Annual Financial Report

RNS Number : 4134F

SSE PLC

14 June 2012

 



Annual Financial Report

Following the Preliminary Results announcement and publication of the Remuneration Report on 16 May 2012, SSE (SSE plc) announces that it has published its Annual Report and Accounts for the year ended 31 March 2012.

The Annual General Meeting (AGM) will be held at the Bournemouth International Centre, Exeter Road, Bournemouth BH2 5BH on Thursday, 26 July 2012 at 12 noon.  The mailing to shareholders of the AGM documentation has commenced, and copies of the Annual Report and Accounts and the Notice of Annual General Meeting for 2012 are available to view on the Company's website: www.sse.com.

Copies of the Annual Report and Accounts, Notice of Annual General Meeting; and Form of Proxy for 2012 have been submitted to the UK Listing Authority and will shortly be available for inspection from the National Storage Mechanism, which can be accessed at: www.hemscott.com/nsm.do

The information below, which is extracted in unedited full text from the 2012 Annual Report and Accounts, is included in this announcement for the purpose of compliance with Disclosure and Transparency Rule 6.3.5.  The information reproduced below should be read in conjunction with the Preliminary Results announcement issued on 16 May 2012.  Together these constitute the material required by Disclosure and Transparency Rule 6.3.5 to be communicated to the media in unedited full text through a Regulatory Information Service.  This material is not a substitute for reading the full 2012 Annual Report and Accounts.  Page numbers and cross-references in the extracted information below refer to page numbers and cross-references in the Annual Report 2012.

Appendix A:  Statement of Directors' responsibilities in respect of the annual report and the financial statements (page 88)

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 IFRSs as adopted by the EU and applicable law and have elected to prepare the parent company financial statements on the same basis.

Under company law the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Group and parent company and of their profit or loss for that period. 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 adequate accounting records that are sufficient to show and explain the parent company's transactions and 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 2006. They have 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 regulations, the Directors are also responsible for preparing a Directors' Report, Directors' Remuneration Report and Corporate Governance Statement that complies 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.

We confirm that to the best of our knowledge:

·      the financial statements, prepared in accordance with the applicable set of accounting standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company and the undertakings included in the consolidation taken as a whole; and

·      the Directors' Report includes a fair review of the development and performance of the business and the position of the issuer and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face.

For and on behalf of the Board

Ian Marchant                        Gregor Alexander

Chief Executive                     Finance Director

15 May 2012

Appendix B: Risk Management (pages 65 - 70)

Introduction

The Board of SSE acknowledges its clear responsibility for risk management. SSE's approach to risk management is that any sustainable and successful business requires clear risk management in all aspects of its activities.

Equally important for SSE is the belief that risk management is first and foremost an integral part of how managers run their activities every day. Therefore SSE has focussed on looking at each business area individually and putting in place a framework that works effectively for that area. SSE recognises that this is an ongoing process as it needs to react to changes in the risk environment by constantly revisiting its internal processes. This report includes a summary of the developments in SSE's approach to risk management during 2011/12.

The need for good risk governance is critical to ensure the overall business model is effective in practice. Risk management in SSE is characterised by: the clarity of its financial goal; its strategy and business model which help to limit the value at risk; the culture and limited appetite for risk; and its work on risk identification and risk management.

Limited appetite for risk

The Teamwork value, combined with other factors such as the clear goal of sustained real growth in the dividend, means SSE has adopted a limited appetite for risk. The appetite varies between businesses. This means that SSE's approach in respect of economically-regulated businesses, which in themselves are lower risk, is more risk averse than is the case in other market-based activities. In these areas, such as electricity generation, 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.

Some examples of the way in which appetite for risk is limited are:

·      energy trading - levels of exposure are strictly monitored through risk models and clear reporting limits;

·      major project construction - the Company has in place a detailed governance and risk process for all its large capital projects;

·      the Company has a selective and disciplined approach to acquisitions, and sets demanding hurdle rates for expected returns;

·      in treasury and funding matters, there is a clear and prudent approach to liquidity levels, and a mix of maturities and currencies; and

·      where available on acceptable terms insurances are in place for all relevant major risks, while maintaining an appropriate balance with self insurance where appropriate.

Risk monitoring

Risks are monitored by the relevant business units within SSE, with an overview provided by the Group Audit Department for the Audit Committee meetings held in May and November of each year. The Board reviews all aspects of risk management and internal control at least twice a year, usually in March and September. At its meeting in March 2012, the Board held a specific review of the developments within the Company during the year to ensure good risk management is in place; it revisited the approach to risk appetite; and reviewed the management reporting arrangements to ensure proper controls are in place.

