Interim Results
Scottish & Southern Energy PLC
04 November 2004
Scottish & Southern Energy plc
4 November 2004
INTERIM RESULTS FOR THE SIX MONTHS TO 30 SEPTEMBER 2004
Chairman's Statement
'Scottish and Southern Energy has delivered a strong financial and operational
performance in the first six months of the financial year and has also taken a
number of important steps which will support the delivery of sustained real
growth in the dividend well into the future. In summary:
• The Board is declaring an interim dividend of 12.2p per share, an
increase of 8.0%, which is ahead of our target of at least 4% real growth for
the year to March 2005.
• Profit before tax grew by 11.3%, from £240.6m to £267.9m, before
goodwill and net finance income from pension assets.
• Earnings per share increased by 8.8% from 21.5p to 23.4p, before
goodwill, net finance income from pension assets and deferred tax.
• SSE has the most diverse and flexible generation portfolio in the UK
following the acquisition of 4,000MW of generation capacity at Ferrybridge and
Fiddler's Ferry power stations, and their coal stocks, for £136m.
• SSE now has almost 600MW of hydro and wind generation capacity
qualifying for Renewable Obligation Certificates (ROCs) which is operational,
consented, or has received conditional consent.
• SSE now has 5.7m energy supply customers, having gained 450,000 in the
first half of the year, including 300,000 acquired from Atlantic Electric & Gas
in April 2004.
• SSE gave a commitment in August 2004 to maintain domestic electricity
and gas prices at their current levels until at least early 2005, despite rising
wholesale energy prices, particularly gas.
• Work on the detailed arrangements for transferring the ownership of
the Scotland and the South of England gas distribution networks from National
Grid Transco to the consortium in which SSE has a 50% interest is now well under
way. SSE will receive 50% of the networks' distributable earnings in return for
a cash investment of £519.4m.
SSE can be very pleased with the progress made during the first six months of
the financial year. Looking forward, our focus will be on successfully
completing the integration of the assets which have been recently acquired, as
well as delivering the benefits from our investment programme while maintaining
our emphasis on strong operational performance. This focus on delivery means
the prospects for sustained real dividend growth in the future are very good
indeed. I am delighted that SSE is in such strong shape and I would like to
wish Sir Robert Smith, our Deputy Chairman, who will succeed me on my retirement
as Chairman on 1 January, and the company as a whole, every success for the
future.'
Dr Bruce Farmer CBE
Chairman
FINANCIAL OVERVIEW
Note: This interim 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 interim dividend is ahead of the target of 4% real growth in
the year to March 2005.
Profit before tax, before goodwill and net finance income from pension assets,
grew by 11.3% from £240.6m to £267.9m. The most significant growth in profits
was achieved in Generation and Supply, reflecting SSE's success in delivering
value from its growing customer base and its investment in, and acquisition of,
generation assets in recent years.
To monitor financial performance over the medium term, SSE continues to focus 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, earnings per
share increased by 8.8%, from 21.5p to 23.4p.
The Board is declaring an interim dividend of 12.2p, compared with 11.3p last
year, an increase of 8.0%. This is ahead of the target of 4% real growth for
2004/05. SSE expects to achieve its overall dividend target, at least 4% real
growth, for the year as a whole.
SSE also expects to achieve sustained real growth in the dividend from 2005
onwards. This belief is based on the value it expects to create through
operational excellence, the successful integration of recently-acquired assets
and the delivery of the investment programme in renewable energy generation,
electricity networks and gas storage. SSE intends to set out dividend growth
targets for the period from 2005/06 in its Preliminary Results Statement for
2004/05.
ENERGY SYSTEMS
Power Systems Overview
Operating profit in Power Systems reduced by 1.3%, from £143.8m to £142.0m.
While operating profit in Scotland rose by 3.8% to £57.4m, following the
under-recovery of allowable revenues in transmission and distribution that
occurred in 2003/04, it fell in England following the over-recovery of revenue
last year. Performance in England was also affected by costs incurred as a
result of summer storms.
In Scotland, 3,763GWh of electricity were distributed, an increase of 50GWh. In
England, 15,376GWh of electricity were distributed, an increase of 265GWh.
The key responsibility of SSE's Power Systems business is to maintain safe and
reliable supplies of electricity, and to restore those supplies as quickly as
possible following interruptions. In line with that, SSE has invested around
£675m in its electricity networks since 2000.
Nevertheless, the average number of minutes of lost supply per customer in the
Southern Electric Power Distribution area in the first six months of the year
was 47.4, up from 40.3 minutes in the previous year, due to a number of
unusually severe summer storms. The average number of minutes lost in the
Scottish Hydro-Electric Power Distribution area was 41.2, compared with 34.9 in
the previous year. This, too, is attributable to exceptionally severe summer
storms.
Distribution Price Control Review
SSE welcomes the transparent and constructive approach which Ofgem has adopted
during the process for determining the distribution price control for 2005 to
2010. Based on the Update Paper issued on 27 September 2004, there has been
encouraging progress on many of the detailed areas of work. The September Paper
confirmed that SSE remains at the frontier of efficiency in electricity
distribution in the UK.
