2 ScottishPower Annual Report & Accounts 1996–97 Energy businesses Generation Wholesale Generates electricity from the company’s own power stations, and conducts bulk trading of electricity and gas including the sale of electricity to other electricity companies and the wholesale market in England and Wales. Power Systems Manages the transmission and distribution systems which transport electricity from the power station to the customer in Scotland. The business also operates the company’s metering function. Energy Supply Sells electricity to 1.8 million customers in Scotland and manages the associated customer service, billing and income collection. Supplies electricity and gas to customers throughout the UK. Manweb Sells and distributes electricity to 1.3 million customers in North West England and North Wales. Water business Southern Water Provides water and waste water services to 1.7 million customers mainly in Kent, Sussex, Hampshire and the Isle of Wight. Developing businesses ScottishTelecom Supplies advanced telecommunications and on-line information services. ScottishTelecom provides services to many of Scotland’s major companies, in addition to supporting ScottishPower’s electricity businesses. Retail Operates 158 shops and superstores throughout the UK, selling brown and white goods. The Retail business is the UK’s third largest electrical retailer with shops from Inverness to Southampton. Group Overview Business turnover 1996-97 n ScottishPower Energy Businesses £1,541.9m n Manweb £755.1m n Southern Water (post acquisition) £316.2m n Developing Businesses £327.5m Group Total £2,940.7m Contribution to group operating profit 1996-97 n ScottishPower Energy Businesses £406.5m n Manweb £135.0m n Southern Water (post acquisition) £114.4m n Developing Businesses £8.0m Group Total £663.9m
Generation WholesaleGenerates electricity from the company’s ownpower stations, and conducts bulk trading ofelectricity and gas including the sale ofelectricity to other electricity companies andthe wholesale market in England and Wales.
Power SystemsManages the transmission and distributionsystems which transport electricity from thepower station to the customer in Scotland. The business also operates the company’smetering function.
Energy SupplySells electricity to 1.8 million customers inScotland and manages the associatedcustomer service, billing and income collection.Supplies electricity and gas to customersthroughout the UK.
ManwebSells and distributes electricity to 1.3 millioncustomers in North West England and North Wales.
Water business
Southern WaterProvides water and waste water services to 1.7 million customers mainly in Kent,Sussex, Hampshire and the Isle of Wight.
Developing businesses
ScottishTelecomSupplies advanced telecommunications and on-line information services. ScottishTelecomprovides services to many of Scotland’s majorcompanies, in addition to supportingScottishPower’s electricity businesses.
RetailOperates 158 shops and superstoresthroughout the UK, selling brown and whitegoods. The Retail business is the UK’s thirdlargest electrical retailer with shops fromInverness to Southampton.
Contracting ServicesConducts the installation and maintenance of alltypes of electrical plant. Provides project andfacilities management services.
TechnologyProvides engineering and scientific consultancyservices to the ScottishPower group andexternal customers.
ScottishPower is committed to building businesses,providing high standards of customer service and achievingcontinuous improvements in environmental performance.
ScottishPowerserves 1 in 5UK homes
1.8mcustomers
1.3mcustomers
1.7mcustomers
No. of employees (full time equivalents) at 31 March 1997
n ScottishPower Energy Businesses 4,916
n Manweb 2,757
n Southern Water 3,526
n Developing Businesses 3,202
Group Total 14,401
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4 ScottishPower Annual Report & Accounts 1996–97
Electricity
• Sales from Scotland to England reached a recordlevel of 5,822 GWh
• Manweb’s Merseyside region – most reliabledistribution network in UK
• Generation and Power Systems achieved upperdecile operational performance
• £255 million investment in networks and power stations
• ScottishPower and Manweb awarded Charter Mark
Water
• Customer Charter established• Leakage rate of 13.2% – one of the lowest
in the UK• Record levels of investment in water and waste
water infrastructure• Water quality amongst the best in Europe
Group Total 14,401 10,773 8,040 7,980 8,038pppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppp ppppppppppp ppppppppppp ppppppppppp ppppppppppp ppppppppppp*The prior year figures are stated after adjusting the number of shares in issue by the bonus element inherent in the rights issue on 30 August 1996.
Your company has made major advances acrossall areas of activity since my last annualstatement to you. The report of the ChiefExecutive which follows, demonstrates in somedetail the achievements of the year in terms ofstrategy, operations, customer service andemployee development. The results themselvesshow another year of growth in turnover, profitand dividends, with the major new acquisitionsperforming above our initial expectations.Today the ScottishPower group has majoractivities in electricity, with generation, powersystems and supply, and in water and wastewater services, gas, telecommunications andretail, and smaller but successful operations in contracting and technology. We now serve, in our three distinct geographic territories,4.8 million customers.
Murray Stuart Chairman
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8 ScottishPower Annual Report & Accounts 1996–97
During the last two years we havedeveloped quickly towards our goalof building a major UK multi-utilitybusiness. In August 1996 weacquired Southern Water, the waterand waste water company operatingmainly in Kent, Sussex, Hampshireand the Isle of Wight, for £1.7 billion.I am pleased to report that to datewe have been more than satisfiedwith the progress we have made inSouthern Water and the potentialvalue for shareholders that we haveidentified. We are confident thatthrough a very large investmentprogramme, and dedicated andhighly focused management, we willdeliver over the next few years, highquality and improving water andwaste water services to our customers.
In October 1995 we completedthe acquisition of Manweb, theRegional Electricity Companyoperating in North West Englandand North Wales. Manweb’s first fullyear of operation under ourownership has exceeded ourexpectations in terms of the tradingresults and the improvements incustomer service which we haveachieved. The major benefits arisingfrom the co-operation betweenManweb and ScottishPower havebeen a factor in this.
I am happy to report that ourScottish electricity operations havecontinued to develop, again not onlyin trading terms, but in the overalllevel of service provided to ourcustomers. The extreme winterstorm experienced in Decembercreated an unprecedented level ofdisruption and damage to both oursystem and the service we provide toour customers in the ScottishBorders. We committed all availableresources to correcting the situationas quickly as possible and we are
continuing to make improvements toenable the network to cope withfuture severe weather.
Our developing businesses –Retail, Telecommunications,Contracting and Technology – allshowed substantial growth, inparticular ScottishTelecom whereexternal revenues increased by£31 million to £37 million.ScottishTelecom has expanded itsnetwork in Scotland and extendedthe range of services it offers toinclude mobile telephony andinformation services. The businesslaunched services to residentialcustomers in April of this year, usingthe latest radio technology.
A sound performance from ourScottish-based businesses, the firstfull year of revenues from Manweband the inclusion of eight monthsturnover from Southern Water, haveincreased our group turnover from£2,271 million to £2,941 million, a30% rise. Pretax profits reached£558 million, a growth of 38%, andearnings per share at 38.11p pershare were up 4.99p or 15%.
In the year we have also madesubstantial capital expendituretotalling £460 million, double theprevious year. Southern Water iscommitted to an investmentprogramme of over £1 billion in theperiod to March 2000 and we aremaking significant investmentselsewhere in ScottishPower andManweb particularly in generation,power systems and informationsystems and in ScottishTelecom.Major investment will be a feature ofour business for the years ahead.
We are recommending a finaldividend of 12.33p net per share,which together with the increasedinterim dividend will result in a fullyear payment of 18.50p net per
The Princess Royal opens thenewly refurbished CathcartBusiness Park on 17 March.Her visit included a tour of theCustomer Service Centre,Open Learning, OccupationalHealth and the PowerClub.
In August 1996 we acquiredSouthern Water, the water and waste water companyoperating mainly in Kent,Sussex, Hampshire and theIsle of Wight.
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share, an increase of 19%. Thedividend is 2.1 times covered byearnings. Our aim remainssustainable 7% to 8% real dividendgrowth per annum, whilstcontinuing to maintain a prudentlevel of dividend cover. Our yearend net borrowing was £1,790million giving gearing of 118%,somewhat less than we forecastwhen acquiring Southern Water.
The period ahead offers bothopportunities and challenges foryour company, an experience notnew to us after the last two years.The liberalisation of the markets forelectricity and gas supply andchanges to regulation are majorissues for any management.However, we are prepared for thesenew and very significant issues andhave invested both manpower andfinancial resources to ensure that wemaximise the opportunities presented.With regard to a potential windfalllevy on the utility companies,ScottishPower was privatised withtougher regulation and on a loweryield than its counterparts inEngland and Wales. The companyhas not made windfall profits andhas worked hard to deliver equitablereturns to all its stakeholders.
In all our businesses, we havecontinued to strive to improve ourservice to customers and havecontinued to deliver further pricereductions to our electricitycustomers. The opportunities fortraining and development, which areavailable to all employees within thegroup, are leading class, as are ourOpen Learning facilities and theWellscreen health programme, nowextended to Manweb. Not forgottenby any means is our involvementwith the communities we servethrough support and sponsorship,particularly the arts where wefacilitate improved accessibility forall to the opera and orchestras suchas the Royal Scottish NationalOrchestra and the Royal LiverpoolPhilharmonic Orchestra. Our majornew business, ScottishPowerLearning, which is in partnershipwith the trade unions, hassuccessfully begun operations.
During the year we weredelighted to welcome to our Board, Baroness Jay of Paddington,Ewen Macpherson, Chief Executiveof 3i Group plc, and Sir PeterGregson, formerly PermanentSecretary of the Department ofTrade and Industry. We have alreadybenefited from their excellent adviceand support. Following herappointment as Minister of State inthe Department of Health, BaronessJay has resigned from the Board.
Nick Kuenssberg retires at theAnnual General Meeting. Nick hasserved for 14 years overall as adirector of ScottishPower and itspredecessor, South of ScotlandElectricity Board. He is thus thelongest serving director and hastwice been Chairman of both theAudit Committee and theEmoluments and Nominations
Committee. In his current role asChairman of the Emoluments andNominations Committee he will besucceeded by Ewen Macpherson.Nick’s sharp mind, ongoinginvolvement and wise contributionhave been invaluable to us, and weare deeply grateful to him.
I can recollect few companieswhich have had such a sustainedand varied period of challengecovering so many areas of activityboth strategic and operational.Without the skills of your executiveteam and the commitment of allemployees, such an outcome as wehave experienced would scarcely becredible. I would like to thank themon your behalf for their continuedefforts.
The next few years will againpresent rapid change in the utilitiessector offering both opportunitiesand challenges. ScottishPower hasestablished a sound business basiswith a breadth of operations andachieved excellence in working for,and caring for, customers. Inaddition, we have provided growthpotential and enhanced income toour shareholders. Looking forward,the ScottishPower group is nowuniquely placed to exploit theopportunities presented by the fullliberalisation of the energy marketsand this will be our principal focusin the year ahead.
Manweb continues to improveservices to its customers,regaining the Charter Markand achieving the ISO 9002international qualityaccreditation. Its Merseysideregion had the most reliabledistribution network in the UK,according to OFFER.
A ScottishPower linesmaninspects the damage to atower wrecked by one of themost devastating blizzards tohit the Scottish Borders inliving memory. A combinationof accumulated ice and highwinds brought down hundredsof lines, poles and steel towers in December 1996.
Chief Executive’s ReviewBuilding a leading UK multi-utility business
In seeking the most effective ways to realise thegroup’s potential in the interest of shareholdersand customers, ScottishPower has beentransformed from an essentially local electricitycompany into a national multi-utility offering abroad mix of services.The purchases of Manweb in October 1995 andSouthern Water less than a year later haveexpanded our core trading areas to threeimportant and varied geographic bases – Centraland Southern Scotland, North West England andNorth Wales, and much of South East England.As a result we now serve 1 in 5 of all UK homeswith one or more ScottishPower services.The two acquisitions and their successfulintegration have laid the foundations forScottishPower’s UK business, creating a broadlybased utility group that is strongly placed to addvalue for shareholders and customers.
Ian Robinson Chief Executive
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Building BusinessesThe strength of the company isfounded principally on the efficiencyand quality of our Scottish energybusinesses, which have year-on-yearincreased electricity sales whileproviding an enhanced level ofcustomer service. In these businesseswe have made considerable progresstowards our aim of achieving best inclass performance, our efforts beingdriven by benchmarking exercisesagainst the very best internationalcompanies. The skills which wedeveloped in Scotland have beentransferred to Manweb and this hasresulted in lower costs and higherlevels of service in that business.
Looking ahead the greatestchallenges for the energy businessesof ScottishPower and Manweb arethe liberalisation of the electricity andgas markets in 1998 – challenges thatwe are well placed to meet.
Our developing businesses, Retailand ScottishTelecom, have grownrapidly. Our portfolio of electricalretail stores now stretchesthroughout the UK from Invernessto Southampton. Our move intotelecommunications exploited thecompany’s existing private networkand we now have a successfulScottish telecommunicationsbusiness.
Through the acquisition ofSouthern Water we have completedthe foundations of our UK utilitybusiness. The priority in SouthernWater is to deliver value by focusingon the core water and waste wateractivities. In addition, SouthernWater gives us a base from which to grow energy sales in SouthernEngland. We participated in theSouthern gas trials whichcommenced in March and we weredelighted to win 70,000 gas
customers. Southern Water’s skillsalso provide the group with theexpertise to participate in projects to upgrade the waste waterinfrastructure in Scotland.
The ScottishPower group is nowuniquely positioned to exploit theopportunities presented by the fullliberalisation of the energy markets,which is expected in 1998. Ourmulti-utility portfolio will give useconomies of scale unavailable toour competitors, while providingcustomers with greater choice andadded convenience from dealingwith a single utility company.
Business review – Energy businessesThe award of the Charter Mark to ScottishPower underlined thecommitment of our energybusinesses to continuedimprovements in customer service,all the more important as weprepare for competitive energymarkets. At the same time priceshave continued to be reduced in real terms to business and domestic customers.
The Customer Service Centrewithin the newly refurbishedCathcart Business Park in Glasgowis now operational 24 hours a day,365 days of the year, and thiscentralisation has resulted in lowercosts and improved customerservice. The Centre was officiallyopened in December by GeorgeRobertson, then Shadow Secretaryof State for Scotland. Three monthslater the Business Park itself wasopened by The Princess Royal.
We have worked hard tomaintain ScottishPower’straditionally high customer servicestandards. In 1996-97 we deliveredmore than 1.8 million services under
guaranteed standards as defined bythe Office of Electricity Regulation(OFFER). Supplying the highestquality service in the most costeffective manner drives all ouroperations and this approach iswinning in the already highlycompetitive market for largebusiness customers. A substantialcontract to supply electricity toMotorola’s three Scottish plants,won in January, is a prime exampleof the kind of business which thecompany is actively exploring with a range of big customers in powercritical industries such as electronics.
The interface between our energysupply and generation activities ismanaged through a newlyestablished central energy tradinggroup. This group will ensure thatwe achieve the best commercialarrangements possible in thewholesale electricity and gas marketsthrough a portfolio of contracts thatmatch supply and demand.
Continued investment in ourGeneration business has been madeto extend the life of the company’scoal-fired power stations, to meetincreasingly tight environmentallegislation and to confirm ourposition as one of the UK’s largestwind farm operators. The benefits ofthe company’s past investments ingeneration were visible during theyear with increased output from ourfossil-fuelled power stations at thesame time as unit costs werereduced. The business has now metits benchmark targets, a year aheadof schedule, and has, we believe,achieved upper decile performanceagainst an international peer group.
The sale of our low costelectricity from Scotland into theEngland and Wales Pool exceededby 5% the level of the previous year.
Helped by further fine tuning,the average capacity of theinterconnector reached 1,300megawatts (MW), and future saleswill be boosted when the upgrade to2,200 MW is completed. The timingof this is subject to the granting ofplanning permission by the Presidentof the Board of Trade. This shouldlead to lower electricity prices forcustomers across the UK.
Increasing electricity sales outsideScotland will substantially expandthe requirements of the company’spower stations for coal. We hopeto meet these needs from ScottishCoal, currently our main supplier,however, this will be subject tonormal competitive processes.
Despite a major programme ofinvestment in our wires network,which has taken place over anumber of years, December saw themost destructive storm ever to hitour distribution system. A freakcombination of high winds andrapidly icing snow brought downover 100 steel towers and poles inthe Borders region of Scotland.Teams brought in from all theScottishPower regions, Manweb,our contractors and Hydro-Electric,worked around the clock for fivedays to help local linesmen restorepower to customers. At the same timeour customer service staff providedsupport to vulnerable members ofthe communities affected.
ManwebThe final stages of the Manwebtransition plan have been completedand the targets for reductions inmanpower and operating costs havebeen beaten. Operating costs in1996-97 were £61 million lowerthan in 1994-95, the last full yearprior to acquisition, and were some
£4 million better than our originaltarget. The Manweb headquartersis now in the process of being soldand a small corporate team hasbeen relocated to a smaller, modernbuilding in Chester. In addition, wehave announced plans to bring themanagement of the energybusinesses in Scotland and Manwebcloser together and this will result infurther operating cost savings overthe original Manweb transitiontargets.
During this period of integrationand change, Manweb has succeededon all fronts. The companycontinued to provide better serviceto customers, regaining the highlyprized Charter Mark and achievingthe international qualityaccreditation ISO 9002.
The performance of the Manwebelectricity network has furtherimproved. During the year, customerminutes lost were down by 12%,while guaranteed standardspayments to customers for failingto provide the relevant serviceswere reduced by 67%. Accordingto OFFER, Manweb’s Merseysideregion had the most reliabledistribution network in the UK.
Continuing the drive to win backcustomers, the group’s share of thecompetitive electricity supply marketin the Manweb region recovered to26%. As part of ScottishPower,Manweb’s electricity customers haveenjoyed three price reductions inreal terms.
Underlining its commitment to its Welsh speaking customers,Manweb has become the firstprivatised utility to have its Welshlanguage scheme approved by theWelsh Language Board.
Electricity supplyProviding low cost, highquality electricity to thehome, at competitive ratesand payment schemes to suityour needs.
TelecommunicationsScottishTelecom offersresidential telephony servicescombining the best of radio andfibre optic technology, providinga greater choice for customers.
Customer serviceScottishPower staff now carrypersonal identification and offerthe added security of apassword scheme.
Metering servicesWe are testing new, hightechnology metering systemswith customers.
Visa CardScottishPower offers acompetitively priced creditcard with the added bonus of cutting electricity bills byshopping with selectedcompanies.
Electric heatingWhether you want full electricheating or just two heatersScottishPower can meet your needs.
Home securityFeel safe in your own home –ScottishPower can provideand install a wide range ofhome security systems.
Energy efficiencyAs part of our commitment to theenvironment and to save moneyfor customers, we offer advice on energy efficiency measuressuch as cavity wall insulation, loftinsulation and light bulbs.
Web siteVisit the ScottishPower groupinternet site onwww.scottishpower.plc.uk.
ScottishPower – providing utility services to the home
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Chief Executive’s Review continued
14 ScottishPower Annual Report & Accounts 1996–97
Southern WaterThe integration of Southern Waterinto the ScottishPower group isproceeding well and we are ahead ofthe targets contained in the InterimStatement published in December1996. The business has beenrefocused on its core water andwaste water activities and a newcounty-based structure has been putin place. As a result of this clearfocus, our early efficiency drive andthe elimination of duplicatedactivities at the corporate level,manpower numbers have alreadybeen reduced by 624, a decrease of14%. The programme of non-corebusiness disposals, which weforecast would raise £70 million intotal, has begun with the sale of ITSouthern, which realised £11million. Further sales will followduring 1997-98. We also expect torealise an additional £30 million incash through the disposal of surplusproperty and already 10% of thistarget has been achieved. Overall,
we are on course to meet our targetto improve profitability by £52million per annum and to release£100 million of cash from disposals.
