Scottish and Southern Energy plc Annual Report 2009 Producing energy in a more sustainable way with new developments like the Glendoe hydro electric scheme. Helping make electricity and gas more affordable by offering a ‘better plan’ and installing insulation. Ensuring electricity supply is reliable through investing in networks in England and Scotland. Providing more capacity for the UK to maintain dependable supplies of gas through development at Aldbrough. SSE’s core purpose is to provide the energy people need in a reliable and sustainable way. Our Values Safety, service, efficiency, sustainability, excellence, teamwork – the SSE SET. 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 18,500 people, working from power stations, depots, customer service centres, offices and shops. * 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. Key Performance Indicators Adjusted Profit Before Tax* – £m Operating Profit* – £m 2007 2008 2009 2009 1,253.7 Generation and Supply 632.5 711.1 832.0 Energy Systems 471.1 544.4 584.2 2008 1,229.2 2007 1,079.3 Gas Storage 55.9 50.9 42.7 15.5 2006 873.9 Telecoms 13.9 14.3 Contracting, Connections 2005 732.1 and Metering 61.7 68.7 74.8 Dividend – pence per share Dividend – composition 66.0 Interim 30% (19.8 pence) 60.5 Final 70% (46.2 pence) 55.0 46.5 42.5 37.7 35.0 32.4 30.0 25.7 27.5 20001999 20001999 2001 2002 2003 2004 2005 2006 2007 2008 2009 Energy Customer Numbers – millions Energy Customers Numbers – composition 2009 9.05 Electricity (residential) 56% (5.10 million) 2008 8.45 Gas (residential) 2007 7.75 39% (3.50 million) 2006 6.70 Electricity and Gas (business) 2005 6.10 5% (0.45 million) Capital Expenditure – £m Capital Expenditure 2008/09 – % 2009 1,279.8 Thermal Generation 17 2008 810.3 Renewable Generation 41 2007 663.4 Power Systems 25 2006 502.1 Gas Storage 4 Other 13 2005 383.5 Corporate Responsibility 2005 2006 2007 2008 2009 Lost-time and Reportable Accidents – per 100,000 hours worked (2007-2009 figures show Total Recordable Injury Rate) N/A 0.08 0.05 0.04 0.07 0.49 Power Station CO2 Emissions – kilograms per kWh N/A 0.62 0.55 0.50 Customer Minutes Lost – SEPD 84 71 72 67 66 Customer Minutes Lost – SHEPD 82 65 77 72 75 Contents 01 Chairman’s Introduction 02 Overview of our Business 06 Our Strategy 08 Chief Executive’s Statement 18 Financial Overview 19 Dividend 20 Investment and Capital Expenditure 20 Financial Management and Balance Sheet 22 Tax 22 Convertible Bond Maturity and Authority to Purchase Own Shares 23 Corporate Responsibility 25 Performance Indicators 28 Generation and Supply 30 Generation 38 Supply 42 Networks 44 Electricity Networks 46 Gas Networks 47 Telecoms Networks 48 Energy-Related Services 48 Contracting, Connections and Metering 51 Energy and Home Services 52 Gas Storage 53 Managing Risk 55 Corporate Governance Report 62 Directors’ Report 64 Directors’ Biographies and Responsibilities 66 Remuneration Report 67 Remuneration Report – At a Glance 68 Remuneration Report – Remuneration Explained 68 The Role of the Remuneration Committee 68 Total Remuneration Policy 72 Service Contracts 72 Non-Executive Directors 73 Remuneration Report – Remuneration in Detail 76 Independent Auditor’s Report 95 6. Directors and Employees 114 19. Trade and Other Payables 77 96 114 Consolidated Income Statement 7. Finance Income and Costs 20. Current Tax Liabilities 78 Balance Sheets 97 8. Taxation 114 21. Construction Contracts 79 Statements of Recognised 99 9. Dividends 114 22. Loans and Other Borrowings Income and Expense 99 10. Earnings Per Share 118 23. Deferred Taxation 80 Cash Flow Statements 100 11. Intangible Assets 119 24. Provisions 82 Notes on the Financial Statements 104 12. Property, Plant and Equipment 119 25. Share Capital 82 1. Significant Accounting Policies 105 13. Investments 120 26. Reserves 90 2. Change in Accounting Policy 108 14. Subsidiary Undertakings 121 27. Retirement Benefit Obligations 91 3. Segmental Information 110 15. Acquisitions and Disposals 125 28. Employee Share-based Payments 93 4. Other Operating Income and Expense 113 16. Inventories 128 29. Financial Instruments and Risk 94 5. Exceptional Items and Certain 113 17. Trade and Other Receivables 140 30. Related Party Transactions Re-measurements 113 18. Cash and Cash Equivalents 141 31. Commitments and Contingencies 143 Shareholder Information Scottish and Southern Energy 01 Annual Report 2009 Chairman’s Introduction At a time of financial, economic and energy market turmoil, a company’s OVERVIEW ability to deliver profit and dividend growth in a responsible way has never been more important. In 2008/09, SSE delivered a 2.0% increase near Loch Ness, being a particularly Report in adjusted