Final Results
Scottish & Southern Energy PLC
19 May 2004
19 May 2004
Scottish and Southern Energy plc
PRELIMINARY RESULTS
for the year to 31 March 2004
Chairman's Statement
'Scottish and Southern Energy's strategy continues to be focused on the delivery
of consistent, year-on-year real increases in the dividend payable to
shareholders, supported by growth in earnings per share. The results for 2003/
04 are in line with this. In particular:
• The Board is recommending a final dividend of 26.4p per share, making a
full-year dividend of 37.7p, an increase of 7.7%. This increase in the
dividend is again ahead of our target of at least 4% real growth for each
year to March 2005. SSE's dividend has grown by 32% in real terms since
1999.
• A 9.4% increase in underlying profit before tax, to £609.7m, has more
than offset the termination in November 2002 of the contract to supply power
to TXU. As a result, headline profit before tax has risen by 3.8% to £619.9m
before goodwill and net finance income from pension assets.
• On an underlying basis, earnings per share increased by 8.6% to 54.1p.
• SSE now has 563MW of generation capacity qualifying for Renewable Obligation
Certificates (ROCs) which is operational or consented. To build on
this, it is planning to increase its investment in new wind energy by £300m
and to have more than 1,000MW of ROC-qualifying capacity by 2008.
• SSE has acquired 550MW of additional thermal generation capacity, with the
acquisitions of Medway Power and Fife Power, and now has over 5,700MW of
capacity.
• The energy supply business gained 400,000 customers in the year to 31 March
2004 and acquired over 300,000 customers from Atlantic Electric & Gas on
28 April. It is now the fourth largest energy supplier in the UK, with 5.55m
customers.
• Work has begun on the development, with Statoil (UK), of around 420 million
cubic metres of additional gas storage capacity at Aldbrough. SSE will
invest £150 million in the joint development and will own 280 million cubic
metres of the capacity.
Overall, SSE delivered good financial and operational performance during 2003/
04. Looking ahead, we will continue to focus on achieving sustainable growth
through the effective management of core businesses, supplemented by the
disciplined delivery of our well-founded plans to invest in renewable energy
generation, electricity networks and gas storage.'
Dr Bruce Farmer CBE
Chairman
Financial Overview
Note: This preliminary results statement describes profits and earnings before
goodwill, net finance income from pension assets ('FRS 17') and the impact of
deferred tax.
SSE has again delivered increases in profit before tax and earnings per share.
The growth in the recommended full-year dividend is once more ahead of the
target of 4% real growth for each year to March 2005.
As stated in the Interim Results in November 2003, the scope for growth in
profit before tax in 2003/04 was significantly affected by the termination of
the contract under which SSE supplied power to TXU (see 'Generation and Supply'
below). Nevertheless, profit before tax, before goodwill and net finance income
from pension assets, grew by 3.8% to £619.9m.
The most meaningful comparison of performance for the year is to set aside the
exceptional effect of the termination of the TXU contract (which contributed
£40m to profit in 2002/03) and a large property disposal (which contributed
£10.2m in 2003/04 - see 'Other Businesses' below) and focus on ongoing business
activities. On this basis, profit before tax increased by 9.4% to £609.7m in
2003/04.
2003/04 2002/03 Change
£m £m %
Headline Profit Before Tax 619.9 597.1 +3.8%
TXU contract - (40.0) -
Property disposal (10.2) - -
Underlying Profit Before Tax 609.7 557.1 +9.4%
To monitor financial performance over the medium term, SSE focuses on earnings
per share before the non-cash items of goodwill, the impact of deferred tax and
net finance income from pension assets. On this basis, during 2003/04, earnings
per share increased by 4.1% to 55.3p (note 8). On an underlying basis, excluding
the effects of the TXU contract and the large property disposal, it increased by
8.6% to 54.1p.
The Board is recommending a final dividend of 26.4p, making a full-year dividend
of 37.7p per share, an increase of 7.7% on last year. This is again ahead of
the target of 4% real growth for 2003/04. SSE is confident that it will achieve
its dividend target for 2004/05 of at least 4% real growth, with sustained real
growth thereafter.
SSE believes that the prospects for future growth are good. It maintains one of
the strongest balance sheets in the global utility sector and, as a result, has
the means and capability to deliver its investment plans and achieve sustained
real dividend growth in the future.
Power Systems
Operating profit in Power Systems rose by 2.0% to £317.5m. In Scotland,
8,743.3GWh of electricity were distributed, an increase of 1.6%. In England,
33,741.3GWh of electricity were distributed, an increase of 2.7%.
While operating profit in Scotland fell by 1.4%, largely as a result of under
recoveries of allowable revenues in both transmission and distribution, it
increased by 4.1% in England, primarily due to an over-recovery of allowable
distribution revenue. Controllable costs were reduced in both Scotland and
England.
SSE believes that a key corporate responsibility is to maintain safe supplies of
electricity and to restore them as quickly as possible following interruptions.
The average number of minutes of lost supply per customer in the Southern
Electric Power Distribution area was 81 minutes. This compares with 82 minutes
during 2002/03, excluding the October 2002 storm, and is well within the targets
set by Ofgem under its Information and Incentives Programme (IIP). The average
number of minutes lost in the Scottish Hydro-Electric Power Distribution area
was 83, excluding the Hogmanay storm. This compares with 87 during 2002/03 and
is also well within the targets set by Ofgem under its IIP.
• Distribution Price Control Review
Investment is now the key issue facing electricity network companies in the UK.
