Making energy better
Annual Report 2012
Inside this report...
Overview
01
02
02
04
06
07
09
Chairman’s statement
The energy sector
Global context
Great Britain
Ireland
Weather
Questions and answers with
the SSE Executive Team
SSE – a balanced range of
energy businesses
12
Strategy
14 Why invest in SSE?
Group performance
17
18
Key performance indicators
Financial overview
Networks
Economically-regulated businesses
Segmental performance
24
24
30 Market-based businesses
31
31 Market-based businesses
39 Wholesale
39 Market-based businesses
Retail
Corporate governance
54
Key performance indicators –
SSE’s core values
Chairman’s introduction to
SSE corporate governance
Board of Directors
The SSE team
How the Board works
Risk management
Nomination Committee
Audit Committee
Safety, Health and Environment
Advisory Committee
Remuneration Report
Introduction
Remuneration in 2011/12
Remuneration for 2012/13
and beyond
Remuneration in detail
Other statutory information
55
56
58
61
65
71
72
74
75
75
77
80
84
87
Independent auditor’s 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
Financial statements
90
91
92
93
94
96
98
98
108 2. Change of reportable segments
111 3. Segmental information
114 4. Other operating income and expense
115
Exceptional items and certain
remeasurements
5.
117 6. Directors and employees
118 7. Finance income and costs
119 8. Taxation
121 9. Dividends
121 10. Earnings per share
122 11. Intangible assets
126 12. Property, plant and equipment
127 13. Biological assets
128 14. Investments
131 15. Subsidiary undertakings
133 16. Acquisitions, disposals and
held for sale assets
134 17. Inventories
135 18. Trade and other receivables
135 19. Cash and cash equivalents
135 20. Trade and other payables
136 21. Current tax liabilities
136 22. Construction contracts
136 23. Loans and other borrowings
139 24. Deferred taxation
140 25. Provisions
141 26. Share capital
141 27. Reserves
142 28. Hybrid capital
142 29. Retirement benefit obligations
146 30. Employee share-based payments
151 31. Financial instruments and risk
165 32. Related party transactions
166 33. Commitments and contingencies
167 34. Post balance sheet events
Shareholder information
168 Shareholder information
Dividend per share – pence
80.12011: 75.0
Operating profit by business
2011/12 – %
Networks 44
Retail 19
Wholesale 37
Capital expenditure and
investment 2011/12 – %
Networks 31
Retail 5
Wholesale 61
Other 3
Total recordable injury rate
2011/12
0.11per 100,000 hours worked
The Directors’ Report is set out on pages 1 to 88.
* 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.
01
SSE Annual Report 2012
Chairman’s statement
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.
This report summarises SSE’s performance in
2011/12 and its plans for 2012/13 and beyond.
There are three issues over which SSE has
no control but which in one way or another
touched every part of its business in 2011/12
– upheaval in global energy markets,
widespread economic uncertainty and the
weather. Higher wholesale gas prices, falling
demand for energy and a succession of winter
storms presented major challenges for the
wholesale, retail and networks parts of SSE.
The fact that, despite all of this, SSE again
delivered increases in the full-year dividend
and in adjusted profit before tax* demonstrates
the resilience inherent in its balanced model
of market-based and economically-regulated
energy businesses, and the robustness of
its strategy of focusing on operations and
investment in each of those businesses. It also
demonstrates the outstanding commitment
and professionalism of the people who work
for SSE throughout the UK and Ireland, where
the Company’s operations and investments
are focused.
In very challenging circumstances, the 2%
increase achieved by SSE in adjusted profit
before tax* in 2011/12 was a solid result and it
is particularly encouraging to see such a good
performance in Networks, which for so long
have been SSE’s backbone. Also encouraging
was the increase in capacity for, and output of,
renewable energy. In both of these areas there
has been significant investment in recent years,
the benefits of which are now coming through.
For some people, ‘profit’ and ‘dividend’ are
contentious words when it comes to energy,
which is not a discretionary purchase but
essential to the functioning of modern life.
The reality is, however, that profit and dividend
allow SSE to employ people, pay tax, make
investments that keep the lights on and
provide an income return that shareholders
need. In doing this, SSE aims to provide social
value as well as economic value.
As a result of this, SSE recognises that it must
continually earn the right to make a profit and
pay dividends and that it must do so in an
environment in which trust in business and
other institutions has eroded significantly
and in which there will be other significant
challenges. This means that 2012/13 and
beyond will be about SSE continuing the work
to earn the trust of customers in retail and
business markets, delivering reliable supplies
of energy to network customers and investing
in assets to support secure and lower-carbon
supplies of energy in the future.
The more some things change in the future,
however, the more others should stay the
same. That means SSE must adhere to
its core values of Safety, Service, Efficiency,
Sustainability, Excellence and Teamwork.
These are the values of an organisation that
is committed to the long-term provision of
services, investment in assets and payment
of dividends and they are the values on which
SSE expects to be judged.
With such a strong commitment to values,
there can be every confidence that SSE
will extend further its record of annual
above-inflation dividend growth. SSE paid
its first full-year dividend in 1999. Since then,
there have been 13 successive above-inflation
increases. The target for 2012/13 is to deliver
a 14th increase in the full-year dividend of
at least 2% more than inflation.
At heart, SSE remains a consistent and
straightforward company – providing vital
services to customers, investing in essential
energy assets and paying dividends to
shareholders every year. It is a company
with which I believe customers, shareholders,
employees and the Board should be pleased
to be associated now and in the future.
Lord Smith of Kelvin
Chairman
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02
SSE Annual Report 2012
The energy sector
Global context
The production of electricity and gas for customers in the
UK and Ireland is a market-based activity in which producers,
retailers, large users and other energy traders buy and sell
electricity and gas like any other commodity.
As the decline of oil and gas production from the UK Continental
Shelf continues, there is a continuing integration of UK energy
prices in the wider global market, which means macro economic
and geopolitical factors are important. During 2011/12, the energy
market was affected by world events including the Eurozone
instability, the Arab Spring and the ongoing effects of the
tsunami-hit Fukushima power plant disaster.
03
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This map shows the energy
interconnection between
Great Britain and Ireland
and between Great Britain
and mainland Europe.
04
SSE Annual Report 2012
The energy sector (continued)
Great Britain
SSE in electricity
SSE is involved in the generation,
transmission, distribution and
supply of electricity.
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.
The majority of SSE’s operations are
in England, Scotland and Wales, where
most parts of the energy sector have
been privatised for over 20 years.
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 3).
Around 30 million homes, offices and
businesses are connected to the electricity
network in Great Britain and around
23 million to the gas network. Total electricity
consumption in Great Britain in 2011 (the
latest for which information is available)
was 371TWh and total gas consumption
was 906TWh.
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.
40%Over 40% of gas used
in the UK was imported.
This is likely to increase
to around 80% in 2020.
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.
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 Regulated Asset
Value (RAV), which represents:
the price paid for them when they
were privatised; plus
allowed capital expenditure; less
annual depreciation.
DD
DD
DD
Economic regulation of networks
The RAV is indexed to the Retail Price Index.
3
ELECTrICITy DISTrIBUTIOn
USING lOWER vOlTAGE lINES AND CABlES
TO DISTRIBUTE ElECTRICITy TO HOmES,
WORKplACES AND OTHER pREmISES.
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:
4
ELECTrICITy SUppLy
RETAIlING ElECTRICITy TO HOUSEHOlD,
SmAll BUSINESS AND INDUSTRIAl AND
COmmERCIAl CUSTOmERS.
DD
DD
DD
DD
electricity transmission (three networks
in GB) – high voltage electricity wires
and cables;
electricity distribution (14 networks in GB)
– lower voltage wires and cables delivering
electricity to customers’ premises;
gas transmission (one network in GB) –
high pressure gas pipelines; and
gas distribution (eight networks in GB) –
lower pressure pipes delivering gas to
customers’ premises.
Distribution networks are each owned and
operated by the same company. Transmission
networks have a single, GB-wide system
operator – National Grid operates the GB
electricity and gas systems.
Companies cannot charge network users
more than is allowed under the Price Control.
If, in any year, a regulated energy network
company’s revenue is greater (over recovery)
or lower (under recovery) than is allowed
under the relevant Price Control, the difference
is carried forward and the subsequent prices
the companies may charge are varied.
Overall, Ofgem seeks to strike the right balance
between attracting investment in electricity
and gas networks, encouraging companies
to operate them as efficiently as possible
and ensuring that prices ultimately borne by
customers are no higher than they need to be.
The current Price Controls are due to run until:
DD
31 March 2013 (electricity transmission,
gas transmission and distribution); and
31 March 2015 (electricity distribution).
DD
For future Price Controls, Ofgem is using its
new RIIO (Revenue = Incentives + Innovation
05
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 lARGE vOlUmES
OF NATURAl GAS UNDER GROUND FOR
USE AT A FUTURE DATE.
3
GaS DISTrIBUTIOn
USING pIpES TO DISTRIBUTE GAS FROm
THE TRANSmISSION NETWORK TO HOmES,
WORKplACES AND OTHER pREmISES.
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 permits 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 buy 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 2012, 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 Poland, Slovenia and
Romania 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. Its Retail Market Review represents
Ofgem’s attempt to enhance competition
in the retail energy market and make it work
more effectively so that the benefits can be
realised for more consumers. •
+ 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 98% of
the electricity consumed by UK customers is
generated in the UK. At 30 May 2011 (the latest
date for which data is available), there were
26 electricity generators with more than 50MW
of capacity operating in Great Britain. In total
there was around 85GW of installed capacity.
In the year 2010/11, over 40% 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:
DD
DD
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
producers, shippers, retailers, 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.
SSE price tracker showing components of a typical dual fuel bill
)
£
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A
1,400
1,200
1,000
800
600
400
200
0
-200
-400
Jan ’04
D
Current
outlook
Wholesale
energy
Supply
Use of system
Government
schemes
Tariff
Margin
See www.sse.com/
pricetracker for
updates.
4
GaS SUppLy
RETAIlING GAS TO HOUSEHOlD,
SmAll BUSINESS AND INDUSTRIAl
AND COmmERCIAl CUSTOmERS.
Jan ’05
Jan ’06
Jan ’07
Jan ’08
Jan ’09
Jan ’10
Jan ’11
Jan ’12
Jan ’13
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06
SSE Annual Report 2012
The energy sector (continued)
Ireland
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:
DD
DD
the 500MW Moyle interconnector;
the Scotland-Northern Ireland gas pipeline;
and
the Scotland-Republic of Ireland gas pipeline.
DD
An additional 500MW interconnector is
under construction between Dublin and
Wales, which is scheduled to come online
by November 2012.
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, which will require approximately
5,000MW of renewable capacity to be
installed across the island. Renewables,
mainly hydro and wind, currently supply
15% of electricity demand. The electricity
Transmission System Operator (TSO),
EirGrid announced that Ireland had reached
2GW of installed wind capacity as of March
2012. With largely untapped offshore
resources Ireland has a significant opportunity
to be an exporter of renewable energy.
The British Irish Council is currently looking
at removing barriers to cross-border
renewables trading.
Economic regulation of networks
The Commission for Energy Regulation
(CER) and the Northern Ireland Utility
Regulator (NIAUR) regulate the electricity
and natural gas markets in RoI and
NI respectively.
The state-owned (RoI) Electricity Supply
Board (ESB) owns and operates the
distribution and transmission networks in
ROI and NI. Similarly to GB, these assets
are regulated through Price Controls set
by CER and NIAUR for five-year periods.
Ireland and northern Ireland
electricity fuel mix (combined) – %
Solid fuels 16
Oil 2
Gas 64
Renewables/other 18
The current price controls in RoI will run until
2015 and 2012 in NI.
The TSO in RoI is EirGrid plc with SONI Ltd,
a wholly-owned subsidiary of EirGrid plc,
operating the system in NI.
In RoI, state-owned Bord Gáis owns,
maintains and develops the gas transmission
and distribution networks while Gaslink, a
ring-fenced business within Bord Gáis, 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. Phoenix’s price
control ended in 2011 and is currently being
reviewed by the Competition Commission,
while Firmus’ runs to 2013.
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. In 2011 the SEM controlled over
6,000MW of fully dispatchable generation
and supplied over 33TWh, costing around
€2bn. The retail market continues to operate
as two separate markets with around 2 million
customers in the Republic of Ireland and
0.8 million in Northern Ireland.
The island consumes approximately 73TWh
of gas annually of which around two thirds
is used in power generation. As in electricity
the gas retail market operates as two separate
markets with some 650,000 consumers in
RoI and 150,000 in NI. The majority of gas
consumed is imported. The governments
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 2012 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 with over
525,000 customers joining in the last
two years.
This has allowed full deregulation of RoI
electricity retail market, since April 2011.
While deregulation in RoI gas and NI
electricity and gas will follow, significantly
lower switching rates are slowing its delivery.
As deregulation progresses the regulatory
authorities will transition from tariff
regulation to market monitoring.
Market structure
The RoI government in early 2012 announced
a programme for the disposal of State assets
through the National Treasury Management
Agency (NTMA). The sale of Bord Gáis Energy
(BGE), which contains retail, trading and
generation assets will comprise the main
element of the disposal, with some
non-strategic power generation capacity
owned by ESB included. Gas and electricity
transmission and distribution systems will
remain in state control. •
80%Over 80% of electricity
generated in Ireland
comes from fossil fuels,
of which over 90% is
imported.
The energy sector (continued)
Weather
Weather and climate change
Often, when discussing prevailing conditions,
the terms weather and climate are used
interchangeably. This is particularly evident
when unseasonably warm or cold days
are contrasted with wider discussions on
climate change.
2011 weather patterns relative
to the 30 year average
In the UK 2011/12 will be remembered for
a warm spring and autumn, contrasting with
an ‘indifferent’ summer, isolated storm events,
and a pronounced north-west to south-east
gradient in rainfall.
For clarity, weather is the temperature,
precipitation and wind, which sees hourly
and daily fluctuations. Climate is the average
weather we expect over a long period of time,
typically 30 years or more.
For the UK and Ireland long-term weather
forecasting is difficult given their geographic
location sitting between the Atlantic Ocean
on one side and continental Europe on the
other. This means even subtle changes in the
wind direction can bring marked changes in
the weather.
The UK and Ireland also lie at a particularly
volatile latitude where warm air from the
tropics and cold air from the Arctic collide
to create numerous weather systems. This
creates unpredictable conditions where
weather can change very quickly.
The months with notable anomalies were:
DD
DD
April 2011 – the warmest and sunniest
on record in the UK with temperatures
some 3.7°C above the average for
the month.
September 2011 – a post tropical storm
that had formerly been hurricane Katia
tracked across the Atlantic bringing very
strong winds. This was the most powerful
ex-hurricane to reach the UK and Ireland
since 1996.
October 2011 – new records were set
during a heat wave when temperatures
widely exceeded 25°C. By contrast, such
warmth was rare during the summer,
the coolest since 1993.
January 2012 – stormy conditions
brought ground level wind speeds
in excess of 90mph.
DD
DD
07
The UK annual rainfall total was close to
average, but this masked striking variations
across the country. While some places in the
west Highlands of Scotland accumulated almost
4,000mm, parts of the east midlands and East
Anglia recorded less than 400mm. Much of
central, eastern and southern England was
very dry, causing concerns for water resources,
agriculture and the environment. Provisionally,
several Midland counties had their driest year
on record while in East Anglia and Lincolnshire
only 1921 was drier. In contrast, Scotland
experienced several very wet months, notably
May and December across the west and
August in eastern areas. Overall, Scotland
had its wettest year since 1910.
In summary, for the calendar year 2011
it was the:
DD
DD
DD
second warmest year for the UK on record
(records began in 1910);
second warmest year for central England
on record (records began in 1659);
wettest year for Scotland on record (records
began in 1910); and
wind speeds for the UK were close to the
11-year average.
DD
annual 2011 mean temperature
(compared to 1971-2000 average)
annual 2011 rainfall amount
(% of 1971-2000 average)
Average (°C):
> 1.5
1.2 to 1.5
0.9 to 1.2
0.6 to 0.9
< 0.6
% of average:
> 135
125 to 135
115 to 125
105 to 115
95 to 105
85 to 95
75 to 85
65 to 75
< 65
© Crown copyright
Source: Met Office
© Crown copyright
Source: Met Office
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SSE Annual Report 2012
The energy sector (continued)
Weather
How weather impacts demand
With its prevailing cool-temperate climate,
demand response to above or below average
temperatures in GB and Ireland tends to be
pronounced. Cold spells result in an upsurge
in heat demand, while in warm weather,
demand can fall dramatically. This contrasts
sharply with other jurisdictions where higher
penetrations of air conditioning in buildings
will also see electricity demand increase at
times of higher temperature.
The residential and commercial building
sectors which combined account for almost
two thirds of non-transport energy consumed
each year, experience the greatest weather
related fluctuations in energy use. With
almost 60% of residential energy used for
heating and cooling a 1°C increase in average
temperature decreases space heating needs
by 6-10%. For commercial consumers, where
40% of energy is for heating and cooling,
it decreases by 7-9%.
The weather effect for industrial users is less
correlated, however, it can indirectly impact
the sector as some industries are incentivised
to reduce energy consumption during periods
of peak power demand. Furthermore, many
industries require large quantities of water for
boilers and cooling systems, the temperature
of which can be influenced by weather.
For example, it takes less energy to bring
75°C water to a boil than 70°C water. It also
requires more 75°C water to cool a system
than 70°C water.
2011 weather and energy demand
As the second warmest year on record and
with unseasonably warm weather in spring
and autumn, UK energy consumption in 2011
was down significantly. Department of Energy
and Climate Change (DECC) data shows
year-on-year primary energy usage fell by
7.3% last year; with electricity falling by 3.6%
and gas by 17%. As a result, gas demand
was the lowest in the UK since 1995.
SSE and the weather
With its variances across both space and time,
weather is an important influence on how SSE
manages its business. Accurate forecasting,
coupled with analysis of generation plant
availability (in SSE’s own portfolio and
elsewhere in the market), customer demand
and its contractual position means SSE can
assess, and therefore manage, exposure to
weather fluctuations and wider market prices.
With unseasonably mild weather throughout
the financial year 2011/12, SSE saw a 19.9%
drop in average household gas consumption
average GB wind speed (2000-2011)
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2009
2010
2011
at ground level. Both 3 and 4 January were
exceptional with winds of 90 miles per hour
resulting in the loss of power to 40,000
households. With its highly experienced
team of Network engineers SSE identified
and repaired over 1,000 points of damage
on the electricity network over the course
of four days, the equivalent of three months’
work. Also during this period SSE’s Emergency
Service Centre supported 126,000 inbound
calls and proactively contacted over one
thousand vulnerable customers.
Future trends
Weather is unpredictable. However, by
optimising its diverse portfolio of assets
and contracts and swiftly and professionally
managing Network outages SSE ensures that
its customers are protected from the volatility
that arises from unexpected weather events
while ensuring adequate returns to support
the business’s commitment to sustained
dividend growth. •
and a 6.9% fall in average household electricity
demand. It is through SSE’s focus on diversity
and maintaining a balanced portfolio of
customers, generation technologies and
energy contracts of varying lengths for
purchasing gas and power purchase
agreements, that it annually ensures its
customers and shareholders are appropriately
hedged against weather risk, while maintaining
its commitment to dividend growth.
Given there are uncertainties around the
volume of energy that will be required at
any particular point, arising from unexpected
weather and other global factors, SSE is
unlikely to be fully hedged until close to the
delivery of the energy itself. This approach
is designed to hedge SSE’s requirements in
a way that minimises its costs while ensuring
its exposure to market prices is not excessive.
SSE’s core operational priority for Generation,
ensuring that power stations maintain a high
level of availability to generate electricity in
response to customers’ needs and market
conditions, supports this focus. During the
financial year 2011/12 availability was also
complemented by very favourable wet (see
map on page 7) and windy weather across
the UK and Ireland. This was SSE’s best year
for renewables output – hydro generation
delivered a new record electricity output of
4,262GWh up from 2,558GWh in 2010/11,
while SSE’s wind generation had 97%
availability with an output of 3,199GWh
up from 1,653GWh in 2010/11. Excluding
new wind turbines delivered in 2011/12, wind
energy output was up one third on 2010 levels.
Weather and SSE networks
While 2011/12 was generally mild it also
experienced an unusually high number
of storms, bringing very high wind speeds
Questions and answers with
the SSE Executive Team
09
SSE has three Executive Directors: Chief
Executive, Ian Marchant; Finance Director,
Gregor alexander; and Generation and
Supply Director, alistair phillips-Davies.
Together they have over 30 years’
experience of serving on the Board of SSE.
Here they answer questions about SSE’s
performance and plans for the future.
How would you describe 2011/12?
Ian D Difficult. At 2%, we reported one of the
smallest increases in adjusted profit before
tax* ever delivered by SSE – but also one of
the hardest to achieve. The combination
of higher wholesale gas prices, poor levels
of income for gas-fired power stations and
falling demand for gas and electricity made
it a tough environment for us, but the whole
of the SSE team responded really well to
the challenge.
Gregor D There were some bright spots. Our
investment in renewable energy paid off, with
record output. That again showed the value
of our large capital projects like wind farms –
although it was also thanks, in part, to the
weather! Our electricity and gas networks
also achieved good results and the gas
production assets we bought at the start
of 2011 performed well. All of that showed
the benefit of maintaining a balance
between market-based and economically-
regulated businesses.
Was there a particular low point in
what you’ve said was a difficult year?
alistair D Absolutely – SSE being found
guilty at Guildford Crown Court on two counts
out of seven relating to the use of doorstep
sales aids, and being fined £1.25m. We should
never have found ourselves in that position
and I’m very sorry that we did.
Ian D I agree. We’ve all thought long and
hard about the lessons that the Guildford
case holds for us. I’m confident that they have
been well and truly learned throughout the
SSE management team and that the need to
maintain the highest standards in everything
we do is clearly understood.
Do you think you have made it
particularly hard to build people’s
trust in energy suppliers?
Ian D Clearly, the doorstep selling case
didn’t help, but I’m proud of the progress that
has been made by SSE in the past year in
terms of more transparent pricing, simplified
tariffs, improved service standards and the
Gregor alexander Finance Director
Ian Marchant Chief Executive
alistair phillips-Davies Generation and Supply Director
Gregor, Ian and Alistair pictured
in the Scottish Hydro Centre for
Renewable Excellence in Glasgow.
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SSE Annual Report 2012
Questions and answers with
the SSE Executive Team (continued)
We understand that energy is one of
the most essential household costs and
also one of the biggest and that the
standards that people expect are –
rightly – increasing all the time.
implementation of our sales guarantee. I’m
also determined that we will maintain the
momentum in the new financial year and the
new commitments we announced in April in
areas like estimated billing were part of that.
alistair D We understand that energy is one
of the most essential household costs and also
one of the biggest and that the standards that
people expect are – rightly – increasing all the
time. We’re doing better – but we realise we
have to do much better still and that’s what
we’re working to achieve.
The nature of electricity and gas
makes energy subject to a lot of
political and regulatory intervention.
Does that worry you?
Ian D It goes with the territory. Elected
politicians have every right to intervene in
the sector if they want to and every right to
give powers to regulators to do so. Our job is
to work with them to make sure that changes
are coherent, practical to implement and
actually in the short-, medium- and long-term
interests of customers.
Gregor D We have a very simple approach to
this. If we’re making any financial decision we
assess the risks, and legislative and regulatory
change are amongst those risks. If the risks
can’t be managed or are too great, then we
won’t invest. At the same time, we work with
governments and regulators to help them
understand what is needed to stimulate
the investment they want.
It’s one thing making the investment
decision – it’s another thing making
sure it’s well-executed. Is SSE doing
well enough in this area?
Gregor D Our large capital project
programme took a big step up five years ago
and in the time since we’ve gained significant
experience and expertise that is now standing
us in good stead. I’m particularly pleased
with our progress in onshore wind farm
construction. Development and construction
of big projects is a complex area, however,
in which continuous improvement – not
complacency – is the order of the day.
Ian D Maintaining excellence in project
selection and execution is a key priority for
SSE. That means picking the right projects,
assigning the right resources and delivering
them well, with managed risks and no
surprises. While the principles of project
selection and execution have to remain
the same, each project presents its own
challenges. This will always be a demanding
and critical area for a company like SSE,
and it will always be treated as such.
as well as politics, regulation and large
capital projects, SSE lists energy portfolio
management as one of its key risks. Is
this getting to be a more difficult area?
Ian D UK gross imports of natural gas now
exceed gross production for the first time since
the 1960s. This big change means that there
is an ongoing integration of UK prices into the
wider global energy market, so we’re affected
by macro economic or geopolitical issues. This
is an issue we can manage through things like
diversifying our energy procurement in areas
like location, counterparty and timing. We’re
also producing more energy ourselves, with
our gas production assets and with our major
investment in renewables.
alistair D As well as acquiring gas production
assets, we’ve also been building up our
portfolio of long-term fuel supply contracts
with companies like Shell and Statoil to help
us meet demand for gas over the rest of this
decade and beyond.
What does this mean for household
energy bills?
alistair D We’ve said we won’t increase
energy prices before October 2012 at the
earliest. Unfortunately, the long-term trend for
unit prices for energy is upwards as worldwide
demand for commodities increases. Equally,
the last few years have shown that prices are
not the same as bills and investment in energy
efficiency really does cut consumption and
help keep bills down.
Ian D If the long-term trend for unit prices
is upwards, we have to redouble our efforts
to show that any profits we make in supplying
energy are fair and reasonable. We’ve taken a
number of steps to improve the transparency
of our Energy Supply business, and we expect
our average profit margin in this area to be
around 5% over the medium term. That’s
what fair and reasonable means in practice.
Why have you started reporting
operating profit for Energy Supply,
and why have you changed your
reportable segments to networks,
retail and Wholesale?
Gregor D It’s the transparency word
again. We already produced what’s called a
Consolidated Segmental Statement for Ofgem
and we’ve decided that we should take the
natural next step and adjust the segments in
our financial statements. The three segments
themselves reflect the way we manage, review
and report our businesses internally.
alistair D Some things haven’t changed. We
still think that being involved in the Wholesale
activities of energy production and portfolio
management and the Retail activity of energy
supply gives us a balanced business model
that’s in the interests of customers and
shareholders. Balance will always be a key
part of the SSE proposition.
It’s said that the cost of renewable
energy is pushing up household bills.
are you concerned about the hostility
to wind farms and what that might
mean for the future?
alistair D Some people simply don’t like wind
farms, and they are entitled to have that view.
In terms of cost, we have a responsibility to
get the cost of renewable energy as low as
possible, and we’re doing a lot of work with
our supply chain to try to do that. At the same
time, demand for commodities like oil and gas
is likely to increase – and it’s also getting more
and more difficult to extract them, even if they
are available. The cost of wind energy has to be
assessed in that context and on the basis that
wind farms should last for 25 years or more.
Ian D Wind as a source of energy is
indigenous, renewable and free at the point
of delivery. I think those features are going
to become more and more important over
the next decade and beyond.
11
Can SSE continue to finance the
investment in energy infrastructure
like wind farms and transmission
upgrades that will be needed over
the next few years?
Gregor D Yes. We have plans to invest
between £1.5bn and £1.7bn a year in the
period up to 2015, and these plans are
consistent with our long-held financial
principles, including balance sheet strength.
We’ve been successful in moving quickly
to secure the right financing options, like
reopening the corporate bond market
last September and completing a private
placement with US investors earlier this year.
Ian D There are some eye-watering numbers
in terms of what the UK and Ireland will need
to invest in energy over the next couple of
decades – but investment decisions in things
like power stations and wind farms are up to us.
As I’ve said before, investment opportunities
are not the same as investment obligations,
and we will only invest in a way that is
disciplined and consistent with earning
returns that support dividend growth.
If the business environment is difficult,
can SSE sustain its commitment to
above-inflation increases in the dividend?
Ian D Yes. We’re committed to an increase
of at least 2% more than RPI inflation for
2012/13 and then annual above-inflation
increases after that. These are realistic targets
which our balanced range of businesses and
our investment programme in large capital
projects are designed to help us achieve.
Gregor D I agree. Our dividend payments are
comfortably covered by our adjusted earnings
per share* and we expect dividend cover to
be in a range around 1.5 over the medium
term. We have many new assets coming into
operation now which should put us in a good
position to deliver real dividend growth in the
years ahead.
alistair D Dividend growth isn’t just a
financial commitment. It’s a management
commitment to being disciplined, consistent
and long term. That’s entirely appropriate
in a sector like energy and I think goes to
the heart of the type of company SSE is.
Is SSE’s focus on the dividend
compatible with wider corporate
and social responsibilities?
Ian D Yes. SSE can only pay out dividends
if it is a successful company. It can only be
a successful company in the short and long
term if it meets the needs of customers and
communities, in a responsible and sustainable
way. That includes providing a fulfilling working
environment. Successful companies buy
services from other companies, employ people
and pay taxes that governments can use to
meet society’s requirements. I think successful
companies with a long-term outlook make a
positive contribution to society and I strongly
believe SSE makes a positive contribution in
England, Scotland, Wales, Northern Ireland
and the Republic of Ireland.
SSE is now one of just five long-serving
FTSE 100 companies to have delivered
above-inflation dividend growth every
year since the year it was formed, 1998.
It’s had the same business model and
financial principles throughout that
period. Do you ever worry that the
longevity of this approach could make
it difficult for SSE to handle change
in its sector or in society more widely?
Ian D It’s the job of every management team
to anticipate change, influence change and
respond to change. I actually think it’s easier
to do that if the organisation is designed for
the long term and has clear values and
principles. All around me I see work being
done that will be of benefit to SSE in three,
five and 10 years’ time and beyond.
to renewable energy to building trust
in energy supply. There is also what you
might call restlessness in the organisation,
with people constantly looking for new
opportunities to be better at what we do.
So what’s the financial outlook
for 2012/13 and beyond?
Gregor D It’s partly the job of the Finance
Director to say each year that big challenges
lie ahead – but they certainly do in 2012/13.
Everything from wholesale energy prices to the
weather can affect our financial performance –
but we have a balanced business model to make
sure that the risk arising from any single business
activity is contained. The key question for SSE
will always be can the dividend targets be met
and the answer is that I am very confident they
can. That means we expect to recommend an
increase of at least 2% more than inflation in
the full-year dividend in the Annual Report 2013.
What is your personal priority
for SSE in 2012/13?
alistair D I have two that stand out
particularly. Last year we adopted a simple goal
on safety – work without anyone getting injured.
I want to see real progress on that. I also want
to keep up the momentum on building trust in
energy supply, with SSE showing real leadership
and taking real action that makes a difference.
Gregor D SSE is actually different from
what it was five or 10 years ago, and it will
be different again in five years’ time. You just
have to look at the asset base for a start.
But everything we do does come back to
the business model and financial principles.
They’ve stood us in good stead in a volatile
world since 1998, and I think they provide
the basis for continued success in the future.
alistair D I think SSE is actually very
innovative and progressive, and we can clearly
point to many parts of the business having
a sector-leading position, from commitment
Gregor D I’d echo what Alistair said on
safety. My other priority is value for money.
For both current operational and capital
expenditure, I want to make sure that every
penny in SSE counts and that we demonstrate
efficiency in everything we do.
Ian D I think we’re all agreed on safety. After
that, I’d like to see more progress on taking
the carbon out of electricity, either through
producing more energy from renewable
sources or putting in place the networks to
deliver it. That will reinforce the sustainability
of SSE in every sense. •
SSE can only pay out dividends if it is
a successful company. It can only be a
successful company in the short and long
term if it meets the needs of customers
and communities, in a responsible and
sustainable way.
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SSE Annual Report 2012
SSE – a balanced range
of energy businesses
SSE
MarKET-
BaSED
ECOnOMICaLLy-
rEGULaTED
nETWOrKS
SSE has an ownership interest in economically-
regulated network businesses in electricity
transmission and electricity and gas distribution
and has other networks businesses in market-
based areas such as lighting services, utility
solutions and telecoms. In operating and investing
in these businesses, SSE’s Networks priorities
are efficiency, responsiveness and innovation.
Electricity
Transmission
Electricity
Distribution
Gas
Distribution
Other networks
£770m
£2,840m
£2,270m
£48m
regulated asset value
regulated asset value
regulated asset value
(SSE share)
Capital expenditure
in 2011/12
Business model
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 means SSE has a strong and diverse group
of energy assets and businesses from which to secure
the revenue to support future dividend growth.
rETaIL
WHOLESaLE
Through brands such as SSE, Southern
Electric, Swalec, Scottish Hydro, Atlantic
and Airtricity, SSE supplies electricity
and gas in markets in Great Britain and
Ireland and also provides other energy-
related services such as mechanical and
electrical contracting. Its Retail priorities
are fair prices, simple products and
excellent service.
To secure energy for its customers, SSE is
involved in energy portfolio management,
electricity generation, gas production and gas
storage. Amongst other things, it is the leading
generator of electricity from renewable sources
across the UK and Ireland. Its Wholesale
businesses priorities are competitiveness,
sustainability and flexibility.
Energy Supply
Energy-related
Services
Energy portfolio
Management
and Electricity
Generation
Gas production
Gas Storage
9.55m
£78m
£982m
177m
Total energy
customer accounts
SSE Contracting order
book as at 31 March 2012
Capital expenditure
in 2011/12
Therms produced
in 2011/12
490mcm
Storage net capacity
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SSE Annual Report 2012
Why invest in SSE?
SSE’s principal financial objective is to
deliver annual above-inflation increases
in the dividend. To do this, it operates
and invests in a balanced range of energy
networks, retail and wholesale businesses.
These businesses, and the people employed
in them, are guided by the SSE SET of
core values: Safety, Service, Efficiency,
Sustainability, Excellence and Teamwork.
Continuing strategy 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 continues
to believe their investment should be
remunerated through the payment
of dividends, for four key reasons:
As a result of this, SSE’s strategy remains
the delivery of 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.
DD
DD
DD
receiving and reinvesting dividends is the
biggest source of an investor’s return over
the long term;
dividends provide income for those
investors who do not wish to reinvest them;
dividend targets provide a transparent
means with which to hold management
to account; and
a long-term commitment to dividend
growth demands a disciplined, consistent
and long-term approach to operations,
investments and acquisitions.
DD
The objective of delivering annual
above-inflation increases in the dividend
paid to shareholders means SSE has a clear,
measurable and practical goal which sets the
long-term financial context for its operational
and investment decisions.
Sticking to financial principles
to underpin dividend growth
The requirement on SSE to maintain
a disciplined, consistent and long-term
approach to the management of business
activities is underpinned by a series
of long-standing financial principles:
DD
rigour:DD
maintenance of a strong
strength:
balance sheet, evidenced by commitment
to the criteria for a single A credit rating;
rigorous analysis to ensure
investments are well-founded and achieve
returns greater than the cost of capital;
deployment of a selective and
discipline:
disciplined approach to acquisitions, which
should enhance earnings per share over
the medium- and long-term; and
measurement:
of purchasing the Company’s own shares
in the market as the first measurement
against which financial decisions are taken.
use of the economics
DD
DD
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 for
a thirteenth successive year
For 2011/12, the Board is recommending
a final dividend of 56.1p per share, making
a full-year dividend of 80.1p, an increase
of 6.8% on the previous year. The full-year
dividend is:
DD
DD
covered 1.41 times by SSE’s adjusted
earnings per share*;
more than three times the first full-year
dividend paid by SSE, in 1999; and
more than twice the full-year dividend
paid eight years ago, in 2004.
DD
The recommended full-year dividend increase
of 6.8% represents the thirteenth successive
above-inflation dividend increase since SSE paid
its first full-year dividend in 1999. SSE is now one
of just five continuing FTSE 100 companies to
have delivered better-than-inflation dividend
2013
pHASE 3 OF EU EmISSIONS
TRADING SCHEmE
NEW ElECTRICITy
TRANSmISSION pRICE
CONTROl (RIIO-T1)
NEW GAS DISTRIBUTION
pRICE CONTROl (RIIO-G1)
2014
NEW lOW CARBON SUppORT
mECHANISm INTRODUCED
SmART mETER
ROll-OUT BEGINS
Key development
2012
GREEN DEAl
2012
Main impact
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.
Under Electricity market
Reform (EmR), the first projects
are to be given the option to
use a new low carbon support
mechanism, the Contract for
Difference (CfD).
The government driven,
supplier led roll-out is
due to begin, delivering
55 million smart electricity
and gas meters.
growth every year during this period and
ranks third amongst that group in terms
of compound annual growth rate.
Of the 48 companies which have been FTSE
100 constituents since 1998, when SSE joined
the Index, SSE is ranked 10th for Total
Shareholder Return.
Targeting sustained dividend
growth over the long-term
As Capita Registrars Dividend Monitor, published
in February 2012, stated, a ‘company’s value
depends, most fundamentally, 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’. It is in recognition of this that
SSE’s key financial objective is the delivery
of annual above-inflation increases in the
dividend paid to shareholders, and its targets
are to deliver:
DD
DD
a full-year dividend increase of at least 2%
more than RPI inflation for 2012/13; and
annual above-RPI inflation dividend
increases from 2013/14 onwards.
In this context, inflation is defined as the
average annual rate across each of the
12 months to March.
SSE’s policy is that dividend targets should be:
DD
DD
DD
set in a way which is consistent with SSE’s
financial principles (see previous page);
realistic and attainable, so there can be
the fullest possible confidence in their
achievability; and
consistent with maintaining dividend cover
over the medium term within a range of
around 1.5 times, which is close to the
average dividend cover which SSE has
achieved in the most recent four years.
Maintaining a balanced range of
energy businesses through which
to achieve dividend growth
SSE has adopted new reportable segments
covering Networks, Retail and Wholesale
businesses and is the only company listed
on the London Stock Exchange which owns,
operates and invests in a balanced group of
economically-regulated energy businesses,
such as electricity networks, and market-based
energy businesses, such as energy supply and
electricity generation. The balance between
these activities means that:
DD
while energy is at their core, SSE has a diverse
range of businesses;
within those businesses, SSE has a diverse
range of assets; and
to add to those assets, SSE has a diverse
range of investment options.
DD
DD
This balance, diversity, growing asset base
and range of investment options means
that SSE has a broad platform from which
to deliver the levels of profitability and
the long-term value required to support
sustained real dividend growth. In addition,
the risks to the achievement of that growth
are contained by that balance and by the
diversity of SSE’s businesses, assets and
investment options.
Moreover, the fact those businesses, assets
and investment options are almost entirely
in Great Britain, Northern Ireland and the
Republic of Ireland means that SSE is able to
combine diversity with a depth of experience,
knowledge and understanding of the markets
in which it operates.
Sustaining dividend growth
through a period of change
Energy markets in Great Britain and Ireland
are increasingly shaped by the EU Climate
15
Change and Renewable Energy Package,
which aims to achieve by 2020:
DD
DD
a reduction, of at least 20%, in the levels
of greenhouse gas emissions across the
EU, compared with 1990 levels; and
an increase, to at least 20%, of all energy
consumption being generated from
renewable sources.
In addition, the EU has a non-binding
target to achieve a 20% reduction in energy
consumption by 2020 through improvements
in energy efficiency and in June 2011 the
European Commission proposed an Energy
Efficiency Directive. The proposed Directive
is broad in scope and would replace a number
of existing Directives.
The EU Package provides the context for four
major developments which are under way
in public policy and regulation and which will
affect SSE’s operations and investments for
years to come:
DD
Ofgem’s new ‘RIIO’ model for the economic
regulation of energy networks in Great
Britain is now going through the key tests
of actual Price Control Reviews;
the Retail Market Review in Great Britain,
being undertaken by Ofgem, is designed
to deliver improvements in the operation
of the retail markets for electricity and gas;
the UK government’s White Paper,
Planning
our Electric Future, sets out a series of
proposed reforms to the market arrangements
for electricity generation in Great Britain; and
energy markets on the island of Ireland are
undergoing a process of harmonisation
to support further the development of
competition, for the benefit of customers.
DD
DD
DD
At the heart of these developments is the
energy ‘trilemma’ – the need for supplies
2015
NEW ElECTRICITy
DISTRIBUTION pRICE
CONTROl
lARGE COmBUSTION plANT
DIRECTIvE (lCpD) DEADlINE
2017
RENEWABlES OBlIGATION
(RO) ClOSURE
2020
DEADlINE FOR EU
RENEWABlE ENERGy
TARGETS
2020
DEADlINE FOR EU
EmISSIONS REDUCTION
TARGETS
2023
INDUSTRIAl EmISSIONS
DIRECTIvE DEADlINE
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.
Under Electricity market
Reform (EmR), the RO
is due to be replaced by
a new low carbon support
mechanism, the Contract
for Difference (CfD).
The UK and Ireland are
required to generate 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.
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SSE Annual Report 2012
Why invest in SSE? (continued)
of energy that are secure, sustainable and
affordable. There are three other significant
factors with which energy companies such
as SSE have to deal:
DD
as the decline of oil and gas production
from the UK Continental Shelf continues,
there is a continuing integration of UK
energy prices into the wider global market,
which means macro-economic and
geopolitical factors are important;
demand for energy in the UK and Ireland
is, rightly, on a downward trend through
the effects of investment in, and greater
awareness of, energy efficiency measures,
more efficient appliances and price
sensitivity on the part of customers; and
the expectation that the decarbonisation
of the economies in the UK and Ireland
will present opportunities for flexible and
skilled employment that is sustainable
in every sense.
DD
DD
As well as dealing with geopolitical,
macro-economic and energy-specific issues,
SSE acknowledged, in a submission to the UK
and Scottish governments in February 2012,
that it would have to decide whether the
additional risk of regulatory and legislative
change with regard to Scotland, raised by
the forthcoming referendum on its future,
means it should apply a risk premium to any
investment proposal in Scotland and assess
the impact of such a premium on whether or
not to proceed with the proposed investment.
Setting the right long-term priorities
to achieve dividend growth
SSE has identified five long-term priorities
across its balanced range of businesses which
reflect and are consistent with the changes
under way at global, EU, UK and Irish levels
and with addressing the energy ‘trilemma’.
The long-term priorities are:
DD
DD
DD
efficiency, responsiveness and innovation
in energy networks;
gaining and retaining the trust of a growing
number of household energy customers;
breadth and depth in the provision of
energy-related services to businesses
and other organisations;
competitive and sustainable energy
procurement; and
flexible and ‘greener’ electricity production.
DD
DD
In focusing on these priorities, SSE will
maintain a strong emphasis on its six core
values, the ‘SSE SET’ of Safety, Service,
Efficiency, Sustainability, Excellence and
Teamwork. It believes these values are
especially significant because energy is
DD
work with the UK government and Ofgem
to secure a stable and competitive
framework for electricity generation
and energy supply in Great Britain;
optimise the management of its portfolio
of energy assets and contracts and of its
energy procurement; and
ensure power stations maintain a high level
of flexibility and fuel efficiency to generate
electricity in response to customers’ needs
and market conditions.
DD
DD
SSE’s main investment priorities are to
support sustainable earnings and dividend
growth by:
DD
making significant progress in its programme
of capital investment in electricity and
(through Scotia Gas Networks) gas networks,
including electricity transmission;
commissioning assets in renewable energy,
including completion of the wind farm
development at Clyde;
meeting development and construction
goals in its investment programme, including
identifying opportunities for possible new
fuel-efficient gas-fired power stations; and
improving the flexibility and efficiency of its
existing fleet of thermal power stations and
maintaining options for future development.
DD
DD
DD
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 in 2012/13: an increase of
at least 2% more than RPI inflation in the
full-year dividend. It should also put SSE in
a good position to deliver dividend increases
that are greater than RPI inflation from
2013/14 onwards. •
something which people need rather than
want and so the highest possible standards in
its operations and investments are essential.
This means that safety must come first.
SSE believes that the effective management
of safety issues is a barometer of effective
management of all operational and
investment-related activities. In 2011/12,
its Total Recordable Injury Rate per 100,000
hours worked was 0.11, compared with 0.12 in
2010/11 and 0.14 in 2009/10. The total number
of working days lost in SSE as a result of injuries
occurring during the year was 53, compared
with 171 in the previous year. The Total
Recordable Injury Rate and total number of
working days lost as a result of injuries occurring
during 2011/12 was the lowest that SSE has had.
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 an
enforcement notice or prosecution by
a government-sponsored environment
protection agency. There were no such
incidents during 2011/12, the second
successive year in which this was achieved.
The prospects for dividend
growth in 2012/13 and beyond
The economic outlook for the UK and Ireland
in 2012/13 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 macro-economic, geopolitical or
other events of potentially global significance.
Against this uncertain background, and with
its strategic focus on efficiency in operations
and investment, SSE’s core operational
priorities during 2012/13 are to:
DD
DD
DD
DD
carry out all work in a safe and responsible
manner, with a lower Total Recordable
Injury Rate;
maintain strong cost control throughout
all business activities;
distribute electricity and (through Scotia
Gas Networks) gas with the minimum
possible interruptions to supplies;
demonstrate responsiveness and
innovation in the management of
electricity and gas networks;
develop and sustain long-term partnerships
and contracts with business customers and
other large organisations;
improve the standards of service delivered
to energy supply customers and continue the
drive to build trust in it as an energy supplier;
DD
DD
Key performance indicators
17
The key performance indicators set out below demonstrate
SSE’s performance in respect of its first financial responsibility
to shareholders – sustained real dividend growth – and include
other important financial metrics. They also demonstrate SSE’s
balanced range of energy businesses.
SSE’s performance in key non-financial areas and in respect of its core
values is set out on page 54.
Dividend per share – pence
Dividend 2011/12 composition – %
Interim 30 (24.0p)
Final 70 (56.1p)
2000
27.5
2001
30.0
2002
32.4
2003
35.0
2004
37.7
2005
42.5
2006
46.5
2007
55.0
2008
60.5
2009
66.0
2010
70.0
2011
75.0
2012
80.1
Dividend cover – times
adjusted earnings per share* – pence
2012
2011
2010
2009
2008
1.41
1.50
1.57
1.57
1.73
2012
2011
2010
2009
2008
adjusted profit before tax* – £m
Operating profit* by business – £m
2012
2011
2010
2009
2008
1,335.7
1,310.1
1,290.1
1,253.7
1,229.2
Networks
Retail
Wholesale
112.7
112.3
110.2
108.0
105.6
2011
2012
690.5
737.1
400.5 321.6
571.5 607.9
Capital expenditure and investment – £m
Capital expenditure and investment 2011/12 – %
2012
2011
2010
2009
2008
1,706.9
1,443.7
1,315.2
1,279.8
810.3
Networks 31
Retail 5
Wholesale 61
Other 3
Energy customer numbers – millions
networks regulated asset Value – £bn
2012
2011
2010
2009
2008
9.55
9.65
9.35
9.10
8.49
2012
2011
2010
2009
2008
5.88
5.40
4.94
4.71
4.45
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18
SSE Annual Report 2012
Financial overview
Changing reportable segments
In its Annual Report 2011, SSE said that
its reporting requirements may evolve
and during 2011/12 it completed a review
of the reportable segments contained within
its financial statements. The review was
undertaken following the creation of SSE’s
Management Board in January 2011 and
resulting changes in the way that SSE manages,
reviews and reports internally its businesses.
The previous segments – Energy Networks,
Generation and Supply and Other Energy
and Utility Services – have been replaced
with the following:
DD
– the economically-
networks
regulated transmission and distribution
of electricity and gas, and other related
networks;
retailDD
– the supply of electricity, gas and
other services to household and business
customers; and
– the production, storage and
Wholesale
generation of energy, and energy portfolio
management.
DD
These are consistent with the principle that
components of a business qualify as separate
reporting segments if they are capable of
earning revenue and incurring expenses
in their own right.
SSE believes that the adoption of these
segments will add further transparency to
its business and to the financial performance
of each part of it. In particular, the new
segments are consistent with SSE’s continuing
work to build customers’ trust in energy
supply, where there will now be separate
reporting of profit.
Increasing adjusted profit before tax*
These financial results for the year to 31 March
2012 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:
DD
DD
reflects the underlying profits of SSE’s
business;
reflects the basis on which the business
is managed; and
avoids the volatility that arises from IAS 39.
DD
The tables that follow reconcile SSE’s adjusted
profit before tax* to its reported profit before tax
and set out the position after tax and in respect
of adjusted earnings per share*. The volatility
that arises from IAS 39 is also demonstrated.
Factors affecting adjusted
profit before tax* in 2011/12
Adjusted profit before tax* rose by 2.0%, from
£1,310.1m to £1,335.7m in the year to 31 March
2012. The level of adjusted profit before tax*
was constrained by four main factors
(comparisons with the year to 31 March
2011 unless otherwise stated):
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DD
DD
the wholesale cost of gas, which
was typically around 20% higher;
‘spark’ spreads (the difference between
the cost of gas and the price of the
electricity produced from it), which
were around 75% lower;
the decision to shield household customers
from rising wholesale energy prices for as long
as practical before eventually implementing
a price increase in September; and
the actual reduction in average consumption
of both electricity (6.9%) and gas (19.9%)
by household customers in the GB market.
DD
In addition, there was a 5.3% reduction in
operating profit* in Electricity Distribution
due to the timing of revenue recovery.
Despite these factors, growth in adjusted
profit before tax* was still achieved, for four
main reasons:
DD
a significant rise (73%) in the output
of renewable energy (hydro and wind),
reflecting more favourable weather
conditions and an increase in the amount
of on- and offshore wind farm capacity
which SSE has in operation;
profit before tax
adjusted profit before tax*
Movement on derivatives (IAS 39)
Exceptional items
Tax on JCEs and Associates
reported profit before tax*
Adjusted profit before tax*
Adjusted current tax charge
adjusted profit after tax*
DD
DD
operating profit* of £42.6m from gas
production assets acquired by SSE towards
the end of 2010/11;
an increase of 54.5% in the operating
profit* of Electricity Transmission, reflecting
the increase in its asset base resulting from
capital invested; and
greater allowed revenue in Scotia Gas
Networks, supporting an increase of 43.5%
in that business’ contribution to adjusted
profit before tax*.
DD
All of this illustrates that SSE continues to
benefit from maintaining a balance between
economically-regulated and market-based
businesses because it is able to continue to
deliver increases in adjusted profit before tax*
even when, as in 2011/12, there are significant
issues to be managed within individual
businesses. It also illustrates that major
benefits from SSE’s programme of investment
in new assets are now emerging and making
a positive contribution to sustaining growth
in adjusted profit before tax*.
Impact of the movement
on derivatives (IaS 39)
At 31 March 2012, there was a net derivative
financial liability in SSE’s balance sheet arising
from IAS 39 of £17.6m, before tax, compared
with a net asset of £438.8m, before tax,
at 31 March 2011. This consists of:
DD
DD
a liability following the valuation of financial
instruments used by SSE to hedge its
exposure to financial risks such as interest
rates; and
an asset relating to 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.
March 12
£m
1,335.7
(509.0)
(551.6)
(6.6)
268.5
1,335.7
(213.4)
1,122.3
197.8
937.8
112.7p
21.1p
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
reported profit after tax1
Number of shares for basic and adjusted EPS* (million)
adjusted EpS*1
Basic EpS
1
Includes a deduction for hybrid debt coupon payment of £65.5m in the year to March 2012.
19
SSE’s first financial responsibility to
its shareholders is to remunerate their
investment through the delivery of
sustained, above-inflation increases
in the dividend.
assets has also been impaired in anticipation
of the expected introduction of smart meters.
Delivering adjusted profit
before tax* in 2012/13
Adjusted profit before tax* is an important
measure of performance in any given year,
but it is not an end in itself. SSE does not have
the goal of maximising profit in any single
year or over any particular period. It takes
a longer-term view, believing 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.
At the same time, SSE has delivered 13
successive increases in adjusted profit before
tax* since it first reported full-year results in
1999. As in any other year, SSE’s adjusted
profit before tax* for 2012/13 as a whole
will be determined by issues such as:
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DD
the management of the overall energy
portfolio, in the context of geopolitical
and macro-economic issues;
the interaction between wholesale prices
for energy and fuel and the prices for the
electricity and gas charged to customers;
the availability of its operating thermal
power stations to generate electricity;
the output of renewable energy from its
hydro-electric stations and wind farms; and
the actual and underlying level of
customers’ energy consumption.
DD
DD
DD
In terms of 2012/13, SSE continues to believe
that its balanced range of market-based and
economically-regulated energy businesses,
and the diversity of opportunities within those
businesses, should enable it to 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 in a range around 1.5 times.
SSE will provide an update on its financial,
operational and investment progress during
2012/13 when it presents its results for the six
months to 30 September 2012. Its expectation
at the start of each financial year is that it will
not provide an outlook for adjusted profit
before tax* before the publication of its fourth
quarter Interim Management Statement, not
least because its principal financial objective
is dividend growth, and that remains the case
for 2012/13.
Monitoring adjusted earnings per share*
To monitor financial performance over the
medium-term, SSE continues to focus on
adjusted earnings per share* because it has
the straightforward benefit of defining the
amount of profit after tax that has been
earned for each Ordinary Share and so
reflects a clear view of underlying financial
performance.
In 2011/12, SSE’s adjusted earnings per share*
were 112.7p, based on 937.8 million shares,
compared with 112.3p, based on 927.6 million
shares, in the previous year. As stated in
SSE’s Annual Report 2011, the charge for
the hybrid debt coupon is presented within
dividends and reflected within adjusted
earnings per share*.
Dividend
Increasing the dividend for 2011/12
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 56.1p,
compared with 52.6p in the previous year,
an increase of 6.7%. This will make a full-year
dividend of 80.1p, which is:
DD
DD
an increase of 6.8% compared with 2010/11;
a real-terms increase of 2.0%, based on the
average annual rate of RPI inflation in the
UK between April 2011 and March 2012,
which meets the target set for the year;
the thirteenth successive above-inflation
dividend increase since the first full-year
dividend paid by SSE, for 1998/99;
more than three times the first full-year
dividend paid by SSE, for 1998/99; and
DD
DD
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IAS 39 requires SSE to record these contracts at
their ‘fair value’ at each balance sheet date.
This involves comparing the contractual price
for commodities against the prevailing
forward market price at 31 March. On that
date this year, the average contractual price
was lower than the market price (in other
words, the contracts were ‘in the money’).
The actual value of the contracts will be
determined as the relevant commodity is
delivered to meet customers’ energy needs.
For around 70% of the total energy volume,
this will be over the next 12 months. As a
result, SSE believes the movement in ‘fair
value’ of the contracts is not relevant to
the underlying performance in 2011/12.
The movement on derivatives under IAS 39 of
£509m shown in the table on page 18 and on
the face of the income statement is primarily
due to the change in the commodity contract
position between the ‘in the money’ positions
on 31 March 2011 and 31 March 2012, when
the average contractual price continued to
be lower than the prevailing forward market
price, but not as much as previously. 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 items totalling £551.6m
relate to the Wholesale (£491.6m) and Retail
(£60.0m) segments and are mainly non-cash.
In the Wholesale segment, changing market
conditions have resulted in impairment and
other charges being made against the value of
some electricity generation plant, CO2 emissions
allowances, goodwill relating to gas storage
assets and gas and oil production prospects.
In particular, following a sustained period of
low ‘spark’ spreads, SSE decided to undertake
a comprehensive programme of maintenance
and upgrade work to support more flexible
operations at Keadby and Medway power
stations from 2013 onwards. This means the
way in which the stations will operate and be
remunerated in the future will change. Other
issues include a small write-down at Ferrybridge
power station, due to the early use of allowed
running hours under the Industrial Emissions
Directive, and a write-down in the value of on-
and offshore wind assets in continental Europe.
In the Retail segment, restructuring and
related costs arising from SSE’s decision
to stop all of its doorstep sales operations
in Great Britain have been recognised as
exceptional. The value of some metering
20
SSE Annual Report 2012
Financial overview (continued)
Investment and capital expenditure summary
Electricity Transmission
Electricity Distribution
Other Networks
Total networks
Total retail
Thermal Generation
Renewable Generation
Gas Storage and Gas Production
Total Wholesale
Other
Total investment and capital expenditure
50% of SGN capital/replacement expenditure
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covered 1.41 times by SSE’s adjusted
earnings per share*.
SSE is now one of just five companies to
have delivered better-than-inflation dividend
growth every year since 1999, while remaining
part of the FTSE 100 for at least 50% of that
time, and ranks third amongst that group in
terms of compound annual growth rate over
that period.