Southern Water customers willalso benefit. During the period1997-2000 prices will be held belowthose allowed under the company’sregulatory pricing formulae. This wasagreed with the regulator at the timeof the acquisition. In addition, asignificant investment is being madein a new centralised call centre atWorthing, based on our servicecentre at Cathcart, which will leadto improvements in our billing andcustomer relations activities.
Southern Water’s capitalprogramme to meet the regulatoryrequirements and to ensureenvironmental compliance andwater supply security is beingaccelerated. Three new waste watertreatment works have beencommissioned as part of OperationSeaclean and the largest storm watertunnel in Europe is nearing
completion at Brighton. Nine out often bathing waters in the SouthernWater region now meet EuropeanUnion standards compared with fourout of ten eight years ago.
The drought in the South East ofEngland continues but underScottishPower management aregion-wide series of improvementsto water supplies and new mains,pumping stations and otherimprovements has been accelerated.At the end of the normal winterrecharge period Southern Water’sreservoirs were over 90% full. Whilstaquifer levels are clearly low for thetime of year, they are generally atthe levels of one year ago. Existingwater resources are better able to bedistributed through new pipelines. A pipeline from Bewl Reservoir onthe Kent county boundary withSussex will take supplies from Bewlto Darwell Reservoir in East Sussex.Another 12 mile pipeline can takesupplies from the River Rother tothe Sussex coast. In Hampshire, a
The gas reburn project atLongannet power station,which boosts the performanceof coal-fired boilers whilereducing emissions, has wona major Business Commitmentto the Environment award.
The new Power SystemsManagement Control centreuses state-of-the-arttechnology to supervise theoperations of ScottishPower’sdistribution network. TheHamilton-based operationreplaces the three previouscentres and helps thecompany maintain itstraditionally highperformance standards.
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new reservoir of 60 million gallonscapacity has been built at Testwoodto serve 200,000 people inHampshire and the Isle of Wight.
Southern Water has one of thebest records in the water supplyindustry on leakage. Losses throughleaks in our distribution systemstand at 13.2% compared to 26% atthe time of privatisation, with atarget to achieve 10% by the year2000. The company now saves26.5 million gallons of water everyday, enough to serve a population of 400,000. Last year alone 14,000leaks were tracked down andrepaired. All of these measures willhelp the water supply situation forthe benefit of customers.
Southern Water is pleased toreport that the quality of our wateris officially recognised as among thebest in Europe, helped by state-of-the-art treatment processes to reducelevels of pesticide to exceed thestringent EU water quality standards.
Information SystemsOur Information Systems Division isplaying an ever more important rolein the ScottishPower group to meetthe complex challenges facing amulti-utility operating in a marketthat will soon go fully competitive. It is a key enabler for all thebusinesses and by exploiting theeconomies of scale and synergiesacross the group we are able to gaincompetitive advantage unavailableto our competitors.
Major projects delivered by theinformation systems team haveincluded a series of assetmanagement tools for Power Systemswhich give geographic information,project planning and trouble callfacilities and a new shop system forthe Retail business. InformationSystems have delivered the systemswhich underpin the new CustomerService Centre at Cathcart and arecurrently rolling out new billingsystems. Metering, settlements, thedevelopment of the billing systems
and electricity and gas tradingprogrammes for generation will bekey projects in the year ahead. Thequality of the Information SystemsDivision was demonstrated with theaward of ISO 9001 during the year.
Multi-utilityAn executive director, DuncanWhyte, has been charged with theresponsibility of developing themulti-utility aspects of the group’sbusiness. While multi-utility can be defined in a number of ways,ScottishPower’s approach is twofold.First, extending the range of servicesthat we offer our customers, forexample through the sale of gas andsecondly, the application of theskills, developed through themanagement of large electricityassets, to other large assets andmulti-utility infrastructures.
The ‘cross-selling’ of utilities is being made possible by theliberalisation of the energy andtelecommunications markets.
Manweb is one of the leadersin ensuring rural communitiesbenefit from energy efficiencyschemes. Dairy farmers haveseen their electricity costs fallafter the installation of highlyefficient milk coolingequipment.
The quality of water suppliedby Southern Water is officiallyrecognised as among the bestin Europe and losses throughleaks in the distributionsystem have been halvedsince privatisation.
Southern Water customers willbenefit from a significantinvestment which is beingmade in a new centralised callcentre at Worthing.
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From 1998 the domestic electricitymarket will be progressively openedup to competition. ScottishPower isinvesting substantial financial andmanpower resources to ensure thatcompetition is introduced smoothlyand effectively. However, it is a largeand complex process which requiresall parties involved to deliver theirpart of the process.
Our first major step towardsextending the range of servicesoffered to domestic customers wasour participation in the gas trial inKent and Sussex, a large part of theSouthern Water territory. This hasproved to be very successful, withScottishPower winning 70,000customers, some 8% of the marketin the areas already mentioned. We believe this was more than anyof the other new entrants and givesus confidence that we will do evenbetter when the Scottish domesticgas market opens up later in theyear. This will enable us to offer ourScottish customers a range of utility
services in electricity, gas andtelecommunications and we wouldexpect to offer electricity in theSouthern Water region, and gas inboth Manweb and Southern Waterfrom Spring 1998. We are evaluatingthe possibility for the longer term ofoffering additional services.
Good progress has been made onmulti-utility infrastructure projectsand new connections in thecommercial sector. For example, thePower Systems business has won a major project to supply theelectricity connection for theLG Group semi-conductor andelectronics factories in South Wales.
We are using the skills we haveacquired from the Southern Waterbusiness to compete for waste waterinfrastructure projects in Scotland, aspart of the Private Finance Initiative.The value of the projects is estimatedto be around £1 billion over the nextten years and ScottishPower expectsto win a substantial share of these.As outlined above, we have made
good progress on a variety of multi-utility projects and we are wellplaced to develop these in thecoming year.
Developing businessesScottishTelecom has grown rapidlyand has established an impressiveniche in the Scottishtelecommunications market,enabling it to break even in only its second full year of operation.ScottishTelecom now provides a service to over 250 businesscustomers and in April 1997 launchedservices to residential customers,who enjoy the benefit of the latestfixed radio access technology, whicheliminates the need for new cablingand leads to reduced prices.
The volume of calls on theScottishTelecom network isincreasing rapidly with furthergrowth coming from the expandingrange of services being offered bythe business. ScottishTelecom nowaccounts for 12% of the customers
Retail’s 158 outlets throughoutthe UK have been installedwith an advanced systemwhich will improve stockcontrol and enhance customerservice.
The new Customer ServiceCentre at Cathcart BusinessPark handles more than50,000 calls a week, coveringall billing and service enquiriesfrom the 1.8 millioncustomers in Scotland.
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ScottishPower offers a glimpse of the future in itsSmartHome at the‘Tomorrow’s World Live’exhibition in Birmingham. It showed how customers inthe next century will be able totake control over their homes.
ScottishPower has beensuccessful in the Southern gas trials winning more than70,000 customers in Kentand Sussex.
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in the Scottish mobile market andhas moved into the provision ofvalue added services. The recentacquisition of TelephoneInformation Services complementsour existing Teledata business andour services now include ‘Club Call’,‘Prestel’ and ‘Weather Call’. Some£100 million has been invested inScottishTelecom to date and our aimis to capture 10% of the Scottishtelecommunications market by 2000,which is then forecast to be valuedat £2 billion.
Retail has continued to performwell with like-for-like sales up 6.5%.Ten stores were opened during theyear, of which three stores were inthe Southern Water area, making ourtotal number of retail outlets acrossthe UK 158. More than 70% of total selling space is in superstores, an important factor inRetail’s growth. We are now the thirdlargest electrical retailer in the UK.The business has diversified itsproduct range and is moving into the
personal computer market after asuccessful trial period. During theyear a new system has beenintroduced which will improve stockcontrol and enhance customerservice through more flexible deliveryscheduling.
Our smaller businesses,Technology and ContractingServices, have continued to growtheir portfolio of external work andare trading profitably.
EnvironmentScottishPower is committed toprotecting the environment. Thiswas recognised by a survey ofFTSE 100 companies commissionedby Business in the Environmentwhich placed us in the top quintileof leading industrial companies, withbusinesses such as British Airwaysand Marks & Spencer.
Major investments have beenmade to reduce the environmentalimpact of our energy businesses. The first boiler at the Longannet
power station converted to burn gasand coal is now commissioned,allowing the plant to burn more coalwith lower levels of gaseous emissions.The project won a Commendation inthe 1996 Business Commitment tothe Environment scheme.
Our generation portfolio has beenenlarged with the purchase of theHagshaw Hill wind farm inLanarkshire and the construction of the Barnesmore site in Donegal.This confirms our position as one of the largest wind farm operators in the British Isles with more than50 MW of capacity.
In ScottishPower and Manweb a significant campaign to promoteenergy efficiency is being carried out.Working with Age Concern, 100,000low energy light bulbs are beingdistributed to senior citizensthroughout the Manweb region andin Scotland customers are alsobenefiting from energy efficiencyschemes such as cavity wall insulation.
Major investment in the wiresbusiness has been made toimprove the quality andreliability of electricity supply,enhance customer service andprovide for new connections.
Hagshaw Hill wind farm inLanarkshire, opened in August1996, confirms our position asone of the largest wind farmoperators in the British Isles withover 50 MW of capacity.
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At Southern Water the constructionof a new reservoir at TestwoodLakes in Hampshire is enabling thecompany to establish a natureconservation area with some 60,000shrubs and trees being planted tocreate a habitat for birds and otters.In addition, the Little TestwoodReservoir is being stocked as acoarse fishery. Special platformshave been constructed for fishermenand several are specially designedfor use by the disabled.
Full details of our environmentalcredentials are given in theEnvironment Report which is availablefrom the Company Secretary.
RegulationScottishPower has continued towork closely with the electricity andwater regulators on a range of issues.
ScottishPower is currentlyparticipating in the OFFER reviewof the Supply Price restraint, with aview to determining what form ofrestraint should be applied. This
review will include discussions onthe pricing of the generationcomponent of the supply price andfollows a one year agreement,starting in April 1997, on theScottish trading arrangements.
At Southern Water a proactiveworking relationship has beendeveloped with the water regulatorand a firm set of investmentperformance milestones have beenagreed, which extend through to theyear 2000. An enhanced CustomerService Charter has been introducedand a more positive approach tometering has been adopted as part ofSouthern Water’s Water EfficiencyPlan. Following discussions withOFWAT, Southern Water has alsointroduced a targeted programme ofsprinkler use metering in those areaswhere water resources are undermost pressure.
SafetySafety is at the heart of our business.This was recognised by the Royal
Society for the Prevention ofAccidents by the award of a goldmedal for the company and eightindividual gold medals for the PowerSystems and Generation businesses.These awards recognised thecontinuous improvement in thecompany’s safety record over the lastfive years.
We were saddened by the recentfatal accident which occurred at oneof our Glasgow substations. Inquiries,both internal and external, into thecause of this accident were initiatedand we await their outcome.
Community and EmployeesGaining the trust of the communitieswithin which we operate is one ofour core values. Our investment inthis important stakeholder group is encompassed in a range ofinitiatives, the largest of which is theScottishPower Learning business, a £4 million initiative in partnershipwith the trade unions. It is designedto provide learning and development
Dave Williams, who suffersfrom cerebral palsy, operates aspecially adapted keyboard aspart of his analyst/programmerduties and was a member ofthe team that won theScottishPower group businessgame.
Marwell Zoo, Winchester, wasone of the beneficiaries ofSouthern Water’s initiativeswhen its flock of penguinswere provided with their ownwater main in time for theofficial opening of PenguinWorld.
Many employees and theirfamilies have benefited fromthe expansion of open learningfacilities which now extendthroughout the group.
Drive for Youth is one of theseveral organisations beingpartnered by the ScottishPower Learningbusiness. The Learningbusiness is a £4 millioninitiative in partnership withthe trade unions.
2 3
1
4
2 3
1
4
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19 ScottishPower Annual Report & Accounts 1996–97
opportunities for some 300unemployed adults and last Octoberthe first groups started trainingcourses in the ScottishPower andManweb areas.
ScottishPower has alreadyexpanded the initiative through theutilisation of its long establishedOpen Learning network to provideskills and personal development forschoolchildren from deprived urbanareas. The Learning business is alsopartnering a range of otherorganisations with complementaryobjectives such as the Prince’s Trust,Drive for Youth and Outward Bound.
Full details of our commitment tothe community are to be found inour Community Report, which isavailable from the CompanySecretary.
Throughout the year we havecontinued to make a significantinvestment in the development ofour people at all levels in theorganisation. Young employees arebenefiting through the young high
potential programme, while allmanagers are about to participate ina values-based developmentprogramme. The company’s distancelearning MBA and business leader-ship programme are also continuing.
Many employees have benefitedfrom the expansion of the group’sOpen Learning facilities which nowextend throughout the group. In Manweb 36% of staff and inSouthern Water 30% of staff arealready enrolled in studyprogrammes. New health careinitiatives to supplement the currenthealth screening programme arebeing developed and include newhealth and fitness clubs which arebeing introduced at our larger centres.
SummaryThis has been an excellent year forScottishPower, with both a strongoperating and financial performanceand significant progress towards ourobjective of building a multi-utilitybusiness.
The company’s success reflects thecommitment of all our employeesacross the group, whose skills andenthusiasm are vital to thecompany’s future growth. Lookingforward, ScottishPower is wellpositioned for the future. We have a unique portfolio of services, withterritories throughout the UK,backed by a strong managementteam that is looking forward to the exciting challenges ahead.
Over the past four yearsSouthern Water has helpedaround 150,000 children learnto swim, under a schemeoperated in conjunction withthe Amateur SwimmingAssociation.
The ScottishPower Pipe Bandtake the sound and colour oftheir native land throughoutthe UK and overseas as partof the company’s sponsorshipof a range of musical andartistic groups.
Annual firework and lasersymphony concert at SouthernWater’s Bewl Reservoir, Kent.
This review discusses the ScottishPower group’sfinancial performance for the year ended 31 March 1997. It provides detailed informationabout the market, turnover and profitability foreach business, together with the associatedcapital expenditure. It also gives details of thegroup interest and taxation, cash flow, the growthin earnings per share and dividends, and theresultant balance sheet as at 31 March 1997.
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21 ScottishPower Annual Report & Accounts 1996–97
Group financial resultsGroup turnover of £2,940.7 millionwas £669.2 million higher than1995-96, reflecting growth in ourScottish-based businesses, the firstfull year of revenues from Manweband the inclusion of post acquisitionturnover from Southern Water. Therise in overall sales and tight controlof costs led to a higher operatingprofit of £663.9 million, an increaseof £229.6 million, or 52.9% on theprevious year. Operating profit inthe Scottish energy businesses roseby £19.4 million. Manweb made anincreased contribution to operatingprofit of £97.3 million, while SouthernWater made a first time contributionof £114.4 million, both of these wereafter reorganisation costs.
The net interest charge increasedby £77.4 million to £107.5 millionmainly due to the additionalborrowings associated with the twomajor acquisitions, offset in part byadditional cash flows arising fromworking capital control and a loweraverage cost of debt.
Profit before tax grew by 37.9% to£558.4 million. The lower effectivetax rate, down from 27.0% to 24.5%due to the acquisition of SouthernWater, resulted in profit after taxincreasing by 42.7% to£421.6 million. With a weightedaverage 1,104.9 million shares in issueduring the year, earnings per sharewere 38.11p, an increase of 15.1%.
The recommended final dividendof 12.33p per share brought the totaldividend per share for the year to18.50p, an increase of 19.4%. Thedividend remained covered 2.1 timesby earnings. This increase in dividendexceeds our stated aim of achievingsustainable 7% to 8% real growth perannum, whilst continuing to maintaina prudent level of dividend cover.
Free cash flow for the year was£572.7 million, an increase of£330.7 million due partly to thehigher level of profitability and alsothe improved management ofworking capital. Capital investmenttotalling £459.7 million has beenmade across the group primarily toupgrade our wires networks, enhancethe performance of our generatingstations and meet increasingly strictenvironmental standards. In addition,capital investment increased due tothe inclusion of a full year ofexpenditure at Manweb andinvestment during the post acquisitionperiod at Southern Water.
Net debt increased from£632.1 million to £1,790.3 million,mainly due to the acquisition ofSouthern Water. However, gearing of117.5% at 31 March 1997 was lessthan previously forecast, and interestcover remained prudent at 6.2 times.
Group turnoverGroup turnover of £2,940.7 millionwas £669.2 million higher than1995-96, an increase of 29.5%. Total energy sales, consisting ofScottishPower and Manweb,increased by £291.4 million mainlyas a result of the inclusion of thefirst full year of Manweb. SouthernWater’s post acquisition turnoverwas £316.2 million and the group’sdeveloping businesses increasedtheir turnover by £54.9 million.
ScottishPower energy sales aredivided in Table 1 into four marketsegments: first tier sales whichrepresent the sale of electricity tocustomers in the Scottish franchisearea; second tier sales byScottishPower to customers outsidethe Scottish franchise area; wholesale,which is the sale of electricity toother electricity companies and to
the Pool in England and Wales; andother energy sales which include thesale of gas by ScottishPower, largelyto commercial and industrialcustomers in the UK.
In the first tier market, thedomestic sector saw unit salesgrowing by 0.7% and prices reducingin real terms, reflecting the benefit tocustomers of lower generation costs.As expected, both prices and salesvolumes to industrial and commercialcustomers showed some decline, dueto competitive pressures. As a resultoverall first tier turnover fell to£1,150.3 million, a decrease of 6.0%over the previous year.
In contrast, second tier volumesshowed a substantial increase for thethird year running, up by 73%.Turnover was £35.7 million higher at£101.8 million which reflected oursuccess in winning new customers.In part this arose from thecombination of the ScottishPowerand Manweb sales forces which ledto all new customers contractingwith ScottishPower.
Wholesale electricity salesincreased by 731 GWh to 6,650GWh as a result of higher sales toother suppliers and increasedexports. The average capacity of theinterconnector reached 1,300 MW,up from 1,270 MW last year, withsales to England and Wales growingby 292 GWh to 5,822 GWh. As aconsequence, wholesale turnoverincreased by £17.2 million to£195.6 million.
Other energy sales grew by 3.2%to £94.2 million. An increase inthird party use of system chargeswas partially offset by a reduction incommercial gas sales, reflectinglower market prices and volumes.
Manweb’s energy turnover for theyear was £738.4 million. After
adjusting for the £60.9 millioncustomer rebate paid in 1995-96,which resulted from the flotation ofthe National Grid Group, turnoverfell by 6.1% or £48.3 million. Thisreduction was partially attributableto a fall in franchise revenue, due tothe pass through to customers oflower electricity purchase costs, andlower competitive sales in Manwebarising from the combination of theScottishPower and Manweb salesforces, as mentioned above.
Southern Water’s turnover forthe full year to 31 March 1997 was£474.5 million, an increase of 11.7%or £49.8 million on the previousyear. Of this increase, £27.5 millionrelated to the retained corebusinesses and the balance aroselargely from the acquisition, beforeour bid, of the vehicle leasingcompany VCHL. In the period afteracquisition by ScottishPower,Southern Water’s turnover was£316.2 million.