The fundamental issue that remains, however, is the need to ensure there is a
satisfactory outcome to the ongoing discussions about the level of real post-tax
cost of capital, allied to ensuring there is a strong enough incentive framework
to allow efficient companies to be rewarded for good performance. SSE will
continue to work closely with Ofgem in the periods leading up to, and following,
the publication of its Final Proposals Paper on 29 November.
Transmission Upgrades
On 12 August, Ofgem published initial proposals for a new mechanism to fund
upgrades of the Scottish electricity transmission system to help support the
growth of renewable energy generation. It stated that investment has been
approved to allow the reinforcement of the transmission system connecting Beauly
in the Highlands with Denny in the Central Belt to go ahead. This work has to
take place if the government's targets for the generation of electricity from
renewable sources are to be achieved.
It is likely that the construction of the replacement line will require
investment in excess of £200m. Following receipt of the Scottish Executive's
response to the request for a 'scoping opinion' on the information that should
be included in the Environmental Statement, SSE expects to submit during 2005 an
application to Scottish Ministers for consent to build the line. On this basis,
and subject to timely progress of the planning application, the replacement line
should be operational during 2008/09.
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 2004/05. In response to this, it has
published a preliminary consultation document on options for connecting possible
renewable generation in the Western Isles to the transmission infrastructure on
the Scottish mainland. While this work is at a relatively early stage, it could
require investment of around £400m towards the end of this decade.
The investment opportunities for SSE that are now apparent in the transmission
and distribution networks are highly significant. SSE's focus will be on
securing an adequate return from the necessary investments by delivering them in
the most efficient and effective way possible.
Gas Distribution Networks
On 31 August 2004, a consortium in which SSE holds 50% of the equity entered
into an agreement to acquire the Scotland and the South of England gas
distribution networks from National Grid Transco. In total, they comprise
73,000km of gas mains, delivering gas to around 5.6m industrial, commercial and
domestic customers. The total value of the acquisitions will be £3,162m. They
are expected to be funded almost entirely by equity and non-recourse borrowings.
This means that, in return for a cash investment of £519.4m, SSE will receive
50% of the distributable earnings from the networks. Upon completion of the
acquisitions, SSE will also provide certain corporate and management services
for the gas networks under an agreement with the consortium. The acquisitions
will make SSE the second largest energy distributor in the UK. They remain
subject to approvals from Ofgem and the Health and Safety Executive, but are now
expected to be completed in the early summer of 2005.
A programme of work to complete the acquisition process, and to put in place all
the necessary arrangements for the change of ownership, is now well under way.
This includes developing the opportunities that exist to create value through
delivering efficiencies and through expanding the activities of SSE's
Contracting and Connections businesses. The acquisitions may also provide
opportunities in gas metering and in the provision and maintenance of gas
equipment. They are expected to enhance earnings from the first year.
SSE will equity account for the networks as a joint venture and its Accounts
will show SSE's share of operating profit, interest and tax.
GENERATION AND SUPPLY
Generation and Supply Overview
Operating profit in Generation and Supply rose by 51.3%, from £88.1m to £133.3m.
Growth was achieved mainly as a result of: benefits arising from the
acquisition of Medway Power; early benefits from the acquisition of the
Ferrybridge and Fiddler's Ferry power stations; increased output from
hydro-electric stations, including more output qualifying for Renewable
Obligation Certificates (ROCs); and sustained growth in energy supply customer
numbers, offset by the impact of rising wholesale gas prices.
As part of the output of its power stations is sold into the wholesale,
industrial and commercial markets, SSE has also continued to benefit from the
recovery in wholesale electricity prices which started in 2003. Its flexible
generation assets have continued to perform well in NETA, with success in the
balancing market contributing £7.6m to operating profit in the first six months
of the year.
Good performance in NETA is dependent on plant reliability, and the number of
unplanned outages at SSE's wholly-owned gas-fired power stations fell by over
50% compared with the same period last year. This follows the reduction, also
of more than 50%, achieved during 2003/04. In SSE's assessment, this
performance remains market-leading.
Looking ahead, SSE believes it has the generation plant, systems and people in
place to enable it to operate successfully in the Great Britain-wide electricity
trading arrangements when they are introduced on 1 April 2005. In addition,
while the UK's proposals for the National Allocation Plan under the forthcoming
EU Emissions Trading Scheme have not yet been finalised, SSE believes that the
work done so far suggests that its allocation of emissions allowances will be
reasonable in comparison to the rest of the UK generation sector.
With the acquisition of Ferrybridge and Fiddler's Ferry, SSE now owns and
operates almost 10,000MW of electricity generation. Comprising largely
mid-merit and peaking plant, SSE's portfolio is now the second largest and the
most diverse in the UK.
Gas Generation
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
£23m additional operating profit in the first half of 2004/05, taking the total
to £36m in the 11 months since the acquisition was completed.
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 is in the process of being
re-commissioned and will return to full service later this month.
The decision, announced in November 2003, to terminate two 'structural'
agreements with Scottish Power will enable SSE to deploy 642MW of additional
efficient and flexible thermal generation capacity at Peterhead Power Station in
the enlarged GB-wide market from 1 April 2005. SSE will also gain access to
115MW of standby capacity at Peterhead. Up to 400GWh of hydro output previously
made available to Scottish Power will also now be at SSE's disposal. There will
be significant value in being able to deploy this in the market, especially if
improved wholesale electricity prices are maintained.
