition of Airtricity Holdings Limited.
(ii) SSE Hornsea Limited was transferred from SSE Energy Supply Limited at book value during the year.
Scottish and Southern Energy
Annual Report 2011
116
Notes on the financial statements (continued)
for the year ended 31 March
15. 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 Council
Newcastle and North Tyneside Council
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.
The Group also owns 100% of the share capital of entities which perform similar services under seven PFI contracts. The terms of the
service concession arrangement are similar to those operated by the companies noted above. The council and contract holder within the
acquired group are as follows:
company
Dorset Lighting Limited
Ealing Lighting Limited
Islington Lighting Limited
Tay Valley Lighting (Hampshire) Limited
Tay Valley Lighting (Southampton) Limited
Tay Valley Lighting (West Sussex) Limited
Tay Valley Lighting (Nottingham) Limited
council
Dorset County Council
London Borough of Ealing
London Borough of Islington
Hampshire County Council
Southampton City Council
West Sussex County Council
Nottingham City Council
The service commencement date for Tay Valley Lighting (Nottingham) Limited was 1 September 2010.
characteristics of the arrangements
Description
The contracts are 25 year arrangements to replace ageing street-lighting stock and to subsequently maintain the new assets throughout
each of the 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.
117
Overview
Strategy
Group performance
Segmental performance
Corporate governance
Financial statements
Shareholder information
16. acquisitions, Disposals anD HElD for salE assEts
(a) Exploration and production assets acquisition
On 2 February 2011, the Group, through its subsidiary SSE E&P UK Limited, concluded the acquisition of joint operating interests in various North Sea
natural gas and infrastructure assets in three main geographical areas (Bacton, Easington Catchment Area (ECA) and Lomond/Everest) from Hess
Limited following a completion period where partner and regulatory approvals were received. The acquisition will provide the Group with a new source
of primary fuel and an economic hedge for the Generation and Supply business. The acquisition will also mean the Group has involvement throughout
the gas supply chain. Goodwill primarily reflects deferred tax liabilities recognised. The completion period included a mechanism to adjust values
for incurred and earned cash flows between the economic date of the agreement and the completion date. Cash consideration of £200.4m
was paid on the date of acquisition which includes the impact of effective cash flow hedge arrangements for the transaction. At 14 April 2011, a
final cash settlement of £3.2m was received in relation to the completion adjustments. Professional fees of £0.9m were incurred and expensed.
The assets and liabilities acquired can be summarised thus:
Goodwill
Production and infrastructure assets (note 12)
Exploration and evaluation assets
Decommissioning provision
Accruals and provisions
Deferred tax asset
Deferred tax liability
Consideration:
Cash
Debtor
Agreement
valuations
£m
Completion
adjustments
£m
Fair value
adjustments
£m
–
165.1
53.8
–
–
–
–
218.9
–
(17.0)
(4.7)
–
–
–
–
(21.7)
38.1
157.1
0.9
(71.5)
(11.4)
22.9
(136.1)
–
total
£m
38.1
305.2
50.0
(71.5)
(11.4)
22.9
(136.1)
197.2
200.4
(3.2)
197.2
The exploration and production business recorded an operating profit of £4.6m in the period from acquisition. The majority of the revenue
earned by the business was internal under arm’s length trading arrangements with the Generation and Supply business (SSE Energy Supply
Limited). Had the business been owned from 1 April 2010, the estimated operating profit before depreciation and amortisation would have
been £42.6m from an estimated revenue of £68.4m. The accounting policies associated with this business are summarised in note 1.
(b) ardrossan acquisition and disposal
On 21 April 2010, the Group acquired the residual 49% of Ardrossan Wind Farm (Scotland) Limited, an operating wind farm company based
in Scotland, for a cash consideration of £13.0m. This took the Group’s investment in the company to 100%. Non-controlling interests of £3.8m
were derecognised on completion of the acquisition. On 20 May 2010, the Group disposed of its 100% holding in Ardrossan Wind Farm
(Scotland) Limited to Wind Acquisitions 1 (Infinis) for cash proceeds of £28.1m. The net result of the acquisition on 21 April and the disposal
on 20 May was a gain of £8.3m.
The transactions can be summarised thus:
Assets disposed of:
Goodwill
Property, plant and equipment
Current assets
Current liabilities
Deferred tax
net assets
Proceeds of disposal:
Cash consideration received
net proceeds of disposal
loss on disposal
Gain on acquisition
net gain on transactions
No significant profit or loss was recognised from this businesses prior to disposal.
£m
7.4
60.3
6.8
(27.6)
(13.9)
33.0
28.1
28.1
(4.9)
13.2
8.3
Scottish and Southern Energy
Annual Report 2011
118
Notes on the financial statements (continued)
for the year ended 31 March
16. acquisitions, Disposals anD HElD for salE assEts (continued)
(c) other acquisitions in the year
In addition to the transactions above, the Group acquired the following companies and businesses in the year:
Entity acquired
Country of incorporation
Date of acquisition
Principal activity
Shareholding
acquired
Consideration
£m
I&H Brown (Calliacher) Limited
RockTron (Widnes) Limited
Stockland (Shaftesbury) Limited
Scotland
England & Wales
Scotland
21 September 2010
1 October 2010
19 October 2010
Wind development
Ash remediation
Office building
100%
100%
100%
6.4
33.5
19.5
59.4
The assumption of ownership of RockTron (Widnes) Limited took the Group’s interest in the business from 49.9% to 100% following the Group
stepping in to acquire the remaining shareholding under the terms of its loan agreement. The fair value of the Group’s interest at 1 October
2010 was £31.5m. As a result of remeasuring the fair value of the 49.9% stake in the Company, the Group recognised a loss on acquisition of
£6.7m which was offset by negative goodwill of £6.4m recognised on the acquisition of the 100% shareholding, as noted in the table below. The
company was subsequently renamed SSE Mineral Solutions Limited. Professional fees incurred in relation to these acquisitions of £0.2m were
expensed. The table below shows the book values and fair values of the assets and liabilities acquired in the combinations in the table above:
Goodwill
Intangible development assets
Property, plant and equipment
Other net current liabilities
Loans and borrowings
Deferred tax
net assets
Consideration:
Cash
Fair value of investment in RockTron (Widnes)
Negative goodwill recognised
Carrying value
of acquired
entities
£m
Fair value of
acquired
entities
£m
–
6.4
85.3
(5.6)
(2.0)
4.5
88.6
1.8
6.4
57.0
(0.5)
–
1.1
65.8
27.9
31.5
59.4
6.4
No significant profit or loss was recognised from these acquisitions in the period to 31 March 2011.
(d) Disposals
On 16 September 2010, the Group disposed of its investment in Butendiek Offshore Winpark Holding GmbH and its subsidiaries to wpd AG
for cash proceeds of £1.0m less £0.3m costs of disposal. No profit or loss was recognised on this disposal. The disposal of Butendiek may
result in additional proceeds being received dependent on certain contingent events. The contingent consideration, which is a financial
asset, has been deemed to have a fair value of zero, due to the Group’s assessment of the likelihood of the contingent events taking place.
In addition, the Group disposed of other minor investments in Germany for cash proceeds of £3.1m and recorded a gain on disposal of £1.9m.
(e) Held for sale assets
At 31 March 2011, a number of wind generation and development assets have been presented as held for sale following the decision of
the Group’s management to sell the respective companies and their related assets. The assets and liabilities classified as held for sale
are as follows:
Property, plant and equipment
Intangible development assets
Equity investment in jointly controlled entities
Cash and cash equivalents
Other net current liabilities
Deferred tax
£m
204.9
10.7
63.7
23.0
(9.6)
(23.3)
269.4
There were no significant cash flows or amounts recognised in the statement of comprehensive income relating to the above assets held
for sale. Of these assets held for sale, three wind farms were disposed of in April 2011 for a consideration of £178.4m (see note 34).
119
Overview
Strategy
Group performance
Segmental performance
Corporate governance
Financial statements
Shareholder information
(f) acquisitions in the previous year
In the previous year, the Group acquired the following companies and businesses:
Entity acquired
Country of incorporation
Date of acquisition
Shareholding
acquired
Consideration
£m
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
21 May 2009
22 May 2009
16 June 2009
13 August 2009
17 September 2009
17 September 2009
30 November 2009
09 March 2010
15 March 2010
100%
100%
100%
100%
97%
97%
100%
100%
100%
39.3
7.3
5.8
27.5
1.9
1.2
5.8
0.8
2.2
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) streetlighting 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 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.
17. inVEntoriEs
Fuel and consumables
Work in progress
Goods for resale
Less: provisions held
Consolidated
2011
£m
190.5
37.1
2.9
(13.0)
217.5
2010
£m
248.9
30.7
2.4
(9.5)
272.5
The Group has recognised £718.2m within cost of sales in the year (2010 – £612.4m) and have also recognised £6.6m (2010 – £3.0m) relating
to stock write-downs and increases in provisions held. The Company does not hold any inventories.
Scottish and Southern Energy
Annual Report 2011
120
Notes on the financial statements (continued)
for the year ended 31 March
18. 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
2011
£m
563.7
2,226.9
541.1
3,331.7
–
330.8
–
1,405.6
5,068.1
2010
Restated
£m
596.3
1,381.6
528.3
2,506.2
–
289.1
71.2
1,583.9
4,450.4
–
–
5,068.1
4,450.4
2011
£m
–
–
–
–
2,220.9
65.0
–
–
2,285.9
3,661.2
5,947.1
2010
Restated
£m
–
–
–
–
1,804.6
55.0
–
–
1,859.6
3,456.1
5,315.7
Wholesale trade receivables includes a balance of £28.1m (2010 – £37.5m) in relation to contractual balances due from British Energy.
Other receivables includes financial assets totalling £93.4m (2010 – £72.1m). Cash held as collateral relates to amounts deposited on
commodity trading exchanges. Other receivables have been restated as explained in note 2.
Trade receivables and other financial assets are part of the Group’s financial exposure to credit risk as explained in note 31.