Turnover in the developingbusinesses increased by £54.9 millionto £327.5 million. The strong growthin our Retail business continued,with sales up by more than 11% to£267.7 million, reflecting not onlythe 10 stores opened during the yearbut also improved performance inour existing stores. ScottishTelecomalso reported a significant rise inexternal turnover, up £31.2 millionto £37.0 million. This wasattributable to an increased numberof customers in ScottishTelecom, thefirst year of results from Teledataand the post acquisition contributionfrom the Woodend group, which wasacquired in August 1996.
Group operating costsCost of sales has increased by£368.5 million to £1,743.5 million
mainly due to the full year effect ofManweb, the inclusion of the postacquisition results of SouthernWater and increased sales volumesin the developing businesses.ScottishPower energy businesses’cost of sales reduced by £20.9 millionwhich included lower nuclearcontract costs arising from thechange of price to the market rate inEngland and Wales following theprivatisation of British Energy. Ourown generation costs increased dueto higher fuel costs offset by reducedstation costs resulting from ourbenchmarking programme.Increased cost of sales in the secondtier market reflected increasedvolumes offset by lower Pool prices.
The focus on operationalefficiency has resulted in operatingcost reductions across all of ourenergy businesses. Transmission anddistribution costs, excluding Manweb,were £2.6 million lower despiteincreased depreciation charges of£4.3 million arising mainly frominvestment in the transmission anddistribution networks. Administrativeexpenses in the ScottishPowerenergy businesses fell by £14.5 million.In Manweb, operating costs were£61.0 million lower than in 1994-95,the last full year prior to acquisition,and were some £4.0 million lowerthan our original target. In SouthernWater, higher costs associated withthe commissioning of new capitalschemes were offset by operatingcost savings implemented under thetransition plan, which achieved costsavings £1.0 million ahead of target.
Group operating profitGroup operating profit was£663.9 million, an increase of 52.9%.Operating profit in the Scottish
energy businesses increased by£19.4 million reflecting increaseduse of system charges and thecontinued drive for cost efficiencies.Manweb contributed an additional£97.3 million arising principally fromthe inclusion of results for a full yearand cost savings delivered by theacquisition transition plan in1996-97. Year-on-year, Manweb’soperating profit increased by 6.6%from £126.6 million to £135.0 million.Southern Water contributed £114.4million, after reorganisation costs of £21.2 million, in the periodfollowing its acquisition in August1996. For the full year SouthernWater’s operating profit was 17.2%higher, reaching £200.0 millionversus £170.6 million in the previousyear. The developing businessesincreased profits by £4.7 million before allowing for the initial costsof gas trials and other new businessinitiatives.
The profit of the GenerationWholesale business decreased by£4.3 million, as can be seen in Table 2, mainly due to lowerwholesale electricity margins offsetin part by reduced costs andincreased volumes. The profitabilityof the generation component grewby £1.7 million to £132.0 milliondue to higher sales volumes, up 2%to 29,024 GWh, and reducedoperating costs. The profitability ofthe wholesale component fell by£6.0 million due to reduced marginsalthough this was offset in part bythe increased volume of sales toEngland and Wales.
In Power Systems, overall profitincreased by £13.2 million.Transmission operating profit was£10.8 million higher due to increasedrevenues from the use of the high
voltage network and greaterinterconnector availability. Allowing for restructuring costs andadditional depreciation arising fromcapital investment, costs werereduced by £4.0 million in realterms. Distribution profit increasedby £2.4 million, primarily as a resultof higher distribution charges and anincrease in volumes, up 503 GWh to21,686 GWh. Real cost savings of£4.0 million were offset by increaseddepreciation, restructuring costs andstorm damage arising from severeweather in December 1996.
In Energy Supply, first tier profitgrew by £8.0 million to £39.4 million,mainly due to further cost efficiencies,including the centralisation of thecustomer call centres last summer,and the release of provisionsfollowing the conclusion of a numberof employment claims. These benefitswere in part offset by the effects offurther competition. Losses of£3.2 million in the fiercely contestedsecond tier electricity supply marketwere £1.2 million lower as a result oftighter cost control, while theoperating loss in the commercial gasmarket was reduced by £1.3 millionto £3.8 million. While both thesemarkets remain very competitive, ouraim is to contain losses as we buildmarket share.
Operating profit for Manweb was£135.0 million, an increase of£8.4 million compared to the fullyear of 1995-96. The distributionbusiness contributed £113.9 millionand supply £21.1 million. Theincreased profit reflected costsavings, ahead of target, arising fromScottishPower management, offset inpart by price reductions.
For the full year, Southern Water’soperating profit increased by £29.4million to £200.0 million, primarily
as a result of higher turnover in thewater and waste water servicesbusiness. Higher costs associatedwith the commissioning of newcapital schemes were offset byoperating cost savings alreadyimplemented under the transitionplan. In the period after thecompany’s acquisition byScottishPower, Southern Water’soperating profit totalled £135.6 millionbefore reorganisation costs of£21.2 million.
Operating profit in the developingbusinesses grew by £4.7 million to£14.2 million before initial costs ofnew business opportunities,predominantly the Southern gas trials.This reflected increased performancein all businesses with Retail up from£12.4 million to £14.1 million.ScottishTelecom improved itsperformance with increased callvolumes and an expanded range ofvalue added services. This led to thebusiness breaking even in 1996-97as forecast in last year’s AnnualReport and Accounts.
Interest and taxationThe net interest charge of£107.5 million was £77.4 millionhigher than in 1995-96. The increasereflected the additional borrowingsassociated with the acquisitions ofManweb in 1995 and Southern Waterin 1996. The effect on interest of thegrowth in borrowings was offsetboth by additional cash flows arisingfrom improved management ofworking capital and a lower averagecost of debt as new borrowings andinterest rate swaps were arranged totake advantage of declining interestrates. At the same time the averageperiod for which interest costs werefixed was extended from four toeight years, whilst interest cover
Group profit before tax £m
600
500
400
300
200
100
297
351 37
5 404
558
93 94 95 96 97
3.1985g04/pp20-33 18/6/97 11:06 Page 24
25 ScottishPower Annual Report & Accounts 1996–97
remained prudent at above six times.Profit before tax grew by 37.9% to
£558.4 million, while the effectivetax rate fell to 24.5% of pretax profitcompared to 27.0% in 1995-96. Forthe group as a whole, the differencebetween the statutory corporationtax rate of 33% and the group’seffective tax rate continued to beaccounted for almost exclusively bythe relatively high level of capitalexpenditure which gave rise to taxallowances in excess of theaccounting depreciation charge forthe year. The changes which wereenacted in the Finance Act 1997 toreduce the tax allowances availablefor capital expenditure on plant andmachinery with a life of more than25 years have had minimal effect onthe tax charge for 1996-97 but areexpected to result in higher effectivetax rates in future years.
Earnings and dividendsThe profit after tax for the yearamounted to £421.6 million, anincrease of £126.1 million. With aweighted average 1,104.9 millionshares in issue during the year,earnings per share were 38.11p, anincrease of 15.1%. This reflected thecontinuing strong performance ofthe Scottish energy businesses andfurther growth in the developingbusinesses. Earnings per share alsogrew as a result of the acquisitionsof Manweb and Southern Water,both of which were earningsenhancing in 1996-97.
The recommended final dividendof 12.33p per share brought the totaldividend per share for the year to18.50p, an increase of 19.4%. Thedividend remained covered 2.1 timesby earnings. This increase individend exceeds our stated aim ofachieving sustainable 7% to 8% real
dividend growth per annum, whilstcontinuing to maintain a prudentlevel of dividend cover.
Capital expenditureThe company has continued to investto build its businesses, with netcapital expenditure for 1996-97 of£459.7 million, an increase of£232.3 million over 1995-96.
Capital expenditure in GenerationWholesale was £77.2 million for theyear, an increase of £46.1 million.Investment was targeted towardsefficiency and environmentalinitiatives, together with renewableenergy resources. Additional capitalexpenditure was incurred atLongannet and Cockenzie powerstations with the continuation of thegas reburn project and installationof low NOx burners. These projectswill ensure that the group continuesto minimise the environmentalimpact of its generation activities.
In Power Systems, net capitalexpenditure in 1996-97 amountedto £102.8 million, an increase of£6.2 million. In distribution£80.3 million was invested with£26.6 million spent on improving thequality and reliability of electricitysupply to our customers and£32.3 million on expanding thesystem to meet demands for newsupplies of electricity. The remainingexpenditure in distribution was onimproving customer service includingfaults and emergency procedures. In transmission, £5.9 million wasinvested to reinforce and refurbishtargeted parts of the 132 kV system.The majority of the balance was inrespect of systems expansion tosupport business opportunities andinward investment in Scotland.
In ScottishTelecom, £28.8 millionwas spent on new fibre optic
networks and £18.9 million wasinvested in residentialtelecommunications. Theseinvestments will enable the businessto meet the increasing requirementsof existing and new customers.
In Manweb, net capitalexpenditure for 1996-97 was£75.1 million, up from £64.9 millionlast year, of which £34.7 million waspost acquisition. Of the 1996-97total, £17.8 million was spent onmeeting new customer requirementswith the majority of the balancedirected at improving customersupplies and service.
In Southern Water, capital andinfrastructure renewals expenditurefor the full year totalled £211.7million, of which £137.2 million wasincurred following the acquisition on6 August 1996. The full year totalwas an increase of £48.7 millioncompared with 1995-96. Theinvestment in the regulatedbusinesses in the year was£192.5 million which included£95.6 million as part of the ongoingprogramme to meet the higherstandards set by European Union(EU) Directives on the quality ofbathing water, urban waste waterdischarges and sludge disposal.Other expenditure included £35.5million on water resources andwater quality improvement projects,£34.2 million on enhancing andextending the water distributionnetwork and £22.4 million onimprovements to the waste watersystem and storm overflows toreduce the risk of flooding.
Cash flowCash flow has been the focus ofmuch attention during 1996-97 withthe result that we have successfullyconverted all of our operating profit
into cash. Net cash inflow fromoperations increased from£408.7 million to £791.2 million.This resulted partly from the higherlevel of profitability in 1996-97 butalso the improved management ofworking capital arising from specificinitiatives including the allocation ofmore resources to debt collectionand the development of improvedsystems. With the acquisition ofSouthern Water, net interest and taxpayments were £51.8 million higher,giving free cash flow for the enlargedgroup of £572.7 million, up 136.7%.This enabled us to fund capitalexpenditure of £459.7 million andstill be cash positive beforeacquisitions.
Cash invested in acquisitions was£1,234.6 million whilst dividendspaid to shareholders increased by£46.9 million. As a result, net cashoutflow before financing was£1,213.3 million in 1996-97.
Allowing for receipts from sharesissued, mainly in relation to theacquisition of Southern Water, of£238.0 million, net debt acquired of£168.6 million and loan notes issuedof £14.3 million, net debt increasedby £1,158.2 million during the year.As a result, at 31 March 1997, netdebt amounted to £1,790.3 million.With shareholders’ funds of £1,523.1million, this gave a lower than fore-cast gearing level of 117.5%, up from52.4% at 31 March 1996. Withoutthe acquisition of Southern Watergearing would have fallen to 39.2%demonstrating the group’s underlyingstrong cash flow in the year.
TreasuryThe increase in net debt of£1,158.2 million arose principallyfrom the acquisition of SouthernWater and resulted in changes to the
structure of the borrowings of theenlarged group. A five year revolvingcredit facility of £2,600 million wasarranged with a syndicate of 39 UKand international banks and thegroup’s Euro-Commercial Paperprogramme was doubled to$1,500 million. In addition thegroup has started the exercise ofextending the maturity profile of itsborrowings with the issue in January1997 of £200 million of 8.375%bonds due 2017.
Uncommitted bank borrowingsand commercial paper at 31 March1997 totalled £1,052.7 million, ofwhich £759 million, all swapped tosterling, related to the Euro-Commercial Paper referred toearlier. Although the uncommittedborrowings were all short term innature, longer term cover was inplace in the form of £2,500 million ofcommitted facilities consisting of theundrawn portion of the revolvingcredit facility and bilateral bankarrangements.
ScottishPower continues toensure that net borrowings arefinanced from a range of competitivesources and that committed facilitiesare available both to coveruncommitted borrowings and tomeet the financing needs of thegroup in the future. The group’scredit quality is confirmed by longterm credit ratings of Aa2/A+ andshort term ratings of P1/A1 fromMoody’s Investors Service andStandard & Poor’s respectively.
In order to manage the risk ofexposure to fluctuating interest rates,the company maintains the majorityof its debt at fixed rates of interest.This is achieved by a combination offixed rate debt issues and theconversion of floating rate issuesinto fixed rate obligations by the useof interest rate swaps, interest ratecaps and forward rate agreements.The group’s use of such financialinstruments relates directly tounderlying indebtedness; nospeculative or trading transactionsare undertaken. The group treasuryoperates strictly within policies setout by the Board and is subject toregular examination by internal andexternal audits. At 31 March 1997,the interest rate on some 77% of debtwas fixed and the interest rate on afurther 11% of borrowings was capped.
The weighted average period tomaturity of year end fixed rate debtand swaps was eight years, whilstthe forward cover on capped debtwas for an average period of somefive years. This provides adequatecover against the potential impact ofinterest rate movements. Accordingly,changes in floating interest rates willhave a limited impact on interestpayable by the group.
The group has limited exposureto foreign currencies. Commercialpaper issued in currencies otherthan sterling is fully covered byforward contracts to convert thedebt to sterling. Certain limitedimports of capital equipment andfuel are denominated in foreigncurrencies and the sterling cost ofthese is fixed by means of forwardcontracts as soon as the company’scontractual commitment is known.
SummaryThese results reflect another strongoperating and financial performanceacross the group. Profit grew in ourScottish businesses, in Manweb andin Southern Water whilst weachieved a lower average cost ofdebt and a lower effective tax rate.The resultant rise in earnings wasbacked by strong cash flow, leadingto a prudent level of interest coverand a lower than expected level ofgearing. These results give the groupthe financial strength to exploit theopportunities presented by the fullliberalisation of the energy markets,our principal focus in the year ahead.
Analysis of debt by repayment profile (31.3.97) £m
1,200
1,000
800
600
400
200
1,13
7.1
<1 year 1-5 years
5-10 years
10+ years
215.
6
395.
2
84.1
3.1985g04/pp20-33 18/6/97 11:06 Page 27
28 ScottishPower Annual Report & Accounts 1996–97
Moving towards sustainabledevelopmentMany of ScottishPower’s operationshave major environmental impacts.These include emissions toatmosphere from power stations,the visual impact of power lines andthe use of water resources. We arecommitted to minimising theconsequences of our operationsthrough our considerableinvestments in capital and expertisewhilst moving progressively towardssustainable development. However,our impact on the environmentcannot be entirely eliminated. For example, our use of wind powercreates a visual impact on theenvironment.
We are moving beyond simplycomplying with legislation byidentifying the management issuesfaced by our businesses and ensuringthat we address them adequately,setting improvement targets asnecessary and measuring the results.
By consulting with our regulatorsand other stakeholders, we aim todevise the best policies, takingaccount of the different viewpointson how we can minimise theseimpacts, whilst maintaining ourcommercial success.
During 1996-97 we madesignificant progress against targets inall key areas of environmental impactacross the group. Some of our keyachievements are set out below.
Corporate overviewScottishPower’s environmentalrecord was recognised in theBusiness in the Environment Surveyof FTSE 100 companies, where wesecured a position in the top quintilefor our environmental performanceand communications.
Both Generation Wholesale’s
Longannet power station andManweb achieved accreditation fortheir environmental managementsystems, being awarded BS 7750 andISO 14001 respectively. In addition,Manweb, Power Systems andGeneration Wholesale havelaunched a number ofenvironmental initiatives withsuppliers.
Fossil fuel use and emissions toatmosphereScottishPower’s main emissions tothe atmosphere arise as a result ofburning fossil fuels at our powerstations. These emissions includecarbon dioxide (CO2), the gasbelieved to contribute to globalclimate change, sulphur dioxide(SO2) and nitrogen oxides (NOx),which contribute to acid rain, andparticulates which affect local air quality.
Our commitment to the reductionof NOx emissions was demonstratedby the completion of the low NOxburner installation programme atLongannet, and their fitment on afirst unit at Cockenzie. To achievefurther NOx reductions we havefitted gas reburn to one unit atLongannet. Our commitment todust emission was demonstratedby completion of the precipitatorrefurbishment programme atLongannet and the installation offabric filters at Methil. We acquireda further 15 MW of wind generationcapacity, thereby increasing ourportfolio of wind energy, which willfacilitate a reduction in CO2.
Customer energy efficiencyImproving the efficiency with whichour customers use electricity cansignificantly reduce emissions frompower stations and is central to ourenvironmental strategy. During1996-97, energy efficiency measureswere put in place under theStandards of Performance Schemeto achieve savings of 188 GWh inScotland and 157 GWh in theManweb region.
Waste managementThe waste arising from ScottishPower’s activities ranges from ashresulting from burning coal in ourpower stations, to waste packaging.In the past year GenerationWholesale has increased by 26% itssales of ash, most of which is used asfill material. Recycling played amajor role in our waste managementprogramme, with our Retail businessrecycling over 33 tonnes of cardboardpackaging waste and plastic and ourContracting Services businessrecycling 95% of all waste paperproduced at Cathcart Business Park.
Oil managementOil contamination can be caused byleakages of oil, for example atsubstations and from undergroundcables. In the last year we havecompleted more than 90% of aprogramme to assess theenvironmental risks arising from oilleaks and we are replacing thealready small proportion ofunderground cable which uses oilfor insulation.
Water resourcesWater is an essential resource and itsmanagement and conservation is ofparamount importance. SouthernWater has one of the lowest leakage
rates of the water companies, at13.2%, and is targeted to reduceleakages to 10% by the year 2000.Southern Water received the 1996Communicators in Business awardfor its environmental publication‘Conservation Matters’.
Drinking waterProvision of clean safe drinkingwater is one of our prime servicestandards and during the last yearSouthern Water has achieved aboveaverage drinking water compliance,over 99.8%, against the standards setby the Drinking Water Inspectorate.
Waste water treatmentWe treat waste water beforereleasing it into rivers and the sea.Since 1990 Southern Water hasupgraded its waste water treatmentworks, resulting in 98% compliancewith consents issued by theEnvironment Agency and a 23%improvement in river quality. In addition, nearly 90% of bathingwaters exceed European Union (EU)standards compared with only 41% in 1988.
Management of land and visualimpactAn innovative substation lightingprogramme undertaken at ourDewar Place substation inEdinburgh, is an excellent exampleof our approach to the managementof visual impact. In addition, we arecontinuing the theme of linkingengineering and art through aninitiative at our Kilmarnock gridsupply point in partnership withEnterprise Ayrshire and EastAyrshire Council.
TransportVehicle exhaust emissions arebelieved to contribute to globalwarming and in the last year ourEnergy Supply business hassponsored two transport relatedinitiatives: the Electric Bus withStrathclyde Passenger Transport andGlasgow City Council, and anelectric vehicle research anddevelopment programme.
SummaryFurther details of ScottishPower’senvironmental policy andperformance can be found in thecompany’s Environment Report. A copy of the report is available onrequest from the Company Secretary.
Safety reportWorking within a corporateframework, individual businesses areresponsible for the safety of theirown staff and operations. TheHealth and Safety Policy Committee,chaired by the Chief Executive,oversees the policies, standards andperformances across the group. This flexible structure allows thebusinesses to focus on their ownsafety issues, whilst maintaining acorporate overview.
Over the past few yearsScottishPower has made progress inimproving standards of safety. In ourScottish businesses the number ofaccidents reportable underlegislation has fallen and the numberwithin Manweb has shown a markedreduction.
