Preliminary Results 2009

RNS Number : 6137S

Scottish & Southern Energy PLC

21 May 2009

PRELIMINARY RESULTS FOR THE YEAR TO

31 MARCH 2009

	March 2009	March 2008	Change

Full-Year Dividend	66.0p	60.5p	+9.1%
Adjusted Profit Before Tax*	£1,253.7m	£1,229.2m	+2.0%
Adjusted Earnings Per Share*	108.0p	105.6p	+2.3%
Investment and Capital Expenditure	£1,279.8m	£810.3m	+57.9%

Power Station Availability (Gas)	76%	95%	- 19%
Power Station Availability (Coal)	89%	91%	-2%
Energy Supply Customer Numbers	9.05m	8.45m	+600,000

Customer Minutes Lost (SHEPD)	75	72	+3 mins
Customer Minutes Lost (SEPD)	66	67	- 1 min

Number of Employees	18,795	16,892	+1,903
Lost Time and Reportable Injury Rate	0.07	0.04	+0.03
Reportable Environmental Incidents	0	0	-

Lord Smith of Kelvin, Chairman of Scottish and Southern Energy, said:

'At a time of financial, economic and energy market turmoil, a company's ability to deliver profit and dividend growth has never been more important. These results mean that SSE has achieved 10 successive years of increasing profits and dividend.

'2008/09 was a tough year, dominated in the first half by very high wholesale prices for electricity and gas. Throughout, SSE managed its business in its usual no-frills way - delivering sector-leading service to energy supply and electricity distribution customers, dealing with the difficult operational issues that arise at power stations from time to time and undertaking a significant programme of investment in energy assets of crucial importance in the UK and Ireland.

'In the current economic environment, SSE's straightforward strategy - operating and investing in a balanced range of regulated and non-regulated energy businesses - has obvious benefits. It supports SSE's fundamental commitment to maintaining annual real dividend growth, with the next step being an increase of at least 4% more than inflation planned for 2009/10.'

* Unless otherwise stated, this preliminary results statement describes adjusted operating profit before exceptional items, the impact of IAS 32 and IAS 39, and after the removal of taxation and interest on profits from jointly controlled entities and associates. In addition, it describes adjusted profit before tax before exceptional items, the impact of IAS 32 and IAS 39 and after the removal of taxation on profits from jointly-controlled entities and associates. It also describes adjusted earnings and earnings per share before exceptional items, the impact of IAS 32 and IAS 39 and deferred tax.

KEY DEVELOPMENTS IN SSE FROM 1 APRIL 2008

GENERATION AND SUPPLY

Operating profit* up 17% to £832.0m

Generation

Gas-fired power station availability 76%; coal station availability 89%
FGD installation-related constraints on output of coal-fired stations ended in January 2009 (Fiddler's Ferry) and February 2009 (Ferrybridge)
Medway return to service expected shortly
Glendoe hydro electric scheme generating electricity from December 2008
£102.7m profit secured from disposal of 50% of Greater Gabbard equity
Clyde wind farm consented in July 2008 and entering construction phase
Acquisition of new CCGT site at Abernedd in Wales
Proposal for new pumped storage facility at Sloy
Planning application submitted for 540MW Viking onshore wind farm JV in Shetland

Supply

Net gain of 600,000 electricity and gas customers during 2008/09
Domestic prices reduced on 30 March 2009
Best-in-sector service according to uSwitch.com and JD Power Study
165,000 'better plan' energy efficiency reward programme customer accounts
Launch of M&S Energy, with 59,000 customer accounts
103,000 customer accounts benefiting from energyplus care 'social' tariff

NETWORKS

Energy Systems operating profit* up 7.3% to £584.2m

Electricity Networks

Power Systems operating profit* up 5.4% to £403.7m
Investment in electricity networks up 19% to £314.6m

Gas Networks

Share of SGN's adjusted operating profit* up 11.8% to £180.5m
Capex/repex investment in gas networks up 1.0% to £191.4m (SSE share only)

Telecoms Networks

Operating profit up 18.3% to £15.5m (excluding sites sold in August 2007)

ENERGY-RELATED SERVICES

Contracting, Connections and Metering

Operating profit* up 8.9% to £74.8m
Contracting order book at £101m at year-end (£99m in previous year)
Number of 'out-of-area' electricity networks up to 47
9,000 smart meters installed in Energy Demand Reduction Trial

Energy and Home Services

97,000 new telecoms and gas boiler customers, taking total to over 330,000

Gas Storage

Operating profit* down 16.1% to £42.7m
First gas imported and exported at Aldbrough

BALANCE SHEET AND FINANCIAL MANAGEMENT

Adjusted net debt up £1.16bn to £4.82bn at 31 March 2009
Almost £4bn of new funding and financing secured, including equity placing and new bank facilities

STRATEGIC OVERVIEW

Purpose and Strategy

SSE's core purpose is to provide the energy people need in a reliable and sustainable way. In line with this, its strategy has been and will continue to be the delivery of sustained real growth in the dividend payable to shareholders through the efficient operation of, and investment in, a balanced range of regulated and non-regulated energy-related businesses.

Within this strategic framework, SSE will continue to focus on enhancing and creating value for shareholders from its energy-related activities in the UK and Ireland and, over time, from the development of a European renewable energy business.

Financial Principles

Implementation of the strategy will continue to be founded on SSE's well-established financial principles. These principles are the:

effective management of core businesses;
maintenance of a strong balance sheet;
rigorous analysis to ensure investments are well-founded and, where appropriate, innovative;
deployment of a selective and disciplined approach to acquisitions;
use of purchase in the market of the company's own shares as the benchmark against which financial decisions are taken; and, most fundamentally of all,
delivery of sustained real dividend growth.

Delivery Against Purpose, Strategy and Principles

The Board is recommending a final dividend of 46.2p per share, making a full-year dividend of 66.0p, an increase of 9.1% on the previous year. The full-year dividend payment for 2008/09 is covered 1.57 times by SSE's adjusted profit after tax and is more than double the dividend per share paid seven years ago, in 2001/02.

Through investment and acquisition, the Regulated Asset Value (RAV) of SSE's energy networks businesses has doubled in six years, to £4.7bn, and the capacity of SSE's power stations has doubled in seven years, to 10.7GW. As a result of effective management of core businesses, the number of customer accounts to which SSE supplies energy has also doubled in seven years, to over nine million. This, allied to SSE's expansion in contracting, connections, metering, gas storage and other businesses makes SSE the biggest and broadest-based energy company in the UK.

Future Environment

In October 2008, the UK Industry Task Force on Peak Oil, of which SSE is a member, published a report, The Oil Crunch, which stated that a peak in cheap, easily available oil production is likely to be reached as early as 2013. It said that the key to all three threats facing the UK, Ireland and other countries - energy security, climate change and peak oil - is 'immediate and rapid acceleration in our use of non-fossil sources of energy, and reduction in the overall demand for energy'.

The requirement for such an immediate and rapid acceleration in the use of non-fossil sources of energy has been put on a statutory footing in the European Union, with the adoption of the Renewable Energy Directive, and in the UK, with the passing of the Climate Change Act. This means it is no longer sustainable - in any sense - for energy companies to develop their business on the basis of ever-increasing consumption; indeed, the reverse is the case.

Implications for SSE

SSE believes that the energy price volatility which the world experienced during 2008 was a foretaste of what is likely to happen as the supply of finite resources like oil and gas begins to struggle to keep pace with the demand. While the economic slowdown is likely to postpone for a time the full impact of this being felt in the UK and elsewhere, it will not prevent it.

For SSE, this means:

producing electricity in a more sustainable way with new developments in generation that make better use of the world's natural resources;
helping make electricity and gas more affordable by offering ways to enable and encourage customers to take control of, and be more efficient in, their use of energy;
ensuring the distribution of energy remains reliable, as sources and use of electricity and gas change, through investment in networks; and
providing more gas storage capacity for the UK to maintain dependable supplies of energy as the peak of easily available oil and gas production approaches.

Outlook for 2009/10 and Beyond

The economic outlook for 2009/10 remains uncertain and the timing, speed and extent of any recovery are all open to question. Against this background, SSE offers three key advantages.

First, its core purpose is to provide energy - something which people need, rather than want. Second, its strategy of maintaining a balanced range of regulated and non-regulated energy-related businesses reduces the risk associated with any particular business activity and provides a broad platform from which to maintain sustained real dividend growth. Third, that over-riding financial goal - sustained real dividend growth - is reasonable and straightforward.

Against this background, SSE's priorities during 2009/10 are to:

work in a safe and responsible manner;
achieve excellence in all aspects of customer service, including energy networks;
increase the number of customers in energy supply and home services;
ensure power stations maintain a high level of availability to generate electricity;
deliver efficient investment throughout its activities, especially in the major projects in generation, electricity networks and gas storage; and
sustain through the economic downturn its other businesses such as contracting, connections and telecoms.

FINANCIAL OVERVIEW

Financial Results for 2008/09

These results for the year to 31 March 2009 are reported under International Financial Reporting Standards, as adopted by the EU. SSE's focus has consistently been on profit before tax before exceptional items, the impact of International Accounting Standards IAS 32 and IAS 39, and after the removal of taxation on profits from jointly controlled entities and associates (adjusted profit before tax*). The table below reconciles SSE's reported profit before tax and its adjusted profit before tax*.

	Mar 09	Mar 08
	£m	£m

Reported Profit before Tax	53.3	1,083.8
Movement on derivatives (IAS 39)	1,263.2	164.1
Exceptional items	(102.7)	(65.2)
Tax on JVs and Associates	39.3	41.9
Interest on convertible debt	0.6	4.6

Adjusted Profit before Tax*	1,253.7	1,229.2

Adjusted current tax charge	(300.4)	(317.2)

Adjusted Profit after Tax*	953.3	912.0

Reported profit after tax	112.3	873.2

Number of shares for basic and adjusted EPS (million)	883.0	863.2

Adjusted EPS*	108.0	105.6
Basic EPS	12.7	101.1

Like all major energy suppliers, SSE has to enter into forward commodity contracts (principally coal, oil, gas, carbon and wholesale electricity) to ensure the future requirements of customers are met. Some of these contracts are deemed to be derivative financial instruments and so must be fair-valued under IAS 39. This means that the prevailing forward market price at 31 March 2009 is applied to these contracts. SSE sets out these fair-value adjustments separately, as re-measurements, because they are unrealised and non-cash.

The statutory results include charges to operating profit relating to these fair-value adjustments of £1,263.2m, which compares with £164.1m in the previous year. This mainly represents unrealised mark-to-market losses created by commodity contracts, most of which were entered into in the first half of the financial year and which were priced above the wholesale market value of commodities as at the financial year-end. The extent of the actual profit or loss arising over the life of these contracts - many of which were entered into to provide fixed price energy to industrial and commercial customers - will not be determined until they unwind; for over 60% of the total energy volume, this will be in 2009/10.

Adjusted Profit Before Tax* in 2008/09

Adjusted profit before tax* rose by 2.0%, from £1,229.2m to £1,253.7m. This is modest growth, consistent with the objective which SSE stated at its Annual General Meeting in July 2008.

In November 2008, SSE highlighted three particular issues that had influenced profitability in the first six months of the financial year - although none of these issues can be viewed in isolation and need to be considered in the context of the conditions in the wholesale energy markets prevailing at the time. In the second half of the financial year:

The progress made in installing flue gas desulphurisation (FGD) equipment at Fiddler's Ferry and Ferrybridge power stations meant SSE was able to operate all of the affected plant at the stations without any restrictions on either running hours or electricity output from January 2009 and February 2009 respectively.
The significant imbalance between the cost of energy procured and the cost of energy supplied in the first half of the year was addressed to the extent that SSE was able to announce a reduction in electricity and gas prices for domestic customers in February 2009.
The major unplanned outage at Medway power station was covered by business interruption insurance from the middle of November 2008, and is now close to an end..

Adjusted profit before tax* during 2008/09 also reflects the requirement to make a provision of £9.6m in respect of a reorganisation of SSE's Home Services businesses, including appliance retailing.

Exceptional Items

There was one exceptional item during 2008/09: the profit of £102.7m secured on the disposal in November 2008 of 50% of the equity in Greater Gabbard Offshore Winds Limited (SSE retained the other 50%).

Adjusted Profit Before Tax* for 2009/10

SSE's emphasis is on adjusted profit before tax* on a full-year, as opposed to half-year, basis and since it was formed in 1998 it has delivered 10 successive increases in profit before tax.

The general economic environment is likely to be challenging during 2009/10. Forecasts for wholesale electricity prices suggest they will not be at the high levels seen in previous years. In addition, there is clear evidence of a likely lowering in demand for energy. Nevertheless, SSE is aiming to deliver a moderate increase in profit before tax in 2009/10.

Actual adjusted profit before tax will, in practice and as always, be determined by issues such as: the availability of SSE's gas- and coal-fired power stations to generate electricity; the output of renewable energy from SSE's hydro electric stations and wind farms; the impact of the weather on energy production and consumption and the actual level of consumption; and the interaction between wholesale prices for energy and the prices for electricity and gas charged to customers.

Adjusted Earnings Per Share*

To monitor financial performance over the medium term, SSE continues to focus on adjusted earnings per share* because it has the straightforward virtue of defining the amount of profit after tax that has been earned for each ordinary share and so reflects a clear view of underlying financial performance. In 2008/09, SSE's adjusted earnings per share were 108.0p, compared with 105.6p in the previous year.

DIVIDEND

Final Dividend

SSE's first responsibility to shareholders is to deliver sustained real growth in the dividend The Board is recommending a final dividend of 46.2 pence per share, compared with 42.4p in the previous year, an increase of 9%.

This will make a full-year dividend of 66.0p, which is:

an increase of 9.1% compared with 2007/08;
a real-terms increase of 9.5%, based on the average rate of inflation in the UK between April 2008 and March 2009;
more than double the dividend paid in 2001/02, since when there has been compound annual growth of 10.7%; and
covered 1.57 times by SSE's adjusted profit after tax, compared with 1.73 times in 2007/08.

The first full-year dividend was paid by SSE in 1999, so the recommended full-year dividend increase of 9.1% represents the tenth successive above-inflation dividend increase since then. SSE is one of just 11 FTSE 100 companies to have delivered better-than-inflation dividend growth every year during this period, and ranks fifth amongst that group in terms of compound annual growth rate over that time.

Future Dividend

According to a study by Standard & Poor's Equity Research, dividend payments by FTSE 100 companies were reduced by 40% in 2008, and this has continued in 2009. Against this background, SSE remains acutely aware of its first responsibility to shareholders: to deliver sustained real growth in the dividend. Its target for 2009/10 as a whole is to grow the dividend by at least 4% more than inflation (based on the average rate of inflation in the UK between April 2009 and March 2010).

Since 2005, SSE's target for dividends after 2010 has been 'sustained real growth', and that remains the case. It will set out more defined dividend targets by its preliminary results statement in May 2010.

The first full-year dividend paid by SSE was 25.7 pence per share, in 1999. By 2007, the dividend was more than twice the original level. The next milestone will be to deliver a dividend that is three times SSE's first payment. That milestone is on the road to SSE's long-term target, which is to double the dividend again, from the 2007 level.

SSE's strategy is explicitly designed to deliver sustained real dividend growth and its operational and investment decisions are all taken to support its achievement.

INVESTMENT AND CAPITAL EXPENDITURE

Key Performance Indicators	Mar 09	Mar 08
	£m	£m

Thermal Generation investment	216.2	246.2
Renewable Generation investment	525.6	132.8
Power Systems investment	314.6	264.4
Gas Storage investment	55.4	40.9
Other	168.0	126.0
Total investment and capital expenditure	1,279.8	810.3
SSE share of SGN capital/replacement expenditure	191.4	189.5

Introduction

In March 2008, SSE set out plans to invest around £6.7 billion (excluding SGN) in the five years to March 2013 - one of the biggest capital investment programmes currently being undertaken in the UK by a FTSE 100 company.

The principal focus of the investment programme is renewable energy, the requirement for which is underpinned by statute at EU and Member State level. At the same time, significant investment is also taking place in thermal generation, electricity networks and in a number of other areas, such as gas storage. It will support the maintenance and development of assets which are of strategic significance in the context of energy policy in the UK, Ireland and elsewhere in the EU and will result in SSE benefiting from a significantly enhanced asset base and additional cash flows, which will support future dividend growth. All of this investment is, therefore, well-founded, in accordance with SSE's financial principles.

Investment in 2008/09

2008/09 represented the first year of SSE's five-year investment programme, and capital and investment expenditure (excluding SGN) totalled £1,279.8m, compared with £810.3m in the previous year. Separately, SSE's share of SGN's capital and replacement expenditure was £191.4m, compared with £189.5m in the previous year.

In the five years to 31 March 2009, SSE's capital and investment expenditure totalled more than £3.6bn, compared with just over £1.6bn in the five years to 31 March 2004. During the 2004-09 period, SSE has built up a significant amount of experience and capability in the delivery of major projects. Inevitably, such experience and capability reflects both the problems that have had to be dealt with and the successes that have been achieved.

During 2008/09, there was total investment of £741.8m in Generation, compared with £379.0m in the previous year.

The investment of £216.2m in thermal generation includes SSE's 50% share of the Marchwood development and the installation of FGD equipment at Fiddler's Ferry and Ferrybridge. The investment in renewable generation includes construction work at Glendoe, and work at a number of wind farm developments. The total includes 50% (£210.5m) of the investment at Greater Gabbard during 2008/09.

Capital expenditure in Power Systems was £314.6m, compared with £264.4m in the previous year, in line with the investment focus described under 'Electricity Network Investment' (see below). The largest project in the programme is the £16m installation of the two new 132kV underground cables between Bramley and Basingstoke, where the on-load commissioning has been successfully completed.

A total of £39.7m was invested in the new gas storage facility at Aldbrough during the period. SSE has so far invested £181.3m at Aldbrough.

Other investment and capital expenditure includes the acquisition in December 2008 of the customer service centre in Cumbernauld from Barclaycard and the development of SSE's new operations centre near Havant on the south coast of England, which will replace and upgrade a number of existing facilities and buildings in that area.

Just over £800m has been invested by SSE in assets which were still under construction at 31 March 2009 but which have yet to contribute earnings, including its share of Greater Gabbard offshore wind farm and Marchwood power station.

Future Investment Priorities in 2009/10 and Beyond

SSE expects its capital and investment expenditure will reach around £1.5bn during 2009/10 as significant projects such as the Clyde, Griffin and Greater Gabbard wind farms, the Aldbrough gas storage facility and, subject to Ministers' views, the Beauly-Denny replacement transmission line make progress.

In the two years to 31 March 2010, SSE will have undertaken capital and investment expenditure of around £2.8bn, which is just over two-fifths of the £6.7bn envisaged for the five years to March 2013. Significant parts of its investment programme are discretionary in nature; others, such as the Griffin wind farm, have been included in the programme following an acquisition because they offer the prospect of a higher return on investment than other projects, which have been displaced.

Inevitably, therefore, the £6.7bn programme is constantly monitored and kept under review, to make sure that SSE is taking advantage of the best opportunities to invest and to make sure that the best projects are prioritised - and all at the optimum time. The risks involved in any individual investment decision - market, technology and construction - are also very carefully considered. These decisions are taken in a way which is consistent with SSE's financial principles, targeting returns which are greater than the cost of capital, enhance earnings and contribute to dividend growth.

FINANCIAL MANAGEMENT AND BALANCE SHEET

Key Performance Indicators	Mar 09	Mar 08

Adjusted net debt (£bn)	4.822	3.660
Average debt maturity (years)	11.8	8.6
Underlying interest cover (excluding SGN)	6.5	11.7
Shares in issue	920.4	870.1

Treasury Policy

SSE's operations are generally financed by a combination of retained profits, bank borrowings, bond issuance and commercial paper. As a matter of policy, a minimum of 50% of SSE's debt is subject to fixed or inflation-linked rates of interest. Within this policy framework, SSE borrows as required on different interest bases, with derivatives and forward rate agreements being used to achieve the desired out-turn interest rate profile. At 31 March 2009, after taking account of interest rate swaps, 84.8% of SSE's borrowings were at fixed or inflation-linked rates.

Borrowings are made in both Sterling and Euro to reflect the underlying currency denomination of assets and cashflows within SSE. All other foreign currency borrowings are swapped back into Sterling.