19. casH anD casH EquiValEnts
Bank balances
Call deposits
Cash and cash equivalents
Consolidated
Company
2011
£m
123.2
353.7
476.9
2010
£m
132.7
129.0
261.7
2011
£m
4.6
314.5
319.1
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.
2010
£m
3.8
95.9
99.7
2010
£m
99.7
–
99.7
Consolidated
Company
2011
£m
476.9
(5.3)
471.6
2010
£m
261.7
(9.2)
252.5
2011
£m
319.1
–
319.1
Consolidated
Company
2011
£m
2010
£m
2011
£m
2010
£m
–
3,197.2
1,227.8
653.0
5,078.0
304.2
5,382.2
–
2,161.6
1,207.3
695.6
4,064.5
324.5
4,389.0
2,757.0
–
35.3
–
2,792.3
2,569.0
–
50.3
–
2,619.3
–
–
2,792.3
2,619.3
Cash and cash equivalents (from above)
Bank overdraft (note 23)
Cash and cash equivalents in the statement of cash flows
20. 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)
(i) Current accruals and deferred income includes customer contributions of £15.4m (2010 – £19.5m) and government grants of £0.6m (2010 – £0.6m).
(ii) Non-current accruals and deferred income includes customer contributions of £234.7m (2010 – £251.3m) and government grants of £5.6m (2010 – £6.3m).
21. currEnt tax liaBilitiEs
Corporation tax
22. construction contracts
contracts in progress at balance sheet date:
Amounts due from contract customers included in trade and other receivables (note 18)
Amounts due to contract customers included in trade and other payables (note 20)
Contract costs incurred plus recognised profits less recognised losses to date
Less: Progress billings
121
Overview
Strategy
Group performance
Segmental performance
Corporate governance
Financial statements
Shareholder information
Consolidated
Company
2011
£m
268.2
2010
£m
216.9
2011
£m
22.9
2011
£m
37.7
(17.7)
196.2
(200.0)
(3.8)
2010
£m
4.0
2010
£m
39.3
(21.8)
183.1
(184.0)
(0.9)
In the year to 31 March 2011, contract revenue of £468.9m (2010 – £460.1m) was recognised.
At 31 March 2011, retentions held by customers for contract work amounted to £1.3m (2010 – £1.6m). Advances received from customers
for contract work amounted to £4.7m (2010 – £4.1m).
The Company does not hold any construction contracts.
23. 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
total loans and borrowings
Cash and cash equivalents (note 19)
Net Debt
Consolidated
Company
2011
£m
5.3
428.4
433.7
12.8
446.5
4,800.5
359.4
–
5,159.9
5,606.4
(476.9)
5,129.5
2010
£m
9.2
882.3
891.5
12.2
903.7
4,771.1
372.2
–
5,143.3
6,047.0
(261.7)
5,785.3
2011
£m
–
106.8
106.8
–
106.8
3,499.5
–
257.4
3,756.9
3,863.7
(319.1)
3,544.6
2010
£m
–
815.6
815.6
–
815.6
3,101.2
–
240.2
3,341.4
4,157.0
(99.7)
4,057.3
Scottish and Southern Energy
Annual Report 2011
122
Notes on the financial statements (continued)
for the year ended 31 March
23. loans anD otHEr BorroWinGs (continued)
(i) Borrowings
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 has extended its existing £900m revolving credit facility and its £100m bilateral facility on
reduced pricing and both facilities now mature in August 2015. These facilities continue to provide a liquidity backstop to the Group’s
commercial paper issuance. As at 31 March 2011 there were no outstanding drawings on either facility.
In the year, the Group borrowed £100m at a fixed rate of 3.725% for 10 years and £300m at a floating rate of GBP 6 month LIBOR plus
50.2 basis points for 10 years from the £400m loan facility with the European Investment Bank.
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 31)
total non-current
total
2011
Weighted
average interest
rate (vi)
2011
face value
£m
2011
fair value
£m
0.50%
6.63%
2.73%
5.63%
5.98%
4.86%
6.13%
5.75%
5.76%
2.15%
5.95%
5.00%
5.88%
8.38%
5.50%
4.63%
6.25%
4.46%
1.66%
2011
carrying
amount
£m
5.3
8.2
408.0
12.2
433.7
5.5
471.0
528.9
697.3
54.7
5.3
8.2
408.1
12.2
433.8
5.5
470.2
530.0
700.0
54.7
5.3
8.8
408.4
12.2
434.7
6.0
491.4
557.0
749.4
54.7
1,760.4
1,858.5
1,757.4
400.0
150.0
500.0
300.0
500.0
350.0
325.0
350.0
105.0
112.7
395.1
150.0
510.1
318.7
652.3
351.5
284.9
379.7
137.1
115.8
400.0
150.0
495.9
296.8
492.6
350.2
323.5
345.6
104.4
112.7
3,092.7
3,295.2
3,071.7
–
–
(28.6)
4,853.1
5,153.7
4,800.5
5,286.9
5,588.4
5,234.2
2010
Weighted
average interest
rate (vi)
2010
Face value
£m
2010
Fair value
£m
123
Overview
Strategy
Group performance
Segmental performance
Corporate governance
Financial statements
Shareholder information
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
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%
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 31)
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 15). 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 either reset quarterly or semi-annually. Other loans include a mixture of fixed and floating debt
repayable between 2012 and 2015.
(vi) The weighted average interest rates are as noted. The weighted average interest rates for the Group (including swaps) for the year ended 31 March 2011
was 5.43% (2010 – 5.35%).
convertible bond
The Group issued a convertible bond in 2004 which was fully converted into Ordinary Shares by 24 October 2009. Conversion was at the
option of the bond holder.
For the purpose of diluted Earnings per Share (EPS), the number of potential Ordinary Shares to be issued should include the following
in respect of the bond:
Weighted average number of shares
2011
number of
shares
2010
Number of
shares
–
709,719
Scottish and Southern Energy
Annual Report 2011
124
Notes on the financial statements (continued)
for the year ended 31 March
23. loans anD otHEr BorroWinGs (continued)
(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
Minimum lease payments
2011
£m
2010
£m
52.2
202.5
488.4
743.1
(370.9)
372.2
52.8
205.7
537.7
796.2
(411.8)
384.4
Present value of
minimum lease payments
2011
£m
12.8
61.1
298.3
372.2
2010
£m
12.2
57.4
314.8
384.4
The Group entered into a power purchase agreement categorised as a finance lease with Marchwood Power Company Ltd in the year ended
March 2010. 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. £20.3m (2010 – £6.5m) of contingent rents
under the lease 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. 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.
24. 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:
consolidated
At 1 April 2009
Acquisitions
Charge/(credit) to Income Statement
Credit to equity
Exchange adjustments
At 1 April 2010
Acquisitions (note 16)
Disposals (note 16)
Transfer to assets held for sale
(Credit)/charge to Income Statement
Charge to equity
Exchange adjustments
at 31 march 2011
Accelerated Fair value gains/
(losses) on
derivatives
£m
capital
allowances
£m
Convertible
bond
£m
Retirement
benefit
obligations
£m
Share based
payments
£m
Other (i)
£m
Total
£m
887.5
–
17.2
–
–
904.7
(22.9)
(6.5)
(23.3)
(84.1)
–
–
767.9
(369.6)
–
113.1
(2.1)
–
(258.6)
–
–
–
384.2
5.9
–
131.5
0.4
–
(0.4)
–
–
–
–
–
–
–
–
–
–
(76.6)
–
17.4
(142.5)
–
(201.7)
–
–
–
20.0
7.9
–
(1.5)
–
–
(0.4)
–
(1.9)
–
–
–
–
0.6
–
54.4
(7.5)
(2.5)
(8.6)
(11.4)
24.4
142.4
(7.4)
–
41.9
1.2
(20.2)
(173.8)
(1.3)
182.3
494.6
(7.5)
144.8
(153.6)
(11.4)
466.9
119.5
(13.9)
(23.3)
362.0
15.6
(20.2)
906.6
company
At 1 April 2009
(Credit)/charge to Income Statement
(Credit)/charge to equity
At 1 April 2010
(Credit)/charge to Income Statement
(Credit)/charge to equity
at 31 march 2011
Accelerated Fair value gains/
(losses) on
derivatives
£m
capital
allowances
£m
Convertible
bond
£m
Retirement
benefit
obligations
£m
Share based
payments
£m
–
–
–
–
–
–
–
22.5
(12.6)
(8.7)
1.2
(10.7)
(0.4)
(9.9)
0.4
(0.4)
–
–
–
–
–
–
10.2
(80.5)
(70.3)
9.7
(1.7)
(62.3)
0.9
–
(0.4)
0.5
–
0.6
1.1
125
Overview
Strategy
Group performance
Segmental performance
Corporate governance
Financial statements
Shareholder information
Other
£m
(56.5)
7.8
0.4
(48.3)
(2.7)
–
(51.0)
Total
£m
(32.7)
5.0
(89.2)
(116.9)
(3.7)
(1.5)
(122.1)
(i)
Includes deferred tax on fair value items recognised in business combinations.
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/(assets)
Consolidated
Company
2011
£m
1,068.3
(161.7)
906.6
2010
£m
624.0
(157.1)
466.9
2011
£m
–
(122.1)
(122.1)
2010
£m
–
(116.9)
(116.9)
The deferred tax assets disclosed relate to the Group’s pension scheme liabilities.
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 £35.2m (2010 – £34.3m charge).
A deferred tax asset has been recognised on £42.7m of trading losses (2010 – £25.0m) due to uncertainty around the availability of future
profits in the companies concerned.
25. proVisions
consolidated
At 1 April 2010
Charged in the year
Increase in decommissioning provision (i)
Acquired in the year (note 16)
Unwind of discount
Released during the year
Utilised during the year
at 31 march 2011
at 31 march 2011
Non-current
Current
At 31 March 2010
Non-current
Current
Decommissioning
(i)
£m
Contracting
provisions
(ii)
£m
58.5
–
32.7
71.5
3.6
(17.5)
–
148.8
148.8
–
148.8
58.5
–
58.5
5.2
5.0
–
–
–
–
(0.5)
9.7
1.2
8.5
9.7
4.4
0.8
5.2
Other
(iii)
£m
26.0
0.2
–
2.5
0.7
(6.0)
(2.8)
20.6
19.2
1.4
20.6
20.3
5.7
26.0
Total
£m
89.7
5.2
32.7
74.0
4.3
(23.5)
(3.3)
179.1
169.2
9.9
179.1
83.2
6.5
89.7
The presentation of this note has changed to improve understanding of the financial statements.
