SSE Annual Report 2013 | Quarterlytics

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FY2013 Annual Report · SSE

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Reliable and
Sustainable

SSE plc Annual Report 2013

We are SSE.
Our purpose is to
provide the energy
people need in
a reliable and
sustainable way.

For customers

Keeping the lights on

Supplying energy
and related services

Investing in energy
infrastructure

Delivering real
dividend increases

For shareholders

SSE delivers electricity to 3.7 million
homes, offices and businesses in
the north of Scotland and central
southern England. Minimising the
number of minutes those customers
are without electricity is the first
responsibility of SSE’s Networks
business.

SSE supplies electricity and gas to
homes, offices and businesses in
Great Britain, Northern Ireland and
the Republic of Ireland, and supports
those customers from centres in
Basingstoke, Cardiff, Cumbernauld,
Dublin, Havant and Perth.

SSE produces electricity using gas,
coal, water, wind and biomass
and is also involved in natural gas
production in the North Sea to help
meet the energy needs of customers
now and in the future.

SSE’s first financial responsibility
to shareholders is to deliver
annual above-inflation increases
in the dividend, and fulfilling that
responsibility is its first financial
objective in the years ahead.

Customer minutes lost
in the north of Scotland

Energy customer
account numbers

Total electricity generation
capacity – MW

Full-year dividend payable to
shareholders – pence per share

7
8 7
3

7
3

100

9
6
5

9
5
5

9
4
7

1
3
0
2
8

1
1
2
9
0

1
1
8
6
0

15,000

12,000

9,000

6,000

3,000

100

8
4
2

8
0
1

7
5
0

2
0
1
2

2
0
1
3

2
0
1
1

• See page 35.

2
0
1
2

2
0
1
3

2
0
1
1

• See page 40.

2
0
1
1

• See page 50.

2
0
1
2

2
0
1
3

2
0
1
1

• See page 14.

2
0
1
2

2
0
1
3

Strategic overview

Inside this year’s report

Section 1.
Strategic overview

02 Chairman’s statement

04 The energy sector
04 Great Britain
05 Ireland
06 Weather

08 Questions and answers with
the SSE Executive Team

12 Our business explained

14 Financial overview

28 Key performance indicators

30 Sustainability overview

Section 2.
Performance review

31 Networks

39 Retail

48 Wholesale

Section 3.
Governance

61 Chairman’s introduction to

SSE corporate governance

62 Board of Directors

64 People and values

69 How the Board works

74 Risk management

80 Nomination Committee Report

82 Audit Committee Report

84 Safety, Health and Environment
Advisory Committee Report

Introduction

86 Remuneration Report
86
89 Remuneration in 2012/13
94 Remuneration for 2013/14

and beyond

98 Remuneration in detail

101 Other statutory information

Section 4.
Financial statements

104 Independent Auditor’s report

105 Consolidated income statement

106 Consolidated statement of
comprehensive income

107 Balance sheets

108 Statement of changes in equity

110 Cash flow statements

111 Notes on the financial statements
111 1. General information and

basis of preparation
111 2. Summary of significant new

accounting policies and
reporting changes

113 3. Critical accounting judgements

and key sources of estimation
uncertainty

115 4. Segmental information
120 5. Other operating income

and expense

121 6. Exceptional items and certain

remeasurements
122 7. Directors and employees
124 8.
Finance income and costs
125 9. Taxation
127 10. Dividends
127 11. Earnings per share
128 12. Notes to the Group cash flow

statement

129 13. Goodwill and other intangible

assets

133 14. Property, plant and equipment
134 15. Biological assets
135 16. Investments
137 17. Subsidiary undertakings
138 18. Acquisitions, disposals and
held-for-sale assets

139 19. Inventories
139 20. Trade and other receivables
140 21. Cash and cash equivalents
140 22. Trade and other payables
140 23. Current tax liabilities
141 24. Construction contracts
141 25. Loans and other borrowings
144 26. Deferred taxation
145 27. Provisions
146 28. Share capital
146 29. Reserves
146 30. Hybrid capital
147 31. Retirement benefit obligations
150 32. Employee share-based

payments

155 33. Capital and financial risk
management

169 34. Related party transactions
170 35. Commitments and

contingencies

172 36. Post balance sheet events
173 Accompanying information
173 A1. Basis of consolidation and

significant accounting policies

182 A2. Principal jointly controlled

entities, operations and
associates

183 A3. Subsidiary undertakings

Shareholder information

IBC Shareholder information

The Directors’ Report is set out on pages 1 to 102.

* Unless otherwise stated, in line with SSE’s approach since September 2005, this financial 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, unless otherwise stated. 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 profit after tax and
earnings per share before exceptional items, remeasurements arising from IAS 39 and deferred tax.

Key features of 2012/13

Above inflation
dividend increase

SSE is recommending a final dividend of 59.0p per share.
This will make a full-year dividend of 84.2p, which is an
increase of 5.1%, and the fourteenth successive above-inflation
dividend increase since the first full-year dividend paid by SSE,

for 1998/99. • See page 14.

• See page 31.

• See page 42.

Networks asset
base expanding

The Regulated Asset Value of SSE’s economically-regulated
energy networks has increased to £6.4bn (net) at 31 March 2013.
This follows significant investment in electricity transmission and
distribution and in gas distribution. The electricity transmission
RAV has exceeded £1bn for the first time.

First customer
service guarantee

SSE is the first leading energy supplier in Great Britain to offer a
Customer Service Guarantee. It means that if SSE fails to meet one
of five commitments, designed to make life easier for customers
and find ways to help them save money, it will discount £20 off
the customer’s next bill.

New generation
assets in Ireland

In October 2012, SSE completed the acquisition of electricity
generation assets in Ireland for £289.8m. They include 1,068MW
of assets in operation and a new 460MW gas-fired power station
under construction in County Wexford. Adding to SSE’s existing
assets, the acquisition is a positive step forward in delivering a
balanced electricity generation and supply business in Ireland.

• See page 57.

1. Strategic overview2. 3. 4. Strategic overview

Chairman’s statement
Lord Smith of Kelvin

SSE’s core purpose is to provide the energy people need
in a reliable and sustainable way. In fulfilling this purpose,
SSE requires the support of shareholders, to whom this
report is addressed. It summarises SSE’s performance in
2012/13 and its plans for 2013/14 and beyond.

performance in the future, have been
consistent features of SSE since the
company was formed in 1998. The other
consistent feature of the company has
been the first financial objective of its
business model and strategy: to deliver
sustained real growth in the dividend
payable to shareholders.

Throughout this time, Ian Marchant has
been a remarkably successful finance
director and then chief executive of SSE.
He is the first to acknowledge, however,
how much he owes to Alistair Phillips-
Davies and Gregor Alexander and SSE is
fortunate indeed to have these two very
able and experienced executives, and a
very strong management team generally,
to take forward the business after Ian,
having completed an exceptional decade
as chief executive, steps down at the end
of next month.

While there will be a change of Chief
Executive in the company, and while the
energy sector is subject to change driven
by regulation, legislation, technology,
demand for natural resources and the
needs of customers, there are four things
at SSE that won’t change: the balanced
business model; the focus on operations
and investment; the dedication to
customer service; and the commitment
to sustained real growth in the dividend
in the years ahead.

Lord Smith of Kelvin
Chairman

In consecutive weeks in the early spring
of 2013, SSE confronted two of the biggest
issues it has had to face since it was
formed in 1998. The last week of March
saw extreme snow falls and ice in the west
of Scotland which inflicted unprecedented
damage on the electricity network on
Arran and Kintyre. Over 500 engineers
and other employees from the company
were deployed to help restore electricity
supplies to households, businesses and
other premises, working closely with
a wide range of authorities and agencies.
This was SSE at its best.

The first week of April saw the Gas and
Electricity Markets Authority announce
a £10.5m penalty on SSE for breaches of
licence conditions in relation to sales of
electricity and gas, mainly between 2009
and 2011. Like everyone else associated
with SSE I have no hesitation in apologising
unequivocally for the breaches that
occurred; but while the breaches were
clearly wrong, the response has been
absolutely right. SSE has undertaken major
reform of its Retail operations since 2011,
including introducing a sales guarantee to
make good any financial loss experienced
by customers joining SSE, and launching
in 2013 the industry’s first-ever customer
service guarantee, backed by a financial
commitment. This is now SSE at its best, too.

A generally good performance in 2012/13
enabled SSE to extend its unbroken record
of annual increases in the full-year dividend
and in adjusted profit before tax*. This ability
to deliver consistently increases in the full-
year dividend and in adjusted profit before
tax* shows the resilience inherent in its
balanced model of economically-regulated
and market-based energy businesses and
the robustness of its strategy of focusing
on operations and investments in each of
those businesses.

A carefully-maintained balanced business
model and a clear strategic emphasis on
operations and investments, including
learning lessons from the past to improve

SSE plc Annual Report 2013

Strategic overview

Strategy

Our aim:

SSE’s principal financial
objective is to deliver
annual above-inflation
increases in the
dividend payable
to shareholders.

SSE’s strategy is to deliver sustained real growth in the dividend
payable to shareholders through the efficient operation of, and
investment in, a balanced range of economically-regulated and
market-based businesses in energy production, storage, distribution,
supply and related services in the UK and Ireland.

Dividend per share

84.2p
+5.1%

100

8
4
2

8
0
1

7
5
0

7
0
0

6
6
0

6
0
5

5
5
0

4
6
5

4
2
5

3
7
7

3
5
0

3
2
4

3
0
0

2
7
5

2
5
7

1
9
9
9

2
0
0
0

2
0
0
1

2
0
0
2

2
0
0
3

2
0
0
4

2
0
0
5

2
0
0
6

2
0
0
7

2
0
0
8

2
0
0
9

2
0
1
0

2
0
1
1

2
0
1
2

2
0
1
3

The key features of SSE’s strategy:

Focus on
core values

Companies have to earn profits the right
way and the SSE SET of values is designed to
help deliver this: Safety, Service, Efficiency,
Sustainability, Excellence and Teamwork.

• See pages 14 and 64.

Maintaining a
balanced business

Its Networks, Retail and Wholesale
businesses give SSE strong foundations
and diverse sources from which to achieve
growth in the dividend, while reducing
the risks associated with over-exposure
to one part of the energy sector.

Sticking to our
financial principles

SSE adopts a prudent approach through
maintenance of a strong balance sheet,
focus on achieving investment returns
greater than the cost of capital, a disciplined
approach to acquisitions and measuring
financial decisions against share buy backs.

• See page 14.

• See page 15.

Setting clear long-
term priorities

Shareholders’ investment should be
remunerated through dividends because
they provide the biggest source of return
over the long term and commitment to
dividend growth demands a long-term
approach to operations, investments

and acquisitions. • See page 15.

1. Strategic overview2. 3. 4.
Strategic overview

The energy sector

Great Britain

The energy sector in Great Britain
remains one of the most competitive
and deregulated energy markets in
the world. 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
that are vertically integrated and
operate in both parts of the sector
must maintain clear legal separation
and confidentiality under the Utilities
Act 2000.

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.

UK energy connections

Around 30 million homes, offices
and businesses are connected to the
electricity network in Great Britain and
around 23 million to the gas network.
Initial figures for 2012 show that total
electricity generation throughout the
UK was 363TWh representing a further
fall in overall electricity demand. Total
gas consumption in 2012 was 855TWh,
representing a further fall in gas demand,
largely driven by a significant reduction
in gas being used to generate electricity.

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.

Energy networks
Electricity and gas networks have operated
under a relatively stable regulatory regime
since privatisation. Regulation is based on
allowing a return on a Regulated Asset
Value (RAV) model. By virtue of their

monopoly status competition in
this sector is defined by the criteria
set by the regulator, Ofgem. Network
operators compete to prove themselves
the most efficient and effective operator
of energy networks and by doing so
they can outperform their allowances,
adding to returns, and vice versa for the
inefficient operators.

There are four types of energy network:

in GB) – high voltage electricity wires
and cables;

• electricity transmission (three networks
• electricity distribution (14 networks in
• gas transmission (one network in GB) –
• gas distribution (eight networks in GB) –

GB) – lower voltage wires and cables
delivering electricity to customers’
premises;

lower pressure pipes delivering gas
to customers’ premises.

high pressure gas pipelines; and

United States

Fukushima

Russia

Europe

Libya

Qatar

Iran

Colombia

SSE plc Annual Report 2013

Belfast

Dublin

Perth

Edinburgh

Electricity interconnector

Gas pipeline

LNG import terminal

Cardiff

London

North SeaIrish SeaEnglish Channel1. Moyle interconnectorDate Established: 2001 Length: Approx 60kmCapacity: 450MW (currently restricted to 250MW)2. Scotland to Northern Ireland pipelineDate Established: 1996 Length: Approx 130kmCapacity: 8mcm3. Scotland to Republic of Ireland pipelineDate Established: 1993 Length: Approx 200kmCapacity: 26mcm4. East to west interconnectorDate Established: 2012 Length: Approx 260kmCapacity: 500MW5. Bacton to Balgzand lineDate Established: 2006 Length: Approx 230kmCapacity: 46mcm6. Bacton to Zeebrugge interconnectorDate Established: 1998 Length: Approx 230kmCapacity: 58-74mcm7. BritNed interconnectorDate Established: 2011 Length: Approx 260kmCapacity: 1,000MW8. England to France interconnectorDate Established: 1986 Length: Approx 70kmCapacity: 2,000MW (DC)Distribution networks are each owned and
operated by the same company. Electricity
transmission networks have a single, GB-
wide system operator (National Grid) with
network ownership spread amongst three
different private owners.

The companies operating these networks
are the subject of economic regulation
through a Price Control determined by
Ofgem which sets 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.
Each network has a Regulated Asset Value
(RAV) indexed to the Retail Price Index,
which represents:

• the price paid for them when they were
• allowed capital expenditure; less
• annual depreciation.

privatised; plus

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. Companies
cannot charge network users more than
is allowed under the Price Control.

The first set of Price Controls under
Ofgem’s new RIIO (Revenue = Incentives
+ Innovation + Outputs) model have
been set for electricity transmission, gas
transmission and gas distribution and will
run until 2021. The existing Price Control for
electricity distribution was set under the
old regime and will run until March 2015.
Thereafter electricity distribution networks
will be subject to a new eight year Price
Control set under the RIIO regime. This new
model delivers eight year price controls,
delivering greater certainty to the sector
over the medium term.

Wholesale electricity and gas
In line with its island status, around 98% of
the electricity consumed by UK customers
is generated in the UK. At the beginning of
2012, the UK as a whole had around 89GW
of electricity capacity, representing a drop

from 90.4GW at the end of 2010. Through
2012 and early 2013 further plant closures
and reductions in capacity have been
announced by generators, including SSE.

they can manage their gas portfolio
more effectively and the country
benefits from greater gas security.

The production of electricity and gas for
customers in Great Britain is a market-
based activity with wholesale markets
in which:

• 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.

Gas production from the UK Continental
Shelf is in long term decline. In 2012,
roughly half of UK gas demand was
supplied through UK production with
the remainder being supplied 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 further.

It is part of Ofgem’s responsibility to
licence electricity generation and to make
sure that electricity and gas markets are
competitive. The markets are designed
to maintain a downward pressure on the
cost of electricity and gas, for the benefit
of customers, and to encourage greater
diversity in the supply of fuels in order
to enhance energy security. In line with
that, the Renewables Obligation requires
licensed UK electricity suppliers to source
a specified proportion of the electricity
they provide to customers from eligible
renewable sources. This proportion is set
each year and has increased annually.

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

Electricity and gas retailing
Great Britain has one of the most
competitive energy retail markets in the
world. There are six electricity and gas
suppliers in Great Britain with a market
share each of more than 5%. Across
Europe, there are only three countries
that have a larger number of suppliers
with a market share of more than 5%.

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.

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.

Ireland

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
though this has improved since December
2012 with the commissioning of the East-
West interconnector connecting Dublin to
Wales. Total interconnection now consists of:

• 450MW Moyle electricity interconnector;
• 500MW East-West electricity
• Scotland-Northern Ireland gas pipeline;
and • Scotland-Republic of Ireland gas pipeline.

interconnector;

Ireland is hugely dependent on fossil fuels,
over 90% of which are imported. With
two gas interconnectors to GB, potentially
carrying over 30mcm daily, indigenous
gas storage is limited. However, a new gas
production field, Corrib, is being developed

1. Strategic overview2. 3. 4. Strategic overview

The energy sector (continued)

off the west coast. At peak flow it is
estimated this field will deliver 42%
of all island demand over the first two
years of operation. With the Republic of
Ireland continental shelf extending to
220 million acres, 10 times its land area,
the government is keen to encourage
exploration companies in the expectation
that significant oil and gas reserves may
lie in deep water in the Atlantic basin.

To further reduce import dependence
and meet strict EU decarbonisation
and renewable energy targets, both RoI and
NI governments have set a target of 40%
renewable electricity to be delivered by 2020.
This target requires approximately 5,000MW
of renewable energy capacity to be installed
across the island. This is underpinned
by established support mechanisms: in RoI,
the Renewable Energy Feed-in tariff which
provides a floor for renewable energy; and,
in NI, Renewable Obligation Certificates
(as in GB). Renewable energy, mainly
hydro and wind, currently supplies 17%
of electricity demand in Ireland.

Ireland currently has approximately
2,070MW of onshore wind connected but
has the resource to increase this on- and
offshore. With a view to harnessing this
potential, in January 2013, Energy Ministers
from the UK and RoI governments signed a
Memorandum of Understanding regarding
the development and subsequent export of
onshore wind from Ireland to GB. Over the
coming year analysis will be completed to
assess the economic viability and if proven,
a legal partnership will be examined.

Economic regulation of networks
The Commission for Energy Regulation
(CER) and the Northern Ireland Utility
Regulator (NIAUR) regulate the electricity
and natural gas markets and networks
in RoI and NI respectively.

The state-owned (RoI) Electricity Supply
Board (ESB) owns and operates the
distribution and owns the transmission
networks in RoI and NI. Similarly to GB,
these activities are regulated through Price
Controls set by CER and NIAUR typically for
five-year periods. The current Price Controls
in RoI will run until 2015. In NI the price
control covers the period 2012-17.

The transmission system in the Republic
of Ireland is operated by EirGrid plc and, in
Northern Ireland, is operated by SONI Ltd,
a wholly-owned subsidiary of EirGrid plc.

SSE plc Annual Report 2013

Ireland is hugely dependent on fossil fuels, over 90%
of which are imported. With two gas interconnectors
to GB, potentially carrying over 30mcm daily, indigenous
gas storage is limited.

In the Republic of Ireland, 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 2017.

In Northern Ireland 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. The forthcoming Phoenix Price
Control will cover the period 2014-16,
while Firmus’ runs to the end of 2016.

Electricity and gas markets
Across the Republic of Ireland and
Northern Ireland there is a common
wholesale electricity market; the Single
Electricity Market. This market operates
with two currencies (Euro and Sterling)
and there are separate dual support
mechanisms for renewable energy.

The Single Electricity Market encompasses
over 9,000MW of fully dispatchable
generation capacity and supplied over
35TWh in 2012, costing around €2bn in
energy payments and €0.5bn in capacity
payments in 2012 (source: EirGrid/SONI).
The retail markets operate separately
with around two 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 the Republic
of Ireland and 150,000 in Northern
Ireland. 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 2013 there were four
main electricity and gas suppliers
operating in the Republic of Ireland
and Northern Ireland.

Despite competitive business markets for
a number of years, domestic switching in
electricity and gas has only taken hold since
2009. SSE’s retail brand in Ireland, Airtricity,
has been a significant contributor to the
development of domestic competition
across the island with almost 800,000
energy customers joining in the last four
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.

In June 2012, SSE completed the acquisition
of Phoenix Supply Limited, to become
the regulated incumbent gas supplier to
130,000 customers. The now renamed
Airtricity Gas Supply NI business completes
its annual tariff review in March each year,
with an interim tariff review in October.

In early 2013, Airtricity also became the
first new market entrant for Large Energy
Users in to Northern Ireland’s Ten Towns
Gas Supply Network, which was opened to
competition in October 2012. Previously,
Large Energy Users had been limited in
their choice of natural gas supplier, with
the Ten Towns license being restricted to
Firmus – the network operator there.

Market structure
The RoI Government in early 2012
announced a programme for the disposal of
State assets through the National Treasury
Management Agency (NTMA). While, gas
and electricity transmission and distribution
systems will remain in state control,
all other state assets are under review.

The sale of Bord Gáis Energy (BGE),
which contains gas and electricity retail
and thermal and renewable generation
assets, will comprise the main element
of the disposal in the energy sector, with
some non-strategic power generation
capacity owned by ESB also proposed.
The sale process of BGE is scheduled
to be completed by the end of 2013.

Weather

The UK and Ireland 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 term ‘climate’ describes the average
weather expected over a long period
of time, typically 30 years or more.

Weather and climate change can
both have an effect on SSE’s business
operations, including:

• variations in customer demand for
• changes in the volume of electricity
• disruption to power supplies as a

result of weather-related damage
to the electricity network.

generated; and, potentially,

energy;

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.

The term ‘weather’ refers to the
temperature, precipitation and wind, which
sees hourly and daily fluctuations; whereas

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.

2012/13 weather patterns relative
to the 30 year average
In the UK 2012/13 will be remembered
as one of the coldest periods of time in
the past 30 years. Not only was it a cold
year but rainfall across the UK was also
higher than the 30-year average for a
number of months.

Most noticeably:

• April 2012 – the coldest April since

1989, it was also the wettest April since
records began in 1910, only the western
fringes of Scotland and parts of Northern
Ireland were drier than average.

and the wettest June on record since
records began in 1910.

month saw flooding in parts of England,
in Wales and Scotland the month was
dry and clear compared with the 30-
year average.

• June 2012 – the coldest June since 1991
• August 2012 – although the start of this
• December 2012 – the UK sunshine figure
• February 2013 – despite generally cold
• March 2013 – the coldest March since

temperatures, there were few major
weather events impacting the UK during
February.

1962. March was the coldest month of
the ‘extended winter’, the first time this
has happened since 1975.

for this month was 120% of average.

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.

Annual 2012 mean temperature
(compared to 1971-2000 average)

Annual 2012 rainfall amount
(% of 1971-2000 average)

Anomaly Value (°C)

> 1.5
1.0 to 1.5
0.5 to 1.0
0.2 to 0.5
-0.2 to 0.2
-0.5 to -0.2
-1.0 to -0.5
-1.5 to -1.0
< -1.5

% 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

1. Strategic overview2. 3. 4. Strategic overview

Questions and answers with
the SSE Executive Team

Answering key
questions.

In the year to March 2013, SSE had three Executive
Directors: outgoing Chief Executive Ian Marchant,
Deputy Chief Executive and Chief Executive Designate
Alistair Phillips-Davies and Finance Director Gregor
Alexander. Here they answer some of the key
questions facing both SSE and the energy industry
now and in the future.

Watch the video
Ian, Alistair and Gregor talk about SSE’s full-year results.
http://www.youtube.com/sseplc

Left to right: Ian, Alistair and Gregor

SSE plc Annual Report 2013

Are you pleased with SSE’s overall
performance in 2012/13?

Ian • After five years of sustaining

profit increases during a period of tough
underlying conditions for the energy sector,
it is clearly encouraging that we have
delivered an increase of 5.6% in adjusted
profit before tax*.

Those tough underlying conditions are
continuing. Stubbornly low margins for gas
generation, persistently weak economic
conditions, turbulence in global energy
markets and heightened political and
regulatory activity at home are continuing
to make for a challenging and complex
operating environment.

Gregor • The increase in profit growth in

2012-13 is down to a number of factors.
First and foremost it is down to SSE’s
vertically integrated business model that
invests in a balanced range of energy
businesses. When the market cycle is at a
low point, regulated networks deliver solid
dependable returns, and when the market
picks up, the competitive businesses should
provide upside.

It is also down to some good, old-fashioned
cost control. SSE has a long standing
reputation for efficiency and controlling
costs and we have worked very hard over
the last year reinforcing that culture and
weeding out any unnecessary spend.

Putting safety first is an often
cited SSE mantra. Are you
satisfied with its safety record
during 2012-13 and why should
this matter to shareholders?

Alistair • I am disappointed with the safety

performance this year. It is true that we
have safety statistics that many companies
would be proud of but, to be frank, that’s not
the most important thing. What matters is
that we should make consistent progress
towards an injury free working environment
– and we still have a lot of work to do before
we reach that target.

Gregor • I believe our safety performance

has to be our top priority. First of all
because of the human impact of a poor
safety performance, but also because a
company’s attitude to the safety of its
workforce tells you a lot about what
kind of company it is. Simply put, safe
companies are good companies.

You have repeatedly made the
point that SSE must earn the
right to make its profit. Do you
believe it has done so this year?

Alistair • This year has been a case of ‘one

step forward; one step back’. The outcome
of Ofgem’s investigation into our previous
sales practices was obviously a significant
setback in persuading customers that we
are worthy of their trust.

We have a lot of work to do in the months
ahead. However, on a more positive note,
we introduced a sector-leading Customer
Service Guarantee that is delivering for
customers.

More broadly, the performance of the
Networks businesses, especially in the
late March snow storms on the west of
Scotland, should have helped to build
trust and respect amongst our network
customers and other stakeholders.

The record £10.5m fine imposed
on SSE for misleading customers
has been described as a “damning
indictment of what SSE has done.”
How can you square that with the
values the company promotes?

Ian • I can’t. But I do believe that good

companies can make bad mistakes. The
test of whether an organisation can live
up to the standards expected of it is in
making sure the mistake is put right and
never repeated. We are all determined
that this will be the case with SSE.

Alistair • The SSE values are about being

open and honest and we have made
no bones about the fact we got things
wrong, and we’ve all apologised for that.
Ofgem has proved itself to be a tough
regulator on this matter. The key thing
that matters now is that we never
repeat the same mistake.

At the end of 2011 we introduced
a Sales Guarantee to compensate
customers who may have been mis-sold.
Since then, we have created a newly-
structured Retail division and brought
in from outside SSE new members of
the senior management team.

We have totally changed the way we
conduct sales. We aim to make every
sale open, honest and informed so that
customers can make the right choice.

There are reports that some
big businesses in the UK
are avoiding making a fair
contribution to the UK Treasury
in terms of tax contributions.
What is SSE’s position?

Gregor • SSE disagrees strongly with any

company that takes an aggressive stance
in interpreting tax legislation, or uses so-
called ‘tax havens’ as a means of doing
so. As a UK based and listed company
operating solely in the UK and Ireland, SSE
believes it has a responsibility to operate
within both the letter and spirit of the law
at all times. While the position varies from
year to year, according to the 2012 PwC
Total Tax Contribution survey, SSE ranked
17th for UK taxes paid, whilst being ranked
30th in the FTSE by market capitalisation

The energy problem in the UK is
often described as a ‘trilemma’,
of competing pressures from
the challenges of climate change,
security of supply and energy
affordability. In the face of
those competing pressures
is it possible for SSE to find
a sustainable balance?

Alistair • The key word here is balance

and to understand the trade offs that
occur in order to achieve that balance.
The UK could provide all of its energy
more cheaply for a short time through
fossil fuels but there would be a very
negative impact on natural resources.
We also can’t be sure that fossil fuels
will deliver security of supply given our
reliance on unpredictable, but increasingly
competitive and demanding, global
markets. The country could put all its
eggs in the renewable basket but it
cannot generate energy 24/7. Equally,
the UK could pursue the very expensive
nuclear option, but even the most ardent
nuclear supporter is unlikely to claim
that it is capable of providing all of the
country’s energy requirements. We – and
the country as a whole – have to manage
these competing demands at the same
time as ensuring the choices for future
generations are not compromised.

Gregor • In this competing trilemma

SSE’s strategy is simple. We will invest
in the things we know we are good at:
renewable energy and lower carbon
thermal generation. The combination
of these two generating technologies

is important. Thermal generation provides
the critical flexibility that enables us to
make the most of the renewable resources
when the wind blows, the sun shines or the
rain falls. We contribute to making energy
as affordable as possible by pursuing only
the most economic investment projects at
the same time as helping our customers
reduce their overall energy consumption.

Customers are worried about
energy bills. How worried
should they be?

Gregor • The winter gas price for 2012/13

contributed to the highest-ever financial
year average price. Because the UK is
increasingly reliant on gas imports, the
volatility we have seen in domestic gas
prices in recent times becomes very
difficult to avoid. SSE works hard to counter
this volatility and to secure supplies for
customers as cheaply and reliably as
possible – it’s in our interests as well as
our customers’ that we do this. But the
underlying structural issues behind price
spikes show no signs of abating, and
that means we all have an interest in
the ongoing political debate that will
help shape our energy future.

Alistair • I am acutely aware the overall

cost of energy to our customers is
becoming an increasing burden on their
household budgets. Energy affordability
is a critical issue and we do everything
we can to avoid price increases, and will
continue to do so. But the additional costs
that are borne by the energy customer –
such as the cost of government-sponsored
environmental and social schemes – have
a material impact on their energy bills.
These costs are part of an obligation placed
on us by Government and there is nothing
we can do to avoid it.

Another issue customers are
worried about is security of
supply. Do you believe the UK’s
current plans for Electricity
Market Reform will enable
sufficient investment in electricity
infrastructure to avoid a security
of supply crunch in the future?

Ian • We can’t speak on behalf of

other companies that may or may not
invest, but given that SSE is the only UK
headquartered energy utility with such
a strong and broad focus on the UK
electricity market, I would suggest that

1. Strategic overview2. 3. 4. Strategic overview

Questions and answers with
the SSE Executive Team (continued)

our assessment should be of particular
concern to the UK government. There is
a real risk that the continuing uncertainty
over measures such as the Contract for
Difference and the capacity market simply
increase a reluctance to invest. An early
and appropriate capacity mechanism
would make a significantly positive impact
on the investment case for new gas-fired
generation plant that is critical to securing
electricity supply throughout this decade.

Alistair • A good illustration of Ian’s point

is the example of nuclear. A six month
delay in agreeing strike prices for nuclear
will simply mean that new nuclear will
come on later than expected and well
after 2020. But slow progress towards
a capacity mechanism will exacerbate
an already precarious security of supply
problem in the middle of this decade.

And what will this mean for
SSE’s investors?

Gregor • We will work hard to make

the case to government for an electricity
market framework that will appropriately
reward the risk that capital providers will
face. If, however, proposed generation
projects fail to meet the disciplined
financial criteria we set, then we will
not put shareholder returns at risk, and
we will seek to invest in alternative options.
SSE has a broad set of investment options
and there is always an alternative value-
adding project to invest in.

Alistair • As Gregor says, we have plenty

of options and that’s one of the benefits
of our balanced business model. For the
period up to 2012, for example, the biggest
element of our investment programme
was renewable energy, but that has started
to change and over the next few years the
biggest proportion of our investment will
be in economically-regulated electricity
networks. We are very careful to make
sure that we don’t over-allocate the
money we invest to any single part of
the business and thereby expose SSE
and its investors to unnecessary risk.

How do you assess political and
regulatory risk to the business
in 2013/14 and beyond?

Alistair • Political and regulatory risk

is a prominent feature of the industry
we participate in and for understandable
reasons. People need energy to live and to

SSE plc Annual Report 2013

live well. SSE has a clearly-defined market
focus – concentrating all of its activities in
the UK and Irish markets. These markets,
in comparison to elsewhere, are noted for
their lower political risk. Of course, even in
the UK political risk is omnipresent which
is why we work hard to make our case to
politicians, government and the regulator.

The date for a referendum on
Scottish independence has now
been set. What does that mean
for SSE?

Gregor • We made our position on this

clear in 2012, and it hasn’t changed.
Constitutional issues are matters for
voters. As we said in 2012, the referendum
does increase the risk of regulatory and
legislative change with regard to the
electricity and gas industry in Scotland
and we have to take account of that in
making decisions about the business.
At the same time, we expect SSE to
continue to be a significant business in
England, Wales, Scotland, Northern Ireland
and the Republic of Ireland in the short,
medium and long term.

When the attention of the
public, politicians and the
media is fixed firmly onto the
debates surrounding security
of supply and the price of
energy, how important are the
Networks businesses to SSE?

Alistair • Many people see networks as

the jewel in SSE’s crown, and it’s easy to
see why. Of course they provide the basis
under which we can make dependable
returns but they also provide an important
contribution to the culture of SSE as a
whole. Operational excellence and a focus
and pride for ‘keeping the lights on’ are
embedded within the network businesses
and influence all the businesses that make
up the SSE Group.

Gregor • All three of SSE’s energy networks

businesses are performing well but with
their own specific challenges to meet.
SGN (of which SSE owns 50%) has proved
itself to be a first class investment, with
its operational performance delivering
dependable returns every year. The
electricity distribution networks in the
south of England and the north of Scotland
are innovating and reforming in a way not
seen for a generation. And the north of
Scotland electricity transmission business

is delivering significant growth in its
regulated asset base, underpinning the
solid and stable returns that are vital for
our shareholders.

In the past, SSE would be
described as an excellent
operator of energy assets, not
necessarily as a company that
was excellent at building energy
assets. Is this still the case?

Ian • In my ten years as Chief Executive

the company has undergone three phases.
Firstly we cut waste and duplication in the
years after the original merger forming
SSE in 1998. Then there was a phase when
acquisitions were plenty and SSE built a
reputation for good judgement and timing
in acquiring assets and for successfully
integrating them in to the business.
Finally, from 2008, SSE has undertaken
a large capital programme of investment
focussing on building new wind farms,
new transmission infrastructure and
the maintenance and development of
existing and new thermal generation plant.
The company is becoming increasingly
skilled in this area.

Alistair • The scale of SSE’s programme

of capital investment makes it one of the
biggest across the UK and Ireland but we
have learnt to pursue and deliver those
investments with the same discipline and
rigour for which we had built a reputation
for in operations and acquisitions. We must
constantly caution against complacency
and have established ways to maintain
the process of continuous improvement.

Gregor • The focus for us is to make sure

capital starts earning its way as quickly as
possible. I am very pleased with the progress
in completing our onshore wind farm
developments to time and within budget
– with the key target for the construction
teams being on achieving ‘first energy’. This
financial year we have seen a substantial
increase in total installed capacity which is
now earning income for our shareholders.

Has SSE become capital
constrained? Are you being
prevented from pursuing
investment opportunities
due to a lack of capital?

Gregor • I am comfortable that the current

level of investment is appropriate in order
to continue delivering the dividend target

over the medium to long term. There is
diversity and flexibility in our financial
management and flexibility within the
capital programme to be able to respond
to opportunities if they arise but we
remain firmly committed to the current
criteria set out for an A- rating from the
credit agencies.

With a new Chief Executive,
will SSE introduce a new
strategy for the future?

Alistair • No. SSE’s existing strategy is the

product of its whole management team –
of which Gregor and I have been members
for over a decade. The Board and the senior
management team remain as clear as we
have always been – SSE’s strategic purpose
is to provide the energy people need in a
reliable and sustainable way. And in doing
so we will work to meet our core financial
objective – which is to deliver real growth
in the dividend every year.

Gregor • Alistair and I have worked

together since SSE was formed in 1998 and
each year since then we have been able
to point to the benefits of the company’s
strategy being realised in practice. There
is no reason to change it, and it would be
wrong to do so. Obviously, we’ll continue
to anticipate and adapt to changes in the
sector and in the wider economy. We’ve
always done that and we always will –
but always within the framework of our
established strategy.

that is very sure of what it is here to do and
what it stands for. That’s partly because of
the SSE SET of core values – safety, service,
efficiency, sustainability, excellence and
teamwork. They’re very well-established
throughout SSE. These values, I believe,
will endure beyond any of the individuals
that hold the most senior management
positions.

Gregor • Alistair and I have thoroughly

enjoyed working alongside Ian. The great
thing is that through the work he has
led, the company is on a strong footing
for the future, with a clear strategy and
straightforward financial objective, backed
up by the core values which go to the heart
of everything we do.

Alistair • SSE is a good company and Ian

has been an outstanding leader. I am
enormously looking forward to taking over
the reins, working alongside Gregor. But I
am clear about what the change means.
This is a change of CEO, or team captain,
not a change in the core strategy or the
overall make-up of the team. SSE’s core
strategic purpose remains firm: to provide
the energy people need in a reliable
and sustainable way and in doing so we
will work to meet our principal financial
objective: delivering real term increases
in the dividend year after year.

What is the greatest risk of SSE
being unable to deliver that
dividend target in 2013-14?

Gregor • Provided we stick to the financial

and operational discipline that has defined
SSE for over a decade, I firmly believe we
will be in a strong position to deliver an
above inflation increase in the dividend
next year. We will also be well positioned
to continue to deliver those all important
dividend payments to our shareholders
every year after that.

Finally, with Ian stepping as
Chief Executive do you have
any comments for the future?

Ian • SSE has always had strength and

depth to its management team. I am
proud that our long term succession
planning has meant that Alistair is the right
person to succeed me. SSE is a company

1. Strategic overview2. 3. 4. Strategic overview

Our business explained
Three connected businesses

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.

1-3
Wholesale

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.

Electricity

1.
Gas Production
Using platforms to extract
natural gas, from fields
in the North Sea, for
use onshore.

2.
Energy Portfolio
Management and
Electricity Generation
Using turbines to convert
energy from gas, oil, coal,
water and wind to generate
electricity.

3.
Gas Storage
Using caverns to store
large volumes of natural
gas under ground for use
at a future date.

4.
Electricity Transmission
Using higher voltage lines
and cables to transmit
electricity from generating
plant to the distribution
network.

Wholesale

Market-based

Networks

Economically Regulated

Gas

SSE plc Annual Report 2013

4-7
Networks

8-9
Retail

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.

Through its brands 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.

5.
Electricity Distribution
Using lower voltage lines
and cables to distribute
electricity to homes,
workplaces and other
premises.

6.
Gas Distribution
Using pipes to distribute
gas from the transmission
network to homes, work
places and other premises.

Utility solutions
and telecoms

8.
Energy Supply
Retailing gas and electricity
to household, small
business and industrial and
commercial customers.

9.
Energy-related Services
Providing energy-related
products and services
to household, small
business and industrial and
commercial customers.

7.
Other Networks
Maintaining street and
highway lighting. Designing,
building, owning and
operating networks for
electricity, gas, water and
heat. Providing network
capacity, bandwidth and
data centre services.

Networks

Retail

Economically Regulated

Market-based

1. Strategic overview2. 3. 4. Strategic overview

Financial overview

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.

Strategic focus #1

Focusing on our
core values

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:

investment is to secure a cash return
and receiving and reinvesting dividends
is the biggest source of an investor’s
return over the long term;

• the ultimate objective of financial
• dividends provide income for those
them; • dividend targets provide a transparent
• long-term commitment to dividend

means with which to hold management
to account; and

growth demands a disciplined, consistent
and long-term approach to operations,
investments and acquisitions.

investors who do not wish to reinvest

As a result of this, SSE’s strategy is to deliver
sustained real growth in the dividend
payable to shareholders through the
efficient operation of, and investment in, a
balanced range of economically-regulated
and market-based businesses in energy
production, storage, distribution, supply
and related services in the UK and Ireland.

Sticking to the financial principles which
underpin dividend growth
This focus on the dividend requires SSE
to maintain a disciplined, consistent and
long-term approach to the management of
business activities and this is underpinned
by its four financial principles:

• strength: maintenance of a strong
• rigour: rigorous analysis to ensure

balance sheet, evidenced by the
ongoing commitment to the current
criteria for a single A credit rating;

investment decisions result in returns
in excess of the cost of capital;

SSE plc Annual Report 2013

• discipline: a disciplined approach to
• measurement: safeguarding the

acquisitions, which should enhance
earnings per share, or should not be
pursued at all; and

interests of shareholders by using the
economics of a company share buy-
back as the first measurement for
financial decisions.

The application of these principles supports
the fulfilment of SSE’s first financial goal:
the delivery of sustained real dividend
growth.

Targeting sustained real dividend
growth over the long term
In practice, dividends are the principal way
in which corporate profits are distributed
and it is in recognition of this that the first
financial objective of SSE’s strategy is the
delivery of sustained real growth in the
dividend paid to shareholders.

financial principles (see above);

As stated in its Annual Report 2012, SSE’s
policy is that dividend targets should be:

• set in a way which is consistent with its
• realistic and attainable, so that there
• consistent with maintaining dividend

can be the fullest possible confidence
in their attainability; and

cover over the medium term within
a range around 1.5 times.

In line with this, its target for 2013/14
onwards is, as stated in its Annual Report
2012, the delivery of annual dividend
increases that are greater than RPI
inflation. In this context, inflation is
defined as the average annual rate
across each of the 12 months to March.

Maintaining a balanced range of energy
businesses through which to continue
dividend growth
SSE has three reportable segments
covering its Networks, Retail and
Wholesale businesses:

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 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 addition, SSE believes that efficiency
in operations and investments, service
of the highest possible standard for
customers, sustainability at the heart
of decision-making, excellence in
all aspects of business activity and
teamwork on the part of all employees
should support the delivery of annual
above-inflation increases in the dividend
paid to shareholders.

Priority for 2013/14
Deliver a reduction in the Total
Recordable Injury Rate.

Total Recordable Injury Rate –
per 100,000 hours worked

0.20

0.15

0.10

0.05

0
1
6

0
1
4

0
1
2

0
1
1

’

0
9

’

1
0

’

1
1

’

1
2

’

1
3

Strategic focus #2

Maintaining a
balanced business

Strategic focus #3

Sticking to
our financial
principles

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:

investment decisions result in returns
greater than the cost of capital;

strong balance sheet, evidenced
by commitment to the current criteria
for a single A credit rating;

• strength: maintenance of a
• rigour: rigorous analysis to ensure
• discipline: deployment of a
• measurement: safeguarding the

selective and disciplined approach
to acquisitions, which should enhance
earnings per share or should not be
pursued at all; and

interests of shareholders by using
the economics of a company share
buy-back as the first measurement
for financial decisions.

The application of these principles
supports the fulfilment of SSE’s
first financial responsibility to
shareholders: the delivery of
sustained real dividend growth.

SSE has adopted reportable
segments covering Networks,
Retail and Wholesale businesses.

SSE 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:

a diverse range of businesses;

• while energy is at their core, SSE has
• within those businesses, SSE has
• to add to those assets, SSE has a

diverse range of investment options.

a diverse range of assets; and

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.

Priority for 2013/14
Maintain a diverse balance between
Networks, Retail and Wholesale
businesses.

Strategic focus #4

Setting clear long-
term priorities

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:

innovation in energy networks;

a growing number of household
energy customers;

• efficiency, responsiveness and
• gaining and retaining the trust of
• breadth and depth in the provision of
• competitive and sustainable energy
• flexible and ‘greener’ electricity

energy-related services to businesses
and other organisations;

procurement; and

production.

SSE believes that the fulfilment of its
core purpose, to provide the energy
people need in a reliable and sustainable
way, and the delivery of annual above-
inflation dividend growth, requires it to
maintain a long-term view and clear
long-term priorities across all aspects
of its business.

Priority for 2013/14
Achieve an above-RPI inflation increase
in the dividend.

Priority for 2013/14
Implement a disciplined £1.5bn capital
and investment programme.

Operating profit* composition
in 2012/13 – %

Dividend per share – pence

Capital expenditure and investment
– £m

Networks 49
Retail 23
Wholesale 28

100

8
0
1

8
4
2

7
5
0

6
6
0

7
0
0

2,000

1,600

1,200

800

400

1
2
7
9
8

1
3
1
5
2

1
4
4
3
7

1
7
0
6
9

1
4
8
5
5

’

0
9

’

1
0

’

1
1

’

1
2

’

1
3

’

0
9

’

1
0

’

1
1

’

1
2

’

1
3

1. Strategic overview2. 3. 4.

Strategic overview

Financial overview (continued)

transmission and distribution of
electricity and gas, plus other related
networks;

• Networks – the economically-regulated
• Retail – the supply of electricity, gas
• Wholesale – the production, storage

and other services to household and
business customers; and

and generation of energy and energy
portfolio management.

These segments reflect the broad structure
of the energy sector in Great Britain and
in Ireland and SSE’s commitment to the
maintenance of a balanced range of
energy businesses. They mean that SSE
is the only company listed on the London
Stock Exchange which owns, operates
and invests in such a balanced group of
economically-regulated energy businesses,
such as electricity networks, and market-
based energy businesses, such as energy
supply and electricity generation.

As a result, SSE has a breadth of perspective
on the energy sector that is complemented
by a depth of knowledge that comes from
it focusing on a defined geographical area
and markets in Great Britain and in Ireland.
This gives SSE a specialism and expertise in
the operation of the energy sectors in Great
Britain and Ireland, and it has unrivalled
experience of them.

This breadth of perspective and depth
of knowledge, and accumulated
management experience, mean SSE is able
to make the most of its balanced range of
energy businesses, its growing asset base
and its range of investment options. This,
in turn, gives SSE strong foundations 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, such as volatility in energy
markets, are contained by that balance
and by the diversity of, and within, SSE’s
businesses, assets and investment options.

Focusing on the SSE SET of core values
Companies don’t just have to earn profits;
they have to earn profits in the right way.
It is for this reason that SSE adopted
in 2006 the SSE SET of core values:
Safety; Service; Efficiency; Sustainability;
Excellence; and Teamwork. Amongst other
things, the core values are used in SSE’s
appraisal process to assess employees’
(including Executive Directors and
Managing Directors) performance.

SSE plc Annual Report 2013

The first value is Safety, which is defined as:
‘We believe all accidents are preventable,
so we do everything safely and responsibly,
or not at all’. In 2012/13, however, SSE’s
Total Recordable Injury Rate (TRIR) per
100,000 hours worked by employees was
0.14, compared with 0.11 in 2011/12. This
disappointing result was the first increase
in the SSE’s TRIR since it was adopted as
a key measure of safety performance in
2008/09. Nevertheless, SSE’s long-term
goal remains, quite simply, to achieve
injury-free working.

should also be reflected in the Annual
Incentive scheme. As a result, it concluded
that the Executive Directors’ award earned
should be reduced by 40% in total. This
represents a fair response to the issues in
one part of SSE’s Retail division, given the
significant progress made in other parts of
the SSE group, including its Networks and
Wholesale businesses. This is the second
consecutive reduction in Annual Incentive
Scheme payments to Executive Directors
as a result of sales-related issues in SSE’s
Energy Supply business.

In support of that, it has created and
is implementing a company-wide
behavioural safety programme in
which every employee is participating.
Beyond the company itself, there was
the extremely sad loss of the lives of two
employees of contractors to SSE during
2012/13. SSE is prioritising the achievement
of enduring improvements in the safety
performance of its contractors so that
standards are as high as possible.

Although Ofgem announced, and SSE
accepted, a penalty in respect of past
breaches of Standard Licence Conditions
in April 2013, SSE began the fundamental
reform of its Energy Supply business
almost two years before, in July 2011,
to ensure all aspects of its operations are
consistent with the Service value: ‘We give
our customers service we are proud of
and make commitments that we deliver.’
The importance of this value was reflected
in SSE’s decision to launch, in February
2013, the first Customer Service Guarantee
of its kind in the energy supply sector
under which a failure to meet key defined
commitments results in a discount being
applied to the affected customer’s bill.

In its response to the Ofgem
announcement, SSE apologised
unreservedly to any customers who were
affected by the Licence Condition breaches
in its Energy Supply business which ran
counter to the values and culture of the
Company. The Remuneration Committee
has agreed that the Executive Directors’
award earned under the Annual Incentive
Scheme for 2012/13 should be reduced
by 23%, which is the contribution to SSE’s
operating profit* in 2012/13 from the Retail
segment, of which Energy Supply is part.
The Committee has also recognised that
the issues in Energy Supply exposed SSE
to substantive criticism from a wide range
of stakeholders and concluded that this

During 2012/13, SSE reviewed the definition
of its Sustainability value and concluded
that it should be updated to reflect the
growing emphasis on the ‘triple bottom
line’ test of environment, society and
economy. It has therefore adopted a
new definition of its Sustainability value,
with effect from 2013/14: ‘our decisions
and actions are ethical, responsible
and balanced, helping to achieve
environmental, social and economic well-
being for current and future generations’.

In terms of Sustainability, there were no
enforcement actions taken against SSE by
environmental agencies during 2012/13.
SSE did, however, receive four formal
warnings from the Environment Agency
and the Scottish Environment Protection
Agency relating to environmental issues,
to which SSE responded fully in each case.

Sustaining dividend growth in a
challenging and changing environment
SSE acknowledged in its Annual Report
2012 that big challenges lay ahead in
2012/13, pointing out that everything
from wholesale energy prices to
the weather can affect its financial
performance. The expectation of big
challenges proved to be correct, and
they are continuing. They include:

networks as the new RIIO (Revenue
= Incentives + Innovation + Outputs)
framework for Price Controls takes shape;

• operating and investing in energy
• the ongoing need to build trust in Energy
• a significant change in the outlook for

electricity generation capacity margins
and the mix of the plant on the system.

Supply; and

Against this background, SSE believes that
its strategy of operating and investing in
a balanced range of market-based and
economically-regulated businesses across

just two increasingly interconnected
markets, and the balanced range of assets
within those businesses and within those
markets, is the one which is most likely
to exhibit resilience and to sustain annual
above-inflation increases in the dividend
payable to shareholders.

Operating and investing in energy
networks as the RIIO framework
takes shape
While SSE’s market-based Wholesale
and Retail businesses are experiencing
significant regulatory, legislative,
technology and market change, its
economically-regulated Networks
businesses are also starting to
operate under a new framework: the
RIIO framework introduced by Ofgem
for eight-year Price Control periods
which started on 1 April 2013.

SSE has an ownership interest in five
economically-regulated energy network
companies. Of these, three that in total
account for 54% of the total net RAV
(Regulated Asset Value) of this Group
are now operating under a Price Control
that will run to 2021; the other two will
begin a new eight-year Price Control,
to be agreed under the RIIO framework,
on 1 April 2015.

This new Price Control – RIIO ED-1 –
will be agreed at a time of significant
technological change as distribution
companies aim to respond to changes
in electricity production and consumption
in innovative ways that minimise the
financial and environmental costs and
avoid disruption to customers associated
with new overhead lines, underground
cables or similar infrastructure. In this
context, SSE’s commitment to efficiency,
responsiveness and innovation should
stand it in good stead, and the theme
of its consultations on RIIO ED-1
is Innovating for a greener, more
efficient future.

There is relative stability in economic
regulation, featuring index-linked
revenue that network companies earn
through charges levied on users to cover
costs and earn a return on regulated
assets. This means it’s efficiently-run,
economically-regulated businesses
are core to SSE, to its strategy in the
short, medium and long term and
to its ability to deliver sustained real
dividend growth.

Renewing the commitment
to build trust in Energy Supply
Customers’ demand for energy in the UK
and Ireland, on an underlying basis, is 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. In October 2012, the
EU Council of Ministers formally adopted
the Energy Efficiency Directive, under
which Member States will be required to
set national targets for energy efficiency
improvements and adopt related measures.

At the same time as featuring declining
demand for energy as a result of greater
efficiency, the retail energy market in Great
Britain is among the most competitive in
the world and the market in Ireland has
experienced the highest rate of customer
switching of any European energy supply
market in the last five years. According
to the UK energy statistics published by
DECC in March 2013, UK domestic gas and
electricity prices are the lowest and fifth
lowest in the EU15 respectively.

Both markets are the subject of substantial
political and regulatory intervention,
leading to non-energy costs accounting
for an increasingly significant proportion
of the bills paid by customers. The Energy
Company Obligation in Great Britain is a
case in point and is described in more
detail in the Retail section.

The aim of Ofgem’s Retail Market Review
in Great Britain is to deliver a ‘simpler,
clearer, fairer’ energy market. Reforms to
be introduced in 2013 include restricting
suppliers to no more than four core tariffs
per fuel type, new requirements for
information on customers’ bills and
more enforceable standards of conduct.

Enforcement action by Ofgem has
increased significantly in recent years,
and in April 2013 the Gas and Electricity
Markets Authority gave notice of its
proposal to impose a penalty of £10.5m
on SSE for past non-compliance with
two licence conditions. SSE accepted
immediately the penalty and apologised
unreservedly to any customers who were
affected by sales activity which ran counter
to the values and culture of the Company.
Its Sales Guarantee to customers who may
have suffered financial disadvantage as a
result of the sales process remains unique
in the GB energy sector.

More generally, Ofgem has acknowledged
that a number of suppliers have taken
steps to improve their interactions with
customers, simplify their tariff offerings
and to rebuild trust and the overall
direction of the Retail Market Review is
consistent with the strategy adopted by
SSE through its Building Trust programme
since 2011: a focus on fairness, simplicity,
transparency and customer service
– including the first Customer Service
Guarantee in the Great Britain energy
industry, which offers customers £20
off their next bill if the company fails to
deliver any one of five clearly defined
and measurable standards.

SSE recognises that it will have to redouble
its efforts to build trust in energy supply
following the shortcomings in aspects of
its previous energy sales operations that
resulted in the fine announced in April
2013. Its creation in 2012 of a bespoke
Retail division, headed by an externally-
appointed Managing Director, is one of
a number of important changes that
SSE is making in Energy Supply and
Energy-related Services.

As part of its drive to build trust, SSE’s
emphasis is on being understood by, and
connected with, customers, a strategy
that will be particularly important as
retail energy markets evolve and if energy
consumption, as expected, continues to
decline. In this context, SSE’s ability to
supply products other than electricity
and gas will also prove to be important
in the years ahead and energy-related
services have contributed 13% of the
operating profit of SSE’s Retail business
over the last three years.

Maintaining a balanced approach
to electricity generation in a period
of change
Energy markets across Europe have
been dominated by the prevailing
economic conditions. In the UK, minimal
economic growth and a sustained fall in
the underlying demand for energy have
combined with high wholesale prices for
gas to create a difficult environment for
gas-fired power stations in particular,
with ‘spark spreads’ proving to be
stubbornly low, if not negative.

While ‘spark spreads’ have remained
low, the EU Large Combustion Plant
Directive will require the closure by the
end of 2015 of a significant amount of

1. Strategic overview2. 3. 4. Strategic overview

Financial overview (continued)

coal- and oil-fired power station capacity
which has not been opted-in to comply
with the Directive’s emission limit values
(ELVs) for pollutants such as sulphur dioxide
and nitrogen oxides. This includes almost
1,000MW of capacity at SSE’s Ferrybridge
power station. The EU Industrial Emission
Directive represents a further tightening
of ELVs and its effect will be to limit the
amount of hours that capacity at coal-fired
power stations can operate between 2016
and 2023 without being compliant with the
new ELVs. Non-compliant (or ‘opted-out’)
capacity will have to close when the hours
are used up, or by the end of 2023.

At the same time, energy markets in
Great Britain and Ireland also operate in
the context of the EU Climate Change and
Renewable Energy Package, which aims to
achieve by 2020:

• a reduction of at least 20% in the levels
• an increase to at least 20% of all energy

of greenhouse gas emissions across the
EU, compared with 1990 levels; and

consumption being generated from
renewable sources.

The net effect of all of this is that,
until recently, the amount of electricity
generation capacity in Great Britain has
remained well in excess of that required
to meet forecasts of peak demand.
Nevertheless, Ofgem’s first annual
Electricity Capacity Statement, published
in October 2012, was one of several
substantive pieces of analysis to forecast
a reduction in the amount of spare
electricity capacity on the system in
the period to 2015/16. SSE is concerned,
however, that the speed and scale of the
‘capacity crunch’ facing Britain in the next
few years is being under-estimated and
that this could have implications for the
security of electricity supplies.

The UK Department of Energy and
Climate Change (DECC) believes that
the current Energy Bill will address these
issues by creating a framework to reform
the electricity market in Great Britain,
including the introduction of a Contract for
Difference (CfD) feed-in tariff for electricity
from low carbon sources and the creation
of auctions to establish payments for the
provision of electricity generation capacity.
Essential detail regarding how the reform
in general, and the CfD and the capacity
mechanism in particular, will work in
practice has yet to be established and

SSE plc Annual Report 2013

the result is significant uncertainty
about how the electricity market
will operate in the second half of
this decade and beyond. The natural
consequence of this is that investment
in new generation capacity is being
delayed. SSE is, however, satisfied that
there is robust policy commitment
to maintaining the investment
support for assets already in
operation or construction.

In this context, SSE believes that its
balanced approach to business – in this
case owning and operating electricity
generation capacity in Great Britain
and in Ireland, and generating electricity
from a wide range of sources such as
gas, coal, onshore wind, offshore wind,
water, biomass and, from 2015, multi-
fuel – puts it in a good position to benefit
from the more robust and sustainable
electricity market conditions expected
in the future as the anticipated reduction
in the amount of spare capacity begins
to have an impact.

Dividend per share and adjusted
earnings per share*

Increasing the dividend for 2012/13
SSE’s first financial responsibility to its
shareholders is to remunerate their
investment through the payment of
dividends. The Board is recommending
a final dividend of 59.0p per share to
which a Scrip alternative is offered,
compared with 56.1p in the previous
year, an increase of 5.2%. This will make
a full-year dividend of 84.2p per share,
which is:

Financial overview

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*

Reported profit after tax**

Number of shares for basic and adjusted EPS

(million)

Adjusted EPS* – pence
Basic EPS – pence

** After distributions to hybrid capital holders.

2011/12;

the average annual rate of RPI inflation
in the UK between April 2012 and March
2013, which meets the target set for
the year;

• an increase of 5.1% compared with
• a real terms increase of 2%, based on
• the fourteenth successive above-
• just over 2.4 times the full-year dividend
• covered 1.4 times by SSE’s adjusted

inflation dividend increase since the
first full-year dividend paid by SSE,
in 1998/99;

paid by SSE in 2002/03; and

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 time.

Targeting above-RPI inflation dividend
increases in 2013/14 and beyond
The stated goal of SSE’s strategy is to
deliver sustained real growth in the
dividend and, as set out in its Annual
Report 2012 and in its six-month financial
report in November 2012, its target from
2013/14 onwards is to deliver annual
dividend increases which are greater than
RPI inflation while maintaining dividend
cover over the medium term within a
range around 1.5 times.

Increasing adjusted earnings per share*
As part of monitoring its financial
performance over the medium term,
SSE focuses consistently on adjusted

Mar 13
£m

Mar 12
£m

Mar 11
£m

Mar 10
£m

1,410.7
(199.7)
(584.7)
(25.4)

600.9
1,410.7
(223.6)

1,335.7
(509.0)
(551.6)
(6.6)

268.5
1,335.7
(213.4)

1,310.1
1,423.3
(625.0)
3.3

2,111.7
1,310.1
(268.2)

1,290.1
399.8
–
(51.3)

1,638.6
1,290.1
(274.1)

1,187.1

1,122.3

1,041.9

1,016.0

425.9

197.8

1,504.5

1,235.5

952.0
118.0
44.7

937.8
112.7
21.1

927.6
112.3
162.2

921.9
110.2
134.0

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.

earnings per share*, which is calculated
by excluding the charge for deferred tax,
exceptional items and the impact of
remeasurements arising from IAS 39
(see also ‘Increasing adjusted profit
before tax*’ below).

Adjusted earnings per share* has the
straightforward benefit of defining
the amount of profit after tax that has
been earned for each Ordinary Share
and so provides an important measure
of underlying financial performance.
Moreover, as stated in its Annual Report
2012, it is SSE’s policy that dividend
targets over the medium term should
be consistent with the dividend being
covered by its adjusted earnings per
share* within a range of around
1.5 times.

In addition to financial performance,
however, SSE’s adjusted earnings per
share* is influenced by two specific factors:

• hybrid capital securities qualify for
• the Scrip dividend scheme, approved

recognition as equity and so charges
for the coupon associated with them
are presented within dividends, with this
cost reflected within adjusted earnings
per share*; and

by shareholders in 2010, results in the
issue of additional Ordinary shares.

In the year to 31 March 2013, SSE’s
adjusted earnings per share* were 118.0p,
based on 952.0 million shares, compared
with 112.7p, based on 937.8 million shares,
in the previous year.

Adjusted profit before tax*

Increasing adjusted profit before tax*
These financial results for the year
to 31 March 2013 are reported under
International Financial Reporting Standards,
as adopted by the EU. In line with its
policy since 2005/06, SSE focuses 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.
As a result, this ‘adjusted profit before tax*’:

• reflects the underlying profits of SSE’s
• reflects the basis on which the business
• avoids the volatility that arises from

is managed; and

business;

IAS 39.

The table opposite reconciles 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*
Adjusted profit before tax* rose by 5.6%,
from £1,335.7m to £1,410.7m in 2012/13
compared with the year before. SSE’s
business has proved itself to be resilient
throughout the period since the UK first
entered recession in 2008, with annual
increases in adjusted profit before tax*,
but this is its biggest increase in adjusted
profit before tax* since 2007/08.

The increase was achieved despite difficult
energy market conditions characterised
by low ‘spark spreads’, meaning much
electricity generation from gas-fired power
stations in particular was barely profitable,
if at all. The impact of these energy market
conditions is reflected in the Wholesale
segment, in which operating profit fell
by 16.2% to £509.5m. Operating profit*
was also affected by the 33% reduction
in output from hydro-electric schemes,
compared with the previous year, which
was the result of lower rainfall in the
catchment areas.

The fall in operating profit* in Wholesale
was more than offset by:

in Retail to £410.1m.

in Networks to £876.1m; and

• a 18.9% increase in operating profit*
• a 27.5% increase in operating profit*
• investment in the asset base of
• the level and timing of recovery of

The increase in operating profit* in
Networks was mainly the result of:

Electricity Transmission; and

allowed income in Electricity Distribution.

The increase in operating profit* in Retail
was mainly the result of the increase
in demand for energy from customers
of SSE’s Energy Supply business during
2012/13, illustrated by:

• a 21.0% increase in average household
• a 5.0% increase in average household

consumption of gas by SSE’s customers
in Great Britain; and

consumption of electricity by SSE’s
customers in Great Britain.

This reflected the fact that the average
temperature in Great Britain in every
calendar month of the 2012/13 financial
year was cooler than the same month
in 2011/12, with the sole exception of
the month of August. The increase in
consumption of gas and electricity
offset the significantly higher costs
that had to be sustained in Energy
Supply, such as for gas purchases
and on UK government sponsored
environmental and social schemes.

The profit margin in Energy Supply
(ie adjusted operating profit* as a
percentage of revenue) rose from 3.5%
to 4.2% in 2012/13, which remains below
the expected medium-term average of
around 5%. Over the last three financial
years the profit margin in SSE’s Energy
Supply business has averaged 4.0%.

Impact of the movement on
derivatives (IAS 39)
At 31 March 2013, there was a net
derivative financial liability in SSE’s
balance sheet arising from IAS 39 of
£161.4m, before tax, compared with
a net liability of £17.6m, before tax,
at 31 March 2012. This consists of:

• a liability arising from the valuation of

financial instruments used by SSE to
hedge its exposure to financial risks
such as interest rates; and

1. Strategic overview2. 3. 4. Strategic overview

Financial overview (continued)

• a liability relating to the valuation

of forward purchase contracts for
commodities such as 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.

The liability arising from the valuation of
interest and currency derivatives reduced
during 2012/13 by £85.0m to £46.9m
on 31 March 2013. The majority of this
movement related to the foreign exchange
position and the weakening of Sterling in
relation to the US Dollar.

In addition, IAS 39 requires SSE to record
designated forward commodity purchase
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 higher
than the market price (in other words,
the contracts were ‘out of the money’),
particularly for future purchases of coal.
The actual value of the contracts will be
determined as the relevant commodity is
delivered to meet customers’ energy needs.
For around half 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
underlying performance in 2012/13.