Despite these encouragingimprovements, we are saddened toreport that an accident at one of ourGlasgow substations resulted in thedeath of two engineers. Internal andexternal inquiries into the cause ofthe accident are ongoing.
The standards achieved withinthe group have been recognised bythe Royal Society for the Preventionof Accidents (ROSPA) with ninegold medals, four silver medals andthree bronze medals awarded tovarious parts of the business,including a gold medal forScottishPower itself.
ScottishPower Businesses (excluding Manweb and Southern Water)
93
92
94
95
96
97
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31 ScottishPower Annual Report & Accounts 1996–97
At ScottishPower we have acommitment to all the communitiesin which we operate and we supporta wide range of organisations whichhelp to meet the many differentneeds of the customers we serve.Through charitable donations,sponsorships, financial and practicalassistance and through the voluntaryefforts of our people, we seek toenhance the lives of many sectionsof the community.
During 1996-97 the groupcontributed to a range of communityprogrammes and initiatives. Thiscommitment underpins ourcorporate value of gaining the trustof communities in which we operate.
Key programmes initiated in1996-97 included the launch of theScottishPower Learning business, a£4 million initiative in partnershipwith the trade unions, to providetraining for 300 unemployed youngpeople and adults combined with awide-ranging schools initiative. Thefirst groups started training coursesin October in the ScottishPower andManweb areas.
We have extended access to ourOpen Learning facilities to familyand community members and nowprovide support to school pupils inEdinburgh, Glasgow, Liverpool andWrexham. The ScottishPowerLearning business is also partneringa range of organisations withcomplementary objectives such asthe Prince’s Trust, Drive for Youthand Outward Bound.
During the year we have providedpractical assistance in response tolocal needs, for example, by laying awater supply to a children’s hospicein Hampshire. In Manweb wesupplied mains electricity to an isletin the Menai Straits, off Anglesey, tohelp the Duke of Edinburgh Award
Scheme develop an outdoor pursuitscentre for young people withdisabilities. We also gave financialand employee assistance and goodsin kind to a range of organisationsconcerned with helping the morevulnerable members of thecommunity, such as Age Concern,The Big Issue and Citizens AdviceBureaux.
In Southern England, around150,000 children have now benefitedfrom our Learn to Swim programmeand more than 500 ponds have beenrebuilt or cleaned through oursupport of Pond Week.
Our support of the arts has beenrecognised by the ABSA NationalAward for ‘Increasing Access to theArts’ through our sponsorship of theRoyal Scottish National Orchestra.Other arts sponsorships include theFirework and Laser SymphonyConcert at Bewl and the ChesterSummer Music Festival.
ScottishPower is also committedto responding to the concerns of itskey stakeholder groups – by workingto understand their needs andexpectations through dialogue andregular reporting of our activitiesand their impact. This year we haveproduced for the first time aCommunity Report which outlinesour activity in support of thecommunities in which we work. We have also identified 10 keyperformance indicators that willdirect our community activitythroughout the group.
The company has produced forthe first time, a full Report of ourcommunity activities. This isavailable on request from theCompany Secretary.
Murray Stuart CBE (63) joined theBoardin March 1990 and was appointedChairman in August 1992. He is a non-executive director of The Royal Bank ofScotland plc and of Willis Corroon Groupplc and Chairman of Intermediate CapitalGroup plc. He was awarded the CBE in1995 for his services to the AuditCommission, of which he was latterlyDeputy Chairman. He is Chairman of theHammersmith Hospitals NHS Trust andalso serves on the MeteorologicalCommittee and on the Private FinanceInitiative Panel as the member for Scotland.
Sir Ronald Garrick CBE (56) joined theBoard in February 1992 and is currentlyChairman of the Audit Committee. He isManaging Director and Chief Executive ofThe Weir Group plc, the Glasgow basedinternational engineering company, and anon-executive director of Shell UK Limited.
Sir Peter Gregson GCB (60) joined theBoard in December 1996. He waspreviously Permanent Secretary of theDepartment of Energy from 1985 to1989 and then Permanent Secretary ofthe Department of Trade and Industryuntil his retirement in June 1996. He is amember of the Board of Companions ofthe Institute of Management.
Baroness Jay of Paddington (57) joinedthe Board in September 1996. She wasformerly Opposition spokesperson forHealth in the House of Lords and anon-executive director of Kensington,Chelsea and Westminster HealthAuthority and Carlton Television, aswell as serving on the MeteorologicalCommittee. Baroness Jay resigned fromthe Board in May 1997 following herappointment as Minister of State in theDepartment of Health.
Nick Kuenssberg (54) became a non-executive director in March 1990, havingpreviously served as a director of Southof Scotland Electricity Board, and iscurrently Chairman of the Emolumentsand Nominations Committee (in whichcapacity he will serve until his retirementfrom the Board at the Annual GeneralMeeting). He is Chairman of David AHall Limited, a non-executive director ofThe Standard Life Assurance Company,Stoddard Sekers International plc andother companies, a member of theScottish Legal Aid Board and Chairmanof the Institute of Directors, ScottishDivision.
Ewen Macpherson (55) joined the Boardin September 1996 and has beennominated to succeed Nick Kuenssberg
as Chairman of the Emoluments andNominations Committee following theAnnual General Meeting. He is shortlyto retire as Chief Executive of 3i Groupplc which he joined in 1970. He is alsoa non-executive director of Foreign &Colonial Investment Trust plc and M&GGroup plc.
John Parnaby CBE (59) joined theBoard in September 1994. He is amember of the Executive Committee ofLucasVarity plc and Group Director forDevelopment and for the GearedSystems Division, having previously beenManaging Director of Lucas ElectronicSystems Products. He is immediate PastPresident of the Institution of ElectricalEngineers, a member of theGovernment’s Foresight Panel forManufacturing, Production and BusinessProcesses and a member of the Senate ofthe UK Engineering Council.
1 Murray Stuart2 Sir Ronald Garrick3 Sir Peter Gregson4 Baroness Jay of Paddington5 Nick Kuenssberg6 Ewen Macpherson7 John Parnaby
8 Ian Robinson9 Michael Kinski10 Ian Russell11 Ken Vowles12 Duncan Whyte
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33 ScottishPower Annual Report & Accounts 1996–97
Executive directors
Ian Robinson (55) was appointed ChiefExecutive in March 1995. He waspreviously with Trafalgar House plcwhere he was Chief Executive of JohnBrown and a main Board director. He is a Fellow of the Royal Academy ofEngineering, a Fellow of the Institutionof Chemical Engineers and a member ofthe Senate of the UK EngineeringCouncil; he also serves as a non-executive director of Scottish Enterpriseand of Lloyd’s Register of Shipping andis a member of the Department of Tradeand Industry’s Overseas Project Boardand the President’s Committee of theConfederation of British Industry.
Michael Kinski (45) joined the Board inDecember 1992 as Human ResourcesDirector. In December 1993, he becameExecutive Director Corporate Resources,responsible in that capacity for a diversebusiness portfolio, in addition to thecompany’s human resources andinformation systems strategy. In October1995, he was appointed Chief Executiveof Manweb plc and then, in August1996, Chief Executive of Southern Waterplc. He retains responsibility at Boardlevel for group human resources strategyand is Chairman of ScottishPower
Learning. He was previously PersonnelDirector of Jaguar Cars Limited. He is aFellow of the Institute of PersonnelManagement and a non-executivedirector of Tickford Limited.
Ian Russell (44) was appointed FinanceDirector in April 1994. He is a member ofthe Institute of Chartered Accountants ofScotland, having trained with ThomsonMcLintock, and has held senior financepositions with Hong Kong and ShanghaiBanking Corporation and Tomkins plc.His role encompasses both the financialdirection of the company and its corporatestrategy, together with responsibility atBoard level for the company’s informationsystems and corporate affairs. He is a non-executive director of Scottish InvestmentTrust plc and of Scottish Knowledge plcand a member of the InvestmentCommittee of the Scottish EquityPartnership.
Ken Vowles (55) joined ScottishPower inSeptember 1990 and was appointed tothe Board in September 1994. He isExecutive Director Generation, and isresponsible in that capacity for thecompany’s Generation Wholesale andTechnology businesses, including theEnergy Trading Centre, and at corporatelevel for safety and environment policy.
He has over 30 years’ experience of thepower generation industry, havingpreviously served with the CentralElectricity Generating Board and withNational Power plc. He is a Fellow ofthe Institution of Electrical Engineers, aFellow of the Institution of MechanicalEngineers and a Member of the Instituteof Management.
Duncan Whyte (50) has been a directorsince March 1990, having previouslybeen appointed Finance Director ofSouth of Scotland Electricity Board inJuly 1988. In January 1993, he becameresponsible for the core electricitybusinesses; then, in November 1995,he was appointed Executive DirectorStrategic Development and, in August1996, Executive Director Multi-Utility.In this latter capacity, he is nowresponsible for the company’s multi-utility strategy, including its developingbusinesses in telecommunications,electrical retailing and contracting. Healso retains responsibility at Board levelfor regulatory matters. He is a member ofthe Council of the Institute of CharteredAccountants of Scotland, and wasformerly a managing partner in Scotlandof Arthur Andersen and Finance Directorof Kwik-Fit Holdings plc.
The directors are pleased to presenttheir eighth Annual Report, togetherwith the audited Accounts for theyear ended 31 March 1997.
Results and dividendThe profit of the group for the yearamounted to £421.1 million, detailsof which are set out in the GroupProfit and Loss Account on page 48.
The directors recommend that afinal dividend of 12.33p net pershare be paid on 1 October 1997 tothose shareholders whose namesappear in the register of members on 22 August 1997. Together with theinterim dividend of 6.17p net pershare, which was paid on 7 March1997, this makes a total dividend of18.50p net for the year. Thesedividends amount in aggregate to £218.1 million and the balance of the profit for the year of £203.0 million has been transferredto reserves.
Activities and reviewThe principal activities ofScottishPower are the generation,transmission, distribution and supply of electricity to domestic,commercial and industrial customersthroughout the UK particularly inthe ScottishPower and Manwebregions. The ScottishPower group isalso developing a wider utilitybusiness which includes gas supply,telecommunications and electricalretailing as well as technology andcontracting services.
The company acquired SouthernWater plc on 6 August 1996, therebyextending the group’s principalactivities to include the supply ofwater and waste water services.
Research and developmentThe company supports research into
and development of the generation,transmission, distribution and supplyof electricity and continually seeksmore innovative and cost effectivemethods of carrying out its waterand waste water activities. It alsocontinues to contribute on anindustry-wide basis towards the cost of research into electricityutilisation, distribution developmentsand water purification and wastewater treatment.
Environmental policyThe company has approved itssecond formal Environment Reportfor publication in July 1997.Throughout its operationsScottishPower will meet, or better,relevant legislative and regulatoryenvironmental requirements andcodes of practice. Details of thecompany’s approach to theenvironment are contained on pages 28 to 29.
Board of DirectorsThe names and details of thedirectors of the company are shownon pages 32 and 33.
James Scott retired as a non-executive director on 24 July 1996.Baroness Jay of Paddington andEwen Macpherson were appointed non-executive directors on 1 September 1996 and Sir PeterGregson on 13 December 1996.Baroness Jay resigned from theBoard on 13 May 1997 following herappointment as Minister of State inthe Department of Health.
In accordance with the Articles of Association of the company, Sir Peter Gregson and EwenMacpherson retire from office at theAnnual General Meeting and, beingeligible, offer themselves for election.Michael Kinski, Nick Kuenssberg
*These shares represent, in each case, the maximum number of shares which the directors may receive, dependent on the satisfaction ofperformance criteria as approved by shareholders in connection with the Long Term Incentive Plan.
The number of shares under option in respect of all options outstanding as at 1 April 1996 and in respect of Sharesave Scheme optionsgranted during the year, prior to the rights issue on 30 August 1996, has been adjusted accordingly.
Full details of options and Long Term Incentive Plan awards held by directors, including options exercised during the year, are set out innote 32 to the Accounts on pages 58 and 59.
and Ian Russell retire by rotation atthe Annual General Meeting.Michael Kinski and Ian Russell,being eligible, offer themselves for re-election. Nick Kuenssberg will retirefrom the Board and accordingly doesnot seek re-election.
Michael Kinski and Ian Russellhave service contracts terminable bythe company upon two years’ notice.
Directors’ interestsDetails of the directors’ remunerationand service contracts are set out inthe Report of the Emoluments and
Nominations Committee on pages40 to 43 and in note 32 to theAccounts on pages 58 and 59.
Other than as disclosed therein,none of the directors had a materialinterest in any contract ofsignificance with the company andits subsidiaries during or at the endof the financial year.
The directors’ interests, allbeneficial, in the ordinary shares of thecompany at the beginning and end ofthe financial year, including interests inoptions held under the company’sExecutive and Sharesave Schemes and
awards made under the Long TermIncentive Plan, are shown below. As at15 May 1997, being for this purposethe latest practicable date prior topublication of this report, there was nochange in the directors’ interests.
Directors’ and Officers’ LiabilityInsuranceThe company maintains liabilityinsurance for the directors andofficers of the company and itssubsidiaries.
Directors’ interest in shares
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36 ScottishPower Annual Report & Accounts 1996–97
Share capital and optionsDuring the year, 223,391,658ordinary shares were issued inconnection with the acquisition ofSouthern Water. As a result of theexercise of options under theEmployee Sharesave and ExecutiveSchemes, a total of 11,548,338ordinary shares of 50p each wereissued during the year. This resultedin the number of ordinary shares in issue being increased to1,177,365,936 as at 31 March 1997.
Options were granted to 5,821employees under the company’sEmployee Sharesave Scheme. Nooptions were granted under theExecutive Share Option Scheme,which was replaced by theintroduction of a Long Term Incentive Plan (‘the Plan’) approvedby shareholders on 24 July 1996.Awards in respect of 678,460 shareshave been made under the Plan,these awards being subject to theachievement of specifiedperformance criteria. Details arecontained in note 32 to theAccounts on pages 58 and 59.
Between 31 March 1997 and15 May 1997, being the latestpracticable date prior to publicationof this report, a further 1,332,383ordinary shares have been issued asa result of the exercise of optionsunder the Employee Sharesave andExecutive Schemes.
At the Annual General Meetingof the company last year, theshareholders granted authority tothe directors to purchase up to94,270,032 ordinary shares of thecompany. The directors have notexercised this authority.
Substantial shareholdingAs at 15 May 1997, the company hadbeen notified that Prudential
Portfolio Fund Managers Limitedheld 84,615,325 ordinary sharesrepresenting 7.17% of the issuedshare capital.
EmployeesEmployee involvement andparticipationIn order to achieve the objective of“Working Together to BuildBusinesses” the group has corporatevalues under the following headings:– well-earned customer loyalty– enhanced shareholder value– positive working environment– trust of communities– teamwork and leadership
The company has taken a variety ofinitiatives to support staff at alllevels in ‘Living the Values’. A valuesbased leadership developmentprogramme has been introduced formanagement across the group. Theestablishment of the ScottishPowerLearning business is an example ofthe company’s determination andcommitment to translate the valuesinto tangible actions. The companyalso provides developmentopportunities through its network of Open Learning facilities anddistance learning MBA programmes.
The group has employeeconsultation and communicationarrangements to encourage theinvolvement and interest of employeesin the group and to develop theirawareness of its business plans andobjectives. These include local jointbodies, designed to provide regulardiscussions between managementand staff representatives, and localannual conferences. The group’sexecutive and managing directorsand the recognised trade unionsmeet normally two or three times
Divisional bargainingarrangements have been establishedto facilitate the development ofterms and conditions of employmenttailored to the diverse needs of thebusinesses and, through this, toprovide employees with a greaterinvolvement in local employmentmatters.
Equal opportunityIt is the group’s policy to promoteequality of opportunity inrecruitment, employment continuity,training and career development.The policy is designed to ensure thatequal opportunity in these areasextends as far as practicable topeople with disabilities. The groupoperates a career break scheme andis a member of the Employer’sForum on Disability, EqualOpportunities Equality Exchangeand the Women’s EngineeringSociety, which pursues the aim ofpromoting the study and practice ofengineering amongst women.
Health and safetyThe group’s safety strategy is basedon a system of corporatedetermination of strategy, policy and standards with devolvedresponsibility for implementationand active leadership from thehighest levels.
The group continues to manageits operations throughout theorganisation to the highest healthand safety standards in the interestof staff, customers and members ofthe public. Details of the company’sapproach to safety are contained onpage 30.
ScottishPower has a wellestablished occupational health
service and a voluntary health careprogramme, Wellscreen, which hasnow been used by over 36% ofemployees in Scotland and in theManweb region. The company hasopened fitness centres for staff inScotland and Manweb and has alsointroduced a physiotherapy service.Further fitness centres throughoutthe group are anticipated.
Charitable and political donationsDuring the financial year donationsmade by ScottishPower and itssubsidiaries for charitable purposestotalled £484,641. There were nocontributions for political purposes.
Creditor payment policy and practiceThe group’s current policy andpractice concerning the payment ofthe majority of its trade creditors isto follow the CBI’s Prompt PayersCode. Copies are available uponrequest from the CompanySecretary. For other suppliers, thecompany’s policy and practice is tosettle terms of payment whenagreeing the terms of thetransaction, to include the terms incontracts and to pay in accordancewith its contractual and legalobligations. The group’s ‘creditordays’ at 31 March 1997 were 34 days.
AuditorsCoopers & Lybrand have expressedtheir willingness to continue inoffice and a resolution to reappointCoopers & Lybrand as thecompany’s auditors will be proposedat the Annual General Meeting.
Annual General MeetingThe Annual General Meeting will beheld at the Royal Concert Hall,
Sauchiehall Street, Glasgow, onWednesday 23 July 1997 at11.00 a.m. Details of the resolutionsto be proposed at the AnnualGeneral Meeting are contained inthe Notice of Meeting.
The company has compliedthroughout the financial year withall the provisions of the CadburyCommittee’s Code of Best Practicewhich are currently applicable.
Board of DirectorsThere is a well established divisionof authority and responsibility at themost senior level within thecompany through the separation ofthe roles of the Chairman and ChiefExecutive.
As at 31 March 1997 there werefive executive and seven non-executive directors (including a non-executive Chairman) on the Board.
The non-executive directors arefrom varied business and otherbackgrounds. Their experienceallows them to exercise independentjudgement on the Board and theirviews carry substantial weight inBoard decisions. They contribute tothe company’s strategy and policyformulation, in addition tomonitoring its performance and itsexecutive management. The non-executive directors are appointed fora specific term and reappointment isnot automatic. Each non-executivedirector’s position is reviewed asexpiry of their term of officeapproaches.
The Board meets regularly andhas a schedule of matters concerningkey aspects of the company’sactivities which are reserved to theBoard for decision. The Boardexercises full control over strategy,investment and capital expenditure.In addition, individual executivedirectors have specific responsibilitiesfor key company-wide operationssuch as health and safety, theenvironment and regulatory affairs.All directors have access to theCompany Secretary who is
responsible for ensuring that allBoard procedures are observed. Any directors wishing to do so in thefurtherance of his or her duties, maytake independent professionaladvice at the company’s expense.
Board committeesThe Audit Committee, whosemembers are all non-executivedirectors and are noted on page 63,reviews accounting policies, internalcontrol and financial reporting, andmakes recommendations on thesematters to the Board for decision.It also considers the appointmentand fees of the external auditors.
