POWERFUL OPPORTUNITIES Scottish and Southern Energy plc Annual Report 2006 Scottish and Southern Energy Annual Report 2006 Contents Chairman’s Statement 1 Directors’ Report 28 Dividends 59 What We Do 2 Corporate Governance 29 Earnings Per Share 60 Where We Are 4 Organisation and Structure 29 Intangible Assets 61 Key Performance Indicators 6 Board Effectiveness 30 Property, Plant and Equipment 63 Chief Executive’s Statement 8 Board Commitees 30 Investment in Associates and Joint Ventures 64 Audit Committee 30 Subsidiary Undertakings 66 Directors’ Statement 9 Remuneration Committee 31 Acquisitions and Disposals 68 Financial Overview 9 Nomination Committee 31 Inventories 70 Energy Systems 9 Risk Committee 32 Trade and Other Receivables 70 Generation and Supply 13 Executive Committee 32 Cash and Cash Equivalents 70 Contracting, Connections and Metering 20 Health, Safety and Environmental Advisory Committee 32 Trade and Other Payables 71 Gas Storage 21 Internal Control and Risk Management Current Tax Liabilities 71 Telecoms 22 Committee 32 Construction Contracts 71 Exceptional Items 22 Going Concern 33 Loans and Other Borrowings 71 Capital Expenditure 22 Communication with Shareholders Deferred Taxation 74 Financial Management 23 and Major Business Stakeholders 33 Provisions 75 Tax 23 Share Capital 76 Balance Sheet 25 Directors’ Biographies and Responsibilities 34 Reserves 76 Purchase of own Shares 25 Remuneration Report 36 Minority Interests 77 Corporate Responsibility 25 Retirement Benefit Obligations 78 Strategy and Outlook 25 Independent Auditors’ Report 42 Employee Share-Based Payments 81 CR Key Performance Indicators 26 Consolidated Income Statement 43 Balance Sheets 44 Financial Instruments 84 Statement of Recognised Income and Expense Related Party Transactions 89 45 Commitments and Contingencies 91 Cash Flow Statement 46 Analysis of Net Debt 92 Notes on the Financial Statements 47 Explanation of Transition to IFRS 93 Significant Accounting Polices 47 IAS 39 and IAS 32: Notes to the Conversion 99 Segmental Information 54 Other Operating Income and Expense 56 Notice of Meeting 101 Exceptional Items and Certain Re-measurements 56 Shareholder Information Back cover Directors and Employees 57 Net Finance Costs 57 Glossary of Terms Back cover Taxation 58 Directors Financial Calendar Sir Robert Smith David Payne Annual General Meeting Chairman Deputy Chairman 27 July 2006 Ian Marchant Alistair Phillips-Davies Ex dividend date Chief Executive Energy Supply Director 23 August 2006 Gregor Alexander Susan Rice CBE Record date Finance Director Non-Executive Director 25 August 2006 Colin Hood Kevin Smith CBE Final dividend payable Chief Operating Officer Non-Executive Director 22 September 2006 René Médori Interim announcement Non-Executive Director 15 November 2006* * Provisional date Scottish and Southern Energy Annual Report 2006 Chairman’s Statement 1 POWERFUL COMMITMENT Sir Robert Smith Chairman Scottish and Southern Energy’s first cuts experienced by our electricity existing energy and infrastructure-related responsibility to its shareholders is to deliver network customers and another reduction businesses in the UK and confirm our sustained real growth in the dividend. I am, in the number of complaints sent by our position as the broadest-based UK energy therefore, pleased to report that the Board energy supply customers for resolution company, with involvement in electricity is recommending a final dividend of 32.7p to energywatch. It is also encouraging that generation, gas storage and gas and per share, making a full-year dividend of this customer-focused approach is being electricity distribution, contracting and supply. 46.5p – an increase of 9.4%. I am also extended to Scotia Gas Networks (SGN), pleased to report that we are on course in which we invested during 2005, where Commitment to deliver at least 4% real growth in the the number of customer complaints is In each of these activities, we depend on the dividend in 2007 and 2008, with sustained also improving. people throughout SSE whose enthusiasm real growth thereafter. As the company and skill is hugely impressive. I’ve heard a approaches the eighth anniversary of its Opportunities member of our customer service team sum formation, at the end of 2006, a decade The investment in SGN confirmed SSE as it up very well: “There’s a culture of passion, of sustained real growth in the dividend the second largest distributor of electricity promises and commitments.” That’s an is coming within sight. and gas in the UK. We are also the largest excellent and deserved tribute to the hard non-nuclear generator of electricity and the work done by people throughout the Focus largest generator from renewable sources organisation, which I endorse wholeheartedly. This has been possible as a result of SSE’s in the UK – as well as being the third largest consistent and continuing focus on the supplier of electricity and gas. At Hornsea, That culture is at the heart of everything four areas in which we can enhance and we have the biggest