Annual Financial Report

RNS Number : 4120N

Scottish & Southern Energy PLC

10 June 2010

 



Annual Financial Report

Following the Preliminary Results announcement on 19 May 2010, SSE (Scottish and Southern Energy plc) announces that it has published its Annual Report and Accounts for the year ended 31 March 2010.

The Annual General Meeting (AGM) will be held at the Bournemouth International Centre, Exeter Road, Bournemouth BH2 5BH on Thursday, 22 July 2010 at 12 noon.  The mailing to shareholders of the AGM documentation has commenced, and copies of the Annual Report and Accounts and the Notice of Annual General Meeting for 2010 are available to view on the Company's website, www.sse.com.

Copies of the Annual Report and Accounts, Notice of Annual General Meeting; and Form of Proxy for 2010 are also being submitted to the UK Listing Authority and will shortly be available for inspection at the document viewing facility situated at: 25 The North Colonnade, Canary Wharf, London E14 5HS.

The Company is proposing to adopt new articles of association at the AGM and two copies of them have been sent to the FSA in accordance with Disclosure and Transparency Rule 6.1.2.  An explanation of the main changes between the proposed and the existing articles of association are set out in the Notice of Annual General Meeting 2010.

The information below, which is extracted in unedited full text from the 2010 Annual Report and Accounts, is included in this announcement for the purpose of compliance with Disclosure and Transparency Rule 6.3.5.  The information reproduced below should be read in conjunction with the Preliminary Results announcement issued on 19 May 2010.  Together these constitute the material required by Disclosure and Transparency Rule 6.3.5 to be communicated to the media in unedited full test through a Regulatory Information Service.  This material is not a substitute for reading the full 2010 Annual Report and Accounts.  Page numbers and cross-references in the extracted information below refer to page numbers and cross-references in the Annual Report 2010.

Appendix A:  Statement of Directors' responsibilities in respect of the annual report and the financial statements (page 76)

The Directors are responsible for preparing the Annual Report and the Group and parent company financial statements in accordance with applicable law and regulations. Company law requires the Directors to prepare Group and parent company financial statements for each financial year. Under that law they are required to prepare the Group financial statements in accordance with IFRSs as adopted by the EU and applicable law and have elected to prepare the parent company financial statements on the same basis.

Under company law the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Group and parent company and of their profit or loss for that period. In preparing each of the Group and parent company financial statements, the Directors are required to:

> select suitable accounting policies and then apply them consistently;

> make judgements and estimates that are reasonable and prudent;

> state whether they have been prepared in accordance with IFRS as adopted by the EU; and

> prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Group and the parent company will continue in business.

The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the parent company's transactions and disclose with reasonable accuracy at any time the financial position of the parent company and enable them to ensure that its financial statements comply with the Companies Act 2006. They have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Group and to prevent and detect fraud and other irregularities.

Under applicable law and regulations, the Directors are also responsible for preparing a Directors' Report, Directors' Remuneration Report and Corporate Governance Statement that complies with that law and those regulations.

The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company's website. Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

We confirm that to the best of our knowledge:

> the financial statements, prepared in accordance with the applicable set of accounting standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company and the undertakings included in the consolidation taken as a whole; and

> the Directors' Report includes a fair review of the development and performance of the business and the position of the issuer and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face.

For and on behalf of the Board

Ian Marchant                        Gregor Alexander

Chief Executive                     Finance Director

18 May 2010

Appendix B: Risk Management (pages 52 to 55)

As SSE has previously observed, there are many definitions of 'risk management' but some organisations with apparently textbook approaches to the issue have been overwhelmed by fundamental failures which well-documented systems and processes appeared powerless to prevent.

Ticking the right boxes is a responsible thing to do, but it is no substitute for a more fundamental responsibility on the part of companies: to ensure their overall business model and strategy and culture are designed with risk firmly in mind.

Clear financial goal

SSE has a clear - and moderate - financial goal: to deliver sustained real growth in the dividend payable to shareholders. To attain that goal, it does not need to seek artificially high rates of growth in profitability or take operational or investment decisions which are high risk. All members of the Board believe that this goal must not be subverted for any other financial end.