Scottish and Southern Energy
Annual Report 2011
126
Notes on the financial statements (continued)
for the year ended 31 March
25. proVisions (continued)
(i) Provision has been made for the estimated net present cost of decommissioning the acquired North Sea exploration and production assets and certain
generation and gas storage assets. Estimates are based on forecasted 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. Decommissioning provisions in relation to the assets subject to impairment
review have been increased. A corresponding increase to value of property, plant and equipment was also made (note 12). A release of £17.5m was
recognised in relation to the decommissioning provision at the coal plant at Uskmouth and was reported as part of Exceptional items in note 5.
(ii) The Group hold provisions in relation to long-term construction contracts including street-lighting PFIs. These relate to contract costs that are not
guaranteed to be recovered under the respective contracts.
(iii) Other provisions include balances held in relation to onerous contracts, 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, which is valued in accordance with IAS 19. The onerous
contracts provision relates to future losses on specific contracts. These contract losses will be incurred over a maximum period to 2019.
The Company does not hold provisions.
26. sHarE capital
Allotted, called up and fully paid:
At 1 April 2010
Issue of shares (i)
at 31 march 2011
Number
(millions)
923.1
13.8
936.9
£m
461.5
6.9
468.4
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) Shareholders were able to elect to receive Ordinary Shares in place of the final dividend of 49p per Ordinary Share (in relation to year ended 31 March
2010) and the interim dividend of 22.4p (in relation to the current year) under the terms of the Company’s scrip dividend scheme. This resulted in the issue
of 7,524,682 and 5,264,873 new fully paid Ordinary Shares, respectively. In addition, the Company issued 1.0 million (2010 – 0.9 million) shares during the
year under the savings-related share option schemes, and discretionary share option schemes for a consideration of £9.2m (2010 – £6.8m).
During the year, on behalf of the Company, the employee share trust purchased 0.8 million shares for a total consideration of £9.2m (2010 –
0.9 million shares, consideration of £15.8m). At 31 March 2011, the trust held 5.1 million shares (2010 – 4.3 million) which had a market
value of £64.4m (2010 – £47.7m).
27. rEsErVEs
The movement in reserves is reported in the Statement of Changes in Equity which is included as part of the primary statements
(pages 82 and 83).
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 comprised the equity component of the Group’s convertible bond which was fully converted by 24 October 2009 (note 23).
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 £627.3m (2010 – £575.9m).
As allowed by section 408 of the Companies Act 2006, the Company has not presented its own income statement.
28. HyBriD capital
GBP 750m 5.453% perpetual subordinated capital securities
EUR 500m 5.025% perpetual subordinated capital securities
2011
£m
744.5
416.9
1,161.4
2010
£m
–
–
–
127
Overview
Strategy
Group performance
Segmental performance
Corporate governance
Financial statements
Shareholder information
On 20 September 2010 the Company issued €500m EUR and £750m Sterling bonds (hybrid capital). They have no fixed redemption date but
the Group may, at its sole discretion, redeem all (but not part) of these bonds at their principal amount on 1 October 2015 or 1 October 2020
or any subsequent coupon payment date after this. In addition, under certain circumstances defined in the terms and conditions of the issue,
the Group may at its sole discretion redeem all (but not part of) the bonds at their principal amount at any time prior to 1 October 2015.
The Company has the option to defer coupon payments on the bonds on any relevant payment date, as long as a dividend on the Ordinary
Shares has not been declared. Deferred coupons shall be satisfied only in the following circumstances, all of which occur at the sole option
of the Company:
kkredemption; or
kkdividend payment on Ordinary Shares.
Interest will accrue on any deferred coupon.
Coupon payments are expected to be made annually in arrears on 1 October in each year from 1 October 2011. Coupon payments are accounted
for as dividends and are recognised in equity at the time the payment obligation arises. The purpose of the issue was to strengthen SSE’s
capital base and to fund the Group’s ongoing capital investment and acquisitions.
29. 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 year’s continuous Company service.
Pension summary:
Scottish Hydro Electric (Company)
Southern Electric
IFRIC 14 movement/liability
Net actuarial gain/(loss) and IFRIC 14 liability
scheme type
Defined benefit
Defined benefit
Net gain/(loss) recognised
in respect of the pension
liability in the Statement
of Comprehensive Income
2011
£m
92.3
16.8
109.1
(117.9)
(8.8)
2010
£m
(161.6)
(221.4)
(383.0)
(125.8)
(508.8)
Net pension (liability)
2011
£m
(239.8)
(428.8)
(668.6)
2010
£m
(251.1)
(469.2)
(720.3)
The Scottish Hydro Electric Pension Scheme net liability of £239.8m (2010 – £251.1m) is presented after an IFRIC 14 minimum funding
requirement of £374.2m (2010 – £256.3m).
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
Hymans Robertson
31 March 2007
Hewitt, Bacon & Woodrow
£860.0m
£1,189.3m
Projected Unit
Inflation curve plus 2.3% pa
2.7%
72.3%
£1,101.5m
£1,361.3m
Projected Unit
5.2%
3.2%
80.9%
An actuarial valuation of the Southern Electric Pension Scheme as at 31 March 2010 remains in progress and is due to be completed in the
year to 31 March 2012.
Scottish and Southern Energy
Annual Report 2011
128
Notes on the financial statements (continued)
for the year ended 31 March
29. rEtirEmEnt BEnEfit oBliGations (continued)
Both schemes have been updated to 31 March 2011 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
2011
At 31 March
2010
5.0%
3.5%
5.5%
3.5%
5.2%
3.7%
5.5%
3.7%
The assumptions relating to longevity underlying the pension liabilities at 31 March 2011 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
2011
male
at 31 march
2011
female
At 31 March
2010
Male
At 31 March
2010
Female
24
26
25
28
23
25
24
27
The impact on the schemes liabilities of changing certain of the major assumptions is as follows:
at 31 march 2011
At 31 March 2010
increase/
decrease in
assumption
0.1%
1 year
Effect on
scheme
liabilities
+/- 1.7%
+/- 2.8%
Increase/
decrease in
assumption
0.1%
1 year
Effect on
scheme
liabilities
+/- 1.8%
+/- 3.0%
31 March
long-term
Value at rate of return
expected at
2010 31 march 2011
%
£m
Company
Long-term
Value at rate of return
31 march
expected at
2011 31 March 2010
%
£m
Discount rate
Longevity
Valuation of combined pension schemes
Consolidated
long-term
rate of return
expected at
31 march 2011
%
Long-term
Value at rate of return
31 march
expected at
2011 31 March 2010
%
£m
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)
Equities
Government bonds
Corporate bonds
Other investments
Total fair value of plan assets
IFRIC 14 liability
Present value of defined benefit obligation
Deficit in the scheme
Deferred tax thereon
Net pension liability
7.8
4.3
5.5
4.4
1,032.5
743.8
471.0
216.3
2,463.6
(374.2)
(2,758.0)
(668.6)
173.8
(494.8)
8.0
4.5
5.5
4.1
1,063.4
563.4
449.0
222.5
2,298.3
(256.3)
(2,762.3)
(720.3)
201.7
(518.6)
7.8
4.3
5.5
4.5
402.9
500.7
207.6
109.9
1,221.1
(374.2)
(1,086.7)
(239.8)
62.3
(177.5)
8.0
4.5
5.5
3.9
movements in the defined benefit obligation during the year:
At 1 April
Movements in the year:
Service costs
Member contributions
Benefits paid
Interest on pension scheme liabilities
Actuarial gains/(losses)
At 31 March
Consolidated
Company
2011
£m
2010
£m
2011
£m
2010
£m
(2,762.3)
(1,929.8)
(1,113.6)
(729.5)
(37.7)
(7.8)
105.6
(150.2)
94.4
(21.4)
(8.1)
101.6
(127.5)
(777.1)
(18.7)
(3.1)
40.2
(60.7)
69.2
(9.8)
(3.4)
39.1
(48.0)
(362.0)
(2,758.0)
(2,762.3)
(1,086.7)
(1,113.6)
129
Overview
Strategy
Group performance
Segmental performance
Corporate governance
Financial statements
Shareholder information
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
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
2011
£m
2010
£m
2,042.0
1,656.3
141.9
(105.7)
106.6
7.8
14.7
(117.9)
100.7
(101.6)
110.2
8.1
394.1
(125.8)
2,089.4
2,042.0
2011
£m
862.5
67.9
(40.3)
48.5
3.1
23.1
(117.9)
846.9
Consolidated
Company
2011
£m
37.7
37.7
(141.9)
150.2
8.3
2010
£m
21.4
21.4
(100.7)
127.5
26.8
2011
£m
18.7
18.7
(67.9)
60.7
(7.2)
History of (deficit)/surplus
Total fair value of plan assets
IFRIC 14 liability
Present value of defined
benefit obligation
Consolidated
Company
2011
£m
2010
£m
2009
£m
2008
£m
2007
£m
2011
£m
2010
£m
2009
£m
2008
£m
2,463.6
(374.2)
2,298.3
(256.3)
1,786.8
(130.5)
2,081.0
(210.6)
2,110.4
–
1,221.1
(374.2)
1,118.8
(256.3)
860.0
(130.5)
1,005.6
(210.6)
(2,758.0)
(2,762.3)
(1,929.8)
(1,919.5)
(2,202.3)
(1,086.7)
(1,113.6)
(729.5)
(709.2)
(862.1)
(Deficit)/surplus in the scheme
(668.6)
(720.3)
(273.5)
(49.1)
(91.9)
(239.8)
(251.1)
–
85.8
128.1
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 2011.
