SECURITIES AND EXCHANGE COMMISSIONS
WASHINGTON, DC 20549
FORM 6-K
REPORT OF FOREIGN PRIVATE ISSUER
PURSUANT TO RULE 13a-16 or 15a-16 OF
THE SECURITIES EXCHANGE ACT OF 1934
For the month of June 2002
SCOTTISH POWER PLC
(Translation of Registrant's Name Into English)
CORPORATE OFFICE, 1 ATLANTIC QUAY, GLASGOW, G2 8SP
(Address of Principal Executive Offices)
(Indicate by check mark whether the registrant files or will file annual
reports under cover of Form 20-F or Form 40-F.)
Form 20-F X Form 40-F ___
-----
(Indicate by check mark whether the registrant by furnishing the
information contained in this form is also thereby furnishing the information to
the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of
1934.)
Yes ___ No X
-----
(If "Yes" is marked, indicate below the file number assigned to the
registrant in connection with Rule 12g3-2(b): 82-_____.)
FORM 6-K: TABLE OF CONTENTS
1. Annual Report for the year ended March 31, 2002.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
/s/ Scottish Power plc
--------------------------------
(Registrant)
Date June 17, 2002 By: /s/ Alan McCulloch
------------- --------------------------------
Alan McCulloch
Assistant Company Secretary
ScottishPower Annual Report & Accounts/Form 20-F 2001/02 |101
Financial Highlights
ONE SCOTTISHPOWER
We are one company, managing regulated and competitive businesses in the UK and
US to service electricity and gas customers. We have one clear strategic aim: to
become a leading international energy company.
Operating profit (Pounds)m Earnings per share pence Dividends per share pence Total shareholder return pence
Before exceptional items and Before exceptional items and *Cash dividends excluding Capital appreciation plus
goodwill amortisation goodwill amortisation dividend in specie' on demerger dividend reinvestment for
of Thus (pound)1 invested on 1 April 1997
Source: Datastream
98 785 98 38.9 98 20.40 98 67.6
99 804 99 39.7 99 22.50 99 68.4
00 961 00 38.0 00 24.80 00 68.9
01 970 01 27.9 01 26.04 01 64.1
02 944 02 26.1 02* 27.34 02 38.1
2002 2001
Turnover (Pounds)6,314m (Pounds)6,349m
Operating profit* (Pounds) 944m (Pounds) 970m
Profit before tax* (Pounds) 567m (Pounds) 628m
Earnings per share* 26.12p 27.86p
Dividends per share** 27.34p 26.04p
*Before exceptional items and goodwill amortisation
** Cash dividends excluding 'dividend in specie' on demerger of Thus
ScottishPower Annual Report & Accounts/Form 20-F 2001/02 |2
Chairman's Statement
[PHOTO]
Both the UK and the US markets were extremely challenging during 2001/02. We
countered the drop in UK wholesale energy prices and increased competition with
a renewed drive for efficiency and improved operational performance. This
reduced the impact on UK profits and earnings but could not prevent it. In the
US, as a result of a sudden shift from energy deficit to surplus, the resulting
fall in electricity prices and the cost of precautions taken to ensure we could
fulfil service commitments during the summer peak, profits for the first half
were down.
We made good progress, however, in the second half of the year with earnings per
share up 45% over the same period last year. We believe that this is evidence of
good recovery underway, driven particularly by improved US performance and the
cost savings achieved in the Infrastructure Division in the UK. PacifiCorp is
making progress towards achieving its targeted return on equity within the
regulated business of approximately 11% by 2004/05. Our new competitive energy
business, PacifiCorp Power Marketing, Inc. has made an encouraging start.
Announcing a second consecutive year of disappointing results is an unpleasant
experience, especially given that we achieved the strategic objective we set a
year ago to redefine the company to focus on energy. During the year, we exited
the financial services market and demerged Thus. We also sold UK Appliance
Retailing and Southern Water.
The exceptional costs associated with our strategic disposals were (Pounds)1.3
billion, however we enter the year with our balance sheet strengthened by the
(Pounds)2.05 billion raised from the sale of Southern Water.
In March we announced a dividend policy to take effect from the year ending
March 2004. This will reflect the reduced proportion of the group's profits
derived from UK regulated infrastructure businesses and the need to balance
future investment with an appropriate return for shareholders. Our current
dividend policy of 5% nominal growth per annum remains in place for the period
to March 2003.
The Executive Team has become more representative of our international business.
It now includes three senior US executives who bring a distinctive American
approach and insight to ScottishPower's decision-making. We also welcome Philip
Carroll to the Board. During the second half of the year, Ken Vowles and Alan
Richardson left ScottishPower. We thank them for their contributions and wish
them well for the future.
On both sides of the Atlantic, the energy industry has had a tough year. In the
wake of California's energy crisis and the UK's transformation into a commodity
market, it is plain that the industry's risk profile has changed significantly,
and that this has implications for shareholders. The events of the last 18
months have further endorsed the view of the Board and the Executive Team that
the relationship between risk and reward benefits from constant scrutiny as part
of good corporate governance.
The need for such scrutiny was vindicated when Enron failed in December and our
exposure was negligible. Nevertheless, it raised questions about corporate
relationships with auditors and consultants. The Board has prohibited the firm
of external auditors from also supplying general consultancy services.
Looking ahead, the Board believes that ScottishPower's focus must remain on
improving operational performance and delivery of service to all customers. We
will aim to deliver steady growth in earnings per share by capitalising on the
opportunities that play to our strengths in energy.
/s/ Charles Miller Smith
Charles Miller Smith
Chairman
1 May 2002
ScottishPower Annual Report & Accounts/Form 20-F 2001/02 |3
Chief Executive's Review
[PHOTO]
The past year has been difficult for ScottishPower, but results through the
second half of the year showed continuing improvement and earnings per share
were 45% higher than those in the second half of the previous year. This was due
to much improved operational performance in our US and Infrastructure
businesses. The total dividend per share (excluding "dividend in specie" on
demerger of Thus) for the year to March 2002 is up 5% to 27.34 pence and in
March 2002 we announced the dividend policy with effect from the year ending
March 2004. In addition, we have redefined our company as an international
energy business through a series of disposals in line with the strategic aim we
set out twelve months ago.
The UK electricity market remains very challenging, but we are making good
progress in developing our energy trading expertise and improving our costs to
serve in the UK Division. Our cost cutting programmes in the Infrastructure
Division continue to drive us closer to our target of meeting the regulator's
efficiency frontier. Our focus on PacifiCorp's management priorities has
delivered much better third and fourth quarter results. Overall we believe that
these actions position the group well for a good recovery, particularly in the
US.
Having completed our strategic disposals, ScottishPower's strategy is now to
become a leading international energy company. We manage regulated and
competitive businesses in the UK and the US to serve electricity and gas
customers. We invest only in businesses where we can deploy proven skills and
strong local market knowledge.
Our regulated businesses seek to provide a base for steady growth, by consistent
investment and by driving our performance with excellent operational and
regulatory management. In competitive activities where we have knowledge and
skill advantages, we seek to enhance margins through the integration of
generation, trading and customer services, underpinned by best in class
operations.
US Division
The US Division comprises PacifiCorp, our regulated utility business, and our
competitive energy business PacifiCorp Power Marketing, Inc. (PPM).
The US businesses reported operating profit of (Pounds)168 million for the
fourth quarter, an improvement of (Pounds)102 million (152%) on the equivalent
period last year. Last year's fourth quarter results included the impact of the
Hunter plant outage and significantly reduced hydro availability resulting in
additional excess net power costs. For the full year, the US businesses'
operating profit increased by (Pounds)16 million to (Pounds)367 million. In the
second half of the year there was a (Pounds)326 million improvement in the US
operating profit compared to the first half of the year. This is as a result of
lower power costs, regulatory rate increases and continued progress with the
Transition Plan, offset in part by planned additional costs on strategic
projects, risk mitigation and from depreciation arising from new investment
activities.
PacifiCorp, doing business as Pacific Power and Utah Power, operates in six
western US states as one of the three largest regulated western electricity
utilities, serving 1.5 million customers. PacifiCorp is focused on improving its
financial performance and customer service, as well as returning to among the
best-in-class regulated electricity utilities in the US. To achieve these
strategic goals, PacifiCorp is concentrating on achieving its target return on
equity of approximately 11% by 2004/05, through the regulatory recovery of costs
incurred on behalf of customers, general rate cases and through improving
operating efficiencies system-wide by the Transition Plan initiated in May 2000.
PacifiCorp operates a relatively balanced system, meeting between 80-90% of its
power needs with a combination of its own generation and long-term purchase
agreements, with the remainder of its requirements being met through a variety
of physical and financial market approaches. PacifiCorp has a good balance of
coal and gas-fired generation, hydro and wind, enabling us to respond quickly to
markets. PacifiCorp has some 8 GW of generating plant, producing typically some
57 TWh, and purchases some 13 TWh under both long-term and short-term contracts.
PacifiCorp has customer demand across retail and wholesale markets of around 70
TWh. Going forward, PacifiCorp's strategy is to reduce exposure to wholesale
markets.
After 18 months of high prices and volatility, the wholesale power and natural
gas markets in the western US have returned to more normal levels. After 10-12
months of flat or reduced load demand, indicators are that economic recovery is
beginning in the US. In addition, regional hydro-electric availability and
precipitation levels have also returned to more normal ranges compared to
conditions a year ago.
Each state regulatory commission establishes its own rate of return on equity
for PacifiCorp. Returns for PacifiCorp
ScottishPower Annual Report & Accounts/Form 20-F 2001/02 |4
Chief Executive's Review continued
to 30 September 2001, being the last reportable period, were approximately half
the 2004/05 target level of approximately 11% due to the impact of power costs,
regulatory disallowances, and other costs, leaving significant room for
improvement and growth.
Under UK GAAP, all of PacifiCorp's net power costs are charged to the profit and
loss account when incurred. The regulatory recovery of the excess power costs
charged to the profit and loss account in the second quarter will be recognised,
under UK GAAP, when billed to customers.
PacifiCorp continues to seek regulatory recovery for costs incurred on behalf of
customers. Filings include general rate cases, deferred accounting requests, and
other filings as needed.
Revenues during the year benefited from regulatory rate increases of $91 million
from general rate cases concluded, the full-year effect of which will increase
revenues by $125 million in the next financial year. Going forward, general rate
case filings of $16 million in California and $14.2 million in Oregon remain
open. An order in the Oregon case is expected by June 2002. The California
Public Utilities Commission has not yet initiated PacifiCorp's filing. In
addition, PacifiCorp will receive a $1.8 million increase on 1 January 2003 as
part of a Washington rate plan. Finally, PacifiCorp will file a general rate
case in Wyoming on 7 May 2002 to recover $31 million in base rates.
At the end of March 2002, amounts held in deferred accounts under US GAAP for
excess net power costs and associated carrying charges totalled $392 million.
These costs have been fully expensed under UK GAAP. At the end of the fourth
quarter, recovery has been requested on $308.5 million, which includes $22.8
million awarded in Oregon and $147 million awarded in Utah on 1 May 2002 that
includes costs related to the Hunter power station outage and summer 2001 excess
net power costs, and currently open recovery amounts totaling $138.7 million,
plus ongoing carrying charges. PacifiCorp will also file a request in Wyoming on
7 May 2002 to recover approximately $91 million in deferred excess net power
costs. Recovery, in most cases, is expected to occur over 2-4 years. The benefit
to revenues in the next financial year resulting from these recoveries and other
orders expected to be concluded early in the first quarter of 2002/03, is
anticipated to be approximately $100 million.
Good progress continues to be made with the PacifiCorp Transition Plan, with
cumulative year-two cost savings achieved of $117 million, ahead of $113 million
in the Plan for 2001/02. The operating cost savings target for the Plan remains
as announced in 2000: $300 million of savings by 2004/05. These savings are
being achieved through a wide range of initiatives including fuel savings,
service centre consolidations and improved procurement practices. For example,
more than 20 operations centres have been closed to date to improve operating
efficiencies, management layers have been significantly reduced, and engineering
and administrative functions have been consolidated.
Customer service remains another key area of operational focus for PacifiCorp.
PacifiCorp made significant progress in 2001/02 in delivering improved service
levels among regional utilities based on independent surveys as measured by JD
Power and other sources. Call centre performance was significantly improved,
with 80% of calls being answered within 20 seconds and customer complaints to
regulators significantly lower over the past three years. A further independent
customer survey of large industrial customers demonstrated that more than three
out of every four customers were very satisfied with PacifiCorp.
PacifiCorp continues to aim for best-in-class performance and our merger goal of
becoming a top 10 US utility by 2004/05, based on various operating and
financial performance metrics. PacifiCorp remains one of the lowest-cost
operators with one of the highest generation plant availability levels in the
western US. For example, in 2001/02 PacifiCorp maintained plant availability of
87%, ahead of the regional average of 84%. In delivering one of our merger
commitments, a further 50 MW of regulated wind power has been installed in
Wyoming, adding to our portfolio of renewable resources.
As one of the 20 largest coal producers in the US, PacifiCorp has the third
lowest cost of delivered coal of $0.81 per million btu for utilities using more
than 10 million tons per year. PacifiCorp currently produces 33% of its own coal
needs and purchases the remaining 67%. Through timely procurement, PacifiCorp
has achieved significant fuel savings as part of the Transition Plan.
To ensure necessary investments are made for infrastructure development,
operations and maintenance, capital expenditure is underway to accommodate
system growth and reliability. Out of a total of $531 million spent in the year
to March 2002, $45 million was on new generation, $129 million on system growth,
$279 million on maintenance of assets and $78 million on other capital projects
including information technology.
In response to a changing environment, however, PacifiCorp spent $25 million on
risk mitigation measures, including physical, hydro and temperature related
hedges, which have reduced our commodity risk exposure. In addition, PacifiCorp
is making investments in new generation such as the Gadsby gas-fired units in
Utah to offset summer peak loads. We expect to make further investments to
improve operational reliability and security of supply of existing plants next
year.
Capital expenditure and the related cost of capital charge are included in the
capital base on which PacifiCorp is allowed to earn a return on equity through
general rate cases. The outlook for capital expenditure for the year to March
2003 is forecast to be approximately $580 million with new generation ($30
million), system growth ($130 million), maintenance ($350 million) and other
capital projects ($70 million).
PacifiCorp has initiated a collaborative process with the six states it serves
to investigate the challenges faced by PacifiCorp as a multi-state utility.
Through this Multi-State
ScottishPower Annual Report & Accounts/Form 20-F 2001/02 |5
Process (MSP), the participants are working to clarify roles and
responsibilities including cost allocations for future generation resources,
provide states with the ability to independently implement state energy policy
objectives and achieve permanent consensus on each state's responsibility for
the costs and entitlement to the benefits of PacifiCorp's existing assets. MSP
was initiated to develop and review possible solutions, including PacifiCorp's
Structural Realignment Proposal (SRP). SRP was filed in December 2000 and would
realign the company to create six state electricity companies, a generation
company and a service company. Individual state proceedings and schedules for
SRP will be "on hold" so long as reasonable progress is made through the MSP.
Current regulatory disallowances, including the impact of different allocation
methodologies, are approximately $100 million per annum and actions are being
carried out to reduce unrecoverable costs or obtain recovery. In addition, a
time lag may exist with costs expected to be recovered at a later date.
PacifiCorp has implemented initiatives to improve our recording of the prudency
of net power cost purchases and investments and other costs on behalf of
customers. This documentation and consultation with states should result in a
higher proportion of allowable costs in the future.
To plan generation and infrastructure investments more effectively in the
future, we are seeking agreement with regulators on forecast demands and
required generation capacity over a 20-year time horizon through the Integrated
Resource Plan. The Plan is due for filing by December 2002. An integrated
approach to resource planning between PacifiCorp and states is needed due to the
large capital investments potentially required to serve customers over this time
period.
PacifiCorp's participation in a Regional Transmission Organization (RTO) took a
further step in March with a filing to the US Federal Energy Regulatory
Commission on the proposal to form RTO West. Under the proposal, regional
transmission lines would function as a common carrier of wholesale electricity
and enable simplified transmission services throughout the northwest region of
the US and Canada. RTO West is not scheduled to begin operations until about
2005. The benefits of the RTO are expected to be enhanced system reliability and
improved market efficiency.
In Oregon, implementation of Senate Bill 1149, the state's electricity
restructuring legislation for small industrial and residential customers, was
started on 1 March 2002. Due to the upheaval in the western US market over the
past 18 months only a handful of customers elected to change their terms of
supply although they will have another opportunity to choose a market provider
at the end of the calendar year 2002. Costs incurred for Senate Bill 1149,
totalling $18.3 million, are being recovered over five years, with future
expenses also to be filed for recovery.
PPM, our competitive US energy business, which commenced substantive operations
during 2001, is growing systematically around a strategy of thermal/renewable
generation and gas storage/hub services. PPM optimises portfolio returns through
an integration of assets, trading and commercial development, taking a regional
approach to growth.
PPM continues to develop generating assets and supply arrangements to be backed
by long-term origination sales contracts, and has a pipeline of new
opportunities in development. PPM is currently targeting 15-20 renewable
development opportunities, principally wind power, in 10 states across the
western and mid-western US over the next five years. During the past year, PPM
has developed a strong trading and risk management capability, positioning
itself for the future. PPM's trading capability enables it to minimise the risk
associated with managing its portfolio and to maximise the margins from the
options available within its portfolio of assets and long-term origination
agreements. Rather than attempting to create value through speculative
approaches PPM trades to protect and enhance the value of its existing
portfolio.
We intend to grow PPM by developing opportunities within thermal generation,
renewable generation and gas storage and hub services that provide the greatest
risk-adjusted rate of return for ScottishPower. Although it is currently a small
but growing part of the company, over the long-term we are targeting PPM to be a
significant value business.
PPM has created a balanced business portfolio, investing in projects with
trading flexibility, expansion capability and arbitrage opportunities. PPM has
two flagship power generation projects. The combined-cycle gas turbine facility
owned by the City of Klamath Falls and the Stateline windfarm which, together
with other supply and development arrangements, represent 800 MW of capacity.
Through its origination business, PPM has sold the equivalent amount of power
forward through long-term contracts. In addition, PPM recently acquired a 40%
interest in a gas storage and hub services business in Alberta, Canada and is
now one of the operators of the facility.
The California Department of Water Resources (CDWR) is the agency that
negotiated power contracts in 2001 on behalf of the state's investor-owned
utilities. In 2001 CDWR and PPM signed a 10-year power supply agreement. The
state is challenging substantially all of the contracts CDWR signed in 2001 as
too expensive or representing too much volume. In our view, PPM has a valid and
legally binding contract, yet has been working with state energy officials to
find a resolution that meets the needs of all parties. PPM has seven major
contracts with five customers, CDWR, Sacramento Municipal Utility District,
Snohomish Public Utility District, Seattle City Light and Bonneville Power
Administration.
We expect PPM to be profitable in 2002/03 by virtue of its generation supply and
long-term sale portfolio, and that it will grow as we focus on developing new
supply and sale arrangements and sites to create future opportunities. Capital
expenditure in 2002/03 is not expected to be extensive, with much of the
activity
ScottishPower Annual Report & Accounts/Form 20-F 2001/02 |6
Chief Executive's Review continued
oriented toward arranging renewable supply along with early phase development of
gas storage facilities. PPM is driven toward developing opportunities within its
business strategy that provide the greatest shareholder value.
UK Division
In the UK Division, our strategy is to grow sales, optimise costs and enhance
margins through the integration of generation assets, trading activities and
energy retailing to customers. This involves a focus on improving profitability
in highly competitive wholesale and retail markets, on investing selectively in
growth areas such as renewables generation, and on growing our customer numbers
and delivering excellence in customer service.
This focus on energy has resulted in significant transformation and change for
the division. During the year we exited the financial services market and
disposed of our UK Appliance Retailing business with minimal disruption, leaving
ourselves free to concentrate on a new integrated structure for generation,
trading and energy retail.
As a result of price pressure on generation margins across the industry and
increased investment in customer acquisitions, operating profit for the UK
Division decreased by (Pounds)7 million to (Pounds)55 million in the fourth
quarter. Operating profit for the full year fell by (Pounds)44 million to
(Pounds)79 million, due to the impact of falling wholesale market prices and the
burden of the Nuclear Energy Agreement (NEA). The results for the year also
include the New Electricity Trading Arrangements (NETA) system error of
(Pounds)10 million reported in the first quarter, offset by positive
contributions from Rye House power station and growth in electricity and gas
retail margins.
Wholesale electricity prices in England & Wales have fallen by approximately 18%
since March 2001, to levels that we believe will not sustain investment in new
thermal generating plant. The wholesale electricity price in Scotland is
directly linked to that in England & Wales. Prices may recover to some extent as
market participants mothball capacity, but we expect prices across the UK to
remain under pressure for the next few years until the present overhang of
generating capacity is reduced.
Generally lower electricity prices heighten the significant burden of the NEA on
our Scottish business. In April 2001 we filed with the Court of Session our
dispute with British Energy (BE) that seeks either a resolution of an agreed
price for power from BE under the NEA, now that there is no longer a reference
"Pool" price under NETA, or alternatively a declaration that the NEA is no
longer capable of operating. In December an interim order decreed that an
appropriate amount from the monthly BE invoices be paid by ScottishPower into an
escrow account in lieu of paying BE until the dispute is resolved. BE appealed
that order and a ruling was issued in April 2002 in BE's favour. This ruling
does not impact on the proceedings dealing with the principal dispute between
ScottishPower and BE. The court hearings with respect to the dispute are
expected to begin in August 2002.