The United Kingdom remains SSE's main area of operation, although business activities in overseas markets - most notably the Republic of Ireland - have grown during the year. Transactional foreign exchange risk arises in respect of procurement contracts, fuel and carbon purchasing, commodity hedging and energy trading operations, and long-term service agreements for plant. SSE's policy is to hedge all material transactional foreign exchange exposures through the use of forward currency purchases and/or derivative instruments. Indirect foreign exchange exposures created by SSE's gas purchasing are similarly hedged on an ongoing basis.

Translational foreign exchange risk arises in respect of overseas investments, and hedging in respect of such exposures is determined as appropriate to the circumstances on a case-by-case basis.

Net Debt and Cash Flow

On an unadjusted basis, SSE's net debt was £5.10bn at 31 March 2009. There were, however, outstanding liquid funds of £277.8m relating to power purchase agreements and wholesale energy transactions, the majority of which was reconciled and settled in April 2009. SSE believes, therefore, that it is more meaningful to adjust its net debt accordingly, giving a total for 31 March 2009 of £4.822bn. This adjusted total compares directly with £4.646bn at 30 September 2008 and £3.660bn at 31 March 2008.

Net debt on 31 March 2009 was inflated by around £500m by three issues:

the delay to the end of August 2008 in implementing increases in domestic prices has resulted in some additional revenue being collected after 31 March 2009;
the delay in Fiddler's Ferry and Ferrybridge power stations returning to unrestricted operations resulted in higher than normal stocks of coal and biomass being in place at the end of the financial year; and
the conversion of €1.092bn of Euro-denominated debt into Sterling for accounting purposes, after a period in which the value of the Euro appreciated significantly versus Sterling, increased the Sterling equivalent value of (but not actual) debt.

The adjusted net debt number of £4.822bn, would result in a Net Debt/EBITDA ratio of around 2.9 on 31 March 2009 (excluding SGN).

Borrowings and Facilities

The objective for SSE is to maintain a balance between continuity of funding and flexibility, with debt maturities staggered across a broad range of dates. Its average age of debt as at 31 March 2009 was 11.8 years, compared with 9.6 years as at 30 September 2008 and 8.6 years at 31 March 2008.

SSE's debt structure remains strong, with around £4.4bn of its net debt at 31 March 2009 in medium- to long-term borrowings in the form of issued bonds, European Investment Bank debt and long-term project finance and other loans. Within this, less than £150m of SSE's medium- to long-term borrowings will mature during 2009/10.

The balance of SSE's net debt has been financed with short-term commercial paper and bank debt. A total of 19.5% of SSE's long-, medium- and short-term borrowings will mature in 2009/10, compared with 47.1% during 2008/09 and 20.4% during 2007/08.

On 3 April 2009, SSE entered into a new £850m revolving credit facility, provided by a group of nine banks, to run until June 2012. This represented the refinancing and up-sizing of an existing £650m facility that had been due to mature in November 2009. SSE has secured bank approval for £150m of additional facilities with the same maturity, subject to agreement of documentation. In addition, it has available to it a further €150m in outstanding committed corporate bank facilities, as well as additional available project finance facilities in its Airtricity division.

Financing Investment

SSE's investment programme is supported by its carefully-maintained balance sheet, which remains one of the strongest in the global utility sector. Its current corporate credit ratings are 'A' (Standard & Poors) and 'A2' (Moody's).

In 2007/08 one utilities analyst team, writing about SSE, said that 'it is a feature of today's markets that investors view lack of suitable leverage as one of the worst 'crimes' that a management can commit'. Events in the financial markets during 2008/09 fully exposed the shortcomings of that view, and reinforced the paramount importance of avoiding inappropriately large levels of debt and of maintaining a strong financial profile.

SSE's balance sheet position means it is comparatively well-placed to raise finance and in a position to pay interest at lower rates than could otherwise be the case. This is demonstrated by its success in securing new funding and facilities of almost £4bn since July 2008, despite the very difficult market conditions experienced by all borrowers. This included:

a €600m five-year Euro bond with a coupon of 6.125%;
a £350m 30-year Sterling bond with a coupon of 6.25%;
a JPY28bn (equivalent to £208m) five-year loan with an effective interest rate of around 6%;
a £500m 20-year Sterling bond with a coupon of 8.375%;
a £700m five-year Sterling bond with a coupon of 5.75%;
a £100m 35-year index-linked loan with a coupon of 4.454%;
bank facilities of over £1.1bn; and
gross proceeds of £479m achieved from the placing of shares, representing approximately 4.8% of SSE's share capital.

The debt raised has an average maturity of around 12 years and an average coupon of around 6.5%.

Placing of Shares

On 7 January 2009, SSE conducted a book-built, non-pre-emptive placing of approximately 42 million new ordinary shares of 50 pence each in SSE. The shares were placed at a price of £11.40 each, which was within 1% of the average closing price of SSE shares in the preceding four weeks. Based on this price, the gross proceeds of the placing were £479m, representing approximately 4.8% of SSE's share capital. The shares carried the right to SSE's interim dividend paid on 27 March 2009 and carry the right to subsequent dividends.

The placing of shares was one of a series of steps taken by SSE which reflects its flexible and prudent approach to financing investment and enhanced its future options by providing additional sources of funding for appropriate investment and acquisition opportunities.

Net Finance Costs

The table below reconciles reported net finance costs to adjusted net finance costs, which SSE believes is a more meaningful measure. In line with this, SSE's adjusted net finance costs during 2008/09 were £287.7m, compared with £154.3m in the previous year. This is mainly due to the increased level of net debt, including the full-year impact of interest costs associated with the acquisition of Airtricity.

	Mar 09	Mar 08
	£m	£m

Reported net finance costs	134.3	32.8
add/(less)
Share of JCE*/Associate interest	128.2	127.6
Interest on convertible debt	(0.6)	(4.6)
Exceptional foreign exchange loss	-	(22.2)
Movement on derivatives	25.8	20.7
Adjusted net finance costs	287.7	154.3
Return on pension scheme assets	135.3	141.4
Interest on pension scheme liabilities	(130.1)	(117.4)
Notional interest arising on discounted provisions	(5.1)	(3.6)
Adjusted interest costs**	287.8	174.7

*Jointly Controlled Entities **Adjusted finance income and costs for interest cover calculation

The average interest rate for SSE, excluding JCE/Associate interest, during the year was 5.25%, compared with 5.23% for the previous year. Based on adjusted interest costs, underlying interest cover for 2008/09 was 6.5 times (excluding interest related to SGN), compared with 11.7 times in 2007/08; including interest related to SGN it was 5.2 times.

Within the adjusted net finance costs of £287.7m, the element relating to SGN's net finance costs was £86.5m (compared with £82.7m in the previous year), after netting loan stock interest payable to SSE. Its contribution to SSE's profit before tax* was, therefore, £94.0m, compared with £78.8m in the previous year.

Pensions

In line with the IAS 19 treatment of pension scheme assets, liabilities and costs, pension scheme liabilities of £273.5m are recognised in the balance sheet at 31 March 2009, gross of deferred tax. This represents an increase in net liabilities of £224.4m compared with the position at March 2008.

During 2008/09, employer cash contributions amounted to:

£14.5m for the Scottish Hydro Electric scheme; and
£56.6m for the Southern Electric scheme, including deficit repair contributions of £36.9m.

As part of the Distribution Price Control for 2005-2010, it was agreed that allowances for 76% of deficit repair contributions in respect of the Southern Electric scheme should be included in price controlled revenue.

At 31 March 2009, there was a net liability arising from IAS 39 of £1,423.6m, before tax, compared with a net liability of £117.3m, before tax, at 31 March 2008. The negative movement on derivatives under IAS 39 principally relates to the movement in commodity prices for coal, oil, gas, carbon and wholesale electricity.

TAX

To assist the understanding of SSE's tax position, the adjusted current tax charge is calculated as follows:

	Mar 09	Mar 08
	£m	£m

Reported tax (credit)/charge	(59.0)	210.6
add back:
Share of JCE/Associate tax	40.4	10.7
less:
Deferred tax	(39.5)	(31.5)
Tax on exceptional items and certain remeasurements	358.5	127.4

Adjusted current tax charge	300.4	317.2

The effective adjusted current tax rate, based on adjusted profit before tax*, was 24.0%, compared with 25.8% in the previous year, on the same basis. The impact of SSE's higher capital expenditure programme and the changes introduced in Budget 2007 have had, and will continue to have, a positive impact on the effective current tax rate. There was a reported tax credit of £59.0m for the year. This reflects the deferred tax associated with the derivatives mark-to-market position (IAS 39).

SSE's contribution to government revenues in the UK, including Corporation Tax, Employers' National Insurance Contributions and Business Rates totalled £484.9m during 2008/09, compared with £517.1m in the previous year, a reduction which reflects the effect of the changes introduced in Budget 2007. The total includes joint ventures and associates.

CONVERTIBLE BOND MATURITY AND AUTHORITY TO PURCHASE OWN SHARES

SSE has an outstanding 3.75% convertible bond which matures on 29 October 2009, which had an initial nominal value of £300m. To date, holders have exercised their option to exchange their bonds for Ordinary Shares in the company, now at £8.88 per share, in respect of bonds totalling £284.1m nominal value. New shares issued as a consequence of these conversions total 31.6 million. A nominal value of £15.9m, or 5.3% of the original bond issue, remains outstanding. The total number of shares in issue at 31 March 2009 was 920.4 million.

During 2008/09, SSE did not purchase any of its own shares for cancellation. The Directors will, however, seek renewal of their authority to purchase in the market the company's own shares at the Annual General Meeting on 23 July 2009 and this remains a benchmark against which financial decisions are taken.

CORPORATE RESPONSIBILITY

Safety

SSE aims to create value for shareholders by maintaining a strong emphasis on its six core values, which include safety and sustainability.

During 2008/09, the number of lost-time and reportable injuries within the company was 0.07 per 100,000 hours worked, compared with 0.04 in the previous year and 0.05 in 2006/07.

SSE is now also focusing on its Total Recordable Incident Rate (TRIR), which includes medical treatment, as well as lost-time and reportable injuries. TRIR is a more comprehensive measure and is comparable with worldwide standards, allowing a more effective benchmarking of performance to take place. In 2008/09, the TRIR for SSE was 0.16 per 100,000 hours worked.

The number of serious, or potentially serious, blameworthy road traffic accidents involving employees driving company vehicles was 0.38 per 100 vehicles, compared with 0.18 in the previous year.

In September 2008, an employee of Hochtief AG, the principal contractor, lost his life at the site of the new Glendoe hydro electric scheme. The circumstances surrounding the incident have since been the subject of detailed investigation. This loss of life remains a source of great sadness for everyone associated with the project.

Environment

SSE's target for any given year is zero environmental incidents which result in it being served with a formal statutory notice by either the Environment Agency or the Scottish Environment Protection Agency (SEPA). In 2008/09, SSE was served with no such notices as a result of an environmental incident. SEPA is continuing to investigate an incident in November 2008, where diesel escaped from a holding tank at SSE's Loch Carnan power station on Uist.

Teamwork

On 31 March 2009, SSE employed 18,795 people, an increase of 1,903 on the previous year. December 2008 saw the tenth anniversary of SSE's formation. Its successes since then reflect the ongoing professionalism and enthusiasm of employees, guided by SSE's 'Teamwork' value which states: 'We support and value our colleagues and enjoy working together in an open and honest way.'

The Good Companies Guide

In November 2008, The Co-operative Asset Management's second annual Good Companies Guide was published. The Guide is a fund management ranking of FTSE 350 companies' performance on environmental, social and governance (ESG) issues. SSE was the overall winner because it has 'shown vision and initiative in being an early mover in renewable energy and domestic energy efficiency'.

Corporate Responsibility Index

Business in the Community's Corporate Responsibility Index provides an authoritative benchmark for companies to evaluate their management practice in four key areas of corporate responsibility (community, environment, marketplace and workplace) and performance in a range of environmental and social impact areas material to their business. In the results of the Index for 2008, SSE retained its performance band of 'Platinum'.

BitC has introduced an additional band, 'Platinum Plus', to test, with additional scrutiny, the connectivity between companies' business strategy and responsible and sustainable business strategy. SSE was advised in May 2009 that it had secured this 'Platinum Plus' status, one of just seven companies to do so.

Risk Management

There are many interpretations of what 'risk management' should mean and should be. SSE believes the fundamental responsibility on the part of companies is to ensure that their overall business model and strategy, and their values and culture, are designed with risk firmly in mind.

SSE's strategy is to deliver sustained real growth in the dividend payable to shareholders through the efficient operation of, and investment in, a balanced range of regulated and non-regulated energy-related businesses. In practice, this means SSE derives income and profit from businesses which are subject to economic regulation and businesses which are not. At the same time, those businesses have a common core: energy.

The practical effect of this is to limit both the extent of any single risk and the value associated with it, and the need to limit the value at risk is at the heart of SSE's decision-making processes. SSE is the only electricity and gas company listed on the London Stock Exchange with a business model which is capable of offering such balance and such a framework for limiting the value at risk.

The strategy and business model, and therefore risk management, are supported by the 'SSE SET' of core values - Safety, Service, Efficiency, Sustainability, Excellence and Teamwork - and by the maintenance of an organisational culture in which the individual, status and seniority take second place to teamwork, knowledge and experience.

Within this framework, SSE has in place a comprehensive approach for managing risks and maintaining internal controls, such that its strategy is not undermined by failures or misjudgements. These will be set out in full in SSE's Annual Report 2009.

Investor Timetable

Annual Report 2009 on website	4 June 2009
AGM (Perth)	23 July 2009
Ex-dividend date	19 August 2009
Record date	21 August 2009
Payment date	25 September 2009
Interim results	11 November 2009

Enquiries to:

Scottish and Southern Energy plc
Alan Young - Director of Corporate Affairs	+ 44 (0)845 0760 530
Sally Fairbairn - Investor Relations Manager	+ 44 (0)845 0760 530

Financial Dynamics
Andrew Dowler	+ 44 (0)20 7831 3113

There will be an analysts' presentation starting at 09:00BST 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 then click on Investor Centre.

Telephone conference call:
	UK Dial in:	0845 146 2004
	International dial in:	+ 44 (0) 1452 569 393

GENERATION AND SUPPLY

Introduction

SSE owns around 10,700MW of capacity for generating electricity, making it the second largest generator across the UK and Ireland. The large majority (over 10,300MW) of this capacity is in Great Britain, which currently has almost 80,000MW in total. The remainder (375MW) is in Northern Ireland and the Republic of Ireland, where there is an all-island Single Electricity Market which is separate from the market in Great Britain.

SSE's total capacity includes its share of joint ventures and associates and comprises around:

4,500MW of gas- and oil-fired capacity;
4,000MW of coal-fired capacity (with biomass 'co-firing' capability); and
2,200MW of renewable (hydro, wind and dedicated biomass) capacity.

This gives SSE diversity in fuels for generating electricity and avoids dependency on a single technology. As a result, SSE has significant optionality in the management of its power stations. It is this diversity and the related optionality which enable SSE to manage the risks associated with primary fuel procurement during periods of volatile wholesale energy prices.

As at 31 March 2009, SSE supplied energy to 9.05 million customer accounts, making it the second largest supplier within Great Britain's competitive electricity and gas supply market, which has around 51 million domestic and business accounts in total. It also supplied energy to 50,000 customers in Ireland. Its responsibility as supplier to customers is to procure the electricity and gas they need, arrange for it to be distributed to them through the relevant networks and provide the associated services such as metering and billing.

Wholesale gas and wholesale electricity are transacted like any other commodity in a competitive market. SSE purchases the gas and some of the electricity it needs to supply customers via bilateral contracts of varying lengths and through trading in the wholesale markets. It also buys gas, coal and oil to use in the production of electricity from its power stations.

Following the extension of power purchase agreements with Seabank Power Ltd, in which SSE has a 50% stake, which took place in 2007/08, none of the long-term agreements under which SSE purchases electricity is due to expire during the 2009/10 financial year. Power purchase agreements with Barking Power (in which SSE has a 30.4% stake) and Derwent Cogeneration Ltd (in which SSE has a 49.5% stake) are, however, due to expire in September 2010. Both agreements contain extension options. The current contract, under which British Energy supplied SSE with 4.4TWh (terra-watt hours) of electricity during 2008/09 and will supply 5TWh during 2009/10 (arranged as part of SSE's acquisition of the SWALEC energy supply business in 2000) ends in March 2011.

SSE's Trading and Risk Management team is responsible for its participation in wholesale markets for electricity and gas, as well as markets for coal, oil and carbon dioxide emissions allowances. Through analysis of generation plant availability, customer demand and its contractual position SSE can assess, and therefore manage, its exposure to market prices.

In summary, SSE assesses Generation and Supply as a single value chain within an integrated business. This means its power stations and fuel supply contracts are used to support performance in electricity supply, mainly through deploying flexibility and optionality to respond to customer demand and market conditions. As a result, SSE seeks to maintain a well-balanced portfolio of assets, contracts and customers, within which there is effective risk management through diversity in earnings opportunities, and which functions and is managed as an integrated whole. This whole is, therefore, greater than the sum of its parts - not least because earnings should be more resilient to a wide range of commodity price outcomes.

Generation and Supply Performance Overview

Operating profit* in Generation and Supply was £832.0m, compared with £711.1m in the previous year, contributing 54% of SSE's total operating profit* in 2008/09. (SSE reports the underlying financial performance of Generation and Supply excluding the impact of IAS 39 remeasurements which are unreaslised as it continues to believe that this does not represent underlying business performance.) The increase in operating profit was supported by the value of the higher output of renewable energy delivered by SSE, following the acquisition of Airtricity in February 2008 and the completion of new renewable energy developments.

Total revenue for Generation and Supply was £24.4bn, which accounted for 93% of SSE's total revenue in 2008/09, of which £8.5bn was in relation to sales of electricity and gas to industrial, commercial and domestic customers.

Electricity Generated and Supplied

During 2008/09, SSE generated 41.2TWh of electricity, including power stations in which it has a part-ownership or contractual interest, compared with 47.9TWh in the previous year (including all of Airtricity's output). SSE also purchased 5.9TWh of electricity through long-term contracts with other generators. In the year, it supplied 29.7TWh of electricity to its domestic and small business customers and 33.6TWh was supplied under contract to industrial and commercial customers. Any net balances were traded in the wholesale electricity market.

It is likely that customers' demand for electricity - and gas - in the UK will be lower in 2009/10 than it was in the previous year as a result of both the impact of investment in energy efficiency and the downturn in the economy. In this context, SSE's long-standing approach of actively maintaining balance in its portfolio of assets, contracts and customers is of particular relevance and means it is not over-exposed to variations in demand for energy.

GENERATION

Key Performance Indicators	Mar 09	Mar 08

Total electricity generation capacity (GW)	10.7	10.5
Gas power station availability (%)	76	95
Total output from gas-fired power stations (TWh)*	15.3	18.2
Coal power station availability (%)	89	91
Total output from coal-fired power stations (TWh)*	7.8	12.0
Co-firing biomass output qualifying for ROCs (GWh)	267	368
Total output from hydro electric schemes (GWh)	3,316	3,518
ROC-qualifying output from hydro schemes (GWh)	1,656	1,702
Wind farm availability (%)	96	96
Total UK and RoI output from wind farms (GWh)	1,718	499**
UK ROC-qualifying output from wind farms (GWh)	953	389**
Output from RoI wind farms (GWh)	765	110**
ROC-qualifying output from dedicated biomass (GWh)	148	33**
Wholly-owned *Includes post-acquisition by SSE output only

Context

In June 2008, the consultation document setting out the UK's renewable energy strategy stated that energy policy in the UK faces two very serious challenges: tackling climate change by reducing emissions of carbon dioxide and ensuring the country's energy supply remains secure.

To address these challenges, the UK and Irish governments (along with all other Member States) are required to contribute towards the achievement of a binding target, that 20% of the EU's all-energy consumption must come from renewable sources by 2020, which was given final approval in April 2009. For the UK, the national target is 15%; for the Republic of Ireland, it is 16%. In practice, this means increasing, to over 30%, the proportion of electricity to come from such sources in the UK and an increase to 40% is required in the Republic of Ireland.

In addition, the Climate Change Act 2008, passed by the UK Parliament, includes not only a long-term target for emissions reductions but also a legally binding trajectory towards this target. The Act requires the UK government to set carbon budgets, fixing binding limits on greenhouse gas emissions over five-year periods. Alongside its Budget 2009, the UK government confirmed it would aim to cut greenhouse gas emissions by 34% by 2020, compared with 1990 levels. It was responding to the findings of the first report by the independent Climate Change Committee, which set out what the UK's carbon emissions reduction targets for the period to 2020 should be.

These 2020 targets are, in fact, only interim milestones in a long-term transition now under way, from a UK energy supply with fossil fuels at its centre to one based largely on the use of renewable sources of energy and other low carbon technologies.

