SCOTTISH POWER UK PLC ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDED 31DECEMBER 2019 Registered No. SC117120 CONTENTS 1 STRATEGIC REPORT 28 DIRECTORS’ REPORT 34 INDEPENDENT AUDITOR’S REPORT 41 CONSOLIDATED BALANCE SHEET 43 CONSOLIDATED INCOME STATEMENT 44 CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME 44 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY 45 CONSOLIDATED CASH FLOW STATEMENT 46 NOTES TO THE CONSOLIDATED ACCOUNTS 98 COMPANY BALANCE SHEET 99 COMPANY STATEMENT OF CHANGES IN EQUITY 100 COMPANY CASH FLOW STATEMENT 101 NOTES TO THE COMPANY ACCOUNTS Some of the statements contained herein are forward looking statements about Scottish Power UK plc and its subsidiaries, and Iberdrola, S.A.’s strategic plans. Although Scottish Power UK plc and Iberdrola, S.A. believe that the expectations reflected in such statements are reasonable, the statements are not guarantees as to future performance and undue reliance should not be placed on them. Scottish Power UK plc Annual Report and Accounts 2019 Group Strategic Report for the year ended 31December 2019 The directors present their Strategic Report on the group for the year ended 31 December 2019. This includes an overview of Scottish Power UK plc’s structure, 2019 performance and strategic outlook including principal risks and uncertainties. References to “ScottishPower” below apply fully to the Scottish Power UK plc group (“the group”). SCOTTISHPOWER TODAY “ScottishPower: creating a better future, quicker, by delivering a low carbon future for the UK” WHO WE ARE Scottish Power UK plc (“the company”), registered company number SC117120, principally acts as 2019 financial the holding company of the group, whose activities comprise the generation, transmission and distribution of electricity, energy management and the supply of electricity and gas principally in highlights the United Kingdom (“UK”). The company is a wholly owned subsidiary of lberdrola, S.A. (“Iberdrola”), one of the largest utility companies in the world and a leader in renewable energy. ScottishPower Limited is the UK holding company of the Scottish Power Limited group (“ScottishPower”) of which the company is a member. REVENUE The three divisions operated by the group during the year were Energy Networks, Renewables and £5,124.5m Energy Retail and Wholesale, which are owned by their respective Head of Business Sub-holding (2018 £4,993.7m) Companies: Scottish Power Energy Networks Holdings Limited (“SPENHL”), ScottishPower Renewable Energy Limited (“SPREL”), and Scottish Power Retail Holdings Limited (“SPRHL”). The Head of Business Sub-holding Companies have their own boards of directors and have the OPERATING necessary autonomy to carry out the day-to-day management and effective administration of their division. PROFIT Further information regarding the corporate governance and board structure of the group is set out £828.7m in the Directors’ Report within the Corporate Governance section on page 28. (2018 £941.8m) OUR ACTIVITIES The group has three operating divisions: Energy Networks CAPITAL Energy Networks is responsible for three regulated electricity network businesses in the UK. These businesses are ‘asset-owner companies’, holding the regulated assets and electricity distribution INVESTMENT and transmission licences of the group, and are regulated monopolies. They own and operate the £1,660.9m network of cables and power lines transporting electricity to around 3.5 million connected customers in the Central Belt and South of Scotland, Cheshire, Merseyside, North Shropshire and (2018 £1,132.8m) North Wales. Renewables Renewables is responsible for the origination, development, construction and operation of renewable ADJUSTED energy generation plants, principally onshore and offshore wind, with a growing presence in emerging NET DEBT renewable technologies and innovations such as battery storage and solar. Energy Retail and Wholesale £3,888.1m Energy Retail is responsible for the supply of electricity and gas to almost five million domestic and (2018 £4,956.0m) business customers throughout the UK, including customer registration, billing and handling enquiries in respect of these services. Energy Retail is also responsible for the associated metering activity including the smart meter installation programme, and managing the group’s Energy Services activities. Energy Wholesale is responsible for managing the group’s exposure to the UK wholesale electricity and gas markets for Energy Retail and Renewables and the optimisation of gas storage. Scottish Power UK plc Annual Report and Accounts 2019 1 Group Strategic Report for the year ended 31December 2019 OUR PURPOSE, VALUES, STRATEGY AND ROLE Iberdrola and ScottishPower are “committed to an energy model that prioritises the well-being