The movement on derivatives under IAS 39
of £199.7m 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’ position on 31 March
2012 and the ‘out of the money‘ position
on 31 March 2013, when the average
contractual price was higher than the
prevailing forward market price. SSE
sets out these movements in fair value
separately, as remeasurements, as the
extent of the actual profit or loss arising
over the life of the contracts giving rise to
this liability will not be determined until
they unwind.

Exceptional items
The pre-tax exceptional items totalling
£584.7m predominantly relate to the
continuation of challenging market
conditions affecting SSE’s Wholesale
businesses, including the economic
prospects for older thermal generation
plants, the resolution of past insurance-

SSE plc Annual Report 2013

related issues at Medway power station
and the lower value of CO2 emissions
allowances:

• In March 2013, SSE announced a

series of decisions about its gas- and
coal-fired power stations including,
for example, the ‘deep mothballing’ of
Keadby power station, the release of
transmission capacity at Peterhead and
the expectation that Units One and Two
at Ferrybridge power station will close
before 31 March 2014. These and related
decisions resulted in impairment charges
being made against a number of SSE’s
thermal plants and the recognition of
provisions related to the restructuring
of thermal generation operations. In
addition, SSE has recognised related
exceptional impairment charges in
relation to its investment in thermal
plants at Barking and Derwent.

• In 2008, SSE experienced significant

unplanned interruptions to electricity
generation at its Medway power station.
This resulted in a number of associated
costs which gave rise to a claim for an
insurance payment, the expected value
of which SSE recognised as receivable
in its accounts for that year. As
stated in its interim financial report
on 14 November 2012, SSE agreed a
settlement with its insurers which,
although still substantial, was lower
than the amount originally expected.

• SSE’s intangible assets include

purchased CO2 emissions allowances,
which it recognises at cost. SSE also
enters into forward contracts for the
future delivery of CO2 allowances.
Due to the continuing low market
prices, SSE has restructured its
portfolio of purchased and committed
allowances, which resulted in the
recognition of net exceptional
charges in the year.

• In addition, SSE also recognised

exceptional impairment and provision
charges in relation to economically
uncertain new technology and
renewable generation development
assets and, in relation to the Retail
businesses, impairments of certain
assets including legacy metering
assets. Of the exceptional items total,
£39.3m relate to the Retail segment.

sole point of SSE. In addition to enabling
employment, investment and payment of
taxation, profit is nevertheless an essential
means to a financial end: it supports the
dividend, which is the key means through
which it remunerates shareholders.

At the same time, SSE has delivered 14
successive increases in adjusted profit
before tax* since it was formed during
the 1998/99 financial year. Because
well-managed economically-regulated
networks provide a relatively stable
revenue flow, SSE’s adjusted profit
before tax* for 2013/14 as a whole
will, as in other years, be determined
mainly by issues in its market-based
Retail and Wholesale businesses,
such as:

the ability of its operating thermal
power stations to generate electricity
efficiently and the price achieved
for output;

prices for energy and fuel, the non-
energy costs associated with supplying
electricity and gas and the prices
charged to customers;

• electricity market conditions,
• the interaction between wholesale
• the output of renewable energy
• the output from its gas production
• the actual and underlying level of
• the management of the overall energy

from its hydro-electric stations and
wind farms;

portfolio, in the context of geopolitical
and macro-economic issues.

customers’ energy consumption; and

assets;

SSE’s emphasis on maintaining a balance
across its business applies to its market-
based Retail and Wholesale segments.
This balance and diversity is illustrated
by the fact SSE:

• is an energy producer and an energy
• has assets which use a wide range
• maintains a broad portfolio of commodity

of fuels from which to generate
electricity; and

contracts as the means of securing the
energy it and its customers need.

retailer;

Delivering adjusted profit before tax*
in 2013/14
SSE’s first financial goal is not the
maximisation of profit and profit is not the

SSE believes that this balance and
diversity within its range of market-based
energy businesses and the extent of the
operations and opportunities within those
businesses, in addition to its economically-

regulated Networks businesses, provides
the best means of enabling it to deliver
a level of adjusted profit before tax*
capable of supporting the achievement
of its principal financial target for the year,
a full-year dividend increase that is greater
than RPI inflation.

In line with its approach in 2012/13, SSE
will not provide an outlook for adjusted
profit before tax* in 2013/14 before the
publication of its third quarter Interim
Management Statement.

Investment and capital
expenditure

Investing for sustained real
dividend growth
In 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 2012/13,
its investment and capital expenditure
totalled £1,485.5m, compared with
£1,706.9m in the previous year. During
the year there was investment of:

was spent on work associated with
preparations for the roll-out of
smart meters;

of which £191.5m was spent on the
work to replace SSE’s section of the
Beauly-Denny replacement line;

the majority of which was spent
on system upgrades such as
the installation of high voltage
under ground cables between
Bracknell and Camberley;

• £334.2m in electricity transmission,
• £288.8m in electricity distribution,
• £77.0m in retail, the majority of which
• £228.1m in thermal generation,
• £382.6m in renewable generation,
• £33.1m in gas storage, including
• £7.2m in gas production.

including investment of £45.7m
in the construction of the new
Combined Cycle Gas Turbine
at Great Island;

a significant part of which was invested
in new wind farms such as Calliachar
in Scotland and Glenconway in
Northern Ireland;

investment in the completion of
the new facility at Aldbrough; and

This means that, for the first year
since 2007/08, renewable energy did
not comprise the largest element of
SSE’s capital and investment expenditure;

it was exceeded by the combined
investment in economically-regulated
electricity networks. In the three years
to 31 March 2012, renewable energy
accounted for just over 50% of SSE’s
capital and investment expenditure;
in the three years from April 2012 to
March 2015, it is likely to account for
around 30% of SSE’s overall total.
Economically-regulated electricity
networks are likely to require the biggest
proportion of capital and investment
expenditure during that period.

SSE keeps the economic evaluation of
its investment programme under close
scrutiny. It uses analysis of previous
projects in making individual investment
decisions and in assessing the overall
size and structure of its investment
programme, which is also designed to
reflect its established financial principles.
The programme is, in turn, greatly
influenced by the need to maintain
balance between, and diversity within,
its economically-regulated and market-
based energy businesses.

During 2012/13, SSE also made acquisitions
with cash consideration totalling £358.4m,
almost all of which was accounted for
by the acquisition of thermal generation
assets in Ireland and gas production assets
in the North Sea. In the last 10 years, SSE
has spent around £4bn on acquiring energy
related assets in the UK and Ireland.

SSE believes that a greatly expanded asset
base and significant value have been and
are being created from its capital and
investment expenditure programme and
that the long-term nature of the assets
which it has developed and continues to
develop means that value will be sustained
into the 2030s and beyond.

of its electricity networks;

Delivering an expanded asset base
In the three years from 2010, SSE’s
investment and capital expenditure totalled
£4.6bn. This has resulted in a significantly
expanded asset base for SSE, including:

• an increase of almost £1bn in the RAV
• an increase of around 800MW in its
• the Aldbrough gas storage facility,

capacity for generating electricity from
wind farms (resulting in SSE’s wind farms
producing 4.3TWh of electricity during
2012/13); and

where the initial capacity is 270 million
cubic metres, of which SSE owns a two
thirds share.

Making capital and investment
expenditure decisions in 2013/14
and beyond
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:

• supportive of the strategic importance
• consistent with SSE’s financial principles

of maintaining a balance between, and
diversity within, SSE’s economically-
regulated and market-based businesses;

and so should achieve returns which are
greater than the cost of capital (with
an appropriate risk premium applied

Investment and capital expenditure summary

Electricity transmission
Electricity distribution
Other networks

Total Networks

Total Retail

Thermal generation
Renewable generation
Gas storage
Gas production

Total Wholesale

Other

Mar 13
Share

Mar 13
£m

Mar 12
£m

22.5%
19.4%
3.6%

45.5%

5.2%

15.3%
25.8%
2.2%
0.5%

43.8%

5.5%

334.2
288.8
52.8

675.8

77.0

228.1
382.6
33.1
7.2

651.0

81.7

228.7
260.3
48.0

537.0

78.5

129.7
852.3
51.0
6.1

1,039.1

52.3

Total investment and capital expenditure

100.0% 1,485.5

1,706.9

50% of SGN capital/replacement expenditure

199.0

202.2

1. Strategic overview2. 3. 4.
Strategic overview

Financial overview (continued)

to the expected rate of return from
individual projects where appropriate
for construction, market, technology,
regulatory or legislative reasons),
enhance earnings and contribute
to dividend growth; and

• governed, developed, approved and

executed in an effective manner,
consistent with SSE’s Major Projects
Governance Framework which is,
itself, regularly updated.

The stated goal of the Framework is
to ensure ‘safe, sustainable and timely
execution of the major project portfolio,
delivering business revenues and
shareholder value in line with approved
business plans’.

For 2013/14 as a whole SSE expects capital
and investment expenditure to total
around £1.5bn, including expenditure to be
incurred on the combined cycle gas turbine
(CCGT) development at Great Island that
was acquired in October 2012 and which
is currently in construction. Looking ahead,
there are four main categories in SSE’s
investment and capital expenditure
plans to March 2015 and beyond:

on electricity transmission upgrades;

distribution expenditure plus essential
maintenance of other assets;

• economically-regulated expenditure
• economically-regulated electricity
• expenditure that is already committed
• expenditure that is not yet committed

to development of new assets such
as the CCGT at Great Island, the ‘multi-
fuel’ plant at Ferrybridge and new wind
farms; and

but which could be incurred to support
the development of new assets.

Decisions on whether to proceed with
individual projects are made following
rigorous analysis and:

maintaining a diverse range of assets
within its economically-regulated and
market-based businesses;

• in the context of SSE’s commitment to
• in the light of developments in public
• on the basis of the experience and
• on the basis of SSE’s established

skills available to SSE; and

policy and regulation;

financial principles.

The uncommitted nature of some
expenditure gives SSE flexibility in the

SSE plc Annual Report 2013

management of its balance sheet.
Moreover, the extent of its project pipeline
means that SSE has a wide range of
investment options from which to select
those most likely to deliver the best returns.
It continues to believe that a disciplined
investment programme with the principles,
shape and scale described above should
allow it to maintain the development of
a balanced and diverse range of assets
to support annual dividend increases
that are above RPI inflation while
remaining consistent with the current
criteria, including the key ratios, associated
with a single A credit rating, without the
need to issue new shares. It will deliver:

asset base in key businesses, including
economically-regulated electricity
networks;

• further significant additions to the
• a continuing increase in fuel for electricity
• a hedge against prices for fossil fuels;
• new, modern capacity for generating
• additional cash flows and profits to

in the form of renewable sources of
energy, supporting a reduction in the
CO2 intensity of electricity generated;

support continuing dividend growth.

electricity; and

Investing in gas distribution through
Scotia Gas Networks (SGN)
In addition to its own capital and
investment expenditure programme,
SSE effectively has a 50% interest
in SGN’s capital and replacement
expenditure, through its 50% equity
share in that business which it acquired
in 2005. 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
economically-regulated gas distribution.
Since 2005, SSE has received from SGN
dividends and shareholder loan interest
totalling £414.0m, which compares with

Adjusted net debt and hybrid capital

Adjusted net debt and hybrid capital
Less: hybrid capital

Adjusted net debt

Less: outstanding liquid funds
Add: finance leases

Unadjusted net debt

the £505.0m investment it made to
acquire its 50% equity share in that year.

In 2012/13, a 50% share of SGN’s
capital and replacement expenditure
was £199.0m, compared with £202.2m
in the previous year. During 2012/13,
SGN’s RAV increased to £4.78bn (SSE
share: £2.39bn), up from £2.80bn (SSE
share: £1.40bn) when it was acquired.

Financial management
and balance sheet

Maintaining a prudent treasury policy
SSE’s treasury policy is designed to be
prudent and flexible. In line with that,
its operations and investments are
generally financed by a combination of:

• retained profits;
• bank borrowings;
• bond issuance; and
• commercial paper.

As a matter of policy, a minimum of
50% of SSE’s debt is subject to fixed
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 2013, after taking
account of interest rate swaps, 87.8% of
SSE’s borrowings were at fixed rates.

Borrowings are mainly made in Sterling
and Euro to reflect the underlying currency
denomination of assets and cash flows
within SSE. All other foreign currency
borrowings are swapped back into
either Sterling or Euros.

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:

Mar 13
£m

Mar 12
£m

Mar 11
£m

(7,347.7)
2,186.8

(6,755.8)
1,161.4

(5,890.6)
1,161.4

(5,160.9)

(5,594.4)

(4,729.2)

(55.0)
(330.4)

(119.9)
(342.1)

(28.1)
(372.2)

(5,546.3)

(6,056.4)

(5,129.5)

Central to SSE’s strategy is ‘efficient’ investment in a
balanced range of economically-regulated and market-
based energy businesses.

Any 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 £538.7m.

Keeping SSE well-financed
SSE believes that maintaining a
strong balance sheet, evidenced by
a commitment to the current criteria
for a single A credit rating, such as a
funds from operations/debt ratio of
20% (Standard & Poor’s) and a retained
cash flow/debt ratio of 13% (Moody’s),
is a key financial principle.

In August 2012, Standard & Poor’s
affirmed SSE’s long-term rating of A-
while changing its rating outlook from
‘stable’ to ‘negative’. Moody’s corporate
credit rating of SSE remains A3 with a
‘stable’ outlook.

SSE is committed to maintaining
financial diversity and diversity of
funding sources and will move quickly
to take the right financing options,
including issuing new bonds and loans.
In line with that it:

• completed in April 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; and

Ensuring 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, excluding hybrid securities, as at
31 March 2013 was 10.6 years, compared
with 10.5 years at 31 March 2012.

SSE’s debt structure remains strong, with
around £5.4bn of medium-/long-term
borrowings in the form of issued bonds,
European Investment Bank debt and
long-term project finance and other loans.
Around £1.5bn of medium- to long-term
borrowings will mature in the period to
31 March 2014. In March 2013, SSE secured
£650m additional bank facilities which will
be drawn down in the course of 2013/14,
at which point they will become term loans.
The table opposite also includes the issue
by SSE of:

• hybrid capital of £1.162bn in September
• hybrid capital of £1.025bn in September

2010; and

2012.

Net finance costs

Adjusted net finance costs

add/(less):
Movement on derivatives
Share of JCE1/associate interest

Reported net finance costs

Adjusted net finance costs

add/(less):
Return on pension scheme assets
Interest on pension scheme liabilities
Finance lease interest
Notional interest arising on discounted provisions
Hybrid coupon payment

Adjusted finance costs for interest cover calculation

1. Jointly controlled entities.

Mar 13
£m

372.1

(20.3)
(152.3)

199.5

Mar 12
£m

322.1

89.5
(146.5)

265.1

372.1

322.1

134.1
(142.3)
(37.1)
(7.7)
63.4

382.5

147.4
(149.8)
(38.4)
(7.8)
65.5

339.0

• procurement contracts;
• fuel and carbon purchasing;
• commodity hedging and energy trading
• long-term service agreements for plant.

operations; and

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 £7.35bn at 31 March 2013,
compared with £6.76bn at 31 March
2012. Fundamentally, this increase
reflects the quantum and phasing
of capital and investment projects to
support sustained real dividend growth,
including the acquisition of electricity
generation assets in Ireland in October
2012. SSE also made acquisitions with
cash consideration totalling £358.4m
during 2012/13.

The adjusted net debt and hybrid capital
number was, however, reduced by £130.9m
as a result of the receipt of the net cash
proceeds from the sale of 79.5MW of
onshore wind farm capacity in March 2013.
During 2013/14, SSE expects to receive its
share of the proceeds from the sale of the
offshore transmission assets associated
with the Greater Gabbard wind farm.

As the table opposite 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.

1. Strategic overview2. 3. 4.
Strategic overview

Financial overview (continued)

• successfully issued in September 2012

hybrid capital securities comprising
US$700m and €750m, which are
perpetual and subordinate to all senior
creditors, with an all-in Euro funding
cost to SSE of around 5.6% per annum.

Following the completion of the private
placement and the issue of hybrid capital
securities, SSE’s principal sources of debt
funding as at 31 March 2013 were:

• bonds – 48%;
• hybrid capital securities – 28%;
• European Investment Bank loans – 6%;
and • The US private placement – 6%

The remaining 12% included index-linked
debt, long-term project finance and other
loans.

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 increased its committed bilateral
facility of £200m with one other bank to
£200m in April 2013.

Furthermore, as stated above, SSE
secured during March 2013 £650m
additional bank facilities which will
be drawn down in the course of
2013/14 at which point they will
become term loans.

In addition to funding sources, the Scrip
Dividend Scheme approved by SSE’s
shareholders in 2010 gives them the
option to receive new fully paid Ordinary
shares in the Company in place of their
cash dividend payments. It therefore
reduces cash outflow and so supports
the balance sheet, although the extent
to which it will do so is inevitably difficult
to predict. Scrip dividend take-up in
2012/13 was as follows:

• September 2012: A total of 30,369

shareholders elected to receive the final
dividend for the year to 31 March 2012
of 56.1p per Ordinary share in respect
of 307,842,342 Ordinary shares in the
form of Scrip dividend, resulting in a
reduction in cash dividend funding of
£172.7m. A total of 13,213,634 new
Ordinary shares, fully paid, were issued
on 21 September 2012, representing an

SSE plc Annual Report 2013

increase of 1.40% on the issued share
capital on the dividend record date of
27 July 2012.

• March 2013: A total of 30,180

shareholders elected to receive the
interim dividend for the year to 31 March
2013 of 25.2p per Ordinary share in
respect of 327,303,253 Ordinary shares
in the form of Scrip dividend, resulting
in a reduction in cash dividend funding
of £82.5m. A total of 5,920,120 new
Ordinary shares, fully paid, were issued
on 22 March 2013, representing an
increase of 0.62% on the issued share
capital on the dividend record date of
25 January 2013.

This means that the cumulative cash
dividend saving or additional equity
capital resulting from the introduction of
SSE’s Scrip Dividend Scheme now stands
at £489.5m. SSE’s current Scrip Dividend
Scheme expires in 2015.

In March 2013, SSE completed the sale of
four wind farms with a total generation
capacity of 79.5MW for a net total cash
consideration of £130.9m and an equity
stake in the fund that bought the assets,
illustrating its ability to create ongoing
value from its pipeline of investments
and its readiness to dispose of assets
where their retention is not fully
consistent with or supportive of its
overall strategy. This, in turn, provides
additional financial flexibility.

Fundamentally, SSE believes its
commitment to the long term means
it must be:

• disciplined and focused when managing
• prudent and flexible in financing its
• rigorous and selective when making

investment and acquisition decisions.

its balance sheet;

activities; and

The hybrid coupon payment is in respect
of the hybrid capital issued in 2010 and
was made on 1 October 2012. The first
coupon payment relating to the US Dollar
hybrid capital issued in September 2012
was made on 1 April 2013 (this issue has
bi-annual coupon payments). The next
payments, which will relate to all SSE’s
issued hybrid capital will be made on
1 October 2013. Charges are presented
as distributions to other equity holders
and are reflected within adjusted earnings
per share*.

The average interest rate for SSE, excluding
JCE/associate interest, during the 2012/13
was 5.26%, compared with 5.06% for the
previous year. Based on adjusted interest
costs, SSE’s adjusted interest cover was
(previous year’s comparison in brackets):

• 5.4 times, excluding interest related
• 4.7 times, including interest related

to SGN (5.9 times); and

to SGN (4.9 times).

Excluding shareholder loans, SGN’s net
debt at 31 March 2013 was unchanged
at £3.27bn, and within the adjusted net
finance costs of £372.1m, the element
relating to SGN’s net finance costs was
£94.4m (compared with £96.5m in the
previous year), after netting loan stock
interest payable to SSE. Its contribution
to SSE’s adjusted profit before tax* was
£139.7m, compared with £138.3m in
2011/12.

Contributing to employees’
pension schemes
In line with the IAS 19 treatment of
pension scheme assets, liabilities and
costs, pension scheme liabilities of
£705.8m are recognised in the balance
sheet at 31 March 2013, before deferred
tax. This compares to a liability of £731.9m
at 31 March 2012.

In summary, it believes that it has
sufficient financial flexibility to pursue
the best opportunities to provide the
means with which to increase dividends.

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
2012/13 were £372.1m, compared with
£322.1m in 2011/12.

During 2012/13, employer cash
contributions amounted to:

• £47.7m for the Scottish Hydro-Electric
• £77.6m for the Southern Electric

scheme, including deficit repair
contributions of £29.5m; and

scheme, including deficit repair
contributions of £55.2m.

As part of the electricity Distribution Price
Control for 2010-15, it was agreed that
allowances equivalent to economically-

SSE pays taxes in the United Kingdom and the Republic of
Ireland, the only states in which it has trading operations.
Central to SSE’s approach to tax is that it should be
regarded as a responsible tax payer.

position, the adjusted current tax charge
is presented in the table below.

For reasons already stated above, SSE’s
focus is on adjusted profit before tax*
and in line with that the adjusted current
tax charge is the tax measure that best
reflects underlying performance.

The effective adjusted current tax rate,
based on adjusted profit before tax*, was
15.9%, compared with 16.0% in 2011/12,
on the same basis. The impact of SSE’s
higher capital expenditure programme
and the series of UK Corporation Tax rate
reductions announced in the 2010 and
subsequent Budgets have had, and will
continue to have, a positive impact on
the effective current tax rate.

The deferred tax balance has been
remeasured to reflect the latest of the series
of annual reductions in the UK Corporation
Tax rate that were announced in the 2010
Budget, and the deferred tax balances for
future years will be remeasured as each
subsequent rate reduction is enacted.

Executive Directors

• the timing of Corporation Tax payments

and a reduction in tax paid to reflect
tax losses expected to be acquired
from Greater Gabbard Offshore Winds
Limited and SSE Renewables Walney (UK)
Limited for which the consortium relief
payments have yet to be made;

• asset impairments which were
• Corporation Tax refunds received

recognised in the subsidiary accounts
for 2011/12 on which Corporation Tax
relief was then recognised in SSE’s
final tax instalment for that year
(and which was paid in 2012/13); and

during 2012/13 that relate to earlier
years (on rolled over capital gains and
losses relief from SGN).

SSE also pays taxes in the Republic of
Ireland, in relation to its operations there,
and also indirectly contributed £57.3m to
UK government tax revenues through its
significant investment in joint ventures and
associates. This compares with £59.5m
in the previous year. SSE also collected
a further £225.4m of employment,
environment and other taxes to add
to its total tax contribution.

In January 2013, PwC has announced the
result of its UK 2012 Total Tax Contribution
Survey for The Hundred Group, in which SSE
ranked 17th for the level of total taxes borne
(the amount a company pays that are its
own tax costs).

Responding to sales-related issues
in Energy Supply
As stated previously (see ‘Focusing on
the SSE SET of core values’ on page 16),
it has been agreed that the Executive
Directors payment earned under the
Annual Incentive Scheme for 2012/13
should be reduced by 40% as a result of
SSE’s previous non-compliance with two
Standard Conditions of the Electricity
and Gas Supply Licences.

This is the second consecutive reduction
in Annual Incentive Scheme payments
to Executive Directors as a result of past
sales-related issues in SSE’s Energy
Supply business.

Setting out SSE’s tax position
To assist the understanding of SSE’s tax

The total earnings of SSE’s Executive
Directors’ in 2012/13 (covering base salary,

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

Being a responsible tax payer
SSE pays taxes in the United Kingdom and
the Republic of Ireland, the only states in
which it has trading operations. 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
relationship with HM Revenue & Customs,
based on trust and cooperation.

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 £312.0m during
the year to 31 March 2013, compared
with £396.4m in the previous year. In the
last three financial years, SSE has paid
£1.0bn in tax on that basis. The reduction
in total tax paid in 2012/13 is the result of:

Tax charge

Adjusted current tax charge

Add/(less):
Share of JCE/associate tax
Deferred tax
Tax on exceptional items/certain remeasurements

Reported tax charge

Mar 13
£m

223.6

(25.4)
115.2
(201.8)

111.6

Mar 12
£m

213.4

(6.6)
118.0
(319.6)

5.2

1. Strategic overview2. 3. 4.
Strategic overview

Financial overview (continued)

benefits and the cash Annual Incentive
Scheme) were £2.320m, compared with
£2.787m in 2011/12.

Ensuring effective succession planning
and Chief Executive transition
As announced on 23 January 2013,
Alistair Phillips-Davies, currently Deputy
Chief Executive, will become Chief
Executive of SSE plc on 1 July 2013
in succession to Ian Marchant.

Gregor Alexander, Finance Director, will
have an expanded role in supporting and
deputising for the Chief Executive in the
running and operations of the SSE group.
In particular, in addition to Finance and
Group Services, he will take on Board-
level responsibility for Energy Portfolio
Management and Regulation and Legal
Services. Brandon Rennet, currently SSE’s
Director of Treasury and Operational
Finance, will join the Management Board on
1 July 2013 as Managing Director, Finance.

From 1 July 2013, Alistair Phillips-Davies’
annual salary as Chief Executive will be
£755,000 per annum, which compares
with Ian Marchant’s current annual salary
of £892,000. In view of his additional
responsibilities from that date, Gregor
Alexander’s annual salary will be
£610,000 per annum.

Alistair Phillips-Davies and Gregor
Alexander joined the Board and Ian
Marchant became Chief Executive in the
course of 2002. The progress achieved
in the 10 full financial years since then
is summarised in the table below:

SSE from 2003 to 2013

Full-year dividend per

share – pence

Adjusted profit before

Mar 13

Mar 03

84.2

35.0

tax – £m

1,410.7

589.8

Capital and investment

expenditure – £m
Energy networks RAV

(net) – £bn

Energy customer
accounts – m

Electricity generation

capacity – GW
People directly

employed

1,485.5

251.9

6.4

2.5

9.47

4.85

13.0

7.0

19,795

9,474

From 1 July 2013, the number of Executive
Directors on the Board of SSE plc will reduce

SSE plc Annual Report 2013

The delivery of strong operational performance and the
achievement of its investment priorities should enable SSE
to achieve its first financial priority for 2013/14: an increase
in the full-year dividend that is greater than RPI inflation.
It should also put SSE in a good position to continue to
deliver above-RPI inflation dividend increases in 2014/15
and beyond.

from three to two. SSE’s Management
Board, which is chaired by the Chief
Executive and of which the Finance
Director is also a member, will remain
responsible for implementing strategy
and policy and for the operational
management of SSE’s businesses.

The combined length of service of SSE’s
Executive Directors and nine Managing
Directors from 1 July 2013 will still
be over 160 years. The transition over
the coming months should, therefore,
be very smooth.

Priorities and outlook for 2013/14

Setting the right long-term priorities
to achieve dividend growth
In support of its strategy, SSE has
identified five long-term priorities across
its balanced range of businesses which
reflect, and are consistent with, the key
issues and trends in its Networks, Retail
and Wholesale segments. The long-term
priorities are:

innovation in energy networks;

of household energy customers;

• efficiency, responsiveness and
• gaining and retaining the trust
• breadth and depth in the provision
• competitive and sustainable energy
• flexible and ‘greener’ electricity

of energy-related services to
businesses and other organisations;

procurement; and

production.

Setting the right operational
priorities for 2013/14
SSE’s strategy is based on the efficient
operation of, and investment in, a
balanced range of energy businesses.
In terms of operations, its first priority

for 2013/14 is to make substantive
progress towards its core operational
objective of injury-free working.

Its Networks priorities are:

Its Retail priorities are:

innovation in the management of
electricity and gas networks; and

electricity distribution Price Control
review.

Scotia Gas Networks) gas with the
minimum possible interruptions
to supplies;

• distribute electricity and (through
• demonstrate responsiveness and
• make a good start to the RIIO ED-1
• improve the standards of service
• improve the breadth, depth and
and • continue to adapt to the technological

delivered to energy supply customers,
reinforce compliance with all licence
obligations and renew the focus on
building trust;

integration of the products and
services offered to business customers;

change that will result from the roll-
out of smart meters and increased
emphasis on digital channels.

Its Wholesale priorities are:

of recently-acquired electricity
generation assets in Ireland and
of gas production assets;

• continue the successful integration
• successfully operate all assets, including
• increase SSE’s capability in the

those recently-commissioned or
undergoing significant change; and

operation and maintenance of its
assets, especially on- and offshore wind.

Setting the right investment priorities
for 2013/14
SSE expects to undertake capital and
investment expenditure totalling around
£1.5bn in 2013/14. Its priorities are to:

programme of capital investment in
electricity and (through Scotia Gas
Networks) gas networks, especially
electricity transmission;

• Networks: continue progress in the
• Retail: make progress with the
• Wholesale: continue its effective and

systems that will be needed to
support the roll-out and operation
of smart meters; and

efficient maintenance, construction
and development of assets which
support the achievement of flexible
and ‘greener’ electricity generation,
especially the new CCGT at Great
Island, Co Wexford.

In addition, one of its priorities for 2013/14
is to work with the UK Department of
Energy and Climate Change and other
stakeholders to secure a package of
reforms that will enable it to invest in
electricity generation in a sustainable way.

Focusing on the right financial priority
for 2013/14
The delivery of strong operational
performance and the achievement of
its investment priorities should enable
SSE to achieve its first financial priority
for 2013/14: an increase in the full-year
dividend that is greater than RPI inflation.
It should also put SSE in a good position
to continue to deliver above-RPI inflation
dividend increases in 2014/15 and beyond.

1. Strategic overview2. 3. 4. Strategic overview

Key performance indicators
How we measure the progress of our business

The key performance indicators for 2012/13 set out
below and opposite demonstrate SSE’s performance in
respect of its first financial responsibility to shareholders
– sustained real dividend growth – and in respect of its
core purpose of providing the energy people need in a
reliable and sustainable way.

Dividend

Profit

Dividend per share – pence

Adjusted profit before tax* – £m

100

8
0
1

8
4
2

7
5
0

6
6
0

7
0
0

1,500

1,000

500

1
2
5
3
7

1
3
1
0
1

1
3
3
5
7

1
4
1
0
7

1
2
9
0
1

’

0
9

’

1
0

’

1
1

’

1
2

’

1
3

’

0
9

’

1
0

’

1
1

’

1
2

’

1
3

Dividend cover – times

Adjusted earnings per share* – pence

2.0

1.5

1.0

0.5

1
5
7

1
5
0

1
4
1

1
4
0

’

0
9

’

1
0

’

1
1

’

1
2

’

1
3

120

115

110

105

1
1
8
0

1
1
2
3

1
1
2
7

1
1
0
2

’

1
0

’

1
1

’

1
2

’

1
3

1
0
8
0

’

0
9

Safety

Total Recordable Injury Rate –
per 100,000 hours worked

0.20

0.15

0.10

0.05

0
1
6

0
1
4

0
1
2

0
1
1

’

0
9

’

1
0

’

1
1

’

1
2

’

1
3

Serious road traffic incidents –
per 100 vehicles

0.4

0.3

0.2

0.1

0
3
1

0
2
6

0
3
1

0
2
3

0
1
6

’

0
9

’

1
0

’

1
1

’

1
2

’

1
3

Investment

Capital expenditure and investment
– £m

2,000

1,600

1,200

800

400

1
2
7
9
8

1
7
0
6
9

1
4
8
5
5

1
4
4
3
7

1
3
1
5
2

’

0
9

’

1
0

’

1
1

’

1
2

’

1
3

Dividend composition – %

Operating profit* composition – %

Capital expenditure and
investment composition – %

Interim 30
Final 70

Networks 49
Retail 23
Wholesale 28

Networks 45
Retail 5
Wholesale 44
Other 6

SSE plc Annual Report 2013

SSE’s performance: KPIs measuring SSE’s performance in the three reportable
segments covering its Networks, Retail and Wholesale businesses.

Networks

Retail

Wholesale

Operating profit* – £m

1,000

800

600

400

200

6
9
0
5

’

1
1

8
7
6
1

7
3
7
1

’

1
2

’

1
3

500

400

300

200

100

4
0
0
5

’

1
1

3
2
1
6

’

1
2

4
1
0
1

’

1
3

800

600

400

200

5
7
1
5

’

1
1

6
0
7
9

’

1
2

5
0
9
5

’

1
3

Regulated Asset Value – £bn

Energy customer accounts – m

Thermal generation output – TWh

6.50

6.00

5.50

5
8
8

’

1
2

5
4
0

’

1
1

6
3
6

’

1
3

9.80

9.60

9.40

9.20

9
6
5

9
5
5

’

1
1

’

1
2

9
4
7

’

1
3

4
2
9

3
8
4

’

1
1

’

1
2

2
9
3

’

1
3

Network customer minutes lost
(north)

Gas supplied (household average,
GB) – therms

Renewable generation output – TWh

7
8

7
3

100

5
6
3

5
4
4

4
5
1

600

500

400

300

200

100

’

1
1

’

1
2

’

1
3

’

1
1

’

1
2

’

1
3

7
6

7
3

’

1
2

’

1
3

4
4

’

1
1

Utility Solutions electricity networks
– number in operation

Financial assistance to vulnerable
GB customers – £m

Electricity produced CO2 emissions –
g/kWh

150

100

7
4

’

1
1

1
3
7

1
1
8

’

1
2

’

1
3

2
8

’

1
1

4
6

5
0

’

1
2

’

1
3

800

600

400

200

6
5
9

5
3
1

’

1
2

’

1
3

5
0
4

’

1
1

1. Strategic overview2. 3. 4.

Strategic overview

Sustainability overview

Integrated reporting
Reflecting the fact that sustainability
is core to SSE businesses the reporting
of sustainability impacts is integrated
throughout this Annual Report. Rather
than produce a separate environmental,
sustainability or corporate social
responsibility report, full descriptions
of the significant impacts and highlights
are given throughout the report, set in
the context of SSE’s three reportable
segments: Networks; Retail; and
Wholesale.

The principal sustainability key
performance indicators against which
SSE reports its performance are the
ratio of power station emissions to
electricity output and the capacity
of its renewable energy portfolio.

Greenhouse gas emissions reporting
During 2013 DEFRA is expected to
implement new greenhouse gas reporting
requirements for large companies
listed on the London Stock Exchange.
With the aim of increasing transparency,

CO2 emissions (000’s)

SSE has adopted the expected reporting
requirements early and below, sets out
relevant emissions for the years ended
March 2012 and 2013.

During the year, total emissions reduced
slightly. In the Wholesale segment report
(from page 48) the operation of SSE’s coal
and gas power stations is described in
detail. The key point to note is that during
the year to 31 March 2013 improved
returns from coal plant due to higher dark
spreads led to increased running hours for
SSE’s coal stations. This led to higher CO2
emissions from the coal plant than in the
previous year. At the same time, there was
weakening of the economics of gas fired
stations due to high gas prices and low
spark spreads. At times the spark spread
was negative. The gas plant recorded lower
operating hours due to the uneconomic
market conditions and maintenance
programmes at Keadby and Medway.
Overall, SSE’s fossil fired stations recorded
lower CO2 emissions than in the previous
year against lower overall output. The ratio
of emissions to output rose to 659g/kWh.

Over the period to 2020 SSE expects its
emissions ratio to decrease due to coal
power plant closures and increased output
from renewable energy plant. Although
the short to medium market economics
remain weak, SSE expects gas plant
to increasingly deliver a balancing role
for variable renewables, that is, lower
net output. On balance, SSE expects to
meets its long term targets to reduce the
emissions ratio of its generation output.
This is defined in SSE’s goal to reduce the
carbon intensity of its energy generation
by 50% by 2020 (against a 2006 baseline).

Capacity for renewable energy
Over the last five years, SSE’s capacity
for generating electricity from renewable
sources has increased from just over
2,000MW to just over 3,200MW. SSE
expects to add to this in the coming years,
mainly through new wind farms that
are in construction or pre-construction,
have consent for construction or are in
development. The details of SSE’s capacity
for renewable sources of energy are set out
from page 54.

Generation1

Other Scope 1

Scope 1 total

Distribution network

losses

Other Scope 2

Scope 2 total

Scope 3 total

Total emissions1

Intensity ratios

Emissions relative

to turnover

Emissions relative
to MW output5

1 April 2012 to 31 March 2013

1 April 2011 to 31 March 2012

CO2

24,319

CO2e

176

Total CO2

24,495

CO2

24,725

CO2e

161

Total CO2

24,886

24,375

185

24,560

24,777

168

24,946

1,284

1,365

1,284

1,311

1,365

1,405

1,311

1,405

25,751

185

25,936

26,193

168

26,362

916

831

659g/kWh

531g/kWh

Notes
1. The figure for generation emissions adjusts the figure from SSE-owned generation to include energy bought in under

power purchase agreements. The figure corresponds to the contracted position set out elsewhere in the report (see page 48).
It includes emissions from generation plant in Ireland from the date of acquisition.

2. Scope 1 comprises generation, operational vehicles, sulphur hexafluoride, fuel combustion, gas consumption in buildings.

3. Scope 2 comprises distribution losses, electricity consumption in buildings and substations.

4. Scope 3 comprises business flights, rail journeys and car miles.

5. Emissions intensity is calculated against generation emissions, rather than total emissions.

6. GHG emissions from SGN’s activities are not included here. Those emissions are reported in SGN’s annual report.

7. GHG emissions arising from the losses across the SHETL owned transmission network are not included since the network is

operated by National Grid Company.

8. The figures have been assured to the CEMARS standard by Achilles Group Limited, consistent with ISO14064-1 and the

Greenhouse Gas Protocol.

SSE plc Annual Report 2013

Definition of sustainability
SSE adopted a broader definition of
sustainability with effect from 1 April
2013. The value forms part of the core
‘SSE SET’ of values which govern how
SSE conducts its activities. The new
definition is: ‘Our decisions and actions
are ethical, responsible and balanced,
helping to achieve environmental,
social and economic wellbeing for
current and future generations’.

The value guides employees to act ethically
and responsibly, and to balance three
aspects of well-being – environmental, social
and economic factors – with a view to both
current and future generations. For energy
companies this balance can also be styled
as a ‘trilemma’ between decarbonisation,
affordability and security of supply.

Given how difficult it is to optimise the
balance between environmental, social
and economic impacts, SSE aims to make
increasingly transparent the balance it
pursues among these factors. Through
greater openness and transparency it
will be possible to understand the full
impact of the social, environmental and
economic implications that result from
SSE’s activities.

Performance review

Networks
Economically-regulated businesses

Keeping the lights
on and supporting
growth.

Networks
operating profit* – £m

Networks Regulated
Asset Value (net) – £bn

Electricity networks
capital expenditure – £m

876.1
+18.9%

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.

6.36
+8.2%

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.

623.0
+27.4%

SSE owns and invests in
three electricity networks
companies: Scottish Hydro
Electric Transmission; Scottish
Hydro Electric Power Distribution;
and Southern Electric Power
Distribution.

Customer minutes lost
(north)

Utility Solutions
electricity networks

Lighting Services
PFI contracts

73
+0.0%

137
+16.1%

11
+0.0%

Customer minutes lost is the
average number of minutes that
customers are without electricity
supply in a year. SSE’s north of
Scotland network distributes
electricity to around 800,000
properties.

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.

SSE’s Lighting Services business
is the UK and Ireland’s largest
streetlighting contractor,
involved in the maintenance
and replacement of public
lighting units.

Key topics in this section

Exceptional weather event on Arran and Kintyre

• See page 32 for more information
• See page 32 for more information
• See page 35 for more information

Upgrading Scotland’s electricity transmission network

Innovating for the future of electricity networks

Owning, operating and investing
in Networks
Electricity and gas transmission and
distribution companies are natural
monopolies, serving defined geographical
areas. The performance of SSE’s
economically-regulated electricity
networks businesses is reported within
Networks, as is the performance of Scotia
Gas Networks (SGN), in which SSE has
a 50% stake. In addition, the market-
based activities of Lighting Services,
Utility Solutions and Telecoms are also
network-based and are, therefore,
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:

Distribution (100%);

• Scottish Hydro Electric Transmission
• Scottish Hydro Electric Power
• Southern Electric Power Distribution
• Scotland Gas Networks (50%); and
• Southern Gas Networks (50%).

(100%);

SSE estimates that the total Regulated
Asset Value (RAV) of its economically-
regulated ‘natural monopoly’ businesses
is now £6.36bn, up £477.0m from £5.88bn
last year, comprising around:

• £1,050m for electricity transmission;
• £2,915m for electricity distribution; and
• £2,392m for gas distribution (ie 50% of

SGN’s total RAV).

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 users to cover 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.

2. Performance review1. 3. 4. Performance review

Networks (continued)
Economically-regulated businesses

compared with £73.7m;

Financial performance in Networks
Operating profit* in Networks increased
by 18.9%, from £737.1m to £876.1m,
contributing 48.8% of SSE’s total operating
profit*. This comprised:

• £93.3m in electricity transmission,
• £512.8m in electricity distribution,
• £234.1m representing SSE’s share of
• £35.9m in other network businesses,

the operating profit* for SGN, compared
with £234.8m; and

compared with £396.5m;

compared with £32.1m.

Managing energy networks
in exceptional situations
In March 2013, SSE’s electricity transmission
and distribution networks in the west of
Scotland were affected by severe snow
drifts and line-icing with the resulting
requirement to replace around 350 wooden
poles on the distribution network and repair
or replace nine steel towers on the 132kV
Port Ann to Carradale transmission line in
Kintyre. To restore supplies as quickly as
possible, two of the largest mobile power
generation installations ever seen in the UK
were deployed. Access was a key issue in
what was an exceptional weather event.

Working closely with partners across
government, local authorities and the
emergency services, power was restored
to the majority of homes within five days
with the remaining households being
connected within a week. The efforts
of SSE’s employees were recognised by,
amongst many others, the residents of
Arran, who gathered hampers of food
and toiletries produced on the island
to say thank you to the SSE employees
who restored their electricity supply.
The Chairman of VisitArran said: ‘We are
enormously grateful to the small army
of men and women who worked in some
pretty appalling conditions to restore
power to our homes and workplaces’.

Several months before, the London
Olympic and Paralympic Games were
described as the biggest event ever
hosted in the United Kingdom. Up to and
during the summer of 2012, Southern
Electric Power Distribution and Southern
Gas Networks worked successfully with
the London Organising Committee of the
Olympic and Paralympic Games to ensure
venues and designated road networks in
their areas were free from disruption.

SSE plc Annual Report 2013

Electricity Transmission

Increasing operating profit* for
Scottish Hydro Electric Transmission
In SHE Transmission, operating profit*
increased by 26.6% from £73.7m to
£93.3m. This reflected the continuing
increase in its investment in its asset
base and the resultant increase in
allowed revenue.

Investing in Scotland’s electricity
transmission network
SHE Transmission 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 covering around 70% of the land
mass of Scotland serving remote and,
in some cases, island communities.
As the licensed transmission company
for the area, SHE Transmission has to
ensure there is sufficient network capacity
for those seeking to generate electricity
from renewable and other sources.

A total of £334.2m was invested by SHE
Transmission in its network in 2012/13, up
from £228.7m in 2011/12, taking its total RAV
to over £1bn for the first time. In 2013/14
SHE Transmission expects to incur capital
expenditure of over £300m and its RAV
should reach around £1.6bn by March 2015.

Upgrading Scotland’s electricity
transmission network
The base of SHE Transmission’s plans for
2013 to 2021 is an approved £1.1bn capital
investment programme in 2009/10 prices,
or £1.4bn in expected out-turn prices
based on a future inflation assumption of
3%. There is flexibility to increase this very
significantly, if required, to upgrade the
transmission network during the period.
To proceed to construction, projects
require a demonstrable commitment
from developers, any necessary consents
for development and authorisation
from Ofgem that SHE Transmission can
recover the cost of its investment. Within
the £1.4bn base capital investment
programme, projects completed or under
construction include (investment numbers
are on an expected out-turn basis):

• Beauly-Dounreay: Work on upgrading

and reinforcing the transmission
network between Beauly and Dounreay
is now complete on time and within
Ofgem’s authorised budget of £78m.

Further work, including on new and
upgraded substations, is under way
which, once complete, will allow the
connection of around an additional
400MW of renewable generation in
the Caithness and Sutherland area.

• Beauly-Denny: Full construction work on

the replacement of SHE Transmission’s
part of the line, from Beauly to Wharry
Burn, is now well under way, with all
136 towers erected in the north section
between Beauly and Fort Augustus
and expectations that this section will
be complete in the next few months.
With a total of around £340m invested
so far, SHE Transmission’s part of the
replacement line is 200km in length
and involves the development of five
substations. Further work is taking
place with SP Transmission on the
interface with the network in the
south of Scotland and this will inform
the timescales for the completion
of the entire line.

• Beauly-Mossford: The first stage

of this project, to construct a new
substation at Corriemoille, is well
under way. This already has an Ofgem
allowance of £14m. Consent for a
replacement 132kV transmission line
between Beauly and Mossford has
been received from Scottish Ministers.
Progress is being made for Ofgem
authorisation and contracts are being
negotiated in order to complete
the overhead line works by 2015.
The estimated cost of both parts
of the project is around £70m.

• Beauly-Blackhillock-Kintore: Work on

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, subject
to the outage programme, well under
way. Ofgem has authorised investment
of over £90m for this development.

A total of £246.1m was invested in these
four projects during 2012/13.

Implementing RIIO-T1
SHE Transmission has now entered the next
Price Control period, RIIO-T1 (Revenue =
Incentives + Innovation + Outputs) which
runs for eight years from 1 April 2013 until
31 March 2021. The decision to fast track
with the publication of the Final Proposals
in April 2012 allowed SHE Transmission a
year to prepare for the implementation of
the new Price Control. This included looking

at opportunities to maximise potential
revenue from incentives and preparing
a number of key projects for submission
under the new flexible funding process
including:

• Kintyre-Hunterston: SHE Transmission

has received consent to build a new
132kV substation in Crossaig on the
Kintyre peninsula and to replace the
existing 132kV overhead line between
Carradale and Crossaig with a higher
capacity double circuit overhead line
and install two subsea cable circuits
from this new substation round the
north coast of Arran to Hunterston.
An investment case has recently been
consulted on by Ofgem. The current
programme anticipates that the
reinforcement will be completed by
around 2016. The investment is currently
estimated to be in excess of £200m.

• Caithness to Moray: SHE Transmission

has submitted an investment case to
Ofgem to develop a subsea electricity
cable between Caithness, where work
is continuing to secure consents for a
new substation at Spittal, and Moray,
where it is proposed to upgrade the
existing substation at Blackhillock. This is
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 of electricity and has
a forecast investment requirement of
around £1.2bn. This proposal to develop
a subsea cable retains the flexibility
to accommodate further generation
developments in the north of Scotland
as and when the need to do so arises.

• East coast 400kV: SHE Transmission is

planning to upgrade the existing east
coast transmission line which runs
from Blackhillock to Kincardine from
an operating voltage of 275kV to
400kV, with associated substation

Restoring power
In March, engineers re-built the
electricity network in Kintyre
and on Arran after catastrophic
damage due to heavy snow and
high winds.

• See the page opposite for more information

Also see YouTube: http://bit.ly/11U9EbV

developments. This will enable new
capacity for generating electricity to
link to the main transmission system
and centres of demand. The project
is a key reinforcement in the Scottish
Government’s National Planning
Framework for Scotland and has a
forecast investment requirement
of around £415m.

The key driver for the above projects,
which could represent an investment of
up to £1.9bn, is the need to accommodate
renewable energy developments in
the north of Scotland. In line with this,
SHE Transmission expects to invest an
average of around £350m for the next
few years, possibly rising to over £500m.
Throughout that period it will be, in essence,
a construction business. In this context,
the enforcement of SSE’s Major Projects
Governance Framework, including strong
control over risk and project management,
is absolutely critical.

In addition, a joint project between SHE
Transmission, National Grid Electricity
Transmission and SP Transmission to
facilitate the proposed development
of a 2GW east coast HVDC subsea link
between the north of Scotland and centres
of electricity demand is progressing. This
project is subject to some uncertainty in
generation scenarios, against which the
cost benefit assessment is being carried out
in order to ensure that the preferred option
for development remains economic and
efficient. While this is taking place, a number
of technical and environmental assessments
and consultations have been carried out
and consultation processes relating to the
proposed infrastructure are under way.

Working with stakeholders
on the Scottish island groups
As stated above SHE Transmission’s plans
for 2013 to 2021 include approved capital

expenditure of £1.4bn; there is also flexibility
to increase this very significantly, to upgrade
the transmission network during 2013-21
in response to the needs of electricity
generators. This need is demonstrated by
developers meeting commercial obligations
under connection agreements thus enabling
SHE Transmission to make the case for
funding for transmission investment with
Ofgem. However, developer confidence is
currently affected by a period of regulatory
and policy change, including the outcome
of the UK government’s Electricity Market
Reform proposals and the transmission
charging regime changes envisaged by
Ofgem’s Project TransmiT.

In recognition of some of the challenges
faced by generation on the Scottish
islands, including the Western Isles,
Orkney and Shetland, a Scottish islands
Renewables Steering Group, chaired by
the UK government with input from the
Scottish Government, has examined
the commercial viability of renewable
projects on the Scottish islands, the
overall value for money that these
projects would provide for the UK
and options to address or mitigate
the impact of transmission charges.

The report, published in May 2013, concludes
that, under current policy, it is unlikely to be
economic to develop further onshore wind
projects on the Scottish islands and that the
marine renewables industry will continue
to require financial support at levels at or
above those currently being offered. The
report calls on government to weigh up the
costs and benefits of renewable generation
on the Scottish islands against other sources
of electricity, considering the impact on the
local economies and communities, and on
wider GB consumers.

Prior to a decision from the UK and Scottish
governments on how to address the above
issue, SHE Transmission continues to make
progress in developing projects to connect
the Scottish islands including:

• Orkney to Caithness: SHE Transmission

is continuing to develop a project for
a new 220kV subsea cable between
Orkney and Dounreay to increase
transmission system capacity to support
renewable energy projects, mainly
marine, in and around Orkney. Site
investigations, survey and design work
is continuing and, pending the required
consents and regulatory approval, the

2. Performance review1. 3. 4. Performance review

Networks (continued)
Economically-regulated businesses

completion of the link is planned for

2018. • Western Isles: SHE Transmission has

undertaken a considerable amount of
work in relation to the proposed Western
Isles HVDC link and Lewis infrastructure.
However, under the regulatory
framework, SHE Transmission needs
to be able to demonstrate a robust
economic case for constructing the
link and, in light of the findings of the
Scottish Islands Renewables Project, the
funding gap for developers continues to
be a key challenge. Therefore, while SHE
Transmission awaits a decision from the
UK and Scottish governments on how to
overcome the costs faced by renewable
developers on the Western Isles, the
placing of the £700m cable contract
by July 2013 is no longer achievable.
As a result it will not be possible to
commission a link before 2017.

• Shetland: SHE Transmission is in

the process of securing consents for
converter stations and the proposed
subsea/onshore under ground 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. Pending the required consents,
regulatory approval and securing
of HVDC supply chain capacity, the
completion of the link is currently
planned for 2018.

For these island projects, a decision from
the UK and Scottish governments on
the issues raised in the Scottish Island
Renewables Project report is required
before SHE Transmission will submit the
projects for regulatory approval. In the
meantime, it will continue to seek planning
consents and engage the supply chain.

Building a supply chain for
transmission infrastructure
Global demand for key plant items
such as HVDC technology, cable
manufacturing capacity and subsea
installation equipment is high, with the
result that there is a restricted market
place and competition with projects
within the UK as well as further afield
across Europe and the rest of the world.
Equally important is the availability of a
skilled and experienced workforce. SHE

SSE plc Annual Report 2013

In addition to the incorporation of innovation in day-to-day
activities, wider change is taking place which means the
way customers use electricity will evolve. SSE’s electricity
distribution businesses continue preparations to make
the network ready for a low carbon future over the
next decade.

Transmission continues to engage with
key global suppliers for HVDC technology
and has recently awarded contracts with
four global businesses to help facilitate
the delivery of new electricity substations
in the north of Scotland, an integral
part of the investment programme. SHE
Transmission is also working on similar
awards for all of the proposed overhead
line and under ground cable works.

In addition, SHE Transmission is investing in
skills for the future through the recruitment
of apprentices, Technical Staff Trainees and
graduates to help deliver the infrastructure
programme over the next decade. In the
last three years, almost 100 such roles
have been created and SHE Transmission
plans to recruit for more than 50 additional
roles this year.

Working with customers and stakeholders
As the licensed electricity Transmission
Owner (TO) in the north of Scotland,
SHE Transmission has a duty to maintain
and develop the transmission system.
In carrying out this duty, SHE Transmission’s
activities are scrutinised and regulated by
Ofgem, including the level of engagement
with customers and stakeholders.

The programme to expand the network to
facilitate the growth of electricity generation
from renewable sources is of interest to a
wide range of individuals and organisations
including developers, communities, national
and local government, the supply chain
and trade organisations. Keeping these
stakeholders updated and informed about
its programme is a key priority for SHE
Transmission.

into England and, potentially, Wales. SHE
Transmission participates in the Electricity
Networks Steering Group, jointly chaired
by the UK government and Ofgem,
to identify and co-ordinate work to help
address key strategic issues that affect
the electricity networks in the transition
to a low carbon future.

Electricity Transmission priorities
for 2013/14 and Beyond

SHE Transmission is SSE’s fastest-
growing business, where the core
activity for much of the next decade
will be construction. Against this
background, its priorities for 2013/14
and beyond are to:

regimes for the 2013-21 Price Control
and maintain high levels of system
availability;

under construction, in a way that
is consistent with all safety and
environmental requirements;

• meet key milestones in projects
• implement the new operational
• make progress with projects
• maintain and develop effective
• ensure it has the people, skills,

in development, including
implementing the programme
of consulting with, and updating,
interested parties;

resources and supply chain
relationships that will be necessary to
support growth on a significant scale.

stakeholder relationships; and

Electricity Distribution

In addition, there is a complex system
of co-ordination for development of the
network in Great Britain, which means that
significant new generation connecting
into the system in the north of Scotland is
likely to impact on the network in the south
of Scotland and require reinforcement

Performance in Southern Electric Power
Distribution and Scottish Hydro Electric
Power Distribution
The performance of SSE’s two electricity
distribution companies during 2012/13
was as follows (comparison with
previous year):

through a regular programme
of inspection, maintenance,
refurbishment and replacement;

existing network or build new lines
to provide an alternative supply should
the existing line be damaged;

• keeping assets in good condition
• investing in areas to reinforce the
• fast response to faults with up to
• communication with customers during

1,000 people based in 40 sites in
the south of England and north of
Scotland, supported by Network
Management Centres in Perth and
Portsmouth; and

planned and unplanned interruptions
through telephone, website, email and
social media.

SSE now restores power within 12 hours
to over 99% of customers who experience
an unplanned interruption. To achieve this
it has used a combination of fast response
teams and innovative technologies to find
and repair faults quickly.

Each year customer tariffs are set to
recover the amount of money agreed
with Ofgem during the Price Control
review. In turn, electricity supply
companies then include these costs
in the charges they make to their
customers. In 2012/13 electricity
distribution charges made up 16% of
an average GB household electricity bill.

Therefore, since any investment
made in the electricity distribution
network is ultimately paid for by
customers, the approach adopted
by SSE’s two electricity distribution
companies is to make sufficient
up front investment, either through
conventional reinforcement or
use of new technologies, so that
a quick response, when customers’
needs become clear, can be made.

to £512.8m;

to 41.6TWh;

• operating profit* increased by 29.3%
• electricity distributed rose by 0.9TWh
• the average number of minutes of lost
• the number of supply interruptions per

supply per customer was 73 in the north
(73) and 65 in the south (60); and

100 customers was 69 in the north (71)
and 62 in the south (70).

The increase in operating profit*
principally reflected additional allowed
revenue under the existing Distribution
Price Control, the recovery of allowed
income not received in the previous year,
2011/12, and revenue resulting from
the increase in the volume of electricity
distributed during 2012/13 (see below)
in addition to continued emphasis on the
control of costs.

Volume of electricity distributed
The total volume of electricity distributed
by the two companies during 2012/13
was 41.6TWh, compared with 40.7TWh
in the previous year. Under the electricity
Distribution Price Control for 2010-15,
the volume of electricity distributed
does not affect companies’ overall
allowed revenue (although it does
have an impact on the timing
of revenue collection).

Investing in electricity networks
at the lowest possible cost
for customers
Capital expenditure in electricity
distribution networks was £288.8m
in 2012/13, taking the total for the
2010-15 Price Control to £761.1m so
far. This investment contributes to its
priority of providing a good service to its
customers by delivering a reliable supply
of electricity. Investing in its network to
maintain reliability takes a number of
forms, including:

Investing in our networks
We’ve invested over £288m in our
electricity distribution networks to
make sure that the electricity supply
is more reliable than ever.

Innovating for the future
of electricity networks
In addition to the incorporation of
innovation in day-to-day activities, wider
change is taking place which means the
way customers use electricity will evolve.
SSE’s electricity distribution businesses
continue preparations to make the network
ready for a low carbon future over the
next decade.

transport;

The drivers for change are numerous and
include:

• increasing electrification of heat and
• further growth of large distributed
• significant energy conservation.

generators, as well as widespread
community and micro-generation
using solar, hydro and wind; and

All of this will change the traditional
flows of electricity, which means smarter,
more dynamic networks will be required.
Two major smart projects, with total
approved funding under the Ofgem
Low Carbon Networks (LCN) Fund of
£26m, are being led by SSE’s electricity
distribution businesses:

• My Electric Avenue, in which SSE is the

host electricity distribution company,
working together with partners, to
undertake a programme of trials with
customers using electric vehicles
to assess their impact on the local
electricity network. The results of
these trials will be shared with other
distribution companies, UK government
and other stakeholders once the project
is complete at the end of 2015.

• Thames Valley Vision (TVV), in and

around Bracknell, 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.
Around 550 participants are now
involved in the project and further
work is being undertaken to increase
this number. TVV 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 modelling.

2. Performance review1. 3. 4. Performance review

Networks (continued)
Economically-regulated businesses

In addition to these two projects, Northern
Isles New Energy Solutions (NINES)
features the use of heat and electricity
storage to manage intelligently the impact
of movements in demand on electricity
generation, which could allow more
renewable energy to be connected to the
network. It also features new active network
management solutions. This means NINES
is not just a smart programme but a
comprehensive and sustainable solution
to the energy challenges on Shetland.
Information gathered through the project
is making an important contribution to
SSE’s proposals for long-term energy
security on Shetland, which are due
to be submitted to Ofgem in July.

The deployment of innovations and
technologies, as well as 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.

Working with stakeholders on the new
electricity distribution Price Control
RIIO-ED1 will be the first electricity
distribution Price Control review to
reflect the new regulatory framework
first adopted in RIIO-T1 and RIIO-GD1.
It will run from 2015 to 2023. In line with
wider trends in electricity networks, it is
likely to put an emphasis on incentives
to secure the innovation required for low
carbon transition. In March 2013 Ofgem
published its strategy decision for RIIO-ED1,
confirming that the regulatory policy for
it will build on the existing framework and
benefit efficient distribution companies
that meet the expectations of their
stakeholders.

As with RIIO-T1, distribution companies
will be required to develop comprehensive
business plans setting out their planned
outputs for the eight-year period and
how they propose to deliver them.
SSE continues to work extensively
with stakeholders to ensure that its plans
meet the requirements of all users of its
distribution networks and in February 2013
published Innovating for a greener, more
efficient future: Our Second Consultation
to invite further views on the priorities
identified for the electricity distribution
businesses between 2015 and 2023.
RIIO-ED1 business plans are to be
submitted to Ofgem in July.

SSE plc Annual Report 2013

Investment will continue to be a top priority for SGN and,
in line with that, it expects to invest around £350.0m in
capital expenditure and mains and service replacement
projects during 2013/14.

Electricity Distribution priorities
in 2013/14 and beyond

During 2013/14 and beyond SSE’s
priorities in Electricity Distribution
are to:

of plans for the networks;

and environmental requirements;

managed as efficiently as possible,
delivering required outputs while
maintaining tight controls over
operational expenditure;

• comply fully with all safety standards
• ensure that the networks are
• place customers’ needs at the centre
• put responsiveness at the heart of
• ensure there is adequate capacity
• work with stakeholders on RIIO-ED1;
and • make progress on the deployment of

day-to-day operations, so that the
number and duration of power cuts
experienced by customers is kept
to a minimum;

to meet changing demands on the
electricity system;

innovative investment in smart grids.

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 some corporate and
management services. In 2012/13:

• SSE’s share of SGN’s operating profit*
• gas transported rose by 19.1TWh to

was £234.1m, compared with £234.8m;

162.5TWh; and

• 98.4% of uncontrolled gas escapes were

attended within one hour of notification,
compared with 98.7% in the previous
year, and exceeding the standard of 97%.

The minimal change in operating profit* for
SGN reflects good operational performance
offset by accounting treatment of some
regulatory and pension costs.

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.

Implementing the new
Gas Distribution Price Control
Following the RIIO-GD1 Final Proposals
from Ofgem for the next Gas Distribution
Price Control for the period 1 April 2013
to 31 March 2021, SGN accepted the
Price Control and believes that the
level of total capital and operational
expenditure is enough to allow it to
maintain safe and reliable networks,
which cover approximately 40% of the
UK land mass and serve around 5.8m
customers, and to secure a fair return
for doing so.

SGN’s preparations for the implementation
of RIIO-GD1 included retaining a strong
focus on operating cost efficiency. During
the next eight years, SGN has committed
to deliver a wide range of outputs and
has been allowed by Ofgem over £4.6bn
(at 2012/13 prices) of cost allowances
to deliver these outputs efficiently.

SGN’s investment programme is key
to this delivery and within the overall
cost allowances, Ofgem has allowed
around £2.8bn over the next eight
years to cover new investment and
to manage the risks relating to SGN’s
existing assets. This investment will
allow SGN to:

for its customers;

• deliver a safe and reliable network
• minimise the impact on the
• deliver new customer-driven initiatives

environment and reduce disruption
for customers and communities; and

to help reduce fuel poverty and
increase awareness of the dangers
of carbon monoxide.

Investing in gas networks and
securing growth in their RAV
The five-year Gas Distribution Price
Control, which began in April 2008,
provided the opportunity for SGN to
increase significantly investment in
its gas distribution networks, thereby
reinforcing safety and reliability and
securing another significant increase
in its RAV. By the end of 2012/13, SGN’s
total RAV was estimated to have
reached £4.78bn.

During 2012/13, SGN invested £398.0m
in capital expenditure and mains and
services replacement projects, compared
with £404.3m in the previous year:

• The majority of the mains replacement

expenditure was incurred under the
30:30 mains replacement programme
which was started in 2002. This requires
that all iron gas mains within 30 metres
of homes and premises must be replaced
over a 30-year period. During 2012/13,
SGN replaced 1,124km of its metallic gas
mains with modern polyethylene pipes.

• Capital projects also included the
• SGN is also committed to making

development of a new UK leading
biogas plant at Poundbury in Dorset
which was opened by HRH The Prince
of Wales in November 2012.

new gas connections to existing
homes that are not on mains gas
as affordable as possible, and is
running an Assisted Connections
scheme, under which 6,714 properties
were connected to its networks
during 2012/13.

Investment will continue to be a top
priority for SGN and, in line with that,
it expects to invest around £350.0m in
capital expenditure and mains and service
replacement projects during 2013/14.

Making gas networks more sustainable
Following the delivery of the country’s
first full-scale anaerobic digester and
biomethane-to-grid project in Poundbury,

Dorset, SGN is now developing this
technology so that larger volumes
of biomethane can be introduced
into the network. SGN believes that this
innovation will help the UK meet its
decarbonisation targets, contribute
to the UK’s energy security and help
with energy affordability.