In parallel with the demand for investment in renewable energy, the UK will need to provide replacement capacity for conventional generation plant which is expected to retire on a shorter timescale - the next decade. As the UK Secretary of State for Energy and Climate Change said in December 2008: 'We must keep the lights on in a world where we are net importers of energy. By 2020 a third of our power plants will be closed due to age or rising environmental standards.'

Fundamentally, the need for the UK to maintain a reasonable margin between electricity generation capacity and electricity demand will reinforce the value of existing and available power-producing plant over the long term. In addition, a balance of fuels used within the generation portfolio will remain critical in providing security of supply, through allowing diversity of primary energy sources, and will support the maximum possible deployment of renewables through proper integration of both energy and system services provision. All of this is likely to require the largest investment programme in the generation sector since privatisation, with renewable energy at its heart.

Over the next three years, SSE believes that a combination of lower demand for electricity, sufficient generating plant remaining open and new generation capacity coming on-stream (particularly new combined cycle gas turbine (CCGT) plant and plant for generating from renewable sources) should ensure that the production of electricity will be able to meet the demand in all likely circumstances.

Beyond that, the position is less predictable, with uncertainties affecting both the likely total of electricity generating capacity and the likely level of demand from customers. In addition, the growth in capacity for generating electricity from renewable sources will have an impact on how gas- and coal-fired capacity operates on a day-to-day basis. In any event, the value of established and continuing capacity is likely to be reinforced.

It is in this context that Ofgem has launched 'Project Discovery', a review of the medium-term outlook for energy markets in Great Britain, as the requirement to retire power generating plant to conform with environmental and other requirements becomes closer. SSE is fully involved in this review with Ofgem.

Generation Objectives

In this context, SSE's key objectives in Generation remain relevant and appropriate. They are to:

comply fully with all safety standards and environmental requirements;
maintain a diverse portfolio of power stations, with the flexibility to respond to customer demand and market conditions;
ensure those power stations are available to generate electricity;
operate power stations efficiently to achieve the optimum conversion of primary fuel into electricity; and
develop and pursue a range of options for adding to its portfolio of power stations, and thus support security of supply.

In achieving these objectives, SSE's target is to reduce by 50% the carbon dioxide intensity of electricity produced at power stations in which it has an ownership or contractual interest, over the period from 2005/06, the first full year after it acquired coal-fired power stations, to 2020.

Gas-fired Generation - Operations

Good performance in Generation and Supply is dependent, first and foremost, on plant at power stations being available to generate electricity as and when required. SSE owns 4,500MW of gas- and oil-fired electricity generation capacity, including its share of joint ventures.

During 2008/09, its principal wholly-owned gas-fired power stations (Fife, Keadby, Medway and Peterhead) achieved 76% of their maximum availability to generate electricity, excluding planned outages, compared with 95% availability in the previous year. This contributed significantly to the reduction in the amount of electricity generated by SSE at gas-fired power stations in which it has an ownership or contractual interest, which was 28TWh in 2008/09 (including 15.3TWh from wholly-owned stations), compared with 31TWh in the previous year (including 18.2TWh from wholly-owned stations).

The plant at Peterhead, Keadby and Fife performed very well during 2008/09, achieving 97.5% availability. The reduction in output is, therefore, attributable to significant difficulties at Medway, where availability was affected by technical issues leading to unplanned outages and also emergent issues arising during planned inspections, affecting one of the gas turbines and the steam turbine.

Resolving these difficulties has proved to be a complex and time-consuming task, involving contractors, station employees, insurance providers and SSE's recently-established Engineering Centre. With its asset management capability adding a new dimension to SSE's engineering rigour, the Centre is playing a key role in minimising the delay in Medway's return to service, as is SSE's policy of holding important power plant components. The return to service is expected shortly.

SSE's experience at Medway was not an isolated one. Across the electricity generation sector in the UK a number of gas-fired power stations which are now into their second decade of operation, including Seabank, in which SSE has a 50% stake, have had unexpected and prolonged outages. While the underlying quality of SSE's power generation assets is not in doubt, its Engineering Centre is reviewing plant design and plant operation within the BETTA (British Electricity Trading and Transmission Arrangements) framework. This review has been supported by external engineering advisers and has indicated that the large majority of prolonged unplanned outages relate to a specific technical issue regarding equipment provided by one supplier, rather than any general underlying problems with plant.

The outcome of this review will inform SSE's long-term asset management and investment planning policies, as will the impact of increasing electricity generation from renewable sources, which means gas-fired and coal-fired power stations will have to be increasingly flexible and run at lower load factors than has historically been the case.

Gas-fired Generation - Investment

Work on the commissioning of Marchwood Power Ltd's new 840MW CCGT plant in Southampton is now well under way. Following the first firing of the gas turbines in March 2009, power from the station is now being exported to the electricity network. Marchwood Power Ltd is a 50:50 joint venture between SSE and ESB International, in which £159m has so far been invested by SSE. All of the station's output is contracted to SSE. It remains on course to be in commercial operation in time for the winter of 2009/10.

With a net thermal efficiency in excess of 58%, Marchwood will be one of the most efficient gas-fired power stations in the UK. Moreover, the plant was procured before the significant increase in costs experienced in the electricity generation sector in 2007 and 2008, making it a particularly well-timed and well-founded investment.

Although it would be unwise for SSE as a company, or the UK as a country, to run the risk of becoming over-dependent on a single fuel, CCGT technology is likely to remain the benchmark technology in generation for some years to come, making a growing contribution to meeting the UK's electricity requirements. This is because of its high thermal efficiency, relatively low costs and short construction time.

In May 2009, SSE entered into an agreement to acquire Abernedd Power Company Limited from BP Alternative Energy. Abernedd has applied for consent to construct and operate a new CCGT power station, with a capacity of over 800MW, on a brownfield site in Baglan Bay in south Wales, where there is already in place electricity transmission, gas and water infrastructure for the first phase of the power station. The total cash consideration will be determined by the progress of the development.

In line with that, and subject to timely planning consent being secured, SSE expects to construct the new power station in two phases to maximise plant flexibility. In the first phase, a unit with capacity of over 400MW will be developed, with a view to becoming operational around 2013; a second unit, with a similar capacity, will become operational around 2016. The two-unit approach gives SSE greater flexibility in the timing and nature of the development and a final investment decision on the first phase will be taken by the end of this financial year.

In addition, SSE has identified a series of options for other CCGT plant. These include the potential development of new capacity at Keadby power station and in April 2009 it secured an agreement to connect a new 850MW power plant to the electricity transmission network from 2016. Barking Power Ltd, in which SSE has a 30.4% stake, has secured consent to develop a new 470MW CCGT, which would effectively add around 140MW to the portfolio of generation assets owned by SSE.

Coal and Biomass Generation - Operations

During 2008/09, SSE generated 7.8TWh of electricity at its coal-fired power stations at Fiddler's Ferry and Ferrybridge, compared with 12.0TWh in the previous year. The stations achieved 89% of their maximum availability to generate electricity, excluding planned outages, which was a reduction compared with the previous year due to additional work emerging during asset upgrades as a result of materials and supplier issues. Their output during the year was significantly affected by the need to operate within the constraints imposed by Article 5(1) of the Large Combustion Plant Directive (LCPD) for a longer period than expected (see below).

The stations 'co-fire' fuels from renewable sources (biomass) in order to displace fossil fuels. During the year, their output qualifying for ROCs (Renewable Obligation Certificates - see below) was 267GWh, compared with 368GWh in the same period in the previous year (included within the above total for the stations as a whole).

From 1 April 2009, electricity output resulting from co-firing receives 0.5 ROCs per MWh (compared with 1.0 ROC per MWh previously) and electricity suppliers can only meet up to 10% of their Renewables Obligation from this technology. Nevertheless, co-firing biomass is an established means of reducing carbon dioxide emissions and the revised ROC arrangements provide an adequate framework to sustain it in the future.

Coal and Biomass Generation - Investment

In November 2005, SSE opted in to the LCPD all of the capacity at Fiddler's Ferry and half of the capacity at Ferrybridge (3,000MW in total). As a result, the operation of that capacity must comply with the Emission Limit Value (ELV) for sulphur dioxide which came into effect on 1 January 2008. By making them compliant with the ELV, the stations' contribution to the security of the UK's electricity supplies is being extended and SSE will continue to have the country's most diverse electricity generation portfolio. Plant which is not opted-in, such as the other 1,000MW of capacity at Ferrybridge, operates under restrictions on its ability to generate electricity and must close in 2015.

Opted-in plant could initially comply with the Directive by operating under the requirements of its Article 5(1), which limits operation to 2,000 hours per year, in advance of completing the hot commissioning of flue gas desulphurisation (FGD) equipment. Having been scheduled to finish by the end of July 2008, SSE's derogations under Article 5(1) eventually ended in January 2009 (Fiddler's Ferry) and February 2009 (Ferrybridge).

SSE's original decision to opt the plant in to the LCPD was unavoidably late, given it only acquired the power stations in July 2004 and given the uncertainty around details of public policy which then applied. This meant the original timetable for FGD installation was particularly challenging. Moreover, 'retro-fitting' FGD equipment to well-established power stations is necessarily complex, with significant technical challenges which don't arise in respect of 'new build' projects. SSE's capital investment in FGD equipment has totalled £240m.

The installation of FGD equipment means the power stations are able to use higher-sulphur coal mined in the UK. As a result, SSE has entered into an agreement with UK Coal, under which it will obtain 3.5 million tonnes of deep- and surface-mined coal from Great Britain, including Kellingley Colliery in West Yorkshire, to provide fuel for Ferrybridge power station between late 2009 and 2015. This should be enough to meet around 15% of the station's requirements during that period. In addition, SSE has agreed to advance a secured loan to UK Coal, on which it will receive interest, to be repaid by 2014.

The LCPD also requires reduced emissions of nitrogen oxides, and SSE has already invested £31m to install SOFA (Separated Overfire Air) and BOFA (Boosted Overfire Air) equipment at the stations. From 2016 limits on those emissions from power stations will be tightened significantly. As a result, SSE is undertaking a front-end engineering design (FEED) study, which it expects to complete during 2009/10, into options for installing Selective Catalytic Reduction (SCR) technology at Fiddler's Ferry and is also considering the option for Ferrybridge. The alternative to fitting SCR is to operate the station within limits required under a derogation from the LCPD's requirements. SSE's analysis of the issues around installing SCR will also take into consideration the progress of the draft EU Industrial Emissions Directive which, if implemented, could replace the LCPD.

As the UK Secretary of State for Business said in September 2008, coal is a critically important fuel for the UK, because of its flexibility, its availability and because it reduces reliance on imported gas. SSE is continuing to examine a range of options for development at Ferrybridge, following the expected closure in 2015 of that plant (1,000MW) which is not opted in to the LCPD. This will leave the station with significant assets in terms of land, a connection to the electricity grid, cooling water and a railhead. A number of options to utilise these assets, featuring a range of fuels and technologies, are being assessed. They include the use of coal-based Integrated Gasification Combined Cycle technology or Advanced Supercritical Boiler technology to replace existing coal-fired capacity and deliver a significant reduction in the carbon dioxide emissions per kilowatt-hour of electricity produced.

In April 2009, the UK government set out proposals for the basis on which coal-fired power stations will be permitted in the future, in advance of a full consultation planned for this summer. These include: no new coal-fired power stations without Carbon Capture and Storage (CCS) demonstration; and full-scale 'retrofit' of CCS within five years of the technology being independently judged as technically and commercially proven. Against this emerging public policy background, a decision on the main use of the part of the Ferrybridge site which has been opted out of the LCPD is unlikely to be taken until 2010 at the earliest.

During 2008/09 SSE supported the study undertaken by the Scottish Centre for Carbon Storage, which found that industrial carbon dioxide produced in the UK during the next 200 years could be stored securely beneath the North Sea. The study was the most comprehensive CO2 source-to-store analysis ever performed in the UK. SSE is also sponsoring the OxyCoal 2 project in Renfrew, Scotland. This project seeks to demonstrate the benefits of oxyfuel technology for carbon capture on coal-fired power plants.

The number and variety of issues that could affect electricity generation from coal-fired (and, indeed, gas-fired) plant reinforces SSE's commitment to developing a number of options to utilise the assets at the Ferrybridge site.

Coal and Biomass Generation - Sustainability

The development by Lafarge Plasterboard Ltd of a plasterboard factory at Ferrybridge has been completed. The plant is operational and using the gypsum produced on site as a result of FGD in the production of plasterboard.

The development by RockTron (Widnes) Ltd of an ash separation plant at Fiddler's Ferry is now complete and moving into operation. It removes and processes all fresh ash produced by the power station, and much of that currently stored in lagoons at the site, turning it into constituent parts which will become marketable mineral products, with the largest volume being initially used as cement substitutes.

SSE acquired 17.5% of the equity in RockTron (Widnes) Ltd, a subsidiary of RockTron Ltd, in September 2008, enabling it to secure a share of the income from the ash separation plant, in addition to the benefits which will result from avoiding the environmental liabilities associated with ash production and storage.

EU Emissions Trading Scheme

Phase II of the EU Emissions Trading Scheme (EU ETS) began on 1 January 2008. Across its electricity generation portfolio (taking account of contractual shares), SSE now has an allocation of 16.8 million tonnes of carbon dioxide emissions allowances per annum. Its emissions allowances requirement for 2008/09, beyond those allocated under EU ETS, was 2.5 million tonnes. This compares with 6.7 million tonnes in the previous year. In addition, Marchwood Power Ltd has an allocation of five million tonnes reserved to it from when it is commissioned to the end of Phase II. During 2008/09, the price of allowances ranged from around €8 to €28 per tonne; the market itself remains relatively new and has yet to mature fully.

At the same time, the EU ETS represents an additional and growing cost for generators, who are having to continue to produce electricity, but with increasing constraints on emissions of carbon dioxide. Moreover, it was confirmed in December 2008 that, from 2013, all of the carbon dioxide emissions allowances for electricity producers will be auctioned. On this basis, it is erroneous to characterise allocations of carbon dioxide emissions allowances as a 'windfall'. In fact, they represent a prudent and practical means of ensuring the EU ETS is successfully phased in and established for the long term, without posing any risk to electricity production - and thus to meeting customers' energy requirements - through the sudden imposition of a major new burden on generators.

Emissions of Carbon Dioxide

In 2008/09, emissions of carbon dioxide from power stations in which SSE has an ownership or contractual interest totalled 19.3 million tonnes, compared with 22.7 million tonnes in the previous year. The scale of this fall clearly reflects the unusually low output of electricity from SSE's coal-fired power stations resulting from Article 5(1) constraints during the installation of FGD equipment.

Assuming it displaced electricity produced from coal-fired power stations, the output of SSE's wind farms and conventional hydro electric schemes (see below) saved around 4.5 million tonnes of carbon dioxide in 2008/09.

Emissions of carbon dioxide are believed to contribute around 70% of the potential global warming of anthropogenic emissions of greenhouse gases. SSE's target is to reduce the amount of carbon dioxide per kilowatt-hour of electricity generated at plant in which it has an ownership or contractual interest by 50%, between 2006, the first full year after it acquired coal-fired power stations, when it was around 600g/kWh, and 2020. On this basis, its carbon intensity in 2008/09 was 491g/kWh.

The decisions SSE takes and the investments it makes are influenced by this target. For example, since 2005/06, it has invested over £65m in carbon dioxide efficiency improvements, or to facilitate the burning of carbon neutral fuels such as biomass and tall oil, at its coal-fired power stations. More fundamentally, SSE's extensive programme of investment in energy from renewable sources, including the decision in May 2008 to proceed with the construction of the Greater Gabbard offshore wind farm, demonstrates its financial commitment to a lower carbon future.

During 2008, SSE participated in the Carbon Disclosure Project (CDP), which states it is the world's largest investor coalition. It said: 'The responses from companies to CDP's annual requests for corporate data provide investors with vital information regarding the current and prospective impact of climate change on their portfolios.' The Carbon Disclosure Leadership Index (CDLI) includes companies that show a 'strong organisational commitment to climate change strategy - and because of this commitment, they can be declared as leaders'. CDP said 90% of FT-SE 100 companies answered its request for information. In 2008 SSE maintained its position in the CDLI for the second consecutive year.

Renewable Energy - Overview

Tackling climate change and securing future supplies remain the two goals of energy policy in the UK, Ireland and the EU. Against this background, the EU Renewable Energy Directive imposes legally-binding targets on EU Member States, specifying the proportion of all energy consumption that must be met by renewable energy sources by 2020. The national target for the UK is 15% (compared with under 2% in 2007) and for the Republic of Ireland it is 16%. In practice, this is likely to mean that over one third of the countries' electricity requirements will have to be met from renewable sources.

In its response to the UK government's 2008 consultation on its strategy for achieving the target, SSE said: 'The scale of the challenge and the timetable for delivery demand early and sustained action to address critical areas. This includes resolving rapidly the current barriers, such as planning, grid access and infrastructure provision.' In other words, the UK and other EU countries have to demonstrate sustained commitment and consistent action to translate the very ambitious goals for 2020 into reality. The UK's goals for 2020 also include a 34% reduction in greenhouse gas emissions (compared with the 1990 baseline), a target which followed the Climate Change Act 2008.

In November 2008, the UK government announced proposals to extend the Renewables Obligation (RO) by at least 10 years, from 2027 to 2037. The RO requires licensed electricity suppliers to source a specific and annually increasing percentage of the electricity they supply from renewable sources and provides the necessary financial incentive, through a system of trade-able Renewable Obligation Certificates (ROCs) which supplement the market price of the electricity, to encourage deployment of renewable energy in the UK. Its extension, therefore, represents a positive long-term signal in favour of future investment.

The Energy Act 2008 enabled the introduction of 'banding' of the RO to allow differentiated levels of support for different renewable energy technologies. From 1 April 2009, electricity from qualifying hydro electric schemes and onshore wind farms continues to receive one ROC per MWh; from offshore wind farms it is now 1.5 ROCs per MWh.

Later that month, the UK government announced a banding review with the intention of increasing ROCs from 1.5 per MWh to 2.0 for offshore wind projects meeting specified completion criteria if they place new orders in 2009-10, and then 1.75 in 2010-11.

SSE has sought, and received, from the UK government clear assurances that any changes to banding, if implemented after the forthcoming review, will not have a negative economic impact on any existing renewable energy developments. It is also engaged in discussions with the UK government as to how any change to banding for offshore wind would strengthen the investment climate for that particular technology. It is particularly concerned to ensure that previous investment decisions in offshore wind are not unfairly treated compared with those projects whose construction was delayed.

In the Republic of Ireland, the Renewable Energy Feed In Tariff (REFIT) scheme is used to support renewable energy by providing a guaranteed price for output and a 15% rebate (subject to a cap) on suppliers' purchase of REFIT energy.

SSE has just over 2,200MW of operating renewable energy capacity in the UK and Ireland, comprising hydro electric schemes (including pumped storage), wind farms and a dedicated biomass facility at Slough, an increase of almost 200MW during the year. Of this, almost 900MW qualifies for ROCs (excluding biomass). Looking ahead, it has set itself the target of owning and operating 4,000MW of renewable energy capacity in the UK and Ireland by the end of 2013.

The achievement of this milestone will mean SSE is making a significant contribution to the achievement of the 2020 targets in the UK and Ireland, and it is making comprehensive plans to build on its 2008-13 programme of investment in renewable energy in the subsequent years.

In addition to its clear environmental benefits, renewable energy also significantly reduces SSE's exposure to volatile prices for fossil fuels because the fuel used to generate electricity is indigenous and free. This is in marked contrast to fossil fuels, sources of which are in decline but which will be in huge demand from economies around a world, in many of which the population is growing fast.

In addition to its focus on the UK and Ireland, SSE is undertaking in the same period a programme of development in renewable energy in new markets in continental Europe (principally Portugal, Scandinavia, Italy, Germany and the Netherlands).

Hydro Generation - Operations

SSE owns and operates just over 1,450MW of capacity in conventional hydro electric schemes, including the new Glendoe hydro electric scheme which became operational in December 2008, and 300MW of pumped storage.

Total output from the conventional hydro electric schemes was 3,316GWh during 2008/09, including 76GWh from Glendoe, compared with 3,518GWh during the previous year. As at 31 March 2009, the amount of water held in SSE's reservoirs which could be used to generate electricity was 73% of the maximum, the same as in the previous year.