The actual return on Pension Scheme assets is as follows:
Actual return on Pension Scheme assets
Consolidated
Company
2011
£m
156.6
2010
£m
494.8
2011
£m
91.0
2010
£m
250.3
2010
£m
729.5
49.9
(39.1)
44.2
3.4
200.4
(125.8)
862.5
2010
£m
9.8
9.8
(49.9)
48.0
(1.9)
2007
£m
990.2
–
Scottish and Southern Energy
Annual Report 2011
130
Notes on the financial statements (continued)
for the year ended 31 March
29. rEtirEmEnt BEnEfit oBliGations (continued)
History of experience gains and losses
Consolidated
Company
2011
£m
2010
£m
2009
£m
2008
£m
2007
£m
2011
£m
2010
£m
2009
£m
2008
£m
2007
£m
Total actuarial gains and (losses)
recognised in the Statement of
Comprehensive Income before
adjustment for taxation
Experience gains/(losses)
on scheme liabilities
Experience gains/(losses)
on scheme assets
109.1
(383.0)
(359.0)
185.0
47.4
92.3
(161.6)
(188.4)
146.3
17.6
52.7
(59.8)
0.8
(50.6)
(7.7)
26.9
(49.7)
–
–
–
14.7
394.1
(412.2)
(153.4)
27.8
23.1
200.4
(190.0)
(31.2)
(9.7)
The cumulative actuarial losses and IFRIC 14 movement recognised in the Statement of Comprehensive Income before adjustment for taxation
since the adoption of IAS 19 is £966.6m losses (2010 – £957.8m).
Defined contribution scheme
The total contribution paid by the Group to defined contribution schemes was £16.9m (2010 – £16.5m).
Employer financed retirement benefit (EfrB) pension costs
The increase in the year in relation EFRB was £0.2m (2010 – £2.9m). This is included in other provisions (note 25).
staff costs analysis
The pension costs in note 6 can be analysed thus:
Service costs
Defined contribution scheme payments
2011
£m
37.7
16.9
54.6
2010
£m
21.4
16.5
37.9
Expected contribution in the year to 31 march 2012
The Group currently expects to make contributions of £48.4m (2010 – £47.8m) and £59.9m (2010 – £61.0m) to the Scottish Hydro Electric
Pension Scheme and the Southern Electric Pension Scheme in the year to 31 March 2012, respectively. However, this is subject to finalisation
of the actuarial valuation of the Southern Electric Pension Scheme.
30. 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 and/or 5 years. At the end of these periods employees have six months to exercise their options by using the cash saved (including
any 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 each month. These shares are held in trust and become free of liability to income tax and national insurance on their fifth
anniversary. These shares may be withdrawn at any point during the 5 years, but tax and national insurance would become payable
on any shares 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. These shares are held in trust and become free of liability to income tax and
national insurance on their fifth anniversary. If an employee leaves during the first three years, or removes his/her ‘Partnership’ shares,
these ‘Matching’ shares are forfeited.
131
Overview
Strategy
Group performance
Segmental performance
Corporate governance
Financial statements
Shareholder information
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 Group. Under the arrangements
for the awards, the shares are held in trust for five years and become free of liability to income tax and national insurance on their fifth
anniversary. These shares may be withdrawn at any point during years four and five, but income tax and national insurance would
become payable on any shares 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. Shares purchased under this agreement were held in trust on behalf of the employee for a period of three years, at which point
the employee became entitled to exercise the award. In addition to shares purchased under the adjusted bonus award, additional shares
were also purchased by the Trustee in respect of amounts equivalent to dividends which would have been payable 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. Shares granted under this arrangement vest subject to the attainment
of performance conditions over the relevant three year performance period as set out below:
Award made
Maximum value of award as a % of base salary
10 June 2008
150
02 June 2009
150
02 June 2010
150
performance conditions
Total shareholder return (i)
Earnings per share (ii)
Dividend per share growth (iii)
Full vesting
25% vesting
≥ 75th percentile
median
≥ 75th percentile
median
≥ 75th percentile
median
Full vesting
25% vesting
Full vesting
25% vesting
RPI + 9%
RPI + 3%
RPI + 9%
RPI + 3%
–
–
–
–
RPI + 8%
RPI + 2%
RPI + 6%
RPI + 2%
These awards will vest after three years to the extent that the relevant performance conditions are met.
(i) Total Shareholder Return (TSR) target relative to other FTSE 100 companies (awards granted in 2008 and 2009) and Total Shareholder Return (TSR)
target relative to other FTSE 100 companies and MSCI Europe Utilities Index (award granted in 2010) over the relevant 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 the lower and upper level above RPI, with no vesting if the minimum EPS growth
target is not achieved.
(iii) Under the Dividend per share growth performance condition, pro rata vesting between 2% and 6% above RPI, with no vesting if the minimum dividend
per share 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 £9.9m (2010 – £17.9m) was recognised in the Income Statement in relation to these schemes, £3.1m (2010 – £3.7m) of this
was in relation to the Directors of the Company.
Details used in the calculation of the costs of these schemes are as follows:
(i) savings-related share option scheme
The movement in savings related share option schemes in the year were as follows:
Scottish and Southern Energy
Annual Report 2011
132
Notes on the financial statements (continued)
for the year ended 31 March
30. EmployEE sHarE-BasED paymEnts (continued)
consolidated
As at 31 March 2011
Award date
16 July 2004
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
30 June 2010
30 June 2010
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
(pence)
Outstanding at
start of year
Granted
Exercised
Lapsed
outstanding at
end of year
Date from which
exercisable
622
886
999
999
1,306
1,306
1,274
1,274
1,042
1,042
871
871
1,890
1,066,454
16,155
563,277
214,493
400,684
252,498
439,226
539,099
1,109,927
–
–
–
–
–
–
–
–
–
–
–
–
823,143
3,073,329
(315)
(1,031,131)
(1,066)
(3,247)
(476)
–
–
–
(2,102)
(494)
–
–
(1,575)
(8,769)
(15,089)
(42,193)
(23,265)
(136,005)
(73,817)
(168,629)
(228,646)
(546,526)
(51,224)
(127,079)
–
26,554
–
517,837
190,752
264,679
178,681
270,597
308,351
562,907
771,919
2,946,250
1 October 2009
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
1 October 2013
1 October 2015
4,603,703
3,896,472
(1,038,831)
(1,422,817)
6,038,527
Option price
(pence)
Outstanding at
start of year
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
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
4,387,150
1,733,434
(886,713)
(630,168)
4,603,703
Expiry date (i)
31 March 2010
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
31 March 2014
31 March 2016
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
As share options are exercised continuously throughout the period from 1 October to 31 March, the weighted average share price during
this period of 1,177p (2010 – 1,126p) is considered representative of the weighted average share price at the date of exercise. The weighted
average share price of forfeitures is simply the option price to which the forfeit relates.
company
As at 31 March 2011
Award date
14 July 2005
10 July 2007
17 July 2008
30 June 2009
30 June 2010
30 June 2010
Option price
(pence)
Outstanding at
start of year
Granted
Exercised
outstanding at
end of year
Date from which
exercisable
886
1,306
1,274
1,042
871
871
3,655
144
442
1,253
–
–
5,494
–
–
–
–
413
283
696
(3,655)
–
–
–
–
–
(3,655)
1 October 2010
1 October 2010
1 October 2011
1 October 2014
1 October 2013
1 October 2015
–
144
442
1,253
413
283
2,535
Expiry date (i)
31 March 2011
31 March 2011
31 March 2012
31 March 2015
31 March 2014
31 March 2016
133
Overview
Strategy
Group performance
Segmental performance
Corporate governance
Financial statements
Shareholder information
As at 31 March 2010
Award date
16 July 2004
14 July 2005
10 July 2007
17 July 2008
30 June 2009
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)
1 October 2009
1 October 2010
1 October 2010
1 October 2011
1 October 2014
–
3,655
144
442
1,253
5,494
Expiry date (i)
31 March 2010
31 March 2011
31 March 2011
31 March 2012
31 March 2015
No options were forfeited in the year.
(i) Options may remain exercisable beyond the published expiry date due to individuals taking advantage of the right to a payment holiday during the term
of the scheme.
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
July 2009
July 2010
3 Year
5 Year
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
108p
117p
126p
137p
217p
227p
287p
313p
304p
339p
244p
269p
231p
246p
Expected volatility
Risk free rate
Expected dividends
Term of the option
Underlying price at grant date
Strike price
17%
4.7%
4.6%
3 yrs
699p
622p
17%
4.8%
4.6%
5 yrs
699p
622p
15%
4.1%
4.2%
3 yrs
967p
886p
19%
4.7%
4.8%
3 yrs
19%
28%
15%
2.2%
4.9%
4.2%
2.2%
4.1%
4.2%
5 yrs
5 yrs
3 yrs
967p 1,180p 1,180p 1,460p 1,460p 1,397p 1,397p 1,139p 1,139p 1,089p 1,089p
871p
999p 1,306p 1,306p 1,274p 1,274p 1,042p 1,042p
886p
19%
4.7%
4.8%
5 yrs
28%
5.0%
4.2%
5 yrs
35%
2.7%
4.1%
3 yrs
19%
1.4%
1.7%
3 yrs
25%
5.8%
5.3%
3 yrs
25%
5.7%
5.2%
5 yrs
35%
2.9%
4.2%
5 yrs
871p
999p
Expected price volatility was determined by calculating the historical volatility of the Group’s share price over the previous 12 months.
(ii) share incentive plan
matching 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
2011
2010
2011
2010
shares
1,745,224
571,166
(68,670)
(138,696)
2,109,024
781,271
Weighted
average price
(pence)
Weighted
average price
(pence)
Shares
1,215 1,260,376
1,161
594,251
1,215
(41,145)
1,149
(68,258)
1,205 1,745,224
1,396
655,440
1,248
1,137
1,248
1,125
1,215
1,289
Weighted
average price
(pence)
1,130
1,161
–
–
1,135
1,096
shares
1,588
288
–
–
1,876
1,040
Weighted
average price
(pence)
1,129
1,137
–
–
1,130
968
Shares
1,300
288
–
–
1,588
800
As shares are exercised continuously throughout the year, the weighted average share price during the period of 1,149p (2010 – 1,125p)
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.