In their book, 'Built to Last', Jim Collins and Jerry Porras wrote about companies that do 'not view business as ultimately about maximising profitability'. That is SSE's view of sustainable business and it underpins its approach to risk management in all aspects of its activities.

Strategy

SSE seeks to achieve its financial goal through the implementation of a well-established strategy: the efficient operation of, and investment in, a balanced range of economically-regulated and market-based energy businesses. SSE is the only company listed on the London Stock Exchange involved in such a wide range of energy businesses in the UK.

Business model

The practical application of its strategy means SSE derives income and profit from:

> three separate economically-regulated activities - electricity transmission, electricity distribution and gas distribution;

> electricity production, using a diverse variety of fuels - gas, oil, coal, biomass, wind and water;

> energy supply - gas and electricity; and

> other energy-related activities such as gas storage, contracting, connections, metering and telecoms.

This means that while they have a common core - energy - there is balance and diversity in the sources of SSE's income and profit.

Culture

Central to SSE's approach to risk management is its core value of Teamwork, defined as supporting and valuing colleagues and working together in an open and honest way. This ensures a full discussion of the risks and potential rewards associated with any major decision - discussion which involves people because of what they know, not simply who they are.

Specific findings from the independent review of SSE Board effectiveness, carried out in the autumn of 2009 by Independent Audit Ltd, included 'a remarkable consensus of opinion' on the following:

> there is 'an open, informal atmosphere which encourages everyone to contribute';

> discussion is 'rigorous'; and

> the Executive Directors 'respond positively and constructively to challenge'.

Limited appetite for risk

The Teamwork value, combined with other factors such as the clear, moderate (but nevertheless fundamentally important) financial goal of sustained real growth in the dividend, mean SSE has a limited appetite for risk. At the same time, its approach in respect of economically-regulated businesses, which in themselves are lower-risk, is more risk-averse than is the case in other, market-based activities. In these areas, such as electricity generation, SSE might consider taking on additional risk where the risk is very well-understood and can be mitigated and the potential returns are clearly attractive (but also credible).

Risk identification

The Teamwork value, the emphasis on people's knowledge rather than status, and the maintenance of a very experienced team, complemented by the recruitment of additional specialist skills where necessary, are all designed to ensure that the risks associated with operations and investments are identified, understood, recorded, mitigated and monitored.

Limited value at risk

The limited appetite for risk and the process of risk identification, allied to the maintenance of a balanced model, in which diversity of operations and investments is a key feature, all mean that the extent of any single risk and the value associated with it is limited.

Risk monitoring

Risks are monitored by the relevant business units within SSE, with an overview provided by the Group Internal Audit Department for the Audit Committee meetings held in May and November of each year and for the Board meeting held in March. During 2009/10, the Group Audit function carried out over 60 separate audits of functions, activities and issues managed by SSE, providing a large number of reports to senior management throughout the year. These include environmental audits carried out by SSE's Group Environmental Auditor. Each audit report included agreed management actions to improve the overall management of risk. The work of Group Audit complements the work done by business-specific compliance functions in areas such as energy trading, domestic sales, IT and customer service.

Risk management

In summary, SSE's approach to risk management is characterised by: the clarity of its financial goal; its strategy and business model, which help to limit the value at risk; its culture and limited appetite for risk; and its work on risk identification and risk management.

Clear and transparent decision-making

Such an approach to risk management still requires one essential feature: clear and transparent decision-making to make the overall approach effective, in support of its clear financial goal.

Risk Categories

At its meeting in March 2010, the Board of SSE reviewed SSE's principal risk categories and the effectiveness of SSE's system of internal controls. The risks are set out under six principal categories, summarised below.

One additional risk is the weather - particularly its impact on the production and consumption of energy in the Generation and Supply business. The extent of this risk is contained by the diversity within SSE's generation portfolio, the further diversity within its renewable energy portfolio, and the integrated nature of its generation and energy supply activities.

No list of risks can ever be totally comprehensive. Circumstances change and the unexpected happens so the extent and materiality of any risk can vary. Nevertheless, in its ongoing review of risk, SSE is confident that its assessment of the principal risk categories is correct and that its analysis of individual risks is soundly-based.