Targeting further dividend increases
in 2012/13 and beyond
SSE’s key financial objective will remain the
delivery of increases in the dividend paid to
shareholders, and its targets are to deliver:
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a full-year dividend increase of at least 2%
more than RPI inflation for 2012/13; and
annual dividend increases from
2013/14 onwards which are greater
than RPI inflation.
Scrip Dividend Scheme option
for shareholders
In 2010, SSE’s shareholders approved for
five years the provision 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:
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a total of 30,397
September 2011:
shareholders elected to receive the final
dividend of 52.6p per Ordinary Share in
respect of 22.6 million Ordinary Shares in
the form of Scrip dividend. This resulted in
the issue of 0.9 million new Ordinary Shares,
fully paid, an increase of 0.1% on the issued
share capital at the dividend record date
of 29 July 2011; and
March 12
£m
March 11
£m
228.7
260.3
48.0
537.0
78.5
129.7
852.3
57.1
1,039.1
52.3
1,706.9
202.2
117.4
211.9
55.0
384.3
27.9
129.8
813.8
52.6
996.2
35.3
1,443.7
199.7
DD
gas storage and gas
£57.1m in
production, including investment
in the new facility at Aldbrough, which
is nearing completion.
Including investment of £134.2m in
2011/12, SSE’s cumulative investment in the
Greater Gabbard offshore wind farm is now
£672.2m, excluding costs associated with the
construction of the offshore transmission line.
Delivering an expanded asset base
In the five years to March 2012, SSE’s
investment and capital expenditure
totalled just over £6.5bn. This has resulted
in a significantly expanded asset base
for SSE, including:
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a total of 30,504
March 2012:
shareholders elected to receive the interim
dividend of 24.0p per Ordinary Share in
respect of 318 million Ordinary Shares in
the form of Scrip dividend. This resulted
in the issue of 6.27 million new Ordinary
Shares, fully paid, an increase of 0.67%
on the issued share capital at the dividend
record date of 27 January 2012.
This had the effect of reducing by £88.2m
the amount of dividends paid in cash during
2011/12. The total number of shares in issue
at 31 March 2012 was 944.7 million.
Investment and
capital expenditure
Investing for sustained dividend growth
In November 2010, SSE said that it expected
its investment and capital expenditure would
be in the range of £1.5bn to £1.7bn in each
of the five years to March 2015. In 2011/12,
its capital and investment expenditure totalled
£1,706.9m, compared with £1,443.7m in the
previous year. During the year there was
investment of:
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electricity distribution, the
electricity transmission,
£228.7m in
of which £126.3m was spent on the work
to replace SSE’s section of the Beauly-
Denny line;
£260.3m in
majority of which was spent on system
upgrades;
£129.7m in
majority of which was for maintenance
and early development of future projects;
£852.3m in
renewable generation, the
larger part of which was invested in the
Clyde, Griffin and Gordonbush onshore
wind farms; and
thermal generation, the
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DD
DD
DD
DD
completion of the 840MW Marchwood
Power Station (SSE share – 50%);
an increase of around 1,500MW in its
capacity for generating electricity from
wind farms (which produced around
3.2TWh of electricity in 2011/12);
near-completion of the Aldbrough gas
storage facility (SSE share – two thirds); and
an increase of over £1bn in the RAV of its
electricity networks.
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The 100MW Glendoe hydro-electric scheme
was also commissioned during this period, in
early 2009. It operated for less than a year
before a tunnel blockage resulted in electricity
generation being stopped. The progress of
repair work means electricity generation is
expected to resume this summer.
SSE remains committed to constructing robust
assets, from which revenue can be generated
on a reliable, long-term basis and which
deliver profit to support future dividend
growth. This entails rigorous scrutiny and
control of the costs of large capital projects
and a clear focus on the return which
completed projects should generate.
In line with this, SSE keeps the economic
evaluation of its investment programme
under close scrutiny to ensure that it
continues to make the right investment
decisions. It continues to be confident that an
enhanced asset base and significant value are
being created from its capital and investment
expenditure programme as a whole, based
on actual delivery of the projects within it and
on the most up-to-date costs and schedules
for projects.
Investing in gas distribution through
Scotia Gas networks (SGn)
In addition to its own capital and investment
expenditure programme, SSE effectively has
21
Capital expenditure and investment 2011/12 – %
Networks 31
Retail 5
Wholesale 61
Other 3
renewable energy capital expenditure – £m
2012
2011
2010
2009
2008 132.8
852.3
813.8
666.6
525.6
Electricity networks capital expenditure – £m
2012
2011
2010
2009
2008
489.0
329.3
334.5
314.6
264.4
a 50% interest in SGN’s capital and
replacement expenditure, through its
50% equity share in that business. SGN
is self-financing and all debt relating to
it 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 2011/12,
a 50% share of SGN’s capital and replacement
expenditure was £202.2m, compared with
£199.7m in the previous year.
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:
DD
consistent with SSE’s financial principles
and so should achieve returns which are
greater than the cost of capital (with an
appropriate risk premium applied to the
expected rate of return from individual
projects where appropriate), enhance
earnings and contribute to dividend
growth; and
governed, developed, approved and
executed in an effective manner,
consistent with SSE’s Large Capital Projects
Governance Framework which is, in itself,
regularly updated.
DD
The premium is applied to reflect any risk
associated with asset construction, market
dynamics, new technologies or regulatory
or legislative change.
There are four main categories in SSE’s
investment and capital expenditure plans
to March 2015:
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DD
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economically-regulated expenditure
on electricity transmission upgrades;
economically-regulated electricity
distribution expenditure plus essential
maintenance of other assets;
expenditure that is already committed
to development of new assets such as
wind farms; and
expenditure that is not yet committed
but which could be incurred to support
the development of new assets.
Decisions on whether to proceed with
individual projects are made:
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in line with SSE’s financial principles;
in the context of SSE’s commitment to
maintaining a diverse range of assets
within its economically-regulated and
market-based businesses;
DD
DD
in the light of developments in public policy
and regulation; and
on the basis of the experience and skills
available to SSE.
SSE believes that its pipeline of development
opportunities means that it will be able to
focus uncommitted spend on projects with
the strongest potential to achieve returns
well in excess of its cost of capital, enhance
earnings and contribute to dividend growth.
In particular, a disciplined programme with
the principles, shape and scale described
above 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. It will deliver:
DD
DD
further significant enhancements to the
asset base in key businesses, including
economically-regulated electricity networks;
a continuing increase in fuel for electricity
in the form of renewable sources of energy,
supporting a reduction in the CO2 intensity
of electricity generated; and
DD
additional cash flows and profits to support
continuing 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.
Financial management
and balance sheet
Maintaining a prudent treasury policy
SSE’s operations and investments are
generally financed by a combination of:
retained profits;
bank borrowings;
bond issuance; and
commercial paper.
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As a matter of policy, a minimum of 50% of
SSE’s debt is subject to fixed, or inflation-linked,
rates of interest. Within this policy framework,
SSE borrows as required on different interest
bases, with derivatives and forward rate
agreements being used to achieve the desired
out-turn interest rate profile. At 31 March 2012,
after taking account of interest rate swaps,
77.4% of SSE’s borrowings were at fixed rates.
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22
SSE Annual Report 2012
Financial overview (continued)
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:
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DD
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procurement contracts;
fuel and carbon purchasing;
commodity hedging and energy trading
operations; and
long-term service agreements for plant.
DD
SSE’s policy is to hedge all material
transactional foreign exchange exposures
through the use of forward currency
purchases and/or derivative instruments.
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
£6.76bn at 31 March 2012, compared with
£5.89bn at 31 March 2011. Fundamentally,
this increase reflects:
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the quantum and phasing of capital and
investment projects to support sustained
real dividend growth; and
the decision to delay the increase in
household energy prices until September
2011 meant some additional revenue
would not be collected until the new
financial year.
In addition, significant coal stocks have
been acquired in anticipation of the fuel
requirements at SSE’s coal-fired power
stations during 2012/13.
adjusted net debt and hybrid capital
adjusted net debt and hybrid capital
Less: hybrid capital
adjusted net debt
Add: outstanding liquid funds
Add: finance leases
Unadjusted net debt
As the table below sets out, adjusted net
debt excludes finance leases and includes
outstanding liquid funds that relate to
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.
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 set across a broad range
of dates. Its average debt maturity as at
31 March 2012 was 9.3 years, compared with
10.6 years at 31 March 2011. The completion
of the private placement (see ‘Ensuring SSE
is well-financed’ below) means that SSE’s
average debt maturity was 9.6 years at
30 April 2012.
SSE’s debt structure remains strong, with
around £5.1bn of medium- to long-term
borrowings in the form of issued bonds,
European Investment Bank debt and
long-term project finance and other loans.
The table below also includes the issue by
SSE, in September 2010, of hybrid capital of
£1.16bn. 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 £189.2m.
Around £100m of medium-to-long-term
borrowings will mature during 2012/13.
Ensuring SSE 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 currently:
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‘A-’, with a ‘stable’ outlook (Standard &
Poors); and
‘A3’ with a ‘stable’ outlook (Moody’s).
DD
March 12
£m
March 11
£m
(6,755.8)
1,161.4
(5,890.6)
1,161.4
(5,594.4)
(4,729.2)
(119.9)
(342.1)
(28.1)
(372.2)
(6,056.4)
(5,129.5)
SSE is committed to maintaining financial
diversity and will move quickly to take the
right financing options, including issuing
new bonds and loans. In line with that it:
DD
¥15bn
successfully re-opened the European
corporate bond market in September 2011
with the issuance of a £300m bond with a
4.25% coupon and a 10-year maturity. As
Lloyds Bank Corporate Markets stated, the
strength of the order book was testament
to SSE’s attractions to investors;
secured in October 2011 a JP
(equivalent to around £125m) seven-year
loan with an effective interest rate of
3.52%; and
undertook in February 2012 a private
placement of senior notes with 22 US-
based investors for a total consideration of
US$700m (equivalent to around £450m).
The senior notes consist of four tranches
with a weighted average maturity of
10.3 years and an all-in funding cost of
around 4.25% once swapped to Sterling.
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Following the issue of hybrid capital in
2010/11, the private placement was a
further example of SSE diversifying its
funding sources and putting in place funding
at attractive rates. The placement was
formally completed in April 2012. The net
proceeds will be used to refinance short-term
debt and to support SSE’s programme of
large capital projects.
With regard to shorter-term funding, SSE’s
core revolving credit facilities of £900m are,
and are expected to remain, undrawn. The
facilities are the subject of an agreement with
banks which runs to 2015. In addition to these
facilities, SSE has a committed bilateral facility
of £100m with one other bank.
SSE believes that it has sufficient financial
flexibility to pursue the best opportunities
to provide the means with which to increase
dividends. At the same time, it also believes
that history – including shocks and
uncertainties seen in the financial markets in
recent years – demonstrates how companies
with a commitment to the long-term must
be disciplined when managing their balance
sheets and cautious in financing their activities.
net finance costs
The table on page 23 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 2011/12 were
£322.1m, compared with £342.8m in
the previous year.
The charge for hybrid debt is presented within
dividends and reflected within adjusted
earnings per share*.
The average interest rate for SSE, excluding JCE/
Associate interest, during 2011/12 was 5.06%,
compared with 5.43% for the previous year.
Based on adjusted interest costs, SSE’s adjusted
interest cover (including the hybrid coupon)
was (previous year’s comparison in brackets):
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5.9 times, excluding interest related
to SGN (7.3 times); and
4.9 times, including interest related
to SGN (5.7 times).
scheme liabilities of £731.9m are recognised
in the balance sheet at 31 March 2012, before
deferred tax. This compares to a liability of
£668.6m at 31 March 2011.
During the year to March 2012, employer
cash contributions amounted to:
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£47.9m for the Scottish Hydro-Electric
scheme, including deficit repair
contributions of £29.5m; and
£90.1m for the Southern Electric scheme,
including deficit repair contributions
of £67.2m.
Excluding shareholder loans, SGN’s net debt
at 31 March 2012 was £3.27bn, and within
the adjusted net finance costs of £322.1m,
the element relating to SGN’s net finance
costs was £96.5m (compared with £90.4m
in the previous year), after netting loan stock
interest payable to SSE. Its contribution to
SSE’s adjusted profit before tax* was £138.3m,
compared with £96.4m in 2010/11.
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 Southern Electric
and Scottish Hydro-Electric schemes would
be included in price controlled revenue, with
an incentive around ongoing pension costs.
Tax
Contributing to employees’
pension schemes
In line with the IAS 19 treatment of pension
scheme assets, liabilities and costs, pension
Being a responsible tax payer
Central to SSE’s approach to tax is that it
should be regarded as a responsible tax payer.
As a consequence, SSE maintains a good
net finance costs
adjusted net finance costs
add/(less):
Movement on derivatives
Exceptional charges
Share of JCE1/Associate interest
Reported net finance costs
Adjusted net finance costs
Return on pension scheme assets
Interest on pension scheme liabilities
Finance lease interest
Notional interest arising on discounted provisions
Hybrid coupon payment
adjusted interest costs for interest cover calculation
1
Jointly Controlled Entities
Tax charge
adjusted current tax charge
add/(less):
Share of JCE/Associate tax
Deferred tax
Tax on exceptional items/certain remeasurements
Reported tax charge
March 12
£m
March 11
£m
322.1
342.8
89.5
–
(146.5)
265.1
322.1
147.4
(149.8)
(38.4)
(7.8)
65.5
339.0
44.4
8.8
(139.9)
256.1
342.8
141.9
(150.2)
(39.7)
(4.3)
–
290.5
March 12
£m
March 11
£m
213.4
268.2
(6.6)
118.0
(319.6)
5.2
3.3
83.3
252.4
607.2
23
relationship with HM Revenue & Customs,
based on trust and co-operation.
SSE strives to manage efficiently its total tax
liability, and this is achieved through operating
within the framework of legislative reliefs.
SSE does not take an aggressive stance in its
interpretation of tax legislation, or use so-called
‘tax havens’ as a means of reducing its tax
liability. SSE’s tax policy is to operate within
both the letter and spirit of the law at all times.
SSE’s tax paid to the government in the
UK, including Corporation Tax, Employers’
National Insurance Contributions and
Business Rates, totalled £396.4m during
the year to 31 March 2012, compared with
£343.8m in the previous year. SSE also pays
taxes in the Republic of Ireland, in relation to
its operations there, and indirectly contributed
£59.5m to UK government tax revenues
through its significant investment in joint
ventures and associates (as compared with
£69.9m in the previous year).
As a member of the Hundred Group of
Finance Directors, SSE contributes to its
annual Total Tax Contribution survey. SSE
ranked 23rd in the 2011 survey, both in terms
of tax paid and total tax contribution.
Setting out SSE’s tax position
To assist the understanding of SSE’s tax
position, the adjusted current tax charge
is presented in the table opposite.
The effective adjusted current tax rate,
based on adjusted profit before tax*, was
16%, compared with 20.5% in 2010/11, on the
same basis. The impact of SSE’s higher capital
expenditure programme and the changes
introduced in Budget 2007, and subsequently,
have had, and will continue to have, a positive
impact on the effective current tax rate.
The Budgets in June 2010, March 2011
and March 2012 have 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 latest of
these enacted rate reductions (from 26% to
24%) and the effect of this has been disclosed
as an exceptional item. The deferred tax
balances for future years will continue to
be remeasured as each subsequent rate
reduction is enacted.
The reported tax charge for 2011/12 is £5.2m,
compared with a tax charge of £607.2m in the
previous year. This reflects a large exceptional
credit in 2011/12 compared to a large
exceptional charge in 2010/11. •
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24
SSE Annual Report 2012
networks
Economically-regulated businesses
nETWOrKS
Keeping the lights on and supporting growth.
networks operating profit – £m
737.1
2011: 690.5
Change: +6.7%
SSE is involved in: electricity transmission;
electricity distribution; gas distribution
(through Scotia Gas Networks); and other
networks-related businesses in lighting
services, utility solutions and telecoms.
Electricity networks capital
expenditure – £m
4892011: 329
Change: +48.5%
SSE owns, operates and invests in three
electricity networks companies: Scottish Hydro
Electric Transmission; Scottish Hydro Electric
Power Distribution; and Southern Electric
Power Distribution.
networks regulated asset
Value (net) – £bn
5.88
2011: 5.40
Change: +8.9%
The RAV is the price paid for economically-
regulated energy networks when they were
privatised plus allowed capital expenditure
less depreciation. It is indexed to the Retail
Price Index.
Customer minutes lost (South)
602011: 64
Change: -6.2%
Customer minutes lost is the average
number of minutes that customers are
without electricity supply in a year. SSE’s
Southern network distributes electricity
to almost three million properties.
Utility Solutions electricity
networks
Lighting Services pFI contracts
1182011: 74
Change: +59.5%
SSE’s Utility Solutions business designs, builds,
owns and operates networks for electricity,
gas, water and heat. The electricity networks
are outside SSE’s two distribution areas.
112011: 10
Change: +10.0%
SSE’s Lighting Services business is the UK’s
and Ireland’s largest streetlighting contractor,
involved in the maintenance and replacement
of public lighting units.
Owning, operating and
investing in networks
In previous years, SSE reported the performance
of its electricity networks on a geographical
basis (ie the north of Scotland and central
southern England). In terms of regulation,
process, customers and service, it is now more
relevant to report performance of electricity
networks by activity (ie transmission and
distribution) rather than geography and so from
2011/12 onwards SSE is adopting this approach.
The performance of the economically-regulated
business SGN will continue to be reported
within Networks. In addition, market-based
activities of Lighting Services, Utility Solutions
and Telecoms are also network-based and
have, therefore, been included within SSE’s
Networks segment as Other Networks.
Economically-regulated network
companies with a growing
regulated asset Value
SSE has an ownership interest in five
economically-regulated energy network
companies:
Scottish Hydro Electric Transmission (100%);
Scottish Hydro Electric Power Distribution
(100%);
Southern Electric Power Distribution (100%);
Scotland Gas Networks (50%); and
Southern Gas Networks (50%).
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SSE’s electricity networks transmit and
distribute electricity to around 3.7 million
businesses, offices and homes via around
130,000km of overhead lines and under ground
cables; and SGN’s gas networks distribute
gas to around 5.7 million homes, offices
and businesses via 75,000km of gas pipes.
SSE estimates that the total Regulated Asset
Value (RAV) of its economically-regulated
‘natural monopoly’ businesses is now £5.88bn,
up from £4.2bn five years ago, comprising:
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£770m for electricity transmission;
£2.84bn for electricity distribution; and
£2.27bn for gas distribution (ie 50% of
the businesses’ total RAV of £4.54bn).
SSE is the only energy company in the UK
to be involved in electricity transmission,
electricity distribution and gas distribution.
Through Price Controls, Ofgem sets the
index-linked revenue the network companies
can earn through charges levied on their
users to cover their costs and earn a return
on their regulated assets. These lower-risk
economically-regulated natural monopoly
businesses provide a financial backbone and
operational focus for SSE and balance its
activities in the competitive Wholesale and
Retail markets. They are core to SSE, to its
strategy in the short-, medium- and long-term
and to its ability to deliver sustained real
dividend growth.
Developing market-based
networks businesses
In addition to its economically-regulated
network companies, SSE owns and operates
three other networks businesses, which are
market-based:
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Lighting Services: maintaining and
replacing street and highway lighting;
Utility Solutions: designing, building,
owning and operating networks for
electricity, gas, water and heat; and
Telecoms: providing network capacity,
bandwidth and data centre services.
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As with economically-regulated networks,
they have made significant progress in the
past five years, in terms of assets, contracts
and operating profit*.
Financial performance in networks
Operating profit* in Networks increased by
6.7%, from £690.5m to £737.1m, contributing
44.5% of SSE’s total operating profit*. This
comprised (comparisons with the previous
year in brackets):
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£73.7m in electricity transmission (£47.7m);
£396.5m in electricity distribution (£418.9m);
£234.8m representing SSE’s share of the
operating profit* for SGN (£186.8m); and
£32.1m in other network businesses (£37.1m).
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25
by SHETL to recover additional forecast
construction costs arising from the
replacement of its part of the line,
from Beauly to Wharry Burn, taking the
total to £539m (at 2009/10 prices). Full
construction work on the replacement line
is now under way, including the erection of
the first of the new pylons. The replacement
line should be completed in 2014.
A total of £173m was invested in these four
projects during 2011/12 and their completion
is expected to take SHETL’s RAV from £770m
as at 31 March 2012 to over £1bn by March
2013 and around £1.6bn in March 2015. In
2012/13, SHETL expects to incur capital
expenditure of over £350m.
In addition, in January 2012, SHETL
submitted to Scottish Ministers an
application to construct a replacement
132kV transmission line between Beauly and
Mossford to accommodate a higher capacity.
Work on a new substation is getting under
way. Based on current estimates, the two
parts of the project are likely to require total
investment of around £45m.
achieving a ‘fast track’ to
price Control agreement
In January 2012 Ofgem announced
that it was recommending that SHETL be
‘fast tracked’ under the RIIO T1 (Revenue =
Incentives + Innovation + Outputs) process
for the eight-year transmission Price Control
period from April 2013. This was on the basis
of the business plan submitted by SHETL,
Keeping the lights on and supporting
growth, which set three key objectives
for the next decade:
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keep the lights on for customers;
invest for a greener future; and
minimise as far as possible the impact
on the environment.
Ofgem said the business plan provided good
evidence of how significant benefits will be
delivered to consumers through ‘greater
efficiency, enhanced consumer engagement
and investment’.
Ofgem adopted the new RIIO framework
during 2011, and it is designed to incentivise
companies to deliver investment while
providing value for money for customers. RIIO
T1 is the first Price Control to be conducted
under the new process. As Ofgem stated,
fast-tracked companies, such as SHETL, can
‘benefit from the swiftness of the process
and concentrate on delivering efficient
network improvements for consumers’.
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Electricity Transmission
performance in Scottish Hydro
Electric Transmission Ltd (SHETL)
In SHETL, operating profit* increased by 54.5%
from £47.7m to £73.7m. This reflected the
increase in its asset base following on from
the ongoing increase in capital invested.
During 2011/12, a total of £228.7m was
invested by SHETL in its networks, up from
£117.4m in the previous year, taking its total
Regulated Asset Value from £560m to £770m.
Upgrading Scotland’s electricity
transmission network
SHETL is responsible for maintaining and
investing in the transmission network in
its area, which comprises almost 5,300km
of high voltage overhead lines and under
ground cables and 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 within it seeking to generate
electricity from renewable and other sources.
A series of major developments is under way
which is transforming the scale and scope
of SHETL:
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Work on
Ofgem
Knocknagael Substation:
authorised £43.8m of investment in
this project (at 2009/10 prices) and all
major construction works relating to the
substation and related overhead lines and
under ground cables have been completed.
The successful completion of the project
has increased by 125MW the amount of
electricity that can be exported from the
north of Scotland;
Beauly-Blackhillock-Kintore:
replacing the conductors of the 275kV
transmission lines between Beauly and
Blackhillock and Blackhillock and Kintore,
to allow an increase in the capacity of the
network to transmit electricity, is well under
way and is expected to be finished in 2015.
Ofgem has authorised investment of £81m
(at 2009/10 prices) for this development;
Work on upgrading
Dounreay-Beauly:
and reinforcing the transmission network
between Dounreay and Beauly is continuing,
including the installation of a second set
of conductors to create a double circuit line
and development of new and upgraded
substations. Ofgem has authorised
investment of £73.5m (at 2009/10 prices)
for this programme, which should be
completed in 2013; and
Beauly-Denny:
Ofgem approved, in September 2011,
an asset value adjusting event submitted
Following consultation,
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SSE Annual Report 2012
networks (continued)
Economically-regulated businesses
Following consultation, Ofgem published Final
Proposals for RIIO T1 in April 2012, featuring:
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an allowed cost of equity of 7.0%;
a new index for determining companies’
debt costs;
depreciation based on 20 years for existing
assets; and
depreciation for new assets (except
Beauly-Denny) moving to 45 years over
the course of two Price Control periods.
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SHETL is now developing a full implementation
plan for the new Price Control period, which
will be shared with stakeholders later this
year, much earlier in the process than would
have been possible had it not been fast
tracked. This should be of benefit to SHETL
and its stakeholders.
Keeping the lights on and supporting
growth in the long-term
The central case of SHETL’s business plan is
a £1.1bn capital investment programme, with
flexibility to increase this by up to a further
£4bn if required, to upgrade the transmission
network during 2013-21. Projects currently
being developed and which could be
constructed during the period include:
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In October 2010, SHETL
Western Isles:
concluded that the lack of financial
underwriting from electricity generators
(attributed to the level of transmission
charges) relating to the proposed 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.
Developers of wind farms on the Western
Isles are now conveying greater confidence
about the deliverability of their projects,
which means that the case for the Western
Isles link has been renewed and submitted
to Ofgem. Detailed work is being
undertaken to ensure that the final scheme
design for the link meets the needs of the
developers and, over the coming months,
work will resume on placing the relevant
contracts and undertaking environmental
and other studies;
Caithness to Moray:
planning to develop a subsea electricity
cable between Caithness, where consent has
been secured for a new substation at Spittal,
and Moray, where it is proposed to upgrade
the existing substation at Blackhillock, to
transmit the large volume of existing and
planned electricity from renewable sources
in the north of Scotland. The cable will be
capable of transmitting around 1,200MW
SHETL is now
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SHETL has now secured consent
of electricity. This proposal to develop
a subsea cable retains the flexibility to
accommodate generation developments
in the north of Scotland as and when the
need to do so arises. An investment case
will be submitted to Ofgem shortly; and
Shetland:
for converter stations associated with the
proposed subsea/onshore under ground high
voltage direct current (HVDC) transmission
link between the Shetland Islands and 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 and could be installed in
the second half of this decade.
Based on current estimates (although these
will inevitably be revised) these developments
could require investment of around £1.4bn
and would form part of the £4bn investment
programme that is additional to the £1.1bn
central case of SHETL’s business plan.
In May 2012, Ofgem set out plans to change
the charging arrangements for electricity
transmission networks, with greater account
being taken of the type of electricity generator
seeking to use the networks. This will require
the Investment Cost Related Pricing (ICRP)
methodology to be improved. Once this is
completed, Ofgem will consider the final
form of the ICRP and make a final decision
on its modification. The impact of the
planned changes 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.
Electricity Transmission priorities
for 2012/13 and beyond
SHETL is SSE’s fastest-growing and
fastest-changing business, where the core
activity for much of the next decade will
be construction. Against this background,
its priorities for 2012/13 and beyond are to:
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complete successfully the remaining
stages of the RIIO T1 price control process;
meet key milestones in projects under
construction, in a way that is consistent with
all safety and environmental requirements;
make progress with projects in
development; and
ensure it has the people, skills, resources,
supply chain and stakeholder relationships
that will be necessary to support growth
on a significant scale.
Electricity Distribution
performance in Southern Electric
power Distribution and Scottish
Hydro Electric power Distribution
The performance of SSE’s two electricity
distribution companies during 2011/12 was
as follows (comparisons with previous years
in brackets):
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operating profit* decreased by 5.3%
to £396.5m;
electricity distributed fell by 1.4TWh
to 40.7TWh;
the average number of minutes of lost
supply per customer was 73 in the north
(78) and 60 in the south (64);
the number of supply interruptions per
100 customers was 71 in the north (74)
and 70 in the south (64); and
performance-based additional incentive
income and allowances (excluding losses)
of £11.4m is expected to be earned (£8.5m).
The decrease in operating profit* principally
reflects the timing of recovery of allowed
income.
Performance in respect of both minutes lost
and interruptions was ahead of the targets
set by Ofgem under its Interruptions Incentive
Scheme (IIS), which gives financial benefits
to distribution network operators that deliver
good performance for customers. The number
of minutes lost in the south was the lowest
ever. Performance-based income covers a
number of issues, including the quality of
service provided to customers, and innovation.
Volume of electricity distributed
The total volume of electricity distributed by
the two distribution companies during 2011/12
was 40.7TWh, compared with 42.1TWh in the
previous year. Under the electricity Distribution
Price Control for 2010-15, the volume of
electricity distributed no longer affects
companies’ overall allowed revenue (although it
does have an impact on the timing of revenue).
This has further reduced the level of risk
associated with energy networks businesses.
Earning revenue by delivering
a good quality of service
As a result of their operational performance
during 2011/12 SSE’s two electricity distribution
companies expect to earn additional incentive
income and allowances of £11.4m (2010/11 –
£8.5m) including additional incentive income
of £4.5m (2010/11 – £3.4m). This reflects
effective investment in the automation of the
networks and effective operational responses
to electricity supply interruptions.
27
networks regulated asset Value – £bn
2012
2011
2010
2009
2008
5.88
5.40
4.94
4.71
4.45
networks regulated asset Value 2011/12 – %
Electricity Distribution (North) 16
Electricity Distribution (South) 32
Electricity Transmission 13
Gas Distribution (50% share) 39
In response to this, SSE 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 important innovations and new
technologies that are delivering cost savings
and minimising disruption.
For example, in rural areas, use of the
Ordnance Survey’s Imagery database of
aerial photography has provided a simple
and effective way of surveying thousands of
kilometres of overhead lines for potential risk
of tree damage. In urban areas, SSE has used
directional drill technology, which creates
minimum disturbance to the highway and
thereby reduces disruption to the public and
the cost of reinstatement, to install – for
example – new 66kW circuits in west London.
The deployment of innovations and
technologies such as these, plus good
performance in response to Ofgem’s
enhanced incentive mechanisms in areas
such as customer service should enable SSE
to continue 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 distribution networks was
£260.3m in 2011/12. The need for further
significant investment in Great Britain’s
electricity distribution networks, to maintain
and/or replace ageing assets or to provide
additional capacity, is likely to mean SSE will
invest around £275m in 2012/13, taking the
total for the first three years of the 2010-15
Price Control to around £750m. As a result,
the RAV of SSE’s two electricity distribution
networks should increase to over £2.9bn over
the course of the year.
Significant developments include a £30m
project to install new 132kV plant at Bracknell
and Camberley substations and new 132kV
under ground cables between the substations.
The project will help to meet demand for
electricity in a key area between the M3 and
M4 motorways. The cabling works should be
finished in the autumn of this year and the final
substation work should be completed in 2013.
In Scotland, plans have been made to invest
in the resilience of the electricity network
in Argyll and Bute, which was particularly
affected by the storms of 2011/12, including
provision of under ground cables in Dunoon
and of large-scale mobile generation
connection points for Bute.
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’.
The next decade promises major technological
change for electricity distribution networks
as a result of things like micro-generation,
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responding to the effects
of severe weather
In the winter of 2011/12, SSE’s electricity
networks were subjected to the effects of
severe weather on an unusually large number
of occasions, including the 3 January storm
affecting the north of Scotland. This weather
event alone, featuring exceptional low altitude
wind speeds of over 90 miles per hour, resulted
in 600 separate faults and over 1,000 points of
damage on the network and the loss of power
to around 40,000 households. The equivalent
of three months of fault repair work was carried
out in four days (with very high winds also
occurring on 4 January) and was marked by
the commitment of SSE employees and the
patience on the part of affected communities.
The efforts of SSE and other service providers
were praised by the Scottish government.
The 3 January storm and a number of other
weather events were treated as exceptional
by Ofgem, meaning that they are excluded
from the calculation of performance measures
such as customer minutes lost.
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:
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customer-facing activities, such as restoring
power supplies or providing new connections,
are managed from a network of 14 depots
in communities throughout central, southern
England and the north of Scotland; and
network management activities,
such as inspections, maintenance
and investment, are carried out in
Operational Production Groups.
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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
2011/12 was the second year of the electricity
Distribution Price Control for 2010-15. The 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.
28
SSE Annual Report 2012
networks (continued)
Economically-regulated businesses
the replacement of gas with electricity as
a source of heating and electric vehicles.
All of this will change the traditional flows
of electricity, which means smarter, more
dynamic networks will be required.
SSE, with Smarter Grid Solutions Ltd, an
associate company, ‘switched on’ the UK’s
first commercial smart grid technology on its
power distribution network on Orkney in 2009.
This has since allowed 20MW of additional
capacity for generating electricity to be
connected to the network, at a small fraction
of the cost that would have been required
had traditional means been adopted.
Two other major smart projects, with total
funding of £64m, are being led by SSE’s
electricity distribution businesses:
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northern Isles new Energy Solutions
(nInES) in Shetland: NINES is a pilot
project representing the first stage of the
Integrated Plan for managing electricity
supply and demand in Shetland, which
Scottish Hydro Electric Power Distribution
is required by Ofgem to present in 2013.
It features the use of heat and electricity
storage to manage intelligently the impact
of movements in demand on electricity
generation in Shetland, which could allow
more renewable energy to be connected
to the network. It also features new
active network management solutions.
In September 2011, Ofgem announced
that NINES should be funded as part
of the Integrated Plan, with 85% of its
expenditure included in SHEPD’s RAV and
the remaining 15% included in SHEPD’s
allowed revenue. This confirmed that
NINES is not just a smart programme but
a comprehensive and sustainable solution
to the energy challenges on Shetland
which is designed to meet the needs and
aspirations of the community; and
new Thames Valley Vision (nTVV)
in and around Bracknell: NTVV 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 reduce significantly costs to
customers. NTVV involves monitoring and
predicting electricity demand and usage
patterns and using a range of innovative
technologies, including network automation,
energy storage and automated demand
response, to manage the network flows
predicted by the modelling. In November
2011, Ofgem announced that NTVV should
secure funding totalling £30m under its
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Low Carbon Networks Fund and, as a result,
NTVV will lead to the creation of one of the
UK’s first intelligent distribution networks.
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make progress on the deployment of
innovative investment in smart grids.
Supporting deployment
of electric vehicles
Electric vehicles (EVs) will be an essential part
of the move towards a low-carbon transport
infrastructure. Current predictions suggest
that EVs could account for as many as 10%
of new car sales by 2020. The challenge for
electricity distribution companies is to prepare
their networks for the likely upswing in
demand arising from EVs and SSE was a
full participant in two EV projects, both
supported by the Technology Strategy
Board – the MINI E and the Ford Transit
Connect consortia.
These have helped to demonstrate that up to
one in four homes will be able to have an EV
without it having a significant impact on the
electricity network. Nevertheless, other issues
– such as the need to schedule re-charging
effectively and to develop new control
systems – require significant attention and
SSE is carrying out further work to understand
the requirements of so-called ‘smart charging’
to maximise use of the existing infrastructure.
In March 2012, SSE opened in Glasgow the
UK’s first dedicated free EV charging, hiring
and parking facility. The facility features six
charging car park spaces and electric car hire
from Europcar and Peugeot as well as an
electric car available for test drives.
Electricity Distribution priorities
in 2012/13 and beyond
During 2012/13 and beyond SSE’s priorities
in Electricity Distribution are to:
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comply fully with all safety standards
and environmental requirements;
ensure that the networks are managed as
efficiently as possible, delivering required
outputs while maintaining tight controls
over operational expenditure;
put responsiveness at the heart of
day-to-day operations, so that the
number and duration of power cuts
experienced by customers is kept to
a minimum;
ensure that there is adequate capacity
to meet changing demands on the
electricity system;
deliver excellent service to customers,
which responds effectively to their needs
during supply interruptions and in
‘business-as-usual’ situations; and
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With such significant changes required over
the next few years, not least in adapting
the networks to accommodate changes in
production and consumption, the scope for
additional incremental growth in electricity
distribution networks is clear.
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 2011/12 (comparisons with the previous
year in brackets):
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SSE’s share of operating profit* was
£234.8m (£186.8m);
gas transported fell by 22.8TWh to
143.4TWh; and
98.7% of uncontrolled gas escapes were
attended within one hour of notification,
compared with the standard of 97% (97.2%).
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is primarily due to three things:
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the impact of the price changes agreed
as part of the five-year gas Distribution
Price Control to March 2013;
underlying operational efficiencies
achieved during the year; and
income from 2010/11 not recovered during
that financial year but subsequently received.
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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 following years, services were
brought within SGN, and SGN’s remaining
service contracts with National Grid totalled
£7m per annum by the end of 2010/11.
These Managed Services Agreement contracts
covered transmission services, control and
IT services and emergency call handling, and
the process of bringing them within SGN is
continuing. In June 2011, SGN stopped using
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National Grid’s Gas Transportation
Management System and replaced it with
its new Distribution Network Control System
and in September 2011 it replaced a National
Grid system with a new application called
Demand Management System. This means
that SGN’s remaining contracts with National
Grid now total £4.5m per annum.
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 another significant increase in their
RAV. By the end of 2012/13, SGN estimates
that its total RAV will be around £4.8bn.
During 2011/12, SGN invested £404.3m in
capital expenditure and mains and services
replacement projects, compared with
£399.3m in the previous year, including the
£21m replacement of the under-sea gas main
between the south coast of England and the Isle
of Wight, completed during the year. The project
involved connecting Lepe and Gurnard through
the longest directional drill ever undertaken
(2.9km). Tunnels were bored from each direction,
meeting around 40 metres below the seabed,
to take the two 12 inch diameter pipes.
The majority of the mains replacement
expenditure was incurred under the 30:30
mains replacement programme which was
started in 2002. This requires that all iron gas
mains within 30 metres of homes and premises
must be replaced over a 30-year period. During
2011/12, SGN replaced 1,202km of its metallic
gas mains with modern polyethylene pipes.
SGN 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 19,456 properties were
connected to its networks during 2011/12.
A further 19,500 properties are expected
to be connected in 2012/13.
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 2012/13.
adopting best practice in serving the interests
of customers, society and the environment.
This was the third successive year in which
SGN secured the highest award under the
scheme, and it recognised SGN’s work on its
environmental impact, fuel poverty and safety.
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 has
since begun participation in the first commercial
biomass upgrading system in England, near
Poundbury in the Duchy of Cornwall. Biogas
produced from green waste and chicken
manure will be upgraded to natural gas quality
and fed into SGN’s gas network to supply
green gas to almost 4,000 homes.
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
carrying out feasibility studies on a further six
proposals for biomethane network entry points
from anaerobic digestion and landfill gas
projects in Scotland and southern England.
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.
Earning financial rewards
for corporate responsibility
In July 2011, SGN was awarded £1.3m under
Ofgem’s Discretionary Reward Scheme which
rewards companies for developing and
In October 2011, SGN completed a public
consultation on its proposed business plan
for RIIO-GD1 and submitted it to Ofgem in
November 2011. The plan set out four key
themes and related measures of progress:
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DD
DD
acting safely, through reducing risk and
protecting the public and employees;
providing excellent service through
maintaining gas supplies, giving timely
information and listening to customers;
being good neighbours by reducing
environmental impact and removing
assets that affect local communities; and
being a business for the future by helping
to mitigate and adapt to climate change
and keeping costs down.
DD
In February 2012, Ofgem set out its initial
assessment of gas distribution networks’
business plans. Overall, it decided not to
retain SGN (or any other company) within
the ‘fast track’ process because of the number
of issues that would have to be resolved in
a compressed timetable. SGN submitted
a revised business plan in April 2012 which
it is hoped Ofgem will adopt as the basis for
its Initial Proposals document on the gas
distribution Price Control in July 2012.
Gas Distribution priorities
in 2012/13 and beyond
During 2012/13, SGN’s priorities are to:
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deliver a safe and secure gas supply
to customers;
deliver to time and budget the 2012/13
mains replacement and capital works
programmes;
continue to work with stakeholders to
secure an acceptable outcome to the
new gas Distribution Price Control; and
support sustainable developments in
gas distribution.
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making energy better:
D restoring power
In January, engineers tackled
three months worth of damage
repair work in just four days
due to storms.
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SSE Annual Report 2012
networks (continued)
Market-based businesses
Other networks
performance in Other networks
SSE’s ‘Other Networks’ businesses – Lighting
Services, Utility Solutions and Telecoms –
are relatively small when compared with its
energy networks, and they operate in tough
and competitive markets. As a result of
difficult economic circumstances, their
contribution to SSE’s operating profit* fell
from £37.1m in 2010/11 to £32.1m in 2011/12.
Maintaining leadership in
lighting services provision
SSE remains the UK and Ireland’s leading
streetlighting contractor. It has:
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24 contracts with local authorities in
England, Wales and Scotland to maintain
over 630,000 lighting units;
28 contracts with local authorities in
the Republic of Ireland to maintain over
240,000 lighting units, through Airtricity
Utility Solutions; and
11 contracts with 12 local authorities, under
the Private Finance Initiative, to replace
and maintain over 610,000 lighting units.
DD
The PFI contracts include the 25-year contract
awarded by Knowsley Metropolitan Borough
Council 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 which began in August 2011. It includes
the deployment of SSE’s Mayflower technology
which offers customers variable light control,
monitoring, fault detection and energy
consumption measurement – all undertaken
from a central location.
Lighting Services fits well within SSE’s business
model and, as in electricity distribution, future
success will be based on effective and efficient
customer service and successful deployment
of new technology.
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 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.
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SSE now owns
Electricity networks:
and operates 118 embedded energised
network offering carrier standard connectivity
to external customers and providing SSE’s
internal managed voice and data services.
The origins of this business lie in the
installation, a decade ago, of fibre on SSE’s
electricity network, and the telecoms network
now comprises:
fibre optic cabling which SSE owns (5,000km);
leased lit fibre (2,600km); and
microwave radio (3,600km).
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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.
Despite gaining some large, high-profile
technology companies as clients, the year was
characterised by a challenging environment for
sales in respect of the network, which made
tight control on operating costs especially
important. To support the business in the
future, there will be a focus on development
of its network and products in what remains
a very fast-developing sector.
Conclusion
Through efficiency, responsiveness and
innovation, SSE aims to expand significantly
its Networks businesses in the coming years
and they will play a significant part in helping
it to meet its financial objective of sustained
and real dividend growth.
Other networks priorities
in 2012/13 and beyond
Lighting Services, Utility Solutions and
Telecoms have specific priorities for 2012/13,
but across all of them there is a continuing
need for:
efficiency and customer service;
effective product development; and
technological change and innovation.
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electricity networks outside the areas
served by its economically-regulated
subsidiaries Scottish Hydro Electric
Power Distribution and Southern Electric
Power Distribution. A further 43 are
under construction and contracts have
been signed for the development of an
additional five, taking the total to 166 – up
from 117 at the end of 2010/11. In total,
SSE has 825MW of network capacity,
including 476MW of existing demand and
349MW of connections to be completed.
SSE is also a licensed
Gas pipelines:
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 2011/12 it connected a further
13,853 premises, taking the total number
of connections to over 92,000. Contracts
have been signed for a further 60,000
connections to be completed.
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Water: DD
Through SSE Water (SSEW) SSE
is 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 15 such appointments and provides, or
has secured contracts to provide, water and
sewerage services to over 21,000 properties
in England and Wales.
Heat:DD
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.
There are currently seven heat networks
in operation and five further schemes
where SSE is the preferred bidder.
Of the four areas that Utility Solutions operates
in, Heat is the least developed and has the
most potential yet to fulfil as a result of the
planning requirements placed on developers
and the introduction of the Renewable Heat
Incentive. That, allied to continuing focus
on safety, customer service and value across
all activities and an ability to offer a true
multi-utility solution to customers, means that
Utility Solutions should continue to increase
its already prominent market presence.
Operating a national telecoms network
SSE’s Telecoms business operates in two
different markets. It owns and operates the
UK’s fourth largest fibre and microwave
31
retail
Market-based businesses
rETaIL
Earning the right to make a profit.
retail operating profit – £m
Energy customer accounts –
millions
321.6
2011: 400.5
Change: -19.7%
SSE is involved in the supply of electricity
and gas and in other energy-related services
such as electrical contracting to business
and household customers.
9.55
2011: 9.65
Change: -1.0%
SSE supplies electricity and gas to household
and business customers in the energy markets
in Great Britain and Ireland. It is Britain’s
second largest energy supplier.
Home services customer
accounts – 000s
Energy efficiency installations
(GB) – 000s
4122011: 420
Change: -1.9%
Home services provided by SSE include
gas boiler, central heating and wiring
maintenance and installation and telephone
line rental, calls and broadband services.
3152011: 193
Change: +63.2%
As an energy supplier, SSE has obligations
under government-sponsored schemes
to deliver energy efficiency measures
in households throughout Great Britain
that deliver savings in CO2.
Financial assistance for
vulnerable customers – £m
SSE Contracting Order Book – £m
462011: 28
Change: +64.3%
SSE provides assistance for customers who
struggle to pay for their basic energy needs,
including discounts on energy bills.
782011: 67
Change: +16.4%
SSE Contracting is one of the largest
mechanical and electrical contracting
businesses in the UK, operating from
regional offices throughout Great Britain.
Improving transparency in competitive
customer-facing businesses
In previous years, SSE reported performance
relating to its Energy Supply activities as part
of a Generation and Supply segment and SSE
continues to believe that its involvement in the
Retail activity of energy supply and the Wholesale
activities of energy production and portfolio
management means it has a well-balanced
portfolio of customers, assets and contracts for
purchasing gas and power purchase agreements.
In October 2009, Ofgem introduced the
requirement to report details of SSE’s Generation
and Supply results in a Consolidated Segmental
Statement (CSS). Ofgem commissioned an
independent review of suppliers’ segmental
statements by BDO LLP and in January 2012
announced that while BDO had recommended
several changes to the way suppliers prepare
their statements to improve transparency and
cross-company comparability the fact it ‘found
suppliers’ financial information to be fair and
appropriate and should also give consumers
a degree of reassurance’.
Therefore, in relation to Generation and Supply,
SSE was already publishing information to help
to improve the transparency of its financial
reporting. Following changes to SSE’s
management structure in 2011 and in
the interests of further transparency, it has
concluded that this should be extended
to its financial statements.
The second biggest energy supplier across
the Great Britain and Ireland markets
SSE is the second biggest energy retailer across
the competitive markets in Great Britain and
Ireland. It supplies electricity and gas to more
than 9.5 million household and business
accounts under brands such as SSE, Scottish
Hydro, Southern Electric, SWALEC and Atlantic
in the Great Britain market and Airtricity in the
markets on the island of Ireland.
The key responsibilities of the Energy Supply
business are to:
DD
ensure it secures enough electricity
and gas to meet customers’ needs;
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SSE Annual Report 2012
retail (continued)
Market-based businesses
DD
arrange for electricity and gas to be
distributed to customers’ premises through
the relevant networks;
provide customers with necessary associated
services such as metering and billing; and
meet obligations in respect of energy
efficiency and any related social or
environmental schemes promoted
by government.
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It must do so while being mindful of the fact
that its core products – electricity and gas
– are something which people need to buy
rather than choose to buy, which means there
is legitimate and significant political and
regulatory interest in energy supply markets.
In Great Britain, for example, energy supply
has been the subject of a Retail Market Review
announced by Ofgem in November 2010, which
is supposed to make energy retail markets work
more effectively in the interests of customers.
a significant provider of
energy-related services
SSE provides other energy-related goods
and services to customers, covering three
principal areas:
DD
retailing of ‘home services’ such as gas boiler,
central heating and wiring maintenance and
installation, telephone line rental, calls and
broadband services and micro-generation;
supplying, installing, maintaining and
reading meters in the household,
commercial, industrial and generation
sectors in Great Britain; and
domestic, commercial and industrial
mechanical and electrical contracting and
electrical and instrumentation engineering.
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DD
SSE’s contracting business is the second largest
mechanical and electrical contracting business in
the UK. Its metering business became national
in Great Britain in 2010 after it completed
a programme of in-sourcing of activities.
Home services were supplied to over 400,000
customer accounts as at 31 March 2012.
SSE’s activities in home services, metering
and electrical and mechanical contracting
are all customer-facing and have, therefore,
been included in the Retail segment.
Financial performance in retail
Operating profit* in Retail fell by 19.7%,
from £400.5m to £321.6m, contributing
19% of SSE’s total operating profit*. This
comprised (comparisons with the previous
year in brackets):
Energy Supply
performance in Energy Supply
SSE’s Energy Supply business buys
the electricity and gas it needs through
SSE’s Energy Portfolio Management and
Generation divisions. The associated cost
to the Energy Supply business comprises:
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the weighted average cost of electricity,
made up of fuel used in generation plus
associated costs of CO2 emissions, power
purchase agreements and direct bilateral
electricity contracts; and
the weighted average cost of gas, made
up of gas purchase contracts and direct
bilateral gas contracts and gas storage.
DD
It therefore carries risks associated with energy
procurement. In addition, the Energy Supply
business has to meet costs associated with
the transmission and distribution of energy,
customer service and government-sponsored
social and environmental obligations.
Operating profit* in Energy Supply in 2011/12
fell by 21.9% to £271.7m, and comprised
16.4% of SSE’s total operating profit*.
Within this, SSE’s operating profit* from
supplying energy to a household account
in Great Britain in 2011/12 was an average
of around £30. Operating profit* in Energy
Supply reflects the higher wholesale gas
costs, and the delay to September 2011
in implementing an increase in household
energy prices and falling energy consumption.
There was, however:
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a reduction in overheads associated with
the doorstep sales operation as a result
of its closure in July 2011; and
success in managing, with customers,
the level of aged debt.
DD
Expected profitability in Energy Supply
Electricity and gas are things which people
need to buy rather than choose to buy (unless
they are used inefficiently), so SSE recognises
that it would not be acceptable for it to
achieve an excessive level of profitability in
Energy Supply. At the same time, a reasonable
and sustainable level of profitability is
necessary to ensure that the risks associated
with energy procurement can be remunerated
in a way that will sustain investment and to
ensure that investment can also be made
in the services and systems that customers
will need in the future.
the medium-term (ie three to five years). In
2011/12, it was 3.5%. On this basis, SSE hopes
to demonstrate that the prices it charges for,
and any profit it makes in, supplying electricity
and gas are fair. It also hopes to give further
momentum to its efforts to build trust in
energy supply.
Building trust in energy supply
In October 2011, SSE published a document,
Building Trust: SSE’s proposals to build
customers’ trust in energy supply in Great
Britain. It set out 10 measures to:
DD
restore simplicity, including reducing the
number of tariffs from over 60 to four
core products;
enhance transparency, including improving
wholesale electricity market liquidity;
improve customer service, including
retrospective introduction of a Sales
Guarantee; and
ensure fairness for all customers,
including ensuring all customers have
the opportunity to access all tariffs.
DD
DD
DD
In line with the fairness principle, SSE has
made a clear commitment never to engage
in any form of unfair pricing. As the Institute
for Public Policy Research stated in February
2012, ‘customers are being overcharged to
subsidise cheap offers for customers who
switch suppliers in the more competitive end
of the market’. An effect of this practice is to
make entry in to the energy supply market in
Great Britain more difficult for new suppliers,
and that is another reason why the practice
should be stamped out.
In April 2012, SSE confirmed that the 10
measures had been completed including two
that had been successfully piloted and would
go forward to full implementation. It also set
out a number of other measures to maintain
the momentum, including steps to simplify
energy bills, tackle estimated bills and
to enable prepayment meter customers
to get on to the best tariff.
As part of its Retail Market Review, Ofgem
has completed consultations on possible
interventions in areas such as pricing
structures, tariff comparability and customer
communications. Ofgem has said it would
prefer to implement reform wherever
appropriate with the co-operation of energy
supply companies but will consider a referral
to the Competition Commission if necessary.
£271.7m in Energy Supply (£347.7m); and
£49.9m in Energy-related Services (£52.8m).
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SSE expects that its profit margin (ie adjusted
operating profit* as a percentage of revenue)
in Energy Supply will average around 5% over
SSE accepts the challenge posed by Ofgem
but believes it is moving faster, and further,
to meet customers’ needs in a way that a
33
9.55
9.65
9.35
9.10
8.49
Energy customer numbers – millions
2012
2011
2010
2009
2008
Energy customer numbers 2011/12 composition – %
Household electricity (GB) 53
Household gas (GB) 36
Business sites (GB) 4
Household/business (Ireland) 7
Domestic customers’ payment methods 2011/12 – %
Direct debit 61
Pay-as-you-go 12
Credit terms 27
regulator-determined approach would not
be able to achieve. Indeed, the quick way
in which SSE was able, in April 2012, to enter
into an agreement with the UK government
on measures to help improve the quality
and relevance of the information available to
customers demonstrates that speed of response
and innovation are most likely to sustain and
build customers’ trust in energy supply.
Energy supply markets in Ireland are at
a different stage of development; indeed,
since 2009, Ireland has experienced the
EU’s highest levels of customers switching
between suppliers. Nevertheless, after a period
of rapid growth in customer numbers, SSE is
committed to ensuring that the principles of
Building Trust are also applied on the island
of Ireland, and its Customer Charter for
household customers in the Republic of
Ireland reflects that commitment.
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:
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offering consistently competitive
prices over the medium-term;
providing a straightforward range of
products that are easy to assess; and
delivering the highest possible quality
of service.
DD
In summary, its proposition to customers
is based on fair pricing, simple products
and excellent service. At the same time, SSE
believes that, because the products it supplies
are fundamental to the functioning of
modern life and so are not discretionary,
it has a responsibility to earn and retain
the trust of customers.
Supplying energy to customers
in GB and Ireland
During 2011/12, SSE’s energy customer
accounts in Great Britain and Ireland fell slightly
to 9.55 million from 9.65 million in March 2011.
Customer accounts at March 2012 comprised:
success in the Irish markets, where there was
a net customer gain of 130,000. In contrast,
there was a reduction of 230,000 in customer
numbers in Great Britain, reflecting the highly
competitive market conditions. Of this net
reduction, most accounts were lost in the six
months between July and December 2011.
This was the period following SSE’s decision
to stop selling energy on the doorstep in Great
Britain and the announcement of increases
in household gas and electricity prices.
Customer account numbers do not tell the
whole story, however. Within the overall total,
2.5 million customer accounts in Great Britain
are for loyalty products such as:
DD
DD
DD
8.52 million household electricity and gas
accounts in GB;
407,000 business electricity and gas sites
in GB; and
621,000 electricity and gas customer
accounts in Northern Ireland and the
Republic of Ireland (91% household and
9% business).
The reduction in customer account numbers
in GB was, therefore, offset somewhat by the
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DD
, under which customers
, which rewards
energyplus argos
customers with money-off discount
vouchers;
energyplus pulse
are able to support the British Heart
Foundation (which received £133,000 from
SSE in respect of energyplus Pulse customers
during 2011/12, taking the total since the
product was launched to £1.5m); and
, available to customers
M&S Energy
through Marks and Spencer’s stores
and website.
DD
In May 2012 SSE announced its intention to
acquire Phoenix Supply Limited, a regulated
supplier of natural gas to 130,000 customers
in Northern Ireland. The acquisition also
includes a small number of customers in
RoI’s deregulated commercial supply market.
The acquisition is subject to approval by
the Irish Competition Authority and SSE
expects to complete the purchase during
the summer.
Selling energy in the right way
In July 2011, SSE became the first of the
leading suppliers in the Great Britain market
to stop commission-based doorstep selling
of energy. The decision was taken because
confidence in the way energy was being sold
on the doorstep and in the way in which
salespeople were being remunerated had
become low.
This was followed in December 2011 by SSE’s
decision to implement its Sales Guarantee
for household energy customers and to apply
the guarantee to any household energy sales
made by it since October 2009, when Ofgem
placed new obligations on energy suppliers
to make sure sales activities are conducted
in a fair and professional manner.
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SSE Annual Report 2012
retail (continued)
Market-based businesses
Under the guarantee, devised as part of
SSE’s Building Trust initiative, any customer
who shows that they switched their energy
supply to SSE after being given inaccurate
information or being misled will have any
resulting financial loss made good. Since it
was launched, SSE has contacted customers
about the guarantee and so far settled over
3,000 claims. It expects that the retrospective
implementation of the guarantee could cost
up to £5m. The application of the guarantee
is being independently assured and extended
to all energy products.
in Wales and Scotland and trained to an
externally-accredited standard. The advisers
will draw on SSE’s experience in the Energy
Demand Research Project carried out in North
Leigh, Oxfordshire, between 2007 and 2010,
during which a locally-based energy adviser
employed by SSE engaged with local people
to secure a 10% reduction in household
energy consumption. According to the
Independent Project Final Analysis, published
in June 2011, the adviser was ‘able to work
very well within the community and was
very well received by them’.
In May 2012, SSE was fined £1.25m after
being found guilty, at Guildford Crown Court,
on two counts (out of seven) relating to the
use of direct sales aids in February 2009. SSE
recognises that a company of its standing and
with its values should not have found itself in
this position and various steps – of which the
Sales Guarantee is one – have been taken to
ensure that it does not do so again.