SGN is in discussions with potential
partners on a further 10 proposals
for biomethane network entry points
from anaerobic digestion projects to
be delivered in the next 18 months in
Scotland and southern England.

Gas Distribution priorities in
2013/14 and beyond

gas supply to customers;

During 2013/14, SGN’s priorities are to:

Regulator to implement the new Gas
Distribution Price Control (2013-21);

• continue to deliver a safe and secure
• work with stakeholders and the
• deliver to time and budget the
• support and invest in sustainable

2013/14 mains replacement and
capital works programmes; and

developments in gas distribution
and biogas production.

Other Networks

Performance in Other Networks
SSE’s ‘Other Networks’ businesses –
Lighting Services, Utility Solutions and
Telecoms – are relatively small when
compared with its economically-regulated
energy networks, and they operate in
tough and competitive markets. Their
contribution to SSE’s operating profit*
increased, from £32.1m in 2011/12 to
£35.9m in 2012/13, despite challenging
trading conditions.

Maintaining leadership
in lighting services provision
SSE remains the UK’s and Ireland’s
leading street-lighting contractor.
At 31 March 2013, it had:

• 22 contracts with local authorities
• 16 consolidated contracts with local

in England, Wales and Scotland to
maintain over 625,000 lighting units;

authorities in the Republic of Ireland
to maintain over 245,000 lighting units,

through Airtricity Utility Solutions
(this was previously 28 individual
contracts); and

• 11 contracts under the Private Finance

Initiative, to replace and maintain
nearly 630,000 lighting units.

Lighting services has been successful
in offering a fully integrated solution for
combined technology contracts covering,
amongst other things, the maintenance
and installation of lighting units and
traffic signs, traffic signals and intelligent
transport systems such as vehicle activated
signs, CCTV traffic control cameras and
speed enforcement cameras. These types
of contract have the benefit of promoting
best practice systems across an area,
enabling local authorities and residents
to be provided with an enhanced,
integrated solution. In line with this,
it has secured a £56m, eight-year
contract for all of the street lighting
and intelligent traffic management
systems across Cornwall.

As part of developing innovative
solutions, it has developed future proof
‘fit and forget’ models aimed at reducing
unit maintenance regimes, improving
efficiency, cost effectiveness and saving
energy. Lighting Services is working with
a number of clients installing Mayflower,
an SSE-owned total lighting control
management system, in the UK, with over
94,000 nodes installed, whilst continuing
to develop the business in Ireland, where
Lighting Services operates as the largest
street lighting operator in the Republic.

The success of lighting services
depends in part on effective long-term
management of contractual relationships
with local authorities. More generally,
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
and heat 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

2. Performance review1. 3. 4. Performance review

Networks (continued)
Economically-regulated businesses

to customers in the development and
construction sectors. For example, in the
past year, SSE has secured contracts at four
large developments to provide combined
electricity, gas and water services to 5,990
homes. Looking at each activity in turn:

• Electricity Networks: SSE now

owns and operates 137 embedded
energised electricity networks outside
the traditional areas served by its
economically-regulated companies
Scottish Hydro Electric Power
Distribution and Southern Electric Power
Distribution. New sites in operation in
2012/13 include data centres, recycling
plants, retail parks and over 1,400
homes. A further 61 networks are
under construction and contracts have
been signed for the development of an
additional six, taking the total to 204
– up from 168 at the end of 2011/12.
Several significant electricity contracts
have been signed, including: the 2,012
plot development at Emerson’s Green
in Bristol and the 650 plot development
at Monbank in Newport, both of
which also include gas and water
contracts; the 2,300 plot development
at Calderwood near Edinburgh, which
also includes a gas contract; and the
adoption of the network at SkyPark
Exeter, one of South West England’s
most ambitious business park
developments.

• Gas Pipelines: SSE is also a licensed

gas transporter, installing, owning
and operating gas mains and services
on new housing and commercial
developments throughout the UK.
The total number of new premises
connected to its gas networks has
continued to grow and since the start
of the current financial year it has
connected a further 15,056 premises,
passing 100,000 total connections in
October 2012. Contracts have been
signed for a further 67,297 connections
to be completed. New gas networks
within multi-utility contracts (as
mentioned above) are complemented
by gas-only developments within SSE’s
electricity distribution areas such as the
312 home development at the former
Prysmian Cable Works in Eastleigh or
the 247 home development at Castle
Meadows in Aberdeen.

• Water: Through SSE Water (SSEW)

SSE is able to install, own, operate and
supply water and sewerage services
alongside its existing electricity and gas

SSE plc Annual Report 2013

business areas and metropolitan data
centres where it sees the greatest growth
in demand.

SSE Telecoms has also set out its longer-
term strategy, which is focused on four
key objectives:

service delivery for customers;

• increasing geographic coverage;
• facilitating fast and reliable cloud
• developing new high-capacity, high
• becoming ever-easier to work with

availability network services; and

as a service provider.

Other Networks priorities in
2013/14 and beyond

Lighting Services, Utility Solutions and
Telecoms have specific priorities for
2013/14, but across all of them there is
a continuing need for:

• efficiency and customer service;
• effective product development; and
• technological change and innovation.

Networks – conclusion
The continuing success of SSE’s
economically-regulated and market-
based Networks will be founded on
efficiency, responsiveness and innovation
in operations, such as restoring power
supplies following interruptions, and
investments, such as upgrading the
transmission network in the north of
Scotland. This, in turn, underpins SSE’s
ability to target annual above-inflation
dividend increases.

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 19 such appointments
and provides, or has secured contracts
to provide, water and sewerage services
to over 28,000 properties in England
and Wales, more than any other new
appointment company. This number
includes over 3,500 SSEW customers
already connected.

• Heat: SSE uses Combined Heat and

Power (CHP) generation on District
Heating schemes to provide hot water
and space heating mainly to high
density residential developments.
There are now seven heat networks in
operation and seven further schemes
where SSE is the preferred bidder.
Over 2,000 new heat customers
have been connected in the last
12 months, including the delivery
of one of Scotland’s largest district
heating schemes at Wyndford, Glasgow.
SSE’s total heat customers now stands
at over 3,000 with a further 4,000
contracted but not yet completed.

Operating a national telecoms network
SSE Telecoms provides high-capacity
resilient network and data centre services
to the UK’s cloud services, systems
integration and telecoms industries.
Its reputation for project delivery and
high availability is based on the effective
management of assets including
12,479km of fibre optic cable, leased
fibre, microwave links and a 10MW,
80,000 square feet data centre built to
exceed the demanding Tier 3 standard.
In addition, SSE Telecoms manages SSE’s
internal call centre, telephony and data
network infrastructure.

The ten-year £30m Janet contract to
provide 6,500km of fibre network to over
30 UK sites used by the UK’s research and
education community has been delivered
successfully, further strengthening SSE
Telecoms’ reputation as a service provider
for education and public services. Contract
wins in the data centre will see the site
approaching its currently fitted-out
capacity, with scope for expansion and
development of existing space and
power supplies.

The focus for the year ahead is the
expansion of SSE Telecoms’ network, which
will reduce its cost to service high-density

Performance review

Retail
Market-based businesses

Earning the right to
make a profit.

Retail operating profit*
– £m

Energy customer
accounts – millions

Home services customer
accounts – millions

410.1
+27.5%

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.

9.47
-0.8%

0.42
+2.4%

SSE supplies electricity and
gas to household and business
customers in the energy markets
in Great Britain and Ireland. It
is the second largest supplier in
both markets.

Home services provided by
SSE include gas boiler, central
heating and wiring maintenance
and installation and telephone
line rental, calls and broadband
services.

Meters read – millions

Financial assistance for
vulnerable customers
– £m

SSE Contracting order
book – £m

14.4
-4.0%

50
+8.7%

88
+12.8%

SSE is involved in supplying,
installing, maintaining and
reading meters in the household,
commercial, industrial and
generation sectors in Great
Britain.

SSE provides assistance for
customers who struggle to
pay for their basic energy
needs, including discounts
on energy bills.

SSE Contracting is one of the
largest mechanical and electrical
contracting businesses in the UK,
operating from regional offices
throughout Great Britain.

Key topics in this section

Demonstrating that saying sorry is not enough

Introducing a new Customer Service Guarantee

• See page 41 for more information
• See page 42 for more information
• See page 43 for more information

Focusing on energy efficiency obligations

Supplying energy and related
services across the Great Britain
and Ireland markets
SSE’s Retail segment comprises two
business areas: Energy Supply and
Energy-related Services.

SSE is the second largest energy supplier
in the competitive market in Great Britain
and the second largest supplier in the
competitive markets in Ireland.

At 31 March 2013, it supplied electricity
and gas to 9.47 million household and
business accounts under its brands SSE,
Scottish Hydro, Southern Electric, SWALEC
and Atlantic in the Great Britain market
and Airtricity in the markets on the
island of Ireland.

SSE also provides other energy-related
products and services to over 400,000
customers, covering three principal areas:
home services; metering; and mechanical
and electrical contracting.

Financial performance in Retail
Operating profit* in Retail in 2012/13 was
£410.1m, compared with £321.6m in the
previous year and £400.5m in 2010/11.
This amounted to 22.8% of SSE’s total
operating profit* and comprised:

• £364.2m in Energy Supply, compared
• £45.9m in Energy-related Services,

with £271.7m in the previous year and
£347.7m in 2010/11; and

compared with £49.9m in the previous
year and £52.8m in 2010/11.

As stated in its Annual Report 2012, SSE
expects that its annual profit margin (ie
adjusted operating profit* as a percentage
of revenue) in Energy Supply should average
around 5% over the medium term (ie three
to five years).

In 2012/13, it was 4.2%, up from 3.5%
in the previous year, and compared with
4.3% in 2011/12. Energy Supply profit
margin has, therefore, averaged 4.0%
over three years.

SSE believes that its expected profit
margin over the medium term is
reasonable and sustainable and that it
stands comparison to organisations that
provide other everyday essentials such
as food retailers, telecoms companies
and high street retailers.

2. Performance review1. 3. 4.
Performance review

Retail (continued)
Market-based businesses

Energy Supply

Supplying energy across Great Britain
and Ireland
The key responsibilities of the Energy
Supply business are to:

and gas to meet customers’ needs;

distributed to customers’ premises
through the relevant networks;

• ensure it secures enough electricity
• arrange for electricity and gas to be
• provide customers with necessary
• meet obligations in respect of energy

associated services such as metering
and billing; and

efficiency and any related social or
environmental schemes promoted
by government.

SSE appreciates that its core products of
electricity and gas are not discretionary
items (except, in some instances, in the
extent of their use) but something
people rely on to heat and power their
homes and live comfortably. That means
there is legitimate regulatory, political
and public interest in its activities and it
is SSE’s responsibility to provide value for
money, fairness and transparency
to customers.

Supplying energy to customers
in Great Britain and Ireland
In the year to 31 March 2013, SSE’s energy
customer accounts in Great Britain and
Ireland fell from 9.55 million to 9.47 million.
This comprised:

• 4.87 million domestic electricity accounts
in GB; • 3.35 million domestic gas accounts in GB;
• 0.43 million business electricity and gas
• 0.82 million electricity and gas accounts

in Northern Ireland and the Republic
of Ireland.

accounts; and

Within the overall total, 2.4 million
customer accounts in Great Britain are
for loyalty and fixed term products.
These include M&S Energy, available to
customers through Marks & Spencer’s
stores and website.

To provide customers with the best possible value for
money SSE believes that it should deliver excellent
customer service, simple products and fair prices.

Including these, customer account
numbers in Ireland rose by 200,000.

In contrast, there was a reduction of
around 275,000 in customer account
numbers in Great Britain. Fundamentally,
this decline reflects the highly competitive
market conditions in Great Britain.
Nevertheless, SSE’s energy customer
account numbers across Great Britain and
Ireland are still just 3% below their peak in
March 2011, on a like-for-like basis and are
still nearly double their level in March 2003.

Making a reasonable profit
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:

• the weighted average cost of electricity,
• the weighted average cost of gas, made

made up of fuel used in generation
plus associated costs of CO2 emissions,
power purchase agreements and direct
bilateral electricity contracts; and

up of gas purchase contracts and direct
bilateral gas contracts and payments for
gas storage.

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
2012/13 increased from £271.7m to
£364.2m and comprised 20.3% of SSE’s
total operating profit*. This includes
operating profit* from the household
and business sectors in Great Britain
and in Ireland.

12 months to March 2013 than it
was during the same month in the
previous year;

• the weather was colder in 11 of the
• at London Heathrow, 2012/13 was the
• March 2013 was the coldest March since

1962 and the equal second coldest since
records began in 1910.

coldest year since 1987/88; and

As a result, SSE estimates its household
customers in Great Britain used, on average
(comparisons with the previous year):

• 544 therms of gas (451); and
• 4,299kWh of electricity (4,104).

Nevertheless, on a weather-corrected
basis, there has been a sustained fall in
average household consumption of gas
and electricity in Great Britain; in 2012/13
it was 21.7% and 15.5% lower respectively
than was the case in 2008.

Retail energy prices in Great Britain
Despite the significant improvements in
energy efficiency, SSE recognises that energy
affordability is a major societal issue and was
therefore disappointed to have to implement
in October 2012 price increases for
household gas and electricity supply in Great
Britain of an average of 9%. This followed
a cut in the unit price of gas of 4.5% in
March 2012. SSE’s gas prices had previously
increased in December 2010 and September
2011 and its electricity prices increased in
August 2008 and September 2011.

The decision to increase prices was
necessary due to rising costs putting
an upward pressure on prices. The main
pressures were:

• the average price in the wholesale

energy markets to secure gas for the
coming winter was around 14% higher
than it was for the winter before. Indeed,
the actual cost of gas turned out to be
even higher than that forecast at the
time the decision was taken to increase
prices. Wholesale energy costs account
for around 50% of a typical gas and
electricity customer’s dual fuel bill;

The total customer account numbers
include the acquisition in June 2012
of 130,000 gas customer accounts in
Northern Ireland from Phoenix Energy
Holdings Ltd for £29.3m, excluding
working capital-related adjustments.

The increase in SSE’s operating profit* in
Energy Supply was mainly due to an increase
in energy consumption as a result of colder
than normal weather in 2012/13 compared
with the warmer weather of the preceding
year. This is illustrated by the fact that:

SSE plc Annual Report 2013

• the increasing costs of delivering gas

and electricity to customers’ homes
through the gas and electricity
transmission and distribution networks,
which are determined by Ofgem and
which are needed to finance necessary
investment in the networks. These costs
represent around 25% of a typical dual
fuel customer’s bill and were 9% higher
than they were the previous year; and

• the cost of government economic and

social initiatives including the Carbon
Emissions Reduction Target (CERT) and
Warm Homes Discount (WHD) that
suppliers are required to fund and pass
onto customers. At the time of the
price increase announcement they had
increased by 30% on the previous year,
accounting for around 10% of a typical
customer’s bill.

At the same time as the price increase
was announced SSE also committed to cap
household energy prices in Great Britain until
at least the second half of 2013. This has
delivered certainty around its tariff offering
in very competitive market conditions.

Looking ahead to 2013/14, the cost
of government-sponsored social and
environmental schemes is leading to
further increases in costs in Great Britain.
The amount of money paid out by SSE
under the fuel poverty-related Warm
Home Discount scheme will be around
£50m, similar to the level paid in 2012/13.
The costs of the feed-in tariffs programme
for promoting micro-renewables are
rising significantly and are on the point
of overtaking the amount spent on the
Warm Home Discount.

The delay in the start date for the new
Energy Company Obligation, designed
to reduce the energy consumption and
support people living in fuel poverty, means
that timescales for it are compressed in

comparison with the UK government’s
original plan. This is expected to inflate
the cost of a programme that was
already based on an optimistic set
of cost assumptions. SSE believes that
a ‘cap’ should be put on energy suppliers’
spend on ECO to ensure value for money
for customers, who ultimately pay for
the scheme.

The need for this is highlighted by the
ECO brokerage mechanism established to
give Green Deal providers an alternative
route to ECO funding and to give obligated
companies an alternative means of
securing the carbon savings they need to
meet their ECO targets. Results from it,
to date, indicate that the actual cost of
delivering ECO is over 30% higher than that
forecast by the UK government, while other
evidence points to a risk of further cost
increases over the course of the scheme.

Other non-energy costs are also increasing,
with the requirement for investment in
transmission and distribution resulting in
further increases in charges. Taken together
these increases point to additional costs of
over £80 per dual fuel customer in 2013/14.
Unless there is a sustained reduction in
prices in wholesale gas and electricity
markets, it is highly likely that these
additional costs will eventually have to be
reflected in higher prices for household
customers. Nevertheless, SSE intends to
resist this trend of higher costs for as long
as possible to shield customers from the
unwelcome impact of higher prices.

Putting customers first
To provide customers with the best possible
value for money SSE believes that it should
deliver excellent customer service, simple
products and fair prices. In recent years
SSE consistently led the energy supply
industry in customer service and became
a benchmark for other energy suppliers.

Building trust
We’ve let some customers down in the past,
but with our Customer Service Guarantee we
are continuing to add to our record of sector-
leading service.

• See page 42 for more information

During 2012/13, the number of SSE-related
complaints to third party organisations
(the Ombudsman Services: Energy UK,
Consumer Focus, Consumer Direct and
Consumer Focus’ Extra Help Unit) was 942,
compared with 896 in the previous year.
The increase reflects greater sensitivity on
the part of customers to all aspects of their
energy supply at a time of higher prices
and greater public scrutiny. Nevertheless,
the energy complaints league table, last
published by Consumer Focus in July
2012, awarded SSE a five star rating with
the lowest number of complaints to
Ombudsman Services.

SSE topped the uSwitch Customer
Satisfaction Award run by uSwitch.com
seven years in a row. In the most recent
survey, in November 2012, SSE came top
for customer service but came second for
the overall Customer Satisfaction Award.
At the time of the survey SSE was the only
major energy supplier to have announced
a price increase. Other energy suppliers
followed suit in the following months. SSE
is working hard to regain the top ranking in
the Customer Satisfaction Index, although
survey-based rankings can be influenced by
events that are current or recent when the
surveys take place.

Demonstrating that saying sorry
is not enough
On 3 April 2013 Ofgem announced its
decision to fine SSE £10.5m for breaches
of two Standard Licence Conditions:
Notification of Domestic Supply Contract
Terms; and Marketing to Gas/Electricity
Domestic Customers. SSE apologised fully
for the breaches and accepted the fine
without appeal. This marked the conclusion
of Ofgem’s investigation and associated
enforcement action, financial or otherwise,
against SSE in relation to these breaches.
Up to that point, SSE has been the only
leading supplier in Great Britain that had
not been subject of a finding of breach
of its supply licence conditions.

Breaches occurred for varying periods
between October 2009 and September
2012, but mainly in the period to July 2011,
the point at which SSE became the first
company to suspend doorstep energy
sales in Great Britain. They related mainly
to inadequate monitoring, auditing and
execution of SSE’s sales activities. SSE
believes it worked hard and in good faith to
implement changes to licence conditions
made by Ofgem in 2009 and 2010

2. Performance review1. 3. 4. Performance review

Retail (continued)
Market-based businesses

designed to ensure sales were conducted
in a fairer and more transparent manner.
Nevertheless, it accepts unreservedly that
it did not move fast or far enough in some
areas and acknowledges readily that some
of its processes were not as effective as
they should have been. SSE estimates
that around 23,000 customers may have
moved to a more expensive energy supply
contract as a result of its energy sales
activity on the doorstep and at venues.

While the investigation was being
undertaken, SSE took significant action to
begin remedying the substantive issues
raised. In addition to ending doorstep sales
in Great Britain, these included the creation
of a new Retail division, the external
recruitment of a new Managing Director and
the development of new sales processes
and related training for employees as well
as new safeguards for customers.

To provide redress for customers affected,
SSE introduced in December 2011 its Sales
Guarantee – setting aside up to £5m to
deal with historic issues to ensure that any
household 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. Although five of the six
leading suppliers have been or are being
investigated in this area, SSE remains the
only leading energy supplier to offer such a
guarantee. The processes underpinning the
Sales Guarantee have been independently
reviewed and audited to make sure
that they are fair and reasonable.

Between 3 April and 17 May 2013, SSE was
contacted by around 14,000 customers
relating to its Sales Guarantee. SSE has
already assessed around 80% of the
cases raised since 3 April and advised
the customers concerned about the
outcome. In around 85% of assessed
cases the customer has not experienced
any financial disadvantage; in the 15%
where the customer has suffered financial
disadvantage payments have been
made. Discussions with a further 25% of
the customers whose situation has been
assessed have resulted in a decision by SSE
to address concerns other than financial
disadvantage arising from the sales process.
As a result, since 3 April 2013, SSE has so
far made payments averaging around £80
to just over 5,000 customers – a total of
around £425,000. SSE is continuing to assess
the outstanding cases raised by customers.

SSE plc Annual Report 2013

SSE has decided to donate to energy-
related charities all of the money that is
remaining on 31 August 2013 from the
£5m it provided for the retrospective
implementation of its Sales Guarantee.
The sum that will be donated is currently
expected to be around £2.5m. SSE
will confirm which charities are being
supported at the end of August.

The safeguard offered by the Sales
Guarantee, the only one of its kind in
the Great Britain energy industry, will
continue to apply to any sale made by
SSE in the future.

Redoubling the effort to
engage with customers
In October 2011 SSE announced a package
of proposals designed to build greater
trust with its customers. These included
a commitment to reduce the number
of tariffs offered, to ensure customers
receive personalised Annual Energy
Reviews (AERs) to help reduce their bills,
and to ensure all customers have the
opportunity to access any SSE product.
SSE’s Building Trust programme led the
energy supply industry and was followed
by similar, but often less radical schemes
from other energy suppliers.

Following the success of Building Trust
SSE published a second document, Still
Building Trust, in April 2012 which set out
a number of further measures to maintain
momentum, including steps to simplify
energy bills, tackle estimated bills and
opened up the best tariff to prepayment
meter customers.

SSE also introduced new measures to
improve customer service, including
the Sales Guarantee and implemented
the Annual Energy Reviews that allow
customers to check they are on the
best tariff for them, are receiving
benefits they may be entitled to
and are taking advantage of energy
efficiency options.

Introducing a new Customer
Service Guarantee
In addition to the Sales Guarantee,
in February 2013 SSE launched a new,
separate Customer Service Guarantee
which promised to meet a new set
of customer service commitments or
give customers £20 off their next bill.
The commitments are based on three
core objectives:

• helping customers save money;
• making life easier for customers; and
• helping customers when they need

it most.

agreed time;

unless the customer agrees;

There are five clearly defined and
measurable standards for SSE’s customer
service team including:

• always calling customers back at the
• never transferring calls more than once
• giving customers the opportunity to
• offering to find ways to save customers
• offering help with energy bills through

payment plans or checking eligibility
for assistance such as the Warm
Home Discount.

speak to a manager if they want;

money on every call; and

The Customer Service Guarantee goes
significantly beyond existing industry-wide
Guaranteed Standards and further than
other energy supply companies’ customer
service standards. By 31 March 2013,
SSE had made 292 individual payments
totalling £5,840.

Communicating with customers
through digital channels
In Ireland SSE leads the energy supply
sector in digital services to domestic
customers with around half of customer
interactions, such as submitting meter
readings, making secure payments
and updating personal account details
carried out through Airtricity’s online self
service channel.

SSE is also the leading innovator of mobile
communications methods in the Irish
energy supply sector with technology
in place that supports a broad range of
customer activity on smartphone devices.

This illustrates that digital channels
are now established as an important
way of communicating with customers
and around one quarter of all of SSE’s
transactions with energy supply customers
are carried out in this way. In Great Britain
and Ireland SSE has 1.9m customers who
receive paperless billing. Customers can
view their account and payment history,
submit meter readings and receive an
up-to-date balance on their account and
make secure payments on their account.
Customers can also undertake online
Annual Energy Reviews.

Providing customers with a high-quality
user experience when they choose to
utilise digital channels is now one of SSE’s
top customer service priorities. Substantial
investment is being made in digital services
based on a customer proposition that is
simple, value-adding and relevant. SSE
is working to ensure that all of the main
customer service requirements are available
online and plans to broaden the digital
touch points on offer, reflecting customers’
enthusiasm for these channels evidenced
across the energy supply and other sectors.

Helping customers save energy
While the average amount of energy used
by SSE’s customers increased during 2012/13
as a result of the colder weather experienced
during the year, the longer-term weather-
corrected position is as follows:

• average household consumption of gas
• average household consumption of

by SSE’s customers has fallen by 21.7%
since 2008; and

electricity by SSE’s customers has fallen
by 15.5% since 2008.

Based on SSE’s unit prices in March 2013,
the underlying fall in consumption since
2008 is equivalent to taking £248 off a
dual fuel bill. This illustrates the distinction
between the price of a unit of energy and
the amount customers pay for heating
and powering their homes.

The decline in energy consumption is
expected to continue for the next few
years. SSE has observed greater reductions
in gas than in electricity, most likely due
to more efficient boilers and to more
energy efficient homes lowering gas
heating requirements. Electricity
demand is reducing, but efficiencies in
appliances are balanced by increasing
household technology.

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.
In this context, SSE’s goal is to broaden the
range of products and services it offers to
household customers.

Delivering past energy
efficiency obligations
As a leading energy supplier, SSE had
obligations under the Carbon Emissions
Reduction Target (CERT) 2008-12 to deliver
energy efficiency measures to households
throughout Great Britain that delivered
savings in CO2 emissions.

Of the total obligation, 40% had to be
met in a Priority Group of households,
within which there was also a Super
Priority Group (SPG) of households which
are low income and qualify for certain
benefits. There were also requirements
in respect of promoting professionally
installed insulation measures (the
Insulation Obligation).

SSE has delivered the carbon savings set
out by the CERT scheme and has contracts
in place to ensure it meets it allocation
under the Community Energy Saving
Scheme (CESP).

SSE complied with the CERT scheme
in full but was unable to verify and report
the delivery of some of the obligations,
namely the Priority Group (PG) and Super
Priority Group (SPG) to Ofgem before the
reporting date. Following verification work
with the Department of Work and Pensions
(DWP) SSE was able to show it delivered
the obligations.

In relation to CESP, SSE acknowledges
that despite best efforts it was not able
to physically deliver all of the obligations
by December 2012. However contracts
were in place shortly afterwards for the
delivery of the obligations in full.

In line with other energy companies,
SSE’s delivery at the reporting date was
under 100% of the target because it did
not achieve the scheme’s bonus uplifts
for multiple measures in a home and
density bonuses within an area. Despite
this, SSE has delivered nearly twice the
unadjusted carbon reduction (ie the real
carbon before bonuses) and spent £40m
more than was suggested in DECC’s
impact assessment.

Ofgem announced in May 2013 that it
will investigate SSE and five other energy
companies’ failure to achieve 100% of
the CESP obligation by the cut-off date.
SSE will co-operate fully with Ofgem
as it considers further actions in relation
to CESP.

SSE has always agreed with the aims of
the schemes and has achieved significant
savings for customers. For example
through CERT, SSE insulated nearly 500,000
cavity wall insulations and nearly 700,000
lofts. SSE has also replaced almost 30,000
boilers. As DECC recently stated, there has
been a substantial reduction in customers’
gas and electricity usage as a result of
these schemes.

These schemes have delivered real
benefits for customers, but it has been
extremely challenging for suppliers
to find, deliver and verify measures in
peoples’ homes without having access
to any data on income and benefits.
These difficulties, along with delivery
and capability issues in the insulation
industry have caused cost inflation
during the schemes. Important lessons
for, and amendments to, the ECO
scheme are also needed to ensure the
schemes are delivered at reasonable
cost for consumers.

Focusing on future energy
efficiency obligations
SSE is now focussing on the delivery
of the new Energy Company Obligation
(ECO), the next phase of the government’s
mandatory energy efficiency programmes.

ECO creates a legal obligation on energy
suppliers to improve the energy efficiency
of households through the establishment
of three distinct targets:

• the Carbon Emissions Reduction
• the Carbon Saving Community

Obligation, focusing primarily on hard-
to-treat homes and with solid wall
insulation and hard-to-treat cavity
wall insulation as primary measures;

Obligation, focusing on the provision
of insulation measures and connections
to district heating systems to domestic
energy users that live within an area of
low income. This target has a sub-target,
which states that at least 15% of each
supplier’s Carbon Saving Community
Obligation must be achieved by
promoting measures to low income
and vulnerable households living
in rural areas; and

• the Home Heating Cost Reduction

Obligation, requiring energy suppliers
to provide measures which improve
the ability of low income and vulnerable
households (the ‘Affordable Warmth
Group’) to heat affordably their homes.

2. Performance review1. 3. 4. Performance review

Retail (continued)
Market-based businesses

While some of the final guidance from
Ofgem is yet to be clarified, SSE is building
its energy efficiency delivery business
and partnerships in order to meet the
new scheme requirements. While very
supportive of the need for schemes to drive
take-up of energy efficiency measures,
particularly among vulnerable customers,
SSE remains concerned by the potential
costs of the new ECO.

The Department of Energy and Climate
Change (DECC) estimates the annual cost
of ECO at £1.3bn a year, an independent
report by economic consultancy NERA for
Energy UK found it could be £2.35bn or
more. Currently the market is indicating
a cost somewhere in between. Given this
potentially huge variation in costs, SSE
has been engaging with the Government
regarding placing a cap on the total cost
of the scheme, so that consumers, who
will pay for it via their gas and electricity
bills, are not unduly penalised should
costs escalate.

Given the expected cost escalation and that
it is ultimately paid for through energy bills
and delivered by companies supplying more
than 250,000 domestic customers, the
Energy Company Obligation highlights three
issues that are becoming increasingly acute:

• competition: ‘small’ suppliers’

exemptions from government-
sponsored schemes and obligations
which means they can avoid passing
on costs totalling an average of
around £100 per dual fuel account
to their customers;

• fairness: ‘small’ suppliers in the Great

Britain market have a significant
number of customer accounts. These
customers are not required to contribute
to the costs of government-sponsored
schemes through their bills, but could
still benefit from them; and

• equity: a larger proportion of the

obligations on energy suppliers fall on
electricity-only customers. This means
that more than two million households
in Great Britain who do not have
access to the gas grid have to bear a
disproportionate share of the burden
of government-sponsored schemes.

and fixed;

in 2012/13 a far simpler range of energy
tariffs which remove unnecessary
complexity, featuring:

• three core products – standard, capped
• general availability for customers;
• five simple questions to help customers
• a new price comparison metric.

find their best deal; and

SSE also announced that its lowest
priced tariff would be made available to
prepayment meter customers, becoming
the first energy supplier to do so.

The current Energy Bill contains clauses
designed to enshrine Ofgem’s Retail Market
Review into primary legislation. The aims
of these interventions are to:

• limit tariff numbers
• prescribe provision of information
• impose new Standards of Conduct for

to customers; and

licence holders.

While supportive of the ‘simpler, clearer,
fairer’ objective, SSE does remain concerned
about the overly-prescriptive nature of
some of the reforms, many of which
will add cost and complexity to energy
suppliers’ relationship with customers.

Clearly the high level of political and media
interest in the sector is meaning that UK
energy suppliers are going through a period
of strong intervention in the regulatory
cycle. It is possible that this may result in
too much regulation, leading to a stifling
of innovation in the sector. It is clear that
Ofgem and the UK government need to
create strong and coherent measures
with which to define the success of these
interventions, given that over-simplification
may result in lower switching rates among
electricity and gas customers.

SSE is nonetheless well placed to deal
with these interventions, having already
migrated customers onto its new tariff
structure, invested in new systems and
with its sector leading customer service.
SSE is committed to being at the vanguard
of good practice in the sector.

Simplifying tariffs and anticipating
new regulations
SSE recognised that the buying of energy
had become too complex and needed to
be simplified. In response it introduced

Continuing to help vulnerable customers
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

SSE plc Annual Report 2013

warm enough. In September 2012, the
UK government proposed new ways to
measure fuel poverty. It is proposing a new
definition which includes dual indicators of
fuel poverty that separate the extent of the
issue (the number of people affected) from
its depth (how badly people are affected).

In addition to the successful deployment of
measures under energy efficiency schemes,
SSE fulfils other key responsibilities in order
to help those of its customers who struggle
to pay for their basic energy needs by:

bills, helping an estimated 370,000
customers, with a total of around
£50m being provided in 2012/13;

• giving financial assistance with energy
• providing tailor-made payment
• undertaking income maximisation
• maintaining, through a Careline

arrangements, helping customers who
may be experiencing hardship and having
difficulty in paying their energy bills;

checks, delivered in partnership with
Citizens Advice Direct; and

supported by specifically-trained people,
extra services for vulnerable customers
and contacting potentially vulnerable
customers each winter, helping them
with practical advice and support.

In addition, SSE did not disconnect the gas
or electricity supply of any customer in
Great Britain between 1 December 2012
and 28 February 2013, in line with its winter
policy in this area.

Working with customers
to manage energy-related debt
At 31 March 2013, 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 £90.4m,
compared with £88.3m in the previous year.
A bad debt-related charge of £50.7m was
recognised in the period. This compares with
a charge of £40.5m in the previous year.

The general economic climate continues to
give rise to significant debt management
challenges. Debt less than three months
old was 20% higher on 31 March 2013 than
the year before and debt overdue by four
to six months was 4.5% lower.

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 proactive
approach is in the best interests of SSE
and the customers concerned.

Supplying energy to customers in Ireland
In the Republic of Ireland SSE’s supply brand
Airtricity increased household energy prices
in October 2012 by 4.7% for electricity
and 8.5% for gas. In Northern Ireland SSE
increased prices for gas by 8.75% from April
2013 following a number of significant cost
increases. The previous April gas prices were
cut by 8.5%. SSE cut household electricity
prices by 14.1% from October 2012. Prices
in Northern Ireland are set by the Northern
Ireland Utility Regulator.

Airtricity, since the early 2000s, has had
a strong brand presence in Ireland which
was synonymous with the development of
renewable energy. While the business had
a small commercial electricity customer
base in RoI and NI, it was not until 2010
that it made a significant push into both
domestic electricity and subsequently gas
supply markets across the island.

This was the first major entry by a privately
owned energy utility into the market,
a move that was widely welcomed by
regulators and politicians in the north and
south of the island. Domestic switching
rates dramatically increased to become
one of the highest in Europe, during the
years 2010 to 2012. Such was the scale
of switching it enabled the RoI regulator,
the Commission for Energy Regulation, to
deregulate the domestic electricity market.

For customers, Airtricity brings three
distinctive characteristics to the market:

• it offers more competitive energy prices,
• it has a positive green image and today

particularly at a difficult economic time;

continues to have the largest renewable
component to its energy sources relative
to other suppliers; and

• it leads the way in providing customers

with an online/digital platform from
where they can sign up, manage their
account, submit meter readings and pay
their bills. This industry-leading service is
particularly important in a market where
1.6 million people own a smartphone
and where the average person spends
around 150 minutes-a-day online.

The online platform also provided Airtricity
with its earliest means of helping customers
identify ways in which they can save money.
From helping householders identify energy
saving measures that can be delivered in the
home, to presenting Airtricity’s competitive
pricing plans, it provided householders with
the information they needed to get the most
from their energy supply.

Since 2011, Airtricity is also obligated, in
an initiative introduced by the Irish Energy
Ministry, to achieve energy efficiency savings
across the RoI economy. While the target
set is challenging, Airtricity Energy Services
(AES) is the retail subdivision focused on
delivering this for commercial, public sector
and household customers. Among a suite
of energy efficiency measures, AES has
completed over 20,000 boiler services
in the past year. Meanwhile, linking with
SSE’s community funding programme
for communities surrounding its wind
farms, SSE has invested over £2m in local
community based energy efficiency
projects in Ireland.

Airtricity’s entry into the domestic market
coincided with difficult economic times in
Ireland, and so from the earliest stage it
sought to implement measures that could
assist customers in managing their bills.
From 2010, in the absence of pre-payment
meters in the RoI market, Airtricity

Keeping you informed
In December 2012 we launched
our news and views website and
Executive blog to keep you up-
to-date with what is happening
at SSE.

• See http://news.sse.com

introduced its SMART Energy card allowing
customers, through their local Post Office
or convenience store to pay amounts
against their account to a value and at a
frequency that suits them. This prevents
the accumulation of a larger bill at the
end of the billing cycle. The success of the
scheme proved to the regulator the benefit
of prepayment meters which have now
been introduced for vulnerable customers.
In 2012/13, Airtricity also introduced a
further service innovation – equal payment
plan (EPP). EPP is a free service which allows
customers to spread their costs for the
year across 12 equal payments, giving
the customer more predictability and
more control.

Energy Supply priorities
in 2013/14 and beyond

consideration of all remaining historic
claims under its Sales Guarantee;

During 2013/14 and beyond, SSE’s
priorities in Energy Supply are to:

upward pressures on household
energy prices;

are conducted in a professional,
transparent and compliant way,
consistent with the letter and spirit
of all relevant regulations;

• resist for as long as is practical
• complete in a fair and timely way
• ensure sales of electricity and gas
• deliver a high standard of customer
• improve customer insight into the
• identify new ways of engaging

energy supply market and ensure
that the value of SSE’s products
and services are better known
and understood; and

service, in keeping with the
principles behind its Customer
Service Guarantee;

with energy supply customers,
including through digital channels.

Energy-related Services

Offering a broader range of 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:

• retailing of ‘home services’ such as

gas boiler, central heating and wiring

2. Performance review1. 3. 4. Performance review

Retail (continued)
Market-based businesses

maintenance and installation, telephone
line rental, calls and broadband services
and microgeneration;

• supplying, installing, maintaining
• domestic, commercial and

and reading meters in the household,
commercial, industrial and generation
sectors in Great Britain; and

industrial mechanical and electrical
contracting and electrical and
instrumentation engineering.

During 2012/13, SSE introduced new leadership and new
management in its Retail division, bringing an opportunity
to renew and refocus activities throughout this part of SSE.

The provision of these and other services
provides scope to expand the business and
provide a quality service to customers. These
products and services are clearly linked to
the supply of electricity and gas and build on
the company’s existing strengths rather than
depart from them. Progress is being made
in broadening the offer to customers and
developing the people and processes
to capitalise on these opportunities.

Providing services for the home
Home Services provides products including
gas boiler, central heating and wiring
maintenance and installation. These
products are marketed to householders
who value the security of having their
heating, hot water and electrics regularly
maintained and a repairs service available
when they need it.

SSE has around 216,000 gas/electricity
maintenance contract accounts, up 12% on
the previous year. It has also completed just
over 8,600 gas central heating installations
and electrical heating/wiring installations
in 2012/13, up 15% on the previous year.

SSE has also launched a domestic
renewable installation business in Scotland
focusing on air-source and ground-
source heat pumps and biomass boilers.
Installation volumes at present are low;
it is anticipated, however, that demand
will increase once the UK government’s
Renewable Heating Incentive is finalised
and implemented later in the year.

SSE offers retail telecoms services including
telephone line rental, calls and broadband
to over 200,000 customer accounts.
In 2012 SSE received accreditation for
compliance against Ofcom’s metering
and billing direction.

Growth plans for the coming year include
the development and launch of innovative
products in the domestic consumer market.
For example, SSE’s Energy Solutions team

SSE plc Annual Report 2013

has expanded the range of energy efficiency
products offered to domestic customers
including the installation of external wall
insulation on over 500 homes.

Playing a part in the Green Deal
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 greater than the cost of the installation
attached to the customer’s energy bill.

SSE has undertaken significant investment
in delivering the customer facing and IT
systems obligations with respect to the
Green Deal which it has to fulfil as an
energy supplier. These include payment
collection and remittance. The system
delivery was highly challenging but
delivered in time for the scheme launch.

In May 2013 SSE launched its own Green
Deal offering to domestic customers. SSE
now provides Green Deal assessments
and eligible measures and believes this is
an important mechanism for customers
to reduce their energy usage. Over 700
customers have already agreed to progress
with a Green Deal assessment which could
lead to a loan and installation of energy
efficiency measures.

Maintaining a national metering business
SSE’s metering business undertakes meter
reading operations and meter operator
work in all parts of the UK. It also provides
services to most electricity suppliers with
customers in central southern England and
the north of Scotland. It supplies, installs and
maintains domestic meters and carries out
metering work in the commercial, industrial
and generation sectors. It also offers data
collection services to the domestic and
SME sectors. The number of SSE electricity
and gas supply customers who receive bills
based on actual meter readings now stands
at 96.8%. SSE Metering has also installed just

over 12,000 AMR (automatic meter reading)
meters which are remotely read.

During 2012/13, SSE collected 8.7 million
electricity readings and 5.7 million
gas readings.

Smart meters which will allow the quantity
and value of electricity and gas used
to be continuously monitored by the
customer and exchanged with the supplier
electronically are expected to transform
energy supply in Great Britain. Around
53 million smart meters are due to be
installed in around 30 million homes and
businesses; of these, SSE is due to install
around nine million meters. This will be
implemented in two phases:

• a foundation phase to enable the energy
• a mass deployment phase to install

supply industry to build and test all the
systems needed to start the roll-out,
ensure positive customer engagement
and deliver energy savings; and

meters across the country once further
customer support has been achieved.

SSE welcomed the announcement in May
2013 of changes to the delivery timetable
for the national rollout of smart meters
which mean that the foundation phase will
extend to the final quarter of 2015, when
the mandated deployment will commence.
The target date for completion of the roll-
out is now the end of 2020.

SSE has consistently had a strategy of
developing consumer-friendly, scalable,
strategic solutions for smart metering,
avoiding interim solutions and asset
stranding wherever possible. This means
taking a measured, realistic approach
to the roll-out of smart meters. SSE has
installed just under 300 smart meters in
customers’ homes to date while developing
the necessary IT systems to support the
wider roll-out. Further installations are
planned in 2013-14 to continue to develop

health and safety management amongst
UK contractors, for its commitment to
achieving excellence in health and safety.

Energy-related Services priorities
in 2013/14 and beyond.

SSE’s priorities in Energy-related
Services in 2013/14 and beyond are to:

portfolio of products and services;

• develop and deploy safely the right
• deliver high standards of customer
• anticipate the changing requirements

of customers.

service; and

Retail – conclusion
During 2012/13, SSE introduced new
leadership and new management in its
Retail division, bringing an opportunity to
renew and refocus activities throughout this
part of SSE. Through a process of evolution,
designed to build on its strengths in retail
and identify opportunities as products and
markets develop, SSE plans to develop and
deploy a central proposition to household
and business customers that enables
them to receive core services from a single
provider, based on value, convenience,
choice and quality.

systems, processes and organisational
capability for mass deployment and
deliver an excellent customer experience.
Investment in systems made up the
majority of capital and investment
expenditure in Retail, which totalled
£77.0m in 2012/13.

In Ireland installation of smart meters will
be the responsibility of network companies.

Managing a leading mechanical and
electrical contracting business
SSE Contracting has two principal areas
of activity:

• industrial, commercial and domestic
and • electrical and instrumentation

mechanical and electrical contracting;

engineering.

It is one of the largest mechanical and
electrical contracting businesses in the UK
and its breadth and depth is illustrated by
some of the specific services it provides,
such as:

services covering consultancy, design
and build, project management and
prime contracting;

• mechanical and electrical packaged
• high voltage power services,
• low voltage infrastructure cabling
• electrical storage heating systems

and services covering design, build,
safety testing and maintenance; and

including design, build, safety
testing and maintenance;

and installations.

SSE Contracting is involved in the industrial,
commercial, retail, housing, health, defence,
transport and local authority sectors.

SSE Contracting continued to make solid
progress during 2012/13. Its order book
ended the year at £88m, compared with
£78m in the previous year. It completed
a number of major projects, such as
the AD47 Air Dispatch Facility at RAF
Brize Norton and the Exxon Mobil CAT
Turnaround Project in the Fawley Refinery.
It was also listed as a top three contractor
in the Electrical Times ‘Top 50 Electrical
Contractor Report 2012’.

In November 2012, SSE Contracting was
awarded accreditation from safecontractor,
a leading third party accreditation scheme
which recognises very high standards in

2. Performance review1. 3. 4. Performance review

Wholesale
Market-based businesses

Securing and
producing the
energy people
need.

Wholesale operating
profit* – £m

Thermal generation
capacity – GW

Thermal generation
output – TWh

509.5
-16.2%

The businesses in SSE’s
Wholesale segment source,
produce and store energy
through energy portfolio
management, electricity
generation, gas production
and gas storage.

9.79
+10.7%

29.3
-23.7%

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
covers the amount of electricity
generated as gas- and coal-fired
power stations at which SSE has
an ownership or contractual
interest.

Renewable generation
capacity – GW

Renewable generation
output – TWh

Gas production – million
therms

3.24
+7.3%

7.3
-3.9%

Renewable generation capacity
covers hydro-electric schemes
(conventional and pumped
storage), wind farms (onshore
and offshore) and dedicated
biomass plant.

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.

183.8
+4.0%

Gas production is responsible for
the efficient delivery of gas from
the physical gas fields that SSE
has a shared ownership in.

Key topics in this section

Changing SSE’s thermal operations in the future

Producing electricity from renewable sources

• See page 52 for more information
• See page 54 for more information
• See page 59 for more information

Continuing to expand the gas production business

SSE plc Annual Report 2013

Sourcing and producing energy
SSE’s Wholesale segment comprises four
different business areas:

• Energy Portfolio Management (EPM)

is responsible for ensuring SSE has
the energy supplies it requires to
meet the needs of its customers and
for procuring the fuel required by the
generation plants that SSE owns or
has a contractual interest in.

operation and management of SSE’s
generation assets, their maintenance
and ensuring this plant is available for
use by EPM.

• Generation is responsible for the
• Gas Production is responsible for
• Gas Storage is responsible for the

the efficient delivery of gas from the
physical gas fields that SSE has a shared
ownership in.

operation and management of SSE’s
gas storage facilities, their maintenance
and ensuring the plant is available for
use by SSE and third parties.

EPM and Generation are not reported as
discrete profit centres or activities but their
shared objective is to provide the lowest
cost input to SSE’s Retail business for the
provision of energy to customers, consistent
with the EU Regulation on Energy Market
Integrity and Transparency (REMIT).

Financial performance in Wholesale
During 2012/13 operating profit* in
Wholesale decreased by 16.2%, from
£607.9m to £509.5m, contributing 28.4% of
SSE’s total operating profit*. This comprised
EPM and Electricity Generation – £451.5m
compared with £541.5m, a decrease of
16.6%. Although profitable, the year was
challenging, with continued low spark
spreads for gas-fired generation and lower
underlying output from renewables sources
due to calmer and drier weather when
compared with the previous year. Total
electricity output fell by 20% to 36.5TWh.
There was however, 570MW of additional
capacity for renewable energy operational
on 1 April 2012 compared with the previous
year. This resulted in actual wind energy
output increasing, although there was
much lower hydro output:

• Gas Production – £39.6m compared

with £42.6m. Despite the small fall in
profits the production assets continued
to perform well, producing 183.8 million
therms compared with 176.7 million
therms in the previous year; and

• Gas Storage – £18.4m compared

with £23.8m. Lower market volatility
and a reduction in the spread between
summer and winter gas prices led
to a lower Standard Bundled Unit
price being achieved. Demand for
storage was also lower. These factors
were only partly offset by additional
storage capacity coming online
at Aldbrough.

Working for customers
The wholesale price of energy can
fluctuate greatly due to factors including
the economy, the weather, customer
demand, infrastructure availability,
and world events. EPM and Electricity
Generation seek to minimise the impact
of these variables by maintaining a diverse
and well-balanced portfolio of contracts
and assets, both long and short term.
In doing so, SSE has:

energy price volatility, thereby
protecting customers from it and
ensuring greater price stability;

• greater ability to manage wholesale
• lower risk from wholesale prices through
• more scope to deliver the investment

reduced exposure to volatility in any
single commodity; and

needed in Generation and Gas Production
because the risks associated with large-
scale and long-term investments are
balanced by the demand from electricity
and gas customers.

Responding to key trends
in the energy sector
The energy sector is undergoing a
period of profound change. The main
public policy drivers are European and
UK-led decarbonisation policy, security
of fuel supplies and price competitiveness
(affordability). These policy objectives
are influencing and in turn being
impacted by:

following the success of energy
efficiency interventions;

• slow economic growth implying lower
• reduced domestic gas consumption
• rising energy prices as a result of higher
• uncertainties surrounding Electricity

input costs and the cost of delivering
mandatory government-sponsored
energy efficiency schemes;

Market Reform and a regulatory
framework trending towards
increased central planning;

electricity demand;

floor and the move to auction all carbon
allowances under EU ETS for thermal
generation plant;

• the introduction of a UK carbon price
• increasing system variability due
• market integration between Great
• forecasts of tightening generation

to higher penetrations of variable
energy sources;

capacity in Great Britain as older
plant (including coal, nuclear and gas)
closes as a result of regulatory and
economic pressures.

Britain and Ireland; and

In addition, the European Target Model
is the principal regulatory vehicle for
working towards a single European
energy market to enable optimal use
of cross-border capacity and greater
harmonisation of electricity wholesale
market arrangements.

Assessing GB electricity
market reform
The UK government believes that
its Electricity Market Reform (EMR),
including the current Energy Bill,
represents the most significant market
intervention since the privatisation of
electricity. It features:

of carbon that applies only in the UK
(the carbon price floor);

fix the price received by generators
for each unit of low carbon electricity
produced (the Contract for Difference
Feed-in Tariffs);

• an annual minimum price for a tonne
• long-term contracts that will effectively
• a mechanism to address the security
• maximum emissions levels for electricity

of supply challenges resulting from
plant closures and the changing
nature of electricity generation
(the Capacity Market); and

generation technologies (the Emissions
Performance Standard).

The origins of EMR go back to 2009,
yet much of the detail is still to be
determined and this prolonged period
of uncertainty is having an effect,
making investment decisions in new
thermal generation plant very difficult.

Clarity and stability are, therefore,
much-needed features of the UK
energy policy landscape and their
absence could eventually jeopardise
the security of electricity supply.

In the meantime, SSE will continue
to manage its portfolio of electricity
generation assets in accordance
with the principles set out below
(see ‘Managing Generation assets
according to long-standing principles’)
and in accordance with the financial
principles set out above (see ‘Sticking
to the financial principles which underpin
dividend growth’).

Energy Portfolio Management (EPM)

Managing an energy portfolio
In recent years, SSE has typically
required around 10 million therms
of gas per day to supply all its customers
and to fuel its power stations, and
around 150GWh of electricity per day
to supply all its customers. EPM has
three primary routes to procure
competitively and sustainably the
energy and fuels it needs to meet
this demand:

gas exploration and production and
thermal and renewable generation;

• SSE-owned assets: including upstream
• Contracts: long-term gas producer
• Wholesale trading: where energy

contracts, power purchase agreements
(with SSE-owned plant and third parties),
and solid fuel contracts; and

contracts are transparently traded on
international exchanges or through
‘over the counter’ markets, with 100%
of electricity supply and demand traded
on the day-ahead auction market.

Managing risks associated with energy
procurement across these channels is
a key challenge for EPM, as it is heavily
influenced to varying degrees by a
multitude of national and international
factors including:

• energy demand growth/decline;
• the global economy;
• fuel supply disruptions;
• international affairs;
• nuclear availability;
• CCGT demand;
• prices for CO2 permits;
• internationalisation of gas supply; and
• LNG availability.

By optimising energy procurement
through a diverse portfolio, SSE ensures
that its customers are protected from
the unavoidable uncertainty that exists
in global markets.

2. Performance review1. 3. 4. Performance review

Wholesale (continued)
Market-based businesses

Meeting current and future
requirements for energy
During 2012/13, EPM was responsible for
the deployment of 7,285GWh of output
from SSE’s renewable portfolio; around
250 million therms of gas would be
needed to generate a similar amount
of electricity.

With no fuel purchasing requirement, this
generation type is increasingly providing a
substantive source of energy and a strong
long term hedge against the volatility in
fossil fuel markets.

In April 2013 SSE completed the acquisition
from BP of a 50% non-operational interest
in the Sean gas field in the southern North
Sea, adding a further 1.1 billion therms
of gas reserves to its existing exploration
and production assets, and providing an
important long-term supply of physical
gas at a ‘fixed’ price.

SSE has also agreed a number of
long-term gas supply contracts in
recent years including:

• a 10-year contract with Statoil for the
• a 10-year gas supply agreement

annual supply of 500 million cubic metres
(mcm) (185Mth) of natural gas which
commenced in October 2012; and

of 790mcm (292Mth) per annum
with Shell Energy Europe, commencing
in 2015.

SSE continues to seek proactively new
capacity and supply contracts to add to
its portfolio. The combination of these
long-term contracts and assets helps SSE
minimise the low liquidity and high volatility
risks of international commodity markets,
brings greater price stability for customers
than would otherwise be the case and
supports its commitment to the dividend.

Increasing wholesale
market transparency
SSE has led the way in responding
to stakeholders’ desire for greater
transparency and increased liquidity in the
short-term wholesale market for electricity.

Since 30 September 2012 SSE has regularly
placed 100% of its electricity generation
and demand into Nasdaq OMX Group Inc.
and Nord Pool Spot AS’s N2EX daily auction
and traded 80.6TWh in the day ahead
auction market in 2012/13. SSE has also
introduced a series of trading commitments

SSE plc Annual Report 2013

for smaller suppliers and traded 795GWh
with such suppliers in 2012/13.

In taking this action SSE has delivered a new
level of market transparency, significantly
improved liquidity, increased the depth and
credibility of the market and assisted in the
creation of a robust and tangible pricing
index. SSE is also an active participant in
wholesale gas markets. It has received
no formal communication or information
requests from any regulatory authority
in connection with the investigation
announced in November 2012.

EPM priorities for 2013/14
and beyond

EPM priorities for the coming financial
year include:

effectively to new UK and EU
regulations;

supply of energy to meet SSE’s
customers’ needs;

• securing a stable and predictable
• driving business change to respond
• identifying and agreeing new long-
• continuing to support improved
• ensuring compliance with UK and EU

market transparency and liquidity
initiatives; and

financial regulations at all times.

term gas supply contracts;

Generation – overview

Managing generation assets
according to long-standing principles
SSE’s strategic objective for its Generation
business is to be the greenest, most flexible,
non-nuclear generator.

This objective is underpinned by six core
principles that direct the operation of, and
investment in, its Generation portfolio:

demand and market conditions;

needs of domestic and small business
customers;

• availability: to respond to customer
• capacity: to meet the electricity
• compliance: with all safety standards
• diversity: to avoid over-dependency
• flexibility: to ensure that changes in

on particular fuels or technologies;

and environmental requirements;

demand for electricity can be addressed;
and

• sustainability: to deliver an overall

50% cut in the CO2 intensity of
electricity produced.

In implementing these principles SSE
is focused on doing the right things
now, while selecting the right projects
for the future. This means capital and
management resources are employed in
areas and at stages where SSE best retains
competitive advantage, supports business
growth, maximises shareholder value and
ensures continued dividend growth.

Maintaining a diverse
generation portfolio
Decarbonisation policy at the UK
and European level is driving the way
energy is converted to electricity; however,
there is no ‘one size fits all’ solution to the
achievement of this objective. Rather, SSE
is maintaining and investing in a diverse
and sustainable portfolio of thermal and
renewable generation plant.

In moving to a low-carbon generation
mix SSE will, by the end of the decade,
transition its generation assets from a
portfolio weighted towards gas and coal,
towards a portfolio weighted towards gas
and renewables.

The practical application of these principles
means that SSE currently owns or has an
ownership interest in over 13,000MW of
capacity, which comprised at 31 March 2013:

• 4,350MW of gas- and oil-fired capacity
(GB); • 1,068MW of gas- and oil-fired capacity
(Ire); • 4,370MW of coal-fired capacity (with
• 3,240MW of renewable capacity

(including hydro, pumped storage,
onshore and offshore wind and
dedicated biomass).

biomass co-firing capability); and

With this portfolio SSE has the greatest
fuel diversity for generating electricity
among UK generators and amongst the
most flexible. It also makes SSE the largest
generator of electricity from renewable
sources across the UK and Ireland.

Reducing the carbon intensity
of electricity generated
A key priority for SSE is a significant and
continuing reduction in the carbon intensity
of the electricity produced by its generation
fleet; in other words reducing significantly its

carbon intensity every decade between now
and 2050. This goal will be achieved through
a diverse range of solutions including:

additional renewable energy capacity;

• the commissioning and development of
• lower emissions from more efficient and
• delivering innovative solid fuel solutions
• reduced output from coal-fired

stations as they use up their allocated
running hours under the EU’s Industrial
Emissions Directive.

flexible gas-fired generation;

at coal-fired stations; and

The SEM in Ireland faces similar market
conditions to the UK but has a very different
regulatory regime, including:

• centrally dispatched generation;
• a capacity mechanism that
• no support for offshore wind generation.

remunerates generators for a proportion
of their fixed costs when plant is made
available; and

This allows SSE to operate generation plant
in a way that is familiar, while taking a
different approach to new investment.

With high gas prices and low spark
spreads for gas-fired generation, during
2012/13 SSE used the portfolio diversity
provided by its coal plants to ensure
lowest possible cost power generation
for its customers. While this has resulted
in a short term increase in emissions
SSE remains on track to halve its carbon
intensity (compared with 2006) by 2020.

More broadly, SSE has formed a coalition
with an expanding list of European energy
companies to encourage the EU to adopt
a greenhouse gas emissions reduction
target of 25% (up from 20% at present)
by 2020 as part of a long-term move
away from fossil fuel-based electricity
generation and full decarbonisation
by 2050.

Building a more geographically
diverse portfolio of assets
As well as diversity of fuel type, SSE
now has greater diversity of generation
plant in the markets in which it operates,
following the acquisition of the assets
of Endesa Ireland in October 2012.
This provided SSE with 1,068MW
of thermal plant in Ireland’s Single
Electricity Market (SEM) to add to the
500MW of wind capacity it already
owned at that stage.

Generation – Great Britain

Addressing challenging market
conditions in GB
The market conditions for electricity
generation remain challenging, as
evidenced by the 16.6% reduction in
operating profit* for EPM and Electricity
Generation in 2012/13 compared with
2011/12. The extent of SSE’s diversified
generation portfolio can be seen by the very
different issues impacting on its thermal
and renewable generation assets and the
fact that public policy decisions can have
quite different impacts on each portfolio.

Responding to difficult times
for thermal generation
2012 saw the lowest spark spreads – the
difference between the cost of gas (plus
carbon) and the price achieved for the
electricity generated from it – in the history
of the GB power market. The average day-
ahead clean spark was negative in every
month except March, giving an average of
-£2.29/MWh for the year (based on 48.5%
efficiency). This followed two years of below
average spark spreads. When combined
with high gas prices relative to coal and
overall excess capacity in the generation
market, this meant much of the UK’s gas-
generation plant operated at a much lower

Renewable generation
We now have 3,240MW of renewable
energy capacity (onshore wind, offshore
wind, hydro and dedicated biomass)
in operation, in the UK and Ireland.

• See page 54 for more information

load factor than in previous years, and
older, less efficient plant struggled to cover
the fixed costs of staying open.

Many new emissions regulations, including
the constraints imposed by the Industrial
Emissions Directive and the move towards
full auctioning of CO2 emissions allowances
for all generation plant, have begun to
weigh heavily on the viability of thermal
generation plant.

From 1 April 2013 the UK government
introduced a new Climate Change Levy
tax rate in the form of the Carbon Price
Support Rate. This acts as an additional
CO2 emissions cost of about £5/tonne in
2013 for fossil-fuelled generation in GB,
on top of the cost complying with EU ETS.
The additional cost is set to rise to about
£18 in 2015/16 (the furthest point for which
the rate has been declared). This will add
further substantial costs to the operation
of fossil-fuelled plant, particularly coal. It
may, however, provide some relative value
increase to renewable and other low-carbon
generation. The levy may rise further to give
a total effective carbon price of £30 in 2020
(in 2009 prices). However uncertainty about
future political intervention in the setting of
the price floor limits the impact of the tax as
a market signal to further the stated policy
objective to provide an incentive to invest in
low-carbon power generation by providing
greater support and certainty to the carbon
price in the UK’s electricity generation sector.

Realising the potential of
renewable sources of energy
SSE continues to respond to and welcomes
the clear policy support for increased
renewable penetration in the portfolio
mix in GB – delivered through the financial
support of the Renewables Obligation
(the RO applies also in Northern Ireland).

Following the revisions to the UK’s
Renewable Obligation Certificates (ROC),
the main financial support scheme for
renewable energy in the UK, levels from
April 2013, the continued delivery of an
effective carbon price floor and cost
reductions in the supply chain for renewable
energy will be of critical importance to the
continued growth and contribution of the
renewables sector. In addition, the need
for appropriate longer-term policy support
delivered beyond electricity market reform
should not be underestimated, and the
viability of the renewables industry remains
dependent on its continued existence.

2. Performance review1. 3. 4. Performance review

Wholesale (continued)
Market-based businesses

Focusing on operations in generation
In the year to 31 March 2013, SSE
generation plant in GB (comparisons with
previous years) generated:

• 29.3TWh, based on contracted output
• 6.3TWh, based on contracted output

of electricity from all thermal power
stations in which it has an ownership
interest (38.4TWh); and

from renewable sources of energy in
which it has an ownership interest,
including pumped storage (6.4TWh).

household customers.

During the same year SSE supplied:

and commercial customers; and

This means that during 2012/13 SSE:

• 20.0TWh of electricity to its industrial
• 27.0TWh to its small business and
• generated the equivalent of 76%
• generated the equivalent of 132%

of the electricity needed to supply
all of its customers in GB; and

of the electricity needed to supply
its household and small business
customers in GB.

Meeting the electricity needs of its
electricity customers is at the heart of SSE’s
EPM and Electricity Generation activities.

Thermal generation

At 31 March 2013, SSE owned or had
an ownership interest in 8,720MW of
thermal generation plant in Great Britain,
comprising (net):

• 4,350MW of gas- and oil-fired
• 4,370MW of coal-fired generation.

generation; and

Maintaining effective performance
in SSE’s gas-fired power stations
With reduced gas-fired generation capacity
in operation and lower running periods
due to low spark spreads, the amount of
electricity generated by gas-fired power
stations in which SSE has an ownership
or contractual interest, including CHP, was
8.7TWh in 2012/13, (including 3.7TWh from
wholly-owned stations), compared with
21.6TWh in the previous year (including
12.5TWh from wholly owned stations).

station, Peterhead, was available to
generate electricity 95% of the time,
excluding planned outages, the same
availability as in the previous year.

generation and lower hydro output
relative to the same period last year.
This demonstrates the considerable
value of SSE’s coal-fired stations as
part of a diverse portfolio.

In addition to its wholly-owned gas
generation, SSE has joint venture
interests in:

• Marchwood, the 840MW CCGT owned

by Marchwood Power Ltd, a 50:50
joint venture between SSE and ESB
International. During 2012/13, the
plant achieved 94% of its maximum
availability to operate during the year,
the same as in the previous year; and

• Seabank, the 1,140MW CCGT, owned by

Seabank Power Limited, a 50:50 joint
venture between SSE and Electricity
First Limited. During 2012/13, the
plant achieved 94% of its maximum
availability to operate during the year,
compared with 86% in the previous year.

All of the electricity output at both plants
is sold under contract to SSE.

