Annual Financial Report

RNS Number : 1895I

Scottish & Southern Energy PLC

09 June 2011

 



Annual Financial Report

Following the Preliminary Results announcement on 20 May 2011, SSE (Scottish and Southern Energy plc) announces that it has published its Annual Report and Accounts for the year ended 31 March 2011.

The Annual General Meeting (AGM) will be held at the Perth Concert Hall, Mill Street, Perth PH1 5HZ on Thursday, 21 July 2011 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 2011 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 2011 have been submitted to the UK Listing Authority and will shortly be available for inspection from the National Storage Mechanism, which can be accessed at: www.hemscott.com/nsm.do

The information below, which is extracted in unedited full text from the 2011 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 20 May 2011.  Together these constitute the material required by Disclosure and Transparency Rule 6.3.5 to be communicated to the media in unedited full text through a Regulatory Information Service.  This material is not a substitute for reading the full 2011 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 2011.

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

19 May 2011

Appendix B: Risk Management (pages 56 to 59)

Risk management

The Board of SSE acknowledges its clear responsibility for risk management.

Whilst good risk governance is a responsible approach, the more fundamental methodology followed by SSE is to ensure the overall business model, strategy, and culture are designed with risk firmly in mind.

Clear and balanced business strategy

SSE has a clear strategic 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. The Board believes that this dividend goal must not be subverted for any other financial end.

SSE's view is that a sustainable business requires a clear approach to risk management in all aspects of its activities.

SSE seeks to achieve its strategic 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.

These businesses operate almost entirely in the UK and Ireland. This means SSE is able to focus closely on issues, giving greater experience, analysis and focus to the identification, consideration and management of risks.

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

•    energy supply - gas and electricity, plus other home services; and

•    other energy-related activities such as gas storage, gas production, contracting, utility solutions, 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 facilitates 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.

Limited appetite for risk

The Teamwork value, combined with other factors such as the clear, moderate (but nevertheless fundamentally important) goal of sustained real growth in the dividend, mean SSE has adopted 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).

Some examples of the risk averse approach are:

•    energy trading - levels of exposure are strictly monitored through sophisticated models and clear reporting limits;

•    major project construction - the Company has put in place a detailed governance process for all its large capital projects;

•    the Company has a strict approach to acquisitions, and sets high hurdle rates for expected returns;

•    in treasury and funding matters, there is a clear and prudent approach to liquidity levels, and a mix of maturities and currencies; and

•    insurances are in place for all relevant major internal risks, while maintaining an appropriate balance with self insurance where appropriate.

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 Audit Department for the Audit Committee meetings held in May and November of each year. The Board reviewed all aspects of risk management and internal control at its meeting in March 2011. At that meeting, the Board held a specific review of the developments within the Company during the year to ensure good risk management; it revisited the approach to risk appetite; and considered the management structure to ensure proper controls are in place. It was also agreed that this strategic review of risk should be held twice each year in future.

Following the March 2011 meeting, the Board undertook a further review of the Company's principal risks and approved the list set out opposite at its May 2011 meeting.

During 2010/11, the Group Audit department 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. Group Audit reviews complement the work done by business-specific compliance functions in areas such as Energy Trading, Energy Efficiency, Domestic Sales, IT and Customer Service.

Risk is also the subject of specific regular reports to the Management Board, which was established in January 2011 (see page 54 for more information on the Management Board).

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

As stated on page 56, the Board reviewed SSE's principal risk categories and the effectiveness of SSE's system of internal controls between March and May 2011. The risks are set out on the previous page.

There are three additional risks that are not specified but which could potentially affect a large number of areas of activity: geopolitical developments; the weather; and reputation.

•    geopolitical developments could have an impact on a number of SSE's activities, such as energy portfolio management or the construction of large capital projects through supply chain impacts. In view of this, SSE's balanced and diverse business model, which is designed amongst other things to avoid dependence on any single technology or fuel, is a key means of seeking to ensure the impact of developments over which SSE can have no control is, in practice, limited;

•    the weather could have an 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. It could also have an impact on the operation of energy networks, and management of this risk is factored into the operational planning of these networks; and

•    SSE believes that the most effective way to manage risks to its reputation is to manage effectively the risks set out on page 57. Corporate reputation is very important for a long-term business such as SSE, but seeking to manage 'reputation', rather than the substance of the issues which determine a company's reputation, could lead to short-term behaviours or actions which have negative long-term implications. For this reason, SSE does not specify 'reputation' as a risk to be managed.

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.

