Scottish and Southern Energy plc For further information In producing this report we have chosen production methods which aim to minimise the impact on our about SSE, please contact: environment. The papers used – Revive 50:50 Silk and Kaskad – are manufactured from sustainable sources. Scottish and Southern Energy plc Revive 50:50 Silk also contains 50% recovered waste. Both the paper mills and printer involved in this production are Scottish and Southern Energy plc Corporate Affairs environmentally accredited with ISO 14001. The printer Annual Report 2011 Inveralmond House is also registered as a Carbon Neutral company. 200 Dunkeld Road Perth PH1 3AQ UK T: +44 (0)1738 456000 E: [email protected] www.sse.com Annual Report 2011 Follow the latest news from SSE on Twitter at: www.twitter.com/sse Registered in Scotland No. 117119 STOCK CODE 008235 Contents Financial statements 78 Independent auditors’ report Overview 79 Consolidated income statement 80 Statement of comprehensive income 01 Introduction 81 Balance sheets 02 The energy sector in Great Britain 82 Statement of changes in equity 05 The energy sector in Ireland 84 Cash flow statements 06 SSE – a balanced range of 86 Notes on the financial statements energy businesses 86 1. Significant accounting policies 08 Chairman and Chief Executive 95 2. Reclassification of comparative Questions and answers The stunning photograph amounts used on the cover of this year’s 96 3. Segmental information Strategy 99 4. Other operating income and expense Annual Report was taken at 10 Why invest in SSE? 100 5. Exceptional items and certain SSE’s Drumderg wind farm in remeasurements Perthshire by award-winning Group performance 101 6. Directors and employees photographer Toby Smith. 16 Key performance indicators 102 7. Finance income and costs 17 Financial overview 103 8. Taxation 105 9. Dividends Last year SSE commissioned Toby Segmental performance 105 10. Earnings per share 106 11. Intangible assets to take a series of photographs 23 Economically-regulated businesses 110 12. Property, plant and equipment of its renewable energy projects 23 Energy networks 111 13. Biological assets 29 Market-based businesses across Scotland. The photographs 112 14. Investments 29 Generation and Supply 115 15. Subsidiary undertakings form a collection known as 43 Other energy and utility services ‘The Renewables Project’, and 117 16. Acquisitions, disposals and Corporate governance held for sale assets are now in use on SSE’s website, 119 17. Inventories www.sse.com, and on display in 47 Chairman’s introduction to 120 18. Trade and other receivables its office buildings. The Renewables SSE corporate governance 120 19. Cash and cash equivalents 48 Board of Directors 120 20. Trade and other payables Project has also since featured in 50 The SSE team 121 21. Current tax liabilities a range of publications including 52 How the Board works 121 22. Construction contracts a special feature in National 56 Risk management 121 23. Loans and other borrowings 60 Audit Committee Geographic magazine. 124 24. Deferred taxation 62 Risk and Trading Committee 125 25. Provisions 63 Nomination Committee 126 26. Share capital 64 Saf ety, Health and Environment 126 27. Reserves Advisory Committee 126 28. Hybrid capital 65 Remuneration Report 127 29. Retirement benefit obligations 65 Introduction 130 30. Employee share-based payments 66 At a glance 135 31. Financial instruments and risk 67 Remuneration explained 149 32. Related party transactions 72 Remuneration in detail 150 33. Commitments and contingencies 75 Other statutory information 151 34. Post balance sheet events Shareholder information 152 Shareholder information The Directors’ Report is set out on pages 6 to 76. *Unless otherwise stated, this Annual Report describes adjusted operating profit before exceptional items, remeasurements arising from IAS 39 and after the removal of taxation and interest on profits from jointly-controlled entities and associates. In addition, it describes adjusted profit before tax before exceptional items, remeasurements arising from IAS 39 and after the removal of taxation on profits from jointly-controlled entities and associates. It also describes adjusted earnings and earnings per share before exceptional items, remeasurements arising from IAS 39 and deferred tax. Designed and produced by Tayburn Scottish and Southern Energy 01 Annual Report 2011 Overview Introduction Strategy Group performance Segmental performance Corporate governance Financial statements Shareholder information Dividend per share – pence “SSE’s core purpose is to provide the 2011 75.0 2010 70.0 energy people need in a reliable 2009 66.0 2008 60.5 and sustainable way. In fulfilling 2007 55.0 this purpose, SSE requires the support Operating profit by business