Scottish and Southern Energy
Annual Report 2011
134
Notes on the financial statements (continued)
for the year ended 31 March
30. EmployEE sHarE-BasED paymEnts (continued)
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
2011
2010
2011
2010
shares
673,999
–
(7,080)
(126,298)
540,621
414,691
Weighted
average price
(pence)
1,210
–
1,210
1,149
Shares
725,729
–
(9,778)
(41,952)
1,224
673,999
1,076
326,058
Weighted
average price
(pence)
Weighted
average price
(pence)
shares
Weighted
average price
(pence)
Shares
1,205
–
1,205
1,125
1,210
965
320
–
–
–
320
280
1,151
–
–
–
1,151
1,113
320
–
–
–
320
200
1,151
–
–
–
1,151
965
As shares are exercised continuously throughout the year, the weighted average share price during the period of 1,149p (2010 – 1,125p)
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
2011
2010
2011
2010
Weighted
average price
(pence)
Weighted
average price
(pence)
Shares
1,367
1,079
1,367
1,054
612,475
153,353
–
(442,923)
1,270
322,905
1,072
1,750
1,324
1,174
–
1,121
1,367
1,265
Weighted
average price
(pence)
1,349
1,079
–
–
1,251
–
Weighted
average price
(pence)
961
1,174
–
1,120
1,349
–
Shares
291,608
31,115
–
(263,856)
58,867
–
shares
58,867
33,298
–
–
92,165
–
shares
322,905
166,426
(22,722)
(2,754)
463,855
868
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.
(iv) performance share plan
Outstanding at start of year
Granted during the year
Forfeited during the year
Exercised during the year
Outstanding at end of year
Consolidated
Company
2011
2010
2011
2010
shares
1,592,479
840,095
(379,500)
(60,590)
1,992,484
Weighted
average price
(pence)
Weighted
average price
(pence)
Weighted
average price
(pence)
shares
Shares
1,353 1,135,023
1,079
714,010
1,353
–
1,076
(256,554)
1,226 1,592,479
752,945
338,645
(181,449)
(35,077)
1,435
1,174
–
1,174
1,353 875,064
1,360
1,079
1,360
1,076
1,233
Weighted
average price
(pence)
1,421
1,174
–
1,174
1,360
Shares
593,122
311,174
–
(151,351)
752,945
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.
135
Overview
Strategy
Group performance
Segmental performance
Corporate governance
Financial statements
Shareholder information
31. 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:
kkCredit risk
kkLiquidity risk
kkCommodity risk
kkCurrency risk
kkInterest rate risk
The Board has overall responsibility for the establishment and oversight of the Group’s risk management framework. The Board established
the Risk and Trading Committee, a standing committee of the Management 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 and Trading 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.
Scottish and Southern Energy
Annual Report 2011
136
Notes on the financial statements (continued)
for the year ended 31 March
31. 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:
2011
amortised cost
or other (i)
£m
2011
2011
classified as total carrying
value
£m
trading (ii)
£m
2010
Amortised cost
or other (i)
Restated
£m
2010
2010 Total carrying
value
Restated
£m
Classified as
trading (ii)
£m
2011
fair value
£m
2010
Fair value
Restated
£m
financial assets
current
Trade receivables
Other receivables
Cash collateral
Cash and cash equivalents
Derivative financial assets
non-current
Loans to associates and jointly
controlled entities
Derivative financial assets
financial liabilities
current
Trade payables
Bank loans and overdrafts
Finance lease liabilities
Derivative financial liabilities
non-current
Loans and borrowings (iii)
Finance lease liabilities
Derivative financial liabilities
3,331.7
93.4
–
476.9
–
3,902.0
1,124.6
–
1,124.6
5,026.2
–
–
–
–
2,525.5
2,525.5
–
990.1
990.1
3,515.6
3,331.7
93.4
–
476.9
2,525.5
6,427.5
1,124.6
990.1
2,114.7
8,542.2
3,331.7
93.4
–
476.9
2.525.5
6,427.5
1,124.6
990.1
2,114.7
8,542.2
2,506.2
72.1
71.2
261.7
–
2,911.2
–
–
–
–
1,468.3
1,468.3
970.5
–
970.5
–
466.3
466.3
3,881.7
1,934.6
2,506.2
72.1
71.2
261.7
1,468.3
4,379.5
970.5
466.3
1,436.8
5,816.3
2,506.2
72.1
71.2
261.7
1,468.3
4,379.5
970.5
466.3
1,436.8
5,816.3
(3,197.2)
(433.7)
(12.8)
–
–
–
–
(2,307.5)
(3,197.2)
(433.7)
(12.8)
(2,307.5)
(3,197.2)
(434.7)
(12.8)
(2,307.5)
(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)
(3,643.7)
(2,307.5)
(5,951.2)
(5,952.2)
(3,065.3)
(2,020.7)
(5,086.0)
(5,090.8)
(4,829.1)
(359.4)
–
(5,188.5)
28.6
–
(769.3)
(4,800.5)
(359.4)
(769.3)
(5,153.7)
(359.4)
(769.3)
(740.7)
(5,929.2)
(6,282.4)
(4,799.8)
(372.2)
–
(5,172.0)
28.7
–
(899.0)
(870.3)
(4,771.1)
(372.2)
(899.0)
(5,205.1)
(372.2)
(899.0)
(6,042.3)
(6,476.3)
(8,832.2)
(3,048.2)
(11,880.4)
(12,234.6)
(8,237.3)
(2,891.0)
(11,128.3)
(11,567.1)
net financial liabilities/asset
(3,806.0)
467.4
(3,338.6)
(3,692.4)
(4,355.6)
(956.4)
(5,312.0)
(5,750.8)
(i) Recorded at amortised cost or loans and receivables.
(ii) IAS 39 financial instruments.
(iii) Includes non-recourse borrowings.
137
Overview
Strategy
Group performance
Segmental performance
Corporate governance
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:
2011
amortised cost
or other (i)
£m
2011
2011
classified as total carrying
value
£m
trading (ii)
£m
2010
Amortised cost
or other (i)
Restated
£m
2010
2010 Total carrying
value
Restated
£m
Classified as
trading (ii)
£m
2011
fair value
£m
2010
Fair value
Restated
£m
financial assets
current
Cash and cash equivalents
Amounts owed by subsidiary
undertakings
Derivative financial assets
non-current
Amounts owed by subsidiary
undertakings
Loans to associates and jointly
controlled entities
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
319.1
–
319.1
319.1
99.7
–
99.7
99.7
2,220.9
–
2,540.0
3,661.2
1,029.5
–
4,690.7
7,230.7
(106.8)
–
(2,757.0)
–
(2,863.8)
(2,857.1)
(671.0)
(257.4)
–
(3,785.5)
(6,649.3)
–
30.0
30.0
2,220.9
30.0
2,570.0
2,220.9
30.0
2,570.0
1,804.6
–
1,904.3
–
56.6
56.6
1,804.6
56.6
1,960.9
1,804.6
56.6
1,960.9
–
3,661.2
3,661.2
3,456.1
–
3,456.1
3,456.1
–
48.0
48.0
78.0
1,029.5
48.0
4,738.7
7,308.7
1,029.5
48.0
4,738.7
7,308.7
835.5
–
4,291.6
6,195.9
–
47.5
47.5
104.1
835.5
47.5
4,339.1
6,300.0
835.5
47.5
4,338.9
6,299.8
–
–
(106.8)
–
(106.9)
–
(815.6)
–
–
–
(815.6)
–
(817.3)
–
–
(15.5)
(2,757.0)
(15.5)
(2,757.0)
(15.5)
(15.5)
(2,879.3)
(2,879.4)
(2,569.0)
–
(3,384.6)
–
(45.2)
(45.2)
(2,569.0)
(45.2)
(2,569.0)
(45.2)
(3,429.8)
(3,431.5)
–
28.6
(2,857.1)
(642.4)
(3,167.2)
(676.9)
(2,858.6)
(271.3)
–
28.7
(2,858.6)
(242.6)
(3,203.1)
(270.2)
–
(136.7)
(257.4)
(136.7)
(257.4)
(136.7)
(108.1)
(3,893.6)
(4,238.2)
(123.6)
(6,772.9)
(7,117.6)
(240.2)
–
(3,370.1)
(6,754.7)
–
(82.8)
(54.1)
(99.3)
(240.2)
(82.8)
(240.2)
(82.8)
(3,424.2)
(3,796.3)
(6,854.0)
(7,227.8)
net financial (liabilities)/asset
(581.4)
(45.6)
(535.8)
191.1
(558.8)
4.8
(554.0)
(928.0)
(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.
Scottish and Southern Energy
Annual Report 2011
138
Notes on the financial statements (continued)
for the year ended 31 March
31. 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 credit-worthiness of business customers is assessed prior to commencing, and for the duration of, their contract
of supply. Domestic customers’ credit-worthiness 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 credit-worthy 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 and Trading Committee within its authorised limits as delegated
by the Management 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 2011, the
Group’s Generation and Supply business had pledged £201.1m (2010 – £169.9m) of cash collateral and letters of credit and had received
£38.7m (2010 – £28.6m) 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 and
Trading 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 and 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
139
Overview
Strategy
Group performance
Segmental performance
Corporate governance
Financial statements
Shareholder information
2011
£m
34.9
28.6
63.5
563.7
2,226.9
366.3
111.3
3,331.7
2010
£m
21.2
21.7
42.9
596.3
1,381.6
355.6
129.8
2,506.2
The Generation and Supply segment accounts for 94.8% (2010 – 93.2%) of the Group’s trade receivables. Trade receivables associated
with the Group’s energy related 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 customer (also a wholesale supplier), is less than 10% (2010 – less than 9%) 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
2011
£m
2010
£m
3,053.7
2,258.5
181.7
69.0
171.5
3,475.9
(144.2)
3,331.7
153.6
57.9
185.1
2,655.1
(148.9)
2,506.2
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 £93.4m (2010 – £72.1m). The Company does not have trade receivables.