Coal and Biomass Generation
SSE acquired the Ferrybridge and Fiddler's Ferry power stations, with a total
capacity of almost 4,000MW, and associated coal stocks of 1.6m tonnes, for £136m
on 30 July 2004. Fuel in transit and contracts to supply fuel for the power
stations were also acquired for US$208 (£114m).
Both are flexible, mid-merit stations which have added to the diversity of SSE's
generation portfolio and help it to meet peak demand for electricity. They also
allow SSE to manage its exposure to changes in commodity prices for fuel by
balancing its gas portfolio with a coal portfolio. In the first two months of
ownership, the two power stations contributed £6m to operating profit.
The stations 'co-fire' fuels from renewable sources in order to displace fossil
fuels, and this output qualifies for ROCs. During 2003/04, their output
qualifying for ROCs was 331GWh. In the first six months of 2004/05, it was over
300GWh, of which the output in August and September is attributable to SSE.
Following the acquisition, SSE is now in the process of completing the
integration of the assets into its generation portfolio. It is also examining
all opportunities for improving the thermal efficiency of the power stations and
all options for maximising the longer-term value of the assets, particularly
with regard to biomass.
Hydro Generation
Performance in Generation and Supply during the first half of 2004/05 also
benefited from the increase in electricity output qualifying for Renewable
Obligation Certificates (ROCs), which attracted a premium of around £45/MWh.
This was attributable to the growing proportion of SSE's hydro-electric capacity
which has been refurbished so that its output qualifies for ROCs and to higher
than average 'run-off' of water flowing into SSE's reservoirs.
The output of refurbished hydro stations with capacity of up to 20MW qualifies
for ROCs. In total, SSE has 394MW of capacity in its sub-20MW stations.
Refurbishment has been completed at an additional 30MW of hydro capacity since
the start of 2004/05, taking the overall total to 305MW. The refurbishment of a
further 40MW will be completed by the end of December and the remaining 49MW is
expected to be completed within the next year. This is a significant milestone
in SSE's £350m programme of investment in refurbishing its existing
hydro-electric power stations and in developing new hydro capacity.
Water running off into reservoirs in the six months to 30 September was 32%
above the long-term average. As a result of this and of the investment in
refurbishing hydro capacity, SSE's ROC-qualifying hydro output in the first half
of this year doubled, to over 400GWh, compared with the same period last year.
Assuming average 'run-off' during the rest of this financial year, the
ROC-qualifying output for 2004/05 as a whole is expected to be over 1,300GWh.
The planning application for consent to build a new 100MW hydro-electric station
at Glendoe near Loch Ness is now with Scottish Ministers for consideration and
the initial tendering process for the project is almost complete. SSE will
determine whether to proceed with the development on the basis of any conditions
which must be met as part of the planning consent and on the outcome of the
tendering process.
Looking ahead, the abolition of Hydro Benefit announced by Ofgem in November
2003 will increase SSE's profit from its generation activities by around £37m a
year from 2005/06.
Wind Generation
In consulting on the terms of reference for their forthcoming reviews of the
Renewables Obligation and the Renewables Obligation Scotland, both the UK
government and the Scottish Executive stated their wish to maintain confidence
in the stability of the renewables support framework.
This provides a very encouraging climate for investment and reinforces SSE's
intention to remain the largest generator of electricity from renewable sources
in the UK. To that end it has already secured planning permission to develop
almost 200MW of new wind energy, including conditional consent received for a
32MW wind farm near Alyth in Perthshire in August 2004. Applications have been
submitted to the relevant authorities in respect of a further 90MW 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
four sites before the end of the current financial year. 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.
This total investment of £500m planned for new wind energy and the £350m
investment in hydro means that SSE's wind and hydro renewables investment
programme is £850m. As a result, SSE is on course to have more than 1,000MW of
ROC-qualifying wind and hydro generating capacity by 2008. Of this, it already
has in place, or has secured consent to develop, almost 600MW of capacity.
New Technologies
The government has made it clear that the key to realising the full potential of
renewables is the development of new technologies.
In August 2004, SSE and Talisman Energy (UK) announced plans to construct a £24m
deep water wind farm demonstrator project, with a capacity of up to 10MW,
adjacent to the Beatrice Field, 25km off the coast of Scotland, in the Moray
Firth. The project is being funded by the Scottish Executive, Department of
Trade and Industry and the European Commission, in addition to the two
companies. SSE is contributing £7m to the project. Electricity from the
demonstrator project should begin to be generated by 2007.
SSE recently entered into an agreement with Renewables Devices Swift Turbines
Ltd, a technology company providing accessible renewable energy solutions. It
has developed what is believed to be the world's first feasible
rooftop-mountable wind energy system, which is designed to be planning-compliant
and capable of delivering significant amounts of energy to businesses, offices
and homes. Under the agreement, SSE has invested in Renewable Devices and will
provide opportunities to market its rooftop wind system to a wide range of
customers.
Renewable Technology Ventures Ltd (RTVL), the joint venture between SSE and The
Weir Group, is continuing development work on a tidal power generating device.