Principal risks

Risk	How risk is managed
Safety management	The Safety, Health and Environment Advisory Committee of the Board is responsible for ensuring SSE's health and safety policy is adhered to. The newly-established Management Board also has a Safety Committee.
Regulatory change	An experienced Regulation Department manages SSE's relationships and interface with Ofgem, Ofwat, Ofcom and energy regulators in other jurisdictions.
Legislative change	An experienced Policy and Public Affairs team manages SSE's relationships and interface with government ministers and officials, legislators and other policy-makers.
Energy portfolio management	The Board approves levels of exposure which are strictly monitored through sophisticated models and clear reporting limits. The Management Board has a Risk and Trading Committee.
Asset and plant management	A Central Engineering Team is well-established. Asset life assessment and risk-based management are applied. Regular testing, review and update of major incident handling processes takes place. Capital spending and maintenance regimes are maintained. The Risk and Trading Committee provides oversight.
Networks management	Significant upgrade and refurbishment programmes are designed to prevent network failures. Business continuity plans, supported by contingency sites and regular testing, are established throughout the Company. Clearly prepared and rehearsed approaches are in place for external relations aspects of emergency incidents and situations.
Information security	The Company has in place an Information Protection Programme which covers all of its operations. Resilient systems and data centres are in place and there is regular testing.
Supply chain failure	The diverse business model avoids over reliance on specific supply chains. The Sustainability value ensures a long-term view is taken. Well established procurement and fuel procurement teams ensure varying supply chains are identified and counterparty exposures monitored.
Treasury management	The Risk and Trading Committee is required to approve any major changes to treasury policy or objectives. Periodic reporting of treasury activity to Audit Committee also takes place. Strong internal controls are maintained and independent reviews take place.
Credit management	There is Executive Director level representation at debt steering group meetings. Ongoing credit monitoring and reporting are supported by credit management teams throughout the Company.
Pension liabilities	There are periodic formal valuations of pension schemes and contributions supported by continual monitoring of scheme investments and valuations. Performance of investment managers is reviewed regularly by pension boards of trustees.
Sector developments	There is a strong external focus to ensure developments are anticipated, including Strategy, Business Development and SSE Ventures. A foresighting capability is maintained through a Policy and Research team which includes Research and Development.
Major capital projects management	Development and implementation of SSE's Large Capital Project Governance Framework is designed to ensure projects are governed, developed, approved and executed in an effective manner. The Framework itself is regularly reviewed and updated.
Transformation projects management	The Company works with experienced advisers and suppliers and implements a strong governance and assurance framework for all aspects of major change programmes.
Compliance management	Wide-ranging consultation and review of all relevant regulatory, legal and accounting frameworks take place. Regulation, Compliance and Group Audit teams develop and monitor compliance processes.
Crisis management	Corporate crisis policy and procedure issued and updated annually. There is Executive training and regular test exercises are undertaken.
Succession planning	The Nomination Committee of the Board is responsible for reviewing the leadership needs of senior management and succession plans for the Executive Directors.
Resource management	Integrated Group Services function to ensure optimum resource management, including Finance, HR, IT and Facilities Management and Property Maintenance, deployment and development of resources is in response to business needs.
Developing corporate arrogance	Board oversight and practical application, including through the performance appraisal process, of the 'SSE SET' of core values: Safety, Service, Efficiency, Sustainability, Excellence and Teamwork.

Internal control

Risk management depends on a strong system of internal control, which is fundamental to achieving SSE's strategic objectives. The Board is responsible for the overall system of internal control and risk management, and it either directly, or through its committees, sets performance targets and policies for the management of key risks facing SSE. The system of internal control is designed to manage, rather than eliminate, risk of failure to achieve business objectives and can provide only reasonable and not absolute assurance against material misstatement or loss.

All employees are expected to adhere to the Company's code of business practice and the SSE values of - Safety, Service, Efficiency, Sustainability, Excellence and Teamwork - which are embedded in the culture. (See page 58 for full definitions). Their consistent application are central to all activities in SSE. 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 are fully understood. Reporting within the Company is structured so that the key issues are escalated through the management team, ultimately to the Board if appropriate.

The key elements of SSE's internal control and financial reporting processes are summarised below:

The Board:

•    approves the policies, procedures and framework for the maintenance of a sound and effective system of internal control ensuring:

-    the provision of quality internal reporting to the Audit Committee and other Board Committees by management and Group Audit;

-    the provision of quality reporting by the external Auditors to the Audit Committee;

-    compliance with the Turnbull Guidance on Internal Control; and

-    compliance with statutory and regulatory obligations,

•    reviews the significant risks identified by each business unit as well as the mitigating action against those risks following review by the Audit Committee;

•    determines the nature and extent of the significant risks it is willing to take in achieving its strategic objectives;

•    approves and regularly reviews and updates SSE's strategy and business development;

•    reviews performance through a system of reporting based on annual operating and capital expenditure budgets; monthly reviews against actual results; analysis of variances and evaluation of key performance indicators;

•    receives regular reports from the Chief Executive, the Finance Director and the other Executive Directors; and

•    undertakes an annual evaluation of the Board, its Committees and individual Directors.