In the light of challenging market
conditions for gas-fired generation,
SSE undertook a comprehensive £100m
programme of upgrade works at its Keadby
(735MW) and Medway (735MW) gas-
fired power stations, which meant that
they did not generate any output at all
during 2012/13, except for short test-firing
operations. The works included upgrades
to gas turbines, steam turbines, boilers
and process control systems designed
to increase the flexibility and efficiency
of the plants. The upgrade programmes
proceeded successfully and are now
complete. Medway was successfully re-
commissioned in early May, but SSE has
decided not to bring Keadby back into
service and instead the plant has been
deep mothballed (see below).

Maintaining effective performance
in SSE’s coal-fired power stations
During 2012/13, SSE’s 4,370MW of
coal-fired power stations, located at
Fiddlers Ferry, Ferrybridge and Uskmouth,
generated 20.6TWh of electricity,
compared with 16.8TWh during the
previous year. The stations achieved 90%
of their maximum availability to generate
electricity, excluding planned outages,
compared with 89% in the previous year.

Complying with the Industrial
Emission Directive
All of the capacity at Fiddlers Ferry and
Uskmouth and half of the capacity at
Ferrybridge (over 3,300MW in total) is able
to comply with the Large Combustion Plant
Directive (LCPD). All this plant has also
been opted-in to the Transitional National
Plan under the Industrial Emissions
Directive (IED) which provides a number
of alternative options for how they will
operate through to at least the end of June
2020. SSE has not made a decision on how
the plant will operate and this will depend
on market conditions and the effects of
any future capacity mechanism.

Participating in the EU Emissions
Trading Scheme
Across its electricity generation portfolio
(taking account of contractual shares), SSE
had an allocation of 18.9 million tonnes of
CO2 emissions allowances for the calendar
year to 31 December 2012. In the nine
months to 31 December 2012, the price
of allowances ranged from €5.71 to
€9.06/tonne, averaging €7.28/tonne.

From 2013, power generators in most
EU countries, including the UK, are not
issued with free EU allowances. In the
three months to 31 March, the price of
permits ranged from €3.32 to €6.45/tonne,
averaging €4.68/tonne.

Changing SSE’s thermal operations
for the future
In advance of its new financial year on
1 April 2013, SSE completed a review
of its existing thermal generation assets
as well as its biomass plant at Slough.

The primary focus of this review was
to ensure that all generation assets
continued to contribute to the company’s
performance by safely delivering the
required levels of availability, efficiency,
cost effectiveness and, ultimately,
sustainable commercial viability.

It concluded that the convergence
of challenging market conditions and
prolonged public policy uncertainty meant
SSE required a significant adjustment to its
generation portfolio.

During 2012/13 SSE’s principal wholly-
owned and operating gas-fired power

This increase in output took place against
a background of significantly lower gas

SSE plc Annual Report 2013

As a result, SSE announced on 21 March
2013 that it had decided to change
the operating regime of a number of
generation plants, the net effect of which
will be the reduction of around 2,000MW
of thermal generation capacity in Great
Britain over the next year. The key changes
to SSE’s thermal assets are:

• Ferrybridge, Yorkshire (coal-fired):

Two 490MW generation units are opted
out of the LCPD and are therefore
required to close once they have used
up their allowed 20,000 operating
hours, or by the end of 2015 at the
latest. These units are both currently
expected to reach their 20,000 allowed
operating hours limit by end of the
2013/14 financial year. SSE has therefore
notified National Grid that it will be
releasing around 1,000MW of electricity
Transmission Entry Capacity (TEC) at this
site from 31 March 2014.

• Keadby, Lincolnshire (gas-fired):

Continuing poor market conditions
for gas generation, combined with
ongoing uncertainty about the timing
and future operation of a capacity
mechanism for existing gas-fired
generation plant, meant that there was
no economic reason to bring Keadby
back into operation after its extended
upgrade. Keadby will therefore be ‘deep
mothballed’ – effectively meaning the
plant at the power station will require
up to one year to recommission.
This decision meant the immediate
withdrawal of all 735MW of capacity
at Keadby. SSE will continually monitor
market conditions but it expects
Keadby to remain in this state for at
least the next two years. Nevertheless,
if and when it is required to generate
electricity in the future, Keadby will
be able to operate in a more flexible
and efficient way as a result of the
investment made during 2012/13.
SSE would also expect to bring this
capacity back into operation before
commissioning any new investment
in gas-fired capacity.

• Uskmouth, Gwent (coal-fired):

Uskmouth was forecast to be loss
making in 2013/14. However,
improvements in market conditions
and the productivity of the station
suggested that it would be able to
operate profitably in the coming year,
if changes were made to the operation
of the station and steps were taken to
reduce ongoing maintenance costs.

One of the three units (120MW) therefore
ceased generation and closed on 1 April
2013 and by doing so avoided the cost
of a major statutory outage that was
otherwise planned for 2013/14. Following
this change Uskmouth has a generation
capacity of 240MW through its two
remaining units. Given the ongoing
financial challenges at Uskmouth, SSE
has also notified National Grid that it
will release all 345MW of the TEC for
the Uskmouth site from 31 March 2014.
This will mean that if market conditions
suggest the station is able to operate
profitably after this date, SSE will need to
purchase the required level of TEC in the
open market. A decision on how SSE will
operate Uskmouth beyond March 2014
will be taken in early 2014.

• Peterhead, Aberdeenshire (gas-fired):

Peterhead technically has an installed
capacity of 1,840MW. However, because
of the impact of high transmission
access charges in the north of Scotland,
SSE took the decision in March 2010 to
release TEC at Peterhead, effectively
constraining the available generation
capacity of the site to 1,180MW.
Transmission access charges continue
to be excessively expensive in the north
of Scotland and, given the challenging
market conditions for gas-fired
generation, SSE has decided to reduce
Peterhead’s TEC to 400MW from
31 March 2014.

The impact of these changes on SSE’s
employees is being managed using SSE’s
policy on organisational change. This
policy was agreed with trade unions two
years ago and operates for the benefit
of people in those parts of the Company
where reorganisation or restructuring
is taking place. It includes an emphasis
on opportunities for redeployment and
retraining and other options such as job
sharing and career breaks.

Making the right investments in
gas-fired power stations
Despite currently experiencing short-term
market challenges, gas-fired plant will play
an increasingly important role in electricity
generation driven by its:

• relatively low capital costs;
• flexibility to support increasing amounts
• short construction time;
• high thermal efficiency; and

of generation from on- and offshore
wind farms;

• its status as the cleanest of the fossil

fuel technologies.

With its growing importance, SSE
continues to develop a range of CCGT
options in Great Britain, for both the
medium- and long-term, including sites
at Abernedd (South Wales), Keadby
(Lincolnshire), and Seabank (Bristol).
These locations offer many attractive
characteristics, including established
grid and gas connections, availability
of cooling water and land area.

Although projects such as Abernedd are
close to being ‘shovel ready’ and others
such as Keadby 2 are at an advanced
stage of development, unless there is
a significant change in UK government
policy around EMR and the timing and
operation of a future capacity mechanism,
and clear market signals suggesting the
need for increased gas-fired generation
capacity, SSE does not expect to take any
final investment decisions to construct
these projects until at least 2015. This
will effectively mean no new capacity
will come into operation until 2017/18
at the earliest, given the lead times for
constructing new CCGT plant.

Looking to the future of solid
fuel generation
SSE’s generation strategy is built upon
managing risk through owning a diverse
range of assets and fuels from which
to meet its customers’ needs. Solid fuel
remains an important part of that strategy.
Over recent years SSE has also been
assessing the potential investment options
for its coal-fired generation plants, in order
to deliver the full potential value from
its portfolio.

In the next few months SSE will conclude
a significant trial investment on one
485MW unit at its Fiddlers Ferry site,
which, if successful, will reduce the
emissions of NOx and provide the option
of increased generation under the
IED Transitional National Plan. Further
investment in similar technologies could
be extended to the other three units at
the plant, as well as to the two remaining
units at Ferrybridge. At a low capital cost,
this investment may provide SSE with
significant optionality to operate this
coal-fired plant up to and beyond 2020
and support SSE’s commitment to
a diverse, flexible and cost effective
generation portfolio.

2. Performance review1. 3. 4. In addition to the MEL joint venture,
SSE is also pursuing the development
of a new 40MW multi-fuel facility at its
Slough site. The project is currently at
the public consultation stage and a full
planning application is expected to be
submitted to Slough Borough Council
towards the end of 2013.

Making the right contribution to Carbon
Capture and Storage (CCS) developments
Delivering the EU’s decarbonisation
policy will broadly require a halving of
CO2 emissions in the electricity sector
every decade between now and 2050.
On this basis, the use of fossil fuels to
generate electricity will eventually depend
on the extent to which CCS technology
can be applied to abate CO2 emissions.
Consequently, the development of viable
carbon capture technology is central
to the UK’s climate change and energy
security objectives.

Against this background, SSE is involved
in two important CCS projects:

• Coal at Ferrybridge: This project is

the UK’s largest operating carbon
capture project and is the first of its
size to be integrated into a working
power plant in the UK. The project,
which became operational in March
2012, has captured, on average, at the
rate of between 90 and 100 tonnes of
CO2 per day over the last year from the
equivalent of 5MW of coal-fired power
generating capacity.

• Gas at Peterhead: SSE is working

with Shell UK to develop a gas CCS
project at SSE’s gas-fired power station
in Peterhead. In March 2013, DECC
confirmed that the Peterhead project
was one of two CCS projects that
would progress to the next stage
of the UK government’s CCS
Commercialisation Competition.

Performance review

Wholesale (continued)
Market-based businesses

Another investment option considered
has been conversion to biomass and co-
firing. In July 2012 the UK government
announced its decision to reduce ROC
banding levels for new biomass co-firing.
In light of this decision, SSE has concluded
that the current economic and policy
investment framework will not support the
further development of new biomass-based
operations at its coal-fired power stations.

SSE continues to maintain options for
new dedicated biomass capacity through
its joint venture with Forth Ports, called
Forth Energy. This seeks to develop
combined heat and power stations
with up to 300MW of electrical output
and 260MW of heat output from biomass
capacity at three sites in Scotland.

Generating electricity from multi-fuel
An important pipeline of potential
new thermal generation investments
for SSE, is multi-fuel. These plants use
waste-derived fuels to generate electricity
and therefore benefit from an additional
revenue opportunity in the form of a
‘gate fee’ for taking the waste, which is
earned on top of revenue received from
any electricity generated by the plant.

In April 2012, SSE and Wheelabrator
Technologies Ltd entered into a 50:50 joint
venture to develop a new £300m multi-
fuel generation facility at SSE’s Ferrybridge
site. The joint venture – Multifuel Energy Ltd
(MEL) – has begun construction of the plant
and it is scheduled to be operational in
2015. So far, the joint venture has invested
£69m in the project. All the electricity
generated by the plant will be sold to
SSE. SSE and Wheelabrator continue to
consider a range of other investment
opportunities and expect to create a
pipeline of new development options
including an option to develop a further
plant on the Ferrybridge site.

Offshore energy
With Greater Gabbard now operational
and a 25.1% stake in another wind farm,
Walney, we’re now generating more
energy from offshore wind than ever.

• See page 55 for more information

SSE plc Annual Report 2013

Shell is leading the development of
the project, and will take responsibility
for the construction of the CO2 capture
plant and thereafter the operation,
transport and storage elements of
the project. SSE will be a strategic
partner, investing in the necessary
infrastructure at Peterhead power
station and providing the flue gas
from which the CO2 will be extracted.
This arrangement enables both parties
to focus on their respective areas
of expertise.

Renewable generation

Successfully constructing and
commissioning capacity for
renewable sources of energy
Following a very successful period
constructing and commissioning
renewable energy projects, SSE had
2,777MW of renewable energy capacity
in operation in GB (as well as 463MW
in Ireland) by the end of the 2012/13
financial year, including its share of joint
ventures. The GB portfolio comprised (net):

• 1,150MW conventional hydro;
• 898MW onshore wind;
• 349MW offshore wind;
• 80MW dedicated biomass; and
• 300MW pumped storage.

Output from over 1,700MW of SSE’s
renewable portfolio in GB qualifies for
ROCs. While the UK government has
completed its review of the bands of
support provided by the Renewables
Obligation, the review will have no
impact on existing assets in operation
or projects being commissioned that
generated their first energy by 31 March
2013, all of which also remain eligible
for the existing 20 year support.

Producing electricity from
renewable sources
Total electricity output from SSE’s
renewable resources in GB (excluding
pumped storage) was 5,950GWh in
2012/13, compared with 6,072GWh
in the previous year – confirming
SSE’s position as the UK’s leading
generator of electricity from
renewable sources.

In energy terms, the slight decrease in
output reflects a return to more normal
hydro and wind conditions after the
record breaking wet and windy weather

experienced during last year. This was
partially offset by the impact of additional
renewable generation capacity that came
into operation in the course of 2011/12
and 2012/13.

Generating electricity from
hydro-electric schemes
SSE owns and operates 1,150MW of
conventional hydro-electric capacity
across 57 hydro-electric power stations
in the north of Scotland. A further 300MW
comes from its pumped storage facility
at Foyers, on Loch Ness. During 2012/13
(comparisons with previous years):

• total output from all of SSE’s
• total output from SSE’s hydro-electric

conventional hydro-electric schemes
was 2,836GWh (4,262GWh); and,
within this,

capacity qualifying for ROCs – just over
500MW – was 1,486GWh (1,954GWh).

While 2011/12 saw a 30-year record output
from conventional hydro-electric schemes,
rainfall during 2012/13 dropped to below
average levels, resulting in 33% less output
than the previous year.

Generation at the 100MW Glendoe
hydro- electric scheme near Loch Ness,
re-started in August 2012, and it produced
100GWh of electricity in the period to
31 March 2013. Indeed, the scheme has
now generated more electricity since
generation was restored than it did in
its initial period of operation.

Restoration of generation took place
after the completion of the work
undertaken at Glendoe following its
interruption in August 2009 as a result
of a rock fall in the tunnel carrying water
from the scheme reservoir to the power
station. SSE is continuing to pursue
its legal and insurance options. In
particular, it has lodged at the Court
of Session notification of its intention
to call a comprehensive action against
Hochtief Solutions AG and Hochtief (UK)
Construction Limited in respect of all
losses resulting from the tunnel collapse
at Glendoe in 2009.

Producing electricity from
onshore wind farms
At 31 March 2013, SSE owned 898MW
of onshore wind farm capacity in GB
and output from these assets during
the previous 12 months was 1,880GWh

compared to 1,225GWh in the
previous year.

The additional output largely reflects the
final commissioning of SSE’s 350MW Clyde
wind farm, which was officially opened by
Scotland’s First Minister on 14 September
2012. At a cost of around £500m the
wind farm is SSE’s largest and is capable
of producing over 1,000GWh of electricity
during a typical year, enough to supply
power to 280,000 homes. Its completion
marked SSE’s position as the largest
generator of electricity from wind across
Great Britain and Ireland.

Responding to constraints on the
electricity transmission system
Constraints occur when there are
limitations in electricity transmission
capacity or for reasons of system
frequency voltage control or stability.
Sustained periods of constraint provide
a clear market signal for additional
investment in the grid infrastructure.

During 2012/13, constraint payments
totalling around £120m were paid to
generators of electricity from all fuels
across Great Britain. Of this total, around
£3m, or less than 3%, was paid to
constrained SSE wind generation.

At times of constraint, generators in
Great Britain are required to bid in their
constrained generation capacity to
National Grid. It is SSE’s policy to offer
appropriate prices at all times for its
renewable generation, and it believes
that this is the equitable approach for
all generators.

Producing electricity from
offshore wind farms
Due to the significantly larger scale and
cost of both consenting and constructing
offshore wind farms compared with
onshore, SSE believes the inherent risks
are best managed through partnership
arrangements. On this basis, SSE has
ownership interests in the following
operating offshore wind farms:

• Greater Gabbard (504MW), through the
• Walney (367MW), through the

partnership Greater Gabbard Offshore
Winds Limited (GGOWL), in which SSE
has a 50% stake;

partnership Walney (UK) Offshore
Windfarms Ltd, in which SSE has
a 25.1% stake; and

• Beatrice, a demonstration project in

which SSE has a 5MW stake.

At 31 March 2013, SSE’s total net capacity
for generating electricity at offshore wind
farms was 349MW. SSE’s share of total
electricity output from all turbines during
the period was 1,066GWh.

Managing the issues at Greater Gabbard
All of the 140 turbines at Greater Gabbard
are now fully commissioned and have been
energised and operational since September
2012. SSE is responsible for the day-to-day
operation of the completed wind farm
and in the six months to March 2013, the
wind farm was operationally available to
generate electricity for 87% of the time.
Availability is now regularly exceeding 90%
and is expected to improve further during
the rest of 2013/14 and beyond. Based on
the actual stress levels monitored during
the operation of the turbines and a detailed
engineering assessment of the impact of
these levels on the known defects in some
foundations, GGOWL is now confident
about the long-term structural integrity
of the disputed foundations.

In November 2012, GGOWL received the
First Partial Award of Fluor Ltd’s claim
against it. The Award was in GGOWL’s
favour, requiring no payment to be made
by GGOWL to Fluor Ltd.

GGOWL and Fluor Ltd subsequently
reached agreement on all of the
outstanding claims relating to the
construction of the offshore wind farm.
The main claim related to the quality of up
to 52 upper foundations (transition pieces)
supporting turbines and the quality of up to
35 lower foundations supporting the same
turbines. The agreement between GGOWL
and Fluor was a positive development and
brought to an end the contractual dispute
between the two parties.

Transferring offshore cable
connections to OFTOs
The Great Britain regulatory regime for
the construction and operation of offshore
transmission assets requires generators
who construct these assets to transfer
them to an Offshore Transmission Owner
(OFTO) post-construction.

In accordance with this requirement, SSE
and its partners have already transferred
the OFTO assets associated with Walney
and are currently in the process of

2. Performance review1. 3. 4. Performance review

Wholesale (continued)
Market-based businesses

transferring the OFTO assets associated
with Greater Gabbard. Around half of
SSE’s share of the proceeds from Walney
(£25m) were received in the financial year
2011/12, with a further £26m received at
the end of December 2012. Proceeds for
Greater Gabbard of around £150m (SSE’s
share) have been agreed with Ofgem and
are expected to be received in the 2013/14
financial year.

Producing electricity from biomass
During 2012/13, SSE’s 80MW biomass plant
at Slough produced 168GWh of electricity,
compared with 156GWh during the previous
year. Slough was loss-making in 2012/13
and faced a similar challenging financial
position in 2013/14, particularly following
the removal of the free allocation of
carbon credits.

Following the review of its thermal and
biomass assets at the end of March 2013,
SSE has decided to decommission two
generation units and the associated
infrastructure on a phased basis over the
next few months. Both units will cease
generation completely by October 2013.
Slough’s remaining boiler and steam
turbines will continue to operate as normal
and SSE will invest approximately £8m to
increase the output and efficiency of this
unit and broaden its fuel envelope. The
station will provide 20MW of capacity after
this upgrade.

Developing new hydro-electric schemes
The Scottish Government’s decision
to maintain support for output from
conventional hydro-electric schemes
at 1.0 ROCs/MWh, meant that SSE
continued with pre-construction work
at its 7.5MW Glasa (formerly known
as Kildermorie) hydro-electric project
near Ardross in Ross-shire. In May 2013,
it announced that it would begin full
construction work on the project in the
summer of 2013.

In October 2012, the Highland Council
confirmed it had no objections to the
development of SSE’s proposed Coire Glas
(Loch Lochy) 600MW pumped storage
scheme, and the planning consent will now
be determined by the Scottish Ministers.
SSE has concluded that Coire Glas is its
preferred option for a pumped storage
development in the near future.

Coire Glas could offer significant benefits to
the Great Britain electricity system in terms

SSE plc Annual Report 2013

connection date;

Scottish Government;

of capacity and flexibility, but it remains
subject to:

• securing planning consent from the
• the availability of a timely grid
• a satisfactory public policy and
• compliance with SSE’s financial

regulatory framework, including the
outcome of the electricity market
reform proposals and the transmission
charging regime changes envisaged
by Ofgem’s Project TransmiT; and

principles and its Major Projects
Governance Framework.

All of this means that a decision on
whether to construct Coire Glas is unlikely
to be taken before 2015 at the earliest.

Developing new onshore wind farms
At 31 March 2013, SSE’s onshore wind
farm portfolio in Great Britain comprised
around (net):

• 898MW in operation;
• 187MW in construction or pre-
• 300MW with consent for development.

construction; and

The following projects are currently in
construction or pre-construction and
are key components of SSE’s portfolio of
strategic onshore wind projects in GB:

• Calliachar (32MW) – The first turbines

have been erected at the site and
generated their first energy during
March 2013, meaning the site is
eligible to receive support through the
Renewable Obligation under the existing
full 20 year ROC scheme. The project is
expected to be completed during the
summer of 2013.

• Keadby (68MW) – Adjacent to SSE’s

Keadby gas-fired power station,
construction is well under way, with the
first turbines expected to be erected
and generating energy by the end of the
summer 2013. As a result of a delayed
grid connection, the project is still able
to qualify for full ROC support if, as
expected, it successfully generates its
first energy by September 2013. The
project is scheduled for full completion
in 2014.

• Strathy North (75MW) – Located

in Sutherland, this project will be a
significant new development for SSE
during 2013/14. Pre-construction

works have begun at the site and full
construction is anticipated to begin
in mid-2013.

SSE had around 300MW of fully consented
projects across Great Britain at 31 March
2013. A major proportion of this is SSE’s
share in the 101 turbine Viking wind farm
in Shetland, which is a joint venture with
Viking Energy Partnership. Although this
project is consented, this determination
is currently subject to a Judicial Review.
The project also faces the same issues
as many island wind farms of high
transmission entry costs and extended grid
connection dates. No investment decision
has therefore been taken on Viking and it is
currently unlikely to be fully commissioned
before the end of the decade. In addition,
SSE acquired the 99MW consented
Dunmaglass scheme in May 2013.

SSE has over 600MW of development
projects currently in planning, and expects
to receive decisions on around 400MW of
these during 2013/14. In addition, SSE has
around 300MW of new onshore wind farm
projects currently in pre-planning.

Developing new offshore wind farms
Offshore wind continues to play an
important role in the delivery of low carbon
energy for GB. GB has been the global
leader in offshore wind since 2008 and
with over 3,300MW in operation, it has
more installed capacity than the rest of
the world combined. A further 3,800MW
is currently under construction and a
total of up to 18GW is planned by 2020.

SSE has gained valuable experience
of offshore wind farm development,
construction and operation 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.

The next offshore wind farm in SSE’s
development pipeline is the Galloper
project, which is located close to the
existing Greater Gabbard development and
has a potential capacity of up to 504MW.
This project is also a 50:50 partnership
with RWE npower Renewables. Significant
progress has been made in the planning
phases of this project and it now awaits
a final decision on planning consent
from the Secretary of State for Energy
and Climate Change, expected by the end

of May 2013. Assuming consent is received,
SSE expects to make a final investment
decision on the project in the first half
of 2014 with the aim of progressing with
a development programme that would
enable Galloper to retain the option
to benefit from the existing ROC regime
for offshore wind.

Beyond this, the planning proposal for
the 1,000MW Beatrice project located in
the Moray Firth, a 75:25 partnership with
Repsol Nuevas Energias UK, is currently
with Marine Scotland with a planning
decision expected in late 2013. The
onshore grid connection for this project
received consent from Moray Council in
February 2013.

SSE is also involved in two consortia that
provide it with valuable development rights
for potentially up to 4.2GW (net) additional
offshore wind farm assets beyond 2020:

• SeaGreen, a 50:50 partnership

between SSE Renewables and Fluor
Limited, which has recently sought
consent for two wind farm areas,
with a capacity of 525MW each, which
represent the first of three phases
in the 3.5GW Firth of Forth offshore
wind farm.

• Forewind, a four-way partnership

with RWE npower Renewables, Statoil
and Statkraft, which plans to submit
consent applications for two wind farm
areas, each with a capacity of 1.2GW,
which represent the first phase of
development of the 9GW Dogger
Bank wind farm.

However, decisions by SSE regarding the
extent of the build out of this pipeline
will be based on its disciplined approach,
consistent with its financial principles
and focused on taking forward only the
best investments and achieving the
strongest possible returns to support
dividend growth.

Reducing the cost of offshore wind
A robust, sustainable and ultimately lower
cost supply chain offers significant value
to renewable energy developers and is
essential to delivering the UK’s offshore
wind potential. As GB’s largest owner,
developer and operator of renewable
energy, SSE has an important role to
play and is focused on forming strategic
alliances and investments to secure this
supply chain.

SSE has a number of initiatives to increase
the effectiveness, and decrease the cost,
of offshore wind deployment, including
the development of the UK’s national
offshore wind testing facility at Hunterston
in North Ayrshire. In partnership with
Scottish Enterprise and leading turbine
suppliers Mitsubishi and Siemens, up to
three prototype offshore wind turbines
will be tested at the facility for a period
of five years. Construction of the facility
began in March 2013 and it is expected
to be fully operational by the end of 2013.

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.

Developing marine-based
renewable energy
Marine-based wave and tidal
technologies are interesting and
potentially important longer-term
prospects for the next generation of
renewable energy technologies, which
could start to make a significant energy
contribution in the next decade.

SSE has worked with JV partners for
a number of years to support the
development of potential technologies and
sites for marine projects, with development
activities focussed on four sites around
Orkney’s Pentland Firth. Although the
technological and site-related issues have
proved to be substantive, SSE believes
that wave and tidal technologies could
ultimately make an important contribution
to meeting electricity requirements.

Generation – Ireland

Creating an integrated business
in Ireland
The acquisition of Airtricity in 2008
established SSE as a significant participant
in the all-island Single Electricity Market
(SEM) and created a platform for SSE to
create and develop a fully integrated
energy business across Ireland. SSE has
since built a strong retail business in
Ireland and through its long established
Ireland-based renewables team, operates
over 463MW of renewable generation and
manages a substantial pipeline of new
renewable developments.

In line with its approach in Great Britain,
SSE is keen to maintain an effective

balance between the electricity required
to meet the demands of its growing
customer base in Ireland and the electricity
it produces from its own generation assets
on the island.

In October 2012, SSE completed the
acquisition from Endesa Generacion SA of
the shares of Endesa Ireland Limited, the
assets of which included plant in operation,
under construction and with consent for
development. The acquisition involved a
total cash consideration of €350m (£282m)
plus €10m (£8m) of deferred consideration.

in County Kerry;

The acquisition included 1,068MW of
operational assets at four sites:

• 620MW fuel oil Tarbert Power Station
• 240MW fuel oil Great Island Power
• 104MW peaking gasoil Tawnaghmore
• 104MW peaking gasoil Rhode Power

Power Station in County Mayo; and

Station in County Wexford;

Station in County Offaly.

The electricity generated by this plant
is traded in the all-island SEM, where
a proportion of fixed capital costs are
remunerated via a capacity payment
mechanism when plant is made available,
and variable costs, including fuel and
carbon, are remunerated through the
energy market.

SSE is now the third largest electricity
generation capacity owner on the island
of Ireland with around 13% of installed
capacity.

Maintaining effective operational
performance
At 31 March 2013, SSE owned 463MW
of onshore wind farm capacity in Ireland
(including 42MW in Northern Ireland)
and 1,068MW of thermal generation
capacity. Output in 2012/13 was as
follows (comparison with previous years):

• 19.5GWh from thermal generation from
• 1,335GWh from renewable generation

date of acquisition, October 2012; and

(1,545GWh).

In the Republic of Ireland renewable
generation receives policy support through
the Renewable Energy Feed-in Tariff.
Policy support for renewable generation in
Northern Ireland is delivered through the
Renewables Obligation, the same as in GB.

2. Performance review1. 3. 4. Performance review

Wholesale (continued)
Market-based businesses

Investing in new capacity for
generating electricity at Great Island
In addition to the operational generation
assets, the Endesa acquisition included a
460MW CCGT currently under construction
at Great Island, County Wexford.

Construction at the site is well advanced,
with the gas turbine, steam turbine and
generator placed on site. A total of €59m
was spent on the development from its
acquisition by SSE in October 2012 to
31 March 2013. The plant is expected
to be commissioned in the second
half of 2014, at which time the existing
240MW fuel oil unit at the site will
be decommissioned.

SSE will incur capital expenditure of around
€140m (£110m) over three financial years
to complete the construction of the new
CCGT. This is included in its plans to incur
capital and investment expenditure in the
range of £1.5bn to £1.7bn in each of the
years to March 2015.

The SEM in Ireland has an effective
capacity mechanism in place. This
mechanism was an important factor in
SSE’s decision to progress with the Great
Island development and means it is able
to proceed with investment in new thermal
electricity generation plant in the Irish
market, which is in contrast to the position
in respect of the Great Britain market.
The SEM itself is expected to undergo
some modifications in order to implement
the EU ‘target model’ in electricity.

Developing new renewable generation
in the all-island market
At 31 March 2013, SSE’s onshore wind
farm development portfolio in Ireland
comprised around:

• 80MW in construction or pre-
• 130MW with consent for development.

construction; and

Projects under construction in Ireland
are Athea (34MW) in County Limerick,
and Glenconway (46MW), part of SSE’s
Slieve Kirk strategic area located in County
Derry. Construction at both projects is
progressing well. The first energy was
exported from Glenconway in March
2013, qualifying it for the full Northern
Ireland ROC support mechanism. Athea
is on target to generate its first energy in
September which would qualify it for the
ReFiT support mechanism in RoI.

SSE plc Annual Report 2013

SSE has around 100MW of other
development projects currently in planning
across Ireland.

Meeting customers’ future requirements
for electricity in Ireland
Over the medium and long term, the
completion of the 460MW CCGT at Great
Island and the continuing development of
its wind farm projects will give SSE a more
balanced generation portfolio in Ireland and
significantly increased output of electricity
with a lower CO2 intensity than the SEM
average.

In a typical year, the Great Island CCGT and
SSE’s wind farms are expected to generate
the equivalent of around two thirds of the
electricity needed to supply SSE’s current
customers in Ireland. Along with its power
purchase agreements, this means SSE
can securely and cost-effectively meet
the demand of its rapidly growing Irish
supply business, Airtricity, in a way that
is sustainable.

Generation – future priorities

Optimising the onshore wind
farm portfolio
To optimise its portfolio of onshore wind
assets, both in operation and development,
SSE continues to have a programme of
selective acquisitions and disposals.

At the end of March 2013, SSE completed
the sale of four wind farms with a total
generation capacity of 79.5MW, to a new
fund managed by Greencoat Capital, for
a total cash consideration of £140.9m.
SSE then re-invested £10m in the new
fund. As part of the deal, SSE entered into
power purchase agreements (PPA) for three
of the wind farms totalling 43.5MW (the
fourth wind farm already had a PPA with
a third party) and will continue to have the
operation and maintenance contract for all
four wind farms.

The proceeds from this disposal will
support further investment in new
renewable assets and, in line with its
commitment to financial discipline,
represent an excellent example of SSE
creating ongoing value from its investment
programme while improving the liquidity
of the market for investment in new
renewable developments.

In line with that, in May 2013, SSE reached
agreement with Renewable Energy Systems

Group (RES) to acquire the Dunmaglass
wind farm project, located near Loch
Mhor, south of Inverness. The 33 turbine
Dunmaglass project received planning
consent in December 2010 and off-site pre-
construction works have already begun.
SSE expects to begin full construction
of the wind farm in late 2013 with an
expected project completion date of early
2016. Once constructed, the project will
have an installed capacity of 99MW and
potential load factors of above 40%. The
total investment in the project is expected
to be around £200m and is consistent with
the scale and composition of SSE’s planned
investment programme to 2015.

Investing in new renewable
sources of energy
As SSE moves forward the next phase
of its renewable development pipeline
it is focusing on projects that best allow
the efficient allocation of resources and
economies of scale. While the scale of
overall development is likely to be lower
than in recent years, the focus is on a
consistent pipeline of new developments.
In addition to its own developed sites,
SSE will also consider opportunities
to acquire projects. These projects
would complement SSE’s existing
generation portfolio and development
pipeline, generally have planning
consent and be aligned with SSE’s
financial principles.

With Great Britain and Ireland identified
as its core markets, a broad portfolio
of development options held in both
jurisdictions and 1GW of electricity
interconnection between the two
markets, SSE has disposed of its
interests in Sweden including a 295MW
development pipeline of which 80MW
had consent for development.

Securing new sources of capital
for renewable investment
SSE is committed to maintaining a
diverse range of funding sources for
its new investments. In line with this
it is continuing to develop ways to involve
new investors and new sources of capital
in its renewable development pipeline.

These include:

• opportunities for involving new

partners at the individual project level,
particularly for large scale capital
intensive projects such as offshore wind;

• establishment of an intermediate

holding company for offshore renewable
energy, which will remain wholly-owned
by SSE for the foreseeable future but will
provide it with the flexibility to introduce
new sources of funding to support the
development portfolio; and

• the recycling of capital through the

sale of selected operating assets to
investment funds, such as Greencoat
Capital, while retaining the electricity
output from these assets.

Generation priorities in 2013/14
and beyond

In Generation, SSE’s 2013/14
operational priorities remain consistent
with its established principles to:

and environmental requirements;

• comply fully with all safety standards
• ensure power stations are available
• operate power stations efficiently to

to respond to customer demand and
market conditions; and

achieve the optimum conversion of
primary fuel into electricity.

Investment priorities for the next
financial year are to:

• ensure continued high quality
• maintain a significant pipeline

project execution on new thermal
developments and in particular the
achievement of first energy from the
Great Island CCGT project before the
end of 2013;

of onshore wind developments
that successfully proceed through
development, consent and
construction and ultimately deliver
around 150MW of new onshore wind
farm capacity in 2013/14;

• secure consent for up to 1GW (net)
• introduce new and potentially

of new offshore wind capacity
through the Galloper and Beatrice
offshore wind projects; and

diverse sources of funding into
the offshore portfolio.

Gas Production

assets was a measured entry into non-
operated upstream assets. In November
2012, it increased its equity interest in
three of these assets – Apollo, Minerva
and Mercury – to 50% for a total cash
consideration of £25.5m.

On 12 April 2013, SSE completed the
acquisition of 50% of the Sean gas field
from BP, for a total cash consideration
of £117.4m.

Following completion of the Sean
acquisition, SSE has a Gas Production
business that is a top 10 gas producer
in the UK, and is in the top 20 for oil and
gas production combined.

SSE’s portfolio is deliberately 100% gas-
weighted, since SSE’s primary reason for
owning gas assets is to secure a long-term
supply of physical gas at a fixed-price,
to enable it to effectively meet the
energy needs of its customers.

SSE’s total portfolio of gas production
assets at April 2013 represented
approximately three billion therms
of proven and probable (2P) reserves.

The volume and production profile of
these assets represents a secure and
fixed-price supply of gas that can meet
around 25% of the forecast demand
from SSE’s domestic gas customers
over the next three years.

In addition to owning these physical
assets SSE also has a 5% shareholding
in the oil and gas explorer, Faroe
Petroleum plc.

SSE is not actively engaged with Faroe
Petroleum other than as a shareholder,
but is content with the strategy that
Faroe Petroleum is pursuing.

Securing output from gas
production assets
The Gas Production business continued to
perform well in 2012/13 and benefitted
from the increased share in the Apollo,
Minerva and Mercury gas fields. The
increase in the asset base was partially
offset by forecast and normal production
decline rates from the existing wells.

There are a number of maintenance
programmes scheduled over the coming
year which will improve the longevity
and integrity of the original assets
acquired from Hess. Scrutiny and
control of these activities and working
with the operating partners for each
field, Perenco, Centrica and Shell, to
minimise downtime, is a key objective
for 2013/14.

Continuing to expand the Gas
Production business
The addition of the Sean asset scaled-up
SSE’s Gas Production business considerably,
with a measured hand-over of the asset
essential for all partners and for maximum
hydrocarbon recovery.

SSE continues to proactively seek new
opportunities to increase its 2P reserve
base. The UK and north-west Europe
remains the focus for this activity, since
it provides a relatively stable tax and
fiscal regime and is near to SSE’s domestic
supply market.

SSE will continue to evaluate gas-weighted
opportunities in line with its investment
criteria, with a view to growing its Gas
Production business at a similar rate over
the medium term. As its gas production
business grows this may also naturally
lead SSE into the operatorship of certain
assets if they are deemed appropriate.

SSE has not set a target scale for its Gas
Production business, but will grow it in line
with its core financial principles and the
primary reason for it owning gas assets –
being one of the ways it can secure a long-
term supply of physical gas that enables
it to meet effectively the energy needs
of its customers.

Examining the opportunities in shale gas
Shale gas has the potential to become
an important new source of indigenous
gas supply for the UK, although SSE
does not expect UK output to reach
significant volumes until the next decade.

SSE has an exclusive five year off-take
agreement with Dart Energy, covering
its coal-bed methane (CBM) operation
in central Scotland.

Producing gas to meet the needs
of customers
SSE’s 2011 acquisition from Hess Limited
of North Sea natural gas and infrastructure

Total output to 31 March 2013 (which
excludes the Sean gas field) was 183.8
million therms, compared with 176.7
million therms in the previous year.

While SSE is prepared to enter into similar
agreements with future CBM and shale
gas operators, it has no such agreements
in place currently.

2. Performance review1. 3. 4. Performance review

Wholesale (continued)
Market-based businesses

Gas Production priorities for
2013/14 and beyond

Gas production priorities for the coming
financial year include:

assets in which it has an ownership
interest;

• ensuring the safe operation of all the
• successful integration of the Sean
• stringent cost control on Operator
• continuing the robust investment

budgets and enhanced monitoring
and reporting of operator work
programmes; and

appraisal process to identify suitable
acquisition targets.

gas asset;

wholesale gas prices and less volatile
shorter-term gas prices. This was off-set
by increased capacity available for storage
as a result of the progress at the Aldbrough
facility.

Both sites continue to operate with
good availability to meet commercial
requirements, despite ongoing
development activities. During 2012/13:

• Hornsea again met 100% of customer
• Aldbrough met close to 100% of

nominations with the site 98% available
during the key winter period and 86%
available overall, except in instances
of planned maintenance; and

customer nominations and was 90%
available overall, while commissioning
the final three caverns during the
period.

Gas Storage

Providing capacity to store gas
Gas storage provides physical flexibility
that enables capacity owners to manage
their market risks and respond to trading
opportunities. It also provides an important
security of supply function for the UK.

SSE has an ownership interest in two major
gas storage facilities in East Yorkshire
– Hornsea (Atwick) and Aldbrough. The
primary objective of these facilities is to
maximise safely the availability of the plant
to import and export gas.

Hornsea provided up to 313 million cubic
metres (mcm) of gas storage capacity to
its customers during 2012/13. It accounts
for around 6% of the total gas storage
capacity in the UK and 12% of deliverability.

Aldbrough is one of the UK’s newest and
largest onshore gas storage facilities,
which SSE (66.6% share) has developed
with Statoil (UK) Ltd. All nine caverns are
operational and its capacity at March
2013 was 270mcm. It will ultimately
have the capacity to store up to 320mcm,
and account for up to 20% of the UK’s
storage deliverability.

Managing operations at Hornsea
and Aldbrough
The decline in the profitability of the Gas
Storage business in 2012/13, reflects a
decline in the price achieved for Standard
Bundled Units of storage capacity. This
has been driven primarily by a reduction in
the spread between summer and winter

SSE plc Annual Report 2013

Looking to the future for gas storage
Current gas storage capacity, both at
SSE and within the UK as a whole, plays
an important role in the UK’s energy
infrastructure.

Further gas storage would understandably
improve UK gas security of supply and
improve price stability. However, the UK
already meets the EU Regulation for
Security of Supply of Gas and will do so
for the foreseeable future. As a result,
no new storage is required unless the
UK government wishes to introduce
a more secure standard.

It is also clear that the market returns
for gas storage are already too low to
encourage additional capacity to be
deployed without UK government support,
and SSE believes this situation is unlikely
to change in the foreseeable future. As a
result, it has urged the UK government to
be extremely cautious about designing a
mechanism to incentivise gas storage.

SSE is only in favour of intervention which
treats equally new and existing plant, and
shorter-range and longer-range facilities.
Failure to adhere to this principle would
distort the market, adversely impacting on
existing assets and leading to unintended
and undesirable outcomes. As a result of
this risk SSE believes that no intervention
is preferable to the wrong type of
intervention.

As a gas storage operator, SSE considers
the main barrier to investment to be the

uncertainty of annual revenues required to
compensate for large capital investments
over a long build period (five to seven
years) and the long commercial operation
lifetimes required to earn a return. In
addition, the act of investing in new gas
storage facilities increases capacity and
lowers returns for all owners, further
discouraging investment. SSE and Statoil
will therefore, not make a decision on the
development of a second gas storage
facility at the Aldbrough site until market
conditions improve.

Gas Storage priorities in 2013/14
and beyond

Gas storage priorities for the coming
financial year include:

standards of operation of the facilities
at Hornsea and Aldbrough and the
compliant operation of the Gas
Storage business;

• ensuring on-going high safety
• continuing to listen to customers,
• maintaining availability and
• continuing targeted investment as

working with them to shape flexible
products which cost-effectively
support their portfolios;

operational performance at Hornsea
and Aldbrough; and

required and justified to prolong
operational life of the existing
facilities.

Wholesale – conclusion
Producing and securing energy to meet the
needs of SSE’s customers is at the heart of
SSE’s Wholesale business. While 2012/13
presented many challenges, continued
excellence in operating its portfolio of
assets, ongoing progress in the delivery of
key assets, including Glendoe and Greater
Gabbard, and strategic investments in
Ireland and in Gas Production, meant
that SSE’s activities in Energy Portfolio
Management, Electricity Generation,
Gas Production and Gas Storage continued
to deliver against this primary objective.

It also supported the achievement
of SSE’s first financial goal of sustained
real growth in the dividend payable
to shareholders and the fulfilment
of SSE’s core purpose of providing the
energy people need in a reliable and
sustainable way.

Governance

Chairman’s introduction to SSE corporate governance

High standards of
corporate governance
are key to running
SSE as a successful,
responsible and
sustainable company,
capable of delivering
increases in the dividend
payable to shareholders
in the short, medium
and long term.

the outcome was satisfactory, but as
always with some helpful suggestions
for improvement. This is covered in more
detail in the How the Board works section
(see page 72), but I would like to highlight
that the external facilitators, PwC, felt
the review was approached in an open
and engaging way by the Directors and
that in their opinion the Board should
feel confident that it is effective. The
suggestions from their report are being
implemented to ensure we continue
to improve.

Time commitment of non-Executives
I have commented in previous years on the
commitment of our non-Executive Directors
to SSE over and above attendance at Board
and Committee meetings. During 2012/13
this has continued to be the case; in fact
it has been greater than ever before. Our
non-Executive Directors have visited sites
throughout SSE, including power stations,
gas storage facilities, major capital project
sites, and our office-based facilities such
as customer service centres. The feedback
from these visits is given to the Board,
and I believe our employees are genuinely
appreciative of the opportunity to meet the
non-Executive Directors and explain our
range of businesses in more detail.

Transparent reporting
Lastly, I am pleased to report that SSE won
the 2012 PwC Building Public Trust Award
for Executive Remuneration Reporting in
the FTSE 100. This is the second time in
three years that we have won this, and
I believe it demonstrates our continuing
commitment to an open and transparent
approach to reporting.

Lord Smith of Kelvin
Chairman
21 May 2013

High standards of corporate governance
are key to running SSE as a successful,
responsible and sustainable company,
capable of delivering increases in the
dividend payable to shareholders in
the short, medium and long term.

Our Report for 2012/13 explains SSE’s
approach to corporate governance with
separate reports being included on each
of the Board Committees. I would like to
focus on five specific areas.

Board changes
First of all, I would like to explain some
important changes to the Board. I have
paid tribute to the outstanding service of
our Chief Executive, Ian Marchant, who
is stepping down on 30 June 2013 and is
being replaced by Alistair Phillips-Davies.
The Board reached the unanimous decision
that Alistair should be appointed as Chief
Executive. This had the full support of the
Nomination Committee, which recognised
both the desire for continuity and Alistair’s
significant experience, having carried out
an extensive benchmarking exercise. The
role of Gregor Alexander is being expanded
to include responsibility for Regulation and
Energy Portfolio Management. The Board
will then comprise two Executive Directors,
five independent non-Executive Directors,
and myself as Chairman. We continue to
consider carefully the independence of
non-Executive Directors, Board diversity,
and succession planning, and this is
explained in more detail in this report.

UK Governance Code
We are reporting against the UK Corporate
Governance Code (the ‘Code’) which was
introduced in June 2010. I am pleased to
report that SSE has complied with all the
relevant provisions of the Code throughout
the year ending 31 March 2013.

A new edition of the Code was published
in September 2012. The changes in the
new edition covers matters such as Audit
Committee requirements, audit contract
tendering, business and financial reporting
and diversity and inclusion. We will be
reporting under the new Code in next
year’s Annual Report. However, we have
already taken steps to comply with the
new requirements in relation to diversity
and inclusion.

Lord Smith of Kelvin

Board evaluation
We carried out an externally facilitated
evaluation of the Board this year, and

3. Governance1. 2. 4. Governance

Board of Directors

Lord Smith of Kelvin
Chairman

Ian Marchant
Chief Executive

Alistair Phillips-Davies
Deputy Chief Executive

Gregor Alexander
Finance Director

Nationality

Date of appointment

Non-Executive Director since
June 2003. Chairman since
January 2005.

Appointed Finance Director
in 1998. Chief Executive since
October 2002. Ian is stepping
down from the Board on
30 June 2013.

Appointed Energy Supply
Director in 2002. Generation
and Supply Director since
December 2010. Deputy Chief
Executive since September
2012. Alistair will become
Chief Executive on
1 July 2013.

Appointed Finance Director
in October 2002.

Committee
Membership

Background

Key appointments

Chairman of the Nomination
Committee; Member of the
Remuneration Committee.

Member of the Nomination
Committee.

Lord Smith has held a
number of senior positions in
a range of financial services
organisations, including
Morgan Grenfell Private
Equity, Morgan Grenfell Asset
Management and Deutsche
Asset Management.

He is a chartered accountant
and a past president of
the Institute of Chartered
Accountants of Scotland.

He was a member of the
Judicial Appointments Board
for Scotland and former
Chairman of the trustees of the
National Museums of Scotland.

Chairman of: The Weir Group
plc; UK Green Investment
Bank plc; Glasgow 2014
Limited, the organising
committee for the
Commonwealth Games.

Non-Executive Director of
Standard Bank Group Ltd
in South Africa.

Ian joined Southern Electric
plc in 1992 and was appointed
Finance Director of that board
in 1996.

Alistair has over 16 years’
service with the Group, having
joined Southern Electric plc
in 1997.

Gregor has over 22 years’
service with the Group, having
joined Scottish Hydro-Electric
plc in 1990.

He is a chartered accountant.

Previously he worked for HSBC
and the National Westminster
Bank in corporate finance and
business development roles.

Alistair currently has SSE
Board-level responsibility
for Generation, Energy
Portfolio Management,
Retail, Renewables and
Energy Demand.

He is a chartered accountant.

He is a chartered accountant.
Gregor currently has SSE
Board-level responsibility for
Finance, Human Resources,
IT, Procurement and other
Group Services.

He is the sponsoring Board
member for SSE’s businesses
in Ireland and Chairman
of 50%-owned Scotia Gas
Networks Ltd.

Chairman of the Scotland
2020 Delivery Group.

Senior Independent Director
of John Wood Group plc.

Non-Executive Director of
Maggie’s Cancer Centres.

Director of Energy UK.

Non-Executive Director
of Stagecoach Group plc
(from April 2013).

SSE plc Annual Report 2013

Richard Gillingwater CBE
Senior Independent
Director

Lady Rice CBE
Non-Executive Director

Thomas Thune Andersen
Non-Executive Director

Jeremy Beeton
Non-Executive Director

Katie Bickerstaffe
Non-Executive Director

USA and UK

Denmark

Non-Executive Director since
May 2007. Senior Independent
Director since July 2012.

Non-Executive Director since
July 2003. Senior Independent
Director from July 2007 to
July 2012.

Non-Executive Director since
January 2009.

Non-Executive Director since
July 2011.

Chairman of the Audit
Committee. Member
of the Nomination and
Remuneration Committees.

Chairman of the Remuneration
Committee. Member of the
Nomination Committee.

Richard was, most recently,
Dean of Cass Business School,
London. Prior to this he spent
10 years at Kleinwort Benson,
before moving to BZW, in due
course, becoming joint Head
of Corporate Finance and,
latterly, Chairman of European
Investment Banking at Credit
Suisse First Boston. He has
previously served as Chief
Executive then Chairman of the
Shareholder Executive. He has
been a non-Executive director
of P&O, Debenhams, Tomkins,
Qinetiq Group and Kidde.

As Chairman and Chief
Executive of Lloyds TSB
Scotland plc, Susan was
the first woman to head
a UK clearing bank.

Previously she worked
for Bank of Scotland and
Natwest Bancorp in New York.
In her earlier career, she was
a Dean at Yale and Colgate
universities in America.

Susan is a Chartered Banker.

Chairman of the Safety,
Health and Environment
Advisory Committee.
Member of the Audit and
Nomination Committees.

Thomas spent 32 years at
the A.P. Møller-Mærsk Group
with an international career
ending as CEO and President
of Mærsk’s oil and gas
company. He also served
on Mærsk’s Board and its
Executive Committee from
2005 to 2009. Previously he
worked for Mærsk in the
Far East, USA and the UK.

Member of Audit, Nomination
and Safety, Health and
Environment Advisory
Committees.

Member of the Nomination
and Remuneration
Committees.

From 2008 to 2012, she served
as Director of Marketing,
People and Property.

Previously Katie was Managing
Director of Kwik Save Ltd
and Group Retail Director
and Group HR Director at
Somerfield plc.

Her earlier career included
roles at Dyson Ltd, PepsiCo Inc
and Unilever PLC.

Jeremy was the Director
General of the UK Government
Olympic Executive, the
lead government body
for coordinating the 2012
London Olympics.

Previously Jeremy was
Principal Vice President
of Bechtel Ltd, where he
had responsibility for the
management and delivery
of Bechtel’s civil engineering
projects in infrastructure and
aviation business lines.

Jeremy is a civil engineer.

Chairman of the Lloyd’s
Register Group and Chairman
of the Board of Trustees for
the Lloyds Foundation.

Chairman of DeepOcean
Group.

Vice Chairman of VKR Holding.

Non-Executive Director of
Petrofac Ltd.

Member of the Court of
Strathclyde University.

Sits on the advisory boards
of PwC and Macquarie, where
he is also a consultant.

Non-Executive Director
of A Proctor Group.

Katie is currently Chief
Executive, UK and Ireland
Dixons Retail plc.

Chairman of Henderson
Group plc.

Managing Director, Lloyds
Banking Group Scotland.

Non-Executive Director of Wm
Morrison Supermarkets plc.

Chairman of the CDC Group.
Senior Independent Director
of Hiscox Ltd and Helical
Bar plc.

Trustee of the British Council
and a member of the advisory
boards of TheCityUK and of
the Association of Corporate
Treasurers.

Non-Executive Director on
the Court of Bank of England,
and chair of its audit and risk
committee. Non-Executive
Director of J Sainsbury plc
(from June 2013); and of
Big Society Capital Ltd and
Scotland’s Futures Forum.

Member of (Scotland’s) First
Minister’s Council of Economic
Advisers and President of
the Scottish Council for
Development and Industry.

Chairman of the Edinburgh
International Book Festival
and Edinburgh Festivals
Forum.

3. Governance1. 2. 4. Governance

People and values

Values and responsibilities
Core values
SSE believes that the behaviours and
culture of an organisation should
be guided by its values, and that an
organisation’s values should be at its
core. SSE has six core values which seek
to bound the behaviour and attitude
of its employees and those it works
with. These are:

preventable, so we do everything
safely and responsibly or not at all.

service we are proud of and
make commitments that
we deliver.

• Safety: We believe all accidents are
• Service: We give our customers
• Efficiency: We keep things simple,
• Sustainability: Our decisions and
• Excellence: We strive to get better,

actions are ethical, responsible
and balanced, helping to achieve
environmental, social and economic
wellbeing for current and future
generations.

do the work that adds value and
avoid wasting money, materials,
energy or time.

smarter and more innovative and
be the best in everything we do.

• Teamwork: We support and value

our colleagues and enjoy working
together as a team in an open and
honest way.

The team
The Board of Directors and the
Management Board
The Board of Directors is accountable to
SSE’s shareholders for the good conduct
of the Company’s affairs. It is responsible
for creating and sustaining shareholder
value in a responsible way through the
overall management of the Company.
In doing so, the Board must ensure that
a sound system of internal control and
risk management is in place.

The Management Board is the group
of Executive Directors and Managing
Directors which is responsible for
implementing strategy and policy as
agreed by the Board of Directors and for
the operational management of all of SSE’s
businesses. The members of the Board
are listed on pages 62 and 63 and the
Management Board are listed below.

A total of 60 senior managers report
to members of the Management Board.
Of these, 15 are women and 45 are men.

All employees
SSE employed 19,795 people on 31 March
2013, an increase of 306 on the previous
year. Fundamental to the Company’s
success is the professionalism and
enthusiasm of employees, guided by
SSE’s teamwork value, which states:
‘We support and value our colleagues
and enjoy working together in an open
and honest way’. 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.

Of all employees, 71% are men and
29% are women. The average age of
SSE’s employees is 40 years. In 2012/13,
there was a 9.2% turnover of employees,
compared with 8.2% in the previous year.

Developing and recruiting people
Building the SSE team
During 2012/13, SSE recruited externally
a total of 2,200 people to jobs in England,
Scotland, Wales, Northern Ireland and the
Republic of Ireland. Of the people recruited
during the year, 69% were men and 31%
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

Management Board

Mark Mathieson
Managing Director,
Networks

Rob McDonald
Managing Director,
Regulation and Strategy

Jim McPhillimy
Managing Director,
Group Services

Will Morris
Managing Director,
Retail

Martin Pibworth
Managing Director,
Energy Portfolio
Management

Mark Mathieson is Managing
Director, Networks. He joined
SSE in 1988 and is responsible
for SSE’s Electricity Networks,
Lighting Services and
Telecoms businesses.

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.

Will Morris is Managing
Director of SSE’s Retail
business. He joined the
company in 2012 and is
responsible for the customer
facing retail business in
energy supply and energy-
related services.

Martin Pibworth is Managing
Director, Energy Portfolio
Management. He joined SSE
in 1998 and is responsible
for the operation of SSE’s
Energy Portfolio Management
business.

SSE plc Annual Report 2013

filled by well qualified people in a timely
way and SSE remains pleased with the
number of high quality applications that
it receives.

SSE’s priorities in maintaining and
developing the right team of employees are:

employees, giving them the time to
build their professional skills and the
opportunity to advance their careers;

therefore retaining engaged, motivated
and committed people and attracting
a strong and diverse number of quality
applicants for new roles;

• making SSE a great place to work,
• making a long-term commitment to
• maintaining a preference for recruiting
• taking steps to ensure a balanced
• ensuring effective succession planning,

and promoting from within the
organisation where possible, while
recognising that some specialist
skills may only be available through
external recruitment;

and diverse list of applicants for roles
within SSE;

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 personal lives.

Diversity and inclusion
SSE has established a Diversity and
Inclusion Working Group which focuses
on ensuring a diverse mix of candidates is
attracted for all available job opportunities,
while helping to build a culture of inclusion
so that everyone has the same opportunity
to progress regardless of background or
personal circumstance.

In support of this, an Equality and Diversity
e-learning module is being rolled out to
all 2,800 people managers in SSE. This
promotes the creativity and innovation
benefits that can be achieved by building
SSE teams which reflect a wide range of
skills, thinking styles, personality types
and perspectives.

In 2012/13, a coaching and mentoring
programme was piloted, to specifically
support those returning from maternity
leave or women with young families.
Those participating in the programme

are identifying blockers which could hold
them back from realising their ambition
and are experiencing an increase in
confidence in their own abilities.

In 2013/14, the diversity and inclusion
agenda is focused on understanding the
skills and employment challenges faced
by SSE over the short, medium and long
term, and identifying creative solutions to
address these. This will include looking at
alternative recruitment routes and markets
to tap into, structure of working patterns and
acceleration of high potential staff within
the business. Another key focus for the year
ahead will be ensuring that SSE’s talent
pipeline and management leadership traits
promote diversity and inclusion.

Youth unemployment
The level of unemployment among 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 around 11% of SSE
employees are aged under 25 (around
2,100 in total).

SSE supports the Barnardo’s Works
programme, which aims to give long term
unemployed young people the opportunity

Jim Smith
Managing Director,
Renewables

Paul Smith
Managing Director,
Generation

Alan Young
Managing Director,
Corporate Affairs

John Morea
Attends SSE’s
Management Board
Meetings

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 sustainable
development policy.

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; Natalie Flageul,
Director of Metering; Rob
McDonald, Managing Director,
Regulation and Strategy; and
Jim McPhillimy, Managing
Director, Group Services.

3. Governance1. 2. 4.
Governance

People and values (continued)

to gain comprehensive paid work
opportunities, training and industry-related
qualifications. Since it began in 2008,
a total of over 130 young people have
taken part in the programme with SSE.

In addition, SSE offers a range of structured
development programmes suited to the
needs of school leavers, trainees, trainee
engineers, graduates and apprentices. The
focus of each programme is to ensure that
those participating gain skills which create
sustainable career opportunities and that
can be used for their future benefit and for
the benefit of SSE. This sustainable creation
of jobs is key to SSE. Currently around 340
individuals are progressing through these
programmes and the Management Board
has agreed an increase in the numbers of
participants in these programmes with the
introduction of new training programmes
planned for 2013/14.

Performance management
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 on:

a review of performance against each
of SSE’s core values (Safety, Service,
Efficiency, Sustainability, Excellence
and Teamwork);

• performance in the past year, including
• key objectives for the year ahead;
• expectations, aspirations and ambitions
• personal development requirements

for the year ahead and beyond; and

and aspirations for the future.

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. Above all, SSE needs
to ensure the safe and efficient operation
of its businesses and the reliable provision
of services to customers.

Training and development
SSE has three technical and general
training centres, located in Berkshire,
Rhondda Cynon Taf and Perthshire.
These centres enable people to train in
the types of environment in which they
will eventually work, providing a realistic
experience in a safe and controlled setting.

SSE plc Annual Report 2013

SSE has three technical and general training centres,
located in Berkshire, Rhondda Cynon Taf and Perthshire.
These centres enable people to train in the types of
environment in which they will eventually work, providing a
realistic experience in a safe and controlled setting.

SSE’s latest training facility, in Rhondda
Cynon Taf, is focussed on delivering skills to
support the delivery of services in key areas
of energy efficiency and smart metering.
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 has an internal training team who
are equipped to run a range of technical,
customer, business and management
training interventions.

During 2012/13, SSE also invested
£2.5m in externally provided training and
development, taking the total to £7.8m
over the last three years. This helped to
deliver training to over 4,000 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 diploma and degree programmes in
Business and Customer Management.

Employees and the law
SSE has in place a comprehensive range
of policies to safeguard the interests of
employees and potential employees.
Like all responsible organisations it has
in place an actively-managed equal
opportunities policy, in keeping with the
spirit as well as the letter of the law in the
UK and elsewhere, designed to ensure
fair and equal treatment of employees
and potential employees across the seven
protected characteristics, as defined in
the Equality Act 2010 – sex, race, religion
or belief, disability, pregnancy and
maternity, sexual orientation and gender
reassignment. The Employment Equality
(Age) Regulations 2006 have now been
incorporated into the Equality Act 2010.
There were no occasions during 2012/13
when SSE was found to have failed to
comply with legislation on equality.

SSE also runs a policy development
group with representatives of its recognised
Trades Unions to ensure that revisions
to existing policies and development of
new policies are discussed and reviewed
with employee representatives prior to
implementation.

SSE also keeps employees and managers
updated with key changes to employment
policy and legislative requirements
through the use of e-learning which has
been used to train managers, for example
on the Bribery Act provisions.

Employee participation
Employee engagement
SSE recognises the value in attracting
and retaining an engaged workforce
and runs a Company wide annual
externally facilitated survey of employee
engagement. The results of the 2012
survey, which had a 90% response
rate and was completed by almost
17,700 of the 19,684 employees invited
to participate, showed that SSE has
an above benchmark employee
engagement score of 81%. SSE shares
the details of the survey results with
all employees and publishes detailed
business by business action plans based
on the findings of the survey.

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.

In addition to a wide range of internal
communication media and events,
employee participation in SSE is also
encouraged through internal blogs,
interactive online forums, division-
and subject specific employee surveys,
Director-led regional roadshows and the
Licence to Innovate scheme, established

in 2007, which enables employees to
research, review and trial new ideas.

Instead, SSE will make an annual donation
to a fuel poverty charity on their behalf.

research, the idea may then be piloted
prior to full implementation.

Joint Negotiating and
Consultative Committee
SSE has a well established Joint
Negotiating and Consultative Committee
(JNCC) which includes lay and full-time
representatives from four recognised
trade unions. This company wide forum
meets to consider key employment issues
impacting SSE employees. This group was
responsible for negotiation of a three year
modernisation agreement which has
led to a move to performance related
pay, and has introduced a number of
employment safeguards in return for
increased employee flexibility. The
JNCC is supported by Joint Business
Committees (JBCs) which seek to deal
with key employment issues within
each of the main business areas.

Employee benefits
SSE believes that there is a commonality
of interest between employees, customers
and shareholders. To reinforce this it:

• provides opportunities for employees
• provides opportunities for employees to

to become and remain shareholders
in SSE through a Share Incentive Plan
and a Sharesave Scheme. Employee
participation in these schemes is now
48% and 38% respectively;

be involved in its ‘Community at Heart’
employee volunteering scheme, which
allows up to 20,000 days of employee
time to be given to assist worthwhile
projects within the communities that SSE
serves. Volunteering activities in 2012/13
saw teams help create an innovative
story-telling area for Inverness Primary
School pupils, transform a woodland
area near Poole into a sensory garden
for nursery children and refurbish dated
changing facilities for Newport High
School’s rugby club; and

• has encouraged all employees to

become and remain customers by
providing them with a 12% discount on
its prices for electricity and gas supply,
plus discounts on other SSE products
and services such as energy efficiency
installations, central heating and wiring
maintenance and telephone and
broadband services.

In 2012/13, SSE introduced a scheme
whereby all eligible employees have the
option to waive their employee discount.

SSE believes that all employees should
invest for retirement and offers pension
schemes to all employees. It has been
automatically enrolling all new starts
into Pension Schemes since 2005.

The UK government has created a new
initiative to help those in employment build
up a pension through their workplace. This
requires all employers to enrol their workers
into a workplace pension scheme if they are
not already in one. From 1 March 2013 SSE
re-registered all eligible employees, into a
competitive pension scheme. This amounted
to around 2,100 employees.

In addition, in recognition that it operates
in a competitive employment market,
SSE provides a wide range of employee
benefits including: a range of salary
sacrifice offerings; access to the SSE Extras
programme which provides employees
with discounts and offers from a range
of retailers; and EmployeeCare, a service
which provides counselling during times
of need and a health and wellbeing
advisory service.

SSE and the external environment

Innovation, research and development
In an industry which has seen significant
technological advancement in recent
decades it is ever more important that,
to maintain its position in a competitive
market, SSE is engaged in innovation,
research and development.

SSE’s employees have extensive
knowledge, expertise and know-how.
New ideas, improvements to process
and design and innovation have been
key to SSE’s successes in the past and
are fundamental to the Company’s
ability to adapt to the challenges
of the future.