In addition to the Board bi-annual risk reviews, the Board undertook a review of the Company's principal risks at its meeting in May 2011 and approved the list of principal Group risks which were referenced in last year's Annual Report.

During the year, the Group Audit department carried out over 65 separate audits of functions, activities and issues managed by SSE, providing senior management with a robust internal control assurance. These included environmental audits carried out by SSE's Group Environmental Auditor. Each audit report included agreed management actions to improve the overall management of risk. Group Audit reviews complement the work done by business-specific compliance functions in areas such as Safety, Energy Trading, Energy Efficiency, Energy Supply, IT and Customer Service.

Developments in SSE risk management during the year

As part of the SSE approach to risk management, the Company continues to review and strengthen its internal control processes. Examples of this approach during 2011/12 are:

·      The top 19 risks reported last year were reviewed in detail at the Board meeting in May 2011. At the Management Board risk workshop held in August 2011 these risks were modified, and a new risk category, management of Joint Ventures, was agreed.

·      All the top 20 Group risks are actively monitored and reviewed. Each principal risk has an assigned risk owner who is a member of the Management Board. The risk owner is responsible for ensuring that key controls for the risk are in place and operating.

·      The Group Insurance department facilitated an extensive review of the existing risk management framework. The output from this review led to guidelines to promote a consistent categorisation and scoring of the enterprise risks facing the business.

·      The Large Capital Projects Governance Framework has now been extended to all major projects, such as IT, Telecoms and Property. In October 2011, the Management Board established a Major Projects (Standards and Delivery) Committee to oversee all major projects.

·      Cyber/information security risk is being addressed with a significant investment programme which was approved during the year.

Internal control

Risk management depends on a strong system of internal control, which is fundamental to achieving SSE's strategic objectives. The Board is responsible for the overall system of internal control and risk management, and it either directly, or through its committees, sets performance targets and policies for the management of key risks facing SSE. The system of internal control is designed to manage, rather than eliminate, risk of failure to achieve business objectives and can provide only reasonable and not absolute assurance against material misstatement or loss. The Internal Control Assurance Process below provides an overview of the key committees and related assurance activities currently in place within the Group.

All employees are expected to adhere to the Company's code of business practice and the SSE values - Safety, Service, Efficiency, Sustainability, Excellence and Teamwork - which are embedded in the culture. Their consistent application is central to all activities in SSE. The Teamwork value, the emphasis on people's knowledge rather than status, and the maintenance of a very experienced team, complemented by the recruitment of additional specialist skills where necessary, are all designed to ensure that the risks associated with operations are fully understood and actively managed. Reporting within the Company is structured so that the key issues are escalated through the management team, ultimately to the Board if appropriate.

The key elements of SSE's internal control and financial reporting processes are summarised below:

The Board:

·      approves the policies, procedures and framework for the maintenance of a sound and effective system of internal control ensuring:

o   the provision of quality internal reporting to the Audit Committee and other Board Committees by management and Group Audit;

o   the provision of quality reporting by the external Auditors to the Audit Committee;

o   compliance with the Turnbull Guidance on Internal Control; and

o   compliance with statutory and regulatory obligations;

·      reviews the significant risks identified by each business unit as well as the mitigating action against those risks following review by the Audit Committee;

·      determines the nature and extent of the significant risks it is willing to take in achieving its strategic objectives;

·      approves and regularly reviews and updates SSE's strategy and business development;

·      reviews the financial reporting process and performance through: annual operating and capital expenditure budgets; monthly reviews against actual results; analysis of variances; and evaluation of key performance indicators;

·      receives regular reports from the Chief Executive, the Finance Director and the Management Board members; and

·      undertakes an annual evaluation of the Board, its Committees and individual Directors.

The Management Board:

·      monitors operational and financial performance of SSE;

·      develops and implements: SSE strategy; operational plans; policies; procedures; and budgets;

·      assesses and controls all SSE risks;

·      monitors competitive forces in each area of operation;

·      receives and reviews reports from its committees, namely: the Risk and Trading Committee; the Safety, Health, and Environment Committee; the Major Projects (Standards and Delivery) Committee; the Disclosure and Governance Committee; and the Business Development Committee; and

·      receives and reviews regular presentations and reports from all the main Group businesses.

The Group Audit department:

·      works with the business units to develop and improve risk-management tools and processes in their business operations;

·      ensures that business risks are identified, managed and regularly reviewed and that the key risks are reported to the Audit Committee and Board;

·      ensures that the business units carry out regular reviews on their internal controls relating to the key risks;

·      monitors the effectiveness of SSE's system of internal control through audit reviews, exercises and reports and, where appropriate, action plans to senior managers, Directors, the Audit Committee and external Auditors;

·      monitors adherence to SSE's key policies and principles; and

·      provides the Audit Committee and Board with objective assurance on SSE's control environment.

