Interim Results

Scottish & Southern Energy PLC 8 November 2001 8 November 2001 INTERIM ANNOUNCEMENT Six months to 30 September 2001 'We are pleased to report another strong financial and operational performance for Scottish and Southern Energy. Pre-tax profit is up 8.3% and earnings per share have increased by 8.6%. We are making a £450M investment in renewable energy now that the Government's financial arrangements for support of new renewables are clear. This should deliver further earnings growth for our shareholders over the next five years' said Bruce Farmer, Chairman of Scottish and Southern Energy. HIGHLIGHTS Financial - Operating profit up 12% to £286.1M - Pre-tax profit up 8.3% to £232.9M - Earnings per share up 8.6% to 21.4p - Dividend up 7.8% to 9.7p - £95M positive cash flow Operational - £450M investment committed in renewable generation - Solid operational performance of SSE's generation portfolio under NETA - Synergy savings will be well ahead of £140M target - Further 9.5% reduction in controllable costs - SWALEC energy customers now successfully transferred to the Group's Customer Service System * All financial information is stated before goodwill and the impact of FRS19 on deferred tax. Overview The first six months of this year show a strong performance for Scottish and Southern Energy. In order to highlight business performance all the financial information is presented before goodwill and the impact of FRS 19 on deferred tax. We have achieved significant success in a number of key areas: - Operating profit up 12% to £286.1M - PBT up 8.3% to £232.9M - Earnings per share are up 8.6% to 21.4p - Dividend growth of 7.8% giving an interim dividend of 9.7p and well ahead of our target of at least 4% real growth - £95M positive cash flow - £450M investment in renewable generation over the next ten years, the largest by any one company in the UK and delivering a significant return for our shareholders - Solid operational performance of our power stations under NETA - Synergy savings will be well ahead of the £140M target - Further 9.5% reduction in controllable costs - SWALEC energy customers now successfully transferred to the Group's Customer Service System Financial and Operating Review Operating profits have increased by 12%, a strong performance against a backdrop of falling wholesale electricity prices, rising wholesale gas prices and the second year of the price reviews. Growth in Generation and Supply in England and Wales has once again been the main driver, but a good performance in our telecoms business has also played a part. Power Systems In the second year of the current price review operating profit in Power Systems was up by 3.1% on last year to £136.1M. The continuing focus on controllable costs which are down 17% in Scotland and 19% in England was the main reason for this. Units distributed have increased by 2.6% in England and 0.6% in Scotland. Customer service standards have improved once again with the fault rate falling by a further 3% in Scotland and 5% in England. Generation and Supply Operating profit in Generation and Supply in England and Wales showed an excellent 40.1% increase to £113.8M against a background of falling wholesale electricity prices and rising wholesale gas prices. This growth has been delivered through our continued focus on improving margins. In the current financial period a number of factors have contributed to this: - Our joint venture power stations have performed well. Seabank 2 has made its first full financial contribution and Barking significantly increased its profits following a major outage last year; - SWALEC has contributed a full half year compared to the two months we reported at the same time last year. This improved operating profit before goodwill by over £10M; - Active risk management using the flexibility within our energy portfolio has minimised purchase costs and allows us to take advantage of 'low risk' trading opportunities; - We have had a successful first six months under NETA. Our performance in the imbalance charge/rebate mechanism and the balancing market has contributed over £15M to Group profits. Our gas business is now enjoying the benefit of the transfer of all its customers to our Customer Service System which was successfully completed in July and should contribute to profits this year. We continue to believe that the current wholesale gas price is not sustainable and we will be well positioned to grow earnings