As the House of Commons Trade and Industry Select Committee made clear in its
Report in March 2004, there needs to be greater emphasis on ensuring that
electricity network owners have the financial resources necessary to secure a
viable long-term electricity supply. The Committee also pointed out that extra
investment is required to ensure the network is ready for the anticipated
changes to electricity generation over the next decade.
A lot of detailed work and discussion has yet to take place during the remainder
of the distribution price control review for 2005 to 2010, involving companies,
the regulator and other stakeholders, particularly on the cost of capital. It is
encouraging that Ofgem has said that a key priority in the price review is to
protect the interests of customers by ensuring that there is sufficient scope
for companies to invest in the networks to safeguard security of supply - and
meet future demands from generation connected to the distribution network.
• Transmission Upgrades
Ofgem has also acknowledged that the UK's transmission system needs to be
reinforced to facilitate the addition of new renewable generation. The first
vital step in this is the need to replace the existing transmission line between
the Highlands and the central belt of Scotland with a new upgraded line. This
has to be built if the government's targets for the generation of electricity
from renewable sources are to be achieved.
The selection of the route for the new line is at an advanced stage, following
extensive environmental studies and public consultation, and SSE expects to
submit a planning application before the end of 2004. The work done so far
suggests that the construction of the line will require investment in excess of
£200m. SSE aims to begin constructing the new line during 2005, subject to
timely progress of the planning application and final agreement on the
regulatory framework for the investment. On this basis, the line could be
operational in 2008.
SSE is continuing to receive applications from renewable generators throughout
the Highlands and Islands for connections to its network, and other applications
are expected during the remainder of 2004. As a result, it is progressing with
studies to determine options for upgrading the network infrastructure and is
also analysing what additional investment may be necessary. While the issues
are still being considered with Ministers, officials, local authorities and
Ofgem, it is clear that further significant transmission investment of around
£800m over the next decade may be required in SSE's transmission area, in
addition to the investment in the new line between the Highlands and the central
belt of Scotland.
• Summary
Major upgrades of the electricity network will lead to an increase in the
Regulated Asset Base, and the investment opportunities for SSE that are now
apparent in the transmission and distribution networks are the most significant
since well before the privatisation of the UK's electricity industry. SSE's
focus will be on delivering the necessary investment programmes in an efficient
and effective manner.
Generation and Supply
Operating profit in Generation and Supply before goodwill rose by 18.4% to
£298.5m, excluding the effects of the termination of the 'in the money' contract
to supply power to TXU, which went into administration in November 2002. The
contract contributed £40m to operating profit in 2002/03, which will not be
repeated in future years.
A claim for over £300m has been lodged with the administrators. Although the
process is complex and time-consuming, SSE remains confident that it is
well-placed relative to other creditors and continues to believe that more than
50% of this claim will be recovered in due course. Any recovery from the
administration will firstly be offset against a debtor of £48m and the balance
remaining will be presented as a credit to the profit and loss account.
• Generation performance in 2003/04
A proportion of the output of SSE's power stations is sold into the wholesale,
industrial and commercial markets and so it has benefited from the recovery in
wholesale electricity prices experienced during 2003/04.
SSE's generation portfolio was expanded with the acquisition of the balance of
the equity interests which it did not already own in Medway Power for £241.1m in
November 2003. This added another modern, flexible and efficient power station
to its group of generation assets and gave SSE the economic benefit from having
a 100% interest in Medway's contracts to supply power. It contributed around
£13m additional profit before tax in the first five months of ownership. SSE
also acquired a 120MW gas-fired power station in Fife for £12.5m in February
2004 to provide further diversity of plant mix within its generation portfolio,
particularly in the mid-merit sector. The station successfully generated
electricity in early May, as part of its planned return to full service for the
coming winter.
These acquisitions mean that the capacity of SSE's wholly-owned power stations
and SSE's share of power station joint ventures is now over 5,700MW. It is able
to deploy fully this enlarged generation portfolio within NETA (the New
Electricity Trading Arrangements) and take advantage of its flexibility to
perform with maximum effectiveness within both the electricity balancing market
and the gas wholesale market.
SSE's flexible generation assets have continued to perform well in NETA, and
£12m of operating profit in 2003/04 can be attributed to its successful
participation in the balancing market, compared with £13m in the previous year.
Good performance in NETA is also dependent on plant reliability, and the number
of unplanned outages at SSE's wholly-owned thermal power stations fell by more
than half during the year. SSE believes this performance is market-leading,
which will help it to operate successfully in the Great Britain-wide electricity
trading arrangements which are scheduled for introduction in April 2005.
In addition, the decision, announced in November 2003, to terminate two '
structural' agreements with Scottish Power means SSE will be able to deploy
642MW of additional efficient and flexible thermal generation capacity at
Peterhead Power Station in the enlarged GB-wide market. SSE will also gain
access to 115MW of standby capacity at Peterhead, which is important in making
sure that the UK is able to meet future peak demand for electricity. Up to
360GWh of hydro output previously made available to Scottish Power will also now
be at SSE's disposal. There will be significant value in having this capacity
to deploy in the market, especially if wholesale electricity prices continue
their recovery. The net loss of income resulting from the termination of the '
structural' agreements is likely to average less than £10m a year for the period
to 2012.