While falling wholesale prices have constrained the profitability of the UK
Division as a whole, retail electricity margins have seen improvement. Retail
gas margins have also delivered a strong performance during the year, increasing
by (Pounds)9 million from last year. This gas margin improvement is mostly as a
result of higher sales volume (8%), due to the successful retention of our
customer base and slightly higher revenue following the domestic gas price
increase in February 2002. We expect UK gas prices to be increasingly linked to
Europe through the interconnector to Zeebrugge, Belgium. European prices are
currently linked to oil and we see no change to that until the advent of greater
European market liberalisation.
Despite the tough underlying market conditions, Trading UK has made a
contribution of over (Pounds)20 million in the year, including market-leading
performance in the balancing mechanism, arbitrage gains and by optimisation of
gas trading activities. Renegotiating the Rye House gas contract has
significantly reduced gas purchase costs and enabled effective arbitrage and
flexing of the Rye House plant.
During the year the UK Division traded 41.9 TWh of power, market share 12%,
(37.6 TWh, market share 11% last year) and 1.7 billion therms of gas, market
share 5% (1.0 billion therms, market share 3% last year). Generation output and
purchases for the retail energy business were traded in order to hedge risk,
protecting overall margins from wholesale price pressure and optimise daily
demand requirements. Trading UK operates within strict risk limits and received
Financial Services Authority authorisation during the year to trade in a range
of energy products.
The UK Division has a good balance of coal and gas-fired generation, hydro, wind
and pumped storage plant, enabling us to respond quickly to market
opportunities. We have some 5 GW of generating plant, generating typically some
20 TWh and purchase 14 TWh of British Energy's Scottish output. We have customer
demand across retail and wholesale markets of around 33 TWh.
Exports to England & Wales continued at a high level, with available generation
capacity on the interconnector at 91%. Exports to Northern Ireland commenced on
1 January 2002 and are expected to be about 1.7 TWh on a full year basis.
During the year we have made improvements to the operating performance of our
generation assets and our plant is now amongst the most flexible in the UK. At
the 2,400 MW coal-fired power station at Longannet, despatch accuracy improved
30% and notice of load change is down to two minutes, leading to a fourfold
increase in our ability to meet frequency response requirements. A 3%
improvement in efficiency was also made at the station.
Meeting customers' expectations on service is a challenge faced by the whole
sector. We are determined to improve the experience of dealing with
ScottishPower
ScottishPower Annual Report & Accounts/Form 20-F 2001/02 |7
and have migrated all our domestic customers onto a single IT and billing
platform during the year. This temporarily interrupted service standards (within
our expectations) but these are now restored and we are seeing a significant
reduction in billing problems. In light of this, we were pleased to receive an
award from JD Power, recognising us as the best company for customer
satisfaction in the domestic gas market. This enhanced reputation is feeding
through into sales performance.
Against a background of declining customer numbers for many companies, we have
successfully held our numbers at 3.5 million, comprising 2.6 million electricity
customers and 0.9 million gas customers. Retention rates are broadly in line
with the industry average of 67% (source, Ofgem January 2002) but customer
losses are on a declining trend compared to April 2001 and churn has reduced by
over four percentage points for both gas and electricity over the year.
According to Ofgem, ScottishPower is the third ranked gas/electricity brand in
the UK, despite having avoided expensive national television campaigns,
concentrating on a successful winback campaign in our historic home areas and
emphasising our "cheaper than British Gas" price positioning for dual fuel.
ScottishPower is the UK's second largest generator of windpower and we have
plans to achieve 10% of our generation from renewable sources by 2010, in line
with government targets. During the year we commissioned a 30 MW windfarm at
Beinn an Tuirc, bringing our total capacity in the UK and Ireland to 128 MW. We
have submitted planning applications for a further 294 MW of wind power,
including what will be Europe's largest on shore windfarm, southwest of Glasgow.
We have a further 250 MW under assessment at five UK sites, one of which is
offshore. Indications are that Renewables Obligation Certificates are being
offered at around 4.5p/kWh, a 50% premium to the buy-out price, reflecting the
shortage of renewable output. ScottishPower is well placed to benefit from its
early mover position in this segment of the market.
We are seeking planning permission for a major gas storage facility in Cheshire,
to add to our Hatfield Moors facility. We expect greater demand for storage
services as the UK becomes more dependent on imported gas in the middle of the
decade and inter-connector capacity becomes a constraint.
In 2001/02, the UK Division capital expenditure was (Pounds)104 million with
(Pounds)75 million targeted at growing our renewables business and maintaining
our generating assets and (Pounds)29 million invested in improving business
processes. We invested (Pounds)12 million in our Beinn an Tuirc windfarm and
(Pounds)38 million in our existing generating plant, including the first phase
of refurbishment of our hydro and pumped storage plant. Going forward, the
capital programme will focus on developing renewable generation and extending
the life of our coal-fired plant, subject to an acceptable outlook for wholesale
prices.
We intend to build on the advantage of our single billing system with a
programme of customer service process improvements to drive out more cost
efficiencies and have recently announced a manpower reduction of approximately
500 in the UK Division. Our aim is to be best-in-class at delivering cost
efficient, high quality customer service.
All final price controls on electricity and gas customers in the UK have now
been removed, completing the process of de-regulation started in 1990. This has
been made possible by the establishment of vigorous competition in energy supply
across all customer types and all locations throughout Great Britain, and
enables the energy supply market to operate on the same basis as other retail
markets. Legislation to extend the new England & Wales electricity trading
arrangements into Scotland through British Electricity Trading and Transmission
Arrangements (BETTA) has been confirmed with a target implementation date of
April 2004. We support a system that will enable all generators and suppliers to
compete on the same basis across the country and will also facilitate the
dismantling of the remaining differences between the Scottish market and the
rest of Great Britain, in particular the NEA, and the other restructuring
contracts put in place at the time of privatisation.
ScottishPower is contributing to the consultation on the Government's Energy
Policy Review and is taking significant initiatives in the key areas of energy
efficiency and renewables. ScottishPower is also actively identifying the
reinforcement to the UK transmission infrastructure required to encourage
development of renewable energy, in Scotland and elsewhere, to meet the
environmental targets set by the Government and Scottish Executive.
Infrastructure Division
The Infrastructure Division reported operating profit of (Pounds)159 million for
the fourth quarter, an increase of (Pounds)5 million on the equivalent period
last year, primarily as a result of higher profits in Southern Water, which is
now reported as a discontinued operation. For the full year to 31 March 2002,
the Division's operating profit was (Pounds)571 million, reflecting a year-on-
year increase of (Pounds)8 million. Power Systems' profit improved by (Pounds)14
million to (Pounds)355 million for the year, as it continued to deliver
financial upsides from its restructuring programme, with operating cost
reductions of (Pounds)39 million achieved during the year. These have mitigated
in full the impact of regulatory price reductions experienced during the first
half of the year and a gain on business disposals reported within last year's
results. Southern Water's operating profit for the full year fell by (Pounds)5
million as a result of new capital obligation costs and increased depreciation
charges, offset in part by (Pounds)11 million of cost savings.
In Power Systems we have just completed the second year of the current five-year
regulatory contract which is based on a pre-tax real return of 6.5% on allowed
investments in our network. Our strategy is to outperform targeted operating
costs and to achieve better than planned outputs from our capital expenditure,
while maintaining a high standard of customer service. Beyond that, value to our
shareholders is maximised by investing consistently in the business, and
minimising our own cost of capital. Strong levels of capital investment not only
ScottishPower Annual Report & Accounts/Form 20-F 2001/02 |8
Chief Executive's Review continued
renew the network but also maintain the value of the Regulated Asset Base which
underpins the future value of the business.
As a long-term business we must also look beyond the current regulatory
contract. By meeting our various cost saving commitments, we expect our cost
base in 2002/03 to be at or near the UK regulatory frontier. Our intention is to
use this to enable a smooth pathway into the next period. In addition, external
indications are that the environment for infrastructure investment is improving
as government interest in renewables grows, and we expect to be well positioned
in our Scottish and Manweb areas and to take advantage of increased investment
opportunities emerging as a result.
We remain firmly on target to deliver (Pounds)75 million of cash cost savings by
March 2003, having achieved (Pounds)70 million to date, and the increased
commercial focus that has arisen from the business change has identified a
further (Pounds)33 million of operating cost reductions by March 2004.
The implementation of the asset manager/service provider structure has delivered
significant savings through a wide range of initiatives that have brought a
sharper commercial focus to contract management, greater network operational
efficiency, stronger procurement practices, engineering innovation and staff
reductions.
The structure enabled us to meet effectively the requirements of the Utilities
Act 2000 to adopt new legal entities and organisational arrangements. A joint
venture, Core Utility Solutions Limited, between ScottishPower and Alfred
McAlpine was established on 27 February 2002 with plans to take advantage of
growing opportunities in the new connections market. From an initial regional
base, we expect the business to grow quickly to become a UK-wide multi-utility
service provider.
Consistent with our strategy, our business continues to invest in networks,
improving customer service and network reliability. The (Pounds)168 million
spent rebuilding, refurbishing and connecting new customers also contributes to
a continually growing Regulated Asset Base.
The business continues to build on substantial upgrading in the Scottish Borders
area over the past four years through its latest initiative which will include
the installation of more than 200 miles of new network and the latest in
protection and control systems. The (Pounds)11 million investment over two years
will significantly reduce the number of major faults and the amount of time it
will take to restore supplies. The project is scheduled for completion in March
2004.
Full completion of the upgrade to the England-Scotland Interconnector to 2,200
MW is expected in May 2002. Full 2,200 MW capability cannot be attained until
National Grid Company completes the reinforcement of its transmission system in
North Yorkshire. This reinforcement has been further delayed due to the foot and
mouth disease outbreak with completion now planned for October 2003.
Nevertheless the upgrade works did help increase the average yearly
Interconnector capability from 1,357 MW in 2000/01 to 1,480 MW in 2001/02 with
capabilities of over 2,000 MW being achieved on certain days over the winter
period.
The completion by ScottishPower last September of the 64 km overhead line from
Ayr to Ballantrae allowed commercial operation of the Scotland-Northern Ireland
Interconnector to commence on schedule on 1 January 2002 despite onerous winter
working conditions and land access problems caused by foot and mouth disease.
Customer Service Guaranteed Standards failures are down 39% in 2001/02 due to
the improved operational focus on fault restoration where failures against
"restoring network faults within 18 hours" dropped from 317 (2000/01) to 117
(2001/02). Underlying system performance during 2001/02 improved during the year
with customer interruptions (CI) down by 18% in Scotland, 8% in Manweb and
customer minutes lost (CML) down by 14% in Scotland and 7% in Manweb. This
continues the downward trend for CI and CML year-on-year. The headline figures
were higher due to the impact of three short but severe weather events in each
operating area.
Ofgem introduced the Information and Incentives Project (IIP) from 1 April 2002.
This project is an incentive scheme designed to improve the quality of service
delivered to customers, particularly reducing the number and duration of
interruptions to customer supplies and improving the quality of telephone
response. Distribution companies can be penalised up to 2% of their annual
allowed revenue for failure to meet pre-specified targets for the number and
duration of interruptions to supply and if the quality of their telephone
response is below the average for the industry as a whole. Companies also have
the opportunity of earning additional revenue in the final year, 2004/05, of the
incentive scheme if they exceed their targets, depending on their rate of
improvement.
Our objective is to invest the (Pounds)2.30 per customer per annum allowed in
the current price control period to deliver the most effective improvements in
overall customer interruptions.
We anticipate the underlying performance of our system will generally be better
than that required by the IIP targets. We would hope therefore to avoid
penalties; however, the possibility of weather related events mean that
achievement of IIP targets every year cannot be guaranteed and therefore the
risk of penalty payments remains.
Overall, our commitment to efficient operational practices and investment
combine to outperform the regulatory rate of return and position us well for the
forthcoming regulatory reviews.
We announced in March 2001 that we would seek greater value for shareholders
from Southern Water by refinancing or selling the business. At a time when many
prevailing share prices for UK water companies do not
ScottishPower Annual Report & Accounts/Form 20-F 2001/02 |9
reflect their full regulatory asset values, we completed the successful sale of
Southern Water to First Aqua Limited in April 2002 for (Pounds)2.05 billion,
including debt assumed by the purchaser, closely reflecting its regulatory asset
value. The sale gives greater returns than the refinancing package proposed in
November 2001, raising (Pounds)300 million more proceeds, and is considerably
better than offers for the sale of the business received last year.
In December 2001, OFWAT commented that Southern Water was the only water company
to be ranked as an A for operational cost efficiency in both water and
wastewater services, having been ranked poorly as D and E respectively when
acquired by ScottishPower in 1996. The value realised for Southern Water
reflects this high efficiency and the excellence in customer standards during
ownership by ScottishPower. This illustrates our key skills in infrastructure
asset management.
Other Discontinued Activities
The decision to withdraw from the loss-making UK Appliance Retailing business
was announced in June 2001, with the disposal of part of the business to
Powerhouse Retail finalised in October 2001 and the closure of the remaining
operations now complete. An exceptional charge of (Pounds)120 million was
recognised in the first quarter following this decision. UK Appliance
Retailing's operating losses of (Pounds)9 million for the year are disclosed
within discontinued operations.
The demerger of Thus was successfully completed on 19 March 2002. The financial
results of the group include the results of Thus up to this date, which are
included within discontinued operations.
Thus incurred an operating loss of (Pounds)64 million, an increase of (Pounds)6
million on last year. Despite overcapacity and falling demand depressing the
wholesale telecoms sector in general, Thus continued to deliver strong growth in
EBITDA, which improved from negative (Pounds)21 million for the prior financial
year, to positive (Pounds)2 million for the period up to demerger.
People and organisation
Following our reorganisation, we have initiated long-term programmes to ensure
that the group has the leadership, competence and performance culture needed for
success. We have established a single corporate human resources team to manage
and nurture the talent within ScottishPower. Although it is in its infancy and
has yet to affect more than our senior management group, we are committed to
ensuring that we recruit, motivate and retain our best staff in a planned,
systematic manner. Our Group Leadership and Business Leadership programmes
identify staff who demonstrate the potential to do well and groom them, through
training, guidance, mentoring and project work, for higher levels of
responsibility.
Corporate social responsibility
ScottishPower seeks to adopt a responsible approach to environmental governance
across the range of our activities. Recognition of the soundness of our approach
via external benchmarks is an important part of the process. We were placed at
the top of the 2001/02 FT/BiE Survey of Corporate Environment Engagement and our
Corporate Environment Report won the ACCA Reporting Award.
Shifting towards more sustainable energy supplies is critical to the reduction
of long-term environmental risk. In our vision, we set out our aim of moving to
become a leading renewables operator. We will do this by working with customers
to promote energy efficiency, increasing choice through green products linked to
renewables, ensuring security of supply, investing where possible in cleaner and
more efficient forms of generation, and achieving lower emissions across our
portfolio. We have made considerable strides in bringing on-line new wind plant
in the UK and US and aim to add a further 1,000 MW over the next few years. Our
green energy offerings in the UK and US have become market leaders. This
together with the commissioning of new gas-fired plant in the US and major
initiatives on energy efficiency in the US and UK have taken us a considerable
way towards our long-term sustainability vision.
Over the last few years, our focus on safety policies and procedures has
resulted in a significant reduction in lost time accidents. In the year to 31
December 2001 our UK safety performance was recognised by the award of 14 gold
medals and 1 silver medal by ROSPA. In addition we were recognised by the Health
and Safety Executive for our participation in the European Week of Safety. Sadly
however, this year we have to report the death of a lineman in Utah who was
electrocuted from accidental contact with low-voltage equipment. This tragedy
overshadows all of the progress we have achieved and reminds us of the danger of
electricity. Safe working practices and the safety of our customers and the
general public remain a top priority, everyday for me and every one of our
employees.
Conclusion
We have made a good start to the current year and believe that our management
focus and renewed, strong commitment to leading operational performance will
drive the sustained creation of shareholder value. The Board also believes that
this focus and commitment will enable it to take advantage of the opportunities
to create shareholder value that will, over time, arise from the changing
structure of our industry in the UK, the rest of Europe and the US.
/s/ Ian Russell
Ian Russell
Chief Executive
1 May 2002
ScottishPower Annual Report & Accounts/Form 20-F 2001/02 |10
Business Review - Description of Business
Description of business
Scottish Power plc ("ScottishPower") is an international energy business listed
on both the New York and London Stock Exchanges. Through its operating
subsidiaries, the company serves five million homes and businesses in the
western US and across the UK. It provides electricity generation, transmission,
distribution and supply services in both countries, whilst the company's US
activities extend to coal mining and, in Britain, ScottishPower also supplies
gas. In the year to 31 March 2002, the sales revenues of the continuing business
of the group were (Pounds)5.5 ($7.8) billion.
Since its creation upon privatisation in 1991, ScottishPower has developed by
organic growth in the UK electricity and gas markets, through strategic
acquisitions in the UK and by the merger with PacifiCorp in the US. During
2001/02, the group exited the financial services market and appliance retailing
in the UK and sold a non-strategic business in synthetic fuel production
belonging to US subsidiaries. The UK telecommunications and internet business,
Thus, was demerged to the company's shareholders and the UK water and wastewater
company, Southern Water, sold, thereby concluding the process of redefining
ScottishPower as an international energy business.
Strategic context
Having completed its strategic disposals, ScottishPower's strategy is to become
a leading international energy company, managing both regulated and competitive
businesses in the US and UK to serve electricity and gas customers. The
regulated businesses provide a base for steady growth through consistent
investment and proven skills in operational and regulatory management. In
competitive activities in which the group has local market knowledge and skill
advantages, it will seek to enhance margins through the integration of
generation, trading and customer services, again underpinned by best-in-class
operational performance. The aim is to deliver steady growth in value and
earnings per share by capitalising on the opportunities afforded by substantial
positions in both the US and UK markets, organising the skills and resources
deployed in these different marketplaces within one common ScottishPower
business framework: but one which takes account of essential differences between
the US and UK situations.
Shared, and increasingly integrated, skills in network management are enhancing
performance in the US and the UK electricity transmission and distribution
businesses. Similarly, both the strongly growing, US competitive energy
business, PacifiCorp Power Marketing, Inc. ("PPM"), and the competitive UK
energy business are taking market-leading positions in windfarm developments and
investing in natural gas storage facilities: two key areas of future value
creation. With UK energy markets now fully competitive but US states adopting
differing approaches to the introduction of energy competition, the company's
skills in the management of legislative and regulatory relations are engaged in
a Multi-State Process ("MSP") with the six states the company serves in the US.
Through MSP, the participants are working to clarify roles and responsibilities
on issues such as cost allocations for future generation resources, ability to
implement state energy policy objectives independently and entitlement to the
benefits of PacifiCorp's existing assets.
The ScottishPower strategy involves a consistent commitment to achieving (or,
where the regulatory process permits, bettering) target returns from regulated
businesses, building sustainable value in competitive energy markets and
actively managing risk, both operational and financial. In 2001/02, the strategy
was delivered through three divisions concentrating on US energy needs, the
evolving competitive market for UK energy and the group's UK infrastructure
assets. The 2001/02 Accounts and Financial Review reflect this segmentation
which is further described under "Accounting Policies and Definitions" (page
56). With PPM developing substantive operations, UK energy market price controls
lifted from 1 April 2002 and the sale of Southern Water, the group's 2002/03
operations are managed through four businesses:
.. PacifiCorp
.. PacifiCorp Power Marketing, Inc.
.. UK Division
.. Infrastructure Division
In each of the US and the UK, there is a business operating under regulation and
one in competitive market conditions.
In the US, PacifiCorp operates as a regulated electricity business with
significant mining affiliates - and the competitive energy business is PPM.
Since 31 December 2001, both have been subsidiaries of PacifiCorp Holdings, Inc.
("PHI") a non-operating, US holding company, itself an indirect wholly-owned
subsidiary of ScottishPower. On 4 February 2002, PHI also became the parent of
PacifiCorp Group Holdings ("Holdings") which owns the shares of subsidiaries not
regulated as domestic electricity providers, including PacifiCorp Financial
Services, Inc. ("PFS"). The transfers to PHI facilitate the further separation
of the company's non-utility operations in the US from the regulated US
business, PacifiCorp.
In the UK, the regulated Infrastructure Division operates electricity
transmission and distribution subsidiaries of the wholly-owned UK holding
company Scottish Power UK plc ("SPUK") whilst other SPUK subsidiaries operating
in the now competitive UK energy markets comprise the group's competitive UK
Division, covering its UK generation assets, commercial and trading activities
and energy supply business units.
All four businesses have a strong commitment to class-leading operational
performance as the route to the creation of shareholder value.
PacifiCorp
In November 1999, PacifiCorp and ScottishPower completed a merger under which
PacifiCorp became an indirect subsidiary of ScottishPower. As a result of the
merger, PacifiCorp developed and commenced its Transition Plan to implement
significant organisational and operational changes arising from the strategic
decision to focus on its electricity businesses in the western US.
Principal business activities
PacifiCorp conducts its retail electricity supply operations as Pacific Power
and Utah Power, operating from Portland, Oregon and Salt Lake City, Utah,
respectively, and engages in power production and sales on a wholesale
ScottishPower Annual Report & Accounts/Form 20-F 2001/02 |11
basis under the name PacifiCorp. Through its mining affiliates, PacifiCorp is
one of the 20 largest coal producers in the US.