onshore gas storage that SSE aims to do. The commitment is create value for shareholders: maintaining facility in the UK and we have one of the to colleagues, customers and shareholders. and investing in our energy networks; country’s most successful electrical It means that we have great strengths to adding to our leading-edge generation contracting business. This gives us an draw on as we continue to work towards portfolio; growing our energy supply excellent platform from which to expand our core objective: the delivery of sustained business; and developing our presence further in the second half of this decade, real growth in the dividend. in businesses such as contracting, and we have the financial strength and the connections, gas storage and telecoms. investment opportunities to do so. We have, as a result, delivered another very good financial performance, with Investment adjusted profit before tax now £858.2m. Over the next few years, we expect to enhance value by investing in assets in our energy Customers networks, electricity generation and gas This consistent focus is not simply financial: storage businesses. During 2005/06 we as a utility and provider of services on which took important decisions to invest in fitting our customers depend, everyone in SSE flue gas desulphurisation equipment at believes it is essential to strive for excellence our coal-fired power stations and in building in everything we do. I am, therefore, Scotland’s first large-scale conventional particularly pleased that we have secured hydro electric station for 50 years. These another reduction in the number of power and other investments will build on our Scottish and Southern Energy Annual Report 2006 What We Do 2 03. 04. GAS BUSINESSES 01. 02. 05. 06. Suppliers 01. Terminal 02. Compressor 03. Liquefied Natural 04. Gas Storage Gas is supplied from Gas is delivered to the Maintains pressure Gas Storage Gas is stored in offshore fields, NationalTransmission and propels gas Gas is cooled and stored underground caverns System through six through the system as liquefied natural gas onshore fields and an beach terminals and is 05. Offtake interconnector with transported at pressures The point where gas is mainland Europe. up to 85 bar gauge (barg) delivered to the distribution system operator 06. High Pressure System Transports gas in steel pipes over large distances at pressures between 03. 7 and 70 barg 05. ELECTRICITY BUSINESSES 01. 02. 04. Power Station 01. Grid Entry Point 03. Very Large 04. Grid Supply Point Electricity is generated The voltage is increased to Industrial Customers The voltage is reduced to from nuclear, gas, 275kV or 400kV and the Very large customers such 132kV and responsibility electricity, coal, oil, transmission company as steel producers take for distribution of the hydro and wind power takes responsibility for their electricity direct from electricity is handed onto transmitting the electricity the transmission system the regional distribution at voltages up to 400kV companies 02. Transmission System The electricity is 05. Large transmitted over large Industrial Customers distances at 400kV or 275kV Large industrial (also 132kV in Scotland) customers connected to the distribution system at 132kV MORE THAN AN ELECTRICITY COMPANY Scottish and Southern Energy Annual Report 2006 3 09. 11. 13. 12. 15. 07. 08. 10. 12. 14. 07. Intermediate 09. Industrial Customers 11. Industrial Customers 12. Pressure Reduction 13. Gas Storage Pressure System Industrial customers Industrial customers Gas is further reduced Gas is stored in Transports gas in steel or such as power stations are connected to the in pressure, to up to large holders high density polyethylene are connected to the IP MP system 75 mbarg (PE) pipes between towns system 14. Low Pressure System and villages at pressures Carries gas in populated between 2 and 7 barg 10. Medium areas in PE, iron or Pressure System steel pipes 08. Pressure Reduction Transports gas into Gas is reduced in towns and villages 15. Commercial pressure to between through PE, iron or Customers 75 mbarg and 2 barg steel pipes Commercial customers connected to the LP 07. system 16/13. 10. 08. 06. 08. 09. 11. 12. 06. Extra High Voltage 08. Primary Distribution 10. Industrial and 12. Low Voltage 16/13. Residential and Distribution System Substations Commercial Distribution System Commercial Customers Electricity is carried The electricity is reduced Customers Electricity is carried Connected to the LP gas between towns and to 33kV or 11kV Connected to the locally on overhead system at pressures of villages on overhead distribution system at lines and underground up to 75 mbarg and to lines (mostly on wooden 09. High Voltage 66kV, 33kV or 11kV cables at 230V the electricity network poles) and underground Distribution System at 230V cables at 66kV or 33kV Electricity is carried 11. Secondary locally at 11kV Distribution 07. Industrial Customers Substation Industrial customers The Electricity is connected to the reduced to 230V network at 66kV or 33kV 16/13.