from the 2001 level if they fall. In electricity, despite our relatively good customer retention, the drop in electricity customer accounts in our three licensed areas is slightly greater than the growth in gas. Despite competition net margins in retail supply have remained steady. The current supply price review ends in April 2002 and in line with what happened in gas we expect price controls to be removed. However, the Regulator has still to make his decision and this could impact on future margins. Following the introduction of NETA we have increasingly managed our Generation & Supply business on a Great Britain wide basis. As a result of this some of the value of our plant flexibility is effectively accounted for in England & Wales, making financial reporting in our traditional segmental analysis increasingly more difficult. The competitive market in Scotland has remained tough contributing to the reported fall in operating profit to £3.3M. The last six months has also seen lower wholesale prices in the Scottish market as it becomes increasingly linked to England and Wales. This has affected both the price and volume associated with interconnector output. We have also been affected by an adverse fuel mix with hydro output below last year's level for the first three months and nuclear output being 22% above last year's level due to the timing of British Energy's outages. Some of these impacts are seasonal and we would not expect to see such a significant reduction in operating profit for the remainder of the year. Operationally we have completed outages on all our major plant over the summer months, therefore availability has been below the long term average. We are confident, following this programme, that our plant can continue to operate flexibly over the long term and make a positive contribution to Group earnings. Other Businesses Our other businesses have continued the good performance seen last year with operating profit up £12.8M to £32.9M. Telecoms, including our internal business, continues to make a positive and growing contribution to operating profit and this year will be positive after all interest charges. Contracting has again performed well with profit up over 25% on the same period last year, reflecting both additional turnover and improved margins. The strength of the economy in south central England has benefited our new connections business. We have also seen an increased profit contribution from our shop business as a result of tight cost control and extra revenue from direct sales. We expect growth in these businesses to continue over the next six months but not at the same level we have seen in the first six months. Synergy Savings At SSE we have continued to make good progress on delivering our target savings level of £140M. As a result of the strong performance we have seen in the first half of the year, with another 9.5% reduction in controllable costs, we are now confident that we will beat the £140M target by a significant amount. In customer service we have successfully transferred all our SWALEC customers to the Group's Customer Service System, with the electricity customers completing the migration last week-end. The additional earnings growth from this low risk source is significant over the coming years. SSE is at the leading edge of efficiency and we intend to remain there with continued progress in all areas. Interest The net interest charge shows an increase of £11.4M to £53.6M as average indebtedness was higher than last year due to the SWALEC acquisition. In addition, £5.2M of interest was capitalised last year on the Peterhead repowering project. Tax The underlying effective tax rate has remained unchanged at 22%. We have now adopted FRS 19 on deferred tax liabilities. As these liabilities are only a potential exposure we have decided to apply discounting to reflect the long term nature of our assets and this impacts on both the Group's profit and loss account and on the balance sheet. The notional tax charge is now 26.5% and on the balance sheet we have recognised an additional discounted liability of £ 362M at 30 September 2001. Earnings per Share We will continue to focus on EPS before goodwill and the impact of FRS19 and on this basis EPS is up 8.6% to 21.4p. This strong performance builds on the last two years during which EPS has grown by 24%. Dividend The Board has recommended a half year dividend of 9.7p per share, an increase of 7.8% on last year and