Meanwhile, SSE is continuing to co-operate
with Ofgem’s investigation into whether it
complied with the new licence conditions to
govern sales processes introduced in 2009.
SSE aims to gain customers through venue,
telephone, online and direct mail sales and
through customer advice activities; through
extending its range of affinity partnerships, of
which M&S Energy is one example; and through
a series of commercially-focused sponsorships.
It is also planning to launch later this year
pilot networks of appointment-only and
salary-based ‘smart energy advisers’, starting
making energy better:
D Educating customers
We’re helping our customers
understand how they use energy
by providing the real-time and
historic information they need
to become more energy efficient.
Customers’ use of energy
is continuing to decline
SSE household customers have continued to
reduce their use of energy, and on an actual
basis in 2011/12 SSE household customers
used, on average:
DD
DD
451 therms of gas, compared with
563 therms in the previous year; and
4,104kWh of electricity, compared
with 4,408kWh in the previous year.
On a weather-corrected basis, average
household consumption of gas by SSE’s
customers has fallen by 21.5% in the five years
since 2007 and consumption of electricity
has fallen by 16.7%. The decline in energy
consumption is expected to continue for
the next few years.
Falling consumption presents short-term issues
in relation to the revenue that companies are
able to earn from supplying energy and in
relation to the operation and development of
plant for generating electricity. Nevertheless,
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 and the overall
sustainability of supplies of gas and electricity
is improved. These are very positive trends,
which SSE welcomes.
Helping customers use
less energy in the future
As an energy supplier, SSE has obligations
under the Carbon Emissions Reduction Target
(CERT) 2008-12 scheme to deliver energy
efficiency measures to households throughout
Great Britain that deliver savings in CO2
emissions. In 2011/12, SSE funded the
installation of cavity wall insulation in over
125,000 homes and loft insulation in over
190,000 homes (excluding DIY insulation),
an increase of over 60% on last year.
In August 2011, Ofgem published its Annual
Report on suppliers’ progress towards CERT
targets for 2008-12. It reported that SSE
had achieved 64% of its obligation by the
end of the third year of CERT; this increases
to 71% when the innovation features of CERT
are taken into account. The delivery of CERT
and, in particular, of the requirement to
ensure that 15% of the CO2 savings are
achieved in a subset of low-income
households considered to be at high risk
of fuel poverty (the Super Priority Group)
has proved to be very challenging, not
least because of difficulties associated
with identifying, and then collecting the
information required to verify, a customer
as being within the Super Priority Group.
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. While delivering
CESP is challenging, SSE now has 33 CESP
agreements in place for locations throughout
England, Scotland and Wales.
CERT and CESP will be superseded by the
Green Deal and Energy Company Obligation
(ECO) when they are introduced following
the passage of the Energy Act 2011:
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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
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.
In April 2012, SSE was one of 22 organisations
to sign an agreement with the UK government
to work to become one of the first Green Deal
providers, offering energy efficiency packages
to consumers when the scheme launches later
this year. The UK government has emphasised
the importance of a ‘good customer
experience from day one’ of the Green
Deal, a point which SSE strongly endorses.
Energy efficiency is also a key issue in Ireland
and 2013 will see the introduction there
of an energy company-administered Pay
As You Save programme.
35
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 and the overall
sustainability of supplies of gas and
electricity is improved.
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the cost of mandatory environmental
and social schemes that energy suppliers
are required to fund; and
the wholesale cost of energy.
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The decline in actual average consumption of
electricity and gas by SSE’s household customers
in Great Britain in 2011/12, compared with
2010/11 means that – despite the price increase
on 14 September – a typical household
customer of SSE paid £1,118 for electricity and
gas in the year to 31 March 2012 (excluding
VAT), down from £1,137 in the previous year.
This illustrates the distinction between the price
of a unit of energy and the amount customers
pay for heating and powering their homes.
According to the UK government’s statement
of Energy Trends in March 2012, for the period
July to December 2011, prices (including tax)
paid by medium domestic gas and electricity
customers in the UK were the lowest and
fourth lowest in the EU15 respectively.
A typical SSE dual fuel bill from 26 March
2012 is made up of:
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distribution costs – 23%;
metering and customer service costs – 8%;
mandatory social and environmental
costs – 9%;
VAT – 5%; and
Energy costs – 50%.
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policy and regulatory decisions on energy
production, distribution and consumption
also having a significant impact.
As part of its Building Trust initiative,
SSE publishes an online ‘tracker’ showing
the relationship between the different
components of a typical dual fuel energy bill.
The tracker shows the changing components
of bills with the aim of explaining the rationale
for pricing decisions (see page 5, and
www.sse.com/pricetracker).
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 are on credit
terms and settled by cheque or other such
payment methods.
Keeping customers’ energy
debt under control
As at 31 March 2012, 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 £88.3m, compared with £89.2m in March
2011. A bad debt-related charge to profits of
£40.5m has been made. This compares with
a charge of £47.4m in the previous year.
This leaves SSE with a profit of around 5%.
As recently as 2008, energy costs accounted
for 55% of a typical dual fuel bill. The fall to
50% in 2012 shows the impact of distribution,
environmental and social costs on household
energy bills. The bills issued by SSE now
contain this breakdown.
SSE will not implement an increase in the price
of household electricity or gas before October
2012 at the earliest. Beyond that, energy
prices for household customers will ultimately
depend on what happens in wholesale
electricity and gas markets, with public
The general economic climate means there
are significant debt management challenges,
with the volume of work in this area for SSE’s
Customer Service division again increasing.
SSE has office- and field-based employees
who work with customers to resolve debt
issues. They aim to help customers by
identifying as early as is practical when their
payments are in arrears and contacting them
as soon as possible to discuss the options
available to them. This makes the situation
easier from both SSE’s point of view and that
of the customer and the benefit can be seen
in the fact that debt which is less than three
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Helping vulnerable customers
In March 2012 Professor John Hills published
the final report following his review of the fuel
poverty definition and target commissioned by
the Secretary of State for Energy and Climate
Change. Under the existing definition, a
household is classed as being in ‘fuel poverty’
if it would need to spend more than 10% of its
income on fuel to keep its home warm enough.
Hills has proposed an alternative measurement
framework focused directly on the overlap
of high energy costs and low income. Hills
believes that the new framework will show
that interventions targeted at the core of the
problem – especially energy efficiency policies
focused on low income households – can make
a substantial difference. Following Hills’ final
report, the UK government has committed
to the adoption of a revised approach to
measuring fuel poverty by the end of the year.
SSE agrees with Hills’ assessment of the
importance of energy efficiency, and the
successful deployment of measures under
schemes like CERT and CESP, is an important
priority for it. In addition, SSE fulfils three
other key responsibilities in order to help those
of its customers who struggle to pay for their
basic energy needs:
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giving financial assistance with energy
bills, helping over 400,000 customers
with a total of £46m in 2011/12;
providing tailor-made payment
arrangements, helping over 300,000
customers who may be experiencing
hardship and having difficulty in paying
their energy bills; and
contacting more than 60,000 potentially
vulnerable customers, helping them with
practical advice and support.
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As in Great Britain, greater energy efficiency is
seen as the most sustainable solution to issues
relating to energy affordability in Ireland.
retail energy bills in Great Britain
SSE increased its prices for household gas
supply by 18% and household electricity
supply by 11% (average) on 14 September
2011. That was the first increase in household
electricity prices for three years. SSE was able
to cut the unit price of gas for household
customers by 4.5% on 26 March 2012.
There are three upward pressures on
household energy bills:
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the cost of using energy networks
to distribute electricity and gas to
customers’ homes;
36
SSE Annual Report 2012
retail (continued)
Market-based businesses
months old was 16.5% lower on 31 March
2012 than the year before and debt overdue
by four-to-six months was 6.3% lower.
complaints in the previous year and the
1,231 complaints in 2009/10.
the ways in which customers engage with SSE
is undergoing further change and responding
to this is a key priority for 2012/13 and beyond.
providing sector-leading
service to customers
SSE continues to be independently and
consistently recognised as the customer
service benchmark for the leading energy
suppliers in Great Britain. To provide customers
with the best possible value for money, SSE
believes that it needs to provide excellent
service, simple products and fair prices.
SSE’s position as the customer service
benchmark for the rest of the energy supply
industry in Great Britain is illustrated by:
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the UK Customer Satisfaction Index,
published in July 2011, in which SSE
achieved the top ranking in the utility
sector for the fourth consecutive year;
the uSwitch.com Energy Customer
Satisfaction Awards, announced in
November 2011, in which SSE won the
Overall Customer Satisfaction category
for the eighth time in a row. Altogether,
SSE won eight of the 11 categories;
the J.D. Power and Associates 2011 UK
Electricity and Gas Supplier Customer
Satisfaction Study, in which SSE brands
topped both the electricity and gas
supplier rankings; and
the energy complaints league table,
published by Consumer Focus in March 2012,
in which SSE achieved a five star rating with
the lowest number of customer complaints
to Ombudsman Services: Energy, Consumer
Direct and contacts with Consumer Focus’
Extra Help Unit. SSE is the only company to
achieve a five star rating and has topped the
league table since it began in April 2010.
During 2011/12, there were 896 SSE-related
complaints to the following third party
organisations: the Ombudsman Services:
Energy, Consumer Focus and Consumer
Direct. This was a reduction from the 1,161
Although SSE maintained its best-in-sector
position in customer service during 2011/12,
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 almost 16 million calls (excluding calls
handled by automated services) to its 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.
The same applies in markets in Ireland
and SSE is planning further investment in
customer services and training to deliver
sector leadership there also.
Making services available digitally
Web and email are now firmly established
as the second most common means of
communication with the Company used
by SSE’s customers. Around 26% of SSE’s
transactions with customers now take place
using digital channels.
Moreover, SSE’s customers in the Great Britain
and Ireland markets now have 1.7 million
digitally-billed accounts, up from 1.3 in the
year before. Such customers can view their
account and 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.
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 using digital
channels if they so choose, is now one of SSE’s
top customer service priorities and significant
investment is being made in this and in services
to customers generally. In this context, the
development of mobile apps and social media
channels such as Twitter and Facebook mean
At the same time, the charges SSE makes
for energy will always be cost-reflective. This
means that any differences between prices
available online and prices available through
other channels will reflect only the different
cost of the transactions. Among leading energy
suppliers, SSE has had the lowest differential
between its online and standard credit prices.
In line with its Building Trust commitments, SSE
has gone one step further and in October 2011
removed all differentials between its tariffs
online and offline. This means that a customer
of SSE will have the same price for their energy,
regardless of the sign-up method used. SSE will
continue to offer a 1% discount to all customers
who choose paperless billing, which reflects
the lower cost of providing this option.
SSE believes that its approach helps make
tariffs simpler and energy prices across all of
its customers fairer. It continues to believe the
much larger differentials maintained by other
suppliers should be the subject of the most
detailed investigation by Ofgem.
Developing new energy
products and services
The competitive energy supply market in Great
Britain spurred companies to develop and
deploy an ever-increasing number of features
and options around the core commodities of
electricity and gas. This led critics to say that
customers had become ‘bamboozled’ by the
complexities that resulted from this.
As part of its Building Trust initiative, SSE has
responded to this by introducing, in February
2012, a dramatically-simplified range of
energy tariffs which will meet the needs of
the vast majority of customers, featuring:
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four core products – two with a variable
price and two with a fixed price;
making energy better:
D Zero-carbon living
In Slough we’ve built ten highly
efficient homes to better understand
customers’ needs in the future as
the UK moves to reduce carbon
emissions by 80% by 2050.
In response to SSE’s tariff simplification,
uSwitch.com said: ‘yet again, SSE is setting
the pace for the rest of the industry, this
time unveiling its plans to simplify its
products and prices while Ofgem is still
consulting on its own proposals.’
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five simple questions to enable customers
to find the best deal;
a new price comparison metric to enable
customers to see the relative cost of each
tariff; and
the same availability online, face-to-face
or over the telephone.
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This fulfils two key principles:
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simplicity for the customer who is concerned
only or mainly about price; and
choice for the customer who is more
concerned about features and products.
To achieve this simplification, SSE removed
the ‘no standing charge’ option from all of its
products, with all new customers being placed
on a tariff consisting of:
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a standing charge which covers a proportion
of the fixed costs in a customer’s bill; and
a single unit price for all units consumed.
DD
In response to SSE’s tariff simplification,
uSwitch.com said: ‘Yet again SSE is setting
the pace for the rest of the industry, this time
unveiling its plans to simplify its products and
prices while Ofgem is still consulting on its
own proposals.’
preparing for the roll-out
of smart meters
Energy supply in Great Britain is expected
to be transformed by the installation of
around 53 million smart energy meters in
around 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.
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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 and deliver energy
savings and to enable the UK government
to establish the Data Communications
Company, on which a consultation was
launched in February 2012, to manage
smart meter communications; and
the roll-out stage, between 2014 and 2019,
during which the meters themselves will
be installed in most households. This has
to be a positive experience for customers,
and there is evidence from elsewhere that
customers can be hostile to smart meter
installation programmes.
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SSE sees its role in the smart meter roll-out
as a service provider, operating within the
framework set by the UK government for
issues like technical standards, data access
and security. In line with this, and its
measured and realistic approach to the
roll-out, SSE’s priority is to make substantive
progress on the necessary IT systems to
support the wider roll-out, without making
commitments that may prove to be
mis-placed as the roll-out plan gets under way.
This means that, under its own programme,
it had installed just 2,500 smart meters in
customers’ homes by the end of March 2012,
as opposed to the hundreds of thousands
installed by one other supplier, many of which
do not conform to the technical specification
issued by the UK government in March 2012.
Fundamentally, SSE believes that the smart
meter roll-out is something which should
be started well and completed successfully,
rather than started too quickly and burdened
by problems before completion.
In Ireland, installation of smart meters will
be the responsibility of network companies.
SSE supports the two-phase approach to
the smart meter roll-out which has been
adopted, featuring:
Delivering zero-carbon homes
Smart meters are one example of change in
the energy sector designed to help the way
37
in which electricity and gas are used
to become more sustainable. The way
in which people live is also changing
and, in line with that, SSE completed a
development of 10 zero-carbon homes
on a brownfield site in Slough in 2010.
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 have been occupied throughout
the period since, allowing information to be
gathered about how householders adapt
and respond to zero-carbon living. The main
findings so far are that:
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residents like zero-carbon homes
which, despite the extensive renewable
and energy efficiency measures, feel
very normal;
due to enhanced insulation and triple
glazing, residents hear very little
external noise;
the homes have used less electricity and
less hot water than expected but more
space heating than expected but net
energy costs were less than half that
of a traditionally-built home; and
the integration of four different renewable
heating technologies into one energy
centre has required time to commission
and optimise.
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Final conclusions from the zero-carbon homes
will be prepared when the initial trial period
is completed, which is expected to be in late
2012. Those conclusions will help inform
future developments in the decarbonisation
of the energy sector.
Energy Supply priorities
in 2012/13 and beyond
During 2012/13, and beyond, SSE’s priorities
in Energy Supply are to:
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deliver fair prices, simple products
and excellent service to customers;
continue to build customers’ trust
in energy supply;
deliver energy efficiency programmes;
make substantive preparations for the
roll-out of smart meters and related
developments; and
maintain progress in providing
additional services through digital
channels.
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SSE Annual Report 2012
retail (continued)
Market-based businesses
Energy-related Services
providing energy-related
products and services
In addition to electricity and gas, SSE also
provides energy-related products and services
to customers, covering three principal areas:
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retailing of ‘home services’ such as
gas boiler, central heating and wiring
maintenance and installation, telephone
line rental, calls and broadband services
and micro-generation;
supplying, installing, maintaining and
reading meters in the household,
commercial, industrial and generation
sectors in Great Britain; and
domestic, commercial and industrial
mechanical and electrical contracting and
electrical and instrumentation engineering.
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providing home services
SSE provides home services to 412,000
accounts. In addition, micro-renewables is a
very small market, but it has grown quickly in
response to Feed-in Tariffs with solar PV being
the most popular product. At 31 March 2012,
SSE had 38,000 registered FiT customers,
equating to a market share of around 15%.
At the same time, customer numbers are
limited by the fact that SSE’s home services
products and services have only been
available in some regions.
SSE believes that extending the availability
of its home services, especially in the context
of the forthcoming launch of the Green Deal,
will be necessary to integrate these products
and services more closely with its wider
proposition for electricity and gas customers
and it intends to do this over the next three
years. It is also intended to extend SSE’s
home services offering in Ireland.
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. 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. This national metering business
was created following the completion of a
programme of in-sourcing in 2010.
During 2011/12, SSE collected (previous year
in brackets):
The structure of the business has also been
kept under review and some rationalisation
of depots has been undertaken.
Conclusion
Through focusing on fair prices, simple
products and excellent service SSE believes
that it can achieve long-term success in its
Retail businesses which, in turn, will contribute
to the achievement of its key financial goal
of sustained real growth in the dividend.
Energy-related Services priorities
in 2012/13 and beyond
Home Services, Metering and Contracting
have specific priorities for 2012/13 and
beyond, but across all of them there is
a need to:
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maintain the right portfolio of products
and services;
deliver high standards of customer
service; and
anticipate the changing requirements
of customers.
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9.1 million electricity readings
(8.4 million); and
5.9 million gas readings (5.4 million).
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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 37).
a leading mechanical and
electrical contracting business
SSE Contracting has two main areas of activity:
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industrial, commercial and domestic
mechanical and electrical contracting; and
electrical and instrumentation engineering.
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It is one of the largest mechanical and
electrical contracting businesses in the UK.
It employs around 4,000 people and operates
from regional offices throughout Great Britain.
SSE Contracting continued to make solid
progress during 2011/12. Its order book
ended the financial year at £78m, compared
with £67m in 2010/11 (on the revised basis
adopted on 1 April 2011). The order book
features a number of important new
contracts with customers as diverse as
Tesco and National Air Traffic Services.
A key focus for SSE Contracting is 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.
Through focusing on fair prices, simple
products and excellent service, SSE believes
that it can achieve long-term success in its
Retail business.
Wholesale
Market-based businesses
39
WHOLESaLE
Securing the energy people and businesses need.
Wholesale operating profit – £m
Thermal generation capacity – GW
607.9
2011: 571.5
Change: +6.4%
The businesses in SSE’s Wholesale segment
source, produce and store energy through
energy portfolio management, electricity
generation, gas production and gas storage.
8.84
2011: 8.84
Change: 0.0%
SSE has wholly-owned gas-fired power
stations at Keadby, Medway and Peterhead
and coal-fired power stations at Ferrybridge,
Fiddler’s Ferry and Uskmouth.
Thermal generation output – TWh
renewable generation
capacity – GW
38.4
2011: 42.9
Change: -10.5%
Thermal generation output covers the
amount of electricity generated at gas-
and coal-fired power stations at which SSE
has an ownership or contractual interest.
3.02
2011: 2.45
Change: +23.3%
Renewable generation capacity covers
hydro-electric schemes (conventional and
pumped storage), wind farms (onshore and
offshore) and dedicated biomass plant.
renewable generation
output – TWh
Gas Storage capacity (net) – mcm
7.62011: 4.4
Change: +72.7%
Renewable generation output is output from
SSE’s conventional hydro-electric schemes,
wind farms and dedicated biomass plant.
Output is affected by the amount of plant
in operation and by weather conditions.
4902011: 440
Change: +11.4%
SSE has gas storage capacity at Hornsea
and, in a joint venture with Statoil (UK) Ltd,
is completing a new development at
nearby Aldbrough.
Sourcing and producing energy
In previous years, SSE reported performance
in Energy Portfolio Management (EPM) and
Electricity Generation as part of a Generation
and Supply segment. Following changes in
SSE’s management structure in 2011 and in
order to report the results of the Generation
and Supply business in a more meaningful
and consistent manner, these activities have
been separated into different segments.
This means that the results from the Energy
Supply business are being reported separately
within the Retail segment and the combined
results of SSE’s wholesale energy procurement
and optimisation activities and the electricity
generation operations are being reported
together as EPM and Electricity Generation.
The aggregation of these activities reflects
the way they are managed and their
relationship to the Energy Supply business,
with EPM acting as the bridge that delivers
energy to Retail customers from SSE’s
electricity generation, gas production
and energy contracts portfolio.
EPM is responsible for the scheduling of
Generation plant through capacity contracts
with the asset owners, the procurement of fuel
for the plants and the optimisation and trading
of electricity, gas and other commodities.
The Generation business is responsible
for asset management, maintenance and
making available plant for use by EPM. Neither
activity is reported as a discrete profit centre
or activity. In combination, these activities are
carried out to provide the lowest cost input
to the Energy Supply business for provision
of energy to customers.
Under the new basis of reporting,
performance in Gas Production and Gas
Storage will be reported separately, within
the Wholesale segment.
SSE continues to believe that its involvement in
the Wholesale activities of Energy Generation
and Energy Portfolio Management and the
Retail activity of Energy Supply means it has
a well-balanced portfolio of customers, assets,
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SSE Annual Report 2012
Wholesale (continued)
Market-based businesses
contracts for purchasing gas and power
purchase agreements.
In undertaking these activities, SSE publicly
discloses planned or unplanned outages
affecting its wholly-owned power plant
for units of more than 100MW in capacity
(or more than 100MW in aggregate for wind
capacity), including the reason for the outage
and its expected duration. This information is
in line with the expected requirements of the
EU Regulation on Energy Market Integrity and
Transparency (REMIT) as it affects wholesale
energy markets.
Financial performance in Wholesale
Operating profit* in Wholesale increased by
6.4%, from £571.5m to £607.9m, contributing
37% of SSE’s total operating profit*. This
comprised (comparisons with the previous
year in brackets):
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competitive and sustainable energy
procurement; and
flexible and ‘greener’ electricity production.
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In delivering on these priorities SSE is
committed to the delivery of a diverse
portfolio of robust assets, from which
revenue can be generated on a reliable,
long-term basis and which support future
dividend growth.
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. EPM and Generation
act in unison maintaining a diverse and
well-balanced portfolio of contracts and
assets, both long- and short-term, to ensure
that customers benefit from lower exposure
to wholesale price volatility and therefore
price stability. In doing so SSE provides:
£541.5m in EPM and Electricity Generation,
(£543.4m);
£42.6m in Gas Production (£4.6m); and
£23.8m in Gas Storage (£23.5m).
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Energy portfolio Management
and Electricity Generation
Financial performance in Energy
portfolio Management and
Electricity Generation
SSE’s EPM and Electricity Generation
businesses have six main responsibilities
for which they are remunerated:
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energy contract management;
sourcing energy through participation in
wholesale markets for electricity, gas, coal,
oil, biomass and CO2 emission permits;
management of existing power generating
assets and making available those assets
for use;
producing renewable energy;
securing Renewable Obligation Certificates
and Levy Exemption Certificates; and
services to the electricity balancing market
under the Balancing and Settlement Code.
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Operating profit* in EPM and Electricity
Generation reduced by 0.3%, from £543.4m
to £541.5m. It contributed 33% of SSE’s total
operating profit* in 2011/12. The reasons
behind this performance are set out under
‘Factors affecting adjusted profit before tax*
in 2011/12’ on page 18.
Working to reduce volatility
for energy customers
SSE’s activities in EPM and Electricity Generation
are guided by two long-term priorities:
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lower risk from wholesale energy price
volatility through reduced exposure to
any single commodity;
greater ability to manage wholesale
energy price volatility and to protect
customers from it; and
more scope to deliver the investment
needed in Generation because the risks
associated with large-scale and long-term
investments are balanced by having
electricity and gas customers.
Generating and buying
electricity in Great Britain
As at 31 March 2012, SSE’s generation
capacity, including its share of joint ventures
and associates, was around 11,860MW,
comprising:
11,360MW in Great Britain;
80MW in Northern Ireland; and
420MW in the Republic of Ireland.
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During 2011/12, in Great Britain, SSE
(previous year’s numbers in brackets):
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generated 38.4TWh, based on contracted
output of electricity from all thermal power
stations in which it has an ownership
interest in GB (42.9TWh); and
generated 6.4TWh based on contracted
output from renewable sources of energy
in which it has an ownership interest in GB,
including pumped storage (3.7TWh).
During the same period, also in Great Britain, it:
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supplied 26.7TWh to its small business
and household customers.
This means that, during the year, SSE:
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generated the equivalent of 86% of the
electricity needed to supply all of its
customers; and
generated the equivalent of 168% 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.
Increasing wholesale market transparency
In response to customers’ wishes for greater
transparency and concerns regarding the lack
of liquidity in the short-term wholesale market
for electricity, SSE introduced a new approach
in October 2011 under which it started to
phase in the auction of all of its electricity
supply and purchase all of its electricity
demand in the day-ahead market. This move
was broadly welcomed by stakeholders, with
Ofgem saying it would ‘create greater liquidity
and more efficient price discovery on the
day-ahead market’.
Moving to this approach effectively means that
SSE is delivering a new level of transparency,
significantly improving liquidity, increasing
the depth and credibility of the market, and
assisting in the creation of a robust and
tangible pricing index.
By the end of 2011/12, SSE had consistently
placed 100% of its flexible thermal electricity
generation and about 60% of its power
demand via Nasdaq OMX Group Inc. and
Nord Pool Spot AS’s N2EX daily auction.
In the financial year 2011/12, SSE traded
over 25TWh in the day-ahead auction market
and, since starting the initiative, daily market
volumes have increased by over 300%. While
it is SSE’s aim to trade 100% of its power in
the day-ahead auction (subject to costs and
market conditions), delays by other utilities in
trading larger volumes has slowed the process.
Overall the move by SSE has been successful in
transforming the market and has significantly
improved liquidity, depth and credibility. It has
contributed to the creation of a more robust
and tangible pricing index for electricity
contracts and with greater participation will
make prices more transparent, robust and
further increase liquidity.
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supplied 25.2TWh of electricity to its
industrial and commercial customers; and
In April 2012, in line with its Building Trust
initiative, SSE announced a series of trading
commitments for smaller suppliers of
electricity to help them secure contracts
for wholesale electricity of the right size
and shape to enable them to manage
their risk profile.
Key trends in EpM and
Electricity Generation
Whether at global, European or GB and Irish
levels, the energy sector is experiencing a
period of profound change and challenge,
with a number of external trends influencing
SSE’s decisions, including:
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slow economic growth implying lower
electricity demand;
UK climate change legislation requiring
a 34% reduction in greenhouse gas
emissions, particularly CO2, by 2020
(compared with 1990 levels);
EU 2020 targets requiring 15% of the
UK’s energy requirements to come from
renewable sources (for Ireland, it is 16%);
projected global growth in coal (25%)
and gas (65%) demand by 2035 (IEA),
impacting fuel supply security;
continuing integration of UK energy
prices into the wider global market;
tightening generation capacity in GB as
older plant closes including coal, nuclear
and gas plant;
increasing system variability due to higher
penetrations of variable energy sources;
uncertainties surrounding electricity
market reform and a regulatory framework
trending towards increased central
planning; and
increasing market integration between
GB and Ireland.
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also be balanced by a focus on selected areas
of competitive advantage to SSE.
Managing an energy portfolio
SSE typically needs around 10 million therms
of gas per day to supply its customers and to
fuel its power stations and around 150GWh
of electricity per day to supply its customers.
It is the role of EPM to acquire the necessary
energy to meet this demand. In focusing on
the competitive and sustainable procurement
of energy, it seeks to meet the needs of
Generation and of Retail customers’ and to
maintain a diverse portfolio of energy options
to ensure the effective spread of risk.
Managing energy procurement risk is a key
challenge as it is heavily influenced to varying
degrees by a multitude of national and
international factors including: demand
growth/decline; the global economy; fuel
supply disruptions; international affairs such
as Libya; nuclear availability; CCGT demand;
shale gas; and Liquefied Natural Gas.
In managing this risk Energy Portfolio
Management has three primary routes
for energy procurement:
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upstream gas exploration and
production, coal production, renewables,
forests and agriculture;
gas producer contracts, LNG
contracts:
capacity, power purchase agreements,
solid fuel contracts; and
wholesale trading:
contracts are transparently traded on
international exchanges.
where energy
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In assessing and responding to these various
trends SSE is committed to the delivery of a
diverse portfolio of robust assets, from which
revenue can be generated on a reliable,
long-term basis and which supports future
dividend growth.
The main public policy driver is European
and GB-led decarbonisation policy. In line
with the energy ‘trilemma’, this must be
carefully balanced by the need for supply
security, both in terms of fuel security and
capacity availability and the need for energy
affordability and competitiveness. To achieve
this tripartite objective, SSE recognises the
need for a diverse, sustainable and
complementary generation and fuel portfolio.
It is, therefore, focused on maintaining a
range of options that will meet policy goals
while being consistent with its financial
goal of sustained real dividend growth.
Retaining options is important but must
By optimising this diverse portfolio SSE
ensures that its customers are protected from
the considerable volatility that exists in global
markets, while ensuring adequate returns to
support its commitment to sustained real
dividend growth.
Meeting longer-term energy requirements
Fuel supply contracts play a key part in helping
SSE to meet its customers’ needs and contribute
to the long-term stability of its energy portfolio.
Long-term fuel supply contracts also support
a stable and confident market which supports
investment in new gas-fired generation. Over
the past year SSE has secured two significant
long-term fuel supply contracts including:
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a 10-year gas supply agreement of
790 million cubic metres (mcm) (292Mth)
per annum with Shell Energy Europe,
commencing in 2015. The gas will be
supplied as a firm delivery of 800,000 th/day,
at a price linked to prevailing prices in the
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natural gas market; and
a 10-year contract with Statoil for the
annual supply of 500mcm (185Mth)
of natural gas to be delivered to SSE’s
Peterhead power station via the St Fergus
gas terminal. Delivery of gas is due to begin
in the final quarter of 2012 with the price
of the gas also linked to prevailing prices
in the natural gas market. The contract also
contains provisions to allow the supply of
gas to be diverted to help meet SSE’s other
requirements if Peterhead is undergoing
maintenance or repair work.
The structure of these agreements fits well
with the gas purchasing profile SSE needs to
support its business contracts and generation
requirements. They provide an excellent
opportunity to cover a portion of future gas
needs with an attractive pricing structure
and minimal risk.
SSE’s contracts with Shell and Statoil add to a
number of arrangements agreed in recent years
including the 15-year tolling agreement with
Marchwood Power Ltd which commenced in
2009, and the 2008 extension of the contract
for electricity output from Seabank Power Ltd.
Furthermore, SSE’s investment in renewable
energy sources across the UK and Ireland
provides long-term energy supply with no fuel
purchasing requirement and a hedge against
the volatility in fossil fuel markets. During
2011/12 the energy produced by SSE’s
renewables portfolio was equivalent to
260Mth of gas. Renewables, coupled with
existing and future investments in exploration
and production assets, are an increasingly
important source of energy for SSE.
In recent years LNG has come more
to the fore in the UK representing
around one quarter of gas entering the
National Transmission System in 2011.
As a further diversification to its long-term
energy contracts, SSE is proactively
investigating options for booking LNG
regasification capacity.
principles for management
of SSE’s Generation portfolio
During 2011, SSE defined its long-term
priorities in Generation as being: flexibility
in operations; and a ‘greening’ in production.
The establishment of these priorities clearly
summarises SSE’s ambitions and is underpinned
by six core principles that direct the operation
of, and investment in, its Generation portfolio:
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compliance:
and environmental requirements;
with all safety standards
42
SSE Annual Report 2012
Wholesale (continued)
Market-based businesses
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to respond to customer
to meet the electricity needs
to avoid over-dependency on
capacity:
of domestic and small business customers;
diversity:
particular fuels or technologies;
availability:
demand and market conditions;
flexibility:
in demand for electricity can be
addressed; and
sustainability:
50% cut in the CO2 intensity of electricity
produced.
to ensure that changes
to deliver an overall
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Playing to its strengths is an important focus
for SSE as it ensures capital and management
resources are employed in areas and at stages
where it best retains competitive advantage,
maximises shareholder value and supports
continued dividend growth.
a decision to exit nuclear
power development
In its Annual Report 2011, SSE said 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’.
It was against this background that SSE
announced in September 2011 its intention
to dispose of its 25% stake in NuGeneration
Ltd, the joint venture company established
to develop proposals for a new nuclear power
station in West Cumbria. In focusing on its
strengths SSE concluded that, for the time
being, its resources are better deployed on
business activities and technologies where it
has the greatest knowledge and experience.
In February 2012, the sale – to NNB
Development Company S.A. – was concluded
for an upfront cash consideration of £5.75m,
with a further contingent payment of £1.25m
dependent on progress with the development
of the West Cumbria site.
While SSE may become involved in nuclear
again at a future date, either as an investor
or as a purchaser of nuclear-generated
electricity, its Generation investment plans
for now are focused on a diverse range of
options including renewable energy, gas-fired
generation, plant with carbon capture and
storage and developments with solid fuel.
Maintaining a diverse
Generation portfolio
The way in which energy is converted
to electricity is changing, primarily driven
by policy drivers directing decarbonisation.
There is no ‘one size fits all’ solution to the
achievement of this objective; rather it will
require a broad portfolio of solutions including
conventional and renewable generation
and where feasible carbon abatement
technologies. With its keen focus on diversity
and sustainability, SSE continues to operate
and develop a variety of options that play
to its strengths and capabilities.
The practical application of its generation
principles means SSE’s portfolio comprised
at 31 March 2012:
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4,470MW of gas- and oil-fired capacity;
4,370MW of coal-fired capacity (with
biomass co-firing capability); and
3,020MW of renewable (hydro, including
pumped storage; wind; and dedicated
biomass) capacity.
With this portfolio, SSE has the greatest
diversity in fuels for generating electricity
among UK generators, which enables it to:
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avoid dependency on a single technology
or commodity;
have a balanced portfolio with significant
optionality in the management of its
power stations; and
manage effectively the risks inevitably
associated with primary fuel procurement.
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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.
SSE’s 31 March 2012 portfolio of 11,860MW
of capacity for generating electricity compares
with 11,290MW the year before. During
2011/12, SSE:
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added 495MW of new onshore wind farm
capacity as a result of its investment
programme;
commissioned over 180MW of new
offshore wind farm capacity at Walney and
Greater Gabbard (this excludes capacity in
disputed turbines at Greater Gabbard); and
sold 96.8MW of onshore wind farm
capacity in April 2011 the majority of which
had no SSE power purchase contracts, and
took a small wind farm at Spurness offline
for re-powering.
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Maximising the capability of
SSE’s Generation portfolio
In order to deliver the long-term value and
reliability of its Generation portfolio and to
better inform its decision-making process SSE
has developed its purpose-built Engineering
Centre of Excellence. Its objectives are to:
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support safe operation of power
generating plant;
help deliver increased availability
and performance of key plant; and
mitigate project risk with optimum
design solutions and technology choice.
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A primary output of the centre, through its
Equipment Performance Centre (EPC) is the
bespoke asset management model which
analyses almost 500 million data points every
hour, allowing for the early identification
and resolution of potential plant safety and
availability risks. The EPC has enabled a number
of early interventions which previously may have
lead to significant forced outages. The first wind
farms were connected to the EPC during 2011
and predictive monitoring trials are currently in
progress, specifically looking at the operational
performance of each SSE wind turbine.
With ever-increasing knowledge as to the
performance and capability of its portfolio,
SSE can ensure the right long-term decisions
are made to deliver an efficient, flexible,
low-carbon generation portfolio which plays
to the Company’s strengths and experience.
Improving delivery of
Large Capital projects
It is through maintaining a breadth of
opportunities that SSE can take forward the
best investments and achieve the strongest
possible returns to support dividend growth.
SSE is focused on the safe, sustainable
and timely execution of its major project
portfolio, delivering business revenues
and shareholder value.
To meet this objective SSE has developed a
Large Capital Project Governance Framework,
which ensures that all of its major investment
projects are governed, developed, approved
and executed in a consistent and effective
manner. Through the rigorous implementation
of this framework SSE is demonstrating
industry-leading performance and delivering
on its business goals as planned.
A further dimension of the Large Capital
Project framework is designed to inform
and optimise the stage at which SSE enters
the project development cycle which can
range from asset purchases, to new build,
to long-term electricity contracts. This
supports SSE in identifying the point of
entry where it can best maximise value
and competitive advantage.
How SSE’s gas-fired power
stations performed
SSE owns 4,470MW of gas- and oil-fired
43
Total generation capacity – MW
2012
2011
2010
2009
2008
11,860
11,290
11,330
10,740
10,530
Generation capacity 2011/12 composition – %
Gas/oil 38
Coal/biomass 37
Renewable 25
power station CO2 emissions – grams per kWh
2012
2011
2010
2009
2008
531
504
494
491
496
electricity generation capacity, including
its share of joint ventures.
During 2011/12, SSE’s principal wholly-owned
gas-fired power stations (Keadby, Medway
and Peterhead) achieved 94% of their
maximum availability to generate electricity,
excluding planned outages, compared with
88% availability in the previous year. In
addition to SSE’s ongoing focus on high
operational performance, availability was
increased by the return to service of Keadby
in early May 2011 following the successful
repair of a generator fault.
In addition to its wholly-owned gas generation
SSE has joint venture interests in:
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Marchwood, the 840MW CCGT, owned
by Marchwood Power Ltd, a 50:50 joint
venture between SSE and ESB
International. During 2011/12 the plant,
achieved 94% of its maximum availability
to operate during the year compared
with 93% the previous year; and
Seabank, the 1,140MW CCGT, owned
by Seabank Power Limited, a 50:50 joint
venture between SSE and Cheung Kong
Infrastructure Holdings Limited. During
2011/12 the plant, achieved 86% of its
maximum availability to operate during
the year, down from 96% the previous year.
All of the electricity output at both plants
is sold under contract to SSE.
The amount of electricity generated by SSE
at gas-fired power stations in which it has an
ownership or contractual interest, including
CHP, was 21.6TWh in the year to 31 March
2012 (including 12.5TWh from wholly-owned
stations), compared with 29.3TWh in the
previous year (including 13.3TWh from
wholly-owned stations).
This reduction in output was driven by very
high wholesale gas prices in the course of the
year which had a significant negative impact
on spark spreads, which averaged less than
£1/MWh over the year. Spark spread is the
difference between the cost of gas and the
price of electricity produced from it. Because it
was very low over the period, the stations were
operated less frequently. This was consistent
with the Department of Energy and Climate
Change’s Energy Trends, published in March
2012, which indicated a 17.4% reduction in
gas used for electricity generation.
However, a record year for SSE’s renewable
generation, alongside increased output from
its coal-fired power stations mitigated the
impact of spark spreads by displacing
higher-cost CCGTs and highlighting the
significant benefits to customers of SSE’s
diverse generation portfolio.
Developing flexibility
in gas-fired generation
With more penetration of renewable
generation in the GB system, the stations
at Peterhead, Keadby and Medway have,
increasingly, been required to operate on a
more flexible ‘two shift’ basis. This requirement
will grow in the medium term. To increase
flexibility SSE is applying modifications to
support more frequent ‘two shifting’.
Against this background, and following the
sustained period of low spark spreads, SSE
has decided to undertake a comprehensive
programme of upgrade work to support more
flexible operations at its Keadby and Medway
power stations from 2013 onwards. To allow
this work to be carried out, it suspended
electricity generation at the stations at the
end of March 2012 (see also exceptional
items in the Financial Overview). The work
that will be carried out follows a similar
and successful programme undertaken
at Peterhead power station in 2011.
Investment options for
gas-fired power stations
Irrespective of current market circumstances,
gas will play an increasingly important role
in electricity generation, providing vital
flexibility to support the increasing amount
of generation from on- and offshore wind
farms required to deliver renewable energy
and climate change targets.
As stated in the EU Energy Roadmap 2050
‘gas will be critical for the transformation
of the energy system’ and, in particular the
power sector. Many factors support this
including its relatively low capital costs,
flexibility, short construction time, high
thermal efficiency and its status as the
cleanest of the fossil fuel technologies.
Recognising this future role for gas in a
diversified generation portfolio SSE continues
to develop a range of CCGT options for both
the medium and long term.
SSE’s most advanced CCGT option, Abernedd
in South Wales, secured its construction and
operation consents in February 2011. SSE is
pursuing a single CCGT unit of up to 470MW,
which it considers the most economic option
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44
SSE Annual Report 2012
Wholesale (continued)
Market-based businesses
Gas will play an increasingly important
role in electricity generation, providing
vital flexibility to support the increasing
amount of generation from wind farms.
in the context of the site and the medium-term
outlook for gas-fired generation. While an
invitation to tender was issued in late 2011 an
investment decision will not be taken until the
second half of 2012 at the earliest and will
depend, amongst other things, on the emerging
shape of the electricity market following the
UK government’s proposed electricity market
reforms. This means that the power station,
if built, will not be operational before 2015.
Furthermore, SSE has a number of high
potential CCGT development options located
at existing generation sites including Keadby,
Ferrybridge and Fiddler’s Ferry, plus Seabank,
where SSE has recently acquired adjacent
land for possible further development. These
locations offer many attractive characteristics
including established grid and gas connections,
availability of cooling water and land area.
These and other potential sites across GB
and Ireland mean SSE has a wide range of
CCGT development options for independent
or co-development.
Additional factors when considering the
development and operation of CCGTs include
fuel procurement, technical requirements for
plant flexibility and future carbon abatement.
In assessing these options, SSE is continuing
its policy of rigorous analysis to ensure the
right investment decisions are made and
then effectively delivered. It is against this
backdrop that:
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Barking Power Ltd, in which SSE has a
30% interest, is mothballing capacity
at its 1,000MW power station; and
Derwent Cogeneration Limited, in which
SSE has a 49.5% share, is planning to cease
operation at its CHP plant during 2013. The
plant provides heat to the nearby Celanese
Acetate’s Spondon factory in Derbyshire.
How SSE’s coal-fired power
stations performed
During 2011/12, SSE’s 4,370MW of coal-fired
power stations, located at Fiddler’s Ferry,
Ferrybridge and Uskmouth generated
16.8TWh of electricity, compared with
13.6TWh in the previous year.
This increase in output took place against
a back drop of global and national energy
market volatility and demonstrated the
considerable value of SSE’s coal-fired stations
as part of a diverse portfolio through their
operational flexibility, availability and reduced
reliance on imported gas.
The stations achieved 89% of their
maximum availability to generate electricity,
excluding planned outages, compared with
84% in the previous year. Availability was
primarily impacted by a number of emergent
issues identified during scheduled outages
at Ferrybridge and Fiddler’s Ferry but all
units were available during the 2011/12
winter period.
SSE Mineral Solutions owns and operates an
ash separation plant at Fiddler’s Ferry, where
fresh and stored ash produced by the power
station can be processed into marketable
minerals and materials such as cement
substitutes. While SSE fundamentally believes
in the inherent value of the asset, overall
market demand for its products is such that
the business is trading at an ongoing loss.
However, as coal-fired stations close, this
situation may change as the value of ash as
a cement substitute increases. Accordingly, SSE
announced in April 2012, the mothballing of
the plant until conditions improve sufficiently
to support the business. This will have no
impact on the continued operation of
Fiddler’s Ferry power station.
While SSE agrees with the important role of
gas-fired generation in both the Company’s
and the overall UK portfolio it believes the
right market signals must be apparent if the
necessary investment decisions are to be
taken, particularly the introduction of a well
functioning capacity mechanism under
Electricity Market Reform proposals.
Looking to the future of
coal-fired power stations
As exemplified in 2011/12 coal-fired power
stations will continue to have a significant
part to play in maintaining secure supplies
of electricity and ensuring customers benefit
from the most cost-effective portfolio of
fuels. Additional value also accrues to SSE’s
coal-fired power sites as they benefit from
key infrastructure including access to water,
transport links, and electricity network
connections.
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 can operate for 17,500 hours between
2016 and 2023.
However, consistent with the UK’s climate
change abatement policies, as set out in
the White Paper Planning our Electric Future,
it is SSE’s view that no new coal-fired power
generation plant should be built in the UK
without CO2 abatement and that no coal-fired
plant without such abatement should remain
operational beyond 2030.
SSE’s desire to deliver the full current and
future value potential of these sites, while
meeting carbon abatement targets, means
operational and investment decisions in its
coal-fired power plants will be influenced
by four main factors:
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the need to maintain and improve the
day-to-day performance of the stations
while they are operational;
the prospects for the development of
other solid fuels;
the UK government’s final determination
on proposed levels of banded support
under the Renewables Obligation between
2013 and 2017; and
the continuing UK government commitment
to the development of Carbon Capture
and Storage (CCS) technology.
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Generating electricity from ‘multi-fuel’
The potential of the sites of SSE’s coal-
fired power stations was demonstrated
in April 2012 when SSE and Wheelabrator
Technologies Ltd entered into a 50:50 joint
venture to develop a new £300m multi-fuel
generation facility at Ferrybridge power
station. The joint venture – Multifuel Energy
Ltd (MFE) – expects to begin full construction
of a 68MW multi-fuel facility later this year
and to complete it in 2015. When operational,
the electricity generated by the plant will be
sold to SSE.
MFE has entered into a long-term fuel
procurement contract with 3SE (SSE’s joint
venture with Shanks Plc), which will provide
processed waste-derived fuels using waste
taken from nearby Barnsley, Rotherham and
Doncaster councils. To support this contract
3SE intends to develop a new Mechanical
Biological Treatment and Anaerobic Digestion
facility. Subject to planning permission, this is
expected to be operational by 2015.
Multi-fuel technology is a tried and tested way
of generating clean, base-load power. This
new multi-fuel plant will provide additional
diversity to SSE’s Generation portfolio and
make a useful contribution to ensuring there
are reliable energy supplies in the future.
The transactions that make up this project
represent a strong partnership between
major players in the multi-fuel sector, who
are committed to making a significant level
of investment in this technology.
Between them the companies involved
have extensive experience in sourcing
and processing waste, constructing and
commissioning multi-fuel technologies, and
operating generation plant. This partnership
creates a valuable platform to develop
multi-fuel technology in the future.
Maintaining additional options
for coal-fired power stations
In addition to multi-fuel, SSE’s investment
strategy for Fiddler’s Ferry, Ferrybridge and
Uskmouth power stations is as follows:
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following completion of a front-end
engineering design (FEED) study, it is
investing in NOx emissions reduction
technology for one unit of 500MW at
Fiddler’s Ferry to establish the feasibility
of the various options for operating the
unit up to and beyond 2023;
it is continuing to invest in the operation
and maintenance of the three stations with
a total of £60.1m invested in the stations
during 2011/12;
it is investigating the potential to increase
co-firing with biomass at Fiddler’s Ferry,
subject to the RO banding review and the
impact on future operation arising from
the Industrial Emissions Directive; and
it is operating Europe’s largest post-
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combustion CO2 capture trial at
Ferrybridge, in collaboration with
Doosan Babcock and Vattenfall,
following its completion during 2011/12
(see ‘Making progress on Carbon Capture
and Storage’ below).
Making progress on Carbon
Capture and Storage (CCS)
EU energy policy is primarily driven by the
decarbonisation agenda and will broadly
require a halving of carbon emissions by
the electricity sector every decade between
now and 2050. Ensuring that this transition
is achieved while retaining supply security
and affordability will require the continued
involvement of carbon-based fuels including
coal and gas.
In the near term, coal-fired power stations
still have a crucial role to play in maintaining
secure supplies of electricity as they provide
capacity availability, flexibility and diversity.
However, in the medium-term, the use of coal
to generate electricity will depend on the
extent to which CCS technology can be
applied to abate CO2 emissions.
In the longer-term CCS technology will need
to be applied as widely as possible if targets
for reducing CO2 emissions are to be met
and has become a key consideration when
planning the development of gas-fired
generation. Consequently, the development
of viable carbon capture technology is central
to the UK’s climate change and energy
security objectives and this is reflected
in the UK government’s welcome inclusion
of gas-fired generation plant in its CCS
demonstration programme.
Against this background, SSE has two CCS
projects under way:
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Coal at Ferrybridge:
Europe’s largest post-combustion CO2
capture trial, came into full operation
This project,
45
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In April 2012, the UK
in early 2012. The project is a collaboration
between SSE, Doosan Power Systems and
Vattenfall and is the first of its size to be
integrated into a working power plant
in the UK. The plant bridges the gap
between the pilot-scale trials and the
commercial-scale demonstration projects
envisaged by the UK government. It
captures 100 tonnes of CO2 per day from
the equivalent of 5MW of coal-fired power
generating capacity. The significance
of the project lies in its scale and its
ability to demonstrate the operational
characteristics of capture plant on an
actual power station; and
Gas at peterhead:
government announced a new competition
for funding of commercial-scale CCS
projects in the UK. SSE is working with Shell
UK to develop a gas CCS project at SSE’s
gas-fired power station in Peterhead. The
project aims to design and develop a full
chain, post-combustion CCS facility which
will be capable of capturing CO2 from
one 385MW CCGT unit. It is planned
that the CO2 will then be transported to
the Shell-operated Goldeneye gas field
in the North Sea using, as far as possible,
existing infrastructure. With works already
undertaken, the Peterhead project should
be in a position to begin a full FEED study
in the second half of 2012 positioning it
as a leading contender for the new CCS
competition. The correct funding package
will be necessary for the project to go
ahead, and it is also being considered
by the European Commission to receive
funding under the EU’s NER (New Entrant
Reserve) scheme to support CCS and
renewable energy projects across the EU.
Generating electricity from
alternative sources like biomass
In October 2011, the UK government released
proposals for the level of banded support
under the Renewables Obligation between
2013 and 2017. This included proposals for:
making energy better:
D renewable generation
We now have 3,020MW of renewable
energy capacity (onshore wind, offshore
wind, hydro and dedicated biomass)
in operation, in the UK and Ireland.
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SSE Annual Report 2012
Wholesale (continued)
Market-based businesses
renewable generation capacity – MW
2012
2011
2010
2009
2008
3,020
2,450
2,370
2,220
2,030
renewable energy capacity 2011/12 composition – %
Conventional hydro 38
Pumped storage 10
Onshore wind 43
Offshore wind 6
Biomass 3
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dedicated biomass (1.5 ROCs);
biomass conversion (1.0 ROCs);
co-firing biomass (0.5 ROCs); and
enhanced co-firing, where biomass is used
to generate at least 15% of gross output
(1.0 ROCs).
portfolio diversity provided by its coal plants
to ensure least-cost power generation for its
customers. However, increased CO2 emissions
from coal generation were offset by reduced
emissions from gas-fired generation, and
record volumes of renewable output.
The outcome of this consultation will have
a significant influence on SSE’s plans for
developments in biomass, particularly enhanced
co-firing, at its coal-fired power stations.
Under the proposals, qualifying output from
dedicated regular biomass plants will continue
to attract 1.5 ROCs per MWh. SSE’s plant at
Slough has a current generating capacity
of 80MW and remains the UK’s largest
dedicated biomass energy facility. During
2011/12, it produced 156GWh of electricity
from renewable sources, compared with
200GWh during the previous year.
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 has an allocation
of 18.9 million tonnes of CO2 emissions
allowances per calendar year. During 2011/12,
the price of allowances ranged from around
€6/tonne to around €17/tonne.
SSE’s emissions allowances requirement for
2011/12, beyond those apportioned from
the EU ETS allocation, was 5.3 million tonnes.
This compares with 6.5 million tonnes in the
previous year. With high gas prices and low
spark spreads for gas generation, SSE used the
Assuming current market conditions persist,
SSE expects a similar output from its coal
plant during 2012/13, after which point
it anticipates a substantial reduction in
coal-related emissions as gas plants such
as Keadby and Medway return to service,
additional renewables are commissioned
and coal plants use up their allocated running
hours under the EU’s Industrial Emissions
Directive. This means SSE remains on track
to half its CO2 emissions by 2020.
From 2013, all of the CO2 emissions allowances
for electricity producers will be auctioned.
Moreover, the UK government’s introduction
of the carbon price floor provides a clear
market signal for investment in low carbon and
carbon sequestration investments. Proposals
for the introduction of a ‘floor’ for the price of
allowances in the electricity sector will result in
an effective carbon price of £16/tonne in 2013,
rising to around £30/tonne in 2020 (in 2009
prices). This further signals the importance of
carbon capture and storage for coal and gas
generation in ensuring the achievement of
long-term carbon abatement targets.
Tackling emissions of CO2
in thermal generation
SSE’s priorities in Generation are to be
a greener and more flexible non-nuclear
electricity generator. Greener means
effectively halving its carbon footprint
every decade between now and 2050.
As a non-nuclear generator, this goal will be
achieved through a stable, managed transition
utilising a diverse range of solutions including:
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expanding biomass co-firing at coal-fired
stations;
demonstrating carbon capture technology
for both coal and gas;
increasing significantly the output
of renewable electricity; and
ensuring industry-leading operational
efficiency of its generation portfolio.
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In 2011/12, emissions of CO2 from power
stations in which SSE has an ownership or
contractual interest totalled 24.9 million
tonnes, compared with 25.3 million tonnes
in the previous year. SSE’s CO2 emissions data
is externally verified by a UK Accreditation
Service (UKAS)-accredited organisation.
SSE’s first target is to reduce the amount of
CO2 per kWh 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 CO2 intensity in 2011/12 was
531g/kWh, compared with 504g/kWh in the
previous year, primarily reflecting increased
output from coal-fired power stations.
More broadly, SSE has formed a partnership
with other European energy companies, 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. As the 2020
deadline nears, SSE considers it critical that
the institutions of Europe provide investors
with certainty regarding targets and the policy
framework beyond the current 2020 cliff edge.
Fulfilling the potential of
renewable sources of energy
The way energy is transformed into
electricity is evolving. While decarbonisation,
supply security and affordability are of
equal importance, the primary European
and UK energy policy intervention is on
decarbonisation. The targets that underpin
this include the binding EU carbon abatement
target of a 20% reduction in CO2 emissions
by 2020, compared with 1990 levels, coupled
with more challenging targets over and above
this that have been adopted by both the UK
and Ireland. These targets accompany the UK
and Ireland’s 15% and 16% renewable energy
targets respectively.
While achievement of the renewable energy
targets is spread across electricity, heating
and transport, it is the electricity sector that
has proven itself most adept at responding
to the policy. This has been evidenced most
recently by DECC’s Energy Trends 2011 which
saw Renewables’ share of generation in the
UK increase to a record 9.5%, coupled with
a one third increase in capacity for renewable
energy over the year.
In its Renewable Energy Roadmap the UK
government made clear its commitment
to increasing the deployment of renewable
energy across the UK stating that ‘renewables
will make the UK more energy secure, will
help protect consumers from fossil fuel price
fluctuations, is driving investment in new jobs
and businesses in the renewable energy sector,
as well as keep us on track to meet our carbon
reduction objectives for the coming decades’.
With this clear vision, public policy is strongly
aligned with the renewable energy targets,
providing financial support via the Renewables
Obligation in the UK and the Renewable
Energy Feed-in-Tariff in the Republic of Ireland.
Furthermore, the UK government’s current
work on electricity market reform is explicitly
intended to make sure that low carbon
technologies such as energy from renewable
sources become a more attractive choice for
investors. The effect of appropriate policy
supports should not be undervalued and the
viability of the renewables industry remains
dependent on their continued existence.
With the exception of hydro, SSE believes that
the UK’s revised ROC levels are appropriate
to changing market conditions, once they are
complemented by an effective carbon floor
price and cost reductions in the supply chain
for renewable energy. It is also of the view
that, given hydro’s flexibility, storage capacity
and investment economics, a ROC of around
1.0/MWh is required to sustain investment in
this important source of renewable energy.
With this continued strong political support
for increased renewable penetration in the
portfolio mix SSE does not perceive any
weakening of public policy commitment to
renewable energy in either the UK or Ireland.
Nevertheless, it remains one of SSE’s priorities
to avoid dependency on a single generation
technology or related financial support.
its conventional hydro-electric capacity for
the first time. It now has over 1,300MW of
onshore wind farm capacity for the first time.
That total compares with just 40MW of wind
power just six years ago.
Good progress made on SSE’s landmark
projects including Clyde, Griffin and
Gordonbush wind farms in Scotland and
Slieve Kirk wind farm in Northern Ireland
means that 495MW of onshore wind farm
capacity became operational during 2011/12.
Progress at Greater Gabbard and Walney
has taken SSE’s net offshore wind farm
capacity to 187MW.
At 31 March 2012, SSE had 3,020MW of
commissioned renewable energy capacity
in the UK and Ireland, including its share
of joint ventures, comprising:
1,150MW conventional hydro;
1,303MW onshore wind;
187MW offshore wind;
80MW dedicated biomass; and
300MW pumped storage.