Role of committees

The role of the Audit Committee, and the Safety, Health and Environment Advisory Committee in the Group's system of internal control and risk management is set out in the individual committee reports.

The Board's review of internal control

While the Board retains overall responsibility, reviewing the system of internal control and monitoring its effectiveness is primarily dealt with by the Audit Committee, and its output is reviewed at least annually by the Board. The Board and the Audit Committee have reviewed the effectiveness of the Company's risk management and internal control system in accordance with the Code for the period from 1 April 2011 to 15 May 2012 (being the last practical day prior to the printing of this Annual Report). The Board confirms that appropriate action would have been taken to address any significant failings or weaknesses identified; however, no intervention has been required.

The internal control procedures described in this section have not been extended to cover its interests in joint ventures. The Group has Board representation on its joint venture companies where separate systems of internal control have been adopted.

Principal risks and their management

Risk definition			Key controls overview			Developments during the year
Safety management Unsafe working practices, equipment and inadequate training may lead to accidents or incidents involving employees, contractors, members of the public or plant and equipment.			Safety is the first of SSE's core values. The Safety, Health and Environment Advisory Committee (SHEAC) of the Board is responsible for ensuring SSE's health and safety policy is adhered to. The detailed report from this Committee is on page 74. The Management Board also has a SHE Committee.			The Terms of Reference for the SHEAC were reviewed and updated during 2011/12. There is now greater non-Executive membership on the SHEAC. The SHE Committee of the Management Board is also fully established, with key priority areas including a Company-wide safety behaviour programme.
Regulatory change An adverse change to the current regulatory framework in all parts of SSE could have a significant effect on its business.			An experienced Regulation Department manages SSE's relationships and interface with Ofgem, Ofwat, Ofcom and other regulators. SSE assesses and anticipates regulatory issues in its decision-making and operations.			The GB energy regulator, Ofgem, adopted a high profile during 2011/12, with a particular emphasis on the Retail Market Review and the RIIO process for determining regulated networks' price control - all of which emphasised the ongoing significance of regulation to SSE.
Legislative change Risks to SSE from unfavourable legislative developments at EU level and in the jurisdictions in which it operates.			SSE has Policy and Public Affairs specialists based in Brussels, London, Edinburgh, Cardiff, Belfast and Dublin who engage openly and constructively with legislators, officials and other policy-makers on all aspects of energy and related environment policy.			The UK government is engaged in a process of electricity market reform which could lead to profound changes in the energy market in Great Britain. In addition, the Scottish and UK governments have consulted on proposals for a referendum on Scottish independence which has a risk to SSE of uncertainty until the result is known.
Energy portfolio management Failure to identify and effectively manage the physical and financial exposures that result from SSE's operational involvement in Generation, Gas Storage, Fuel Procurement, Wholesale Trading and Retail Supply.			The Board approves levels of exposure which are strictly monitored through sophisticated reporting and clear reporting limits. The Management Board has a Risk and Trading Committee, with members drawn from a number of key functions across SSE.			The process of the UK energy prices becoming increasingly integrated into the wider global energy market is continuing and as a result there is an increasing focus on macro-economic and geopolitical issues in the ongoing management of the portfolio.
Asset and plant management Loss or extended disruption to key Group Infrastructure caused by failure/loss of containment of key plant.			SSE's Engineering Centre oversees a process of asset life management and risk-based management. Regular testing, review and updating of major incident handling processes takes place. Capital spending and maintenance programmes are maintained and the Risk and Trading Committee provides oversight.			SSE has always emphasised the need for flexibility in its generation assets to ensure that changes in supply of and demand for electricity can be managed. In 2011/12 it decided to start a comprehensive programme of maintenance at two gas-fired power stations to support more flexible operations.
Networks management Loss or extended disruption to key Group network Infrastructure.			Substantial refurbishment and upgrade programmes are designed to prevent network failures. There is a rigorous post-event analysis following each major network event such as storms. Business continuity plans, supported by contingency sites and regular testing, are well-established.			The winter of 2011/12 represented the biggest challenge to electricity network resilience for a generation, with a succession of major weather events resulting in significant losses of electricity supply. The implications of this will be reflected in future networks planning.
Cyber/information security Unauthorised access or disclosure of data either within the SSE Group or between SSE and external environments and markets.			SSE has in place an actively managed Information Security programme across all of its activities to ensure resilient business operations.			Cyber security has been a particularly prominent issue in the UK and elsewhere during 2011/12, with individual sectors and organisations being targeted. SSE is increasing its investment in information security.
Supply chain Delivery of large-scale investment programme is impacted through failure to establish, contract and maintain adequate supply chains and strategic alliances.			SSE's diverse businesses help reduce reliance on specific supply chains and the sustainability value requires a long-term view to be taken. Well-established procurement teams ensure varying supply chains are identified and counterparty exposures monitored.			A supplier relationship model has been put in place to build relationships with strategic suppliers and put SSE in the position of being a key customer. In the high risk categories long-term contracts are being implemented and tendering has commenced. This is designed to secure supply chains and ensure value for money.
Treasury management Failure to identify and effectively manage treasury and tax exposures and to meet the organisation's funding requirements and obligations.			The Risk and Trading Committee oversees any major changes to treasury policy or objectives. Regular reporting of treasury activity is made to the Audit Committee and Board. Strong internal controls are maintained and independent reviews take place.			During 2011/12, SSE continued its approach of maintaining diversity in its funding sources through successfully reopening the European corporate bond market in September 2011 and undertaking a private placement of senior notes with US-based investors in February 2012.