Performance in Generation and Supply during 2003/04 also benefited from the
increase in electricity output qualifying for Renewable Obligation Certificates
(ROCs), which attracted a premium of around £45/MWh. As a result of this
premium, operating profit is more sensitive to the output of ROC-qualifying
electricity from hydro-electric stations within each reporting period. This is
dependent on the amount of 'run-off' water flowing into water storage facilities
which is, in turn, dependent on rainfall levels. In the 30 years to March 2004,
the average 'run-off' was equivalent to 3,086GWh a year, with the lowest '
run-off' in any one year being equivalent to 2,379GWh and the highest being
3,900GWh.
'Run-off' in 2003/04 was 14% below the 30-year average. Nevertheless,
ROC-qualifying output increased from 186GWh in 2002/03 to 916GWh in 2003/04.
Assuming average 'run-off', the output from SSE's ROC-qualifying hydro-electric
stations in 2004/05 is expected to be around 1,300GWh. This is a direct result
of SSE's investment in hydro station refurbishment.
• Generation investment
The extension of the government's targets for renewable energy and the
forthcoming introduction of the EU Emissions Trading Scheme indicate that there
is now a clear shift towards energy sources and generation technologies that
produce less, or no, carbon. SSE intends to remain the largest generator of
electricity from renewable sources in the UK. To that end it has already
secured planning permission to develop 162MW of new wind energy capacity and
planning applications have been submitted to the relevant authorities in respect
of a further 120MW of new wind farm capacity. In all, these developments will
require investment of around £200m.
SSE is also planning the next phase of its investment in wind energy and expects
to submit planning applications in respect of a further 200MW of capacity at
five sites during 2004/05. A number of other sites are also being developed
with a view to seeking planning consent in future years. The development of all
of these sites, if consented, will require investment of around £300m, in
addition to the £200m already earmarked, over the next five years.
SSE is also investing around £350m in refurbishing its existing hydro-electric
power stations and in developing new hydro capacity. The output of refurbished
hydro stations with capacity of up to 20MW qualifies for ROCs. In total, SSE
has 391MW of capacity in its sub-20MW stations. Of this, a total of 275MW was
refurbished by 31 March 2004. The refurbishment of a further 90MW is expected
to be completed during 2004/05.
In April, the Highland Council accepted that the development of SSE's new 100MW
hydro-electric station planned for Glendoe at Loch Ness should proceed, and the
planning application is now with Scottish Ministers for determination. SSE has
secured planning permission for the development of 7MW of new hydro-electric
capacity at Fasnakyle, the output of which will also qualify for ROCs.
In total, SSE now has in place, or has secured consent to develop, 563MW of
generation capacity qualifying for Renewable Obligation Certificates (ROCs), as
part of its existing £550m programme of investment in renewables. The
additional investment of £300m now planned for new wind energy will take SSE's
total investment in renewables to £850m, of which £150m has already been
invested. This, in turn, should enable SSE to have more than 1,000MW of
ROC-qualifying generation capacity by 2008.
The government has made it clear that the key to realising the full potential of
renewables is the development of new technologies. In line with this, Renewable
Technology Ventures Ltd (RTVL), a joint venture between SSE and The Weir Group,
is investing in the development of a tidal power generating device. Other
marine opportunities are being pursued by RTVL. In addition, SSE is working in
partnership with Talisman Energy on the possible development of the world's
first deep-water offshore wind farm in the Moray Firth. This project has
attracted financial support from both the UK government and the Scottish
Executive.
• Generation outlook
SSE believes that its position as the UK's largest generator of electricity from
renewable sources, combined with its portfolio of gas-fired power stations,
which is the most thermally-efficient in the UK, should mean that it is
well-positioned for the introduction of the Emissions Trading Scheme in 2005.
In the future, the profitability of SSE's generation activities will receive a
major boost from Ofgem's agreement in November 2003 that Hydro Benefit should be
abolished from April 2005. This was a formula-based payment made by SSE's
generation business to subsidise the relatively high cost of distributing
electricity in the north of Scotland. In response, the UK government has taken
action to establish an alternative mechanism to reduce the cost to customers of
electricity distribution in the north of Scotland. The abolition of Hydro
Benefit will increase SSE's profit from generation activities by around £37m a
year from 2005/06.
• Supply
SSE's energy supply business is larger than ever before. It has now grown to
5.55m customers, having gained 400,000 customers during 2003/04 and then
acquired more than 300,000 customers from Atlantic Electric and Gas on 28 April
2004. Overall, SSE now has one million more customers than at the start of 2002,
an increase of 22%, including 700,000 gained through organic growth. It is now
the fourth largest supplier of electricity and gas in the UK.
Growth achieved during 2003/04 includes a net gain of business customers
covering around 45,000 sites throughout Great Britain, including Lloyds TSB, the
Scottish Executive and Manchester City Council. In total, SSE's business
customers now cover more than 320,000 sites throughout Great Britain.
SSE's long-term success as an energy supplier depends on safeguarding its
reputation for excellent customer service. SSE's 'one-stop' fully integrated
system continues to offer the fullest range of customer service functions in the
sector. It covers all brands and products and has the flexibility to allow SSE
to offer additional products and services. In line with this, the integration of
Atlantic into SSE's supply business is now under way and will largely be
completed during 2004/05.
The system will continue to be enhanced to further improve standards of customer
service while at the same time keeping pace with changing technology. During
2004/05 it is intended to offer on-line billing to all existing SSE energy
supply customers. Improvements to internal telephony systems are also under
way to better integrate them with other IT systems.
It is this reputation for customer service which has helped SSE's three strong
regional brands - Southern Electric, SWALEC and Scottish Hydro-Electric - to be
more successful at retaining customers in their traditional areas than any other
suppliers of electricity in Great Britain. The leading independent study, by JD
Power, confirmed that SSE continues to have the highest levels of customer
satisfaction among electricity suppliers in the UK. In addition, SSE secured a
23% reduction in the number of customer complaints to energywatch during 2003/
04, despite the significant growth in customer numbers.