The movement in the allowance for 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
2011
£m
148.9
50.7
(61.7)
6.3
–
144.2
2010
£m
126.7
81.7
(70.2)
9.5
1.2
148.9
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.
Scottish and Southern Energy
Annual Report 2011
140
Notes on the financial statements (continued)
for the year ended 31 March
31. 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 Management Board.
The department’s operations are governed by policies determined by the Management Board and any breaches of these policies are reported
to the Risk and Trading Committee and the 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.
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 23, the Group has £70m of uncommitted bank lines and a £20m overdraft facility.
During the year, the Group has extended its existing £900m revolving credit facility and its £100m bilateral facility on reduced terms which
will now mature in August 2015. In the year, the Group borrowed £100m at a fixed price of 3.725% for a period of 10 years and £300m at a
floating rate of GBP 6 month LIBOR plus 50.2 basis points also for a period of 10 years from its £400m loan facility with the European
Investment Bank. In addition to these, the Group issued Hybrid Capital of £1,161.4m in the year. Details are included at note 28.
Under the going concern principle, the Group does not expect to issue medium to long term debt during the year ended 31 March 2012
although it may choose to do so at its discretion. Taking this and the current liquidity in the commercial paper market and the availability
of undrawn committed bank facilities into account, the Directors have concluded 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 £4.1bn of medium to long term
debt including Hybrid Capital 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 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.
As at 31 March 2011, the value of outstanding cash collateral in respect of mark-to-market related margin calls on exchange traded
positions was £nil (2010 – £71.2m).
The contractual cash flows shown in the following tables are the contractual undiscounted cash flows under the relevant financial
instruments. Where the contractual cash flows are variable based on a price, foreign exchange rate or index in the future, the contractual
cash flows 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 cash flows 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 cash flows 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 cash flow forecasts for the purposes of considering liquidity risk
as noted above.
141
Overview
Strategy
Group performance
Segmental performance
Corporate governance
Financial statements
Shareholder information
The following are the undiscounted contractual maturities of financial liabilities, including interest and excluding the impact of netting
agreements:
liability risk
2011
2011
carrying contractual
cash flows
£m
value
£m
2011
0-12
months
£m
2011
1-2
years
£m
2011
2-5
years
£m
2011
> 5
years
£m
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
> 5
years
£m
financial liabilities
loans and borrowings
Bank overdrafts
Commercial paper and
cash advances
5.3
(5.3)
(5.3)
–
–
–
9.2
(9.2)
(9.2)
–
–
–
106.7
511.5
Bank loans – floating
778.9
Bank loans – fixed
Unsecured bonds – fixed 3,643.5
216.9
Non-recourse funding
(28.6)
Fair value adjustment
(106.8)
(564.5)
(1,189.5)
(6,833.0)
(217.6)
–
(106.8)
(107.3)
(239.9)
(215.3)
(12.5)
–
–
–
–
(322.0)
(103.7)
(31.5)
(519.9)
(322.9)
(106.8)
(215.3) (1,803.4) (4,599.0)
(149.9)
(43.3)
–
–
(11.9)
–
745.6
281.6
530.9
3,639.9
484.1
(28.7)
(745.6)
(296.0)
(851.5)
(6,956.7)
(648.9)
–
(745.6)
(72.4)
(62.0)
(215.2)
(53.6)
–
–
(2.8)
(60.2)
–
–
(220.8)
–
(321.6)
(407.7)
(215.2) (1,807.4) (4,718.9)
(398.6)
(145.7)
–
(51.0)
–
–
Finance lease
obligations
5,234.2
(8,916.7)
(687.1)
(365.5) (2,273.3) (5,590.8)
5,662.6
(9,507.9) (1,158.0)
(329.2) (2,581.6) (5,439.1)
372.2
(743.0)
(52.1)
(50.2)
(152.4)
(488.4)
384.4
(796.2)
(52.8)
(52.0)
(153.7)
(537.7)
5,606.4
(9,659.7)
(739.2)
(415.7) (2,425.7) (6,079.2)
6,047.0 (10,304.1) (1,210.8)
(381.2) (2,735.3) (5,976.8)
Derivative financial liabilities
Operating derivatives
designated at fair value 2,911.8 12,623.3
Interest rate swaps
used for hedging
Interest rate swaps
designated at fair value 115.7
Forward exchange
contracts held for
hedging
33.3
0.6
(115.6)
(33.2)
(10.2)
9,363.5 2,413.4
846.4
–
2,738.1 (11,514.2) (8,421.2) (1,870.1) (1,174.8)
(48.1)
(8.5)
(7.6)
(8.8)
(8.3)
74.2
(74.3)
(15.9)
(14.8)
(26.2)
(17.4)
(7.1)
(5.3)
(15.9)
(87.3)
101.6
(101.6)
(8.0)
(6.1)
(11.9)
(75.6)
(5.5)
(4.7)
–
–
1.1
(3.3)
(2.0)
(1.2)
(0.1)
Forward exchange
contracts designated
at fair value
15.4
(960.5)
(488.3)
(363.3)
(108.9)
3,076.8 11,503.8
8,854.1 2,032.5
712.8
other financial liabilities
–
(39.6)
(95.6) 2,919.7 (11,891.4) (8,626.5) (1,950.4) (1,173.4)
(198.0)
(179.4)
(58.2)
4.7
–
–
(141.1)
Trade payables
3,197.2
(3,197.2) (3,197.2)
3,197.2
(3,197.2) (3,197.2)
–
–
–
–
–
–
2,161.6
(2,161.6) (2,161.6)
2,161.6
(2,161.6) (2,161.6)
–
–
–
–
–
–
total
11,880.4 (1,353.1) 4,917.7 1,616.8 (1,712.9) (6,174.8) 11,128.3 (24,357.1) (11,998.9) (2,331.6) (3,908.7) (6,117.9)
Derivative financial assets
Financing derivatives
Operating derivatives
designated at fair value (3,433.7) (15,189.2) (10,945.1) (2,832.5) (1,359.2)
(3,515.6) (15,966.4) (11,805.2) (2,718.6) (1,369.9)
(860.1)
(777.2)
(81.9)
(10.7)
113.9
(20.3)
(106.8) (1,466.4) (1,149.8)
(280.6)
(18.5)
(17.5)
(52.4) (1,827.8) 8,200.6 6,930.1 1,175.5
(72.7) (1,934.6) 6,734.2 5,780.3
894.9
119.2
100.7
(24.2)
(41.7)
Net total (i)
8,364.8 (17,319.5) (6,887.5) (1,101.8) (3,082.8) (6,247.5) 9,193.7 (17,622.9) (6,218.6) (1,436.7) (3,808.0) (6,159.6)
(i) The Group believes the liquidity risk associated with out-of-the-money operating derivative contracts needs to be considered in conjunction with the
profile of payments or receipts arising from derivative financial assets. It should be noted that cash flows associated with future energy sales and
commodity contracts which are not IAS 39 financial instruments are not included in this analysis, which is prepared in accordance with IFRS 7.
Scottish and Southern Energy
Annual Report 2011
142
Notes on the financial statements (continued)
for the year ended 31 March
31. financial instrumEnts anD risK (continued)
B. risKs from usE of financial instrumEnts (continued)
The Company has the following liquidity maturity profile:
liquidity risk
2011
2011
carrying contractual
cash flows
£m
value
£m
2011
0-12
months
£m
2011
1-2
years
£m
2011
2-5
years
£m
2011
> 5
years
£m
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
> 5
years
£m
financial liabilities
loans and borrowings
Commercial paper and
cash advances
106.8
361.5
Bank loans – floating
309.5
Bank loans – fixed
Unsecured bonds – fixed 2,857.1
(28.6)
Fair value adjustment
(106.8)
(412.3)
(375.3)
(4,949.8)
–
(106.8)
(6.0)
(16.2)
(179.4)
–
–
(6.0)
(16.2)
–
–
(321.9)
(78.4)
(116.8)
(226.1)
(179.4) (1,695.1) (2,895.9)
–
–
–
745.6
131.5
209.8
2,858.6
(28.7)
(745.6)
(142.5)
(252.4)
(5,060.6)
–
(745.6)
(71.2)
(12.5)
(179.4)
–
–
(1.7)
(12.5)
–
–
–
(69.6)
–
(227.4)
(179.4) (1,699.5) (3,002.3)
–
–
–
Derivative financial liabilities
3,606.3
(5,844.2)
(308.4)
(201.6) (1,999.6) (3,334.6)
3,916.8
(6,201.1) (1,008.7)
(193.6) (1,996.5) (3,002.3)
29.1
Interest rate swaps
used for hedging
Interest rate swaps
designated at fair value 106.8
Forward exchange
contracts held for
hedging
0.6
Forward exchange
contracts designated
at fair value
other financial liabilities
(29.1)
(6.3)
(6.3)
(8.2)
(8.3)
32.3
(32.3)
(9.2)
(9.2)
(13.9)
–
(106.8)
(5.8)
(4.8)
(15.4)
(80.8)
89.9
(89.9)
(6.5)
(4.6)
(10.7)
(68.1)
(10.2)
(5.5)
(4.7)
–
1.1
(3.3)
(2.0)
(1.2)
(0.1)
15.7
(960.5)
(488.3)
(363.3)
(108.9)
4.7
(198.0)
(179.4)
(58.2)
152.2
(1,106.6)
(505.9)
(379.1)
(132.5)
(89.1)
128.0
(323.5)
(197.1)
(73.2)
–
–
–
–
(68.1)
39.6
14.9
Amounts due to
subsidiary
undertakings
2,757.0
(2,757.0) (2,757.0)
2,757.0
(2,757.0) (2,757.0)
–
–
–
–
–
–
2,569.0
(2,569.0) (2,569.0)
2,569.0
(2,569.0) (2,569.0)
–
–
–
–
–
–
total
6,515.5
(9,707.8) (3,571.3)
(580.7) (2,132.1) (3,423.7) 6,613.8
(9,093.6) (3,774.8)
(266.8) (1,981.6) (3,070.4)
Derivative financial assets
Financing derivatives
(78.0)
(777.3)
(860.3)
Net total
6,437.5 (10,485.1) (4,431.6)
113.7
(104.1) (1,466.5) (1,149.8)
(467.0) (2,142.5) (3,444.0) 6,509.7 (10,560.1) (4,924.6)
(10.4)
(20.3)
(280.6)
(18.5)
(17.6)
(547.4) (2,000.1) (3,088.0)
(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 Management Board and managed by the Risk and Trading
Committee. The exposure 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
143
Overview
Strategy
Group performance
Segmental performance
Corporate governance
Financial statements
Shareholder information
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.