It is currently validating the design of the device and hopes to deploy it at
the Orkney Marine Energy Test Centre during the next financial year.
Supply
SSE's energy supply business has now grown to 5.7m customers, having gained
450,000 customers in the first six months of the year, including over 300,000
customers from Atlantic Electric and Gas on 28 April 2004. Overall, SSE now has
1.15m more customers than at the start of 2002, an increase of 25%. It is now
the fourth largest supplier of electricity and gas in the UK.
The final acquisition cost of the Atlantic customers and the customer debt book
was £85.3m. Since the acquisition, over £30m from the debt book has been
collected. Good progress continues to be made with integration so that, for
example, it is now possible to handle calls to Atlantic in any part of SSE's
Customer Service function. Integration is on course to be largely completed by
the end of this financial year. Six months on from the acquisition, the number
of customers with Atlantic is still over 300,000.
The winter normally represents a period of greater risk within energy trading,
and this is especially the case this year given recent volatility in wholesale
gas prices. The acquisition of Ferrybridge and Fiddler's Ferry has, however,
significantly changed the nature of SSE's energy trading portfolio and it
remains focused on minimising its exposure to commodity prices. In line with
this, its long-term gas procurement strategy also means that SSE's energy
requirements for the forthcoming winter have been generally satisfied.
While other energy supply companies have raised their prices at least twice
during 2004, SSE has made just one increase and gave a commitment in August 2004
to hold prices at their current levels until at least early 2005. The actual
duration of this commitment into 2005 is dependent on trends in wholesale energy
prices.
Growth achieved during the first half of this year includes a net gain of
business customers covering around 74,000 sites throughout Great Britain,
including HSBC, the RAC, British Airways, Leeds City Council and the National
Trust for Scotland. SSE also won the tender to supply electricity to the NHS's
800 large sites in England in a three-year deal worth over £220m. In total,
SSE's business customers now cover almost 400,000 sites throughout Great
Britain.
SSE believes that its long-term success as an energy supplier depends on
supporting the strength of its regional brands, maintaining the highest possible
standards of customer service and developing new products and services. The
three strong regional brands - Southern Electric, SWALEC and Scottish Hydro
Electric - have been more successful at retaining customers in their traditional
areas than any other suppliers of electricity in Great Britain.
SSE's 'one-stop' fully integrated customer service system continues to offer the
fullest range of functions in the sector and is being enhanced to improve
further standards of service while at the same time keeping pace with changing
technology. It is intended to offer on-line billing services to all existing
SSE energy supply customers within the next few months. This will allow
customers to view and pay their bills, submit meter readings and raise
enquiries.
SSE secured a reduction of almost 50% in the number of customer complaints to
energywatch (excluding Atlantic) during the first six months of the year,
despite the significant growth in customer numbers. This follows the 23%
reduction achieved during 2003/04. SSE, excluding Atlantic, is the only energy
supply company in the UK to have a five star Service Rating from uSwitch, which
bases its analysis on how energy suppliers deal with customer complaints and on
how wide a range of services they offer. The leading independent study, by JD
Power, published on 2 November, found that SSE has the highest level of customer
satisfaction among UK gas suppliers and the third highest among electricity
suppliers.
During the first half of the year, SSE launched two new products, demonstrating
the strength of its commitment to product development as a key contributor to
success in energy supply. power2 is a unique package which offers customers a
commitment that electricity will be generated from SSE's hydro-electric schemes
along with a tree-raising scheme to offset carbon emissions resulting from their
consumption of gas and disposal of household waste. easywarm is a fixed-price
energy product for customers aged over 50 which is currently being piloted in
south Wales.
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
three years.
This will be done through development of a range of other energy-related
services from other parts of SSE, such as electrical contracting services and
domestic appliances. SSE believes it is uniquely well-placed among UK energy
suppliers to consolidate and market the services it provides to customers '
beyond the meter'. In line with this, an energy services unit has recently been
established within SSE to take account of the changing marketplace and to look
at ways of capitalising on the breadth of SSE's products and services, with the
aim of building longer-term and deeper relationships with customers.
CONTRACTING, CONNECTIONS, GAS STORAGE, TELECOMS AND OTHER BUSINESSES
Operating profit from contracting, connections, gas storage, telecommunications
and other businesses increased by 3.8%, from £37.3m to £38.7m.
Contracting and Connections
Contracting and Connections delivered operating profit of £19.6m in the first
six months of the year, a decrease of 10.9% on the previous year, when a
particularly large number of connections contracts were completed. Nevertheless,
the Contracting business' plans for future growth are progressing well.
Its joint venture with Interserve, called 'PriDE', has been named by the
Ministry of Defence as the preferred bidder for its £400m South East Regional
Prime contract to provide mechanical and electrical maintenance for more than
100 MoD locations in London and the south-east of England. In the past six
months, it has also been successful in winning contracts from organisations such
as South West Trains, Airbus and Astra Zeneca.
The Connections business completed around 20,000 electrical connections in the
first half of the year. In addition, it has continued to expand its portfolio
of out-of-area electricity networks. It secured a large contract from Barclays
Capital to provide electrical connections for the development at Rowdell Road,
Northolt, in London. The rate of connecting new premises to its gas networks
continued to grow, and during the first six months of the year, it connected a
further 2,700 premises, taking the total number of connections to just over
23,000.