Power production and fuel supply
PacifiCorp owns or has interests in generating plants with an aggregate
nameplate rating of 8,269 megawatts ("MW") and plant net capability of 7,815 MW,
see Table 1 (page 27). During 2001/02, approximately 5% and 63% of PacifiCorp's
energy requirements were supplied by its hydro-electric and thermal generation
plants, respectively. The remaining 32% was supplied by purchased power. The
contribution of thermal energy was reduced during the year by the outage at the
Hunter plant, which lasted from late November 2000 to early May 2001. With its
present generating facilities, under average water conditions, PacifiCorp would
expect that approximately 6% of its energy requirements for 2002/03 would be
supplied by its hydro-electric plants and 66% by its thermal plants. Of the
balance, 13% would be obtained under existing long-term purchase contracts, the
remaining 15% being secured through short-term purchase agreements.
At 31 March 2002, PacifiCorp had 218 million tons of recoverable coal reserves
that are mined by PacifiCorp and are dedicated to nearby PacifiCorp operated
generating plants, see Table 2 (page 28). During 2001/02, these mines supplied
approximately one-third of PacifiCorp's total coal requirements. Coal is also
acquired through long-term and short-term contracts of which eight long-term
contracts, having remaining terms ranging from 3 to 20 years, account for some
45% of the forward commitment at 31 March 2002.
PacifiCorp has also entered into long-term, fixed price natural gas contracts to
supply natural gas to its owned gas-fired generation facilities as well as the
leased West Valley Units. These long-term contracts meet 100% of the expected
needs for natural gas at these facilities until 2004.
In light of the growing demand within its service area, PacifiCorp obtained
permits and other approvals to install a 120 MW permanent peaking facility in
Utah in time to mitigate a portion of the calendar 2002 peak demand. It is also
transacting on the results of a comprehensive energy solicitation proposal that
resulted in more than 50 responses from 30 prospective suppliers to meet Utah's
forward energy requirements. To provide longer-term solutions, PacifiCorp is
working with regulators and other stakeholders to develop an Integrated Resource
Plan to identify the least cost and lowest risk approach to supplying its
service area with power over the next 20 to 25 years.
Wholesale sales and purchased power
PacifiCorp's wholesale sales complement its retail business, enhance the
efficient use of its generating capacity over the long-term and, because
PacifiCorp's transmission system connects with power providers in the western
states with widely varying generation plant characteristics, facilitate load
shaping, balancing and hedging arrangements. In the generally volatile market
conditions of 2001/02, both short-term market prices and long-term contract
volumes dropped. Net wholesale volume fell some 11% year-on-year to 34% of total
gigawatthours ("GWh") sold in 2001/02. In addition to its base of thermal,
renewable and hydro-electric generation assets, PacifiCorp uses a mix of
long-term and short-term firm power purchases and non-firm purchases to meet its
load obligations, wholesale obligations and its balancing requirements.
Long-term firm power purchases supplied 12% and short-term firm and non-firm
power purchases supplied 21% of PacifiCorp's total energy requirements in
2001/02. Lower volumes of long-term wholesale sales allowed both long and
short-term purchase volumes to be reduced with a larger proportion of purchases
used to meet load requirements and also to reduce the purchase of short-term
spot power to balance load.
PacifiCorp currently purchases, annually, 925 MW of firm capacity from the
federal Bonneville Power Administration ("BPA") pursuant to a long-term
agreement. The purchase amount declines to 750 MW annually in July 2003 and
again to 575 MW in July 2004 until August 2011. PacifiCorp's annual payment
under this agreement for the period ended 31 March 2002 was $60 million. The
price for this capacity is a per MW charge, therefore the costs associated with
this agreement will decline as the MW purchase declines. The price is adjusted
by the rate of change in the BPA's Average System Cost. A slight decline is
expected in 2003. The next scheduled price change will be in October 2006. Under
the requirements of the Public Utility Regulatory Policies Act of 1978,
PacifiCorp purchases the output of qualifying facilities constructed and
operated by entities that are not public utilities. During 2001/02, PacifiCorp
purchased an average of 104 MW from qualifying facilities, compared to an
average of 109 MW in 2000/01.
Retail electricity sales
PacifiCorp serves approximately 1.5 million retail customers in service
territories aggregating about 136,000 square miles in portions of six western
states. The geographical distribution of PacifiCorp's retail electricity
operating revenues for the year ended 31 March 2002 was Utah, 39%; Oregon, 32%;
Wyoming, 13%; Washington, 8%; Idaho, 6%; and California, 2%. These proportions
remain substantially the same year-on-year. (PacifiCorp is currently seeking to
exit operations in California. See "Proposed asset sale" page 12.)
The PacifiCorp service area's diverse regional economy helps mitigate exposure
to economic swings. In the eastern portion of the service area, where customer
demand peaks in the summer when irrigation and cooling systems are heavily used
in Wyoming and eastern Utah, the main industrial activities are mining and
extracting coal, oil, natural gas, uranium and oil shale. In the western part of
the service territory, mainly consisting of Oregon and southeastern Washington,
customer demand peaks in the winter months due to space heating requirements and
the economy generally revolves around agriculture and manufacturing, with pulp
and paper, lumber and wood products, food processing, high technology and
primary metals being the largest industrial sectors. During 2001/02, no single
retail customer accounted for more than 1.4% of PacifiCorp's retail electricity
revenues and the 20 largest retail customers accounted for 14% of total retail
electricity revenues. Trends in energy sales by class of customer are set out in
Tables 3, 5 and 6 (page 28).
Retail energy sales for PacifiCorp have grown at a compound annual rate of 1.8%
since 1996: however, this has been affected
ScottishPower Annual Report & Accounts/Form 20-F 2001/02 |12
Business Review - Description of Business continued
by a decrease in GWh sales of about 2.0% during 2001/02. This is a consequence
of extreme volatility and unprecedented high price levels, which characterised
the western US wholesale energy markets, and deteriorating economic conditions
across the US, which impacted the PacifiCorp service territory during that
period. In order to meet its obligations to serve regulated customers and in the
expectation of continuing high spot prices in the balancing market, PacifiCorp
purchased electricity in the forward market, primarily for delivery over the
June to September period of 2001. The aim was to mitigate the impact of then
anticipated high prices in excess of those included in retail rates, in
particular for peak demand balancing load. Western US power costs, however,
declined abruptly, from the unprecedented highs of the spring of calendar 2001,
in the face of the price-cap mechanism for the western US introduced by the
Federal Energy Regulatory Commission ("FERC") and other market factors. This
left PacifiCorp with actual net power costs during the summer of 2001 exceeding
the levels included in retail rates. During the latter half of 2001/02, however,
PacifiCorp experienced electricity prices that were at levels consistent with
those historically allowed in cost-of-service rates charged to customers.
Some of the net power costs in excess of those included in prevailing retail
rates at that time will be recovered by allowed rate increases or temporary
surcharges. PacifiCorp has reached settlement agreements in Utah, Oregon and
Idaho to recover costs for electricity in excess of costs included in retail
rates. Under US Generally Accepted Accounting Principles ("GAAP") excess net
power costs, where approved by regulators, are initially deferred as regulatory
assets and recovery subsequently sought through rate filings. At 31 March 2002,
deferred excess power costs totalled $392 million (including carrying charges),
of which $308 million were the subject of filings made. Rate adjustments awarded
so far total approximately $171 million. Under UK GAAP, all PacifiCorp's net
power costs are charged to the profit and loss account when incurred. There is,
therefore, a time lag between the recognition of allowable excess power costs
under UK GAAP compared to US GAAP, which will benefit future UK GAAP reported
earnings. General rate adjustments granted in the past year have an annualised
value of approximately $125 million.
For the periods 2003 to 2006, the average annual growth in retail megawatthour
("MWh") sales in PacifiCorp's franchise service territories is estimated to be
about 2.4%, excluding the potential effects of decreased demand from price
increases and conservation efforts. If price increases occur in the region,
PacifiCorp believes that demand growth may slow.
During 2001/02, PacifiCorp continued to operate its electricity distribution and
retail sales business as a regulated monopoly throughout most of its franchise
service territories. In the longer term, customer demand for choice may
eventually lead to retail competition in each state. Deregulation in the states
in which PacifiCorp operates has varied and, in general, is not greatly
advanced. However, as the electricity industry evolves toward deregulation,
PacifiCorp may lose retail energy sales to other suppliers but expects to have
opportunities to sell any excess power in wholesale markets. PacifiCorp's actual
results will be determined by a variety of factors, including the outcome of
deregulation in the electricity industry, economic and demographic growth and
competition.
Proposed asset sale
In October 2001, PacifiCorp and Nor-Cal Electric Authority reached an agreement
in principle for the sale of PacifiCorp's California electricity distribution
assets. The California Public Utilities Commission ("CPUC") turned down a
previous agreement between the parties. If a definitive agreement is reached, it
will have to be approved by the CPUC.
PacifiCorp Power Marketing, Inc.
The Energy Policy Act, passed in 1992, opened wholesale competition to energy
brokers, independent power producers and power marketers. The group's own
competitive energy business, PPM, serves a wide variety of wholesale energy
customers including municipal agencies, public utility districts and
investor-owned utilities. These customers are primarily located in wholesale
energy markets served by the 1.8 million square mile Western Electricity
Coordinating Council ("WECC") service territories in the western US. In addition
to its active engagement in the west, PPM is currently developing wind
generation projects in the mid-western US and developing gas storage/hub
services projects in several regions.
PPM commenced substantive operations during 2001. In July 2001, PPM brought
on-line the 484 MW Klamath Cogeneration Plant, of which it has access to 227 MW
base load and 10 MW peaking capacity. Following Klamath, the Stateline windfarm
commenced operations by autumn 2001, of which PPM purchased the entire output.
Stateline is currently rated 263 MW capacity, with expansion planned for later
in 2002. PPM also constructed two peaking plants providing 260 MW (soon to be
300 MW) of additional capacity. The equivalent output and energy for these
facilities has been sold under long-term contracts, thereby providing PPM with a
balanced portfolio of assets and long-term contracts.
PPM further expanded its activities in January 2002 with the purchase of a 40%
interest in an underground natural gas storage facility and hub service business
located 80 miles west of Edmonton, Alberta, and PPM is now one of the operators
of the facility. The facility is connected to the major pipelines that transport
gas to Canadian and US markets.
For the future, PPM is targeting 15-20 renewable development opportunities which
it believes the market will support based upon competitive costs and increasing
public support for renewables. PPM is also targeting two to four new gas storage
developments that are strategically located and cost competitive. PPM is a
western US leader in the supply of renewable energy and is committed to
sustainable and clean energy development for the future, as demanded by the
market.
UK Division
With the ending of residual price controls on residential electricity on 31
March 2002, the UK gas and electricity markets became fully competitive,
although the Gas and Electricity Markets Authority ("the Authority") and the
Office of Gas and Electricity Markets
ScottishPower Annual Report & Accounts/Form 20-F 2001/02 |13
("Ofgem") continue to enforce licence conditions and regulate quality of
service. During 2001/02, and in line with a timetable agreed with the Department
of Trade and Industry ("DTI") to give effect to the requirements of the
Utilities Act 2000 ("Utilities Act"), the UK Division's now competitive
generation, trading, supply and service businesses were separated from the still
price-regulated UK networks businesses in the Infrastructure Division. Five new
wholly-owned subsidiaries of Scottish Power UK plc now form the UK Division:
Scottish Power Generation Limited owns and operates the power stations and other
generation assets in the British Isles and holds the group's generation licence;
ScottishPower Energy Trading Limited and ScottishPower Energy Trading (Agency)
Limited deal in gas, electricity and coal at the wholesale level and in the
trading instruments and agreements which constitute the market balancing
mechanisms for the competitive energy market in the UK; ScottishPower Energy
Retail Limited is the gas and electricity supply company and holder of the
group's supply licences, managing pricing, selling, billing and receipting for
gas and electricity supply to both business and domestic customers and dealing
with enquiries arising in the course of this business; and SP Dataserve Limited
is the data management and metering company, providing a meter reading service
to its supply business customers and managing the data processes which underpin
customer registration and billing in the competitive energy market.
An integrated divisional management team seeks competitive advantage for
ScottishPower by optimising the energy value chain, maximising the value of both
generation and supply assets in a period of uncertainty in wholesale energy
markets. This uncertainty derives, in part, from the continuing structural and
contractual changes in the market and from the potential impact of the, as yet
incomplete, review of energy policy by the UK government. As an active market
participant, the division engages fully in regulatory and contractual debate and
in the consultation processes surrounding the Government's review of energy
policy. In the meantime, it aims to leverage the benefits of its flexible
generation asset base and commercial trading operations and to deliver sustained
earnings through improved business processes and customer service.
Principal business activities
The group's UK Division operates ScottishPower's generating stations in the
British Isles, deals in the wholesale trading of electricity, gas and coal and
is responsible for energy supply: the sales and marketing of electricity and gas
to customers throughout Great Britain, together with the associated customer
registration, billing and receipting processes and handling enquiries in respect
of these services.
Power plant portfolio, fuel strategy and generation sales
ScottishPower has access to some 4,500 MW of owned generating capacity, see
Table 7 (page 29) comprising coal, gas, hydro-and wind-power generation assets,
giving the division a particularly flexible portfolio. Gas-fired generation
capacity in England & Wales was boosted to approximately 1,000 MW during 2000/01
by the purchase of the Rye House station and the start of commercial operation
of the Brighton station in which ScottishPower has a 50% interest. Acquisition
of additional thermal generation capacity is kept under continuing review. In
2001/02, the windfarm business continued to expand, a high wind-speed site with
30 MW peak output at Beinn an Tuirc in Kintyre being commissioned and planning
applications for a further 294 MW submitted. The division now has projects in
Scotland totalling almost 500 MW in planning or detailed environmental
assessment, with a further 55 MW in joint venture projects in England & Wales,
to ensure that the company target of 10% generation from renewables by 2010 is
met.
ScottishPower's fuel purchasing strategy is based upon the objective of
achieving competitive fuel prices while balancing the need for security and
flexibility of supply. The major components of the fuel portfolio are coal and
gas. The division has four long-term contracts with terms of greater than five
years for supply from major gas producers.
Generation output was traded in order to hedge risk and optimise the position in
the balancing market. Some 20 terawatthours ("TWh") were despatched, both to
contribute towards the approximately 33 TWh of retail and wholesale demand
provided by the division and to maintain export volumes through the
interconnectors to England & Wales and, from January 2002, to Northern Ireland.
Energy trading and commercial arrangements
In addition to its own generation capacity and long-term bulk gas contracts
(which can be used to service generation plants or the gas supply business),
ScottishPower has access to additional generation under contract. Through its
commercial and trading operations, the division uses medium and short-term
contractual arrangements to complete its energy purchase requirements and to
sell its generation output into the electricity market in Scotland and, through
the interconnectors, to England & Wales and Northern Ireland. Proposals for
transmission access and the England-Scotland interconnector will be key to
ScottishPower's acceptance of the proposed British Electricity Trading and
Transmission Arrangements ("BETTA") which are expected to become effective
during 2004.
Electricity, gas and coal trading, within Trading UK, secures competitive
advantage for the group through trading and optimising its position across the
energy value chain, continuously evaluating and managing risk exposure.
ScottishPower's Hatfield Moors gas storage site enhances the flexibility of the
trading position, both in meeting peak demands of supply customers and
responding to the volatility of gas prices between mid-week and weekends. In
addition, the gas contract linked to the Rye House power station purchase has
been re-negotiated to allow the gas to be sold out or used elsewhere in the
business, giving yet more trading flexibility. Further investment in gas storage
facilities is in hand.
From 27 March 2001, New Electricity Trading Arrangements ("NETA") were
introduced, replacing the Pool market established at privatisation with
market-based arrangements more akin to those in commodity markets and comprising
a three-tier trading system: a forward and futures market, a short-term
bilateral market and a balancing mechanism with a settlement process for
imbalances and penal imbalance charges, requiring highly
ScottishPower Annual Report & Accounts/Form 20-F 2001/02 |14
Business Review - Description of Business continued
efficient forecasting, trading and risk management on the part of all
participants.
The NETA arrangements encourage all generators to find buyers for their output,
by offering them competitive prices, and all suppliers to contract with
generators to purchase sufficient electricity to meet their customers' demand.
Imbalances between actual and contracted positions are settled through the
balancing mechanism. The pay-as-bid and balancing process exposes market
participants to the costs and consequences of their actions, and therefore leads
to more cost-reflective prices and more effective management of risk. Under the
Nuclear Energy Agreement ("NEA") of 1990, ScottishPower and Scottish & Southern
were contracted, until 2005, to purchase the entire output from British Energy's
nuclear plants in Scotland. The pricing formula contained in the NEA is based
upon Pool Price and ScottishPower is seeking clarification from the Court of
Session as to whether or not the NEA is capable in law of continuing after the
introduction of NETA and/or the cessation of the Pool Price and, if so, the
contractual terms upon which it can continue.
Energy supply
Since September 1998, when competition was extended to residential electricity
customers, the strategic focus of the ScottishPower energy supply business has
been the defence of its core markets, residential and small business customers
in the ScottishPower and Manweb home areas, whilst seeking profitable additional
business outside these historical regional boundaries. Retention of home area
residential customers remains broadly in line with the industry average of 67%.
Targeted sales efforts and strategic marketing alliances, such as those with
Sainsbury's and Union Energy, have helped develop a Britain-wide customer base
of some 3.5 million energy accounts, 0.9 million being gas supplies. The
business' Customer Service Guaranteed Standards were maintained in the year
ended 31 March 2002 at the high level set in the previous year, with over 99.99%
of all electricity services provided currently matching or exceeding regulatory
standards. The continuing improvement in service levels was recognised in
November 2001 when JD Power and Associates judged ScottishPower the number one
UK domestic gas supplier for customer satisfaction.
Both service improvements and economies of scale derive from integrated systems
and the move to a single billing platform. The priorities remain accelerating
the reduction of servicing costs to benchmark levels and enabling referral of
customers to sales and retention channels suited to an increasingly competitive
market. In mid-2001, the division's e-business site was upgraded to allow
customers to manage their own accounts on-line if they wish. Customers can now
enter meter readings, view previous bills, create and pay new ones and switch to
new internet tariffs through which they can share in the savings generated by
the low costs of managing accounts on-line.
Metering and data management
In the competitive energy market, meter reading and meter operation form parts
of an integrated data management process, also covering customer registration,
billing record set-up and agent registration. SP Dataserve operates end-to-end
process management in order to maximise efficiencies in the provision and
control of registration and metering data. Meter reading and meter operation are
characterised by a large regional field force, working from home, which carries
out over 12 million customer visits a year and operates in a competitive market
covering activities (from meter installation and meter operation to data
collection) for gas, electricity and water supply business customers.
Infrastructure Division
During 2001/02, the UK wires businesses were restructured in line with a
timetable agreed with the DTI to give effect to the requirements of the
Utilities Act and to develop further the commercial focus applied to the
management of these assets. Three wholly-owned subsidiaries of Scottish Power UK
plc; SP Transmission Limited, SP Distribution Limited and SP Manweb plc, are the
"owner companies" holding the regulated assets and transmission and distribution
licences. They now act as an integrated business unit to concentrate expertise
on regulatory issues. A further wholly-owned subsidiary of Scottish Power UK
plc, SP Power Systems Limited, ("Power Systems"), provides asset management
expertise and conducts the day-to-day operation of the networks on behalf of the
asset-owner business. Strict commercial disciplines are applied at the asset
owner-service provider interface. The move towards fully competitive provision
of connections to distribution networks is supported by Core Utility Solutions
Limited, a joint venture with Alfred McAlpine Utility Services Limited in which
ScottishPower has an indirect beneficial interest of 50%.
An integrated senior management team within the Infrastructure Division applies
the benefits of growing expertise in asset ownership, financing and operational
service provision to the management of the group's regulated networks businesses
in both the US and the UK.
Principal business activities - transmission and distribution
ScottishPower owns and manages a substantial UK electricity distribution and
transmission network which extends to 115,633 km, with 65,590 km of underground
cables and 50,043 km of overhead lines network, comprising both the distribution
system to customers in its two authorised areas and, in Scotland, its high
voltage transmission system (132 kilovolts ("kV") and above, including those
parts of the England-Scotland interconnector which are in its Scottish
authorised area). Table 8 (page 29) shows key information with respect to the
business' transmission and distribution services in 2001/02. These networks are
operated under licences issued by the Authority and held by the transmission and
distribution businesses, which are entitled to charge for the use of the systems
on terms approved by the Authority under various price control formulae. The
management focus of the transmission and distribution business unit is to
outperform allowed regulatory returns from the provision of efficient,
coordinated and economical networks which are open to licensed users on a non-
discriminatory basis (in order to facilitate competition in generation and
supply) and operated to approved standards of safety and reliability.
The income derived from the distribution business is dependent on the demand for
electricity by customers in the licenced areas. Demand for electricity is
affected by such factors as growth and movements in
ScottishPower Annual Report & Accounts/Form 20-F 2001/02 |15
population, social trends, economic and business growth or decline, changes in
the mix of energy sources used by customers, weather conditions and energy
efficiency measures. Tables 9 and 10 (page 29) set out the demand in GWh by
customer type within the broadly stable levels of electricity transported over
the distribution systems in the ScottishPower and Manweb home areas during the
five most recent financial years.
Principal business activities - asset management
Within the Power Systems business unit, the focus continues to be on reducing
costs and improving service. Its principal business activities involve the
construction and refurbishment of the UK transmission and distribution systems,
their maintenance and related fault repair. Power Systems acts as the major
service provider to the ScottishPower transmission and distribution business
unit and as the primary customer contact agent for network-related matters.
Power Systems continues to focus strongly on the efficient delivery of these
services under contract. Power Systems has entered into a joint venture with
Alfred McAlpine Utility Services Limited, called Core Utility Solutions Limited,
to take advantage of the opportunities presented by the requirement for
competitive provision of connections to distribution networks.