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Of this, output from over 1,500MW qualifies
for ROCs, the key financial support scheme
for renewable energy in the UK, with:
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1.0 ROC/MWh for qualifying hydro and
onshore wind;
1.5 ROCs/MWh for qualifying dedicated
biomass; and
2.0 ROCs/MWh for qualifying offshore wind.
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In advance of planned revisions to ROC
banding, most of SSE’s existing construction
sites will be accredited before the April 2013
value revision and, as such, will be eligible for
existing 20-year supports.
Following a very successful year of
constructing renewable energy projects SSE
remains on course to own around 3,500MW
of renewable capacity that is in operation
or under construction, in the UK and Ireland,
by the end of 2012/13. This will mean SSE is
making solid progress in line with its ‘green’
priority and is supporting the achievement
of CO2 abatement targets, maximising the
potential of indigenous and free renewable
resources and reducing consumer exposure
to the price volatility of internationally-
traded fossil fuels.
Increasing energy from renewable sources
In January 2012, SSE announced that
ongoing progress in the construction of
its large capital projects meant that its
onshore wind farm capacity had exceeded
producing electricity from
renewable sources
Total electricity output from all of SSE’s
renewable resources including conventional
hydro-electric schemes, onshore wind
47
farms, offshore wind farms and dedicated
biomass plant was 7,617GWh during
2011/12 compared with 4,411GWh in
2010/11. This 73% increase is a reflection
of additional generation capacity coming
into operation and the wet and windy
weather conditions experienced during
the period. In energy terms, it is equivalent
to 260Mth of gas.
producing electricity from
hydro-electric schemes
SSE owns and operates more than 50
hydro-electric power stations in the Highlands,
Perth and Kinross, and Argyll and Bute, with
just over 1,150MW of capacity. A further
300MW comes from its pumped storage
facility at Foyers, on Loch Ness.
Over 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. However, 2011/12 was
an exceptional year, delivering a new record
hydro-electricity output of 4,262GWh.
This success is a result of SSE’s continued
investment in refurbishment of its hydro
schemes in the North of Scotland coupled
with a particularly high amount of rainfall
and snowmelt in each hydro catchment.
During 2011/12 (previous year’s comparison
in brackets):
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total output from all of SSE’s conventional
hydro-electric schemes was 4,262GWh
(2,558GWh); and, within this,
total output from SSE’s hydro-electric
capacity qualifying for ROCs – just over
500MW – was 1,954GWh (1,193GWh).
As at 31 March 2012, the total amount
of water held in SSE’s reservoirs which could
be used to generate electricity was 60% of
the maximum, compared with 61% in the
previous year.
restoring generation at the
Glendoe hydro-electric scheme
Work on the restoration of electricity
generation at the 100MW Glendoe
hydro-electric scheme is continuing to
progress well, although it is a very substantial
project which has required considerably more
investment than originally expected. The
restoration works arose due to a rock fall
which blocked the tunnel carrying water from
the reservoir to the power station, stopping
operation. The process of re-filling the
reservoir is expected to begin shortly, with
electricity generation resuming in the middle
of the calendar year.
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48
SSE Annual Report 2012
Wholesale (continued)
Market-based businesses
Meanwhile, SSE is continuing to pursue its
legal and insurance options following the loss
of electricity generation in August 2009. The
net cost to SSE of the restoration work will not
be known until the works and the insurance
and legal processes are complete. The actual
and projected rate of return on the total net
investment at Glendoe, including the original
construction cost of £160m, will depend on
this and on the prices achieved for the
electricity produced. These prices should, in
turn, reflect the strategic nature of the asset
and its ability to respond rapidly to help meet
changes in electricity demand.
Developing new hydro-electric schemes
Through the combination of investment
and ideal weather conditions hydro-sourced
generation has demonstrated its continuing
success as a valued source of renewable
energy.
Investment in such schemes should continue
to be attractive as they provide firm capacity
and fast-response flexibility complementing
variable output from the growing number of
wind farms – characteristics that the market
should value more in the future.
With its considerable operational experience
in this technology SSE is advancing a number
of development opportunities:
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SSE has consent to develop
Kildermorie:
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
scheduled to commence later in 2012, but
is subject to the outcome of the current
ROC banding review.
Sloy:DD
SSE has consent to develop a 60MW
In February 2012 SSE
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. A final decision on this circa £40m
investment will be made following review
of technical and engineering assessments,
which are now nearing completion and
following consideration of decisions
relating to Electricity Market Reform.
Coire Glas:
submitted an application to the Scottish
government for consent to construct a new
pumped storage scheme of up to 600MW
capacity to the north-west of Loch Lochy
in the Great Glen. This scheme has the
potential to produce 1,000GWh of
electricity in a typical year and would be
the largest hydro project to be built in
Scotland and the first brand new pumped
storage scheme to be developed in Great
Britain in almost 40 years. The scheme
would require the construction of a new
dam and upper reservoir at Loch a’ Choire
Ghlais (the upper reservoir). A powerhouse
complex would be constructed under
ground, together with a series of tunnels to
provide access and convey water between
the lower reservoir (Loch Lochy) and the
upper reservoir. Once completed the
scheme would have minimal visual
impact in the Great Glen.
SSE is also proposing to
Balmacaan:
develop a 300MW-600MW pumped
storage scheme at Loch Ness. While
independent of Coire glas the two projects
are managed by a single development
team. Balmacaan has recently completed
its pre-planning consultation on its
environmental impact assessment and
is expected to be submitted for planning
during 2012.
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making energy better:
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north of mainland Orkney we
have been awarded exclusive rights
to develop Costa Head, a 200MW
wave energy site.
Construction of Coire Glas and/or Balmacaan
would not begin before 2014 at the earliest
and, subject to planning consent among
other factors, SSE will have the option to
build neither, one or both of the schemes.
Furthermore, progressing these schemes
and other similar developments will be
dependent upon a satisfactory public policy
and regulatory framework, including the
ROC banding review and the transmission
charging regime changes envisaged
by Ofgem’s Project TransmiT.
adding to onshore wind farm
capacity and production
At 31 March 2012, SSE owned 1,303MW
of onshore wind farm capacity and output
during 2011/12 was as follows (previous
year’s comparison in brackets):
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1,418GWh in the UK, (739GWh); and
1,353GWh in the Republic of Ireland,
(914GWh).
Total electricity output from onshore
wind-based generation increased from
1,653GWh in 2010/11 to 2,771GWh in
2011/12. The key drivers of this increase
was the completion of an additional 495MW
of new generation and the significantly
windier weather relative to 2010/11. Windier
conditions also saw load factors rise above
30% compared with 24% in 2010/11.
On average, the turbines at SSE’s onshore
wind farms in the UK and Ireland achieved
97% of their maximum availability to
generate electricity which has been
consistent over the past three years.
Delivering new onshore wind farms
In meeting its commitment to high quality
project delivery SSE has made significant
progress in 2011/12 with the completion of
its wind farms at Griffin (156MW) in Perthshire
and Gordonbush (70MW) in Sutherland. Their
total capital cost was £340m and they are
expected to produce around 640GWh of
electricity in a typical year.
At Clyde, 100 turbines with a total capacity of
230MW are producing electricity. The remaining
52 turbines, which will bring the project to its
350MW total, are expected to be completed
around the end of summer 2012. The project is
expected to cost around £500m and produce
over 1,000GWh of electricity in a typical year.
Also during 2011/12, SSE constructed and
commissioned the 27MW Slieve Kirk wind
farm in Northern Ireland and the 12MW
Rathcahill wind farm located in the Republic
of Ireland.
Developing new onshore wind farms
At 31 March 2012, SSE’s onshore wind farm
portfolio comprised around (net):
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1,303MW in operation;
380MW in construction or pre-construction;
and
over 550MW with consent for development.
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49
Through the combination of investment
and ideal weather conditions hydro-
sourced generation has demonstrated
its continuing success as a valued source
of renewable energy.
Partnership will now prepare reports for its
shareholders so they can consider the funding
of the next steps in the project.
This provides a portfolio of options whereby
SSE may select developments that deliver
the best value and continue to support
dividend growth.
In addition to its consented portfolio, SSE
continues to assess high potential developments
and has submitted for approval by the relevant
planning authorities in the UK and Ireland
proposals for onshore wind farms with a total
capacity of over 500MW including Clyde
Extension (171MW) and Dalnessie (70MW).
Progress on all of SSE’s renewable projects
is dependent on a continued favourable
planning, policy and regulatory environment.
The projects themselves would be developed
over the next few years.
Maximising electricity
output from wind farms
With its onshore and offshore wind farms
producing 3,199GWh of electricity in 2011/12,
SSE is the largest operator and developer of
wind power across GB and Ireland. From its
Centre of Engineering Excellence in Renewable
Energy in Glasgow, SSE’s highly-skilled team
of professionals ensure that maximum value
is derived from its wind assets. Ensuring
maximum value is founded in four critical
factors, rigorously assessed through the
development stages:
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site selection;
wind analysis carried out by a specialist
team;
site optimisation to maximise output,
including turbine layout; and
turbine selection to match turbine
characteristics with wind conditions
and ensure reliability.
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Carefully assessing each of these criteria
ensures delivery of high quality projects,
adding to business value and supporting
sustained dividend growth.
Developing options in Scandanavia
Further afield, SSE is actively pursuing a
295MW development pipeline in Sweden,
of which 80MW has consent for development,
and the Nordconnect interconnector. In an
early stage of development, Nordconnect is
a partnership between SSE, Energi, E-CO, Lyse
and Vattenfall AB to plan, build and operate
an HVDC interconnector between Norway
and the UK. These projects align strategically
to maximise the potential of the European
energy market, while providing diversity
to the portfolio of future SSE renewable
development options.
Managing constraint on
the electricity system
Constraint occurs when there are limitations
in electricity transmission capacity or for
reasons of system frequency voltage control
or stability. Transmission systems generally
experience periods of constraint, and it is this
that provides a market signal for additional
investment in the grid infrastructure.
During 2011/12, across GB, 6TWh of
generation was constrained at a value of
around £300m. Of this, SSE wind generation
was 80GWh or 1.3% of the total constraint
over the whole system.
With additional volumes of variable
renewable generation on the system,
instances of constraint will occur from time
to time at different locations. In Great Britain
and Ireland an emergent issue centres on
equitable compensation for constrained wind.
At times of constraint, generators in Great
Britain are required to bid in their constrained
generation capacity to National Grid. It has
been SSE’s policy to bid fair and reasonable
prices at all times for its renewable generation
and it believes that this is the equitable
approach for all renewable generators
and in the best interest of customers.
In Ireland’s SEM market, compensation
rules for wind generation recognise both the
degree of control of an individual wind farm
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As the current tranche of onshore wind farms
reaches completion during 2012/13 SSE is
focusing on the alignment of its development
pipeline into strategic areas. These areas
facilitate the continued efficient allocation
of resources and economies of scale. The
following fully consented projects in the UK
and Ireland are components of these areas:
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KeadbyDD
(75MW): Located near
Strathy north
Strathy village, Sutherland, this project
received consent from Scottish Ministers
in November 2011. The wind farm, which is
near Gordonbush, will comprise 33 turbines
over an area of around 950 hectares within
Strathy North Forest, which is a commercial
conifer plantation. The project is anticipated
to enter construction in the next 18 months;
(68MW): This is a fully consented
(32MW): This fully consented
project acquired from RES in May 2011.
Adjacent to SSE’s Keadby gas-fired power
station, preparatory works began for the wind
farm in February 2012 with construction
expected to start later this year;
Calliachar
site, adjacent to SSE’s Griffin project in
Perthshire was acquired by SSE in 2010. SSE
subsequently sought consent to increase
the tip height of the turbines from 100m
to 109.8m. In January 2012, consent was
received from Perth and Kinross Council
Development Control Committee subject
to conditions. Work is ongoing to satisfy
the conditions and construction is getting
under way; and
(18MW): As part of the Slieve
Glenconway
Kirk strategic area located in County Derry,
Northern Ireland, Glenconway will add
a further 18MW to the existing 27MW
completed during 2011/12. The project
began construction in early May and is
expected to be completed during 2013.
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In total, onshore wind farm projects in or near
construction will add more than 150MW to the
existing portfolio in 2012/13. In addition, SSE
has over 550MW of fully consented projects
across GB and Ireland including its 110MW
share of the 170MW Galway Wind Park.
The amount with consent for development
also includes SSE’s 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 a wind
farm with a capacity expected to be around
370MW (SSE’s share being 185MW) on
Shetland’s Central Mainland. This project
has recently received consent from Scottish
government Ministers, with a reduction in the
number of turbines to 103. The Viking Energy
50
SSE Annual Report 2012
Wholesale (continued)
Market-based businesses
Onshore wind capacity – MW
2012
2011
2010
2009
2008
1,303
910
840
690
600
and the export capacity guaranteed in its
connection agreement with the System
Operator. In times of constraint, controllable
wind farms are compensated for their lost
output at market prices, while government
support payments (REFIT in RoI and ROCs
in NI) are paid on the basis of metered
output. SSE works with the System Operator
to ensure that its wind farms demonstrate
the level of response required to be recognised
as ‘controllable’.
To minimise the impact of constraints,
appropriate investment is needed in
transmission infrastructure, an issue which
is particularly acute in Ireland. At the same
time, market arrangements in both GB and
Ireland must provide equitable payment
for constrained generation.
Creating local value from onshore
renewable development
A leading differentiator and a source of pride
for SSE is the economic benefit its onshore
renewable investments bring to local
communities. In particular this year, SSE:
natural environment. The fund is in
addition to the £150m SSE has already
committed to support community projects
in Scotland over the 25-year projected
lifetime of the Company’s existing and
planned wind farms.
Building new offshore wind farms
Due to the significantly larger scale and cost of
both consenting and constructing offshore wind
farms compared with onshore, SSE recognises
the inherent risks are best managed through
partnership arrangements across a portfolio
of projects. To this end SSE is building:
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Greater Gabbard, a 500MW development
being built by Greater Gabbard Offshore
Winds Limited (GGOWL), in which SSE has
a 50% stake; and
Walney, a 367MW development being built
by Walney (UK) Offshore Windfarms Ltd,
in which SSE has a 25.1% stake.
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Total electricity output from SSE’s offshore
wind farms was 428GWh in 2011/12. This was
the result of significant progress in the period
to 31 March at:
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confirmed its ongoing commitment to
the Highland region of Scotland with the
announcement of 50 new roles created
at its regional headquarters in Inverness.
The new roles are being created primarily
to support SSE’s renewable ambitions in
the north of Scotland. The local economic
and employment value associated with the
establishment of a corporate presence in
Inverness helps to highlight the benefit of
renewable development. SSE believes the
new regional headquarters will support its
endeavours in working with communities
and stakeholders.
established its Scotland Sustainable
Energy Fund, an onshore wind community
investment plan. The fund will be worth a
potential £90m over 25 years if SSE is able
to realise its ambitions for new onshore
wind farms in Scotland. The fund will be
available for organisations promoting
skills development, community energy
schemes and improving the built and
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Greater Gabbard where all 140 turbines
were in place, of which 62 had been
commissioned, and not the subject of
any claim and are successfully generating
electricity. In addition, 46 of the 52
disputed turbines had also exported
power; and
Walney where all of the phase one turbines
have been successfully commissioned and
all 51 turbines in the second phase are
producing power, of which 27 are fully
commissioned.
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Progress has continued at Greater Gabbard
since the year end and currently 81 turbines
which are not the subject of dispute have
been commissioned. At Walney, an additional
19 turbines have also been commissioned.
Managing the issues at Greater Gabbard
Significant construction progress was made
at Greater Gabbard during the financial year
with all 140 monopile foundations and
turbines installed and to date, a total of 127
have produced power. Meanwhile, the third
and final electricity export cable has been
installed and is undergoing commissioning.
All of this means that construction works
should be completed, as planned, before
the end of this year.
GGOWL remains in a contractual dispute
with Fluor Limited, the principal contractor
for the wind farm. The dispute relates to the
quality of lower foundations (monopiles)
and upper foundations (transition pieces)
used in the early stages of the development
and supporting 52 of the 140 turbines.
The contractual dispute centres on:
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the claim by Fluor Limited of around
£300m relating to time and costs Fluor
Limited alleges it incurred in carrying out
additional testing and repairs of some
of the welds on these foundations; and
GGOWL’s need for assurance as to the
structural integrity of these foundations,
which resulted in GGOWL initiating its
own programme of offshore testing to
determine whether they meet the required
contractual standards and will provide
a full operating life of at least 25 years.
In relation to the claim by Fluor, GGOWL
has submitted what it believes is a very
robust defence. A formal arbitration process
is beginning and will resolve the dispute in
due course.
In relation to the second aspect of the
dispute, in October 2011, on the basis of
the available evidence, including from its
own programme of testing, and independent
advice, GGOWL notified Fluor Limited that all
52 of the relevant foundations are defective
and do not meet the standard required by
the contract between the two companies.
Of these 52 foundations, Fluor Limited
previously corrected defects that had been
identified in a number of the monopiles
before they were installed, and GGOWL
believes that these repaired monopiles are
sound. The balance of the monopiles and
all 52 of the transition pieces are believed
to be defective.
GGOWL believes that the onus is currently on
Fluor Limited to determine how it proposes to
meet its contractual obligation to ensure that
the transition pieces and monopiles comply
with the contract and that Fluor Limited will
be liable for all associated costs. In relation
to this, GGOWL has initiated a formal
51
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to collaborate on offshore wind
development;
ongoing participation in the Carbon
Trust’s Offshore Wind Accelerator; and
acquisition of Wind Towers Ltd, a joint
venture between SSE and Marsh Wind
Technology Ltd in May 2011. In addition to
producing wind turbine towers for onshore
wind farms, this site is constructing new
facilities to allow the production of turbine
towers for offshore wind and therefore
maximising the potential of its modern
facilities in the expanding market for
offshore wind turbine towers.
In seeking to reduce supply chain cost SSE is
giving practical leadership in the delivery of
the UK government’s ambitious 2020 target
to lower the levelised cost of energy from
offshore wind to £100/MWh and believes this
target can, and indeed should, be achieved.
Establishing an intermediate holding
company for offshore renewable energy
SSE has advised external stakeholders that
it intends to reorganise all of its offshore
wind farm equity interests, including assets
in operation, under construction or in
development, into a newly-incorporated
holding company. It will be wholly-owned
by SSE for the foreseeable future and its
establishment will give SSE a company
through which to finance offshore renewable
energy developments and the flexibility to
introduce other sources of funding should
this be required to support the development
and construction of offshore wind farms.
The incorporation of the new company
should be completed shortly.
making energy better:
D producing biogas
In ayrshire, HrH The prince of Wales
officially opened our innovative
anaerobic Digestion plant where
food waste and other matter is
broken down to produce biogas.
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contractual claim against Fluor Limited,
which is currently the subject of a formal
arbitration process.
progress at Walney
The first phase of Walney is operational and
commissioning of the second and final phase
of the wind farm, 51 turbines with a total
installed capacity of 183.6MW, is now well
under way. All of the turbines have now been
installed, and all have now exported electricity.
The progress at Walney has set the
benchmark for future offshore development
where DONG Energy has constructed the
second phase of Walney in the fastest ever
time for an offshore wind project. A new
record was set for the sector following the
installation of all turbines and cables in just
five months and 13 days. This marks an
important step in the drive toward further
industrialising the sector. As a result of this
progress it is expected that the full 102
turbine, 367MW wind farm will be completed
in the next few months.
Developing more new
offshore wind farms
Undoubtedly, offshore wind will play an ever
increasing role in the delivery of low-carbon
energy for the UK. Already the GB offshore
wind market is the largest in the world with
1.5GW in operation, 2.6GW under construction
and a total of 11-18GW planned by 2020.
SSE has gained valuable experience of
offshore wind farm development and
construction through the Greater Gabbard and
Walney projects and it is this experience that
enables it to exercise informed and disciplined
judgement when prioritising projects in its
development pipeline. In the near-term, the
main focus for SSE is the successful and timely
completion and commissioning of these
projects. The next two offshore wind farm
projects then taking priority are:
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the 500MW Galloper wind farm, close to
the existing Greater Gabbard development,
a 50:50 partnership with RWE npower
renewables; and
the 1,000MW Beatrice wind farm in the
Moray Firth, a 75:25 partnership with
Repsol Nuevas Energias UK (25%)
(formerly SeaEnergy Renewables).
Through 2011/12 significant progress was
made in the planning phases of these
projects, with Galloper receiving confirmation
from the Infrastructure Planning Commission
that it has accepted the Development
Consent Order application.
At Beatrice, an application for consent to
develop the Beatrice offshore wind farm in the
Outer Moray Firth has been submitted to the
Scottish government. The application is the
first of the Scottish Territorial Waters sites to
be submitted for consideration. The proposed
wind farm builds on the success of the
Beatrice Demonstrator Project and would
have a maximum of 142 to 277 turbines,
depending on turbine size.
Beyond this, SSE has secured from The Crown
Estate rights for the potential development
of up to 4.8GW (net) additional offshore wind
farm assets later in the decade. Decisions
regarding the build out of this pipeline will
be reflective of SSE’s disciplined approach
and focus on taking forward only the best
investments and achieve the strongest
possible returns to support dividend growth.
Building a supply chain for offshore wind
In order to meet the full potential of the UK’s
offshore wind resource it is essential to exert
downward pressure on the cost of energy
through the evolution of a sustainable supply
chain. This will include the development of
larger and simpler turbines and the effective
industrialisation of the sector.
SSE has recently invested in a broad range of
new initiatives to increase the effectiveness,
and decrease the cost, of offshore wind
deployment, including:
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taking a leading role in forming the ‘G9’
group of the world’s largest renewable
energy developers, which have come
together to place health and safety at
the forefront of all offshore wind activity
and developments;
consent from North Ayrshire Council
to construct an offshore test facility at
Hunterston in North Ayrshire. The facility
will be Scotland’s first offshore wind turbine
test site and will be an extension of SSE’s
Centre of Engineering Excellence for
Renewable Energy. In partnership with
leading turbine suppliers, up to three
prototype turbines will be tested at
the site for a period of five years;
identification of Dundee as a key
strategic location for the development of
a comprehensive supply chain to support
Scotland’s emerging offshore wind industry.
Joining forces with Forth Ports, Scottish
Enterprise and Dundee City Council,
SSE has taken a proactive approach to
the development of the offshore wind
supply chain;
formation of strategic alliances with
companies such as Siemens and Mitsubishi
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52
SSE Annual Report 2012
Wholesale (continued)
Market-based businesses
Developing marine sources of electricity
While offshore wind is a rapidly evolving
technology at deployment stage, marine-based
wave and tidal energy is at an earlier stage
of technology development. As a longer-term
prospect, the UK’s substantial marine
energy resource coupled with a considerable
commitment to technology testing facilities
means this sector could start to make a
significant energy contribution around the
end of this decade and beyond.
SSE has a two-pronged approach to the
development of this sector and to fulfilling
the potential of marine energy resources:
Technology development:
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Aquamarine Power is a wave energy
developer, in which SSE has invested
£24.7m over the past three years.
At the beginning of 2012 11% of
SSE’s shareholding was acquired by
the Environmental Energies Fund (EEF)
(see ‘Investing in New Ventures’ below).
EEF is now one of Aquamarine Power’s
largest shareholders, along with SSE,
multinational power and automation
company ABB and Scottish Enterprise.
The investment is a further step
toward taking Aquamarine Power
to commercialisation in 2014.
In November 2011 Aquamarine installed
its next-generation Oyster 800 wave energy
device to its foundations on the seabed
at Orkney. Final commissioning is under
way and the device is expected to be fully
operational this summer. In February 2012,
consent was granted to install two further
Oyster devices in the same location. With
a maximum generating capacity of 2.4MW
the three Oyster devices will demonstrate
the feasibility of installing multiple Oysters
in small arrays and ultimately in larger
wave farms.
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Sites development:
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SSE and its JV partners, including
Aquamarine, Open Hydro and most
recently, Alstom, have exclusive rights
from The Crown Estate to develop 600MW
of wave and tidal energy at sites in the
Pentland Firth and Orkney Waters. This
includes the 200MW Costa Head wave
project, a new joint venture between SSE
and Alstom agreed in January 2012. SSE
also retains exclusive rights to develop
a further 200MW of tidal energy. SSE is
continuing to work closely with The Crown
Estate and other stakeholders in advance
of submitting consent applications for
these projects, the first of which is
expected in 2013.
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.
In January 2012 it completed a deal with
Scottish Equity Partners (SEP) that involves
SEP’s new EEF acquiring a portfolio of
cleantech investments owned by SSEV. As
part of the deal, SSEV has become a major
partner in the new £95m green energy fund.
The new Fund has acquired nine investments
from the SSEV portfolio, all of which are
market leaders from across the clean energy
spectrum. The fund will have substantial
fresh capital available for investment in the
portfolio and also has agreement to add up
to five further SSE investments to the portfolio
in future.
By moving investments into the EEF, cleantech
companies can now also benefit from the
track record and expertise of SEP, draw upon
the financial resources of the new partners
and ultimately deliver a better return on
SSE’s initial investment.
Energy portfolio Management
and Electricity Generation
priorities in 2012/13 and beyond
Over the coming year EPM will maintain
its focus on value for money while further
diversifying its range of energy options,
including:
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continuing to improve wholesale market
liquidity including forward markets;
optimising SSE’s energy portfolio,
including upstream assets, fuel supply,
purchase of storage services, and
generation; and
investigating additional long-term
and geographically diverse fuel supply
contracts across the fuel portfolio.
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In Generation, SSE’s 2012/13 priorities
remain consistent with its established
principles to:
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comply fully with all safety standards
and environmental requirements;
ensure power stations are available
to respond to customer demand and
market conditions; and
operate power stations efficiently
to achieve the optimum conversion
of primary fuel into electricity.
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SSE’s Generation 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 through trialling
other forms of decarbonised generation,
including carbon capture and storage.
All of this is aimed at maintaining, for the
long-term, a diverse, well balanced portfolio
that will deliver a decarbonised, secure and
affordable energy supply.
During 2012/13, SSE expects to invest
around £750m in maintaining and
upgrading existing generation assets and
in developing new assets. Investment
priorities for the coming year are to:
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invest in power stations to increase
flexibility;
complete asset maintenance and
refurbishment programmes on time
and on budget;
meet key milestones in new asset
development and construction,
particularly on and offshore wind
and multi-fuel; and
make progress in developing the
diverse range of investment options
it has created for the second half
of this decade.
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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 CO2 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 still 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.
It retains concerns, however, about the
proposed ‘Contract for Difference’ model
and is continuing to work with the UK
government and other stakeholders to
ensure that the shortcomings associated
with this proposal are addressed. The
UK government is expected to introduce
legislation later this year, after further
consultations.
53
ground are leached out by seawater which,
in turn, is replaced (dewatered) by gas under
pressure. At Aldbrough, six of nine caverns are
already storing gas at a capacity of 170mcm.
Leaching at the remaining three caverns is
completed and completion of dewatering
through the injection of gas is expected
shortly. They are expected to be fully
operational by the summer of this calendar
year. SSE’s forecast total investment for
the development remains around £290m.
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.
Conclusion
With a focus on flexibility and sustainability
in its Wholesale businesses, SSE believes that
its activities in EPM, Generation and Gas
Production and Gas Storage will support
the achievement of its first financial goal of
sustained real growth in the dividend payable
to shareholders.
Gas Storage priorities
in 2012/13 and beyond
Gas storage priorities for the coming
financial year include:
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completion of construction work
at Aldbrough; and
ensuring safe and effective operation
of capacity at Hornsea and Aldbrough.
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Gas production
producing upstream supplies of gas
A key milestone for SSE in 2011 was its
acquisition from Hess Limited of North
Sea natural gas and infrastructure assets.
This acquisition was a measured entry by
SSE into non-operated upstream assets.
Following from the significant learning and
experience gained, it is SSE’s intention to
increase its presence in the upstream fuel
sector if assets can be acquired for a fair
price. In doing so, SSE aims to diversify
further its sources of primary fuel and
provide a hedge for its gas-fired generation
and gas supply activities.
Overall, Gas Production delivered an operating
profit* of £42.6m in 2011/12 compared with
£4.6m for the short period after the assets
were acquired in 2010/11. Total output during
the year was 176.7Mth, compared with
27.6Mth in the period from acquisition
in February 2011 to March 2011.
Gas production priorities
in 2012/13 and beyond
In seeking to pursue further opportunities
to secure upstream gas assets SSE will:
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focus on mature, producing, gas-weighted
assets; and
consider opportunities that include
operatorship.
As well as pursuing such opportunities
directly, SSE will work with Faroe Petroleum
plc, in which it has a 5% holding. Future
investment decisions will, however, continue
to be considered in a careful, measured way,
consistent with its financial principles and,
therefore, only where fair value can be secured.
Gas Storage
providing capacity to store gas
In 2011 the UK’s gross imports of natural
gas were greater than gross production for
the first time since 1967 and over the coming
decade UK gas imports are projected to
increase significantly. This presents both
a supply security and price risk associated
with the potential for: operational failures
in pipelines delivering gas to the UK; political
disputes in gas-producing regions; increased
demand from emerging economies; and
periods of unexpected low temperatures.
The two leading solutions to abating this risk
are gas storage and liquefied natural gas
(LNG), both of which are required to
accommodate future growth in gas demand.
SSE has an ownership interest in two major
gas storage facilities in East Yorkshire:
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is the UK’s largest onshore gas
Hornsea
storage facility in which around 325mcm 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. It can be injected with
gas at a rate of 2mcm per day and delivered
to the National Transmission System at
a rate of 18mcm per day, equivalent to
the demand of four million homes. During
2011/12, Hornsea 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.
aldbrough
onshore gas storage facilities, which SSE
(66.6% share) is developing with Statoil
(UK) Ltd. Aldbrough will ultimately have
the capacity to store around 330mcm in
nine under ground caverns (of which SSE
will own two 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.
In parallel with completion of the project,
the Aldbrough site has been in commercial
operation since July 2009. During 2011/12
it performed well, with the surface plant
delivering 94% availability,
is one of the UK’s newest
Gas Storage profitability
During 2011/12, gas storage delivered an
operating profit* of £23.8m, compared with
£23.5m in the previous year. Profitability
has been aided by the increased capacity
available for storage as a result of the
progress of the Aldbrough development.
However, this was offset by weaker prices for
Standard Bundled Units arising from the very
mild winter and a reduction in the differentials
between forward summer and winter gas
prices and reflecting the increased availability
of LNG. While LNG has had a negative financial
impact on gas storage in the near-term, the
diversity offered by both options will be
important for risk abatement for the reasons
set out above.
Completing the new gas
storage facility at aldbrough
To form caverns such as those at Aldbrough
and Hornsea, salt deposits around 2km under
54
SSE Annual Report 2012
Key performance indicators –
SSE’s core values
Safety: Total Recordable Injury Rate –
per 100,000 hours worked
Safety: Working days lost through injury
2012
2011
2010
2009
2008 N/A
0.11
0.12
0.14
0.16
2008
824
2009
361
2010
73
2011
171
2012
53
Service: GB supply customer complaints to third parties
Service: Network emergency calls response times – seconds
2012
2011
2010
2009 N/A
2008 N/A
896
1,161
1,231
2008
12
2009
18
2010
22
2011
19
2012
15
Efficiency: Network customer minutes lost (South)
Efficiency: Operational stock availability – %
2012
2011
2010
2009
93.1
93.2
91.1
89.3
2008
67
2009
66
2010
65
2011
64
2012
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2008 N/A
Sustainability: Power station CO2 emissions – g/kWh
Sustainability: Capacity of renewable energy – MW
2012
2011
2010
2009
2008
531
504
494
491
496
2008
2,030
2009
2,220
2010
2,370
2011
2,450
2012
3,020
Excellence: Investment in ‘smart’ electricity grids – £m
Excellence: Value creation from Licence to Innovate – £m
2008
0.2
2009
0.7
2010
1.3
2011
3.8
2012
8.4
70
45
22
2012
2011
2010
2009 5
2008 N/A
Teamwork: Number of employees
Teamwork: Great place to work engagement score – %
2012
2011
2010
2009
2008
19,489
2012
73
20,249
20,177
18,795
16,892
2011 N/A
2010 N/A
2009 N/A
2008 N/A
Chairman’s introduction to
SSE corporate governance
55
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.
Richard Gillingwater will take over as Chairman
of the Audit Committee. He will also become
Senior Independent Director on 24 July 2012
in place of Lady Rice, who will continue as an
independent non-Executive Director and
Chairman of the Remuneration Committee.
Lord Smith of Kelvin
Chairman
Following the Davies Review of ‘Women on
Boards’ we have confirmed our commitment
to diversity generally throughout SSE, and
in particular diversity at Board and senior
management level.
Commitment
The non-Executive Directors devote significant
time to SSE over and above attendance at
Board and Committee meetings. During
the year the non-Executive Directors had
individual visits to key business locations and
received briefings from members of the SSE
management team on a range of matters.
The visits included: onshore and offshore
wind farms, coal-fired power stations, the
gas storage facility, customer service facilities
and joint venture offices, including SGN.
The full Board remains totally committed to
the continued success of SSE, and to ensure
that it is run to the highest standards of
corporate governance.
Lord Smith of Kelvin
Chairman
15 May 2012
Our corporate governance report for
2011/12 sets out our approach by describing
the SSE team, how the Board works and risk
management and includes separate reports
on each of the Board Committees. I would
like to highlight some specific points:
UK Corporate Governance Code
The principal governance rules applying
to UK companies listed on the London Stock
Exchange are contained in The UK Corporate
Governance Code adopted in June 2010. The
Board has been fully briefed on the recent
changes to the Code, in particular the annual
re-appointment of Directors, Board diversity,
the requirement for regular external Board
evaluation, a greater emphasis on risk, and
the need for a clear explanation of business
model and strategy. We welcome these
changes and are committed to complying
with them.
Changes to the Board
As part of our planned and continuing
refreshment of the Board, we welcomed two
new non-Executive Directors to the Board
during the year – Jeremy Beeton and Katie
Bickerstaffe. They bring specific experience
which will be invaluable as SSE undertakes
major capital projects and faces the
challenges of changes in the domestic
customer market. Jeremy has joined the
Audit and Nomination Committees as well as
the Safety, Health and Environment Advisory
Committee. Katie has joined the Nomination
and Remuneration Committees.
Colin Hood, SSE’s Chief Operating Officer
retired from the Board on 31 October
2011. His Board level responsibilities were
reallocated among existing Executive
Directors and his operational responsibilities
were divided between members of the
Management Board. I would like to thank
Colin for his many years of leadership and
service to the Company. Thomas Andersen,
non-Executive Director, has taken over from
Colin the Chairmanship of the Safety, Health
and Environment Advisory Committee.
René Médori, non-Executive Director and
Chairman of the Audit Committee, will step
down from the Board on 25 June 2012.
I would like to thank René for his nine years’
service as a non-Executive Director and his
Chairmanship of the Audit Committee.
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SSE Annual Report 2012
Board of Directors
The Board of Directors
From left: Ian Marchant, Lord Smith of Kelvin, Lady Rice CBE, Jeremy
Beeton, Thomas Thune Andersen, Gregor Alexander, Alistair Phillips-Davies,
Richard Gillingwater CBE, Katie Bickerstaffe, René Médori.
In March, the Board of Directors met at the UK’s first
‘Power of Now’ exhibition and all-electric vehicle centre at
the Scottish Hydro Centre for Renewable Excellence in Glasgow.
The Management Board
From left: David Franklin, Rob McDonald, Jim McPhillimy, Mark Mathieson, Jim Smith, Paul Smith, Alan Young, John Morea (in attendance)
57
Management Board
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, gas, 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 and is responsible for SSE’s
Electricity Networks, Lighting Services and
Telecoms businesses.
Jim Smith is Managing Director, Renewables.
He joined SSE in 1988 and is responsible for renewable
energy development and construction.
paul Smith is Managing Director, Generation.
He joined SSE in 1998 and is responsible for operational
generation and gas storage businesses, which include
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 foresighting.
John Morea attends meetings of SSE’s Management
Board. He is the Chief Executive of SGN, which owns
and operates gas distribution networks in Scotland and
southern England and in which SSE has a 50% stake.
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:
Gregor alexander, Finance Director; Jim Mcphillimy,
Managing Director, Group Services; natalie Bruce,
Head of Metering; and rob McDonald, Managing
Director, Regulation and Strategy.
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The Board of Directors
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.
Jeremy Beeton
non-Executive Director
Jeremy joined 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 management and delivery of
Bechtel’s civil engineering projects in infrastructure
and aviation business lines. He is a member of
the Audit, Nomination, and Safety, Health and
Environment Advisory Committees.
Katie Bickerstaffe
non-Executive Director
Katie joined the Board as non-Executive Director in
July 2011. She is Chief Executive – UK and Ireland of
Dixons Retail plc. She 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. She is a member of
the Nomination and Remuneration Committees.
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 the
Senior Independent Director of Hiscox Ltd. He was
previously Chairman of European Investment Banking
at CSFB. Richard is a member of the Audit, Remuneration
and Nomination Committees.
rené Médori
non-Executive Director and
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,
DB (De Beers) Investments and Petrofac Ltd. He is
Chairman of the Audit Committee and a member
of the Nomination Committee.
alistair phillips-Davies
Generation and Supply Director
Alistair was appointed Energy Supply Director in
January 2002. He became Generation and Supply
Director in December 2010 after taking responsibility
for Generation Operations. He has worked in the
energy industry since 1997, when he joined Southern
Electric. He is a director of Energy UK. Alistair has Board
level responsibility for Wholesale and Retail activities.
Ian Marchant
Chief Executive
Ian was appointed Chief Executive in October 2002,
having been Finance Director since 1998. He has worked
in the energy industry since 1992, when he joined
Southern Electric. He is Senior Independent Director
of John Wood Group plc and a non-Executive Director
of Maggie’s Cancer Centres. He gets involved in a wide
range of other business connected with his role as Chief
Executive. Ian is a member of the Nomination Committee.
Lady rice CBE
Senior Independent Director and
remuneration Committee Chairman
Susan joined the Board as non-Executive Director in July
2003 and was appointed 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, of Big Society Capital
and Scotland’s Futures Forum. She chairs the Boards
of the Edinburgh International Book Festival and the
Edinburgh Festivals Forum and is a member of the First
Minister’s Council of Economic Advisers. Susan chairs
the Remuneration Committee and is a member of the
Nomination Committee.
Gregor alexander
Finance Director
Gregor was appointed Finance Director in September
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.
Gregor is Chairman of SGN.
Thomas Thune andersen
non-Executive Director and Safety, Health and
Environment advisory Committee Chairman
Thomas joined the Board as a non-Executive Director
in January 2009. He is the Chairman of Lloyd’s Register
Group, Chairman of DeepOcean Group, Vice-Chairman
of the VKR Holding Group (VELUX) and a non-Executive
Director of Petrofac Ltd. He was previously CEO of
Maersk Oil and a partner in the A. P. Moeller Group. He
is a member of the Audit and Nomination Committees
and Chairman of the Safety, Health and Environment
Advisory Committee.
Changes to the Board
René Médori will step down from the Board of SSE
on 25 June 2012. On that date, Richard Gillingwater,
non-Executive Director, will become Chairman of
the Audit Committee and he will become Senior
Independent Director on 24 July 2012 in place
of Lady Rice. A fuller explanation of these changes
is set out on page 62.
58
SSE Annual Report 2012
The SSE team
On 31 March 2012, SSE employed 19,489
people, a reduction of 760 on the previous
year following the decision in July 2011 to stop
doorstep selling of energy. 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.’ SSE is
committed to ensuring that it is a great place
to work and its policies on human resources
are developed and delivered in support of this.
The Board of Directors and
the Management Board
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 61
to 64. The Management Board is the group
of Executive Directors and Managing Directors
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. The members of the Board and
the Management Board are listed on page 57.
Other employees
The Executive Directors, Managing Directors
and other senior executives and managers are
among the 19,489 people directly employed
by SSE on 31 March 2012. Most of these
people work in the United Kingdom; just over
600 are employed in the Republic of Ireland;
and a total of 18 work in mainland Europe.
Of all employees, 71% are men and 29% are
women. The average age of SSE’s employees
is 38 years. In 2011/12, there was a 8.2%
turnover of employees, compared with 9.5%
in the previous year.
Building the SSE team
SSE’s strategy is to deliver sustained
real growth in the dividend through the
efficient operation of, and investment in, a
balanced range of energy-related businesses.
To deliver this strategy in a complex industry
that is both long term and fast-changing
requires the maintenance and development
of a strong team of employees who have
the technical knowledge required of
participants in the energy sector and the
professional and generic skills required
to make SSE a successful company in the
second and third decades of the 21st century
and beyond.
This means that SSE’s priorities in
maintaining and developing the right
team of employees are:
DD
DD
DD
DD
making SSE a great place to work, therefore
retaining motivated and committed people
and attracting a strong number of quality
applicants for new roles;
making a long-term commitment to
employees, giving them the time to build
their professional skills and the opportunity
to advance their careers;
maintaining a preference for recruiting and
promoting from within the organisation
where possible, while recognising that
some specialist skills may only be available
through external recruitment;
ensuring effective succession planning,
based on a comprehensive annual review
process which extends beyond the Board
and the Management Board to other levels
in the organisation and which features
a range of options for the development
of key individuals; and
recognising that the most effective
employees over the long term are those
who are able to maintain a balance
between their working and family lives.
DD
recruitment
During 2011/12, SSE recruited externally a total
of 2,225 people to jobs in England, Scotland,
Wales, Northern Ireland and the Republic of
Ireland. Of the people recruited during the
year, 64% were men and 36% were women.
While it was difficult to find candidates for
a very small number of the jobs, because of
the technical requirements or location issues,
the vast majority were filled by appropriately-
qualified people in a timely way and SSE
remains pleased with the number of high
quality applications that it receives.
The level of unemployment amongst 18 to
24 year olds has been a particular cause for
concern as a result of the economic slowdown
in the UK and Ireland in recent years. Overall
12% of SSE employees are aged under 25
(around 2,300 in total).
SSE also supports the Barnardo’s Works
programme, which aims to give long term
unemployed young people the opportunity
to gain comprehensive waged work
opportunities, training and industry-related
qualifications. Since it began in 2008, a total
of 105 young people have taken part in the
programme with SSE.
graduates and apprenticeships. The focus
of each programme is to ensure that those
participating gain skills that can be used for
their future benefit and for the benefit of SSE.
This sustainable creation of jobs is key to SSE.
Currently 450 individuals are progressing
through these programmes and SSE has been
nationally recognised for the quality of these
programmes, winning a number of awards
during 2011/12.
In recognition that it operates in a
competitive employment market, SSE has
introduced a wide range of employee benefit
offerings including a competitive pension, a
range of salary sacrifice offerings and a wide
range of employee benefits including its
Extras programme.
Diversity
In February 2011, the Davies Review of Women
on Boards quoted evidence that companies
with a strong female representation at board
and top management level perform better
than those without and that gender-diverse
boards have a positive impact on performance.
It said that boards make better decisions
where a range of voices, drawing on different
life experiences, can be heard and that this
‘mix of voices must include women’.
Of the 54 senior managers who report directly
to members of the Management Board,
12 are women; and of the 49 members of
the five Committees of the Management
Board, 12 are women. Although the number
of women in senior and other management
roles in SSE is increasing, it is recognised that
more work needs to be done to secure greater
gender diversity.
In support of this a number of steps are
being taken, and a survey of over 200 senior
managers in SSE was carried out to establish
attitudes to, perceptions of and steps needed
to support greater gender diversity in SSE. The
principal finding of the survey was that SSE
could do more to advance a culture of flexible
and family-friendly working for both women
and men. This and other actions will be
addressed by SSE’s newly-established Diversity
Working Group in the course of 2012/13. SSE
will continue to make appointments to all
roles within the organisation on merit, but
believes it must take steps to enhance the
diversity of the lists of candidates from
which appointments are made.
In addition, SSE offers a range of structured
development programmes suited to the needs
of school leavers, trainees, trainee engineers,
participation
SSE believes that there is a commonality of
interest between employees and customers
and shareholders. To reinforce that it:
59
ongoing improvement target for these survey
results. The next engagement survey is being
conducted in June 2012, when all employees
across SSE will be invited to participate.
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, disability,
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 2011/12 when SSE was found to have
failed to comply with legislation on equality.
responsibilities
SSE also believes that employees have
responsibilities, summarised in eight People
Principles, adopted in 2008 and built around
its core value of Teamwork:
TDD ake all active steps to ensure there
is no intimidation or discrimination;
EDD ngage in safe, healthy and
environmentally-friendly working practices;
aDD lways know and understand what is
expected of you in your job;
MDD aintain respect and support for
colleagues at all times;
WDD ork continuously to improve team
and individual performance;
ODD btain constructive feedback on your
performance from your line manager;
rDD eceive appropriate training, development
and rewards; and
KDD now 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.
performance management,
training and development
SSE has in place a wide-ranging performance
management system, designed to make sure
that employees are able to fulfil their potential
and contribute as much as possible to the
achievement of SSE’s goals and the delivery
in practice of SSE’s values. For this reason,
the performance appraisal system is focused
in part on performance against each of the SSE
SET of core values (Safety, Service, Efficiency,
Sustainability, Excellence and Teamwork). It is
also designed to focus on agreed objectives
for the following year and on personal
development and professional aspirations.
Performance management therefore focuses
on the skills and competencies of employees,
which are critical to SSE and to the energy
sector in the UK, the Republic of Ireland and
elsewhere. SSE needs to ensure the safe and
efficient operation of its businesses and the
reliable provision of services to customers.
In addition, SSE needs to develop new skills
and flexibility to manage new technologies.
It is, therefore, critical that employees of SSE
have the training, development and work
experience they need to fulfil their potential.
In order to do this, SSE uses a range of
delivery media for training.
During 2011/12, SSE invested £1.5m in
externally-provided training and development,
taking the total to £5.3m over the last three
years. This helped to deliver training to 3,991
employees. Training interventions included
the delivery of a number of development
programmes run in partnership with selected
universities focused on supporting the
development of employees across the
business. These programmes included an
MSc in Leadership and degree programmes
in Business and Customer Management.
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. This training is supplemented
by operational awareness days, during
which best-in-class working practices are
demonstrated to employees through detailed
coaching and assessment in operational
environments. SSE also announced that it will
open a new Smart Energy Training Centre
in Treforest, Wales during 2012. This centre
will focus on delivering skills to support the
delivery of services in key areas of energy
efficiency and smart metering.
Joint negotiating and
Consultative Committee
SSE benefits from a well-established Joint
Negotiating and Consultative Committee
(JNCC) which includes lay and full-time
representatives from four recognised trade
unions. During 2011/12, SSE and the JNCC
reached an agreement on a three-year
package, featuring pay increases, performance
pay, flexible working patterns, job stability,
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encourages all 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;
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 43% and 35%
respectively; and
provides 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.
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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
an updated code of business practice, ‘Doing
the right thing’ in April 2011. 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 attracting and
retaining an engaged workforce and runs
an annual externally-facilitated survey of
employee engagement. The results of the
2011 survey, which had a 70% response rate
and was completed by almost 10,000 of
the 14,000 employees invited to participate,
showed that SSE has an above benchmark
employee engagement score of 73%.
Following this survey, a series of actions have
been put in place to address key employee
engagement drivers identified in the surveys.
The Management Board has also set an
60
SSE Annual Report 2012
The SSE team (continued)
commitments around non-outsourcing of
key core activities, family-friendly working
policies and an additional day’s holiday. Joint
Business Committees have been established,
complementing the work of the JNCC by
focusing on issues that affect particular parts
of SSE. Pay arrangements in SSE’s Contracting
division are in line with national construction
agreements.
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 9,700 Licences to Innovate were
received from 3,400 employees during
2011/12, of which 497 were implemented.
A number of these Licences have helped
create value of around £70m, building on
the £45m of value created in the previous
year. Others have contributed to improved
performance in specific areas, such as safety,
service and sustainability.
To complement the Licence to Innovate
scheme, an SSE Entrepreneur competition
attracted over 100 entrants. The three winning
ideas, which are receiving financial and other
resources, covered micro generation, energy
demand management and safety.
SSE’s focus on innovation complements
its work in research and development.
For SSE, this means focusing on development,
demonstration and deployment rather than
on basic research. This reflects the fact that
SSE is, fundamentally, an adopter of
technology. Against this background, SSE
has two broad categories of research and
development projects:
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thematic, addressing pre-selected
knowledge gaps or development needs
within SSE; and
responsive, which arise when an
opportunity (and associated funding)
emerges that can add value to SSE.
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visitor facilities in Dorset, Cheshire and
Perthshire. During 2011/12 a fundamental
review of the facilities was undertaken,
with opportunities for future development
being identified;
financial support for community
programmes near wind farm developments
and in the wider regions where wind farms
are developed; and
support for the work of schools through
Eco Schools programmes.
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Through these and other schemes, SSE
made payments of £6.1m to charitable
and community programmes in the UK
and Ireland during 2011/12.
During 2012/13, SSE expects to develop plans
for new visitor facilities at some of its major
sites, with enhanced educational links to
partnership schools.
Suppliers and contractors
SSE depends upon an extended team of
suppliers and contractors 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 include:
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improving contractors’ safety
performance; and
reducing the CO
2 footprint.
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As part of this, SSE has adopted a supplier
relationship management approach to
managing its most strategic supplier
relationships. More broadly, SSE is joining The
Total Supplier Management System hosted by
an independent company, Achilles Information
Limited. This will provide SSE with online
information on suppliers, including categories
relating to where they work on site, data on
safety, health and the environment and quality.
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 2011/12,
SSE had successfully encouraged 47 of its main
suppliers to sign up to the scheme. SSE also
successfully completed the process itself and
again achieved CEMARS certification. •
There is a considerable amount of research
and development-related work taking place
in SSE. In total, during 2011/12, SSE initiated
research and development projects with a
value of £11.2m. The large majority of this
was in Networks (for example low carbon
networks) and in the electricity generation
part of Wholesale (for example, carbon
capture and storage). Most of SSE Ventures’
investments, such as Aquamarine Power
Ltd and Onzo Ltd, include an element of
research and development activity.
SSE has also entered into an agreement with
the University of Strathclyde to be a partner
in its Technology Innovation Centre. The
Centre is intended to share knowledge and
find solutions to issues of economic and
societal importance, including energy, and
to help companies compete. It is intended to
revolutionise the way researchers in academia
and industry collaborate and innovate.
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 40 years. These range from
developments in hydrogen to energy
affordability and the impact of smart
metering on customer behaviour.
Community and
charitable activities
In support of its core values such as Service,
Sustainability and Teamwork, SSE has a
wide-ranging programme of community-
based activities. With its origins in the north
of Scotland and central southern England,
and with over 19,000 employees throughout
the UK and Ireland, SSE can make a positive
impact to hundreds of communities.
The programme has four principal features:
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employee volunteering, under which
employees are given one day of leave to
support community programmes. During
2011/12, 6,216 volunteer days were given
to 570 projects in the UK and Ireland;
How the Board works
The Board is collectively responsible to the
Company’s shareholders for the long-term
success of SSE and for its overall strategic
direction, its values and its governance.
The framework of corporate governance
This report explains how the Company
applies the principles of The UK Corporate
Governance Code (the Code) issued by the
Financial Reporting Council in June 2010.
The Board confirms that the Company has,
throughout the period under review, complied
with all provisions set out in the Code, except
in the following respect:
Code Provision D.2.1 states: ‘The Board should
establish a Remuneration Committee of at
least three, or in the case of smaller companies
two, independent non-executive directors.’
SSE was not compliant with this Code Provision
from 1 April 2011 until 1 July 2011. This was
due to the resignation of Nick Baldwin as a
non-Executive Director on 1 April 2011 following
his appointment as the interim chair of the
Office for Nuclear Regulation. The appointment
of Katie Bickerstaffe as a non-Executive Director
and member of the Remuneration Committee
did not take effect until she joined the Board
on 1 July 2011. Since then the Company has
been fully compliant with the Code.
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.
Board decisions
A formal list of matters is specifically reserved
to the Board for its decision, including:
Group strategy;
annual budget;
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approval of interim and final financial
statements;
interim dividend payments and
recommendation of final dividends;
significant changes in accounting policy
and practice;
the Group’s corporate governance
and system of internal control;
Board and Committee membership;
major acquisitions, mergers, disposals
and capital expenditure;
changes in the capital and structure
of the Group;
approval of key policies such as safety,
health and environment; and
regulatory matters including approval of
Price Control Reviews proposed by Ofgem
and tariffs.
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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 65 to 70.
attendance at Board and
Board Committee meetings
The Board has six scheduled Board meetings
each 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 discussions with external stakeholders.
The Board 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 to 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.
61
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
the Chairman, Committee Chairman or
Company Secretary who ensures that the
comments received are raised at the meeting.
Members of the Management Board are
invited to attend Board meetings on a
rotational basis.
The table below sets out the attendance of
the Directors at the scheduled Board meetings.
attendance at Board meetings
Attended/scheduled
Lord Smith of Kelvin
Gregor Alexander
Thomas Thune Andersen
Jeremy Beeton
Katie Bickerstaffe
Richard Gillingwater
Colin Hood
Ian Marchant
René Médori
Alistair Phillips-Davies
Lady Rice
6/6
6/6
6/6
5/5
5/5
6/6
3/3
6/6
6/6
6/6
6/6
roles of Chairman and Chief Executive
The roles of the Chairman and the Chief
Executive are separate and clearly defined.
The Chairman:
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is responsible for the operation, leadership
and governance of the Board ensuring
that the Board operates effectively whilst
providing appropriate challenge to
management;
identifies individual Director training
needs and conducts the performance
evaluation; and
meets with shareholders, analysts and other
representatives of institutional investors,
and participates in both the interim and
annual results presentations and the AGM.
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The Chairman regularly meets with managers
and employees at locations and key sites
throughout the Group.
The Chief Executive:
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leads the other Executive Directors, the
Managing Directors and the management
team in the day-to-day running and
operations of the Group;
implements the strategy and policy
as agreed by the Board; and
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SSE Annual Report 2012
How the Board works (continued)
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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 63.
role of non-Executive Directors
The non-Executive Directors are chosen for
their diversity 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:
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scrutinise, measure and review the
performance of management;
assist in the development of strategy;
review the Group financial information;
ensure systems of internal control and risk
management are appropriate and effective;
through the Audit Committee, review the
relationship with the external Auditors; and
review the remuneration of and succession
planning for the Board.
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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
and acts as a sounding board for the Chairman
and serves as intermediary to other Directors
when necessary. Lady Rice carried out the
Chairman’s performance evaluation, together
with the other non-Executive Directors and
with input from the Executive Directors. She
also undertook management visits during
the year. From 24 July 2012 the position of
Senior Independent Director will be taken
by Richard Gillingwater.
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.
On 1 April 2011, Nick Baldwin resigned from
his position as non-Executive Director. Colin
Hood retired as an Executive Director
on 31 October 2011. On 1 July 2011 Katie
Bickerstaffe and Jeremy Beeton were
appointed to the Board as independent
non-Executive Directors. René Médori will
resign from the Board on 25 June 2012.
After all of these changes have taken place,
the Board will comprise the Chairman, three
Executive Directors and five 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.
Diversity on the Board
The Davies Review, published in February
2011 contained a review of Women on Boards
and recommended that FTSE 100 Boards
should aim for a minimum of 25% female
representation by 2015. Upon the retirement
of René Médori from the Board on 25 June
2012 female representation on the Board will
be 22%. The Company is committed to the
approach on diversity set out in the Davies
Review, and will continue to take diversity
matters into account for future Board and
management appointments.
Director independence
The Board considers that the Chairman
was independent on appointment and all
non-Executive Directors are independent
for the purposes of the Code. The continuing
independent and objective judgement of
the non-Executive Directors was confirmed
in the annual Board performance evaluation
process. On 24 July 2012 Lady Rice will have
served for nine years on the Board. The Board
has considered the length of service of Lady
Rice and continues to view her as independent
in character and judgement. She continues
to have a broad range of external experience
which she brings to the Board. She is a
valuable member of the Board, and
contributes significantly to the Board’s
deliberations. She will continue to chair the
Remuneration Committee. Her position and
independence will continue to be regularly
reviewed and scrutinised by the Nomination
Committee and the Board.
The Board evaluation process also confirmed
that the performance of the Directors
continued to be effective and that they
continue to demonstrate commitment in their
respective roles. The Board has agreed that
each Director shall be subject to annual
re-appointment and as such all Directors
(other than René Médori) will stand for
re-appointment at the 2012 AGM.