Gas Storage
Gas storage delivered an operating profit of £8.7m, an increase of 47.5%
compared with the previous year. Demand for gas storage facilities in the UK
remains high and, in a volatile gas market, SSE has continued to enter into new
contracts to provide storage at a significantly higher value than the 'legacy'
contracts it inherited when Hornsea was acquired.
SSE's joint venture with Statoil (UK), in which SSE is investing £150m, to
develop the UK's largest onshore gas storage facility at Aldbrough, is making
good progress, with the project on course to commence 'leaching' of the salt
caverns within the next few weeks. The development will feature nine such
caverns, with a total new capacity of around 420 million cubic metres, of which
SSE will have the ownership interest in 280 million cubic metres. Overall, each
day, SSE will be able to import 14 million cubic metres of gas into Aldbrough
and to deliver 26 million cubic metres of gas from the facility. The first part
of the new facility is expected to be operational from 2007. It will, as a
result, secure for SSE a significantly enhanced presence in the UK gas storage
market.
Telecoms
SSE's combined telecoms business achieved an operating profit of £4.8m in the
six months to 30 September, compared to £0.9m in the same period last year.
The benefits from establishing in 2003/04 a national telecoms network, a
UK-wide sales force and a competitive range of products targeted at commercial
and public sector customers are now being realised.
This means the improvement in performance is partly the result of higher sales,
and important contracts have been signed with major companies such as AT&T and
NTL. In addition, an improvement in gross margins and a reduction in overhead
costs has been achieved, partly through synergy savings achieved by combining
the SSE Telecom and Neos businesses.
Corporate and Property Services
Corporate and Property Services contributed £5.6m to operating profit.
SAFETY AND THE ENVIRONMENT
SSE aims to create value for shareholders by running the business with a strong
emphasis on safety and on caring for the environment. During the first six
months of the year, the number of lost time and reportable accidents within the
company was 10, compared with 7 in the same period last year and 27 during 2003/
04 as a whole. The number of serious, or potentially serious, road traffic
accidents involving employees driving company vehicles was 8, compared with 14
in the same period last year.
SSE's target for any given year is zero reportable environmental incidents.
There were no such incidents during the first six months of 2004/05. SSE
published 12 environmental targets in its Environment Annual Report 2004, and is
on course to deliver improved environmental performance in many key activities
during 2004/05.
COST SAVINGS
Since SSE was formed at the end of 1998, total cumulative cost savings of £692m
have been secured. The expansion at SSE over the past two years, however,
combined with the forthcoming investment in gas distribution networks, means
that SSE's established means of reporting post-merger cost savings no longer
provides a fully meaningful picture of the extent of efficiency gains that are
being made within SSE as a whole. Nevertheless, the scope for achieving further
efficiencies across SSE's activities remains significant, and the tight controls
over costs remain in place.
GROUP CAPITAL EXPENDITURE
Group investment and capital expenditure, excluding acquisitions, totalled
£160.7m in the first six months of the year, compared with £125.7m in the same
period last year.
Capital expenditure in Power Systems was £75.2m, compared with £65.6m in the
previous year. Of this, £38.5m was invested in network refurbishment and £36.7m
on network expansion.
The other main feature of capital expenditure was investment of £44.5m 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 production of ROC-qualifying energy.
Within the overall total, capital expenditure for growth was £105.4m in the
first half of the year. This largely comprised network expansion and renewable
energy. As stated in the Preliminary Results in May 2004, capital expenditure
will increase significantly in the next few years, with investment in renewable
energy, networks and gas storage, and is expected to be up to £400m by the end
of the current financial year. 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 £46.1m, compared with £38.9m in the previous year.
This reflects the acquisitions made during the period, offset by continuing
strong cash flow. Underlying interest cover was 6.8 times, compared with 7.2
times the previous year.
On 29 September 2004, SSE announced the issue of £300m of Senior Unsecured 3.75%
Convertible Bonds, due 2009, convertible at 900p into fully paid ordinary shares
of SSE. The net proceeds of the issue will be used for general corporate
purposes and, in the short term, to reduce SSE's existing borrowings.
TAX
The effective current tax rate was 25.5%, compared with 24.0% in the same period
last year. 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. An
additional discounted liability of £8.2m has been recognised on the balance
sheet as at 30 September. The tax charge is 28.6%, compared with 26.2% in the
previous year.
CASH FLOW
In the six months to 30 September 2004, SSE's net debt increased by £238.6m to
£1,655.7m. This increase is more than accounted for by acquisitions totalling
£338.0m and capital expenditure for growth in renewable energy, gas storage and
expansion of electricity networks totalling £105.4m. Underlying operational cash
flow, therefore, remains strong.
BALANCE SHEET
SSE continues to maintain one of the strongest balance sheets in the global
utility sector, which 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 30 September 2004, a net pension scheme
deficit of £169.3m is recognised in the balance sheet, including £19.6m of
deficit in respect of the scheme for employees at Ferrybridge and Fiddler's
Ferry. The deficit on 31 March 2004 was £124.4m. Employer cash contributions
to the Southern Electric pension scheme amounted to £5.0m in the first six
months of the year; contributions to the Scottish Hydro-Electric scheme amounted
to £4.4m; and £0.5m was contributed to the schemes for employees at Ferrybridge
and Fiddler's Ferry.