In order to encourage investment in maintaining for the long-term smaller schemes, the output of refurbished hydro electric stations with capacity of up to 20MW qualifies for ROCs. SSE has just over 400MW of capacity in this category (including the new plant commissioned in the last few years at Culleig, Kingairloch and Fasnakyle). In addition, the output from all new hydro electric schemes, such as Glendoe, also qualifies for ROCs. Of the total hydro output in 2008/09, just over 1,650GWh qualified for ROCs, compared with just over 1,700GWh in the previous year. Assuming average 'run off' of water into SSE's reservoirs during the year, the ROC-qualifying output from hydro generation is expected to be around 1,700GWh in 2009/10.

Hydro Generation - Investment

The construction of SSE's new 100MW hydro electric station, at Glendoe near Loch Ness, was completed two months earlier than scheduled and at final capital cost of just over £160m. Glendoe is now SSE's second largest conventional hydro electric station, and the first large-scale station to be built in Scotland for over 50 years. Operationally, its principal feature is that it is able to start generating electricity at full capacity in just 30 seconds. In a year of average rainfall, its output should be around 180GWh of electricity. During the final three months of 2008/09, its total output was 76GWh.

Since the Renewables Obligation was introduced in April 2002, SSE has invested over £300m in refurbishing and developing hydro electric schemes in Scotland, including Glendoe.

The vast majority of SSE's hydro electric stations were built in the 1950s and early 1960s and are the subject of a rolling programme of investment to prolong their working life and improve their operational efficiency. In 2008/09, it totalled just over £20m.

In September 2008, the Scottish Government published a study carried out for the Forum for Renewable Energy Development in Scotland, which argued that there are still over 600MW of 'financially viable' hydro electric schemes to exploit, especially smaller and micro schemes. SSE has consent to develop new 'run-of-river' hydro electric schemes near Crianlarich (2.5MW) and Wester Ross (3.5MW). It is continuing to examine the scope for new hydro electric developments and in August 2008 invested £750,000 in Green Highland Renewables, in return for a 33.3% stake in the company, which develops small and medium-sized hydro electric schemes.

Hydro electric schemes which use impounded water to generate electricity have an important part to play in meeting peak demand and also complement the growing, but variable, amount of output from wind farms. Against this background, SSE is submitting to Scottish Ministers an application for consent to develop a 60MW pumped storage scheme at its 152MW Sloy power station, near Loch Lomond. This means that in addition to electricity produced from water collected and held in the Loch Sloy reservoir, Sloy would generate electricity using water pumped from Loch Lomond to the reservoir.

In an average year, Sloy produces around 120GWh of electricity and adding to it to a pumped storage facility would allow it to produce an additional 100GWh of electricity in a typical year to help meet peak demand. SSE currently expects that developing a pumped storage facility at Sloy will require investment of over £30m. SSE is also exploring whether other potential sites could be suitable for the development of pumped storage schemes.

Wind Generation - Operations

As at 31 March 2009, SSE owns and operates almost 700MW of onshore wind farm capacity in the UK and Ireland, of which 300MW is in the Republic of Ireland. Although lower wind speeds were experienced during 2008/09, total output from SSE's portfolio of wind farms in the UK was 953GWh during the year, all of which was eligible for ROCs, compared with 389GWh in the previous year (which includes the output from the Airtricity portfolio of wind farms that was generated between its acquisition by SSE on 15 February 2008 and 31 March 2008); from its wind farms in the Republic of Ireland, the output was 765GWh in the same period. On average, the turbines at SSE's wind farms in the UK and Ireland achieved 96% of their maximum availability to generate electricity.

Wind Generation - Investment Overview

When SSE entered into the agreement to acquire Airtricity, now its renewable energy development division, in January 2008, the combined business had just over 870MW of onshore wind farm capacity in operation, in construction or with consent for development in the UK and Ireland. This has now reached almost 1,700MW, including:

the Clyde wind farm in southern Scotland (see below); and
the Griffin wind farm in Perthshire in which SSE acquired a majority stake in the early part of 2009, the total capacity of which will depend on the most economic turbine option but will be well in excess of 100MW.

The progress of the Clyde project in particular demonstrates that the pipeline of opportunities in renewable energy on which the acquisition was based are now being realised. Further evidence of this is that SSE expects to complete the construction of over 150MW of onshore wind farm capacity during 2009/10.

SSE also has a 50% share of the 500MW Greater Gabbard wind farm now under construction in the outer Thames Estuary (see below). It also has almost 1,400MW of offshore wind farm capacity with consent for development. This comprises:

the 280MW Butendiek offshore wind farm planned for a site off the coast of Germany;
two offshore wind farms proposed in the Dutch sector of the North Sea with a total capacity of up to 610MW; and
the 500MW Arklow scheme off the east coast of the Republic of Ireland.

The most advanced of these projects is Butendiek, in respect of which SSE has entered into a turbine reservation agreement with Siemens Wind Power.

This reflects SSE's aim to develop a substantial portfolio of offshore wind farm assets in northern Europe, thus helping a number of EU Member States to achieve their legally-binding 2020 targets for renewable energy. This is because wind energy is an increasingly mature technology, capable of relatively speedy deployment on a large scale, and must thus play a critical part in the achievement of the UK's, the Republic of Ireland's and the EU's renewable energy targets for 2020.

All of this means that SSE now has:

over 3,400MW of renewable energy capacity (onshore wind, offshore wind, hydro and dedicated biomass) in operation, under construction or with consent in the UK and the Republic of Ireland (excluding Arklow in the Republic of Ireland); and
over 1,400MW of offshore wind farm capacity with consent for development in Europe (including Arklow).

In addition, the proposal by Viking Energy, the joint venture between Viking Energy Ltd (which is 90% owned by Shetland Charitable Trust) and SSE to develop on Shetland's Central Mainland a wind farm with 540MW of capacity was yesterday submitted to Scottish Ministers. This takes to over 1,000MW the amount of onshore wind farm capacity for which SSE has applied for consent to build in Scotland, England, Northern Ireland, Italy and Sweden.

SSE remains on course to make investments of around £3bn in renewable energy in the five years between 2008 and 2013. A key consideration in investments will be the prices of the wind turbines themselves. While these are the subject of a number of variations, SSE has seen some reductions and does not expect them to return to the market peak reached during 2008 for the foreseeable future.

The principal projects within SSE's five year programme are the Clyde wind farm and the Greater Gabbard offshore wind farm.

Wind Generation Investment - Clyde

Clyde has consent for 152 turbines. As a result of the tender process, SSE may seek to optimise the energy yield by selecting turbines which give a lower installed capacity than that originally envisaged but which represent the most economic solution. Nevertheless, the configuration of the selected turbines will not affect the expected annual output of over 1,000GWh. Initial site works began in April 2009 and full construction work will begin later in the summer. First commissioning is scheduled for 2011 and completion is scheduled for 2012. The construction cost is now expected to be around £500m. This is included within SSE's existing investment plans for the period to 2013.

Wind Generation Investment - Greater Gabbard

Greater Gabbard Offshore Winds Limited ('GGOWL') is a 50:50 joint venture between SSE and RWE npower renewables, which acquired its 50% stake from SSE in November 2008, to develop in the outer Thames Estuary what is the world's largest offshore wind farm under construction.

The development of Greater Gabbard, excluding the connection to the electricity grid, is expected to require total investment of around £1.3bn. Onshore work on the construction of the wind farm is now well under way, as is fabrication of offshore structures and turbines. Offshore work is on track to begin in the next few months, with the first installations taking place before the end of the financial year. It will be commissioned in two phases, with the entire construction scheduled to be completed in 2012. On completion, the wind farm will have a total capacity of around 500MW, with 140 turbines mounted on steel monopiles, in water depths between around 20 and 30 metres. It is expected to have a load factor of over 40%, based on site-specific met mast data collected since 2005, and produce around 1,900GWh of electricity in a typical year. SSE will take 50% of the output. Its operations and maintenance will be carried out by SSE Generation, under a management services agreement with GGOWL.

Although SSE is very positive about the long-term benefits of offshore wind farms, the difficulties associated with developing, operating and maintaining energy assets in a marine environment and the challenges associated with the development of offshore wind farms are not being under-estimated.

Wind Generation Investment - Offshore Wind in the UK

SSE expects that Greater Gabbard will prove to be the first of a series of major offshore wind farms which it develops over the next decade. In February 2009, it was granted exclusivity by The Crown Estate to develop offshore wind farms at four locations in Scottish territorial waters. At two of the four sites, SSE is in partnership with other specialist developers.

The proposed wind farms could have a total capacity of up to 2,700MW, of which SSE would own 85%.

Their development is subject to site-specific consultations and environmental impact assessments, statutory consents and satisfactory completion of the Strategic Environmental Assessment for offshore wind announced by the Scottish government in October 2008.

A month later, SSE joined forces with RWE npower renewables, Statkraft and Statoil/Hydro to bid to win exclusive rights to develop wind farms under the terms of the Zone Development Agreements as part of The Crown Estate's third licence round for UK offshore wind farms (Round 3). The four companies are co-operating on a single, joint bid and - should they be successful - will work together on the development, construction and operation of Round 3 wind farms.

In April 2009, SSE joined forces with Fluor Limited, the UK operating arm of Fluor Corporation, to create another consortium, Seagreen Renewables, to bid for the exclusive rights to develop other wind farms under Round 3 (Airtricity and Fluor jointly developed the Greater Gabbard offshore wind farm). Partnerships with other developers such as this are intended by SSE to minimise risks involved in offshore wind projects and to maximise the development capability.

In October 2008, SSE was one of five energy companies to sign an agreement on offshore wind with The Carbon Trust. This marked the start of a major new research, development and demonstration initiative called the Offshore Wind Accelerator (OWA). The OWA aims to cut the cost of energy from offshore wind by at least 10% through a combination of reducing costs and increasing revenues for the developers and operators of projects.

Investment Options in New Markets

In addition to its wind and hydro investments in the UK and Ireland, SSE is identifying options to invest in renewable energy in new markets: waste-to-energy (principally in the UK - see below); onshore and offshore wind farms in Europe (principally Portugal, Scandinavia, Italy, Germany and the Netherlands where there are particular opportunities for growth in renewables - see above); and emerging technologies. Any investment will involve working with partners and will largely be on an equity basis, with non-recourse or project-specific debt typically expected to account for around 75% of the total cost of the investment.

In April 2008, SSE entered into a 50:50 joint venture with Gothia Vind, which is aiming to develop around 200MW of onshore wind farm capacity in Sweden over the next three years. Two months later, SSE entered into two joint venture partnerships, with Riviera and with Hispano Lusa SL, to further its plans for the development of wind farms in Portugal with a total potential capacity of around 400MW (gross). This was followed by the establishment of a joint venture with an Italian wind farm development company, Entropya, which has a wind farm development pipeline in excess of 2,000MW (gross) at various stages in the authorisation process.

The acquisition of Airtricity has extended the scope of SSE's interests to continental Europe, thereby giving it development and operational activity in a new geographical location. That activity will remain disciplined and clearly focused on renewable energy, especially in view of developments in financial markets. This means investments in the UK and Ireland are likely to be prioritised in the first instance, followed by investments elsewhere in Europe.

SSE does not expect to undertake any wind farm developments in China in the foreseeable future and is planning to dispose of Airtricity's development portfolio there.

Marine Energy

In February 2009, SSE and Aquamarine Power, in which it has a 50% stake, entered into a joint venture aimed at developing sites in the UK and the Republic of Ireland capable of hosting 1,000MW of marine energy capacity by 2020. The two companies' goal is to deliver marine energy sites suitable for Aquamarine Power's wave technology, Oyster, a prototype of which should be deployed at the European Marine Energy Centre in Orkney in the summer of 2009. In April 2009, the Oyster device produced and exported electricity at the New and Renewable Energy Centre ('NaREC') near Newcastle, for the first time.

Biomass and Multi-fuel

SSE's plant at Slough has a current generating capacity of 80MW and remains the UK's largest dedicated biomass energy facility. During 2008/09, it produced 148GWh of electricity qualifying for ROCs, compared with 33GWh during the three months in which it was under SSE's ownership in the previous year. Output was affected by technical issues concerning the operation of one of the steam turbines at the plant.

The acquisition of the plant at Slough in January 2008 gave SSE a platform from which to invest in biomass and waste-to-energy. Against this background, and in line with its approach to developing a number of options for the site, SSE announced in March 2009 plans for a multi-fuel combined heat and power (CHP) facility at Ferrybridge. The proposed multi-fuel CHP facility will use a range of fuel sources, which could include biomass, waste-derived fuels and wood products, to generate around 90MW of electricity and to provide heat to the Ferrybridge site. It will be compliant with the Waste Incineration Directive.

The potential for such technology should not be under-estimated. In December 2008, the Institution of Mechanical Engineers said that the UK could generate one fifth of its electricity from the 300 million tonnes of waste per annum otherwise destined for landfill - much of which can be readily prepared to become refuse derived fuel (RDF).

In line with that, SSE expects to expand its interests in this area, including establishing long-term relationships with a number of companies to help deliver some sources of fuel for its generation and its first fuel contract, with Shanks, was agreed in 2008/09 for the Yorkshire area. Proposals for multi-fuel plant in other parts of the country are also being prepared.

Forth Energy

In June 2008, SSE and Forth Ports plc entered into a strategic venture to develop renewable energy projects around Forth Ports' sites in Scotland and England. The new venture, called Forth Energy, will invest in the generation, distribution and supply of renewable energy for export to the electricity network for commercial sale and for consumption at Forth Ports' sites.

The venture envisages projects across a number of renewable energy technologies, including wind, tidal and biomass, and related networks and infrastructure. Possible projects with a total installed capacity in excess of 150MW have been identified. These projects are being progressed through feasibility stages, with a view to applications for consent being made in 2009/10.

Emerging Technologies - SSE Ventures

In February 2007, SSE set up SSE Ventures (SSEV) to develop and grow its portfolio of investments in small and medium-sized businesses offering renewable, sustainable and energy efficiency-enhancing products and services. In addition to the financial support offered, SSEV works in close partnership with investee companies to help their products or services make progress towards full commercial viability. Participation in emerging technology developments helps SSE to anticipate, be at the forefront of, and adapt to, the changes in energy production and consumption that are likely to occur over the next decade. During 2008/09, through equity and loans, SSEV committed to investing £43m in a variety of emerging technologies and now holds direct or indirect stakes in a total of 24 companies.

Nuclear Power

SSE was part of a consortium, with GDF SUEZ and Iberdrola which placed bids in the auction by the Nuclear Decommissioning Authority and EDF of three potential nuclear new-build sites in the UK, that was concluded in April 2009. The consortium elected to maintain its financial discipline and did not secure any of the sites.

Nevertheless, SSE continues to believe that it should work with other parties to help secure the development of new nuclear power stations, through appropriate investment or contractual support, in order to help maintain secure supplies of energy for customers.

As a result, it is examining a number of opportunities for other potential sites with its consortium partners. In particular, the consortium will be focusing on the sites nominated as part of the UK Government's Strategic Siting Assessment, which was published for public consultation in April 2009, which may have to be sold by their current owners.

Competition Issues

In April 2008, Ofgem launched an investigation into SSE and Scottish Power Limited, under section 18 of the Competition Act 1998 and Article 82 of the EC Treaty. SSE co-operated fully with Ofgem, which concluded in January 2009 that there had been no breach of the Competition Act.

In May 2009 EDF Group and Centrica plc announced their 'definitive agreement' whereby Centrica will invest in EDF's nuclear business in the UK, including the current British Energy nuclear power station fleet. This agreement would bind together companies which currently supply electricity and gas to over 40% of the homes, offices and businesses in Great Britain. As a result, its implications for the energy supply market and for the wholesale electricity market will require the most detailed scrutiny by the relevant competition authorities. SSE believes that it is likely to require detailed conditions to be placed on the parties directly involved to safeguard competition.

Generation Priorities for 2009/10 and beyond

During 2009/10 and beyond, SSE's key objectives in Generation will be to ensure that its diverse portfolio of power stations is well-maintained and available to generate electricity, with the maximum flexibility and efficiency, in response to customer demand and market conditions, while complying fully with all safety standards and environmental regulations.

SSE will also be pursuing timely investment in asset refurbishment and replacement projects, and working to deliver on time and on budget its projects to develop new capacity for generating electricity. Key milestones include the start of construction work at the Clyde and Griffin wind farms and the start of offshore construction work at Greater Gabbard.

In the five years between 2008 and 2013, SSE currently expects that its investment across its entire generation portfolio will be over £4bn, including investment in existing assets. This investment will be designed to abate the environmental impact of existing assets and extend their working lives and to deliver new assets, principally in renewable energy but also - as in the case of Marchwood and Abernedd - thermal generation. All of this will support security of energy supply.

In addition, SSE is seeking to build up a major offshore wind farm capability in northern Europe, and so successful participation in The Crown Estate's Round 3 is a major priority.

As a result, SSE will have a growing and balanced portfolio of electricity generation assets, with a diminishing environmental impact in which its exposure to fossil fuel price volatility will be increasingly diluted. At the same time, SSE will actively seek to maintain optionality and diversity in the future development of its generation portfolio.

ENERGY SUPPLY

Key Performance Indicators	Mar 09	Mar 08
	million	million
Domestic electricity customer accounts (GB)	5.10	4.90
Domestic gas customer accounts (GB)	3.50	3.15
Business electricity and gas customer sites (GB)	0.45	0.40
Total energy customers (GB)	9.05	8.45
Telecoms and home services customers (GB)	0.330	0.235
Total customer numbers (GB)	9.38	8.68
Electricity customer numbers (Ireland)	0.050	0.040

Introduction

Energy supply in Great Britain experienced an exceptional degree of volatility and intense public scrutiny during 2008/09. Forward annual wholesale prices for electricity peaked at almost £90 per MWh; for gas, they peaked at 100 pence per therm. Although they subsequently fell back from these peaks, wholesale prices for electricity and gas remained relatively high. Like other suppliers, SSE procures energy through a variety of long- and short-term contracts. As a result, there is a time lag between rises and falls in wholesale prices and rises and falls in the prices charged to domestic customers. Ofgem said in October 2008 that it found no evidence that this lag is greater when prices are falling than when they are rising.

That conclusion was part of Ofgem's Initial Findings Report, following its inquiry into energy supply markets in Great Britain, using its powers under the Enterprise Act 2002. It confirmed that the fundamental structures of a competitive market are in place and the transition to effective competitive markets is well advanced and continuing. It was to be expected that Ofgem would identify a number of areas where 'the transition to fully effective competition should be accelerated'. In line with that, in March 2009, it announced it was minded to

introduce a new licence condition on suppliers requiring that prices should reflect the costs to the companies, a principle which SSE has always supported.

Much of the commentary on Ofgem's Initial Report focused on suppliers' pricing structures with respect to particular segments of the market. These included:

electricity 'in-area' versus 'out-of-area' price differentials, where Ofgem's analysis showed that SSE has the smallest such differential; and
pre-payment meters (PPMs), where SSE had already aligned its electricity charges with those for customers paying by standard credit terms and subsequently implemented a 3% reduction in the price paid by its gas customers who use PPMs, thus reducing the average differential between them and customers paying by standard credit terms by around £25 per annum.

SSE remains very mindful of the impact that rising fuel bills have on already hard-pressed households and has worked extensively to minimise their impact, including delaying for as long as tenable the introduction of price increases. This has again demonstrated that the best counter to upward pressures on energy prices, and the best safeguard for customers, is Great Britain's highly-scrutinised competitive market.

Indeed, in March 2009, the UK Department of Energy and Climate Change published Quarterly Energy Prices in the UK which said that: 'Provisional estimates suggest that, for the period July to December 2008, prices for medium domestic gas and electricity consumers, including tax, were the lowest and fifth lowest in the EU 15 respectively.'

Energy Supply Objectives

SSE's objective is to grow its energy supply business by offering consistently competitive prices over the medium term and providing best-in-sector service and market-leading products so that it is able to retain and gain customers. It also aims to broaden its relationship with these customers through the provision of added-value energy-related products and services relevant to them and their needs. In other words, SSE is not building this part of its business on the premise of simply selling more of its core products of electricity and gas but on providing the energy and, increasingly, the related products and services people need.

Energy Supply Operations - Customer Numbers

SSE supplies electricity and gas in Great Britain as Southern Electric, SWALEC, Scottish Hydro Electric and Atlantic Electric and Gas. During 2008/09, it achieved a net gain of 600,000 energy supply customer accounts, taking the total to 9.05 million. This was the seventh successive year in which SSE achieved a net gain in energy supply customer numbers and means it has doubled its total number in that period. The total comprises:

5.1 million domestic electricity customer accounts;
3.5 million domestic gas customer accounts; and
0.45 million business electricity and gas sites.