Credit management Failure to effectively manage billing and collection/counterparty risk.			There is Executive Director-level representation in debt steering group meetings. Ongoing credit monitoring and reporting are supported by credit management teams throughout the Company.			The general economic climate in the UK and Ireland has resulted in significant debt management challenges, with the volume of work increasing and with the need to deploy practical steps to work with customers becoming increasingly critical.
Pension liabilities Liabilities increase due to market conditions or demographic changes and investments under perform.			There are periodic formal valuations of pension schemes and contributions supported by continual monitoring of scheme investments and valuations. Performance of investment managers are reviewed regularly by the pension trustees.			Continued improvements of member longevity will likely add to the liabilities of both the Scottish Hydro-Electric and Southern Electric Pension Schemes. Uncertainty of markets in Eurozone could detract from investment performance directly impacting scheme funding levels.
Sector developments Failure to identify/tardiness in identifying step changes in the industry sectors and reacting appropriately.			There is a strong external focus to ensure developments are anticipated and, where appropriate, addressed. Senior managers have responsibility for areas such as policy and research, strategy and business development. Participation in these areas is broad, to ensure all relevant sector developments are addressed.			2011/12 saw four significant developments which will influence the sector for the long term: electricity market reform; the Retail Market Review and the RIIO model for economic regulation in Great Britain; and the process of harmonisation affecting energy markets on the island of Ireland. SSE is actively involved in giving input to policy and regulatory developments in each of these areas.
Large capital projects management Failure to deliver quality projects on time and on budget.			The deployment and updating of SSE's Large Capital Project Governance Framework is designed to ensure projects are governed, developed, approved and executed in an effective manner.			During 2011/12, SSE reallocated responsibility for large capital projects, focusing on three key areas: renewable energy; thermal generation; and networks. The Management Board established a Major Projects (Standards and Delivery) Committee.
Transformation projects management Failure to deliver quality projects on time and on budget to implement required upgrades to customer systems in relation to Smart Metering and the Energy Supply business requirements.			SSE works with experienced advisers and suppliers and implements a strong governance and assurance framework for all aspects of major change programmes. The approach increasingly reflects the governance framework originally developed for large capital projects.			In the course of 2011/12, the remit of SSE's Project Services team was extended to include centralised expertise and support for all of SSE's significant projects, not just large capital projects. The new Management Board Major Projects (Standards and Delivery) Committee reviews all major projects.
Compliance management Any significant or multiple compliance failures could result in an adverse effect on SSE, including the possibility of financial penalties being levied.		Wide-ranging consultation and review of all relevant regulatory, legal and accounting frameworks takes place. Regulation, Compliance and Group Audit teams develop and monitor compliance processes.			During 2011/12 SSE was prosecuted in relation to the use of direct sales aids by doorstep sellers. SSE took the lead by being the first of the big six energy suppliers to stop doorstep selling activities in the UK, which is an example of the seriousness with which SSE regards compliance with all its obligations.
Crisis management Inadequate response to a major emergency/contingency event. If something goes wrong, how well can SSE deal with it?		The corporate crisis management policy and procedure are updated and issued annually. There is Executive training and regular test exercises are undertaken. A member of the Management Board 'champions' crisis management.			In 2011/12, SSE refreshed its crisis management and emergency planning approach. Senior roles and responsibilities have been defined, facilities have been enhanced and Group-level exercises have been undertaken to practise SSE's response capabilities.
Management of joint ventures Failure to effectively manage SSE Joint Venture assets results in reputational damage or destruction in value.		Joint ventures are in themselves a means of managing risk, but SSE's interests in them also require careful management and oversight. This is provided through clear governance arrangements, senior manager representation on Boards, and effective reporting within SSE - to the Management Board and the Board as required.			SSE continues to enter into joint venture arrangements, particularly for large renewable generation projects. Joint ventures are particularly critical in the development and construction of wind farms offshore and during the year the new role of Head of JV Management was created within SSE's renewable energy division, to reinforce oversight and management of joint ventures.
Succession planning Not having cover for the Board and the Management Board and their direct reports.		The Nomination Committee of the Board is responsible for reviewing the leadership needs of senior management in general and succession plans for the Executive Directors in particular. The detailed report for this Committee is on page 71.			Colin Hood, Chief Operating Officer, stepped down from the Board in October 2011. His Board-level responsibilities were reallocated among existing Executive Directors and his operational responsibilities were divided between members of the Management Board. The handover and transition proved to be effective.
Resource and internal infrastructure Inability to establish and maintain a competent workforce. Failure to forward plan and identify a capabilities matrix to match growth plans. Portfolio of assets (Buildings, transport and IT) not maintained and enhanced to support business plans.		An integrated Group Services function is in place to ensure optimum resource management, including Safety, HR, IT, Facilities Management and Procurement.			In the course of 2011/12, SSE sought to strike the balance between cost efficiency and investment in adequate resources for the future. A particular focus was IT, where the new Director of IT led the implementation of plans to improve operational performance, service delivery and project delivery.
Corporate arrogance or hubris Unwarranted belief in SSE's own abilities, failure to keep listening and to keep challenging conventional wisdom.		There is Board oversight of this, and practical application throughout SSE, including through the performance appraisal system, of the 'SSE SET' of core values: Safety, Service, Efficiency, Sustainability, Excellence and Teamwork.			External criticism of energy suppliers was substantial during 2011/12. In response, SSE developed its proposals to 'build trust' in energy supply - which explicitly accepted Ofgem's analysis that in an environment of higher prices, suppliers have to transform the way they deal with customers.

