Scottish and Southern Energy plc PROVIDING THE ENERGY PEOPLE NEED IN A RELIABLE AND SUSTAINABLE WAY Annual Report 2010 For further information about SSE, please contact: Scottish and Southern Energy plc Corporate Affairs Inveralmond House 200 Dunkeld Road Perth PH1 3AQ UK In producing this report we have chosen production methods which aim to minimise the impact on our environment. The papers chosen – T: +44 (0)1738 456000 Revive 50:50 Silk and Revive 100 Uncoated – contain 50% and E: [email protected] 100% recovered waste respectively and conform to government www.sse.com requirements for recycled paper. They are also certified as FSC mixed sources grade. Both the paper mill and printer involved in this production are environmentally accredited with ISO 14001. Follow the latest news The printer is also registered as a Carbon Neutral company. from SSE on Twitter at: www.twitter.com/sseplc Registered in Scotland No. 117119 Scottish and Southern Energy plc STOCK CODE 008234 Annual Report 2010 Introduction to SSE Financial statements 01 What SSE does 77 Independent auditors’ report 02 How SSE provides energy 78 Consolidated income statement 79 Statement of comprehensive income Directors’ report 80 Balance sheets 04 Key performance indicators 81 Statement of changes in equity 05 Principal assets 83 Cash flow statements 06 Chairman and Chief Executive 85 Notes on the financial statements Questions and answers 85 1. Significant accounting policies 08 Strategic overview 94 2. Segmental information 11 Financial overview 97 3. Other operating income and expense 16 Performance indicators 98 4. Exceptional items and certain 20 Business overview remeasurements 47 Corporate governance 99 5. Directors and employees 47 Chairman’s introduction 100 6. Finance income and costs 48 The SSE team 101 7. Taxation 52 Risk management 102 8. Dividends 56 How the Board works 103 9. Earnings per share 60 Audit Committee 104 10. Intangible assets 62 Risk and Trading Committee 108 11. Property, plant and equipment 63 Nomination Committee 109 12. Biological assets 64 Safety, Health and Environment 110 13. Investments Advisory Committee 113 14. Subsidiary undertakings 65 Remuneration Report – Introduction 115 15. Acquisitions and disposals 66 Remuneration Report – At a glance 117 16. Inventories 67 Remuneration Report – Remuneration explained 117 17. Trade and other receivables 72 Remuneration Report – Remuneration 118 18. Cash and cash equivalents in detail 118 19. Trade and other payables 75 Other statutory information 118 20. Current tax liabilities 119 21. Construction contracts 119 22. Loans and other borrowings 123 23. Deferred taxation 124 24. Provisions 125 25. Share capital and reserves 125 26. Retirement benefit obligations 129 27. Employee share-based payments 133 28. Financial instruments and risk 146 29. Related party transactions 148 30. Commitments and contingencies 149 31. Post balance sheet events Shareholder information 150 Shareholder information 151 Glossary * Unless otherwise stated, this Annual Report describes adjusted operating profit before exceptional items, the impact of IAS 32 and IAS 39 and after the removal of taxation and interest on profits from jointly-controlled entities and associates. In addition, it describes adjusted profit before tax before exceptional items, the impact of IAS 32 and IAS 39 and after the removal of taxation on profits from jointly-controlled entities and associates. It also describes adjusted earnings and earnings per share before exceptional items, the impact of IAS 32 and IAS 39 and deferred tax. Designed and produced by Tayburn Corporate Scottish and Southern Energy 01 Annual Report 2010 What SSE does Introduction to SSE Directors’ report Financial statements Shareholder information SSE’s core purpose is to provide the energy people need in a reliable and sustainable way. Its strategy is to deliver sustained real growth in the dividend payable to shareholders through the efficient operation of, and investment in, a balanced range of market-based and economically-regulated businesses in energy production, storage, distribution, supply and related services, mainly in the UK and Ireland. This Annual Report sets out what SSE achieved in 2009/10 and its plans for 2010/11 and beyond. Dividend – pence per share ’10 70.0 ’09 66.0 ’08 60.5 ’07 55.0 ’06 46.5 ’05 42.5 ’04 37.7 ’03 35.0 ’02 32.4 ’01 30.0 ’00 27.5 ’99 25.7 80 70 60 50 40 30 20 Scottish and Southern Energy 02 Annual Report 2010 How SSE provides energy Generation Supply Fuel Production Energy Networks and Storage Services Market based Gas-fired power Wind power Electricity supply Gas production Gas storage Electricity transmission Coal-fired power Hydro power Gas supply Utility solutions