The actuarial valuation of the Southern Electric scheme as at 31 March 2004 is
not yet finalised. The draft results, however, suggest a gross deficit of
£275.5m, compared with the FRS 17 deficit of £253.0m. Discussions with the
Trustees on how this deficit might be repaired are continuing. A contribution
towards the deficit of around £28m per year (increasing each year in line with
RPI) is anticipated, in addition to an ongoing contribution rate of 19.9% of
salaries. Similar discussions are in progress with the Trustees of the pension
scheme that exists for the benefit of employees at Fiddler's Ferry and
Ferrybridge power stations where a draft deficit of £13.6m has been calculated
as at 31 March 2004.
As previously disclosed, a claim for over £300m has been lodged with the
administrators of TXU following the termination of the 'in the money' contract
to supply power to TXU, which went into administration in November 2002. 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.
PURCHASE OF OWN SHARES
During 2003/04, 1,760,000 of the Company's 50p ordinary shares were purchased
and cancelled at an average price of 633p per share. While the Directors'
authority to purchase, in the market, the Company's own shares was renewed at
the Annual General Meeting on 29 July 2004, that authority has not so far been
exercised during 2004/05. The Board of SSE will, however, continue to take
opportunities to return value to shareholders through the purchase of the
Company's own shares should the conditions be appropriate.
STRATEGY AND OUTLOOK
Over the past two years, SSE has taken advantage of its carefully-maintained
balance sheet strength to make a number of acquisitions in energy businesses in
the UK, while progressing with a major programme of investment in renewable
energy, electricity networks and gas storage. In doing so, it has maintained
the overall balance within SSE between regulated network businesses and
Generation and Supply.
Key tasks now for SSE are to complete the successful integration of the various
acquisitions into its existing businesses and to deliver maximum value from the
investment programme. This will be done while keeping a clear focus on the need
to maintain operational excellence throughout all of SSE's activities. This
balanced and disciplined strategy has been designed, and is being implemented,
with the clear objective of delivering sustained real growth in the dividend in
the years ahead.
Investor Timetable
23 February 2005 Shares go ex-dividend
25 February 2005 Date for recording transfers to receive dividend
24 March 2005 Dividend payable
18 May 2005 Announcement of Preliminary Results
28 July 2005 Annual General Meeting - Pitlochry
Enquiries to:
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: Thursday 4 November
UK: 0845 146 2004
International: +44 1452 569 393
Replay facility (for one week)
UK: 0845 245 5205
International: +44 1452 550 000
Pin number: 2123682#
PROFIT AND LOSS ACCOUNT
For the period 1 April 2004 to 30 September 2004
Year to Note Half Year to Half Year to
31 March 2004 30 Sept. 2004 30 Sept. 2003
unaudited unaudited
£m £m £m
5,124.4 Total group turnover 6 2,705.1 1,963.5
629.1 Group operating profit 283.0 240.1
Share of operating profit in:
30.6 Joint ventures 14.8 14.7
20.6 Associates 8.3 7.8
680.3 Total operating profit 6 306.1 262.6
10.2 Gain on disposal of property 6 - 10.2
0.1 Income from fixed asset investments - 0.1
Net interest payable:
(63.3) Group (37.2) (26.6)
(11.5) Joint ventures (5.3) (5.9)
(10.7) Associates (3.6) (6.4)
2.2 Other finance income 6.2 1.2
607.3 Profit on ordinary activities before taxation 266.2 235.2
(159.5) Taxation 4 (76.1) (61.7)
447.8 Profit on ordinary activities after taxation 190.1 173.5
0.1 Equity minority interests in subsidiary 0.1 -
undertaking
447.9 Profit attributable to ordinary shareholders 190.2 173.5
(322.9) Dividends 7 (104.9) (96.9)
125.0 Retained profit 85.3 76.6
52.3p Earnings per share - basic 8 22.2p 20.3p
54.1p - adjusted 8 23.4p 20.3p
52.2p - diluted 8 22.2p 20.2p
37.7p Dividend per ordinary share 7 12.2p 11.3p
BALANCE SHEET
At 30 September 2004
At 31 March At 30 Sept. 2004 At 30 Sept. 2003
2004 unaudited unaudited
£m Note £m £m
4,610.1 Fixed assets 4,829.0 4,292.8
Current assets
46.0 Stocks 136.5 54.9
736.9 Debtors 688.5 446.3
21.8 Investments 13.4 7.3
6.5 Cash at bank and in hand - -
(1,291.5) Creditors - amounts falling due within one year (1,401.0) (940.3)
(480.3) Net current liabilities (562.6) (431.8)
4,129.8 Total assets less current liabilities 4,266.4 3,861.0
(1,668.6) Creditors - amounts falling due after more than one (1,656.8) (1,443.5)
year
(608.7) Provisions for liabilities and charges (653.9) (573.9)