Within the total, 2.2 million customer accounts are for 'loyalty' products such as energyplus Argos, which rewards customers with money-off discount vouchers, and energyplus Pulse, under which customers are able to support the British Heart Foundation (which received £295,000 from SSE in respect of energyplus Pulse customers during 2008/09).

In addition, in October 2008, SSE and Marks & Spencer (M&S) launched a new dual fuel product under the brand name M&S Energy. The product is available to M&S customers exclusively through M&S' stores and website, and by 31 March 2009 had attracted 59,000 customer accounts.

Energy Supply Operations - Prices in Great Britain

Over the past few years, SSE has maintained a responsible pricing policy, seeking to delay for as long as possible any increases in prices and seeking to implement as quickly as possible any reductions. The application of this policy means that over 2008 as a whole, SSE's quarterly-paying dual fuel customers paid an average of almost £100 (including VAT) less for their energy than customers of the largest energy supplier.

SSE increased its prices for domestic electricity and gas customers in August 2008. The upsurge in wholesale electricity and gas prices experienced up to that point made delaying price rises beyond that untenable because SSE could no longer sustain the significant losses in energy supply then being experienced. The Business and Enterprise Committee of the UK House of Commons said in December 2008 'a reasonable level of profit by the big energy suppliers will be a precondition' of the necessary investment in new electricity generating capacity taking place.

Fortunately, falls in wholesale energy prices which started between July and October 2008 were sustained in to the early part of 2009 and SSE announced a reduction in its prices for domestic electricity and gas customers in February.

Future trends in energy prices for domestic customers will depend on what happens in wholesale electricity and gas markets, with public policy decisions on energy production and consumption also having an impact. The competitive supply market and the comprehensive scrutiny to which energy suppliers are subject represent the best means of ensuring that prices under any scenario are as low as possible.

The long-term outlook was considered by the Business and Enterprise Committee which said in December 2008 that: 'We continue to believe that once the global economy begins to recover, in the long term 'the era of cheap energy is surely over'.'

Energy Supply Operations - Payment Profiles

Almost 58% of SSE's domestic electricity and gas accounts are paid by direct debit or standing order. A further 10% are paid through pay-as-you-go (or prepayment) meters and the balance are on credit terms and settled by cheque or other such payment methods. According to Ofgem's Initial Findings Report, published in October 2008, 43% of energy accounts in Great Britain are settled using direct debit and 16% are settled through PPMs, with the balance using standard credit terms.

As at 31 March 2009, the total aged debt (ie debt that is overdue by more than six months) of SSE's domestic and small business electricity and gas customers was £72m, compared with £70m in March 2008, during which period the number of customers increased by over 7%. While improvements continue to be made in SSE's debtor position, leading indicators, such as the number of payment reminders being issued to customers, suggest that 2009/10 will pose significant debt management challenges, with the volume of work in this area for the Customer Service division increasing significantly.

In March 2009, Ofgem published the outcome of its investigation into domestic customers' direct debits. It focused on over 800 customer complaints which identified the name of the supplier. Of these, 2% were about SSE - the lowest total for any of the leading suppliers - and SSE was held up as having best practice in a number of areas. At the same time, Ofgem identified a number of sector-wide criticisms which SSE, in line with the other suppliers, will have to address.

Energy Supply Operations - Customer Service

It is no coincidence that SSE has achieved seven successive years of growth in energy supply while being independently and consistently recognised as the customer service benchmark for the rest of the industry. SSE believes that its proposition for customers needs to include service and products, as well as price, to ensure it offers the best possible value for money.

In the latest independent Customer Satisfaction Report from uSwitch.com, published in October 2008, SSE was ranked the best energy supplier, for the fifth successive time. It was ranked top in seven of the 11 categories featured in the Report. uSwitch.com stated: 'SSE has become the customer service benchmark for the rest of the industry.' In the JD Power UK Electricity and Gas Customer Satisfaction Study, also published in October 2008, SSE was the top-ranked supplier in both electricity and gas for the second successive year and, once again, was the only supplier with a score significantly above the sector average. In addition, in the Institute of Customer Service study completed in July 2008, SSE was the top-ranked performer amongst UK energy suppliers.

In previous years, SSE also used the number of complaints about it sent to energywatch for resolution as a key performance indicator in this area. Following the Consumer, Estate Agents and Redress (CEAR) Act 2007, new arrangements have been put in place under which customers who are unable to resolve issues with their supplier can take them up with Consumer Direct. Complaints which are not resolved within eight weeks, or which become 'deadlocked', may be taken to the new Energy Supply Ombudsman. During 2008/09, 183 'deadlocked' complaints involving SSE were passed on to the Ombudsman, the lowest number for any supplier.

Although SSE maintained its best-in-sector position in customer service during 2008/09, it was a year in which the environment in which its teams operated was very different as customers responded to price increases and the increasing profile of energy efficiency with a major increase in the number of calls to customer service centres. In total, SSE's energy supply customers made 18 million calls to the company during 2008/09, an increase of around one quarter on the previous year.

The changing shape of customer service is also illustrated by the fact that email overtook letters to become the second most common means of communication with the company used by SSE's customers. This, in turn, indicates that the popularity of e-services such as paperless billing is likely to increase rapidly over the next few years, and preparing for that is one of SSE's key priorities over the coming years.

Nevertheless, conversations with customers will remain the most important means of communication for the foreseeable future and in December 2008 SSE completed the acquisition of Barclaycard's customer service centre at Cumbernauld.,.

The centre became fully operational in January 2009 and it provides SSE with the capacity to expand its customer service operations and recruit many new skilled people at a time when the number of customers has continued to grow. It will relieve some of the pressures that would otherwise have been felt at SSE's existing sites and gives it a new geographic area from which to recruit people.

Energy Supply Operations - Energy Efficiency

As the UK Department of Energy and Climate Change said when launching its consultation on a heat and energy efficiency strategy in early 2009, there needs to be a transformation in the attitudes and actions of everyone when it comes to energy efficiency. It said: 'We need a radical shift in our use of energy and heat in our homes.'

Using energy more efficiently is the fastest and most cost-effective means of reducing energy costs, sustaining supplies for the long term and securing reductions in emissions of carbon dioxide. SSE has obligations under the Carbon Emissions Reduction Target (CERT) scheme to deliver energy efficiency measures to households throughout Great Britain and in 2008/09 funded the installation of cavity wall insulation in 87,000 homes and loft insulation in 104,000 homes (excluding DIY insulation). It also distributed around 16 million low energy lightbulbs.

To complement its heat and energy efficiency strategy, the UK government is also developing a Community Energy Saving Programme (CESP), which aims to deliver energy efficiency measures on a community basis, and is seeking to implement a 20% increase in suppliers' CERT obligations.

These are substantial measures, which will require the commitment of significant resources by energy suppliers, but SSE endorses the goal of securing substantial savings in energy bills and reductions in emissions of carbon dioxide, and major energy efficiency initiatives are clearly the most sustainable way of achieving this.

Energy Supply Operations - Vulnerable Customers

While any type of poverty, including fuel poverty, fundamentally results from an individual or household having insufficient income, SSE recognises that it has a significant role to play in reducing its customers' energy consumption (and thus the associated costs) and a role also in helping those of its customers who struggle to pay for their basic energy needs.

In April 2008, SSE published its Code of Practice for Vulnerable Customers, following consultation with consumer and voluntary organisations. At its core is SSE's belief that any 'social' tariff offered by energy suppliers is only meaningful if it is clearly the lowest-cost tariff that they make available to any type of customer on any sign-up method.

SSE's social tariff, energyplus care, conforms to this principle and currently gives eligible dual fuel customers a discount of just over one third compared with SSE's standard tariff, as well as other help including benefit entitlement checks and free energy efficient appliances and home insulation. The number of customer accounts benefiting from energyplus care increased by 77,000 to 103,000 during 2008/09.

This fulfilled SSE's agreement with the UK government to operate schemes with a total value of over £16m to help vulnerable customers in 2008/09. Under this agreement, that will increase to around £22m in 2009/10.

It is SSE's policy to do all it can to help customers who may be having difficulties in paying for the electricity and gas they use by offering 'tailor-made' payment arrangements that suit their needs and their circumstances. In March 2009, customers with almost 250,000 electricity and gas accounts were taking advantage of these arrangements.

Product Development

Energy supply remains intensely competitive and gaining and retaining customers' loyalty is key to long-term success. At a time of higher energy prices, the 'better plan' is at the centre of the portfolio of products and services which SSE currently markets. It offers a variety of incentives to help customers use less energy and earn credits as a result. The credits are then applied as a reduction to the customers' energy bills.

SSE launched the 'better plan' towards the end of 2007 as part of its commitment to work in partnership with its customers to help them reduce their energy use and to create a more sustainable level of energy consumption. During 2008/09, customers with an additional 125,000 energy accounts joined the 'better plan', taking the total to 165,000, making it SSE's most successful new product ever.

The core of the 'better plan' proposition is encouraging customers to use less energy and thus save money. SSE is examining options for developing a broader proposition centred on enabling customers to take control over their energy use and secure very significant reductions in their consumption. Against this background, in April 2008, it agreed to invest £1m in Onzo Limited ('Onzo'), in return for a 24.5% share of the business. Onzo is a systems development business, with specific intellectual property relating to the development of display devices that support smart metering systems.

The relationship between technology and people's behaviour is frequently demonstrated, as the changes effected by the launch of the iPod just eight years ago illustrates. The change to a low carbon economy will be challenging because of the intangible nature of energy production, distribution and supply. That is why developments which allow customers to take real control over their energy consumption are of particular significance in the context of energy policy goals in the UK, Ireland and elsewhere.

Ireland

Following the acquisitions in 2007/08 of Airtricity and CHP Supply Ltd and a year of steady growth SSE has increased its customer base in the all-island electricity market in Ireland by 25% to 50,000, including almost 10,000 in Northern Ireland. While the majority of these customers are commercial, SSE began to supply electricity to domestic customers during 2008. It also now supplies gas to industrial and commercial customers in Ireland and expects to supply it to domestic customers later in 2009.

Energy Supply Priorities in 2009/10

During 2009/10, and beyond, SSE will seek to:

retain a reputation for fair pricing for domestic customers;
maintain best-in-sector service, including improvements in billing, call handling times and enhancements to e-services;
increase further the number of customers on the 'better plan';
deliver energy efficiency improvements through the CERT and other programmes;
continue to ensure customers' energy accounts are well-managed;
increase the number of customers in Great Britain; and
increase the number of customers in the Irish all-energy market.

In summary, SSE aims to build on its position as the energy supplier with the strong regional brands, best-in-sector service, fair pricing policy and range of value-adding offers to secure an eighth successive year of customer growth.

NETWORKS

Networks Overview

SSE owns Scottish Hydro Electric Transmission, Scottish Hydro Electric Power Distribution and Southern Electric Power Distribution which transmit and distribute electricity to 3,5 million businesses, offices and homes via 127,000km of overhead lines and underground cables.

These companies are the subject of incentive-based economic regulation by Ofgem which sets for periods of five years the index-linked prices they can charge for the use of their electricity networks, their capital expenditure and their allowed operating expenditure, within a framework known as the Price Control. Ofgem also places specific incentives on companies to improve their efficiency and quality of service.

Overall, Ofgem seeks to strike the right balance between attracting investment in electricity and gas networks, encouraging companies to operate them as efficiently as possible and ensuring that prices ultimately borne by customers are no higher than they need to be. In electricity, the current Distribution Price Control runs until 31 March 2010 and the current Transmission Price Control runs until 31 March 2012.

As at 31 March 2009, SSE's estimate of Ofgem's valuation of the assets of its electricity distribution and transmission businesses (the Regulated Asset Value, or RAV) was £2.9bn, based on Ofgem's methodology, including £375m for transmission. This gives it around 12% of the total Great Britain electricity transmission and distribution RAV.

SSE also has an equity interest of 50% in, and provides corporate and management services to, Scotia Gas Networks (SGN), which owns Southern Gas Networks and Scotland Gas Networks. These companies own and operate the medium and low pressure networks which deliver gas to 5.7 million properties in their areas of the UK. They are the subject of incentive-based regulation by Ofgem similar to that which applies in electricity. 2008/09 was the first year of a price control for the five years to 31 March 2013.

SGN estimates that the RAV of the networks it owns was around £3.6bn, based on Ofgem's methodology, as at 31 March 2009. This makes it the UK's second largest gas distribution company, with around one quarter of the total Great Britain gas distribution RAV. SSE's share of this RAV is £1.8bn which, when added to its electricity networks businesses, gives SSE a total RAV of £4.7bn, making it the UK's second largest distributor of energy.

Together, these lower-risk economically-regulated 'natural monopoly' businesses provide a financial backbone and operational focus for SSE and balance its activities in the competitive Generation and Supply markets.

The Chief Executive of Ofgem wrote to the Financial Times in June 2008 and said: 'The fact remains that, in energy, the [incentive-based] model has delivered lower prices, better service and record investment in the UK.' At the same time, Ofgem has embarked upon a two-year review of the model in the context of the security of supply and climate change issues now prevalent in energy in the UK.

During 2008, a study by the international consultancy Capgemini found that the performance of electricity distribution companies in the UK is consistently better than the European average in terms of controlling costs, operating networks and customer services.

In March 2009, the Presidency of the EU and Members of the European Parliament agreed on new rules to increase competition in the EU's energy market by separating the management of electricity generation companies from that of transmission operators. Member States will have three options for compliance in the structuring of their energy markets. The options include the Independent System Operator (ISO), where companies can retain ownership of their transmission networks although their operation is managed by a separate, independent body (the ISO). An ISO model already operates in Scotland, where SSE's transmission network is located.

After electricity and gas, telecoms is SSE's third networks business. Unlike the other two, it is not the subject of economic regulation. It operates a national telecoms network for commercial and public sector customers which extends to around 10,300km throughout Great Britain.

Networks Performance Overview

Operating profit* in Energy Networks increased by 7.3%, from £544.4m to £584.2m, contributing 38% of SSE's total operating profit*. This comprised:

£403.7m in electricity networks, compared with £382.9m in the previous year; and
£180.5m representing SSE's share of the operating profit* for SGN, compared with £161.5m in the previous year.

SSE's combined Telecoms business (SSE Telecom and Neos) achieved an operating profit* of £15.5m during the year, an increase of 18.3% (excluding the telecoms sites assets disposed of in August 2007).

Key Performance Indicators	Mar 09	Mar 08

Units of electricity distributed (SEPD) (TWh)	34.37	34.24
Units of electricity distributed (SHEPD) (TWh)	8.51	8.65
Average number of minutes lost per customer (SEPD)	66	67
Average number of minutes lost per customer (SHEPD)	75	72
Number of supply interruptions/100 customers (SEPD)	64	66
Number of supply interruptions/100 customers (SHEPD)	76	69
Volume of gas distributed (Southern) (TWh)	114.9	109.9
Volume of gas distributed (Scotland) (TWh)	58.6	59.4
	£m	£m
Capital expenditure on electricity networks	314.6	264.4
SSE share of total SGN capex/repex	191.4	189.5
Capital expenditure on telecoms	23.0	38.4

ELECTRICITY NETWORKS

Objectives

The amount of electricity transmitted and distributed through SSE's networks and the amount of gas distributed through SGN's networks is largely determined by the weather and by customers' demand for energy. Variations in the volume of electricity distributed have an impact on SSE's transmission and distribution networks' revenues (although energy volume drivers have been removed from the price controls for gas distribution companies).

If, in any year, regulated energy networks companies' revenue is greater (over recovery) or lower (under recovery) than is allowed under the relevant Price Control, the difference is carried forward and the subsequent prices the companies may charge are varied.

SSE's objectives in electricity networks are to ensure that they are managed as efficiently as possible, including maintaining tight controls over operational expenditure and delivering effectively capital expenditure, so that the number and duration of power cuts experienced by customers is kept to a minimum.

Through good performance in areas such as customer service and innovation SSE seeks to earn additional incentive-based revenue under the various Ofgem schemes to encourage good performance in these areas. Over time, its objective is to grow the RAV of the networks businesses and so secure increased revenue from them. Constructive engagement with the regulator, Ofgem, during the various Price Control Reviews is central to this objective.

Southern Electric Power Distribution

In Southern Electric Power Distribution (SEPD) in 2008/09:

operating profit* increased by 4.6% to £243.3m;
electricity distributed rose by 0.13TWh to 34.37TWh;
the average number of minutes of lost supply per customer was 66, down from 67;
the number of supply interruptions per 100 customers was 64, down from 66; and
performance-based additional income of £11.8m was earned.

The increase in operating profit reflects changes in the price of units distributed. Performance in respect of both minutes lost and interruptions was ahead of the targets set by Ofgem under its Quality of Service Incentive Scheme (QSIS), which gives financial benefits to distribution network operators that deliver good performance for customers. Performance-based income covers a number of issues, including the quality of service provided to customers and innovation.

Scottish Hydro Electric Power Distribution and Scottish Hydro Electric Transmission

In Scottish Hydro Electric Power Distribution (SHEPD) in 2008/09:

operating profit* increased by 6.8% to £160.4m;
electricity distributed fell by 0.14TWh to 8.51TWh;
the average number of minutes of lost supply per customer was 75, up from 72;
the number of supply interruptions per 100 customers was 76, up from 69; and
performance-based additional income of £7.6m was earned.

The increase in operating profit reflects changes in the price of units distributed and increased transmission income. Performance in respect of both minutes lost and interruptions was ahead of Ofgem's QSIS targets.

The increase in the number of supply interruptions in the SHEPD area reflects the fact that snow, accompanied by strong winds, was a feature of the weather over an extended period during the winter and resulted in more faults to the network.

Energy Volumes

The volume of electricity distributed by SSE during the year was very similar to 2007/08, and the volume of gas transported by SGN during the year rose by 4.2TWh. In both cases, there were increases in the south; in Scotland, the volume of electricity and gas distributed fell.

Specific local factors added to energy volumes in the south of England during 2008/09, compared with the previous year, such as the opening of Terminal 5 at Heathrow Airport and the return to service of Shoreham power station. In addition, 2008/09 was the coldest winter in the UK for 13 years. As a result, SSE believes that underlying consumption of energy fell during the year, with weather-corrected energy volumes during the second half of the financial year being around 5% lower than in the previous year.

Operational Cost Efficiency

Efficiency is one of SSE's core values and amongst Ofgem's explicit purposes in setting Price Controls is to keep the costs of providing secure and reliable networks as low as possible. An initial assessment of operational cost efficiency analysis published by Ofgem in May 2009 suggests that SSE continues to be the most efficient electricity distribution operator in Great Britain.

Power Distribution Quality of Service

According to Ofgem's Distribution Quality of Service Report, published in December 2008, covering performance in respect of Customer Interruptions and Customer Minutes Lost, SSE's two networks earned additional revenue of £33m in the three years to March 2008 (the most recent period for which comparative data is available), making them the two best-performing electricity distribution companies in Great Britain. This reflects successful investment in the automation of the networks and effective operational responses to electricity supply interruptions.

Electricity Network Investment and RAV Growth

The key responsibility of SSE's electricity networks businesses is to maintain safe and reliable supplies of electricity and to restore supplies as quickly as possible in the event of interruptions. The Distribution Price Control Review for 2005-10 resulted in substantially increased allowances for capital expenditure to maintain and improve the networks' performance. By earning a return from this investment, SSE is able to increase its revenue from the networks and the efficient delivery of this enhanced investment programme was one of its priorities for 2008/09. Investment is geared to renewing SSE's networks, which were largely built in the 1950s and 1960s, and thereby reducing the number and duration of power supply interruptions. It is also geared to providing the infrastructure to accommodate customers' demand for power.

Capital expenditure in the electricity networks during 2008/09 was £314.6m. In the first four years of the current Distribution Price Control which began in April 2005, SSE has invested £810.0m in its distribution networks (which excludes metering) and a further £148.4m in its transmission network. This represents a 81.2% increase compared with the first four years of the previous Price Control, 2000-2004.

SSE forecasts that the total growth in the RAV of its electricity distribution and transmission businesses, over the five years to March 2010, should total around £500m, taking it to around £3bn in 2010.

One feature of the current Price Control which has been widely welcomed is the ability to place under ground electricity distribution lines which were previously overhead, to help restore views in national parks and areas of outstanding natural beauty. Many of these lines have been placed under ground using the 'mole-ploughing' technique, which buries cable with minimal environmental disruption, but at nine times the speed of conventional trenching. This technique was used, for example, when 5km of overhead line close to the world heritage site at Avebury, which features the largest pre-historic stone circle in Great Britain, was removed and placed under ground.