Board composition, gender – %
Male 80
Female 20
Board composition, sector – %
Corporate finance 20
Major projects 10
Retail 10
Natural resources 20
Banking 10
Utilities 30
Board composition, nationality – %
American 10
Danish 10
French 10
British 70
Biographical details for all the Directors
are set out on page 57.
Board committees
There are four 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 of the
next Board meeting for information.
The relationship between the Board, Board
Committees and the management of the
Company is summarised in the chart to the
right. Details of each Board Committee,
including membership, meetings, role and
activities in 2011/12, are set out in the
Committee reports on pages 71 to 86.
Management Board
The Management Board is responsible for
implementing policy and strategy set by the
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Board and for the operational management
of all SSE’s businesses. The Management
Board comprises the three Executive
Directors and the seven Managing Directors
representing the key areas of the business.
The Chief Executive of SGN also attends
meetings of the Management Board. The
Management Board meets monthly and the
minutes of the meeting are also provided
to the Board for information.
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 any major
current matters from the Group’s business;
the Finance Director presents a report on
financial performance and the Board
receives a detailed business report from
the Management Board. The Board also
receives regular updates on the progress
and performance of investments, and a
detailed key performance indicator report.
During the year, the Board and Committees
were kept up to date with developments
through a programme of briefings by
Executive Directors and senior management
on the full range of business areas. Specialist
briefings and presentations were given on
areas such as corporate governance,
regulatory development, risk, strategy, energy
trading, health and safety, major projects,
and SSE’s major business activities generally.
Separate more informal meetings were also
Governance structure
held between individual Directors and 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 operational 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. Katie
Bickerstaffe and Jeremy Beeton received a full
induction programme, which included two
days at SSE’s Head Office in Perth, visiting
various parts of the business. In addition,
Jeremy Beeton visited Peterhead Power
Station and Katie Bickerstaffe visited the
major customer contact and IT centre
at Havant and the zero-carbon homes
development at Slough. They both also had
a full briefing with the Company’s brokers.
As part of the annual Board evaluation
process the training and development
needs of individual Directors are reviewed
by the Chairman. The Company makes the
necessary resources available should any
Director require 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
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
Major Projects
(Standards and
Delivery) Committee
£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 operates 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 57 and any fees
are disclosed in the Remuneration report.
Conflicts of interest
During the year a review of the Directors’
interests and appointments was carried out
by the Company Secretary and a report was
provided to the Nomination Committee for
review and recommendation to the Board.
The full Board then considered and authorised
each Director’s reported actual or potential
conflicts of interest at the Board meeting
in January 2012. 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, following an external-led
review in 2010. The outcome of the evaluation
process was considered at the Board meeting
held in January 2012. The findings of the
evaluation continued to be positive and the
suggestions included further consideration
of diversity and succession planning, more
specific briefings on matters such as Energy
Trading and Risk, and wider sector-related
topics to be brought to future meetings.
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
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SSE Annual Report 2012
How the Board works (continued)
Independent Director which involved a
separate meeting with the non-Executive
Directors and included feedback from the
Executive Directors. All of the Directors
continued to make an effective contribution
to the work of the Board and its Committees,
were 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. An external evaluation process is
carried out every three years as recommended
by the Code, with the next one due in 2012/13.
Engagement with shareholders
and major stakeholders
Disclosure and Governance Committee
The 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 Committee
comprises: the Chief Executive; Finance
Director; Company Secretary; Managing
Director, Corporate Affairs; Head of Investor
Relations and Analysis; and the Assistant
Company Secretary. The Committee meets
as required and had five meetings in the year.
relations with shareholders
The Company continued to maintain an
effective dialogue with shareholders, based
on a mutual understanding of objectives.
The Board believes that this is fundamental
to ensuring that the Company’s strategy is
understood and that any questions or issues
are dealt with in a constructive way.
institutional shareholders from time to time to
gain a first-hand understanding of key issues.
views, hear their suggestions and address
any areas of concern.
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 2011.
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 several ways:
Communications with shareholders
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.
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. In recognition of the reduced
cost and environmental impact of this form
of communication, the Company, on behalf
of shareholders, makes a donation to the
World Wildlife Fund’s International Forest
Programme for every shareholder that
elects for email communication or receives
Company documentation via the SSE website.
annual General Meeting
The Company’s AGM will be held at the
Bournemouth International Centre, Exeter
Road, Bournemouth BH2 5BH on 26 July 2012
at 12 noon. Details of the business to be
proposed at the meeting are contained
in the Notice of Annual General Meeting.
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constructive engagement where
appropriate with Ofgem, which is
responsible for promoting competition,
and regulating the monopoly companies
which run the gas and electricity networks;
ongoing dialogue with Ministers and
officials in government, including the
devolved administrations in the UK;
submissions to government and
Parliamentary consultations and inquiries;
meetings with, and briefings of, elected
members of all parties in legislatures;
engagement with local authority elected
members and officials;
active participation in relevant trade
associations and bodies; and
discussions with non-governmental
organisations and other relevant
organisations such as charities.
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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. In pursuing public policy
goals, SSE always aims to deploy evidence
and arguments that are consistent with its
purpose, values and strategy as outlined
in this Report and to do so in a way that
is appropriate and responsible. •
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
and Analysis has day-to-day responsibility
for communications with institutional
shareholders. Brokers’ reports and analysts’
briefings are distributed to the Directors. The
Board receives regular reports on the various
issues raised by institutional shareholders,
fund managers and analysts which allow the
Directors to form a view of the priorities and
concerns of the Company’s stakeholders.
The Chairman participated in the Company’s
results presentations in May 2011 and
November 2011. The Chairman meets major
The AGM provides an opportunity for the
Board to meet with shareholders and provide
an update on the performance and plans
of the Company. Shareholders are invited to
ask questions at the AGM and to meet the
Directors and senior managers. Jeremy Beeton
may be unable to attend the 2012 AGM due
to a prior commitment as Director General
of the UK Government Olympic Executive.
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 stakeholders’
risk management
risk management model
Identify risks
Know the key risks
and maintain a
register of them.
Monitor and review
Review and report –
keep risk registers
refreshed
and updated.
Identify impact
and likelihood of risks
look to understand
and define the key
drivers and impacts
for the risks.
record, prioritise,
take action
Ensure issues identified
are addressed and
improvements
are made.
Evaluate risks
and controls
Understand the key
controls relied on to
manage key risks.
Know and monitor the
measures that indicate
the controls are
working.
Introduction
The Board of SSE acknowledges its clear
responsibility for risk management. SSE’s
approach to risk management is that
any sustainable and successful business
requires clear risk management in all
aspects of its activities.
Equally important for SSE is the belief that risk
management is first and foremost an integral
part of how managers run their activities
every day. Therefore SSE has focussed on
looking at each business area individually
and putting in place a framework that works
effectively for that area. SSE recognises
that this is an ongoing process as it needs
to react to changes in the risk environment
by constantly revisiting its internal processes.
This report includes a summary of the
developments in SSE’s approach to risk
management during 2011/12.
The need for good risk governance is critical
to ensure the overall business model is
effective in practice. Risk management in SSE
is characterised by: the clarity of its financial
goal; its strategy and business model which
help to limit the value at risk; the culture and
limited appetite for risk; and its work on risk
identification and risk management.
Limited appetite for risk
The Teamwork value, combined with other
factors such as the clear goal of sustained real
growth in the dividend, means SSE has adopted
a limited appetite for risk. The appetite varies
between businesses. This means that SSE’s
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.
Some examples of the way in which appetite
for risk is limited are:
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energy trading – levels of exposure are
strictly monitored through risk models
and clear reporting limits;
major project construction – the Company
has in place a detailed governance and risk
process for all its large capital projects;
the Company has a selective and disciplined
approach to acquisitions, and sets
demanding hurdle rates for expected returns;
in treasury and funding matters, there is a
clear and prudent approach to liquidity levels,
and a mix of maturities and currencies; and
65
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where available on acceptable terms
insurances are in place for all relevant
major risks, while maintaining an
appropriate balance with self insurance
where appropriate.
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 reviews
all aspects of risk management and internal
control at least twice a year, usually in March
and September. At its meeting in March
2012, the Board held a specific review of the
developments within the Company during
the year to ensure good risk management
is in place; it revisited the approach to risk
appetite; and reviewed the management
reporting arrangements to ensure proper
controls are in place.
In addition to the Board bi-annual risk
reviews, the Board undertook a review of the
Company’s principal risks at its meeting in
May 2011 and approved the list of principal
Group risks which were referenced in last
year’s Annual Report.
During the year, the Group Audit department
carried out over 65 separate audits of
functions, activities and issues managed
by SSE, providing senior management with
a robust internal control assurance. These
included 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 Safety, Energy
Trading, Energy Efficiency, Energy Supply,
IT and Customer Service.
Developments in SSE risk
management during the year
As part of the SSE approach to risk
management, the Company continues to
review and strengthen its internal control
processes. Examples of this approach during
2011/12 are:
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The top 19 risks reported last year were
reviewed in detail at the Board meeting in
May 2011. At the Management Board risk
workshop held in August 2011 these risks
were modified, and a new risk category,
management of Joint Ventures, was agreed.
All the top 20 Group risks are actively
monitored and reviewed. Each principal risk
has an assigned risk owner who is a member
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SSE Annual Report 2012
risk management (continued)
All employees are expected to adhere
to SSE’s code of business practice and
to the SSE SET of values – Safety, Service,
Efficiency, Sustainability, Excellence
and Teamwork – which are embedded
in the culture.
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;
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of the Management Board. The risk owner
is responsible for ensuring that key controls
for the risk are in place and operating.
The Group Insurance department facilitated
an extensive review of the existing risk
management framework. The output from
this review led to guidelines to promote a
consistent categorisation and scoring of
the enterprise risks facing the business.
The Large Capital Projects Governance
Framework has now been extended to
all major projects, such as IT, Telecoms
and Property. In October 2011, the
Management Board established a Major
Projects (Standards and Delivery)
Committee to oversee all major projects.
Cyber/information security risk is being
addressed with a significant investment
programme which was approved during
the year.
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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
SSE SET of values to manage risk
objectives and can provide only reasonable
and not absolute assurance against material
misstatement or loss. The Internal Control
Assurance Process below provides an overview
of the key committees and related assurance
activities currently in place within the Group.
All employees are expected to adhere to
the Company’s code of business practice and
the SSE values – Safety, Service, Efficiency,
Sustainability, Excellence and Teamwork –
which are embedded in the culture. Their
consistent application is 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 and
actively managed. 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:
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approves the policies, procedures
and framework for the maintenance
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reviews the significant risks identified by
each business unit as well as the mitigating
action against those risks following review
by the Audit Committee;
determines the nature and extent of
the significant risks it is willing to take
in achieving its strategic objectives;
approves and regularly reviews and
updates SSE’s strategy and business
development;
reviews the financial reporting process and
performance through: annual operating
and capital expenditure budgets; monthly
reviews against actual results; analysis
of variances; and evaluation of key
performance indicators;
receives regular reports from the Chief
Executive, the Finance Director and the
Management Board members; and
undertakes an annual evaluation of the
Board, its Committees and individual
Directors.
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The Management Board:
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monitors operational and financial
performance of SSE;
develops and implements: SSE strategy;
operational plans; policies; procedures;
and budgets;
assesses and controls all SSE risks;
monitors competitive forces in each area
of operation;
receives and reviews reports from its
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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.
67
Internal Control assurance process
Board of Directors
Audit
Committee
Management
Board
Safety, Health
and Environment
Advisory Committee
Group Audit
Major Projects
(Standards and
Delivery) Committee
Safety, Health
and Environment
Committee
Business
Development
Committee
Risk and Trading
Committee
Disclosure and
Governance
Commitee
committees, namely: the Risk and Trading
Committee; the Safety, Health, and
Environment Committee; the Major Projects
(Standards and Delivery) Committee; the
Disclosure and Governance Committee; and
the Business Development Committee; and
receives and reviews regular presentations
and reports from all the main Group
businesses.
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The Group audit department:
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works with the business units to develop
and improve risk-management tools and
processes in their business operations;
ensures that business risks are identified,
managed and regularly reviewed and that
the key risks are reported to the Audit
Committee and Board;
ensures that the business units carry out
regular reviews on their internal controls
relating to the key risks;
monitors the effectiveness of SSE’s system
of internal control through audit reviews,
exercises and reports and, where appropriate,
action plans to senior managers, Directors,
the Audit Committee and external Auditors;
monitors adherence to SSE’s key policies
and principles; and
provides the Audit Committee and Board
with objective assurance on SSE’s control
environment.
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Business Units
role of committees
The role of the Audit Committee, and the
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.
The Board’s review of internal control
While the Board retains overall responsibility,
reviewing the system of internal control and
monitoring its effectiveness is primarily dealt
with by the Audit Committee, and its output
is reviewed at least annually by the Board.
The Board and the Audit Committee have
reviewed the effectiveness of the Company’s
risk management and internal control system
in accordance with the Code for the period
from 1 April 2011 to 15 May 2012 (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.
The internal control procedures described in
this section have not been extended to cover
its interests in joint ventures. The Group has
Board representation on its joint venture
companies where separate systems of
internal control have been adopted. •
Risk management depends on a
strong system of internal control,
which is fundamental to achieving
SSE’s strategic objectives.
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SSE Annual Report 2012
risk management (continued)
principal risks and their management
risk definition
Key controls overview
Developments during the year
Safety management
Unsafe working practices, equipment and
inadequate training may lead to accidents
or incidents involving employees, contractors,
members of the public or plant and equipment.
Safety is the first of SSE’s core values. The
Safety, Health and Environment Advisory
Committee (SHEAC) of the Board is responsible
for ensuring SSE’s health and safety policy
is adhered to. The detailed report from this
Committee is on page 74. The Management
Board also has a SHE Committee.
The Terms of Reference for the SHEAC were
reviewed and updated during 2011/12. There
is now greater non-Executive membership
on the SHEAC. The SHE Committee of the
Management Board is also fully established,
with key priority areas including a Company-
wide safety behaviour programme.
regulatory change
An adverse change to the current regulatory
framework in all parts of SSE could have a
significant effect on its business.
Legislative change
Risks to SSE from unfavourable legislative
developments at EU level and in the
jurisdictions in which it operates.
An experienced Regulation Department
manages SSE’s relationships and interface
with Ofgem, Ofwat, Ofcom and other
regulators. SSE assesses and anticipates
regulatory issues in its decision-making
and operations.
SSE has Policy and Public Affairs specialists
based in Brussels, London, Edinburgh, Cardiff,
Belfast and Dublin who engage openly and
constructively with legislators, officials and
other policy-makers on all aspects of energy
and related environment policy.
The GB energy regulator, Ofgem, adopted a
high profile during 2011/12, with a particular
emphasis on the Retail Market Review and
the RIIO process for determining regulated
networks’ price control – all of which
emphasised the ongoing significance
of regulation to SSE.
The UK government is engaged in a process
of electricity market reform which could lead
to profound changes in the energy market
in Great Britain. In addition, the Scottish and
UK governments have consulted on proposals
for a referendum on Scottish independence
which has a risk to SSE of uncertainty until
the result is known.
Energy portfolio management
Failure to identify and effectively manage
the physical and financial exposures that
result from SSE’s operational involvement in
Generation, Gas Storage, Fuel Procurement,
Wholesale Trading and Retail Supply.
The Board approves levels of exposure which
are strictly monitored through sophisticated
reporting and clear reporting limits. The
Management Board has a Risk and Trading
Committee, with members drawn from a
number of key functions across SSE.
The process of the UK energy prices
becoming increasingly integrated into the
wider global energy market is continuing
and as a result there is an increasing focus
on macro-economic and geopolitical issues
in the ongoing management of the portfolio.
asset and plant management
Loss or extended disruption to key Group
Infrastructure caused by failure/loss of
containment of key plant.
networks management
Loss or extended disruption to key Group
network Infrastructure.
SSE’s Engineering Centre oversees a process
of asset life management and risk-based
management. Regular testing, review and
updating of major incident handling processes
takes place. Capital spending and maintenance
programmes are maintained and the Risk and
Trading Committee provides oversight.
SSE has always emphasised the need for
flexibility in its generation assets to ensure
that changes in supply of and demand for
electricity can be managed. In 2011/12 it
decided to start a comprehensive programme
of maintenance at two gas-fired power
stations to support more flexible operations.
Substantial refurbishment and upgrade
programmes are designed to prevent network
failures. There is a rigorous post-event analysis
following each major network event such as
storms. Business continuity plans, supported
by contingency sites and regular testing, are
well-established.
The winter of 2011/12 represented the
biggest challenge to electricity network
resilience for a generation, with a succession
of major weather events resulting in
significant losses of electricity supply.
The implications of this will be reflected
in future networks planning.
Cyber/information security
Unauthorised access or disclosure of data
either within the SSE Group or between SSE
and external environments and markets.
SSE has in place an actively managed
Information Security programme across all
of its activities to ensure resilient business
operations.
Cyber security has been a particularly
prominent issue in the UK and elsewhere
during 2011/12, with individual sectors and
organisations being targeted. SSE is increasing
its investment in information security.
69
principal risks and their management
risk definition
Key controls overview
Developments during the year
Supply chain
Delivery of large-scale investment
programme is impacted through failure to
establish, contract and maintain adequate
supply chains and strategic alliances.
SSE’s diverse businesses help reduce reliance
on specific supply chains and the sustainability
value requires a long-term view to be taken.
Well-established procurement teams ensure
varying supply chains are identified and
counterparty exposures monitored.
Treasury management
Failure to identify and effectively manage
treasury and tax exposures and to meet the
organisation’s funding requirements and
obligations.
The Risk and Trading Committee oversees any
major changes to treasury policy or objectives.
Regular reporting of treasury activity is made
to the Audit Committee and Board. Strong
internal controls are maintained and
independent reviews take place.
Credit management
Failure to effectively manage billing and
collection/counterparty risk.
pension liabilities
Liabilities increase due to market conditions
or demographic changes and investments
under perform.
Sector developments
Failure to identify/tardiness in identifying
step changes in the industry sectors and
reacting appropriately.
There is Executive Director-level representation
in 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 are reviewed regularly by the
pension trustees.
There is a strong external focus to ensure
developments are anticipated and, where
appropriate, addressed. Senior managers
have responsibility for areas such as policy
and research, strategy and business
development. Participation in these areas
is broad, to ensure all relevant sector
developments are addressed.
Large capital projects management
Failure to deliver quality projects on time
and on budget.
The deployment and updating of SSE’s Large
Capital Project Governance Framework is
designed to ensure projects are governed,
developed, approved and executed in an
effective manner.
Transformation projects management
Failure to deliver quality projects on time and
on budget to implement required upgrades
to customer systems in relation to Smart
Metering and the Energy Supply business
requirements.
SSE works with experienced advisers and
suppliers and implements a strong governance
and assurance framework for all aspects of
major change programmes. The approach
increasingly reflects the governance framework
originally developed for large capital projects.
A supplier relationship model has been put
in place to build relationships with strategic
suppliers and put SSE in the position of being
a key customer. In the high risk categories
long-term contracts are being implemented
and tendering has commenced. This is
designed to secure supply chains and
ensure value for money.
During 2011/12, SSE continued its approach
of maintaining diversity in its funding sources
through successfully reopening the European
corporate bond market in September 2011
and undertaking a private placement of
senior notes with US-based investors in
February 2012.
The general economic climate in the UK
and Ireland has resulted in significant debt
management challenges, with the volume of
work increasing and with the need to deploy
practical steps to work with customers
becoming increasingly critical.
Continued improvements of member
longevity will likely add to the liabilities
of both the Scottish Hydro-Electric and
Southern Electric Pension Schemes.
Uncertainty of markets in Eurozone could
detract from investment performance
directly impacting scheme funding levels.
2011/12 saw four significant developments
which will influence the sector for the long
term: electricity market reform; the Retail
Market Review and the RIIO model for
economic regulation in Great Britain; and
the process of harmonisation affecting
energy markets on the island of Ireland.
SSE is actively involved in giving input to
policy and regulatory developments in
each of these areas.
During 2011/12, SSE reallocated responsibility
for large capital projects, focusing on three key
areas: renewable energy; thermal generation;
and networks. The Management Board
established a Major Projects (Standards
and Delivery) Committee.
In the course of 2011/12, the remit of SSE’s
Project Services team was extended to include
centralised expertise and support for all of
SSE’s significant projects, not just large capital
projects. The new Management Board Major
Projects (Standards and Delivery) Committee
reviews all major projects.
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SSE Annual Report 2012
risk management (continued)
principal risks and their management
risk definition
Key controls overview
Developments during the year
Compliance management
Any significant or multiple compliance
failures could result in an adverse effect
on SSE, including the possibility of financial
penalties being levied.
Wide-ranging consultation and review of
all relevant regulatory, legal and accounting
frameworks takes place. Regulation, Compliance
and Group Audit teams develop and monitor
compliance processes.
Crisis management
Inadequate response to a major emergency/
contingency event. If something goes wrong,
how well can SSE deal with it?
Management of joint ventures
Failure to effectively manage SSE Joint
Venture assets results in reputational
damage or destruction in value.
Succession planning
Not having cover for the Board and the
Management Board and their direct reports.
resource and internal infrastructure
Inability to establish and maintain a
competent workforce. Failure to forward plan
and identify a capabilities matrix to match
growth plans. Portfolio of assets (Buildings,
transport and IT) not maintained and
enhanced to support business plans.
Corporate arrogance or hubris
Unwarranted belief in SSE’s own abilities,
failure to keep listening and to keep
challenging conventional wisdom.
The corporate crisis management policy and
procedure are updated and issued annually.
There is Executive training and regular test
exercises are undertaken. A member of the
Management Board ‘champions’ crisis
management.
Joint ventures are in themselves a means of
managing risk, but SSE’s interests in them also
require careful management and oversight.
This is provided through clear governance
arrangements, senior manager representation
on Boards, and effective reporting within SSE
– to the Management Board and the Board
as required.
The Nomination Committee of the Board
is responsible for reviewing the leadership
needs of senior management in general and
succession plans for the Executive Directors
in particular. The detailed report for this
Committee is on page 71.
An integrated Group Services function
is in place to ensure optimum resource
management, including Safety, HR, IT,
Facilities Management and Procurement.
There is Board oversight of this, and practical
application throughout SSE, including through
the performance appraisal system, of the ‘SSE
SET’ of core values: Safety, Service, Efficiency,
Sustainability, Excellence and Teamwork.
During 2011/12 SSE was prosecuted in
relation to the use of direct sales aids by
doorstep sellers. SSE took the lead by being
the first of the big six energy suppliers to stop
doorstep selling activities in the UK, which is
an example of the seriousness with which SSE
regards compliance with all its obligations.
In 2011/12, SSE refreshed its crisis
management and emergency planning
approach. Senior roles and responsibilities
have been defined, facilities have been
enhanced and Group-level exercises have
been undertaken to practise SSE’s response
capabilities.
SSE continues to enter into joint venture
arrangements, particularly for large
renewable generation projects. Joint ventures
are particularly critical in the development
and construction of wind farms offshore
and during the year the new role of Head
of JV Management was created within
SSE’s renewable energy division, to reinforce
oversight and management of joint ventures.
Colin Hood, Chief Operating Officer, stepped
down from the Board in October 2011. His
Board-level responsibilities were reallocated
among existing Executive Directors and his
operational responsibilities were divided
between members of the Management
Board. The handover and transition proved
to be effective.
In the course of 2011/12, SSE sought to strike
the balance between cost efficiency and
investment in adequate resources for the
future. A particular focus was IT, where the new
Director of IT led the implementation of plans
to improve operational performance, service
delivery and project delivery.
External criticism of energy suppliers was
substantial during 2011/12. In response, SSE
developed its proposals to ‘build trust’ in
energy supply – which explicitly accepted
Ofgem’s analysis that in an environment
of higher prices, suppliers have to transform
the way they deal with customers.
nomination Committee
Lord Smith of Kelvin
Nomination Committee Chairman
Members and meetings
Membership
Lord Smith of Kelvin
Thomas Thune Andersen
Jeremy Beeton
Katie Bickerstaffe
Richard Gillingwater
Ian Marchant
René Médori
Lady Rice
Attended/
scheduled
2/2
2/2
2/2
2/2
2/2
2/2
2/2
2/2
I chair the Nomination Committee.
The membership also includes all of the
non-Executive Directors and the Chief Executive.
As Company Chairman, I 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:
71
Candidates from a wide range of backgrounds
are considered and appointments are made
on merit, with due regard for the benefits of
diversity on the Board, including gender. The
selection process generally involves interviews
with a number of candidates, using the
services of a professional search firm
specialising in Board level recruitment.
The Committee also reviews succession
planning and leadership needs in the course
of its work taking into account the risks and
opportunities facing the Company, and from
this identifies the skills and expertise required
from the Board and senior management team.
activities in 2011/12
The Nomination Committee had two meetings
during the year. The business covered at the
meetings included the following:
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a full review of Committee chairmanship
and membership following the appointment
of Katie Bickerstaffe and Jeremy Beeton
to the Board;
consideration of proposals for management
succession on the retirement of Colin Hood
as Chief Operating Officer;
the review and re-appointment of certain
non-Executive Directors for further fixed
periods and review of the position of Senior
Independent Director;
consideration of the Company’s approach
and response to the Davies Review on
Women on Boards; and
the annual review of the Directors’ Conflicts
of Interests declaration.
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As part of the Board evaluation process, the
operation of the Nomination Committee was
evaluated and it was confirmed that the
Committee was operating effectively.
Lord Smith of Kelvin
Chairman
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reviewing the structure, size and
composition of the Board and its
Committees and making recommendations
to the Board on any desired changes;
reviewing the succession plans for the
Executive Directors;
making recommendations to the Board
on suitable candidates to fill vacancies for
both non-Executive and Executive Directors;
ensuring that the procedure for appointing
new Directors is rigorous and transparent
and that appointments are made on merit
and against objective criteria;
reviewing potential conflicts of interest
of Directors; and
reviewing the external commitments
of the Directors and the time required to
discharge their responsibilities effectively.
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Before a Board appointment is made, the
Committee evaluates the skills, knowledge and
experience of the Board to ensure that any new
appointment complements these qualities.
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SSE Annual Report 2012
audit Committee
rené Médori
Audit Committee Chairman
Members and meetings
Membership
René Médori
Thomas Thune Andersen
Jeremy Beeton
Richard Gillingwater
Attended/
scheduled
3/3
3/3
2/2
3/3
I was pleased to welcome Jeremy Beeton
as a member of the Audit Committee when
he joined the Board on 1 July 2011. After nine
years on the Board, including eight years as
Chairman of the Audit Committee, I will step
down as non-Executive Director on 25 June
2012. Richard Gillingwater will become
Chairman of the Audit Committee on that
date. Richard Gillingwater and I are identified
as having recent and relevant financial
experience.
The Board confirms that each member
of the Committee is independent and that
the membership meets the requirements
of the Code.
The Finance Director, Head of Group Internal
Audit and the external Auditors attend and
report at Audit Committee meetings. The
Company Chairman and the Generation and
Supply Director also regularly attend Audit
Committee meetings. Senior management
including the Group Treasurer, Group Financial
Controller and Managing Director, Energy
Portfolio Management, may also be invited
to present reports. During the year, the
Committee met privately with the external
Auditors, and separately with the Head of
Group Internal Audit.
The Assistant Company Secretary is Secretary
to the Audit Committee.
The Committee has unrestricted access to
Company documents and information as well
as to management and the external Auditors.
As Audit Committee Chairman, I report 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:
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reviewing the Company’s financial reports
and formal announcements to ensure they
represent an accurate, clear and balanced
assessment of the Company’s position
and prospects;
monitoring and reviewing the effectiveness
of the Company’s accounting systems,
internal control policies and procedures
and risk management systems;
monitoring and reviewing the effectiveness
of the Company’s internal audit function;
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;
monitoring and reviewing the significant
risks identified by each business unit as well
as the mitigating action against those risks;
monitoring and reviewing the arrangements
by which employees can in confidence raise
concerns about any possible improprieties
in financial and other matters; and
reviewing the significant financial reporting
issues and judgements.
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activities in 2011/12
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
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reviewed the financial statements in the
2011 Annual 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;
reviewed the impairment of assets and
related accounting matters;
reviewed the annual and interim results
announcements; and
reviewed the reportable segments to
be included in the financial statements
of the 2012 Annual Report and accounts.
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Control environment and risk management
received six-monthly reports by Group
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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;
reviewed and agreed the Group
Internal Audit Plan for the year ending
31 March 2013;
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;
received six-monthly reviews from Group
Internal Audit on the Internal Control Risk
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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. Accordingly,
it has not considered it necessary to require
the firm to tender for the audit work. 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 three years.
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.
As part of the Board evaluation process,
the operation of the Audit Committee was
evaluated, and it was confirmed that the
Committee was operating effectively.
rené Médori
Chairman
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Assessment setting out the Group Risk
Map and Residual Risk Map;
reviewed aged debts and bad debts;
reviewed Post-Investment Appraisal
Reports; and
received reports under the Group
whistleblowing policy and reviewed
the implementation of this policy.
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External audit process
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reviewed the effectiveness of the overall
audit process for 2010/11, meeting with
the external Auditors and management
separately to identify any areas of concern in
the preparation of the financial statements;
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;
reviewed and agreed the audit fees, fees
for non-recurring work and the regulatory
reporting fee;
reviewed internal control and key
accounting and audit issues; and
reviewed recommendations made by
the external Auditors and the adequacy
of management’s response.
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Independence of Auditors
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reviewed changes in the Audit team; and
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
external Auditors because of their
knowledge of the Group; and
– the Committee must be satisfied that
the objectivity and independence of
the external 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:
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taxation advice including general
consultancy, acquisitions and disposals; and
accounting due diligence.
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Full disclosure of the audit and non-audit fees
paid during the year is made in note 4 to the
Financial Statements.
Following a competitive tender, KPMG Audit
Plc has been the external auditor of the
74
SSE Annual Report 2012
Safety, Health and Environment
advisory Committee
Management System focuses on five ‘Ps’:
policy:DD
people:DD
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defining how things get done;
helping employees to act safely;
managing risks and delivering
processes:
safe systems of work;
plant:DD
maintaining the integrity of plant
and equipment; and
performance:
SHE performance.
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managing and improving
Safety performance
The Committee monitored carefully SSE’s
safety performance during 2011/12. The
results in key areas were as follows (previous
year’s performance in brackets):
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the Lost Time/Reportable Injury Rate
was 0.02 (0.04);
the Total Recordable Injury Rate (TRIR),
covering lost-time, reportable and medical
treatment injuries, was 0.11 per 100,000
hours worked (0.12);
the total number of working days lost
as a result of injuries was 53 (171); and
the number of dangerous or potentially
dangerous road traffic accidents involving
SSE employees driving Company vehicles
was 0.23 per 100 vehicles (0.31).
By many companies’ standards, this was a
strong safety performance. During the year,
however, the Committee endorsed the new
goal adopted by SSE: work without anyone
getting injured. Until this goal is achieved,
the Committee, and SSE as a whole, will not
be satisfied. For this reason the Committee
places particular emphasis on the successful
delivery of SSE’s behavioural safety programme,
The Safety Family, in which every employee
will take part.
Contractors’ safety performance
The safety of contractors working on SSE
projects and sites is fundamentally the
responsibility of their employers, but is an
increasingly significant issue for SSE. The
Committee believes SSE must work closely
with its contractors in increasing their safety
standards. For this group, the TRIR was 0.56
per 100,000 hours worked, compared with
0.36 in the previous year.
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. Along with other leading developers of
renewable energy, SSE has established the G9
Offshore Wind Health and Safety Association,
which aims to deliver world-class safety
performance in offshore wind activities.
Thomas Thune andersen
Safety, Health and Environment
Advisory Committee Chairman
Members and meetings
Membership
Thomas Thune Andersen
Jeremy Beeton
Colin Hood (retired 31/10/11)
Attended/
scheduled
3/3
2/2
1/1
I was very pleased to be given the opportunity
to succeed Colin Hood as Chairman of the
Committee. Colin gave SSE many years of
outstanding leadership in all aspects of
safety, health and the environment.
The membership also comprises the Managing
Director, Group Services; the Managing
Director, Generation; and the Group Safety,
Health and Environment Manager. The Chief
Executive also attends when required.
The Assistant Company Secretary is Secretary
to the Committee.
The Committee had three meetings during
the year. Its remit includes responsibility for:
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ensuring that SSE’s health and safety policy
and environment policy statements are
adhered to;
setting safety, health and environmental
(SHE) targets for improved performance;
monitoring SHE performance in SSE;
encouraging greater awareness throughout
SSE of the importance of SHE
management and higher achievement
in SHE performance; and
providing a link between the non-Executive
Directors of the Board, the Management
Board and other members of the
management team with responsibility
for SHE management.
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policy
People in SSE have many different working
environments – from full-scale industrial
processes to offices – but the Committee is
clear that the Company’s policy statements
mean everyone must play a part in achieving
safe working conditions. SSE’s Safety
Health promotion
SSE’s Health and Well-being Action Plan
provides the basis for workplace health
programmes and initiatives, all designed to
help employees be in good shape for 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. During 2011/12, the average number
of days of absence from work was 5.87,
compared with 5.38 in the previous year.
Environmental management
SSE’s main environmental impact is generally
regarded as emissions of CO2 from electricity
generation. 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.
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. There were
no such incidents during 2011/12.
Good environmental stewardship involves
on-site energy efficiency and management
of waste. A key goal is to minimise waste
and unnecessary use of natural resources
by re-using and recycling materials. During
2011/12, 13,214 tonnes of waste were sent
from SSE’s networks and offices for disposal
at landfill sites, compared with 20,821 tonnes
in the previous year.
priorities for 2012/13
The Committee’s priorities are to:
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support progress towards SSE’s ultimate goal
of working without anyone getting injured;
promote the health and well-being of
people working for SSE; and
encourage effective environmental
management throughout SSE.
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The progress towards working without anyone
getting injured will be supported by four
specific initiatives:
all employees’ safety-related behaviours;
safe working offshore;
safe working by contractors; and
management of ‘leading’ safety indicators.
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Thomas Thune andersen
Chairman
remuneration report
Introduction
75
To assess performance, targets are set each
year that are clear, robust and objective.
At the same time, there has to be a realistic
appraisal of performance in the context of
the wider economic and energy environment.
Unexpected situations or issues can arise that
take priority and test the skills and resilience
of the Executive Directors and other members
of the management team, and these should
be taken account of as well.
policy has to be able to respond. SSE should
never have found itself in the position it did
in relation to doorstep selling activities. It’s for
this reason that the Remuneration Committee
agreed that the Executive Directors should
forego the Corporate Performance element
of the Annual Incentive Scheme, despite the
fact that an award could have been made
on the basis of the targets set at the start
of the financial year.
Judgement
The Executive Directors at SSE are clearly
well-paid, relative to the average employee,
but a key feature of our remuneration policy is
to make sure they are fairly rewarded and not
overpaid. While the actual position may vary
from one year to the next, the goal is to keep
reward below market median for FTSE 20-50
companies (excluding financial services) and
below median against other benchmarks such
as FTSE 100, industrial companies and direct
competitors. At the same time, it is designed
to reflect the responsibility and contribution
of the individual and to make sure that SSE is
able to retain people of the necessary calibre.
In terms of contribution, SSE’s Executive
Directors have each worked for the Group for
at least 15 years and given a total of over 30
years’ service to the Board. This is a sustained,
long-term commitment and their contribution
has helped SSE to deliver an above-inflation
increase in the dividend every year since it
was formed in 1998. Very few companies in
the UK can say that.
Much of the debate on executive remuneration
centres on what is perceived as reward for
failure. Equally, success must be genuine
and sustained or it isn’t really success. SSE’s
achievement in fulfilling, year after year, its
first financial responsibility to shareholders –
dividend growth – is a success to which the
Executive Directors, individually and collectively,
have contributed enormously year after year.
Fairness
The responsibilities of the Executive Directors
are extensive, and growing. They lead an
organisation which operates major assets
such as power stations and electricity lines
and which looks after millions of customers’
energy needs. The standards which are
expected in asset operation, as in customer
service, are rightly increasing. Providing the
necessary leadership, and living with the
associated responsibility, requires fair
remuneration.
Fairness works both ways, however. When
things go wrong, a company’s remuneration
Teamwork
While reward must reflect the responsibility
and contribution of the individual, for us
teamwork is one of the essential elements
on which individuals are rewarded.
Teamwork must also extend beyond the
Executive Directors, to the other employees
of the organisation. Restraint in remuneration
contributes to that culture of teamwork by
ensuring that Executive Directors and other
senior managers do not become remote or
detached from the people they are leading.
Similarly, effective remuneration for Executive
Directors can only be a sound investment if
that investment extends to other people. One
of the important issues that the debate on
executive remuneration has raised is the link
between reward at the top of organisations
and elsewhere in those organisations. SSE
continues to make that link when assessing
the position for Executive Directors.
Fundamentally, SSE’s remuneration policy
remained unchanged in 2011/12 and no
major changes are planned in 2012/13. We
believe it is important that there is stability in
remuneration policy to ensure that criticisms
of complexity, opaqueness and lack of
transparency cannot be levelled against SSE.
The Remuneration Committee continues
to stay close to the concerns of shareholders
and other stakeholders, and we continue to
welcome shareholder feedback on any issue
related to executive remuneration.
Straightforward, performance-related, retention-
focused, and below median – these are the
characteristics of SSE’s remuneration policy,
looking back and looking ahead. Responsibility,
commitment and leadership – these are the
characteristics expected of SSE’s Executive
Directors. In presenting this remuneration
report to shareholders, I believe that these
characteristics have all been demonstrated.
Lady rice CBE
Chairman
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Lady rice CBE
Remuneration Committee Chairman
In last year’s report, I noted that executive
remuneration was ‘a high profile issue, and
rightly so’. A year on, the profile of the issue
has become even higher. Business has seen
renewed investor activism. But activism should
start within a business itself. And while
investors mainly look back as they judge
remuneration, a business can and should
look ahead as well.
In January 2012, the UK Secretary of State
for Business told the House of Commons that
a ‘major transformation’ needs to get under
way, as he set out a series of remuneration
reforms. SSE endorses in principle what the
reforms are trying to achieve. In particular,
what Executive Directors earn needs to be
clear and easily understood and should help
shareholders to hold companies to account
for their performance. But we need to
consider as well what counts as performance;
the traditional focus on short-term results
alone simply isn’t good enough. Reward
should also reflect longer-term aspects of the
business – both repercussions of decisions in
the past and expectations for the future. And
it should respond to the external economic
environment, especially at times of constraint.
Transparency
SSE sets great store by transparency in
remuneration reporting; its overall approach
is straightforward. What Executive Directors
earn is made up of: base salary, plus some
benefits-in-kind; cash and shares awarded
under an annual incentive scheme; and a
long-term incentive scheme, also with shares.
Three of the elements are performance-
related and two of the elements can only be
earned through continued service, to help
encourage Executive Directors to remain with
the Company. The focus on performance is
also being emphasised by the introduction
of a mechanism to ‘claw back’ share awards
if the need arises. Retention and ongoing
service is further recognised through the
pension arrangements in place for the
Executive Directors, which reward ongoing
tenure of service.
76
SSE Annual Report 2012
remuneration report (continued)
Introduction
role of the remuneration
Committee
Governance
The Remuneration Committee’s composition,
responsibilities and operation complied with
Section D of the UK Corporate Governance
Code other than in respect of the membership
of the Committee for the period from
1 April 2011 until the appointment of Katie
Bickerstaffe to the Committee on joining the
Board on 1 July 2011. This is fully explained on
page 61 of the Corporate Governance Report.
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 2012 and complies with the
regulations made under the Companies
Act 2006. The report will be presented at
the AGM on 26 July 2012 for approval and
shareholders will be able to ask questions
on the report at the AGM.
Members and meetings
Membership
Lady Rice (Committee Chairman)
Richard Gillingwater
Lord Smith of Kelvin
Katie Bickerstaffe
Attended/
scheduled
5/5
5/5
5/5
4/4
The membership of the Committee comprises
three independent non-Executive Directors
plus the Chairman of SSE. They represent
diverse backgrounds and experience. This is
designed to provide balance and diversity
within the Committee. Informal consultation
among the Committee members, and also
with other non-Executive Directors, takes place
outside the scheduled meetings as necessary.
remuneration agenda 2011/12
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Terms of reference of the Committee
sets the Total Remuneration Policy
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on behalf of the Board;
approves the detailed remuneration terms
of the Executive Directors including their
service contract and the impact on senior
management remuneration;
approves the remuneration of the Chairman,
however the Chairman is not present for
discussions on his own remuneration;
approves the design and performance
targets of incentive schemes;
grants awards under the Company’s
Long-term Incentive Plan to all senior
managers; and
reviews the total remuneration of the
Management Board and other senior
executives below Board level.
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advisors
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the Chief Executive, the Director of Human
Resources, and SSE’s Head of Reward,
advised the Committee on matters relating
to the appropriateness of awards for the
Executive Directors and senior executives
although they were not present for any
discussions on their own remuneration;
the Director of Human Resources and SSE’s
Head of Reward advised on HR strategy
and the application of policies across the
organisation;
Deloitte LLP provided a range of advice
to the Committee which included market
information drawn from published surveys,
governance developments and their
application to the Company, advice on
the appropriate structure of short-term
incentives, long-term incentives, and
comparator group pay and performance.
Deloitte LLP received fees of £70,000 in
relation to their work for the Committee.
They were appointed by the Committee and
also provide ad hoc tax advice to SSE plc; and
Bank of America Merrill Lynch provided
advice on shareholder views. They were
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appointed by the Committee for these
services. They did not receive any fees
relating specifically to these services,
and they are retained as SSE’s brokers.
Stakeholder engagement and consultation
As referred to in last year’s Remuneration
Report, Lady Rice, on behalf of the Committee,
undertook a consultation with a number of
institutional shareholders in June 2011
regarding the likely non vesting of the 2009-12
Performance Share Plan, and sought their
views on potential changes to the performance
criteria of current awards which had not yet
vested. The outcome of the consultation was
considered, and the Committee decided that
there should be no alteration to the
performance targets.
The Committee also took the opportunity
to respond to the Department for Business,
Innovation and Skills (BIS) Executive
Remuneration consultation in November
2011. The Committee was supportive of
a number of the proposals set out in the
consultation, and Lady Rice has since
participated in discussions with BIS. The
Committee also responded to the follow-up
2012 BIS Consultation Document.
Employee representatives
The Director of Human Resources provided
an update to all SSE-recognised trade unions
in March 2012 explaining the Company’s
position on Executive remuneration. This
covered many of the policy positions covered
in this report and its view on current items such
as the recent BIS proposals. Pay awards for
senior executives take into account the general
environment and the approach to employee
pay. For example, this year, the Chief Executive
received a percentage increase award equal
to the Company-wide pay review. It is the
Company’s intention to continue to liaise with
employee representative bodies in the future.
Regular items
Other items
Directors’ Remuneration Report. Approval of Performance
Share Targets and 2011 Grants. Approval of Vesting Awards.
2011 annual incentive out-turn approval.
May
July
September
november
External governance environment update.
March
Review of Chief Executive’s salary and Chairman’s fee. Establishment
of the 2012/13 annual incentive Performance targets. Performance
Share Plan Forecast Results. Approval of 2012/13 PSP targets.
Review of BIS executive remuneration consultation
exercise and proposals. Introduction of ‘claw back’
arrangements on incentive plans.
Performance Share Plan – shareholder consultation feedback.
Colin Hood retiral, remuneration approvals. Review of Total
Remuneration arrangements for Executive Directors.
Review of base salary for Alistair Phillips-Davies and Gregor
Alexander following allocation of extra responsibilities.
remuneration report (continued)
Remuneration in 2011/12
77
decisions for 2011/12. They included positive
aspects of performance, including effective
teamworking, achievement of important
personal objectives and another increase in
adjusted profit before tax*. They also reflect
the decision to adjust payments under the
Annual Incentive Scheme to reflect the
difficulties in which SSE found itself in relating
to the use of sales aids in doorstep selling.
How has SSE presented one single
figure for total remuneration for
each Executive Director?
At SSE, what Executive Directors earn
is made up of:
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base salary;
benefits-in-kind;
cash awarded under the Annual Incentive
Scheme;
shares awarded under the Annual Incentive
Scheme and secured through continued
employment; and
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March 2012 meeting the Committee agreed
to adopt a number of the proposals at an
early stage rather than wait until they
become a formal requirement in 2013.
During the last year the Committee discussed
the need to put in place a ‘claw back’
arrangement in both the main incentive plans
from 2012 grants onwards. This would allow
the Committee potentially to reduce payouts
under these arrangements should there be
any events such as material mis-statement
of accounts, gross misconduct, or something
which causes significant reputational damage
to the Company.
What issues did the remuneration
Committee take account of in
making its decisions?
The Remuneration Committee Chairman’s
Introduction on page 75 and the table on
page 79 summarise the issues that the
Committee took account of in making its
What is SSE’s Total Executive remuneration policy?
Summary of remuneration policy
Fixed remuneration
variable remuneration
Base salary
Short-term – annual
Long-term – three years
pension –
final salary
Benefits-in-kind –
car, private medical
Annual Incentive Scheme –
75% maximum cash and
25% deferred shares
linked to individual and team
performance, corporate, financial
and operational measures
performance Share plan
(pSp) – 3 years
25% linked to relative FTSE 100
TSR, 25% mSCI Eur. Utilities TSR,
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%
15%
19%
28%
10%
26%
38%
Base salary/benefits-in-kind
Pension
Annual Incentive Scheme
PSP
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Base salary includes 1% to cover benefits-in-kind, namely a car allowance and private medical plan.
The pension element is the average of the present value of providing a single year of pension
for the Executive Directors.
Target performance comprises annual incentive scheme 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.
Stretch performance is based on an annual incentive 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 47%-64% in variable pay to recognise
exceptional performance.
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at a glance
How has this remuneration report
been put together?
In January 2012 the UK government
recommended that remuneration reports
should comprise two sections: one setting out
how remuneration policy has been implemented
in the previous year (for SSE, 2011/12); and
one setting out future policy for Executive
remuneration. With sections on Remuneration in
2011/12 (pages 75 to 79) and on Remuneration
for 2012/13 and beyond (pages 80 to 83),
this Report follows that structure.
What are the principles of the SSE
Executive remuneration policy?
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attract and retain Executive Directors who
run the Company effectively for the benefit
of shareholders, customers and employees;
adopt a competitive and straightforward
approach to total remuneration, which
meets shareholder expectation;
reinforce the culture and teamwork to
deliver the long-term growth and
sustainability of the business; and
set Total Remuneration Policy at levels
which promote the long-term development
of the business and reward individuals in
line with performance.
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DD
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What was new in 2011/12?
Colin Hood (Chief Operating Officer) retired
from the Company in October 2011. The
Remuneration Committee confirmed the
remuneration terms on exit which provided
exactly what he was due under either his
contract of employment or through the rules
of the relevant incentive plans.
Colin Hood’s existing responsibilities were
shared between Gregor Alexander, Alistair
Phillips-Davies, and selected Management
Board members. With the new responsibilities
in mind, Alistair Phillips-Davies and Gregor
Alexander’s remuneration arrangements
were reviewed, resulting in both receiving an
increase in basic pay of 10% with effect from
1 November 2011. There was no increase in
salaries for the Executive Directors in 2010/11.
No other terms were adjusted and their next
formal pay review will be in April 2013. The
cost of Colin Hood’s retiral, including the
pay enhancements to those taking on more
responsibilities as a result, will be absorbed
within a period of less than one year.
BIS launched a consultation exercise to
improve both the reporting and governance
arrangements in Executive remuneration. The
Committee participated in the consultation
exercise putting forward SSE’s views. At the
78
SSE Annual Report 2012
remuneration report (continued)
Remuneration in 2011/12
DD
shares awarded under the Performance Share
Plan, secured through continued employment
and attaining performance criteria.
The calculation of what Executive Directors
earned in 2011/12 is made up of salary,
benefits-in-kind, cash awarded under the
Annual Incentive Scheme for 2011/12 and
shares awarded under the Annual Incentive
Scheme and Performance Share Plan in
2008/09, but earned in 2011/12 as a result
of continued employment (and, in the case
of the Performance Share Plan, through
performance over the three years against
the criteria for awards).
The table opposite sets out what each Executive
Director earned in 2011/12 on this basis.
What is the position with regard to
members of the Management Board?
In addition to the three Executive Directors,
SSE has seven Managing Directors who are
also members of the Management Board, the
role of which is summarised on page 58. On
the same basis as that used for determining
Executive Directors’ earnings in 2011/12,
the total earnings of the seven Managing
Directors in 2011/12 was £2,313,000.
How does Executive Directors’
remuneration compare with
other financial dispersals?
The UK government has said that, to provide
context, companies should outline how
remuneration for Executive Directors compares
with other dispersals such as dividends, capital
and investment expenditure, taxation and
general staffing costs.
SSE has set out the position for each of these
areas in the table opposite. It shows that
for every £1 spent on Executive Directors’
earnings by SSE in 2011/12, £122 was paid
in tax, £192 was spent on employee costs,
£220 was made in dividend payments to
shareholders and £524 was spent on capital
and investment expenditure.
SSE’s contribution to government revenues
in the UK is also included in the table, and the
overall position on taxation is set out on page
23. It is important to note that:
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Executive Directors’ earnings as described
in this report are subject to taxation in the
UK; and
in line with the countries in which it has
substantial commercial operations, SSE
is liable for taxation in the UK and Ireland
only and does not use so-called ‘tax havens’
to avoid paying tax.
What did the Executive Directors earn during the year ending 31 March 2012?
Base
salary
£000s
Benefits
£000s
Cash
incentive
£000s
Subtotal
£000s
DBP vesting
value
£000s
PSP vesting
value
£000s
Total
(2012)
£000s
Total
(2011)
£000s
Ian Marchant
Colin Hood
Gregor Alexander
Alistair Phillips-Davies
840
377
516
516
Total remuneration
2,249
19
10
16
16
61
158
94
123
102
477
1,017
481
655
634
2,787
170
125
98
98
491
– 1,187 1,382
606 1,059
–
816
–
753
815
–
732
– 3,278 4,072
Note: The shares earned under the DBP were awarded in respect of performance in the year to 31 March 2009 but were
subject to continued employment with SSE until at least 31 March 2012, excluding Colin Hood who retired on 31 October
2011 and received these shares on his retiral. The value is based on the shares disclosed in table D and, in addition, dividend
shares as follows: Ian Marchant – 2,076 shares, Gregor Alexander and Alistair Phillips-Davies – 1,192 shares, and Colin Hood –
1,385 shares. The shares earned under the PSP were granted in 2009 but were subject to continued employment with SSE
until at least 31 March 2012 and to SSE’s performance over the three years to that date in respect of Total Shareholder Return
and Adjusted Earnings Per Share*. The valuation of the shares of both schemes is based on the closing price of 1,329p as at
31 March 2012. They will vest in June 2012. The cash payment under the Annual Incentive Scheme will be made in June 2012.
In addition, the Directors also participated in pension arrangements during the year to 31 March 2012 and accrued
additional benefits under these arrangements. More information is given in table B on page 84.
Colin Hood’s salary reflects earnings up to his leaving date of 31 October 2011 and his DBP vesting value reflects the
vesting of the 2009 award. Alistair Phillips-Davies’ and Gregor Alexander’s salary reflects an increase in basic salary
from £495,000 to £544,500 from 1 November 2011.
How do the earnings of the Executive Directors compare with other financial dispersals?
2008
£m
2009
£m
2010
£m
2011
£m
2012
£m
Executive Directors’ earnings1
Dividend payments to shareholders
Capital and investment expenditure
Contribution to government revenues in UK2
Staffing costs3
7.0
551.9
4.5
5.1
3.3
502.8
618.5
716.9
810.3 1,279.8 1,315.2 1,443.7 1,706.9
460.7
413.6
396.4
585.3
438.8
624.9
343.8
615.2
402.0
537.4
4.1
659.8
1. On same basis as ‘What did the Executive Directors earn?’ table.
2. Includes Corporation Tax, Employer’s National Insurance Contributions and Business Rates.
3. Wages and salaries and share-based remuneration for all staff, as per note 6(i) of the accounts, excluding Executive Directors.
The Executive earnings show a reduction
despite strong business performance for
two main reasons:
Executive Directors’ earnings
compared with dividend payments
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a reduction in the number of Executive
Directors during 2011/12 from four to
three; and
the fact that despite strong underlying
performance the long-term incentive plan
did not pay out in 2010/11 or 2011/12
although it should pay out in future years
if performance criteria are met.
Rebased to 100
160
140
120
100
80
60
40
2008
2009
2010
2011
2012
Executive Directors’ earnings
Dividend payments to shareholders
remuneration glossary of terms
STI – Short Term Incentive
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
DBp – Deferred Annual Incentive Scheme
79
remuneration and performance
Executive Directors’ salary and incentive plans 2011/12
performance measure
purpose – link to strategy
policy and decisions
Base salary
annual Incentive Scheme
The Annual Incentive Scheme is determined by
the Remuneration Committee’s assessment of
the performance during the year, based on the
three key areas below: corporate performance;
teamwork; and achievement of objectives.
Corporate performance (60%)
Group corporate performance is measured by
adjusted profit before tax*, which reflects the
underlying profits of SSE’s business and the
basis on which it is managed.
Reflects market data, role, business and individual
performance measured against SSE’s strategy as
set out on pages 1 to 53.
The performance targets are clearly linked to
SSE’s strategy, which is to deliver sustained real
growth in the dividend through the efficient
operation of, and investment in, a balanced
range of energy businesses.
Following an increase in responsibilities the
Finance Director and the Generation and Supply
Director received a one-off increase of 10%.
Following the annual review in March 2012 the
salary for the Chief Executive was increased by
3.5%, the first increase since January 2009.
range of 25%-30% awarded
Maximum award of up to 100% of base salary:
75% in cash (non-pensionable); 25% compulsorily
deferred into shares which only vest, subject to
continued service, after three years. There is no
share matching award in place.
Corporate performance (60%)
Sustained real dividend growth can only be
delivered if it is supported by an adequate level of
adjusted profit before tax*. At the same time, the
long-term nature of SSE’s dividend commitments
means that adjusted profit before tax* has to be
earned in a way that is responsible and durable.
Corporate performance (max 60%)
During 2011/12, SSE delivered a 2% increase
in adjusted profit before tax*, which would
have resulted in a payment under this element.
It was, however, decided that there should be
no payment in view of the situation in respect
of SSE’s doorstep selling activities.
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.
personal objectives (20%)
SSE believes personal objectives should form a part
of the Annual Incentive Scheme. In keeping with
its Teamwork value, SSE seeks to avoid potentially
conflicting personal objectives. Focusing on
operations and the investment programme,
they are designed to support achievement
of SSE’s strategy and reinforce its values.
personal objectives (20%)
Personal objectives set during the year covered
areas such as performance in respect of safety,
customer service and delivery of new sources for
generating electricity from renewable sources.
Success in each of these areas is central to SSE’s
emphasis on efficient operations and investment
to support dividend growth.
performance Share plan 2009-2012
For awards granted in 2009 performance is
measured against the following two elements
over a three-year period.
Total Shareholder return (TSr)
DD100% vests at or above 75th percentile
DD25% vests at median
DDstraight-line basis between median and 75th
percentile
DDno vesting of award if median performance
not achieved
adjusted Earnings per Share* (EpS)
DD100% vests where EPS is 9% RPI
DD25% vests where EPS is 3% above RPI
DDstraight-line basis between 3% and 9%
above RPI
DDDno vesting if EPS minimum growth of RPI +3%
is not achieved
The two elements of TSR and EPS reflect relative
and absolute measures of performance.
The relative TSR measure is dependent on SSE’s
relative long-term share price performance and
dividend return. It is therefore directly linked
to the strategic objective of sustained real
dividend growth.
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. Profit is required to support the payment of,
and increases in, the dividend.
Teamwork (max 20%)
Safety: Total Recordable Injury Rate and working
days lost through injury lowest ever. Service:
Leading position among the major energy
suppliers. Efficiency: Lowest-ever customer
minutes lost in Southern distribution network.