well ahead of the target of at least 4% real growth. Once again this is an excellent performance against the backdrop of falling wholesale electricity prices, rising wholesale gas prices, the second year of the price review and a tough competitive environment. We remain confident that we will achieve our dividend target of at least 4% real growth for the next two years and sustained real growth thereafter. £450M investment programme in renewable generation The Government has recently announced the detail of its Renewables Obligation (RO) which will encourage investment in new renewable generation in order to help it achieve its target of 10% of all UK generation coming from renewable sources by 2010. Under the RO, all electricity suppliers will eventually be obliged to meet 10% of their needs via Renewable Obligation Certificates (ROC's) which have been set at £30 per MWh. As the UK's largest generator of renewable energy through our hydro assets, this presents SSE with two new opportunities to grow earnings, one unique to us and the other open to all others operating in the marketplace. The Government has agreed that all hydro stations up to 20MW in capacity will be eligible for ROC's once they have been refurbished. We have, therefore, committed to a programme of up to £250M over the next ten years to refurbish all our hydro assets, beginning in April 2002. We generate around 1TWh of electricity from the stations under 20MW. We also expect to see improvements in output and cost savings. The first three schemes which we have committed to are at Invergarry, Gaur and Orrin. The second opportunity is in the development of new renewable generation, mainly wind and possibly new hydro. We have also committed around £200M towards the development of over 200MW of new renewable generation over the next five to six years. This will be through a combination of new sites developed by SSE where we expect to be able to exploit our geographic advantage in the north of Scotland which has Europe's best wind farm potential, and the acquisition of sites partially developed by others. Our first 11MW scheme at Tangy on the Mull of Kintyre is progressing well. Together these investments will help our supply business to meet its renewable obligation, but equally importantly should deliver a healthy return in generation for our shareholders. The impact on all supply businesses in the UK will depend on the regulatory framework going forward and how these businesses react to this additional cost. Group Capital Expenditure Group capital expenditure shows a small increase on the same period last year, largely because of an increase in Power Systems spend over the summer months and the completion of our spend on our two regional telecoms networks. We would expect capital expenditure in Power Systems for the full year to be lower than last year. There has been a reduction in spend in our generation business following the completion of the investment in new thermal assets. Balance Sheet and Cash Flow SSE's balance sheet remains very strong. This was recognised by Standard and Poor's who increased our long term credit rating to AA- last month, the first upgrade of this kind in the global electricity industry for many years. Interest cover was nearly 6 times. We anticipate it will be above this level for the full year. During the first six months of this year SSE reduced net debt by £95.0M compared with an increase of £199.1M in the same period last year. We have also seen a £31.2M improvement in free cash flow as debtors have reduced following a drive to improve collection performance across the whole supply business. Strategy and Outlook At SSE we remain focused on running our core businesses well and looking for incremental areas where we can create earnings growth for our shareholders. We remain disciplined in our approach to mergers and acquisitions and will only pursue these options if they deliver enhanced value for our shareholders. However, we continue to monitor any opportunities which arise both in the UK and overseas. SSE has once again shown that it can deliver strong earnings growth. This will continue to be delivered through our synergy savings, the £450M investment programme in renewable generation and our other businesses. The strength of our balance sheet continues to position us well to take advantage of opportunities to both create and return value to our shareholders. NOTES TO EDITORS 1. SSE is the largest generator from renewable resources in the UK with close to 50% of the country's renewable generation capacity. 