Risk categories	Risks in this category	How risk is managed
Strategic risk This means a risk which could adversely affect SSE's ability to achieve its core financial objective of sustained real growth in the dividend.	Risks could arise from issues such as the impact of climate change and scarcity of natural resources and commodities, the emergence of new, so-called 'disruptive' technologies, poorly-judged acquisitions or investments, fundamental weaknesses in project management or sustained reputational damage.	SSE manages strategic risk by operating and investing in a balanced range of market-based and economically-regulated energy businesses, thus limiting the value at risk associated with any single business issue. Furthermore, its approach to risk identification, monitoring and management is applied in detail to individual issues as they arise, thereby further diluting strategic risk.
Financial risk This means a risk which could result in a material financial loss to SSE or an inability to meet its obligations.	Risks could arise from issues such as participation in wholesale markets for gas and electricity and other commodities, an adverse movement in exchange rates between sterling and other currencies or inability to secure short-, medium or long-term funding.	SSE has a Risk and Trading Committee which manages the financial exposures, operations and internal controls related to participation in wholesale energy and commodity markets and to Treasury related activities. SSE maintains a balanced approach to financing its operations and investments, founded on maintenance of a strong balance sheet.
Credit risk This means a risk of default by a contractual counter-party resulting in failure to settle or deliver on liabilities or an inability to finance its operations and investments.	This risk applies especially in wholesale energy and commodity activity and in the supply of energy to major customers. In other areas, such as SSE's economically regulated businesses, credit risks are managed in accordance with industry standards as set out by Ofgem. Like other companies, SSE seeks external funding at an economic rate to finance its activities.	Specific credit risk controls that match the risk profile of those activities are applied. SSE does not deliberately seek exposure to credit risk as a means of generating profit. SSE also observes a number of financial principles, including maintenance of a strong balance sheet.
Market risk This means a risk of major change arising in one or more of the markets in which SSE is an active participant.	SSE is active in a number of markets, including energy supply and energy services such as contracting. Any participant in competitive markets is exposed to risks associated with competitors' behaviour and customers' changing expectations and requirements.	SSE actively monitors, manages and develops its proposition in all of the markets in which it takes part and talks every day to customers to make sure it is meeting their expectations. It has specific Leadership Teams comprising managers tasked with promoting SSE's position in the provision of products and services to households and businesses.
Operational risk This means the risks associated with the day-to-day operations of SSE, across all of its business activities, and relating to processes, systems or people.	SSE is a complex business and operational risks range from management of electricity generation plant and overhead power lines to safety, health or environmental issues and compliance with legislation and regulations.	Operational risks are managed through the identification of specific risks within each activity and the development of associated mitigation plans and deployment of relevant policies. SSE also prioritises the development and retention of experienced employees whose risk management experience is used. SSE has in place insurance policies in respect of all major operational risks.
Political and regulatory risk This means environmental, safety, regulatory and general legislative and public policy changes which could affect any part of SSE's business.	In SSE's economically-regulated businesses, the principal risk arises from Ofgem's determination of the Price Control for electricity distribution and transmission and gas distribution. In market-based businesses, the principal risk arises from the high political profile of electricity generation and energy supply.	SSE has a Policy and Regulation Leadership Group to oversee political and regulatory matters. It maintains a high level of constructive interaction with regulators, policy-makers, legislators, officials and other opinion formers in the political and legislative process.

Appendix C: Related Party Transactions (pages 146 to 148)

The immediate parent and ultimate controlling party of the Group is Scottish and Southern Energy plc (incorporated in Scotland).

Balances and transactions between the Company and its subsidiaries, which are related parties of the Company, have been eliminated on consolidation and are not disclosed in this note. Details of transactions between the Group and other related parties are disclosed below.

(i)    Trading transactions

The following transactions took place during the year between the Group and entities which are related to the Group but which are not members of the Group. Related parties are defined as those in which the Group has control, joint control or significant influence over.