Sustainability: Renewable generation capacity
up. Excellence: Culture of innovation reinforced
around £70m of benefit from Licence to Innovate
Scheme. Teamwork: Employee engagement
score above average and upper quartile for first-
time company. All of this resulted in an above-
target payment of 75% of the maximum.
personal objectives (max 20%)
Overall, the Remuneration Committee concluded
that progress was made in areas such as safety,
customer service and renewable energy during
2011/12 and that individually and collectively the
Executive Directors delivered strong performance
during the year – resulting in payment in the
range of 50%-75% of maximum.
0% awarded
Maximum award of 150% of base salary each
year. Awards are released to the extent
performance conditions are met.
TSr (max 50%)
Out-turn below median of FTSE 100 and 0%
of TSR element awarded; the graph on page 81
reflects performance over a five-year period.
EpS (max 50%)
Out-turn growth below the EPS minimum growth
target RPI+3% and 0% of EPS element awarded.
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80
SSE Annual Report 2012
remuneration report (continued)
Remuneration for 2012/13 and beyond
2012/13 and beyond
During 2012/13 the Committee:
DD
will continue to review its Total
Remuneration Policy to ensure it is aligned
to the long-term needs of the business,
shareholders and customers;
will introduce a ‘claw back’ arrangement
on its incentive plans to maintain a strong
focus on performance; and
continue to engage with key stakeholders
and in particular, participate in the ongoing
BIS consultation.
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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
‘SSE – a balanced range of energy businesses’
section as shown on pages 12 and 13 together
with policy details and charts which illustrate
performance variation between the target
and maximum values of the packages.
The policy comprises:
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base salary;
benefits, including a defined benefit
pension plan;
an Annual Incentive Scheme; and
a long-term incentive plan.
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The current incentive plans are shown
in the chart on page 79.
Total remuneration policy
Remuneration policy for Executive Directors
is to remain below median of the FTSE 20-50,
excluding financial services, and to be positioned
generally conservatively against direct peers and
UK listed companies in related sectors. 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 reflects the 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.
DD
The Committee reviews regularly the total
compensation, including pensions, of 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.
A number of institutional shareholders
were consulted on key aspects of the Total
Remuneration Policy as part of a regular
dialogue between shareholders and the
Remuneration Committee.
As a matter of policy the Committee takes
account of any changing or increasing
responsibilities when determining the
appropriate remuneration.
The Committee reviews the long-term total
reward of the Executive Directors, to ensure
that it is suitably aligned with the long-term
performance of the business.
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DD
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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
79 as this rewards performance sufficiently
without causing undue risk taking.
Senior executives, managers
and employees
The Committee appreciates the importance
of an appropriate relationship between the
remuneration levels of the Executive Directors,
senior executives, managers and other
employees within the Group. 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.
The Committee conducted a review of
salaries for Executive Directors in November
2011 and March 2012. It considered the
following factors in the light of recent
market and governance trends:
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DD
year as dividend growth has exceeded RPI
inflation for the thirteenth consecutive year;
management and Collective Agreements
which provide an average 3.5% salary
increase this year; and
total remuneration and basic salary, when
benchmarked where relevant to FTSE 20-50
excluding Financial Services, remain behind
market median for the Executive Directors.
After taking careful consideration of all factors,
the Committee decided to increase the base
salary of the Chief Executive by 3.5% (the first
increase since January 2009), in line with the
wider employee population, effective from
1 April 2012. For the two other Executive
Directors an increase of 10% of base salary was
approved, effective from 1 November 2011,
to reflect the additional responsibilities, which
they have absorbed since the retiral of Colin
Hood. The next planned salary review for all
Executive Directors will be in April 2013.
Current incentive plans
Annual Incentive Scheme
The purpose of the Annual Incentive Scheme
is to reward Executive Directors’ performance
during the year, based on an analysis of
corporate performance, 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 2011/12, the total annual incentive paid
to the Executive Directors was in the range
of 20%-30% of salary, compared to 60% in
the previous year, both against a maximum
payable of 100%. The portion of the annual
incentive that would have been payable in
respect of corporate performance was withheld
in recognition of the position SSE found itself in
with regards to the use of sales aids in doorstep
selling. The incentive payable for 2011/12
reflects the elements in respect of team
working and performance against personal
objectives. ‘Executive Directors’ salary and
incentive plans 2011/12’, on page 79, sets out
performance metrics used in the assessment
of the annual incentive for the year.
For 2012/13, the structure of the annual
incentive will remain the same as in 2011/12.
The maximum annual incentive payable will
be 100% of salary, split between:
DD
the Executive Directors continue to deliver a
strong financial performance with significant
results to shareholders in a difficult trading
corporate performance (60%);
team working (20%); and
personal objectives (20%).
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DD
81
Changes to performance
share plan 2010 awards
Since 2010, awards have had four performance
criteria of 25% each. Threshold vesting delivers
25% of each element, with full vesting
delivering 100% of each element as follows:
during the period between the granting and
vesting of awards there has been an event
such as material mis-statement of accounts,
gross misconduct or something which causes
significant reputational damage to the
Company, it will have the ability to reduce
the final award or deem it to have lapsed.
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relative TSR performance compared to
FTSE 100 (threshold vesting for median
performance and full vesting for upper
quartile performance);
relative TSR performance compared to
a selected peer group of UK and other
European utilities (threshold vesting for
median performance and full vesting
for upper quartile performance);
EPS growth of RPI plus 2% (threshold
vesting) to 8% (full vesting); and
dividend per share growth of RPI plus 2%
(threshold vesting) to 6% (full vesting).
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The introduction of TSR performance compared
to a selected 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 while maintaining a good dividend cover.
The Committee believes that the two additional
measures provide a focus on the performance
of SSE’s wider competitive group, its key
financial goals and the level of dividend paid.
‘Claw back’
During the year the Committee agreed to
the introduction of a ‘claw back’ arrangement
which will apply to all awards made under
the deferred Annual Incentive Scheme and
Performance Share Plan from 2012 onwards.
This amendment to the schemes rules will give
the Committee powers to review the final award
of shares under these arrangements when they
vest. Should the Committee conclude that
Share ownership policy
Employee share ownership is a key part of Total
Remuneration Policy and is designed to help
maintain long-term employee commitment and
business understanding, offering the opportunity
to benefit from any growth in shareholder value.
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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 incentive award and employee
share schemes facilitate this alignment.
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.
It is also expected that all non-Executive
Directors should hold a minimum of 2,000
shares in the Company.
As reported on page 59, 43% of SSE
employees are members of the Share
Incentive Plan.
35% of employees are members of the
Sharesave Scheme.
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Directors’ shareholdings as
percentage of annual salary
Ian Marchant
Gregor Alexander
Alistair Phillips-Davies
2012
% salary
2011
% salary
367
242
268
338
230
256
Based on a share price at 31 March 2012 of £13.29.
SSE TSr performance: 31 March 2007 to 31 March 2012
Rebased to 100
120
110
100
90
80
70
60
SSE
FTSE 100
Source: Datastream
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In any single year, it is expected that the
annual incentive paid will be around 50%
of Executive Directors’ salary for on-target
performance. The annual incentive is paid 75%
in cash, and 25% deferred into shares which
vest after three years, subject to continued
service. The Committee retains the discretion
to vary this award level in exceptional
circumstances as illustrated for 2011/12.
For the Management Board and other
senior executives a ‘safety modifier’ applies
to any annual incentive awards as safety
is of paramount importance to SSE. This
modifier applies to team working and personal
objectives and allows an additional incentive
to be earned for exceptional safety leadership
but also a reduction for poor safety leadership.
This modifier does not apply to the Executive
Directors’ annual incentive scheme, which
already takes account of the Company’s
safety performance.
long-term incentive plan
The Performance Share Plan rewards 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 (EPS) and the Total
Shareholder Return (TSR) compared to the
FTSE 100. Awards equivalent to 150% of salary
are granted annually to Executive Directors
and at lower rates to other senior executives.
Awards will be released after three years
subject to meeting demanding performance
conditions relating to the Company’s relative
TSR performance and the Company’s adjusted
EPS* growth. Further details of the performance
targets are in the table on page 79. 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 2008 PSP award which was due to vest
in May 2011 did not achieve the performance
criteria and therefore did not vest although
the PSP should pay out in future years if
performance criteria are met. The TSR
out-turn was below median for FTSE 100
and EPS growth was below target.
The 2009 PSP award will also not vest as
the TSR and EPS measures are below target.
50
Mar ’07
Mar ’08
Mar ’09
Mar ’10
Mar ’11
Mar ’12
82
SSE Annual Report 2012
remuneration report (continued)
Remuneration for 2012/13 and beyond
all-employee share schemes
Executive Directors are eligible to participate
in the Company’s all-employee share schemes
on the same terms as other employees. These
schemes comprise:
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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;
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
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.
DD
DD
Funding of share schemes and dilution
Shares are purchased in the market to satisfy
the exercise of awards under the deferred
Annual Incentive Scheme, the Performance
Share Plan, and the SIP.
The Company’s Sharesave Scheme uses
unissued shares to satisfy the exercise of
share options. As at 31 March 2012, there
were approximately six million share options
outstanding under this scheme, and if all the
outstanding options were exercised this would
amount to 0.63% 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
government and fiscal changes, the Company
has provided cash allowance options in
exchange for reduced accrual at no extra
cost to the Company.
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:
DD
for retirement through ill-health an
unreduced pension based on service
to expected retirement is paid;
in the event of any reorganisation or
DD
redundancy an unreduced accrued pension
is paid to a member who is aged 50 or
above, with at least five years’ service or, for
a member who has not yet reached that age,
it will be payable with effect from 50; and
from the age of 55, a scheme member is
entitled to leave the Company and receive
a pension, reduced for early payment,
unless the Company gives consent and
funds this pension being paid on an
unreduced basis.
DD
The Executive Directors are 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. Dependent upon the circumstances
surrounding the departure of the Executive
Director and financial health of the Company
at the time, the Committee’s policy is to give
consideration to a cash commutation of the
unfunded unapproved retirement benefit
(UURB) pension at the time of leaving. Any
cash commutation would limit SSE’s liability,
taking into account valuations provided by
independent actuarial advisors, and would
be undertaken on what was judged to be a
cost neutral basis to SSE. The Committee has
agreed to consider a cash commutation of the
UURBs, if requested, when Colin Hood is age
60. Prior to that, the benefit from Colin Hood’s
UURBs will be paid monthly. In determining
whether it is appropriate to offer a cash
commutation, the Committee will apply
the policy stated above.
Full details of the Executive Directors’ pension
plans can be found in Table B of the audited
information on page 84.
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 below.
Service contract key items
Provision
Detailed terms
Notice period
12 months by either Company or Director
DD
Termination payment
Remuneration
DD
DD
Up to 12 months’ salary (excluding any annual incentive 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
DD
DD
DD
DD
DD
Salary, pension and benefits
Company car or cash allowance
Participation in Annual Incentive Scheme, employee share schemes
and Executive incentive plans
Private health insurance
DD
Non competition
During employment and for six months after leaving
DD
Contract dates
All contracts dated 11 March 2005
DD
Length of service
Ian Marchant
Gregor Alexander
Alistair Phillips-Davies
* Including two years as Finance Director of Southern Electric plc.
Industry service
Length of Board service
20
21
15
16 years*
9 years
10 years
awards under the Performance Share Plan
were preserved by the Committee on his
retirement, to vest at the normal time to the
extent that the performance targets are met
(but subject to prorating for Mr Hood’s actual
service during the three year performance
period). Mr Hood’s 2009 award did not vest.
non-Executive Directors
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.
They do not participate in the Annual Incentive
Scheme, deferred Annual Incentive Scheme,
any of the share option schemes, or contribute
to any Group pension scheme although as
indicated above they are required to hold
2,000 Company shares.
The fees of the independent non-Executive
Directors are agreed by the Board, with the
non-Executive Directors concerned not
participating in this process.
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. Reasonable travelling and other
expenses for costs incurred in the course of
their duties are reimbursed.
Fee history
2012
£000s
2011
£000s
Board
Audit Committee Chairmanship
Remuneration Committee
Chairmanship
Senior Independent Director
Company Chairman
54
14
54
12
12
10
10
10
341 341
From 1 April 2012, the fees for all non-Executive
Director roles were increased by 3.5% in line
with the average salary increase of SSE’s
employees in general. •
The Company may at its discretion terminate
any Executive Director’s contract by making
a payment in lieu of notice equal to the base
salary which would have been received during
the notice period (excluding any annual
incentive 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
and will remain subject to performance. If the
Executive Director leaves for any other reason,
PSP share awards will lapse.
In the event of a change of control of the
Company, performance in the PSP will be
measured to that date and the award will
normally be scaled down to reflect the period
prior to the change of control.
Outside appointments
Executive Directors are able 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 2011/12 Ian Marchant was a non-Executive
Director with John Wood Group plc, and
received £45,000 in fees. Colin Hood was
a non-Executive Director of FirstGroup plc,
and received £29,200 in fees, he was a
non-Executive Director in Southern Water
Services Ltd and received £58,300 in fees and
he was a non-Executive Director of HSI Ltd
and received £17,500 in fees, all in respect
of the period to cessation of his employment
on 31 October 2011.
retirement of Colin Hood
Colin Hood retired as a Director and ceased
employment on 31 October 2011. He was
employed under a service contract dated
11 March 2005, and did not receive a
termination payment on retirement. Details
of his pension arrangements are set out on
page 84. The Committee awarded Mr Hood a
payment under the Annual Incentive Scheme
for his period of service in 2011/12; this was
subject to performance and will be paid in
cash in June 2012 (rather than part being
deferred into shares). In relation to his share
awards under the DBP from 2009 and 2010,
the Committee permitted Mr Hood to call
for these shares within six months of his
retirement date. Mr Hood’s 2009 and 2010
83
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84
SSE Annual Report 2012
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 (retired 31/10/11)
Alistair Phillips-Davies
non-Executive Directors
Thomas Thune Andersen
Jeremy Beeton
Katie Bickerstaffe
Richard Gillingwater
René Médori
Lady Rice
Lord Smith of Kelvin (Chairman)
Former Director
Nick Baldwin (retired 01/04/11)
Salary/fee
£000s
Cash incentives
£000s
Benefits
£000s
2012
840
516
377
516
54
41
41
54
68
76
341
–
2,924
158
123
94
102
–
–
–
–
–
–
–
–
19
16
10
16
–
–
–
–
–
–
–
–
477
61
Total
£000s
1,017
655
481
634
54
41
41
54
68
76
341
2011
Total
£000s
1,237
734
954
734
54
–
–
54
66
74
341
–
3,462
54
4,302
notes
In addition to the annual cash incentive amount for this year, Ian Marchant, Gregor Alexander and Alistair Phillips-Davies will be awarded
£52,500, £40,800 and £34,000 respectively in the form of deferred shares in respect of the annual incentive due to them for 2011/12. These
share awards will not be made until June 2012 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 2015.
Colin Hood’s appointment ceased with effect from 31 October 2011, therefore total benefits are pro-rata up to this date. Colin Hood’s pro-rated
annual incentive will be paid entirely in cash.
Table B – Directors’ pension information
Years of
industry
service
at 31 March
2012
£000s
20
21
15
34
388
230
177
366
Increase in year
including
inflation
£000s
Accrued benefit
Increase in year
excluding
inflation
£000s
at 31 March
2012
£000s
At 31 March
2011
£000s
Transfer value of accrued benefit
Increase less
Directors’
contributions
£000s
Increase in year
excluding
inflation
£000s
19
17
16
11
6
7
10
–
9,188
4,999
3,676
9,962
6,191
3,545
2,394
7,267
2,978
1,435
1,263
2,673
437
357
345
382
Ian Marchant
Gregor Alexander
Alistair Phillips-Davies
Colin Hood
The transfer value of the accrued benefit has increased over the year. There has been no change in the Directors’ pension entitlements over the
year and the increase in value is largely the result of the change in financial conditions since 31 March 2011, notably the significant reduction in
bond yields. If bond yields were to go up, the value would go down.
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 lifetime allowance (LTA), the benefits payable by the scheme from that
excess will be subject to a higher rate of income tax. The Company has maximised the use of the allowance to provide Executive Directors
with the maximum benefits via the registered schemes.
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.
85
(ii) Post retirement increases are expected to be in line with inflation.
The following is information relating to the Directors’ pensions of Colin Hood, Ian Marchant and Alistair Phillips-Davies, as participants in the
HM Revenue & Customs approved Southern Electric Group of the Electricity Supply Pension Scheme.
(i)
Dependants’ pensions on death are four-ninths of the member’s pensionable pay, together with a capital sum equal to four times pensionable
pay. If death occurs after attaining the age of 55 an additional lump sum between three to five times notional pension is payable dependent
upon age and length of service.
(ii) On death in retirement, the Director’s spouse will receive a pension equal to two-thirds of that payable to the Director. In addition, on death
within the first five years of retirement, a lump sum is payable equal to the balance outstanding of the first five years’ pension payments.
(iii) Post retirement increases are expected to be in line with inflation (guaranteed up to the level of 5% per annum and discretionary above that level).
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
Jeremy Beeton
Katie Bickerstaffe
Richard Gillingwater
Colin Hood
Ian Marchant
René Médori
Alistair Phillips-Davies
Lady Rice
Lord Smith of Kelvin
31 March 2012
31 March 2011
Shares held
Shares under
option
93,915
2,000
4,000
2,000
2,000
144,519
232,023
2,050
104,062
5,533
22,600
204,019
–
–
–
–
184,716
349,978
–
202,483
–
–
Shares held
90,504
2,000
–
–
2,000
138,659
225,773
2,050
100,703
5,216
22,600
Shares under
option
193,304
–
–
–
–
250,056
334,522
–
191,738
–
–
notes
From 31 March 2012 to 15 May 2012, the following changes to the interests of Directors took place:
Under a standing order for reinvestment of an ISA, on 10 April 2012 Gregor Alexander acquired 15 shares.
Under the SIP, on 5 April 2012 Ian Marchant and Gregor Alexander each acquired 15 shares and Alistair Phillips-Davies acquired 16 shares.
On 4 May 2012, Ian Marchant and Gregor Alexander each acquired 16 shares and Alistair Phillips-Davies acquired 15 shares.
The Register of Directors’ Interests (which is open to shareholder inspection) contains full details of Directors’ shareholdings and options
to subscribe for shares.
Colin Hood’s holding covers to the date of leaving on 31 October 2011.
Table D (page 86) shows the interests of the Executive Directors in awards granted under the DBP 2006 and the PSP during the year ended
31 March 2012.
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86
SSE Annual Report 2012
remuneration report (continued)
Remuneration in detail
Table D – Directors’ long term incentive plan interests
Ian Marchant
Gregor Alexander
Alistair Phillips-Davies
Colin Hood
Share plan
Date of award
DBP 20062
DBP 20062
DBP 20062
DBP 20062
PSP1
PSP1
PSP1
PSP1
Sharesave
10/06/2008
02/06/2009
02/06/2010
14/06/2011
10/06/2008
02/06/2009
02/06/2010
14/06/2011
22/07/2008
Sharesave
30/06/2010
DBP 20062
DBP 20062
DBP 20062
DBP 20062
PSP1
PSP1
PSP1
PSP1
Sharesave
10/06/2008
02/06/2009
02/06/2010
14/06/2011
10/06/2008
02/06/2009
02/06/2010
14/06/2011
30/06/2009
Sharesave
30/06/2010
DBP 20062
DBP 20062
DBP 20062
DBP 20062
PSP1
PSP1
PSP1
PSP1
DBP 20062
DBP 20062
DBP 20062
PSP1
PSP1
PSP1
10/06/2008
02/06/2009
02/06/2010
14/06/2011
10/06/2008
02/06/2009
02/06/2010
14/06/2011
10/06/2008
02/06/2009
02/06/2010
10/06/2008
02/06/2009
02/06/2010
Normal
exercise period
(or vesting date)
No. of shares
under award as
at 1 April 2011
Option
exercise
price
Additional
shares awarded
during the year
No. of shares
lapsed during
the year
No. of shares
realised during
the year
No. of shares
under award at
31 March 2012
10/06/2011
02/06/2012
02/06/2013
14/06/2014
May 2011
May 2012
May 2013
May 2014
01/10/2011-
31/03/2012
01/10/2013-
31/03/2014
10/06/2011
02/06/2012
02/06/2013
14/06/2014
May 2011
May 2012
May 2013
May 2014
01/10/2014-
31/03/2015
01/10/2015-
31/03/2016
10/06/2011
02/06/2012
02/06/2013
14/06/2014
May 2011
May 2012
May 2013
May 2014
10/06/2011
02/06/2012
02/06/2013
May 2011
May 2012
May 2013
9,709
10,730
11,482
77,670
107,302
116,774
442 1,274p
413
871p
5,493
6,169
6,602
44,661
61,698
67,145
1,253 1,042p
283
871p
5,463
6,169
6,602
44,661
61,698
67,145
7,087
8,047
8,612
58,253
80,476
87,581
9,3883
77,670
93,8893
5,5333
44,661
55,3363
5,5333
44,661
55,3363
58,253
9,7094
4425
5,4934
5,4634
7,0874
8,0476
8,6126
10,730
11,482
9,388
107,302
116,774
93,889
413
6,169
6,602
5,533
61,698
67,145
55,336
1,253
283
6,169
6,602
5,533
61,698
67,145
55,336
80,4767
87,5817
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
DBP 2006, as indicated in the table above, the following shares were realised arising from such notional reinvestment of dividends: Ian Marchant – 1,748 shares, Gregor Alexander –
987 shares, Alistair Phillips-Davies – 983 Shares, Colin Hood – 2,297 shares.
1. The performance conditions applicable to awards under the PSP since 2007 are described on page 81. The 2008 award under the PSP did not vest.
2.
25% of annual incentive payable to Executive Directors and senior managers is 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 incentive, 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 1,374p.
4. The market value of a share on the date on which these awards were realised was 1,384p.
5. The market value of a share on the date on which these awards were exercised was 1,312p.
6. The market value of a share on the date on which these awards were realised was 1,277p.
7. Colin Hood’s shareholdings cover the period to date of leaving on 31 October 2011.
The closing market price of shares at 31 March 2012 was 1,329p and the range for the year was 1,193p to 1,423p. Awards granted during the year were granted under the DBP 2006
and the PSP. The aggregate amount of gains made by the Directors on the exercise of share options and realisation of awards during the year was £337,629 (2011 – £446,597).
This report was approved by the Board and signed on its behalf by:
Lady rice CBE
Remuneration Committee Chairman
15 May 2012
Other statutory information
87
principal activities
SSE plc is the holding company of the Group.
Its subsidiaries are organised into the main
businesses of:
DD
Networks – the economically-
regulated transmission and distribution
of electricity and gas and other related
networks;
Retail – the supply of electricity, gas and
other services to household and business
customers; and
Wholesale – the production, storage and
generation of energy and energy portfolio
management.
DD
DD
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 2012 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 88 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 (retired 31 October 2011)
Alistair Phillips-Davies
Non-Executive
Lord Smith of Kelvin (Chairman)
Thomas Thune Andersen
Nick Baldwin (resigned 1 April 2011)
Jeremy Beeton (appointed 1 July 2011)
Katie Bickerstaffe (appointed 1 July 2011)
Richard Gillingwater
René Médori
Lady Rice (Senior Independent Director)
At the 2012 AGM all of the current Directors
(apart from René Médori) will retire and offer
themselves for re-appointment. René Médori
will resign from the Board on 25 June 2012.
Richard Gillingwater will assume the position
of Senior Independent Director on 24 July
2012 in place of Lady Rice who will remain
an independent non-Executive Director.
Biographical details of all Directors are set out
on page 57. 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
pages 82 and 83 respectively.
The interests of the Directors in the Ordinary
Shares of the Company at 31 March 2012 are
set out in the Remuneration Report on pages
85 and 86.
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 Ordinary
Shareholders for the financial year amounted
to £197.8m. The Directors recommend a
final dividend of 56.1p per Ordinary Share
which, subject to approval at the AGM,
will be payable on 21 September 2012 to
shareholders on the Register of Members at
close of business on 27 July 2012. With the
interim dividend of 24.0p per Ordinary Share
paid on 23 March 2012, this makes a total
dividend of 80.1p per Ordinary 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 2011
AGM to purchase its own shares within certain
limits. During 2011/12, 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 26 July 2012, and this
remains a benchmark against which financial
decisions are taken.
annual General Meeting 2012
The 23rd AGM of the Company will be held on
26 July 2012 at 12 noon at the Bournemouth
International Centre, Exeter Road, Bournemouth
BH2 5BH. The Notice of Annual General
Meeting 2012, which contains full explanations
of the business to be conducted at the AGM,
is set out in a separate shareholder circular.
Substantial shareholdings
As at 15 May 2012 the Company has been
notified under Rule 5 of the Disclosure and
Transparency Rules of the interests in its
shares 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 37 days at 31 March 2012.
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
Details of the Company’s issued share capital
at 31 March 2012, which includes options
granted under the Group’s employee share
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.
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88
SSE Annual Report 2012
Other statutory information (continued)
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:
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DD
DD
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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:
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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
15 May 2012
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 and replacement of Directors are
set out in the Company’s Articles of Association.
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 are 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 are
aware of that information.
By Order of the Board
Vincent Donnelly
Company Secretary
15 May 2012
Financial statements
Contents
Independent auditor’s 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
Financial statements
90
91
92
93
94
96
98
98
108 2. Change of reportable segments
111 3. Segmental information
114 4. Other operating income and expense
115
Exceptional items and certain
remeasurements
5.
117 6. Directors and employees
118 7. Finance income and costs
119 8. Taxation
121 9. Dividends
121 10. Earnings per share
122 11. Intangible assets
126 12. Property, plant and equipment
127 13. Biological assets
128 14. Investments
131 15. Subsidiary undertakings
133 16. Acquisitions, disposals and
held for sale assets
134 17. Inventories
135 18. Trade and other receivables
135 19. Cash and cash equivalents
135 20. Trade and other payables
136 21. Current tax liabilities
136 22. Construction contracts
136 23. Loans and other borrowings
139 24. Deferred taxation
140 25. Provisions
141 26. Share capital
141 27. Reserves
142 28. Hybrid capital
142 29. Retirement benefit obligations
146 30. Employee share-based payments
151 31. Financial instruments and risk
165 32. Related party transactions
166 33. Commitments and contingencies
167 34. Post balance sheet events
Shareholder information
168 Shareholder information
89
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90
SSE Annual Report 2012
Independent auditor’s report
to the members of SSE plc
We have audited the financial statements of SSE plc for the year ended 31 March 2012 set out on pages 91 to 167. 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 88, 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:
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the financial statements give a true and fair view of the state of the Group’s and of the parent company’s affairs as at 31 March 2012
and of the Group’s profit for the year then ended;
the Group financial statements have been properly prepared in accordance with IFRSs as adopted by the EU;
the parent company financial statements have been properly prepared in accordance with IFRSs as adopted by the EU and as applied
in accordance with the provisions of the Companies Act 2006; and
the financial statements have been prepared in accordance with the requirements of the Companies Act 2006 and, as regards the Group
financial statements, Article 4 of the IAS Regulation.
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Opinion on other matters prescribed by the Companies act 2006
In our opinion:
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the part of the Directors’ Remuneration Report to be audited has been properly prepared in accordance with the Companies Act 2006; and
the information given in the Directors’ Report for the financial year for which the financial statements are prepared is consistent with the
financial statements.
Matters on which we are required to report by exception
We have nothing to report in respect of the following:
Under the Companies Act 2006 we are required to report to you if, in our opinion:
DD
adequate accounting records have not been kept by the parent company, or returns adequate for our audit have not been received from
branches not visited by us; or
the parent company financial statements and the part of the Directors’ Remuneration Report to be audited are not in agreement with the
accounting records and returns; or
certain disclosures of Directors’ remuneration specified by law are not made; or
we have not received all the information and explanations we require for our audit.
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Under the Listing Rules we are required to review:
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the Directors’ statement, set out on page 87, in relation to going concern;
the part of the Corporate Governance Statement on pages 61 to 64 relating to the Company’s compliance with the nine provisions of the
UK Corporate Governance Code specified for our review; and
certain elements of the report to shareholders by the Board on Directors’ remuneration.
DD
John Luke
For and on behalf of KPMG Audit Plc, Statutory Auditor
Chartered Accountants
Saltire Court
20 Castle Terrace
Edinburgh
EH1 2EG
15 May 2012
Consolidated income statement
for the year ended 31 March
91
2012
2011
Before
exceptional
items and
certain
remeasurements
£m
Exceptional
items and
certain
remeasurements
(note 5)
£m
Before
exceptional
items and certain
remeasurements
£m
Exceptional
items and certain
remeasurements
(note 5)
£m
Total
£m
Total
£m
31,723.9
(29,464.4)
2,259.5
(888.0)
8.0
–
(903.3)
(903.3)
(82.0)
–
31,723.9
(30,367.7)
1,356.2
(970.0)
8.0
28,334.2
(26,094.1)
2,240.1
(902.0)
16.0
–
948.8
948.8
–
–
28,334.2
(25,145.3)
3,188.9
(902.0)
16.0
1,379.5
(985.3)
394.2
1,354.1
948.8
2,302.9
278.3
(146.5)
–
(44.9)
86.9
1,466.4
250.1
(425.7)
1,290.8
(324.8)
966.0
–
–
14.2
38.3
52.5
(932.8)
–
(89.5)
(1,022.3)
319.6
(702.7)
900.5
65.5
(702.7)
–
278.3
(146.5)
14.2
(6.6)
139.4
533.6
250.1
(515.2)
268.5
(5.2)
263.3
197.8
65.5
21.1p
21.1p
£716.9m
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
897.1
–
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
1,504.5
–
162.2p
162.0p
£659.8m
Note
2,3
4
14
2,3
7
7
8
10
10
9
revenue
Cost of sales
Gross profit
Operating costs
Other operating income
Operating profit before jointly
controlled entities and associates
Jointly controlled entities and associates:
Share of operating profit
Share of interest
Share of movement on derivatives
Share of tax
Share of profit on jointly controlled
entities and associates
Operating profit
Finance income
Finance costs
profit before taxation
Taxation
profit for the year
attributable to:
Ordinary Shareholders of the parent
Other equity holders
Basic earnings per share (pence)
Diluted earnings per share (pence)
Dividends in the year (£m)
The accompanying notes are an integral part of these financial statements.
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92
SSE Annual Report 2012
Statement of comprehensive income
for the year ended 31 March
profit for the year
Other comprehensive income:
(Losses)/gains 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 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 gain/(losses) on retirement benefit schemes
Share of taxation of actuarial gain/(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:
Ordinary Shareholders of the parent
Other equity holders
Consolidated
2012
£m
263.3
(15.3)
0.2
4.0
(11.1)
(65.3)
29.8
(7.7)
(43.2)
(161.1)
30.3
(130.8)
(20.8)
3.7
(17.1)
5.6
(3.9)
1.7
(15.4)
2011
£m
1,504.5
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)
(200.5)
(86.7)
62.8
1,417.8
(2.7)
65.5
62.8
1,417.8
–
1,417.8
Consolidated
Company
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
Equity attributable to Ordinary Shareholders of the parent
Hybrid capital
Total equity attributable to equity holders of the parent
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
2012
£m
9,153.1
3.4
627.5
218.8
911.7
1,191.9
36.1
–
–
222.1
348.0
2011
£m
8,513.1
4.4
685.3
287.8
760.8
1,124.6
39.6
–
–
161.7
990.1
12,712.6
12,567.4
365.7
323.7
5,174.6
189.2
851.2
68.0
6,972.4
19,685.0
708.6
5,182.7
231.8
55.3
817.6
6,996.0
5,537.0
921.8
332.7
182.3
731.9
399.2
8,104.9
325.6
217.5
5,068.1
476.9
2,525.5
269.4
8,883.0
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
15,100.9
4,584.1
16,249.6
5,200.8
472.3
862.0
22.0
(29.4)
(5.0)
2,100.8
3,422.7
1,161.4
4,584.1
468.4
859.8
22.0
(1.2)
38.2
2,652.2
4,039.4
1,161.4
5,200.8
21,450.4
10,660.4
10,022.2
93
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
2012
£m
–
–
–
–
190.0
1,140.0
18.0
2,349.1
3,790.6
115.9
94.7
7,698.3
–
–
2,935.6
14.3
12.2
–
2,962.1
440.1
2,514.9
10.7
–
8.5
2,974.2
4,223.4
–
–
–
196.2
206.3
4,625.9
7,600.1
3,060.3
472.3
862.0
22.0
5.8
–
536.8
1,898.9
1,161.4
3,060.3
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
1,789.9
1,161.4
2,951.3
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These financial statements were approved by the Board of Directors on 15 May 2012 and signed on their behalf by:
Gregor alexander
Finance Director
Lord Smith of Kelvin
Chairman
SSE plc, Registered No: SC117119
94
SSE Annual Report 2012
Statement of changes in equity
for the year ended 31 March
Consolidated
Statement of changes in equity
At 1 April 2011
468.4
859.8
22.0
(1.2)
38.2 2,652.2
1,161.4 5,200.8
Share
capital
£m
Share
premium
account
£m
Capital
redemption
reserve
£m
Hedge
reserve
£m
Translation
reserve
£m
Retained
earnings
£m
Hybrid
capital
£m
Total
£m
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 gains on retirement benefit schemes
(net of tax)
Total comprehensive income for the year
Dividends to shareholders
Scrip dividend related share issue
Distributions to hybrid capital holders
Issue of shares
Credit in respect of employee share awards
Investment in own shares
–
–
–
–
–
–
–
–
–
–
3.6
–
0.3
–
–
–
–
–
–
–
–
–
–
–
–
(3.6)
–
5.8
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
197.8
65.5
263.3
(11.3)
0.2
–
–
–
(17.1)
–
–
–
22.1
(65.3)
–
–
–
–
–
(130.8)
–
–
–
1.7
68.7
(28.2)
(43.2)
–
–
–
–
–
–
–
–
–
–
–
–
(716.9)
88.2
–
–
13.5
(4.9)
–
–
–
–
–
–
–
65.5
–
–
(65.5)
–
–
–
(11.3)
0.2
22.1
(65.3)
(130.8)
(17.1)
1.7
62.8
(716.9)
88.2
(65.5)
6.1
13.5
(4.9)
at 31 March 2012
472.3
862.0
22.0
(29.4)
(5.0) 2,100.8 1,161.4 4,584.1
Company
Statement of changes in equity
At 1 April 2011
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
Scrip dividend related share issue
Distributions to hybrid capital holders
Issue of shares
Increase in investment in subsidiaries
Investment in own shares
at 31 March 2012
Share
capital
£m
Share
premium
account
£m
Capital
redemption
reserve
£m
Hedge
reserve
£m
Retained
earnings
£m
Hybrid
capital
£m
Total
£m
468.4
859.8
22.0
19.2
420.5
1,161.4 2,951.3
–
–
–
–
–
3.6
–
0.3
–
–
–
–
–
–
–
(3.6)
–
5.8
–
–
–
–
–
–
–
–
–
–
–
–
–
(13.4)
–
(13.4)
–
–
–
–
–
–
739.0
–
(2.6)
736.4
(716.9)
88.2
–
–
13.5
(4.9)
65.5
–
–
65.5
804.5
(13.4)
(2.6)
788.5
–
–
(65.5)
–
–
–
(716.9)
88.2
(65.5)
6.1
13.5
(4.9)
472.3
862.0
22.0
5.8
536.8 1,161.4 3,060.3
Consolidated
Statement of changes in equity
Share
capital
£m
Share
premium
account
£m
Capital
redemption
reserve
£m
Hedge
reserve
£m
Translation
reserve
£m
Retained
earnings
£m
Non-
controlling
interest
£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)
–
– 1,504.5
–
–
–
3.1
(78.3)
–
–
–
–
–
–
(16.7)
–
(9.8)
15.0
(75.2) 1,478.0
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(659.8)
146.1
–
–
–
9.9
(9.2)
0.6
–
–
–
–
–
–
–
–
–
–
–
–
–
3.8
–
–
–
95
Hybrid
capital
£m
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 1,161.4
9.2
3.8
9.9
(9.2)
–
–
–
–
–
0.6
at 31 March 2011
468.4
859.8
22.0
(1.2)
38.2 2,652.2
– 1,161.4 5,200.8
Company
Statement of changes in equity
At 1 April 2010
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
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
Share
capital
£m
Share
premium
account
£m
Capital
redemption
reserve
£m
Hedge
reserve
£m
Retained
earnings
£m
Hybrid
capital
£m
Total
£m
461.5
857.5
22.0
21.0
329.4
– 1,691.4
–
–
–
–
–
6.4
–
0.5
–
–
–
–
–
–
–
–
(6.4)
–
8.7
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(1.8)
–
(1.8)
–
–
–
–
–
–
–
627.3
–
(23.8)
603.5
(659.8)
146.1
–
–
9.9
(9.2)
–
–
–
–
627.3
(1.8)
(23.8)
601.7
–
–
(659.8)
146.1
1,161.4 1,161.4
9.2
9.9
(9.2)
–
–
–
0.6
–
0.6
at 31 March 2011
468.4
859.8
22.0
19.2
420.5 1,161.4 2,951.3
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96
SSE Annual Report 2012
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
Other exceptional items
Depreciation of assets
Amortisation and impairment of intangible assets
Impairment of inventories
Release of provisions
Release of deferred income
(Increase)/decrease in inventories
(Increase) in receivables
Increase/(decrease) in payables
Increase in provisions
Charge in respect of employee share awards (before tax)
Gain on disposal of property, plant and equipment
Loss on disposal of fixed asset investments
Gain on disposal of business and subsidiaries
Cash generated from operations
Dividends received from jointly controlled entities and associates
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
Other loans to jointly controlled entities
Purchase of businesses and subsidiaries
Cash included in disposals
Cash included in held for sale assets
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
Note
16
16
14
16
2012
£m
263.3
5.2
523.2
425.7
(250.1)
(139.4)
–
(100.2)
478.6
73.0
561.8
13.5
1.1
(7.3)
(14.7)
(107.3)
(133.7)
342.9
5.9
13.5
(4.6)
2.1
(5.5)
2011
Restated
£m
1,504.5
607.2
(1,417.4)
453.1
(250.2)
(64.9)
–
(68.8)
521.8
–
496.7
21.5
6.6
(6.0)
(19.6)
48.4
(95.4)
635.2
1.9
9.9
(5.8)
–
(10.2)
1,947.0
2,368.5
111.4
–
108.3
(242.2)
(211.4)
(4.9)
81.7
–
109.7
(316.0)
(172.6)
(21.2)
1,708.2
2,050.1
(1,501.2)
(400.9)
0.5
22.2
23.5
185.5
(138.6)
(3.6)
–
(3.9)
(138.8)
25.9
(2.1)
(1,931.5)
(1,079.0)
(297.3)
–
7.9
–
31.9
(204.4)
(241.3)
(5.5)
(23.0)
(221.6)
13.3
(30.4)
(2,049.4)
2012
£m
804.5
8.9
76.6
335.9
(464.0)
–
(747.6)
(47.9)
–
–
–
–
–
–
–
–
(582.7)
(278.9)
–
–
–
–
–
(895.2)
65.0
682.6
397.7
(267.6)
(212.8)
–
(230.3)
–
–
–
–
–
–
(118.9)
–
–
–
–
8.4
–
(110.5)
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)
97
Consolidated
Company
Note
2012
£m
2011
£m
2012
£m
2011
£m
Cash flows from financing activities
Proceeds from issue of share capital
Dividends paid to Company’s equity holders
Hybrid capital dividend payment
Issue of hybrid capital
Employee share awards share purchase
New borrowings
Repayment of borrowings
net cash from financing activities
6.1
(628.7)
(65.5)
–
(4.9)
1,024.1
(393.0)
(61.9)
9.2
(513.7)
–
1,161.4
(9.2)
765.1
(1,187.1)
225.7
6.1
(628.7)
(65.5)
–
(4.9)
835.8
(106.8)
36.0
net (decrease)/increase in cash and cash equivalents
(285.2)
226.4
(304.8)
Cash and cash equivalents at the start of year
Net (decrease)/increase in cash and cash equivalents
Effect of foreign exchange rate changes
Cash and cash equivalents at the end of year
19
19
471.6
(285.2)
(0.9)
185.5
252.5
226.4
(7.3)
471.6
319.1
(304.8)
–
14.3
The accompanying notes are an integral part of these financial statements.
9.2
(513.7)
–
1,161.4
(9.2)
506.7
(815.6)
338.8
219.4
99.7
219.4
–
319.1
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98
SSE Annual Report 2012
notes on the financial statements
for the year ended 31 March
1. SIGnIFICanT aCCOUnTInG pOLICIES
General information
SSE plc (the Company) is a company domiciled in Scotland. The Company changed its name from Scottish and Southern Energy plc to SSE plc
on 1 October 2011. 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 9 to 54. The consolidated financial statements for the year ended 31 March 2012 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 15 May 2012. 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 taking account of
net current liabilities of £23.6m. 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 151.
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 page 106.
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
There are no new standards, amendments or interpretations that are effective for the first time for the current financial year that have had
a material impact on the Group.
At the date of authorisation of these financial statements, the following standards, amendments to existing standards and interpretations
have been issued, which have not been adopted in these consolidated financial statements, were in issue but not yet effective:
Amendment to IFRS 7
IFRS 9
IFRS 10
IFRS 11
IFRS 12
IFRS 13
Amendment to IAS 1
Amendment to IAS12
IAS 19
IAS 27
IAS 28
DD
DD
DD
DD
DD
DD
DD
DD
DD
DD
DD
Disclosures – transfers of financial assets
Financial instruments
Consolidated financial statements
Joint arrangements
Disclosure of interests in other entities
Fair value measurement
Presentation of items of other comprehensive income
Deferred tax – recovery of underlying assets
Employee benefits
Separate financial statements
Investments in associates and joint ventures
Effective on or after 1 July 2011
Effective on or after 1 January 2015
Effective on or after 1 January 2013
Effective on or after 1 January 2013
Effective on or after 1 January 2013
Effective on or after 1 January 2013
Effective on or after 1 July 2012
Effective on or after 1 January 2012
Effective on or after 1 January 2013
Effective on or after 1 January 2013
Effective on or after 1 January 2013
The above, with the exception of the IFRS 7 amendment, are awaiting EU endorsement and as such have not been early adopted by the Group.
The impact of adopting these standards and amendments to existing standards is currently being assessed.
99
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, normally
where the Group has a shareholding of between 20% and 50% of the voting rights. Investments in associates are accounted for using the equity
method and are recognised initially at cost. The cost of the investment includes transaction costs. The consolidated financial statements include
the Group’s share of the profit or loss and other comprehensive income of associates, from the date that significant influence commences until
the date that significant influence ceases.
In the Company, investments in associates are carried at cost less any impairment charges.
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 and are recognised initially at cost.
The cost of the investment includes transaction costs. The consolidated financial statements include the Group’s share of the profit or loss and
other comprehensive income of jointly controlled entities, after adjustments to align the accounting policies with those of the Group.
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.
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.
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100
SSE Annual Report 2012
notes on the financial statements (continued)
for the year ended 31 March
1. SIGnIFICanT aCCOUnTInG pOLICIES (continued)
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.
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.
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 102.
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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.
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.
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SSE Annual Report 2012
notes on the financial statements (continued)
for the year ended 31 March
1. SIGnIFICanT aCCOUnTInG pOLICIES (continued)
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 and Oil Production Assets which are depreciated on the Units of Production basis. Heritable and freehold land
is not depreciated.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
years
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20 to 60
20 to 25
40 to 80
25 to 50
10 to 45
30 to 40
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.
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.
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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 are recognised and, together with 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 on initial recognition to those cash-generating units expected to benefit from
the combination’s synergies. The cash-generating units used for goodwill impairment testing purposes will represent how goodwill was
attributed but may not represent reportable business segments.
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 exceed the level of allowances held and this is recorded
as a current liability. Up to the level of allowances held the liability is measured at the cost of purchased allowances. When the carbon
emission liability exceeds the carbon allowances held, the net liability is measured at the anticipated 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 or fair 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.
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SSE Annual Report 2012
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
include wind farm developments, thermal generation and gas storage projects, prospective gas production assets and other developments
relating to proven technologies. 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. Depreciation will then be charged over the expected useful life of the related operational asset. The asset is derecognised on
disposal, or when no future economic benefits are expected from their use.
(v) Other intangible assets
Other intangible assets that have been acquired by the Group including brands are stated at cost less accumulated amortisation and
impairment losses. Software licenses are stated at cost less accumulated amortisation. Expenditure on internally generated brands is
expensed as incurred. Amortisation is charged to the income statement on a straight-line basis over the estimated useful life of these
other intangible assets. The amortisation periods utilised are as follows:
Brand values
Application software licences
Customer lists
Contracts
10
5
5
Shorter of contract term or 5
years
Impairment review
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 associated
with the asset, 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. For property, plant and
equipment assets exhibiting indications of impairment, the review of impairment will be performed annually until there is evidence that any
potential impairment loss has been appropriately recognised.
Inventories and work in progress
Inventories are valued at the lower of cost (on a first-in, first-out basis) and net realisable value. Net realisable value is the estimated selling price
in the ordinary course of business, less the estimated costs of completion and selling expenses. The cost of fuel stocks is based on the weighted
average principle. The valuation of work in progress is based on the cost of labour, the cost of contractors, the cost of materials plus 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.
105
(ii) Defined contribution pension schemes
The Group also operates a number of defined contribution pension schemes. The assets of the schemes are held separately from those
of the Group in independently administered funds. The amounts charged represent the contributions payable to the schemes in the year
and are charged directly to the income statement.
(iii) Equity and equity-related compensation benefits
The Group operates a number of employee share schemes as described in the Remuneration Report and note 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.
(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.
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SSE Annual Report 2012
notes on the financial statements (continued)
for the year ended 31 March
1. SIGnIFICanT aCCOUnTInG pOLICIES (continued)
(iii) Embedded derivatives
Derivatives embedded in other financial instruments or other host contracts are treated as separate derivatives where the characteristics
of the derivatives are not closely related to those of the host contracts.
(iv) Net investment hedges
Hedges of net investments in foreign operations are accounted in a manner similar to effective cash flow hedges. Any gain or loss on the
effective portion of the hedge is recognised in equity, in the translation reserve, and any gain or loss on the ineffective portion of the hedge
is recognised in the income statement. On disposal of the foreign operation, the cumulative value of any gains or losses recognised directly
in equity is transferred to the income statement.
(v) Cash and cash equivalents
Cash and cash equivalents comprise cash balances and call deposits. Bank overdrafts that are repayable on demand and form an integral part
of the Group’s cash management are included as a component of cash and cash equivalents for the purpose of the statement of cash flows.
(vi) Trade receivables
Trade receivables do not carry any interest and are measured at cost less an appropriate allowance for irrecoverable receivables.
(vii) Interest-bearing loans and borrowings
All such loans and borrowings are initially recognised at fair value including transaction costs and are subsequently measured at amortised
cost, except where the loan or borrowing is the hedged item in an effective fair value hedge relationship.
(viii) Share capital
Ordinary Shares are accounted for as equity. Incremental costs directly attributable to the issue of new shares are shown in equity as a deduction
from the proceeds received.
(ix) 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 of 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.
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(i) Revenue recognition
Revenue on energy sales includes an estimate of the value of electricity or gas supplied to customers between the date of the last meter
reading and the year end. This will have been estimated by using historical consumption patterns and takes into consideration industry
reconciliation processes for total consumption by supplier. At the balance sheet date, the estimated consumption by customers will either
have been billed (estimated billed revenue) or accrued (unbilled revenue). Management apply judgement to the measurement of the quantum
of the estimated consumption and to the valuation of that consumption. The judgements applied, and the assumptions underpinning these
judgements are considered to be appropriate. However, a change in these assumptions would impact upon the amount of revenue recognised.
(ii) Retirement benefits
The assumptions in relation to the cost of providing post-retirement benefits during the period are set after consultation with qualified
actuaries. While these assumptions are believed to be appropriate, a change in these assumptions would impact the earnings of the Group.
The value of scheme assets is impacted by the asset ceiling test which restricts the surplus that can be recognised to assets that can be
recovered fully through refunds or reductions in future contributions.
(iii) Impairment testing
The Group reviews the carrying amounts of its goodwill, other intangible assets and property, plant and equipment 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)
on initial recognition. The recoverable amount of the assets, or the CGU where appropriate, 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 assets or
CGUs and the selection of 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.
Where assets under review are able to be assessed independently, for example thermal generation plants, the value-in-use method will be
applied to ascertain the extent of any potential impairment charge.
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 Group has
entered into a number of commodity contracts relating to specific assets. Where the unavoidable costs of meeting the obligations under
the contracts exceed the expected net revenues from the assets in the normal course of business, an onerous provision has been recognised.
The provisions are calculated based on estimations. 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 costs 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) 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 Gas Production
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 revised 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.
(vii) Exceptionals and remeasurements
The criteria for identifying what constitutes an exceptional item are outlined in note 1 Exceptional items and certain remeasurements on page 98.
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108
SSE Annual Report 2012
notes on the financial statements (continued)
for the year ended 31 March
2. CHanGE OF rEpOrTaBLE SEGMEnTS
Following changes to the structure of the Group’s internal organisation, and subsequent changes to the way in which financial and management
information is presented to both the Board and Management Board in the current year, the composition of the Group’s reportable segments
has changed.
The activities included in the new reportable segments are explained in more detail in note 3. The main changes to the segments have been:
DD
DD
Power Systems, previously split on a geographical basis, is now presented as Electricity Distribution and Electricity Transmission. The Electricity
Connections activity is now included in Electricity Distribution.
Generation and Supply, previously a single reportable segment, will now be reported as two new main segments, (i) Energy Supply and (ii) Energy
Portfolio Management and Electricity Generation, reflecting the new management structure and change in basis of management reporting.
Other activities previously included in this segment, such as other energy-related services provided to end-user customers, are disclosed in
Energy-related Services.
The Other businesses segment, previously disclosed as an aggregation of less significant activities are now disclosed in the segment which
corresponds to the Group’s new management structure, excepting corporate costs which remain unallocated. These new segments include
Other Networks, Gas Storage and Gas Production.
DD
The impact of the change in the segments on the prior year can be summarised as follows:
(a) revenue
The Revenue by segment disclosure note for the year to March 2011 was as follows:
power Systems
Scotland
England
Generation and Supply
Retail
Wholesale and Trading
Other
Other businesses
Following the change in the composition of segments, this has been restated as follows:
networks
Electricity Distribution
Electricity Transmission
Other Networks
retail
Energy Supply
Energy-related Services
Wholesale
Energy Portfolio Management and Electricity Generation
Gas Storage
Gas Production
Corporate unallocated
Total
External
revenue
£m
Intra-segment
revenue
£m
245.7
303.1
548.8
8,044.4
18,882.8
207.1
27,134.3
651.1
28,334.2
111.0
214.1
325.1
–
17.1
15.8
32.9
568.8
926.8
Total
revenue
£m
356.7
517.2
873.9
8,044.4
18,899.9
222.9
27,167.2
1,219.9
29,261.0
External
revenue
£m
Intra-segment
revenue
£m
Total
revenue
£m
559.8
94.1
148.9
802.8
8,008.1
429.7
8,437.8
19,014.1
30.5
0.2
19,044.8
48.8
28,334.2
325.0
0.1
40.7
365.8
15.8
164.6
180.4
4,547.1
42.2
15.6
4,604.9
305.7
5,456.8
884.8
94.2
189.6
1,168.6
8,023.9
594.3
8,618.2
23,561.2
72.7
15.8
23,649.7
354.5
33,791.0
The increase in intra-segment revenue relates to electricity and gas provided to Energy Supply from the Energy Portfolio Management
and Electricity Generation segment (£4,530.0m).
(b) Operating profit by segment
The operating profit by segment disclosure note for the year to March 2011 was as follows:
power Systems
Scotland
England
Scotia Gas Networks
Energy Systems
Generation and Supply
Other businesses
Unallocated expenses
Adjusted
operating profit
reported to
the Board
£m
JCE/Associate
share of interest
and tax
£m
2011
Before
exceptional
items and certain
remeasurements
£m
Exceptional
items and certain
remeasurements
£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
Following the change in the composition of segments, this has been restated as follows:
networks
Electricity Distribution
Electricity Transmission
Gas Distribution
Other Networks
retail
Energy Supply
Energy-related Services
Wholesale
Energy Portfolio Management and Electricity Generation
Gas Storage
Gas Production
Corporate unallocated
Total
Adjusted
operating profit
reported to
the Board
£m
JCE/Associate
share of interest
and tax
£m
2011
Before
exceptional
items and certain
remeasurements
£m
Exceptional
items and certain
remeasurements
£m
418.9
47.7
186.8
37.1
690.5
347.7
52.8
400.5
543.4
23.5
4.6
571.5
(9.6)
–
–
(150.7)
–
(150.7)
–
(0.3)
(0.3)
(47.1)
–
–
(47.1)
–
418.9
47.7
36.1
37.1
539.8
347.7
52.5
400.2
496.3
23.5
4.6
524.4
(9.6)
1,652.9
(198.1)
1,454.8
–
–
38.4
–
38.4
–
–
–
874.6
–
–
874.6
–
913.0
109
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
Total
£m
418.9
47.7
74.5
37.1
578.2
347.7
52.5
400.2
1,370.9
23.5
4.6
1,399.0
(9.6)
2,367.8
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110
SSE Annual Report 2012
notes on the financial statements (continued)
for the year ended 31 March
2. CHanGE OF rEpOrTaBLE SEGMEnTS (continued)
(c) Capital expenditure by segment
The Capital Expenditure by segment disclosure note for the year to March 2011 was as follows:
power Systems
Scotland
England
Generation and Supply
Other businesses
Corporate and unallocated
Following the change in the composition of segments, this has been restated as follows:
networks
Electricity Distribution
Electricity Transmission
Other Networks
retail
Energy Supply
Energy-related Services
Wholesale
Energy Portfolio Management and Electricity Generation
Gas Storage
Gas Production
Corporate unallocated
Total
(d) Items included in operating profit by segment
The operating profit by segment disclosure note for the year to March 2011 was as follows:
Capital additions
to intangible
assets
2011
£m
Capital additions
to property, plant
and equipment
2011
£m
–
–
–
432.7
–
1.3
434.0
216.2
207.9
424.1
560.4
175.0
–
1,159.5
Capital additions
to intangible
assets
2011
£m
Capital additions
to property, plant
and equipment
2011
£m
–
–
0.2
0.2
–
–
–
430.9
1.6
–
432.5
1.3
434.0
307.6
117.4
55.0
480.0
–
27.9
27.9
563.7
52.6
–
616.3
35.3
1,159.5
power Systems
Scotland
England
Generation and Supply
Other businesses
Corporate and unallocated
Depreciation/impairment on property,
plant and equipment
Amortisation/
impairment of
intangible assets
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
2011
£m
–
–
–
98.9
1.1
100.0
3.7
103.7
Following the change in the composition of segments, this has been restated as follows:
Depreciation/impairment on property,
plant and equipment
Amortisation/impairment
of intangible assets
Before
exceptional items
2011
£m
Exceptional
charges
2011
£m
Before
exceptional items
2011
£m
Total
2011
£m
Exceptional
charges
2011
£m
229.8
28.2
25.5
283.5
–
3.3
3.3
175.8
7.1
7.1
190.0
19.9
496.7
–
–
–
–
–
–
–
442.7
–
–
442.7
–
442.7
229.8
28.2
25.5
283.5
–
3.3
3.3
618.5
7.1
7.1
632.7
19.9
939.4
–
–
1.1
1.1
2.6
–
2.6
12.5
1.6
–
14.1
3.7
21.5
–
–
–
–
–
–
–
82.2
–
–
82.2
–
82.2
networks
Electricity Distribution
Electricity Transmission
Other Networks
retail
Energy Supply
Energy-related Services
Wholesale
Energy Portfolio Management and
Electricity Generation
Gas Storage
Gas Production
Corporate unallocated
Total
3. SEGMEnTaL InFOrMaTIOn
111
Total
2011
£m
–
–
1.1
1.1
2.6
–
2.6
94.7
1.6
–
96.3
3.7
103.7
The Group’s operating segments are those used internally by the Board to run the business, allocate resources and make strategic decisions.
The Group’s main businesses and operating segments are the networks business comprising Electricity Distribution, Electricity Transmission,
Gas Distribution and Other Networks; the retail business comprising Energy Supply and Energy-related Services, and; Wholesale comprising
Energy Portfolio Management and Electricity Generation, Gas Storage and Gas Production.