profit before tax* and is significant accomplishment. This should be This Annual Report describes in detail SSE’s recommending a 9.1% increase in the followed during 2009/10 by the completion financial and operational performance full-year dividend per share payable to of Marchwood, which will be one of the in 2008/09 and priorities for 2009/10 and shareholders. This means that since it was most efficient gas-fired power stations beyond. It also sets out SSE’s approach formed, SSE has achieved 10 successive in the UK. Major infrastructure projects to the vital issues of risk management, years of increasing profits and dividend. always present challenges, but I am corporate governance and remuneration – confident that SSE’s growing capability all in the context of its strategy, purpose and No Frills in this area will stand the company in values. SSE believes it is not an exercise 2008/09 was a tough year, dominated in good stead in the years to come. in box-ticking, but a balanced portrayal the first half by very high wholesale prices of the business. I would be very happy for electricity and gas. Throughout, SSE Purpose to hear from any shareholder who has managed its business in its usual no-frills In total, SSE is planning to invest around suggestions for improving the Annual way. That means delivering sector-leading £6.7bn in the five years between 2008 Report in 2010. service to energy supply and electricity and 2013. This investment is geared to distribution customers, dealing with the fulfilling SSE’s core purpose, which is Future difficult operational issues that arise to provide the energy people need in a Many changes are likely to take place at power stations from time to time and reliable and sustainable way. SSE has in energy production, distribution and undertaking a significant programme of two types of customer – those to whom consumption in the next decade. With investment in energy assets of crucial it supplies energy and related services such a strong team in place throughout importance in the UK and Ireland. within competitive markets and those SSE, however, I am very confident about to whom it delivers energy through the future. The organisation is built for the Strategy economically-regulated regional networks long term, and has the strategy, purpose, In the current environment, SSE’s strategy – and its commitment to delivering best- values and people to deliver sustained – operating and investing in a balanced in-sector service applies across the board. success in the coming years.// range of regulated and non-regulated energy businesses – is straightforward Values Lord Smith of Kelvin Chairman and has obvious benefits. It supports Service is part of the ‘SSE SET’ of SSE’s fundamental commitment to core values – Safety, Service, Efficiency, maintaining annual real dividend growth, Sustainability, Excellence and Teamwork. with the next step being the increase of Applying them has resulted in SSE at least 4% more than inflation targeted doubling the regulated asset value of its for 2009/10. networks, the capacity of its generation portfolio, the number of energy supply Investment customers and the dividend per share Dividend growth is supported by in seven years. They will continue to be investment. Securing future supplies the mainstay of the company. and tackling climate change are now the twin goals of energy policy in the UK, People Ireland and throughout the European The SSE team – now numbering more Union, and our programme of investment than 18,500 people – works together in continues to reflect this. As a result, our an outstanding way and it is a privilege portfolio of assets is growing, with the for the non-Executive Directors, including completion during 2008/09 of the large- our new colleague Thomas Andersen, scale hydro electric scheme at Glendoe, and me to be associated with them. Scottish and Southern Energy 02 Annual Report 2009 Overview of our Business Scottish and Southern Energy is involved in the generation of electricity; the supply of electricity and gas; electricity, gas and telecoms networks; and other energy-related services such as gas storage, contracting, connections and metering. Generation Supply Sustainability, Diversity, Optionality Affordability, Products, Service SSE owns around 10,700MW of electricity SSE supplies electricity and gas to over nine generation capacity in the UK and Ireland, million domestic, commercial and industrial comprising around: 4,500MW of gas- and customers within Great Britain’s competitive oil-fi red capacity; 4,000MW of coal-fi red market and to around 50,000 customers in the capacity (with biomass co-firing capability) and Irish all-island market.