SSE believes that the combination of best-in-class customer service and the high
value of its regional brands means the energy supply business can continue to
grow in the future. It is important, however, to maximise the value to be
derived from the enlarged customer base which has been built up over the last
two years. This will be done by further strengthening relationships with
customers through development of an expanded group of core energy products and
providing a range of other energy-related services from other parts of SSE, such
as electrical contracting services and domestic appliances. Looking ahead, the
focus of SSE's retail business will be on supporting its energy supply brands.
Contracting, Connections, Gas Storage, Telecoms and Other Businesses
Total profit before goodwill from contracting, connections, gas storage,
telecommunications and other businesses increased by 9.3% to £89.3m. Within
this, the sale of the Amersham Road site in Reading realised a profit of £10.2m.
This gain is unusual because of its size and it has been disclosed separately
below Operating Profit in the Profit and Loss Account.
• Contracting and Connections
Contracting and Connections delivered operating profit of £48.7m, an increase of
8.5% on the previous year. The contracting business' growth strategy is built
on client development and maximising repeat business. In line with this, it
signed new contracts with existing customers such as Exxon Mobil and Foster
Wheeler during the year. At the same time, it is exploiting opportunities for
new streams of business and, working with the asset finance division of The
Royal Bank of Scotland, has signed contracts worth £350m to replace and maintain
street lights for three local authorities in England under the Private Finance
Initiative. It is the UK's largest street lighting contractor, and is now
responsible for maintaining more than one million lighting units.
The Connections business completed around 43,000 electrical connections during
2003/04. In addition, it has continued to expand its portfolio of out-of-area
electricity networks. For example, it has won the £4m contract to provide, own
and operate the electricity network for the Tilfen Land's development at
Thamesmead, which is part of the Thames Gateway re-generation project in east
London. The rate of connecting new premises to its gas networks continued to
grow, and during 2003/04 it connected a further 5,000 premises, taking the total
to just over 20,000.
• Gas Storage
Gas storage delivered an operating profit of £11.4m and enhanced earnings in its
first full year of ownership. Demand for gas storage facilities in the UK
continues to be high and, in a volatile gas market, SSE has entered into new
contracts to provide storage at a significantly higher value than the 'legacy'
contracts it inherited when Hornsea was acquired. All capacity for 2004/05 was
sold before 31 March 2004.
Over the next few years, a projected decline in UK gas production is expected to
increase the need for additional gas storage capacity. Against this background,
SSE has entered into a joint venture with Statoil (UK) to develop the UK's
largest onshore gas storage facility at Aldbrough. It will feature nine salt
caverns, with a total new capacity of around 420 million cubic metres, of which
SSE will have the ownership interest in 280 million cubic meters. Overall, each
day, SSE will be able to import 14 million cubic meters of gas into Aldbrough
and to deliver 26 million cubic metres of gas from the facility.
Proceeding with the development on this basis will require total investment by
SSE of around £150m. Work on the development has started, and the first part of
the new facility is expected to be operational from 2007. It will, therefore,
secure for SSE a significantly enhanced presence in the UK gas storage market.
• Telecoms
In April 2003, SSE acquired Neoscorp Ltd (Neos) for a net consideration of
£9.7m, and combined it with its existing business, SSE Telecom. Integration is
now complete. The combined business achieved an operating profit before
goodwill of £3.5m. SSE Telecom itself delivered an operating profit of £11.0m,
compared with £12.0m in the previous year. Neos' sales performance in 2003/04
was disappointing, with growth being lower than expected. Accordingly, it made
a £7.5m loss. However, SSE now has a national telecoms network, a UK-wide sales
force and a competitive range of products targeted at commercial and public
sector customers. This puts it in a good position to achieve faster sales
growth going forward.
• Corporate and Property Services
Corporate and Property Services contributed £15.5m to operating profit and the
sale of the Amersham Road site in Reading also realised a profit of £10.2m.
Safety and the Environment
SSE aims to create value for shareholders by running the business in a way which
is both safe and responsible. During the year, the number of lost time and
reportable accidents within the company was 27, one fewer than in the previous
year. The number of serious, or potentially serious, road traffic accidents
involving employees driving company vehicles fell by more than half during 2003/
04, to 23.
To benchmark its environmental activities, SSE participated in the eighth
Business in the Environment Index, the UK's leading environmental benchmarking
tool, the results of which were announced in March 2004. SSE's score improved
from 97.92% last year to 98.13% this year, making it the top-performing
electricity company. It meant SSE featured in BiE's 'Premier League' of
companies for the second consecutive year.
Cost Savings
SSE remains focused on enhancing shareholder value through greater efficiencies
and in line with this secured an additional £11m of cost savings in 2003/04,
representing 4.8% of the overall total. This takes the annualised post-merger
cost savings to £175m, compared with an original target of £90m. Since SSE was
formed at the end of 1998, total cumulative cost savings of £604m have been
secured. Further cost savings should be achieved in 2004/05.
Group Capital Expenditure
Group investment and capital expenditure, excluding acquisitions, totalled
£289.7m in 2003/04, compared with £251.9m in the previous year.
Capital expenditure in Power Systems was £147.9m, compared with £143.7m in 2002/
2003. Of this, £86.4m was invested in network refurbishment and £61.5m on
network expansion.