2. Invergarry is a 20MW power station built as part of the Garry/Moriston scheme in the Great Glen north of Fort William. The scheme was built between 1949-1962 and has a total installed capacity of 113MW. 3. Gaur is a 6.4MW station built aspart of the Tummel Valley scheme to the west of Pitlochry. This scheme was built between 1946-1951 and has a total installed capacity of 244.8MW, making it the largest hydro devlopment in Scotland. 4. Orrin is an 18MW power station built between 1946-1961. It is part of the Conon Valley scheme north west of Inverness which has a total installed capacity of 118MW. 5. Photographs are available of each of these dams in jpg format by email. - ENDS - For further information contact: Andrew Dowler, Financial Dynamics : 0207 269 7140 Alan Young, Scottish and Southern Energy 0870 900 0410 Debbie Smith, Scottish and Southern Energy : 0870 900 0410 SSE has provided a dial-in facility for those unable to attend the meeting. Date of call: 8 November 2001 Time of call: 09.30 Call in number: +44 (0) 208 781 0576 Password: Scottish and Southern Energy A replay facility will be available for 48 hours: Dial in number: +44 (0) 208 288 4459 Passcode: 631352 PROFIT AND LOSS ACCOUNT For the period 1 April 2001 to 30 September 2001 Year to Half Year to Half Year to 31 March 30 Sept. 30 Sept. 2001 2001 2000 restated unaudited restated £M Note £M £M 3,585.6 Total group turnover 4 1,804.6 1,497.3 587.2 Group operating profit 250.6 231.6 Share of operating profit in: 25.4 - Joint ventures 14.4 10.9 37.5 - Associates 15.3 11.1 650.1 Total operating profit 4 280.3 253.6 2.1 Income from fixed asset investments 0.4 1.9 Net interest payable: 67.7 Group 36.8 26.1 11.8 Joint ventures 7.3 5.5 22.3 Associates 9.5 10.6 550.4 Profit on ordinary activities before 227.1 213.3 taxation 143.8 Taxation 3 60.2 55.7 406.6 Profit on ordinary activities after 166.9 157.6 taxation 0.4 Equity minority interests in 0.2 subsidiary undertaking 407.0 Profit attributable to ordinary 167.1 157.6 shareholders 257.0 Dividends 5 83.8 77.2 150.0 Retained profit 83.3 80.4 47.5p Earnings per share - basic 6 19.5p 18.4p 50.9p - adjusted 6 21.4p 19.7p 47.4p - diluted 6 19.4p 18.4p 30.0p Dividend per ordinary share 5 9.7p 9.0p BALANCE SHEET At 30 September 2001 At 31 March At 30 Sept. At 30 Sept. 2001 2001 2000 restated unaudited restated £M £M £M 4,015.6 Fixed assets 4,043.6 3,928.2 Current assets 36.2 Stocks 56.5 43.4 672.3 Debtors 477.4 570.0 31.3 Investments 28.4 29.8 27.3 Cash at bank and in hand 24.4 35.8 (1,621.7) Creditors - amounts falling due within (1,351.6) (1,441.5) one year (854.6) Net current liabilities (764.9) (762.5) 3,161.0 Total assets less current liabilities 3,278.7 3,165.7 Creditors - amounts falling due after more than (1,134.4) one year (1,152.6) (1,224.0) (544.7) Provisions for liabilities and charges (551.6) (533.4) 1,481.9 Net assets 1,574.5 1,408.3 429.3 Called up share capital 430.1 428.2 1,051.9 Reserves 1,143.9 980.1 1,481.2 Total shareholders' funds 1,574.0 1,4083 Equity minority interests in subsidiary 0.7 undertaking 0.5 - 1,481.9 1,574.5 1,408.3 90.7% Gearing 79.3% 93.3% CASH FLOW STATEMENT For the period 1 April 2001 to 30 September 2001 Year to Half Year to Half Year to 31 March 30 Sept. 30 Sept. 2001 2001 2000 unaudited restated £M Note £M £M 650.2 Net cash inflow from operating 8 472.1 396.7 activities Dividends from joint ventures, associates and trade 10.1 investments 14.1 9.1 (67.7) Returns on investments and servicing of (39.9) (21.9) finance (79.9) Taxation (39.4) (8.2) 512.7 Free cash flow 406.9 375.7 (278.4) Capital expenditure and financial (141.1) (146.1) investment (217.8) Acquisitions and disposals - (257.0) (241.6) Equity dividends paid (180.3) (164.6) Cash inflow/(outflow) before management of liquid (225.1) resources and financing 85.5 (192.0) 15.6 Management of liquid resources 2.9 17.1 227.1 Financing (91.3) 194.5 17.6 (Decrease)/Increase in cash in the (2.9) 19.6 period STATEMENT OF TOTAL RECOGNISED GAINS AND LOSSES For the period 1 April 2001 to 30 September 2001 Year to Half Year to Half Year to 31 March 30 Sept. 30 Sept. 2001 2001 2000 restated unaudited restated £M £M £M Profit for the financial period: 389.5 Group 158.8 155.2 9.2 Joint ventures 4.9 3.9 8.3 Associates 3.4 (1.5) Total recognised gains and losses relating to 407.0 the financial period 167.1 157.6 Prior