	Sale of goods and services 2010 £m	Purchase of goods and services 2010 £m	Other transactions 2010 £m	Sale of goods and services 2009 £m	Purchase of goods and services 2009 £m	Other transactions 2009 £m
Jointly controlled entities:
Seabank Power Limited	3.0	(107.1)	7.1	5.2	(82.4)	20.7
PriDE (South East Regional Prime) Limited	40.5	-	-	54.3	-	-
Scotia Gas Networks Limited	54.9	(145.0)	-	59.0	(134.7)	35.0
Marchwood Power Limited	31.5	(65.7)	-	-	-	104.6
Greater Gabbard Offshore Winds Ltd	3.9	-	-	1.0	-	-
Associates:
Barking Power Limited	2.5	(135.5)	15.2	0.7	(177.5)	(0.1)
Derwent Co-generation Limited	30.6	(96.6)	-	37.4	(94.6)	-
Logan Energy Ltd	0.8	-	-	0.7	-	-
Green Highland Renewables Ltd	0.3	-	-	0.2	-	-
Vital Holdings Limited	1.1	(0.6)	-	-	-	-
Onzo Limited	-	(1.0)	(4.9)	-	-	-

The transactions with Marchwood Power Limited, Seabank Power Limited, Barking Power Limited and  Derwent Co-generation Limited relate to the contracts for the provision of energy or the tolling of energy under power purchase arrangements. PriDE (South East Regional Prime) Limited operates a long-term contract with Defence Estates for management of MoD facilities in the South East of England. All operational activities are sub-contracted to the ventures partners including Southern Electric Contracting Limited. Scotia Gas Networks Limited has operated the gas distribution networks in Scotland and the South of England from 1 June 2005. The Group's gas supply activity incurs gas distribution charges while the Group also provides services to Scotia Gas Networks in the form of a management service agreement for corporate services, stock procurement services and the provision of the capital expenditure on the development of front office management information systems. Sales of goods to related parties were made at an arms length price.

The balances outstanding with related parties at 31 March were as follows:

Consolidated

	Amounts owed by related parties		Amounts owed to related parties
	2010	2009	2010	2009
	£m	£m	£m	£m
Jointly controlled entities:
Seabank Power Limited	0.3	4.6	26.0	23.1
PriDE (South East Regional Prime) Limited	7.0	6.6	-	Nil
Greater Gabbard Offshore Winds Limited	-	0.2	-	Nil
Scotia Gas Networks Limited	16.4	27.4	1.3	0.3
Marchwood Power Limited	-	0.4	7.0	Nil
Associates:
Barking Power Limited	16.4	0.1	9.3	17.7
Derwent Co-generation Limited	2.0	8.3	9.4	9.5
Logan Energy Ltd	-	-	0.1	0.1
Onzo Limited	-	-	1.2	-

The amounts outstanding are trading balances, are unsecured and will be settled in cash. No guarantees have been given or received. No provisions have been made for doubtful debts in respect of the amounts owed by related parties.

(ii)  Loans to related parties

	2010 £m	2009 £m
Loans to associates:
At 1 April	25.0	10.4
Loans advanced during the year	7.7	14.6
Loan repayments received	(1.1)	-
Interest charged	0.7	1.1
Interest received	(0.7)	(1.1)
At 31 March	31.6	25.0
Loans to jointly controlled entities:
At 1 April	685.9	425.3
Loans advanced during the year	289.1	286.9
Loan repayments received	(27.4)	(25.8)
Interest charged	53.2	52.8
Interest received	(51.2)	(53.3)
At 31 March	949.6	685.9
Loans to subsidiaries:
At 1 April	1,388.1	1,083.1
Loans advanced during the year	1,558.6	330.0
Loan repayments received	-	(25.0)
Interest charged	135.8	143.8
Interest received	(135.8)	(143.8)
At 31 March	2,946.7	1,388.1

Remuneration of key management personnel

The remuneration of the executive Directors, who are the key management personnel of the Group, is set out below in aggregate.

	2010 £m	2009 £m
Short-term employment benefits	3.6	3.5

In addition, the key management personnel receive share based remuneration, details of which are found at note 27. Further information about the remuneration of individual Directors is provided in the audited part of the Directors' Remuneration Report. The key management personnel are employed by the Company.

Information regarding transactions with post-retirement benefit plans is included in note 26.

 

END

 

 

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