1,852.5 Net assets excluding pension asset/(liability) 1,955.7 1,843.6
52.7 Pension asset 52.6 33.6
(177.1) Pension liability (221.9) (179.9)
1,728.1 Net assets including pension asset/(liability) 1,786.4 1,697.3
428.7 Called up share capital 429.2 428.9
1,299.7 Reserves 1,357.6 1,268.6
1,728.4 Total shareholders' funds 9 1,786.8 1,697.5
(0.3) Equity minority interests in subsidiary undertaking (0.4) (0.2)
1,728.1 1,786.4 1,697.3
CASH FLOW STATEMENT
For the period 1 April 2004 to 30 September 2004
Year to Half Year to Half Year to
31 March 2004 30 Sept. 2004 30 Sept. 2003
unaudited unaudited
£m Note £m £m
800.3 Net cash inflow from operating activities 10 573.7 434.4
11.5 Dividends from joint ventures and associates 3.7 3.7
(53.5) Returns on investments and servicing of finance (49.0) (35.9)
(142.7) Taxation (76.7) (75.0)
615.6 Free cash flow 451.7 327.2
(259.9) Capital expenditure and financial investment (131.4) (130.5)
(244.5) Acquisitions and disposals (338.0) (9.7)
(306.7) Equity dividends paid (226.4) (210.0)
(195.5) Cash outflow before management of liquid resources and (244.1) (23.0)
financing
(12.8) Management of liquid resources 8.4 1.7
219.5 Financing 220.4 16.5
11.2 (Decrease)/increase in cash in the period (15.3) (4.8)
STATEMENT OF TOTAL RECOGNISED GAINS AND LOSSES
For the period 1 April 2004 to 30 September 2004
Year to Half Year to Half Year to
31 March 2004 30 Sept. 2004 30 Sept. 2003
unaudited unaudited
£m £m £m
Profit for the financial period:
425.5 Group 179.2 166.8
16.3 Joint ventures 6.8 6.7
6.1 Associates 4.2 -
447.9 Profit for the financial period: 190.2 173.5
153.8 Actuarial (loss) / gain recognised in respect of (32.4) 139.2
pension fund
601.7 Total recognised gains and losses relating to the 157.8 312.7
financial period
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
2004. 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 2004 included within this report are an abridged version of the full
accounts which carry an unqualified auditor's report and have been filed with
the Registrar of Companies.
2. International Financial Reporting Standards
The application of International Financial Reporting Standards (IFRS) will be
required for listed companies commencing on or after 1 January 2005. Therefore,
SSE will publish IFRS compliant interim financial statements for the six month
period to 30 September 2005 and for the year to 31 March 2006. A working group
has conducted a review of SSE's financial reporting procedures and disclosures
and has identified a number of areas where restatement is likely to be required.
A timetable of key dates has also been established to manage this process. At
this stage, it is not appropriate to disclose any quantitative impacts of
conversion.
3. Approval
The interim report for the six months ended 30 September 2004 was approved by
the directors on 4 November 2004.
4. Taxation
The corporation tax charge reflects the anticipated effective rate on profit
before taxation for the Group for the year ending 31 March 2005. The anticipated
effective rate for the Group for the current year, after charging deferred tax,
is 28.6% (2004 - 26.3%).
5. Acquisitions
On 28 April 2004, the Group acquired the assets and ongoing business of Atlantic
Electric & Gas (in administrative receivership) from the Receivers. The fair
value of the assets acquired and the final consideration paid as included in
these accounts are provisional.
On 30 July 2004, the Group acquired the Fiddler's Ferry and Ferrybridge power
stations, associated coal stocks, fuel in transit and contracts to supply fuel
from AEP Energy Services UK Ltd. The fair value of the assets acquired and the
final consideration paid as included in these accounts are provisional.
6. Turnover and profit analysis
Year to Half Year to Half Year to
31 March 2004 30 Sept. 2004 30 Sept. 2003
£m £m £m
Turnover
243.3 Power Systems Scotland 119.8 116.2
378.5 England 170.4 177.6
621.8 290.2 293.8
4,505.6 Generation and Supply 2,403.7 1,721.4
576.5 Other businesses 287.8 263.4
5,703.9 2,981.7 2,278.6
(579.5) Less inter activity sales (276.6) (315.1)
5,124.4 2,705.1 1,963.5
Operating profit
118.1 Power Systems Scotland 57.4 55.3
199.4 England 84.6 88.5
317.5 142.0 143.8
286.5 Generation and Supply 126.8 82.6
76.3 Other businesses 37.3 36.2
680.3 306.1 262.6
The gain on disposal of property at March 2004 and September 2003 relates to the
sale of land and buildings at Amersham Road, Reading.
7. Dividends
The interim dividend per ordinary share of 12.2p (2003 - 11.3p) will be paid on
24 March 2005 to those shareholders on the Scottish and Southern Energy plc
share register on 25 February 2005.