Discontinued activities
US synthetic fuel operations
In October 2001, PacifiCorp sold its synthetic fuel operations and, in addition
to the initial sale consideration, may receive quarterly royalty payments from
the purchaser until October 2007. The synthetic fuel business was intended to
qualify for tax credits but PacifiCorp did not have sufficient qualifying tax
liabilities to make effective use of the offset potential.
US leasing and financial services
During the first quarter of 2001/02, certain aircraft owned by subsidiaries of
PFS were sold. Holdings continues to liquidate portions of the loan and leasing
portfolios of PFS.
UK appliance retailing
A decision to withdraw from the loss-making UK Appliance Retailing business was
announced in June 2001. The disposal of 98 stores to Powerhouse Retail Limited
was finalised in October 2001 and the closure of the remaining operations is now
complete.
UK telecommunications - Thus
On 19 March 2002, ScottishPower's former controlling interest in Thus Group plc
("Thus"), was demerged to ScottishPower ordinary shareholders, in order to
release its value to shareholders and to allow the management of ScottishPower
to focus on the company's core operations. Thus provides data and telecoms,
internet and call centre services, operating throughout the UK and wholly
focused on the corporate and small and medium enterprise markets. In its results
for the year to 31 March 2002, Thus restated its belief that the refinancing
which accompanied the demerger will leave it in a position fully to finance its
business plan on an independent basis through to the point where it becomes cash
flow positive.
UK water and wastewater services - Southern Water
The sale of Southern Water to First Aqua Limited, a company specifically formed
to undertake the acquisition, was announced on 8 March 2002 and concluded on 23
April 2002. Southern Water operates in an area of approximately 10,450 km/2/
in the southeast of the UK and has a coastline stretching, including the Isle of
Wight, 1,250 km from within the Thames Estuary to just beyond the Solent. It
collects wastewater from approximately 1.7 million premises and supplies water
to approximately 1 million and is one of the 10 water and wastewater companies
operating in England and Wales.
Southern Water supplies, on average, 578 million litres of water per day, which
is pumped through 13,327 km of water main by 541 pumping stations. Southern
Water's 104 water treatment works treat water from 130 water sources in the
region with 72% of water supplied coming from underground sources, 22%
abstracted from rivers and 6% taken from four impounding reservoirs, which have
a total storage capacity of 42,390 million litres. In all cases, protection
against bacteria and other micro-organisms throughout the distribution system to
the point of use at the customers' taps is maintained by a residual level of
chlorine. Southern Water monitors water quality through a programme in which
samples are analysed regularly for both microbiological and chemical parameters.
Losses through leaks in the Southern Water distribution system were reduced to
the target level of 10.9% in 2000/01, compared to 26% just before the time of
privatisation.
Southern Water has 388 wastewater treatment works ("WTWs"), which treat sewage
pumped through 20,885 km of sewer by 1,975 pumping stations. WTWs provide
various types of treatment and, under the Water Resources Act 1991, are granted
consents by the Environment Agency ("EA") to discharge sewage effluent to
controlled waters. The disposal of sludge produced by WTWs is strictly
controlled. Over 85% of the 90,900 tonnes of dry solids per year produced at
Southern Water's WTWs is further recycled, using processes controlled by an EU
directive, to produce a soil conditioner sold to the agricultural industry. As
part of the treatment process to meet current bathing water standards, Southern
Water has 7 marine treatment works and 30 long sea outfalls around the coastline
of its region. Under the EU Bathing Water Directive, the EA tests the 79
designated beaches in the Southern Water region, taking at least 20 samples
during the bathing water season (1 May to 30 September) at each identified
bathing beach. Results may be published and posted by district councils on the
beaches concerned. In the 2001 bathing season, only one beach out of 79 failed
the compliance tests.
Group employees
US businesses
PHI and its subsidiaries had 6,387 employees at 31 March 2002. Of these, 5,495
were employed by PacifiCorp, 782 by its mining affiliates and 12 by PFS and
other subsidiaries. In addition, at 31 March 2002, PPM had 98 employees.
As a result of the merger with ScottishPower, PacifiCorp developed and is
delivering a Transition Plan to implement significant organisational and
operational changes. As part of this Transition Plan, PacifiCorp expects to
reduce its work force company-wide by approximately 1,600 over a five year
period ending in 2005, mainly through early retirement, voluntary severance and
attrition.
ScottishPower Annual Report & Accounts/Form 20-F 2001/02 |16
Business Review - Description of Business continued
Approximately 60% of the employees of PacifiCorp and its mining affiliates are
covered by union contracts, principally with the International Brotherhood of
Electrical Workers, the Utility Workers Union of America, the International
Brotherhood of Boilermakers and the United Mine Workers of America. In the
company's judgement, employee relations in the US businesses are satisfactory.
UK businesses
ScottishPower and its continuing UK subsidiaries had 7,666 employees, as at 31
March 2002, of these, 4,582 were employed in the UK Division and 3,084 in the
Infrastructure Division. Approximately 60% of employees in the UK are union
members, and over 80% are covered by collective bargaining arrangements. There
are a number of different collective agreements in place throughout the group,
reflecting differing market conditions in which the group's businesses operate.
Although there was a brief industrial dispute (now resolved) within the Power
Systems business unit during the period of its restructuring, the company judges
employee relations in the UK businesses to be satisfactory.
Group environmental policy
ScottishPower aims to be a responsible company, balancing its business goal of
creating sustainable value with wide-ranging but differing stakeholder opinions
on which environmental issues are particularly crucial. Nonetheless, climate
change has emerged as a dominant sustainability challenge for all businesses,
and is particularly acute for the energy sector. In the UK, policies to combat
global climate change are paramount, with fiscal and regulatory incentives
deployed with the aim of achieving a UK target of a 20% reduction in carbon
dioxide ("CO\\2\\") emissions by 2010. The US remains concerned about global
climate change and has proposed measures to bring CO\\2\\ emissions under
control. Similarly, both the US and the UK aim to reduce emissions to air from
fossil-fired generation, with tighter controls on air pollution proposed in the
Clear Skies Initiative and driven by continued implementation of the US Clean
Air Act and, in the UK, by regulations such as the European Union ("EU")
Ceilings Directive, the Large Combustion Plants Directive ("LCPD") and the
Directive on Integrated Pollution Prevention and Control. In the US, issues of
biodiversity and conservation are more prominent than in the UK, with the impact
of hydro dams on migratory fish runs being of broad concern to western
stakeholders. ScottishPower has responded to these policy drivers and market
forces by developing an international vision which focuses on investing heavily
in renewables (in particular, wind generation), reducing both the CO\\2\\ output
and clean air impact of its generation plants and working with customers to
implement energy efficiency programmes.
ScottishPower's vision and framework for action involve achieving lower levels
of CO\\2\\/GWh across the generation portfolio to combat global climate change,
backed up by a range of measures to achieve this overarching goal. Additionally,
the company aims to contain the environmental impact of its activities to a
practicable minimum and to work with customers and other stakeholders to promote
the efficient use of energy and of essential resources. Demanding aspirational
targets have been set in both the US and the UK to drive the achievement of this
vision and a range of specific initiatives and investments with measurable
outcomes, aimed at improving group environmental performance, has been
implemented. All ScottishPower businesses are required to implement an
environmental management system equivalent to ISO 14001, in order to develop
management controls appropriate to the level of risk faced by any particular
business area. Some of those systems are certified to the international standard
ISO 14001 or, in Europe, registered as compliant with the EU's Eco-Management
and Audit Scheme.
The Safety and Environmental Management Rating Agency ("SERM") operates an
industry benchmarking scheme which uses a mathematical model to assess the cost
of potential incidents and a company's measures for risk reduction. The results
of this exercise are presented in a similar format to a credit rating.
ScottishPower's SERM rating is AA-, where AAA+ is the highest possible and C- is
the lowest. ScottishPower has a robust process of environmental risk assessment
operating comprehensively across the business and subject to internal review and
external scrutiny. The most recent external review was conducted by the
respected consultancy firm, OXERA, and concluded that the company had an
excellent knowledge of environmental risk and managed such risks with a high
level of care and prudence.
Research and development
ScottishPower supports research into development of the generation,
transmission, distribution and supply of electricity. It also continues to
contribute, on an industry-wide basis, towards the cost of research into
electricity utilisation and distribution developments. In financial years
2001/02, 2000/01 and 1999/2000, expenditure on research and development in the
group businesses was (Pounds)3.1 million, (Pounds)4.2 million and (Pounds)5.5
million, respectively.
Charitable donations
During 2001/02, donations made for charitable purposes by ScottishPower
companies totalled (Pounds)3.5 million. In addition, some (Pounds)6.0 million of
community support activity comprising community investment and commercial
initiatives given in cash, through staff time and in-kind donations was
undertaken by the company's US and UK operations.
Description of the company's property
US business
The US properties consist of generating stations, electricity transmission and
distribution facilities, coal mines and a number of non-operational office and
service centre facilities. Substantially all of PacifiCorp's electricity plants
are subject to the lien of PacifiCorp's Mortgage and Deed of Trust.
PacifiCorp owns or has an interest in 53 hydro-electricity plants having an
aggregate nameplate rating of 1,068 MW and plant net capability of 1,119 MW. It
also owns or has interests in 17 thermal-electricity generating plants with an
aggregate nameplate rating of 7,169 MW and plant net capability of 6,663 MW.
PacifiCorp also jointly owns one wind power generating plant with an aggregate
nameplate rating and plant net capability of 33 MW. Table 1 (page 27) sets out
key aspects of PacifiCorp's existing generating facilities. These generating
ScottishPower Annual Report & Accounts/Form 20-F 2001/02 |17
facilities are interconnected through PacifiCorp's own transmission lines or by
contract through the lines of others. Substantially all generating facilities
and reservoirs located within the western states region are managed on a
coordinated basis to obtain maximum load carrying capability and efficiency.
Portions of PacifiCorp's transmission and distribution systems are located, by
franchise or permit, upon public lands, roads and streets and, by easement or
licence, upon the lands of other third parties.
PacifiCorp's coal reserves are described in Table 2 (page 28). Most are held
pursuant to leases from the federal government through the Bureau of Land
Management and from certain states and private parties. The leases generally
have multi-year terms that may be renewed or extended and require payment of
rentals and royalties. In addition, federal and state regulations require that
comprehensive environmental protection and reclamation standards be met during
the course of mining operations and upon completion of mining activities.
PPM owns the entire output from the 263 MW Stateline windfarm and has access to
237 MW from the Klamath co-generation plant.
UK business
The UK properties consist of generating stations, transmission and distribution
facilities and certain non-operational properties in which the company holds
freehold or leasehold interests.
ScottishPower owns seven power stations in Scotland, two (at Methil and
Inverkip) are non-operational, and two in England. It also owns three windfarms
in Northern Ireland, four in Scotland, and one in the Republic of Ireland. In
addition, the company has joint venture interests in one power station in
England and three windfarms, two of which are in England and one in Wales. All
generation plant is owned by the group, with the exception of the Methil power
station, which is held on a ground lease that expires in 2012 and the windfarms
which are generally held on ground leases of at least 25 years' duration. See
Table 7 (page 29) for further details of operational generation assets.
As at 31 March 2002, the UK transmission facilities included approximately 3,900
circuit km of overhead lines and 250 circuit km of underground cable operated at
400 kV, 275 kV and 132 kV. In addition, the distribution facilities included
approximately 24,500 circuit km of overhead lines and 41,000 circuit km of
underground cable at voltages operating from 33 kV to 0.23 kV in Scotland and
approximately 21,500 km of overhead lines and 24,000 km of underground cable at
voltages operating from 132 kV to 0.23 kV in England & Wales. The group holds
either permanent rights or wayleaves which entitle it to run these lines and
cables through private land. See Table 8 (page 29) for further details.
ScottishPower Annual Report & Accounts/Form 20-F 2001/02 |18
Business Review - Description of Legislative and Regulatory Background
As a public limited company ("plc"), Scottish Power plc is subject to the UK
Companies Acts and is also registered as a holding company under the US federal
Public Utility Holding Company Act of 1935, as amended ("1935 Act") which is
administered by the US federal Securities and Exchange Commission ("SEC").
Hence, Scottish Power plc, PacifiCorp and other subsidiaries are subject to
regulation unless specific subsidiaries or transactions are otherwise exempt by
SEC rules or orders. Scottish Power UK plc and its subsidiaries are exempt
because Scottish Power UK plc is an exempt foreign utility as defined in Section
33 of the 1935 Act. Whereas US state regulatory commissions generally have
jurisdiction over mergers, acquisitions and the sale of utility assets, the UK
government, as a way to maintain control over ScottishPower and certain of its
subsidiaries, required the issuance of a "Special Share". The Special Share only
affects the corporate control transactions at the overall group holding company
level and has no effect on PacifiCorp.
ScottishPower's UK operations are subject to such EU Directives as the UK
Government brings into effect, specifically the EU (energy) Liberalisation
Directive and EU prohibitions on anti-competitive agreements and the abuse of a
dominant position (implemented through the Competition Act 1998 ("Competition
Act"), which came into effect from 1 March 2000). They are also subject to the
provisions of the Utilities Act 2000 ("Utilities Act"). The Utilities Act
introduced a legal framework for energy company licences based on standard,
UK-wide conditions and, taken together with requirements of the DTI and licence
changes introduced by the Regulators, has obliged the group to restructure its
UK operations into a series of separate limited companies, each a wholly-owned
subsidiary of Scottish Power UK plc. This process was implemented in line with a
DTI timetable and completed by March 2002.
A summary of the more specific legislative and regulatory background to the
operations of the group's businesses is set out below.
US business regulation
PacifiCorp is subject to the jurisdiction of the public utility regulatory
commissions of each of the states in which it conducts retail electricity
operations as to prices, services, accounting, issuance of securities and other
matters. Commissioners are appointed by the individual state's governor for
varying terms. PacifiCorp is a "licensee" and a "public utility" as those terms
are used in the Federal Power Act ("FPA") and is, therefore, subject to
regulation by the Federal Energy Regulatory Commission ("FERC") as to accounting
policies and practices, certain prices and other matters.
Proposed restructuring
PacifiCorp has initiated a collaborative process with the six states it serves
to investigate the challenges faced by the Company as a multi-state utility.
Through this Multi-State Process ("MSP"), the participants are working to
clarify roles and responsibilities including cost allocations for future
generation resources, provide states with the ability to independently implement
state energy policy objectives, and achieve permanent consensus on each state's
responsibility for the costs and entitlement to the benefits of PacifiCorp's
existing assets. MSP was initiated to develop and review possible solutions,
including PacifiCorp's Structural Realignment Proposal ("SRP"). SRP was filed in
December 2000 and would realign PacifiCorp to create six state electricity
companies, a generation company and a service company. Individual state
proceedings and schedules for SRP will be `on-hold' so long as reasonable
progress is made through the MSP.
Regional Transmission Organization ("RTO")
PacifiCorp is one of 10 parties involved in an effort to form an RTO, named RTO
West, in support of FERC Order 2000. The 10 members of RTO West will be Avista
Corporation, British Columbia Hydro Power Authority, Bonneville Power
Administration, Idaho Power Company, Northwestern Energy L.L.C (formerly Montana
Power Company), Nevada Power Company, PacifiCorp, Portland General Electric
Company, Puget Sound Energy, Inc. and Sierra Pacific Power Company. Creation of
RTO West is subject to regulatory approvals from FERC and the states served by
these entities. RTO West plans to operate all transmission facilities needed for
bulk power transfers and control the majority of the 60,000 miles of
transmission line owned by the parties. On 29 March 2002, the members filed a
request with the FERC for a declaratory judgement that their proposals satisfy
the characteristics and functions of FERC Order 2000; a ruling is expected by
August 2002.
Relicensing of hydro-electric projects
PacifiCorp's hydro-electric portfolio consists of 53 plants with a total
capacity of approximately 1,100 MW. Of the installed capacity, 97% is regulated
by the FERC through 20 individual licences. These projects account for about 14%
of PacifiCorp's total generating capacity and provide operational benefits such
as peaking capacity, generation, spinning reserves and voltage control. Nearly
all of PacifiCorp's hydro-electric projects are in some stage of relicensing
under the FPA. The relicensing process is a public regulatory process that
involves controversial resource issues. In the new licences, the FERC is
expected to impose conditions designed to address the impact of the projects on
fish and other environmental concerns. In addition, under the FPA and other
laws, the state and federal agencies and Native American Tribal Councils have
mandatory conditioning authorities that give them significant influence and
control in the relicensing process. It is difficult to determine the economic
impact of these mandates but capital expenditure and operating costs are
expected to increase in future periods, while power losses may result due to
environmental and fish concerns. As a result of these issues, PacifiCorp has
analysed the costs and benefits of relicensing the Condit dam and has agreed to
remove it, subject to FERC approval.
Recovery of deferred net power costs
PacifiCorp is actively pursuing recovery of net power costs greater than the
power costs used in setting retail rates. At 31 March 2002, net power costs held
in deferred accounts under US GAAP totalled $392 million (including carrying
charges) of which filings for recovery had been made to the relevant state
commissions for $308 million plus carrying charges.
ScottishPower Annual Report & Accounts/Form 20-F 2001/02 |19
Commodity price risk mitigation
PacifiCorp continues to take further steps to manage commodity price volatility
and to reduce its exposure, including adding generating capacity and entering
into transactions which further hedge demand shape and reduce resource and price
risk on hot summer days. "Hydro-electric", physical and temperature-related
hedges are in place to limit commodity volume and price risks and PacifiCorp is
working with regulators and other stakeholders on an Integrated Resource Plan
intended to identify the least cost and lowest risk approach to securing power
over the next 20 to 25 years.
Demand side management
PacifiCorp continues to offer its Energy Exchange programmes in Utah, Oregon,
Wyoming, Washington and Idaho. These programmes are optional, supplemental
services that allow participating customers an opportunity to reduce electricity
usage in exchange for a payment at times and at prices determined by PacifiCorp.
The programmes are designed to help all customers of one MW and greater to
address high-price and volatile wholesale market circumstances when they occur.
Voluntary curtailment programmes for irrigation customers in Utah, Oregon,
Washington and Idaho operated for relevant parts of the 2001 calendar year. On
30 September 2001, PacifiCorp also completed its Customer Challenge Program
under which residential customers in all six states it serves could secure a 20%
credit on monthly bills in June, July, August and September of 2001 by reducing
their monthly kWh usage from the corresponding month one year ago by 20%. In
Utah, Oregon, Wyoming, Washington and Idaho, PacifiCorp residential customers
achieving a 10% reduction compared with the equivalent month in the previous
year qualified for a 10% credit to their monthly bills. Evaluation reports were
filed with the state commissions in December 2001.
BPA Exchange
The 1980 Pacific Northwest Electric Power Planning and Conservation Act provided
for, among other things, the Residential Exchange Program to give the
residential and small farm customers of Northwest investor-owned utilities a
share of the benefits associated with the federal Columbia River Power System.
The Residential Exchange Program expired on 30 September 2001. Replacement
agreements executed on 30 October 2000 and 23 May 2001 between PacifiCorp and
the BPA and effective from 1 October 2001 are expected to provide PacifiCorp's
residential and irrigation customers in Oregon, Washington and Idaho with annual
benefits equalling $115 million in year one and $119 million a year for years
two to five. These benefits pass through to customers and do not affect
PacifiCorp's earnings.
A summary of the outcomes and the most significant further regulatory and
legislative developments in the states concerned is set out below.
Utah
On 12 January 2001, PacifiCorp filed a request with the Utah Public Service
Commission ("UPSC") for an increase in electricity prices for its customers in
Utah. Concurrently, PacifiCorp filed a separate emergency petition for interim
relief in respect of power cost variances associated with the outage caused by
the failure of a 430 MW generation unit at PacifiCorp's Hunter power plant in
Utah. An interim increase was granted in February 2001 and, on 1 May 2002, the
UPSC issued an order approving an agreement regarding the recovery of deferred
net power costs in Utah. The order allows for the consolidation of a number of
individual issues into an overall programme under which PacifiCorp will recover
a total of $147 million of deferred power costs and commit not to file a general
rate case that would take effect prior to 1 January 2004, except in certain
exceptional circumstances.
PacifiCorp's previously approved application for deferred accounting treatment
of unrecovered investment associated with the closed Trail Mountain coal mine
was amended, on 10 July 2001, from $27 million to $46 million, to include
estimated mine closure costs. On 4 April 2002, the UPSC approved deferral of its
share of the $46 million, which is to be amortised over five years from 1 April
2002.
Oregon
New rates, which took effect on 1 July 2001 through an annual adjustment as part
of the alternative form of regulation ("AFOR") process previously authorised in
Oregon, increased annual revenues by approximately $7.6 million and will run
until PacifiCorp recovers all earnings allowed under the AFOR, estimated to be
by June 2002. On 7 September 2001, the Oregon Public Utility Commission ("OPUC")
granted a rate increase of $64.4 million, effective from 10 September 2001,
reflecting the increased costs of operations. Senate Bill 1149, which was
enacted in 1999, provides direct access for industrial and large commercial
customers of both PacifiCorp and Portland General Electric Company and offers to
residential and small commercial customers a portfolio of rate options that
includes new renewable energy resources and market-based pricing. Enactment of
subsequent legislation in 2001 delayed implementation of SB 1149 to 1 March 2002
and required PacifiCorp and Portland General Electric Company to provide all
customers with a cost-of-service rate option for an indefinite period. Beginning
1 July 2003, the OPUC may waive the cost-of-service rate option for classes of
customers if it finds that retail markets are functioning properly. PacifiCorp
is now recovering the approximately $18 million additional costs arising from SB
1149 implementation over a five year period.