The types of products and services from which each reportable segment derives its revenues are:
Business area
Reported segments
Description
networks
Electricity Distribution
The economically regulated lower voltage distribution of electricity to customer premises
in the North of Scotland and the South of England
Electricity Transmission
The economically regulated high voltage transmission of electricity from generating plant
to the distribution network in the North of Scotland
Gas Distribution
Other Networks
SSE’s share of Scotia Gas Networks, which operates two economically regulated gas distribution
networks in Scotland and the South of England
Operation of other networks and services including telecoms capacity and bandwidth, out-of-area
local networks in the UK and streetlighting services in the UK and Ireland
retail
Energy Supply
The supply of electricity and gas to residential and business customers in the UK and Ireland
Energy-related Services
The provision of energy-related goods and services to customers in the UK including electrical
contracting, meter reading and installation, telecommunication and broadband services, boiler
maintenance and installation and the sale of electrical appliances
Wholesale
Energy Portfolio Management
and Electricity Generation
The generation of power from renewable and thermal plant in the UK, Ireland and Europe
and the optimisation of SSE’s power and gas contracts and requirements
Gas Storage
Gas Production
The operation of gas storage facilities in the UK
The production and processing of gas and oil from North Sea fields
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.
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112
SSE Annual Report 2012
notes on the financial statements (continued)
for the year ended 31 March
3. SEGMEnTaL InFOrMaTIOn (continued)
(a) revenue by segment
networks
Electricity Distribution
Electricity Transmission
Other Networks
retail
Energy Supply
Energy-related Services
Wholesale
Energy Portfolio Management and Electricity Generation
Gas Storage
Gas Production
Corporate unallocated
Total
External
revenue
2012
£m
Intra-segment
revenue (i)
2012
£m
Total
revenue
2012
£m
542.1
117.7
249.0
908.8
7,787.3
280.4
8,067.7
22,664.2
30.3
3.0
22,697.5
49.9
31,723.9
336.9
0.1
49.4
386.4
23.1
184.8
207.9
4,447.5
51.9
99.3
4,598.7
264.3
5,457.3
879.0
117.8
298.4
1,295.2
7,810.4
465.2
8,275.6
27,111.7
82.2
102.3
27,296.2
314.2
37,181.2
The comparative information for the previous financial year is shown in note 2.
(i)
Significant intra-segment revenue is derived from use of system income received by the Electricity Distribution business from Energy Supply; Other Networks provide Telecoms and
other infrastructure charges to other Group companies; Energy Supply provides internal heat and light power supplies to other Group companies; Energy-related Services provides
Contracting, Metering and other services to other Group companies; Energy Portfolio Management and Electricity Generation provides power and gas to the Energy Supply segment;
Gas Storage provide the use of Gas Storage facilities to Energy Portfolio Management, Gas Production sells gas from producing North Sea fields to the Energy Portfolio Management
and Electricity Generation segment and corporate unallocated provides corporate and infrastructure services to the operating businesses. All are provided at arm’s length basis.
Revenue within Energy Portfolio Management and Electricity Generation 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 segment. Purchase trades are included in cost of sales.
Revenue from the Group’s investment in Scotia Gas Networks (SSE share being: 2012 – £454.3m; 2011 – £392.5m) is not recorded in the revenue
line in the income statement.
Revenue by geographical location is as follows:
UK
Ireland plus Continental Europe
2012
£m
31,069.7
654.2
31,723.9
2011
£m
27,666.6
667.6
28,334.2
(b) Operating profit/(loss) by segment
networks
Electricity Distribution
Electricity Transmission
Gas Distribution
Other Networks
retail
Energy Supply
Energy-related Services
Wholesale
Energy Portfolio Management and Electricity Generation
Gas Storage
Gas Production
Corporate unallocated
Total
Adjusted
operating profit
reported to
the Board
£m
JCE/Associate
share of interest
and tax (i)
£m
2012
Before
exceptional
items and certain
remeasurements
£m
Exceptional
items and certain
remeasurements
£m
396.5
73.7
234.8
32.1
737.1
271.7
49.9
321.6
541.5
23.8
42.6
607.9
(8.8)
–
–
(164.5)
–
(164.5)
–
(0.2)
(0.2)
(26.7)
–
–
(26.7)
–
396.5
73.7
70.3
32.1
572.6
271.7
49.7
321.4
514.8
23.8
42.6
581.2
(8.8)
1,657.8
(191.4)
1,466.4
–
–
48.5
–
48.5
(20.0)
(40.0)
(60.0)
(869.3)
(30.0)
(22.0)
(921.3)
–
(932.8)
113
Total
£m
396.5
73.7
118.8
32.1
621.1
251.7
9.7
261.4
(354.5)
(6.2)
20.6
(340.1)
(8.8)
533.6
The comparative information for the previous financial year is shown in note 2.
(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 (included in Gas Distribution).
The Group has accounted for its 50% share of this, £33.4m (2011 – £33.4m), as finance income (note 7).
The Group’s share of operating profit from jointly controlled entities and associates has been recognised in the Energy Portfolio Management
and Electricity Generation segment other than that for Scotia Gas Networks Limited, which is recorded in Gas Distribution, and PriDE (SERP),
which is recognised in Energy-related Services (£0.2m before tax; 2011 – £0.3m before tax).
(c) Capital expenditure by segment
networks
Electricity Distribution
Electricity Transmission
Other Networks
retail
Energy Supply
Energy-related Services
Wholesale
Energy Portfolio Management and Electricity Generation
Gas Storage
Gas Production
Corporate unallocated
Total
The comparative information for the previous financial year is shown in note 2.
Capital additions
to intangible
assets
2012
£m
Capital additions
to property, plant
and equipment
2012
£m
–
–
–
–
–
–
–
539.8
–
–
539.8
0.1
539.9
347.5
228.7
48.0
624.2
–
25.7
25.7
664.3
51.0
6.1
721.4
105.2
1,476.5
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114
SSE Annual Report 2012
notes on the financial statements (continued)
for the year ended 31 March
3. SEGMEnTaL InFOrMaTIOn (continued)
Capital additions does 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 (2012 – £503.7m; 2011 – £399.3m).
No segmental analysis of assets requires to be disclosed as this information is not presented to the Board.
(d) Items included in operating profit by segment
Depreciation/impairment on property,
plant and equipment
Amortisation/impairment
of intangible assets
networks
Electricity Distribution
Electricity Transmission
Other Networks
retail
Energy Supply
Energy-related Services
Wholesale
Energy Portfolio Management and
Electricity Generation
Gas Storage
Gas Production
Corporate unallocated
Total
Before
exceptional items
2012
£m
Exceptional
charges
2012
£m
Before
exceptional items
2012
£m
Total
2012
£m
Exceptional
charges
2012
£m
224.6
26.7
29.7
281.0
–
4.7
4.7
212.4
8.8
30.5
251.7
24.4
561.8
–
–
–
–
–
30.0
30.0
275.1
–
–
275.1
–
305.1
224.6
26.7
29.7
281.0
–
34.7
34.7
487.5
8.8
30.5
526.8
24.4
866.9
–
–
5.1
5.1
3.2
0.1
3.3
2.3
–
–
2.3
2.8
13.5
–
–
–
–
–
–
–
106.6
30.0
22.0
158.6
–
158.6
Total
2012
£m
–
–
5.1
5.1
3.2
0.1
3.3
108.9
30.0
22.0
160.9
2.8
172.1
The comparative information for the previous financial year is shown in note 2.
The Group’s share of Scotia Gas Networks Limited depreciation (2012 – £57.9m; 2011 – £52.3m) and amortisation (2012 – £4.8m; 2011 – £4.8m)
is not included within operating costs.
4. OTHEr OpEraTInG InCOME anD ExpEnSE
Group operating costs before exceptional items and certain remeasurements can be analysed thus:
Distribution costs
Administration costs
Group operating profit is stated after charging (or crediting) the following items:
Depreciation and impairment of property, plant and equipment (note 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
Loss on disposal of fixed asset investments
(Gain) on disposal of businesses and subsidiaries
Amortisation of brand costs (note 11)
Amortisation and impairment of intangible assets (note 11) (i)
(i) Does not include exceptional impairment charges.
2012
£m
370.0
518.0
888.0
2012
£m
561.8
478.6
1.1
11.2
169.9
(14.7)
(4.6)
2.1
(5.5)
1.2
12.3
2011
£m
371.1
530.9
902.0
2011
£m
496.7
524.9
6.6
9.0
235.3
(19.6)
(5.8)
–
(10.2)
0.9
20.6
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
115
2011
£m
0.3
0.7
1.0
0.2
0.1
2012
£m
0.3
0.7
1.0
0.1
0.1
Tax service fees incurred in the year were £0.1m (2011 – £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 page 72 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 2012, the following exceptional items were recorded:
Impairment of Generation-related assets arising from changing market conditions. Exceptional charges have been recognised in relation
to the impairment of goodwill (£19.3m), property, plant and equipment (£275.1m), current receivables (£5.0m), held for sale assets (£9.9m) and
intangible assets (£87.3m), in relation to Generation-related assets.
These were recognised as a result of the long-term view of spark spreads at Medway and Keadby, which will change the way the plants are
operationally configured. In addition, further impairment charges in respect of the station running hours at Ferrybridge and in respect of the
future prospects for the European wind portfolio were recognised. Carbon dioxide emissions allowances intangible assets purchased to cover
the future emissions liabilities at the Group’s thermal plants have been impaired based on current market prices.
Impairment of Other assets. Exceptional charges have been recognised in relation to goodwill (£30.0m, note 14), property, plant and equipment
(£30.0m) and intangible assets (£22.0m). These were recognised following the goodwill impairment review of the Gas Storage CGU and as a
result from changing operational conditions and updated development expectations associated with legacy Metering assets and North Sea
exploration assets.
Provisions for onerous contracts, restructuring and other liabilities. Exceptional charges have been recognised in relation to commodity
contracts associated with thermal Generation assets (£37.4m). In addition, costs associated with Retail restructuring and other charges and
the impairment of other financial assets (£35.6m) have been recognised as exceptional in the year.
Changes in UK corporation tax rates. The Emergency Budget on 22 June 2010 announced that the UK corporation tax rate would reduce from
28% to 24% over a period of four years from 2011. The first changes from 28% to 27% and, after the March 2011 Budget, accelerated to 26% had
been substantively enacted and applied by 1 April 2011. The March 2012 Budget confirmed a further acceleration of the reduction in rate to 24%
effective from 1 April 2012, this being substantively enacted on 26 March 2012, with a revised rate of 22% expected to be enacted by 2014.
These changes will reduce the Group’s future current tax charge accordingly. As the rate change to 24% has been substantively enacted it has the
effect of reducing the Group’s net deferred tax liabilities recognised at 31 March 2012 by £45.7m (2011 – £49.4m). It has not yet been possible
to quantify the full anticipated effect of the announced further 2% rate reduction due to legislation not being enacted, although this will further
reduce the Group’s future current tax charge and reduce the Group’s deferred tax liabilities/assets accordingly.
In addition, in the previous year, the March 2011 Budget increased the rate of supplementary corporation tax (SCT) from 20% to 32%. This had been
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
Gas Production business to which this supplementary tax applies. The impact on the Group’s net deferred tax liabilities was an increase of £31.7m.
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116
SSE Annual Report 2012
notes on the financial statements (continued)
for the year ended 31 March
5. ExCEpTIOnaL ITEMS anD CErTaIn rEMEaSUrEMEnTS (continued)
In the year to 31 March 2011 the following exceptional items were recorded:
Impairment of thermal and renewable generation portfolio assets arising from changing market conditions. Exceptional charges were
recognised in relation to the impairment of goodwill (£42.5m), property, plant and equipment (£442.7m), development intangible assets (£39.7m)
and financial assets (£7.6m). In addition, related net credits of £10.6m were 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 were 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 were impaired. The combined impairment charges were £76.3m net of deferred tax.
(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.
(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 Other assets
Provisions for onerous contracts, restructuring and other liabilities
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)
Exceptional items before taxation
Exceptional items (iii)
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
Exceptional items after taxation
2012
£m
2011
£m
(396.6)
(82.0)
(73.0)
–
42.0
(509.6)
(433.7)
(89.5)
10.5
(512.7)
(1,022.3)
45.7
–
137.4
183.1
136.5
319.6
(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)
(702.7)
607.4
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
117
Consolidated
2012
£m
614.7
62.2
13.5
56.9
747.3
(123.2)
624.1
2011
£m
609.4
63.1
9.9
54.6
737.0
(108.6)
628.4
Consolidated
Company
2012
number
19,489
2011
Number
20,249
2012
number
3
2011
Number
3
The average number of people employed by the Group (including Executive Directors) during the year was:
Consolidated
Company
networks
Electricity Distribution
Electricity Transmission
Other Networks
retail
Energy Supply
Energy-related Services
Wholesale
Energy Portfolio Management and Electricity Generation
Gas Storage
Gas Production
Corporate unallocated
Total
2012
number
2,085
201
361
2,647
6,389
7,203
13,592
1,370
86
4
1,460
1,948
2011
Number
2,054
85
241
2,380
7,083
7,386
14,469
1,368
88
–
1,456
1,961
19,647
20,266
2012
number
2011
Number
–
–
–
–
–
–
–
–
–
–
–
4
4
–
–
–
–
–
–
–
–
–
–
–
4
4
The costs associated with the employees of the Company, who are the Executive Directors of the Group, are borne by Group companies.
No amounts are charged to the Company.
(ii) Directors’ remuneration and interests
Information concerning Directors’ remuneration, shareholdings, options, long term incentive schemes and pensions is shown in the Remuneration
Report on pages 75 to 86. 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.
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118
SSE Annual Report 2012
notes on the financial statements (continued)
for the year ended 31 March
7. FInanCE InCOME anD COSTS
recognised in income statement
2012
2011
Finance income:
Return on pension scheme assets
Interest income from short term deposits
Other interest receivable:
Scotia Gas Networks loan stock
Other jointly controlled entities and associates
Other receivable
Total finance income
Finance costs:
Bank loans and overdrafts
Other loans and charges
Interest on pension scheme liabilities
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
Before
exceptional
items and certain
remeasurements
£m
Exceptional
items and certain
remeasurements
(note 5)
£m
147.4
2.0
33.4
23.8
43.5
100.7
250.1
(25.0)
(280.3)
(149.8)
(7.8)
(38.4)
(0.3)
75.9
(425.7)
–
(175.6)
250.1
(425.7)
(175.6)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(89.5)
(89.5)
–
(89.5)
(89.5)
Total
£m
147.4
2.0
33.4
23.8
43.5
100.7
250.1
(25.0)
(280.3)
(149.8)
(7.8)
(38.4)
(0.3)
75.9
(425.7)
(89.5)
(265.1)
250.1
(515.2)
(265.1)
(i) The capitalisation rate applied in determining the amount of borrowing costs to capitalise in the period was 5.36% (2011 – 5.74%).
recognised in equity
(Loss)/gain 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
Before
exceptional
items and certain
remeasurements
£m
Exceptional
items and certain
remeasurements
(note 5)
£m
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)
2012
£m
(15.3)
(20.8)
(36.1)
Total
£m
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)
2011
£m
32.3
(4.1)
28.2
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
Hybrid coupon payment (note 28)
Adjusted finance income and costs and hybrid coupon payments for interest cover calculations
8. TaxaTIOn
Analysis of charge recognised in the income statement:
Current tax
UK corporation tax
Adjustments in respect of previous years
Total current tax
Deferred tax
Current year
Effect of change in tax rate
Adjustments in respect of previous years
Total deferred tax
2012
2011
Before
exceptional
items and certain
remeasurements
£m
Exceptional
items and certain
remeasurements
(note 5)
£m
224.2
(22.3)
201.9
93.3
–
29.6
122.9
(16.9)
–
(16.9)
(257.0)
(45.7)
–
(302.7)
Before
exceptional
items and certain
remeasurements
£m
Exceptional
items and certain
remeasurements
(note 5)
£m
270.2
(25.0)
245.2
60.8
–
48.8
109.6
–
–
–
234.7
17.7
–
252.4
Total
£m
207.3
(22.3)
185.0
(163.7)
(45.7)
29.6
(179.8)
Total taxation charge
324.8
(319.6)
5.2
354.8
252.4
607.2
119
2012
£m
2011
£m
(265.1)
(256.1)
(33.4)
(113.1)
(146.5)
–
89.5
(322.1)
(147.4)
149.8
7.8
38.4
(65.5)
(339.0)
(33.4)
(106.5)
(139.9)
8.8
44.4
(342.8)
(141.9)
150.2
4.3
39.7
–
(290.5)
Total
£m
270.2
(25.0)
245.2
295.5
17.7
48.8
362.0
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120
SSE Annual Report 2012
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 26%
(2011 – 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
Hybrid capital coupon payments
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 (credit)/charge 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.
2012
£m
268.5
(139.4)
129.1
33.6
(45.7)
–
16.8
22.7
–
(3.8)
7.3
(16.6)
(8.6)
(0.5)
5.2
2012
£m
5.2
–
5.2
11.5
183.1
136.5
(122.9)
213.4
2012
%
26.0
(35.4)
–
13.0
17.6
–
(2.9)
5.7
(12.9)
(6.7)
(0.4)
4.0
2012
%
4.0
(3.6)
0.4
0.9
13.7
10.2
(9.2)
16.0
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
2012
£m
268.5
1,022.3
44.9
1,335.7
2012
£m
(30.3)
3.7
–
(26.6)
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
2011
£m
2,111.7
(859.8)
58.2
1,310.1
2011
£m
7.9
7.1
0.6
15.6
121
9. DIVIDEnDS
Ordinary dividends
Interim – year ended 31 March 2012
Final – year ended 31 March 2011
Interim – year ended 31 March 2011
Final – year ended 31 March 2010
year ended
31 March 2012
Total
£m
Settled
via scrip
£m
pence per
Ordinary Share
Year ended
31 March 2011
Total
£m
224.8
492.1
–
–
716.9
76.3
11.9
–
–
88.2
24.0
52.6
–
–
–
–
208.3
451.5
659.8
Settled
via scrip
£m
–
–
61.7
84.4
146.1
Pence per
Ordinary Share
–
–
22.4
49.0
The final dividend of 52.6p per Ordinary Share declared in the financial year ended 31 March 2011 (2010 – 49.0p) was approved at the Annual
General Meeting on 21 July 2011 and was paid to shareholders on 23 September 2011. 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 24.0p per Ordinary Share (2011 – 22.4p) was declared and paid on 23 March 2012 to those shareholders on the SSE plc
share register on 27 January 2012. 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 56.1p 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 2012 is based on the net profit attributable to Ordinary Shareholders and a
weighted average number of Ordinary Shares outstanding during the year ended 31 March 2012. 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 outstanding share options
Diluted
year ended
31 March 2012
Earnings
£m
year ended
31 March 2012
Earnings
per share
pence
Year ended
31 March 2011
Earnings
£m
Year ended
31 March 2011
Earnings
per share
pence
197.8
702.7
900.5
122.9
33.4
1,056.8
197.8
–
197.8
21.1
74.9
96.0
13.1
3.6
112.7
21.1
–
21.1
1,504.5
(607.4)
897.1
109.6
35.2
1,041.9
1,504.5
–
1,504.5
162.2
(65.5)
96.7
11.8
3.8
112.3
162.2
(0.2)
162.0
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122
SSE Annual Report 2012
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
For diluted earnings per share
11. InTanGIBLE aSSETS
Consolidated
Cost:
At 1 April 2010
Additions
Acquisitions (note 16)
Transfer to Property Plant and Equipment (note 11)
Transfer to Assets Held For Sale (note 16)
Disposals/utilised
Exchange adjustments
At 31 March 2011
Additions
Acquisitions (note 16)
Transfer to Property Plant and Equipment (note 12)
Disposals/utilised
Exchange adjustments
at 31 March 2012
aggregate amortisation and impairment:
At 1 April 2010
Charge for the year
Exceptional impairment (note 5)
At 31 March 2011
Charge for the year
Exceptional impairment (note 5)
at 31 March 2012
Carrying amount:
at 31 March 2012
At 31 March 2011
At 1 April 2010
The Company does not hold intangible assets.
Intangible assets have been analysed as current and non-current as follows:
Current
Non-current:
Goodwill
Other
Goodwill
£m
Allowances and
certificates
£m
Development
assets
£m
Brands
£m
Other
intangibles
£m
726.3
3.8
39.9
–
–
–
(42.2)
727.8
–
0.3
–
–
(8.8)
719.3
–
–
(42.5)
(42.5)
–
(49.3)
(91.8)
627.5
685.3
726.3
229.7
399.3
–
–
–
(287.0)
–
342.0
503.7
–
–
(391.7)
–
454.0
(16.4)
–
–
(16.4)
–
(71.9)
264.1
29.6
56.4
(3.8)
(10.7)
(0.6)
(11.5)
323.5
36.1
3.6
(52.5)
–
(2.5)
308.2
(7.3)
(15.1)
(39.7)
(62.1)
(2.3)
(37.4)
(88.3)
(101.8)
365.7
325.6
213.3
206.4
261.4
256.8
11.8
–
–
–
–
–
–
11.8
–
–
–
–
(0.2)
11.6
(5.8)
(0.9)
–
(6.7)
(1.2)
–
(7.9)
3.7
5.1
6.0
31 March 2012
number of
shares
(millions)
31 March 2011
Number of
shares
(millions)
937.8
1.5
939.3
927.6
1.1
928.7
Total
£m
1,295.3
434.0
96.3
(3.8)
(10.7)
(287.6)
(53.6)
1,469.9
539.9
3.9
(52.5)
(391.7)
(14.2)
1,555.3
(67.5)
(21.5)
(82.2)
(171.2)
(13.5)
(158.6)
63.4
1.3
–
–
–
–
0.1
64.8
0.1
–
–
–
(2.7)
62.2
(38.0)
(5.5)
–
(43.5)
(10.0)
–
(53.5)
(343.3)
8.7
21.3
25.4
1,212.0
1,298.7
1,227.8
2012
£m
365.7
627.5
218.8
2011
£m
325.6
685.3
287.8
1,212.0
1,298.7
123
(a) Impairment review of goodwill and basis of other impairment reviews
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
Operating Segment
Ireland wind farms
UK wind farms
European wind farms
UK Supply
UK Generation
Gas Storage
Exploration and Production
Other Networks (i)
Energy-related Services (i)
Energy Portfolio Management and Electricity Generation
Energy Portfolio Management and Electricity Generation
Energy Portfolio Management and Electricity Generation
Energy Supply
Energy Portfolio Management and Electricity Generation
Gas Storage
Gas Production
Other Networks
Energy-related Services
2012
£m
153.1
199.9
–
187.0
10.1
26.2
38.1
10.6
2.5
627.5
2011
£m
159.9
199.9
20.3
187.0
10.1
56.2
38.1
11.3
2.5
685.3
(i)
Represents goodwill balances related to acquisitions of Telecoms, Streetlighting (Other Networks) and Contracting businesses (Energy-related Services). The amount of goodwill
is not significant compared to the aggregate carrying value of the business units or the aggregate value of goodwill held by the Group. Following review, it is concluded that no
impairment is required.
The recoverable amount of the UK Supply, Gas Storage and Exploration and Production CGUs is determined by reference to value-in-use calculations.
The impairment review of the UK Generation CGU has been discontinued and is commented upon below. The value-in-use 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 forward 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 various wind farm CGUs is based on the fair value less costs to sell methodology. The basis applied has been
deemed appropriate as it is consistent with the way in which the economic value of the individual CGUs are assessed by management and would
be by other market participants. The method applied is to determine fair value by assessing the discounted pre-tax cash flows expected to be
earned by the individual wind farm projects within the respective CGUs. The three identified CGUs (Ireland wind farms, UK wind farms, European
wind farms) share many of the same risk factors and are discounted accordingly.
The key assumptions used for the main value-in-use calculations are as follows:
Cash-generating unit
Operating Segment
2012
Discount rate
(%)
2011
Discount rate
(%)
2012 and 2011
Cash flow
projection period
(years)
Ireland, UK and Europe wind farms
(onshore and offshore)
UK Supply
UK Generation (excluding wind)
Gas Storage
Exploration and Production
Energy Portfolio Management and Electricity Generation
7.0%-9.0%
7.0%-9.0%
25
Energy Supply
Energy Portfolio Management and Electricity Generation
Gas Storage
Gas Production
8.3%
8.3%
8.3%
8.3%
8.3%
8.3%
8.0%-10.0% 8.0%-10.0%
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, the significant wind farm CGUs were established following the acquisition of the SSE Renewables
(formerly Airtricity) business in 2008. In order to assess the respective recoverable amounts against an appropriate carrying value, goodwill was
allocated to the main geographic regions in which the business operates. The established CGUs (Ireland, UK, rest of Europe) have subsequently
been 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.
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124
SSE Annual Report 2012
notes on the financial statements (continued)
for the year ended 31 March
11. InTanGIBLE aSSETS (continued)
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 and on delivery of projects in the development pipeline.
Outcome of tests
The recoverable amounts of the UK and Ireland wind farm CGUs, following the impairment of £20.3m of property, plant and equipment and
intangible development assets in the Ireland CGU, 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.
Following review of the economic prospects in relation to the European portfolio, including developments in Italy, Portugal, Sweden and Germany,
the goodwill associated with the CGU has been fully impaired. Accordingly, an exceptional charge of £19.3m has been recognised (note 5).
UK Supply
Goodwill carried in relation to the acquisition, in 2001, of the Swalec supply business is attributed to the Group’s UK retail electricity and
gas supply business CGU. The activities within CGU equate to the new energy supply reportable segment with the exception of the Airtricity
supply business in Ireland. Margins assumed in the value in use calculations are 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 moderate over the forecast period and cash outflows associated with
increased customer service are incorporated accordingly. This growth rate is supported by reference to both past performance and management
expectation. Margin assumptions also take account of forward wholesale energy price curves for both electricity and gas.
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 of £10.1m is carried by the Group in relation to acquired deferred tax temporary differences. No other goodwill balances related to the
previously identified UK Generation CGU were held at March 2011 and March 2012. The operational plants in Energy Portfolio Management and
Electricity Generation are operated as part of the integrated business segment. An impairment review of goodwill is not necessary in the year to
March 2012, and consequently the Group’s measurement on the CGU basis applied in previous years on the projected cash flows of the main UK
Generation plants has been discontinued. Instead, all plants exhibiting indications of impairment have been reviewed independently to derive
the extent of any potential impairment (see note 12).
Gas Storage
Goodwill was recognised on the acquisition of the Hornsea gas storage facility in 2003. 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 to the end of the assets’ expected economic lives. This longer period is necessary due to
the long-term infrastructure nature of these assets but will consequently introduce less certainty into the valuation process. 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 review indicated that the prospects in the medium term for the CGU had been impacted by lower volatility in the gas market and lower
demand for gas from generating plants. As a consequence, an impairment charge of £30.0m has been recognised against the value of goodwill
held. There is an inherent uncertainty in the valuation process but reasonably possible changes in the key assumptions applied in assessing the
value-in-use may potentially require further impairment. The impact of these changes is dependent upon a number of factors but reasonably
possible changes could further impair the remaining goodwill balance of £26.2m.
125
Exploration and production
Goodwill was recognised on the purchase of North Sea assets in 2011 (note 16). On acquisition, goodwill was attributed to three cash generating
units being the three main field development areas. Indications of impairment at asset/field level are investigated separately. All goodwill 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
Following impairment charges relating to a development field in the Lomond/Everest CGU, 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.
(b) Other intangible assets
(i) allowances and Certificates
Allowances and Certificates consist of purchased carbon emissions allowances and generated or purchased renewable obligations
certificates (ROCs). In the year to 31 March 2012, the Group recognised an exceptional impairment charge of £71.9m against the value of
carbon emissions allowances held following the impairment reviews of its thermal generation assets and the economic prospects for those
plants. See also note 5.
(ii) Development assets
Development costs relate to the design, construction and testing of thermal networks and renewable generation sites and devices, including
wind farms, which the Group believes will generate probable future economic benefits. Costs capitalised as development intangibles assets
include options over land rights, planning application costs, environmental impact studies and other costs incurred in bringing wind farm and
other generation and network development projects to the consented stage. These may be costs incurred directly or at a cost as part of the
fair value attribution on acquisition. Development assets also includes the Group’s exploration and evaluation expenditure in relation to
exploration wells in its Gas Production business.
At the point the development reaches the consent stage and is approved for construction, the carrying value is transferred to Property, Plant
and Equipment (note 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. Exceptional impairment charges of £37.4m were recognised in relation to
an offshore wind development project and prospective oil exploration field following review of its future development prospects. In the prior
year, an exceptional charge was recognised in relation to European Wind Farms (£39.7m). Both years’ impairments are commented in more
detail at note 5.
(iii) 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.
(iv) 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.
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126
SSE Annual Report 2012
notes on the financial statements (continued)
for the year ended 31 March
12. prOpErTy, pLanT anD EQUIpMEnT
Consolidated
Cost:
At 31 March 2010
Additions
Acquisitions (note 16)
Change in decommissioning asset values
Transfer from intangible assets (note 11) (iii)
Transfer to held for sale
Disposals
Exchange rate adjustments
At 31 March 2011
Additions
Transfer from intangible assets (note 11) (iii)
Disposals
Transfer between categories
Exchange rate adjustments
Power
generation
assets (i)
£m
Gas storage and
production
assets (ii)
£m
Land and
buildings
£m
Network and
Metering
assets
£m
Vehicles and
miscellaneous
equipment
£m
5,424.6
554.7
63.9
32.7
3.8
(253.6)
(73.2)
(72.0)
5,680.9
646.0
52.5
(0.2)
3.2
(28.8)
376.9
52.6
305.2
–
–
–
–
–
734.7
57.0
–
–
–
–
247.8
12.4
19.5
–
–
–
(0.8)
–
278.9
18.1
–
(2.6)
–
–
5,670.7
489.5
–
–
–
–
(0.7)
–
6,159.5
636.0
–
(0.4)
(7.5)
–
273.2
50.3
–
–
–
–
(3.1)
–
320.4
119.4
–
(35.4)
4.3
(2.0)
Total
£m
11,993.2
1,159.5
388.6
32.7
3.8
(253.6)
(77.8)
(72.0)
13,174.4
1,476.5
52.5
(38.6)
–
(30.8)
at 31 March 2012
6,353.6
791.7
294.4
6,787.6
406.7
14,634.0
Depreciation:
At 1 April 2010
Charge for the year
Exceptional impairments (iv)
Transfer to held for sale
Disposals
Exchange rate adjustments
At 31 March 2011
Charge for the year
Exceptional impairments (iv)
Disposals
Exchange rate adjustments
at 31 March 2012
Consolidated
net book value
at 31 March 2012
At 31 March 2011
At 1 April 2010
1,257.8
176.3
442.7
(48.7)
(13.3)
(1.1)
1,813.7
209.7
275.1
(0.2)
(10.0)
52.3
14.2
–
–
–
–
66.5
39.3
–
–
–
37.3
7.3
–
–
(0.8)
–
43.8
7.6
–
(1.8)
–
2,260.9
279.9
–
–
(0.1)
–
2,540.7
281.7
30.0
(0.4)
–
180.7
19.0
–
–
(3.1)
–
196.6
23.5
–
(33.6)
(1.3)
3,789.0
496.7
442.7
(48.7)
(17.3)
(1.1)
4, 661.3
561.8
305.1
(36.0)
(11.3)
2,288.3
105.8
49.6
2,852.0
185.2
5,480.9
Power
generation
assets (i)
£m
Gas storage and
production
assets (ii)
£m
4,065.3
3,867.2
4,166.8
685.9
668.2
324.6
Land and
buildings
£m
244.8
235.1
210.5
Network
assets
£m
Vehicles and
miscellaneous
equipment (ii)
£m
3,935.6
3,618.8
3,409.8
221.5
123.8
92.5
Total
£m
9,153.1
8,513.1
8,204.2
(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.
The net book value of generation assets includes decommissioning costs with a net book value of £37.6m (2011 – £62.3m).
(ii) Gas storage and production assets include decommissioning costs with a net book value of £68.6m (2011 – £81.7m).
(iii) 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.
(iv) Assets displaying indications of impairment, such as the Keadby and Medway gas-fired power stations, are impairment reviewed under the value-in-use methodology (see page 107
for explanation of key accounting judgements).
The current year property, plant and equipment impairment charges in relation to the Keadby and Medway gas-fired power stations assumes the current over-capacity in the power
generation market will decrease following the closure of plants in the latter part of the current decade, with SSE’s refurbished plants returning to merit at that point. 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. The discount rates applied was a pre-tax real rate of 8.3%. Total exceptional impairment of £305.1m (2011 – £447.7m) were recognised.
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 and metering assets
Corporate assets
The Company does not hold any property, plant or equipment.
Included within property, plant and equipment are the following assets held under finance leases:
2012
£m
560.1
171.1
377.1
64.6
1,172.9
Cost
At 1 April 2010 and 1 April 2011
Additions
at 31 March 2012
Depreciation
At 31 March 2010
Charge for the year
At 31 March 2011
Charge for the year
at 31 March 2012
net book value
at 31 March 2012
At 31 March 2011
At 1 April 2010
13. BIOLOGICaL aSSETS
Power
generation
assets
£m
Network
assets
£m
Vehicles and
miscellaneous
equipment
£m
387.8
–
387.8
11.3
18.5
29.8
18.5
48.3
339.5
358.0
376.5
5.0
–
5.0
5.0
–
5.0
–
5.0
–
–
–
7.0
–
7.0
7.0
–
7.0
–
7.0
–
–
–
127
2011
£m
647.0
120.4
188.2
5.7
961.3
Total
£m
399.8
–
399.8
23.3
18.5
41.8
18.5
60.3
339.5
358.0
376.5
The Group owns 2,394 hectares of forest land including planted trees. The living trees are accounted for as biological assets and are subject
to revaluation each year.
At 1 April 2011
Changes in fair value assumptions
At 31 March 2012
2011
£m
4.4
(1.0)
3.4
The pre-tax discount rate used in determining the fair value in 2012 was 8% (2011 – 8%). A 2.0% decrease/(increase) in the discount rate would
increase/(decrease) the fair value of biological assets by approximately £0.5m (2011 – £0.6m). No trees were harvested during the year, however
changes to other fair value assumptions led to a £1.0m reduction in value. The Company does not hold any biological assets.
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128
SSE Annual Report 2012
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 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
At 31 March 2011
New equity investments
Increase in shareholder loans
Repayment of shareholder loans
Conversion of loan to equity
Disposal of shareholder loan
Transfer to Held For Sale
Dividends received
Share of profit/(loss) after tax
Share of other reserves adjustments
Disposal
Exchange rate adjustments
at 31 March 2012
Equity
Loans
SGN
£m
JCEs
£m
Associates
£m
Equity total
£m
SGN
£m
JCEs
£m
Associates
£m
Loans total
£m
Total
£m
155.4
–
–
–
–
–
(30.0)
74.5
(8.9)
–
–
191.0
–
–
–
–
–
–
(65.0)
118.8
(12.2)
–
–
232.6
264.0
24.0
–
–
–
(63.7)
(26.5)
56.0
(5.2)
(13.7)
(3.4)
231.5
25.5
–
–
35.4
–
(7.5)
(8.0)
24.1
(3.2)
(12.1)
(6.5)
279.2
215.8
176.3
–
–
37.0
–
(25.2)
(65.6)
–
–
–
338.3
130.0
–
–
–
–
–
(38.4)
(3.5)
–
(26.5)
–
399.9
635.2
200.3
–
–
37.0
(63.7)
(81.7)
64.9
(14.1)
(13.7)
(3.4)
760.8
155.5
–
–
35.4
–
(7.5)
(111.4)
139.4
(15.4)
(38.6)
(6.5)
911.7
266.9
–
–
–
–
–
–
–
–
–
–
266.9
–
–
–
–
–
–
–
–
–
–
–
266.9
657.3
–
199.8
(13.3)
–
–
–
–
–
–
–
843.8
–
128.9
(20.4)
(35.4)
–
–
–
–
–
–
–
916.9
46.3
–
4.6
–
(37.0)
–
–
–
–
–
–
13.9
–
9.7
(5.5)
–
(10.0)
–
–
–
–
–
–
8.1
970.5
–
204.4
(13.3)
(37.0)
–
–
–
–
–
–
1,124.6
–
138.6
(25.9)
(35.4)
(10.0)
–
–
–
–
–
–
1,605.7
200.3
204.4
(13.3)
–
(63.7)
(81.7)
64.9
(14.1)
(13.7)
(3.4)
1,885.4
155.5
138.6
(25.9)
–
(10.0)
(7.5)
(111.4)
139.4
(15.4)
(38.6)
(6.5)
1,191.9
2,103.6
The investment in Scotia Gas Networks (SGN) is disclosed separately to aid understanding of the Group’s financial performance.
On 21 Dec 2012, the Group disposed of a portfolio of investments to EEF Consortium SPV Ltd in return for cash consideration of £16.4m and
a 49.5% share in the Environment Energies Fund Limited partnership. In addition, the Group disposed of its investment in the NuGen Limited
venture and diluted its investment in Onzo Limited. In combination, total proceeds of £40.0m were received, of which £23.5m was cash, and
a loss on disposal of £2.1m was recognised. Further consideration will potentially be received subject to certain contingent events.
Company
Share of net assets/cost
At 31 March 2010
Increase in shareholder loans
Disposal
At 31 March 2011
Increase in shareholder loans
Repayment of shareholder loans
at 31 March 2012
Equity
Other
JCEs and
Associates
£m
Equity total
£m
SGN
£m
Loans
Other
JCEs and
Associates
£m
Loans total
£m
Total
£m
17.0
–
(17.0)
–
–
–
–
207.0
–
(17.0)
190.0
–
–
190.0
266.9
–
–
266.9
–
–
266.9
568.4
194.2
–
762.6
118.9
(8.4)
873.1
835.3
194.2
–
1,029.5
118.9
(8.4)
1,042.3
194.2
(17.0)
1,219.5
118.9
(8.4)
1,140.0
1,330.0
SGN
£m
190.0
–
–
190.0
–
–
190.0
129
Details of the principal jointly controlled entities, operations and associates are as follows:
Country of incorporation
31 March 2012
Holding %
31 March 2011
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)
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
England and Wales
England and Wales
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
27.5
Gas distribution networks
50.0
50.0 Offshore wind development
50.0
Electricity generation
50.0 Defence estates contractor
Electricity generation
50.0
25.1 Offshore wind development
Electricity generation
30.4
49.5
Electricity generation
43.2 Marine energy conversion
Jointly Controlled Operations (unincorporated)
Aldbrough
England
66.7
66.7 Development of gas storage facility
Location of operations
31 March 2012
Holding %
31 March 2011
Holding %
principal activity
The above companies’ shares consist of Ordinary Shares only with the exception of Aquamarine Power Limited, which has issued preference
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 SSE Contracting Limited
(iii) Shares held by SSE Seabank Investments Limited
(iv) Shares held by SSE Venture Capital Limited
(v) Shares held by SSE plc
(vi) Shares held by SSE Renewables Holdings Limited (or subsidiaries)
Scotia Gas Networks Limited is deemed to warrant separate disclosure from other jointly controlled entities to aid understanding of the Group’s
financial performance, and the share of result is reported 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:
2012
2011
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
items and certain
remeasurements
£m
Exceptional
items and certain
remeasurements
£m
469.6
(193.0)
(66.8)
209.8
(69.2)
140.6
–
28.3
–
28.3
68.7
97.0
Total
£m
469.6
(164.7)
(66.8)
238.1
(0.5)
237.6
Before
exceptional
items and certain
remeasurements
£m
Exceptional
items and certain
remeasurements
£m
373.6
(180.9)
(66.7)
126.0
(53.9)
72.1
–
12.8
–
12.8
64.1
76.9
38.4
70.3
48.5
118.8
36.1
Total
£m
373.6
(168.1)
(66.7)
138.8
10.2
149.0
74.5
As an investor, SSE plc received £33.4m (2011 – £33.4m) in relation to loan stock interest payable to the Group.
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SSE Annual Report 2012
notes on the financial statements (continued)
for the year ended 31 March
14. InVESTMEnTS (continued)
The balance sheet of Scotia Gas Networks Limited can be summarised as follows (100%):
Scotia Gas networks Limited
31 March 2012
31 March 2011
Non-current
assets
£m
5,870.4
5,603.4
Current
assets
£m
159.8
110.3
Current
liabilities
£m
Non-current
liabilities
£m
(429.3)
(416.6)
(5,135.5)
(4,914.6)
The financial statements of the Group’s other jointly controlled entities and associates can be summarised as follows (100%):
Jointly Controlled Entities
31 March 2012
31 March 2011
associates
31 March 2012
31 March 2011
Current
assets
£m
Non-current
assets
£m
Current
liabilities
£m
Non-current
liabilities
£m
Revenues
£m
Profit
after tax
£m
133.6
170.8
1,721.8
1,430.2
(135.7)
(131.3)
(1,195.3)
(1,239.6)
268.4
319.7
114.1
144.9
203.3
277.7
(45.5)
(62.6)
(42.5)
(44.6)
186.8
313.4
40.7
117.0
2.7
46.9
In addition to Scotia Gas Networks, the Group has investments in a number of materially significant joint ventures and associates. At 31 March
2012, the Group has provided loans of £740.3m (2011 – £624.6m) to Greater Gabbard Offshore Winds Limited, £132.9m (2011 – £141.4m)
to Marchwood Power Limited and had invested equity and loans of £298.3m (2011 – £238.2m) in Walney (UK) Offshore Winds Limited.
(b) Other investments
Consolidated
At 31 March 2010
Additions in the year
At 31 March 2011
Additions in the year
Disposals (i)
at 31 March 2012
Faroe Petroleum
£m
–
18.0
18.0
–
–
18.0
BiFab
£m
–
11.0
11.0
–
–
11.0
Solar Century
£m
Sigma
£m
4.1
–
4.1
1.1
(5.2)
–
2.9
0.3
3.2
0.3
–
3.5
Other
£m
2.2
1.1
3.3
0.7
(0.4)
3.6
(i) Disposals in the year were made as part of the Group’s investment in the Environment Energies Fund limited partnership, details of which are noted on page 128.
Company
at 31 March 2011 and 31 March 2012
Faroe Petroleum
£m
18.0
Total
£m
9.2
30.4
39.6
2.1
(5.6)
36.1
Total
£m
18.0
131
15. SUBSIDIary UnDErTaKInGS
Details of the principal subsidiary undertakings are as follows:
Country of incorporation
31 March 2012
Holding %
31 March 2011
Holding %
principal activity
England and Wales
England and Wales
England and Wales
England and Wales
England and Wales
England and Wales
Scotland
Scotland
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)
Clyde Windfarm (Scotland) Limited (xi)
Griffin Wind Farm Limited (xii)
SSE Renewables Holdings Limited (i)
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)
SSE Metering Limited (i)
SSE 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
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
Corporate support services
100
Electricity supply
100
Electricity generation
100
Electricity generation
100
Electricity generation
100
Gas supply
100
Renewable electricity generation
100
Renewable electricity generation
100
100
Renewables holding company
100 Wind generation development
100 Wind generation development
Energy supply
100
Energy supply
100
100
Transmission of electricity
100 Distribution of electricity
100 Distribution of electricity
100 Meter reader and operator
Electrical contractor
100
Gas storage
100
Gas exploration and production
100
Telecommunication services
100
Telecommunication services
100
The above companies’ shares consist of Ordinary Shares only. All companies operate in the UK and Ireland except for SSE Insurance Limited
which operates in the Isle of Man. 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) SSE plc
(ii) SSE Generation Limited
(iii) SSE Renewables Holdings Limited
(iv) Scottish and Southern Energy 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
(xi) SSE Renewables Development (UK) Limited
(xii) Griffin Wind Farm (Holdings) Limited
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132
SSE Annual Report 2012
notes on the financial statements (continued)
for the year ended 31 March
15. SUBSIDIary UnDErTaKInGS (continued)
Investment in subsidiaries
Company
At 31 March 2010
Increase in existing investments
Transfers in (ii)
at 31 March 2011
Increase in existing investments (i)
at 31 March 2012
Total
£m
2,172.1
13.6
132.7
2,318.4
30.7
2,349.1
(i)
The increase in existing investments held by the Company relates to equity shares in the Company awarded to the employees of the subsidiaries of the Group under the Group’s
share schemes, which are recognised as an increase in the cost of investment in those subsidiaries as directed by IFRIC 11 (2012 – £13.5m, 2011 – £9.9m) and also to shares issued
in the subsidiary SSE E&P (UK) Limited in the current year (£17.2m).
(ii) The equity held in SSE Hornsea Limited was transferred from SSE Energy Supply Limited at book value during the previous year.
Service concession arrangements
In partnership with Royal Bank Leasing Limited, the Group has a 50% holding in three companies which provide streetlighting services to councils
under the Private Finance Initiative (PFI). These services are thereafter sub-contracted to SSE Contracting Limited, a wholly owned subsidiary.
These companies are as follows:
Company
Council
Tay Valley Lighting (Stoke on Trent) Limited
Tay Valley Lighting (Newcastle and North Tyneside) Limited
Tay Valley Lighting (Leeds) Limited
Stoke-on-Trent
Newcastle and North Tyneside
Leeds City Council
Under SIC-12 Consolidation – Special Purpose Entities, despite being 50% owned, the three companies are categorised as subsidiaries and are
accounted for accordingly since the Group bears the majority of the risks and rewards. The debt associated with these companies is non-recourse
to the Group. The arrangements for all three companies are materially similar.
In addition to these, the Group owns 100% of the share capital of entities which perform similar services under eight PFI contracts. The terms
of the service concession arrangement are similar to those operated by the three companies noted above. The council and contract holder within
the acquired group are as follows:
Company
Council
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
Tay Valley Lighting (Knowsley) Limited
Dorset County Council
London Borough of Ealing
London Borough of Islington
Hampshire County Council
Southampton City Council
West Sussex County Council
Nottingham County Council
Knowsley Metropolitan Borough Council
The service commencement date for Tay Valley Lighting (Knowsley) Limited was 20 April 2011.
Characteristics of the arrangements
Description
The contracts are 25 year arrangements to replace ageing streetlighting stock and to subsequently maintain the new assets throughout each
Councils’ areas.
Significant terms
The cash flows under the PFI arrangements come from the unitary charge for these services paid by the Councils. The unitary charge can only
be adjusted if performance under the contract falls below the required standards. Any significant change to the services proposed by either party
is subject to a formal change procedure and agreement to such a change is required by the other party.
133
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 SSE Contracting Limited or to other companies
within the SSE Contracting group of companies through operating sub-contracts. 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.
16. aCQUISITIOnS, DISpOSaLS anD HELD FOr SaLE aSSETS
(a) additions
During the year, the Group acquired full ownership of three wind farm development companies including the acquisition of the remaining holding
in St John’s Hill Limited, a 50% owned joint venture that was designated as held for sale at March 2011. Total consideration paid for these
businesses was £3.6m. The net assets acquired can be summarised in the following table:
Assets acquired:
Goodwill
Intangible development assets
Deferred tax
net assets
£m
0.3
3.6
(0.3)
3.6
St John’s Hill Limited was subsequently disposed for cash consideration of £2.3m, which gave rise to a £0.3m gain on disposal.
(b) Disposals
In addition to the disposal of St John’s Hill Limited, the Group disposed of three 100% owned wind farms for cash consideration of £176.4m
on 14 April 2011. These wind farms were disclosed as held for sale assets at 31 March 2011. No gain or loss was recognised on the transaction.
Consideration of £6.8m was received in respect of additional disposals of subsidiary investments, which realised a gain on disposal of £5.2m.
(c) Held for sale assets
At 31 March 2011, a number of wind generation and development assets were presented as held for sale following the decision of the Group’s
management to sell the respective companies and their related assets. In addition, certain items of plant were also held for sale at that date.
In the year to 31 March 2012, the Group disposed of a number of the assets held for sale at the previous year end generating a net loss of
£0.3m and cash proceeds of £184.5m. In addition, an impairment charge of £9.9m was recognised on certain development assets held for sale.
The assets and liabilities classified as held for sale, and the comparative balances at 31 March 2011, 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
2012
£m
5.5
–
58.3
3.9
0.3
–
68.0
2011
£m
204.9
10.7
63.7
23.0
(9.6)
(23.3)
269.4
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134
SSE Annual Report 2012
notes on the financial statements (continued)
for the year ended 31 March
16. aCQUISITIOnS, DISpOSaLS anD HELD FOr SaLE aSSETS (continued)
(d) acquisitions and disposals in the previous year
(i) Acquisitions in the previous year
On 2 February 2011, the Group, through its subsidiary SSE E&P (UK) Limited acquired, for consideration of £197.2m, joint operating interests
in various North Sea natural gas and infrastructure assets in three main geographical areas from Hess Limited following a completion period
where partner and regulatory approvals were received.
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
Total
£m
38.1
305.2
50.0
(71.5)
(11.4)
22.9
(136.1)
197.2
The Group acquired other businesses for a combined consideration of £59.4m in the previous year. No significant changes to the fair values
recognised have been identified.
(ii) Ardrossan acquisition and disposal
On 21 April 2010, the Group acquired the residual 49% of Ardrossan Windfarm (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 net cash proceeds of £28.1m. The net result of the acquisition on 21 April 2011 and the disposal
on 20 May 2011 was a gain of £8.3m.
17. InVEnTOrIES
Fuel and consumables
Work in progress
Goods for resale
Less: provisions held
Consolidated
2012
£m
308.2
26.1
2.8
(13.4)
323.7
2011
£m
190.5
37.1
2.9
(13.0)
217.5
The Group has expensed inventory costs of £1,505.5m within cost of sales in the year (2011 – £718.2m) and has also recognised £1.1m
(2011 – £6.6m) relating to stock write-downs and increases in provisions held. The Company does not hold any inventories.
18. TraDE anD OTHEr rECEIVaBLES
Current assets
Retail trade receivables
Wholesale trade receivables
Networks and corporate 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
135
2011
£m
–
–
–
–
2,220.9
65.0
–
–
2,285.9
3,661.2
5,947.1
Consolidated
Company
2012
£m
2011
£m
2012
£m
597.3
2,553.3
194.5
3,345.1
–
286.7
119.9
1,422.9
5,174.6
733.8
2,423.1
174.8
3,331.7
–
330.8
–
1,405.6
5,068.1
–
–
5,174.6
5,068.1
–
–
–
–
2,917.8
17.8
–
–
2,935.6
3,790.6
6,726.2
Wholesale trade receivables includes a balance of £nil (2011 – £28.1m) in relation to contractual balances due from British Energy.
Other receivables includes financial assets totalling £21.8m (2011 – £93.4m). Cash held as collateral relates to amounts deposited on commodity
trading exchanges.
Trade receivables and other financial assets are part of the Group’s financial exposure to credit risk as explained in note 31.
19. CaSH anD CaSH EQUIVaLEnTS
Bank balances
Call deposits
Cash and cash equivalents
Consolidated
Company
2012
£m
158.9
30.3
189.2
2011
£m
123.2
353.7
476.9
2012
£m
9.4
4.9
14.3
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.
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)
Consolidated
Company
2012
£m
189.2
(3.7)
185.5
2011
£m
476.9
(5.3)
471.6
2012
£m
14.3
–
14.3
2011
£m
319.1
–
319.1
Consolidated
Company
2012
£m
2011
£m
2012
£m
2011
£m
–
3,212.5
1,344.6
625.6
5,182.7
332.7
5,515.4
–
3,197.2
1,227.8
653.0
5,078.0
304.2
5,382.2
2,463.2
–
51.7
–
2,514.9
2,757.0
–
35.3
–
2,792.3
–
–
2,514.9
2,792.3
(i) Current accruals and deferred income includes customer contributions of £15.2m (2011 – £15.4m) and government grants of £0.6m (2011 – £0.6m).
(ii) Non-current accruals and deferred income includes customer contributions of £221.2m (2011 – £234.7m) and government grants of £5.0m (2011 – £5.6m).
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136
SSE Annual Report 2012
notes on the financial statements (continued)
for the year ended 31 March
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
Consolidated
Company
2012
£m
231.8
2011
£m
268.2
2012
£m
10.7
2012
£m
29.3
(26.7)
201.6
(209.0)
(7.4)
2011
£m
22.9
2011
£m
37.7
(17.7)
196.2
(200.0)
(3.8)
In the year to 31 March 2012, contract revenue of £462.9m (2011 – £468.9m) was recognised.
At 31 March 2012, retentions held by customers for contract work amounted to £1.8m (2011 – £1.3m). Advances received from customers
for contract work amounted to £12.9m (2011 – £4.7m).
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
Obligations under finance leases
Amounts owed to subsidiary undertakings
Total loans and borrowings
Cash and cash equivalents (note 19)
net debt
Consolidated
Company
2012
£m
3.7
693.1
696.8
11.8
708.6
5,206.7
330.3
–
5,537.0
6,245.6
(189.2)
6,056.4
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
2012
£m
–
440.1
440.1
–
440.1
3,955.2
–
268.2
4,223.4
4,663.5
(14.3)
4,649.2
2011
£m
–
106.8
106.8
–
106.8
3,499.5
–
257.4
3,756.9
3,863.7
(319.1)
3,544.6
137
(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. The Group has £1.0bn (2011 – £1.0bn) of committed credit facilities in place, maturing in August 2015. These provide back up to the
commercial paper programme and at 31 March 2012 these facilities were undrawn.
In the year, the Group issued a new ten year £300m Sterling bond at a coupon of 4.25% and entered into a JP¥15bn (£126.7m) seven year loan
at a fixed rate of 3.52% through a reverse enquiry on its EMTN programme.
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
4.25% Eurobond repayable 14 September 2021
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
2012
Weighted
average interest
rate (vi)
2012
Face value
£m
2012
Fair value
£m
0.50%
6.04%
2.46%
5.73%
5.79%
4.92%
6.13%
5.75%
5.88%
2.61%
6.30%
5.00%
4.25%
5.88%
8.38%
5.50%
4.63%
6.25%
4.46%
1.72%
2012
Carrying
amount
£m
3.7
4.1
675.2
13.8
696.8
1.4
370.7
499.6
698.2
59.4
3.7
4.1
676.1
13.8
697.7
1.4
370.2
500.3
700.0
59.4
3.7
4.3
678.4
13.8
700.2
1.5
382.2
530.0
747.9
59.4
1,631.3
1,721.0
1,629.3
526.6
188.7
500.0
300.0
300.0
500.0
350.0
325.0
350.0
110.4
118.4
552.2
188.7
553.2
307.7
349.1
709.6
387.8
315.3
413.7
188.9
120.4
526.6
188.7
496.5
296.4
297.1
493.1
350.2
323.6
345.8
110.4
117.8
3,569.1
4,086.6
3,546.2
–
–
31.2
5,200.4
5,807.6
5,206.7
5,898.1
6,507.8
5,903.5
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138
SSE Annual Report 2012
notes on the financial statements (continued)
for the year ended 31 March
23. LOanS anD OTHEr BOrrOWInGS (continued)
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.
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
(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 streetlighting 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 2012 was 5.06% (2011 – 5.43%).
(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
139
Minimum lease payments
Present value of minimum
lease payments
2012
£m
48.8
199.9
423.2
671.9
(329.8)
342.1
2011
£m
52.2
202.5
488.4
743.1
(370.9)
372.2
2012
£m
11.8
66.5
263.8
342.1
2011
£m
12.8
61.1
298.3
372.2
The Group has a power purchase agreement with Marchwood Power Ltd that is categorised as a finance lease. 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. £19.6m (2011 – £20.3m) 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 remaining term of the telecom leases is 7 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 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
Acquisitions (note 16)
(Credit)/charge to income statement
Charge to equity
Exchange adjustments
at 31 March 2012
904.7
(22.9)
(6.5)
(23.3)
(84.1)
–
–
767.9
–
(64.9)
–
–
703.0
(i) Includes deferred tax on fair value items recognised in business combinations.