Street-lighting Electricity distribution Biomass power Emerging technologies Home services Metering Telecom networks Gas distribution 03 Introduction to SSE Directors’ report Financial statements Shareholder information Generation Supply Fuel Production Energy Networks and Storage Services Market based Economically regulated Gas-fired power Wind power Electricity supply Gas production Gas storage Electricity transmission Coal-fired power Hydro power Gas supply Utility solutions Street-lighting Electricity distribution Biomass power Emerging technologies Home services Metering Telecom networks Gas distribution Scottish and Southern Energy 04 Annual Report 2010 Key performance indicators Dividend – pence per share ’10 Dividend – composition ’09 70.0 ’08 66.0 ’07 60.5 55.0 ’06 ’05 46.5 ’04 42.5 ’03 37.7 80 ’02 35.0 ’01 32.4 Interim 30% (21.0p) ’99 ’00 30.0 25.7 27.5 Final 70% (49.0p) 70 Dividend cover – times Adjusted earnings per share* – pence 60 2010 1.57 2010 110.2 50 2009 1.57 2009 108.0 2008 1.73 2008 105.6 40 2007 1.68 2007 92.5 2006 1.61 2006 74.7 30 Adjusted profit before tax* – £m Operating profit by business – £m 20 2008 2009 2010 2010 1,290.1 Generation and Supply 711.1 832.0 896.0 2009 1,253.7 Energy networks 544.4 584.2 599.5 2008 1,229.2 Gas storage 50.9 42.7 41.8 2007 1,079.3 Telecoms 14.3 15.5 16.4 2006 873.9 Contracting, Connections and Metering 68.7 74.8 80.2 Capital expenditure – £m Capital expenditure 2009/10 – % 2010 1,315.2 Thermal generation 11 2009 1,279.8 Renewable generation 51 2008 810.3 Power systems 25 2007 663.4 Gas storage 4 2006 502.1 Other 9 Safety, sustainability and teamwork 2006 2007 2008 2009 2010 Total Recordable Injury Rate – per 100,000 hours worked N/A N/A N/A 0.16 0.14 Power station CO2 emissions – grams per kWh 622 555 496 491 494 Reportable environmental incidents 0 0 1 1 2 Number of employees 12,287 13,427 16,892 18,795 20,177 05 Principal assets Introduction to SSE Directors’ report Financial statements Shareholder information Generation capacity – MW Generation capacity – composition % 2010 11,330 2009 10,740 2008 10,530 Gas/oil 40 2007 10,017 Coal/biomass 39 2006 10,015 Renewable 21 Energy customer numbers – millions Energy customer numbers – composition % 2010 9.35 2009 9.10 Household electricity (GB) 55 2008 8.49 Household gas (GB) 38 2007 7.75 Business sites (GB) 5 2006 6.70 Household/business (Ire) 2 Networks regulated asset value – £bn Networks regulated asset value – % 2010 4.9 2009 4.7 SHEPD 17 2008 4.5 SEPD 35 2007 4.2 SHETL 8 2006 4.1 SGN (50% share) 40 Gas storage capacity – million cubic metres Gas storage capacity – composition % 2010 400 2009 325 2008 325 2007 325 Aldbrough 19 2006 325 Hornsea 81 Other assets and contracts 2006 2007 2008 2009 2010 Telecoms network (owned and leased) – km 7,500 7,500 8,000 10,300 11,200 Contracting order book – £m 87 95 99 101 115 Out-of-area networks in operation 19 24 33 47 53 Water inset appointments N/A N/A 1 2 5 Scottish and Southern Energy 06 Annual Report 2010 Chairman and Chief Executive Questions and answers In SSE, the Chairman (Lord Smith of Kelvin, below right) is responsible for the operation of the Board, ensuring it works effectively. The Chief Executive (Ian Marchant, below left) is responsible How would you sum up SSE’s for the management of the business, performance in 2009/10? implementing the strategy and policies Robert k It was business as usual, in that the Company delivered a 2.9% increase in agreed by the Board. Here they answer adjusted profit before tax* and the Board is recommending a 6.1% increase in the key questions about SSE’s performance full-year dividend. Since it was formed in 1998, SSE has achieved 11 successive years and plans for the future. of increasing profits and dividend. That’s quite a track record to build on in the future. Ian k Solid. As well as turning in a sound financial performance, we continued to lead the sector in customer service in both energy supply and electricity distribution. Our power stations and electricity networks performed well. Most encouragingly of all, our safety performance was the best ever in SSE’s history. We want to make it better still, and safety will continue to be a big priority in 2010/11. What was the rationale for the new dividend targets for 2010/11 onwards? Ian k In the half-year results in November 2009, we said that our priority in setting new dividend targets would be to make sure that they are realistic and attainable, thereby giving shareholders the fullest possible confidence in their achievability. That’s what our targets for dividend growth are designed to do. We believe that a target of annual real dividend growth of at least 2% in each of the three years to March 2013 is the right way forward.