The final order in the rate case that concluded in September 2001 required
PacifiCorp to file the results of a new hourly net cost model. The new model was
filed on 31 December 2001 as part of a power cost rate case requesting a $34.3
million annual rate increase and a permanent power cost adjustment mechanism.
All parties filed a stipulation on 29 March 2002 providing for a variety of
permanent and temporary rate increases and decreases resulting from changes in
net power costs, the sale of PacifiCorp's Hermiston service territory and Trail
Mountain mine closure costs. These changes total an overall first-year increase
of $14.2 million. A final order in the power cost rate case is expected to be
issued by June 2002.
Deferred accounting filings encompassing power costs that varied from the levels
in Oregon rates are the subject of continuing hearings, although partial
recovery of the deferred costs is continuing under a 3% ($23 million a year)
rate increase effective
ScottishPower Annual Report & Accounts/Form 20-F 2001/02 |20
Business Review - Description of Legislative and Regulatory Background continued
from 21 February 2001 and now extended to June 2002. In December 2001,
PacifiCorp reached an agreement with OPUC staff under which the recovery of $130
million of deferred net power costs would be allowed. Final orders arising from
the various deferred power cost hearings are expected in May and June 2002.
Wyoming
In April 2001, the Wyoming Public Service Commission ("WPSC") approved deferred
accounting treatment of the State's share of the unrecovered investment
associated with the Trail Mountain coal mine closure. On 9 July 2001, PacifiCorp
received an order from the WPSC approving the all-party stipulation settling all
issues in the December 2000 rate case. The order resulted in increased annual
revenues of $8.9 million, effective from 1 August 2001. A $121 million general
rate case, including the excess net power costs for which recovery was being
sought in earlier proceedings now withdrawn without prejudice, will be filed on
7 May 2002.
Washington
On 9 August 2000, PacifiCorp received an order from the Washington Utilities &
Transportation Commission which authorised PacifiCorp to increase rates by 3% on
1 September 2000, 3% on 1 January 2002 and 1% on 1 January 2003.
PacifiCorp filed on 5 April 2002 for approval to begin deferred accounting for
excess power costs. Deferred account amounts in Washington are estimated at up
to $12 million. Under the proposal, PacifiCorp would track costs beginning 1
June 2002 for one year or until a power cost adjustment mechanism is implemented
in the state. If the deferred accounting proposal is approved, PacifiCorp plans
to propose a recovery mechanism before October 2002.
Idaho
On 7 January 2002, PacifiCorp filed a request with the Idaho Public Utilities
Commission ("IPUC") to recover $38 million of deferred excess power costs
through a temporary 24-month surcharge and to implement a new credit to pass
through the benefits from the two BPA settlement agreements. On 10 April 2002
parties reached agreement on a $25 million stipulation on power costs which
will, if subsequently approved by the IPUC, be recovered through a two-year
surcharge on Utah Power customer bills in Idaho and the elimination of merger
credit obligations.
California
An order for PacifiCorp's 16 March 2001 request for immediate interim rate
relief has been routed for review by the assigned administrative law judge
("ALJ") and should be voted upon by the California Public Utilities Commission
in the near future. This request, if granted in terms of the proposed order,
would provide approximately $4.9 million in annual rate relief and would be
subject to refund pending the outcome of a general rate case.
On 21 December 2001, the company filed a general rate case requesting a $16
million, or 29.4%, annual general rate increase, which incorporates the interim
rate relief request. Both the California staff and PacifiCorp have filed motions
regarding the litigation of the case, however at this time no decision has been
made by the assigned ALJ to move forward with a review.
Regulation of the electricity and gas industries in the UK
The UK electricity and gas industries are regulated under the provisions of the
Electricity Act, the Gas Acts and the Utilities Act. The Electricity and Gas
Acts provided for the privatisation and restructuring of the industries in the
late 1980s and the 1990s, including the introduction of price regulation for
electricity transmission and distribution and gas transportation; and of
competition in electricity generation, gas storage and the supply of both gas
and electricity. The Acts established the licensing of industry participants and
created regulatory bodies for each of the electricity and gas industries. In
2000, the Utilities Act enabled the electricity and gas regulators to be merged
as the Gas and Electricity Markets Authority ("the Authority"), established new
independent consumer councils and provided powers for Government Ministers to
give statutory guidance on social and environmental issues and to set energy
efficiency targets and renewables obligations.
The Utilities Act transferred the functions of the previous electricity and gas
industry regulators to the Authority and provided for the appointment of a
Chairman and other members of the Authority by the Secretary of State for Trade
and Industry ("Secretary of State"). The Chairman of the Authority holds office
for renewable periods of five years and is the Managing Director of the Office
of Gas and Electricity Markets ("Ofgem") which provides administrative support
to the Authority. Under the Utilities Act, the principal objective of the
Secretary of State and the Authority is to protect the interest of customers,
wherever appropriate by promoting effective competition. In carrying out those
functions, they are required to have regard to the need to secure that all
reasonable demands for electricity and gas are met; the need to ensure that
licence holders are able to finance their functions; the interests of
individuals who are disabled or chronically sick, of pensionable age, with low
incomes or residing in rural areas. The Authority exercises, concurrently with
the Director General of Fair Trading, certain functions relating to monopoly
situations under the Fair Trading Act 1973 and to anticompetitive conduct under
the Competition Act 1980 and the Competition Act 1998. The Authority also
manages UK compliance with the European Community Liberalisation Directive,
which is concerned to introduce competition in generation and supply and
non-discriminatory access to gas transportation and electricity transmission and
distribution across the EU.
The licensing regime
The Authority is responsible for granting new licences or licence extensions for
each of the following separate activities:
Electricity generation - the production of electricity at power stations,
hydro-electric plants, windfarms and some industrial plants. Through its
wholly-owned subsidiary, Scottish Power Generation Limited, the group is
licensed to operate some 5,300 MW of UK generating capacity, see Table 7 (page
29) and, by contracting in the wholesale market, has access to capacity operated
by other licensed generators.
Electricity transmission - the bulk transfer of electricity across a high
voltage network of overhead lines, underground cables and
ScottishPower Annual Report & Accounts/Form 20-F 2001/02 |21
associated equipment typically operating at or above 132 kV. Through its wholly-
owned subsidiary, SP Transmission Limited, the group owns and is licensed to
operate the transmission system in central and southern Scotland.
ScottishPower's transmission system is connected to that of Scottish & Southern
Energy in the north of Scotland and is linked to the National Grid in England &
Wales and to the Northern Ireland transmission system by interconnectors which
enable the export and import of electricity within the UK. The Authority is
currently conducting a review of transmission arrangements (BETTA) which
envisages a Great Britain-wide wholesale market for electricity and revised
arrangements in respect of the interconnector between England and Scotland. It
is anticipated that new arrangements will require primary legislation and
development work is underway aimed at implementation in 2004.
Electricity distribution - the transfer of electricity from the high voltage
transmission system and its delivery to customers, across a network of overhead
lines and underground cables operating at voltages ranging from 33 kV to 0.23
kV. The Utilities Act required separate licensing of the 14 regional
distribution businesses introduced under electricity privatisation. Each Public
Electricity Distributor ("PED") licensee is required, among other duties, to
develop and maintain an efficient, coordinated and economical system of
electricity distribution and to offer terms for connection to, and use of, its
distribution system on a non-discriminatory basis, in order to ensure
competition in the supply and generation of electricity. Through its
wholly-owned subsidiaries, SP Distribution Limited and SP Manweb plc, the group
is licensed to distribute electricity within its two distribution services areas
for all suppliers whose customers are within the areas. Charges for distribution
are made to the various suppliers as appropriate. The Authority has granted a
derogation, which will lapse only in certain limited circumstances, allowing the
distribution businesses in the ScottishPower and Manweb PED distribution
services areas to be managed and operated jointly.
Gas transportation and storage - the onshore transportation system, most of
which is owned and operated by Transco, the transportation arm of Lattice plc,
and the rest by other gas transporters, conveys gas from the beach terminals to
consumers and is interconnected with the gas transportation systems of
continental Europe, Northern Ireland and the Republic of Ireland. Storage
capacities are largely used to balance supply and demand over time. Major
facilities are used to balance seasonal variations in demand while diurnal
storage capacities provide flexibility in meeting changing gas demand on a daily
basis. Competition in storage has been introduced progressively since 1998
through the auction of major storage capacity owned by Transco and the provision
of new capacity by independent operators, including ScottishPower. Through its
wholly-owned subsidiary, SP Gas Limited, the group is licensed as a gas
transporter.
Gas shipping - gas shippers contract with gas transporters to have gas
transported between the beach terminal and the point of supply. Gas shippers can
also access storage facilities. The group is licensed as a gas shipper.
Supply of gas and electricity - the bulk purchase of gas and electricity by
suppliers and its sale to customers, with the associated customer service
activities, including customer registration, meter reading, sales and marketing,
billing and revenue collection. Large industrial and commercial customers have
been able to choose their energy suppliers for a number of years and the
residential market was opened to competition progressively, commencing in April
1996, with residual controls on residential electricity prices ending in March
2002. Any electricity supplier wishing to supply electricity to domestic
customers must obtain authorisation from the Authority and be subject to
additional domestic supply obligations in its licence, including having its
codes of practice (statements of intent about how the supplier will interact
with customers) approved by the Authority. Broadly comparable arrangements allow
British Gas Trading to supply mains gas to any connected customer in competition
with licensed gas suppliers. Customers may continue to take supplies from the
pre-privatisation monopoly supplier for the area or may choose an alternative
licensed supplier. Once customers have changed a gas or electricity supplier,
they are able to change supplier again subject to the contractual terms offered
by licensed suppliers and approved by the Authority. Through its wholly-owned
subsidiary, ScottishPower Energy Retail Limited, the group is licensed as a gas
supplier and an electricity supplier.
Modification of licences - The Authority is responsible for monitoring
compliance with the conditions of licences and, where necessary, enforcing them
through procedures laid down in the Electricity and Gas Acts. Under these Acts,
as amended by the Utilities Act, licences consist of standard licence
conditions, which apply to all classes of licences, and special conditions
particular to that licence. The Authority may modify standard licence conditions
collectively through making proposals to all relevant licence holders. If some
licence holders object, the modification may be carried out only if the number
of objectors is below a specified minority. The Authority may modify a special
licence condition with the agreement of the licence holder after due notice,
public consultation, and consideration of any representations or objections. In
the absence of agreement for a special licence condition or if objections are
above the specified minority threshold for a standard licence condition, the
only means by which the Authority can secure a modification is following a
modification reference to the Competition Commission and in the circumstances
set out below. A modification reference requires the Competition Commission to
investigate (having regard to the matters in relation to which duties are
imposed on the Secretary of State and the Authority) and report on whether
matters specified in the reference in pursuance of a licence operate, or may be
expected to operate, against the public interest; and, if so, whether the
adverse public interest effect of these factors could be remedied or prevented
by modification of the conditions of the licence. If the Competition Commission
so concludes, the Authority must then make such modifications to the licence as
appear to it requisite for the purpose of remedying or preventing the adverse
effects specified in the report, after giving due notice and consideration to
any representations and
ScottishPower Annual Report & Accounts/Form 20-F 2001/02 |22
Business Review - Description of Legislative and Regulatory Background continued
objections. The Secretary of State has the power to veto any modification.
Modifications to licence conditions may also be made in consequence of a
monopoly or merger reference under the Fair Trading Act 1973 or a reference
under the Competition Act. ScottishPower's acquisition of Manweb in 1995 and of
Southern Water in 1996 and its merger with PacifiCorp in 1999 all involved
ScottishPower giving undertakings to the Secretary of State to agree to
modifications to the licences under which the group operates in the UK (and to
Southern Water Services' Water Appointment). Broadly, these modifications were
designed to ring-fence various UK regulated businesses, to require that the
group had sufficient management and financial resources to fulfil its UK
obligations and to ensure that UK regulators would continue to have access to
the information needed to carry out their duties.
Term and revocation of licences - Licences under the Electricity Act, as
modified by the Utilities Act, may be terminated by not less than 25 years'
notice given by the Secretary of State and may be revoked in certain
circumstances specified in the licence. These include the insolvency of the
licensee, the licensee's failure to comply with an enforcement order made by the
Authority and the licensee's failure to carry on the activities authorised by
the licence.
Price controls
The primary objective of the regulation of the UK gas and electricity industry
is the promotion of competition, while ensuring that demand can be met and
companies are able to finance their regulated activities. However, it is
recognised that the development of competitive markets is not appropriate in
some areas: the transmission and distribution of electricity and the operation
of the gas transportation system. In these areas, regulatory controls are deemed
necessary to protect customers in monopoly markets (by determining
inflation-limited price caps) and to encourage efficiency. The group's UK wires
businesses are subject to price controls (or revenue controls in the case of the
transmission business) which restrict the average amount, or total amount,
charged for a bundle of services. The price caps are expressed in terms of an
"RPI - X" constraint on charges, where "RPI" represents the annual percentage
change in the UK's retail price index, and X may be any number determined by the
Authority. The X factor is used to reflect expected efficiency gains and
investment requirements. For example, where RPI is running at 3% and X is 2%, a
company would be able to increase the average charge for a bundle of services by
1% per annum. The Authority from time to time reviews the price cap formulae.
Through participation in, and the submission of evidence to, these price control
reviews and, where necessary, through the Competition Commission modification
process described above, companies have the opportunity to comment on and seek
to influence the final outcome of any price control review.
Transmission price control - The revised transmission price control for
ScottishPower, which took effect for the five years from 1 April 2000, is
subject to the BETTA review, which envisages a Great Britain-wide wholesale
market for electricity and revised arrangements in respect of the interconnector
between Scotland and England. This is likely to involve the inclusion of the
present interconnector circuits into the relevant price controlled transmission
asset bases and the application of harmonised transmission access principles
across Great Britain. It is anticipated that new arrangements will require
primary legislation and development work is underway aimed at implementation in
2004.
Distribution price control - The maximum distribution revenue is calculated from
a formula that is based on customer numbers as well as units distributed.
Distribution price controls for the ScottishPower and Manweb areas, which took
effect for the five years from 1 April 2000, have been subject to a review by
the Authority aimed at ensuring that revenues and outputs of the business are
more closely matched and meet customers' expectations. This has involved an
examination of the appropriate information and incentives and has led to a
refinement of the price controls to place less emphasis on periodic reviews and
more emphasis on continuous performance. Following completion of the review, in
April 2002, companies' future revenues can be adjusted by up to 2% to reflect
better or worse than target performance.
Environmental regulation
Throughout its operations, ScottishPower aims to meet, or better, relevant
legislative and regulatory environmental requirements and codes of practice.
ScottishPower will publish its 2002 Environmental Sustainability Report in July
2002. Copies will be available on request from the Company Secretary.
US environmental regulation
Federal, state and local authorities regulate many of PacifiCorp's activities
pursuant to laws designed to protect, restore and enhance the quality of the
environment. These laws have increased the cost of providing electricity
service. PacifiCorp is unable to predict what material impact, if any, changes
in environmental laws and regulations may have on the group's consolidated
financial position, results of operations, cash flows, liquidity and capital
expenditure requirements.
Air quality
PacifiCorp's fossil-fuel electricity generating plants are subject to air
quality regulation under federal, state and local requirements. Emission
controls and trading, low sulphur coal, plant operating practices and continuous
emissions monitoring are all used to enable coal-burning plants to comply with
emission limits, opacity, visibility and other air quality requirements. The
United States Environmental Protection Agency ("EPA") has implemented
regulations addressing regional haze. Carbon dioxide ("CO\\2\\") emissions are
the subject of growing worldwide discussion and action in the context of global
warming but such emissions are not currently regulated. The Clear Skies
Initiative proposes indicative reductions in relative CO\\2\\ levels and
reductions in sulphur dioxide ("SO\\2\\"), oxides of nitrogen ("NO\\X\\") and
mercury emissions, which will be taken into account in the forward development
of the PacifiCorp emissions-scrubbing programme. In 1999, the EPA commenced
enforcement actions under the New Source Review ("NSR") against some eastern and
mid-western utilities. Fact finding with respect to NSR is proceeding against
western utilities, including PacifiCorp. NSR cases could potentially require
retro-fitting of SO\\2\\ and NO\\X\\ control equipment on some
ScottishPower Annual Report & Accounts/Form 20-F 2001/02 |23
PacifiCorp coal-fired plants. PacifiCorp is co-operating with the EPA and is
actively considering the implications of the Clear Skies Initiative.
Electric and Magnetic Fields ("EMFs")
A number of studies continue to examine the possibility of adverse health
effects from EMFs, without conclusive results. Certain states and cities have
enacted regulations to limit the strength of magnetic fields at the edge of
transmission line rights-of-way. Other than in California, none of the state
agencies with jurisdiction over PacifiCorp's operations has adopted formal rules
or programmes with respect to magnetic fields or magnetic field considerations
in the siting of electricity facilities. The CPUC has issued an interim order
requiring power providers to implement no-cost or low-cost mitigation steps in
the design of new facilities. It is uncertain whether PacifiCorp's operations
may be adversely affected in other ways as a result of EMF concerns.
Endangered species
Presence of threatened and endangered species ("T&E species") or protection of
their habitat can make it difficult and more costly to perform some of the core
activities of PacifiCorp. These include the siting, construction, maintenance
and operation of new and existing transmission and distribution facilities and
generating plants. In addition, T&E species issues and compliance with the
Endangered Species Act ("ESA") impact the relicensing of existing hydro-electric
generating projects, resulting in costly mitigation. Mitigation costs generally
raise the price PacifiCorp must pay to purchase wholesale power from
hydro-electric facilities owned by others and increases the costs of operating
PacifiCorp's own hydro-electric resources. Compliance with the ESA could also
result in further restrictions on land uses, including timber harvesting, and
adversely affect electricity sales to PacifiCorp's customers in the wood
products industry.
Environmental clean-ups
Under the Federal Comprehensive Environmental Response, Compensation and
Liability Act and similar state statutes, entities that accidentally or
intentionally disposed of, or arranged for the disposal of, hazardous substances
may be liable for clean-up of the contaminated property. In addition, the
current or former owners or operators of affected sites also may be liable.
PacifiCorp has been identified as a potentially responsible party in connection
with a number of clean-up sites because of current or past ownership or
operation of the property or because PacifiCorp sent hazardous waste or other
hazardous substances to the property in the past. PacifiCorp has completed
several clean-up actions and is actively participating in investigations and
remedial actions at other sites. The costs associated with those actions are not
expected to be material to the group's consolidated financial position, results
of operations, cash flows, liquidity or capital expenditure requirements.
Mining
All of PacifiCorp's mining operations are subject to reclamation and closure
requirements. Compliance with these requirements could result in higher
expenditures for both capital improvements and operating costs.
Water quality
The Federal Clean Water Act and individual state clean water regulations require
a permit for the discharge of wastewater, including storm water run off from the
power plants and coal storage areas, into surface waters. Also, permits may be
required in some cases for discharges into ground waters. PacifiCorp believes
that it currently has all required permits and management systems in place to
assure compliance with permit requirements, except that additional permits are
required in connection with the relicensing of hydro-electric facilities (see
page 18).
UK environmental regulation
The group's UK businesses are subject to numerous regulatory requirements with
respect to the protection of the environment, including environmental laws which
regulate the construction, operation and decommissioning of power stations,
pursuant to legislation implementing environmental directives adopted by the EU
and protocols agreed under the auspices of international bodies such as the
United Nations Economic Commission for Europe ("UNECE"). The group believes that
it has taken and continues to take measures to comply with applicable laws and
regulations for the protection of the environment. Applicable regulations and
requirements pertaining to the environment change frequently, however, with the
result that continued compliance may require material investments or that the
group's costs and results of operation are less favourable than anticipated.
Electricity generation, transmission, distribution and supply
The Electricity Act obligates the Secretary of State to take into account the
effect of electricity generation, transmission and supply activities upon the
physical environment in approving applications for the construction of
generating facilities and the location of overhead power lines. The Electricity
Act requires the group to take into account the conservation of natural features
of beauty and other items of particular interest and, in terms of the
Environmental Impact Assessment Regulations, to carry out an environmental
assessment when it intends to construct significant overhead transmission
systems or power stations of greater capacity than 50 MW. The group also
prepares formal statements on the "Preservation of Amenity and Fisheries" in
line with the requirements of the Electricity Act.
The Utilities Act provided for environmental guidance to be given by the
Secretary of State to the energy regulator, Ofgem, and for regulations to be
drawn up which require licensed electricity suppliers to secure a certain
percentage of their supplies from renewable energy sources, compliance being
demonstrated by tradable 'Renewable Obligation Certificates'. The current
objective is that 10% of UK energy should come from renewable sources by 2010
and it is anticipated that, in the forthcoming government review of energy
policy, this obligation could rise to 20% of supplies in the UK by 2020.
ScottishPower continues to develop its windfarm business and expects to meet the
company target of 10% generation from renewables by 2010. The Utilities Act also
provided for energy efficiency targets to be set for licensed suppliers to be
implemented by an "Energy Efficiency Commitment" and the emphasis on energy
saving in the recent Cabinet Office report suggests that this may be further
reinforced in the Energy White Paper scheduled for late 2002.
ScottishPower Annual Report & Accounts/Form 20-F 2001/02 |24
Business Review - Description of Legislative and Regulatory Background continued
The Environmental Protection Act of 1990 ("EPA 1990") requires that potentially
polluting activities such as the operation of combustion processes (which
includes power plant) obtain prior authorisation. The Act also provides for the
licensing of waste management and imposes certain obligations and duties on
companies which produce, handle and dispose of waste. Waste generated as a
result of the group's electricity activities is managed to ensure compliance
with legislation and waste minimisation is undertaken where possible.