Distribution Price Control Review 2010-15 and Beyond

Detailed work has begun on the Distribution Price Control Review for 2010-15. Ofgem's key priorities include encouraging electricity distribution companies to be more responsive to the needs of customers and ensuring that companies provide secure and more sustainable networks. SSE therefore expects that annual capital expenditure during the next Price Control will be maintained at broadly the 2008/09 level. Having published its third consultation document about the Review for 2010-15 in May 2009, Ofgem will publish its Initial Proposals on each electricity distribution company's revenue requirements in late July 2009.

SSE is the only energy company in the UK to be involved in electricity distribution, gas distribution and electricity transmission. It therefore participates in three price control reviews in every five years, which gives it ongoing involvement in, and extensive experience of, price control issues in the UK.

Ofgem's two-year review of the regulatory regime for electricity and gas networks ('RPI-X@20'), which is considering whether the current approach will continue to deliver customers reliable, well-run networks with good service at reasonable prices, amid the growing investment challenges faced by the energy networks in the future, will not report until 2010. Any changes arising from it will be the subject of consultation and so work on the Distribution Price Control Review for 2010-15 is expected to be largely unaffected.

As Ofgem has stated, the current regime has delivered lower costs, better service and record investment. Nevertheless, SSE understands Ofgem's rationale for undertaking this review, and is fully engaged in it.

Looking ahead, 'intelligent' networks, featuring distributed sources of electricity and leading-edge communication and control technologies to deliver electricity more efficiently, are expected to play an increasingly important part in enabling the delivery of long-term targets for renewable energy and reduced emissions of carbon dioxide.

The next decade is also likely to see a significant uptake of electric vehicles, which some reports have suggested could reach around 1.5 million in the UK as early as 2020. SSE is part of two consortia, led by BMW UK and Ford, which have applied to the Technology Strategy Board (TSB) for a one-year research and demonstration project of prototype electric vehicles in Oxford and other locations in south-east England. Both consortia are confident of receiving TSB support and will seek to establish what needs to be done to ensure that electric vehicles can be rolled out as widely and as rapidly as possible.

These are just some of the technological developments which may have implications for electricity networks in the UK and in which SSE is taking an active interest.

Future Transmission Developments

Scottish Hydro Electric Transmission is responsible for operating, maintaining and investing in the transmission network in its area, which serves around 70% of the land mass of Scotland. As the licensed transmission company for the area, SSE has to ensure there is sufficient network capacity for those seeking to generate electricity from renewable sources.

The project to replace the electricity transmission line connecting Beauly in the Highlands and Denny in the Central Belt of Scotland follows on from SSE's licence responsibilities. The Beauly-Denny Public Inquiry, the largest in Scotland since devolution, was completed in February 2008. Scottish Ministers received the report of the Inquiry in February 2009, and the Scottish Government said they will 'take a final decision on the proposal later this year'.

It is likely that SSE's share of the replacement line (200km of the total distance of 220km) will require investment in excess of £300m.

The Transmission Investment for Renewable Generation mechanism provides funding for transmission companies which are required to undertake work in connection with renewable energy that was not forecast at the time the relevant price controls were set. In May 2008, Ofgem announced it would allow an increase in SHETL's income to take account of costs incurred in respect of the Beauly-Denny replacement. In doing so, it noted that: 'We are convinced that SHETL diverting its own internal resources to the public inquiry (above and beyond what could reasonably be expected) has resulted in material cost savings that would otherwise have been funded by consumers'.

In December 2008, the Scottish government included future electricity network reinforcement to support renewable energy development as one of 12 'National Developments' in the second National Planning Framework. Designation as National Developments in the Framework establishes the need for these projects in the national interest. The Renewable Energy Directive includes a binding commitment on EU Member States to ensure their electricity networks 'accommodate the further development of electricity production from renewable energy sources'.

Against this background, in March 2009, the Electricity Networks Strategy Group, co-chaired by Ofgem and the UK Department of Energy and Climate Change, and on which SSE is represented, published Our Electricity Transmission Network: A Vision for 2020. It set out a series of proposed reinforcements to the Great Britain transmission network, with a total value of £4.7bn, of which over £1bn would be required in the SHETL area, in two stages. The reinforcements would accommodate, amongst other things, the large amount of onshore and offshore wind farms that will be required to meet the UK's legally-binding renewable energy targets for 2020.

The report said: 'The proposed Beauly-Denny rebuild is an important step in developing a transmission system in the north of Scotland of sufficient capacity to accommodate renewable development proposals. With this upgrade in place, further reinforcement of the North of Scotland transmission system can be achieved by the strengthening of the other elements of the system.'

In other words, the consenting and completion of the Beauly-Denny upgrade would allow other elements of the north of Scotland transmission ring to be re-conductored and re-insulated while avoiding any need for new overhead line routes. This would increase the capability for renewable energy capacity in the north of Scotland to over 6GW, well over double that currently connected.

SSE's proposal for an electricity transmission connection between the Western Isles and the north west of Scotland is consistent with this featuring, for the mainland section, an underground cable between the west coast of Sutherland and the Beauly substation near Inverness. SSE submitted to Scottish Ministers an application for consent to construct the connection in October 2008.

Electricity Distribution and Transmission Priorities in 2009/10 and Beyond

During 2009/10 and beyond, SSE's first objective in electricity distribution and transmission will be to maintain safe and reliable supplies of power and to restore supplies as quickly as possible in the event of interruptions, and so performance in terms of customer minutes lost and customer interruptions will continue to be critical.

Also critical will be the delivery of SSE's investment plans in its electricity networks, which it expects to total around £350m in 2009/10, and securing Ministers' consent to upgrade the Beauly-Denny transmission network.

SSE will seek an acceptable outcome from the Distribution Price Control Review for 2010-15, which means being able to earn a reasonable return on the RAV through: a fair allowed return (currently 4.8% post-tax real) which reflects the current economic and financial environment; and scope for out-performance from the various incentive mechanisms.

It is clear that encouraging electricity companies to be more responsive to the needs of customers will be amongst Ofgem's key priorities for 2010-15, and SSE has in place a programme of continuous improvement initiatives in anticipation of this. SSE is also looking to the longer-term issues, such as the possible impact on its distribution networks of the deployment of a large number of electric vehicles and the development of 'intelligent' networks.

GAS NETWORKS

Scotia Gas Networks (SGN) - Financial

SGN, in which SSE holds 50% of the equity, owns and operates the Scotland and the Southern gas distribution networks. The networks comprise around 74,000km of gas mains, delivering gas to around 5.7 million industrial, commercial and domestic customers. SSE receives 50% of the distributable earnings from SGN, in line with its equity holding, and also provides it with corporate and management services.

SSE's share of the adjusted operating profit* of SGN was £180.5m in 2008/09, compared with £161.5m in the previous year. The increase is primarily due to two things: the impact of the price changes agreed for the year to 31 March 2009 as part of the five-year Price Control to March 2013, which accounted for the majority of the year-on-year improvement; and additional underlying operational efficiencies achieved during the year.

A small part of SGN's operating profit is derived from the non-regulated activities of its contracting, connections and commercial services operations.

Scotia Gas Networks - Operational

In March 2009, Ofgem published its Gas Distribution Annual Report for 2007/08. It included a 'top-down' regression analysis of controllable operating costs which showed that SGN's two networks are first and third out of the eight networks in Great Britain for operating cost efficiency, compared with seventh and sixth when they were acquired by SGN in 2005.

One of the conditions in SGN's license to operate is that it should attend at least 97% of uncontrolled gas escapes within one hour of notification. During 2008/09: 98.75% of uncontrolled gas escapes in Scotland were attended within one hour of notification; and in Southern, the number was 98.43%.

During 2008/09, SGN's gas transportation volumes were:

58.6TWh in Scotland, compared with 59.4TWh in the previous year; and
114.9TWh in Southern, compared with 109.9TWh in the previous year.

Since 1 October 2008 only 3.5% of SGN's income is volume-related; the remaining 96.5% is related to the maximum capacity requirements of its customers.

During 2008/09, a milestone was reached in the System Control project, when SGN took over control of its gas network areas in Scotland and the south of England. The company was the first of the three independent gas network companies to take full operational control of its gas networks from National Grid. The second phase of the project will see SGN implement a new IT system for gas control, allowing it to operate completely independently. This implementation is expected to be completed in 2010.

When SGN acquired its networks in June 2005, National Grid was contracted to provide it with services with a total value of over £30m per annum. In the four years since, services have been brought within SGN, and by the end of 2010, it is expected that SGN's remaining service contracts with National Grid will total just over £10m per annum.

In March 2009, the number of lost-time injuries in SGN was 0.13 per 100,000 hours worked, compared with 0.15 in March 2008. One of SGN's key environmental objectives is to reduce methane emissions. During the year, a project began to automate gas pressure management which, once commissioned, will further reduce these emissions.

Scotia Gas Networks - Investment

The five-year Gas Distribution Price Control, which began in April 2008, provides the opportunity for SGN to increase significantly investment in its gas distribution networks, thereby reinforcing their safety and reliability and securing another significant increase in their RAV. By 2013, SGN estimates that its total RAV will be around £4.6bn.

During the first year of the new Price Control, 2008/09, SGN invested £382.8m in capital expenditure and mains and services replacement projects, compared with £379.0m in the previous year. The majority of the mains replacement expenditure was incurred under the 30:30 mains replacement programme which was started in 2002. This requires that all iron gas mains within 30 metres of homes and premises must be replaced over a 30-year period, and in 2008/09 SGN replaced over 1,000km of its metallic gas mains with modern polyethylene pipes.

Investment will continue to be a top priority during 2009/10 and, in line with that, SGN expects to invest over £350m in capital expenditure and mains and services replacement projects.

For example, construction work is getting under way on a 23km long, 1,200mm diameter high-pressure gas pipeline designed to maintain safe and reliable gas supplies in south east England. Increases in demand for gas have led to the development of this project to construct the pipeline between Farningham and Hadlow in Kent. The total investment in the project will be around £50m.

Scotia Gas Networks Priorities in 2009/10 and Beyond

SSE's priority in gas distribution will continue to be to provide SGN with the corporate and management services to support its ongoing drive to operate with the maximum possible efficiency, building on the progress made in the last four years. The successful delivery of the second phase of SGN's gas network 'System Control', and of the £50m high pressure gas pipeline project in Kent, are among SGN's key priorities.

TELECOMS NETWORKS

Introduction to Telecoms

After electricity and gas, Telecoms is SSE's third networks business. It combines SSE Telecom and Neos Networks and, following several acquisitions in recent years, now operates a 10,300km UK-wide telecoms network, providing services for other telecoms providers, companies and public sector organisations. This includes 4,100km of fibre optic cabling which SSE owns; the remainder is leased lit fibre (2,600km) and microwave radio (3,600km). As a result, SSE is the fourth largest telecoms network company in the UK.

The business offers customers a national telecoms network, and has a UK-wide sales force and a competitive range of products targeted at public sector organisations, medium and large enterprises, internet service providers, application service providers and other licence operators. As a subsidiary of SSE, it is also able to position itself as one of the UK's most financially secure telecoms network operators, which gives it an important competitive advantage, especially during an economic downturn.

Telecoms Operations

SSE's combined Telecoms business achieved an operating profit* of £15.5m during 2008/09, compared with £13.1m in the previous year (excluding the telecoms assets disposed of in August 2007). This reflected a strong sales performance and greater success in retaining customers. During the year, the consolidation of the fibre optic and telecom duct assets acquired in 2007/08 was successfully completed.

Telecoms Investment

In 2008/09, SSE undertook capital expenditure of £23.0m in respect of its telecoms networks, principally focused on improving network reliability and reach.

Telecoms Priorities in 2009/10 and Beyond

SSE's priority in Telecoms in 2009/10 is to continue to grow its sales, using its now-integrated expanded nationwide network, with its competitive range of products targeted at commercial and public sector customers. Longer term, its ambition is to become the UK's leading alternative telecoms network, capable of delivering a consistent level of growth.

ENERGY-RELATED SERVICES

Energy-Related Services Overview

As well as being involved in Generation, Supply and Networks, SSE also provides an additional range of energy-related services which complement its other businesses: Contracting, Connections and Metering, including Utility Solutions; Energy and Home Services; and Gas Storage. These are important services, on which customers depend, so that their increasingly complex energy requirements can be met.

Key Performance Indicators	Mar 09	Mar 08

SEC order book (£m)	101	99
New electrical connections	36,000	42,800
New gas connections	7,300	8,200
Out-of-area networks in operation	47	33
Telecoms customers	217,000	165,000
Home services customers	115,000	70,000
Gas storage customer nominations met (%)	100	100

CONTRACTING, CONNECTIONS AND METERING

Operating profit* in Contracting, Connections and Metering rose by 8.9%, from £68.7m to £74.8m, during 2008/09.

Introduction to Contracting

SSE's Contracting business, Southern Electric Contracting (SEC) has three main areas of activity: industrial, commercial and domestic mechanical and electrical contracting; electrical and instrumentation engineering; and public and highway lighting. Now employing 4,700 people, it is one of the largest mechanical and electrical contracting businesses in the UK. It operates from 57 regional offices throughout Great Britain and also trades as SWALEC Contracting in Wales and Scottish Hydro Contracting in Scotland.

Contracting Performance During 2008/09

SEC made solid progress during 2008/09, with its order book ending the year at £101m, which was slightly higher than the year before, despite the onset of the economic recession. The order book was supported by significant new contract wins with a number of major organisations in recent months, ranging from Network Rail to the University of Bristol.

A major proportion of SEC's business is from public sector bodies and end-user client organisations with a high degree of 'repeat' business or long-term contracts. This puts it in a relatively good position to withstand the economic downturn. Nevertheless, there is clearly a risk that the business' order book and profitability will be affected as a result of the recession. As a result, cost control and customer relationships are a particularly high priority for SEC during 2009/10.

SEC remains the UK's leading street-lighting contractor, and in 2008/09 retained four maintenance contracts with local authorities, gained three and lost one, giving it a total of 24 contracts covering over one million lighting columns as at 31 March 2009.

In addition, through its partnership with the asset finance division of The Royal Bank of Scotland, SEC operates street lighting maintenance and replacement projects for four local authorities in England under the Private Finance Initiative and has a further three such projects following its acquisition of Seeboard Trading Limited in 2007/08. In total, these projects cover around 300,000 street lighting columns and all have at least 20 years to run.

Contracting Priorities in 2009/10 and Beyond

The first priority for SEC in 2009/10 is to ensure that it delivers a high standard of service to all customers in all of the sectors in which it operates. In an economic downturn, it is important to maximise business opportunities with existing customers, and a top quality level of service is fundamental to that. This, in turn, should enable SEC to consolidate its position among the leading GB-wide electrical and mechanical contractors. During 2009/10 a total of eight PFI contracts will be determined and SEC is aiming to add to its existing portfolio in this area. It is also aiming to retain street lighting maintenance contracts.

Introduction to Connections, including Utility Solutions

As its name implies SSE's Connections business provides electricity connections for homes, offices and businesses. Separately, during 2008/09, SSE combined its existing 'out-of-area' embedded electricity networks (previously known as 'National Networks'), its licensed gas transportation business (SSE Pipelines), SSE Water and its commercial energy services company (ESCo) business in order to provide a one-stop solution for 'multi-utility' infrastructure requirements. In line with that, the combined business, now named SSE Utility Solutions, provides electricity, gas, water, heat and fibre-to-home solutions.

Electricity Connections

During 2008/09, SSE completed 36,000 electrical connections, compared with 42,800 in the previous year. This was the second successive year in which the number of connections completed fell, and the recession means SSE expects a further decline in 2009/10 - although the financial impact of any decline should be partly offset by connection work relating to wind farms.

Utility Solutions - Electricity Networks

SSE has continued to develop its portfolio of electricity networks outside the Southern Electric and Scottish Hydro Electric Power Distribution areas. It now owns and manages 47 energised electricity networks outside these two areas, with development work ongoing at a number of these, and a further seven are under construction, including residential and commercial developments across England, Scotland and Wales. In total, SSE has 390MW of energised networks capacity, including 3MW currently under construction. Nevertheless, a reduction in new development activity in the UK economy is clearly evident and this will have an impact on SSE's shorter-term growth ambitions in this area, although its market share has been increasing and it expects this to continue.

Utility Solutions - Gas Pipelines

SSE is also a licensed gas transporter. Previously known as SSE Pipelines, this business installs, owns and operates gas mains and services on new housing and commercial developments throughout the UK. Although at a slower rate than in previous years, the total number of new premises connected to its gas networks has continued to grow, and during 2008/09, it connected a further 7,300 premises, taking the total number of connections to more than 60,000. This is despite an increasing number of building sites being mothballed, and building projects being deferred, which means the number of gas connections completed in 2009/10 is likely to be lower than in the previous year.

Utility Solutions - Water

SSE Water (SSEW) is the first new company to offer both water and sewerage services since privatisation in England and Wales in 1989, and its establishment will enable SSE to provide, over the long term, a more comprehensive multi-utility solution to customers in the property development and house-building sectors, through being able to install, own, operate and supply water and sewerage services alongside its existing electricity and gas services.

An 'inset' appointment is the route by which one company replaces another as the appointed water and/or sewerage company for a specified area. SSE Water was granted its first inset appointment in October 2007 to become the water and sewerage provider to a housing development near Salisbury. In March 2009, Ofwat varied the inset appointment of SSE Water, allowing it to serve a large development consisting of houses and commercial premises in south Wales, at Llanilid.

Utility Solutions - Energy Services

SSE provides site-wide energy infrastructure for industrial, commercial, public sector and domestic customers. Utility Solutions currently operates and maintains commercial and domestic heating along with a 4.5MW Combined Heat and Power (CHP) facility at Woolwich, and it is developing biomass, heat pump and wind energy solutions for communities and commercial enterprises (most of customers' CHP assets are now managed within SSE's Generation and Supply business). The impact of the economic slowdown on the UK's construction sector means that projects to develop new residential CHP schemes are fewer than was the case a year ago and SSE is now seeking to participate in other markets such as health, education and defence.

Utility Solutions Priorities for 2009/10 and Beyond

The key priority is to complete the combination of business activities under the SSE Utility Solutions name and develop the comprehensive package of services available to customers, all with the objective of creating a profitable business with activities throughout the UK.

Introduction to Metering

SSE's Metering business provides services to most electricity suppliers with customers in central southern England and the north of Scotland and has undertaken a programme of in-sourcing of meter reading operations and meter operator work in other parts of the UK. It supplies, installs and maintains domestic meters and carries out metering work in the commercial, industrial and generation sectors. It also offers data collection services to the domestic and SME sectors.

Metering Performance During 2008/09

In total, SSE owns 3.76 million meters and changes around 280,000 meters each year as they reach the end of their useful life or to meet customers' requests for changed functionality. During 2008/09, it collected around 6.4 million electricity readings and 2.6 million gas readings, up from 5.8 million and 2.3 million respectively in the previous year.

This increase partly reflects the fact that, over the past two years, SSE has in-sourced meter reading and meter operations work relating to its own customers in a number of parts of Great Britain. This process has so far taken the total number of people employed in the Metering business to over 1,000 as at March 2009 and means SSE is able to read over 70% of meters relating to its customers' electricity and gas accounts.

This programme of in-sourcing is continuing, so that by the end of 2009/10, SSE expects to be undertaking meter reading work in all but three of the former electricity supply regions in Great Britain and meter operator work in all but four.

An accurately-read meter is the cornerstone of good service in energy supply. This programme of in-sourcing delivers significant savings against contractor costs and supports the energy supply brands by delivering improved customer service, partly through the face-to-face contact that takes place between SSE and its customers and partly through the delivery of a more reliable meter reading service. At the same time, it provides a foundation from which SSE will be able to deploy other energy-related services and products as customers increasingly seek help and advice to reduce their consumption of electricity and gas.

Smart Metering

'Smart' metering is an emerging system that enables the quantity and value of electricity and gas used by the customer to be continuously monitored and allows information about its use and cost to be available to the customer and exchanged with the supplier, through two-way electronic communications.

SSE is a leading participant in the UK government-sponsored Energy Demand Reduction Project, in which smart meters are the subject of a trial, and in 2008/09 installed around 9,000 smart meters in homes in Perthshire, Oxfordshire and in south Wales.

The Energy Act 2008 includes powers to enable the Secretary of State for Energy and Climate Change to make the necessary arrangements to facilitate the installation of smart meters throughout Great Britain. The UK government has said that smart meters will be rolled out to all domestic customers by the end of 2020 and in May 2009 embarked on a consultation to consider the best model for rolling them out to 26 million homes in Great Britain.