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, the acquired exploration and production business 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 and Trading Committee. The Group’s exposure to commodity risk is reported to and monitored
by the Risk and Trading 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 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.
commodity prices
UK gas (p/therm)
UK power (£/MWh)
UK coal (US$/tonne)
UK emissions (€/tonne)
UK oil (US$/bbl)
2011
2010
reasonably
possible
increase/
decrease in
variable
+/- 10
+/- 9
+/- 13
+/- 3
+/- 12
Base price (i)
44
43
97
14
86
Reasonably
possible
increase/
decrease in
variable
+/- 6
+/- 6
+/- 11
+/- 2
+/- 10
Base price (i)
72
63
132
19
109
(i) The base price represents the average forward market price over the duration of the active market curve used to calculate the sensitivity analysis.
Scottish and Southern Energy
Annual Report 2011
144
Notes on the financial statements (continued)
for the year ended 31 March
31. financial instrumEnts anD risK (continued)
B. risKs from usE of financial instrumEnts (continued)
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
2011
2010
impact on
profit
£m
impact on
equity
£m
Impact on
profit
£m
Impact on
equity
£m
257.3
(257.3)
–
–
196.0
(196.0)
–
–
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 Group’s
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:
2011
£m
2010
£m
2,074.4
1,864.8
2011
2010
¥m
DKK
(million)
€m
$m
cHf
(million)
¥m
DKK
(million)
€m
$m
CHF
(million)
28,000.0
–
664.8
150.0
20.0 28,000.0
–
1,370.0
210.0
Gross exposure
28,000.0
1,036.8
1,079.8
2,009.7
20.0
28,253.4
–
1,036.8
415.0
1,859.7
–
253.4
843.1
843.1
627.5
2,818.4
1,997.5
3,028.4
Loans and borrowings
Purchase and commodity
contract commitments
Forward exchange/
swap contracts
Net exposure (in currency)
Net exposure (in £m)
28,000.0
1,036.8
770.0
1,682.3
20.0
28,253.4
843.1
843.2
1,538.9
–
–
–
–
309.8
273.7
327.4
203.8
–
–
–
–
–
–
1,154.3
1,489.5
1,028.1
980.5
–
–
–
–
–
–
145
Overview
Strategy
Group performance
Segmental performance
Corporate governance
Financial statements
Shareholder information
This represents the net exposure to foreign currencies, reported in pounds sterling, and arising from all Group activities. All sensitivity
analysis has been prepared on the basis of the relative proportions of instruments in foreign currencies being consistent as at the balance
sheet date. This includes only monetary assets and liabilities denominated in a currency other than sterling and excludes the translation
of the net assets of foreign operations but not the corresponding impact of the net investment hedge.
The sensitivity analysis is indicative only and it should be noted that the Group’s exposure to such market rate changes is continually changing.
The calculations are based on linear extrapolations of rate changes which may not reflect the actual result which would impact upon the Group.
A 10% increase in foreign currency exchange rates would have had the following impact on profit after taxation, based on the assumptions
presented above:
US Dollars
Euro
DKK
¥
CHF
Equity
Income Statement
at 31 march
2011
£m
At 31 March
2010
£m
at 31 march
2011
£m
At 31 March
2010
£m
–
68.8
–
–
–
68.8
–
58.4
–
–
–
58.4
16.5
(46.6)
–
–
–
(30.1)
78.4
23.9
–
–
–
102.3
The impact of a 10% decrease in rates would be an equal and opposite change 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 rates 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
2011
carrying
amount
£m
(4,258.4)
(1,016.2)
(5,274.6)
476.9
(116.5)
(5,262.8)
(372.2)
(5,274.6)
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)
Scottish and Southern Energy
Annual Report 2011
146
Notes on the financial statements (continued)
for the year ended 31 March
31. financial instrumEnts anD risK (continued)
B. risKs from usE of financial instrumEnts (continued)
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.
The sensitivity analysis is indicative only and it should be noted that the Group’s exposure to such market rate changes is continually
changing. The calculations are based on linear extrapolations of rate changes which may not reflect the actual result which would impact
upon the Group.
Income statement
2011
£m
10.4
10.4
2010
£m
9.9
9.9
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
2011
£m
2010
£m
887.9
573.9
1,461.8
(3,449.6)
3,881.8
432.2
(935.9)
891.5
(44.4)
(640.6)
604.1
(36.5)
1,417.4
395.7
(i) Total result on derivatives in the income statement represents the total amounts (charged) or credited to the income statement in respect of operating
and financial derivatives.
(ii) Amounts settled in the year represent the result on derivatives transacted which have matured or been delivered and have been included within the total
result on derivatives.
The net derivative financial assets and (liabilities) are represented as follows:
Derivative financial assets
Non-current
Current
Derivative liabilities
Non-current
Current
Total derivative liabilities
net asset/(liability)
147
Overview
Strategy
Group performance
Segmental performance
Corporate governance
Financial statements
Shareholder information
2011
£m
2010
£m
990.1
2,525.5
3,515.6
(769.3)
(2,307.5)
(3,076.8)
438.8
466.3
1,468.3
1,934.6
(899.0)
(2,020.7)
(2,919.7)
(985.1)
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.
kkLevel 1 fair value measurements are those derived from unadjusted quoted market prices for identical assets or liabilities.
kkLevel 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).
kkLevel 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
Level 2
Level 3
total
212.3
–
–
212.3
(132.4)
–
–
–
(132.4)
3,225.4
32.2
45.7
3,303.3
(2,779.4)
(149.0)
(16.0)
28.6
(2,915.8)
–
–
–
–
–
–
–
–
–
3,437.7
32.2
45.7
3,515.6
(2,911.8)
(149.0)
(16.0)
28.6
(3,048.2)
There were no significant transfers out of level 1 into level 2 and out of level 2 into level 1 during the year ended 31 March 2011.
(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
2011
2011
carrying Expected
2011
0-12
amount cash flows months
£m
£m
£m
2011
1-2
years
£m
2011
2-5
years
£m
2011
2010
2010
> 5 Carrying Expected
2010
0-12
amount cash flows months
£m
£m
£m
years
£m
2010
1-2
years
£m
2010
2-5
years
£m
2010
> 5
years
£m
(4.0)
(4.0)
(2.2)
(1.3)
(0.5)
–
(7.1)
(7.1)
(3.2)
(2.1)
(1.8)
–
18.5
(0.6)
(237.8)
(10.2)
(186.2)
(5.5)
(11.8)
(4.7)
(19.5)
–
(20.3)
–
22.0
(1.1)
(543.5)
(3.3)
(485.5)
(2.0)
17.9
(248.0)
(191.7)
(16.5)
(19.5)
(20.3)
20.9
(546.8)
(487.5)
(11.8)
(1.2)
(13.0)
(19.4)
(0.1)
(19.5)
(26.8)
–
(26.8)
Scottish and Southern Energy
Annual Report 2011
148
Notes on the financial statements (continued)
for the year ended 31 March
31. financial instrumEnts anD risK (continued)
B. risKs from usE of financial instrumEnts (continued)
net investment hedge
The Group’s net investment hedge consists of debt issued in the same currency (€) as the net investment in foreign subsidiaries with
€ denominated functional currencies being the Airtricity Supply business and the Ireland and European wind farm portfolios. The hedge
compares the element of these net assets 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
(2011 – £4.3m gain, 2010 – £47.2m loss). Gains and losses on the ineffective portion of the hedge are recognised immediately in the income
statement (2011 – £nil, 2010 – £nil).
(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. The Group’s credit ratings are also important in maintaining an efficient cost of capital and
in limiting collateral requirements throughout the Group. As at 31 March 2011, the Group’s long term credit rating was A3 stable outlook for
Moody’s and A- stable outlook for Standard & Poors. These remained unchanged in the year to 31 March 2011. Further detail of the capital
management objectives, policies and procedures are included in the ‘Financial management and balance sheet’ section of the Financial
Overview at pages 20 to 22 of this report.
The maintenance of a medium-term corporate model is a key control in monitoring the development of the Group’s capital structure, and
allows for detailed scenarios and sensitivity testing. Key ratios drawn from this analysis underpin regular updates to the Board and include
the ratios used by the rating agencies in assessing the Group’s credit ratings.
From time-to-time the Group purchases its own shares on the market; the timing of these purchases depends on market prices and economic
conditions. The use of share buy-backs is the Group’s benchmark for investment decisions and can be utilised at times when management
believe the Group’s shares are undervalued. No share buy-back was made during the year.
The Group’s debt requirements are principally met through issuing bonds denominated in sterling and euros as well as medium term bank
loans predominately with the European Investment Bank. The Group also maintains £1bn of committed bank facilities that act as a backstop
to the Group’s commercial paper programme and these remain undrawn for the majority of the time.
In October 2010 the Group issued it’s debut Hybrid bond, a financial instrument which brings together features of both debt and equity and
is perpetual and subordinate to all senior creditors. The dual tranche issue comprised £750m and €500m (£461m) and has an all-in funding
cost of around 5.6% per annum. There is no fixed redemption date but SSE may, at its sole discretion, redeem all, but not part of, these
bonds at their principal amount on 1 October 2015 or 1 October 2020 or any subsequent annual coupon payment date. The issue of the
Hybrid bond and the equity placing back in January 2009 reflects the Group’s prudent approach to financing investment and has also
enhanced the Group’s future options by providing additional sources of funding.
