Results Centre

Financial Overview

Financial Results for 2009/10

These results for the year to 31 March 2010 are reported under International Financial Reporting Standards, as adopted by the EU. SSE's focus has consistently been, and remains, 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.

This 'adjusted profit before tax'* was first adopted as a key performance indicator by SSE in 2005/06, and it has been applied consistently since then. It reflects the underlying profits of SSE's business and the basis on which it is managed and avoids the volatility introduced by IAS 39. The table below reconciles SSE's reported profit before tax to its adjusted profit before tax*.

IAS 39 requires companies to record certain forward commodity contracts that are deemed to be derivative financial instruments at 'fair value'. At 31 March 2010, there was a net derivative financial liability in SSE's balance sheet arising from IAS 39 of £985.1m, before tax, compared with a net liability of £1,423.6m, before tax, at 31 March 2009.

The liability principally relates to some forward commodity purchase contracts for gas, coal, oil, carbon and wholesale electricity that SSE, like all major energy suppliers, has to enter into to ensure that the future requirements of its customers are met. IAS 39 requires SSE to record these contracts at their 'fair value'. This involves comparing their contractual price against the prevailing forward market price at the financial year end. At 31 March 2010 the average contractual price was higher than the market price (in other words, 'out of the money'), albeit by a smaller amount than at the same time last year, leading to a smaller liability.

Thus the movement on derivatives under IAS 39 of £399.8m shown in the table above and on the face of the income statement is primarily due to a reduction in the 'out of the money' position on commodity contracts between 31 March 2009 and 31 March 2010. SSE sets out these movements in fair value separately, as re-measurements, as they do not reflect the underlying performance of the business and the extent of the actual profit or loss arising over the life of the contracts giving rise to this liability will not be determined until they unwind; for around 50% of the total energy volume, this will be over the next 12 months.

Adjusted Profit Before Tax* in 2009/10

Adjusted profit before tax* rose by 2.9%, from £1,253.7m to £1,290.1m. This is moderate growth, consistent with the objective which SSE set out in its Annual Report 2009. SSE's adjusted profit before tax reflects four key steps forward in its Generation and Supply business in 2009/10, compared with the previous year:

• The installation of flue gas desulphurisation (FGD) equipment in early 2009 meant there were no related restrictions on running hours at Fiddler's Ferry and Ferrybridge power stations;
• The return to service in June 2009 of Medway power station, following a 15-month unplanned outage, meant the availability of SSE's gas-fired power stations to generate electricity was significantly better;
• There was an increase in the number of customer accounts to which SSE supplies electricity and gas in the Great Britain and Ireland markets (600,000 more in April 2009 than in April 2008); and
• A better balance between the cost of energy procured and the cost of energy supplied was achieved, following the energy supply losses sustained during the previous financial year to protect customers from the worst effects of exceptionally high wholesale prices.

At the same time, however:

• output of renewable energy was much lower than expected because of the unusually dry, cold and still weather conditions experienced during the winter of 2009/10 and the loss of output from the Glendoe hydro electric scheme;
• the achieved price of electricity produced from renewable sources was lower; and
• although the output of electricity from gas- and coal-fired power stations was higher, the difference between the cost of the primary fuel and the price of the electricity generated from it (the 'spark' and 'dark' spread respectively) was lower.

Adjusted Profit Before Tax* for 2010/11

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 11 successive increases in adjusted profit before tax*.

Adjusted profit before tax* is an important measure of performance in any given year. In SSE's view, however, adjusted profit before tax* is not an end in itself and SSE does not have the goal of maximising profit in any single year or over any particular period. It takes a longer-term view and believes that profit is a means to an end: sustained real growth in the dividend, the delivery of which is its first responsibility to shareholders.

SSE's adjusted profit before tax* in any single year will always be determined by issues such as:

• the availability of its gas- and coal-fired power stations to generate electricity;
• the output of renewable energy from its hydro electric stations and wind farms;
• the impact of the weather on energy production and consumption;
• the actual underlying level of energy consumption;
• the interaction between wholesale prices for energy and fuel and the prices for the electricity and gas charged to customers; and
• the timely commissioning of new assets.

In terms of 2010/11, SSE believes that its balanced range of market-based and economically-regulated energy businesses, and the diversity of opportunities within those businesses, will deliver a level of adjusted profit before tax* capable of supporting the achievement of its new full-year dividend target.

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 benefit 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 2009/10, SSE's adjusted earnings per share* were 110.2p, compared with 108.0p in the previous year.

Dividend

Final Dividend for 2009/10

SSE cannot emphasise enough that its first responsibility to shareholders is to deliver sustained real growth in the dividend. The Board is recommending a final dividend of 49p per share, compared with 46.2p in the previous year, an increase of 6.1%. This will make a full-year dividend of 70p, which is:

• an increase of 6.1% compared with 2008/09;
• a real-terms increase of 5.6%, based on the average annual rate of inflation in the UK between April 2009 and March 2010, which exceeds the target of 4%;
• the 11th successive real-terms above-inflation dividend increase since the first full-year dividend of 25.7p paid by SSE in 1998/99;
• double the dividend paid in 2002/03, since when there has been compound annual growth of 10.4%; and
• covered 1.57 times by SSE's adjusted profit after tax.

Dividend Target for 2010/11 and Beyond

Its newly-adopted targets mean SSE is aiming to deliver an increase in the full-year dividend of at least 2% more than inflation in 2010/11. The same target is in place for 2011/12 and 2012/13, with sustained real growth thereafter also being targeted.

Scrip Dividend Scheme

A resolution will be put to shareholders at the Annual General Meeting to propose the introduction of a Scrip Dividend Scheme. The proposed Scrip Dividend Scheme is intended to replace the current dividend reinvestment plan. It will give shareholders the option to receive new fully paid Ordinary Shares in the Company in place of their cash dividend payments.

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