Possible adverse health effects of EMFs from various sources, including
transmission and distribution lines, have been the subject of a number of
studies and increasing public discussion. The UK Childhood Cancer Study - the
world's largest study ever of its kind - found no evidence that EMFs do cause
cancer. Evidence from other research, such as laboratory studies, also argues
against any link but, because of the conclusions of other smaller studies from
around the world, scientists cannot totally dismiss the possibility of a small
risk to the very few children who receive the highest exposure to magnetic
fields. However, the March 2001 National Radiological Protection Board review
concluded that the epidemiological evidence does not support the conclusion that
exposure to magnetic fields causes leukaemia.
Generation activities
The principal emissions from fossil-fuelled electricity generation are SO\\2\\,
NO\\x\\, CO\\2\\ and particulate matter, such as dust, with the main waste being
ash, namely pulverised fuel ash and furnace bottom ash. The primary focus of
current environmental legislation is to reduce emissions of S\\O2\\, NO\\X\\ and
particulates, the first two of which contribute to acid rain. A number of other
power station emissions and discharges are subject to environmental regulation.
The EU has, under the terms of the Kyoto Protocol, signed up to the United
Nations Framework Convention on Climate Change, under which Member States are
committed to reducing "greenhouse gases" by 8% below 1990 emission levels
between the years 2008 and 2012. The UK Government has announced its goal of a
20% reduction in CO\\2\\ emissions by 2010, largely driven by its "Climate
Change Programme" which sets in place a range of policy instruments aimed at
delivery of the 20% reduction target. These include targets for renewable
energy, targets for combined heat and power, a Climate Change Levy charged on
industrial and commercial energy usage and residential energy efficiency
measures. Obligations put in place under the Utilities Act play an important
part in the Programme.
EPA 1990 is the primary UK statute governing the environmental regulation of
power stations. In April 1991, it introduced a system of Integrated Pollution
Control ("IPC") for large-scale industrial processes, including power stations,
now enforced with respect to emissions to the atmosphere in England & Wales by
the Environment Agency ("EA") and in Scotland by the Scottish Environment
Protection Agency ("SEPA"). Each of ScottishPower's power stations is required
to have its own IPC authorisation, issued by the EA or SEPA, regulating
emissions of certain pollutants, seeking to minimise pollution of the
environment and containing an improvement programme. Each IPC authorisation
required that a power station uses the Best Available Techniques Not Entailing
Excessive Cost ("BATNEEC") to prevent the emissions described above or, to the
extent this is not practicable, to minimise and render harmless any such
emissions. ScottishPower's IPC authorisations do not have an expiry date, but
the EA or SEPA is required to review the conditions contained within them at
least once every four years and may impose new conditions to prevent or reduce
emissions of pollutants, subject to the application of BATNEEC.
The EU has agreed a Directive on Integrated Pollution Prevention and Control,
which introduces a system of licensing for industrial processes such as power
stations. This Directive is being implemented via the Pollution Prevention and
Control Regulations ("PPC Regulations") which is bringing modifications to the
IPC regime into effect, on a staged basis. The EU Directive will eventually
require that all emission and pollution control measures are placed onto a "Best
Available Techniques" basis to control impact on the environment.
The EU has adopted a framework directive on ambient air quality assessment and
management, which is being implemented in the UK by means of the National Air
Quality Strategy published in 1997 and reviewed in 2000. Under the auspices of
UNECE, protocols regarding reductions in the emissions of SO\\2\\ and NO\\x\\
have been agreed. These are currently implemented in the EU by means of the
LCPD. The EU has agreed a "Ceilings Directive" which will implement the SO\\2\\
and NO\\x\\ targets agreed in the UNECE Gothenburg Protocol. The LCPD has been
reviewed and will bring into place a new control framework. The government
intends to consult on UK implementation during the summer of 2002. Controls on
emissions from existing and new plants will be introduced via the new
provisions, the Air Framework Directive and, in the future, the PPC Regulations.
The group has identified options that, given the appropriate commercial
conditions, would enable it to continue to meet the environmental improvements
required by potential future limits arising from this review, without materially
constraining operational and commercial flexibility. In particular, gas-reburn
technology, as used at Longannet, offers greater potential to reduce emissions
than other technology in use elsewhere in the UK.
Contaminated sites
While the nature of developments in environmental regulation and control cannot
be predicted, the group anticipates that the direction of future changes will be
towards tightening controls. In view of the age and history of many sites owned
by the group, the group may incur liability in respect of sites which are found
to be contaminated, together with increased costs of managing or cleaning up
such sites. Site values could be affected and potential liability and clean-up
costs may make disposal of potentially contaminated sites more difficult. The
Contaminated Land Regulations, which implement provisions of the Environment Act
1995 ("EA 1995"), require local authorities to identify sites where significant
harm is being caused and to take appropriate steps. In order for harm to be
demonstrated, it must be shown that a source of pollution, a receptor and a
ScottishPower Annual Report & Accounts/Form 20-F 2001/02 |25
pathway are present. Harm may be eliminated by clean-up or by breaking the
source to receptor pathway. Clean-up is only required to "fit for subsequent
use" standards, so that environmental compliance is consistent with the intended
use of the site.
Other proposals which may impose strict liability for environmental damage are
also under consideration by the EU and a draft directive may be brought forward.
ScottishPower is not currently aware of any liability which it may have under
EA1995 or proposed EU directives which will have a materially adverse impact on
its operations.
Employment regulation
Equal opportunity
US businesses
Both PacifiCorp and PPM have equal employment and harassment policies which
reflect their belief that they can best achieve their objectives by effectively
utilising the skills and abilities of a diverse workforce. The US has extensive
anti-discrimination legislation enacted at federal, state and local levels which
prohibits discrimination in employment for a variety of reasons including age,
race, colour, sex, religion, creed, sexual orientation, national origin,
physical or mental disability. As part of its equal employment opportunity
policy, PacifiCorp has implemented and maintains a programme of "affirmative
action" in order to effectively employ minorities and women in the workforce and
to encourage workforce diversity. This programme also covers Vietnam veterans
and disabled persons/veterans. The programme also provides an effective means of
complying with the periodic compliance reviews conducted by the United States
Department of Labor. PacifiCorp has long recognised its responsibility to assist
community action services. An integral part of the company's Affirmative Action
Program is participation in organisations which are active in workforce and
economic development within communities served by PacifiCorp.
UK businesses
It is ScottishPower's policy to promote equality of opportunity in recruitment,
employment continuity, training and career development. To support the Policy
Statement on Equal Opportunities, specific policies have been introduced on
people with disabilities, on sex and race discrimination, and on harassment. In
addition, a number of family friendly policies have been introduced including a
caring break, enhanced maternity leave, paternity leave and leave for adoption
or fertility treatment. ScottishPower is a Gold Card Member of the Employers'
Forum on Disability and also a member of the Employers' Forum on Age, and the
Equal Opportunities Commission Equality Exchange. The company is also in the
process of gaining accreditation for Tommy's Pregnancy Programme and the Two
Tick Disability Symbol. As part of the ongoing development and implementation of
its equal opportunities strategy, the group has designed and implemented an
Equality Framework, which is used to audit and undertake action plans on an
annual basis. Actions arising from these plans are discussed in the Company
Equality Forum.
Health and safety
Corporate Responsibility
ScottishPower constantly strives to work to the highest levels of occupational
safety across its international business and to continuously improve health and
safety performance. The policy framework developed to drive this process in the
UK has been reviewed in relation to US operations, leading to largely harmonised
arrangements which recognise the different regulatory and cultural environments
in which the group operates. A US safety policy has recently been issued by
PacifiCorp's Executive Safety Committee. This is aligned to ScottishPower's
policy but a number of features are designed for compliance with US law.
The group's approach to health and safety governance mirrors the highly
commended structures and processes adopted for the direction and control of
environmental issues. The governance system being developed in the US will be
designed to limit risk under US law but will follow the UK model where this is
feasible. It is anticipated that a corporate governance audit of the UK
programmes will take place in the financial year 2002/03.
In the UK, most business units have now applied the Quality Safety Audit ("QSA")
technique to their operations. This audit system measures the quality of safety
management on a scale from 1 to 5, with 5 being the best. All UK business units
have the target of achieving level 5.
The applicability of this technique in the US is being reviewed and, if
appropriate, it will be introduced there. Formal audit programmes with close
similarities to QSA have been in place for some years in PacifiCorp's generation
and mining businesses.
Further details of the group's approach to and performance in respect of health
and safety matters are contained in the Health & Safety Report for 2001/02 which
will be available on the ScottishPower and PacifiCorp websites from August 2002.
Compliance arrangements
In the US, companies can be fined and prosecuted under federal and state
Occupational Safety and Health Act programmes and by Public Utility Commissions
and the Department of Transportation with significant civil fines and possible
criminal penalties related to serious health and safety accidents. Fines are the
most typical form of punishment for significant non-intentional violations of
regulations and laws. Prosecutions related to health and safety matters are much
more common in the US than the UK. Most prosecutions are performed under the
normal criminal justice system, rather than health and safety laws. These
usually involve serious neglect, near the level of gross negligence or knowing
failure to comply with rules.
In the US, it is mandatory for the mining regulatory authority, MSHA, to inspect
businesses and underground mines at least four times a year and surface mines at
least twice a year. Citations are issued by the agency if any of the extensive
regulations are violated, with fines issued for all violations which, in the
inspector's opinion, are of a more serious nature. Businesses are subsequently
required to correct all violations.
In the UK, there has recently been a
ScottishPower Annual Report & Accounts/Form 20-F 2001/02 |26
Business Review - Description of Legislative and Regulatory Background continued
renewed focus on health and safety with the publication of the landmark
"Revitalising Health and Safety" strategy. It also seems more likely that
directors and boards of companies can be prosecuted under so called 'Corporate
Killing' legislation. In addition, the Health and Safety Executive appears more
interested in taking action under provisions of the existing Health and Safety
Law (S37) for offences which have been committed with the 'consent, connivance
or attributable to neglect' of officers.
Litigation
ScottishPower is not aware of any material pending legal proceedings, other than
ordinary routine litigation incidental to the business of the group, to which
ScottishPower or any of its subsidiaries is a party, or any such proceedings
known to be contemplated by any governmental authority.
ScottishPower Annual Report & Accounts/Form 20-F 2001/02 |27
Summary of Key Operating Statistics
Table 1 - Summary of PacifiCorp generating facilities
------------------------------------------------------------------------------------------------------------------------------------
Nameplate Plant net
Installation rating capability
Location Energy source dates (MW) (MW)
------------------------------------------------------------------------------------------------------------------------------------
Hydro-electric plants
Swift Cougar, WA Lewis River 1958 240.0 263.6
Merwin Ariel, WA Lewis River 1932-1958 135.0 144.0
Yale Amboy, WA Lewis River 1953 134.0 134.0
Five North Umpqua Plants Toketee Falls, OR N. Umpqua River 1949-1956 133.5 137.5
John C. Boyle Keno, OR Klamath River 1958 80.0 84.0
Copco Nos. 1 and 2 Plants Hornbrook, CA Klamath River 1918-1925 47.0 54.5
Clearwater Nos. 1 and 2 Plants Toketee Falls, OR Clearwater River 1953 41.0 41.0
Grace Grace, ID Bear River 1914-1923 33.0 33.0
Prospect No. 2 Prospect, OR Rogue River 1928 32.0 36.0
Cutler Collingston, UT Bear River 1927 30.0 29.1
Oneida Preston, ID Bear River 1915-1920 30.0 28.0
Iron Gate Hornbrook, CA Klamath River 1962 18.0 20.0
Soda Soda Springs, ID Bear River 1924 14.0 14.0
Fish Creek Toketee Falls, OR Fish Creek 1952 11.0 12.0
33 minor hydro-electric plants Various Various 1896-1990 89.3* 89.1*
---------------------------------------------------------- ------------------ ---------------- --------- -------- --------
Subtotal (53 hydro-electric plants) 1,067.8 1,119.3
========================================================== ================== ================ ========= ======== ========
Thermal electric plants
Jim Bridger Rock Springs, WY Coal-Fired 1974-1979 1,541.1* 1,413.4*
Huntington Huntington, UT Coal-Fired 1974-1977 996.0 895.0
Dave Johnston Glenrock, WY Coal-Fired 1959-1972 816.8 762.0
Naughton Kemmerer, WY Coal-Fired 1963-1971 707.2 700.0
Hunter 1 and 2 Castle Dale, UT Coal-Fired 1978-1980 727.9* 662.5*
Hunter 3 Castle Dale, UT Coal-Fired 1983 495.6 460.0
Cholla Unit 4 Joseph City, AZ Coal-Fired 1981 414.0* 380.0*
Wyodak Gillette, WY Coal-Fired 1978 289.7* 268.0*
Carbon Castle Gate, UT Coal-Fired 1954-1957 188.6 175.0
Craig 1 and 2 Craig, CO Coal-Fired 1979-1980 172.1* 165.0*
Colstrip 3 and 4 Colstrip, MT Coal-Fired 1984-1986 155.6* 144.0*
Hayden 1 and 2 Hayden, CO Coal-Fired 1965-1976 81.3* 78.0*
Blundell Milford, UT Geothermal 1984 26.1 23.0
Gadsby Salt Lake City, UT Gas-Fired 1951-1955 251.6 235.0
Little Mountain Ogden, UT Gas-Fired 1971 16.0 14.0
Hermiston Hermiston, OR Gas-Fired 1996 237.0* 236.0*
James River Camas, WA Black Liquor 1996 52.2 52.0
---------------------------------------------------------- ------------------ ---------------- --------- -------- --------
Subtotal (17 thermal electric plants) 7,168.8 6,662.9
========================================================== ================== ================ ========= ======== ========
Other plants
Foote Creek Arlington, WY Wind Turbines 1998 32.6* 32.6*
---------------------------------------------------------- ------------------ ---------------- --------- -------- --------
Subtotal (1 other plant) 32.6 32.6
========================================================== ================== ================ ========= ======== ========
Total hydro, thermal and other generating facilities (71) 8,269.2 7,814.8
========================================================== ================== ================ ========= ======== ========
Notes:
* Jointly owned plants; amount shown represents PacifiCorp's share only.
Hydro-electric project locations are stated by locality and river watershed.
27
ScottishPower Annual Report & Accounts/Form 20-F 2001/02 |28
Summary of Key Operating Statistics continued
Table 2 - PacifiCorp recoverable coal reserves as at 31 March 2002
--------------------------------------------------------------------------------
Recoverable tons
Location Plant served (in millions) Notes
--------------------------------------------------------------------------------
Craig, Colorado Craig 50 (1)
Emery County, Utah Huntington and Hunter 68 (2)
Rock Springs, Wyoming Jim Bridger 100 (3)
====================================================== ========= =======
Notes:
1 These coal reserves are leased and mined by Trapper Mining, Inc., a Delaware
non-stock corporation operated on a cooperative basis, in which PacifiCorp has
an ownership interest of 21.4%.
2 These coal reserves are mined by PacifiCorp subsidiaries.
3 These coal reserves are leased and mined by Bridger Coal Company, a joint
venture between Pacific Minerals, Inc., a subsidiary of PacifiCorp, and a
subsidiary of Idaho Power Company. Pacific Minerals, Inc. has a two-thirds
interest in the joint venture.
Coal reserve estimates are subject to adjustment as a result of the development
of additional data, new mining technology and changes in regulation and economic
factors affecting the use of such reserves.
Table 3 - PacifiCorp Electricity GWh energy sales by customer class
--------------------------------------------------------------------------------
Electricity sales, by class of customer, for the years ended 31 March 2002, 2001
and 2000 were as follows:
2002 % 2001 % 2000 %
-------------------------------------------------------------------------------------------------------------------------
Gigawatt hours sold
- Residential 13,395 19 13,455 18 13,028 16
- Commercial 13,810 19 13,634 18 12,827 16
- Industrial 19,611 27 20,659 27 20,488 25
- Government, Municipal and Other 711 1 705 1 663 1
------------------------------------------------------------------ -------- ---- -------- ----- -------- -----
- Total Retail Sales 47,527 66 48,453 64 47,006 58
- Wholesale Sales and Market Trading 24,438 34 27,502 36 34,327 42
------------------------------------------------------------------ -------- ---- -------- ----- -------- -----
Total GWh Sold 71,965 100 75,955 100 81,333 100
================================================================== ======== ==== ======== ===== ======== =====
Table 4 - PacifiCorp transmission and distribution systems key information
2001/02
------------------------------------------------------------------------------------------------
Pacific Power Utah Power Total
------------------------------------------------------------------------------------------------
Franchise area 76,173 sq miles 58,977 sq miles 135,150 sq miles
System maximum demand 3,808 MW 4,091 MW 7,899 MW
Transmission network (miles)
- Underground - - -
- Overhead 6,827 8,087 14,914
Distribution network (miles)
- Underground 4,863 7,653 12,516
- Overhead 25,876 17,896 43,772
========================================== =============== ================= =================
Table 5 - Total electricity units distributed in Pacific Power service area
(GWh)
Year Residential % Commercial % Industrial % Other % Total
----------------------------------------------------------------------------------------------------------------------------
1997/98 7,885 31 6,770 26 10,689 42 139 1 25,483
1998/99 7,994 32 6,908 27 10,166 40 128 1 25,196
1999/00 7,612 31 6,766 27 10,167 42 122 - 24,667
2000/01 7,768 31 7,041 28 10,164 40 130 1 25,103
2001/02 7,537 31 6,932 29 9,743 40 129 - 24,341
======================================= ===== ====== ====== ======= ====== ==== ==== ========
Table 6 - Total electricity units distributed in Utah Power service area (GWh)
---------------------------------------------------------------------------------------------------------------------------
Year Residential % Commercial % Industrial % Other % Total
---------------------------------------------------------------------------------------------------------------------------
1997/98 4,940 24 5,306 25 10,082 48 556 3 20,884
1998/99 4,998 24 5,392 26 10,056 48 517 2 20,963
1999/00 5,416 24 6,061 27 10,321 46 541 3 22,339
2000/01 5,687 24 6,593 28 10,495 45 575 3 23,350
2001/02 5,858 25 6,878 30 9,868 43 582 2 23,186
--------------------------------------- ----- ------ ------ ------- ------ ---- ---- --------
ScottishPower Annual Report & Accounts/Form 20-F 2001/02 |29
Table 7 - Sources of ScottishPower owned generating capacity and output in the
UK and the Republic of Ireland as at 31 March 2002
--------------------------------------------------------------------------------------------------------------------------------
Number of Maximum
generating sets and/or Net output capacity
installed capacity capacity available
Notes MW MW MW
--------------------------------------------------------------------------------------------------------------------------------
Coal
Longannet 4 x 600 2,304
Cockenzie 4 x 300 1,152
1 3,456 2,880
Gas Turbine
Rye House 1 x 715 715 715
Brighton 2 1 x 414 400 200
Knapton 1 x 42 42 42
Pumped Storage
Cruachan 4 x 100 400 400
Conventional Hydro
Galloway Scheme 109 106 106
Lanark Scheme 17 17 17
Windfarms
Beinn an Tuirc 46 x 0.66 30 30
Barnesmore 25 x 0.6 15 15
Hagshaw Hill 26 x 0.6 16 16
P & L Windfarm 3 103 x 0.3 31 15
Rigged Hill 10 x 0.5 5 5
Corkey 10 x 0.5 5 5
Elliots Hill 10 x 0.5 5 5
Coal Clough 4 24 x 0.4 10 4
Carland Cross 4 15 x 0.4 6 3
Dun Law 26 x 0.66 17 17
Hare Hill 20 x 0.66 13 13
CHP 43 43 43
----------------------------------------------------- --------------------- ------------------ ----------------
Total 5,332 4,531
===================================================== ===================== ================== ================
Notes:
1 Scottish & Southern Energy is entitled to a supply of electricity from part of
the capacity of ScottishPower's coal-fired generating stations at Longannet and
Cockenzie.
2 Brighton power station is owned by South Coast Power Limited, with Scottish
Power Generation Limited and American Electric Power (the US parent company of
SEEBOARD) each having a 50% ownership interest.
3 The P & L Windfarm is owned by CeltPower Limited, with Scottish Power
Generation Limited and Tomen Power (Europe) BV each having a 50% ownership
interest.
4 The windfarms at Coal Clough and Carland Cross are owned by a joint venture
between Scottish Power Generation Limited, Western Power Distribution and
Renewable Energy Systems, with Scottish Power Generation Limited having a 45%
ownership interest.
Table 8 - UK transmission and distribution systems key information 2001/02
--------------------------------------------------------------------------------------------------------------------------------
ScottishPower Manweb Total
--------------------------------------------------------------------------------------------------------------------------------
Franchise area 22,950 km/2/ 12,200 km/2/ 35,150 km/2/
System maximum demand 4,200 MW 3,089 MW 7,289 MW
Transmission network (km)
- Underground 249 - 249
- Overhead 3,915 - 3,915
Distribution network (km)
- Underground 41,137 24,204 65,341
- Overhead 24,460 21,668 46,128
================================================================================== ================== ================
Table 9 - Total electricity units distributed in the ScottishPower service area
(GWh)
--------------------------------------------------------------------------------------------------------------------------------
Year Residential % Business % Total
--------------------------------------------------------------------------------------------------------------------------------
1997/98 8,048 37 13,664 63 21,712
1998/99 8,345 37 14,023 63 22,368
1999/00 8,385 38 13,996 62 22,381
2000/01 8,505 38 14,189 62 22,694
2001/02 8,698 39 13,864 61 22,562
========================================================================== ====== === ======= === =======
Table 10 - Total electricity units distributed in the Manweb service area (GWh)
--------------------------------------------------------------------------------------------------------------------------------
Year Residential % Business % Total
--------------------------------------------------------------------------------------------------------------------------------
1997/98 4,916 26 13,606 74 18,522
1998/99 5,037 29 12,287 71 17,324
1999/00 5,204 30 11,977 70 17,181
2000/01 5,460 32 11,826 68 17,286
2001/02 5,387 32 11,540 68 16,927
========================================================================== ====== === ======= === =======
ScottishPower Annual Report & Accounts/Form 20-F 2001/02 |30
Financial Review
[PHOTO]
All figures below are before the impact of goodwill amortisation and exceptional
items unless otherwise stated.