The other main feature of capital expenditure was investment of £69.1m for
growth in generation, with the refurbishment work being carried out at
hydro-electric power stations and the development of new hydro-electric and wind
energy schemes which will lead to the generation of ROC-qualifying energy. There
was also planned capital expenditure of £30m at Peterhead Power Station, in line
with its long-term service agreement with Siemens.
Within the overall total, capital expenditure for growth was £152.5m in 2003/04.
This largely comprised network expansion and renewable energy. Capital
expenditure will increase significantly in the next few years, with investment
in renewable energy, networks and gas storage, and is expected to be over £400m
in 2004/05. All investments are expected to achieve returns which are greater
than the cost of capital and are expected to enhance earnings.
Interest
The net interest charge was £85.5m. The reduction of £3.6m reflects continuing
strong cash flow and lower interest rates. The average interest rate for SSE in
2003/04 was 5.96%, compared with 5.98% last year. Underlying interest cover was
8.4 times, compared with 8.1 times the previous year.
Tax
The effective current tax rate was 24.1%, compared with 23.0% in the year
before. As deferred tax liabilities are only a potential exposure, discounting
has been applied to reflect the long-term nature of the assets and this impacts
on both the profit and loss account and the balance sheet. The tax charge is
26.3%, compared with 27.6% in 2002/03. This reflects a reduction in the
discounted deferred tax rate, due to an increase in discount rates applying to
long-term liabilities. An additional discounted liability of £13.5m has been
recognised on the balance sheet as at 31 March 2004.
Cash Flow
During the year to 31 March 2004, SSE's net debt increased by £200.1m to
£1,417.1m. This increase is more than accounted for by acquisitions, share buy
backs and capital expenditure for growth in renewable energy and expansion of
electricity networks totalling £408.2m. Underlying operational cash flow,
therefore, remains strong.
Balance Sheet
SSE continues to maintain one of the strongest balance sheets in the global
utility sector, holding an AA- long-term credit rating. This continues to give
it significant competitive advantage in terms of cost of funding and supporting
new developments.
FRS 17 was adopted in full for 2001/02 for the treatment of pension scheme
assets, liabilities and costs. At 31 March 2004, the FT-SE Index closed at
4,386. A net pension scheme deficit of £124.4m is recognised in the balance
sheet, compared with a deficit of £281.5m on 31 March 2003, when the FT-SE Index
was at 3,613.
Employer cash contributions to the Southern Electric scheme resumed in November
2002 and amounted to £11m during 2003/04; contributions to the Scottish
Hydro-Electric scheme restarted in April 2003, and amounted to £8m during the
year.
Purchase of Own Shares
During 2003/04, 1,760,000 of the Company's 50p ordinary shares were purchased
and cancelled, representing 0.2% of the called-up share capital of the Company.
The aggregate consideration was £11.2m and the average price was 633p per share.
During the previous year, 2,990,945 shares were purchased, with an aggregate
consideration of £18.1m and an average price of 601p per share.
This is the fifth successive year in which shares have been purchased in this
way. Overall, 27,378,946 shares have been purchased and cancelled, representing
3.1% of the Company's called-up share capital. The Board of SSE will continue to
return value to shareholders through the purchase of the Company's own shares
when the conditions are appropriate.
Strategy and Outlook
SSE's focus continues to be on sustainable long-term real dividend growth.
Consequently, it attaches the highest importance to enhancing value by managing
its existing businesses well through operational excellence. Where growth
opportunities arise, SSE will exploit them to maximise shareholder return in
existing areas of activity, typically in the energy and utility sectors in the
UK.
This same rigour applies to merger and acquisition opportunities. SSE has
expanded through the incremental addition of assets which have been successfully
integrated into its existing businesses. As demonstrated during 2003/04, it will
continue with its disciplined approach towards all existing and future
acquisition possibilities.
There have been and continue to be material changes in the energy sector in the
UK - in legislation, regulation and in the market as a whole - which are
creating substantial opportunities. SSE has the balance sheet strength, the
financial discipline and the operational excellence to exploit these
opportunities and so continue to deliver significant value for shareholders in
the future.
Investor Timetable
29 July 2004 Annual General Meeting (Bournemouth)
25 August 2004 Shares go ex-dividend
27 August 2004 Date for recording transfers to receive dividend
24 September 2004 Dividend payable
4 November 2004 Announcement of interim results
For further information please contact:
Scottish and Southern Energy plc
Alan Young - Director of Corporate Communications + 44 (0)870 900 0410
Denis Kerby - Investor and Media Relations Manager + 44 (0)870 900 0410
Financial Dynamics
Andrew Dowler + 44 (0)20 7831 3113
There will be an analysts' presentation starting at 09:30 GMT at the offices of
Financial Dynamics, Holborn Gate, 26 Southampton Buildings, London WC2A 1PB.
