energy made better Scottish and Southern Energy plc Annual Report 2007 Our purpose is to provide people with the energy they need – in a reliable and sustainable way. This Annual Report describes how we’ve worked to make energy better. And we’re continuing to work to make it better still. Scottish and Southern Energy Annual Report 2007 Contents 1 Chairman’s Statement 2 Directors’ Report 36 Dividends 68 Profile 3 Corporate Governance Report 38 Earnings Per Share 69 Providing Energy 4 Organisation and Structure 38 Intangible Assets 70 Key Performance Indicators 6 Board Effectiveness 39 Property, Plant and Equipment 72 Board Committees 39 Investment in Associates and Joint Ventures 73 Chief Executive’s Statement 10 Audit Committee 39 Subsidiary Undertakings 76 Financial Overview 10 Remuneration Committee 40 Acquisitions and Disposals 77 Energy Systems 11 Nomination Committee 40 Inventories 79 Generation and Supply 16 Risk Committee 40 Trade and Other Receivables 79 Contracting, Connections and Metering 25 Executive Committee 40 Cash and Cash Equivalents 80 Gas Storage 27 Health, Safety and Environmental Advisory Committee 40 Trade and Other Payables 80 Telecoms 28 Internal Control and Risk Management 40 Current Tax Liabilities 80 Exceptional Item 28 Going Concern 41 Construction Contracts 80 Investment and Capital Expenditure 28 Communication with Shareholders Loans and Other Borrowings 81 Financial Management 30 and Major Business Stakeholders 41 Deferred Taxation 83 Tax 31 Provisions 84 Balance Sheet 31 Directors’ Biographies and Responsibilities 42 Share Capital 85 Purchase of Own Shares 31 Remuneration Report 44 Reserves 85 Corporate Responsibility 31 Retirement Benefit Obligations 86 Strategy and Outlook 32 Independent Auditors’ Report 50 Employee Share-Based Payments 89 CR Key Performance Indicators 33 Consolidated Income Statement 51 Financial Instruments 93 Balance Sheets 52 Related Party Transactions 97 Statements of Recognised Income and Expense 53 Commitments and Contingencies 98 Cash Flow Statements 54 Analysis of Net Debt 100 Notes on the Financial Statements 55 Post Balance Sheet Events 100 Significant Accounting Policies 55 Segmental Information 61 Notice of Meeting 101 Other Operating Income and Expense 64 Shareholder Information 104 Exceptional Items and Certain Glossary of Terms Back cover Re-measurements 64 Directors and Employees 65 Finance Income and Costs 66 Taxation 67 Directors Financial Calendar *This results statement describes adjusted profit Sir Robert Smith René Médori Annual General Meeting before tax before exceptional items, the impact Chairman Non-Executive Director 26 July 2007 of IAS 32 and IAS 39 and after the removal of Ian Marchant David Payne Ex dividend date taxation on profits from jointly-controlled entities Chief Executive Deputy Chairman 22 August 2007 and associates. It also describes adjusted Gregor Alexander Alistair Phillips-Davies Record date earnings and earnings per share before Finance Director Energy Supply Director 24 August 2007 exceptional items, the impact of IAS 32 and Colin Hood Susan Rice CBE Final dividend payable IAS 39 and deferred tax. In addition, it describes Chief Operating Officer Non-Executive Director 21 September 2007 adjusted operating profit before exceptional Nick Baldwin Sir Kevin Smith CBE Interim announcement items, the impact of IAS 32 and IAS 39, and after Non-Executive Director Non-Executive Director 14 November 2007* the removal of taxation and interest on profits Richard Gillingwater from jointly controlled entities and associates. Non-Executive Director * Provisional date Operational data for 2005 and 2006 has been restated in some places to conform with the definitions for data published for 2007. Scottish and Southern Energy Annual Report 2007 Chairman’s Statement 2 Making dividends bigger Sir Robert Smith Chairman Scottish and Southern Energy’s strategy I am very pleased to report that we responded operations and investment in alternative is to deliver sustained real growth in the effectively to the power cuts experienced sources of energy. In this context, I am dividend payable to shareholders through by our electricity network customers particularly pleased that we have set the efficient operation of, and investment and achieved another reduction in the ourselves the target of reducing the carbon in, a balanced range of regulated and non- number of complaints sent by customers intensity of electricity generated at power regulated energy-related businesses. The of Scotia Gas Networks to energywatch for stations in which we have an ownership or successful implementation of this strategy resolution. We have also set the standard contractual interest by 20% by 2016. This is in 2006/07 delivered another year of excellent in customer service in energy supply, with just one example of our determination to financial performance, with profit before the implementation of our sector-leading make energy better. tax exceeding £1 billion for the first time, Customer Charter. This, combined with and strong operational performance, our policy of responsible