Annual Financial Report

RNS Number : 7728T

Scottish & Southern Energy PLC

11 June 2009

 



Annual Financial Report

Following the release on 21 May 2009 of the Company's preliminary full year results announcement for the year ended 31 March 2009 (the 'Preliminary Announcement'), the Company published its Annual Report and Accounts for 2008/09 (the 'Annual Report and Accounts ') in pdf form on 3 June 2009 and interactive form on 10 June 2009.

Copies of the Annual Report and Accounts and the Notice of Annual General Meeting for 2009 are available to view on the Company's website:

www.scottish-southern.co.uk

In accordance with Disclosure and Transparency Rule 6.3.5 (2) (b) additional information is set out in the appendices to this announcement.

The Preliminary Announcement included a set of condensed financial statements and a fair review of the development and performance of the business and the position of the Company and the group.

Pursuant to Listing Rule 9.6.1, two copies of each of the Directors' Report and Accounts, the Notice of the Annual General Meeting for 2009 and the form of the proxy in relation to the Annual General Meeting for 2009 are being submitted to the UK Listing Authority. These documents will shortly be available for inspection at the Document Viewing Facilities of the UK Listing Authority which is situated at:

Financial Services Authority, 25 The North Colonnade, Canary Wharf, London E14 5HS

Appendices

The following information is extracted from the Annual Report and Accounts.

Page references are to pages in the Annual Report and Accounts.

Appendix A:  Directors' responsibility statement (page 65)

The Directors are responsible for preparing the Annual Report and the Group and parent company financial statements in accordance with applicable law and regulations.

Company law requires the Directors to prepare Group and parent company financial statements for each financial year.

Under that law they are required to prepare the Group financial statements in accordance with IFRS as adopted by the EU and have elected to prepare the parent company financial statements on the same basis.

The Group and parent company financial statements are required by law and IFRS as adopted by the EU to present fairly the financial position of the Group and the parent company and the performance for that period; the Companies Act 1985 provides

in relation to such financial statements that references in the relevant part of the Act to financial statements giving a true and fair view are references to their achieving a fair presentation.

The parent company financial statements are required by law to give a true and fair view of the state of affairs of the parent company.

In preparing each of the Group and parent company financial statements, the Directors are required to:

• select suitable accounting policies and then apply them consistently;

• make judgements and estimates that are reasonable and prudent;

•  state whether they have been prepared in accordance with IFRS as adopted by the EU; and

•  prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Group and the parent company will continue in business.

The Directors are responsible for keeping proper accounting records which disclose with reasonable accuracy at any time the financial position of the parent company and enable them to ensure that its financial statements comply with the Companies Act 1985. They have a general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Group and to prevent and detect fraud and other irregularities.

Under applicable law and regulation, the Directors are also responsible for preparing a Directors' Report, Directors' Remuneration Report and the Corporate Governance Statement that comply with that law and those regulations.

The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the company's website. Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

Appendix B: Principal Risks and Uncertainties (pages 53 and 54)

There are many definitions of 'risk management' and the events of 2008 demonstrated that very high profile organisations with apparently textbook approaches to the issue can be overwhelmed by fundamental failures which well-documented systems and processes appeared powerless to prevent.

Ticking the right boxes is a responsible thing to do, but it is no substitute for a more fundamental responsibility on the part of companies: to ensure their overall business model and strategy and culture is designed with risk firmly in mind. 

Limiting Value at Risk

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. In the regulated category, SSE is involved in three separate activities - electricity transmission, electricity distribution and gas distribution.

In the latter (non-regulated) category, SSE is involved in electricity production and in electricity and gas supply. Within electricity production, it uses a variety of sources - coal, gas, oil, biomass, wind and water - from which to generate power. These businesses are complemented by other energy-related activities such as contracting, connections, metering and gas storage. 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 company listed on the London Stock Exchange involved in electricity and gas distribution and supply, with the associated business model which is capable of offering such balance and such a framework for limiting the value at risk.

Clarity of Financial Goal

SSE's decision-making processes, including its assessment and management of risks, are also supported by the clarity of its fundamental financial goal for shareholders - to deliver sustained real dividend growth - which all members of the Board are agreed must not be subverted for any other financial end.

Against this background, SSE believes it has - and should be seen to have - a relatively risk-adverse approach, consistent with this fundamental financial goal. Within this model, SSE has in place a comprehensive approach for assessing and managing risks and maintaining internal controls, such that neither the company nor its reputation are undermined by failures or misjudgements. These are set out below.

Approach to Risk Management

The objectives of SSE's risk management policy are to ensure that risk is:

• consistently identified, measured, monitored and reported across all business activities; 

• managed in a co-ordinated way, with clear roles and responsibilities; and

• managed within SSE's specified risk appetite.