Over 8,400 Licences to Innovate were
received from over 3,600 employees during
2012/13, of which 729 were implemented.
A number of these Licences have helped
create value of around £40m, building on
the £70m of value created in the previous
year. Others have contributed to improved
performance in specific areas such as
safety, service and sustainability.

SSE’s focus on innovation complements
its work in research and development.
SSE is, fundamentally, an adopter
of technology, choosing to focus on
development, demonstration and
deployment rather than on basic
research. Against this background,
SSE has two broad categories of
research and development projects:

• thematic, addressing pre-selected
• responsive, which arise when an

knowledge gaps or development
needs within SSE; and

opportunity (and associated funding)
emerges that can add value to SSE.

There is a considerable amount of
research and development-related work
taking place in SSE. In total, during 2012/13,
SSE incurred research expenditure with
a value of £5.9m, compared to £11.2m
in 2011/12.

A snapshot of activity SSE is involved
in today shows that the total value of
projects is in the order of £300m, spread
over several years, depending on project
lengths, and made up of funding from
multiple partners and public bodies. SSE’s
contribution to this project portfolio is in
the order of £20m to £25m, again spread
over several years and including in-kind
support. Therefore SSE stands to benefit
from projects worth over ten times its
own contribution.

SSE takes a systematic approach to
implementing ideas that add value to
the business. This is through its 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
up to two months researching further their
proposal. Subject to the outcome of the

Community development
and charitable giving
SSE continues to establish close working
relationships with local community groups,
organisations and charities in the regions
in which it operates. With its origins in
the north of Scotland, central southern
England, south Wales and with over
19,500 employees throughout the
UK and Ireland, SSE can make a positive
impact to hundreds of local communities.

3. Governance1. 2. 4. Governance

People and values (continued)

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:

• improving contractors’ safety
• reducing the CO2 footprint.

performance; and

In support of this, SSE has set up a supplier
registration system which provides it
with information on suppliers, including
categories relating to where they work
on site, data on safety, health and the
environment and quality.

Continuing the focus on reducing carbon
emissions, SSE has successfully completed
the Certified Emissions Management
and Reduction Scheme (CEMARS) and
encouraged 86 of its main suppliers
to sign up to the programme.

SSE successfully launched an Open4Business
initiative which specifically targets small to
medium enterprises and is an easy-to-use
platform for local companies to do business
with SSE and its core contractors.

The portal is backed by The Highland
Council; Highlands and Islands Enterprise;
Inverness Chamber of Commerce; trade
bodies including The Scottish Council for
Development and Industry (SCDI) and
Energy North; and two key contractors,
R J McLeod and BAM Nuttall.

More generally, SSE recognises that
prompt payment is vital to the cash flow
of suppliers, especially smaller businesses
within the supply chain. In the UK, the
Prompt Payment Code is designed to
encourage and promote best practice
between organisations and their suppliers
and enable suppliers and customers to
maintain effective relationships. SSE is
committed to the objectives of the Code
and to being a signatory to it.

SSE’s community development programme
has three principal features:

• Action – employee volunteering, under

which employees are given one day of
leave to support community initiatives.
During 2012/13, 6,268 volunteer days
were given to 622 projects in the UK
and Ireland. SSE teams supported a
range of projects.

• Investment – financial support for

community projects and initiatives
in regions where renewable energy
projects are developed. During 2012/13,
SSE provided around £2m to community
projects in Great Britain through these
funds, supporting initiatives including
local sports team kits; the purchase of
essential mountain rescue equipment,
including a new 4x4 vehicle; and helping
renovate a disused cinema, reopening
it to help drive visitors to the area and
allowing the community to share in
the profits.

• Education – support the work of schools

by promoting safe and responsible
use of energy. During 2012/13, SSE
established a partnership with Keep
Scotland Beautiful. Through the
partnership, SSE has sponsored the
Eco-Schools initiative which works with
schools to change attitudes towards
the environment. Furthermore, SSE is
supporting the work of the Wood Family
Trust in helping to support the Youth and
Philanthropy Initiative which engages
young people in creating social change.

SSE took the decision not to reopen its
visitor facilities in Dorset and Perthshire.
Following a detailed review, SSE concluded
that, in order to bring the buildings up to
modern standards, including the addition
of suitable disabled access, a significant
investment would be required.

SSE is now seeking to create more
sustainable options for delivering a quality
education programme to schools and
visitors in the future. In particular, it is
developing proposals for a brand new
visitors’ facility close to its hydro-electric
power station in Pitlochry.

More information on SSE’s community
programmes can be found online at
www.sse.com/community.

Suppliers and contractors
SSE depends upon an extended team
of suppliers and contractors for the

SSE plc Annual Report 2013

Governance

How the Board works

The UK Corporate Governance Code
This report explains how the Company
applies the main principles of The UK
Corporate Governance Code (the Code)
issued by the Financial Reporting Council
in June 2010 (available on the FRC website).
The Board confirms that the Company
has, throughout the period under review,
complied with all provisions set out in
the Code.

Leadership

The 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.

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.

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

policy and practice;

financial statements;

and recommendation of final
dividends;

• Group strategy;
• annual budget;
• approval of interim and final
• interim dividend payments
• significant changes in accounting
• the Group’s corporate governance
• Board and Committee membership;
• major acquisitions, mergers, disposals
• changes in the capital and structure
• significant changes in consumer
• approval of key policies such as safety,
• regulatory matters including approval

of Price Control Reviews proposed
by Ofgem.

and system of internal control;

health and environment; and

and capital expenditure;

of the Group;

prices;

The Schedule of Reserved Matters
is reviewed regularly by the Board
and is published on the SSE website.

It was most recently reviewed
at the Board meeting in March 2013.

The Board also has overall responsibility
for risk management, which is reported
in detail on pages 74 to 79.

The roles of Chairman
and Chief Executive
The roles of Chairman and Chief Executive
are separate and clearly defined. They
were most recently reviewed at the Board
meeting in March 2013.

The Chairman
The Board is chaired by Lord Smith of
Kelvin. The Chairman is responsible for
the operation, leadership and governance
of the Board ensuring that it operates
effectively while providing appropriate
challenge and debate. He ensures
constructive relations exist between the
Executive and non-Executive Directors.
He identifies individual Director training
needs and oversees the performance
evaluation. The Chairman meets with
shareholders, analysts and other
representatives of institutional investors,
and participates in both the interim
and annual results presentations
and the AGM.

The Chairman regularly meets with
managers and employees at various
locations throughout the Group.

The Chief Executive
Ian Marchant is the Chief Executive,
and leads the other Executive Directors,
the Managing Directors and the
management team in the day-to-day
running and operations of the Group. He is
responsible for implementing the strategy
and policy set by the Board. He 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 and
its role is explained on pages 64 and 65.

The role of the Executive Directors
The biographical details of the Executive
Directors and details of their relevant
experience, are set out on page 62.

The Executive Directors have specific
executive responsibilities. As Board members
their duties also extend to the whole of the
Group’s operations and activities and are
not limited to their specific executive roles.

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
62 and any fees earned during the year
are disclosed in the Remuneration report.

The role of the 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 subject to
annual re-election by shareholders. 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: scrutinise,
measure and review the performance of
management; constructively challenge
and assist in the development of strategy;
review the Group financial information
and ensure systems of internal control
and risk management are appropriate
and effective; through the Audit
Committee, review the relationship
with the external Auditor; through the
Remuneration Committee, review the
remuneration of the Executive Directors
and senior management; and through
the Nomination Committee review,
the succession planning for the Board.

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

Role of the Senior Independent Director
Richard Gillingwater is the Senior
Independent Director. He acts as a
sounding board for the Chairman, and
serves as intermediary to other Directors
when necessary. He carried out the
Chairman’s performance evaluation,
together with the other non-Executive
Directors and with input from the Executive
Directors. He also undertook meetings
with investors and management visits
during the year. His other responsibilities
include being available to shareholders

3. Governance1. 2. 4. Governance

How the Board works (continued)

if they have any concerns which contact
through the normal channels of Chairman,
Chief Executive or Finance Director has
failed to resolve or for which contact is
inappropriate.

The role of the Company Secretary
The Company Secretary reports to
the Chairman on board governance
matters. He is responsible to the Board
for compliance with Board procedures
and, through the Chairman, for advising
and keeping the Board up to date on all
corporate governance developments.
He facilitates the Directors’ induction
programme and assists with professional
development as required. The advice,
services and support of the Company
Secretary are available to all Directors.

Board and 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
meeting is used to meet with external
stakeholders. The Board meeting then
continues the following day and is routinely
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 an update conference call
which is held in the month between the bi-
monthly scheduled Board meetings. These
calls usually last for around one hour and
are used to update the Board on 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.

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.

SSE plc Annual Report 2013

Attendance at Board meetings
The table below sets out the attendance
of the Directors at the scheduled Board
meetings during 2012/13. In addition to
these and the other meetings described
above, the Chairman and non-Executive
Directors undertake site visits and other
meetings related to the Company.

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 are included
on the agenda of the next Board meeting
for information.

Lord Smith of Kelvin

Gregor Alexander

Thomas Thune Andersen

Jeremy Beeton

Katie Bickerstaffe

Richard Gillingwater

Ian Marchant

René Médori *

Alistair Phillips-Davies

Lady Rice

Attended/scheduled

6/6

1/1

6/6

* René Médori retired from the Board on 25 June 2012.

Board Committees
There are four standing committees
of the Board. The terms of reference of
these committees are set by the Board,
are reviewed regularly, and are available

The relationship between the Board, its
Committees and the management of
the Company is summarised in the chart
below. The Board Committee reports are
set out on pages 80 to 100.

The Management Board
The Management Board is responsible
for implementing policy and strategy
set by the Board and for the operational
management of all SSE’s businesses.
The Management Board comprises three
Executive Directors and eight 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 provided to the
Board for information. There are
five standing committees of the
Management Board.

Governance structure

Board of Directors

Audit
Committee

Safety, Health
and Environment
Advisory Committee

Nomination
Committee

Remuneration
Committee

Chief Executive

Management Board

Risk and Trading
Committee

Safety, Health
and Environment
Committee

Business
Development
Committee

Disclosure and
Governance
Committee

Major Projects
(Standards
and Delivery)
Committee

Effectiveness

The composition of the Board
The composition of the Board and its
Committees is regularly reviewed to
ensure that the balance and mix of skills,
knowledge and experience is maintained.

On 25 June 2012 René Médori resigned
from the Board. On 24 July 2012 Richard
Gillingwater took over the role of Senior
Independent Director from Lady Rice.
Alistair Phillips-Davies, currently Deputy
Chief Executive, will become Chief Executive
on 1 July 2013 in succession to Ian Marchant
who is stepping down after over 10 years in
the role. Gregor Alexander, Finance Director
will have an expanded role in supporting
the Chief Executive in the running of the
operations of the group.

Following these changes, the Board will
comprise the Chairman, two 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.

Succession planning
The Nomination Committee report sets out
the process carried out during the year to
verify the continuing independence of the
non-Executive Directors and succession
plans for the Board. The succession plans
for management positions are reviewed
each year by the Executive Directors to
ensure management roles are refreshed
with the best candidates, taking account
of a range of factors such as background,
experience, qualifications and gender. The
process also identifies the high potential
individuals and their development needs.

Board balance
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
as part of the annual Board performance
evaluation process.

Lady Rice has served on the Board since July
2003. The Board recognises and understands
investor concerns over long-serving non-
Executive Directors and has considered the
length of service of Lady Rice, and continues
to view her as independent in character

and judgement. Lady Rice’s service with the
Company enables her to provide an effective
and vigorous challenge to management
because of her extensive knowledge of
the Company’s business. Her experience
and expertise in Remuneration matters
is important in this period of scrutiny of
Executive remuneration, change in reporting
requirements, and change in Executive
roles within the Company. She is a valuable
member of the Board, and contributes
significantly to the Board’s deliberations.
The Board is currently undertaking a search
for a new non-Executive Director as part
of its refreshment programme, and Lady
Rice intends to step down from the Board
during 2014.

Boardroom diversity
The Davies Report, Women on Boards,
published in March 2012 contained a review
on the progress made by FTSE Company
Boards in relation to gender diversity.
The recommendation of the Davies Report
is that FTSE 100 Boards should aim for a
minimum of 25% female representation
by 2015. Female representation on the
SSE board is currently 22% and when
Ian Marchant steps down from the Board
on 30 June 2013 female representation
on the Board will be 25%. 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
appointments whilst appointing on
merit. The Board’s statement on diversity
is set out on the Company’s website,
and is as follows:

‘The Board comprises three Executive
Directors and five non-Executive Directors
plus the Chairman. Female representation
is 22%. The Davies Review into Women
on Boards recommended FTSE 100
Boards should aim for a minimum of
25% of female representation by 2015.
SSE endorses this recommendation and
we expect to be at least broadly compliant
with it. We will continue to appoint
Executive and non-Executive Directors
to ensure diversity of background and on
the basis of their skills and experience.’

Terms of Appointment of the
non-Executive Directors
The non-Executive Directors are
appointed for specified terms subject
to annual re-election. Any term beyond
six years for a non-Executive Director is
subject to particularly rigorous review and

Board diversity, by age

45-54 years old 4
55-64 years old 3
65-70 years old 2

Board diversity, by gender

Male 7
Female 2

Board diversity, by sector

Corporate finance 2
Major projects 1
Retail 1
Natural resources 1
Banking 1
Utilities 3

Board diversity, by nationality

USA/UK 1
Denmark 1
UK 7

takes into account the need for progressive
refreshing of the Board.

Director induction, training
and development
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 major
project sites, power stations, customer
service centres, and gas storage facilities.

3. Governance1. 2. 4. Governance

How the Board works (continued)

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.

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.

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.

Information and briefings
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 held between individual
Directors and senior management.

Independent professional advice
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

SSE plc Annual Report 2013

is required where the cost of such advice
is likely to exceed £10,000. Any advice
obtained shall be made available to the
other members of the Board, if the Board
so requests. This procedure was not required
to be used during the year.

and as such all Directors (other than Ian
Marchant who is stepping down from
the Board on 30 June 2013) will stand for
re-election at the 2013 AGM. Biographical
details for all the Directors are set out on
pages 62 and 63.

Evaluation of the Board, Committees
and Directors
The Board, its Committees and the individual
Directors participate in an annual evaluation
of performance.

An externally facilitated evaluation process,
every three years is recommended by
the Code, and the Board and Committee
evaluation process this year was
facilitated by PwC. The evaluation took
the form of individual meetings with
each of the Directors and members of
the Management Board. The outcome
of the evaluation process was considered
at the Board meeting held in January
2013. The outcome was positive,
however there were recommendations
for further consideration. These included
increasing the profile of the Board within
SSE, more training and briefings for the
non-Executive Directors in certain areas,
specific development plans for each
Board member, and reviewing the
process for identifying significant
future adverse events.

PwC provide ad hoc professional services
to the SSE Group, such as tax, systems and
general financial consultancy. Given the
level and nature of work carried out, there
was not considered to be any potential
conflict of interest in carrying out the
externally facilitated Board evaluation.

The Directors also participated in detailed
reviews of individual performance which
were carried out in separate meetings with
the Chairman. The process for evaluating
the Chairman was managed by the Senior
Independent Director which involved a
separate meeting with the non-Executive
Directors and included feedback from the
Executive Directors.

The Board evaluation process also
confirmed that the performance of
the Directors continues to be effective
and that they continue to demonstrate
commitment in their respective roles.

Annual re-election of Directors
The Board has agreed that each Director
shall be subject to annual re-election

Indemnification of Directors
and insurance
The Directors have the benefit of the
indemnity provision contained in the
Company’s Articles of Association. They
also 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.

Directors’ 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 2013.
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.

Accountability

Financial and business reporting
In its reporting to shareholders, the
Board recognises its responsibility to
present a balanced and understandable
assessment of the group’s position and
prospects. This responsibility covers the
Annual Report and Accounts and extends
to interim and other price sensitive public
announcements and reports to regulators
as well as to information required to be
presented by statutory requirements. The
Business Review on pages 1 to 102 sets
out explanations of the basis on which
the Company generates or preserves
value over the longer term and the
strategy for delivering the objectives of the
Company. This Annual Report is intended
to provide the information necessary to
enable an assessment of the company’s
performance, the business model and
its strategy.

The Audit Committee
The Audit Committee Report, which
describes the work of the Audit Committee
in discharging its responsibilities, is set out
on pages 82 and 83.

Relations with shareholders
and major stakeholders

Disclosure and Governance Committee
The Disclosure and Governance Committee
is a Committee of the Management
Board. It 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 as well as
maintaining high standards of corporate
governance. 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 six meetings in the year.

Dialogue 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.

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.

to time to gain a first-hand understanding
of key issues.

Richard Gillingwater, 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. Together with
the Chairman he had separate meetings
with some institutional shareholders.
A range of topics were covered at the
shareholder meetings including the plans
for continued refreshment of the Board.

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’ views,
hear their suggestions and address any
areas of concern.

More generally, working with public policy
makers is a vital area for the Company,
given the high profile of energy and
environment related issues in the UK
and elsewhere. The Company engages
with stakeholders in several ways:

and officials in the UK and Irish
governments, and in the devolved
administrations in the UK;

appropriate with Ofgem, which is
responsible for promoting competition,
and regulating the regional monopoly
companies which run the gas and
electricity networks;

• constructive engagement where
• ongoing dialogue with Ministers
• submissions to government and
• meetings with, and briefings of, elected
• engagement with local authority
• active participation in relevant trade
• discussions with non-governmental

Parliamentary consultations and
inquiries;

organisations and other relevant
organisations such as charities.

members of all parties in legislatures;

elected members and officials;

associations and bodies; and

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.

Communications with investors
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 WWF’s International
Forest Programme for every shareholder
that elects for email communication or
receives Company documentation via the
SSE website.

Annual General Meeting 2013
The 24th AGM of the Company will be held
on 25 July 2013 at 12 noon at the Perth
Concert Hall, Mill Street, Perth PH1 5HZ.
The Notice of Annual General Meeting
2013, which contains full explanations of
the business to be conducted at the AGM,
is set out in a separate shareholder circular.

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.

The Chairman participated in the
Company’s results presentations in May
2012 and November 2012. The Chairman
meets major institutional shareholders and
institutional shareholder bodies from time

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

3. Governance1. 2. 4. Governance

Risk management

All business involves
risk; as such risk
management is
regarded as essential
in everything SSE does.

The Board of SSE acknowledges its clear responsibility
for risk management. SSE understands that any
sustainable and successful business requires clear
and effective risk management in all aspects of
its activities.

1.
Identify risks
Know the key risks and
maintain a register of them.

5.
Monitor and
review
Review and report – keep
risk registers refreshed and
updated.

2.
Assess impact
and likelihood
of risks
Look to understand and define
the key drivers and impacts
of the risks in relation to
SSE risk tolerance.

4.
Record,
prioritise,
communicate,
take action
Ensure risks and issues
identified are addressed
and improvements are
made.

3.
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.

SSE plc Annual Report 2013

Risk management is first and foremost an
integral part of how managers run their
activities every day. Therefore SSE focuses
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 business environment by
constantly revisiting its internal processes.
This report includes a summary of the
developments in SSE’s approach to risk
management during 2012/13.

The need for good risk governance is
critical to ensure the overall business
model and operation 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, evaluation
and cost effective management.

Limited appetite for risk
SSE’s Teamwork value, combined with
other factors such as the clear financial
goal of sustained real growth in the
dividend, means SSE has adopted a limited
appetite for, and tolerance of, 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
cost effectively where potential returns
are clearly attractive.

Some examples of the way in which
appetite/tolerance for risk are limited include:

exposure are strictly monitored through
risk models and clear trading and
reporting limits;

• energy portfolio management – levels of
• major project construction – the
• acquisitions – the Company has a
• funding – in treasury and funding

selective and disciplined approach to
acquisitions, and sets demanding hurdle
rates for expected returns;

Company has in place a detailed
governance and risk process for
all its large capital projects;

matters, there is a clear and prudent
approach to liquidity levels, and a mix
of maturities and currencies; and

• insurance – where available on

acceptable terms, insurance policies have
been placed maintaining an appropriate
balance with self insurance. Additionally,
the Insurance department actively seeks
to identify new or emerging risks where
insurance mitigation may be available.

Risk identification, evaluation,
and monitoring
Risks are identified, evaluated and
monitored by the relevant business units
within SSE, with an overview provided
by the Group Audit department for the
Audit Committee meetings. Key strategic
risks are identified and evaluated by
senior management on a regular basis.
In addition, the Board reviews all aspects
of risk management and internal control
twice a year, in March and September.

At its meeting in March 2013, the Board
held a specific review of the developments
within the Company during the year to
ensure best practice risk management is
in place; and it reviewed the management
sponsoring and reporting arrangements
to ensure proper controls are in place.
The Board also undertook a review of the
Company’s principal risks and agreed the
list set out in pages 77 to 79.

There are three additional risks that are not
listed among the principal risks but which
could potentially affect a large number of
areas of activity: geopolitical developments;
the weather; and reputation:

• Geopolitical developments could

have an impact on a number of SSE’s
activities, such as energy portfolio
management or the construction of
large capital projects through supply
chain impacts. In view of this, SSE’s
balanced and diverse business model,
which is designed amongst other things
to avoid dependence on any single
technology or fuel, is a key means
of seeking to ensure the impact of
developments over which SSE can
have no control is, in practice, limited;

• The weather could have an impact on the

production and consumption of energy
in the Electricity Generation and Energy
Supply businesses. The extent of this risk
is contained by the diversity within SSE’s
generation portfolio, the further diversity
within its renewable energy portfolio,
and the balance between its generation
and supply activities. The weather could
also have an impact on the operation

of energy networks, as was exemplified
on Arran and Kintyre in March 2013,
and management of this risk is factored
in to the operational planning of these
networks; and

• SSE believes that the most effective

way to manage risks to its reputation
is to manage effectively its principal
Group risks. Corporate reputation is
very important for a long-term business
such as SSE, but seeking to manage
‘reputation’ rather than the substance
of the issues, which determine a
company’s reputation, could lead to
short-term behaviours or actions which
have negative long-term implications.
For this reason, SSE does not specify
‘reputation’ as a risk to be managed.
Nevertheless, the need to have regard
to the Company’s long-term reputation
is now explicitly recognised in the
definition of the corporate arrogance
or hubris principal risk.

During the year, the Group Audit department
carried out over 60 separate audits of
functions, activities and issues managed
by SSE, providing senior management with
a robust internal control assurance. 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
Portfolio Management, Energy Efficiency,
Energy Supply, IT and Customer Service.

The effectiveness of the business-
specific compliance functions, and the
arrangements around them, is kept under
review. In line with that, the compliance
function relating to Energy Supply has
undergone, and continues to undergo,
reform in the light of the breaches by SSE
of the new Energy Supply licence conditions
introduced in 2009 that were highlighted
by Ofgem in April 2013.

Review of SSE risk management during
the year
As part of the SSE approach to risk
management, the Company continues
to review and strengthen its risk and
internal control processes. Examples
of this approach during 2012/13 are:

• All the top 20 risks were reviewed in

detail by the Management Board, and at
the Board meeting in March 2013. Each
principal risk has an assigned risk owner
who is a member of the Management

Board. The risk owner is responsible for
ensuring that key controls for the risk
are in place and operating effectively.

• As stated above, the corporate
• The credit management risk was

arrogance or hubris risk definition was
adapted to include a specific reference
to the Company’s long-term reputation.

replaced with energy affordability,
in recognition of the fact economic,
social and energy market and policy
conditions could make it difficult for
households and businesses to pay the
cost of electricity and gas, which could
have significant implications for SSE.

leadership conferences within the
Company to communicate the
need for, and required approach
to, risk management in SSE.

a review of the existing risk management
framework. The output from this review
led to the business risk and internal
control procedures and guidelines
being updated to reflect best practice.

• The Group Audit department facilitated
• Risk presentations were given at
• All business unit risk registers have been
• Risk awareness training was given to
• Cyber/information security risk was
• Business continuity planning exercises

addressed with a significant investment
programme getting under way after
being approved in 2012.

standardised to ensure that evaluation
of risk is consistent across SSE and
aligned with the top 20 principal risks.

all Management Board members and
their first line of reports.

were carried out.

In April and May 2013, the Management
Board and the Board gave extensive
consideration to the penalty notice issued
to SSE by Ofgem for breaches of licence
conditions in its Energy Supply business.
They concluded that the breaches arose
from a combination of factors, including
weaknesses in the operational model,
under-estimation of changes in the
external environment and insufficiently
robust arrangements to ensure
compliance. The Management Board and
the Board concluded that the steps taken
since 2011 to address these issues had
been appropriate and agreed additional
steps to strengthen further the operations
of the Energy Supply business.

Internal control
Risk management depends on a strong
system of internal control, which is

3. Governance1. 2. 4. Governance

Risk management (continued)

fundamental to achieving SSE’s strategic
objectives. The Board is responsible for
the overall system of internal control and
risk management, and it either directly, or
through its committees, sets performance
targets and policies for the management of
key risks facing SSE. The system of internal
control is designed to manage, rather than
eliminate, risk of failure to achieve business
objectives and can provide only reasonable
and not absolute assurance against
material misstatement or loss. 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 signature risk practices in
addition to the SSE SET of values – Safety,
Service, Efficiency, Sustainability, Excellence
and Teamwork – which are embedded in
the culture. The signature risk practices
adopted within SSE are outlined as:

established evaluation criteria;

• Consistently assess risks using the
• Apply a standard approach to risk
• Rigorously evaluate risks on a regular
• Ensure submissions for key decisions

basis using detailed review; and

include a risk assessment.

control sheets;

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

Internal control assurance process

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 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:

• approves the policies, procedures and

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

reporting to the Audit Committee
and other Board Committees by
management and Group Audit;
– the provision of quality reporting
by the external Auditors to the
Audit Committee;

– compliance with the Turnbull

Guidance on Internal Control; and

regulatory obligations;

– compliance with statutory and

by each business unit as well as the
mitigating action against those risks
following review by the Audit Committee;

• reviews the significant key risks identified
• determines the nature and extent of
• approves and regularly reviews and

the significant risks it is willing to take
in achieving its strategic objectives;

updates SSE’s strategy and business
development;

Board of Directors

Audit Committee

Management Board

Safety, Health and Environment
Advisory Committee (SHEAC)

Group Audit

Major Projects
(Standards
and Delivery)
Committee

Business
Development
Committee

Risk and Trading
Committee

Disclosure and
Governance
Committee

Safety, Health
and Environment
Committee

Business units

SSE plc Annual Report 2013

The Management Board:

• 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;

of the Board, its Committees and
individual Directors.

Chief Executive, the Finance Director
and the Management Board; and

• receives regular reports from the
• undertakes an annual evaluation
• monitors operational and financial
• develops and implements: SSE strategy;
• assesses and controls all key strategic
• monitors competitive forces in each
• receives and reviews reports from

operational plans; policies; procedures;
and budgets;

its 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.

performance of SSE;

area of operation;

SSE risks;

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 Risk and Trading Committee reports
to the Management Board. The specific
remit of the Committee is to support
the Company’s risk management
responsibilities by reviewing the strategic,
market, credit, operational and liquidity
risks and exposures arising from SSE’s
energy portfolio management, generation
and treasury operations.

The Group Audit department:

• works with the business units to develop
• ensures that business risks are identified,

and improve risk-management tools and
processes in their business operations;

managed and regularly reviewed and
that the key risks are reported to the
Audit Committee and Board;

SSE SET of values to manage risk

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.

out regular reviews on their internal
controls relating to the key risks;

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;

• ensures that the business units carry
• monitors the effectiveness of SSE’s
• monitors adherence to SSE’s key policies
• provides the Audit Committee and
• undertakes specialist risk based

Board with objective assurance on
SSE’s control environment;

assurance exercises as required; and

and principles;

EXCELLENCE
We strive to get better, smarter and
more innovative and be the best in
everything we do.

• provides risk training to senior

management.

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 2012 to 21 May 2013 (being the
last practical day prior to the printing of this

SUSTAINABILITY
Our decisions and actions are ethical,
responsible and balanced, helping to achieve
environmental, social and economic wellbeing
for current and future generations.

Annual Report). The Board believes
that appropriate action has been taken
to address significant failings in SSE’s
past domestic energy sales activities
(see page 75). The Board confirms that no
other significant failings or weaknesses
have been identified in the Company’s
management and internal control system.

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.

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 Committee of the
Management Board is responsible for ensuring
SSE’s Safety, Health and Environment policy is
adhered to.

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.

Awareness of safety, health and environment risk
across SSE has been enhanced. A behavioural
safety programme is being embedded company-
wide and leading performance indicators are
increasingly used to target improvements.
The Company’s focus areas are behavioural
safety, contractor safety, and high hazard risks.

During 2012/13, the GB energy regulator Ofgem
made decisions on the Retail Market Review and
price controls for transmission and gas distribution
networks. Following active participation in the
regulatory process, SSE has begun implementing
these changes.

The UK government is legislating for a major
process of electricity market reform in GB,
significant details of which have yet to be
confirmed. This means there is significant
uncertainty about the future shape of the
electricity market in GB. Uncertainty also arises
from the fact that a referendum on whether
Scotland should become an independent country
will take place in September 2014; a ‘Yes’ vote
would extend that uncertainty until the details of
Scotland’s post-independence relationship with
the rest of the United Kingdom are determined.

3. Governance1. 2. 4.

Governance

Risk management (continued)

Principal risks and their management (continued)

Risk definition

Key controls overview

Developments during the year

Energy portfolio management
Failure to identify and effectively manage the
physical and financial exposures that result from
SSE’s operational involvement in Generation, Fuel
Procurement, Wholesale Trading and Retail Supply.

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.

Cyber/information security
Unauthorised access or disclosure of data either
within the SSE Group or between SSE and external
environments and markets.

Supply chain
Delivery of large-scale investment programme is
impacted through failure to establish, contract
and maintain adequate supply chains and
strategic alliances.

Treasury management
Failure to identify and effectively manage treasury
and tax exposures and to meet the organisation’s
funding requirements and obligations.

Energy affordability
Economic, social and energy market and policy
conditions which make it difficult for households
and businesses to pay the cost of electricity
and gas.

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.

SSE plc Annual Report 2013

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.

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 2012/13 SSE announced the
outcome of the review of its generation fleet to
reflect the future sustainability of the fleet in
the market conditions.

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.

SSE has in place an actively managed Information
Security programme across all of its activities to
ensure resilient business operations.

Well-established procurement teams ensure
varying supply chains are identified and
counterparty exposures monitored.

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.

The severe snowstorm in west Scotland in March
2013 represented a big challenge to electricity
network resilience. The business continuity
plan was deployed successfully, with one of the
highlights being the highly successful enhanced
plans for customer support and communications
that had been developed following a similar event
in the winter of 2011/12.

Cyber security has become an increasing focus
nationally at Government levels, and SSE has
significantly increased its investment in a specific
IT Security Programme.

A supplier relationship model is 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 implemented. This is designed to secure
supply chains and ensure value for money.

SSE continued its approach of maintaining
diversity in its funding sources with the issuance
of hybrid capital bonds, denominated in Euros
and US Dollars in September 2012. In addition,
new banking facilities, totalling £650m were
signed in March 2013 and will be drawn later
in the financial year.

Energy affordability is impacted by issues in
the sourcing, production, distribution and
supply of electricity and gas. In addition to
assessing regularly the likely prevailing economic
environment in the years ahead, Managing
Directors and their management teams are
focused on keeping to a minimum the costs
associated with each part of the electricity
and gas ‘chains’.

In January 2013, the UK Department of Energy
and Climate Change published Policy impacts
on prices and bills, an assessment of how costs
to consumers are affected by changes in energy
and climate change policy. It acknowledged
that energy and climate change policies impact
households and businesses through changes
in prices for goods and services and changing
patterns of consumption, in particular for energy.

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.

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.

There are 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 continues to input to policy and regulatory
developments in each of these areas.

Risk definition

Key controls overview

Developments during the year

Large capital projects management
Failure to deliver quality projects on time and
on budget.

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.

Compliance management
Any significant or multiple compliance failures
could result in an adverse effect on SSE, including
the possibility of financial penalties being levied.

The deployment and updating of SSE’s Major
Projects Governance Framework is designed
to ensure projects are governed, developed,
approved and executed in an effective manner.

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. The
Management Board Major Projects (Standards and
Delivery) Committee reviews all major projects.

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.

Management Board Major Projects (Standards
and Delivery) Committee has completed a full
year of operation. Its Terms of Reference have
been updated to reflect its role in overall
portfolio management.

The remit of SSE’s Project Services team has
been extended to include centralised expertise
and support for all of SSE’s significant projects,
including large transformational projects in Retail.

In March 2013, the GB energy regulator proposed
changes to its enforcement regime ‘to deliver
credible deterrence and meaningful consequences
for businesses that fail consumers and don’t
comply’. This is intended to complement its Retail
Market Review which includes new enforceable
standards of conduct. SSE experienced the
consequences of shortcomings in compliance
management when it received and accepted in
April 2013 a £10.5m penalty for past breaches
of Energy Supply licence conditions.

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, inadequate regard
for the Company’s long term reputation and
insufficient challenge to conventional wisdom.

The corporate Emergency Planning and Response
standard is reviewed and issued annually.
Regular test exercises are undertaken. A member
of the Management Board ‘champions’ crisis
management.

SSE reviewed and refreshed its approach
to Business Continuity Planning and will
progressively update existing plans. Exercises
have been undertaken to practise SSE’s response
capabilities at all levels in the Company.

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
pages 80 and 81.

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.

SSE continues to enter into joint venture
arrangements, for large projects including
renewable generation, gas storage, thermal
generation and oil and gas projects.

A regular management review of all succession
plans for the Group businesses was held during
the year for senior roles, and to identify future
potential talent within the Group. The successor
to the Chief Executive was identified from within
SSE. An external appointment to the newly
created position of Managing Director, Retail
was made during the year.

SSE seeks to strike the balance between cost
efficiency and investment in adequate resources
for the future. A particular focus was IT, where the
Director of IT has led the implementation of plans
to improve operational performance, service
delivery and project delivery.

In a continuing environment of austerity in the
UK and Ireland, higher unit prices for energy and
increasing expectations on the part of customers
and stakeholders of large corporations, SSE has
recognised the importance of safeguarding its
reputation by including an explicit reference to
it in the definition of this principal risk.

3. Governance1. 2. 4.

Governance

Nomination Committee Report

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.

Members and meetings

Membership

Attended/scheduled

Lord Smith of Kelvin

Thomas Thune Andersen

Jeremy Beeton

Katie Bickerstaffe

Richard Gillingwater

Ian Marchant

Lady Rice

4/4

I chair the Nomination Committee.
The membership also includes all of
the non-Executive Directors and the
Chief Executive. The Company Secretary is
Secretary to the Nomination Committee.

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.

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:

Executive Directors;

and composition of the Board
and its Committees and making
recommendations to the Board
on any desired changes;

• reviewing the structure, size
• reviewing the succession plans for the
• making recommendations to the
• ensuring that the procedure

Board on suitable candidates to fill
vacancies for both non-Executive
and Executive Directors;

for appointing new Directors is
rigorous and transparent and that
appointments are made on merit
and against objective criteria,
including independence and
diversity of candidates;

• reviewing potential conflicts

of interest of Directors; and

Lord Smith of Kelvin

SSE plc Annual Report 2013

• reviewing the external commitments

of the Directors and the time required to
discharge their responsibilities effectively.

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. 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 2012/13
The Nomination Committee had four
meetings during the year. The business
covered at the meetings included
the following:

of interests of the Directors;

Gillingwater as a non-Executive Director
for a further three year period;

• a review of any declared conflicts
• the reappointment of Richard
• the independence of Lady Rice as
• succession planning of the Board
• the instruction of a search for a new

a member and Chairman of the
Remuneration Committee given
her length of service;

including the process for identifying the
criteria for a new Chief Executive and the
recommendation for the appointment
of Alistair Phillips-Davies to that role; and

non-Executive Director as part of the
ongoing review of succession and
refreshment of the Board.

The recommendation to reappoint Richard
Gillingwater was following a rigorous
review of his continuing independence.

Lady Rice’s continuing independence was
considered carefully by the Committee
taking account of the fact she has been
on the Board since 2003. The Committee’s
clear view was that she remained

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.

independent, she provides robust challenge,
and her knowledge and experience as
a Remuneration Committee member is
invaluable in a period of change of Executive
Directors’ roles and responsibilities, and a
period of significant developments and in
the governance and reporting requirements
of remuneration matters. She has agreed to
remain on the Board for one more year and
intends to stand down in 2014.

The Committee has undertaken a
search for a new non-Executive Director
as part of the Board refreshment process.
The specification for the proposed
recruitment of a new non-Executive
Director set out certain essential
characteristics. The Board’s policy on
diversity and progress on implementation
is explained in detail on page 71 of
the Corporate Governance report.
Odgers Berndtson were appointed by
the Committee to carry out the search
for a new non-Executive Director. The
Committee was satisfied that Odgers
Berndtson had no other connections
with the Company which would give
rise to a conflict of interest.

The process for Chief Executive succession
involved the appointment of Sam Allen
Associates to carry out an analysis of
the role, development of a profile, and
a benchmarking review of potential
candidates, including external candidates.
The Committee was satisfied that Sam
Allen Associates had no other connection
with the Company that would give rise
to a conflict of interest.

In considering who should succeed Ian
Marchant, the Board set clear criteria.
SSE’s Chief Executive should have:

• detailed understanding of the energy

markets in Great Britain and Ireland
and of the increasingly global context
in which they operate;

and to deliver change where needed
to meet the requirements of SSE’s
stakeholders, especially customers;

• clear ability to learn from experience
• successful experience of carrying
• commitment to the dividend as the best

out a leadership role in a FTSE 100
company and an appreciation of the
accountability that goes with leading
a major UK-listed company; and

means of remunerating shareholders for
their investment.

It was the unanimous recommendation
of the Committee that Alistair Phillips-
Davies be appointed as Chief Executive
in succession to Ian Marchant. In arriving
at this recommendation, the Committee
considered the above criteria, the scale
and profile of the post, and the fit with the
culture and leadership style of SSE.

Evaluation
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

3. Governance1. 2. 4. Governance

Audit Committee Report

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.

Richard Gillingwater

SSE plc Annual Report 2013

Members and meetings

Membership

Attended/scheduled

Richard Gillingwater

Thomas Thune Andersen

Jeremy Beeton

René Médori *

3/3

1/1

* René Médori retired from the Committee on 25 June 2012.

I was pleased to take over from René
Médori and become Chairman of the
Audit Committee in June 2012.

The Board confirms that each member of
the Committee is independent and that the
membership meets the requirements of the
Code. The Board also confirms that I have
recent and relevant financial experience
as required by the Code. Each of the other
non-Executive Directors on the Committee
has, through their other business activities,
significant experience in financial matters
(see biographies on pages 62 and 63).

The Assistant Company Secretary is
Secretary to the Audit Committee.
The Finance Director, Head of Group
Audit and the external Auditors attend
and report at Audit Committee meetings.
The Company Chairman regularly
attends Audit Committee meetings.
Senior management including the
Director of Treasury and Operational
Finance, Group Financial Controller and
Managing Director, Energy Portfolio
Management, are regularly invited
to present reports.

During the year, the Committee met
privately with the external Auditors, and
separately with the Head of Group Audit.
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 Committee has unrestricted
access to Company documents and
information as well as to management
and the external Auditors. The Audit
Committee’s remit, which is set out
in its terms of reference includes
responsibility for:

effectiveness of the Company’s internal
audit function;

effectiveness of the Company’s
accounting systems, internal control
policies and procedures and risk
management systems;

reports and formal announcements
to ensure they represent an accurate,
clear and balanced assessment of the
Company’s position and prospects;

• reviewing the Company’s financial
• monitoring and reviewing the
• assessing and reviewing the
• monitoring and reviewing the objectivity
• monitoring and reviewing the significant
• monitoring and reviewing the
• reviewing the significant financial

arrangements by which employees can
in confidence raise concerns about any
possible improprieties in financial and
other matters; and

and independence of the external
Auditors taking into consideration the
scope of their work and fees paid for
both audit and non-audit services;

risks identified by each business unit as
well as the mitigating action against
those risks;

reporting issues and judgements.

Activities in 2012/13
The Audit Committee had three meetings
in the year. The key activities during the
year are set out below:

Financial statements
The Committee reviewed:

• the financial statements in the 2012

Annual Report and accounts and the
interim results. As part of this review the
Committee received from the external
Auditors reports on their audit of the
Annual Report and accounts and their
review of the interim results;

• the impairment of assets and related
• the annual and interim results

accounting matters; and

announcements.

Control environment and
risk management
The Committee reviewed:

• six-monthly reports by Group Audit

setting out progress against the Internal
Audit Plan, the results of key audits and
other significant findings, the adequacy
of management’s response and the
timeliness of resolution of actions;

The Audit Committee considers that the
relationship with the Auditors is working
well and remains satisfied with their
effectiveness, expertise and independence.
Accordingly, it has not considered it
necessary to require the firm to re-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 four years.

KPMG Audit Plc has informed the company
that they have initiated a process to
streamline their two registered audit firms
(KPMG Audit Plc and KPMG LLP). As such,
KPMG Audit Plc have notified the company
that they are not seeking re-appointment.
Consequently, the Audit Committee
has recommended, and the Board has
approved, the resolutions to appoint KPMG
LLP as Auditor of the Company and its
subsidiaries, and to authorise the Directors
to fix their remuneration, which will be
proposed at the forthcoming AGM.

Evaluation
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.

Richard Gillingwater
Chairman

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.

• recommendations made

by the external Auditors and the
adequacy of management’s response.

Independence of Auditors
The Committee reviewed:

• changes in the Audit team; and
• 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 would 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 would not be
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:

consultancy, acquisitions and disposals;

• taxation advice including general
and • advice relating to landfill tax

compliances.

a Networks project;

ending 31 March 2014 and agreed it;

out strategy, market developments, any
significant risks and the controls in place
to mitigate these risks;

on the Internal Control Risk Assessment
setting out the Group Risk Map and
Residual Risk Map;

Portfolio Management setting out
strategy, market and financial regulation
developments, any significant risks
and the controls in place to mitigate
these risks;

• the Internal Audit Plan for the year
• six-monthly reports from Treasury setting
• six-monthly reports from Energy
• six-monthly reviews from Group Audit
• reports on unbilled energy debtors, aged
• a post-investment appraisal report on
• reports under the Group Whistleblowing
• a report on governance developments
• the effectiveness of the

Policy and reviewed the implementation
of this policy; and

External audit process
The Committee reviewed:

energy debt and bad energy debt;

relating to audit committees.

overall audit process for 2011/12,
meeting with the external Auditors
and management separately
to identify any areas of concern
in the preparation of the financial
statements;

• the independence and objectivity

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

• and agreed the audit fees, fees for
• internal control and key accounting and

non-recurring work and the regulatory
reporting fee;

audit issues; and

Full disclosure of the audit and non-audit
fees paid during the year is made in Note 5
to the Financial Statements.

External Auditor
Following a competitive tender, KPMG
Audit Plc has been the external Auditor of
the enlarged Group since 1999. Under its
terms of reference, the Audit Committee
has responsibility for recommending to the
Board the appointment, re-appointment
and removal of the external Auditors.

3. Governance1. 2. 4. Governance

Safety Health and Environment Advisory Committee Report

The Committee advises
the main Board of SSE
and works alongside
the SHE Committee of
the Management Board,
which implements
SHE Policy within
SSE’s businesses. The
Committee provides a
forum for non-Executive
Directors to contribute
to improving SSE’s
SHE performance.

Members and meetings

Members

Thomas Thune Andersen,
Committee Chairman

Jeremy Beeton,
Non-Executive Director

Jim McPhillimy,
Managing Director Group Services

Paul Smith,
Managing Director Generation

Iwan Tukalo,
Group SHE Manager
(April to December 2012)

Mark Patterson,
Group SHE Manager
(January to March 2013)

Attended/
scheduled

6/6

5/6

4/4

2/2

The Safety, Health and Environment Advisory
Committee (SHEAC) met six times during
the year.

The Chief Executive attends when required.
The Assistant Company Secretary is
Secretary to the Committee.

Function
The SHEAC advises the main Board of SSE
and works alongside the SHE Committee of
the Management Board, which implements
SHE Policy within SSE’s businesses. The
SHEAC provides a forum for non-Executive
Directors to contribute to improving SSE’s
SHE performance.

All members of the SHEAC share a common
goal with SSE’s Board: to protect the health
and safety of all employees, contractors
and the environment. This ensures there is
strong SHE leadership within SSE, including
an active commitment from the Board, and
the integration of good SHE management
with business decisions.

Responsibilities
The SHEAC is responsible to the SSE Board for:

the Major Accident Prevention Policy,
is adhered to;

• ensuring that SSE’s SHE Policy, including
• setting Group SHE targets and strategy
• monitoring Group SHE performance
• encouraging greater awareness

throughout SSE of the importance
of SHE management and higher
achievement in SHE performance;

for improved performance;

against targets;

Thomas Thune Andersen

SSE plc Annual Report 2013

Executive Directors of the Board, the
Management Board and other members
of the management team with
responsibility for SHE management; and

• providing a link between the non-
• making recommendations to the Board
Authority • The SHEAC has no executive powers but

it can recommend executive action it
considers necessary to the Board.

where action or improvement is needed.

Policy
People in SSE have many different working
environments – from full-scale industrial
processes to offices – but the SHEAC is
clear that the Company expects everyone
to play a part in achieving safe working
practices. SSE’s Safety Management
System focuses on five ‘Ps’:

• Policy: defining how things get done;
• People: helping employees to act safely;
• Processes: managing risks and
• Plant: maintaining the integrity of plant
• Performance: managing and improving

delivering safe systems of work;

and equipment; and

SHE performance.

Value, goal and priorities
In SSE Safety is the first value: we believe
all accidents are preventable, so we do
everything safely and responsibly or not at all.

The SHEAC endorses SSE’s overall goal:
work without anyone getting injured.
To meet this goal the SHEAC, and SSE
as a whole, will retain a healthy level of
dissatisfaction until the highest levels
of SHE performance are met.

The SHEAC’s priorities are to:

goal of working without anyone getting
injured;

• support progress towards SSE’s ultimate
• promote the health and well-being of
• encourage effective environmental

management throughout SSE.

people working for SSE; and

Managing SHE matters in SSE
To effectively manage SHE risks SSE needs
both rigour in systems and passion to make
them work. This is achieved through the
implementation and rigorous application
of dedicated SHE Management Systems,
and through a positive safety culture based
on fairness, trust and co-operation.

All members of the SHEAC share a common goal with SSE’s
Board: to protect the health and safety of all employees
and contractors and the environment. Together we ensure
there is strong SHE leadership within SSE, including an
active commitment from the Board and the integration
of good SHE management with business decisions.

SSE’s fundamental principles are that SHE
risks are best managed by those who
create and work with the risk and that
everyone has their part to play. To meet
this challenge everyone, every supervisor
and every manager will need to fulfil their
responsibilities for their safety, the safety
of others and that of the environment.
Successful delivery of SSE’s behavioural
safety programme, ‘The Safety Family’,
reinforces this.

SSE safety performance
The SHEAC carefully monitored SSE’s
safety performance during 2012/13.
The results in key areas were as follows
(previous year’s performance in brackets):

(AFR) was 0.05 per 100,000 hours
worked (0.02);

• the Lost Time/Reportable Injury Rate
• the Total Recordable Injury Rate (TRIR)
• the number of dangerous or potentially

(covering lost-time, reportable and
medical treatment injuries) was 0.14
per 100,000 hours worked (0.11);

dangerous road traffic incidents
involving SSE employees driving
Company vehicles was 0.16 per
100 vehicles (0.23).

The most common measures of safety
performance, AFR and TRIR, increased
slightly compared to 2011/12. When
viewed against long-term trends there
have been significant improvements in
performance. Acknowledging the slight
decline in 2012/13 performance the
SHEAC welcomed the identification
of three ‘Priorities for 2013/2014’
(set out below) to maintain an overall
improving performance trend.

It is pleasing to note the reduction in
serious incidents involving employees
driving Company vehicles; this follows
an investment in systems to monitor
driving habits and performance in
Company vehicles.

During the year SSE has made increasing
use of more positive leading indicators
of SHE performance and these are used
throughout SSE’s business to set targets
and improve performance. This includes
measures specifically designed to monitor
improvements in the management of
process safety risks.

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 SHEAC believes SSE must work closely
with its contractors in increasing their
safety standards.

SSE’s contractors’ TRIR was 0.50 per 100,000
hours worked, compared with 0.56 the
previous year. While this represented an
improvement in safety performance,
there were two contractor fatalities during
2012/13, both on the major Beauly-Denny
Transmission project. These very tragic
events have re-emphasised the requirement
for improvement in safety performance in
2013/14.

Health promotion
SSE’s Health and Well-Being Action Plan
provides the basis for workplace health
programmes and initiatives, all designed
to help employees optimise performance.

SSE’s policy is to deal with sickness absence
in a sympathetic and constructive way,
helping people make a speedy return
to health and to work. During 2012/13,
the average number of days of sickness
absence from work was 6.69 days per
person, compared with 5.87 the previous
year.

Environmental management
SSE’s main environmental impact is
generally regarded as emissions of CO2
associated with electricity generation.
In addition the focus remains on meeting

permit conditions associated with SSE’s
operations and minimising the
impact of operations and projects in
environmentally sensitive areas.

A key objective each year is to ensure there
are no environmental incidents which result
in SSE receiving an enforcement notice from
an environmental regulator. There were no
such incidents during 2012/13.

Good environmental stewardship
involves on-site energy efficiency and
waste management. A key goal is to
minimise waste and unnecessary use
of natural resources by re-using and
recycling materials. During 2012/13,
the recycling and recovery rate for SSE’s
internal waste collection and management
process (including office waste and scrap
metal from SSE’s facilities) increased to
97.8% (96.9% in 2011/12).

Priorities for 2013/14
The key priorities for 2013/2014 are:

implementing action plans and
delivering enhanced behavioural safety
training for supervisors across SSE;

• embed ‘The Safety Family’, by
• identify and manage high-impact risks,
• improve contractor SHE performance,

such as asset integrity, process safety
and major accident hazards; and

a particularly important issue given the
scale and scope of SSE’s investment
programme, by engaging with this key
group in different ways.

Thomas Thune Andersen
Chairman

3. Governance1. 2. 4. Governance

Remuneration Report
Introduction

The Remuneration
Report sets out the
Company’s policy on
Executive Directors’
remuneration for the
year ended 31 March
2013.

SSE has always embraced the transparency
and accountability that goes with being a
FTSE 100 company and so it was particularly
encouraging that the Company received in
October 2012 the Building Public Trust Award
for Executive Remuneration Reporting in the
FTSE 100. The Award was a clear reminder of
the importance of transparent remuneration
disclosure, underpinned by a fair and
appropriate approach to remuneration
itself. This report, and the approach to
remuneration that it sets out, has been
prepared with that firmly in mind.

Committee agreed should be disclosed in
SSE’s results statement on 22 May 2013,
are derived solely from his current terms
of remuneration – no more, but actually
some less because of his decisions to
waive his right to participate in the 2012
Performance Share Plan and to waive any
payment under the 2013 Annual Incentive
Scheme. The Committee has preserved
his participation in the 2011 Performance
Share Plan on a pro-rata basis which
it believes is fair and appropriate. No
termination payment was asked for
or given.

Key issues
The Remuneration Committee has had to
consider three specific issues in the course
of the last year:

highly-regarded Chief Executive to step
down after 17 years’ Board service,
including more than 10 as Chief Executive;

• the decision by a long-standing and
• the decision to appoint to the role of
• the announcement by Ofgem that SSE

Chief Executive an internal candidate
who already has more than 10 years
of Board service; and

should be fined for non-compliance
with its obligations under two Standard
Conditions of the Electricity and
Gas Supply Licences for varying
periods between October 2009
and September 2012.

In dealing with each of these issues,
the guiding principle of the Committee
has been fairness. On the one hand, the
Committee has to reflect the long-term
commitment and success of the Executive
Directors, who have led the company
to deliver 14 successive annual above-
inflation dividend increases and extensive
operational improvements of real benefit
to customers; on the other hand, the
Committee has to respond appropriately
when things go wrong, as they clearly
did for a period in domestic energy sales.

I believe that this is what the Committee
has done.

Fair approach
Ian Marchant has been an employee of
SSE and one of its predecessor companies
for 21 years. Across all of SSE’s core values
– safety, service, efficiency, sustainability,
excellence and teamwork – he can point
to an impressive record of progress.

Lady Rice

The financial arrangements, which the

SSE plc Annual Report 2013

Notwithstanding those decisions,
the financial sums involved are clearly
substantial; but they are what he has
earned and accumulated as a result of a
long period of service in a complex sector.
During this time he has had serious and
wide-ranging responsibilities and has
discharged them in a highly effective
manner. The Committee believes
fairness has prevailed.

Fair value
After a rigorous process based on
objective criteria, the Board concluded
that Alistair Phillips-Davies is the right
person to become Chief Executive.
Amongst other things, this decision
demonstrates the benefit of effective
succession planning. With 10 years’
service on the Board already, Alistair
will bring to his new role extensive
knowledge of SSE, detailed understanding
of energy markets, clear ability to learn
from experience and to deliver change
where needed to meet the needs of
all of SSE’s stakeholders, including
customers, and successful experience
of a leadership role in a FTSE 100
company. He will, therefore, be able
to hit the ground running.

In view of that, and in view of the
significantly increased accountabilities
that he will have as Chief Executive,
it is only fair that he should receive an
appropriate increase in salary reflecting
the value of the role itself, consistent with
the principles of SSE’s policy on executive
remuneration – and that is exactly
what he will receive. The same principle
applies in respect of Finance Director,
Gregor Alexander, and his additional
accountabilities. These changes take
effect on 1 July 2013 when their salaries
will be increased to reflect their new roles
and responsibilities.

The consistent features of simplicity, acceptability and
longevity underpinned by the vital principle of fairness
have guided the Committee’s deliberations in 2012/13.

core values of safety, service, efficiency,
sustainability, excellence and teamwork.

The second feature is acceptability. The
Remuneration Committee is specifically
mindful of this period of austerity in the
wider economy and of the breadth of
views on remuneration. We pay attention
to the external environment at the same
time as we also seek to do what is right in
a large, highly complex business – and one
that pays dividends to shareholders. The
Executive Directors at SSE are clearly well
paid, and a key feature of remuneration
policy is to make sure they are not overpaid,
especially given the sector in which they
operate. For this reason, their reward is
kept below market median for FTSE 20-50
companies (excluding financial services).

The third is longevity. SSE is a long-term
business. This means it is important that
remuneration for the Executive Directors
and other senior managers reflects
and encourages sustained, long-term
commitment balanced with consideration
of the environment within which SSE
operates. It is not our goal to make SSE
the kind of company people work for
simply because they can make more
money with it than elsewhere, but it
is our responsibility to make sure people
do not lose out because they are loyal
and committed over the long term.

These consistent features – simplicity,
acceptability and longevity – underpinned
by the vital principle of fairness have
guided the Committee’s deliberations
in 2012/13 and will continue to do so
in the new financial year and beyond.

Lady Rice CBE
Chairman

Fair response
As I have said before, fairness works
both ways. While the Executive Directors
have ensured SSE’s success in so many
areas, one activity in one part of the
business was, for a period, not of the
standard that SSE’s values require and
that its customers rightly expect: domestic
energy sales. The Committee always
stays close to the concerns of stakeholders
and shareholders.

In 2012/13, the Retail business, of which
Energy Supply is part, contributed 23%
of SSE’s operating profit. In light of the
Ofgem decision, the Committee agreed
that the Executive Directors’ award
under the Annual Incentive Scheme for
2012/13 should be reduced by at least that
percentage. In addition, the Committee
recognised that the issues in Energy
Supply fell short of the standards it would
expect, and exposed the company to
trenchant criticism from a wide range
of stakeholders. It concluded that this
should also be reflected in the reduced
payment of the Annual Incentive scheme.
The Executive Directors’ overall award
was therefore reduced by 40% in total.
The Committee believes this represents a
fair response to the issues in one of SSE’s
Retail businesses, given the significant
progress made in other parts of the
SSE group, including its Networks and
Wholesale businesses.

Consistent features
While the Committee has been considering
these specific issues it has also retained
its focus on the consistent features of
remuneration in SSE.

The first is simplicity. What Executive
Directors are paid is made up of just four
elements: base salary, plus benefits in
kind; pension rights; an annual incentive
scheme, with cash and shares; and a long-
term incentive scheme, with shares. This
provides the right balance between fixed
and variable remuneration. Two of the four
elements are performance-related and the
whole package is about reinforcing SSE’s

3. Governance1. 2. 4. Governance

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. 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
2013 and complies with the regulations
made under the Companies Act 2006.
The report will be presented at the AGM on
25 July 2013 for approval and shareholders
will be able to ask questions on the report
at the AGM.

Members and meetings

Membership

Attended/scheduled

Lady Rice
(Committee Chairman)

Richard Gillingwater

Lord Smith of Kelvin

Katie Bickerstaffe

5/5

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 2012/13

2012 voting
At the SSE Annual General Meeting held
on 26 July 2012, shareholders approved
the Remuneration Report for the year
ended 31 March 2012. Below is the result
of the resolution, which required a simple
majority of the votes to be cast in favour
in order for the resolution to be passed.

Votes for

Votes against

556,243,654 98.9%

6,166,812 1.1%

behalf of the Board;

Terms of Reference of the Committee

Chairman, however the Chairman is
not present for discussions on his own
remuneration;

terms of the Executive Directors
including their service contract and
the impact on senior management
remuneration;

• sets the Total Remuneration Policy on
• approves the detailed remuneration
• approves the remuneration of the
• approves the design and performance
• grants awards under the Company’s
• reviews the total remuneration of the
Advisors • the Chief Executive, the Director of

Long-term Incentive Plan to all senior
managers; and

Management Board and other senior
executives below Board level.

targets of incentive schemes;

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
• Deloitte LLP provided a range of

SSE’s Head of Reward advised on HR
strategy and the application of policies
across the organisation;

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 £75,550 in relation
to their work for the Committee. They
were appointed by the Committee.
Deloitte LLP also provides ad hoc tax
advice to SSE plc. Deloitte LLP is one of
the founding members of, and adheres
to, the Remuneration Consultants’
Group Code of Conduct. During the
year the Committee reviewed Deloitte’s
performance in relation to this Code
and remained satisfied that the advice
provided was independent; and

• Bank of America Merrill Lynch provided

advice on shareholder views. They were
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.

Shareholder consultation
Lady Rice, on behalf of the Committee,
undertook a consultation with a number
of institutional shareholders in April and
May 2013 regarding a broad range of
remuneration issues including the leaving
arrangements for Ian Marchant, the
appointment terms for Alistair Phillips-
Davies and Gregor Alexander in their
new roles, and changes to the Dividend

May

November

January

Regular items

Other items

Directors Remuneration Report. Approval of
Performance Share Targets and 2012 Grants.
Approval of Vesting Awards. 2012 annual
incentive out-turn approval.

Discussion around introduction of clawback.
SSE response to BIS consultation.

External governance environment update.
Performance Share Plan forecasts.

Review of Remuneration Consultants Group
Code of Conduct.

Discussion around leaving arrangements
for Ian Marchant.

March (2 meetings)

Review of Chief Executive’s salary and Chairman’s
fee. Establishment of the 2013/14 annual incentive
performance targets.

Review of remuneration arrangements for
Alistair Phillips-Davies and Gregor Alexander
following change of responsibilities.

SSE plc Annual Report 2013

Governance

Remuneration Report (continued)
Remuneration in 2012/13

The Committee fully embraces the objectives of the
Department of Business, Innovation and Skills (BIS) in
creating a transparent and consistent approach to full
reporting. We have aimed to adopt a number of the
draft recommendations in this report.

Per Share (DPS) metric in the 2013
Performance Share Plan. Lady Rice and
the Committee find these consultation
meetings a valuable opportunity to receive
feedback on the work of the Committee
and the key issues that it is considering.
The feedback received has been helpful
in informing the Committee’s decisions.

Employee representatives
The Head of Reward provided an
update to all SSE-recognised trade
unions in March 2013 explaining the
Company’s position on Executive
remuneration. This covered many of the
policy positions explained in this report.
He explained the Committee’s view
on current items such as the recent
Department of Business, Innovation
and Skills (BIS) proposals on Executive
remuneration, career shares, clawback,
the remuneration position regarding
the outgoing CEO and the approach to
senior management pay and benefits.
The Company will continue to liaise with
employee representative bodies in the
future and welcomes their views and
opinions on remuneration issues.

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,
2012/13); and one setting out future policy
for Executive remuneration. With sections
on Remuneration in 2012/13 (pages 89
to 93) and on Remuneration for 2013/14
and beyond (pages 94 to 97), this Report
follows that structure.

What are the principles of the SSE
Executive Remuneration Policy?

• attract and retain Executive Directors

who run the Company effectively for
the benefit of shareholders, customers
and employees;

approach to total remuneration, which
meets shareholder expectations;

• adopt a competitive and straightforward
• reinforce the culture and teamwork
• set Total Remuneration Policy at

to deliver the long-term growth and
sustainability of the business; and

levels which promote the long-term
development of the business and reward
individuals in line with performance.

What was new in 2012/13?
Ian Marchant’s retirement was announced
in January 2013. The remuneration terms to
be applied on exit are derived from his terms
of employment or through the rules of the
relevant incentive plans. The Committee
agreed that the terms should be disclosed
in SSE’s results statement on 22 May 2013.

Specifically, Ian Marchant will continue
to receive his salary until he steps
down on 30 June 2013. He will also
have the opportunity to receive a pro-
rata annual incentive payment based
on the Committee’s assessment of his
performance up to 30 June. Ian Marchant’s
terms of employment provide for a pension
of around £420,000 payable from age 60.

This pension is provided by two schemes,
the Southern Electric Pension Scheme
(SEPS) and an Unfunded Unapproved
Retirement Benefit Scheme (UURBs).
As previously disclosed, Ian Marchant
has the option to request that the SEPS
element of his pension is payable from
age 55. If this request is made it would
be subject to actuarial reduction.

Ian Marchant also has the option to
request that the portion of his pension
provided through the UURBs is paid as
a commuted lump sum. If Ian Marchant
makes this request, the Committee
would consider the financial health
of the Company and, if appropriate,
would offer him a cash-out payment,
which in its judgement and that of its
actuaries was deemed to be broadly
cost neutral to SSE.

Ian Marchant will for the purposes
of his share plans be treated as a good
leaver and based on the number of
months that he will have been employed
he will be entitled to receive 27/36ths of
any award that may vest under the 2011
Performance Share Plan. At his request,
participation in the 2012 plan, where
he could have received 15/36ths of any
award that may vest, has been cancelled.

The Committee also noted that Ian
Marchant decided to waive his annual
incentive payment for 2012/13 (see page 95).

Alistair Phillips-Davies will replace Ian
Marchant as Chief Executive and Gregor
Alexander will also take on increased
responsibilities in his expanded role in
supporting and deputising for the Chief
Executive in July 2013. With this in mind,
their remuneration arrangements were
reviewed, resulting in both receiving
increases in basic salary to £755,000
and £610,000 respectively with effect
from July 2013. They received no
increase in salary on 1 April 2013
and their next formal salary review
will be in April 2014.

The Committee also considered revised
Performance Share Plan criteria to take
account of the dividend policy from April
2013. The Committee introduced a revised
DPS target to align to the policy. This has
been discussed with key stakeholders
as part of the Committee Chairman’s
consultation exercise. The new target
will mean a threshold payout of 25%
for achieving DPS growth at RPI, rising to
100% payout if RPI plus 4% is achieved.