SSE strongly supports smart meters, and the opportunity they provide to help customers cut their energy consumption, while reducing the number of service-based tasks which are largely administrative and reactive in nature, and replacing them with more substantive energy advice, products and services. They have the potential to help transform the relationship between customers and their energy supplier.

Metering Priorities in 2009/10 and Beyond

For Metering, the key priority is the successful progress of in-sourcing of work in various parts of Great Britain, in line with SSE's long-term objective of building a national metering business, and maximising the number of bills issued to customers on the basis of an actual - as opposed to estimated - meter reading. It is also important that SSE's participation in the Energy Demand Reduction Project continues to be successful, with the lessons learned from it being used to support a full roll-out of smart meters throughout the country.

ENERGY AND HOME SERVICES

Introduction to Energy and Home Services

'Energy services' is a frequently used term, which has different meanings within different organisations. For SSE it means products and services which complement the supply of electricity and gas.

SSE's energy and home services team offers a range of maintenance and protection services for customers' gas and electrical systems and a full range of gas and electrical installation services. It also offers electricity and gas appliances and telecoms products and community-focused renewable energy schemes.

Adjusted profit before tax during 2008/09 reflects the requirement to make a provision of £9.6m in respect of a reorganisation of SSE's Home Services businesses, including appliance retailing.

Energy and Home Services Performance During 2008/09

SSE's 'shield' gas boiler, central heating and wiring protection service is now in its third year of operation and at 31 March 2009 had 115,000 customers, an increase of 45,000 on the previous year. The service now covers 43 postcode areas, enabling 65% of SSE's existing energy customers to benefit from it.

The 'talk' telecoms package, under which telephone line rental and calls services are supplied, now has 217,000 customers, an increase of 52,000 on the previous year. In March 2009, SSE also launched a new broadband service under which customers are offered unlimited high-speed wireless broadband, supported by a three-year partnership agreed with BT Wholesale.

Sales of electrical and gas appliances have struggled in the light of the recession and in line with the downturn in sales experienced across the retail sector, and this prompted a reorganisation of SSE's activities in this area.

Higher energy prices reached in 2008/09 had the effect of renewing customers' and communities' interest in the potential for wind to help meet their electricity needs in a sustainable way. For example, after a number of public consultations, residents on the Orkney island of Sanday voted in favour of a joint community wind project with SSE and a planning application for a community wind turbine was granted in January 2009.

Energy Services Priorities for 2009/10 and Beyond

SSE's key priorities in energy services during 2009/10 are to:

increase customer numbers;
develop the range of products available;
continue to move the 'shield' business towards profitability; and
commence construction on the first community wind energy schemes.

GAS STORAGE

Introduction to Gas Storage

It is generally recognised that the UK has insufficient gas storage. This under-capacity reflects the reliance it was able to place in past years on gas production from the North Sea. As North Sea gas declines, UK imports will continue to increase to meet demand from domestic customers, the increasing number of gas-fired power stations and other industrial and commercial users. At the same time, the wholesale gas market has become increasingly volatile, with significant rises in prices for gas in the UK, particularly during days of higher demand and colder-than-forecast weather.

All of this means there will be a growing demand in the UK for more gas storage facilities to help provide security of supply of gas. Such facilities therefore have a long-term value, especially if their cycle rate (the speed at which gas can be withdrawn from storage and then replaced) is fast enough.

SSE owns and operates the UK's largest onshore gas storage facility at Hornsea in East Yorkshire, in which around 325 million cubic metres (mcm) of gas can be contained in a total of nine caverns and with Statoil (UK) Ltd is developing another gas storage facility at nearby Aldbrough. To form such caverns, salt deposits around 2km under ground are leached out by seawater which, in turn, is replaced by gas under pressure. Hornsea accounts for around 15% of the total gas storage capacity in the UK.

At Hornsea, gas can be injected at a rate of 2mcm per day and withdrawn at a rate of 18mcm per day, which is equivalent to the requirements of around four million homes. The services offered at Hornsea provide customers with a reliable source of flexibility with which to manage their gas supply/demand and respond to market opportunities.

Gas Storage - Operations

Gas Storage delivered an operating profit* of £42.7m, during 2008/09, compared with £50.9m in the previous year. The reduction reflects the lower prices achieved at the start of the new storage year.

One of SSE's priorities for 2008/09 was to ensure that Hornsea maintained its excellent record of dependability, and during the year it was 100% available to customers, except in instances of planned maintenance. This enabled customers to manage their gas market risks and respond to gas trading opportunities.

Gas Storage - Investment

SSE's joint venture with Statoil (UK) Ltd to develop at Aldbrough what will become the UK's largest onshore gas storage facility made further important progress during the year, but at a slower rate than originally expected, with the development as a whole taking longer than was expected when it started in 2004. This is the result of a series of issues, including leaching of caverns requiring more time than planned and problems with the installation and operation of some equipment such as valves and compressors.

Nevertheless, the gas export capability of the facility has now been successfully tested and the first 60mcm of storage capacity has been importing and exporting gas during the commissioning phase and should be in commercial operation next month. Aldbrough will provide the first new gas storage facility to become available in the UK for four years. Capacity in another two caverns is currently expected to become available by the end of 2009/10.

When fully commissioned, currently expected to be in 2012, it will have the capacity to inject gas and store up to 370mcm in nine underground caverns. Aldbrough will be the largest onshore gas storage facility in the UK and have the capacity to deliver gas to the National Transmission System at a rate of 40mcm per day, equivalent to the average daily consumption of eight million homes, and the ability to have up to 30mcm of gas per day injected.

As the UK becomes increasingly dependent on imported gas to meet growing demand from new power stations and industry, gas storage will play an essential role in meeting its energy needs. Aldbrough, able to inject and deliver gas rapidly to meet fluctuations in demand and supply, will provide a valuable source of flexibility to the UK gas market.

SSE and Statoil (UK) Ltd now expect to invest a total of over £300m to complete the Aldbrough phase one development, with SSE owning two thirds of the capacity and Statoil (UK) Ltd owning one third.

Investment in gas storage in the UK will benefit from the decision by HM Revenue and Customs in April 2009 to recognise the purchase of cushion gas, required to maintain pressure within storage caverns, as part of the capital cost of a development. This means it is eligible for tax relief through plant and machinery capital allowances.

SSE and Statoil (UK) Ltd have secured consent to increase the storage capacity at the Aldbrough site beyond that currently under development. If developed in full, this would approximately double the amount of gas that can be stored, to well over 700mcm. SSE believes that there is a case for investing in additional gas storage facility and is aiming to take a final decision on whether and how to invest in a second phase of development at Aldbrough during 2009/10.

Gas Storage Priorities in 2009/10 and Beyond

SSE's priorities in Gas Storage during 2009/10 are to:

maintain its excellent record of reliability at Hornsea;
maximise the amount of capacity at Aldbrough that is available for commercial storage; and
make a decision on whether to proceed with the Aldbrough extension.

Longer term, SSE will also continue to look for other opportunities to add to its gas storage capacity.

Disclaimer

This preliminary results statement contains forward-looking statements about financial and operational matters. Because they relate to future events and are subject to future circumstances, these forward-looking statements are subject to risks, uncertainties and other factors. As a result, actual financial results, operational performance and other future developments could differ materially from those envisaged by the forward-looking statements.

Consolidated Income Statement

for the year ended 31 March 2009

		2009			2008
		Before exceptional items and certain re-measure-ments	Exceptional items and certain re-measure-ments (note 5)	Total	Before exceptional items and certain re-measure-ments	Exceptional items and certain re-measure-ments (note 5)	Total
	Note	£m	£m	£m	£m	£m	£m


Revenue	4	25,424.2	-	25,424.2	15,256.3	-	15,256.3
Cost of sales		(23,552.7)	(1,291.7)	(24,844.4)	(13,509.8)	(187.8)	(13,697.6)
Gross profit		1,871.5	(1,291.7)	579.8	1,746.5	(187.8)	1,558.7
Operating costs		(576.5)	-	(576.5)	(605.7)	-	(605.7)
Other operating income		-	102.7	102.7	0.1	55.0	55.1
Operating profit before jointly controlled entities and associates		1,295.0	(1,189.0)	106.0	1,140.9	(132.8)	1,008.1
Jointly controlled entities and associates:
Share of operating profit		246.4	-	246.4	242.6	-	242.6
Share of interest		(128.2)	-	(128.2)	(127.6)	-	(127.6)
Share of movement on derivatives		-	3.8	3.8	-	4.2	4.2
Share of tax		(39.3)	(1.1)	(40.4)	(41.9)	31.2	(10.7)
Share of profit on jointly controlled entities and associates		78.9	2.7	81.6	73.1	35.4	108.5
Operating profit	4	1,373.9	(1,186.3)	187.6	1,214.0	(97.4)	1,116.6
Finance income	6	209.7	-	209.7	202.6	-	202.6
Finance costs	6	(369.8)	25.8	(344.0)	(233.9)	(1.5)	(235.4)
Profit before taxation		1,213.8	(1,160.5)	53.3	1,182.7	(98.9)	1,083.8
Taxation	7	(300.6)	359.6	59.0	(306.8)	96.2	(210.6)
Profit for the year		913.2	(800.9)	112.3	875.9	(2.7)	873.2

Attributable to:
Equity holders of the parent		913.2	(800.9)	112.3	875.6	(2.7)	872.9
Minority interest		-	-	-	0.3	-	0.3

Basic earnings per share	9			12.7p			101.1p
Diluted earnings per share	9			12.8p			101.0p
Adjusted earnings per share	9			108.0p			105.6p

Dividends paid in the year	8			£551.9m			£502.8m

The accompanying notes are an integral part of the financial information in this announcement.

Consolidated Balance Sheet

as at 31 March 2009

		2009	2008 restated
	Note	£m	£m
Assets
Property, plant and equipment		7,232.2	6,334.3
Intangible assets:
Goodwill		724.0	659.0
Other intangible assets		253.0	256.9
Investments in associates and jointly controlled entities		918.7	917.8
Other investments		18.3	6.0
Retirement benefit assets		-	85.8
Deferred tax assets		100.1	43.1
Derivative financial assets	12	449.2	318.9
Non-current assets		9,695.5	8,621.8

Intangible assets		213.9	138.9
Inventories		366.7	251.2
Trade and other receivables		5,659.6	3,400.3
Cash and cash equivalents		295.9	255.3
Derivative financial assets	12	1,537.7	1,106.5
Current assets		8,073.8	5,152.2
Total assets		17,769.3	13,774.0

Liabilities
Loans and other borrowings		1,060.1	1,847.6
Trade and other payables		4,364.9	3,399.9
Current tax liabilities		254.6	220.8
Provisions		13.8	9.5
Derivative financial liabilities	12	2,451.0	1,229.4
Current liabilities		8,144.4	6,707.2

Loans and other borrowings		4,336.1	2,073.6
Deferred tax liabilities		594.7	967.3
Provisions		60.2	107.3
Trade and other payables		426.0	490.1
Retirement benefit obligations	11	273.5	134.9
Derivative financial liabilities	12	959.5	313.3
Non-current liabilities		6,650.0	4,086.5
Total liabilities		14,794.4	10,793.7
Net assets		2,974.9	2,980.3

Equity:
Share capital		460.2	435.1
Share premium	10	835.3	315.7
Capital redemption reserve	10	22.0	22.0
Equity reserve	10	0.8	3.9
Hedge reserve	10	19.6	2.3
Translation reserve	10	146.6	25.4
Retained earnings	10	1,492.7	2,175.6
Total equity attributable to equity holders of the parent		2,977.2	2,980.0
Minority Interest	10	(2.3)	0.3
Total Equity		2,974.9	2,980.3

Consolidated statement of recognised income and expense

For the year ended 31 March 2009

	2009	2008
	£m	£m


Gains on effective portion of cash flow hedges (net of tax)	16.5	11.6
Transferred to income statement on cash flow hedges (net of tax)	-	8.0
Effective net investment hedge (net of tax)	(102.9)	(21.1)
Actuarial (losses) on retirement benefit schemes (net of tax)	(200.8)	(17.4)
Exchange difference on translation of foreign operations	221.7	46.5
Jointly controlled entities and associates:
Share of gains / (losses) on effective portion of cash flow hedges (net of tax)	3.2	(6.8)
Share of actuarial (losses) / gains on retirement benefit schemes (net of tax)	(38.3)	16.4

Net (expense) / income recognised directly in equity	(100.6)	37.2
Profit for the year	112.3	873.2
Total recognised income and expense for the year	11.7	910.4

Attributable to:
Equity holders of the parent	11.7	910.1
Minority interests	-	0.3
	11.7	910.4

Consolidated Cash Flow Statement

for the year ended 31 March 2009

	2009	2008
	£m	£m
Cash flows from operating activities
Profit for the year after tax	112.3	873.2
Taxation	(59.0)	210.6
Movement on financing and operating derivatives	1,265.9	167.1
Exchange loss in relation to foreign investment	-	22.2
Finance costs	369.8	233.9
Finance income	(209.7)	(202.6)
Share of jointly controlled entities and associates	(81.6)	(108.5)
Pension service charges less contributions paid	(49.3)	(44.4)
Depreciation and impairment of assets	315.9	267.8
Amortisation and impairment of intangible assets	14.4	32.5
Impairment of inventories	8.2	-
Release of provisions	(47.5)	-
Deferred income released	(16.7)	(15.1)
(Increase) in inventories	(127.7)	(25.9)
(Increase) in receivables	(2,048.3)	(571.5)
Increase in payables	958.0	725.5
Increase / (decrease) in provisions	4.7	(6.4)
Charge in respect of employee share awards (before tax)	14.3	10.8
Profit on disposal of property, plant and equipment	(2.0)	(65.3)
Profit on disposal of 50% of Greater Gabbard Offshore Winds	(102.7)	-
Profit on disposal of fixed asset investment	(2.2)	-
Loss on disposal of replaced assets	0.3	0.4
Cash generated from operations	317.1	1,504.3

Dividends received from jointly controlled entities	39.8	35.1
Dividends paid to minority investment holders	(2.6)	-
Interest income	74.4	61.2
Interest costs	(219.2)	(108.6)
Income taxes paid	(255.5)	(283.6)
Payment for consortium relief	(0.4)	(7.6)
Net cash from operating activities	(46.4)	1,200.8

Cash flows from investing activities
Purchase of property, plant and equipment	(1,172.2)	(798.8)
Purchase of other intangible assets	(37.5)	(16.9)
Deferred income received	24.8	8.9
Proceeds from sale of property, plant and equipment	3.8	100.6
Proceeds from disposal of 50% of Greater Gabbard Offshore Winds	308.5	-
Purchase of 50% of Greater Gabbard Offshore Winds	(40.0)	-
Proceeds from sale of fixed asset investment	2.4	-
Loans to jointly controlled entities	(262.0)	(50.1)
Purchase of Airtricity (note 11)	(2.1)	(1,302.2)
Purchase of businesses and subsidiaries	(26.3)	(65.7)
Cash acquired in purchases	0.1	597.3
Investment in jointly controlled entities and associates	(44.7)	-
Investment in Marchwood Power	(19.7)	-
Loans and equity repaid by jointly controlled entities	79.7	10.8
Increase in other investments	(12.5)	(14.5)
Net cash from investing activities	(1,197.7)	(1,530.6)

Cash flows from financing activities
Proceeds from issue of share capital	479.6	2.2
Repurchase of ordinary share capital for cancellation	-	(237.0)
Dividends paid to company's equity holders	(551.9)	(502.8)
Employee share awards share purchase	(15.8)	(12.4)
New borrowings	3,203.1	2,275.1
Borrowings acquired in purchases	-	(543.0)
Repayment of borrowings	(1,835.3)	(466.6)
Net cash from financing activities	1,279.7	515.5

Net increase in cash and cash equivalents	35.6	185.7

Cash and cash equivalents at the start of year	243.1	48.4
Net increase in cash and cash equivalents	35.6	185.7
Effect of foreign exchange rate changes	14.9	9.0
Cash and cash equivalents at the end of year	293.6	243.1

Cash and cash equivalents as above	293.6	243.1
Bank overdraft (i)	2.3	12.2
Cash and cash equivalents per balance sheet	295.9	255.3

(i) Bank overdrafts are reported on the balance sheet as part of current loans and borrowings. For cash flow purposes, these have been included as cash and cash equivalents. Notes to the Preliminary Statement

For the year ended 31 March 2009

1. Financial Information

The financial information set out in this announcement does not constitute the Group's statutory accounts for the years ended 31 March 2009 or 2008 within the meaning of Section 240 of the Companies Act 1985. Statutory accounts for 2008 have been delivered to the Registrar of Companies and those for 2009 will be delivered in due course. Both sets of accounts have been prepared under International Financial Reporting Standards as adopted by the EU (adopted IFRS) The auditors have reported on those financial statements; their reports were (i) unqualified; (ii) did not include references to any matters to which the auditors drew attention by way of emphasis without qualifying their reports; and (iii) did not contain statements under sections 237(2) or (3) of the Companies Act 1985. This preliminary announcement was authorised by the Board on 20 May 2009.

2. Basis of preparation

The financial information set out in this announcement has been prepared under the historical cost convention excepting assets and liabilities stated at fair value and in accordance with International Financial Reporting Standards and its interpretations as adopted by the European Union (adopted IFRS). The accounting policies adopted by the Group in this financial information are consistent with those used in the financial statements for the year ended 31 March 2009. The Directors consider that the Group has adequate resources to continue in operational existence for the foreseeable future and expects to issue further debt in the capital markets during 2009/10 to meet its funding requirements. The financial information has therefore been prepared on a going concern basis. Certain items have been reclassified to enhance understanding of the prior year results and to aid comparability with the current year presentation. The financial statements are presented in pounds sterling.

3. Basis of consolidation of the Group

The financial information consolidates the results and net assets of Scottish and Southern Energy plc and its subsidiaries together with the Group's share of the results and net assets of its jointly controlled entities and associates.

The results of subsidiary undertakings acquired or sold are consolidated from the date that control commences until the date control ceases using the purchase method of accounting.

The Group's share of the total recognised gains and losses of associates are included on an equity accounted basis from the date that significant influence commences until the date significant influence ceases.

Investments in jointly controlled entities are accounted for under the equity method of accounting from the date that joint control commences until the date joint control ceases. Jointly controlled operations are businesses which use assets and liabilities that are separable from the rest of the Group. In these arrangements, the Group accounts for its own share of property, plant and equipment, carries its own inventories, incurs its own expenses and liabilities and raises its own finance.

4. Segmental information

Primary reporting format - business segments

The primary segments are as reported for management purposes and reflect the day-to-day management of the business. The Group's primary segments are the distribution and transmission of electricity in the North of Scotland, the distribution of electricity the South of England (together referred to as Power Systems), the generation and supply of electricity and sale of gas in Great Britain and Ireland (Generation and Supply). The Group's 50% equity share in Scotia Gas Networks plc, a business which distributes gas in Scotland and the South of England, is included as a separate segment where appropriate due to its significance.

Analysis of revenue and operating profit by segment is provided below. All revenue and profit before taxation arise from operations within Great Britain and Ireland.

a) Revenue by segment

	Total revenue		Intra-segment revenue		External revenue
	2009	2008	2009	2008	2009	2008
	£m	£m	£m	£m	£m	£m
Power Systems
Scotland	292.1	283.6	104.1	108.4	188.0	175.2
England	450.9	434.0	204.1	194.6	246.8	239.4
	743.0	717.6	308.2	303.0	434.8	414.6
Generation and Supply
Retail	8,516.5	5,648.6	8.2	7.0	8,508.3	5,641.6
Wholesale and Trading	15,409.4	8,353.9	-	-	15,409.4	8,353.9
Other	440.7	260.5	20.7	6.1	420.0	254.4
	24,366.6	14,263.0	28.9	13.1	24,337.7	14,249.9

Other businesses	1,077.2	1,017.8	425.5	426.0	651.7	591.8
	26,186.8	15,998.4	762.6	742.1	25,424.2	15,256.3

Notes to the Preliminary Statement

for the year ended 31 March 2009

4. Segmental information (continued)

a) Revenue by segment (continued)

Revenue within Generation and Supply includes retail sales from energy supply customers, wholesale and trading revenue and other sales. Wholesale and Trading revenue includes revenues from generation plant output and gross value of all wholesale power and gas sales including settled physical and financial trades. These are entered into to optimise the performance of the generation plants and to support the energy supply business. Purchase trades are included in cost of sales.