The Emoluments andNominations Committee, whosemembers are all non-executivedirectors and are noted on page 63,is responsible for determining theremuneration policy for theScottishPower group, including theremuneration arrangements forexecutive directors and other seniorexecutives and the operation of thecompany’s employee share schemes.It is also responsible for reviewingthe company’s succession plans andmaking recommendations to theBoard on the appointment ofdirectors. The Report of theEmoluments and NominationsCommittee is contained on pages 40to 43.
The Chief Executive’s Committeecomprises the Chief Executive, thefour other executive directors, themanaging directors of the company’sPower Systems, Energy Supply andInformation Systems businesses, theChief Executives of Manweb andScottishTelecom, the Director ofCorporate Affairs and the CompanySecretary. Operational control andimplementation of group strategyand policy are responsibilities
delegated by the Board to the ChiefExecutive who is supported by theCommittee in the discharge of thesefunctions. The Committee’s terms ofreference also include monitoring ofthe performance of the company’sbusinesses against business plansagreed by the Board. Major issuesand decisions are reported monthlyto the Board.
Internal financial controlThe Board of Directors isresponsible for the group’s system ofinternal financial control and formonitoring its effectiveness. It mustbe recognised that any such systemcan provide only reasonable and notabsolute assurance of thesafeguarding of assets, themaintenance of proper accountingrecords and the reliability offinancial information. The keyfeatures of the control system whichhas been established, and which isdesigned to ensure effective internalfinancial control, are as follows:
Control environmentThe company is committed toensuring that a proper controlenvironment is maintained. There isa commitment to competence andintegrity, and the communication ofethical values and controlconsciousness to managers andemployees. Human Resourcespolicies underpin that commitmentby a focus on enhancing job skillsand promoting high standards ofprobity amongst staff. In addition,the appropriate organisationalstructure has been developed withinwhich to control the businesses andto delegate authority andaccountability having regard toacceptable levels of risk. Businessmanaging directors report regularly
on operating performance to therelevant executive director with lineresponsibility, and the performanceof each business is reviewed monthlyby the Chief Executive’s Committee.
Risk assessment and controlproceduresThe company’s strategy is to follow a prudent risk policy, effectivelymanaging exposures whereappropriate.
The Board has undertaken aspecific exercise to review and assessits key risks at a group level and toensure that it is receivingappropriate information to monitorthe management of those risks. The Board has required each of thebusinesses to complete a similarexercise to define key risks, controlsand monitoring procedures utilisinga well defined and consistentmethodology. It is a key requirementof the procedures that a writtencertificate is provided annually bythe managing director and financialmanager of each business confirmingthat they have reviewed theeffectiveness of the system ofinternal financial controls during theyear. Periodic detailed review by theFinance Director of the accountingrecords of each business reinforces a focused approach to controlthroughout the group’s financefunctions.
Audit of controlsOperation of the group’s control andmonitoring procedures is reviewedand tested by the group’s internalaudit function under the supervisionof the Head of Internal Audit,reporting directly to the FinanceDirector. Internal audit reports andrecommendations on the group’sprocedures are reviewed regularly by
the Audit Committee. As part oftheir external audit responsibilities,the external auditors also providereports to the Audit Committee onthe operation of the group’s internalfinancial control procedures.
The directors confirm that theyhave reviewed the effectiveness ofthe system of internal financialcontrols utilising the procedures setout above.
Directors’ responsibility for thefinancial statementsThe directors are required by law toprepare financial statements for eachfinancial year and to present themannually to the company’s membersat the Annual General Meeting. The financial statements of whichthe form and content is prescribedby the Companies Act 1985 andapplicable accounting standards,must give a true and fair view of thestate of affairs of the company andthe group as at the end of thefinancial year and of the group’sprofit or loss for the period.
The directors confirm thatsuitable accounting policies havebeen used and applied consistentlyand that reasonable and prudentjudgements and estimates have beenmade in the preparation of thefinancial statements for the yearended 31 March 1997. The directorsalso confirm that applicableaccounting standards have beenfollowed and that the financialstatements have been prepared onthe going concern basis.
The directors are responsible formaintaining proper accountingrecords and sufficient internalcontrols to safeguard the assets ofthe company and the group and toprevent and detect fraud or anyother irregularities.
Going concernThe directors confirm that thecompany remains a going concernon the basis of adequate cash flowforecasts.
Auditors’ responsibilitiesThe company’s registered auditors,Coopers & Lybrand, are responsiblefor forming an independent opinionon the financial statements of thegroup presented by the directors andfor reporting their opinion to theshareholders. The report of theAuditors to the members of ScottishPower plc is set out on page 61.
The auditors are also required toreport to the shareholders if thefollowing requirements are not met:– that the group has maintained
proper accounting records– that the financial statements are in
agreement with the accountingrecords
– that the contents of the Directors’Report are consistent with thefinancial statements
– that directors’ emoluments andother transactions with directorsare properly disclosed in thefinancial statements
– that they have obtained allinformation and explanationswhich, to the best of theirknowledge and belief, arenecessary for the purpose oftheir audit.In addition, as recommended by
the Cadbury Committee, andrequired by the London StockExchange, the auditors haveconsidered the directors’ statementof compliance in relation to thosepoints of the Code which can beobjectively verified. Their report oncorporate governance matters isset out on page 62.
Emoluments and NominationsCommitteeThe Emoluments and NominationsCommittee (‘the Committee’) isresponsible for determining theremuneration policy for theScottishPower group, including theremuneration arrangements forexecutive directors and other seniorexecutives. It is also responsible formaking recommendations to theBoard on the appointment ofdirectors.
The Committee consists solely of non-executive directors. Itsmembers, who have no personalfinancial interest other than asshareholders in the mattersconsidered by the Committee, areNick Kuenssberg (Chairman), Sir Ronald Garrick, Sir PeterGregson, Ewen Macpherson andJohn Parnaby.
The Committee is advisedinternally and externally and isprovided with independent advicefrom external remunerationconsultants in order to assist indetermining and developing itspolicies.
Committee members are paid afee and expenses, but do not receiveany other remuneration fromthe company. Details of theremuneration of all non-executivedirectors are set out in note 32 tothe Accounts on pages 58 and 59.
The Committee’s policy anddisclosures on directors and seniormanagement remuneration are setout below. Throughout the period,the company has complied withSection A of the Best PracticeProvisions annexed to the LondonStock Exchange Listing Rules.
Executive remuneration policyThe aim of ScottishPower’s
remuneration policy is to ensure thatthe rewards for executives anddirectors attract and retainexecutives of the highest quality,who are incentivised to achieveperformance which exceeds that ofcompetitors. Furthermore, theobjective is to ensure that incentiveschemes are in line with bestpractice and promote the interests ofthe shareholders.
Competitiveness of remunerationThe Committee believes that toattract and retain key executives ofthe highest calibre, the remunerationpackage it offers must be marketcompetitive. The remunerationstrategy is to adopt a market medianpositioning on all seniormanagement remuneration packagesand to provide packages above themarket median only wheresupported by demonstrably superiorpersonal performance. Thispositioning is established by advicereceived from an independentevaluation of job size and ananalysis of the market situation byindependent remunerationconsultants against a comparatorgroup of selected utilities and theFTSE 100 companies.
The Committee takes a balancedview of remuneration, consideringeach element relative to the marketand, in the past, has realignedelements of the package to reflectmarket, or changes in market,practice. In the last three years,annual bonus arrangements havebeen further strengthened so that thetargets reflect shareholder value andfocus on improvements to businessperformance. In July 1996shareholders approved theintroduction of a long term incentiveplan which replaced all future grants
Report of the Emoluments and Nominations Committee
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41 ScottishPower Annual Report & Accounts 1996–97
of executive share options.In determining its remunerationpolicy the Committee has given fullconsideration to Section B of theBest Practice Provisions annexed tothe London Stock Exchange ListingRules.
Remuneration policyIn setting remuneration levels, theCommittee commissioned anindependent evaluation of theexecutive roles and also the nextlevel of management within thecompany. The Committee has alsocontinued to take independentadvice from three remunerationconsultants on market levelremuneration based on acomparison with companies ofsimilar size and complexity. Inconsidering the comparatorcompanies, the consultants haveincluded a number of other utilitiesbut have not restricted their studysolely to other utilities.
After careful consideration, andwith the benefit of the long termincentive plan replacing executiveshare options, the Committee is ofthe view that the remunerationpolicy stated for the company isappropriate. In line with its objectiveto build a multi-utility business,ScottishPower has recruited anumber of executives with keybusiness skills, and hence a rewardstructure broadly equivalent to otherlarge UK listed companies isnecessary.
Base salaryThe Committee sets the base salaryfor each executive director byreference to individual performancethrough a formal appraisal systemand external market data, based onthe Hay job evaluation system and
reflecting similar roles in othercomparable companies. Inevaluating the roles, Hay takes intoaccount its view of the environmentin which the company is operating.
Annual performance related bonusExecutive directors and seniormanagement participate in thecompany’s performance related payschemes. The schemes provide amaximum total payment of 40% ofsalary for executive directors and themanaging directors of the company’senergy businesses, 30% of salary forother directors and 20% of salary forsenior managers, and focus oncorporate and business performance.All payments under the schemes arenon-pensionable and non-contractual and are subject to thespecific approval of the Committee.
The bonus structure is reviewedannually to ensure that it reflects thepriorities of the business. The 1997review of annual bonusarrangements confirmed that theseforms of arrangement arewidespread within the UK, and theamounts receivable at the on targetand maximum levels of performanceare broadly in line with the FTSE100 comparator group.
The scheme for executivedirectors provides a bonus of amaximum of 40% of salary, with upto a maximum of 25% of base salarydetermined by the company’sperformance. Measurement is byreference to a matrix of performanceagainst targets of earnings per shareand return on capital employed toreflect shareholder value. Thebalance of the bonus, of a maximumof 15% of base salary, is linked toeach executive’s achievement of keystrategic objectives, both short termand long term. Objectives are set
annually and performance againstthese is reviewed on a six monthlybasis.
During 1996-97 a specific bonuswas paid to reflect the keyachievement of one executivedirector relating to the acquisition ofSouthern Water.
Directors do not participate inthe Inland Revenue approved profitrelated pay scheme which wasintroduced in April 1995.
Share option schemesThe company operates an executiveshare option scheme which appliesto executive directors and certainsenior managers. However, therewill be no future grants under thisscheme which has been replaced bythe company’s long term incentiveplan. The last grant of executiveshare options to executive directorswas in May 1995. Existing optionsremain exercisable. The Committeehas not awarded any replacementoptions and does not propose to doso. Options have not been granted ata discounted price.
The company also operates asavings-related share option scheme,which is open to all permanentemployees. Under this schemeoptions are granted overScottishPower shares at a discountof 20% to the prevailing marketprice at the time of grant to eligibleemployees who agree to save up to£250 per month over a period ofthree or five years.
Long term incentive planThe company operates a long termincentive plan for executive directorsand other senior managers, whichwas approved by shareholders at thecompany’s Annual General Meetingin July 1996. The plan links the
rewards closely betweenmanagement and shareholders andfocuses on long term corporateperformance.
Under the plan, awards toacquire shares in ScottishPower atnil or nominal cost are made to theplan participants up to a maximumvalue equal to 60% of base salary.The award will vest only if theCommittee is satisfied that certainperformance measures related to thesustained underlying financialperformance of the company andimprovements in OFFER publishedCustomer Service Standards areachieved over a period of threefinancial years commencing with thefinancial year preceding the date anaward is made. Assuming that suchtargets have been achieved, thenumber of shares that can beacquired on vesting of the awardwill be dependent upon how thecompany ranks, in terms of its totalshareholder return performance overa three year performance period, incomparison to the constituentcompanies of the FTSE 100 Indexand the Electricity and Water sectors.Half of each award will be measuredagainst the FTSE 100 companiesand half against the Electricity andWater companies. A percentage ofeach half of the award will vestdepending upon the company’sranking within the relevantcomparator group as follows:– 100% if the company ranks in the
top decile– 90% if the company ranks in the
second decile– 80% if the company ranks in the
third decile– 60% if the company ranks in the
fourth decile– 40% if the company ranks in the
fifth decile
– nil if the company ranks in thesixth decile or lower.
Once the company’s totalshareholder return performance hasbeen measured over the three yearperformance period following thegrant of the award, the award mustbe held for a further year before itmay be exercised. The planparticipant may acquire the sharesin respect of the percentage of theaward which has vested at any timeafter the fourth year up to theseventh year after the grant of theaward.
It is the intention to extend theCustomer Service Standard measuresfor all future awards under the planto include reference to OFWATCustomer Service Standards.
PensionThe executive directors, and othersenior management of the company,are provided with pension benefitsthrough the company’s mainpension scheme and an executivetop up pension plan which providesa maximum pension of two-thirds offinal salary on retirement at age 63,reduced where service to age 63 isless than 20 years. Pensionablesalary is base salary in the 12 months prior to leaving thecompany.
Individuals who joined thecompany on or after 1 June 1989 are subject to the Inland Revenueearnings cap introduced by theFinance Act 1989. Entitlementabove the cap cannot be providedthrough the company’s approvedpension benefits, and thereforearrangements on an unapprovedbasis have been made to providetotal benefits for executives affectedby the legislation. The total liabilityin respect of executives and senior
employees arising in relation tounapproved benefits accrued forservice for the year to 31 March1997 is £305,952.
The normal retirement age is 63,apart from the Chief Executive whohas a planned retirement age of 60by special agreement at the time hejoined the company.
The trustee body of the executivetop up plan is chaired by theChairman of the company.
The Committee intends to reportpension expense in future inaccordance with the requirements ofthe London Stock Exchange whichwill come into force on 1 July 1997.Pension costs detailed in theaccounts are calculated as the costof providing benefits accrued in the1996-97 year.
Service contractsAll executive directors have servicecontracts terminable by the companyon two years’ notice (prior toSeptember 1994 notice periods werethree years) and by the individualson up to 12 months’ notice. Againstthe need to retain and motivatedirectors in a competitiveenvironment, the Committeebelieves that it remains appropriatefor the executive directors tocontinue to be on two year rollingcontracts.
None of the executive directors’service contracts provides forpredetermined amounts ofcompensation in the event of earlytermination. The Committee’s policyon early termination is to emphasisethe duty to mitigate to the fullestextent practicable.
Senior managers within thecompany have notice periodsranging from six months to one year.
Report of the Emoluments and Nominations Committee continued
3.1985g05/pp34-43 18/6/97 11:34 Page 42
43 ScottishPower Annual Report & Accounts 1996–97
External non-executiveappointmentsThe company encourages itsdirectors to become non-executivedirectors of other companies,provided that these are not withcompeting companies and are notlikely to lead to any conflicts ofinterest, and do not requireextensive commitments of timewhich would prejudice their roleswithin ScottishPower. This serves to add to their personal andprofessional experience andknowledge to the benefit ofScottishPower. Any fees derivedfrom such appointments may beretained by the executives.
BenefitsExecutive directors are eligible for arange of benefits on which they areassessed for tax and which includethe provision of a company car, fuel,private medical insurance andpermanent health insurance. Seniorexecutives depending upon grade areeligible for certain of these benefits.
As with salary, the level ofbenefits is reviewed annuallythrough surveys from independentconsultants. Practice varies as to thecomposition of these items amongstthe comparator group and thecompany’s benefits are broadly inline with the practice of the group.
The company provides all levelsof staff, including directors andcertain pensioners, with a discounton merchandise sold by its retailbusiness.
Remuneration policy for non-executive directorsThe remuneration of non-executivedirectors is determined by the Boardand consists of fees for their servicesin connection with the Board and
Board Committees. Additional feesare also payable for chairing BoardCommittees. The non-executivedirectors do not have servicecontracts, are not members of thecompany’s pension scheme and donot participate in any bonus, shareoption or other profit or incentiveschemes.
The company provides lifeassurance cover, up to a limit of£400,000 on the life of the Chairman.
Full details of the remunerationof the directors are contained innote 32 to the accounts on pages 58and 59.
Principal Subsidiary Undertakings and Investments 60
Report of the Auditors to the members of 61Scottish Power plc
Report of the Auditors to Scottish Power plc 62on Corporate Governance matters
Accounts Contents
3.1985g01/pp44-48 18/6/97 11:17 Page 44
Basis of accountingThe accounts have been preparedunder the historical cost conventionand in accordance with applicableaccounting standards in the UK and,subject to the treatment of waterinfrastructure grants andcontributions described below, withthe requirements of the CompaniesAct 1985. The cash flow statementhas been restated to incorporate therevised requirements of FRS 1 –Cash Flow Statements. Thecomparative information has beenrestated to reflect the revisedaccounting standard.
Basis of consolidationThe group accounts include theaccounts of the company and itsprincipal subsidiary undertakingstogether with the group’s share ofresults and net assets of associatedundertakings. For commercialreasons certain subsidiaries havedifferent year ends. Theconsolidation therefore includes theaccounts of these companies, asadjusted for material transactions inthe periods between the year ends ofthe companies and 31 March 1997.
TurnoverTurnover comprises the sales valueof energy, goods, water and wastewater services and other servicessupplied to customers during theyear and excludes value added taxand intra-group sales. Income fromthe sale of energy and measuredwater is the value of units suppliedduring the year and includes anestimate of the value of unitssupplied to customers between thedate of their last meter reading andthe year end.
Under/over recovery of regulated incomeUnder the licences which permitScottishPower and Manweb tooperate as public electricitycompanies, price control formulaedetermine the regulated allowablemaximum unit revenues of theTransmission, Distribution andSupply businesses, as appropriate. If actual revenue of the year exceedsthe regulated allowable maximum,the excess is deducted from turnoverand included in creditors. Wherethere is an under recovery comparedwith the regulated allowablemaximum no anticipation of anypotential future recovery is made.
Research and developmentExpenditure on research anddevelopment is charged to the profitand loss account as it is incurred.
InterestInterest on the funding attributableto major capital projects iscapitalised gross of tax relief duringthe period of construction andwritten off as part of the total costover the operational life of the asset.All other interest payable andreceivable is reflected in the profitand loss account as it arises.
Financial instrumentsDebt instrumentsAll borrowings are stated at fairvalue of consideration received afterdeduction of issue costs. The issuecosts of bonds and interest payableon bonds are charged to the profitand loss account at a constant rateover the life of the bond.
Interest rate swapsInterest rate swap agreements areused to manage interest rateexposures. Amounts payable orreceivable in respect of theseagreements are recognised asadjustments to interest expense overthe period of the contracts.
Interest rate capsInterest rate caps are used to limitinterest rate exposures. Thepremiums on these contracts aredisclosed as interest expense and areamortised over the period of thecontracts.
Premiums and discountsPremiums and discounts arising onthe early repayment of borrowingsare written off to the profit and lossaccount as incurred.
GoodwillGoodwill arising from the purchaseof trading entities represents theexcess of the fair value of thepurchase consideration over the fairvalue of the net assets acquired andis written off against reserves onacquisition.
Tangible fixed assetsTangible fixed assets are stated atcost and are depreciated on thestraight-line method over theirestimated operational lives. Certainhydro civil assets and waterinfrastructure assets, which haveinfinite lives, and land are notdepreciated. Depreciation is, ingeneral, first charged in the yearfollowing that in which theexpenditure was incurred. Waterinfrastructure assets, being mainsand sewers, reservoirs, dams, sludge
pipelines and sea outfalls are notdepreciated because the network ofsystems is required to be maintainedin perpetuity and therefore has nofinite economic life. Expenditure onmaintaining the operating capabilityof the network is charged as anoperating cost. The maindepreciation periods used by thecompany are as set out below:
Years
Coal and oil-fired generating stations 35-40Hydro plant and machinery 20-40Other buildings 40Transmission and distribution plant 30-40Towers, lines and underground cables 40-60Vehicles, miscellaneous equipment and fittings 3-15
Leased assetsAs lesseeAssets leased to the group underfinance leases are capitalised anddepreciated in line with the groupdepreciation policy. The interestelement of the finance leaserepayments is charged to the profitand loss account in proportion tothe balance of the capitalrepayments outstanding. Rentalspayable under operating leases arecharged to the profit and lossaccount as incurred.