Overview of the year to March 2002
Group turnover for the year to 31 March 2002 decreased by (Pounds)35 million to
(Pounds)6,314 million. Continuing operations' turnover increased by (Pounds)113
million to (Pounds)5,523 million, with the US Division contributing revenues of
(Pounds)3,154 million, a rise of (Pounds)31 million on the prior year due to an
increase in unregulated revenues in PacifiCorp Power Marketing, Inc. ("PPM"),
rate increases in PacifiCorp and foreign exchange benefits, offset by
significant reductions in wholesale market prices. Turnover in the UK Division
rose by (Pounds)58 million to (Pounds)2,121 million due to higher gas retail and
wholesale revenues and increased output from new generating plant, partially
offset by lower electricity retail sales due to lower volumes and prices. Power
Systems' turnover was (Pounds)248 million, an increase of (Pounds)24 million on
last year due to higher regulatory sales volumes and prices. Turnover for
discontinued operations fell by (Pounds)148 million to (Pounds)791 million due
to our exit from UK Appliance Retailing, which resulted in lower group revenues
year-on-year of (Pounds)185 million, offset in part by year-on-year revenue
growth by Southern Water of (Pounds)7 million and by Thus of (Pounds)30 million.
Cost of sales of (Pounds)4,411 million were (Pounds)3 million higher than
2000/01. Continuing operations' cost of sales increased by (Pounds)83 million to
(Pounds)3,920 million mainly due to gas purchase costs in the UK Division for
Rye House power station, which was acquired in March 2001. US Division cost of
sales were broadly in line with the prior year as lower purchase volumes and
prices in the regulated business were offset by the growth in PPM and foreign
exchange movements. Cost of sales for discontinued operations fell by (Pounds)80
million mainly due to our exit from UK Appliance Retailing early in the year.
Transmission and distribution costs were (Pounds)9 million lower at (Pounds)513
million, reflecting lower net operating costs in Power Systems. Administrative
expenses increased by (Pounds)27 million in the year. Within continuing
operations, increased depreciation charges in both the UK and US and foreign
exchange movements were partly offset by lower discontinued operations' costs,
due to our exit from UK Appliance Retailing. Depreciation for the year for
continuing operations increased by (Pounds)46 million to (Pounds)409 million,
reflecting recent investment in new generation in the US and the acquisition of
Rye House in the UK. Depreciation for the year for discontinued operations
increased from (Pounds)118 million to (Pounds)146 million.
Group operating profit for the year to 31 March 2002 reduced by (Pounds)26
million to (Pounds)944 million, with operating profit from continuing operations
falling by (Pounds)15 million to (Pounds)801 million. The challenging conditions
experienced in the UK energy market and the price premium currently being borne
under the Nuclear Energy Agreement ("NEA") resulted in a fall of (Pounds)44
million in the UK Division's profit. However, this was substantially offset by
the benefits derived from the operating cost saving programme within Power
Systems, where operating profit increased by (Pounds)14 million in the year, and
by the recovery in PacifiCorp's operating profit in the US. The US Division
reported year-on-year profit improvement of (Pounds)16 million after incurring
some $300 million of additional excess net power costs earlier this year as a
result of the unprecedented fall in wholesale price levels in the western US
market. Operating profit for our discontinued operations decreased by (Pounds)11
million to (Pounds)144 million, as a result of a (Pounds)5 million fall in
Southern Water's profit to (Pounds)216 million and an increase in Thus' losses
of (Pounds)6 million to (Pounds)64 million for the period to 19 March 2002, the
date of the demerger.
Exceptional items of (Pounds)1,326 million (before interest and tax) have been
recognised in the year to 31 March 2002. These exceptional items relate to the
disposal of Southern Water and UK reorganisation costs recognised in the fourth
quarter and a charge of (Pounds)120 million associated with our disposal of and
withdrawal from UK Appliance Retailing which was recognised in the first quarter
results. An exceptional charge of (Pounds)121 million was incurred last year in
respect of the costs of implementing the PacifiCorp Transition Plan.
The net interest charge for the year to 31 March 2002, excluding exceptional
interest, increased by (Pounds)46 million to (Pounds)379 million as a result of
the higher debt levels in the UK and US, partly offset by lower interest rates
in the UK. The exceptional interest charge of (Pounds)31 million principally
relates to costs associated with restructuring the debt portfolio, as a
consequence of the sale of Southern Water.
Profit before tax for the full year fell by (Pounds)61 million to (Pounds)567
million. Including the impact of goodwill amortisation and exceptional items the
loss before tax was (Pounds)939 million compared to a profit before tax of
(Pounds)380 million in the prior year. The tax charge for the year was
(Pounds)122 million before taking account of tax relief of (Pounds)39 million
relating to exceptional charges. The corresponding amounts for 2000/01 were
(Pounds)141 million and (Pounds)46 million, respectively. The effective rate of
tax on profits before goodwill amortisation and exceptional items was 21.5%
(2000/01 22.5%).
Net debt increased in the year by (Pounds)923 million to (Pounds)6,208 million
at 31 March 2002. Cash inflows from operating activities of (Pounds)1,248
million funded capital expenditure of (Pounds)1,245 million in the year.
Interest, tax and dividend payments of (Pounds)960 million and the (Pounds)70
million redemption of preferred stock by PacifiCorp were partly offset by net
receipts of (Pounds)103 million from business disposals, and other inflows.
Gearing (net debt/shareholders' funds) increased to 131% from 90% at 31 March
2001. Due to the timing of the
ScottishPower Annual Report & Accounts/Form 20-F 2001/02 |31
Table 11 - Key Group Financial Information
---------------------------------------------------------------------
2001/02 2000/01
---------------------------------------------------------------------
Operating profit ((Pounds)m)* 944.1 970.2
Profit before tax ((Pounds)m)* 567.1 628.0
Earning per share (pence)* 26.12 27.86
Dividends per share (pence)** 27.34 26.04
============================================= ========= =========
* Before goodwill amortisation and exceptional items.
** Cash dividends, excluding `dividend in specie' on demerger of Thus.
completion of the Southern Water disposal, the year-end net debt position does
not reflect the (Pounds)2.05 billion gross proceeds, including debt assumed by
the purchaser, as a result of the sale. The cash consideration, which was
received during April 2002, has been used to reduce group net debt and results
in pro forma gearing at 31 March 2002 of 89%.
Group earnings per share were 26.12 pence compared with 27.86 pence last year,
due to lower UK divisional profit and higher interest charges. Earnings per
share including the impact of goodwill amortisation and exceptional items
resulted in a loss per share of 53.71 pence compared to earnings per share of
16.80 pence last year. Earnings per share increased by 45% to 22.59 pence for
the second half compared to the corresponding period last year.
Dividends for the year included a `dividend in specie' of (Pounds)437 million
arising on the demerger of Thus. The full year cash dividend was up 5% on last
year at 27.34 pence per share, consistent with our stated aim of 5% annual
increase in dividends to March 2003.
Key group financial information is shown in Table 11.
Business Reviews
US Division
Turnover in the US Division was (Pounds)3,154 million, an increase of (Pounds)31
million on last year. Excluding the effect of foreign exchange, residential and
commercial revenues increased by (Pounds)35 million or 6% and (Pounds)26 million
or 5% respectively, mainly as a result of price increases and customer growth
partly offset by lower volumes due to weather and the impact of demand side
management programmes. Industrial revenues were down by (Pounds)18 million as a
result of a 5% decrease in volumes due to lower irrigation usage and the impact
of US economic conditions. A 22% decrease in average short-term firm and spot
market wholesale prices ($107/MWh to $83/MWh) and lower long-term volumes have
significantly impacted wholesale revenues in the year. Partially offsetting this
was an increase in short-term firm and spot volumes, leaving turnover from
wholesale activities down by (Pounds)275 million or 19% on last year. Other
revenue growth mainly came from our non-regulated PPM business where revenues
were up by (Pounds)156 million to (Pounds)173 million and from favourable
foreign exchange movements of (Pounds)91 million.
For the year, the US Division's operating profit increased by (Pounds)16 million
to (Pounds)367 million despite the impact of additional excess power costs of
$300 million incurred in the first six months. Increases in regulatory rates
charged to customers and other revenues of (Pounds)72 million and continued
Transition Plan savings of (Pounds)24 million, were offset by higher
depreciation on regulated assets of (Pounds)25 million, costs of strategic and
risk initiatives of (Pounds)45 million and other movements of (Pounds)10 million
including higher net power costs and foreign exchange movements. Operating
profits for the second half of the year have seen a strong recovery and were
(Pounds)326 million higher than for the first six months. This was as a result
of lower power purchase costs, regulatory rate increases and continued progress
with the Transition Plan, offset in part by planned additional costs on
strategic projects, risk mitigation and depreciation arising from new investment
activities.
The key financial information is shown in Table 12.
UK Division
Turnover for the UK Division grew by (Pounds)58 million to (Pounds)2,121 million
for the year. Turnover was (Pounds)106 million higher due to sales from Rye
House power station. As a result of the decrease in wholesale market prices,
agency turnover fell by (Pounds)7 million despite volume growth from 3,874 GWh
to 4,656 GWh and export sales in England and Wales reduced by (Pounds)16
million, with volumes 22 GWh lower at 4,539 GWh. Sales from exports via the
Northern Ireland Interconnector of 356 GWh improved turnover by (Pounds)8
million in the year. Turnover also increased due to higher wholesale gas sales.
Supply turnover was down on last year by (Pounds)60 million with higher retail
gas sales of (Pounds)48 million and increased turnover from out-of-area customer
gains of (Pounds)54 million, offset by loss of market share and lower prices in
our home areas which reduced turnover by (Pounds)162 million. Overall customer
numbers have been maintained at 3.5 million, and domestic retention rates are
broadly in line with the industry average of 67% (source, Ofgem January 2002).
Operating profit in the UK Division fell by (Pounds)44 million to (Pounds)79
million, primarily due to the impact of falling wholesale market prices and the
burden of the NEA. As a result of these market pressures, generation margins
were (Pounds)63 million lower than last year. Partially offsetting this was an
improvement in electricity and gas retail margins of (Pounds)29 million after
the increased cost of acquiring new customers. The results for the year also
include the New Electricity Trading Arrangements ("NETA") system error of
(Pounds)10 million reported in the first quarter.
The key financial information is shown in Table 13.
Table 12 - US Division
-------------------------------------------------------------------------
2001/02 2000/01
-------------------------------------------------------------------------
External turnover ((Pounds)m) 3,153.8 3,122.3
Operating profit ((Pounds)m)* 366.9 351.3
=============================================== ========== ===========
* Before goodwill amortisation and exceptional item.
Table 13 - UK Division
-------------------------------------------------------------------------
2001/02 2000/01
-------------------------------------------------------------------------
External turnover ((Pounds)m) 2,121.4 2,063.8
Operating profit ((Pounds)m)* 78.7 122.7
=============================================== ========== ===========
* Before goodwill amortisation and exceptional item.
ScottishPower Annual Report & Accounts/Form 20-F 2001/02 |32
Financial Review continued
Table 14 - Infrastructure Division
-------------------------------------------------------------------------
2001/02 2000/01
-------------------------------------------------------------------------
External turnover ((Pounds)m)
- Power Systems - continuing operations 247.6 223.7
- Southern Water - discontinued operations 429.9 422.4
----------------------------------------------- ---------- ---------
Total 677.5 646.1
=============================================== ========== =========
Operating profit ((Pounds)m)
- Power Systems - continuing operations 354.9 341.3
- Southern Water - discontinued operations 216.3 221.6
----------------------------------------------- ---------- ---------
Total 571.2 562.9
=============================================== ========== =========
Infrastructure Division
Power Systems
Power Systems' turnover increased from (Pounds)224 million last year to
(Pounds)248 million, an increase of (Pounds)24 million. Power Systems' sales are
still mainly internal to our supply business but, as customer retention in our
home markets has declined due to competition, Power Systems external sales have
increased as distribution and transmission use of system charges are recovered
from third party suppliers.
Power Systems' operating profit improved by (Pounds)14 million to (Pounds)355
million, as it continued to deliver financial upsides from its restructuring
programme, with operating cost reductions of (Pounds)39 million achieved during
the year. These savings have offset the impact of regulatory price reductions
experienced in the first half of the year and a gain on business disposals
reported within last year's results of (Pounds)18 million. Power Systems remains
on target to deliver (Pounds)75 million of cash cost savings by March 2003 and
identified a further (Pounds)33 million of operating cost reductions by March
2004.
Southern Water
Turnover from Southern Water increased by (Pounds)7 million to (Pounds)430
million. This was primarily due to allowed regulatory price increases and
customer growth from 11,000 new connections, partly offset by the move to
measured supply and also from surface water rebates.
Southern Water's operating profit of (Pounds)216 million fell by (Pounds)5
million as a result of new capital obligation costs and increased depreciation
charges, offset in part by (Pounds)11 million of cost savings. Southern Water's
results are now reported as part of discontinued operations.
The key financial information is shown in Table 14.
Other Discontinued Activities
Table 15 - Thus and UK Appliance Retailing
-------------------------------------------------------------------------
2001/02 2000/01
-------------------------------------------------------------------------
External turnover ((Pounds)m)
- Thus 229.1 199.4
- UK Appliance Retailing 132.3 317.7
=============================================== ========== ===========
Operating loss ((Pounds)m)*
- Thus (63.7) (58.0)
- UK Appliance Retailing (9.0) (8.7)
=============================================== ========== ===========
* Before goodwill amortisation.
UK Appliance Retailing
The decision to withdraw from the loss-making UK Appliance Retailing business
was announced in June 2001. The disposal of part of the business to Powerhouse
Retail finalised in October 2001 and the closure of the remaining operations is
now complete. An exceptional charge of (Pounds)120 million was recognised in the
first quarter following this decision. UK Appliance Retailing's turnover of
(Pounds)132 million and operating loss of (Pounds)9 million for the year are
disclosed within discontinued operations.
Thus
The demerger of Thus was successfully completed on 19 March 2002. The financial
results of the group include the results of Thus up to this date, which are
included within discontinued operations.
Turnover for Thus to 19 March 2002 was (Pounds)30 million higher than last year
at (Pounds)229 million mainly due to increased data and telecoms revenues. Thus
incurred an operating loss of (Pounds)64 million, an increase of (Pounds)6
million on last year. Despite overcapacity and falling demand depressing the
wholesale telecoms sector in general, Thus continued to deliver strong growth in
Earnings Before Interest, Tax, Depreciation and Amortisation ("EBITDA") which
improved from negative (Pounds)21 million for the prior financial year to
positive (Pounds)2 million for the period up to demerger.
The key financial information is shown in Table 15.
Interest, Tax, Earnings and Dividends
Interest
The net interest charge for the year, excluding exceptional interest, was
(Pounds)379 million an increase of (Pounds)46 million on 2000/01, primarily due
to higher levels of debt in both the UK and US. The net proceeds from the sale
of Southern Water were received in April 2002. The UK interest charge rose by
(Pounds)30 million to (Pounds)214 million and represented an average interest
rate for the year of 6.7% compared with 7.4% in 2000/01. The exceptional UK
interest charge of (Pounds)31 million principally relates to the restructuring
of the group debt portfolio as a consequence of the sale of Southern Water. The
interest charge for the US increased by (Pounds)32 million to (Pounds)172
million, with average interest rates falling to 6.5% compared to 6.6% in the
prior year. Also included within interest is a (Pounds)7 million benefit due to
foreign exchange hedging. Interest cover for the year was 2.5 times compared
with 3.0 times for 2000/01.
Tax
The taxation charge for the year was (Pounds)122 million, (Pounds)19 million
lower than 2000/01. This amount excludes an exceptional tax credit of (Pounds)39
million on the exceptional charges arising during the year as a result of the
disposal of and withdrawal from our UK Appliance Retailing business and
restructuring of the debt portfolio following the decision to sell Southern
Water. The group's effective tax rate before goodwill amortisation and
exceptional items was 21.5% compared to 22.5% in the
ScottishPower Annual Report & Accounts/Form 20-F 2001/02 |33
Table 16 - Interest and Tax
------------------------------------------------------------------------------
2001/02 2000/01
------------------------------------------------------------------------------
Interest charge ((Pounds)m)* 379.4 332.9
Tax charge ((Pounds)m)* 122.0 141.1
Effective group tax rate** 21.5% 22.5%
======================================================= ========= ========
* Before exceptional items.
** Before goodwill amortisation and exceptional items.
previous year. The rate benefited by the release of provisions made in prior
years following agreement with the tax authorities on the treatment of specific
items. Although corporate tax rates in the US are higher than those in the UK,
the financial structure of the group results in a reduction in the amount of
overseas tax payable. Including goodwill amortisation and exceptional items
resulted in a tax charge of (Pounds)83 million on a loss before tax of
(Pounds)939 million compared to a tax charge of (Pounds)95 million on profits
before tax of (Pounds)380 million in the previous year.
Key interest and tax information is shown in Table 16.
Earnings and Dividends
Excluding the impact of exceptional items and goodwill amortisation, profit
after tax decreased by (Pounds)42 million to (Pounds)445 million primarily as a
result of lower UK Division operating profit and increased interest charges.
With a weighted average 1,838 million shares in issue during the year, earnings
per share were 26.12 pence compared to 27.86 pence in the previous year. The
loss after tax for the year, including the effect of goodwill amortisation and
exceptional items, amounted to (Pounds)1,022 million compared to a profit of
(Pounds)285 million for the prior year. The fall in profit is mainly due to
higher exceptional charges in the current year associated with the sale of
Southern Water of which (Pounds)738 million was the write back of goodwill. In
last year's results, there was a pre-tax exceptional charge of (Pounds)121
million for the cost of implementing the US Transition Plan.
The total cash dividends per share for the year of 27.34 pence were 5% higher
than the 2000/01 dividends of 26.04 pence. This increase is consistent with our
stated aim of growing dividends by 5% per annum, for each of the three financial
years to March 2003. Dividends for the year also included a `dividend in specie'
of (Pounds)437 million arising on the demerger of Thus on 19 March 2002. Group
dividend cover, excluding exceptional items and goodwill amortisation, fell to
1.0 times from 1.1 times in the previous year.
Capital Expenditure, Cash Flow and Net Debt
Capital Expenditure
Net capital expenditure totalled (Pounds)1,229 million in the year, an increase
of (Pounds)135 million on 2000/01, primarily as a result of significant
investment in new generation assets within our US Division.
US Division
Capital expenditure within the US Division increased by (Pounds)267 million to
(Pounds)576 million. Of this amount, (Pounds)233 million was on new generation
of which (Pounds)31 million was spent on PacifiCorp's regulated Gadsby Peakers
plant. PPM spent (Pounds)101 million on 47% of the Klamath Falls power station,
a 484 MW natural gas-fired plant which was commissioned in July 2001, and
(Pounds)61 million on a 200 MW gas turbine plant at West Valley City, Utah. PPM
also spent (Pounds)20 million acquiring a 40% interest in a gas storage and hub
services business in Alberta, Canada. Total capital spend for the non-regulated
PPM business was (Pounds)205 million. The regulated PacifiCorp business capital
spend of (Pounds)371 million consisted of new systems growth and maintenance of
(Pounds)285 million, (Pounds)31 million on new generation mentioned above and
(Pounds)55 million on other capital projects including information technology.
UK Division
In the UK Division, capital expenditure reduced by (Pounds)56 million to
(Pounds)104 million as a result of significant spend in the prior year on CHP
generation plants and the Daldowie wastewater project. This year, the main areas
of expenditure included (Pounds)38 million on plant refurbishment, including the
first phase of refurbishment of a hydro and pumped storage plant, and (Pounds)15
million increasing the renewable generation capacity, including a 30 MW windfarm
at Beinn an Tuirc. In Supply, capital expenditure of (Pounds)24 million was
primarily on improving business processes and new systems and represented a
year-on-year reduction of (Pounds)13 million.
Infrastructure Division
Net capital expenditure for the Infrastructure Division amounted to (Pounds)459
million, in line with the previous year. In the continuing Power Systems
business, expenditure increased by (Pounds)41 million to (Pounds)192 million,
which included spend of (Pounds)168 million rebuilding, refurbishing and
connecting new customers to the network to meet demand for new electricity
supply and support new business opportunities. The remaining amount included
spend on IT systems and on compliance with Ofgem requirements. Capital
expenditure in the discontinued Southern Water business totalled (Pounds)267
million, a fall of (Pounds)41 million on 2000/01. This included (Pounds)151
million spent on sewage treatment and disposal, and (Pounds)62 million on water
resources, treatment and distribution.
Thus
During the year, Thus incurred capital expenditure of (Pounds)78 million to the
date of demerger, a reduction of (Pounds)81 million compared to the previous
year. Expenditure was targeted on metropolitan network build and customer
connections.