Assessment of Risks

Risks are assessed by management and reported on in each business unit within SSE. An overview of the main risks are set out by the Group Audit department for the Audit Committee meetings held in November and May of each year, and also annually for the Board - most recently at its meeting held in March 2009, during which it reviewed principal risk categories and the effectiveness of SSE's system of internal controls. This process involves an assessment of both the likelihood and importance of each risk.

The Risk and Trading Committee of the Board meets monthly to review operational and financial risks and exposures in energy trading, generation and treasury.

The policy of the Board is to ensure proper identification, measurement, and monitoring of such risks, ensure clarity of roles and responsibilities, and to ensure where possible that risks are covered or hedged within SSE due to the diversity of energy-related activities.

Risk Categories

The risks are set out under six principal categories, summarised below. They are:

• Strategic risk is defined as losses resulting from a fundamental and long-lasting change to the business environment within which SSE operates. Strategic risks which SSE has to manage include material changes in economic and financial conditions and the impact of climate change.

• Market risk stems from unexpected adverse movements in commodity prices and exchange rates. Market risks which SSE has to manage include its obligations to supply customers with electricity and gas. Related to this, SSE's Risk and Trading Committee is authorised to take on energy market risk within specified limits. There are also general market risks from the competitive market place which SSE operates in.

• Credit risk arises from the default of a contractual counter-party resulting in failure to settle or deliver on liabilities. Credit risk exists in SSE's core business due to its need to purchase fuel for generating assets and as a consequence of its energy trading activity. SSE does not deliberately seek exposure to credit risk as a means of generating profit.

• Financial risk covers interest rates, foreign exchange, liquidity or credit - in summary, the failure to have sufficient financial resources to meet obligations as they fall due.

• Operational risk stems from the failure of internal processes, systems or people and from external events not included in other categories. Operational risk is inherent in SSE's activities due to the relatively complex nature of its business processes. 

•  Regulatory and legislation risk covers environmental, safety, regulatory and general legislative and public policy changes which can affect any aspect of SSE's business.

Management of Risk Categories

In addition to SSE's well-established policies and procedures on internal control and risk management, including managers' defined responsibilities, and its active and ongoing programme of audit reviews, designed to review internal control environments in key risk areas, SSE has the following approaches to managing principal risk categories: 

• Strategic risks are minimised by SSE's approach of operating and investing in a balanced range of regulated and non-regulated energy-related businesses, thus limiting the value at risk. The other key feature of SSE is that it provides energy, which is something that is needed rather than just wanted.

• Market risks are managed through volumetric limits on commodity-related risks and through the application of a Value at Risk (VaR) model applied in the context of the underlying position and how it could change. The exposure is subject to financial limits established by the Board and managed by the Risk and Trading Committee. Operationally, the economic risks associated with this exposure are managed through a selection of longer- and shorter-term contracts for commodities. More fundamentally, SSE manages generation and supply activities as a single value chain which, in itself, is a means of managing risks.

• Credit risks in relation to SSE's economically-regulated businesses are managed in accordance with industry standards as set out by Ofgem. The greatest credit risks lie with the non-regulated Generation and Supply business, for which specific credit risk controls that match the risk profile of those activities are applied. SSE does not deliberately seek exposure to credit risk as a means of generating profit.

• Financial risks are managed through the application of policies designed to maintain a balance between continuity of funding and flexibility, with debt maturities spread across a broad range of dates and the majority of interest rate exposure fixed. Liquidity risk and Going Concern is fully described in note 29 to the Accounts. More broadly, clear authorisation levels are maintained and there is clear segregation of accounting duties.

• Operational risks are managed through the identification of specific risks within each activity and the development of associated mitigation plans and deployment of relevant policies. More fundamentally, SSE prioritises the development and retention of experienced employees who have operated in a wide variety of circumstances and conditions and whose risk management experience is used. SSE has in place insurance policies in respect of all major risks, including operational, and these are reviewed annually by the Board.

• Regulatory and legislation risks are managed by engagement with regulators, government officials and other key organisations to ensure the risks are mitigated.

Appetite For Risk

As stated above, SSE has a generally risk-averse approach, consistent with its moderate (but nevertheless fundamentally important) financial goal of delivering sustained real growth in the dividend. Within this, its approach in respect of regulated businesses is more risk-averse than is the case in other activities, where SSE might consider taking on additional risk where the risk is very well-understood and can be

mitigated and the potential returns are clearly attractive (but also credible).

Culture

Also central to SSE's approach to risk is its core value of Teamwork, defined as supporting and valuing colleagues and working together in an open and honest way. This doesn't just allow but encourages full discussion of the risks and rewards of any major decision - discussion which involves people because of what they know, not simply who they are.