As lessorRentals receivable under financeleases are allocated to accountingperiods to give a constant periodicrate of return on the net cashinvestment in the lease in eachperiod. The amounts due fromlessees under finance leases arerecorded in the balance sheet as a
debtor at the amount of the netinvestment in the lease after makingprovisions for bad and doubtfulrentals receivable.
Property clawbackA debenture has been issued to theSecretary of State for Scotland whichentitles HM Government to aproportion of any property gain(above certain thresholds and afterdeducting an amount representingcorporation tax thereon) accruing ortreated as accruing to ScottishPoweras a result of the disposal or deemeddisposal after 31 March 1991 ofcertain property held at 31 March1990. These arrangements last until31 March 2001.
In the case of Manweb, if propertiesare disposed of, or are deemed to havebeen disposed of, prior to 1 April2000, a part of the gain over the valueat 31 March 1990 (as adjusted forinflation and taxation) will becomepayable to HM Government.
In the case of both companies, aliability for clawback in respect ofproperty disposals is recognised onlywhen an actual or a deemed disposaloccurs.
InvestmentsInvestments in the subsidiary andassociated undertakings are stated inthe balance sheet of the parentcompany at cost, or nominal value ofshares issued as consideration whereapplicable, less provision for anypermanent diminution in value. Theconsolidated profit and loss accountincludes the group’s share of theprofits less losses and taxation ofassociated undertakings. The groupbalance sheet includes the investmentin associated undertakings at the
group’s share of their net assets.Other fixed asset investments arecarried at cost less provision forpermanent diminution in value.
StocksStocks are valued at the lower ofcost and net realisable value.
Foreign currenciesTransactions in foreign currenciesare recorded at the rate ruling at thedate of the transaction. At the yearend, liabilities and monetary assetsdenominated in foreign currenciesare translated at the rate of exchangeruling at the balance sheet date or,where applicable, at the contractedrate. Any gain or loss arising on therestatement of such balances istaken to the profit and loss account.
TaxationThe charge for taxation is based onthe profits for the year and takes intoaccount taxation deferred, using theliability method, in respect of timingdifferences to the extent that it isprobable that a liability will crystallisein the foreseeable future. Such timingdifferences arise primarily from thediffering treatment for taxation andaccounting purposes of provisionsand the depreciation of fixed assets.
PensionsRevaluations of the Pension Schemesare normally conducted by anindependent actuary every threeyears. The regular cost of providingpensions and related benefits and anyvariations from regular cost arisingfrom the actuarial valuations arecharged to the profit and loss accountover the expected remaining servicelives of current employees following
consultations with the actuary. Anydifference between the charge to theprofit and loss account and the actualcontributions paid to the PensionSchemes is included as an asset orliability in the balance sheet.
Grants and contributionsCapital grants and customercontributions in respect of additionsto non-water infrastructure fixedassets are treated as deferred incomeand released to the profit and lossaccount over the estimatedoperational lives of the relatedassets. The treatment of grants andcontributions relating to waterinfrastructure assets differs, sincethese assets are not depreciated andtherefore no basis exists on which torecognise grants and contributionsas deferred income. Accordingly,grants and contributions relating towater infrastructure asset additionsare deducted from the cost of waterinfrastructure assets. This treatmentis in accordance with SSAP 4 andthe effect on the value of tangiblefixed assets is disclosed in note 14.This is not in accordance with theCompanies Act 1985 which requiresassets to be stated at their purchaseprice or production cost. Thedeparture from the requirements ofthe Act is, in the opinion of thedirectors, necessary to give a trueand fair view, since water infra-structure assets are not depreciated.
Own shares held under trustShares in the company purchasedfor the Long Term Incentive Plan,are held under trust and arerecorded within investments in thebalance sheet at cost. The cost ofawards made by the trust are taken
to the profit and loss account on astraight-line basis over the period inwhich performance is measured.
Business segment definitionsThe business segments of the groupare defined as follows:
Generation WholesaleThe generation of electricity fromthe company’s own power stations,the purchase of external supplies ofenergy for sale to other businesssegments of the company and thesale of electricity to other electricitycompanies and to the Pool inEngland and Wales.
Power SystemsThe transportation of units ofelectricity from the power stationsthrough the transmission anddistribution networks to customersin Scotland and to customers inEngland and Wales through theAnglo-Scottish Interconnector.
Energy SupplyThe sale of energy to customers,together with related billing andcollection activities.
ManwebThe purchase, distribution and sale ofelectricity to customers, together withrelated billing and collection activities.
Southern WaterThe provision of water and wastewater services, together with relatedbilling and collection activities.
Developing businesses and ancillary servicesThe retailing and servicing ofdomestic electrical goods and home
entertainment appliances, the supplyof telecommunication services, theprovision of electrical contracting,consultancy and corporate servicesand the company’s other subsidiaryand associated undertakings.
In the segmental analysis on pages49 and 53, all material activities arederived from continuing operationsin the United Kingdom.
Revenue cost definitionsCost of salesCost of sales for the group, excludingSouthern Water, reflects the directcosts of the generation and purchaseof electricity, retail trading,telecommunication services,electrical contracting, consultancyservices and the purchase of naturalgas. For Southern Water cost of salesrepresents the cost of extracting waterfrom underground and raw watersurface reservoirs and of its treatmentand supply to customers and thesubsequent collection of waste waterand its treatment and disposal.
Transmission and distribution costsTransmission and distribution costsrepresent the cost of transmittingunits of electricity from the powerstations through the transmissionnetwork to the distribution networkand through that network tocustomers. It includes the costs ofmetering, billing and debt collection.This heading is considered to be moreappropriate to the electricity industrythan the standard Companies Actheading of Distribution costs.
Administrative expensesAdministrative expenses compriseindirect costs of the businesses, thecosts of centralised services and rates.
Earnings per ordinary share 6 38.11p 33.12pppppppppppp ppppppppppp
Dividend per ordinary share 7 18.50p 15.50ppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppp ppppppppppp ppppppppppp
Acquisitions and reorganisation costs relate to the results of Southern Water for the period 6 August 1996 to 31 March 1997.
A statement of total recognised gains and losses and a reconciliation to historical cost profits and losses are not shown as all gains and lossesfor 1996 and 1997 are recognised in the profit and loss account under the historical cost convention.
The accounting policies and definitions on pages 45 to 47, together with the notes on pages 49, 51 and 53 to 60 form part of these accounts.
Group Profit and Loss Accountfor the year ended 31 March 1997
Total 663.9 434.3ppppppppppppppppppppppppppppppppppppppppppppppppppppp pppppppp pppppppp
2 Operating profitOperating profit is stated after charging / (crediting):
Beforeacquisitions Acquisitions Total Total
1997 1997 1997 1996£m £m £m £m
Depreciation 113.1 32.4 145.5 86.8Release of customer contributions / grants (21.7) (0.8) (22.5) (6.7)Research and development 2.9 2.7 5.6 3.4Hire of plant and equipment– operating leases 1.9 0.7 2.6 3.5Hire of other assets – operating leases 20.6 – 20.6 19.6Auditors’ remuneration for audit of– group 0.5 0.1 0.6 0.4– company 0.3 – 0.3 0.2Auditors’ remuneration for non-audit services to the company and its UK subsidiary undertakings 1.3 0.1 1.4 0.7pppppppppppppppppppppppppppppppppp pppppppp pppppppp pppppppp pppppppp
Coopers & Lybrand were paid £0.5 million (1996 £0.4 million) which has beenincluded in the expenses of the acquisitions (note 27) and not charged to the profitand loss account.
Total employee costs 324.5 232.5Less: charged as capital expenditure (48.0) (46.1)ppppppppppppppppppppppppppppppppppppppppppppppppppppp pppppppp pppppppp
Charged to the profit and loss account 276.5 186.4ppppppppppppppppppppppppppppppppppppppppppppppppppppp pppppppp pppppppp
3 Employee information continued(b) Employee numbersThe year end and average numbers of employees (full time and part time) employedby the group, including executive directors, were:
15,018 11,359 15,303 11,885pppppppppppppppppppppppppppppppppp pppppppp pppppppp pppppppp ppppppppThe number of full time equivalent staff was: 14,401 10,773 14,657 11,344pppppppppppppppppppppppppppppppppp pppppppp pppppppp pppppppp pppppppp
A total of 4,161 employees were employed by the Southern Water group at the dateof acquisition (1996 Manweb 3,260 employees at the date of acquisition).
4 Net interest charge1997 1996
£m £m
Interest on overdrafts, bonds and other borrowings:Repayable wholly within five years 64.7 34.3Not wholly repayable within five years 12.6 –Repaid during the year 33.0 0.3ppppppppppppppppppppppppppppppppppppppppppppppppppppp pppppppp pppppppp
Interest cover is calculated by dividing profit on ordinary activities before interest bythe net interest charge.
Total interest payable, other than on finance leases, can be analysed as relatingto bank loans and overdrafts £64.8 million (1996 £17.4 million), governmentborrowings £16.3 million (1996 £16.3 million), loan notes £2.7 million (1996 £0.9 million), commercial paper £24.3 million (1996 £nil) and euro-bonds£2.2 million (1996 £nil).
5 Taxation1997 1996
£m £m
UK Corporation Tax at 33% (1996 33%) 135.7 109.0Associated undertakings 1.1 0.3ppppppppppppppppppppppppppppppppppppppppppppppppppppp pppppppp pppppppp
The charge has been reduced by £64.0 million (1996 £29.9 million) in respect oftiming differences for which no deferred tax provision is considered necessary (note 20).
6 Earnings per ordinary shareEarnings per ordinary share have been calculated on the basis of the profit for thefinancial year of £421.1 million (1996 £296.4 million) and by reference to1,104,932,445 shares, being the weighted average number of ordinary shares inissue and ranking for dividend during the period after adjusting the number ofshares in issue by the bonus element inherent in the rights issue on 30 August1996. The comparative figure has also been adjusted (1996 894,936,240). Therewould be no significant dilution of earnings per ordinary share if all outstandingshare options were exercised.
Increase/(decrease) in cash in year 12 52.3 (22.3)pppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppp ppppppppppp ppppppppppp
Reconciliation of net cash flow to movement in net debtBefore
acquisitions Acquisitions Total Total1997 1997 1997 1996
£m £m £m £m
Increase/(decrease) in cash in year 44.4 7.9 52.3 (22.3)Cash inflow from increase in debt – (1,048.6) (1,048.6) (395.5)Cash outflow/(inflow) from movement in liquid resources – 21.0 21.0 (87.2)ppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppp ppppppppppp ppppppppppp ppppppppppp ppppppppppp
Change in net debt resulting from cashflows 44.4 (1,019.7) (975.3) (505.0)Net debt acquired – (168.6) (168.6) (0.6)Loan notes issued – (14.3) (14.3) (40.2)ppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppp ppppppppppp ppppppppppp ppppppppppp ppppppppppp
Movement in net debt in year (1,158.2) (545.8)Net debt at end of previous year (632.1) (86.3)ppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppp ppppppppppp ppppppppppp
Net debt at end of year (1,790.3) (632.1)ppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppp ppppppppppp ppppppppppp
The accounting policies and definitions on pages 45 to 47, together with the notes on pages 49, 51 and 53 to 60 form part of these accounts.
Group Cash Flow Statementfor the year ended 31 March 1997
(a) Returns on investments and servicing of financeInterest received 3.3 5.8Interest paid (103.9) (24.0)Interest element of finance lease rental payments (0.5) –Dividends received from associatedundertakings – 0.8
pppppppp pppppppp
Net cash outflow for returns on investments and servicing of finance (101.1) (17.4)pppppppppppppppppppppppppppppppppppppppppppp pppppppp pppppppp
(b) Capital expenditure and financialinvestmentPurchase of tangible fixed assets (435.4) (233.3)Deferred income received 44.7 35.0Sale of listed investments – 207.7Sale of tangible fixed assets 13.9 4.9Acquisition of retail outlets and stock – (1.1)Purchase of fixed assets investments (4.6) (0.6)
pppppppp pppppppp
Net cash (outflow)/inflow for capitalexpenditure and financial investment (381.4) 12.6pppppppppppppppppppppppppppppppppppppppppppp pppppppp pppppppp
(c) Management of liquid resources*Sale of commercial paper held – 101.6Cash outflow in relation to short-term deposits (21.0) (14.4)
pppppppp pppppppp
Net cash (outflow)/inflow formanagement of liquid resources (21.0) 87.2pppppppppppppppppppppppppppppppppppppppppppp pppppppp pppppppp
(d) FinancingIssue of ordinary share capital** 263.0 156.9Expenses paid in connection with share issue (25.0) (13.2)
pppppppp pppppppp
238.0 143.7Debt due within one year:Net drawdown of uncommitted facilities 252.9 36.7Net commercial paper issued 700.5 58.8Redemption of loan notes (0.4) –European Investment Bank loan 8.7 –Issue of Grid exchangeable bonds – 2.3Redemption of Grid exchangeable bonds – (2.3)Debt due after one year:Net drawdown of uncommitted facilities 3.8 –Net (repayment)/drawdown ofcommitted facilities (100.0) 300.0European Investment Bank loan (11.6) –8.375% euro-sterling bond issue 196.6 –Capital element of finance lease rental payments (1.9) –
pppppppp pppppppp
1,048.6 395.5pppppppp pppppppp
Net cash inflow from financing 1,286.6 539.2ppppppppppppppppppppppppppppppppppppppppppp pppppppp pppppppp*Liquid resources include term deposits of less than one year, commercial paper andother short-term investments.**Part of the consideration for the purchase of Southern Water comprised ordinaryshares. Further details of the acquisition are set out in note 27.
9 Reconciliation of operating profit to cash inflow fromcontinuing operating activities
1997 1996£m £m
Operating profit 663.9 434.3Acquisition reorganisation accruals and provisions 15.2 36.2Depreciation charge 145.5 86.8Profit on sale of tangible fixed assets (2.4) (0.1)Release of deferred income (22.5) (6.7)Movement in provisions for liabilities and charges (17.1) (21.4)Increase in stocks (31.1) (0.3)Decrease/(increase) in debtors 38.7 (118.0)Increase/(decrease) in creditors 1.0 (2.1)ppppppppppppppppppppppppppppppppppppppppppppppppppppp pppppppp pppppppp
Cash inflow from continuing operating activities 791.2 408.7ppppppppppppppppppppppppppppppppppppppppppppppppppppp pppppppp ppppppppThe table above includes cash outflow of £6.0 million in relation to acquisitionreorganisation costs for Southern Water (1996 £6.5 million Manweb). The acquisitionreorganisation accruals and provisions for 1997 and 1996 relate to the cost ofimplementing the post acquisition plans for Southern Water and Manweb respectively.
10 Effect of acquisitions on cash flow1997 1996
£m £m
Cash flow from operating activities 140.3 (81.5)Returns on investment and servicing of finance (5.6) (1.7)Taxation (18.0) (28.3)Capital expenditure and financial investment (93.2) 209.3Management of liquid resources 49.0 –Financing (2.8) (86.7)ppppppppppppppppppppppppppppppppppppppppppppppppppppp pppppppp pppppppp
Increase in cash 69.7 11.1ppppppppppppppppppppppppppppppppppppppppppppppppppppp pppppppp ppppppppThe above analysis for 1997 details the contribution of Southern Water to group cashflows since the date of acquisition (1996 Manweb). The post acquisition cash flows ofWoodend Group Limited and Telephone Information Services plc were not material to thegroup.
11 Analysis of cash flows in respect of acquisitionsSouthern Other
Water acquisitions Total Total1997 1997 1997 1996
£m £m £m £m
Cash consideration including acquisition expenses 1,283.9 6.9 1,290.8 776.3Cash at bank acquired (58.6) – (58.6) (16.8)Bank overdrafts acquired – 2.4 2.4 20.7pppppppppppppppppppppppppppppppppp pppppppp pppppppp pppppppp pppppppp
1,225.3 9.3 1,234.6 780.2pppppppppppppppppppppppppppppppppp pppppppp pppppppp pppppppp ppppppppOther acquisitions relate to Woodend Group Limited and Telephone Information Servicesplc (see note 27).
12 Analysis of net debtAcquisi-
tions Other AtAt 1 April (excl cash non-cash 31 March
Current assetsStocks 16 113.7 76.2 101.0 71.4Debtors 17 622.8 543.2 1,500.7 826.6Short term bank and other deposits 41.7 20.3 1.1 1.4pppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppp pppppppppppp pppppppppppp pppppppppppp pppppppppppp
778.2 639.7 1,602.8 899.4Creditors: amounts falling due within one yearLoans and other borrowings 18 (1,137.1) (209.8) (1,118.6) (199.5)Other creditors 19 (1,112.0) (658.8) (983.5) (1,035.7)pppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppp pppppppppppp pppppppppppp pppppppppppp pppppppppppp
Net current liabilities (1,470.9) (228.9) (499.3) (335.8)pppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppp pppppppppppp pppppppppppp pppppppppppp pppppppppppp
Total assets less current liabilities 2,598.9 1,992.1 2,589.5 2,091.5Creditors: amounts falling due after more than one yearLoans and other borrowings 18 (694.9) (442.6) (542.4) (442.0)Provisions for liabilities and charges 21 (45.6) (56.8) (17.6) (28.6)Deferred income 22 (335.3) (285.8) (172.0) (160.4)pppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppp pppppppppppp pppppppppppp pppppppppppp pppppppppppp
13 Segmental analysisNet assets / (liabilities) by business segment
Net assets / (liabilities)1997 1996
Notes £m £m
Generation Wholesale 323.2 277.8Power Systems 1,030.2 970.4Energy Supply 41.7 68.4Manweb 520.4 521.5Southern Water 1,224.2 –Developing businesses and ancillary services (a) 246.6 152.7ppppppppppppppppppppppppppppppppppppppppppppppppppppp pppppppp pppppppp
Sub-total 3,386.3 1,990.8Unallocated net liabilities (b) (1,863.2) (783.9)ppppppppppppppppppppppppppppppppppppppppppppppppppppp pppppppp pppppppp
Total 1,523.1 1,206.9ppppppppppppppppppppppppppppppppppppppppppppppppppppp pppppppp pppppppp
(a) The net assets of the Retail business, included within developing businesses andancillary services, are £130.6 million (1996 £114.8 million).(b) Unallocated net liabilities include net debt, dividends payable and tax liabilities.
At 31 March 1997 279.9 – 2,114.1 198.3 2,592.3 ppppppppppppppppppppppppp pppppppp pppppppp pppppppp pppppppp ppppppppDepreciation:At 1 April 1996 120.5 – 770.5 58.3 949.3Charge for the year 10.3 – 49.7 10.4 70.4Disposals (0.3) – (3.7) (1.2) (5.2)ppppppppppppppppppppppppp pppppppp pppppppp pppppppp pppppppp pppppppp
At 31 March 1997 130.5 – 816.5 67.5 1,014.5ppppppppppppppppppppppppp pppppppp pppppppp pppppppp pppppppp ppppppppNet book value:At 31 March 1997 149.4 – 1,297.6 130.8 1,577.8At 31 March 1996 152.1 – 1,185.8 97.5 1,435.4ppppppppppppppppppppppppp pppppppp pppppppp pppppppp pppppppp ppppppppLand held by the group and the company is predominantly freehold. The exceptionsare a number of retail premises and other operational sites which are held underlease. Land, water infrastructure and certain hydro civil assets with a book value at31 March 1997 of £710.3 million are not depreciated (1996 £10.7 million).