of people and the preservation of the planet.” OUR PURPOSE Shaping the future of energy in the UK Following our exit from thermal generation at the end of 2018, all of the group’s generation capacity is now from renewable energy sources. We started 2019 in the unique position of being the first integrated energy utility in the UK to generate 100% green electricity. Our focus is on wind energy, smart grids and driving the change to a cleaner, electric future. We are playing a leading role in the delivery of a clean, low-carbon system for the UK, currently investing £5 million every working day to create a better future, quicker. With our future plans to invest significantly in renewables generation and the electricity network infrastructure that will support the green transition, we are well placed to contribute to helping the UK meet its ‘net zero’ ambitions. The UK will host the next United Nations (“UN”) Climate Change Conference, the Conference of the Parties (“COP 26”), in our home city of Glasgow, and whilst it was announced on 1April 2020 that COP 26 has been postponed until 2021 due to COVID-19, this continues to present an important opportunity to raise public awareness of the importance and urgency of the climate change challenge, and to galvanise the action necessary to meet the UK’s decarbonisation goals. Delivering a better future, quicker for everyone We are committed to speeding up the transition to cleaner electric transport, improving air quality and, over time, helping to reduce energy bills. As part of Iberdrola, one of the world’s largest integrated utility companies and a global leader in wind energy, we believe in developing an energy model that prioritises the well-being of people and the preservation of the planet. Recognising the importance of taking care of the environment and people’s health, we want to offer society our experience in addressing these urgent social needs through our work on the decarbonisation and electrification of the economy as a whole, using renewable energy sources, efficient energy storage, smart grids and digitisation. We share Iberdrola’s purpose and values, and these are the bridge that connects the communities we serve with our growing group. We are dedicated to the purpose of building together, each day, a healthier, more accessible energy model, based on electricity. OUR VALUES Our values rest on continuing to develop as a leading, global and sustainable group in the 21st century. To meet our purpose, we are founded on three corporate values that define the group's identity and form the foundation of our strategy: being sustainable, dynamic and collaborative. Sustainable We are pioneers of renewable energy. We seek to inspire others by creating economic, social and environmental value wherever we are now and looking to the future. We put this value into action by continually putting safety first, respecting the environment, and acting ethically, rationally and responsibly to meet our commitments. Dynamic We bring about efficient change, big and small, through constantly challenging ourselves and our processes. We innovate to deliver continuous improvement. We put this value into action by challenging ourselves to do things more simply or efficiently, coming up with ideas and leading innovation, and anticipating our customers’ needs. Collaborative We are an energetic and responsible force for change. Through working together, we build and grow talent to achieve our common goals and purpose. We put this value into action by sharing knowledge and information; working together with our employees, suppliers and customers; and by breaking the mould, and encouraging diversity. OUR STRATEGY Our strategy is to create value from investment in networks, renewable energy generation and retail to help our customers realise a better future, quicker, under the pillars of our strategic values. Our key strategic goals include: • investing in networks to make them smarter, more resilient and creating a platform for the UK’s sustainable electric future; • investing in renewable energy generation, principally onshore and offshore wind, to tackle climate change and reduce the cost of electricity generation; • creating a fairer and more transparent market where customers are in control of their energy usage through digitisation and smart metering; and • designing and delivering an energy system to facilitate and encourage the growth of electric vehicles (“EVs”) and clean heating solutions to improve air quality and tackle climate change. To achieve these goals: • We will continue to invest in transmission and distribution networks, to ensure all customers have the power they need as set out in the RIIO-1 (Revenue = Incentives + Innovation + Outputs) business plan. RIIO refers to the price control