Appendix C: Related party transactions (page 165)

The immediate parent and ultimate controlling party of the Group is SSE plc (incorporated in Scotland).

Balances and transactions between the Company and its subsidiaries, which are related parties of the Company, have been eliminated on consolidation and are not disclosed in this note. Details of transactions between the Group and other related parties are disclosed below.

(i)    Trading transactions

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.

	Sale of goods and services 2012 £m	Purchase of goods and services 2012 £m	Amounts owed from 2012 £m	Amounts owed to 2012 £m	Sale of goods and services 2011 £m	Purchase of goods and services 2011 £m	Amounts owed from 2011 £m	Amounts owed to 2011 £m
Jointly controlled entities:
Seabank Power Ltd	34.7	(94.8)	0.1	9.1	7.9	(121.3)	0.3	25.9
Marchwood Power Ltd	46.8	(80.5)	0.2	4.0	-	(82.7)	0.1	7.3
Greater Gabbard Offshore Winds Ltd	-	(24.4)	-	15.4	6.3	(0.2)	-	-
Scotia Gas Networks Ltd	59.2	(154.3)	7.3	13.9	61.8	(131.2)	15.7	12.1
Other Joint Ventures	42.0	-	0.2	0.3	39.7	-	0.3	0.6
Associates	42.4	(44.5)	11.8	21.4	39.9	(104.3)	8.3	3.7

The transactions with Seabank Power Limited, Marchwood Power Limited and Greater Gabbard Offshore Winds Limited relate to the contracts for the provision of energy or the tolling of energy under power purchase arrangements. 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 and stock procurement services. Other transactions include those with PriDE (SERP) Limited, which 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 SSE Contracting Limited.

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 14.

Remuneration of key management personnel

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

	2012 £m	2011 £m
Short-term employment benefits
Executive Directors	2.8	3.7
Other Management Board members (from 1 January 2011)	2.0	0.3
	4.8	4.0

Key management personnel are responsible for planning, directing and controlling the operations of the Group. From 1 January 2011 these personnel were identified as the Management Board, which is made up of the Executive Directors, seven (2011 - six) senior managers and the Chief Executive Officer of Scotia Gas Networks Limited (who is not remunerated by the Group).

In addition, the key management personnel receive share-based remuneration, details of which are found at note 30. Further information about the remuneration of individual Directors is provided in the audited part of the Directors' Remuneration Report. The Executive Directors are employed by the Company.

Information regarding transactions with post-retirement benefit plans is included in note 29.

 

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