Included in the cost of fixed assets of the group and the company at 31 March1997 is capitalised interest amounting to £8.0 million (1996 £8.0 million). At 31 March 1997, tangible fixed assets include £185.1 million of major assets in the course of construction (1996 £nil).
The net book value of Southern Water’s infrastructure assets is stated afterdeducting grants and contributions since privatisation of £74.7 million.
The net book value of tangible fixed assets held under finance leases was£15.0 million (1996 £nil). The charge for depreciation against these assets during theyear was £2.4 million (1996 £nil).
15 Fixed asset investmentsSubsidiary
under-Own shares takings Associatedheld under and other undertakings
At 31 March 1997 2.2 1,504.4 – 4.4 1,511.0ppppppppppppppppppppppppp pppppppp pppppppp ppppppppÐppppppppÐppppppppThe principal subsidiary and associated undertakings are listed on page 60.Own shares held under trustShares of the company are held under trust as part of the Long Term Incentive Plan forexecutive directors and other senior management (see Report of the Emoluments andNominations Committee on pages 40 to 43 for details of the plan). On 9 August 1996,the trust purchased 678,460 shares in the company on the open market, at a price of£3.27 per share, with funds borrowed from the company. The number of shares held at31 March 1997 was 678,460. These shares had a market value at that date of£2.4 million.
16 StocksGroup Company
1997 1996 1997 1996£m £m £m £m
Raw materials and consumables 41.1 34.2 33.6 30.4Gas stocks 36.2 14.1 36.2 14.1Work in progress 5.6 3.3 1.5 2.3Finished goods and goods for resale 30.8 24.6 29.7 24.6pppppppppppppppppppppppppppppppppp pppppppp pppppppp pppppppp pppppppp
113.7 76.2 101.0 71.4pppppppppppppppppppppppppppppppppp pppppppp pppppppp pppppppp ppppppppGas stocks represent gas delivered to third parties under sale and repurchaseagreements to match gas usage requirements arising mainly from generation, withexisting gas purchase obligations. Under the provisions of Financial ReportingStandard 5, the cost of gas delivered to third parties is shown as gas stocks andamounts payable to third parties totalling £25.7 million (1996 £10.9 million) areincluded in accrued expenses in note 19.
17 DebtorsGroup Company
1997 1996 1997 1996£m £m £m £m
(a) Amounts falling due within one year:Trade debtors 428.9 370.5 265.7 250.2Amounts owed by subsidiary undertakings – – 218.3 439.1Prepayments and accrued income 104.9 86.9 67.8 75.7Other debtors 48.6 58.5 26.3 37.2pppppppppppppppppppppppppppppppppp pppppppp pppppppp pppppppp pppppppp
582.4 515.9 578.1 802.2(b) Amounts falling due after more than one year:Amounts owed by subsidiary undertakings – – 886.2 –Amounts receivable under finance leases 3.6 2.9 – –Advance corporation tax recoverableon proposed dividend 36.4 24.4 36.4 24.4Other debtors 0.4 – – –pppppppppppppppppppppppppppppppppp pppppppp pppppppp pppppppp pppppppp
622.8 543.2 1,500.7 826.6pppppppppppppppppppppppppppppppppp pppppppp pppppppp pppppppp ppppppppAmounts receivable under finance leases relate to ScottishPower Leasing Limited,one of the company’s subsidiaries (see page 60). The total cost of assets acquiredby ScottishPower Leasing Limited for letting under leases is £4.0 million(1996 £3.2 million). Total amounts receivable during the year under finance leaseswere £0.4 million (1996 £0.3 million).
Notes to the Group Balance Sheetas at 31 March 1997
Bank overdraft 22.2 74.1 15.7 63.8Uncommitted bank loan 293.4 36.7 293.3 36.7Committed bank loan (a) 200.6 300.6 200.0 300.0Commercial paper (b) 759.3 58.8 759.3 58.8Loan notes (c) 54.1 40.2 54.1 40.2European Investment Bank loan 155.1 – – –Lease finance 8.7 – – –11.457% bond 2001 (held by HM Treasury) 142.0 142.0 142.0 142.08.375% euro-sterling bond 2017 (d) 196.6 – 196.6 –pppppppppppppppppppppppppppppppppp pppppppp pppppppp pppppppp pppppppp
1,832.0 652.4 1,661.0 641.5pppppppppppppppppppppppppppppppppp pppppppp pppppppp pppppppp ppppppppWith the exception of finance leases, all borrowings are unsecured.
Repayments fall due as follows:Within one year, or on demand 1,137.1 209.8 1,118.6 199.5After more than one year 694.9 442.6 542.4 442.0pppppppppppppppppppppppppppppppppp pppppppp pppppppp pppppppp pppppppp
1,832.0 652.4 1,661.0 641.5pppppppppppppppppppppppppppppppppp pppppppp pppppppp pppppppp ppppppppRepayments due after more than one year are split as follows:Between one and two years 13.3 – – –Between two and five years 381.9 442.6 342.0 442.0After five years 299.7 – 200.4 –pppppppppppppppppppppppppppppppppp pppppppp pppppppp pppppppp pppppppp
(a) Committed bank loanBank borrowings include drawings of £200 million (1996 £300 million) under a£2.6 billion (1996 £800 million) revolving credit facility in place until 2001. This facility provides a backstop to the commercial paper programme.(b) Commercial paperThe company has an established US$1.5 billion euro-commercial paperprogramme. Paper is issued in a range of currencies and swapped back into sterling.(c) Loan notesAll loan notes are redeemable at the holder’s discretion. Ultimate maturity datesrange from 1999 to 2006.(d) Euro-sterling bondIn January 1997 the company issued £200 million 8.375% bonds due 2017. The proceeds of the issue were £196.6 million.
Interest rate analysis
Weighted averageinterest rate Weighted average
at which borrowings period forBorrowings are fixed/capped which interestat 31 March at 31 March rate is fixed/capped
1997 1996 1997 1996 1997 1996£m £m % % Years Years
1,832.0 652.4ppppppppppppppppp pppppppp ppppppppAll amounts in the analysis above are payable in sterling and take into account theeffect of interest rate swaps and caps and currency swaps.
19 Other creditorsGroup Company
1997 1996 1997 1996£m £m £m £m
Amounts falling due within one yearTrade creditors 165.7 146.6 89.9 89.1Amounts owed to subsidiary undertakings – – 354.0 564.6Corporation tax 148.7 121.4 72.1 80.8Advance corporation tax 54.6 24.4 54.5 24.4Other taxes and social security 19.9 29.4 22.9 29.7Payments received on account 47.9 14.6 17.8 8.4Capital creditors and accruals 144.4 34.0 34.7 26.4Other creditors 74.3 25.5 23.7 0.8Accrued expenses 311.0 165.4 168.4 114.0Proposed dividend 145.5 97.5 145.5 97.5pppppppppppppppppppppppppppppppppp pppppppp pppppppp pppppppp pppppppp
20 Deferred taxationNo provision for deferred taxation is considered necessary at 31 March 1997, sincefuture taxation depreciation is expected to exceed accounting depreciation andtherefore no deferred taxation liabilities are expected to crystallise in the foreseeablefuture. Total potential deferred liabilities computed at the current rate of corporationtax of 33% (1996 33%) are as follows:
at acquisition Receivable at1 April of Southern during 31 March1996 Water year Amortised 1997
£m £m £m £m £m
Grants and customercontributions:– Group 285.8 29.0 43.0 (22.5) 335.3– Company 160.4 – 25.9 (14.3) 172.0ppppppppppppppppppppppppp pppppppp pppppppp pppppppp pppppppp ppppppppDeferred income excludes grants and contributions received in respect of water infrastructure assets.
Authorised:1,700,000,000 (1996 1,300,000,000) ordinary shares of 50p each (a) 850.0 650.0One Special Share of £1 (b) – –ppppppppppppppppppppppppppppppppppppppppppppppppppppp pppppppp pppppppp
Allotted, called up and fully paid:1,177,365,936 (1996 942,425,940) ordinary shares of 50p each 588.7 471.2One Special Share of £1 (b) – –ppppppppppppppppppppppppppppppppppppppppppppppppppppp pppppppp pppppppp
23 Share capital continued(a) Increase of authorised share capitalAt an Extraordinary General Meeting held on 27 July 1996, a resolution waspassed to increase the authorised share capital of the company by 400,000,000new ordinary shares of 50p each, ranking pari passu in all respects with theexisting shares in the capital of the company.(b) Special ShareThe ‘Special Share’, which can be held only by one of the Secretaries of State orany other person acting on behalf of HM Government, does not carry rights to voteat general or separate meetings but entitles the holder to attend and speak at suchmeetings. Written consent of the Special Shareholder is required before certainprovisions of the company’s Articles of Association or certain rights attaching to theSpecial Share are varied. This share shall confer no rights to participate in thecapital or profits of the company, except that in a winding up, the SpecialShareholder shall be entitled to repayment in priority to the other shareholders. The Special Share is redeemable at par at any time by the Special Shareholder afterconsultation with the company.
24 Reconciliation of movements in shareholders’ fundsProfit
Share Share Merger and losscapital premium reserve account Total
Notes £m £m £m £m £m
GroupBalance at 1 April 1996 471.2 122.0 (230.2) 844.7 1,207.7Retained profit for the year – – – 203.0 203.0Share capital issued– As part of funding for an acquisition (a) 63.2 – 332.0 – 395.2– Rights issue for an acquisition 48.0 191.9 – – 239.9– Employee share option scheme 6.2 16.6 – – 22.8– Executive share option scheme 0.1 0.2 – – 0.3Shares to be issued (b) – – 13.4 – 13.4Share issue expenses – (25.0) – – (25.0)Goodwill written off (c) – – (534.6) – (534.6)pppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppp ppppppppppp ppppppppppp ppppppppppp ppppppppppp ppppppppppp
Balance at 31 March 1997 588.7 305.7 (419.4) 1,047.7 1,522.7pppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppp ppppppppppp ppppppppppp ppppppppppp ppppppppppp pppppppppppCompanyBalance at 1 April 1996 471.2 122.0 – 867.3 1,460.5Retained profit for the year (d) – – – 82.4 82.4Share capital issued– As part of funding for an acquisition (a) 63.2 – – – 63.2– Rights issue for an acquisition 48.0 191.9 – – 239.9– Employee share option scheme 6.2 16.6 – – 22.8– Executive share option scheme 0.1 0.2 – – 0.3Shares to be issued (b) – – 13.4 – 13.4Share issue expenses – (25.0) – – (25.0)pppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppp ppppppppppp ppppppppppp ppppppppppp ppppppppppp ppppppppppp
Balance at 31 March 1997 588.7 305.7 13.4 949.7 1,857.5pppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppp ppppppppppp ppppppppppp ppppppppppp ppppppppppp ppppppppppp(a) Merger reliefIn accordance with Section 131 of the Companies Act 1985, the company recorded its investment in Southern Water at the nominal value of the shares issued as consideration. The shares were allotted at their fair value of £3.13 and the premium per share has been taken to the merger reserve.(b) Shares to be issuedThis represents shares to be issued, upon exercise of options, to participants in the Southern Water Sharesave Scheme who had elected on acquisition to be granted options overScottishPower shares in place of options previously granted over Southern Water shares. The merger reserve has been credited with the fair value of the ScottishPower shares onacquisition (see note 27), on the assumption that all share options will be exercised. Where options lapse, the investment in Southern Water will reduce by the attributable cost of theoption, with a corresponding adjustment to goodwill.(c) Goodwill written offThis represents goodwill on acquisition of Southern Water (£518.7 million) and other acquisitions (£15.9 million). See note 27.(d) Profit and loss account of the companyAs permitted by Section 230 of the Companies Act 1985, the company has not presented its own profit and loss account. The company’s profit and loss account was approved bythe Board on 15 May 1997. The profit for the financial year per the accounts of the company was £300.5 million (1996 £315.8 million).
25 Related party transactionsIn accordance with Financial Reporting Standard 8, the following disclosurerelates to related party transactions during 1996-97.
Scottish Electricity Settlements Limited (50% owned associated undertaking)In accordance with the instructions of the Director General of Electricity Supply,ScottishPower and Hydro-Electric established Scottish Electricity SettlementsLimited (“SES Ltd”) during 1996-97. As at 31 March 1997, the company hadprovided long term loans to SES Ltd of £1.7 million. In addition, the companyprovided services with a value of £1.2 million to SES Ltd during 1996-97. A balance of £0.7 million in respect of these services was due to the company at 31 March 1997.
25 Related party transactions continuedScotland On Line Limited (50% owned subsidiary undertaking)During the year Scotland On Line Limited had sales to other ScottishPower groupcompanies of £0.1 million and purchases from other group companies of£0.1 million. At 31 March 1997, £0.1 million was owed to and receivable fromother group companies in respect of these transactions. These transactions werematerial to Scotland On Line Limited.
3.1985g02/pp49-64 18/6/97 11:19 Page 55
26 Minority interest1997 1996
£m £m
Equity minority interest:Balance at 1 April (0.8) 0.1Additions 0.7 –Profit and loss account 0.5 (0.9)ppppppppppppppppppppppppppppppppppppppppppppppppppppp pppppppp pppppppp
Balance at 31 March 0.4 (0.8)ppppppppppppppppppppppppppppppppppppppppppppppppppppp pppppppp pppppppp
27 AcquisitionsAcquisitions consist of Southern Water which was acquired on 6 August 1996,Woodend Group Limited which was acquired on 15 August 1996, and TelephoneInformation Services plc which was acquired on 6 March 1997.Southern Water On 6 August 1996 the company acquired Southern Water for a total considerationof £1,716.5 million. The acquisition method of accounting has been adopted andthe goodwill arising on the purchase has been written off to reserves. The details ofthe transaction, results and fair value adjustments arising from the change inownership are shown below. Share issue costs of £25.0 million relating to theacquisition and the rights issue have been charged to the share premium account.
The results of Southern Water for the 12 months to 31 March 1996, for the preacquisition period from 1 April 1996 to 5 August 1996 and for the post acquisitionperiod from 6 August 1996 to 31 March 1997 are shown below.
Profit on ordinary activities before taxation* 165.6 44.4 106.6Taxation (20.8) (4.2) (7.5)pppppppppppppppppppppppppppppppppppppppppppp pppppppp pppppppp pppppppp
Profit on ordinary activities after taxation 144.8 40.2 99.1Minority interests 0.6 – –pppppppppppppppppppppppppppppppppppppppppppp pppppppp pppppppp pppppppp
Profit attributable to shareholders 145.4 40.2 99.1pppppppppppppppppppppppppppppppppppppppppppp pppppppp pppppppp pppppppp*Profit on ordinary activities before taxation for the pre acquisition period to 5 August1996 is stated after a charge of £16.0 million in relation to bid defence costs.
The results to 31 March 1997 do not include fair value adjustments arising from the acquisition.
A reconciliation to historical cost profits and losses is not included as all gains andlosses for the period shown were recognised under the historical cost convention.
Statement of total recognised gains and losses
12 months to31 March 1997
12 months to31 March Pre Post
1996 acquisition acquisition£m £m £m
Profit attributable to shareholders 145.4 40.2 99.1Advance corporation tax on share repurchase (24.0) – –pppppppppppppppppppppppppppppppppppppppppppp pppppppp pppppppp pppppppp
Total recognised gains and losses 121.4 40.2 99.1pppppppppppppppppppppppppppppppppppppppppppp pppppppp pppppppp pppppppp
27 Acquisitions continuedFair value of the Southern Water considerationThe shares issued as part of the purchase consideration were valued on 6 August 1996at the mid-market price on an ex-dividend basis at the date of acquisition. The loan noteswere issued as an alternative to the cash consideration and have been valued at par forthe purposes of determining the fair value of the consideration.
Net assets 1,067.3 130.5 1,197.8pppppppppppppppppppppppppppppppppppppppppppp pppppppp ppppppppGoodwill arising on acquisition of Southern Water 518.7ppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppp pppppppp
(a) Freehold land and buildings (non-operational)Southern Water’s non-operational freehold land and buildings have been adjusted toopen market value. This value has been assessed by Matthews and Goodman, andGrimleys (both of whom are chartered surveyors). This resulted in an increase in bookvalue of £23.3 million.(b) Operational assetsThe fair value of the Southern Water operational assets has been determined at their estimated recoverable amount. This has resulted in an increase in valuation of£136.9 million. In estimating the recoverable amounts, due allowance has been madefor regulatory, market and other risk factors.(c) Creditors and provisionsA number of additional liabilities were recognised to reflect their fair value at the date ofacquisition. This resulted in a total adjustment of £29.7 million net of a dividend whichformed part of the purchase consideration.(d) Acquisition expensesIncluded within acquisition expenses are accruals for £11.0 million.(e) Deferred, contingent considerationThe deferred, contingent consideration relates to the election made by participants in theSouthern Water Sharesave Scheme to be granted options over ScottishPower shares inplace of options previously granted over Southern Water shares. The deferred, contingentconsideration assumes all options are exercised.
Pre acquisition provisionsThe liabilities of Southern Water included in the book value prior to the acquisition at6 August 1996, set out above, included the following in respect of provisions:
Total 5.9ppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppp pppppppp
Other acquisitionsThe company acquired the remaining share capital of Woodend Group Limited and theentire share capital of Telephone Information Services plc during the year for an aggregatefair value consideration of £11.1 million. The total fair value of assets and liabilitiesacquired was £4.8 million. The goodwill arising on acquisition of £15.9 million hasbeen written off to reserves. The results of these companies for the periods before andsince acquisition are not material to the group.Goodwill written offThe cumulative amount of goodwill written off to reserves at 31 March 1997 was£1,020.5 million (31 March 1996 £485.9 million).
for the year as at 31 Marchppppppppppppppppppppppppp ppppppppppppppppppppppppp
Scheme Funded or 1997 1996 1997 1996Pension fund type unfunded £m £m £m £m
ScottishPower Defined benefit funded 13.6 13.8 18.4 20.8Manweb Defined benefit funded 6.0 12.5 – –Southern Water Defined benefit funded 5.1 – – –ppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppppp ppppppppppppppp ppppppppppp ppppppppppp ppppppppppp ppppppppppp ppppppppppp
Principal actuarial assumptions
Market value of Value of fundLatest full Valuation assets based Valuation Average Average Average assets/actuarial carried on valuation method investment salary pension accrued
Pension fund valuation out by £m adopted rate of return increases increases benefits
ScottishPower 31 December 1994 William M Mercer 1,025.7 projected unit 9.0% 7.0% 5.0% 111%Manweb 31 March 1995 Bacon & Woodrow 412.3 projected unit 9.0% 7.0% 5.0% 100%Southern Water 31 March 1995 Watson Wyatt 148.3 projected unit 8.5% 6.5% 5.0% 102%ppppppppppppppppppppppppppppppppppppppppppppppppp pppppppppppppppppppp ppppppppppppppp pppppppppppppppp ppppppppppp ppppppppppp ppppppppppp ppppppppppp
(a) ScottishPower The company operates a funded pension scheme (“the Scheme”) providing defined benefits based on final pensionable salary for eligible employees of the company.The assets of the Scheme are held separately from those of the company in a separate trustee administered fund. The pension charge for the year is based on the advice of theScheme’s independent qualified actuary. The prepayment included in the balance sheet represents the accumulated excess of the actual contributions paid to the Scheme over the pensionaccounting charge.(b) Manweb Most of the company’s employees are entitled to join the Electricity Supply Pension Scheme (“the Scheme“) which provides pension and other related benefits based on finalpensionable pay to employees throughout the Electricity Supply Industry in England and Wales. The assets are held in a separate trustee administered fund. The pension charge for theyear is based on the advice of the Scheme’s independent qualified actuary. The 1996 comparative relates only to the post acquisition period. The full year charge was £16.6 million.(c) Southern Water The Southern Water group operates a number of pension schemes. The scheme details above relate to the principal defined benefit scheme which covers 70% ofthe group’s employees. The assets are held in a separate trustee administered fund. Southern Water’s other schemes are not material to the group. The pension charge for the year isbased on the advice of the Scheme’s independent qualified actuary and represents the charge for the post acquisition period only. The full year charge was £7.6 million.