year adjustment for implementation of FRS 19 'Deferred Tax' (note 3) (351.7) Total gains and losses recognised since last annual report (184.6) NOTES TO THE INTERIM ACCOUNTS 1. Basis of preparation The interim report has been prepared on the basis of accounting policies consistent with those set out in the annual report for the year ended 31 March 2001 except for the effect of implementing FRS 19 Deferred Tax (note 3). The financial information in this report does not constitute statutory accounts within the meaning of Section 240 of the Companies Act 1985. It is unaudited but has been reviewed by the auditors. Figures for the year to 31 March 2001 included within this report are an abridged version of the full accounts (as restated) which carry an unqualified auditor's report and have been filed with the Registrar of Companies. 2. Approval The interim report for the six months ended 30 September 2001 was approved by the directors on 8 November 2001. 3. Taxation Financial Reporting Standard (FRS) 19 'Deferred Tax' is mandatory for all accounting periods ending on or after 23 January 2002 and accordingly has been reflected in the interim accounts to 30 September 2001. Under FRS 19, deferred tax is recognised in respect of all timing differences which have originated but not reversed at the balance sheet date, subject to certain exceptions. Previously deferred tax was provided for in respect of timing differences to the extent that it was probable that a liability would crystallise in the foreseeable future. As permitted by FRS 19, deferred tax is calculated on a discounted basis and the net present value of the deferred tax liability is reflected in the accounts. Comparative figures have been restated as required. The estimated effect on the group's reported results and net assets is as follows: Half Year to Year to 30 Sept. 2000 31 March 2001 Profit attributable to shareholders £M £M As previously reported 166.4 430.0 Impact of FRS 19 (8.8) (23.0) As restated 157.6 407.0 Net assets As previously reported 1,745.8 1,833.6 Impact of FRS 19 - increase in provision for deferred tax (337.5) (351.7) As restated 1,408.3 1,481.9 As a consequence of this change opening shareholders' funds at 1 April 2001 were reduced from £1,832.9M to £1,481.2M. Corporation tax has been charged at 30%. The estimated effective rate applied to profit before taxation for the Group for the current year is 26.5% (2000 - 26.1%) after charging deferred tax. NOTES TO THE INTERIM ACCOUNTS 4. Segmental Analysis Year to Half Year to Half Year to 31 March 30 Sept. 30 Sept. 2001 2001 2000 £M £M £M Turnover 225.5 Power Systems Scotland 110.3 101.9 367.2 England 169.5 160.9 592.7 279.8 262.8 585.0 Generation and Supply Scotland 240.9 268.3 2,495.6 England and 1,337.4 994.8 Wales 3,080.6 1,578.3 1,263.1 387.6 Other businesses 194.0 162.0 4,060.9 2,052.1 1,687.9 (475.3) Less inter activity (247.5) (190.6) sales 3,585.6 1,804.6 1,497.3 Operating profit 115.8 Power Systems Scotland 54.6 54.5 195.7 England 81.5 77.5 311.5 136.1 132.0 60.7 Generation and Supply Scotland 3.3 22.1 226.6 England and 108.1 79.4 Wales 287.3 111.4 101.5 51.3 Other businesses 32.8 20.1 650.1 280.3 253.6 The comparative figure for operating profit for the Generation and Supply, England and Wales segment has been restated to reflect the £4.5M amortisation of discount, associated with the onerous energy provision, now shown within interest costs. NOTES TO THE INTERIM ACCOUNTS 5. Dividends The recommended interim dividend per ordinary share of 9.7p (2000 - 9.0p) will be paid on 25 March 2002 to those shareholders on the Scottish and Southern Energy plc register on 8 March 2002. 6. Earnings per Share Year Half year Half year Half year Half year to to to to to 31 March 30 Sept 30 Sept 30 Sept 30 Sept 2001 2001 2000 2001 2000 Pence per Earnings Earnings Pence per Pence per share £M £M share share restated restated restated 47.5 Basic 167.1 157.6 19.5 18.4 Adjusted for : 0.7 amortisation of 5.8 1.8 0.7 0.2 goodwill 2.7 deferred tax 10.2 8.8 1.2 1.1 50.9 Adjusted 183.1 168.2 21.4 19.7 47.4 Diluted 167.1 157.6 19.4 18.4 The adjusted figures are before amortisation of goodwill and the incremental charge for deferred tax. The weighted average number of shares used in each calculation is as follows: September 2001 September 2000 Number of shares Number of shares (millions) (millions) For basic and adjusted earnings per share 857.5 855.6 Effect of exercise of share options 3.5 2.2 For