pricing, has Values with our policy of responsible pricing helped us to reach 7.75 million customers, Sustainability – aiming to operate ethically, helping us to gain more than one million an increase of over 70% in five years. taking the long-term view to achieve growth additional customers. while safeguarding the environment – is one Dividend of six core values for SSE which we defined Assets SSE’s first responsibility to shareholders is to during the year. The others are safety, There has been very good progress in our deliver sustained real growth in the dividend. service, efficiency, excellence and teamwork. major investment programme, with the result With its operational and investment focus These values are demonstrated day-in, that our asset base in energy networks, leading to value enhancement and creation, day-out by people throughout SSE and it is electricity generation, energy supply and SSE is in an excellent position to deliver this which helps to set the company apart gas storage, which has grown substantially in very good results in the years ahead, as a from so many others, and to which I pay a recent years, will again increase significantly customer-serving, dividend-paying company. fulsome tribute. Adhering to them helped us in the coming years. Later this year, for Our enhanced dividend policy reflects this. to achieve another reduction in the number example, the first of the gas storage caverns The Board is recommending a final dividend of lost time and reportable injuries to a new at our development at Aldbrough in East of 39.9p, making a full-year dividend of 55p – record low for the company. Nevertheless, Yorkshire are set to be commissioned, and our an increase of 18.3%. From this new, higher we remain focused on our ultimate goal of first new large-scale hydro electric scheme base, our new target is to deliver at least injury-free working. for 50 years is taking shape at Glendoe near 4% real growth in the dividend in respect Loch Ness. This growth in assets will confirm of 2007/08, 2008/09 and 2009/10 and to Long-term our position as the broadest-based UK energy deliver sustained real growth in the dividend Next year will see the completion of SSE’s company, and we have the opportunities and thereafter. first decade as one of the UK’s leading financial strength to invest further. energy companies, and the company is Environment full of ideas, plans and opportunities for Customers SSE’s core activities present significant its second decade. That decade will be SSE has two kinds of customers: those environmental challenges and our policy is challenging, and there is absolutely no room to whom we supply electricity and gas to minimise where possible the emissions of whatsoever for complacency, but I am fully and other energy and utility services in carbon, sulphur and nitrogen from all of our confident that the company is exceptionally competitive markets; and those to whom activities through a combination of continuous well-placed to add greatly to its track record we distribute energy via regulated networks. improvement in the management of our of sustained real growth in the dividend. Scottish and Southern Energy Annual Report 2007 Profile 3 SSE’s core purpose is to provide the energy people need in a reliable and sustainable way. Our values: safety, service, efficiency, sustainability, excellence and teamwork. Our strategy: to deliver sustained real growth in the dividend payable to shareholders through the efficient operation of, and investment in, a balanced range of regulated and non-regulated energy-related businesses. Our team: more than 13,400 people, working from more than 150 power stations, depots, customer service centres, offices and shops. We have a clear purpose, clear values and a clear strategy. We believe in teamwork. And the net result? Energy made better. Scottish and Southern Energy Annual Report 2007 Providing Energy 4 6 1 2 3 4 5 1. Generation portfolio 4. Electricity networks infrastructure 7. Telecoms SSE owns and operates over 10,000MW of electricity SSE is responsible for 128,000km of overhead lines and SSE Telecom provides radio sites for local authorities, generation capacity, including its share of joint ventures. underground cables, distributing electricity to 3.5 million mobile operators and emergency services and its This capacity includes coal-fired (with biomass co-firing homes, offices and businesses in the north of Scotland subsidiary, Neos Networks, operates a 7,500km UK-wide capability) and gas-fired power stations, as well as wind and central, southern England. telecoms network, providing services for other telecoms farms and hydro electric schemes. providers, companies and public sector organisations. 5. Electricity networks management 2. Wind SSE’s investment in its electricity networks, and its 8. Gas networks SSE owns and operates and has consent to build six response to incidents such as storms, means its SSE has a 50% stake in Scotia Gas Networks, which owns onshore wind farms in the UK, including the first to electricity network is more than 99.99% reliable.