Revenue from the Group's investment in Scotia Gas Networks (SSE share being 2009 - £365.7m; 2008 - £361.2m) is not recorded in the revenue line in the income statement.

b) Operating profit by segment

	2009
	Adjusted	JCE / Associate share of interest and tax (i)	Before exceptional items and certain re-measurements	Exceptional items and certain re-measurements	Total
	£m	£m	£m	£m	£m
Power Systems
Scotland	160.4	-	160.4	-	160.4
England	243.3	-	243.3	-	243.3
	403.7	-	403.7	-	403.7
Scotia Gas Networks plc	180.5	(146.3)	34.2	3.9	38.1
Energy Systems	584.2	(146.3)	437.9	3.9	441.8

Generation and Supply	832.0	(20.9)	811.1	(1,190.2)	(379.1)
Other businesses	134.1	(0.3)	133.8	-	133.8
	1,550.3	(167.5)	1,382.8	(1,186.3)	196.5
Unallocated expenses (ii)	(8.9)	-	(8.9)	-	(8.9)
	1,541.4	(167.5)	1,373.9	(1,186.3)	187.6

	2008
	Adjusted	JCE / Associate share of interest and tax (i)	Before exceptional items and certain re-measurements	Exceptional items and certain re-measurements	Total
	£m	£m	£m	£m	£m
Power Systems
Scotland	150.2	-	150.2	-	150.2
England	232.7	-	232.7	-	232.7
	382.9	-	382.9	-	382.9
Scotia Gas Networks plc	161.5	(139.3)	22.2	30.3	52.5
Energy Systems	544.4	(139.3)	405.1	30.3	435.4

Generation and Supply	711.1	(29.9)	681.2	(182.7)	498.5
Other businesses	137.8	(0.3)	137.5	55.0	192.5
	1,393.3	(169.5)	1,223.8	(97.4)	1,126.4
Unallocated expenses (ii)	(9.8)	-	(9.8)	-	(9.8)
	1,383.5	(169.5)	1,214.0	(97.4)	1,116.6

(i) The adjusted operating profit of the Group is reported after removal of the Group's share of interest, fair value movements on financing derivatives and tax from jointly controlled entities and associates. The share of Scotia Gas Networks plc interest includes loan stock interest payable to the consortium shareholders, £33.6m (2008 - £35.4.m). The Group has accounted for its 50% share of this as finance income (note 6).

(ii) Unallocated expenses comprise corporate office costs which are not directly allocable to particular segments.

Notes to the Preliminary Statement

for the year ended 31 March 2009

5. Exceptional items and certain re-measurements

i) Exceptional items

During the year, the Group disposed of 50% of its equity shareholding in Greater Gabbard Offshore Winds Limited (GGOWL) to Npower Renewables Limited, the UK fully owned subsidiary of RWE Innogy GmbH for a total cash consideration of £308.5m.

GGOWL was originally a jointly controlled entity between Airtricity, acquired by SSE in February 2008, and Fluor International Limited. In May 2008, SSE acquired Fluor's 50% stake for a cash consideration of £40.0m, while stating its intention to dispose of it later in the year.

The total proceeds on disposal was £308.5m, which comprised £165.6m reimbursement of 50% of the capital costs already incurred in developing the project and £142.9m in relation to the 50% of the equity. The gain on sale recognised was £102.7m, which has been disclosed separately in the income statement as an exceptional item. While no tax charge was recognised in relation to the gain on disposal, a tax credit was recognised on the reversal of deferred tax related to the derecognition of fair value items deemed to have been part of the costs of disposal (£5.7m).

In the previous financial year, the Group disposed of telecoms sites assets to the Wireless Infrastructure Company Limited, for a consideration of £79.0m. The gain recognised on this disposal was £55.0m. This gain has been disclosed separately in the income statement. Also in the previous financial year, the Group incurred an unhedged translation loss of £22.2m on € denominated debt held in relation to the acquisition of Airtricity Holdings Limited. This has been recognised as exceptional following the Group's decision to restructure the borrowings associated with this element of the acquisition in order to match sterling exposures with sterling funding. As a consequence this translation loss was a non-recurring item.

ii) Certain re-measurements

Certain re-measurements arising from the adoption of IAS 39 are disclosed separately to aid understanding of the underlying performance of the Group. This category includes the movement on derivatives as described in note 12.

iii) Taxation

The Group has separately recognised the tax effect of the exceptional items and certain re-measurements summarised above. In addition to this, the Group also separately disclosed in the previous financial year the effect of the announced change in the base corporation tax rate of 30% to 28%, which was effective from 1 April 2008. This had an impact on any temporary differences which existed at 1 April 2008 (note 7).

These transactions can be summarised thus:

	2009 £m	2008 £m
Exceptional items
Gain on disposal of share in Greater Gabbard Offshore Winds	102.7	-
Disposal of Telecoms Mast Assets	-	55.0
Share of change in corporation tax in jointly controlled entities and associates	-	32.4
Exceptional loss on translation	-	(22.2)
	102.7	65.2
Certain re-measurements
Movement on operating derivatives (note 12)	(1,291.7)	(187.8)
Movement on financing derivatives (note 12)	25.8	20.7
Share of movements on derivatives in jointly controlled entities (net of tax)	2.7	3.0
	(1,263.2)	(164.1)
(Loss)/profit before taxation	(1,160.5)	(98.9)

Exceptional items
Effect of change in corporation tax on deferred tax liabilities and assets	-	55.4
Taxation on other exceptional items	5.7	(9.9)
	5.7	45.5
Taxation on certain re-measurements	353.9	50.7
Taxation	359.6	96.2

Impact on profit for the year	(800.9)	(2.7)

Notes to the Preliminary Statement

for the year ended 31 March 2009

6. Net finance costs

Recognised in income statement

	Before Exceptional items and certain re-measure ments	Exceptional items and certain re-measure ments	2009	Before Exceptional items and certain re-measure ments	Exceptional items and certain re-measure ments	2008
	£m	£m	£m	£m	£m	£m

Finance income:
Return on pension scheme assets	135.3	-	135.3	141.4	-	141.4
Interest income from short term deposits	9.4	-	9.4	4.9	-	4.9
Other interest receivable:
Scotia Gas Networks loan stock	33.6	-	33.6	35.4	-	35.4
Other jointly controlled entities and associates	14.6	-	14.6	10.8	-	10.8
Other receivable	16.8	-	16.8	10.1	-	10.1

Total finance income	209.7	-	209.7	202.6	-	202.6

Finance costs:
Bank loans and overdrafts	(149.9)	-	(149.9)	(52.5)	-	(52.5)
Other loans and charges	(132.9)	-	(132.9)	(81.2)	-	(81.2)
Interest on pension scheme liabilities	(130.1)	-	(130.1)	(117.4)	-	(117.4)
Accretion of convertible debt component	(0.6)	-	(0.6)	(4.6)	-	(4.6)
Notional interest arising on discounted provisions	(5.1)	-	(5.1)	(3.6)	-	(3.6)
Foreign exchange translation of monetary assets and liabilities	(2.4)	-	(2.4)	2.1	(22.2)	(20.1)
Less: interest capitalised	51.2	-	51.2	23.3	-	23.3

Total finance costs	(369.8)	-	(369.8)	(233.9)	(22.2)	(256.1)
Changes in fair value of financing derivative assets or liabilities designated at fair value through profit or loss	-	25.8	25.8	-	20.7	20.7
Net finance costs	(160.1)	25.8	(134.3)	(31.3)	(1.5)	(32.8)

Finance income	209.7	-	209.7	202.6	-	202.6
Finance costs	(369.8)	25.8	(344.0)	(233.9)	(1.5)	(235.4)

Net finance costs	(160.1)	25.8	(134.3)	(31.3)	(1.5)	(32.8)

Adjusted net finance costs are arrived at after the following adjustments:

	2009 £m	2008 £m
Net finance costs	(134.3)	(32.8)
(add)/less:
Share of interest from jointly controlled entities and associates
Scotia Gas Networks loan stock	(33.6)	(35.4)
Other jointly controlled entities and associates	(94.6)	(92.2)
	(128.2)	(127.6)
Accretion of convertible debt component	0.6	4.6
Exceptional foreign exchange translation loss	-	22.2
Movement on financing derivatives (note 12)	(25.8)	(20.7)
Adjusted finance income and costs	(287.7)	(154.3)
(add)/less:
Return on pension scheme assets	(135.3)	(141.4)
Interest on pension scheme liabilities	130.1	117.4
Notional interest arising on discounted provisions	5.1	3.6
Adjusted finance income and costs for interest cover calculation	(287.8)	(174.7)

Notes to the Preliminary Statement

for the year ended 31 March 2009

7. Taxation

Analysis of charge recognised in the income statement:

	2009			2008
	Before Exceptional items and certain re-measure- ments	Exceptional items and certain re-measure- ments	Total	Before Exceptional items and certain re-measure- ments	Exceptional items and certain re-measure- ments	Total
	£m	£m	£m	£m	£m	£m
Current tax
UK corporation tax	298.6	-	298.6	315.3	13.6	328.9
Adjustments in respect of previous years	(10.1)	-	(10.1)	(18.9)	-	(18.9)
Total current tax	288.5	-	288.5	296.4	13.6	310.0

Deferred tax
Current year	13.8	(359.6)	(345.8)	11.4	(54.4)	(43.0)
Effect of change of UK corporation tax rate	-	-	-	-	(55.4)	(55.4)
Adjustments in respect of previous years	(1.7)	-	(1.7)	(1.0)	-	(1.0)
Total deferred tax	12.1	(359.6)	(347.5)	10.4	(109.8)	(99.4)

Total taxation charge	300.6	(359.6)	(59.0)	306.8	(96.2)	210.6

The charge for the year can be reconciled to the profit per the income statement as follows:

	2009		2008
	£m	%	£m	%
Group profit before tax	53.3		1,083.8
Less: share of results of associates and jointly controlled entities	(81.6)		(108.5)
Profit before tax	(28.3)		975.3
Tax on profit on ordinary activities at standard UK corporation tax rate of 28% (2008 - 30%)	(7.9)	28.0	292.6	30.0
Tax effect of:
Expenses not deductible for tax purposes	3.7	(13.1)	5.6	0.6
Non taxable income	(34.4)	121.5	(0.4)	-
Effect of change of UK corporation tax rate	-	-	(55.4)	(5.7)
Impact of foreign tax rates and foreign dividends	0.3	(1.1)	(0.6)	(0.1)
Adjustments to tax charge in respect of previous years	(11.8)	41.7	(21.0)	(2.1)
Consortium relief not paid for	(9.1)	32.2	(9.7)	(1.0)
Utilisation of tax losses	(1.5)	5.3	(0.5)	(0.1)
Other items	1.7	(6.0)	-	-
Group tax charge and effective rate	(59.0)	208.5	210.6	21.6

The adjusted current tax charge is arrived at after the following adjustments:

	2009		2008
	£m	%	£m	%
Total taxation charge	(59.0)	208.5	210.6	21.6
Effect of adjusting items (see below)	-	(213.2)	-	(4.5)
	(59.0)	(4.7)	210.6	17.1
(add)/less:
Share of current tax from jointly controlled entities and associates	11.9	1.0	20.8	1.7
Exceptional items	5.7	0.5	(9.9)	(0.8)
Effect of change of UK corporation tax rate	-	-	55.4	4.5
Tax on movement on derivatives	353.9	28.2	50.7	4.1
Deferred tax (excluding share of jointly controlled entities)	(12.1)	(1.0)	(10.4)	(0.8)
Adjusted current tax charge and effective rate	300.4	24.0	317.2	25.8

The adjusted effective rate is based on adjusted profit before tax being:

	2009 £m	2008 £m
Profit before tax	53.3	1,083.8
(add)/less:
Exceptional items and certain re-measurements	1,160.5	98.9
Share of tax from jointly controlled entities and associates	39.3	41.9
Accretion of convertible debt component	0.6	4.6

Adjusted profit before tax	1,253.7	1,229.2

Notes to the Preliminary Statement

for the year ended 31 March 2009

8. Dividends

	2009	2008
	£m	£m
Amounts recognised as distributions from equity
Final dividend for the previous year of 42.4p (2008 - 39.9p) per share	370.0	345.5
Interim dividend for the current year of 19.8p (2008 - 18.1p) per share	181.9	157.3
	551.9	502.8

Proposed final dividend for the current year of 46.2p (2008 - 42.4p) per share	425.2	368.9

The proposed final dividend is subject to approval by shareholders at the Annual General Meeting and has not been included as a liability in these financial statements. The final dividend paid, £370.0m (42.4p, 2008 - 39.9p), was declared on 29 May 2008, approved at the Annual General Meeting on 24 July 2008 and was paid to shareholders on 26 September 2008. An interim dividend of £181.9m (19.8p, 2008 - 18.1p) was paid on 27 March 2009.

9. Earnings per share

Basic earnings per share

The calculation of basic earnings per share at 31 March 2009 is based on the net profit attributable to ordinary shareholders and a weighted average number of ordinary shares outstanding during the year ended 31 March 2009. All earnings are from continuing operations.

Adjusted earnings per share

Adjusted earnings per share has been calculated by excluding the charge for deferred tax and exceptional items and certain re-measurements.

	2009		2008
	Earnings £m	Earnings per share pence	Earnings £m	Earnings per share pence


Basic	112.3	12.7	872.9	101.1
Exceptional items and certain re-measurements (note 5)	800.9	90.7	2.7	0.3
Basic excluding exceptional items and certain re-measurements	913.2	103.4	875.6	101.4
Adjusted for:
Deferred tax (note 7)	12.1	1.4	10.4	1.2
Deferred tax from share of jointly controlled entities and associates results	27.4	3.1	21.1	2.5
Accretion of convertible debt component	0.6	0.1	4.6	0.5
Adjusted	953.3	108.0	911.7	105.6


Basic	112.3	12.7	872.9	101.1
Convertible debt interest (net of tax)	1.2	0.1	9.8	1.1
Dilutive effect of convertible debt	-	-	-	(1.2)
Diluted	113.5	12.8	882.7	101.0
Exceptional items and certain re-measurements (note 5)	800.9	90.5	2.7	0.3
Diluted excluding exceptional items and certain re-measurements	914.4	103.3	885.4	101.3

The weighted average number of shares used in each calculation is as follows:

	2009 Number of shares (millions)	2008 Number of shares (millions)

For basic and adjusted earnings per share	883.0	863.2
Effect of exercise of share options	0.8	2.0
	883.8	865.2
Effect of dilutive convertible debt	1.7	8.8
For diluted earnings per share	885.5	874.0

Notes to the Preliminary Statement

for the year ended 31 March 2009

10. Reserves

	Share premium account	Capital redemption reserve	Equity reserve	Hedge reserve	Translation reserve	Retained earnings	Minority interest	Total
	£m	£m	£m	£m	£m	£m	£m	£m

At 1 April 2008	315.7	22.0	3.9	2.3	25.4	2,175.6	0.3	2,545.2
Profit for the year	-	-	-	-	-	112.3		112.3
Effective portion of changes in fair value of cash flow hedges	-	-	-	16.5	-	-	-	16.5
Effective net investment hedge (net of tax)	-	-	-	-	(102.9)	-	-	(102.9)
Premium on issue of shares	458.0	-	-	-	-	-	-	458.0
Convertible bond converted to equity	61.6	-	(3.1)	-	-	-	-	58.5
Exchange differences on translation of foreign operation	-	-	-	(2.4)	224.1	-	-	221.7
Actuarial gains on retirement benefit schemes (net of tax)	-	-	-	-	-	(200.8)	-	(200.8)
Jointly controlled entities:
Share of change in fair value of effective cash flow hedges	-	-	-	3.2	-	-	-	3.2
Share of actuarial losses on retirement benefit schemes (net of tax)	-	-	-	-	-	(38.3)	-	(38.3)
Dividends to shareholders	-	-	-	-	-	(551.9)	(2.6)	(554.5)
Credit in respect of employee share awards	-	-	-	-	-	14.3	-	14.3
Investment in own shares	-	-	-	-	-	(15.8)	-	(15.8)
Current and deferred tax recognised in equity in respect of employee share awards	-	-	-	-	-	(2.7)	-	(2.7)

At 31 March 2009	835.3	22.0	0.8	19.6	146.6	1,492.7	(2.3)	2,514.7

The capital redemption reserve comprises the value of shares redeemed or purchased from distributable profits.

The hedge reserve comprises the effective portion of the cumulative net change in the fair value of cash flow hedge derivative instruments related to hedged transactions that have not yet occurred.

The equity reserve comprises the equity component of the Group's convertible bond.

The translation reserve comprises exchange translation differences on foreign currency net investments offset by exchange translation differences on borrowings and derivatives classified as net investment hedges under IAS 39.

Notes to the Preliminary Statement

for the year ended 31 March 2009

11. Pensions

Valuation of combined Pension Schemes

	Long- term rate of return expected at 31 March 2009	Value at 31 March 2009	Long- term rate of return expected at 31 March 2008	Value at 31 March 2008
	%	£m	%	£m

Equities	7.7	665.8	8.0	939.6
Government bonds	4.2	576.7	4.5	481.5
Corporate bonds	6.7	244.3	6.9	343.0
Other investments	3.4	300.0	5.6	316.9
Total fair value of plan assets		1,786.8		2,081.0
Irrecoverable surplus		(130.5)		(210.6)
Present value of defined benefit obligations		(1,929.8)		(1,919.5)
Deficit in the schemes		(273.5)		(49.1)

Movements in the defined benefit obligation are as follows:

	2009	2008
	£m	£m

At 1 April	(1,919.5)	(2,202.3)
Movements in the year:
Service costs	(21.8)	(29.2)
Member contributions	(8.1)	(7.5)
Benefits paid	96.5	95.0
Interest on pension scheme liabilities	(130.1)	(117.4)
Actuarial gains	53.2	341.9

At 31 March	(1,929.8)	(1,919.5)

Movements in scheme assets during the year:

	2009	2008
	£m	£m

At 1 April	1,870.4	2,110.4
Movements in the year:
Expected return on pension scheme assets	135.3	141.4
Assets distributed on settlement	(96.5)	(95.0)
Employer contributions	71.1	73.6
Member contributions	8.1	7.5
Actuarial (losses)	(412.2)	(156.9)
Irrecoverable surplus	80.1	(210.6)

At 31 March	1,656.3	1,870.4

The Scottish Hydro Electric Pension Scheme net asset is presented after an irrecoverable surplus of £130.5m, (2008 - £210.6m). The Scheme's surplus is at such a level that the Company is only able to recognise the surplus to the extent that it is expected to be recoverable from estimated reductions to scheme contribution rates.

Notes to the Preliminary Statement

for the year ended 31 March 2009

12. Derivative financial assets and liabilities

For financial reporting purposes, the Group has classified derivative financial instruments into two categories, operating derivatives and financing derivatives. Operating derivatives include all qualifying commodity contracts including those for electricity, gas, oil, coal and carbon. Financing derivatives include all fair value and cash flow interest rate hedges, non-hedge accounted (mark-to-market) interest rate derivatives, cash flow foreign exchange hedges and non-hedge accounted (MTM) foreign exchange contracts. Non-hedge accounted contracts are treated as held for trading.

The net movement reflected in the Income Statement can be summarised thus:

	2009 £m	2008 £m
Operating derivatives
Total result on operating derivatives (i)	(3,964.8)	135.7
Less: amounts settled in the year (ii)	2,673.1	(323.5)
Movement in unrealised derivatives	(1,291.7)	(187.8)

Financing derivatives (and hedged items)
Total result on financing derivatives (i)	70.5	(116.8)
Less: amounts settled in the year (ii)	(44.7)	137.5
Movement in unrealised derivatives	25.8	20.7
Net income statement impact	(1,265.9)	(167.1)

(i) Total result on derivatives in the income statement represents the total amount (charged) or credited to the income statement in respect of operating and financing derivatives.

(ii) Amounts settled in the year represent the result on derivatives transacted which have matured or been delivered and have been included within the total result on derivatives.

Net derivative financial assets and (liabilities) are represented as follows:

	2009 £m	2008 £m
Derivative financial assets
Non-current	449.2	318.9
Current	1,537.7	1,106.5
	1,986.9	1,425.4
Derivative financial liabilities
Non-current	(926.1)	(313.3)
Current	(2,451.0)	(1,229.4)
	(3,377.1)	(1,542.7)
Fair value adjustment to hedged item (loans and borrowings)	(33.4)	-
Total derivative liabilities	(3,410.5)	(1,542.7)
	(1,423.6)	(117.3)

This information is provided by RNS

The company news service from the London Stock Exchange

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