The Management Board:

•    monitors operational and financial performance of SSE;

•    develops and implements SSE strategy, operational plans, policies, procedures and budgets;

•    assesses and controls all SSE risks;

•    monitors competitive forces in each area of operation;

•    receives and reviews reports from its four committees including the Risk and Trading Committee and the Safety, Health, and Environment Committee; and

•    receives and reviews regular presentations and reports from all the main Group businesses.

The Group Audit department:

•    works with the business units to develop and improve risk-management tools and processes in their business operations;

•    ensures that business risks are identified, managed and regularly reviewed and that the key risks are reported to the Audit Committee and Board;

•    ensures that the business units carry out regular reviews on their internal controls relating to the key risks;

•    monitors the effectiveness of SSE's system of internal control through the distribution of reports and, where appropriate, action plans to senior managers, Directors, the Audit Committee and external Auditors;

•    monitors adherence to SSE's key policies and principles; and

•    provides the Audit Committee and Board with objective assurance on SSE's control environment.

Role of committees

The role of the Audit Committee, Risk and Trading Committee and Safety, Health and Environment Advisory Committee in the Group's system of internal control and risk management is set out in the individual committee reports.

Reviewing the system of internal control and monitoring its effectiveness is delegated to the Audit Committee and is reviewed at least annually by the Board. The Board and the Audit Committee have reviewed the effectiveness of the internal control system in accordance with the Code for the period from 1 April 2010 to 19 May 2011 (being the last practical day prior to the printing of this Annual Report). The Board confirms that appropriate action would have been taken to address any significant failings or weaknesses identified; however, no intervention has been required. 

Appendix C: Related Party Transactions (pages 149 to 150)

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 2011 £m	Purchase of goods and services 2011 £m	Other transactions 2011 £m	Sale of goods and services 2010 £m	Purchase of goods and services 2010 £m	Other transactions 2010 £m
Jointly controlled entities:
Seabank Power Limited	7.9	(121.3)	22.5	3.0	(107.1)	7.1
PriDE (SERP) Limited	39.7	-	-	40.5	-	-
Scotia Gas Networks Limited	61.8	(131.2)	-	54.9	(145.0)	-
Marchwood Power Limited	-	(82.7)	14.6	31.5	(65.7)	-
Greater Gabbard Offshore Winds Ltd	6.3	(0.2)	-	3.9	-	-
Associates:
Barking Power Limited	0.9	(45.3)	6.1	2.5	(135.5)	15.2
Derwent Cogeneration Limited	38.8	(53.2)	-	30.6	(96.6)	-
Logan Energy Ltd	-	(0.1)	-	0.8	-	-
Onzo Limited	-	(4.3)	-	-	(0.1)	(4.9)
Geothermal International Limited	-	(0.8)	-	-	-	-
Aquamarine Power Limited	-	-	0.1	-	-	-
Green Highland Renewables Limited	-	-	-	0.3	-	-
Vital Holdings Limited	0.2	(0.6)	-	1.1	(0.6)	-

The transactions with Seabank Power Limited, Barking Power Limited and Derwent Cogeneration Limited relate to the contracts for the provision of energy or the tolling of energy under power purchase arrangements. Other transactions with Seabank Power Limited and Barking Power Limited relate to dividends received by the Group. PriDE (SERP) 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.

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

Consolidated

	Amounts owed by related parties		Amounts owed to  related parties
	2011 £m	2010 £m	2011 £m	2010 £m
Jointly controlled entities:
Seabank Power Limited	0.3	0.3	25.9	26.0
PriDE (SERP) Limited	0.3	7.0	0.6	-
Scotia Gas Networks Limited	15.7	16.4	12.1	1.3
Marchwood Power Limited	0.1	-	7.3	7.0
Associates:
Barking Power Limited	-	16.4	1.0	9.3
Derwent Cogeneration Limited	3.1	2.0	1.8	9.4
Onzo Limited	5.2	-	0.9	1.2
Logan Energy Ltd	-	-	-	0.1

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. Aggregate capital loans to jointly controlled entities and associates are shown in note 14.

 

Remuneration of key management personnel

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

	2011 £m	2010 £m
Short-term employment benefits
Executive Directors	3.7	3.6
Other Management Board members (from 1 January 2011)	0.3	-
	4.0	3.6

Key management personnel are responsible for planning, directing and controlling the operations of the Group. From 1 January 2011 these were identified as the Management Board, which is made up of the Executive Directors and six senior managers.

In addition, the key management personnel receive share based remuneration, details of which are found at note 30. Further information about the remuneration of individual Directors is provided in the audited part of the Directors' Remuneration Report. The Executive Directors are employed by the Company.

Information regarding transactions with post-retirement benefit plans is included in note 29.

 

END

 

 

ACSSSIFLUFFSEIM