When considering the level of vesting
at the end of the performance period,
the Committee will ensure that a
suitable level of dividend cover has
been maintained throughout the
performance period.

The Committee continued to discuss the
evolving developments in respect of the
BIS proposals on Executive Remuneration.
The Committee agreed to adopt a number
of the proposals at an early stage rather
than wait until they become a formal
requirement in 2014.

The Committee was also mindful that
a number of the BIS proposals remain
in draft form at the time of writing this
report.

3. Governance1. 2. 4. Governance

Remuneration Report (continued)
Remuneration in 2012/13

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

What did the Executive Directors earn during the year ending 31 March 2013?

Annual remuneration
Base salary
Benefits
Annual incentive

Total annual remuneration

Vested long-term remuneration
Performance share plan

Total remuneration

Pension
Pension value increase

Total including pension

Ian Marchant

Gregor Alexander

Alistair Phillips-Davies

2013
£000s

870
20
0

890

1,059

1,949

680

2,629

2012
£000s

840
19
210

1,069

380

1,449

2013
£000s

545
16
206

767

609

1,376

500

1,876

2012
£000s

516
16
163

695

340

1,035

2013
£000s

545
16
206

767

609

1,376

460

1,836

2012
£000s

516
16
136

668

320

988

Why have the totals increased in 2013?
The main reason for the growth in total earnings from 2012 to 2013 is due to the PSP vesting at 51% in 2013 compared with zero in 2012,
reflecting a three-year measurement period.

There is also an increase in the pension values year on year. This represents Ian Marchant moving from a pay freeze in 2011 to a
3.5% increase in 2012 and 10% increases in base salary for Gregor Alexander and Alistair Phillips-Davies in 2012 following increased
responsibility in their roles after the departure of the Chief Operating Officer in 2011.

The pension value represents the cash value of pension accrued over one year times a multiple of 20 in line with anticipated statutory
reporting requirements. Current statutory reporting on pensions is shown in Table B (page 98) which describes the value of pension
accrued over one year under the heading ‘Increase in year including inflation’.

Note
Benefits relate to car and private medical insurance.

Annual Incentive represents the total value awarded for the year. 75% of this value will be paid as cash in June 2013 and the remaining 25% will be used to fund the purchase of shares which are
deferred for a period of 3 years. The deferred shares are not subject to further performance conditions and will be payable in 2016 should the director remain in employment with the company.
Ian Marchant decided to waive his annual incentive for 2012/2013 which would have been £329,000.

PSP value is the number of shares vesting including dividend shares accrued at the closing market price on 28 March 2013 of £14.84 (initial grant price in 2010 was £10.79).

SSE plc Annual Report 2013

How do the earnings of the Executive Directors compare with other financial dispersals?

Executive Directors’ earnings1
Dividends to shareholders
Capital and investment expenditure
Contribution to government revenues in UK2
Staffing costs3

2009
£m

2010
£m

2011
£m

2012
£m

2013
£m

8.2
551.9
1,279.8
402.0
627.8

6.3
618.5
1,315.2
460.7
684.5

5.4
659.8
1,443.7
343.8
737.0

4.2
716.9
1,706.9
396.4
747.3

6.3
770.5
1,485.5
312.0
783.8

1. On same basis as ‘What did the Executive Directors earn?’ table above.

Includes Corporation Tax, Employer’s National Insurance Contributions and Business Rates.

3. Wages and salaries and share-based remuneration for all employees, as per Note 7(i) of the accounts, excluding Executive Directors.

SSE has set out the position for each
of these areas in the table above.
It shows that for every £1 spent on
Executive Directors’ earnings by SSE
in 2012/13, £50 was paid in tax, £124
was spent on employee costs, £122
was made in dividend payments to
shareholders and £236 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 25.
In addition:

• Executive Directors’ earnings as
• in line with the countries in which it

described in this report are subject
to taxation in the UK; and

has substantial commercial operations,
SSE is liable for taxation in the UK
and Ireland.

Why do Executive Directors’ earnings
appear to have gone up so much in
2012/13?
The main reason for the year-on-year
increase in Executive Directors’ earnings is
the fact that SSE’s financial performance
over three years meant there was an
award of 51% of the maximum under
the Performance Share Plan for 2010-13,
whereas there was no such payout in the
previous year, under the PSP for 2009-12.

What issues did the Remuneration
Committee take account of in making
its decisions?
The Remuneration Committee Chairman’s
Introduction on page 86 and the table on
page 88 summarises the issues that the
Committee took account of in making
its decisions for 2012/13. The Committee
also considered carefully and in detail
the appropriate appointment terms
for Alistair Phillips-Davies and Gregor
Alexander in their respective new roles.
When considering incentive payment
levels the Committee reviewed positive
aspects of performance, including
effective teamworking, achievement
of important personal objectives and
another increase in adjusted profit
before tax*. It did however, for a second
year running also have to consider
the financial and reputational impact
of the Ofgem decision in relation to
Domestic Energy Sales, and the most
appropriate way to respond to this issue.

Executive Directors’ earnings compared
with dividend payments

150

120

2009

2010

2011

2012

2013

Dividend payments to shareholders
Executive Directors’ earnings

Incentive Scheme for 2012/13 and shares
vesting under the Performance Share Plan
(2010) in 2012/13. This is in line with the
proposals outlined by BIS.

The table opposite sets out what each
Executive Director earned in 2012/13
on this basis.

What is the position with regard to
members of the Management Board?
In addition to the three Executive Directors,
SSE has eight Managing Directors who
are also members of the Management
Board, the role of which is summarised
on pages 62 and 63. On the same basis
as that used for determining Executive
Directors’ earnings in 2012/13, the total
earnings of the eight Managing Directors
in 2012/13 was around £4.5m.

How has SSE presented one single
figure for total remuneration for
each Executive Director?
The calculation of what Executive
Directors earned in 2012/13 is made
up of salary, benefits-in-kind, the cash
value of pension accrued over one
year times a multiple of 20 (which is
the anticipated method of statutory
calculation), the award under the Annual

How does Executive Directors’
remuneration compare with other
financial dispersals?
BIS 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.

3. Governance1. 2. 4.

Governance

Remuneration Report (continued)
Remuneration in 2012/13

Remuneration and performance

Executive Directors’ salary and incentive plans 2012/13

Performance measure

Purpose – link to strategy

Policy and decisions

Base salary

Reflects market data, role, business and individual
performance measured against SSE’s strategy as
set out on pages 2 to 30.

Following an increase in responsibilities, Alistair
Phillips-Davies and Gregor Alexander will receive
increases in July when Ian Marchant departs.
There were no increases for them as at 1 April
2013. Following the annual review in March 2013
the salary for the Chief Executive was increased
by 2.5%, in line with the pay budget for the wider
SSE senior management team.

Annual Incentive Scheme (Maximum award 100% of base salary)

38% of maximum awarded

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.

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.

Maximum award 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%)
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.

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.

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.

SSE plc Annual Report 2013

Corporate performance (max 60%)
During 2012/13, SSE delivered a 5.1% increase
in the dividend per share and a 5.6% increase
in adjusted profit before tax*. This means it
achieved its first financial objective of annual
above-inflation dividend increases for the 14th
consecutive year. The increase in adjusted
profit before tax* was the biggest since 2007/08
and was also the 14th consecutive increase.
In addition to enabling it to pay dividends, on
which investors like pension schemes depend,
adjusted profit before tax* allows SSE to improve
its operations for the benefit of customers, invest
in the energy infrastructure that customers will
depend on in the future and employ people
throughout the United Kingdom and Ireland.

Teamwork performance (max 20%)
During 2012/13: Safety: the Total Recordable
Injury Rate increased but the rate of road traffic
accidents involving company vehicles decreased;
Service: SSE was the leading large supplier in
customer service surveys; Efficiency: outstanding
performance in restoring electricity supplies
in Arran and Kintyre in March; Sustainability:
continued progress in the development and
deployment of more sustainable sources of
energy; Excellence: increasing success in
converting innovative ideas into new business
practices; and Teamwork: independently
assessed Employee Engagement Index score
up from 73% to 81%.

Personal objectives (max 20%)
During 2012/13, the Executive Directors,
in addition to their normal responsibilities,
have been working individually and collectively
to ensure that SSE is well-prepared for the
management changes that will take place on
1 July 2013. SSE is well-placed for those changes.

Remuneration and performance

Executive Directors’ salary and incentive plans 2012/13

Performance measure

Purpose – link to strategy

Policy and decisions

Annual Incentive Scheme (continued)

When determining overall performance against
incentives what other factors did the committee
consider during the year?
Whilst recognising strong underlying
performance of the business, it is key to the
Committee that profit is earned in the correct
manner. As such, the Committee gave detailed
consideration to the issue of the Ofgem
authority decision in relation to domestic
energy customers.

38% of maximum awarded

Impact of Ofgem decision
On the basis of the above, the Executive
Directors would qualify for an Annual Incentive
Scheme payment of 63% of the maximum.
The Remuneration Committee concluded that
the breaches in Energy Supply licence conditions
set out by Ofgem on 3 April 2013 fell below the
standard it would expect and also exposed SSE
to significant criticism from key stakeholders.
Therefore this should result in the Annual
Incentive Scheme payment being reduced by
40% to 38% of the maximum.

Performance Share Plan 2010-2013 (Maximum award 150% of base salary)

51% of maximum awarded

For awards granted in 2010, performance is
measured against the following criteria over
a three-year period.

The elements of TSR, EPS and DPS reflect relative
and absolute measures of performance.

Maximum award of 150% of base salary
each year. Awards are released to the extent
performance conditions are met.

percentile

not achieved

Total Shareholder Return (TSR) compared
to FTSE 100

Total Shareholder Return (TSR) compared to
peer group of UK and other European Utilities

• 100% vests at or above 75th percentile
• 25% vests at median
• straight-line basis between median and 75th
• no vesting of award if median performance
(MSCI) • 100% vests at or above 75th percentile
• 25% vests at median
• straight-line basis between median and 75th
• no vesting of award if median performance
• 100% vests where EPS is 8% above RPI
• 25% vests where EPS is 2% above RPI
• straight-line basis between 2% and 8% above
RPI • no vesting if EPS minimum growth of RPI +2%
• 100% vests where DPS is 6% above RPI
• 25% vests where DPS is 2% above RPI
• straight-line basis between 2% and 6%
• no vesting if DPS minimum growth of RPI +2%

Adjusted earnings per share* (EPS)

Dividend per Share (DPS)

is not achieved

not achieved

above RPI

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.

TSR FTSE 100 (max 25%)
Out-turn between median and upper quartile of
FTSE 100 constituents at rank 32, and 79% of TSR
element awarded.

TSR performance is compared to a dedicated
peer group of around 30 UK and other European
utilities (the MSCI Europe Utilities) and provides
a sector emphasis whilst continuing to bring a
market perspective to the plan.

TSR MSCI (max 25%)
Out-turn above upper quartile of MSCI
constituents and 100% of TSR element awarded;

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.

The DPS growth target reflects the Company’s
objective to deliver strong real dividend growth
in the future (while maintaining a dividend
cover consistent with its established range).
In assessing performance against DPS the
Committee was satisfied that a reasonable
level of dividend cover has been maintained
during the performance period.

EPS (max 25%)
Out-turn growth below the EPS minimum growth
target RPI+2%, and 0% of EPS element awarded.

DPS (max 25%)
Out-turn growth above the DPS minimum growth
target off RPI+2% at 2.05%, and 26% of DPS
element awarded.

3. Governance1. 2. 4. Governance

Remuneration Report (continued)
Remuneration for 2013/14 and beyond

2013/14 and beyond

During 2013/14 the Committee will:

what the long-term strategy means
for the accountabilities of senior
managers and for ensuring effective
long-term performance;

• consider the incoming CEO’s views on
• continue to review its Total
and • continue to engage with key

Remuneration Policy to ensure it is
aligned to the long-term needs of the
business, shareholders and customers;

stakeholders.

Total Remuneration Policy

Total Remuneration Policy is integral to
overall HR Strategy and the SSE set of core
values are supported in the objectives,
plan design and application of the policy.

The principles
The core principles of the Company’s
remuneration policy are outlined in
the ‘At a glance’ section on page 89
together with policy details and charts
which illustrate performance variation
between the target and maximum values
of the packages.

The policy comprises:

• base salary and benefits;
• a defined benefit pension plan;

• an Annual Incentive Scheme; and
• a long-term incentive plan.

The current incentive plans are shown in
the table on pages 92 and 93.

Total Remuneration Policy
Remuneration policy for Executive Directors
is to remain below median of the FTSE
20-50, excluding financial services. SSE
also monitors its generally conservative
positioning 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 reflect 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.

• 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,
and shareholder feedback was taken
into account by the committee when
making decisions.

• As a matter of policy the Committee
• The Committee reviews the long-term

takes account of any changing or
increasing responsibilities when
determining the appropriate
remuneration.

total reward of the Executive Directors,
to ensure that it is suitably aligned
with the long-term performance of
the business.

The balance of fixed and
variable remuneration
Taking into account the SSE business
profile, the Remuneration Committee
believes that around 40% of the total
remuneration should be performance-
related, increasing up to around 60%
for exceptional performance as shown
in the table below 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.

Balance of fixed and variable remuneration: Directors’ scenario charts
Ian Marchant
Maximum

Total Fixed 42%

Target

Minimum

Actual

Total Fixed 60%

Total Fixed 100%

Total Fixed 70%

Total Variable 40%

Total Variable 30%

Gregor Alexander
Maximum

Target

Minimum

Actual

Total Fixed 44%

Total Fixed 60%

Total Fixed 100%

Total Fixed 63%

Alistair Phillips-Davies
Maximum

Total Fixed 43%

Target

Minimum

Actual

Total Fixed 60%

Total Fixed 100%

Total Fixed 62%

Total Variable 56%

Total Variable 40%

Total Variable 37%

Total Variable 57%

Total Variable 40%

Total Variable 38%

Total Variable 58%

Fixed

Salary
Pension and Benefits

Variable

Annual Incentive Scheme
Long Term PSP1

£500k

£1,000k

£1,500k

£2,000k

£2,500k

£3,000k

£3,500k

£4,000k

1. Excluding impact of share price and dividend.

SSE plc Annual Report 2013

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 March
2013. It considered the following factors in
the light of recent market and governance
trends, and increased responsibilities:

deliver a strong financial performance
with significant results to shareholders
in a difficult trading year with dividend
growth exceeding RPI inflation for the
fourteenth consecutive year;

• the Executive Directors continue to
• management and Collective
• in line with policy, total remuneration

Agreements which provide an average
3.5% salary increase this year; and

and basic salary, when benchmarked
where relevant to FTSE 20-50 excluding
financial services, remain behind market
median for the Executive Directors.

In selecting and appointing the right
leadership team to take SSE forward, the
Committee was minded to offer a fair and
competitive package, reflecting the role
and the experience of the candidate.

After taking careful consideration of all
factors, the Committee decided to increase
the base salary of the Chief Executive by
2.5%, in line with the wider senior employee
population, effective from 1 April 2013.
After detailed and careful deliberation on
the issue of the salary levels for the new
appointments, Alistair Phillips-Davies’
salary will be increased to £755,000 with
effect from 1 July 2013 when he assumes
his new role as Chief Executive and Gregor
Alexander’s salary will be increased by
12% to £610,000 on the same date for
his significant additional responsibilities.

Current incentive plans
Annual Incentive Scheme
In line with the need to achieve the correct
balance of fixed and variable remuneration,

£4,000k

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 2012/13, the total annual incentive paid
to the Executive Directors was in the range of
0%-38% of salary, compared to 20%-30% in
the previous year, both against a maximum
payable of 100%. The incentive payable for
2012/13 reflects the elements in respect
of team working and performance against
personal objectives. ‘Executive Directors’
salary and incentive plans 2012/13’, on
pages 92 and 93, sets out performance
metrics used in the assessment of the
annual incentive for the year.

Based on business performance the
Executive Directors would have been
eligible to receive a payment in the range
of 63% of maximum opportunity but the
Committee decided to reduce this by 40%
in light of the Ofgem decision regarding
sales processes for domestic energy
customers. While the Committee had also
reduced incentive levels in 2011/12 as a
result of the sales compliance issues, it
recognises that SSE has got things wrong,
and believes that it is appropriate to
implement a further reduction in 2012/13.

The Committee has also sought assurances
that the Company is reviewing incentive
arrangements for employees with
leadership responsibilities in the area
of Domestic Energy Sales.

In addition, in recognition that it is his
last year in employment at SSE, and
wishing to give back to employees in SSE,
Ian Marchant has requested that the
remaining portion of his incentive payment,
£329,000 be waived, with the value of
the payment being used to set up a new
fund to provide support and funding for
personal development opportunities for
current and future employees of SSE.
The opportunities to be provided will
be clearly additional to those that are
currently available through the Company.
The Committee is supportive of this,
and has agreed to this request.

The Committee will continue to be
mindful of and exercise its discretion to
reduce or withhold an incentive, if it is
not satisfied that the Company is holding
itself to the very high standards that the
Committee expects and demands of SSE.

For 2013/14, the structure of the annual
incentive will remain the same as in 2012/13.
The maximum annual incentive payable will
be 100% of salary, split between:

• corporate performance (60%);
• team working (20%); and
• personal objectives (20%).

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.

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 by Earnings Per
Share (EPS), Total Shareholder Return
(TSR) compared to the FTSE 100, TSR
compared with the MSCI European
Utilities Index and Dividend Per Share
(DPS). 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 performance.
This is in line with the need to achieve
the correct balance of fixed and variable
remuneration.

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:

• relative TSR performance compared to

FTSE 100 (threshold vesting for median
performance and full vesting for upper
quartile performance);

3. Governance1. 2. 4. Governance

Remuneration Report (continued)
Remuneration for 2013/14 and beyond

to a selected peer group of UK and other
European utilities (threshold vesting for
median performance and full vesting
for upper quartile performance);

• relative TSR performance compared
• EPS growth of RPI plus 2% (threshold
• dividend per share growth of RPI plus 2%

(threshold vesting) to 6% (full vesting).

vesting) to 8% (full vesting); and

The 2010 PSP award vested at 51% of
maximum. Further details are given in
the table on page 90 of the report.

As previously stated, the Committee
agreed to an amendment to the PSP
target from 2013 onwards. The revised
DPS target will have a threshold payout
of 25% for achieving DPS growth at RPI,
rising to 100% payout if RPI plus 4% is
achieved. When considering the level of
vesting at the end of the performance
period, the Committee will ensure that
a reasonable level of dividend cover
has been maintained throughout the
performance period.

The Committee has in place from 2012
onwards the power to review the final
award of shares, when they vest, made
under the Annual Incentive Scheme and
the Performance Share Plan and to operate
a ‘claw back’ if it deems appropriate.

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.

• 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 participation in all 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.

SSE plc Annual Report 2013

SSE TSR performance: 31 March 2008 to
31 March 2013

or 50 years’ service respectively with
the Group.

160

140

120

100

Mar 08

Mar 09

Mar 10

Mar 11

Mar 12

Mar 13

SSE
FTSE 100

Source: Datastream

• As reported on page 67, 48% of SSE
• 38% of employees are members of

employees are members of the Share
Incentive Plan.

the Sharesave Scheme.

Directors’ shareholdings as percentage
of annual salary

Ian Marchant
Gregor Alexander
Alistair Phillips-Davies

2013
%
salary

379
266
294

2012
%
salary

367
242
268

2013 – Based on a share price at 28 March 2013 of £14.84.
2012 – Based on a share price at 31 March 2012 of £13.29.

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:

• 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

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 2013, there
were approximately six million share options
outstanding under this scheme, and if all
the outstanding options were exercised this
would amount to 0.65% 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. SSE welcomes
the introduction of auto-enrolment,
an approach it has been practising for
a number of years. Each employee is
encouraged to join and remain a member
of the relevant pension plan and SSE is
encouraged by high employee participation
rates of over 90%.

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:

• for retirement through ill-health an
• in the event of any reorganisation or

unreduced pension based on service
to expected retirement is paid;

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.

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.

Full details of the Executive Directors’
pension plans can be found in Table B
of the audited information on page 98.

Service contracts

It is the Company’s policy that Executive
Directors have service contracts with the
Company which can be terminated on 12
months’ notice given by either party.

The Committee is updating the contracts
to reflect changes to employment law
and will issue updated contracts to Alistair
Phillips-Davies and Gregor Alexander
effective 1 July 2013. There will be no
material changes to their existing terms
and conditions.

The current Executive Directors’ service
contracts contain the key items shown
in the table opposite.

Length of service

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’s employment
terminates in certain circumstances such
as death, ill-health or other circumstances
that the Committee deems appropriate,
the PSP shares will be reduced to
reflect the point during the three-year
performance period when the Director’s
employment ends and will remain subject
to performance. If the Executive Director’s
employment ends for any other reason,
PSP share awards will lapse.

In March 2013 Ian Marchant decided to
relinquish in full his entitlement to any
award under the 2012 PSP which may
vest in 2015. He decided to do this so
that all aspects of his remuneration
will be concluded during the financial
year 2013/14.

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 2012/13 Ian Marchant was a non-
Executive Director with John Wood
Group plc, and received £46,250 in fees.

Gregor Alexander was appointed as a
non-Executive Director with Stagecoach
Group plc with effect from 1 April 2013.
He is also Chairman of Scotia Gas Networks
and receives no additional fees for this.

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.

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.

The fees of the independent non-Executive
Directors are agreed by the Board. The
non-Executive Directors do not participate
in the review process for their fees. The
fee for the Chairman is agreed by the
Remuneration Committee.

Service contract key items

Provision

Notice period

Termination payment

Detailed terms

or other emolument)

to the Executive gaining new employment

• 12 months by either Company or Director
• Up to 12 months’ salary (excluding any annual incentive
• Payment in lieu of notice in staged payments subject
• No special change of control provisions
• Obligation on departing Executives to mitigate loss
• Salary, pension and benefits
• Company car or cash allowance
• Participation in Annual Incentive Scheme, employee
• Private health insurance
• During employment and for six months after leaving
• All contracts dated 11 March 2005

share schemes and Executive incentive plans

Industry
service

Length of
Board
service

Remuneration

Ian Marchant
Gregor Alexander
Alistair Phillips-Davies

21 17 years*
22 10 years
11 years
16

* Including two years as Finance Director of Southern

Electric plc.

Non-competition

Contract dates

3. Governance1. 2. 4. Governance

Remuneration Report (continued)
Remuneration in detail

The fees are reviewed against companies of
similar size and complexity. To be consistent
with wider remuneration policy, fees are set
at below median.

Fee history

Board
Audit Committee
Chairmanship

Remuneration Committee

Chairmanship
SHEAC Committee
Chairmanship

Senior Independent

Director

Company Chairman

2013
£000s

2012
£000s

–

10
353

10
341

With an expanding Committee workload,
the Board decided to introduce a
Chairmanship fee of £10,000 per annum
for the Safety, Health and Environment
Advisory Committee (SHEAC). This fee
was introduced on 1 June 2012.

From 1 April 2013, the fees for all non-
Executive Director roles were increased
by 2.5% in line with the average salary
increase of SSE’s wider management
population in general. Reasonable travelling
and other expenses for costs incurred in
the course of their duties are reimbursed.

The Auditors are required to report on the
information contained in Tables A, B and D.

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.

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.

(i) Dependants’ pensions on death
are half of members’ pension
entitlements, together with a capital
sum equal to four times pensionable
pay. On death in retirement, the
Director’s spouse will receive a pension
equal to half of that payable to the
Director. In addition, on death within
the first five years of retirement,
a lump sum is payable equal to the
balance outstanding of the first five
years’ pension payments.

(ii) Post retirement increases are expected

to be in line with inflation.

The following is information relating to
the Directors’ pensions of 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

Table A – Directors’ remuneration excluding LTIP and pension information

Executive Directors
Ian Marchant
Gregor Alexander
Alistair Phillips-Davies
Colin Hood (retired 31/10/11)

Non-Executive Directors
Thomas Thune Andersen
Jeremy Beeton
Katie Bickerstaffe
Richard Gillingwater
Lady Rice
Lord Smith of Kelvin
René Médori (retired 25/6/12)

2013

Salary/fee
£000s

Cash incentives
£000s

Benefits
£000s

Total
£000s

2012

Total
£000s

870
545
545
–

66
56
56
74
72
353
17

01
154
154
–

–
–
–
–
–
–
–

20
16
16
–

–
–
–
–
–
–
–

890
715
715
–

66
56
56
74
72
353
17

1,017
655
634
481

54
41
41
54
76
341
68

2,654

308

3,014

3,462

Notes
In addition to the annual cash bonus amounts for this year, Gregor Alexander and Alistair Phillips Davies will be awarded £51,000 in the form of deferred shares in respect of the bonus due to them
for 2012/13. These share awards will not be made until June 2013 and therefore the number of shares to which they 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 2016.

Ian Marchant decided to waive any entitlement to incentives in the year. He would have been paid £329,000.

SSE plc Annual Report 2013

Table B – Directors’ pension information

Ian Marchant
Gregor Alexander
Alistair Phillips-Davies

Accrued benefit

Transfer value of accrued benefit

Years of
industry
service

At
31 March
2013
£000s

Increase
in year
including
inflation
£000s

Increase
in year
excluding
inflation
£000s

At
31 March
2013
£000s

At
31 March
2012
£000s

Increase less
Directors’
contributions
£000s

21
22
16

422
255
200

34
25
23

22 10,457
19
5,900
17
4,373

9,188
4,999
3,676

1,250
882
678

Increase
in year
excluding
inflation
£000s

570
463
427

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 and updated valuation since 31 March 2012, 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.

Table C – Directors’ share interests

Gregor Alexander
Thomas Andersen
Jeremy Beeton
Katie Bickerstaffe
Richard Gillingwater
Ian Marchant
Alistair Phillips-Davies
Lady Rice
Lord Smith of Kelvin
René Médori (retired 25/6/12)

31 March 2013

31 March 2012

Shares held

97,787
2,000
4,000
2,000
2,000
222,439
107,886
5,875
22,600
2,050

Shares
under option

198,170
–
–
–
–
235,742
197,550
–
–
–

Shares held

93,915
2,000
4,000
2,000
2,000
232,023
104,062
5,533
22,600
2,050

Shares
under option

204,019
–
–
–
–
349,978
202,483
–
–
–

Notes
From 31 March 2013 to 21 May 2013, the following changes to the interests of Directors took place:

Under a standing order for reinvestment of an ISA, on 8 April 2013, Gregor Alexander acquired 14 shares.

Under the Share Incentive Plan (SIP) on 5 April 2013 Ian Marchant and Gregor Alexander each acquired 15 shares and Alistair Phillips-Davies acquired 14 shares, and on 3 May they each acquired
14 shares.

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

Table D (page 100) shows the interests of the Executive Directors in awards granted under the Deferred Bonus Plan 2006 and the Performance Share Plan (PSP) and in options granted under the
Sharesave Scheme during the year ended 31 March 2013.

René Médori’s holding covers to the date of leaving on 25 June 2012.

3. Governance1. 2. 4. Governance

Remuneration Report (continued)
Remuneration in detail

Table D – Directors’ long term incentive plan interests

Share plan

Date of award

Normal
exercise period
(or vesting date)

No. of Shares
under award as
at 1 April 2012

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 2013

Ian Marchant

Gregor Alexander

DBP 20062 02/06/2009 02/06/2012
DBP 20062 02/06/2010 02/06/2013
DBP 20062 14/06/2011 14/06/2014
DBP 20062 22/06/2012 22/06/2015
PSP1 02/06/2009 May 2012
PSP1 02/06/2010 May 2013
PSP1 14/06/2011
May 2014
PSP1 22/06/2012 May 2015
Sharesave 30/06/2010 01/10/2013–

31/03/2014

– 31/03/15

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

–
–
–
–
–
–
–
–
871p

–
–
–
–
–
–
–
–
1,042p

Sharesave 30/06/2010 01/10/2015

283

871p

– 31/03/16

Alistair Phillips-

DBP 20062 02/06/2009 02/06/2012

6,169

–

Davies

DBP 20062 02/06/2010 02/06/2013
DBP 20062 14/06/2011 14/06/2014
DBP 20062 22/06/2012 22/06/2015
PSP1 02/06/2009 May 2012
PSP1 02/06/2010 May 2013
PSP1 14/06/2011
May 2014
PSP1 22/06/2012 May 2015
Sharesave 29/06/2012 01/10/2017

– 31/03/18

6,602
5,533
–
61,698
67,145
55,336
–
–

–
–
–
–
–
–
–
1,065p

–
–
–
3,7963
–
–
–
94,3603
–

–
–
–
2,9533
–
–
–
59,0653
–

–

–
–
2,4613
–
–
–
59,0653
1,408

–
–
–
–
107,302
–
–
94,3605
–

–
–
–
–
61,698
–
–
–
–

–

–
–
–
61,698
–
–
–
–

10,7304
–
–
–
–
–
–
–
–

6,1694
–
–
–
–
–
–
–
–

–
11,482
9,388
3,796
–
116,774
70,4176
–
413

–
6,602
5,533
2,953
–
67,145
55,336
59,065
1,253

–

283

6,1694

–

–
–
–
–
–
–
–
–

6,602
5,533
2,461
–
67,145
55,336
59,065
1,408

Notes
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 – 2,076 shares, Gregor Alexander – 1,192 shares,
Alistair Phillips-Davies – 1,192 shares.

1. The performance conditions applicable to awards under the PSP since 2007 are described on page 92. The 2009 award under the PSP did not vest.

2. 25% of annual bonus 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 bonus, no further performance condition applies to the vesting of DBP 2006 awards.

3. The market value of a share on the date on which these awards were made was 1,376p.

4. The market value of a share on the date on which these awards were realised was 1,372p.

Ian Marchant waived his 2012 PSP award over 94,360 shares on 28 March 2013.

Ian Marchant’s 2011 PSP award has been pro-rated by a factor of 27/36ths, to reflect his service to 30 June 2013.

The closing market price of shares at 28 March 2013 was 1,484p and the range for the year was 1,294p to 1,488p. 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 £377,549.27 (2012 – £337,628.68).

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

Lady Rice CBE
Remuneration Committee Chairman
21 May 2013

100

SSE plc Annual Report 2013

Governance

Other statutory information

Principal activities
SSE plc is the holding company of the Group.
Its subsidiaries are organised into the main
businesses of:

transmission and distribution of electricity
and gas and other related networks;

• Networks – the economically-regulated
• Retail – the supply of electricity, gas
• Wholesale – the production, storage

and other services to household and
business customers; and

and generation of energy and energy
portfolio management.

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
2013 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 102 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
Alistair Phillips-Davies

Non-Executive
Lord Smith of Kelvin (Chairman)
Thomas Thune Andersen
Jeremy Beeton
Katie Bickerstaffe
Richard Gillingwater (Senior Independent
Director)
Lady Rice
René Médori (resigned 25 June 2012)

At the 2013 AGM all of the current Directors
(apart from Ian Marchant) will retire and
offer themselves for re-appointment.
Ian Marchant will resign from the Board
on 30 June 2013. Alistair Phillips-Davies
will assume the position of Chief Executive
on 1 July 2013. Biographical details of all

Directors are set out on pages 62 and 63.
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 97 and 98 respectively.

The interests of the Directors in the
Ordinary Shares of the Company
at 31 March 2013 are set out in the
Remuneration Report on page 100.

Results and dividends
The Group profit attributable to Ordinary
Shareholders for the financial year
amounted to £425.9m. The Directors
recommend a final dividend of 59.0p
per Ordinary Share which, subject to
approval at the AGM, will be payable on
27 September 2013 to shareholders on the
Register of Members at close of business on
2 August 2013. With the interim dividend of
25.2p per Ordinary Share paid on 22 March
2013, this makes a total dividend of 84.2p
per Ordinary Share.

Going Concern
After making enquiries, the Directors
have a reasonable expectation that the
Company and the Group have adequate
resources to continue in operational
existence for the foreseeable future.
The Financial Statements are therefore
prepared on a Going Concern basis. Further
details of the Group’s liquidity position
and Going Concern review are provided
in Note 33 to the Financial Statements.

Share capital
Details of the Company’s issued share capital
at 31 March 2013, which includes options
granted under the Group’s employee share
option schemes, are set out in notes 28 and
32 to the Financial Statements.

Authority to purchase shares
The Company was authorised at the 2012
AGM to purchase its own shares within
certain limits. During 2012/13, SSE did not
purchase any shares under this authority.
The Directors will, however, seek renewal
of their authority to purchase in the

Substantial shareholdings
Entity

The Capital Group Companies, Inc

Legal & General Group Plc

Norges Bank

* At date of disclosure by relevant entity.

market the Company’s own shares at the
AGM on 25 July 2013, and this remains
a benchmark against which financial
decisions are taken.

Substantial shareholdings
As at 21 May 2013 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 35 days at 31 March 2013. SSE
is signing up to the Prompt Payment Code.

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 to 3 and 33 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.

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 Conduct 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

Number of shares*

Percentage*

Nature of holding

85,895,986

37,426,851

29,138,248

8.96%

3.99%

3.02%

Indirect

Direct

Since the date of disclosure to the Company, the interests of the shareholders listed above may have increased or decreased.

101

3. Governance1. 2. 4. Governance

Other statutory information (continued)

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 36 to the Financial
Statements.

Auditors
KPMG Audit Plc has informed the
Company that they have initiated a
process to streamline their two registered
audit firms (KPMG Audit Plc and KPMG
LLP). As such, KPMG Audit Plc have notified
the Company that they are not seeking
re-appointment. Consequently, the Audit
Committee has recommended, and the
Board has approved, the resolutions
to appoint KPMG LLP as Auditor of the
Company and its subsidiaries, and
to authorise the Directors to fix their
remuneration, which 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
21 May 2013

102

SSE plc Annual Report 2013

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:

• 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
• 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.

EU; and

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:

• the financial statements, prepared in accordance with the applicable set of
• the Directors’ Report includes a fair review of the development and performance

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

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
21 May 2013

Gregor Alexander
Finance Director

Financial statements

Contents

Financial statements

104 Independent Auditor’s report

105 Consolidated income statement

106 Consolidated statement of
comprehensive income

107 Balance sheets

108 Statement of changes in equity

110 Cash flow statements

111 Notes on the financial statements
111 1. General information and

basis of preparation
111 2. Summary of significant new

accounting policies and
reporting changes

113 3. Critical accounting judgements

and key sources of estimation
uncertainty

115 4. Segmental information
120 5. Other operating income

and expense

121 6. Exceptional items and certain

remeasurements
122 7. Directors and employees
124 8.
Finance income and costs
125 9. Taxation
127 10. Dividends
127 11. Earnings per share
128 12. Notes to the Group cash flow

statement

129 13. Goodwill and other intangible

assets

133 14. Property, plant and equipment
134 15. Biological assets
135 16. Investments
137 17. Subsidiary undertakings
138 18. Acquisitions, disposals and
held-for-sale assets

payments

155 33. Capital and financial risk
management

169 34. Related party transactions
170 35. Commitments and

contingencies

172 36. Post balance sheet events
173 Accompanying information
173 A1. Basis of consolidation and

significant accounting policies

182 A2. Principal jointly controlled

entities, operations and
associates

183 A3. Subsidiary undertakings

Shareholder information

IBC Shareholder information

103

4. Financial statements1. 2. 3. 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 2013 set out on pages 105 to 184. 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 102, 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 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 Financial Reporting Council’s website at
www.frc.org.uk/auditscopeukprivate.

and of the group’s profit for the year then ended;

group financial statements, Article 4 of the IAS Regulation.

Opinion on financial statements
In our opinion:

applied in accordance with the provisions of the Companies Act 2006; and

• 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 2013
• 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
• the financial statements have been prepared in accordance with the requirements of the Companies Act 2006 and, as regards the
• the part of the Directors’ Remuneration Report to be audited has been properly prepared in accordance with the Companies Act 2006;
• the information given in the Directors’ Report for the financial year for which the financial statements are prepared is consistent with
• information given in the Corporate Governance Statement set out on pages 61 to 100 with respect to internal control and risk

management systems in relation to financial reporting processes and about share capital structures is consistent with the
financial statements.

Opinion on other matters prescribed by the Companies Act 2006
In our opinion:

the financial statements; and

from branches not visited by us; or

with the accounting records and returns; or

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:

• adequate accounting records have not been kept by the parent company, or returns adequate for our audit have not been received
• the parent company financial statements and the part of the Directors’ Remuneration Report to be audited are not in agreement
• 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; or
• a Corporate Governance Statement has not been prepared by the Company.
• the Directors’ statement, set out on page 101, in relation to Going Concern;
• the part of the Corporate Governance Statement on pages 61 to 100 relating to the Company’s compliance with the nine provisions
• certain elements of the report to shareholders by the Board on Directors’ remuneration.

of the UK Corporate Governance Code specified for our review; and

Under the Listing Rules we are required to review:

John Luke (Senior Statutory Auditor)
for and on behalf of KPMG Audit Plc, Statutory Auditor
Chartered Accountants
191 West George Street, Glasgow G2 2LJ
21 May 2013

104

SSE plc Annual Report 2013

Financial statementsConsolidated income statement
for the year ended 31 March 2013

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)

Interim dividend paid per share (pence)
Final dividend proposed per share

(pence)

2013

Before
exceptional
items and certain
remeasurements
£m

Exceptional items
and certain
remeasurements
(Note 6)
£m

28,304.6
(25,612.5)

2,692.1
(1,236.7)
11.8

–
(691.3)

(691.3)
(105.6)
–

Note

2012

Before
exceptional
items and certain
remeasurements
£m

Exceptional items
and certain
remeasurements
(Note 6)
£m

31,723.9
(29,222.1)

2,501.8
(1,130.3)
8.0

–
(903.3)

(903.3)
(82.0)
–

Total
£m

28,304.6
(26,303.8)

2,000.8
(1,342.3)
11.8

Total
£m

31,723.9
(30,125.4)

1,598.5
(1,212.3)
8.0

1,467.2

(796.9)

670.3

1,379.5

(985.3)

394.2

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)
–

315.6
(152.3)
–
(51.0)

112.3

1,579.5
235.5
(455.3)

1,359.7
(313.4)

1,046.3

(16.5)
–
8.7
25.6

17.8

(779.1)
–
20.3

(758.8)
201.8

(557.0)

982.9
63.4

(557.0)
–

4,5

299.1
(152.3)
8.7
(25.4)

130.1

800.4
235.5
(435.0)

600.9
(111.6)

489.3

425.9
63.4

44.7p
44.6p

25.2p

59.0p

84.2p

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

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

24.0p

56.1p

80.1p

105

4. Financial statements1. 2. 3. Financial statements

Consolidated statement of comprehensive income
for the year ended 31 March 2013

Profit for the year

Other comprehensive income:
Items that will not be reclassified to profit or loss:
Actuarial losses on retirement benefit schemes
Taxation on actuarial losses on defined benefit pension schemes

Share of jointly controlled entities and associates actuarial gains on retirement benefit schemes
Share of jointly controlled entities and associates taxation of actuarial gains on retirement benefit schemes

Items that will be reclassified subsequently to profit or loss:
Gains/(losses) on effective portion of cash flow hedges
Transferred to assets and liabilities on cash flow hedges
Taxation on cash flow hedges

Share of jointly controlled entities and associates (loss) on effective portion of cash flow hedges
Share of jointly controlled entities and associates taxation on cash flow hedges

Exchange difference on translation of foreign operations
Movement on net investment hedge
Taxation on net investment hedge

Other comprehensive income/(loss), net of taxation

Total comprehensive income for the period

Attributable to:
Ordinary shareholders of the parent
Other equity holders

2013
£m

489.3

(50.2)
4.4

(45.8)

11.9
(3.1)

8.8

46.4
0.7
(11.4)

35.7

(0.4)
(0.1)

(0.5)

22.6
(7.3)
1.3

16.6

2012
£m

263.3

(161.1)
30.3

(130.8)

5.6
(3.9)

1.7

(15.3)
0.2
4.0

(11.1)

(20.8)
3.7

(17.1)

(65.3)
29.8
(7.7)

(43.2)

14.8

(200.5)

504.1

62.8

440.7
63.4

504.1

(2.7)
65.5

62.8

106

SSE plc Annual Report 2013

Financial statements
Balance sheets
as at 31 March 2013

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

Consolidated

Company

Note

2013
£m

2012
£m

9,838.3
3.4

635.8
282.2
913.2
1,244.0
46.7
–
–
155.4
382.4

9,153.1
3.4

627.5
218.8
911.7
1,191.9
36.1
–
–
222.1
348.0

13,501.4

12,712.6

368.4
291.7
4,953.0
538.7
940.8
2.3

7,094.9

20,596.3

1,544.6
5,047.6
286.8
60.1
1,011.2

7,950.3

4,540.4
806.6
341.4
229.5
705.8
473.4

7,097.1

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

15,047.4

5,548.9

15,100.9

4,584.1

482.1
857.9
22.0
5.8
11.6
1,982.7

3,362.1
2,186.8

5,548.9

472.3
862.0
22.0
(29.4)
(5.0)
2,100.8

3,422.7
1,161.4

4,584.1

2013
£m

–
–

–
–
190.0
1,208.5
18.0
2,426.8
4,341.9
96.8
151.7

8,433.7

–
–
3,802.9
289.2
65.1
–

4,157.2

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

12,590.9

10,660.4

1,414.1
2,971.4
17.9
–
–

4,403.4

3,282.1
–
–
–
185.9
253.5

3,721.5

8,124.9

4,466.0

482.1
857.9
22.0
41.0
–
876.2

2,279.2
2,186.8

4,466.0

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

These financial statements were approved by the Board of Directors on 21 May 2013 and signed on their behalf by:

Gregor Alexander
Finance Director

Lord Smith of Kelvin
Chairman

SSE plc, Registered No: SC117119

107

4. Financial statements1. 2. 3. Financial statements

Statement of changes in equity
for the year ended 31 March 2013

Consolidated
Statement of changes in equity

At 1 April 2012

Profit for the year
Other comprehensive income/(loss)
Share of jointly controlled entities and

associates other comprehensive
income/(loss)

Total comprehensive income for the year

Dividends to shareholders
Scrip dividend related share issue
Distributions to hybrid capital holders
Issue of shares
Issue of hybrid capital
Credit in respect of employee

share awards

Investment in own shares

At 31 March 2013

Consolidated
Statement of changes in equity

Share capital
£m

Share
premium
account
£m

Capital
redemption
reserve
£m

472.3

862.0

22.0

–
–

–

–
9.6
–
0.2
–

–
–

–

–
(9.6)
–
5.5
–

–
–

–

–
–
–
–
–

–
–

Hedge
reserve
£m

(29.4)

–
35.7

Translation
reserve
£m

Retained
earnings
£m

Total
attributable
to Ordinary
shareholders
£m

Hybrid
capital
£m

Total
£m

(5.0) 2,100.8

3,422.7

1,161.4

4,584.1

–
16.6

425.9
(45.8)

425.9
6.5

(0.5)

35.2

–

8.8

16.6

388.9

8.3

440.7

63.4
–

–

63.4

489.3
6.5

8.3

504.1

–
–
–
–
–

–
–

–
–
–
–
–

–
–

(770.5)
255.2
–
–
–

(770.5)
255.2
–
5.7
–

–
–
(63.4)
–
1,025.4

(770.5)
255.2
(63.4)
5.7
1,025.4

16.0
(7.7)

–
–

16.0
(7.7)

482.1

857.9

22.0

5.8

11.6

1,982.7

3,362.1

2,186.8

5,548.9

Share capital
£m

Share
premium
account
£m

Capital
redemption
reserve
£m

Hedge
reserve
£m

Translation
reserve
£m

Retained
earnings
£m

Total
attributable
to Ordinary
shareholders
£m

Hybrid
capital
£m

Total
£m

At 1 April 2011

468.4

859.8

22.0

(1.2)

38.2

2,652.2

4,039.4

1,161.4

5,200.8

Profit for the year
Other comprehensive (loss)
Share of jointly controlled entities and

associates other comprehensive
income/(loss)

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

At 31 March 2012

–
–

–

–
3.6
–
0.3

–
–

–

–
(3.6)
–
5.8

–
–

–

–
–
–
–

–
–

–
(11.1)

–
(43.2)

197.8
(130.8)

197.8
(185.1)

(17.1)

(28.2)

–

(43.2)

1.7

68.7

–
–
–
–

–
–

–
–
–
–

–
–

(716.9)
88.2
–
–

13.5
(4.9)

(15.4)

(2.7)

(716.9)
88.2
–
6.1

13.5
(4.9)

65.5
–

–

65.5

–
–
(65.5)
–

–
–

263.3
(185.1)

(15.4)

62.8

(716.9)
88.2
(65.5)
6.1

13.5
(4.9)

472.3

862.0

22.0

(29.4)

(5.0) 2,100.8

3,422.7

1,161.4

4,584.1

108

SSE plc Annual Report 2013

Financial statementsCompany
Statement of changes in equity

Share capital
£m

Share
premium
account
£m

Capital
redemption
reserve
£m

Hedge
reserve
£m

Retained
earnings
£m

Total
attributable
to Ordinary
shareholders
£m

Hybrid
capital
£m

Total
£m

At 1 April 2012

472.3

862.0

22.0

5.8

536.8

1,898.9

1,161.4

3,060.3

Profit for the year
Other comprehensive income/(loss)

Total comprehensive income for the period

Dividends to shareholders
Scrip dividend related share issue
Distributions to hybrid capital holders
Issue of shares
Issue of hybrid capital
Increase in investment in subsidiaries
Investment in own shares

–
–

–

–
9.6
–
0.2
–
–
–

–
–

–

–
(9.6)
–
5.5
–
–
–

–
–

–

–
–
–
–
–
–
–

–
35.2

35.2

–
–
–
–
–
–
–

866.5
(20.1)

846.4

(770.5)
255.2
–
–
–
16.0
(7.7)

866.5
15.1

881.6

(770.5)
255.2
–
5.7
–
16.0
(7.7)

63.4
–

63.4

929.9
15.1

945.0

–
–
(63.4)
–
1,025.4
–
–

(770.5)
255.2
(63.4)
5.7
1,025.4
16.0
(7.7)

At 31 March 2013

482.1

857.9

22.0

41.0

876.2

2,279.2

2,186.8

4,466.0

Company
Statement of changes in equity

At 1 April 2011

Profit for the year
Other comprehensive (loss)

Total comprehensive income for the period

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

Share capital
£m

Share
premium
account
£m

Capital
redemption
reserve
£m

468.4

859.8

22.0

–
–

–

–
3.6
–
0.3
–
–

–
–

–

–
(3.6)
–
5.8
–
–

–
–

–

–
–
–
–
–
–

Total
attributable
to Ordinary
shareholders
£m

Retained
earnings
£m

Hybrid
capital
£m

Total
£m

420.5

1,789.9

1,161.4

2,951.3

739.0
(2.6)

736.4

(716.9)
88.2
–
–
13.5
(4.9)

739.0
(16.0)

723.0

(716.9)
88.2
–
6.1
13.5
(4.9)

65.5
–

65.5

–
–
(65.5)
–
–
–

804.5
(16.0)

788.5

(716.9)
88.2
(65.5)
6.1
13.5
(4.9)

Hedge
reserve
£m

19.2

–
(13.4)

(13.4)

–
–
–
–
–
–

At 31 March 2012

472.3

862.0

22.0

5.8

536.8

1,898.9

1,161.4

3,060.3

109

4. Financial statements1. 2. 3. Financial statementsConsolidated

Company

2013
£m

2012
£m

2013
£m

2012
£m

Cash flow statements
for the year ended 31 March 2013

Note

Cash generated from/(absorbed by) operations before working

capital movements

Decrease/(Increase) in inventories
Decrease/(Increase) in receivables
(Decrease)/increase in payables
Increase in provisions

Cash generated from/(absorbed by) operations

Dividends received from jointly controlled entities and associates
Dividends received from subsidiaries
Interest received
Interest paid
Income taxes paid
Payment for consortium relief

1,953.5
47.6
250.1
(110.3)
22.8

2,163.7

87.0
–
88.5
(245.5)
(114.6)
(1.9)

1,839.2
(107.3)
(133.7)
342.9
5.9

1,947.0

111.4
–
108.3
(242.2)
(211.4)
(4.9)

Net cash from operating activities

1,977.2

1,708.2

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 investments
Proceeds from sale of business and subsidiaries
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

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

(1,303.3)
(317.1)
7.5
2.0
–
153.8
(88.6)
(358.4)
5.4
–
(13.5)
31.6
(10.6)

(1,891.2)

5.7
(515.3)
(63.4)
1,025.4
(7.7)
517.1
(694.7)

267.1

(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)

6.1
(628.7)
(65.5)
–
(4.9)
1,024.1
(393.0)

(61.9)

(28.8)
–
(1,436.6)
380.2
–

(1,085.2)

30.0
931.7
440.9
(274.8)
(148.8)
–

(106.2)

–
–
–
–
–
–
(76.8)
–
–
–
–
8.3
–

(68.5)

5.7
(515.3)
(63.4)
1,025.4
(7.7)
445.0
(440.1)

449.6

(33.6)
–
(582.7)
(278.9)
–

(895.2)

65.0
682.6
397.7
(267.6)
(212.8)
–

(230.3)

–
–
–
–
–
–
(118.9)
–
–
–
–
8.4
–

(110.5)

6.1
(628.7)
(65.5)
–
(4.9)
835.8
(106.8)

36.0

Net increase/(decrease) in cash and cash equivalents

353.1

(285.2)

274.9

(304.8)

Cash and cash equivalents at the start of year
Net increase/(decrease) in cash and cash equivalents
Effect of foreign exchange rate changes

Cash and cash equivalents at the end of year

185.5
353.1
0.1

538.7

471.6
(285.2)
(0.9)

185.5

14.3
274.9
–

289.2

319.1
(304.8)
–

14.3

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

110

SSE plc Annual Report 2013

Financial statements
Notes on the financial statements
for the year ended 31 March 2013

1. General information and basis of preparation
General information
SSE plc (the Company) is a company domiciled in Scotland. The address of the registered office is given on the back cover. The Group’s
operations and its principal activities are set out earlier in this Report at pages 12 to 60. The consolidated financial statements for
the year ended 31 March 2013 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 21 May 2013. 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 despite
net current liabilities of £855.4m. 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 33 of the Financial statements on page 161.

Basis of measurement
The financial statements of the Group and the Company are prepared on the historical cost basis except for derivative financial
instruments, biological assets and the assets of the Group pension scheme which are stated at their fair value, and the liabilities of the
Group pension schemes which are measured using the projected unit credit method. The Directors believe the financial statements
present a true and fair view. The financial statements of the Group and Company are presented in pounds Sterling. Operations and
transactions conducted in currencies other than pounds Sterling are included in the consolidated financial statements in accordance
with the Group’s foreign currencies accounting policy.

Use of estimates and judgements
The preparation of financial statements conforming with adopted IFRS requires the use of certain accounting estimates. It also requires
management to exercise judgement in the process of applying the accounting policies. The areas involving a higher level of judgement
or estimation are summarised at pages 113 and 114.

2. Summary of significant new accounting policies and reporting changes
The principal accounting policies applied in the preparation of these financial statements are set out below and in the Accompanying
Information section (A1) on pages 173 to 181.

New 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, there were a number of new standards, amendments to existing standards
and interpretations in issue that have not been applied in preparing these consolidated financial statements. The group has no plan to
adopt these standards earlier than the effective date. Those that are most relevant to the Group are set out below.

For defined benefit plans, the Group will change its measurement principles by replacing the interest costs and expected return on
plan assets with a net interest amount that is calculated by applying the discount rate to the net defined benefit liability including
the IFRIC 14 Liability. There will also be a corresponding change in the amount recognised in other comprehensive income, so that
the net impact on total comprehensive income and net assets will be nil. If this standard had been applied to the year ended
31 March 2013, it is estimated the interest income would have been reduced by approximately £34m.

• IAS 19, ‘Employee benefits’, was amended in June 2011 and is effective for annual periods beginning on or after 1 January 2013.
• IFRS 10, ‘Consolidated Financial statements’, which establishes a single control model that applies to all entities including special
• IFRS 11, ‘Joint arrangements’, under IFRS 11 the structure of the joint arrangement, although still an important consideration, is no

purpose entities and requirements management to exercise judgement over which entities are required to be consolidated. IFRS 11
is effective for annual periods beginning on or after 1 January 2014.

longer the main factor in determining the type of joint arrangement and therefore subsequent accounting. The Group may need to
reclassify its joint arrangements, which may lead to changes in current accounting for these interests. IFRS 11 is effective for annual
periods beginning on or after 1 January 2014.

111

4. Financial statements1. 2. 3. Financial statementsNotes on the financial statements (continued)
for the year ended 31 March 2013

2. Summary of significant new accounting policies and reporting changes (continued)

• IFRS 12, ‘Disclosures of interests in other entities’ brings together all the disclosure requirements about an entity’s interests
• IFRS 13, ‘Fair value measurement’, provides consistency by making available a single source of guidance on how fair value is

in subsidiaries, joint arrangements, associates and unconsolidated structured entities. IFRS 12 is effective for annual periods
beginning on or after 1 January 2014.

measured. IFRS 13 is applied when fair value measurements or disclosures are required or permitted by other IFRSs. IFRS 13
is effective for annual periods beginning on or after 1 January 2013.

In addition, as part of the IASB’s project to replace IAS 39 ‘Financial Instruments: Recognition and Measurement’, the IASB has
issued the phases of IFRS 9 covering the classification and measurement of financial assets and the accounting for financial liabilities.
The other phases, covering hedge accounting and impairment, are still to be completed. In December 2011, the IASB decided that
IFRS 9 will be effective for annual periods beginning on or after 1 January 2015. The date for EU adoption is not yet known.

The Group is continuing to assess the impact the standards and amendment will have on future financial statements.

Changes to presentation of financial statements
Income statement presentation
The presentation of cost of sales and operating costs has been changed. The impact on the income statement for the previous year
is to decrease cost of sales by £242.3m (to £29,222.1m) and increase operating costs by £242.3m (to £1,130.3m). The reason for the
change is to reclassify (as operating costs) costs associated with back office activities such as sales processing, compliance and other
indirect costs related to the Energy Supply business and other overhead costs associated with activities in Ireland. The change has been
made to reflect the way these costs are reported to management and to improve the relevance of the income statement presentation.

Cash flow statement presentation
The presentation of the cash flow statement on page 110 has been changed to focus on the significant cash movements after cash
generated from operations. The reconciliation from profit for the year to cash generated from operations before working capital
movements is included at Note 12 (a). This presentation has been adopted to improve the relevance of the main statement to users
of the financial statements. An additional table explaining the reconciliation of the movement in cash and cash equivalents to the
movement in adjusted net debt has been included at Note 12(b) to aid understanding of the group’s financial position.

Intangible assets disclosure
The disclosure of intangible assets at Note 13 has been amended by changing the presentation of acquired brand assets. These assets,
which were previously shown separately, are now included in ‘Other Intangible Assets’. The brand values associated had a net book
value of £3.7m at 31 March 2012 and are not considered to be material items.

Property, plant and equipment disclosure
The presentation of property, plant and equipment at Note 14 has been amended to include the net book value of assets under
construction as a separate column in the main tabular disclosure. This has the effect of requiring a restatement of the comparative
values. Assets under construction that are commissioned and enter operation in the financial year are transferred from the newly
created column to the relevant category of assets in the table. Capital additions in the year comprise both additions to assets still in
construction, additions to commissioned operational assets and other directly incurred capital costs. The disclosure has been adopted
to improve the relevance of the table to users and for consistency with internal reporting.

112

SSE plc Annual Report 2013

Financial statements3. 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.

Accounting judgements
(i) 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.

(ii) Adjusted measures

The Directors assess the performance of the reportable segments based on an ‘adjusted profit before tax’ measure. This is
reconciled to reported profit before tax by adding back exceptional items, remeasurements arising from IAS 39 and after the
removal of taxation on profits from jointly controlled entities and associates. The Directors also present details of an ‘adjusted
earnings per share’ measure, which is based on basic earnings per share before exceptional items, remeasurements arising from
IAS 39 and after the removal of deferred taxation. The adjusted measures are considered more reflective of the Group’s underlying
performance, are consistent with way the Group is managed and avoids volatility arising from IAS 39 fair value measurements.

(iii) Wind farm disposals

In the current year and in previous years, the Group has disposed of 100% of the equity in various wind farm companies, including
those included in the significant disposal described at Note 18b. At the same time as disposing of these interests, the Group has
entered into long-term offtake arrangements for certain of these wind farms for a proportion of the output from the wind farms.
The Directors have judged that these arrangements are not leasing arrangements as the Group is not purchasing substantially all
of the economic output of the wind farms.

(iv) Business Combinations and acquisitions

Business combinations and acquisitions require a fair value exercise to be undertaken to allocate the purchase price to the fair
value of the identifiable assets acquired and the liabilities assumed. The determination of the fair value of the assets and liabilities is
based, to a considerable extent, on management’s judgement. The amount of goodwill initially recognised as a result of a business
combination is dependent on the allocation of this purchase price to the identifiable assets and liabilities with any unallocated
portion being recorded as goodwill. Business combinations are disclosed in Note 18.

113

4. Financial statements1. 2. 3. Financial statements

Notes on the financial statements (continued)
for the year ended 31 March 2013

3. Critical accounting judgements and key sources of estimation uncertainty (continued)
Estimation uncertainty
(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). The recoverable amount of the assets, or the appropriate CGU, is measured as the higher of their fair value less costs to sell
and value in use. Value in use calculations require the estimation of future cash flows to be derived from the respective CGUs and 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 will
be 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 the 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
producing gas and liquids property, plant and equipment. This is also a significant input estimate to the associated impairment and
decommissioning calculations. The impact of a change in estimated proven and probable reserves is dealt with prospectively by
depreciating the remaining book value of producing assets over the expected future production. If proven and probable reserves
estimates are revised downwards, earnings could be affected by higher depreciation expense or an immediate write-down
(impairment) of the asset’s book value.

114

SSE plc Annual Report 2013

Financial statements

4. Segmental information
The Group’s operating segments are those used internally by the Main 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

Retail

Energy Supply

Energy-related Services

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 street-lighting services in the UK and Ireland

The supply of electricity and gas to residential and business customers in the UK
and Ireland

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.

115

4. Financial statements1. 2. 3. Financial statementsNotes on the financial statements (continued)
for the year ended 31 March 2013

4. Segmental information (continued)
(a) Revenue by segment

External
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

Inter-segment
revenue (i)
2012
£m

Total
revenue
2012
£m

336.9
0.1
49.4

386.4

23.1
184.8

207.9

Networks

Electricity Distribution
Electricity Transmission

879.0
117.8
298.4 Other Networks

1,295.2

7,810.4
465.2

8,275.6

Retail

Energy Supply
Energy-related Services

Wholesale

Energy Portfolio Management and Electricity

4,447.5
51.9
99.3

27,111.7

Generation
82.2 Gas Storage
102.3 Gas Production

4,598.7

27,296.2

49.9

264.3

314.2 Corporate unallocated

31,723.9

5,457.3

37,181.2 Total

External
revenue
2013
£m

Inter-segment
revenue (i)
2013
£m

647.0
139.1
246.3

1,032.4

8,602.1
246.0

8,848.1

348.8
0.1
68.5

417.4

35.1
203.2

238.3

Total
revenue
2013
£m

995.8
139.2
314.8

1,449.8

8,637.2
449.2

9,086.4

18,356.9
19.4
3.7

4,420.4
93.4
114.4

22,777.3
112.8
118.1

18,380.0

4,628.2

23,008.2

44.1

247.9

292.0

28,304.6

5,531.8

33,836.4

(i) Significant inter-segment revenue is derived from use of system income received by the Electricity Distribution business from Energy Supply; Other Networks provide Telecoms 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 Electricity Generation and Energy Portfolio Management 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: 2013 – £458.0m; 2012 – £454.3m) is not recorded
in the revenue line in the income statement.

Revenue by geographical location is as follows:

UK
Ireland and mainland Europe

2013
£m

27,528.5
776.1

28,304.6

2012
£m

31,069.7
654.2

31,723.9

116

SSE plc Annual Report 2013

Financial statements

4. Segmental information (continued)
(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

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

2013

Adjusted
operating profit
reported to the
Board
£m

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

Before
exceptional items
and certain
remeasurements
£m

Exceptional
items and
certain
remeasurements
£m

512.8
93.3
234.1
35.9

876.1

364.2
45.9

410.1

451.5
18.4
39.6

509.5
(12.9)

–
–
(160.1)
–

(160.1)

–
(0.2)

(0.2)

(43.0)
–
–

(43.0)
–

512.8
93.3
74.0
35.9

716.0

364.2
45.7

409.9

408.5
18.4
39.6

466.5
(12.9)

1,782.8

(203.3)

1,579.5

–
–
27.4
–

27.4

(4.3)
(31.7)

(36.0)

(767.2)
–
–

(767.2)
(3.3)

(779.1)

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)

Total
£m

512.8
93.3
101.4
35.9

743.4

359.9
14.0

373.9

(358.7)
18.4
39.6

(300.7)
(16.2)

800.4

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

(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, £33.3m (2012 – £33.4m), as finance income (Note 8).

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 (South East Regional Prime), which is recognised in Energy-related Services (£1.0m before tax; 2012 – £0.9m before tax).

117

4. Financial statements1. 2. 3. Financial statements
Notes on the financial statements (continued)
for the year ended 31 March 2013

4. Segmental information (continued)
(c) Capital expenditure by segment

Capital additions
to Intangible
Assets
2012
£m

Capital additions
to Property, Plant
and Equipment
2012
£m

–
–
–
–

–

–
–

–

539.8
–
–

539.8
0.1

539.9

–
–
(139.1)

400.9

Networks

347.5
228.7

Electricity Distribution
Electricity Transmission

– Gas Distribution
48.0 Other Networks

624.2

–
25.7

25.7

Retail

Energy Supply
Energy-related Services

Wholesale

664.3

Energy Portfolio Management and Electricity Generation

51.0 Gas Storage
6.1 Gas Production

721.4
105.2 Corporate unallocated

1,476.5 Total

(16.5) (Decrease)/increase in prepayments related to capital expenditure
41.2 Decrease/(increase) in trade payables related to capital expenditure

– Less: Other non-cash additions

1,501.2 Net cash outflow

Capital additions
to Intangible
Assets
2013
£m

Capital additions
to Property, Plant
and Equipment
2013
£m

–
–
–
–

–

45.4
–

45.4

482.5
–
–

482.5
1.1

529.0

–
–
(211.9)

317.1

364.9
334.2
–
52.8

751.9

15.3
15.4

30.7

456.7
33.0
7.2

496.9
73.7

1,353.2

(3.9)
(46.0)
–

1,303.3

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 (2013 – £300.9m; 2012 – £503.7m). Other non-cash additions
comprise self-generated renewable obligation certificates.

No segmental analysis of assets requires to be disclosed as this information is not presented to the Board.