Webcast facility: This is available by going to: www.scottish-southern.co.uk
Telephone conference call: Wednesday, 19 May:
UK: 0845 146 2004
International: +44 (0) 1452 569 393
Password: SSE
Replay facility (for one week)
UK: 0845 245 5205
International: +44 (0) 1452 55 00 00
Password: 1391926#
Group Profit and Loss Account
for the year ended 31 March 2004
Total Total
2004 2003
Note £m £m
Turnover
Group and share of joint ventures 5,184.2 4,113.6
Less: share of joint ventures 59.8 48.3
___________ ___________
Group turnover 3 5,124.4 4,065.3
Cost of sales (4,100.1) (3,089.2)
___________ ___________
Gross profit 1,024.3 976.1
Distribution costs (229.1) (238.8)
Administrative costs (166.1) (133.1)
___________ ___________
Operating profit
Group 629.1 604.2
Share of joint ventures 30.6 32.1
Share of associates 20.6 35.2
___________ ___________
Total operating profit 3 680.3 671.5
Gain on disposal of property 3 10.2 -
Income from fixed asset investments 0.1 0.9
Net interest payable 4
Group (63.3) (60.8)
Joint ventures (11.5) (12.6)
Associates (10.7) (15.7)
Other finance Income 5 2.2 32.7
___________ ___________
Profit on ordinary activities before taxation 607.3 616.0
Taxation 6 (159.5) (170.0)
___________ ___________
Profit on ordinary activities after taxation 447.8 446.0
Equity minority interests in subsidiary undertaking 0.1 0.2
___________ ___________
Profit attributable to ordinary shareholders 447.9 446.2
Dividends 7 (322.9) (300.0)
___________ ___________
Retained profit for the financial year 125.0 146.2
___________ ___________
Earnings per share (p) 8
- basic 52.3 52.0
___________ ___________
- adjusted basic 54.1 49.8
___________ ___________
- diluted 52.2 51.9
___________ ___________
Balance Sheets
as at 31 March 2004
Group Company
2004 2003 2004 2003
Note £m £m £m £m
Fixed Assets
Intangible assets 274.0 257.3 - -
Tangible assets 4,139.1 3,757.8 - -
Investments in subsidiaries - - 777.9 777.9
Investments in joint ventures
_______ ______
Share of gross assets 195.9 199.5 - -
Share of gross liabilities (19.8) (20.4) - -
_______ ______ _________ ________
176.1 179.1 - -
Investments in associates 20.7 53.1 - -
Other investments 0.2 0.2 - -
_______ ______ _________ ________
197.0 232.4 - -
_______ ______ _________ ________
4,610.1 4,247.5 777.9 777.9
_______ ______ _________ ________
Current Assets
Stocks 46.0 49.9 - -
Debtors 736.9 601.3 2,753.4 2,812.9
Investments 21.8 9.0 8.6 -
Cash at bank and in hand 6.5 3.0 0.4 1.0
_______ ______ _________ ________
811.2 663.2 2,762.4 2,813.9
_______ ______ _________ ________
Creditors: amounts falling due
within one year 1,291.5 1,142.6 1,813.9 1,648.7
_______ ______ _________ ________
Net current (liabilities) / assets (480.3) (479.4) 948.5 1,165.2
_______ ______ _________ ________
Total assets less current liabilities 4,129.8 3,768.1 1,726.4 1,943.1
_______ ______ _________ ________
Creditors: amounts falling due
after more than one year 1,668.6 1,428.4 684.8 684.4
Provisions for liabilities and charges
Deferred taxation 512.7 462.2 - -
Other provisions 9 96.0 114.2 - -
_______ ______ _________ ________
Net assets excluding pension asset / (liability) 1,852.5 1,763.3 1,041.6 1,258.7
_______ ______ _________ ________
Pension asset 5 52.7 - 52.7 -
Pension liability 5 (177.1) (281.5) - (65.2)
_______ ______ _________ ________
Net assets including pension asset / (liability) 1,728.1 1,481.8 1,094.3 1,193.5
_______ ______ _________ ________
Capital and reserves
Called up share capital 428.7 429.1 428.7 429.1
Share premium account 72.6 66.5 72.6 66.5
Capital redemption reserve 13.7 12.8 13.7 12.8
Profit and loss account 1,213.4 973.6 579.3 685.1
_______ ______ _________ ________
Total shareholders' funds 1,728.4 1,482.0 1,094.3 1,193.5
Equity minority interests in subsidiary undertaking
(0.3) (0.2) - -
_______ ______ _________ ________
1,728.1 1,481.8 1,094.3 1,193.5
_______ ______ _________ ________
Group Cash Flow Statement
for the year ended 31 March 2004
2004 2003
Note £m £m
Net cash inflow from operating activities 10 800.3 814.4
Dividends received from joint ventures and associates 11.5 17.7
Returns on investments and servicing of finance (53.5) (47.4)
Taxation (142.7) (148.1)
___________ _________
Free cash flow 615.6 636.6
Capital expenditure and financial investment (259.9) (216.7)
Acquisitions and disposals (244.5) (132.7)
Equity dividends paid (306.7) (284.9)
___________ _________
Net cash (outflow)/inflow before management of liquid resources and
financing
(195.5) 2.3
Management of liquid resources (12.8) 14.7
Financing 219.5 (47.8)
___________ _________
Increase/(decrease) in cash in the year 11.2 (30.8)
___________ _________
Notes to the Group Cash Flow Statement
Reconciliation of net cash flow to movement in net debt
2004 2003
£m £m
Increase/(decrease) in cash in the year 11.2 (30.8)
Cash (inflow)/outflow from (increase)/decrease in debt and lease
financing
(224.1) 35.8
Cash outflow/(inflow) from increase/(decrease) in liquid resources 12.8 (14.7)
___________ _________
Movement in net debt in the year (200.1) (9.7)