57 ScottishPower Annual Report & Accounts 1996–97
29 Contingent liabilities(a) Windfall levy On 2 May 1997, the Labour Party was invited to form the Governmentof the United Kingdom. The Labour Party’s election manifesto contained proposals for a“windfall levy” of unspecified amount to be imposed on United Kingdom utilitycompanies. It is probable that the windfall levy will be reflected in the Government’slegislative proposals for 1997-98. However, details of the application of the proposedlevy and its basis of calculation have not been published. Therefore it is not possible forthe group to ascertain whether or not it will be liable to a levy, and if it were, the amountthat would be charged. Provision for the group’s liability, if any, in respect of any suchlevy will therefore be charged in arriving at the results of the group once details of thelevy and its application have been determined. (b) The group has contingent liabilities under performance bonds and actual andpotential claims, none of which, in the opinion of the directors, is material to the group.(c) The company has guaranteed the overdraft of one subsidiary undertaking up to anamount of £0.5 million (1996 two subsidiary undertakings for £0.5 million each).(d) The company has guaranteed Manweb’s liabilities to the Pool in England and Wales.At 31 March 1997 these liabilities were £30.3 million (1996 no such guarantee existed).(e) Mutual cross guarantee arrangements exist within the Southern Water group, wherebyall wholly owned subsidiaries within the group have provided mutual cross guaranteesfor borrowings from National Westminster Bank plc. At 31 March 1997 the amountunder guarantee was £nil (1996 £nil).
30 Financial commitments(a) Non-cancellable operating lease, finance lease and capital commitments of the group
1997 1996pppppppppppppppppp pppppppppppppppppp
Land and Land andbuildings Other buildings Other
£m £m £m £m
Operating leasesExpiring within one year 0.1 6.2 0.1 2.3Expiring between two and five years inclusive 0.8 3.9 0.1 10.6Expiring in over five years 13.5 0.3 11.4 0.2pppppppppppppppppppppppppppppppppp pppppppp pppppppp pppppppp pppppppp
14.4 10.4 11.6 13.1pppppppppppppppppppppppppppppppppp pppppppp pppppppp pppppppp ppppppppGroup Company
pppppppppppppppppp pppppppppppppppppp
1997 1996 1997 1996£m £m £m £m
Finance leasesExpiring within one year 3.2 – – –Expiring between two and five years inclusive 5.4 – – –Expiring in over five years 0.1 – – –pppppppppppppppppppppppppppppppppp pppppppp pppppppp pppppppp pppppppp
8.7 – – –pppppppppppppppppppppppppppppppppp pppppppp pppppppp pppppppp ppppppppCapital commitmentsContracted but not provided 394.4 71.1 49.5 65.0pppppppppppppppppppppppppppppppppp pppppppp pppppppp pppppppp pppppppp
30 Financial commitments continued(b) Other contractual commitmentsUnder contractual commitments, the group has rights and obligations in relation tothe undernoted contracts. The annual value of the purchases and income arising from these contracts is provided below:
Purchases/sales in yearunder group commitmentspppppppppppppppppppp
Commit- Commit-ment ment 1997 1996
Notes entered into expires £m £m
The purchase of electricity from Scottish Nuclear 1990 2005 373.2 442.2ppppppppppppppppppppppppppppppppppp pppppppp ppppppppÐppppppppÐpppppppp
The purchase of electricityfrom Hydro-Electric (1) 1990 see below 120.5 121.4ppppppppppppppppppppppppppppppppppp pppppppp ppppppppÐppppppppÐpppppppp
The supply of electricity to Hydro-Electric 1990 2004 15.7 16.3ppppppppppppppppppppppppppppppppppp pppppppp ppppppppÐppppppppÐpppppppp
Revenue from the operation of the company’s transmission system and access by Hydro-Electric no fixedto the Anglo-Scottish date ofInterconnector 1990 expiry 24.7 22.1ppppppppppppppppppppppppppppppppppp pppppppp ppppppppÐppppppppÐpppppppp
Purchase of coal from theScottish Coal Company 1994 1998 75.5 75.6ppppppppppppppppppppppppppppppppppp pppppppp ppppppppÐppppppppÐpppppppp
Purchase of gas from various see seefields in the North Sea (2) below below 50.4 19.3ppppppppppppppppppppppppppppppppppp pppppppp ppppppppÐppppppppÐpppppppp(1) There are two agreements relating to the purchase of electricity from Hydro-Electric. These expire in 2012 and 2039.(2) The group has entered into a number of contracts to purchase gas, primarily fromvarious fields in the North Sea. Gas production from the fields commences on variousdates between December 1994 and October 1997 and the duration of the productionperiods is likely to vary between three and fifteen years. The total expected purchase costof the contracts entered into is £570 million and the output purchased is expected to befully utilised by the group within the gas supply business and in the production ofelectricity by the power stations.
3.1985g02/pp49-64 18/6/97 11:19 Page 57
31 Employee share schemes(a) Summary of movements in share options in ScottishPower shares
Southern ExecutiveScottishPower Manweb Water share
sharesave sharesave sharesave optionscheme scheme scheme scheme Total
Outstanding at31 March 1997 17,513,717 – 6,691,925 1,552,789 25,758,431ppppppppppppppp pppppppppp ppppppppp ppppppppppp pppppppppp pppppppppppThe options granted under the Southern Water Sharesave Scheme represent 7,885,138options granted to participants in the Southern Water Sharesave Scheme who had electedon acquisition to be granted options over ScottishPower shares in place of options previouslygranted over Southern Water shares.
(b) Analysis of share options outstanding at 31 March 1997Date of Number of Number of Option Normal
grant participants shares price exercisable date
ScottishPower 06.10.92 1,169 2,735,329 197.6 6 months to sharesave June 1998scheme 30.06.93 739 1,026,697 248.4 6 months to
March 199922.06.94 1,441 1,440,030 273.8 6 months to
March 200020.06.95 1,053 1,277,228 262.1 6 months to
March 200120.06.96 5,750 11,034,433 263.1 6 months to
March 2000 or 2002
Southern 16.01.91 109 576,276 70.4 6 months to Water March 1996 or 1998sharesave 03.02.92 493 1,647,010 74.0 6 months to scheme March 1997 or 1999
26.01.93 400 1,119,893 111.0 6 months to March 1998 or 2000
25.01.94 422 740,192 154.9 6 months to March 1999 or 2001
25.01.95 562 1,473,150 136.1 6 months to March 2000 or 2002
25.01.96 642 1,135,404 160.2 6 months to March 2001 or 2003
All options are exercisable over ScottishPower shares. Where reference is made toManweb or Southern Water, this is to identify the sharesave schemes under whichthe options over ScottishPower shares have been granted. The exercise prices ofoptions granted prior to the rights issue were adjusted to reflect the bonus elementinherent in the rights issue.
32 Directors’ emoluments and interestsPolicyThe Emoluments and Nominations Committee is responsible for determining theremuneration policy for the ScottishPower group. The aim of ScottishPower’sremuneration policy is to ensure that the rewards for executives and directors attractand retain executives of the highest quality who are incentivised to achieveperformance which exceeds that of competitors. Furthermore, the objective is toensure that incentive schemes are in line with best practice and promote theinterests of the shareholders.
Total emolumentsThe following table provides a breakdown of the total emoluments of the Chairmanand all directors in office during the year ended 31 March 1997. Full details of theremuneration policy of the ScottishPower group are contained in the Report of theEmoluments and Nominations Committee on pages 40 to 43.
32 Directors’ emoluments and interests continuedBasic Benefits Total Totalsalary Bonuses in kind 1997 1996
£ £ £ £ £
Chairman and executive directors(in office as at 1 April 1996)C M Stuart 140,000 – 14,665 154,665 152,593I Robinson 280,000 102,900 14,356 397,256 385,082M J Kinski 193,710 67,500 6,506 267,716 230,414I M Russell 210,000 102,175 21,531 333,706 284,580K L Vowles 150,000 54,000 6,576 210,576 149,107D Whyte 195,000 70,200 13,969 279,169 266,102Non-executive directors(fees and expenses)Sir Ronald Garrick 25,000 – 449 25,449 20,000Sir Peter Gregson (appointed 13.12.96) 5,894 – 2,105 7,999 –Baroness Jay (appointed 1.9.96/resigned 13.5.97) 11,667 – 1,371 13,038 –N Kuenssberg 25,000 – 540 25,540 25,036E Macpherson(appointed 1.9.96) 12,292 – 1,129 13,421 –J Parnaby 20,000 – 3,825 23,825 25,017J Scott(retired 24.7.96) 6,667 – 361 7,028 20,373C Black(retired 31.7.95) – – – – 13,306ppppppppppppppppppp pppppppppp ppppppppp pppppppppp pppppppppp pppppppppp
Pension benefit earned in yearTotal pension benefit earned from approved 1997 1996and unapproved pension arrangements: £ £
Chairman and executive directors (in office as at 1 April 1996)C M Stuart – –I Robinson 12,365 10,452M J Kinski 7,011 5,715I M Russell 6,753 6,530K L Vowles 3,375 1,958D Whyte 3,569 4,271pppppppppppppppppppppppppppppppppppppppppppppppppppppppp pppppppppp pppppppppp(a) The emoluments of the highest paid director (Mr Robinson) excluding pensioncontributions and relocation expenses were £397,256 (1996 £385,082). Pensioncontributions made by the company under approved pension arrangements forMr Robinson amounted to £10,138 (1996 £11,633). In addition to thecontributions made by the company under approved pension arrangementsdisclosed above, Mr Robinson also has an entitlement under the unapprovedpension benefits described further in note (c) below. The amount of Mr Robinson’spension benefit accrued in respect of service up to 31 March 1997 was £101,762per annum payable at age 60. £78,119 of this was provided by a transfer ofpension rights received in respect of a previous employment. There were norelocation payments during the year in respect of Mr Robinson (1996 £49,405).(b) Relocation assistance is provided, in accordance with a standard company scheme,in respect of executives who, at the time of joining the company, do not live withincommuting distance of Glasgow. Relocation assistance is also provided under thescheme for executives who, as part of their employment, are relocated to other companyoffices outwith commuting distance. During the year, payment was made of £6,368 inrespect of Mr Kinski.(c) Executives who joined the company on or after 1 June 1989 are subject to theearnings cap introduced in the Finance Act 1989. Pension entitlement which cannot beprovided through the company’s approved arrangements due to the earnings cap areprovided through unapproved pension benefits. Full details are included in the Report ofthe Emoluments and Nominations Committee. The total of the liabilities in respect of the12 executives and senior employees arising in relation to unapproved benefits forservice for the year to 31 March 1997 is £305,952.(d) The aggregate emoluments, including pension and relocation costs, for the year ended 31 March 1997 at £1,896,508 as a ratio to profit before taxation for the year amounted to0.34%. The ratio of emoluments to current assets amounted to 0.24% and the ratio ofemoluments to turnover amounted to 0.06%.
(a) The market price of the shares at 31 March 1997 was 353.5p and the range during 1996-97 was 300.5p to 400.5p.(b) The Long Term Incentive Plan supersedes the Executive Share Option Scheme, and annual awards to acquire shares in ScottishPower at nil or nominal cost are made to the plan participantsup to a maximum value equal to 60% of base salary. The award will vest only if the Emoluments and Nominations Committee is satisfied that certain performance measures related to thesustained underlying financial performance of the company and improvements in OFFER published Customer Service Standards are achieved over a period of three financial years commencingwith the financial year preceding the date an award is made. The number of shares that can be acquired will be dependent upon how the company ranks, in terms of its total shareholder returnperformance over a three year period, in comparison to the constituent companies of the FTSE 100 Index and the Electricity and Water sectors. A percentage of half of the award will vestdepending upon the company’s ranking within each of the relevant comparator groups. The plan participant may acquire the shares in respect of the percentage of the award which has vestedat any time after the fourth year up to the seventh year after the grant of the award. No dividends accrue to participants prior to vesting.(c) The exercise price of options granted prior to the rights issue has been adjusted to reflect the bonus element inherent in the rights issue. The number of shares under option in respect of alloptions outstanding as at 1 April 1996 and in respect of Sharesave Scheme options granted during the year, prior to the rights issue, has been adjusted accordingly.(d) The option price of executive share options is based on the middle-market share price on the day immediately preceding the date of grant. For Sharesave options, the option price iscalculated in the same way and discounted by 20% in accordance with the Inland Revenue rules for such schemes.(e) No new grants have been made in 1996-97 under the Executive Share Option Scheme. The options initially granted to each executive director under the Executive Share Option Schemewere based on a multiple of four times salary in respect of the Chief Executive, Mr Robinson, and three times in respect of the other executive directors, which is in accordance with the limits setout in current guidelines. Subsequent grant of options were made to reflect increases in directors’ basic salary levels, following periodic review by the Emoluments and Nominations Committee ofthe performance of the company and the executive directors individually. Executive options are normally exercisable in a manner which does not attract income tax liability provided that exerciseoccurs between three and ten years after the date of grant and at least three years have elapsed from the date of the last “tax relieved” exercise. Total gains made on exercise of directors’ shareoptions in 1996-97 were £16,979.(f) The number of options granted to a director under the Sharesave Scheme is calculated by reference to the total amount which the director agrees to save for a period of three or five yearsunder an Inland Revenue approved savings contract, subject to a current maximum of £250 per month. Options under the Sharesave Scheme are, subject to a few exceptions, exercisablewithin a period of six months from the date of completion of the savings contract.(g) Unless marked with an asterisk (*) all sharesave schemes are for a five year period. An asterisk denotes options granted under a three year contract.
– Other investmentsFolkestone & Dover Water Services Limited* Ordinary shares 25% Water supply
Notes*The investments in these companies are indirect holdings.(a) Manweb Insurance Limited changed its name to ScottishPower Insurance Limited during the year.(b) The year end of ScottishPower Investments Limited is 28 February.(c) The year end of Vehicle Contract Hire & Leasing Limited is 31 August.All companies are incorporated in the United Kingdom, unless otherwise stated.
Principal Subsidiary Undertakings and Investments
60 ScottishPower Annual Report & Accounts 1996–97
3.1985g02/pp49-64 18/6/97 11:19 Page 60
We have audited the financial statements on pages 45 to 60.
Respective responsibilities of directors and auditorsAs described on page 39, the company’s directors are responsible for thepreparation of the financial statements. It is our responsibility to form anindependent opinion, based on our audit, on those financial statements andto report our opinion to you.
Basis of opinionWe conducted our audit in accordance with Auditing Standards issued bythe Auditing Practices Board. An audit includes examination, on a test basis,of evidence relevant to the amounts and disclosures in the financialstatements. It also includes an assessment of the significant estimates andjudgements made by the directors in the preparation of the financialstatements, and of whether the accounting policies are appropriate to thegroup’s circumstances, consistently applied and adequately disclosed.
We planned and performed our audit so as to obtain all the informationand explanations which we considered necessary in order to provide us withsufficient evidence to give reasonable assurance that the financial statementsare free from material misstatement, whether caused by fraud or otherirregularity or error. In forming our opinion we also evaluated the overalladequacy of the presentation of information in the financial statements.
OpinionIn our opinion the financial statements give a true and fair view of the state of the affairs of the company and the group at 31 March 1997 and of theprofit and cash flows of the group for the year then ended and have beenproperly prepared in accordance with the Companies Act 1985.
Coopers & LybrandChartered Accountants and Registered AuditorsGlasgow
15 May 1997
Report of the Auditorsto the members of Scottish Power plc
In addition to our audit of the financial statements, we have reviewed thedirectors’ statements on pages 38 and 39 concerning the company’scompliance with the paragraphs of the Cadbury Code of Best Practicespecified for our review by the London Stock Exchange and their adoptionof the going concern basis in preparing the financial statements. Theobjective of our review is to draw attention to non-compliance with ListingRules 12.43(j) and 12.43(v).
Basis of opinionWe carried out our review in accordance with guidance issued by theAuditing Practices Board. That guidance does not require us to perform theadditional work necessary to, and we do not, express any opinion on theeffectiveness of either the group’s system of internal financial control or itscorporate governance procedures nor on the ability of the group andcompany to continue in operational existence.
OpinionWith respect to the directors’ statements on internal financial control onpages 38 and 39 and going concern on page 39, in our opinion the directorshave provided the disclosures required by the Listing Rules referred to aboveand such statements are not inconsistent with the information of which weare aware from our audit work on the financial statements.
Based on enquiry of certain directors and officers of the company, andexamination of relevant documents, in our opinion the directors’ statementson pages 38 and 39 appropriately reflect the company’s compliance with theother aspects of the Code specified for our review by Listing Rule 12.43(j).
Coopers & LybrandChartered AccountantsGlasgow
15 May 1997
Report of the Auditorsto Scottish Power plc on Corporate Governance matters
22 August 1997 Last date for registering transfers to receive the final dividend
1 October 1997 Final dividend payable
November 1997 Announcement of Interim Results for 1997-98
January 1998 Shares ‘ex-dividend’
February 1998 Last date for registering transfers to receive the interim dividend
March 1998 Interim dividend payable
May 1998 Preliminary Announcement of final results for 1997-98
Annual General MeetingThe Annual General Meeting will be held at the Royal Concert Hall, SauchiehallStreet, Glasgow, on Wednesday 23 July 1997 at 11.00 a.m. Details of the resolutionsto be proposed at the Annual General Meeting are contained in the Notice of Meeting.
Interim reportThe company, as permitted by the London Stock Exchange, publishes its InterimReport in one national newspaper. In 1997, it is expected that the Interim Reportwill be published in the Financial Times. Press releases and up-to-date informationon the company can also be found on the ScottishPower web page(www.scottishpower.plc.uk).
Copies of the Interim Report may be obtained, free of charge, on request from theCompany Secretary at the company’s registered office.
Shareholder servicesScottishPower, by arrangement with Bank of Scotland and Barclays StockbrokersLimited, offers the following services for the private investor:
Share consolidation and PEPsShare consolidation is a facility which allows a number of holdings, and especiallyfamily holdings, to be consolidated into one holding. This service is provided freeof charge.Personal equity plans (PEPs) are suitable for those private investors who may wish to shelter their ScottishPower shares from Income and Capital Gains Taxes. A Corporate PEP service is offered, comprising the ScottishPower General PEP and the ScottishPower Single Company PEP.Further details of these services, and copies of the ScottishPower PEP brochure,may be obtained from Bank of Scotland on Freephone 0500 143543.
Share dealingScottishPower shares may be bought or sold at competitive rates by post or telephone.For further details, please contact Barclays Stockbrokers on Freephone 0800 551177.