In summary, the Group’s intent is to balance returns to shareholders between current 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. There were no changes to the Group’s capital management approach during the year.
149
Overview
Strategy
Group performance
Segmental performance
Corporate governance
Financial statements
Shareholder information
32. 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 (SERP) Limited
Scotia Gas Networks Limited
Marchwood Power Limited
Greater Gabbard Offshore Winds Ltd
associates:
Barking Power Limited
Derwent Cogeneration Limited
Logan Energy Ltd
Onzo Limited
Geothermal International Limited
Aquamarine Power Limited
Green Highland Renewables Limited
Vital Holdings Limited
sale of goods
and services
2011
£m
purchase of
goods and
services
2011
£m
other
transactions
2011
£m
Sale of goods
and services
2010
£m
Purchase of
goods and
services
2010
£m
Other
transactions
2010
£m
7.9
39.7
61.8
–
6.3
0.9
38.8
–
–
–
–
–
0.2
(121.3)
–
(131.2)
(82.7)
(0.2)
(45.3)
(53.2)
(0.1)
(4.3)
(0.8)
–
–
(0.6)
22.5
–
–
14.6
–
6.1
–
–
–
–
0.1
–
–
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)
–
(0.1)
–
–
–
(0.6)
7.1
–
–
–
–
15.2
–
–
(4.9)
–
–
–
–
The transactions with Seabank Power Limited, Barking Power Limited and Derwent Cogeneration Limited relate to the contracts for the
provision of energy or the tolling of energy under power purchase arrangements. Other transactions with Seabank Power Limited and
Barking Power Limited relate to dividends received by the Group. PriDE (SERP) 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.
The balances outstanding with related parties at 31 March were as follows:
consolidated
Jointly controlled entities:
Seabank Power Limited
PriDE (SERP) Limited
Scotia Gas Networks Limited
Marchwood Power Limited
associates:
Barking Power Limited
Derwent Cogeneration Limited
Onzo Limited
Logan Energy Ltd
Amounts owed by
related parties
Amounts owed to
related parties
2011
£m
0.3
0.3
15.7
0.1
–
3.1
5.2
–
2010
£m
0.3
7.0
16.4
–
16.4
2.0
–
–
2011
£m
25.9
0.6
12.1
7.3
1.0
1.8
0.9
–
2010
£m
26.0
–
1.3
7.0
9.3
9.4
1.2
0.1
The amounts outstanding are trading balances, are unsecured and will be settled in cash. No guarantees have been given or received.
No provisions have been made for doubtful debts in respect of the amounts owed by related parties. Aggregate capital loans to jointly
controlled entities and associates are shown in note 14.
Scottish and Southern Energy
Annual Report 2011
150
Notes on the financial statements (continued)
for the year ended 31 March
32. rElatED party transactions (continued)
remuneration of key management personnel
The remuneration of the key management personnel of the Group, is set out below in aggregate.
short-term employment benefits
Executive Directors
Other Management Board members (from 1 January 2011)
2011
£m
3.7
0.3
4.0
2010
£m
3.6
–
3.6
Key management personnel are responsible for planning, directing and controlling the operations of the Group. From 1 January 2011 these
were identified as the Management Board, which is made up of the Executive Directors and six senior managers.
In addition, the key management personnel receive share based remuneration, details of which are found at note 30. Further information
about the remuneration of individual Directors is provided in the audited part of the Directors’ Remuneration Report. The Executive
Directors are employed by the Company.
Information regarding transactions with post-retirement benefit plans is included in note 29.
33. commitmEnts anD continGEnciEs
(i) capital commitments
Capital expenditure:
Contracted for but not provided
2011
£m
2010
£m
1,146.9
994.5
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.
(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
2011
£m
182.0
37.7
219.7
2010
£m
229.6
41.6
271.2
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
2011
£m
120.8
358.0
156.5
635.3
51.6
93.3
139.4
284.3
172.4
451.3
295.9
919.6
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
151
Overview
Strategy
Group performance
Segmental performance
Corporate governance
Financial statements
Shareholder information
The average power purchase agreement lease term is 5 years.
The obligations under power purchase agreements with various power generating companies are not deemed to qualify as finance leases
under IAS 17.
The Company has no operating lease commitments as a lessee.
(b) leases as lessor:
The Group and Company have no operating lease commitments as a lessor.
(iii) Guarantees and indemnities
Scottish and Southern Energy plc has provided guarantees on behalf of subsidiary, joint venture and associated undertakings as follows:
Bank borrowing
Performance of contracts
Purchase of gas
2011
£m
400.0
1,851.9
50.5
2010
£m
–
2,042.1
60.5
The Company has entered into guarantees in respect of 50% of the major contracts for the Greater Gabbard Offshore Winds joint venture
project which is reflected in the above guarantees.
In addition, unlimited guarantees have been provided on behalf of subsidiary undertakings in relation to six 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 funding required by the scheme. SSE E&P UK Limited,
a wholly owned subsidiary of the Company, has provided a guarantee to Hess Limited in respect of decommissioning liabilities.
The Group has drawn down £400m from its European Investment Bank facility in the year. SSE Renewables Holdings Limited and SSE
Generation Limited, both wholly owned subsidiaries of the Company, have entered into guarantee and indemnity agreements with the
European Investment Bank for the amounts drawn down.
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.
34. post BalancE sHEEt EVEnts
On 14 April 2011 the Group disposed of three wind farms to Infinis for a final cash consideration of £178.4m. The wind farms were included
in assets held for sale in note 16. No profit or loss was recognised on this transaction.
152
Shareholder information
Scottish and Southern Energy
Annual Report 2011
Overview
Strategy
Group performance
Segmental performance
Corporate governance
Financial statements
Shareholder information
ecommunications programme
To sign up to our eCommunications
Programme visit www.sse.com/investors/
ecommsprogramme. As a thank you we
will donate £2 on your behalf to the World
Wildlife Fund’s (WWF) International
Forest Programme. In 2010, SSE made
a donation of over £22,000 to this fund
on behalf of shareholders.
Keep us informed
Keep us informed of changes to your
email address by visiting www.sse.com/
investors/ecommsprogramme and follow
the instructions under ‘update your
email address’.
copy reports
Copies of the Annual Report and Accounts
2011 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, The Registry,
34 Beckenham Road, Beckenham,
Kent BR3 4TU
Telephone: 0845 143 4005
Email: sse@capitaregistars.com
financial calendar
Annual General Meeting
21 July 2011
Ex dividend date
27 July 2011
Record date
29 July 2011
Final date for receipt of Scrip Elections
(in respect of the 2010/11 final dividend)
25 August 2011
Final dividend payable
23 September 2011
Half year results announcement*
9 November 2011
Website – www.sse.com
The Company’s website contains a wide
range of information including a dedicated
Investors section where you can find further
information about shareholder services
including:
kkshare price information;
kkdividend history and trading graphs;
kkthe Scrip Dividend Scheme;
kktelephone and internet share dealing; and
kkdownloadable shareholder forms.
mobile users
If you use a mobile phone with a barcode
scanning application, you can scan the
barcode below to access a copy of our
website from your mobile device. If you
don’t have a mobile phone with a barcode
scanning application you can still visit
www.sse.com/mobile for a mobile-friendly
version of the Company’s website.
* Provisional date.
The stunning photograph
used on the cover of this year’s
Annual Report was taken at
SSE’s Drumderg wind farm in
Perthshire by award-winning
photographer Toby Smith.
Last year SSE commissioned Toby
to take a series of photographs
of its renewable energy projects
across Scotland. The photographs
form a collection known as
‘The Renewables Project’, and
are now in use on SSE’s website,
www.sse.com, and on display in
its office buildings. The Renewables
Project has also since featured in
a range of publications including
a special feature in National
Geographic magazine.
Contents
Overview
01
02
05
06
08
Introduction
The energy sector in Great Britain
The energy sector in Ireland
SSE – a balanced range of
energy businesses
Chairman and Chief Executive
Questions and answers
Strategy
10
Why invest in SSE?
Group performance
16
17
Key performance indicators
Financial overview
Segmental performance
23
23
29
29
43
Economically-regulated businesses
Energy networks
Market-based businesses
Generation and Supply
Other energy and utility services
Corporate governance
47
Chairman’s introduction to
SSE corporate governance
Board of Directors
The SSE team
How the Board works
Risk management
Audit Committee
Risk and Trading Committee
Nomination Committee
Safety, Health and Environment
Advisory Committee
Remuneration Report
Introduction
At a glance
Remuneration explained
Remuneration in detail
Other statutory information
48
50
52
56
60
62
63
64
65
65
66
67
72
75
Financial statements
78
79
80
81
82
84
86
86
95
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. Reclassification of comparative
amounts
3. Segmental information
4. Other operating income and expense
5. Exceptional items and certain
remeasurements
6. Directors and employees
7. Finance income and costs
8. Taxation
9. Dividends
10. Earnings per share
11. Intangible assets
12. Property, plant and equipment
13. Biological assets
14. Investments
15. Subsidiary undertakings
16. Acquisitions, disposals and
held for sale assets
17. Inventories
18. Trade and other receivables
19. Cash and cash equivalents
20. Trade and other payables
21. Current tax liabilities
22. Construction contracts
23. Loans and other borrowings
24. Deferred taxation
25. Provisions
26. Share capital
27. Reserves
28. Hybrid capital
29. Retirement benefit obligations
30. Employee share-based payments
31. Financial instruments and risk
32. Related party transactions
33. Commitments and contingencies
34. Post balance sheet events
96
99
100
101
102
103
105
105
106
110
111
112
115
117
119
120
120
120
121
121
121
124
125
126
126
126
127
130
135
149
150
151
Shareholder information
152
Shareholder information
The Directors’ Report is set out on pages 6 to 76.
*Unless otherwise stated, this Annual Report describes adjusted operating profit before exceptional
items, remeasurements arising from 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, remeasurements arising from 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, remeasurements arising from IAS 39 and deferred tax.
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Scottish and Southern Energy plc
Annual Report 2011