8. Earnings per Share
Year to Half Year to Half year to Half Year to Half year to
31 March 30 Sept. 30 Sept. 30 Sept. 30 Sept.
2004 2004 2003 2004 2003
Earnings per share Earnings Earnings Earnings per Earnings per
Pence £m £m share share
pence pence
52.3 Basic 190.2 173.5 22.2 20.3
Adjusted for:
1.7 amortisation of 7.9 6.6 0.9 0.7
goodwill
1.6 deferred tax 8.2 5.2 1.0 0.6
finance income from
(0.3) net pension asset (6.2) (1.2) (0.7) (0.1)
55.3 200.1 184.1 23.4 21.5
(1.2) disposal of property - (10.2) - (1.2)
54.1 Adjusted 200.1 173.9 23.4 20.3
52.2 Diluted 190.2 173.5 22.2 20.2
The adjusted figures are before amortisation of goodwill, the charge for
deferred tax, finance income from net pension asset and the disposal of property
in 2003.
The weighted average number of shares used in each calculation is as follows:
Sept. 2004 Sept. 2003
Number of shares Number of shares
(millions) (millions)
For basic and adjusted earnings per 857.0 856.7
share
Effect of exercise of share options 1.6 1.6
For diluted earnings per share 858.6 858.3
9. Reconciliation of movement in equity shareholders' funds
Year to Half Year to Half Year to
31 March 2004 30 Sept. 2004 30 Sept. 2003
£m £m £m
447.9 Profit for the period 190.2 173.5
(322.9) Dividends (104.9) (96.9)
125.0 Retained profit for the financial period 85.3 76.6
153.8 Actuarial (loss)/gain recognised in respect of the pension (32.4) 139.2
fund
278.8 52.9 215.8
6.6 New share capital subscribed 5.5 2.0
(27.8) Transfer on acquisition of subsidiary - -
(11.2) Repurchase of ordinary share capital for cancellation - (2.3)
246.4 Net addition to shareholders' funds 58.4 215.5
1,482.0 Opening shareholders' funds 1,728.4 1,482.0
1,728.4 Closing shareholders' funds 1,786.8 1,697.5
10. Reconciliation of operating profit to net cash flow from operating
activities
Year to Half Year to Half Year to
31 March 2004 30 Sept. 2004 30 Sept. 2003
£m £m £m
629.1 Operating profit 283.0 240.1
(2.3) FRS 17 pension charge 0.4 4.3
183.1 Depreciation, amortisation and revaluation adjustments 99.3 87.1
14.8 Amortisation of goodwill and intangible asset 8.2 6.6
(20.4) Customer contributions and capital grants released (12.4) (8.0)
15.0 (Increase)/Decrease in stocks (7.5) (4.6)
(131.3) Decrease/(Increase) in debtors 185.8 166.7
- Recovery from Atlantic debt acquired 30.2 -
130.6 (Decrease)/Increase in creditors (6.3) (46.4)
(17.0) Decrease in provisions (6.6) (10.5)
(1.3) Profit on disposal of tangible fixed assets (0.4) (0.9)
800.3 Net cash inflow from operating activities 573.7 434.4
11. Reconciliation of net cash flow to movement in net debt
Year to Half Year to Half Year to
31 March 2004 30 Sept. 2004 30 Sept. 2003
£m £m £m
11.2 (Decrease)/increase in cash in the financial period (15.3) (4.8)
(224.1) Net cash (inflow) from (increase) in debt and lease financing (214.9) (16.8)
12.8 Net cash (inflow)/outflow from (decrease)/increase in liquid (8.4) (1.7)
resources
(200.1) Movement in net debt in the financial period (238.6) (23.3)
(1,217.0) Net debt at start of financial period (1,417.1) (1,217.0)
(1,417.1) Net debt at end of financial period (1,655.7) (1,240.3)
12. Analysis of net debt
1 April 2004 Cash Flow 30 Sept. 2004
£m £m £m
Cash at bank and in hand 6.5 (6.5) -
Overdrafts (1.8) (8.8) (10.6)
Other debt due within one year (64.3) (217.2) (281.5)
Net borrowings due within one year (59.6) (232.5) (292.1)
Net borrowings due after more than one year (1,379.3) 2.3 (1,377.0)
Current asset investments 21.8 (8.4) 13.4
Net debt (1,417.1) (238.6) (1,655.7)
13. Amortisation of goodwill
The goodwill amortisation charge for the period can be analysed across business
segments as follows:
Half Year to Half Year to
30 Sept. 2004 30 Sept. 2003
£m £m
Power Systems - -
Generation and Supply 6.5 5.5
Other Businesses 1.4 1.1
7.9 6.6
INDEPENDENT REVIEW REPORT BY KPMG AUDIT PLC TO SCOTTISH
AND SOUTHERN ENERGY PLC
Introduction
We have been engaged by the company to review the financial information set out
on pages 11 to 18 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.
This report is made solely to the company in accordance with the terms of our
engagement to assist the company in meeting the requirements of the Listing
Rules of the Financial Services Authority. Our review has been undertaken so
that we might state to the company those matters we are required to state to it
in this report and for no other purpose. To the fullest extent permitted by law,
we do not accept or assume responsibility to anyone other than the company for
our review work, for this report, or for the conclusions we have reached.
Directors' responsibilities
The interim report, including the financial information contained therein, is
the responsibility of, and has been approved by, the directors. The directors
are responsible for preparing the interim report in accordance with the Listing
Rules of the Financial Services Authority which 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 2004.
KPMG Audit Plc
Chartered Accountants
Edinburgh
4 November 2004
This information is provided by RNS
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