Net debt at 1 April (1,217.0) (1,207.3)
___________ _________
Net debt at 31 March (1,417.1) (1,217.0)
___________ _________
Analysis of net debt As at Increase (Increase)/ As at
31 March in cash decrease 31 March
2003 £m in debt 2004
£m £m £m
Cash at bank and in hand 3.0 3.5 - 6.5
Overdrafts (9.5) 7.7 - (1.8)
Other debt due within one year (102.9) - 38.6 (64.3)
_________ ________ __________ __________
Net borrowings due within one year (109.4) 11.2 38.6 (59.6)
Net borrowings due after more than one year (1,116.6) - (262.7) (1,379.3)
Current asset investments 9.0 - 12.8 21.8
_________ ________ __________ __________
Net debt (1,217.0) 11.2 (211.3) (1,417.1)
_________ ________ __________ __________
Group Statement of Total Recognised Gains and Losses
for the year ended 31 March 2004
2004 2003
£m £m
Profit for the financial year
Group 425.5 418.0
Share of joint ventures 16.3 14.7
Share of associates 6.1 13.5
__________ _____________
Profit for the financial year 447.9 446.2
Actuarial gain/(loss) recognised in respect of pension funds 153.8 (358.3)
__________ _____________
Total recognised gains and losses relating to the financial year 601.7 87.9
__________ _____________
Group Reconciliation of Movement in Shareholders' Funds
as at 31 March 2004
2004 2003
£m £m
Profit for the financial year 447.9 446.2
Dividends (322.9) (300.0)
__________ _____________
Retained profit for the year 125.0 146.2
Actuarial gain/(loss) recognised in respect of the pension funds 153.8 (358.3)
__________ _____________
278.8 (212.1)
New share capital subscribed 6.6 6.1
Transfer on acquisition of subsidiary (27.8) -
Repurchase of ordinary share capital for cancellation (11.2) (18.1)
__________ _____________
Net addition to/(reduction in) shareholders' funds 246.4 (224.1)
Opening shareholders' funds 1,482.0 1,706.1
__________ _____________
Closing shareholders' funds 1,728.4 1,482.0
__________ _____________
Notes on the Financial Statements
1. Financial Statements
The financial information set out in this announcement does not constitute the
Group's Statutory Accounts for the years ended 31 March 2004 or 2003 but is
derived from those Accounts. Statutory Accounts for 2002/03 have been delivered
to the Registrar of Companies, and those for 2003/04 will be delivered following
the Company's Annual General Meeting on 29 July 2004. The Auditors have
reported on those Accounts and their reports were unqualified and did not
contain statements under section 237(2) or (3) of the Companies Act 1985. This
Preliminary Announcement was approved by the Board on 18 May 2004.
2. Basis of consolidation
The Group Accounts consolidate the Accounts of Scottish and Southern Energy plc
and its subsidiary undertakings together with the Group's share of the results
and net assets of its joint ventures and associates.
The results of subsidiary undertakings acquired or sold are consolidated from
the date of acquisition, using the acquisition method of accounting. The results
of joint ventures and associates are included using the equity method of
accounting.
3. Segmental analysis
All turnover and profit before taxation arise from operations within Great
Britain and Ireland and relate to continuing operations.
The Group's principal business is the generation, distribution and supply of
electricity and sale of gas in Great Britain and Ireland and the transmission of
electricity in the north of Scotland. Analysis of turnover and operating profit
by activity is provided below:
Turnover
Total Internal External
turnover turnover turnover
2004 2003 2004 2003 2004 2003
£m £m £m £m £m £m
Power Systems
Scotland 243.3 247.3 180.9 183.2 62.4 64.1
England 378.5 375.3 187.7 188.2 190.8 187.1
_________ ________ _________ ________ _________ ________
621.8 622.6 368.6 371.4 253.2 251.2
_________ ________ _________ ________ _________ ________
Generation and Supply 4,505.6 3,481.9 16.4 11.4 4,489.2 3,470.5
_________ ________ _________ ________ _________ ________
Other Businesses 576.5 534.1 194.5 190.5 382.0 343.6
_________ ________ _________ ________ _________ ________
5,703.9 4,638.6 579.5 573.3 5,124.4 4,065.3
_________ ________ _________ ________ _________ ________
Notes on the Financial Statements
3. Segmental analysis (continued)
Operating Profit
2004 2003
£m £m
Power Systems
Scotland 118.1 119.8
England 199.4 191.6
_________ ___________
317.5 311.4
_________ ___________
Generation and Supply 286.5 280.7
_________ ___________
Other Businesses 76.3 79.4
_________ ___________
680.3 671.5
_________ ___________
The total operating profits relating to joint ventures of £30.6m (2003 - £32.1m)
and associates of £20.6m (2003 - £35.2m) are included in Generation and Supply.
The gain on disposal of property separately disclosed on the face of the Profit
and Loss Account relates to the sale of land and buildings at Amersham Road,
Reading.
Income and costs have been allocated specifically to the activity to which they
relate wherever possible. Certain costs have been apportioned or recharged
between businesses.