118

SSE plc Annual Report 2013

Financial statements
4. Segmental information (continued)
(d) Items included in operating profit by segment

Depreciation/Impairment on Property,
Plant and Equipment

Amortisation/
Impairment of Intangible Assets

Before
exceptional items
2013
£m

Exceptional
charges
2013
£m

Before
exceptional items
2013
£m

Total
2013
£m

Exceptional
charges
2013
£m

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

222.8
24.1
–
34.9

281.8

5.4
6.6

12.0

194.5
12.3
33.3

240.1
36.9

570.8

–
–
–
–

–

–
23.4

23.4

277.9
–
–

277.9
2.0

303.3

222.8
24.1
–
34.9

281.8

5.4
30.0

35.4

472.4
12.3
33.3

518.0
38.9

874.1

–
–
–
0.3

0.3

2.6
0.3

2.9

1.5
–
–

1.5
1.2

5.9

–
–
–
–

–

4.3
–

4.3

159.1
–
–

159.1
1.3

164.7

Depreciation/Impairment on Property,
Plant and Equipment

Amortisation/
Impairment of Intangible Assets

Before
exceptional items
2012
£m

Exceptional
charges
2012
£m

Before
exceptional items
2012
£m

Total
2012
£m

Exceptional
charges
2012
£m

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

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
2013
£m

–
–
–
0.3

0.3

6.9
0.3

7.2

160.6
–
–

160.6
2.5

170.6

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 Group’s share of Scotia Gas Networks Limited depreciation (2013 – £55.0m; 2012 – £57.9m) and amortisation (2013 – £4.8m;
2012 – £4.8m) is not included within operating costs.

119

4. Financial statements1. 2. 3. Financial statements

Notes on the financial statements (continued)
for the year ended 31 March 2013

5. Other operating income and cost
Total Group costs before exceptional items and certain remeasurements can be analysed thus:

Cost of sales

Distribution costs
Administration costs

Operating costs

Total costs

Group operating profit is stated after charging (or crediting) the following items:

Depreciation and impairment of property, plant and equipment (Note 14) (i)
Exceptional impairment charges (Note 6)
Impairment of inventories (Note 19)
Research costs
Operating lease rentals (Note 35)
Release of deferred income in relation to capital grants and historic customer contributions
Loss/(gain) on disposal of property, plant and equipment
Loss on disposal of fixed asset investments
(Gain) on disposal of businesses and subsidiaries
Amortisation and impairment of intangible assets (Note 13) (i)

(i) Does not include exceptional impairment charges.

Auditor’s remuneration:

Audit of these financial statements

Amounts receivable by the Company’s Auditor and its associates in respect of:

Audit of financial statements of subsidiaries of the Company
Audit-related assurance services
Taxation compliance services
Other tax advisory services

Total remuneration paid to Auditor

2013
£m

2012
restated
£m

25,612.5

29,222.1

476.4
760.3

1,236.7

26,849.2

432.9
697.4

1,130.3

30,352.4

2013
£m

570.8
561.3
3.6
5.9
193.3
(16.8)
0.1
–
(8.2)
5.9

2013
£m

0.3

0.7
0.1
0.1
0.1

1.0

1.3

2012
£m

561.8
478.6
1.1
11.2
169.9
(14.7)
(4.6)
2.1
(5.5)
13.5

2012
£m

0.3

0.7
0.1
0.1
–

0.9

1.2

Tax service fees incurred in the year were £0.2m (2012 – £0.1m). Audit-related assurance services include fees incurred in relation to
regulatory accounts and returns required by Ofgem. A description of the work of the Audit Committee is set out on pages 82 and 83
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.

120

SSE plc Annual Report 2013

Financial statements

6. Exceptional items and certain remeasurements
(i) Exceptional items
In the year to 31 March 2013, the following exceptional items were recorded:

Impairments and other charges: On 21 March 2013, the Group announced the results of a comprehensive review of generation
operations. This review was conducted in the context of challenging energy market conditions including continued extremely low ‘spark
spreads’, the early introduction of the Carbon Price Floor at a high level, the ongoing constraints on coal plant arising from the Industrial
Emissions Directive and the ongoing uncertainty around the Electricity Market Reform proposals. The conclusions of the review were
that around 2,000MW of the Group’s existing thermal generation capacity will cease operation during the 2013/14 financial year, with
the main stations affected being Ferrybridge, Keadby, Slough, Uskmouth and Peterhead. Related to this, the Group has reassessed
the carrying value of its associate investments at Barking Power Limited and Derwent Cogeneration Limited. Accordingly, combined
impairment charges of £306.9m have been recognised of which £277.9m relates to property, plant and equipment and £33.0m relates
to investments (less £4.0m of related deferred tax). In addition to this, further impairment charges of £84.6m were recognised following
a detailed review of the group’s investments (£25.8m), property, plant and equipment (£25.4m), intangible assets (£25.5m) and other
assets (£7.9m). This included further impairment of legacy Metering assets (£23.4m), charges related to wind development pipeline
assets (£20.0m) and the reassessment of the recoverable value of certain associate investments and other assets (£41.2m).

The Group recognised current asset impairments and other related charges in relation to the settlement of certain claims associated
with the outage at Medway power station in 2008/09 (£43.0m). In addition, the group recognised charges in relation to the impairment
of carbon dioxide emissions allowances purchased to cover the emissions liabilities at the group’s thermal plants (£139.3m).

Provisions for onerous contracts, restructuring and other liabilities. On review of the Group’s provisions at 31 March 2013, certain
provisions for onerous contracts were released (£37.4m) and other provisions for restructuring related to the announcement on
21 March 2013, doubtful debts, project exit costs and potential contractual settlement were recognised (£44.3m).

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 starting in 2011. The March 2011 Budget accelerated the reductions and the March 2012
Budget confirmed a further acceleration of the reduction in rate to 24% effective from 1 April 2012. The Finance Act 2012 confirmed the
reduction to 23% as being effective from 1 April 2013. This was substantively enacted on 17 July 2012. A revised rate of 22% is expected
to be enacted by 2014.

As the rate change to 23% has been substantively enacted it has the effect of reducing the group’s net deferred tax liabilities recognised
at 31 March 2013 by £22.0m (£45.7m). It has not yet been possible to quantify the full anticipated effect of the announced further 1%
rate reduction due to legislation not being enacted, although this will further reduce the Group’s future current tax charge and the
reduce the Group’s deferred tax liabilities/assets accordingly.

In the year to 31 March 2012, the following exceptional items were recorded:

Exceptional charges were recognised in relation to the impairment of goodwill (£49.3m), property, plant and equipment (£305.1m),
current receivables (£5.0m), held for sale assets (£9.9m) and intangible assets (£109.3m). These were recognised as a result of the long-
term view of spark spreads at Medway and Keadby, leading to a change the way in which the plants are operationally configured, and
also following the goodwill impairment review of the Gas Storage CGU and updated development expectations associated with legacy
Metering assets (£30.0m) and North Sea exploration assets (£22.0m). 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 recognised as intangible assets purchased to cover the emissions liabilities at the Group’s thermal plants were
impaired based on prevailing market prices.

Exceptional charges were also recognised in relation to commodity contracts associated with thermal Generation assets (£37.4m).
In addition costs associated with Retail restructuring and the impairment of other financial assets (£35.6m) were recognised as
exceptional in the year to 31 March 2012.

(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 33.

121

4. Financial statements1. 2. 3. Financial statementsNotes on the financial statements (continued)
for the year ended 31 March 2013

6. Exceptional items and certain remeasurements (continued)
(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 and other related market costs
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 33)
Movement on financing derivatives (Note 33)
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
Taxation on other exceptional items

2013
£m

2012
£m

(496.7)
(64.6)
(6.9)
(12.5)

23.8

(556.9)

(228.7)
20.3
6.5

(201.9)

(758.8)

22.0
129.6

151.6
50.2

201.8

(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

(557.0)

(702.7)

Consolidated

2013
£m

638.3
61.3
16.0
68.2

783.8
(114.8)

669.0

2012
£m

614.7
62.2
13.5
56.9

747.3
(123.2)

624.1

Consolidated

Company

2013
Number

19,795

2012
Number

19,489

2013
Number

2012
Number

Taxation on certain remeasurements

Taxation

Exceptional items after taxation

7. Directors and employees
(i) Staff costs

Staff costs:
Wages and salaries
Social security costs
Share-based remuneration (Note 32)
Pension costs (Note 31)

Less: capitalised as property, plant and equipment

Employee numbers:

Numbers employed at 31 March

122

SSE plc Annual Report 2013

Financial statements

7. Directors and employees (continued)
The average number of people employed by the Group (including Executive Directors) during the year was:

Networks

Distribution
Transmission
Other Networks

Retail

Energy Supply
Energy-related Services

Wholesale

Electricity Generation and Energy Portfolio Management
Gas Storage
Gas Production

Corporate unallocated

Total

Consolidated

Company

2013
Number

2,173
295
387

2,855

5,828
7,098

12,926

1,912
93
3

2,008

1,980

19,769

2012
Number

2,085
201
361

2,647

6,389
7,203

13,592

1,370
86
4

1,460

1,948

19,647

2013
Number

2012
Number

–
–
–

–

–
–

–

–
–
–

–

–
–
–

–

–
–

–

–
–
–

–

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 86 to 100. 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.

123

4. Financial statements1. 2. 3. Financial statements

Notes on the financial statements (continued)
for the year ended 31 March 2013

8. Finance income and costs
Recognised in income statement

2013

Before
exceptional
items and certain
remeasurements
£m

Exceptional
items and certain
remeasurements
£m

Finance income:
Return on pension scheme assets
Interest income from short term deposits
Foreign exchange translation of monetary assets

and liabilities

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

134.1
1.7

12.9

33.3
25.4
28.1

86.8

235.5

(22.5)
(302.7)
(142.3)
(7.7)
(37.1)

–
57.0

(455.3)

–

(219.8)

235.5
(455.3)

(219.8)

–
–

–

–
–
–

–

–
–
–
–
–

–
–

–

20.3

–
20.3

20.3

Total
£m

134.1
1.7

12.9

33.3
25.4
28.1

86.8

235.5

(22.5)
(302.7)
(142.3)
(7.7)
(37.1)

–
57.0

(455.3)

20.3

(199.5)

235.5
(435.0)

(199.5)

(i) The capitalisation rate applied in determining the amount of borrowing costs to capitalise in the period was 5.38% (2012 – 5.36%).

Recognised in equity

Gain/(loss) on effective portion of cash flow hedges (i)
Share of jointly controlled entity/associate (loss) on effective portion of cash flow hedges (i)

2012

Before
exceptional
items and certain
remeasurements
£m

Exceptional
items and certain
remeasurements
£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)

2013
£m

46.4
(0.4)

46.0

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)

2012
£m

(15.3)
(20.8)

(36.1)

(i) Before deduction of tax.

124

SSE plc Annual Report 2013

Financial statements

8. Finance income and costs (continued)
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

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 30)

Adjusted finance income and costs and hybrid coupon payments for interest cover calculations

9. 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

Total taxation charge

Before
Exceptional
items and certain
remeasurements
£m

Exceptional
items and certain
remeasurements
£m

243.5
(23.5)

220.0

67.9
–
25.5

93.4

313.4

(50.6)
–

(50.6)

(129.2)
(22.0)
–

(151.2)

(201.8)

Before
Exceptional
items and certain
remeasurements
£m

Exceptional
items and certain
remeasurements
£m

224.2
(22.3)

201.9

93.3
–
29.6

122.9

324.8

(16.9)
–

(16.9)

(257.0)
(45.7)
–

(302.7)

(319.6)

2013
£m

192.9
(23.5)

169.4

(61.3)
(22.0)
25.5

(57.8)

111.6

2013
£m

2012
£m

(199.5)

(265.1)

(33.3)
(119.0)

(152.3)
(20.3)

(372.1)

(134.1)
142.3
7.7
37.1
(63.4)

(382.5)

(33.4)
(113.1)

(146.5)
89.5

(322.1)

(147.4)
149.8
7.8
38.4
(65.5)

(339.0)

2012
£m

207.3
(22.3)

185.0

(163.7)
(45.7)
29.6

(179.8)

5.2

125

4. Financial statements1. 2. 3. Financial statements

Notes on the financial statements (continued)
for the year ended 31 March 2013

9. 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 24% (2012 – 26%)

Tax effect of:

Change in rate of UK corporation tax
Expenses not deductible for tax purposes
Impact of supplementary corporation tax
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 before

exceptional items and certain remeasurements

Adjusted profit before tax

Tax (credit)/charge recognised directly in equity

Relating to:
Pension scheme actuarial movements
Cash flow and net investment hedge movements

All tax recognised directly in equity is deferred tax.

126

SSE plc Annual Report 2013

2013
£m

600.9

(130.1)

470.8

113.0

(22.0)
15.8
24.2
3.2
2.0
(15.4)
(6.6)
(2.6)

111.6

2013
£m

111.6
–

111.6

3.6
151.6
50.2
(93.4)

223.6

2013
%

–

24.0

(4.7)
3.4
5.1
0.7
0.4
(3.3)
(1.4)
(0.5)

23.7

2013
%

23.7
(15.8)

7.9

0.3
10.7
3.6
(6.6)

15.9

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

2013
£m

600.9

758.8

51.0

1,410.7

2013
£m

(4.4)
12.8

8.4

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

2012
£m

268.5

1,022.3

44.9

1,335.7

2012
£m

(30.3)
3.7

(26.6)

Financial statements

10. Dividends
Ordinary dividends

Interim – year ended 31 March 2013
Final – year ended 31 March 2012
Interim – year ended 31 March 2012
Final – year ended 31 March 2011

Year ended
31 March 2013
Total
£m

241.2
529.3
–
–

770.5

Settled
via Scrip
£m

82.5
172.7
–
–

255.2

Pence per
Ordinary share

Year ended
31 March 2012
Total
£m

25.2
56.1
–
–

–
–
224.8
492.1

716.9

Settled
via Scrip
£m

–
–
76.3
11.9

88.2

Pence per
ordinary
share

–
–
24.0
52.6

The final dividend of 56.1p per Ordinary share declared in the financial year ended 31 March 2012 (2011 – 52.6p) was approved at
the Annual General Meeting on 26 July 2012 and was paid to shareholders on 21 September 2012. 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 25.2p per Ordinary share (2012 – 24.0p) was declared and paid on 22 March 2013 to those shareholders on the
SSE plc share register on 23 January 2013. 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 59.0p per Ordinary share (which equates to a dividend of £568.9m, based on the number of issued
Ordinary shares at 31 March 2013) is subject to approval by shareholders at the Annual General Meeting and has not been included
as a liability in these financial statements.

11. Earnings per share
Basic earnings per share
The calculation of basic earnings per Ordinary share at 31 March 2013 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 2013. 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 6.

Basic
Exceptional items and certain remeasurements (Note 6)

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

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

Year ended
31 March
2013
Earnings
£m

Year ended
31 March
2013
Earnings per share
pence

Year ended
31 March
2012
Earnings
£m

Year ended
31 March
2012
Earnings per share
Pence

425.9
557.0

982.9

93.4
47.4

44.7
58.5

103.2

9.8
5.0

197.8
702.7

900.5

122.9
33.4

1,123.7

118.0

1,056.8

425.9
–

425.9

44.7
(0.1)

44.6

197.8
–

197.8

21.1
74.9

96.0

13.1
3.6

112.7

21.1
–

21.1

31 March 2013
Number of shares
(millions)

31 March 2012
Number of shares
(millions)

952.0
1.9

953.9

937.8
1.5

939.3

127

4. Financial statements1. 2. 3. Financial statements

Notes on the financial statements (continued)
for the year ended 31 March 2013

12. Notes to the Group cash flow statement
(a) Reconciliation of Group operating profit to cash generated from operations

Profit for the year
Add back: taxation
Add back: net finance costs

Operating profit
Less share of profit of joint ventures and associates

Operating profit before jointly controlled entities and associates

Note

Movement on operating derivatives
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
Charge in respect of employee share awards (before tax)
Loss/(profit) on disposal of property, plant and equipment
Loss on disposal of investments
(Profit) on disposal of business and subsidiaries
Income from investment in subsidiaries, jointly controlled

entities and associates

Cash generated from/(absorbed by) operations before

working capital movements

Consolidated

Company

2013
£m

489.3
111.6
199.5

800.4
(130.1)

670.3

228.7
(84.5)
561.3
6.9
570.8
5.9
3.6
(0.6)
(16.8)
16.0
0.1
–
(8.2)

2012
£m

263.3
5.2
265.1

533.6
(139.4)

394.2

433.7
(100.2)
478.6
73.0
561.8
13.5
1.1
(7.3)
(14.7)
13.5
(4.6)
2.1
(5.5)

2013
£m

929.9
35.3
(172.5)

792.7
–

792.7

–
(47.7)
–
187.9
–
–
–
–
–
–
–
–
–

2012
£m

804.5
8.9
(51.5)

761.9
–

761.9

–
(47.9)
–
–
–
–
–
–
–
–
–
–
–

–

(961.7)

(747.6)

1,953.5

1,839.2

(28.8)

(33.6)

(b) Reconciliation of net increase in cash and cash equivalents to movement in adjusted net debt and hybrid capital

Increase/(decrease) in cash and cash equivalents
Add:
New borrowings
Repayment of borrowings
Issue of Hybrid Capital
Non-cash movement on borrowings
(Decrease)/increase in cash held as collateral

Movement in adjusted net debt and hybrid capital

Note

Consolidated

2013
£m

353.1

(517.1)
694.7
(1,025.4)
(32.3)
(64.9)

(591.9)

2012
£m

(285.2)

(1,024.1)
393.0
–
(40.7)
91.8

(865.2)

Non-cash movement on borrowings includes revaluation of fair value items, exchange movements and accreditation of index linked bonds.

128

SSE plc Annual Report 2013

Financial statements

13. Goodwill and other intangible assets
Consolidated

Cost:
At 1 April 2011
Additions
Acquisitions (Note 18)

Transfer to Property Plant and Equipment (Note 14)
Disposals/utilised
Exchange adjustments

At 31 March 2012
Additions
Acquisitions (Note 18)
Transfer to Property Plant and Equipment (Note 14)
Disposals/utilised
Exchange adjustments

At 31 March 2013

Aggregate amortisation and impairment:
At 1 April 2011
Charge for the year
Exceptional impairment (Note 6)

At 31 March 2012
Charge for the year
Exceptional impairment (Note 6)

At 31 March 2013

Carrying amount:

At 31 March 2013

At 31 March 2012

At 1 April 2011

Goodwill
£m

Allowances and
certificates
£m

Development
assets
£m

Other intangibles
£m

727.8
–
0.3

–
–
(8.8)

719.3
–
8.3
–
(1.3)
1.3

727.6

(42.5)
–
(49.3)

(91.8)
–
–

(91.8)

635.8

627.5

685.3

342.0
503.7
–

–
(391.7)
–

454.0
430.0
25.7
–
(314.7)
0.9

595.9

(16.4)
–
(71.9)

(88.3)
–
(139.2)

(227.5)

368.4

365.7

325.6

323.5
36.1
3.6

(52.5)
–
(2.5)

308.2
50.8
–
(11.5)
(9.8)
2.6

340.3

(62.1)
(2.3)
(37.4)

(101.8)
(1.3)
(21.2)

(124.3)

216.0

206.4

261.4

The Company does not hold intangible assets.

Intangible assets have been analysed as current and non-current as follows:

Current
Non-current:
Goodwill
Other

Total
£m

1,469.9
539.9
3.9

(52.5)
(391.7)
(14.2)

1,555.3
529.0
48.5
(11.5)
(325.8)
4.8

76.6
0.1
–

–
–
(2.9)

73.8
48.2
14.5
–
–
–

136.5

1,800.3

(50.2)
(11.2)
–

(61.4)
(4.6)
(4.3)

(70.3)

66.2

12.4

26.4

2013
£m

368.4

635.8
282.2

(171.2)
(13.5)
(158.6)

(343.3)
(5.9)
(164.7)

(513.9)

1,286.4

1,212.0

1,298.7

2012
£m

365.7

627.5
218.8

1,286.4

1,212.0

129

4. Financial statements1. 2. 3. Financial statements

Notes on the financial statements (continued)
for the year ended 31 March 2013

13. Goodwill and other intangible assets (continued)
(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
UK Supply
UK Generation
Gas Storage
Exploration and Production
Other Networks1
Energy-related Services1
Ireland Supply1

Electricity Generation and Energy Portfolio Management
Electricity Generation and Energy Portfolio Management
Energy Supply
Electricity Generation and Energy Portfolio Management
Gas Storage
Gas Production
Other Networks
Energy-related Services
Energy Supply

2013
£m

153.1
199.9
187.0
10.1
26.2
38.1
10.6
2.5
8.3

635.8

2012
£m

153.1
199.9
187.0
10.1
26.2
38.1
10.6
2.5
–

627.5

1. Represents goodwill balances related to acquisitions of Telecoms, Streetlighting (Other Networks) and Contracting businesses (Energy-related services) businesses and the Phoenix gas supply
acquisition in the current financial year (£8.3m), which represents related deferred tax items. The amount of goodwill related to these businesses is not significant in context of 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 amounts of the UK Supply, Gas Storage and Exploration and Production CGUs are 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 values 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 two identified CGUs
(Ireland wind farms and UK 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

Ireland and UK wind farms
(onshore and offshore)

UK Supply
UK Generation (excluding wind)
Gas Storage
Exploration and Production

Electricity Generation and Energy Portfolio Management
Energy Supply
Electricity Generation and Energy Portfolio Management
Gas Storage
Gas Production

2013
Discount rate
(%)

2012
Discount rate
(%)

2013 and 2012
Cash flow
projection period
(years)

7.0%-9.0% 7.0%-9.0%
8.3%
8.3%
8.3%

Up to 25
5
Up to 15
25
8.0%-10.0% 8.0%-10.0% Life of field

7.3%
7.3%
7.3%

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.

130

SSE plc Annual Report 2013

Financial statements

13. Goodwill and other intangible assets (continued)
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 and UK)
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. The goodwill associated with the rest of Europe has been fully impaired in previous years.

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 both 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 based on wind studies and past experience and are valued
at forward power prices based on available market information, continuing government support mechanisms for wind 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 exceeded the respective carrying values at the time of the impairment
test. While cash flow projections are subject to inherent uncertainty, reasonably possible changes in the key assumptions applied in
assessing the fair value less costs-to-sell would not cause a change to the conclusion reached.

UK Supply
Goodwill carried in relation to the acquisition, in 2001, of SWALEC is attributed to the Group’s UK retail electricity and gas supply business CGU.
The CGU is equivalent to the new Energy Supply reported segment with the exception of the Airtricity supply business in Ireland. Margins
assumed in the value-in-use test are based on historic and projected gross margin percentages. 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.

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 UK Generation CGU were held at March 2011 and March 2012. The operational plants in Electricity Generation and
Energy Portfolio Management are operated as part of the integrated business segment. All main thermal generation plants exhibiting
indications of impairment due to market conditions and operational deployment decisions have been assessed to ascertain the impact
on carrying values (see Note 14).

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.

131

4. Financial statements1. 2. 3. Financial statementsNotes on the financial statements (continued)
for the year ended 31 March 2013

13. Goodwill and other intangible assets (continued)
Outcome of test
The prospects in the medium term for the CGU continue to be impacted by lower volatility in the gas market and lower demand for
gas from generating plants. However, no further impairment has been recognised in the financial year following consideration of the
immediate and longer term economic viability of the CGU. An impairment charge of £30.0m was recognised in the previous financial
year and reasonably possible changes in assumptions could further impair the remaining goodwill balance of £26.2m. It is noted
that there remains inherent imprecision in the valuation process for these long-term infrastructure assets which is dependent upon
a number of macro-economic factors.

Exploration and production
Goodwill was recognised on the purchase of North Sea assets in 2011. Goodwill was been attributed to three cash generating units
being the three main field development areas (Bacton, Easington Catchment Area (ECA) and Lomond/Everest) and their supporting
infrastructure assets. Indications of impairment at asset/field level are investigated separately. All goodwill was derived from the
recognition of deferred tax temporary liabilities.

The impairment test assumptions are based on forward prices of gas or oil, timing of cash flows including capital and abandonment
costs, reserves information and discount rates.

Outcome of test
The recoverable amount of all Exploration and Production CGUs continued to exceed their 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 2013, the Group recognised an exceptional impairment charge of £139.2m (2012 – £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. This is commented in more detail at Note 6.

(ii) Development assets
Development costs relate to the design, construction and testing of thermal and renewable generation sites and devices, including
wind farms, which the Group believes will generate probable future economic benefits. Costs capitalised as development intangibles
include options over land rights, planning application costs, environmental impact studies and other costs incurred in bringing wind
farm and other 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.

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 14). 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 18. Exceptional impairment charges of £25.5m were recognised
in relation to UK wind farm developments (£20.0m) and other development projects (£5.5m). In the prior year, an exceptional charge
was recognised in relation to a prospective oil field and an offshore wind project (£37.4m).

(iii) Other intangible assets
Included within other intangible assets are brands, customer lists, contracts, application software licence fees, software development
work, software upgrades and purchased PC software packages. Amortisation is over the shorter of the contract term or five years with
the exception of certain application software assets, which are amortised over 10 years.

132

SSE plc Annual Report 2013

Financial statements14. Property, plant and equipment
Consolidated

Power
generation
assets (i)
£m

Gas storage and
production
assets (ii)
£m

Land and
buildings
£m

Network
assets
£m

Metering assets
and other
equipment
£m

Assets under
construction (vi)
£m

Cost:
At 31 March 2011
Additions
Transfer from Intangible Assets

(Note 13) (iv)

Transfer from Assets under Construction
Disposals
Exchange rate adjustments

At 31 March 2012
Additions
Acquisitions (Note 18)
Transfer from Intangible Assets

(Note 13) (iv)

Disposals (iii)
Transfer from Assets under Construction
Exchange rate adjustments

At 31 March 2013

Depreciation:
At 1 April 2011
Charge for the year
Exceptional impairments (v)
Disposals (iii)
Exchange rate adjustments

At 31 March 2012
Charge for the year
Exceptional impairments (v)
Disposals (iii)
Exchange rate adjustments

5,014.7
–

–
785.4
(0.2)
(28.8)

5,771.1
1.7
94.3

1.6
(170.6)
756.4
29.6

6,484.1

1,781.9
208.5
275.1
(0.2)
(10.0)

2,255.3
202.3
277.9
(54.3)
9.9

616.5
–

–
6.3
–
–

622.8
3.4
30.0

–
–
204.3
–

860.5

59.0
39.3

–
–

98.3
45.6
–
–
–

At 31 March 2013

2,691.1

143.9

Consolidated

Net book value

At 31 March 2013

At 31 March 2012

At 1 April 2011

Power
generation
assets (i)
£m

Gas storage and
production
Assets (ii)
£m

3,793.0

3,515.8

3,232.8

716.6

524.5

557.5

241.6
–

–
18.1
(2.6)
–

257.1
–
8.8

–
–
0.1
–

5,859.3
76.1

–
371.0
(0.4)
–

6,306.0
62.3
–

–
–
999.8
–

481.0
–

–
60.5
(35.4)
(2.0)

504.1
0.2
4.7

–
(5.0)
44.9
0.4

961.3
1,400.4

52.5
(1,241.3)
–
–

1,172.9
1,285.6
157.7

9.9
(1.2)
(2,005.5)
1.0

Total
£m

13,174.4
1,476.5

52.5
–
(38.6)
(30.8)

14,634.0
1,353.2
295.5

11.5
(176.8)
–
31.0

266.0

7,368.1

549.3

620.4

16,148.4

39.7
7.2
–
(1.8)
–

45.1
7.5
2.0
–
–

54.6

Land and
buildings
£m

211.4

212.0

201.9

2,491.9
288.4
–
(0.4)
–

2,779.9
276.7
–
–
–

3,056.6

288.8
18.4
30.0
(33.6)
(1.3)

302.3
38.7
23.4
(0.9)
0.4

363.9

–
–
–
–
–

–

Network
assets
£m

Metering assets
and other
equipment
£m

Assets under
construction (vi)
£m

4,311.5

3,526.1

3,367.4

185.4

201.8

192.2

620.4

1,172.9

961.3

4, 661.3
561.8
305.1
(36.0)
(11.3)

5,480.9
570.8
303.3
(55.2)
10.3

6,310.1

Total
£m

9,838.3

9,153.1

8,513.1

(i) Power generation assets comprise thermal and renewable generating plant, 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 £42.4m, (2012 – £37.6m).

(ii) Gas storage and production assets include decommissioning costs with a net book value of £53.2m (2012 – £68.6m).

(iii) Assets disposed includes operating and in construction wind farms and miscellaneous office equipment.

(iv) Represents the carrying value of development assets transferred from intangible assets (Note 13) which have reached the consent

stage and have been approved for construction.

133

4. Financial statements1. 2. 3. Financial statementsNotes on the financial statements (continued)
for the year ended 31 March 2013

14. Property, plant and equipment (continued)
(v) Assets displaying indications of impairment, such as the SSE’s main gas-fired and coal-fired generation plants and legacy Metering

assets, are impairment reviewed under the value-in-use methodology.

The current year property, plant and equipment impairment charges in relation to the Keadby, Medway, Peterhead, Fiddler’s
Ferry and Ferrybridge thermal generation plants reflects the challenging market conditions for those plants and the operational
strategy announced by the Group in March 2013. The fair value 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
valuations assume a recovery of market conditions in the latter period of the current decade. The discount rates applied was
a pre-tax real rate of 7.3%. Total exceptional impairments of £303.3m (2012 – £305.1m) were recognised.

(vi) Assets under construction have been re-presented within the table on page 133 to aid understanding of these items. Assets under

construction at the balance sheet date does not include expenditure on economically-regulated network 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:

Cost

At 1 April 2011 and 1 April 2012
Additions

At 31 March 2013

Depreciation
At 31 March 2011
Charge for the year

At 31 March 2012
Charge for the year

At 31 March 2013

Net book value

At 31 March 2013

At 31 March 2012

At 1 April 2011

Power
generation
assets
£m

387.8
–

387.8

29.8
18.5

48.3
18.5

66.8

321.0

339.5

358.0

Network
assets
£m

Metering assets
and other
equipment
£m

5.0
–

5.0

5.0
–

5.0

–

7.0
–

7.0

7.0
–

7.0

–

Total
£m

399.8
–

399.8

41.8
18.5

60.3
18.5

78.8

321.0

339.5

358.0

15. Biological assets
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 2012 and 31 March 2013

£m

3.4

The pre-tax discount rate used in determining the fair value in 2013 was 8% (2012 – 8%). A 2.0% decrease/(increase) in the discount rate
would increase/(decrease) the fair value of biological assets by approximately £0.5m (2012 – £0.5m). No trees were harvested during the
year. The Company does not hold any biological assets.

134

SSE plc Annual Report 2013

Financial statements

16. Investments
(a) Associates and Joint Ventures

Share of net assets/cost
At 31 March 2011
Additions
Repayment of shareholder loans
Conversion of loan to equity
Disposal of shareholder loan
Transfer to Held For Sale
Dividends received
Share of profit after tax
Share of other reserves

adjustments

Disposal
Exchange rate adjustments

At 31 March 2012
Additions
Repayment of shareholder loans
Dividends received
Share of profit after tax
Share of other reserves

adjustments

Disposal
Impairment
Exchange rate adjustments

SGN
£m

191.0
–
–
–
–
–
(65.0)
118.8

(12.2)
–
–

232.6
–
–
(30.0)
101.5

8.3
–
–
–

Equity

Other JCEs
and associates

Equity total
£m

SGN
£m

Other JCEs
and associates
£m

Loans total
£m

Total
£m

Loans

569.8
155.5
–
35.4
–
(7.5)
(46.4)
20.6

(3.2)
(38.6)
(6.5)

679.1
13.5
–
(57.0)
28.6

(1.3)
(26.5)
(37.4)
1.8

760.8
155.5
–
35.4
–
(7.5)
(111.4)
139.4

(15.4)
(38.6)
(6.5)

911.7
13.5
–
(87.0)
130.1

7.0
(26.5)
(37.4)
1.8

913.2

266.9
–
–
–
–
–
–
–

–
–
–

266.9
–
–
–
–

–
–
–
–

857.7
138.6
(25.9)
(35.4)
(10.0)
–
–
–

–
–
–

925.0
88.6
(31.6)
–
–

–
–
(4.9)
–

1,124.6
138.6
(25.9)
(35.4)
(10.0)
–
–
–

–
–
–

1,191.9
88.6
(31.6)
–
–

–
–
(4.9)
–

1,885.4
294.1
(25.9)
–
(10.0)
(7.5)
(111.4)
139.4

(15.4)
(38.6)
(6.5)

2,103.6
102.1
(31.6)
(87.0)
130.1

7.0
(26.5)
(42.3)
1.8

266.9

977.1

1,244.0

2,157.2

At 31 March 2013

312.4

600.8

The investment in Scotia Gas Networks is disclosed separately to aid understanding of the Group’s financial performance.

Company

Equity

Loans

SGN
£m

Other JCEs
and associates
£m

Equity total
£m

SGN
£m

Other JCEs
and associates
£m

Loans total
£m

Total
£m

Share of net assets/cost
At 31 March 2011
Increase in shareholder loans
Repayment of shareholder loans

At 31 March 2012
Increase in shareholder loans
Repayment of shareholder loans

At 31 March 2013

190.0
–
–

190.0

–
–
–

–

190.0
–
–

190.0

266.9
–
–

266.9

762.6
118.9
(8.4)

873.1
76.8
(8.3)

941.6

1,029.5
118.9
(8.4)

1,140.0
76.8
(8.3)

1,208.5

1,219.5
118.9
(8.4)

1,330.0
76.8
(8.3)

1,398.5

135

4. Financial statements1. 2. 3. Financial statements

Notes on the financial statements (continued)
for the year ended 31 March 2013

16. Investments (continued)
Scotia Gas Networks Limited is deemed to warrant separate disclosure from other jointly controlled entities and is reported as a
separate segment in the analysis of Group operating profit (Note 4). The results of Scotia Gas Networks Limited, of which the Group
has a 50% share, can be illustrated thus:

Operating Profit
Finance Costs: excluding loan stock
Finance Costs: interest on loan stock

Profit before tax
Taxation

Profit for the year

SSE share of profit

2013

Before
exceptional
items and certain
remeasurements
£m

Exceptional
items and certain
remeasurements
£m

468.1
(188.7)
(66.5)

212.9
(64.8)

148.1

–
17.4
–

17.4
37.4

54.8

2012

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

468.1
(171.3)
(66.5)

230.3
(27.4)

202.9

Total
£m

469.6
(164.7)
(66.8)

238.1
(0.5)

237.6

74.0

27.4

101.4

70.3

48.5

118.8

As an investor, SSE plc received £33.3m (2012 – £33.4m) in relation to loan stock interest payable to the Group.

The balance sheet of Scotia Gas Networks Limited can be summarised as follows (100%):

Scotia Gas Networks Limited

31 March 2013

31 March 2012

Non-current
assets
£m

6,120.0

5,870.4

Current
assets
£m

114.7

159.8

Current
liabilities
£m

Non-current
liabilities
£m

(342.7)

(429.3)

(5,267.0)

(5,135.5)

The financial statements of the Group’s other jointly controlled entities and associates can be summarised as follows (100%):

Jointly Controlled Entities

31 March 2013

31 March 2012

Associates

31 March 2013

31 March 2012

Current
assets
£m

Non-current
assets
£m

Current
liabilities
£m

Non-current
liabilities
£m

Revenues
£m

Profit after tax
£m

445.2

133.6

116.7

114.1

2,326.7

1,721.8

1,126.5

203.3

(1,417.4)

(1,005.4)

(135.7)

(1,195.3)

(56.1)

(45.5)

(37.9)

(42.5)

562.1

268.4

179.9

186.8

89.1

40.7

0.2

2.7

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 had provided loans of £761.6m (2012 – £740.3m) to Greater Gabbard Offshore Winds Limited, £124.7m
(2012 – £132.9m) to Marchwood Power Limited and had invested equity and loans of £261.0m (2012 – £298.3m) in Walney (UK)
Offshore Winds Limited.

136

SSE plc Annual Report 2013

Financial statements
16. Investments (continued)
(b) Other investments
Consolidated

At 31 March 2011
Additions in the year
Disposals

At 31 March 2012
Additions in the year

At 31 March 2013

Faroe Petroleum
£m

18.0
–
–

18.0
–

18.0

BIFab
£m

11.0
–
–

11.0
–

11.0

Other
£m

10.6
2.1
(5.6)

7.1
10.6

17.7

Total
£m

39.6
2.1
(5.6)

36.1
10.6

46.7

Other investment additions in the year includes £10.0m invested in Greencoat Capital following disposal of certain wind farms (Note 18a).

Company

At 31 March 2012 and at 31 March 2013

Faroe Petroleum
£m

18.0

Total
£m

18.0

17. Subsidiary undertakings
Details of the principal subsidiary undertakings are disclosed in the Accompanying Information section (A3) on page 183.

Investment in subsidiaries
Company

At 31 March 2011
Increase in existing investments (i)

At 31 March 2012
Increase in existing investments (i)
Transfers in (ii)

At 31 March 2013

Total
£m

2,318.4
30.7

2,349.1
16.0
61.7

2,426.8

(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 (2013 – £16.0m, 2012 – £13.5m) and shares issued in the subsidiary SSE E&P (UK) Limited
in the prior year (2012 – £17.2m).

(ii) Equity in SSE Renewables Limited was transferred from SSE Renewables Group (UK) Limited at book value during the year.

Service concession arrangements
Details of the Group’s service concession arrangements are disclosed in the Accompanying information Note (A3) on page 183.

137

4. Financial statements1. 2. 3. Financial statementsNotes on the financial statements (continued)
for the year ended 31 March 2013

18. Acquisitions, disposals and held-for-sale assets
(a) Acquisitions
On 9 October 2012, the Group acquired 100% of the shares of Endesa Ireland Limited from Endesa Generacion SA for total consideration
of £281.8m cash and £8.0m of deferred consideration. The business consists of four thermal generation plants in operation and a 460MW
CCGT plant under construction (Great Island). The acquisition contributes towards the Group’s aim of operating a balanced generation
and supply business in Ireland. Following the acquisition the Company changed its name from Endesa Ireland Limited to SSE Generation
Ireland Limited.

Assets acquired:
Property, Plant and Equipment
Intangible Assets
Inventories
Cash
Other working capital items
Provisions
Deferred tax

Net Assets

£m

268.2
25.3
19.2
0.5
15.5
(26.4)
(12.5)

289.8

The acquired business contributed £38.0m to revenue and £11.0m to operating profit in the year to 31 March 2013.

During the financial year, the Group acquired a number of other businesses and assets which are not considered material. On 22 June
2012, the Group acquired the Phoenix gas supply business in Northern Ireland for cash consideration of £29.3m and on 1 December
2012, the Group increased its stake to 50% in three producing North Sea gas fields for a net cash consideration of £25.5m. Other
businesses were acquired in the year for cash consideration of £3.8m. A cash deposit of £18.0m in relation to the Sean gas field
acquisition (see Note 36) was paid on 28 January 2013.

(b) Disposals
On 27 March 2013, SSE completed the disposal of four wind farms, including its stake in the Braes of Doune joint venture, to
Greencoat Capital for a total cash consideration of £140.9m, which resulted in a gain on disposal of £8.8m. The Group entered into
power purchase agreements (PPAs) with Greencoat Capital for three of the wind farms for a proportion of the output from the wind
farms. The arrangements are not judged to be leasing arrangements. In addition, SSE invested cash of £10m in the Greencoat initial
public offering, which is disclosed in Other Investments (Note 16). During the financial year, the Group also disposed of its wind
portfolios in Sweden and Italy for a combined cash consideration of £12.9m, which resulted in a loss on disposal of £0.6m.

(c) Held-for-sale assets
At 31 March 2012, 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 the year to 31 March 2013, the Group disposed of
the majority of these items in the transactions noted at (b). The assets and liabilities classified as held for sale, and the comparative
balances at 31 March 2012, are as follows:

Property, Plant and Equipment
Equity investment in jointly controlled entities
Cash and cash equivalents
Other net current liabilities

2013
£m

2.3
–
–
–

2.3

2012
£m

5.5
58.3
3.9
0.3

68.0

138

SSE plc Annual Report 2013

Financial statements

18. Acquisitions, disposals and held-for-sale assets (continued)
(d) Acquisitions and disposals in the previous year
(i) Acquisitions in the previous year
In the prior 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.

(ii) Disposals in the prior year
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.

19. Inventories

Fuel and consumables
Work in progress
Goods for resale
Less: provisions held

Consolidated

2013
£m

272.5
31.9
2.6
(15.3)

291.7

2012
£m

308.2
26.1
2.8
(13.4)

323.7

The Group has recognised £1,519.4m within cost of sales in the year (2012 – £1,505.5m) and have also recognised £3.6m (2012 – £1.1m)
relating to stock write-downs and increases in provisions held. The Company does not hold any inventories.

20. Trade and other receivables

Current assets
Retail debtors
Wholesale trade receivables
Other trade receivables

Trade receivables

Amounts owed by subsidiary undertakings
Other receivables
Cash held as collateral
Prepayments and accrued income

Non-current assets
Amounts owed by subsidiary undertakings

Consolidated

Company

2013
£m

2012
£m

2013
£m

2012
£m

825.6
1,854.7
134.8

2,815.1

–
306.0
55.0
1,776.9

4,953.0

690.5
2,553.3
101.3

3,345.1

–
286.7
119.9
1,422.9

5,174.6

–

4,953.0

5,174.6

–
–
–

–

3,782.5
20.4
–
–

3,802.9

4,341.9

8,144.8

–
–
–

–

2,917.8
17.8
–
–

2,935.6

3,790.6

6,726.2

Other receivables includes financial assets totalling £39.9m (2012 – £21.8m). 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 33.

139

4. Financial statements1. 2. 3. Financial statements

Notes on the financial statements (continued)
for the year ended 31 March 2013

21. Cash and cash equivalents

Bank balances
Call deposits

Cash and cash equivalents

Consolidated

Company

2013
£m

517.8
20.9

538.7

2012
£m

158.9
30.3

189.2

2013
£m

289.2
–

289.2

2012
£m

9.4
4.9

14.3

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 25)

Cash and cash equivalents in the statement of cash flows

22. 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

2013
£m

538.7
–

538.7

2012
£m

189.2
(3.7)

185.5

2013
£m

289.2
–

289.2

2012
£m

14.3
–

14.3

Consolidated

Company

2013
£m

2012
£m

2013
£m

2012
£m

–
2,531.4
1,418.9
1,097.3

5,047.6

341.4

5,389.0

–
3,212.5
1,344.6
625.6

5,182.7

332.7

5,515.4

2,899.7
–
71.7
–

2,971.4

2,463.2
–
51.7
–

2,514.9

–

2,971.4

2,514.9

(i) Current accruals and deferred income includes customer contributions of £16.0m (2012 – £15.2m) and government grants of £1.0m (2012 – £0.6m).

(ii) Non-current accruals and deferred income includes customer contributions of £211.3m (2012 – £221.2m) and government grants of £6.9m (2012 – £5.0m).

23. Current tax liabilities

Corporation tax

Consolidated

Company

2013
£m

286.8

2012
£m

231.8

2013
£m

17.9

2012
£m

10.7

140

SSE plc Annual Report 2013

Financial statements

24. Construction contracts

Contracts in progress at balance sheet date:
Amounts due from contract customers included in trade and other receivables (Note 20)
Amounts due to contract customers included in trade and other payables (Note 22)

Contract costs incurred plus recognised profits less recognised losses to date
Less: Progress billings

2013
£m

47.1
(33.4)

286.7
(298.8)

(12.1)

2012
£m

29.3
(26.7)

201.6
(209.0)

(7.4)

In the year to 31 March 2013, contract revenue of £488.2m (2012 – £462.9m) was recognised.

At 31 March 2013, retentions held by customers for contract work amounted to £2.0m (2012 – £1.8m). Advances received from
customers for contract work amounted to £3.6m (2012 – £12.9m).

The Company does not hold any construction contracts.

25. 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 21)

Unadjusted Net Debt

Add/(less):
Hybrid capital (Note 30)
Obligations under finance leases
Cash held as collateral (Note 20)

Adjusted Net Debt and Hybrid Capital

Consolidated

Company

2013
£m

–
1,529.2

1,529.2
15.4

1,544.6

2013
£m

4,225.4
315.0
–

4,540.4

6,085.0

(538.7)

5,546.3

2,186.8
(330.4)
(55.0)

7,347.7

2012
£m

3.7
693.1

696.8
11.8

708.6

2012
£m

5,206.7
330.3
–

5,537.0

6,245.6

(189.2)

6,056.4

1,161.4
(342.1)
(119.9)

6,755.8

2013
£m

–
1,414.1

1,414.1
–

1,414.1

2013
£m

3,011.6
–
270.5

3,282.1

4,696.2

(289.2)

4,407.0

2,186.8
–
–

6,593.8

2012
£m

–
440.1

440.1
–

440.1

2012
£m

3,955.2
–
268.2

4,223.4

4,663.5

(14.3)

4,649.2

1,161.4
–
–

5,810.6

141

4. Financial statements1. 2. 3. Financial statements

Notes on the financial statements (continued)
for the year ended 31 March 2013

25. Loans and other borrowings (continued)
(i) Borrowings
Borrowing facilities
The Group has an established €1.5bn Euro Commercial Paper programme. Paper can be issued in a range of currencies and is swapped
back into Sterling. The Group has £1.0bn (2012: £1.0bn) of committed credit facilities in place, maturing in August 2015, which provide
a backup to the commercial paper programme and at 31 March 2013 these facilities were undrawn. In addition the Group has a further
£650m of bank facilities that will be drawn down in the course of next year at which point they will become term loans.

In the year the Group undertook a US private placement for a total consideration of $700m (£446m) which was split over 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.

Analysis of borrowings
Loans and borrowings – Consolidated

Current
Other short-term loans – amortising (ii)
Other short-term loans – non-amortising (iii)
Non-recourse funding (iv)
6.125% Eurobond repayable on 29 July 2013
5.75% Eurobond repayable 5 February 2014

Total current

Non-current
Bank loans – non-amortising (v)
Non-recourse funding (iv)
US Private Placement 16 April 2017

Between two and five years

Bank loans – non-amortising (v)
Non-recourse funding (iv)
5.00% Eurobond repayable on 1 October 2018
US Private Placement 16 April 2019
4.25% Eurobond repayable 14 September 2021
US Private Placement 16 April 2022
5.875% Eurobond repayable on 26 September 2022
US Private Placement 16 April 2024
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 (vi) (Note 33)

Total non-current

Total

142

SSE plc Annual Report 2013

2013
Weighted
average interest
rate (vi)

2013
Face value
£m

2013
Fair value
£m

5.79%
5.37%
5.74%
6.13%
5.75%

1.40%
6.04%
3.17%

2.18%
6.58%
5.00%
3.66%
4.25%
4.31%
5.88%
4.44%
8.38%
5.50%
4.63%
6.25%
4.46%
1.77%

2013
Carrying
amount
£m

1.4
308.9
13.7
506.0
699.2

1.4
308.7
13.7
506.2
700.0

1.4
328.1
13.7
515.3
726.6

1,530.0

1,585.1

1,529.2

61.5
65.1
12.8

139.4

526.6
239.7
500.0
67.0
300.0
162.7
300.0
204.1
500.0
350.0
325.0
350.0
113.7
122.0

57.3
65.1
13.6

136.0

571.1
239.7
577.1
72.6
331.0
179.0
373.0
224.0
755.1
427.2
352.0
453.3
199.0
124.4

61.5
65.1
12.7

139.3

526.6
239.8
497.0
66.7
296.7
162.1
297.4
203.5
493.5
350.2
323.6
346.0
113.1
122.0

4,060.8

4,878.5

4,038.2

–

47.9

4,200.2

5,014.5

4,225.4

5,730.2

6,599.6

5,754.6

Financial statements
25. Loans and other borrowings (continued)
Loans and borrowings – Consolidated

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 (vi) (Note 33)

Total non-current

Total

(i) Bank overdrafts are repayable on demand.

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

5,200.4

5,807.6

5,206.7

31.2

5,898.1

6,507.8

5,903.5

(ii) Balances under amortising loans are adjusted for capital repayments or drawings in the financial year. These are held with the European Investment Bank (EIB) in a combination of fixed and

floating rates.

(iii) Balances include commercial paper, term loans and EIB debt.

(iv) The Tay Valley Lighting companies formed under 50:50 partnership with Royal Bank Leasing Limited to provide street lighting services are categorised as subsidiaries under SIC-12 (Accompanying

information A3). 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 fair value adjustment relates to the change in the carrying amount of the borrowings as a result of fair value hedges that are in place. The movement in the fair value adjustment is recognised

in the income statement with a corresponding movement on the hedging instrument also being recognised in the income statement.

(vii) The weighted average interest rates are as noted. The weighted average interest rates for the Group (including swaps) for the year ended 31 March 2013 was 5.26% (2012 – 5.06%).

143

4. Financial statements1. 2. 3. Financial statementsNotes on the financial statements (continued)
for the year ended 31 March 2013

25. Loans and other borrowings (continued)
(ii) Finance lease liabilities
Future finance lease commitments are as follows:

Amounts payable:
Within one year
Between one and five years
After five years

Less: future finance charge

Present value of lease obligations

Minimum lease payments

Present Value of minimum
lease payments

2013
£m

51.2
199.1
373.4

623.7

(293.3)

330.4

2012
£m

48.8
199.9
423.2

671.9

(329.8)

342.1

2013
£m

15.4
73.0
242.0

330.4

2012
£m

11.8
66.5
263.8

342.1

The Group entered into a power purchase agreement categorised as a finance lease with Marchwood Power Ltd in the year ended March
2010. The lease is for use of their main asset, a 840MW Gas powered CCGT Electricity Generating Plant. The term of the lease is 15 years
with the Group having the option for a further 5 years extension at the end of this period. £18.9m (2012 – £19.6m) 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 seven 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.

26. Deferred taxation

The following are the deferred tax liabilities and assets recognised by the Group and movements thereon during the current and prior
reporting periods:

Accelerated
capital
allowances
£m

Fair value
gains/(losses)
on derivatives
£m

Retirement
benefit
obligations
£m

Other (i)
£m

181.0
0.3
(12.3)
8.4
(0.8)

176.6
5.8
(10.0)
(18.2)
(1.3)
0.5

153.4

Total
£m

906.6
0.3
(179.8)
(26.6)
(0.8)

699.7
13.1
(10.0)
(57.8)
5.7
0.5

651.2

767.9
–
(64.9)
–
–

703.0
7.3
–
(9.0)
–
–

701.3

131.5
–
(131.0)
(4.7)
–

(4.2)
–
–
(48.4)
11.4
–

(41.2)

(173.8)
–
28.4
(30.3)
–

(175.7)
–
–
17.8
(4.4)
–

(162.3)

Consolidated
At 1 April 2011
Acquisitions
(Credit)/charge to Income Statement
(Credit)/charge to equity
Exchange adjustments

At 31 March 2012
Acquisitions
Disposals
(Credit)/charge to Income Statement
(Credit)/charge to equity
Exchange adjustments

At 31 March 2013

144

SSE plc Annual Report 2013

Financial statements
26. Deferred taxation (continued)

Company
At 1 April 2011
(Credit)/charge to Income Statement
(Credit)/charge to equity

At 31 March 2012
Charge/(credit) to Income Statement
Charge/(credit) to equity

At 31 March 2013

Fair value
gains/(losses)
on derivatives
£m

Retirement
benefit
obligations
£m

Share-
based
payments
£m

(9.9)
(16.4)
(3.6)

(29.9)
3.3
11.0

(15.6)

(62.3)
9.7
5.5

(47.1)
8.1
(3.8)

(42.8)

1.1
(0.1)
–

1.0
–
(0.1)

0.9

Other
£m

(51.0)
11.1
–

(39.9)
0.6
–

(39.3)

Total
£m

(122.1)
4.3
1.9

(115.9)
12.0
7.1

(96.8)

(i)

Includes deferred tax on fair value items recognised in business combinations.

Certain deferred tax assets and liabilities have been offset, including the asset balances analysed 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

2013
£m

806.6
(155.4)

651.2

2012
£m

921.8
(222.1)

699.7

2013
£m

–
(96.8)

(96.8)

2012
£m

–
(115.9)

(115.9)

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 remeasurement, of
£47.4m (2012 – £33.4m charge).

A deferred tax asset has not been recognised on £66.0m of trading losses (2012 – £56.3m) due to uncertainty around the availability
of future profits in the companies concerned.

27. Provisions

Consolidated
At 1 April 2012
Charged in the year
Unwind of discount
Released during the year
Acquired
Utilised during the year

At 31 March 2013

At 31 March 2013
Non-current
Current

At 31 March 2012
Non-current
Current

Decommissioning
(i)
£m

Contracting
provisions
(ii)
£m

Onerous
contracts
(iii)
£m

151.9
0.3
7.7
–
25.1
–

185.0

185.0
–

185.0

151.9
–

151.9

24.1
8.9
–
–
–
(1.7)

31.3

16.0
15.3

31.3

13.0
11.1

24.1

37.4
–
–
–
–
(37.4)

–

–
–

–

–
37.4

37.4

Other
(iv)
£m

24.2
47.7
–
(0.6)
4.7
(2.7)

73.3

28.5
44.8

73.3

17.4
6.8

24.2

Total
£m

237.6
56.9
7.7
(0.6)
29.8
(41.8)

289.6

229.5
60.1

289.6

182.3
55.3

237.6

145

4. Financial statements1. 2. 3. Financial statements
Notes on the financial statements (continued)
for the year ended 31 March 2013

27. Provisions (continued)
(i) Provision has been made for the estimated net present cost of decommissioning North Sea gas production assets and certain generation and gas storage assets. Estimates are based on

forecasted clean-up costs at the time of decommissioning discounted for the time value of money. The timing of costs provided is dependent on the lives of the facilities. Decommissioning
provisions associated with the acquisitions of Endesa Ireland and the increase in SSE’s share of certain gas fields have been recognised in the year.

(ii) The Group holds provisions in relation to long-term construction contracts including street lighting PFIs. These relate to contract costs that are not guaranteed to being recovered under the

respective contracts.

(iii) The Group utilised provisions of £37.4m held in relation to onerous contracts in the year. The initial recognition of these provisions was as exceptional charges and accordingly the utilisation credit

has been included in exceptional items (Note 6).

(iv) Other provisions include balances held in relation to insurance and warranty claims and costs associated with licence condition breaches. In the year, provisions totalling £47.7m were recognised
in relation to restructuring costs related to the closure of certain thermal generation plants, exit costs in relation to certain investments and developments and legal and contractual disputes
with £44.3m being recognised as exceptional charges (Note 6). The Group also 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.

28. Share capital

Allotted, called up and fully paid:
At 1 April 2012
Issue of shares (i)

At 31 March 2013

Number
(millions)

944.7
19.6

964.3

£m

472.3
9.8

482.1

The Company has one class of Ordinary share which carries no right to fixed income. The holders of Ordinary shares are entitled to
receive dividends as declared and are entitled to one vote per share at meetings of the Company.

(i) Shareholders were able to elect to receive Ordinary shares in place of the final dividend of 56.1p per Ordinary share (in relation to year ended 31 March 2012) and the interim dividend of 25.2p

(in relation to the current year) under the terms of the Company’s Scrip dividend scheme. This resulted in the issue of 13,213,634 and 5,920,120 new fully paid Ordinary shares respectively (2012:
907,008 and 6,273,193). In addition, the Company issued 0.5m (2012 – 0.6m) shares during the year under the savings-related share option schemes for a consideration of £5.7m (2012 – £6.1m).

During the year, on behalf of the Company, the employee share trust purchased 0.6m shares for a total consideration of £7.7m
(2012 – 0.4m shares, consideration of £4.9m). At 31 March 2013, the trust held 3.5m shares (2012 – 3.6m) which had a market value
of £51.9m (2012 – £48.0m).

29. Reserves
The movement in reserves is reported in the Statement of Changes in Equity which is included as part of the primary statements
(pages 108 and 109).

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 £866.5m
(2012 – £739.0m). As allowed by section 408 of the Companies Act 2006, the Company has not presented its own income statement.

30. Hybrid capital

GBP 750m 5.453% perpetual subordinated capital securities
EUR 500m 5.025% perpetual subordinated capital securities
USD 700m 5.625% perpetual subordinated capital securities
EUR 750m 5.625% perpetual subordinated capital securities

2013
£m

744.5
416.9
427.2
598.2

2012
£m

744.5
416.9
–
–

2,186.8

1,161.4

On 18 September 2012 the Company issued €750m EUR and $700m USD bonds (hybrid capital). This added to the GBP and EUR hybrid
capital bonds that were issued in 20 September 2010. Each bond has no fixed redemption date but the Company may, at its sole
discretion, redeem all, but not part, of these capital securities at their principal amount. The date for the discretionary redemption
of the capital issued on 18 September 2012 is 1 October 2017 and every five years thereafter. The 20 September 2010 issued capital
may be redeemed at their principal amounts on 1 October 2015 or 1 October 2020 or any subsequent coupon payment date.
146

SSE plc Annual Report 2013

Financial statements
30. Hybrid capital (continued)
In addition, under certain circumstances defined in the terms and conditions of the issue, the Company may at its sole discretion
redeem all (but not part of) the bonds at their principal amount at any time prior to 1 October 2017 (for the 18 September 2012
securities) or at any time prior to 1 October 2015 (for the 20 September 2010 securities).

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

Interest will accrue on any deferred coupon.

For the capital issued on 20 September 2010 and the EUR 750m capital issued on 18 September 2012, coupon payments are expected
to be made annually in arrears on 1 October in each year. Coupon payments of £63.4m (2012 – £65.5m) in relation to the capital issued
on 20 September 2010 were made on 1 October 2012. For the USD 700m capital issued on 18 September 2012, coupon payments are
expected to be made bi-annually in arrears on 1 April and 1 October each year. The purpose of both issues was to strengthen SSE’s
capital base and to fund the Group’s ongoing capital investment and acquisitions.

31. Retirement benefit obligations
Defined Benefit Schemes
The Group has two funded final salary pension schemes which provide defined benefits based on final pensionable pay. The schemes
are subject to independent valuations at least every three years. The future benefit obligations are valued by actuarial methods on the
basis of an appropriate assessment of the relevant parameters. The Company operates one of these schemes, being the Scottish Hydro-
Electric scheme.

The Group also has an Employer Financed Retirement Benefit scheme and a Group Personal Pension Plan. The Group Personal Pension
Plan operates on a Money purchase basis and has been arranged with Friends Provident. The Group matches employee contributions up
to a specified limit, in most circumstances this is set at 6%. The Group may also provide additional contributions of 3% after five years
and a further 3% after ten year’s continuous Group service.

Pension summary:

Scottish Hydro-Electric (Company)
Southern Electric

Scheme type

Defined benefit
Defined benefit

IFRIC 14 movement

Net actuarial loss and movement in IFRIC 14 liability

Net actuarial (loss)/gain recognised
in respect of the pension asset in the
Statement of Comprehensive Income

Net pension (liability)

2013
£m

(136.6)
(26.7)

(163.3)

113.1

(50.2)

2012
£m

(68.8)
(164.1)

(232.9)

71.8

(161.1)

2013
£m

(185.9)
(519.9)

(705.8)

2012
£m

(196.2)
(535.7)

(731.9)

The Scottish Hydro-Electric Pension Scheme net liability of £185.9m (2012 – £196.2m) is presented after an IFRIC 14 minimum funding
requirement of £189.3m (2012 – £302.4m).

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 2012
Hymans Robertson

£1,374.5m
£1,621.2m
Projected Unit

Inflation curve plus 1.5% pa
RPI
84.8%

Southern Electric

31 March 2010
Aon Hewitt

£1,183.5m
£1,666.6m
Projected Unit

5.2%
3.7%
71.0%

147

4. Financial statements1. 2. 3. Financial statements
Notes on the financial statements (continued)
for the year ended 31 March 2013

31. Retirement benefit obligations (continued)
Both schemes have been updated to 31 March 2013 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
2013

At 31 March
2012

4.7%
3.2%
4.1%
3.2%

4.7%
3.2%
4.6%
3.2%

The assumptions relating to longevity underlying the pension liabilities at 31 March 2013 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
2013
Male

At 31 March
2013
Female

At 31 March
2012
Male

At 31 March
2012
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

Valuation of combined Pension Schemes

At 31 March 2013

At 31 March 2012

Increase/
decrease in
assumption

0.1%
1 year

Effect on
scheme
liabilities

+/- 1.9%
+/- 3.2%

Increase/
decrease in
assumption

0.1%
1 year

Effect on
scheme
liabilities

+/- 1.8%
+/- 2.9%

Long-term
rate of return
expected at
31 March
2013
%

6.7
3.0
4.1
3.7

Consolidated

Company

Long-term
rate of return
expected at
31 March
2012
%

7.0
3.3
4.6
4.3

Value at
31 March
2013
£m

1,109.0
883.0
812.0
314.1

3,118.1

Long-term
rate of return
expected at
31 March
2013
%

7.0
3.0
4.1
4.6

Value at
31 March
2012
£m

1,040.3
939.4
481.2
234.2

2,695.1

Value at
31 March
2013
£m

407.2
736.0
281.9
140.9

1,566.0

Long-term
rate of return
expected at
31 March
2012
%

7.0
3.3
4.6
4.3

Value at
31 March
2012
£m

406.6
636.9
189.7
122.0

1,355.2

(3,634.6)

(3,124.6)

(1,562.6)

(1,249.0)

(516.5)
(189.3)

(705.8)
162.3

(543.5)

(429.5)
(302.4)

(731.9)
175.7

(556.2)

3.4
(189.3)

(185.9)
42.8

(143.1)

106.2
(302.4)

(196.2)
47.1

(149.1)

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

(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.

148

SSE plc Annual Report 2013

Financial statements

31. Retirement benefit obligations (continued)
Movements in the defined benefit obligation during the year:

At 1 April
Movements in the year:
Service costs
Member contributions
Benefits paid
Interest on pension scheme liabilities
Actuarial (losses)

At 31 March

Movements in scheme assets during the year:

At 1 April
Movements in the year:
Expected return on pension scheme assets
Assets distributed on settlement
Employer contributions
Member contributions
Actuarial gains

At 31 March

Charges/(credits) recognised:

Current service cost (charged to operating profit)

Charged/(credited) to finance costs:
Expected return on pension scheme assets
Interest on pension scheme liabilities

Consolidated

Company

2013
£m

2012
£m

2013
£m

2012
£m

(3,124.6)

(2,758.0)

(1,249.0)

(1,086.7)

(40.8)
(7.6)
112.5
(142.3)
(431.8)

(37.8)
(7.8)
112.8
(149.8)
(284.0)

(20.6)
(3.2)
40.1
(57.1)
(272.8)

(17.7)
(3.3)
40.1
(59.2)
(122.2)

(3,634.6)

(3,124.6)

(1,562.6)

(1,249.0)

Consolidated

Company

2013
£m

2012
£m

2013
£m

2012
£m

2,695.1

2,463.6

1,355.2

1,221.1

134.1
(112.5)
125.3
7.6
268.5

147.4
(112.8)
138.0
7.8
51.1

63.8
(40.1)
47.7
3.2
136.2

69.6
(40.1)
47.9
3.3
53.4

3,118.1

2,695.1

1,566.0

1,355.2

Consolidated

Company

2013
£m

40.8

(134.1)
142.3

8.2

2012
£m

37.8

(147.4)
149.8

2.4

2013
£m

20.6

(63.8)
57.1

(6.7)

2012
£m

17.7

(69.6)
59.2

(10.4)

History of (deficit)

Total fair value of

plan assets

Present value of defined

benefit obligation

IFRIC 14 Liability

Consolidated

Company

2013
£m

2012
£m

2011
£m

2010
£m

2009
£m

2013
£m

2012
£m

2011
£m

2010
£m

2009
£m

3,118.1

2,695.1

2,463.6

2,298.3

1,786.8

1,566.0

1,355.2

1,221.1

1,118.8

860.0

(3,634.6)
(189.3)

(3,124.6)
(302.4)

(2,758.0)
(374.2)

(2,762.3)
(256.3)

(1,929.8)
(130.5)

(1,562.6)
(189.3)

(1,249.0)
(302.4)

(1,086.7)
(374.2)

(1,113.6)
(256.3)

(729.5)
(130.5)

(Deficit) in the scheme

(705.8)

(731.9)

(668.6)

(720.3)

(273.5)

(185.9)

(196.2)

(239.8)

(251.1)

–

Return on assets
As required by IAS 19, the expected return on assets is based on the long-term expectation of returns for each asset class at the
beginning of the year. The return on equities is 3.7% 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 2013.