diluted earnings per share 861.0 857.8 7. Reconciliation of Movement in Equity Shareholders' Funds Year Half Year Half Year to to to 31 March 30 Sept. 30 Sept. 2001 2001 2000 restated restated £M £M £M 407.0 Profit for the financial period 167.1 157.6 (257.0) Dividends (83.8) (77.2) 150.0 Retained profit for the financial period 83.3 80.4 8.2 New share capital subscribed 9.5 4.2 8.0 Premium on issue of shares to Quest (8.7) Contribution to Quest (11.3) Repurchase of ordinary share capital for (11.3) cancellation 146.2 Net addition in shareholders' funds 92.8 73.3 1,335.0 Opening shareholders' funds 1,481.2 1,335.0 1,481.2 Closing shareholders' funds 1,574.0 1,408.3 Opening shareholders' funds at 1 April 2000 were originally £1,663.7M before deducting the prior year adjustment of £328.7M (note 3). NOTES TO THE INTERIM ACCOUNTS 8. Reconciliation of Operating Profit to Net Cash Flow from Operating Activities Year Half Year Half Year to to to 31 March 30 Sept. 30 Sept. 2001 2001 2000 £M £M restated £M 587.2 Operating profit 250.6 227.1 173.0 Depreciation, amortisation and revaluation 89.1 79.7 adjustments 5.9 Amortisation of goodwill 5.8 1.8 (15.1) Customer contributions and capital grants (7.8) (7.8) released 6.9 Increase in stocks (20.3) (0.3) (242.5) Decrease/(increase) in debtors 194.8 (52.5) 161.6 (Decrease)/increase in creditors (34.7) 160.1 (23.9) Decrease in provisions (3.0) (11.0) (2.9) (Profit) on disposal of tangible fixed assets (2.4) (0.4) 650.2 Net cash inflow from operating activities 472.1 396.7 9. Reconciliation of Net Cash Flow to Movement in Net Debt Year Half Year Half Year to to to 31 March 30 Sept. 30 Sept. 2001 2001 2000 restated £M £M £M 17.6 (Decrease)/Increase in cash in the financial (2.9) 19.6 period Net cash outflow/(inflow) from decrease/ (increase) in (230.9) debt and lease financing 100.8 (111.3) (15.6) Net cash (inflow) from (decrease) in liquid (2.9) (107.4) resources (228.9) Movement in net debt in the financial period 95.0 (199.1) (1,114.8) Net debt at start of financial period (1,343.7) (1,114.8) (1,343.7) Net debt at end of financial period (1,248.7) (1,313.9) 10. Analysis of Net Debt 1 April 2001 Cash Flow 30 Sept. 2001 £M £M £M Cash at bank and in hand 27.3 (2.9) 24.4 Overdrafts Other debt due within one year (600.7) 124.4 (476.3) Net borrowings due within one year (573.4) 121.5 (451.9) Net borrowings due after more than one year (801.6) (23.6) (825.2) Current asset investments 31.3 (2.9) 28.4 Net debt (1,343.7) 95.0 (1,248.7) INDEPENDENT REVIEW REPORT BY KPMG AUDIT PLC TO SCOTTISH AND SOUTHERN ENERGY PLC Introduction We have been instructed by the company to review the financial information set out above and we have read the other information contained in the interim report and considered whether it contains any apparent misstatements or material inconsistencies with the financial information. Directors' responsibilities The interim report, including the financial information contained therein, is the responsibility of, and has been approved by, the directors. The Listing Rules of the Financial Services Authority require that the accounting policies and presentation applied to the interim figures should be consistent with those applied in preparing the preceding annual accounts except where they are to be changed in the next annual accounts in which case any changes, and the reasons for them, are to be disclosed. Review work performed We conducted our review in accordance with guidance contained in Bulletin 1999 /4: Review of interim financial information issued by the Auditing Practices Board for use in the United Kingdom. A review consists principally of making enquiries of group management and applying analytical procedures to the financial information and underlying financial data and, based thereon, assessing whether the accounting policies and presentation have been consistently applied unless otherwise disclosed. A review is substantially less in scope than an audit performed in accordance with Auditing Standards and therefore provides a lower level of assurance than an audit. Accordingly we do not express an audit opinion on the financial information. Review conclusion On the basis of our review we are not aware of any material modifications that should be made to the financial information as presented for the six months ended 30 September 2001. KPMG Audit Plc Chartered Accountants Edinburgh 8 November 2001

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