A company's culture can be a risk in itself. If mistakes are harshly dealt with, they will be hidden; if arrogance is tolerated within an organisation, the risk of poor decisions goes up. If bonuses encourage sub-optimal behaviour, sub-optimal behaviour will result. SSE, on the other hand, regards culture as a risk management tool. In this context, the practical application of the Teamwork value within SSE means the award of team-based bonuses and a culture of openness and transparency. The Board reviewed the organisational culture and its impact on the company's management and operations, in May 2009 and is satisfied that it is generally consistent with the company's publicly stated core values of Safety, Service, Efficiency, Sustainability, Excellence and Teamwork.

Purpose and Risk

As stated above, SSE's purpose is to provide energy, which is something people need. Its principal financial goal is to deliver sustained real dividend growth, which is moderate. In their book, Built to Last, Jim Collins and Jerry Porras wrote about companies that do 'not view business as ultimately about maximising profitability'. That is SSE's view of sustainable business and it underpins its approach to risk management in all aspects of its activities. It means current management meeting the needs to present stakeholders, customers, employees, communities and shareholders without compromising the ability of future management to meet their stakeholders' needs.

Appendix C: Related Party Transactions (page 140)

The following transactions took place during the year between the Group and entities which are related to the Group but which are not members of the Group. Related parties are defined as those in which the Group has control, joint control or significant influence over.

	2009 Sale of goods and services £m	2009 Purchase of goods and services £m	2009 Other transactions £m	2008 Sale of goods and services £m	2008 Purchase of goods and services £m	2008 Other transactions £m
Jointly controlled entities:
Seabank Power Limited	5.2	(82.4)	20.7	19.5	(150.6)	27.0
PriDE (South East Regional Prime) Limited	54.3	-	-	39.2	-	-
Scotia Gas Networks Limited	59.0	(134.7)	35.0	56.0	(106.9)	35.3
Marchwood Power Limited	_	_	104.6	-	-	2.7
Greater Gabbard Offshore Winds Limited	1.0	-	-	-	-	-
Associates
Barking Power Limited	0.7	(177.5)	(0.1)	0.7	(85.0)	0.4
Derwent Co-generation Limited	37.4	(94.6)	-	22.0	(82.2)	-
Logan Energy Limited	0.7	-	-	-	-	-
Green Highland Renewables Limited	0.2	-	-	-	-	-

The transactions with Seabank Power Limited, Barking Power Limited and Derwent Co-generation Limited relate to the contracts for the provision of energy or the tolling of energy under power purchase arrangements. PriDE (South East Regional Prime) Limited operates a long-term contract with Defence Estates for management of MoD facilities in the South East of England. All operational activities are sub-contracted to the ventures partners including Southern Electric Contracting Limited. Scotia Gas Networks Limited has operated the gas distribution networks in Scotland and the South of England from 1 June 2005. The Group's gas supply activity incurs gas distribution charges while the Group also provides services to Scotia Gas Networks in the form of a management service agreement for corporate services, stock procurement services and the provision of the capital expenditure on the development of front office management information systems. Sales of goods to related parties were made at an arms length price. The transactions with Marchwood Power Limited relate to fees and loan interest.

During the year, the Group paid non-refundable advance deposits of £2.3m (2008 - £nil) to Onzo Limited (an associated Company).

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

	Amounts owed by related parties		Amounts owed to related parties
	2009 £m	2008 £m	2009 £m	2008 £m
Jointly controlled entities:
Seabank Power Limited	75.8	82.9	23.1	57.0
PriDE (South East Regional Prime) Limited	6.6	-	-	0.4
Scotia Gas Networks Limited	0.2	-	-	-
Marchwood Power Limited	305.2	303.7	0.3	0.4
Greater Gabbard Offshore Winds Limited	154.2	60.7	-	-
Associates
Barking Power Limited	0.1	0.3	17.7	7.5
Derwent Co-generation Limited	8.3	0.1	9.5	9.5
Logan Energy Limited	-	-	0.1	-

The amounts outstanding are trading balances, are unsecured and will be settled in cash. No guarantees have been given or received.

No provisions have been made for doubtful debts in respect of the amounts owed by related parties. Aggregate capital loans to jointly controlled entities and associates are shown in note 13.

During the year, the Company entered into the following transactions with its subsidiaries (note 14):

	2009 £m	2008 £m
Company
Loans granted to subsidiaries	330.0	-
Loans repaid by subsidiaries	25.0	-
Interest charged to subsidiaries	143.8	124.1
Sale of goods	-	-
Purchase of goods	-	-
Balances outstanding at the year end
Loan balances outstanding at the year end	1,338.1	1,083.1

Remuneration of key management personnel

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

                                                              2009      2008

                                                                £m          £m

Short-term employment benefits                 3.5         3.4

In addition, the key management personnel receive share based remuneration, details of which are found at note 28. Further information about the remuneration of individual directors is provided in the audited part of the Directors' Remuneration Report.

The key management personnel are employed by the Company.

Information regarding transactions with post-retirement benefit plans is included in note 27.

 

END

 

 

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