149

4. Financial statements1. 2. 3. Financial statements

Notes on the financial statements (continued)
for the year ended 31 March 2013

31. Retirement benefit obligations (continued)
The actual return on Pension Scheme assets is as follows:

Actual return on Pension Scheme assets

History of experience gains and losses

Consolidated

Company

2013
£m

402.6

2012
£m

198.5

2013
£m

200.0

2012
£m

123.0

Consolidated

Company

2013
£m

2012
£m

2011
£m

2010
£m

2009
£m

2013
£m

2012
£m

2011
£m

2010
£m

2009
£m

Total actuarial (losses)
and gains recognised
in the Statement of
Comprehensive Income
before adjustment
for taxation

Experience (losses)/gains

on scheme liabilities

Experience gains/(losses)

on scheme assets

(163.3)

(232.9)

109.1

(383.0)

(359.0)

(136.6)

(68.8)

92.3

(161.6)

(188.4)

(57.4)

17.3

52.7

(59.8)

0.8

(54.4)

6.2

26.9

(49.7)

–

268.5

51.1

14.7

394.1

(412.2)

136.2

53.4

23.1

200.4

(190.0)

The cumulative actuarial losses recognised in the Statement of Comprehensive Income before adjustment for taxation since the
adoption of IAS 19 is £1,047.4m losses (2012 – £997.2m).

Defined contribution scheme
The total contribution paid by the Group to defined contribution schemes was £27.4m (2012 – £19.1m).

Employer financed retirement benefit (EFRB) pension costs
The increase in the year in relation EFRB was £3.7m (2012 – £5.4m). This is included in other provisions (Note 27).

Staff costs analysis
The pension costs in Note 7 can be analysed thus;

Service costs
Defined contribution scheme payments

2013
£m

40.8
27.4

68.2

2012
£m

37.8
19.1

56.9

Expected contribution in the year to 31 March 2014
The Group currently expects to make contributions of £48.1m and £78.1m to the Scottish Hydro-Electric Pension Scheme and the
Southern Electric Pension Scheme in the year to 31 March 2014, respectively. These contributions include deficit repair contributions
of £29.5m and £56.7m respectively.

32. Employee share-based payments
The Group operates a number of share schemes for the benefit of its employees. Details of these schemes, all of which are equity-
settled, are as follows:

(i) Savings-related share option schemes (‘Sharesave’)

This scheme gives employees the option to purchase shares in the Company at a discounted market price, subject to the
employees remaining in employment for the term of the agreement. Employees may opt to save between £5 and £250 per month
for a period of 3 and/or 5 years. At the end of these periods employees have six months to exercise their options by using the cash
saved (including any bonus equivalent to interest). If the option is not exercised, the funds may be withdrawn by the employee and
the option expires.

150

SSE plc Annual Report 2013

Financial statements

32. Employee share-based payments (continued)
(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 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.

(iii) Deferred Annual Incentive Scheme

This scheme (previously deferred bonus scheme) applies to senior managers and Executive Directors. Under this scheme, 25% of all
eligible employees’ annual bonus is deferred into shares which only vest after three years, subject to continued service. The number
of shares awarded is determined by dividing the relevant pre-tax bonus amount by the share price shortly after the announcement
of the results for the financial year to which the bonus relates.

(iv) Performance Share Plan

This scheme applies to Executive Directors and Senior Executives. Shares granted under this arrangement vest subject to the
attainment of performance conditions over the relevant three year performance period as set out below:

Award made
Maximum value of award as a % of base salary

2 June 2009
150

2 June 2010
150

2 June 2011 2 June 2012
150

150

Performance conditions
Total shareholder return (i)

Earnings per share (ii)

Dividend per share growth (iii)

Full vesting
25% vesting

≥ 75th
percentile
median

Full vesting
25% vesting

RPI + 9%
RPI + 3%

Full vesting
25% vesting

–
–

RPI + 8%
RPI + 2%

RPI + 6%
RPI + 2%

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 FTSE 100 companies for the 2009 award and TSR target relative to other FTSE 100 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.

151

4. Financial statements1. 2. 3. Financial statements

Notes on the financial statements (continued)
for the year ended 31 March 2013

32. Employee share-based payments (continued)
(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 £16.0m (2012 – £13.5m) was recognised in the Income Statement in relation to these schemes, £1.9m (2012 – £1.4m) of this
was in relation to the Directors of the Company.

Details used in the calculation of the costs of these schemes are as follows:

(i) Savings-related share option scheme
The movement in savings related share option schemes in the year were as follows:

Consolidated
As at 31 March 2013

Award date

11 July 2006
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
29 June 2012
29 June 2012

Option price
(pence)

Outstanding at
start of year

Granted

Exercised

Lapsed

Outstanding at
end of year

Date from which
exercisable

999
1,306
1,274
1,274
1,042
1,042
871
871
1,105
1,105
1,065
1,065

26,772
247,611
92,487
245,672
276,846
513,404
702,312
2,762,353
386,019
711,871
–
–

–
–
–
–
–
–
–
–
–
–
611,099
622,647

5,965,347

1,233,746

(3,671)
(210,405)
(1,210)
(1,672)
(255,314)
(1,597)
(9,197)
(4,621)
(1,429)
(516)
–
–

(489,632)

(23,101)
(7,669)
(91,277)
(7,856)
(6,102)
(19,396)
(28,492)
(101,337)
(49,151)
(56,257)
(32,984)
(33,079)

–
29,537
–
236,144
15,430
492,411
664,623
2,656,395
335,439
655,098
578,115
589,568

(456,701)

6,252,760

1 October 2011
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
1 October 2015
1 October 2017

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

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)

–
26,772
–
247,611
92,487
245,672
276,846
513,404
702,312
2,762,353
386,019
711,871

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

6,038,527

1,191,686

(584,178)

(680,688)

5,965,347

Expiry date (i)

31 March 2012
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
31 March 2016
31 March 2018

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

As share options are exercised continuously throughout the period from 1 October to 31 March, the weighted average share price
during this period of 1,433p (2012 – 1,291p) 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.

152

SSE plc Annual Report 2013

Financial statements

32. Employee share-based payments (continued)
Company
As at 31 March 2013

Award date

30 June 2009
30 June 2010
30 June 2010

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

Expiry date

1,042
871
871

1,253
413
283

1,949

–
–
–

–

–
–
–

–

1,253 1 October 2014 31 March 2015
413 1 October 2013 31 March 2014
283 1 October 2015 31 March 2016

1,949

Option price
(pence)

Outstanding at
start of year

Granted

Exercised

Outstanding at
end of year

Date from which
exercisable

Expiry date

1,306
1,274
1,042
871
871

144
442
1,253
413
283

2,535

–
–
–
–
–

–

(144)
(442)
–
–
–

(586)

– 1 October 2010 31 March 2011
– 1 October 2011 31 March 2012
1,253 1 October 2014 31 March 2015
413 1 October 2013 31 March 2014
283 1 October 2015 31 March 2016

1,949

No options were forfeited in the year.

(i) Options may remain exercisable beyond the published expiry date due to individuals taking advantage of the right to a payment holiday during the term of the scheme.

The fair value of these share options at the measurement date, calculated using the Black-Scholes model, and the assumptions made
in that model are as follows:

July 2006

July 2007

July 2008

July 2009

July 2010

July 2011

July 2012

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

227p

287p

217p
159p
Fair value of option
19% 19% 25% 25% 28% 28% 35% 35% 19% 19% 18% 18% 18% 18%
Expected volatility
4.7% 4.7% 5.8% 5.7% 4.9% 5.0% 2.7% 2.9% 1.4% 2.2% 1.2% 2.1% 0.4% 0.9%
Risk free rate
4.8% 4.8% 5.3% 5.2% 4.1% 4.2% 4.1% 4.2% 1.7% 2.2% 6.1% 6.1% 5.9% 5.8%
Expected dividends
Term of the option
5 yrs
3 yrs
Underlying price at grant date 1,180p 1,180p 1,460p 1,460p 1,397p 1,397p 1,139p 1,139p 1,089p 1,089p 1,393p 1,393p 1,391p 1,391p
871p 1,105p 1,105p 1,065p 1,065p
Strike price

999p 999p 1,306p 1,306p 1,274p 1,274p 1,042p 1,042p

313p 304p 339p 244p 269p

231p 246p

871p

182p

163p

171p

3 yrs

5 yrs

3 yrs

5 yrs

3 yrs

5 yrs

3 yrs

5 yrs

3 yrs

5 yrs

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

Consolidated

Company

2013

2012

Weighted average
price (pence)

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

1,899,009
610,162
(90,652)
(96,718)
(195,345)

2,126,456

645,462

1,219 1,752,503
522,744
1,395
(92,419)
1,263
(98,585)
1,255
1,506 (185,234)

1,240 1,899,009

1,301

802,911

1,205
1,315
1,194
1,304
1,328

1,219

1,581

2013

Weighted average
price (pence)

1,091
1,393
–
–
1,507

1,240

1,301

1,008
216
–
–
(180)

1,044

414

1,320
240
–
(342)
(210)

1,008

192

2012

Weighted average
price (pence)

1,135
1,320
–
1,287
1,311

1,091

1,260

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.

153

4. Financial statements1. 2. 3. Financial statements

Notes on the financial statements (continued)
for the year ended 31 March 2013

32. Employee share-based payments (continued)
The fair value of shares in the share incentive plan is not subject to valuation using the Black-Scholes model. However, the fair value
of shares granted in the year is equal to the weighted average price and is based on the price paid for the shares at the grant date as
shares are acquired out of the market as at that date to satisfy awards made under the scheme.

Free shares

Consolidated

Company

2013

2012

2013

Weighted average
price (pence)

Outstanding at start of year
Forfeited during the year

262,277
–

1,187
–

308,163
(1,860)

Exercised during the year

22,682

1,432

(43,976)

Transfer to pool during the year

(146,731)

Outstanding at end of year

Exercisable at end of year

138,228

1,474

1,417

(50)

262,277

1,224
1,225

1,310

1,000

1,187

90
–

–

(60)

1,098
–

120
–

–

(30)

1,474

1,417

–

2012

Weighted average
price (pence)

1,151
–

1,310

–

1,098

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

2013

2012

2013

Weighted average
price (pence)

395,755
95,681
(18,434)
(126,788)

346,214

2,298

463,855
1,198
134,328
1,383
(14,403)
1,196
1,177 (188,025)

1,257

1,327

395,755

1,867

1,270
1,342
1,144
1,484

1,198

1,277

68,208
9,210
–
(23,068)

54,350

–

1,177
1,383
–
1,174

1,229

–

92,165
20,454
–
(44,411)

68,208

–

2012

Weighted average
price (pence)

1,251
1,342
–
1,545

1,177

–

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

Consolidated

Company

2013

2012

2013

2012

Weighted average
price (pence)

Outstanding at start of year
Granted during the year
Forfeited during the year
Exercised during the year

Outstanding at end of year

2,040,423
656,437
(738,000)
(49,293)

1,909,567

1,185 1,992,484
580,614
1,383
(476,916)
1,204
(55,759)
1,174

1,226 854,380
1,342
212,490
1,505 (311,174)
1,545
–

875,064
1,177
204,561
1,383
1,174 (225,245)
–

–

1,246 2,040,423

1,185

755,696

1,236

854,380

1,233
1,342
1,545
–

1,177

Of the outstanding options at the end of the year, none were exercisable.

154

SSE plc Annual Report 2013

Financial statements

32. Employee share-based payments (continued)
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
Forfeited during year

Outstanding at end of year

2013

2012

Weighted average
price (pence)

225,687
50,986
(29,806)

246,867

1,342
1,383
1,342

1,350

–
225,687
–

225,687

–
1,342
–

1,342

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.

33. Capital and financial risk management
Capital management
The Board’s policy is to maintain a strong balance sheet and credit rating so as to support investor, counterparty and market confidence
and to underpin future development of the business. The Group’s credit ratings are also important in maintaining an efficient cost of
capital and in determining collateral requirements throughout the Group. As at 31 March 2013, the Group’s long term credit rating
was A3 stable outlook for Moody’s and A- negative outlook for Standard & Poors. 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 14 to
27 of this report.

The maintenance of a medium-term corporate model is a key control in monitoring the development of the Group’s capital structure,
and allows for detailed scenarios and sensitivity testing. Key ratios drawn from this analysis underpin regular updates to the Board and
include the ratios used by the rating agencies in assessing the Group’s credit ratings.

From time to time the Group purchases its own shares on the market; the timing of these purchases depends on market prices and
economic conditions. The use of share buy-backs is the Group’s benchmark for investment decisions and 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
private placements and medium term bank loans predominately with the European Investment Bank. In addition the Group has issued
hybrid capital securities which bring together features of both debt and equity, are perpetual and subordinate to all senior creditors. The
Group has £1.65bn of committed bank facilities of which £0.65bn are new bank facilities entered into during this year and are required to
be draw down during 2013 at which point they will become term loans. The remaining £1.0bn relates to the Groups revolving credit and
bilateral facilities that can be accessed at short notice for use in managing the Group’s short term funding requirements however these
committed facilities remain undrawn for the majority of the time.

During the year the Group completed in April 2012 a private placement of senior notes with 22 US based investors for a total consideration
of $700m (£446m) over four tranches with a weighted average maturity of 10.3 years and an average all in rate of around 4.25% once
swapped to Sterling. The Group also successfully issued in September 2012 further hybrid capital securities comprising $700m (£427.2m)
and €750m (£598.2m), with an all-in Euro funding cost of around 5.6% per annum.

The Group capital comprises:

Total borrowings (excluding finance leases)
Less: Cash and cash equivalents

Net debt (excluding hybrid capital)
Hybrid capital
Equity attributable to shareholders of the parent

Total capital

2013
£m

5,754.6
(538.7)

5,215.9
2,186.8
3,362.1

2012
£m

5,903.5
(189.2)

5,714.3
1,161.4
3,422.7

10,764.8

10,298.4

155

4. Financial statements1. 2. 3. Financial statements

Notes on the financial statements (continued)
for the year ended 31 March 2013

is not less than 2.5:1.

The following definitions apply in the calculation of these financial covenants:

33. Capital and financial risk management (continued)
Under the terms of its major borrowing facilities, the Group is required to comply with the following financial covenants:

• Interest Cover Ratio: The Company shall procure that the ratio of Operating Profit to Net Interest Payable for any relevant period
• ‘Operating Profit’ means, in relation to a relevant period, the profit on ordinary activities before taxation (after adding back Net
• ‘Net Interest Payable’ means, in respect of any relevant period, interest payable during that relevant period less interest receivable

Interest Payable) of the Group for that relevant period but after adjusting this amount to exclude any exceptional profits (or losses)
and excluding the effect of IAS 39.

during that relevant period.

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 current
economic environment prudently. There were no changes to the Group’s capital management approach during the year.

Financial risk management
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

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.

156

SSE plc Annual Report 2013

Financial statements33. Capital and financial risk management (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:

2013
Amortised
cost or
other (i)
£m

2,815.1
39.9
55.0

538.7

–

3,448.7

28.7

1,244.0

–

1,272.2

4,721.4

(2,531.4)

(1,529.2)

(15.4)

–

(4,076.0)

2013
Classified as
trading (ii)
£m

2013
Total
carrying
value
£m

2013
Fair
value
£m

2012
Amortised
cost or
other (i)
£m

3,345.1
21.8
119.9

2012
Classified as
trading (ii)
£m

2012
Total
carrying
value
£m

2012
Fair
value
£m

–
–
–

–

3,345.1
21.8
119.9

189.2

2,815.1
39.9
55.0

–
–
–

–

538.7

189.2

940.8

4,389.5

940.8

4,389.5

–

3,676.0

851.2

4,527.2

851.2

4,527.2

–

28.7

18.1

1,244.0

1,191.9

–

382.4

1,323.2

382.4

1,654.6

6,044.6

382.4

1,654.6

6,044.6

–

1,210.0

4,886.0

348.0

1,199.2

18.1

1,191.9

348.0

1,558.0

6,085.2

348.0

1,558.0

6,085.2

–

(2,531.4)

(3,212.5)

(1,529.2)

(1,530.0)

(696.8)

(15.4)

(11.8)

–

(3,212.5)

(696.8)

(700.2)

(11.8)

(1,011.2)

–

(5,087.2)

(5,088.0)

(3,921.1)

(817.6)

(4,738.7)

(4,742.1)

(4,177.5)

(47.9)

(4,225.4)

(5,062.4)

(5,175.5)

(31.2)

(5,206.7)

(5,807.6)

(315.0)

–

(315.0)

(330.3)

–

(330.3)

–

(4,492.5)

(473.4)

(521.3)

(473.4)

(5,013.8)

(5,850.8)

(8,568.5)

(1,532.5)

(10,101.0)

(10,938.8)

–

(5,505.8)

(9,426.9)

(399.2)

(430.4)

(399.2)

(5,936.2)

(399.2)

(6,537.1)

(1,248.0)

(10,674.9)

(11,279.2)

(3,847.1)

(209.3)

(4,056.4)

(4,894.2)

(4,540.9)

(48.8)

(4,589.7)

(5,194.0)

Financial assets
Current
Trade receivables
Other receivables
Cash collateral
Cash and cash
equivalents

Derivative financial

assets

Non-current
Unquoted equity
investments

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

Net financial
liabilities

(i) Recorded at amortised cost or loans and receivables.

(ii) IAS 39 financial instruments.

(iii) Includes non-recourse borrowings.

157

4. Financial statements1. 2. 3. Financial statements
Notes on the financial statements (continued)
for the year ended 31 March 2013

33. Capital and financial risk management (continued)
B. Risks from use of financial instruments
The fair values of the primary financial assets and liabilities of the Company together with their carrying values are as follows:

Financial assets
Current

Cash and cash equivalents
Amounts owed by subsidiary undertakings
Derivative financial assets

Non-current

Amounts owed by subsidiary undertakings
Loans to associates and jointly controlled

entities

Derivative financial assets

Financial liabilities
Current

Bank loans and overdrafts
Eurobonds
Amounts owed to subsidiary undertakings
Derivative financial liabilities

Non-current
Eurobonds
Bank loans
Amounts owed to subsidiary undertakings
Derivative financial liabilities

2013
Amortised
cost or
other (i)
£m

2013
Classified as
trading (ii)
£m

2013
Total
carrying
value
£m

2013
Fair
value
£m

2012
Amortised
cost or
other (i)
£m

2012
Classified as
trading (ii)
£m

2012
Total
carrying
value
£m

2012
Fair
value
£m

289.2
3,782.5
–

4,071.7

–
–
65.1

65.1

289.2
3,782.5
65.1

4,136.8

14.3
2,917.8
–

2.932.1

–
–
12.2

12.2

14.3
2,917.8
12.2

2,944.3

4,341.9

–

4,341.9

3,790.6

–

3,790.6

1,208.5
–

5,550.4

9,622.1

–
151.7

151.7

1,208.5
151.7

5,702.1

216.8

9,838.9

1,140.0
–

4,930.6

7,862.7

–
94.7

94.7

1,140.0
94.7

5,025.3

106.9

7,969.6

(208.9)
(1,205.2)
(2,899.7)
–

(4,313.8)

(1,930.6)
(1,033.1)
(270.5)
–

–
–
–
–

–

(208.9)
(1,205.2)
(2,899.7)
–

(226.6)
(1,241.8)
(2,899.7)
–

(4,313.8)

(4,368.1)

–
(47.9)
–
(253.5)

(1,930.6)
(1,081.0)
(270.5)
(253.5)

(2,489.5)
(1,046.8)
(270.5)
(253.5)

(440.1)
–
(2,463.2)
–

(2,903.3)

(3,126.7)
(797.3)
(268.2)
–

–
–
–
(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)

(3,234.2)

(301.4)

(3,535.6)

(4,060.3)

(4,192.2)

(237.5)

(4,429.7)

(4,947.5)

(7,548.0)

(301.4)

(7,849.4)

(8,428.4)

(7,095.5)

(246.0)

(7,341.5)

(7,810.9)

Net financial assets/(liabilities)

2,074.1

(84.6) 1,989.5

1,410.5

767.2

(139.1)

628.1

158.7

(i) Recorded at amortised cost, available for sale, or loans and receivables.

(ii) IAS 39 financial instruments.

Basis of determining fair value
Certain assets and liabilities designated and carried at amortised cost are loans and receivables. For certain current assets and liabilities
their carrying value is equivalent to fair value due to short term maturity.

Assets and liabilities designated at fair value and the fair value of other financial assets and liabilities have been determined by
reference to closing rate market values. This basis has been used in valuing interest rate instruments, foreign currency hedge contracts
and denominated long-term fixed rate debt. Commodity contracts fair values are based on published price quotations.

The fair values are stated at a specific date and may be different from the amounts which will actually be paid or received on
settlement of the instruments. The fair value of items such as property, plant and equipment, internally generated brands or the
Group’s customer base are not included as these are not financial instruments.

158

SSE plc Annual Report 2013

Financial statements

33. Capital and financial risk management (continued)
(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
and Energy Portfolio Management activities 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 and Trading 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 activities, increasing volumes of commodity derivative products are now traded
through cleared exchanges to further mitigate credit risk. Such exchanges are subject to strict regulation by the UK Financial Services
Authority (FSA) and participants in these exchanges are obliged to meet rigorous capital adequacy requirements.

Individual counterparty credit exposures are monitored by category of credit risk and are subject to approved limits. At 31 March 2013,
the Group’s Energy Portfolio Management activities had pledged £248.5m (2012 – £254.4m) of cash collateral and letters of credit and
had received £33.2m (2012 – £54.3m) 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 after an allowance for impairment.

159

4. Financial statements1. 2. 3. Financial statementsNotes on the financial statements (continued)
for the year ended 31 March 2013

33. Capital and financial risk management (continued)
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

2013
£m

101.7
3.4
28.4

133.5

696.2
129.4

825.6

1,852.5
2.2
–

1,854.7

1.3

2012
£m

80.1
0.8
20.2

101.1

579.1
111.4

690.5

2,551.0
2.3
–

2,553.3

0.2

2,815.1

3,345.1

The Retail segment accounts for 29.3% (2012 – 20.6%) of the Group’s trade receivables. Trade receivables associated with the Group’s
9.47 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 two to four 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 8% (2012 – less than 9%) of the total trade receivables.

The ageing of trade receivables at the reporting date was:

Not past due
Past due but not individually impaired:
0 – 30 days
31 – 90 days
Over 90 days

Less: allowance for impairment

Net Trade receivables

2013
£m

2012
£m

2,534.1

3,121.1

173.1
65.3
189.9

2,962.4
(147.3)

2,815.1

140.5
53.9
166.9

3,482.4
(137.3)

3,345.1

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 £39.9m (2012 – £21.8m). The Company does not have
trade receivables.

160

SSE plc Annual Report 2013

Financial statements

33. Capital and financial risk management (continued)
The movement in the allowance for impairment of trade receivables was:

Balance at 1 April
Increase in allowance for impairment
Impairment losses recognised
Recovery of impairment loss previously recognised
Acquired allowance
Foreign exchange movements

Balance at 31 March

2013
£m

137.3
52.3
(49.3)
2.3
4.7
–

147.3

2012
£m

144.2
46.7
(57.0)
4.2
–
(0.8)

137.3

At the end of each reporting period a review of the provision for bad and doubtful debts is performed. It is an assessment of the
potential amount of trade 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 function.
The Group can have significant movements in its liquidity position due to movement in commodity price, working capital requirements,
the seasonal nature of the business and phasing of its capital investment 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 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 25, the Group has £100m of uncommitted bank lines
and a £15m overdraft facility.

During the year the Group (through SSE plc) completed in April 2012 a private placement of senior notes with US based investors for a total
consideration of $700m (£446m) as well as successfully issuing in September 2012 hybrid capital securities comprising $700m (£427.2m)
and €750m (£598.2m). The US Private placement senior notes consist of four tranches with a weighted average maturity of 10.3 years
and an all-in-rate of 4.25% while the hybrid capital securities provided an all-in Euro funding cost of around 5.6% per annum. Furthermore
during March 2013 the SSE Group secured £650m of additional bank facilities which will be drawn down in the course of 2013, at which
point they will become term loans, and in April 2013 SSE increased it’s bilateral facility with Bank of China from £100m to £200m. As a
result of the above increases in committed bank facilities the Group now has £1.75bn of committed facilities available to draw.

Over the course of the financial year to 31 March 2014, the Group has around £1.5bn of debt reaching maturity. New Bank Facilities
of £650m have been agreed and are expected to be drawn in this period. In addition, it is expected that the capital markets will be
accessed and further new bank loans will be agreed to meet the Group’s ongoing funding requirements. Given the new bank facilities
already agreed, the committed bank facilities maintained by the Group and the current capital market conditions, the Directors have
concluded that the Group has sufficient headroom to continue as a Going Concern. In coming to this conclusion the Directors have also
taken into account the successful issuance of £6.0bn of medium to long term debt and hybrid capital since July 2008, and the Group’s
credit rating. The statement of Going Concern is included in the Directors’ Corporate Governance report on pages 61 to 101.

Treasury also manage the Group’s interaction with its relationship banks (defined as those banks that support the Company’s
financing activities through their ongoing participation in the committed lending facilities that are maintained by the Group). These
are each allocated financial limits, subject to the maintenance of a minimum credit rating of investment grade or better 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.

161

4. Financial statements1. 2. 3. Financial statements
Notes on the financial statements (continued)
for the year ended 31 March 2013

33. Capital and financial risk management (continued)
As at 31 March 2013, the value of outstanding cash collateral in respect of mark-to-market related margin calls on exchange traded
positions was £55.0m (2011 – £119.9m).

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.

The following are the undiscounted contractual maturities of financial liabilities, including interest and excluding the impact of
netting agreements:

Liquidity risk

Financial liabilities
Loans and borrowings
Bank overdrafts
Commercial paper and cash advances
Bank loans – floating
Bank loans – fixed
Unsecured bonds – fixed
Non-recourse funding
Fair value adjustment

Finance lease obligations

Derivative financial liabilities
Operating derivatives designated at

fair value

Interest rate swaps used for hedging
Interest rate swaps designated at

2013
Carrying
value
£m

2013
Contractual
cash flows
£m

2013
0-12
months
£m

2013
1-2
years
£m

2013
2-5
years
£m

2013
> 5
years
£m

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

–
–
386.5
1,070.0
3,931.6
318.6
47.9

–
–
(411.6)
(1,640.0)
(7,036.6)
(318.7)
–

–
–
(4.4)
(317.5)
(226.0)
(13.7)
–

–
–
(90.7)
(32.4)
(1,426.3)
(13.8)
–

–
–
(9.9)
(129.8)
(465.8)
(51.5)
–

–
–
(306.6)
(1,160.3)
(4,918.5)
(239.7)
–

5,754.6
330.4

(9,406.9)
(623.6)

(561.6)
(51.2)

(1,563.2)
(49.9)

(657.0)
(149.2)

(6,625.1)
(373.3)

3.7
440.1
411.5
836.8
3,918.2
262.0
31.2

5,903.5
342.1

(3.7)
(441.0)
(457.4)
(1,237.9)
(7,036.6)
(262.5)
–

(9,439.1)
(671.8)

(3.7)
(441.0)
(32.0)
(246.4)
(226.0)
(14.0)
–

–
–
(6.8)
(307.9)
(1,426.3)
(14.0)
–

–
–
(103.3)
(40.7)
(465.8)
(45.6)
–

–
–
(315.3)
(642.9)
(4,918.5)
(188.9)
–

(963.1)
(48.8)

(1,755.0)
(51.2)

(655.4)
(148.7)

(6,065.6)
(423.1)

6,085.0 (10,030.5)

(612.8)

(1,613.1)

(806.2)

(6,998.4)

6,245.6

(10,110.9)

(1,011.9)

(1,806.2)

(804.1)

(6,488.7)

1,220.9
50.3

3,572.5
(50.3)

4,005.2
(24.3)

(303.1)
(5.7)

(113.4)
(17.0)

(16.2)
(3.3)

983.3
25.4

1,974.3
(25.4)

1,489.6
(9.9)

102.7
(6.1)

393.3
(2.5)

(11.3)
(6.9)

fair value

213.2

(213.2)

(11.9)

(35.1)

(154.3)

191.5

(191.5)

(9.6)

(9.5)

(24.6)

(147.8)

Forward exchange contracts held

for hedging

Forward exchange contracts designated

0.2

(14.6)

(12.8)

(1.8)

at fair value

–

8.1

(620.6)

(490.5)

(101.6)

(28.5)

8.5

(866.6)

(736.1)

(130.5)

–

1,484.6

3,294.4

3,956.2

(322.5)

(165.5)

(173.8)

1,216.8

270.2

243.5

(145.0)

337.7

(166.0)

Other financial liabilities
Trade payables

2,531.4

(2,531.4)

2,531.4

(2,531.4)

–

3,212.5

(3,212.5)

3,212.5

(3,212.5)

–

Total

10,101.0

(9,267.5)

812.0

(1,935.6)

(971.7)

(7,172.2) 10,674.9

(13,053.2)

(3,980.9)

(1,951.2)

(466.4)

(6,654.7)

Derivative financial assets
Financing derivatives
Operating derivatives designated at

(216.8)

(1,470.3)

(1,099.3)

(304.1)

(66.1)

(0.8)

(101.7)

(169.2)

(50.9)

(41.2)

(55.5)

(21.6)

fair value

(1,106.4)

(5,498.0)

(4,925.0)

(311.9)

(247.2)

(13.9)

(1,097.5)

(4,847.9)

(3,559.0)

(682.7)

(574.1)

(32.1)

(1,323.2)

(6,968.3)

(6,024.3)

(616.0)

(313.3)

(14.7)

(1,199.2)

(5,017.1)

(3,609.9)

(723.9)

(629.6)

(53.7)

Net total (i)

8,777.8 (16,235.8)

(5,212.3)

(2,551.6)

(1,285.0)

(7,186.9)

9,475.7

(18,070.3)

(7,590.8)

(2,675.1)

(1,096.0)

(6,708.4)

(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.

162

SSE plc Annual Report 2013

Financial statements
33. Capital and financial risk management (continued)
The Company has the following liquidity maturity profile:

Liquidity risk

Financial liabilities
Loans and borrowings
Commercial paper and cash advances
Bank loans – floating
Bank loans – fixed
Unsecured bonds – fixed
Fair value adjustment

Derivative financial liabilities
Interest rate swaps used for hedging
Interest rate swaps designated at

2013
Carrying
value
£m

2013
Contractual
cash flows
£m

2013
0-12
months
£m

2013
1-2 years
£m

2013
2-5 years
£m

2013
> 5 years
£m

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

–
361.5
880.5
3,163.1
47.9

–
(386.4)
(1,141.2)
(4,907.2)
–

–
(4.2)
(232.6)
(1,396.6)
–

–
(65.7)
(27.1)
(119.1)
–

–
(9.9)
(113.0)
(357.4)
–

–
(306.6)
(768.5)
(3,034.1)
–

440.1
361.5
435.8
3,126.7
31.2

(441.0)
(406.3)
(516.9)
(5,172.3)
–

(441.0)
(6.4)
(20.7)
(190.0)
–

–
(6.4)
(223.1)
(1,390.3)
–

–
(78.2)
(24.6)
(357.4)
–

–
(315.3)
(248.5)
(3,234.6)
–

4,453.0

(6,434.8)

(1,633.4)

(211.9)

(480.3)

(4,109.2)

4,395.3

(6,536.5)

(658.1)

(1,619.8)

(460.2)

(3,798.4)

49.6

(49.6)

(23.6)

(5.7)

(17.0)

(3.3)

25.2

(25.2)

(8.4)

(5.5)

(2.5)

(8.8)

fair value

203.7

(203.7)

(11.5)

(34.0)

(146.7)

173.0

(173.0)

(8.7)

(22.1)

(133.5)

Forward exchange contracts held

for hedging

Forward exchange contracts designated

0.2

(14.6)

(12.8)

(1.8)

at fair value

–

8.1

(620.6)

(490.5)

(101.6)

(28.5)

8.5

(866.6)

(736.1)

(130.5)

–

253.5

(267.9)

(47.9)

(19.0)

(51.0)

(150.0)

214.8

(1,685.4)

(1,243.7)

(246.3)

(53.1)

(142.3)

Other financial liabilities
Amounts due to subsidiary undertakings

3,170.2

(3,170.2)

(2,899.7)

(270.5)

3,170.2

(3,170.2)

(2,899.7)

(270.5)

–

2,731.4

(2,731.4)

(2,463.2)

(268.2)

2,731.4

(2,731.4)

(2,463.2)

(268.2)

–

Total

7,876.7

(9,872.9)

(4,581.0)

(501.4)

(531.3)

(4,259.2)

7,341.5

(10,953.3)

(4,365.0)

(2,134.3)

(513.3)

(3,940.7)

Derivative financial assets
Financing derivatives

(216.8)

(1,470.3)

(1,099.3)

(304.1)

(66.1)

(0.8)

(106.9)

(169.2)

(50.9)

(41.2)

(55.5)

(21.6)

Net total

7,659.9 (11,343.2)

(5,680.3)

(805.5)

(597.4)

(4,260.0)

7,234.6

(11,122.5)

(4,415.9)

(2,175.5)

(568.8)

(3,962.3)

(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 to supply customers, or to procure fuel to produce electricity for the Energy Supply business.

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 activities is monitored for internal risk
management purposes and is outside the scope of IAS 39, these measures are not required to comply with IFRS 7.

Operationally, the economic risks associated with this exposure are managed through a selection of longer and shorter term contracts
for commodities such as gas, electricity, coal and oil, the 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, 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.

163

4. Financial statements1. 2. 3. Financial statements
Notes on the financial statements (continued)
for the year ended 31 March 2013

33. Capital and financial risk management (continued)
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 the Accompanying Information section (A1).

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$/tonne)
UK emissions (€/tonne)
UK oil (US$/bbl)

2013

2012

Reasonably
possible increase/
decrease in
variable

Base price (i)

Reasonably
possible increase/
decrease in
variable

Base price (i)

68
57
99
5
98

+/- 4
+/- 3
+/- 6
+/- 2
+/- 8

69
57
121
8
105

+/- 6
+/- 6
+/- 7
+/- 3
+/- 11

(i) The base price represents the average forward market price over the duration of the active market curve used to calculate the sensitivity analysis.

The impacts of reasonably possible changes in commodity prices on profit after taxation based on the rationale described are
as follows:

Incremental profit/(loss)
Commodity prices combined – increase
Commodity prices combined – decrease

2013

2012

Impact on profit
(£m)

Impact on equity
(£m)

Impact on profit
(£m)

Impact on equity
(£m)

96.2
(96.2)

–
–

227.6
(227.6)

–
–

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.

164

SSE plc Annual Report 2013

Financial statements

33. Capital and financial risk management (continued)
(iv) Currency risk
The Group publishes its consolidated financial statements in Sterling but also conducts business in foreign currencies. As a result,
it is subject to foreign currency exchange risk arising from exchange rate movements which will be reflected in the Group’s transaction
costs or in the underlying foreign currency assets of its foreign operations.

The Group’s policy is to use forward contracts, swaps and options to manage its exposures to foreign exchange risk. All such
exposures are transactional in nature, and relate primarily to procurement contracts, commodity purchasing and related freight
requirements, commodity hedging, long term plant servicing and maintenance agreements, and the purchase and sale of carbon
emission certificates. The policy is to seek to hedge 100% of its currency requirements arising under all committed contracts excepting
commodity hedge transactions, the requirements for which are significantly less predictable. The policy for these latter transactions is
to assess the Group’s requirements on a rolling basis and to enter into cover contracts as appropriate.

The Group has foreign subsidiary operations with significant Euro-denominated net assets. The Group’s policy is to hedge its net
investment in its foreign operations by ensuring the net assets whose functional currency cash flows are denominated in Euros are
matched by borrowings in Euros. For the acquired net assets whose functional cash flows are in Sterling, the Group will ensure Sterling
denominated borrowings are in place to minimise currency risk.

Significant exposures are reported to, and discussed by, the Risk and Trading Committee on an ongoing basis and additionally form part
of the bi-annual Treasury report to the Audit Committee.

At the balance sheet date, the total nominal value of outstanding forward foreign exchange contracts that the Group has committed to is:

Forward foreign exchange contracts

The Group’s exposure to foreign currency risk was as follows:

2013
£m

2012
£m

1,954.4

2,119.5

¥m DKK (million)

SEK (million)

€m

$m CHF (million)

¥m DKK (million)

€m

$m CHF (million)

2013

2012

43,000.0

–

604.5

100.0

– 46,000.0

–

923.6

248.3

10.0

Gross exposure

43,000.0

–

70.8

37.1

529.9

1,307.0

–

1,197.4

1,407.0

– 46,000.0

106.7

578.8

2,019.1

1,502.4

2,267.4

44.8

54.8

Forward

exchange/swap
contracts

Net exposure
(in currency)

Net exposure

(in £m)

43,000.0

70.8

37.1

915.2

1,322.3

– 46,000.0

106.7

893.9

1,559.1

54.8

–

282.2

84.7

238.1

55.8

–

608.5

708.3

507.4

442.9

–

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.
33. Capital and financial risk management (continued)
A 10% change in foreign currency exchange rates would have had the following impact on profit after taxation, based on the

165

Loans and

borrowings
Purchase and
commodity
contract
commitments

4. Financial statements1. 2. 3. Financial statements

Notes on the financial statements (continued)
for the year ended 31 March 2013

assumptions presented above:

US Dollars
Euro
DKK
¥
CHF

Equity

Income Statement

At 31 March
2013
£m

At 31 March
2012
£m

At 31 March
2013
£m

At 31 March
2012
£m

–
42.7
–
–
–

42.7

–
41.1
–
–
–

41.1

4.7
(22.6)
–
–
–

(17.9)

36.4
0.6
–
–
–

37.0

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 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

2013
Carrying
amount
£m

(5,351.1)
(276.8)

(5,627.9)

538.7
(129.5)
(5,706.7)
(330.4)

(5,627.9)

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)

Following from this, the table below represents the expected impact of a change in 100 basis points in short term interest rates at the
reporting date in relation to equity and income statement. The analysis assumes that all other variables, in particular foreign currency
rates, remain constant. An increase in exchange rates would be a change to either the income statement or equity. The assessment is
based on a revision of the fair value assumptions included in the calculated exposures in the previous table.

166

SSE plc Annual Report 2013

Financial statements

33. Capital and financial risk management (continued)
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.

Income statement

2013
£m

7.1

2012
£m

11.9

The impact of a decrease in rates would be an identical reduction in the annual charge. There is no impact on equity as the analysis
relates to the Group’s net exposure at the balance sheet date. Contracts qualifying for hedge accounting are, by definition, part of the
group’s covered position.

(vi) Primary statement disclosures
For financial reporting purposes, the Group has classified derivative financial instruments into two categories, operating derivatives and
financing derivatives. Operating derivatives include all qualifying commodity contracts including those for electricity, gas, oil, coal and
carbon. Financing derivatives include all fair value and cash flow interest rate hedges, non-hedge accounted (mark-to-market) interest
rate derivatives, cash flow foreign exchange hedges and non-hedge accounted foreign exchange contracts. Non-hedge accounted
contracts are treated as held for trading.

The net movement reflected in the income statement can be summarised thus:

Operating Derivatives
Total result on operating derivatives (i)

Less: Amounts settled (ii)

Movement in unrealised derivatives

Financing Derivatives (and hedged items)
Total result on financing derivatives (i)

Less: Amounts settled (ii)

Movement in unrealised derivatives

Net income statement impact

2013
£m

33.7
(262.4)

(228.7)

(755.0)
775.3

20.3

2012
£m

142.0
(575.7)

(433.7)

(1,288.7)
1,199.2

(89.5)

(208.4)

(523.2)

(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.

167

4. Financial statements1. 2. 3. Financial statements

Notes on the financial statements (continued)
for the year ended 31 March 2013

33. Capital and financial risk management (continued)
The derivative financial assets and (liabilities) are represented as follows:

Derivative financial assets
Non-current
Current

Derivative liabilities
Non-current
Current

Total derivative liabilities

Net (liability)

2013
£m

2012
£m

382.4
940.8

1,323.2

(473.4)
(1,011.2)

(1,484.6)

(161.4)

348.0
851.2

1,199.2

(399.2)
(817.6)

(1,216.8)

(17.6)

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.

• 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
• Level 3 fair value measurements are those derived from valuation techniques that include inputs for the asset or liability that are

for the asset or liability, either directly (ie as prices) or indirectly (ie derived from prices).

not based on observable market data.

Financial assets
Energy derivatives
Interest rate derivatives
Foreign exchange derivatives

Financial liabilities
Energy derivatives
Interest rate derivatives
Foreign exchange derivatives
Loans and borrowings

Level 1
£m

51.5
–
–

51.5

(80.5)
–
–
–

(80.5)

Level 2
£m

Level 3
£m

Total
£m

1,054.9
134.0
82.8

1,271.7

(1,140.4)
(263.5)
(0.2)
(47.9)

(1,452.0)

–
–
–

–

–
–
–
–

–

1,106.4
134.0
82.8

1,323.2

(1,220.9)
(263.5)
(0.2)
(47.9)

(1,532.5)

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 2013.

(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 the Accompanying Information section A1.

168

SSE plc Annual Report 2013

Financial statements

33. Capital and financial risk management (continued)
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

2013
Carrying
amount

2013
Expected
cash flows

2013
0-12
months

2013
1-2
years

2013
2-5
years

2013
> 5
years

2012
Carrying
amount

2012
Expected
cash flows

2012
0-12
months

2012
1-2
years

2012
2-5
years

2012
> 5
years

(0.7)

–

(2.2)

(1.6)

(0.6)

–

47.4
(0.2)

(658.0)
(14.6)

(474.7)
(12.8)

(60.5)
(1.8)

(82.0)
–

(40.8)
–

47.2

(672.6)

(487.5)

(62.3)

(82.0)

(40.8)

9.0
(8.1)

0.9

(257.9)
(620.6)

(64.6)
(490.5)

(48.9)
(101.6)

(84.9)
(28.5)

(878.5)

(555.1)

(150.5)

(113.4)

(59.5)
–

(59.5)

Net investment hedge
The Group’s net investment hedge consists of debt issued in the same currency (€) as the net investment in foreign subsidiaries with
€ denominated functional currencies being the Airtricity Supply business, the acquired thermal plant in Ireland 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 therefore provides protection against movements in foreign
exchange rates.

Gains and losses in the hedge are recognised in equity and will be transferred to the income statement on disposal of the foreign
operation (2013 – £6.0m loss, 2012 – £29.8m gain). Gains and losses on the ineffective portion of the hedge are recognised immediately
in the income statement (2013 – £nil, 2012 – £nil).

34. 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 over.

Sale of goods
and services
2013
£m

Purchase of goods
and services
2013
£m

Amounts
owed from
2013
£m

Amounts
owed
to 2013
£m

Sale of goods
and services
2012
£m

Purchase of goods
and services
2012
£m

Amounts
owed from
2012
£m

Amounts
owed to
2012
£m

Jointly controlled

entities:

Seabank Power Ltd
Marchwood
Power Ltd

Greater Gabbard

Offshore Winds Ltd

Scotia Gas

Networks Ltd

Other Joint Ventures

Associates

27.2

22.5

–

57.6
42.1

29.6

(99.5)

(85.5)

(90.0)

(157.2)
–

(38.3)

2.9

0.3

–

9.2
9.8

1.2

8.9

6.0

33.4

15.1
–

2.4

34.7

46.8

0.0

59.2
42.0

42.4

(94.8)

(80.5)

(24.4)

(154.3)
0.0

0.1

0.2

0.0

7.3
0.2

(44.5)

11.8

9.1

4.0

15.4

13.9
0.3

21.4

The transactions with Seabank Power Limited, Marchwood Power Limited and Greater Gabbard Offshore Winds Limited relate to
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, stock procurement services and the provision of the capital expenditure on the development of front office
management information systems.

169

4. Financial statements1. 2. 3. Financial statements

Notes on the financial statements (continued)
for the year ended 31 March 2013

34. Related party transactions (continued)
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 16.

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

2013
£m

1.9
2.5

4.4

2012
£m

2.8
1.6

4.4

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, eight (2012 – seven) Managing
Directors and also attended by the Chief Executive Officer of Scotia Gas Networks Limited.

In addition, the key management personnel receive share-based remuneration, details of which are found at Note 32. 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 31.

35. Commitments and contingencies
(i) Capital commitments

Capital expenditure:

Contracted for but not provided

2013
£m

2012
£m

741.0

828.0

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

2013
£m

132.2
61.1

193.3

2012
£m

116.0
53.9

169.9

170

SSE plc Annual Report 2013

Financial statements

35. Commitments and contingencies (continued)
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

2013
£m

86.8
333.9
–

420.7

54.4
96.2
201.9

352.5

141.2
430.1
201.9

773.2

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

The average power purchase agreement lease term is 5 years (2012 – 4 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:

Borrowings
Performance of contracts
Purchase of gas

2013
£m

855.7
1,124.6
30.5

2012
£m

400.0
1,127.4
40.5

In the year to 31 March 2013, the Group had drawn down £446.6m from its US Private Placement facility. SSE Energy Supply Limited
and SSE Generation Limited, both wholly owned subsidiaries of the Company, have entered into guarantee and indemnity agreements
with the various purchasers for the amount drawn down. In the year to 31 March 2012, the Group had 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 current year’s guarantee amount includes accrued interest.

Unlimited guarantees have been provided on behalf of subsidiary undertakings in relation to eight 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 Electricity Supply Pension scheme in respect of 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. SSE E&P UK Limited has also provided a guarantee to Britoil Limited and Arco British Limited in respect
of the acquisition of the Sean Field and has also provided a guarantee to Perenco UK Limited in respect of the Minerva, Apollo and
Mercury Fields.

171

4. Financial statements1. 2. 3. Financial statements

Notes on the financial statements (continued)
for the year ended 31 March 2013

35. Commitments and contingencies (continued)
Where the Company enters into financial guarantee contracts to guarantee indebtedness of the 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 payment
under the guarantee.

The Group has a contingent liability in respect of a contractual dispute with an electricity generation counterparty. The Group has
contested the validity of the dispute claim by the counterparty and believes its position is robust. However the likelihood and extent
of any potential liability is not yet known and will only be confirmed following the conclusion of the dispute process.

36. Post balance sheet events
On 12 April 2013, the Group, through its wholly-owned subsidiary SSE E&P UK Limited, completed the acquisition from BP of a 50%
working interest in the Sean gas field in the southern North Sea for a total cash consideration of £117.4m, which reflects the value of the
asset based on an effective economic date of 1 January 2012 (£180m), less the value of the gas produced between 1 January 2012 and
the completion date of the transaction.

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SSE plc Annual Report 2013

Financial statementsAccompanying information
for the year ended 31 March 2013

This section explains the significant accounting policies applied in the preparation of the consolidated financial statements and provides
details of the Group’s principal subsidiaries, joint ventures and subsidiaries.

A1. Basis of consolidation and significant accounting policies
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.

173

4. Financial statements1. 2. 3. Financial statementsAccompanying information (continued)
for the year ended 31 March 2013

A1. Basis of consolidation and significant accounting policies (continued)
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.

Revenue from use of energy systems includes an estimation of the volume of electricity distributed or transmitted by customers based
on independently procured electricity settlement systems data. Annual revenue is dependent on being approved by the industry
regulator, Ofgem. Certain circumstances may result in the regulatory ‘allowed’ income being over- or under-recovered in the financial
year. Any over- or under-recovery is included in the calculation of the following year’s regulatory use of system revenue within agreed
parameters. No adjustment is made for over- or under-recoveries in the year that they arise.

Revenue from the production of natural gas, crude oil and condensates is recognised when title passes to the customer. The Group has
an interest with other producers in jointly controlled operations for the production of such products. Revenue under these arrangements
is recognised based on the entitlement method in reference to the Group’s interest and the relevant production sharing terms. Where
there are differences between the Group’s share of production and the volume sold, an overlift or underlift is recorded (see below).

Where the Group has an ongoing obligation to provide services, revenues are recognised as the service is performed and amounts billed
in advance are treated as deferred income and excluded from current revenue. For network connections activity from 1 November
2009, the revenue recognition rules of IFRIC 18 have been applied, whereby income is recognised over the course of completion of
the associated capital works unless there is a future service obligation, in which case revenue is recognised over the service period.
Revenue from fixed-fee service contracts is recognised over the life of the contract, in relation to the benefit received by the customer.

Gas storage facilities revenues are recognised evenly over the contract period, whilst revenues for the injection and withdrawal of gas
are recognised at the point of gas flowing into or out of the storage facilities.

Sales of goods are recognised when goods are delivered and title has passed, along with the risks and rewards of ownership.

Overlift and underlift
In relation to the Group’s gas production activities, it is often not practical for each participant to receive or sell its precise share of the
overall production from a jointly controlled operation under the contractual offtake arrangements in any given period. These short-
term imbalances between cumulative production entitlement and cumulative sales are referred to as overlift and underlift. An overlift
payable, or underlift receivable, is recognised at the balance sheet date and measured at market value, with movements in the period
recognised within cost of sales.

Exploration, evaluation and production assets
The Group uses the successful efforts method of accounting for exploration and evaluation expenditure associated with exploration
wells or ‘prospects’. This expenditure will be capitalised initially within intangible assets and will include licence acquisition costs
associated with the prospects. If the prospects are subsequently determined to be successful on completion of the evaluation
period, the relevant expenditure will be transferred to property, plant and equipment and depreciated on a unit of production basis.
If the prospects are subsequently determined to be unsuccessful on completion of the evaluation period, the intangible asset will be
expensed in the period in which that determination is made.

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SSE plc Annual Report 2013

Financial statementsA1. Basis of consolidation and significant accounting policies (continued)
Accounting policies (continued)
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 176.

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.

175

4. Financial statements1. 2. 3. Financial statementsAccompanying information (continued)
for the year ended 31 March 2013

A1. Basis of consolidation and significant accounting policies (continued)
Accounting policies (continued)
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.

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.

176

SSE plc Annual Report 2013

Financial statementsA1. Basis of consolidation and significant accounting policies (continued)
Accounting policies (continued)
(iv) Depreciation
Depreciation is charged to the income statement to write off cost, less residual values, on a straight line basis over their estimated
useful lives 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, underground 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

100
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.

(vi) Derecognition
An item of property, plant or equipment is derecognised upon disposal or when no future economic benefits are expected to arise from
the continued use of the asset. Gains and losses on disposals are determined by comparing the proceeds received with the carrying
amount of the asset and are included in the income statement. Any gain or loss on derecognition of the asset is included in the income
statement in the period of derecognition.

Biological assets
Biological assets, such as living trees, are measured at their fair value less estimated point of sale costs. The valuation of forest assets
is based on discounted cash flow models whereby the fair value of the biological asset is calculated using cash flows from continuous
operations, that is, each forest asset is split into an appropriate grouping based on the maturity and/or type of trees. An expected future
volume of Timber that will be produced from each of these groups is then derived. The expected volume is used to apply a market value
to the groups of trees based on the market value of Standing Timber. These market values are discounted based on the time to full
maturity to appropriately value each grouping.

Periodic changes resulting from growth, felling prices, discount rate, costs and other premise changes are included in operating profit
on the income statement.

Business combinations
The acquisition of subsidiaries is accounted for under the purchase method. The acquired business is measured at the date of acquisition
as the aggregate fair value of assets, liabilities and contingent liabilities as required under IFRS 3 Business Combinations. The excess of the
cost of acquisition over the fair value of the acquired business is represented as goodwill. For combinations taking place from 1 April 2010,
contingent consideration classified as a liability will be subsequently remeasured through the income statement under the requirements
of the revised IFRS 3. Pre-existing relationships are recognised and, together with all acquisition-related costs, are expensed.

177

4. Financial statements1. 2. 3. Financial statementsAccompanying information (continued)
for the year ended 31 March 2013

A1. Basis of consolidation and significant accounting policies (continued)
Accounting policies (continued)
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 current liability is recognised based on the level of emissions recorded. Up to the level of allowances held,
the liability is measured at the cost of purchase. When the carbon emission liability exceeds the carbon allowances held, the net liability
is measured at market value 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 carbon allowance intangible asset is surrendered at the end of the compliance period to the extent required reflecting the
consumption of the economic benefit and is recorded as being utilised. As a result, no amortisation is booked but an impairment
charge may be recognised should the carrying value of allowances exceed market or fair value.

Under the Renewable Obligations Certificates (ROCs) scheme, certificates obtained from own generation are awarded by a third
party, Ofgem. Self-generated certificates are recorded at market value and purchased certificates are recognised at cost, both within
intangible assets. The liability under the renewables obligation is recognised based on electricity supplied to customers, the percentages
set by Ofgem and the prevailing market price. The intangible asset is surrendered at the end of the compliance period reflecting the
consumption of economic benefit. As a result no amortisation is recorded during the period.

(iv) Development 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.

178

SSE plc Annual Report 2013

Financial statementsA1. Basis of consolidation and significant accounting policies (continued)
Accounting policies (continued)
(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 licences 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
Developed software assets and application software licences
Customer lists
Contracts

Years

10
5-10
5
Shorter of
contract
term or 5

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.

(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.

179

4. Financial statements1. 2. 3. Financial statementsAccompanying information (continued)
for the year ended 31 March 2013

A1. Basis of consolidation and significant accounting policies (continued)
Accounting policies (continued)
(iii) Equity and equity-related compensation benefits
The Group operates a number of employee share schemes as described in the Remuneration Report and Note 32. 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 33.

(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 plc Annual Report 2013

Financial statementsA1. Basis of consolidation and significant accounting policies (continued)
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
Hybrid capital comprises issued bonds that qualify for recognition as equity. Accordingly, any coupon payments are accounted for
as dividends and are recognised directly in equity at the time the payment obligation arises. This is because the coupon payments
are discretionary and relate to equity. Coupon payments consequently do not have any impact on the income statement. Coupon
payments are recognised in the cash flow statement in the same way as dividends to Ordinary shareholders.

Provisions
A provision is recognised in the balance sheet when the Group has a present legal or constructive obligation as a result of a past event,
and it is probable that an outflow of economic benefits will be required to settle the obligation. If the effect is material, provisions are
determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value
of money and, where appropriate, the risks specific to the liability.

Decommissioning costs
The estimated cost of decommissioning at the end of the useful lives of certain assets is reviewed periodically. Provision is made for the
net present value of the estimated cost of decommissioning gas production facilities at the end of the producing lives of fields, and gas
storage facilities and power stations at the end of the useful life of the facilities. The estimates are based on technology and prices at
the balance sheet date. A corresponding decommissioning asset is recognised and is included within property, plant and equipment
when the provision gives access to future economic benefits. Changes in these provisions are recognised prospectively. For offshore
wind assets, power stations and gas storage facilities the unwinding of the discount on the provision is included in finance costs and the
depreciation for the asset is straight-line over the expected useful life of the asset. For gas production facilities the decommissioning
asset is amortised using the unit of production method, based on proven and probable reserves. No provision is recognised where the
residual value of the asset exceeds the clear-up costs associated with decommissioning.

181

4. Financial statements1. 2. 3. Financial statementsAccompanying information (continued)
for the year ended 31 March 2013

A2. Principal jointly controlled entities, operations and associates
Details of the principal jointly controlled entities, operations and associates are as follows:

Country of incorporation

31 March 2013
Holding %

31 March 2012

Holding % Principal activity

Jointly controlled entities
Scotia Gas Networks Limited (iv)
Greater Gabbard Offshore Winds Limited (v)
Marchwood Power Limited (i)
PriDE (SERP) Limited (ii)
Seabank Power Limited (iii)

England and Wales
England and Wales
England and Wales
England and Wales
England and Wales

Associates
Walney (UK) Offshore Windfarms Limited (v)
Barking Power Limited (i)
Derwent Cogeneration Limited (i)

England and Wales
England and Wales
England and Wales

50.0
50.0
50.0
50.0
50.0

25.1
30.4
49.5

50.0 Gas distribution networks
50.0 Offshore wind development
50.0 Electricity generation
50.0 Defence estates contractor
50.0 Electricity generation

25.1 Offshore wind development
30.4 Electricity generation
49.5 Electricity generation

Jointly controlled operations (unincorporated)
Aldbrough

England

66.7

66.7 Development of gas storage facility

Location of operations

Holding %

Holding % Principal activity

The above companies’ shares consist of Ordinary shares only. All companies operate in Great Britain and Ireland. Seabank Power Limited,
Walney (UK) Offshore Windfarms 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 plc.
(v) Shares held by SSE Renewables Holdings Limited (or subsidiaries).

182

SSE plc Annual Report 2013

Financial statements
A3. Subsidiary undertakings
Details of the principal subsidiary undertakings are as follows:

Country of incorporation

2013
Holding %

2012

Holding % Principal activity

SSE Services plc (i)
SSE Energy Supply Limited (i)
SSE Generation Limited (i)
Medway Power Limited (ii)
SSE Generation Ireland 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) Northern Ireland
SSE Renewables (Ireland) Limited (iii)
Airtricity Limited (iii)
Airtricity Energy Supply (Northern Ireland)

England and Wales
England and Wales
England and Wales
England and Wales
Ireland
England and Wales
England and Wales
Scotland
Scotland
Ireland

Ireland
Ireland

Limited (x)

Northern Ireland
Scottish Hydro Electric Transmission plc (iv)
Scotland
Scottish Hydro Electric Power Distribution plc (iv) Scotland
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)

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
100

100 Corporate support services
100 Electricity supply
100 Electricity generation
100 Electricity generation
– Electricity generation
100 Electricity generation
100 Gas supply
100 Renewable electricity generation
100 Renewable electricity generation
100 Renewables holding company
100 Wind generation development
100 Wind generation development
100 Energy supply

100 Energy supply
100 Transmission of electricity
100 Distribution of electricity
100 Distribution of electricity
100 Meter reader and operator
100 Electrical contractor
100 Gas storage
100 Gas exploration and production
100 Telecommunication services
100 Telecommunication services

The above companies’ shares consist of Ordinary shares only. All companies operate in the UK and Ireland. All companies have
accounting periods ending on 31 March. The Group has other subsidiary undertakings which do not significantly affect the results and
position disclosed in these financial statements. A full list of the subsidiary undertakings will be included in the Company’s annual return.

Shares in the above subsidiaries are held by:

(i) 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 Developments (UK) Limited.
(xii) Griffin Wind Farm (Holdings) Limited.

Service concession arrangements
In 50:50 partnership with Royal Bank Leasing Limited, the Group established three companies to provide street lighting services to
councils under the Private Finance Initiative (PFI). These services are thereafter sub-contracted to SSE Contracting Limited, a wholly
owned subsidiary of the Group. The companies established are as follows:

Company

Tay Valley Lighting (Stoke on Trent) Limited
Tay Valley Lighting (Newcastle and North Tyneside) Limited
Tay Valley Lighting (Leeds) Limited

Council

Stoke-on-Trent
Newcastle and North Tyneside
Leeds City Council

183

4. Financial statements1. 2. 3. Financial statements
Accompanying information (continued)
for the year ended 31 March 2013

A3. Subsidiary undertakings (continued)
Under SIC-12 Consolidation – Special Purpose Entities, despite being 50% owned, these companies are categorised as subsidiaries and
are accounted for accordingly due to the Group being deemed to bear the majority of the risks and rewards associated with these
companies. The debt associated with these companies is non-recourse to the Group. The arrangements for all three companies are
materially similar.

In addition to these, the Group acquired 100% of the share capital of entities which perform similar services under eight PFI contracts.
The terms of the service concession arrangement are similar to those operated by the companies noted above. The council and
contract holder within the acquired group are as follows:

Company

Dorset Lighting Limited
Ealing Lighting Limited
Islington Lighting Limited
Tay Valley Lighting (Hampshire) Limited
Tay Valley Lighting (Southampton) Limited
Tay Valley Lighting (West Sussex) Limited
Tay Valley Lighting (Nottingham) Limited
Tay Valley Lighting (Knowsley) Limited

Council

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

Characteristics of the arrangements
Description
The contracts are 25 year arrangements to replace ageing street lighting stock and to subsequently maintain the new assets
throughout each Councils’ areas.

Significant terms
The cash flows under the PFI arrangements come from the unitary charge for these services paid by the Councils. The unitary charge
can only be adjusted if performance under the contract falls below the required standards. Any significant change to the services
proposed by either party is subject to a formal change procedure and agreement to such a change is required by the other party.

Nature and extent of rights and obligations
The assets are part of the public highway and ownership of the assets remains with the Councils. The 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 through the operating sub-contract. Any failure to provide the services to the required
standards will result in financial penalties which are taken from the unitary charge.

The companies have 25 year contracts with no extension options. Termination during this period can be initiated through a number
of routes including service provider default, force majeure or the event of a risk becoming uninsurable, authority default, voluntary
authority termination, or termination for a prohibited act or breach of refinancing provisions. In all cases, a formula exists for calculating
compensation payments to the service provider.

Throughout the contract period there are a number of circumstances under which the companies could potentially be required to
provide additional services:

(i) Changes in the law
If circumstances arise where by a change in legislation would mean a change in the way the services are to be provided the companies
would be liable for part of the cost of this change. This liability is capped.

(ii) Final survey
The Councils have the ability to deduct a percentage of the unitary charge in the last two years if an independent survey indicates the
assets are unlikely to have a 5-year residual life.

184

SSE plc Annual Report 2013

Financial statementsShareholder 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
25 July 2013

Ex-dividend date
31 July 2013

Record date
2 August 2013

Final date for receipt of Scrip Elections
(in respect of the 2012/13 final dividend)
30 August 2013

Payment date
27 September 2013

Half-year results announcement
13 November 2013 (provisional date)

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:

• share price information;
• dividend history and trading graphs;
• the Scrip Dividend Scheme;
• telephone and internet share dealing; and
• downloadable shareholder forms.

Digital news
We use a dedicated news and views website (available at
http://news.sse.com) and Twitter (www.twitter.com/sse) to
keep shareholders, investors, journalists, employees and other
interested parties up-to-date with news from the Company.

eCommunications programme
Sign up to our eCommunications Programme at
www.sse.com/investors/ecommsprogramme and receive
shareholder documentation via e-delivery. As a thank you we
will donate £2 on your behalf to the World Wildlife Fund’s (WWF)
International Conservation Programmes. In 2012/13, SSE made
a donation of over £16,500 on behalf of its shareholders.

Keep us informed
Keep us informed of changes to your email address by visiting
www.sse.com/investors/ecommsprogramme and follow the
instructions under ‘how to register or update your email address’.

Copy reports
You can obtain copies of the Annual Report 2013, 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.

FTSE Group confirms that SSE has been independently assessed according to the FTSE4Good
criteria, and has satisfied the requirements to become a constituent of the FTSE4Good Index
Series. Created by the global index company FTSE Group, FTSE4Good is an equity index series
that is designed to facilitate investment in companies that meet globally recognised corporate
responsibility standards. Companies in the FTSE4Good Index Series have met stringent
environmental, social and governance criteria, and are positioned to capitalise on the
benefits of responsible business practice.

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For further information about SSE,
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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

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Registered in Scotland No. 117119

STOCK CODE 008237