4. Net interest payable
Group Joint Ventures Associates
2004 2003 2004 2003 2004 2003
£m £m £m £m £m £m
Interest receivable:
Interest from short-term deposits 2.2 1.9 - - - -
Other interest receivable 17.4 18.4 0.4 0.4 1.0 1.7
________ ________ ________ ________ _________ ________
19.6 20.3 0.4 0.4 1.0 1.7
________ ________ ________ ________ _________ ________
Interest payable and similar charges:
Bank loans and overdrafts 27.1 22.3 - - 11.0 16.0
Other loans 46.9 47.4 11.9 13.0 0.7 1.4
Other financing charges 7.7 6.4 - - - -
________ ________ ________ ________ _________ ________
81.7 76.1 11.9 13.0 11.7 17.4
Interest capitalised (2.0) (1.4) - - - -
________ ________ ________ ________ _________ ________
79.7 74.7 11.9 13.0 11.7 17.4
________ ________ ________ ________ _________ ________
Amortisation of discount 3.2 6.4 - - - -
________ ________ ________ ________ _________ ________
Net interest payable 63.3 60.8 11.5 12.6 10.7 15.7
________ ________ ________ ________ _________ ________
Notes on the Financial Statements
5. Pensions
Value at Value at
31 March 31 March
2004 2003
£m £m
Total market value of schemes' assets 1,499.8 1,271.1
Present value of schemes' liabilities (1,677.5) (1,673.3)
__________ _________
(Deficit) in the schemes (177.7) (402.2)
Deferred tax thereon 53.3 120.7
__________ _________
Net pension (liability) (124.4) (281.5)
__________ _________
Movements during the year 2004 2003
£m £m
Total gross (deficit)/surplus at beginning of the year (402.2) 92.0
Movement in year:
Current service costs (16.7) (19.3)
Contributions paid 19.0 5.0
Curtailment costs charged to reorganisation provision (1.2) (6.0)
Other finance income 2.2 32.7
__________ _________
Profit before tax impact 3.3 12.4
__________ _________
Actual return less expected return on pension scheme assets 190.5 (464.7)
Experience gain arising on pension scheme liabilities 60.3 3.0
Changes in financial assumptions underlying pension scheme liabilities (29.6) (44.9)
__________ _________
Variance between pension fund actuarial assumptions and actual experience
221.2 (506.6)
__________ _________
Total gross (deficit) in schemes at end of the year (177.7) (402.2)
__________ _________
6. Taxation
Analysis of charge in the year
2004 2003
£m £m
Current tax:
UK Corporation tax on profits of the year 154.9 148.6
Adjustments in respect of previous years (15.5) (17.7)
Joint ventures 2.8 4.8
Associates 3.8 6.0
____________________________________________________________ _________ ___________
Total current tax 146.0 141.7
____________________________________________________________ _________ ___________
Deferred tax:
Origination and reversal of timing differences 23.9 26.8
Increase in discount (18.7) (2.6)
Adjustments in respect of prior year 8.3 4.1
____________________________________________________________ _________ ___________
Total deferred tax 13.5 28.3
____________________________________________________________ _________ ___________
Tax on profit on ordinary activities 159.5 170.0
____________________________________________________________ _________ ___________
Notes on the Financial Statements
7. Dividends
2004 2003
£m £m
Dividends on ordinary shares:
Interim of 11.3p (2003 - 10.5p) 96.8 90.1
Proposed final of 26.4p * (2003 - 24.5p) 226.1 209.9
_________ ___________
322.9 300.0
_________ ___________
* Payable on 24 September 2004 to shareholders on the register at close of
business on 27 August 2004.
8. Earnings per share
2004 2003 2004 Earnings 2003 Earnings
Earnings Earnings per Share per Share
£m £m pence pence
Basic 447.9 446.2 52.3 52.0
_________ ________ __________ __________
Adjusted - amortisation of goodwill 14.8 13.8 1.7 1.6
- deferred tax 13.5 28.3 1.6 3.3
- finance income (2.2) (32.7) (0.3) (3.8)
_________ ________ __________ __________
474.0 455.6 55.3 53.1
- disposal of property (10.2) - (1.2) -
- discontinued TXU contract (net of tax) - (28.0) - (3.3)
_________ ________ __________ __________
Adjusted 463.8 427.6 54.1 49.8
_________ ________ __________ __________
Diluted 447.9 446.2 52.2 51.9
_________ ________ __________ __________
The weighted average number of shares used in each
calculation is as follows:
2004 2003
Number of Number of
shares shares
(millions) (millions)
For basic and adjusted earnings per share 856.8 858.4
Effect of exercise of share options 1.3 1.6
__________ __________
For diluted earnings per share 858.1 860.0
__________ __________
9. Group Provisions for liabilities and charges
Onerous
Energy
Restructure Contracts Other Total
£m £m £m £m
At 1 April 2003 15.7 79.9 18.6 114.2
Utilised during the year (3.3) (13.5) (1.4) (18.2)
___________ __________ __________ __________
At 31 March 2004 12.4 66.4 17.2 96.0
___________ __________ __________ __________
The restructure provision is in relation to expected costs associated with the
continuing rationalisation of the business. The costs mainly comprise employee
related costs, principally redundancy and early retirement costs. The majority
of the expenditure is expected to be incurred in the next two years.
The onerous energy contracts provision relates to the present value of 'out of
money' purchase contracts and will be utilised over a maximum period to 2011
when the contracts terminate. Other provisions include insurance/warranty claims
and the costs of various committed expenditures relating to hydro civil assets
and are expected to be incurred over the next two years.
10. Reconciliation of operating profit to operating cash flows
2004 2003
£m £m
Operating profit 629.1 604.2
FRS 17 pension (credit)/charge (2.3) 15.6
Depreciation 183.1 181.9
Amortisation of goodwill 14.8 13.8
Customer contributions and capital grants released (20.4) (15.9)
(Profit) on disposal of tangible fixed assets (1.3) (2.7)
(Increase)/decrease in working capital and provisions (2.7) 17.5
_________ _________
Net cash inflow from operating activities 800.3 814.4
_________ _________
11. Amortisation of goodwill
The goodwill amortisation charge for the year can be analysed across business
segments as follows:
2004 2003
£m £m
Power Systems - -
Generation and Supply 12.0 11.5
Other Businesses 2.8 2.3
_________ _________
14.8 13.8
_________ _________
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