of shareholders, to whom this report 2010/11 – % Generation and Supply 53 is addressed. Energy networks 39 Energy and utility solutions 8 It summarises SSE’s performance in 2010/11 and its plans for 2011/12 Energy customers – millions and beyond. Plans for the future are of 2011 9.65 central importance. Providing energy 2010 9.35 2009 9.10 is a long-term activity, and SSE is a 2008 8.49 2007 7.75 company that plans for the long term. Capital expenditure 2010/11 – % SSE is a straightforward company with Thermal generation 9 Renewable generation 54 straightforward priorities. It provides Power systems 23 Gas storage 4 Other 10 vital services to customers, invests in essential energy assets and pays Our work dividends to shareholders every year. SSE is involved in the generation, transmission, distribution and supply of electricity, the production, storage, distribution and supply of gas and in the In this report, SSE accounts for its provision of other energy-related services. performance against those priorities Our values In carrying out its work, SSE is guided and it is on this that it should be judged.” by its core values, the ‘SSE SET’ of Safety, Service, Efficiency, Sustainability, Excellence Lord Smith of Kelvin and Teamwork. Chairman Scottish and Southern Energy 02 Annual Report 2011 The energy sector in Great Britain Gas and electricity SSE in electricity The majority of SSE’s operations are SSE is involved in the generation, in England, Scotland and Wales, where transmission, distribution and supply of electricity. most parts of the energy sector have been privatised for at least two decades. Reflecting its island status, Great Britain’s have a single, GB-wide system operator – energy (ie electricity and gas) sector is National Grid operates the GB electricity largely free-standing with the exception and gas systems. 1 of some electricity interconnection with Ireland and mainland Europe and some The companies operating these networks ELECTRICITY GENERATION gas pipelines from mainland Europe and are the subject of economic regulation USING TURBINES TO CONVERT ENERGY to Ireland (see the map on page 4). through a Price Control set by Ofgem FROM GAS, OIL, COAL, WATER AND WIND which sets for periods of five (in the TO GENERATE ELECTRICITY Around 34 million homes, offices and future, eight) years the index-linked businesses are connected to the electricity revenue they can earn, through charges network in Great Britain and around 22 levied on network users, to cover their million to the gas network. Total electricity costs and earn a return on their regulated consumption in Great Britain in 2010 (the assets. Ofgem also places incentives on latest for which information is available) companies to be more efficient and was 325TWh and total gas consumption innovative and to deliver an enhanced was 606TWh. quality of service. The stated goal of the UK government’s It also sets the framework for the capital 2 energy policy is to achieve secure, affordable investment they are able to make in ELECTRICITY TRANSMISSION and low-carbon energy in the years and maintaining and upgrading the networks. decades ahead. The networks each have a Regulatory Asset USING HIGHER VOLTAGE LINES AND CABLES TO TRANSMIT ELECTRICITY FROM GENERATING Value (RAV), which represents: PLANT TO THE DISTRIBUTION NETWORK The sector is split between activities which are economically-regulated (energy transmission kk the price paid for them when they were and distribution networks) and activities which privatised; plus are market-based (energy production and kkallowed capital expenditure; less retailing). Companies which operate in both kkannual depreciation. parts of the sector must adhere to rules to maintain legal separation and confidentiality, The RAV is indexed to the Retail Price Index. under the Utilities Act 2000. Companies cannot charge network users Economic regulation of networks more than is allowed under the Price 3 Control. If, in any year, regulated energy As the Great Britain energy regulator, Ofgem, networks companies’ revenue is greater ELECTRICITY DISTRIBUTION puts it, energy transportation (transmission (over recovery) or lower (under recovery) USING LOWER VOLTAGE LINES AND CABLES and distribution) networks are ‘natural than is allowed under the relevant Price TO DISTRIBUTE ELECTRICITY TO HOMES, monopolies – there is no realistic means Control, the difference is carried forward WORKPLACES AND OTHER PREMISES of introducing competition’. There are four and the subsequent prices the companies types of energy network: may charge are varied. kk electricity transmission (three networks in GB) – high voltage electricity wires and cables; kkelectricity distribution (14 networks in GB) – lower voltage wires and cables delivering electricity