Accelerated
capital
allowances
£m
Fair value
gains/(losses)
on derivatives
£m
Retirement
benefit
obligations
£m
Share-based
payments
£m
(258.6)
–
–
–
384.2
5.9
–
131.5
–
(131.0)
(4.7)
–
(201.7)
–
–
–
20.0
7.9
–
(173.8)
–
28.4
(30.3)
–
(1.9)
–
–
–
–
0.6
–
(1.3)
–
(0.4)
–
–
(4.2)
(175.7)
(1.7)
178.3
Other (i)
£m
24.4
142.4
(7.4)
–
41.9
1.2
(20.2)
182.3
0.3
(11.9)
8.4
(0.8)
Total
£m
466.9
119.5
(13.9)
(23.3)
362.0
15.6
(20.2)
906.6
0.3
(179.8)
(26.6)
(0.8)
699.7
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140
SSE Annual Report 2012
notes on the financial statements (continued)
for the year ended 31 March
24. DEFErrED TaxaTIOn (continued)
Company
At 1 April 2010
(Credit)/charge to income statement
(Credit)/charge to equity
At 31 March 2011
(Credit)/charge to income statement
(Credit)/charge to equity
at 31 March 2012
Fair value
gains/(losses)
on derivatives
£m
Retirement
benefit
obligations
£m
Share-based
payments
£m
1.2
(10.7)
(0.4)
(9.9)
(16.4)
(3.6)
(29.9)
(70.3)
9.7
(1.7)
(62.3)
9.7
5.5
(47.1)
0.5
–
0.6
1.1
(0.1)
–
1.0
Other
£m
(48.3)
(2.7)
–
(51.0)
11.1
–
(39.9)
Total
£m
(116.9)
(3.7)
(1.5)
(122.1)
4.3
1.9
(115.9)
Certain deferred tax assets and liabilities have been offset, including the asset balances analysed in the tables above. The following is an analysis
of the deferred tax balances (after offset) for financial reporting purposes:
Deferred tax liabilities
Deferred tax assets
Net deferred tax liabilities/(asset)
Consolidated
Company
2012
£m
921.8
(222.1)
699.7
2011
£m
1,068.3
(161.7)
906.6
2012
£m
–
(115.9)
(115.9)
2011
£m
–
(122.1)
(122.1)
The deferred tax assets disclosed include the deferred tax relating 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, excluding exceptional items and remeasurements, of £33.4m
(2011 – £35.2m charge).
A deferred tax asset has not been recognised on £56.3m of trading losses (2011 – £42.7m) due to uncertainty around the availability of future
profits in the companies concerned.
25. prOVISIOnS
Consolidated
At 1 April 2011
Charged in the year
Unwind of discount
Released during the year
Utilised during the year
at 31 March 2012
at 31 March 2012
Non-current
Current
At 31 March 2011
Non-current
Current
Decommissioning
(i)
£m
Contracting
provisions
(ii)
£m
Onerous
contracts
(iii)
£m
148.8
–
7.7
(3.7)
(0.9)
151.9
151.9
–
151.9
148.8
–
148.8
9.7
14.4
–
–
–
24.1
13.0
11.1
24.1
1.2
8.5
9.7
1.3
37.4
–
(1.3)
–
37.4
–
37.4
37.4
–
1.3
1.3
Other
(iv)
£m
19.3
12.1
0.1
(2.3)
(5.0)
24.2
17.4
6.8
24.2
19.2
0.1
19.3
Total
£m
179.1
63.9
7.8
(7.3)
(5.9)
237.6
182.3
55.3
237.6
169.2
9.9
179.1
141
(i)
Provision has been made for the estimated net present cost of decommissioning North Sea exploration and production assets and certain generation and gas storage assets.
Estimates are based on forecast 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.
(ii) The Group hold provisions in relation to long-term construction contracts including streetlighting PFIs. These relate to contract costs that are not guaranteed to being recovered
under the respective contracts.
(iii) The Group has recognised provisions of £37.4m in relation to onerous contracts in the year. These have been treated as exceptional charges (note 5). These contracts will be settled
in the next year.
(iv) Other provisions include balances held in relation to 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 Company does not hold provisions.
26. SHarE CapITaL
Allotted, called up and fully paid:
At 1 April 2011
Issue of shares (i)
at 31 March 2012
Number
(millions)
936.9
7.8
944.7
£m
468.4
3.9
472.3
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 52.6p per Ordinary Share (in relation to year ended 31 March 2011) and the interim
dividend of 24.0p (in relation to the current year) under the terms of the Company’s scrip dividend scheme. This resulted in the issue of 907,008 and 6,273,193 new fully paid
Ordinary Shares, respectively. In addition, the Company issued 0.6 million (2011 – 1.0 million) shares during the year under the savings-related share option schemes for a
consideration of £6.1m (2011 – £9.2m).
During the year, on behalf of the Company, the employee share trust purchased 0.4 million shares for a total consideration of £4.9m (2011 –
0.8 million shares, consideration of £9.2m). At 31 March 2012, the trust held 3.6 million shares (2011 – 5.1 million) which had a market value
of £48.0m (2011 – £64.4m).
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 94 to 95).
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 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 Ordinary Shareholders dealt with in the financial statements of the Company was £739.0m
(2011 – £627.3m). As allowed by section 408 of the Companies Act 2006, the Company has not presented its own income statement.
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142
SSE Annual Report 2012
notes on the financial statements (continued)
for the year ended 31 March
28. HyBrID CapITaL
GBP 750m 5.453% perpetual subordinated capital securities
EUR 500m 5.025% perpetual subordinated capital securities
2012
£m
744.5
416.9
1,161.4
2011
£m
744.5
416.9
1,161.4
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:
redemption; or
dividend payment on Ordinary Shares.
DD
DD
Interest will accrue on any deferred coupon.
Coupon payments of £65.5m were made on 1 October 2011 and are expected to be made annually in arrears on 1 October in subsequent years.
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
Southern Electric
IFRIC 14 movement
Net actuarial gain/loss and IFRIC 14 liability
Scheme type
Defined benefit
Defined benefit
Net actuarial (loss)/gain recognised
in respect of the pension asset in the
Statement of Comprehensive Income
2012
£m
(68.8)
(164.1)
(232.9)
71.8
(161.1)
2011
£m
92.3
16.8
109.1
(117.9)
(8.8)
Net pension (liability)
2012
£m
(196.2)
(535.7)
(731.9)
2011
£m
(239.8)
(428.8)
(668.6)
The Scottish Hydro-Electric Pension Scheme net liability of £196.2m (2011 – £239.8m) is presented after an IFRIC 14 minimum funding
requirement of £302.4m (2011 – £374.2m).
143
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
31 March 2009
Hymans Robertson
£860.0m
£1,189.3m
Projected Unit
Inflation curve plus 2.3% pa
2.7%
72.3%
Southern Electric
31 March 2010
Aon Hewitt
£1,183.5m
£1,666.6m
Projected Unit
5.2%
3.7%
71.0%
Both schemes have been updated to 31 March 2012 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
2012
At 31 March
2011
4.7%
3.2%
4.6%
3.2%
5.0%
3.5%
5.5%
3.5%
The assumptions relating to longevity underlying the pension liabilities at 31 March 2012 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
2012
Male
at 31 March
2012
Female
At 31 March
2011
Male
At 31 March
2011
Female
24
26
25
28
24
26
25
28
The impact on the schemes liabilities of changing certain of the major assumptions is as follows:
Discount rate
Longevity
at 31 March 2012
At 31 March 2011
Increase/
decrease in
assumption
0.1%
1 year
Effect on
scheme
liabilities
+/- 1.8%
+/- 2.9%
Increase/
decrease in
assumption
0.1%
1 year
Effect on
scheme
liabilities
+/- 1.7%
+/- 2.8%
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144
SSE Annual Report 2012
notes on the financial statements (continued)
for the year ended 31 March
29. rETIrEMEnT BEnEFIT OBLIGaTIOnS (continued)
Valuation of combined pension Schemes
Long-term
rate of return
expected at
31 March
2012
%
7.0
3.3
4.6
4.3
Equities
Government bonds
Corporate bonds
Other investments
Total fair value of plan assets
Present value of defined benefit obligation
Pension (liability)/asset (pre IFRIC 14)
IFRIC 14 liability (i)
Deficit in the scheme
Deferred tax thereon
Net pension liability
Consolidated
Company
Long-term
rate of return
expected at
31 March
2011
%
7.8
4.3
5.5
4.4
Value at
31 March
2012
£m
1,040.3
939.4
481.2
234.2
2,695.1
(3,124.6)
(429.5)
(302.4)
(731.9)
175.7
(556.2)
Long-term
rate of return
expected at
31 March
2011
%
7.8
4.3
5.5
4.5
Long-term
rate of return
expected at
31 March
2012
%
7.0
3.3
4.6
4.3
Value at
31 March
2011
£m
1,032.5
743.8
471.0
216.3
2,463.6
(2,758.0)
(294.4)
(374.2)
(668.6)
173.8
(494.8)
Value at
31 March
2012
£m
406.6
636.9
189.7
122.0
1,355.2
(1,249.0)
106.2
(302.4)
(196.2)
47.1
(149.1)
Value at
31 March
2011
£m
402.9
500.7
207.6
109.9
1,221.1
(1,086.7)
134.4
(374.2)
(239.8)
62.3
(177.5)
(i)
The IFRIC 14 liability represents the deficit repair obligations required to ensure a minimum funding level together with a restriction on the surplus that can be recognised in the
Scottish Hydro-Electric scheme.
Movements in the defined benefit obligation during the year:
At 1 April
Movements in the year:
Service costs
Member contributions
Benefits paid
Interest on pension scheme liabilities
Actuarial (losses)/gains
At 31 March
Movements in scheme assets during the year:
At 1 April
Movements in the year:
Expected return on pension scheme assets
Assets distributed on settlement
Employer contributions
Member contributions
Actuarial gains
At 31 March
Consolidated
Company
2012
£m
2011
£m
2012
£m
2011
£m
(2,758.0)
(2,762.3)
(1,086.7)
(1,113.6)
(37.8)
(7.8)
112.8
(149.8)
(284.0)
(37.8)
(7.8)
105.7
(150.2)
94.4
(17.7)
(3.3)
40.1
(59.2)
(122.2)
(18.7)
(3.1)
40.2
(60.7)
69.2
(3,124.6)
(2,758.0)
(1,249.0)
(1,086.7)
Consolidated
Company
2012
£m
2011
£m
2012
£m
2011
£m
2,463.6
2,298.3
1,221.1
1,118.8
147.4
(112.8)
138.0
7.8
51.1
141.9
(105.7)
106.6
7.8
14.7
69.6
(40.1)
47.9
3.3
53.4
67.9
(40.3)
48.5
3.1
23.1
2,695.1
2,463.6
1,355.2
1,221.1
145
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
2012
£m
37.8
37.8
(147.4)
149.8
2.4
2011
£m
37.8
37.8
(141.9)
150.2
8.3
2012
£m
17.7
17.7
(69.6)
59.2
(10.4)
2011
£m
18.7
18.7
(67.9)
60.7
(7.2)
History of (deficit)/surplus
Total fair value of plan assets
Present value of defined
benefit obligation
IFRIC 14 Liability
Consolidated
Company
2012
£m
2011
£m
2010
£m
2009
£m
2008
£m
2012
£m
2011
£m
2010
£m
2009
£m
2008
£m
2,695.1
2,463.6
2,298.3
1,786.8
2,081.0 1,355.2
1,221.1
1,118.8
860.0
1,005.6
(3,124.6) (2,758.0)
(374.2)
(302.4)
(2,762.3)
(256.3)
(1,929.8)
(130.5)
(1,919.5) (1,249.0)
(302.4)
(210.6)
(1,086.7)
(374.2)
(1,113.6)
(256.3)
(729.5)
(130.5)
(709.2)
(210.6)
(Deficit)/surplus in the scheme
(731.9)
(668.6)
(720.3)
(273.5)
(49.1)
(196.2)
(239.8)
(251.1)
–
85.8
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 3.7% 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 2012.
The actual return on Pension Scheme assets is as follows:
Actual return on Pension Scheme assets
History of experience gains and losses
Consolidated
Company
2012
£m
198.5
2011
£m
156.6
2012
£m
123.0
2011
£m
91.0
Consolidated
Company
2012
£m
2011
£m
2010
£m
2009
£m
2008
£m
2012
£m
2011
£m
2010
£m
2009
£m
2008
£m
Total actuarial gains and (losses) and
gains recognised in the Statement
of Comprehensive Income before
adjustment for taxation
Experience gains/(losses) on
scheme liabilities
Experience gains/(losses) on
scheme assets
(232.9)
109.1
(383.0)
(359.0)
185.0
(68.8)
92.3
(161.6)
(188.4)
146.3
17.3
51.1
52.7
(59.8)
0.8
(50.6)
6.2
26.9
(49.7)
–
–
14.7
394.1
(412.2)
(153.4)
53.4
23.1
200.4
(190.0)
(31.2)
The cumulative actuarial losses recognised in the Statement of Comprehensive Income before adjustment for taxation since the adoption of IAS 19
is £997.2m losses (2011 – £836.1m).
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146
SSE Annual Report 2012
notes on the financial statements (continued)
for the year ended 31 March
29. rETIrEMEnT BEnEFIT OBLIGaTIOnS (continued)
Defined contribution scheme
The total contribution paid by the Group to defined contribution schemes was £19.1m (2011 – £16.8m).
Employer financed retirement benefit (EFrB) pension costs
The increase in the year in relation EFRB was £5.4m (2011 – £0.2m). 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
2012
£m
37.8
19.1
56.9
2011
£m
37.8
16.8
54.6
Expected contributions in the year to 31 March 2013
The Group currently expects to make contributions of £47.7m and £75.2m to the Scottish Hydro-Electric Pension Scheme and the Southern
Electric Pension Scheme in the year to 31 March 2013, respectively. These include deficit repair contributions of £29.5m and £55.2m respectively.
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 three and/or
five 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 also 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.
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 2007
20
31 March 2008
10
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.
147
(iii) Deferred annual Incentive Scheme
This scheme (previously called deferred bonus scheme) applies to senior managers and Executive Directors. Under this scheme, 25% of
all eligible employees’ annual incentive 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 incentive amount by the share price shortly after the announcement
of the results for the financial year to which the incentive 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
2 June 2009
150
2 June 2010
150
2 June 2011
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 + 8%
RPI + 2%
RPI + 6%
RPI + 2%
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 FTSE100 companies for the 2009 award and TSR target relative to other FTSE100 companies and MSCI Europe Utilities
(a dedicated peer group of UK and other European utilities) Index for all other awards 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.
(v) Long Term Incentive plan (LTIp)
This scheme applies to the Management Board (excluding Executive Directors). Shares granted under this arrangement vest subject to the
attainment of performance conditions over the relevant performance period. The relevant performance period for this LTIP award is 1 April
2011 to 31 March 2016. The performance conditions are as set out below:
performance conditions
Dividend per share growth (DPS)
Full vesting
40% vesting
RPI + 5%
RPI + 2%
Where DPS growth is between 2 and 5% above RPI, vesting will be calculated on a straight-line basis. Where DPS growth is less than RPI + 2%
no vesting will occur.
A charge of £13.5m (2011 – £9.9m) was recognised in the income statement in relation to these schemes, £1.4m (2011 – £3.1m) of this was in relation
to the Directors of the Company.
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148
SSE Annual Report 2012
notes on the financial statements (continued)
for the year ended 31 March
30. EMpLOyEE SHarE-BaSED payMEnTS (continued)
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:
Consolidated
As at 31 March 2012
Award date
14 July 2005
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
29 June 2011
29 June 2011
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
Option price
(pence)
Outstanding
at start of year
Granted
Exercised
Lapsed
Outstanding
at end of year
Date from which
exercisable
886
999
1,306
1,306
1,274
1,274
1,042
1,042
871
871
1,105
1,105
26,554
517,837
190,752
264,679
178,681
270,597
308,351
562,907
771,919
2,946,250
–
–
–
–
–
–
–
–
–
–
–
–
426,347
765,339
(3,318)
(485,772)
(216)
(392)
(74,697)
(150)
(7,382)
(2,664)
(4,320)
(5,222)
–
(45)
(23,236)
(5,293)
(190,536)
(16,676)
(11,497)
(24,775)
(24,123)
(46,839)
(65,287)
(178,675)
(40,328)
(53,423)
6,038,527
1,191,686
(584,178)
(680,688)
–
26,772
–
247,611
92,487
245,672
276,846
513,404
702,312
2,762,353
386,019
711,871
5,965,347
1 October 2010
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
1 October 2014
1 October 2016
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
Expiry date (i)
31 March 2011
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
31 March 2015
31 March 2017
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
4,603,703
3,896,472
(1,038,831)
(1,422,817)
6,038,527
(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.
As share options are exercised continuously throughout the period from 1 October to 31 March, the weighted average share price during this
period of 1,291p (2011 – 1,177p) 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 2012
Award date
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
1,306
1,274
1,042
871
871
144
442
1,253
413
283
2,535
–
–
–
–
–
–
(144)
(442)
–
–
–
(586)
1 October 2010
1 October 2011
1 October 2014
1 October 2013
1 October 2015
–
–
1,253
413
283
1,949
Expiry date
31 March 2011
31 March 2012
31 March 2015
31 March 2014
31 March 2016
149
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
31 March 2011
31 March 2011
31 March 2012
31 March 2015
31 March 2014
31 March 2016
No options were forfeited in the year.
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 2005
July 2006
July 2007
July 2008
July 2009
July 2010
July 2011
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
126p
137p
217p
227p
287p
313p
304p
339p
244p
269p
231p
246p
171p
163p
Expected volatility
Risk free rate
Expected dividends
Term of the option
Underlying price at grant date
Strike price
15%
19%
19%
25%
15%
18%
4.1% 4.2% 4.7% 4.7% 5.8% 5.7% 4.9% 5.0% 2.7% 2.9% 1.4% 2.2% 1.2% 2.1%
4.2% 4.2% 4.8% 4.8% 5.3% 5.2% 4.1% 4.2% 4.1% 4.2% 1.7% 2.2% 6.1% 6.1%
5 yrs
3 yrs
5 yrs
5 yrs
967p 1,180p 1,180p 1,460p 1,460p 1,397p 1,397p 1,139p 1,139p 1,089p 1,089p 1,393p 1,393p
967p
871p 1,105p 1,105p
886p
886p
999p 1,306p 1,306p 1,274p 1,274p 1,042p 1,042p
999p
871p
5 yrs
3 yrs
3 yrs
5 yrs
3 yrs
3 yrs
3 yrs
5 yrs
3 yrs
5 yrs
28%
28%
25%
18%
35%
35%
19%
19%
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
Transfer to pool during the year
Outstanding at end of year
Exercisable at end of year
Consolidated
Company
2012
2011
2012
2011
Weighted
average
price
(pence)
Shares
1,205 1,745,224
571,166
1,315
(68,670)
1,194
(138,696)
1,304
(356,521)
1,328
1,219 1,752,503
781,271
1,581
Weighted
average
price
(pence)
1,215
1,161
1,215
1,149
1,149
1,205
1,396
Shares
1,752,503
522,744
(92,419)
(98,585)
(185,234)
1,899,009
802,911
Weighted
average
price
(pence)
1,135
1,320
–
1,287
1,311
1,091
1,260
Shares
1,320
240
–
(342)
(210)
1,008
192
Weighted
average
price
(pence)
1,130
1,161
–
–
1,149
1,135
1,096
Shares
1,588
288
–
–
(556)
1,320
1,040
When shares have been held for 5 years they are transferred to a pooled share account. At this point the holder has an unconditional right to the share.
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.
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150
SSE Annual Report 2012
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
Forfeited during the year
Exercised during the year
Transfer to pool during the year
Outstanding at end of year
Exercisable at end of year
Consolidated
Company
2012
2011
2012
2011
Weighted
average
price
(pence)
1,224
1,225
1,310
1,000
1,187
1,187
Shares
308,163
(1,860)
(43,976)
(50)
262,277
262,277
Shares
673,999
(7,080)
(126,298)
(232,458)
308,163
308,163
Weighted
average
price
(pence)
1,210
1,210
1,149
1,000
1,224
1,076
Weighted
average
price
(pence)
1,151
–
1,310
–
1,098
1,098
Shares
120
–
(30)
–
90
90
Weighted
average
price
(pence)
1,151
–
–
1,000
1,151
1,113
Shares
320
–
–
(200)
120
120
As shares are exercised continuously throughout the year, the weighted average share price during the period of 1,310p (2011 – 1,149p) 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 annual Incentive 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
2012
2011
2012
2011
Weighted
average
price
(pence)
1,270
1,342
1,144
1,484
1,198
1,277
Shares
463,855
134,328
(14,403)
(188,025)
395,755
1,867
Shares
322,905
166,426
(22,722)
(2,754)
463,855
868
Weighted
average
price
(pence)
1,367
1,079
1,367
1,054
1,270
1,072
Weighted
average
price
(pence)
1,251
1,342
–
1,545
1,177
–
Shares
92,165
20,454
–
(44,411)
68,208
–
Weighted
average
price
(pence)
1,349
1,079
–
–
1,251
–
Shares
58,867
33,298
–
–
92,165
–
The fair value of the annual incentive scheme 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
2012
2011
2012
2011
Weighted
average
price
(pence)
Weighted
average
price
(pence)
Shares
Shares
1,226 1,592,479
840,095
1,342
(379,500)
1,505
(60,590)
1,545
1,185 1,992,484
1,353
875,064
1,079
204,561
1,353 (225,245)
1,076
–
1,226
854,380
Weighted
average
price
(pence)
1,233
1,342
1,545
–
1,177
Shares
752,945
338,645
(181,449)
(35,077)
875,064
Weighted
average
price
(pence)
1,360
1,079
1,360
1,076
1,233
Shares
1,992,484
580,614
(476,916)
(55,759)
2,040,423
Of the outstanding options at the end of the year, none were exercisable.
The fair value of the performance share plan shares is not subject to valuation using the Black-Scholes model. The fair value of shares granted
in the year is equal to the closing market price on the date of grant.
(v) Long Term Incentive plan
Outstanding at start of year
Granted during year
Outstanding at end of year
151
2012
Weighted
average price
(pence)
–
1,342
1,342
Shares
–
225,687
225,687
Of the outstanding options at the end of the year, none were exerciseable. The Company has no employees in the LTIP.
The fair value of the long term incentive 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.
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:
Credit risk
Liquidity risk
Commodity risk
Currency risk
Interest rate risk
DD
DD
DD
DD
DD
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 Energy Portfolio Management 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.
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152
SSE Annual Report 2012
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:
2012
amortised cost
or other (i)
£m
2012
Classified as
trading (ii)
£m
2012
Total
carrying
value
£m
2012
Fair value
£m
2011
Amortised cost
or other (i)
Restated
£m
2011
Classified as
trading (ii)
£m
2011
Total
carrying 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
2011
Fair value
Restated
£m
3.331.7
93.4
–
476.9
2.525.5
6,427.5
3,345.1
21.8
119.9
189.2
–
3,676.0
–
–
–
–
851.2
851.2
3,345.1
21.8
119.9
189.2
851.2
3,345.1
21.8
119.9
189.2
851.2
4,527.2
4,527.2
1,191.9
–
1,191.9
–
348.0
348.0
1,191.9
348.0
1,191.9
348.0
1,539.9
1,539.9
3,331.7
93.4
–
476.9
–
3,902.0
1,124.6
–
1,124.6
–
–
–
–
2,525.5
2,525.5
3,331.7
93.4
–
476.9
2,525.5
6,427.5
–
990.1
990.1
1,124.6
990.1
2,114.7
1,124.6
990.1
2,114.7
4,867.9
1,199.2
6,067.1
6,067.1
5,026.2
3,515.6
8,542.2
8,542.2
(3,212.5)
(696.8)
(11.8)
–
–
–
–
(817.6)
(3,212.5)
(696.8)
(11.8)
(817.6)
(3,212.5)
(700.2)
(11.8)
(817.6)
(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)
(3,921.1)
(817.6)
(4,738.7)
(4,742.1)
(3,643.7)
(2,307.5)
(5,951.2)
(5,952.2)
(5,175.5)
(330.3)
–
(31.2)
–
(399.2)
(5,206.7)
(330.3)
(399.2)
(5,807.6)
(330.3)
(399.2)
(4,829.1)
(359.4)
–
28.6
–
(769.3)
(4,800.5)
(359.4)
(769.3)
(5,153.7)
(359.4)
(769.3)
(5,505.8)
(430.4)
(5,936.2)
(6,537.1)
(5,188.5)
(740.7)
(5,929.2)
(6,282.4)
(9,426.9)
(1,248.0) (10,674.9) (11,279.2)
(8.832.2)
(3,048.2)
(11,880.4)
(12,234.6)
net financial liabilities
(4,559.0)
(48.8)
(4,607.8)
(5,212.1)
(3,806.0)
467.4
(3,338.6)
(3,692.4)
(i) Recorded at amortised cost or loans and receivables.
(ii) IAS 39 financial instruments.
(iii) Includes non-recourse borrowings.
153
The fair values of the primary financial assets and liabilities of the Company together with their carrying values are as follows:
2012
amortised cost
or other (i)
£m
2012
Classified as
trading (ii)
£m
2012
Total
carrying
value
£m
2012
Fair value
£m
2011
Amortised cost
or other (i)
Restated
£m
2011
Classified as
trading (ii)
£m
2011
Total
carrying value
Restated
£m
2011
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
Amounts owed to subsidiary undertakings
Derivative financial liabilities
non-current
Eurobonds
Bank loans
Amounts owed to subsidiary undertakings
Derivative financial liabilities
14.3
2,917.8
–
2,932.1
3,790.6
1,140.0
–
4,930.6
7,862.7
(440.1)
(2,463.2)
–
(2,903.3)
(3,126.7)
(797.3)
(268.2)
–
–
–
12.2
12.2
14.3
2,917.8
12.2
14.3
2,917.8
12.2
2,944.3
2,944.3
–
3,790.6
3,790.6
–
94.7
94.7
1,140.0
94.7
1,140.0
94.7
5,025.3
5,025.3
106.9
7,969.6
7,969.6
–
–
(8.5)
(440.1)
(2,463.2)
(8.5)
(391.7)
(2,463.2)
(8.5)
(8.5)
(2,911.8)
(2,863.4)
–
(31.2)
–
(206.3)
(3,126.7)
(828.5)
(268.2)
(206.3)
(3,611.1)
(861.9)
(268.2)
(206.3)
(4,192.2)
(237.5)
(4,429.7)
(4,947.5)
(7,095.5)
(246.0)
(7,341.5)
(7,810.9)
319.1
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
319.1
2,220.9
30.0
2,570.0
319.1
2,220.9
30.0
2,570.0
–
3,661.2
3,661.2
–
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
–
–
(15.5)
(15.5)
(106.8)
(2,757.0)
(15.5)
(106.9)
(2,757.0)
(15.5)
(2,879.3)
(2,879.4)
–
28.6
–
(136.7)
(2,857.1)
(642.4)
(257.4)
(136.7)
(3,167.2)
(676.9)
(257.4)
(136.7)
(108.1)
(3,893.6)
(4,238.2)
(123.6)
(6,772.9)
(7,117.6)
net financial assets/(liabilities)
767.2
(139.1)
628.1
158.7
(581.4)
(45.6)
(535.8)
191.1
(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, brands or the Group’s customer base are not included as these
are not financial instruments.
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154
SSE Annual Report 2012
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 Networks 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 operations of the Energy Supply business and the Energy
Portfolio Management function and the activities carried out by the Group’s Treasury function, for which specific credit risk controls that match
the risk profile of those activities are applied.
Exposure to credit risk in the supply of electricity and gas arises from the potential of a customer defaulting on their invoiced payables.
The financial strength and creditworthiness of business customers is assessed prior to commencing, and for the duration of, their contract
of supply. Domestic customers’ creditworthiness is reviewed from a variety of internal and external information.
Exposure to credit risk in the procurement of wholesale energy and fuel is managed by reference to agreed transaction credit limits which
are determined by whether the counterparty:
(i) holds an investment grade credit rating; or
(ii) can be assessed as adequately creditworthy in accordance with internal credit rules using information from other external credit agencies; or
(iii)
can provide a guarantee from an investment grade-rated entity or post suitable collateral or provide other acceptable assurances in accordance
with Group procedures where they have failed to meet the above conditions; or
(iv) can be allocated a non-standard credit limit approved by the Risk Committee within its authorised limits as delegated by the Group Board.
Credit support clauses or side agreements are typically included or entered into to protect the Group against counterparty failure or non-delivery.
Within the Energy Portfolio Management business, significantly increasing volumes of gas, electricity and other commodities 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 2012, the Group’s
Energy Portfolio Management activities business had pledged £254.4m (2011 – £201.1m) of cash collateral and letters of credit and had received
£54.3m (2011 – £38.7m) 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, letters of credit or other credit
enhancements. The trade receivables total includes an allowance for impairment.
Concentrations of risk
Trade receivables recorded by reported segment held at the 31 March were:
networks
Electricity Distribution
Electricity Transmission
Other Networks
retail
Energy Supply
Energy-related Services
Wholesale
Energy Portfolio Management and Electricity Generation
Gas Storage
Gas Production
Corporate unallocated
Total
155
2011
£m
63.4
0.2
92.9
156.5
733.8
17.7
751.5
2,410.8
12.3
–
2,423.1
0.6
3,331.7
2012
£m
80.1
0.8
113.4
194.3
579.1
18.2
597.3
2,551.0
2.3
–
2,553.3
0.2
3,345.1
The Retail segment accounts for 17.8% (2011 – 22.6%) of the Group’s trade receivables. Trade receivables associated with the Group’s 9.55 million
electricity and gas customers are recorded in this segment. The Group also has significant receivables associated with its Wholesale activities
which are generally settled within 2 to 4 weeks from invoicing. The Group’s exposure to credit risk is therefore subject to diversification with no
exposure to individual customers totalling >10% of trade receivables. The biggest customer balance, due from a wholesale customer (also a
wholesale supplier), is less than 9% (2011 – less than 10%) 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
2012
£m
2011
£m
3,121.1
3,053.7
140.5
53.9
166.9
3,482.4
(137.3)
3,345.1
181.7
69.0
171.5
3,475.9
(144.2)
3,331.7
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 £21.8m (2011 – £93.4m). The Company does not have trade receivables.
The movement in the allowance for impairment of trade receivables was:
Balance at 1 April
Increase in allowance for impairment
Impairment losses recognised
Recovery of impairment loss previously recognised
Foreign exchange movements
Balance at 31 March
2012
£m
144.2
46.7
(57.0)
4.2
(0.8)
137.3
2011
£m
148.9
50.7
(61.7)
6.3
–
144.2
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156
SSE Annual Report 2012
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)
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.
(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 department. The Group
can have significant movements in its liquidity position due to movement in commodity price, working capital requirements, the seasonal nature
of the business and phasing of its capital reduction programme.
Treasury is responsible for managing the banking and liquidity requirements of the Group, risk management relating to interest rate and foreign
exchange exposures, and for managing the credit risk relating to the banking counterparties with which it transacts. Short term liquidity is reviewed
daily by Treasury, while the longer term liquidity position is reviewed on a regular basis by the Board. The department’s operations are governed
by policies determined by the Board and any breaches of these policies are reported to the Risk and Trading Committee and Audit Committee.
In relation to the Group’s liquidity risk, the Group’s policy is to ensure, as far as possible, that it will always have sufficient liquidity to meet its liabilities
when due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the Company’s reputation.
During the year, the Group’s approach to managing liquidity was 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. In May 2012, the Board revised this policy to cover at least
105% of forecast borrowings over a rolling 6 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 £100m of uncommitted bank lines and a £15m overdraft facility.
During the year the Group (through SSE plc) successfully re-opened the European corporate bond market after the summer break by issuing a
£300m ten year bond with a 4.25% coupon as well as managing to secure a JP¥15bn (equivalent to £126.7m) seven year loan with an effective
interest rate of 3.52% through a reserve enquiry on its EMTN programme. In addition during February 2012 the Group also undertook a US
private placement for a total consideration of $700m (equivalent to £446.4m) with proceeds being received in April 2012. The senior notes were
issued over four tranches at an average maturity of 10.3 years and an average all-in-cost of around 4.25%. This follows on from the previous year
when the Group extended its existing £900m revolving credit facility and its £100m bilateral facility on reduced terms to August 2015, borrowed
£400m from the European Investment Bank for a period of 10 years and issued hybrid capital of £1,161.4m.
Under the going concern principle, the Group does not need to issue medium to long term debt but does expect to do so during the year ended
31 March 2013. 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 £5.0bn 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 Directors’ Corporate Governance report on page 87.
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 an investment grade credit rating 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 2012, the value of outstanding cash collateral in respect of mark-to-market related margin calls on exchange traded positions
was £119.9m (2011 – £nil).
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.
157
The following are the undiscounted contractual maturities of financial liabilities, including interest and excluding the impact of netting agreements:
Liquidity risk
2012
Carrying
value
£m
2012
Contractual
cash flows
£m
2012
0-12
months
£m
2012
1-2
years
£m
2012
2-5
years
£m
2012
> 5
years
£m
2011
Carrying
value
£m
2011
Contractual
cash flows
£m
2011
0-12
months
£m
2011
1-2
years
£m
2011
2-5
years
£m
2011
> 5
years
£m
(3.7)
–
–
–
5.3
(5.3)
(5.3)
–
–
–
3.7
Financial liabilities
Loans and borrowings
Bank overdrafts
Commercial paper and
cash advances
(441.0)
Bank loans – floating
(457.4)
Bank loans – fixed
(1,237.9)
Unsecured bonds – fixed 3,918.2 (7,036.6)
Non-recourse funding
(262.5)
Fair value adjustment
–
440.1
411.5
836.8
262.0
31.2
(3.7)
–
(441.0)
(6.8)
(32.0)
(246.4)
(307.9)
(226.0) (1,426.3)
(14.0)
–
(14.0)
–
–
(103.3)
(40.7)
–
(315.3)
(642.9)
(106.8)
106.7
511.5
(564.5)
778.9 (1,189.5)
(465.8) (4,918.5) 3,643.5 (6,833.0)
(217.6)
–
(188.9)
–
(45.6)
–
216.9
(28.6)
(106.8)
(107.3)
(239.9)
(215.3)
(12.5)
–
–
–
–
(322.0)
(103.7)
(31.5)
(519.9)
(106.8)
(322.9)
(215.3) (1,803.4) (4,599.0)
(149.9)
(43.3)
–
–
(11.9)
–
(687.1)
(52.1)
(365.5) (2,273.3) (5,590.8)
(488.4)
(152.4)
(50.2)
(739.2)
(415.7) (2,425.7) (6,079.2)
Finance lease obligations
5,903.5
342.1
(9,439.1)
(671.8)
(963.1) (1,755.0)
(51.2)
(48.8)
6,245.6 (10,110.9) (1,011.9) (1,806.2)
(655.4) (6,065.6) 5,234.2 (8,916.7)
(743.0)
(148.7)
(804.1) (6,488.7) 5,606.4 (9,659.7)
(423.1)
372.2
983.3
Derivative financial liabilities
Operating derivatives
designated at fair value
Interest rate swaps used
for hedging
Interest rate swaps
designated at fair value
Forward exchange
contracts held for
hedging
Forward exchange
contracts designated
at fair value
25.4
191.5
8.1
8.5
1,974.3 1,489.6
102.7
393.3
(11.3) 2,911.8 12,623.3
9,363.5 2,413.4
846.4
–
(25.4)
(9.9)
(6.1)
(2.5)
(6.9)
33.3
(33.2)
(8.5)
(7.6)
(8.8)
(8.3)
(191.5)
(9.6)
(9.5)
(24.6)
(147.8)
115.7
(115.6)
(7.1)
(5.3)
(15.9)
(87.3)
(620.6)
(490.5)
(101.6)
(28.5)
(866.6)
(736.1)
(130.5)
–
–
–
0.6
(10.2)
(5.5)
(4.7)
–
15.4
(960.5)
(488.3)
(363.3)
(108.9)
–
–
1,216.8
270.2
243.5
(145.0)
337.7
(166.0) 3,076.8 11,503.8
8,854.1 2,032.5
712.8
(95.6)
Other financial liabilities
Trade payables
3,212.5 (3,212.5) (3,212.5)
3,212.5 (3,212.5) (3,212.5)
–
–
–
–
–
–
3,197.2
(3,197.2)
(3,197.2)
3,197.2
(3,197.2)
(3,197.2)
–
–
–
–
–
–
Total
10,674.9 (13,053.2) (3,980.9) (1,951.2)
(466.4) (6,654.7)11,880.4
(1,353.1) 4,917.7 1,616.8 (1,712.9) (6,174.8)
Derivative financial assets
Financing derivatives
Operating derivatives
designated at fair value (1,097.5)
(101.7)
(169.2)
(50.9)
(41.2)
(55.5)
(21.6)
(81.9)
(777.2)
(860.1)
113.9
(10.7)
(20.3)
(4,847.9) (3,559.0)
(682.7)
(574.1)
(1,199.2)
(5,017.1) (3,609.9)
(723.9)
(629.6)
(32.1) (3,433.7) (15,189.2) (10,945.1) (2,832.5) (1,359.2)
(53.7) (3,515.6) (15,966.4) (11,805.2) (2,718.6) (1,369.9)
(52.4)
(72.7)
Net total (i)
9,475.7 (18,070.3) (7,590.8) (2,675.1)(1,096.0)(6,708.4) 8,364.8 (17,319.5) (6,887.5) (1,101.8) (3,082.8) (6,247.5)
(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.
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158
SSE Annual Report 2012
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
2012
Carrying
value
£m
2012
Contractual
cash flows
£m
2012
0-12
months
£m
2012
1-2
years
£m
2012
2-5
years
£m
2012
> 5
years
£m
2011
Carrying
value
£m
2011
Contractual
cash flows
£m
2011
0-12
months
£m
2011
1-2
years
£m
2011
2-5
years
£m
2011
> 5
years
£m
Financial liabilities
Loans and borrowings
Commercial paper and
cash advances
(441.0)
Bank loans – floating
(406.3)
Bank loans – fixed
(516.9)
Unsecured bonds – fixed 3,126.7 (5,172.3)
Fair value adjustment
–
440.1
361.5
435.8
31.2
–
(6.4)
(223.1)
(106.8)
(441.0)
(412.3)
(6.4)
(375.3)
(20.7)
(190.0) (1,390.3) (357.4) (3,234.6) 2,857.1 (4,949.8)
–
–
(315.3)
(248.5)
–
(78.2)
(24.6)
106.8
361.5
309.5
(28.6)
–
–
–
–
(106.8)
(6.0)
(16.2)
(179.4)
–
–
–
–
(321.9)
(78.4)
(6.0)
(116.8)
(16.2)
(226.1)
(179.4) (1,695.1) (2,895.9)
–
–
–
4,395.3 (6,536.5)
(658.1) (1,619.8) (460.2) (3,798.4) 3,606.2 (5,844.2)
(308.4)
(201.6) (1,999.6) (3,334.6)
25.2
173.0
Derivative financial liabilities
Interest rate swaps used
for hedging
Interest rate swaps
designated at fair value
Forward exchange
contracts held for
hedging
Forward exchange
contracts designated
at fair value
8.1
8.5
(25.2)
(8.4)
(5.5)
(2.5)
(8.8)
29.1
(29.1)
(6.3)
(6.3)
(8.2)
(8.3)
(173.0)
(8.7)
(8.7)
(22.1)
(133.5)
106.8
(106.8)
(5.8)
(4.8)
(15.4)
(80.8)
(620.6)
(490.5)
(101.6)
(28.5)
(866.6)
(736.1)
(130.5)
–
–
–
0.6
(10.2)
(5.5)
(4.7)
–
15.7
(960.5)
(488.3)
(363.3)
(108.9)
–
–
214.8 (1,685.4) (1,243.7)
(246.3)
(53.1)
(142.3)
152.2 (1,106.6)
(505.9)
(379.1)
(132.5)
(89.1)
Other financial liabilities
Amounts due to
subsidiary undertakings 2,731.4 (2,731.4) (2,463.2)
(268.2)
2,731.4 (2,731.4) (2,463.2)
(268.2)
–
–
– 3,014.4 (3,014.4) (2,757.0)
– 3,014.4 (3,014.4) (2,757.0)
(257.4)
(257.4)
–
–
–
–
Total
7,341.5 (10,953.3) (4,365.0) (2,134.3) (513.3) (3,940.7) 6,772.9 (9,965.2) (3,571.3)
(838.1) (2,132.1) (3,423.7)
Derivative financial assets
Financing derivatives
Net total
(106.9)
7,234.6 (11,122.5) (4,415.9) (2,175.5) (568.8) (3,962.3) (6,694.9) (10,742.5) (4,431.6)
(169.2)
(55.5)
(50.9)
(21.6)
(41.2)
(860.3)
(777.3)
(78.0)
113.7
(10.4)
(20.3)
(724.4) (2,142.5) (3,444.0)
(iii) Commodity risk
The Group’s Energy Portfolio Management function manages the Group’s 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 for
the Energy Supply business, or to procure fuel to produce electricity from its generation assets. Insofar as the contracts relate to Energy Supply,
the impact of delivered commodities will be passed through to the newly established segment.
The Group’s strategy is to manage all exposures to commodity risk through volumetric limits and to measure the exposure by use of a Value at Risk
(VaR) model. The exposure is subject to financial limits established by the Board and managed by the Risk 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 with the Energy Portfolio Management activity 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.
159
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 carbon emissions allowances, through the gas production assets and through flexibility from
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 the Energy Supply business customers or from Generation power plants, 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 customers or to provide fuel to 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, other physical contracts can be 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 subsequently reported to and monitored by the
Risk and Trading Committee and to the Management Board by exception.
The Group’s exposure to commodity price risk according to IFRS 7 is measured by reference to the Group’s IAS 39 commodity contracts. IFRS 7
requires disclosure of a sensitivity analysis for market risks that is intended to illustrate the sensitivity of the Group’s financial position and
performance to changes in market variables impacting upon the fair value or cash flows associated with the Group’s financial instruments.
Therefore, the sensitivity analysis provided discloses the effect on profit or loss and equity at the balance sheet date assuming that a reasonably
possible change in the relevant commodity price had occurred, and been applied to the risk exposures in existence at that date. The reasonably
possible changes in commodity prices used in the sensitivity analysis were determined based on calculated or implied volatilities where available,
or historical data.
The sensitivity analysis has been calculated on the basis that the proportion of commodity contracts that are IAS 39 financial instruments remains
consistent with those at that point. Excluded from this analysis are all commodity contracts that are not financial instruments under IAS 39.
Commodity prices
UK gas (p/therm)
UK power (£/MWh)
UK coal (US$/tonne)
UK carbon emissions allowances (€/tonne)
UK oil (US$/bbl)
2012
2011
reasonably
possible
increase/
decrease in
variable
+/- 6
+/- 6
+/- 7
+/- 3
+/- 11
Base price (i)
72
63
132
19
109
Reasonably
possible
increase/
decrease in
variable
+/- 10
+/- 9
+/- 13
+/- 3
+/- 12
Base price (i)
69
57
121
8
105
(i) The base price represents the average forward market price over the duration of the active market curve used to calculate the sensitivity analysis.
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160
SSE Annual Report 2012
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
2012
2011
Impact on
profit
£m
Impact on
equity
£m
Impact on
profit
£m
Impact
on equity
£m
227.6
(227.6)
–
–
257.3
(257.3)
–
–
The sensitivity analysis provided is hypothetical and is based on the Group’s commodity contracts under IAS 39. This is analysis only and 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 impacts provided are indicative only and are based on calculations which do not consider all interrelationships,
consequences and effects of such a change in those prices.
(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 allowances. The policy is to seek
to hedge 100% of its currency requirements arising under all committed contracts excepting commodity hedge transactions, the requirements
for which are significantly less predictable. The policy for these latter transactions is to assess the Group’s requirements on a rolling basis and to
enter into cover contracts as appropriate.
The Group has foreign subsidiary operations with significant Euro-denominated net assets. The Group’s policy is to hedge its net investment in its
foreign operations by ensuring the net assets whose functional currency cash flows are denominated in Euros are matched by borrowings in Euros.
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:
2012
£m
2011
£m
2,119.5
2,074.4
Loans and borrowings
Purchase and commodity
contract commitments
Gross exposure
2012
2011
Jp¥m
DKK
(million)
€m
US$m
CHF
(million)
JP¥m
DKK
(million)
€m
US$m
46,000.0
–
923.6
248.3
10.0 28,000.0
–
664.8
150.0
–
106.7
578.8
2,019.1
46,000.0
106.7 1,502.4 2,267.4
44.8
54.8 28,000.0
–
1,036.8
415.0
1,859.7
1,036.8
1,079.8
2,009.7
CHF
(million)
20.0
–
20.0
Forward exchange/swap contracts
46,000.0
106.7
893.9
1,559.1
Net exposure (in currency)
Net exposure (in £m)
–
–
–
–
608.5
507.4
708.8
442.9
54.8 28,000.0
–
–
–
–
1,036.8
770.0
1,682.3
20.0
–
–
309.8
273.7
327.4
203.8
–
–
161
This represents the net exposure to foreign currencies, reported in pounds Sterling, and arising from all Group activities. All sensitivity analysis
has been prepared on the basis of the relative proportions of instruments in foreign currencies being consistent as at the balance sheet date.
This includes only monetary assets and liabilities denominated in a currency other than Sterling and excludes the translation of the net assets
of foreign operations but not the corresponding impact of the net investment hedge.
The sensitivity analysis is indicative only and it should be noted that the Group’s exposure to such market rate changes is continually changing.
The calculations are based on linear extrapolations of rate changes which may not reflect the actual result which would impact upon the Group.
A 10% change in foreign currency exchange rates would have had the following impact on profit after taxation, based on the assumptions
presented above:
US Dollars
Euro
DKK
JP¥
CHF
Equity
Income statement
at 31 March
2012
£m
At 31 March
2011
£m
at 31 March
2012
£m
At 31 March
2011
£m
–
41.1
–
–
–
41.1
–
22.2
–
–
–
22.2
36.4
0.6
–
–
–
37.0
16.5
–
–
–
–
16.5
The impact of a decrease in rates would be an identical reduction in the annual charge.
(v) Interest rate risk
Interest rate risk derives from the Group’s exposure to changes in the value of an asset or liability or future cash flows through changes in
interest rates.
The Group’s policy is to manage this risk by stipulating that a minimum of 50% of Group borrowings be subject to fixed rates of interest, either
directly through the debt instruments themselves or through the use of derivative financial instruments. Such instruments include interest rate
swaps and options, forward rate agreements and, in the case of debt raised in currencies other than Sterling, cross currency swaps. These
practices serve to reduce the volatility of the Group’s financial performance.
Although interest rate derivatives are primarily used to hedge risk relating to current borrowings, under certain circumstances they may also be
used to hedge future borrowings. Any such pre-hedging is unwound at the time of pricing the underlying debt, either through cash settlement on
a net present value basis or by transacting offsetting trades. The floating rate borrowings mainly comprise commercial paper issued at interest
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
2012
Carrying
amount
£m
(4,815.8)
(1,336.7)
(6,152.5)
189.2
(127.3)
(5,872.3)
(342.1)
(6,152.5)
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)
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162
SSE Annual Report 2012
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 an increase in 100 basis points in short term interest rates at the reporting
date in relation to the income statement. 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. The analysis assumes that all other
variables, in particular foreign currency rates, remain constant. 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
2012
£m
11.9
11.9
2011
£m
10.4
10.4
The impact of an identified decrease in basis points would be an equal reduction in the annual charge.
(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
2012
£m
2011
£m
142.0
(575.7)
(433.7)
887.9
573.9
1,461.8
(1,288.7)
1,199.2
(89.5)
(935.9)
891.5
(44.4)
(523.2)
1,417.4
(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.
163
2011
£m
48.0
30.0
78.0
(136.7)
(15.5)
(152.2)
(74.2)
Consolidated
Company
2012
£m
2011
£m
2012
£m
348.0
851.2
1,199.2
(399.2)
(817.6)
(1,216.8)
(17.6)
990.1
2,525.5
3,515.6
(769.3)
(2,307.5)
(3,076.8)
438.8
94.7
12.2
106.9
(206.3)
(8.5)
(214.8)
(107.9)
The net derivative financial (liabilities) and assets are represented as follows:
Derivative financial assets
Non-current
Current
Derivative liabilities
Non-current
Current
Total derivative liabilities
net liability
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.
DD
DD
Level 1 fair value measurements are those derived from unadjusted quoted market prices for identical assets or liabilities.
Level 2 fair value measurements are those derived from inputs other than quoted prices included within level 1 that are observable for the
asset or liability, either directly (ie as prices) or indirectly (ie derived from prices).
Level 3 fair value measurements are those derived from valuation techniques that include inputs for the asset or liability that are not based
on observable market data.
DD
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
59.8
–
–
59.8
(110.2)
–
–
–
(110.2)
1,037.7
69.6
32.1
1,139.4
(873.2)
(196.8)
(36.6)
(31.2)
(1,137.8)
–
–
–
–
–
–
–
–
–
1,097.5
69.6
32.1
1,199.2
(983.4)
(196.8)
(36.6)
(31.2)
(1,248.0)
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 2012.
(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
2012
Carrying
amount
£m
2012
Expected
cash flows
£m
2012
0-12
months
£m
2012
1-2
years
£m
2012
2-5
years
£m
2012
> 5
years
£m
2011
Carrying
amount
£m
2011
Expected
cash flows
£m
2011
0-12
months
£m
2011
1-2
years
£m
2011
2-5
years
£m
2011
> 5
years
£m
(2.2)
(2.2)
(1.6)
(0.6)
–
–
(4.0)
(4.0)
(2.2)
(1.3)
(0.5)
–
9.0
(8.1)
(257.9)
(64.6)
(620.6) (490.5)
(48.9)
(101.6)
(84.9)
(28.5)
(59.5)
–
0.9
(878.5)
(555.1)
(150.5)
(113.4)
(59.5)
18.5
(0.6)
17.9
(237.8)
(10.2)
(186.2)
(5.5)
(11.8)
(4.7)
(248.0)
(191.7)
(16.5)
(19.5)
–
(19.5)
(20.3)
–
(20.3)
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164
SSE Annual Report 2012
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 covers debt issued in the same currency (€) as the net investment in foreign subsidiaries with € denominated
functional currencies, these being the Airtricity Supply business and the Ireland and European wind farm portfolios. The hedge compares the
element of the net assets whose functional cash flows are denominated in € to the matching portion of the € borrowings held by the Group.
This 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
(2012 – £29.8m gain, 2011 – £4.3m gain). Gains and losses on the ineffective portion of the hedge are recognised immediately in the income
statement (2012 – £nil, 2011 – £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 2012, the Group’s long term credit rating was A3 stable outlook for Moody’s and A- stable
outlook for Standard & Poors. These remain unchanged in the year to 31 March 2012. 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 21 to 23 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 will depend on market prices and economic
conditions. The use of share buy-backs is the Group’s benchmark for investment decisions and is utilised at times when management believe the
Group’s shares are undervalued. No share buy-back was made during the year.
The Group’s debt requirements are principally met through issuing bonds denominated in Sterling, US dollars and Euros as well as medium term
bank loans predominately with the European Investment Bank. In addition the Group issued hybrid capital bonds which bring together features
of both debt and equity, are perpetual and subordinate to all senior creditors. During February 2012 the Group also undertook a US private
placement for a total consideration of $700m (equivalent to £446.4m). 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 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. In these respects, there were no changes to the Group’s capital management approach during the year.
165
32. rELaTED parTy TranSaCTIOnS
The immediate parent and ultimate controlling party of the Group is SSE 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.
Sale of goods
and services
2012
£m
purchase of
goods and
services
2012
£m
amounts
owed from
2012
£m
amounts
owed to
2012
£m
Sale of goods
and services
2011
£m
Purchase of
goods and
services
2011
£m
Amounts
owed from
2011
£m
Amounts
owed to
2011
£m
Jointly controlled entities:
Seabank Power Ltd
Marchwood Power Ltd
Greater Gabbard Offshore Winds Ltd
Scotia Gas Networks Ltd
Other Joint Ventures
associates
34.7
46.8
–
59.2
42.0
42.4
(94.8)
(80.5)
(24.4)
(154.3)
–
0.1
0.2
–
7.3
0.2
(44.5)
11.8
9.1
4.0
15.4
13.9
0.3
21.4
7.9
–
6.3
61.8
39.7
39.9
(121.3)
(82.7)
(0.2)
(131.2)
–
(104.3)
0.3
0.1
–
15.7
0.3
8.3
25.9
7.3
–
12.1
0.6
3.7
The transactions with Seabank Power Limited, Marchwood Power Limited and Greater Gabbard Offshore Winds Limited relate to the contracts
for the provision of energy or the tolling of energy under power purchase arrangements. 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 and stock
procurement services. Other transactions include those with PriDE (SERP) Limited, which 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 SSE
Contracting Limited.
The amounts outstanding are trading balances, are unsecured and will be settled in cash. No guarantees have been given or received. No
provisions have been made for doubtful debts in respect of the amounts owed by related parties. Aggregate capital loans to jointly controlled
entities and associates are shown in note 14.
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)
2012
£m
2.8
2.0
4.8
2011
£m
3.7
0.3
4.0
Key management personnel are responsible for planning, directing and controlling the operations of the Group. From 1 January 2011 these
personnel were identified as the Management Board, which is made up of the Executive Directors, seven (2011 – six) senior managers and
the Chief Executive Officer of Scotia Gas Networks Limited (who is not remunerated by the Group).
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.
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166
SSE Annual Report 2012
notes on the financial statements (continued)
for the year ended 31 March
33. COMMITMEnTS anD COnTInGEnCIES
(i) Capital commitments
Capital expenditure:
Contracted for but not provided
2012
£m
2011
£m
828.0
1,146.9
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
2012
£m
116.0
53.9
169.9
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
2012
£m
134.2
336.4
82.2
552.8
55.3
103.1
206.5
364.9
189.5
439.5
288.7
917.7
2011
£m
182.0
53.3
235.3
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
The average power purchase agreement lease term is 4 years (2011 – 5 years).
Certain obligations under power purchase agreements with various power generating companies are not deemed to qualify as finance leases
as the lease term is not judged to be substantially all of the economic life of the power station and the present value of the minimum lease
payments at the inception of the agreements did not amount to substantially all of the fair value of the power stations at that time.
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
SSE plc has provided guarantees on behalf of subsidiary, joint venture and associated undertakings as follows:
Bank borrowing
Performance of contracts
Purchase of gas
167
2012
£m
400.0
1,127.4
40.5
2011
£m
400.0
1,851.9
50.5
The Group has drawn down £400m from its European Investment Bank facility. 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.
The guarantees provided in respect of 50% of the major contracts for Greater Gabbard Offshore Winds joint venture project and certain other
renewable capital developments reduced significantly during the year 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.
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 16 April 2012, the Group received proceeds of US$700.0m (£446.4m) from the US private placement undertaken in February 2012 (note 31).
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eCommunications programme
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made a donation of over £6,000 on behalf
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Copy reports
You can obtain copies of the Annual Report
2012, free of charge, from the Company
Secretary, SSE plc, Inveralmond House, 200
Dunkeld Road, Perth PH1 3AQ or by accessing
the Company’s website at www.sse.com.
168
SSE Annual Report 2012
Shareholder information
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/
Interim Management Statement
26 July 2012
Ex-dividend date
25 July 2012
Record date
27 July 2012
Final date for receipt of Scrip Elections
(in respect of the 2011/12 final dividend)
24 August 2012
Payment date
21 September 2012
Half-year results announcement*
14 November 2012
Website
The Company’s website, www.sse.com,
contains a wide range of information including
a dedicated Investors section where you can
find further information about shareholder
services including:
DDshare price information;
DDdividend history and trading graphs;
DDthe Scrip Dividend Scheme;
DDtelephone and internet share dealing; and
DDdownloadable shareholder forms.
Twitter
We use popular social networking site Twitter
to keep shareholders, investors, journalists,
employees and other interested parties
up-to-date with news from the Company.
You can follow SSE on Twitter at
www.twitter.com/sse.
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.
Designed and produced by Tayburn
Photography by Toby Smith, Matt Davis and Steve Reid
For further information about SSE,
please contact:
SSE plc
Corporate Affairs
Inveralmond House
200 Dunkeld Road
perth pH1 3AQ
UK
Tel: +44 (0)1738 456000
Email: info@sse.com
www.sse.com
Follow the latest news
from SSE on Twitter at:
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Registered in Scotland No. 117119
STOCK CODE 008236
In producing this report we have chosen production methods
that aim to minimise the impact on our environment. The
papers used – Revive 50 White Silk and Revive 100 premium
White Uncoated – contain 50% and 100% recovered waste
respectively and conform to government requirements for
recycled paper. They are also certified as FSC mixed sources
grades. Both the paper mills and printer involved in this
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The printer is also registered as a Carbon Neutral company.