Cash Flow and Net Debt
Net cash flow from operating activities decreased from (Pounds)1,412 million to
(Pounds)1,248 million, due to lower cash inflows in the US Division resulting
from additional excess power costs in the first six months of the financial
year. This was partly offset by lower tax payments and, after net interest
payments and minority dividends, resulted in free cash flow for the group of
(Pounds)786 million compared to (Pounds)888 million for the previous year. This
funded payments on capital expenditure of (Pounds)1,245 million, an increase of
(Pounds)101 million on the prior year mainly due to investment in new generation
assets in the US. Cash inflows from disposals of (Pounds)150 million primarily
relate to the sale of the non-core synthetic fuels operations in the US and the
collection of a note receivable relating to PacifiCorp's mining and resource
development business, NERCO, which was sold in 1993. Dividends paid to
shareholders amounted to (Pounds)497 million, up from (Pounds)471 million last
year, reflecting the 5% increase in dividends per share. Net debt at 31 March
2002 was (Pounds)6,208 million, an increase of (Pounds)923 million on the
previous year and gearing (net debt/shareholders' funds) increased to
ScottishPower Annual Report & Accounts/Form 20-F 2001/02 |34
Financial Review continued
Table 17 - Capital Expenditure, Cash Flow and Net Debt
--------------------------------------------------------------------------------
2001/02 2000/01
--------------------------------------------------------------------------------
Net capital expenditure ((Pounds)m) 1,229.4 1,094.8
Free cash flow ((Pounds)m) 785.9 887.6
Net debt ((Pounds)m) 6,208.4 5,285.1
========================================================= ========= ========
Table 18 - Key Group Financial Information
--------------------------------------------------------------------------------
2000/01 1999/00
--------------------------------------------------------------------------------
Operating profit ((Pounds)m)* 970.2 961.4
Profit before tax ((Pounds)m)* 628.0 735.6
Earnings per share (pence)* 27.86 37.97
Dividends per share (pence) 26.04 24.80
================================================================================
* Before goodwill amortisation and exceptional items.
131% from 90% at 31 March 2001. Due to the timing of the completion of the
Southern Water disposal, the year-end net debt position does not reflect the
(Pounds)2.05 billion gross proceeds, including debt assumed by the purchaser, as
a result of the sale. The cash consideration, which was received during April
2002, has been used to reduce group net debt and results in pro forma gearing at
31 March 2002 of 89%.
Key capital expenditure, cash flow and net debt information is shown in Table
17.
Overview of the year to March 2001
For the year to 31 March 2001, group turnover grew significantly by
(Pounds)2,234 million (54%) to (Pounds)6,349 million. The US Division
contributed revenues of (Pounds)3,122 million, an increase of (Pounds)2,411
million on the four month period post acquisition in 1999/00. Increased prices
and higher demand in the US resulted in revenues from retail customers growing
by 6% year-on-year and, although US wholesale volumes fell by 20%, sales
revenues more than doubled as a result of the significant increase in power
prices. Turnover in the UK Division fell by (Pounds)124 million to (Pounds)2,064
million, as the impact of competition in the electricity supply market resulted
in lower volumes and prices within the ScottishPower and Manweb areas. This was
offset in part by electricity sales growth outside our home areas, significant
year-on-year increases in gas sales and net volume gains within the generation
wholesale market. Infrastructure Division turnover decreased by (Pounds)37
million to (Pounds)646 million as the impact of the regulatory price review on
Southern Water, which is reported in the Accounts as a discontinued operation,
contributed to a (Pounds)51 million fall in revenues. This was offset in part by
external growth in Power Systems as the impact of competition in our home
markets led to a shift from internal to external sales.
Cost of sales increased by 82% to (Pounds)4,407 million, reflecting the
inclusion of a full year's trading from the US Division compared to four months
during 1999/00. Costs also increased as a result of higher US power purchase
costs following the Hunter outage, a decrease in hydro availability and growth
in the retail load. Transmission and distribution costs were higher by
(Pounds)171 million year-on-year, including the impact of a full year's US costs
of (Pounds)158 million. Administrative expenses increased by (Pounds)83 million
in the year, including US costs of (Pounds)48 million, and an increase in UK
costs by (Pounds)35 million, mainly as a result of the growth of Thus.
Despite the impact of the Hunter outage in the US and the regulatory reviews in
the UK, operating profit for the year increased by (Pounds)9 million to
(Pounds)970 million. The US Division contributed profits of (Pounds)351 million
compared to (Pounds)152 million for the four month post acquisition period to 31
March 2000. In the UK Division the impact of competition on wholesale prices and
the application of Ofgem's revised cost allocations on supply margins resulted
in decreased operating profit of (Pounds)123 million compared to (Pounds)156
million in the previous financial year. Operating profit for the Infrastructure
Division fell by (Pounds)93 million as a result of the impact of the regulatory
price reviews and costs arising from new capital projects commissioned at the
discontinued Southern Water business, offset in part by a programme of cost
saving intiatives introduced in both Power Systems and Southern Water.
Key group financial information is shown in Table 18.
Business Reviews
US Division
Turnover for the US Division was (Pounds)3,122 million, an increase of
(Pounds)2,411 million on the four month period post acquisition in 1999/00. When
comparing revenue on a like-for-like basis, for a full twelve month period for
1999/00, turnover increased by (Pounds)845 million in 2000/01 due to the impact
of high power prices on wholesale revenues and increased retail volumes. In the
wholesale market, revenues increased by (Pounds)718 million (102%) as a result
of substantial increases in short-term firm and spot market sales prices, offset
in part by lower wholesale volumes. The decrease in volumes was attributable to
the sale of the Centralia plant and mine, lower hydro availability, the outage
of the Hunter unit and the increase in retail load requirements. All of these
factors impacted the amount of power available to sell on the short-term and
spot market. Revenue grew by (Pounds)90 million within the retail markets
reflecting customer number and volume growth within the residential and
commercial sectors, and increased prices throughout the residential and
industrial sectors. Other revenues increased by (Pounds)37 million primarily as
a result of growth in wheeling sales from increased usage of PacifiCorp's
transmission system by third parties.
Table 19 - US Division
------------------------------------------------------------------------------
2000/01 1999/00
------------------------------------------------------------------------------
External turnover ((Pounds)m) 3,122.3 711.7
Operating profit ((Pounds)m)* 351.3 151.7
======================================================== ========= ========
* Before goodwill amortisation and exceptional item.
Figures for 1999/00 represent the external turnover and operating profit for the
four months from date of acquisition to 31 March 2000.
ScottishPower Annual Report & Accounts/Form 20-F 2001/02 |35
Table 20 - UK Division
--------------------------------------------------------------------------------
2000/01 1999/00
--------------------------------------------------------------------------------
External turnover ((Pounds)m) 2,063.8 2,187.9
Operating profit ((Pounds)m)* 122.7 156.3
========================================================== ========= =========
* Before goodwill amortisation and exceptional items.
The US Division reported operating profit of (Pounds)351 million, which included
the impact of the Hunter outage. Strong economic growth and abnormal
temperatures led to an increase in retail demand throughout the western US.
This, coupled with lower than normal hydro generation, resulted in demand
exceeding supply and exposed the division to high power prices. Purchased power
costs increased year-on-year by over (Pounds)1 billion (159%), however these
were largely offset by increased wholesale revenues.
The key financial information is shown in Table 19.
UK Division
Turnover for the UK Division was (Pounds)2,064 million, a fall of (Pounds)124
million on the previous year, as a result of lower revenues in the residential
electricity markets, offset in part by higher generation sales. Total generation
revenues increased by (Pounds)71 million in the year to (Pounds)356 million,
with a higher proportion of sales being made to third parties due to the impact
of competition. Gas and other revenues rose by (Pounds)51 million, the
acquisition of Rye House power station in March 2001 contributed additional
revenues of (Pounds)8 million and higher volumes resulted in agency sales growth
of (Pounds)53 million. This was partly offset by lower export sales in England &
Wales, which fell by (Pounds)41 million, with volumes 1,705 GWh lower at 4,561
GWh. Electricity supply sales within our home areas of Scotland and Manweb
reduced year-on-year by (Pounds)153 million and (Pounds)84 million respectively,
due to lower volumes and the effect of competition hitting customer retention
levels and forcing prices downward. Outside the home areas, electricity sales
increased by (Pounds)25 million to (Pounds)209 million, reflecting customer
gains and volume growth in our domestic and small business markets. Strong
growth was also experienced in gas and other energy sales which increased by
(Pounds)17 million to (Pounds)239 million. The business now supplies 3.5 million
electricity and gas customers in the UK.
The UK Division contributed operating profit of (Pounds)123 million for the
year, down (Pounds)34 million compared with the prior year. Generation profits
fell during the year by (Pounds)12 million due to the continuing effects of
wholesale prices reduced by competition. The new 400 MW combined-cycle gas
turbine plant at Brighton became operational during the year and produced a
contribution to joint venture operating profits of (Pounds)8 million in the
year. Supply profits decreased during the year by (Pounds)22 million, primarily
as a result of the application of Ofgem's revised cost allocations in the year.
Electricity margins in our home areas improved as the business continued to
focus on value and benefits from lower generation and use of system costs. In
addition, the contribution from new electricity customers outside our home areas
and from gas customers increased by (Pounds)12 million. These margin increases
were partly offset by increased costs of capturing and serving our customer base
and increased system depreciation charges.
The key financial information is shown in Table 20.
Infrastructure Division
Power Systems
Power Systems sales are up by (Pounds)14 million to (Pounds)224 million. In the
past, sales have been mainly internal to our Supply business, but as a result of
competition in home markets, Power Systems' external sales continue to increase
as distribution and transmission use of system charges were recovered from other
electricity suppliers. Partly offsetting this is a fall in non regulated income,
including a business disposal during the year.
Power Systems' operating profit fell by (Pounds)27 million to (Pounds)341
million for the year. The reduction was attributable to the application of
Ofgem's revised cost allocations, which reduced prices allowed under the
distribution and transmission regulatory review, the impact of which was partly
offset by savings in controllable costs and an (Pounds)18 million gain on the
sale of the contracting business.
Southern Water
Southern Water's contribution to group turnover decreased by (Pounds)51 million
to (Pounds)422 million following the OFWAT review, with measured sales reducing
by (Pounds)14 million and unmeasured sales (Pounds)34 million lower than the
previous year. New customer connections during the year were just over 13,000
and 21,000 customers opted to switch to metered supply.
Southern Water contributed (Pounds)222 million to operating profits, (Pounds)66
million lower than the prior year, with reduced revenues following the OFWAT
review and new costs arising from recently commissioned capital schemes offset
in part by cost saving initiatives. Southern Water's results are now reported as
part of discontinued operations.
The key financial information is shown in Table 21.
Other Discontinued Activities
UK Appliance Retailing
The UK Appliance Retailing business turnover was (Pounds)318 million in the
year, (Pounds)12 million lower than in 1999/00. The operating loss was (Pounds)9
million compared to the previous year's profit
Table 21 - Infrastructure Division
--------------------------------------------------------------------------------
2000/01 1999/00
--------------------------------------------------------------------------------
External turnover ((Pounds)m)
- Power Systems - continuing operations 223.7 210.2
- Southern Water - discontinued operations 422.4 473.2
------------------------------------------------------------ -------- -------
Total 646.1 683.4
============================================================ ======== =======
Operating profit ((Pounds)m)*
- Power Systems - continuing operations 341.3 368.4
- Southern Water - discontinued operations 221.6 287.4
------------------------------------------------------------ -------- -------
Total 562.9 655.8
============================================================ ======== =======
* Before exceptional items.
ScottishPower Annual Report & Accounts/Form 20-F 2001/02 |36
Financial Review continued
Table 22 - Thus and UK Appliance Retailing
--------------------------------------------------------------------------------
2000/01 1999/00
--------------------------------------------------------------------------------
External turnover ((Pounds)m)
- Thus* 199.4 177.1
- UK Appliance Retailing 317.7 329.2
======================================================= ========== ========
Operating (loss)/profit ((Pounds)m)**
- Thus (58.0) (9.5)
- UK Appliance Retailing (8.7) 7.1
======================================================= ========== ========
* Adjusted for disposal of mobile telephone business in 1999/00.
** Before goodwill amortisation and exceptional item.
of(Pounds)7 million, largely as a result of competitive trading conditions.
Thus
Total turnover from Thus was (Pounds)234 million, up (Pounds)17 million (8%) on
the previous year, after allowing for the disposal of the mobile telephone
business in the prior year. Second half sales grew by 25% to (Pounds)130 million
compared with the first half and by 12% year-on-year. Total business service
sales grew 31% to (Pounds)160 million year-on-year, with second half sales up
39% to (Pounds)93 million over the first half and by 37% year-on-year. External
turnover for the full year increased by 13% to (Pounds)199 million on a like-
for-like basis.
Thus continued with the ongoing investment in its national network and
development of its services. Operating losses were (Pounds)58 million for the
twelve months to March 2001, compared to a loss of (Pounds)10 million for the
equivalent period in 1999/00.
The key financial information is shown in Table 22.
Interest, Tax, Earnings and Dividends
Interest
The net interest charge of (Pounds)333 million was (Pounds)105 million higher
than in 1999/00 due to the inclusion of a full year's trading from PacifiCorp
and continued capital investment. The UK interest charge for the year was
(Pounds)184 million and represented an average rate for the year of 7.4%, versus
7.9% in 1999/00. The interest charge for PacifiCorp was (Pounds)140 million,
including benefits from the sale of Powercor and Centralia in the year,
resulting in an average interest rate of 6.6%. In addition, interest charges
were increased by (Pounds)9 million as a result of foreign exchange. Interest
cover was 3.0 times against 4.2 times in the prior year.
Tax
The taxation charge for the year was (Pounds)141 million, (Pounds)66 million
lower than 1999/00. This amount excludes an exceptional tax credit of (Pounds)46
million on the exceptional charge for the costs associated with the PacifiCorp
Transition Plan. The group's effective tax rate before goodwill amortisation and
exceptional items was 22.5% compared to 28.1% in the previous year.
Earnings and Dividends
The profit after tax for the year including the effect of goodwill amortisation
and exceptional items amounted to (Pounds)285 million, a decrease of (Pounds)602
million, primarily as a result of the exceptional gain from the partial
flotation of Thus reflected in the Accounts to March 2000. Excluding the impact
of exceptional items and goodwill amortisation, profit after tax decreased by
(Pounds)42 million to (Pounds)487 million, reflecting the impact of the UK
regulatory reviews. With a weighted average 1,830 million shares in issue during
the year, earnings per share were 27.86 pence, compared to 37.97 pence in the
previous year.
The final quarter dividend of 6.51 pence per share brought the total dividends
per share for the year to 26.04 pence, an increase of 5%, consistent with our
stated aim of growing dividends by 5% per annum for each of the three financial
years to March 2003. Group dividend cover, excluding exceptional items and
goodwill amortisation, fell to 1.1 times from 1.5 times the previous year.
Treasury
The treasury focus during the year was to minimise interest payments and reduce
risk. The group continues to ensure that borrowings are financed from a variety
of competitive sources and that committed facilities are available both to cover
uncommitted borrowings and to meet the financing needs of the group in the
future. Cash requirements are subject to seasonal variations.
Since the PacifiCorp acquisition, the group's external borrowings have been
sourced in two separate pools. In the UK, Scottish Power UK plc ("SPUK")
continues to be the finance vehicle for the bulk of the UK activities. In the
US, predominantly all of the debt is issued by PacifiCorp the regulated utility,
and is entirely denominated in US dollars.
In both cases, regulatory constraints apply to financing activities. Scottish
Power plc ("SP plc") is not permitted to borrow from its subsidiaries with the
exception of certain intermediate holding companies in the US ownership chain
and is currently financed by way of dividend and external debt. During the year
two (Pounds)50 million bilateral 364 day committed facilities were arranged for
SP plc. Both were fully drawn at the year end.
PacifiCorp's principal debt limitations are a 60.0% debt to defined
capitalisation test and interest coverage covenant contained in its principal
credit agreements.
In addition, under the Public Utility Holding Company Act of 1935 there are
restrictions on the ability of group companies to lend to or borrow from one
another.
In the UK, financing activities have been heavily influenced by plans relating
to the disposal or refinancing of Southern Water. In the latter half of the year
no new long-term financing was put in place and, as at the balance sheet date,
the amount of short-term debt reflects preparation for the receipt of sale
proceeds.
Under SPUK's Euro-Medium Term Note Programme, established in November 1997, two
issues were undertaken earlier in the financial year. These were a (Pounds)100
million increase to the (Pounds)200 million, 20-year, 5.90% issue originally
undertaken in February 2001 and a (Pounds)100 million, 5-year, 6.50% issue in
May 2001 which may, in certain circumstances, be extended to 40 years.
Cumulative issues outstanding under the programme now total $3,146 million
against a programme limit, which has been increased, of $7,000 million. As part
of the annual update of the programme SP plc was added as an issuer, although no
issues have been made since. SPUK will continue to issue bonds and notes under
the programme which allows the UK
ScottishPower Annual Report & Accounts/Form 20-F 2001/02 |37
part of the group access to a variety of funding sources and the ability to tap
market demand as and when appropriate. Following the sale of Southern Water it
is not expected that any new issues will be made for some time.
As part of the group's strategy to diversify funding sources, an A$650 million
10 year credit wrapped floating rate bond was issued in the Australian market
swapped into floating rate Sterling. Total borrowings from the European
Investment Bank ("EIB") amount to (Pounds)328 million, although (Pounds)129
million of this in respect of Southern Water was repaid following completion of
the sale as agreed under the terms of the sale and purchase agreement with First
Aqua Limited. During the year SPUK has taken on no more index-linked liabilities
which total (Pounds)275 million, both through issues of debt and through
swapping fixed rate debt into index-linked. This represents around 8% of the UK
debt portfolio in recognition of the fact that a large percentage of UK revenues
are linked to inflation.
In June 2001, SPUK replaced its expiring (Pounds)1,000 million revolving credit
facility with a new five year facility of the same value. The facility was used
principally as committed support for issues of commercial paper. This facility
was cancelled following receipt of the proceeds of the sale of Southern Water in
April.
On 1 October 2001, to comply with the Utilities Act, SPUK's businesses were
incorporated as subsidiaries. The new distribution, transmission and generation
subsidiaries have provided upstream guarantees to support the majority of SPUK's
debt as existed at that date. New debt issued by SPUK after 1 October 2001 is
not permitted to benefit from the guarantee of SPUK's subsidiaries, SP
Distribution Limited and SP Transmission Limited.
In November 2001, PacifiCorp issued bonds of $500 million and $300 million with
maturities of 10 and 30 years, respectively. Like SPUK, PacifiCorp has also had
to replace expiring bank facilities and therefore in June 2001, in conjunction
with the SPUK transaction, two 364 day facilities were put in place totalling
$880 million. These two bank facilities provided the opportunity to establish a
group of core bank relationships that is common to both SPUK and PacifiCorp.
Treasury transactions are focused on this group of banks. PacifiCorp is
currently negotiating replacements to these existing bank facilities.
The group continues to manage its interest rate exposure by maintaining a large
percentage of its debt at fixed rates of interest. This is done either directly
by means of fixed rate debt issues or by use of interest and cross currency
swaps to convert variable rate debt into fixed rate debt or fixed/variable
nonfunctional foreign currency denominated debt into fixed rate functional
currency debt. The use of derivative financial instruments relates directly to
underlying anticipated indebtedness. The group treasury operates strictly within
policies set out by the Board and is subject to regular examination by internal
audit. The group amended its policy during the year, and now it is to maintain
at least 50% (previously 70%) of its anticipated year-end debt at fixed interest
rates.
In recognition of the long life of the group's assets and anticipated
indebtedness and to create financial efficiencies, the group entered into
borrowing agreements for periods out to 2039. In addition, SPUK entered into
derivative contracts to a notional value of (Pounds)100 million which may result
in fixed interest rates of 4.25% for periods out to 2030 on this notional
amount. At 31 March 2002, the interest rate on some 66% (UK 55%, US 79%) of debt
was fixed.
The weighted average period of maturity of year-end fixed debt and swaps was 11
years (UK 10 years, US 13 years).
During the financial year, the group implemented a policy to hedge part of the
foreign currency value of PacifiCorp. This was done by creating notional US$
debt by the use of cross-currency interest rate swaps, cross-currency basis
swaps and foreign currency forward contracts. The current amount of these hedges
is $4,900 million representing approximately 80% of the net assets of
PacifiCorp.
Both SPUK and PacifiCorp have credit ratings published by Moody's Investor
Services, Standard & Poor's Ratings Group and The Fitch Group. SPUK's long-term
ratings for guaranteed debt, pre 1 October 2001, are now A2, A- and A from the
three agencies respectively. SPUK's long term ratings for unguaranteed debt are
A3, A- and A from the three agencies respectively. PacifiCorp's senior secured
debt is rated A3, A, A and its unsecured debt is rated Baa1, BBB+ and A-.
Short-term ratings of P-2, A-2 and F-1 apply to both companies. PacifiCorp Group
Holdings, a subsidiary of PHI, has slightly lower ratings although they remain
investment grade.
In November 2001, both PacifiCorp and SPUK had their credit ratings lowered by
the rating agencies, citing the impact of high purchased power prices, the
Hunter outage and the uncertainty and expected delay between incurring and
recovering deferred net power costs from customers. Any adverse change to credit
ratings of group companies could negatively impact on their ability to access
capital markets and on the rates of interest that they would be charged for such
access. The EIB debt within SP Transmission Limited and SP Distribution Limited
contains credit downgrade language, which does not constitute default, and means
that, should the ratings of SP Transmission Limited or SP Distribution Limited
fall, the EIB will be entitled to ask for additional security in the form of a
guarantee acceptable to the EIB. The EIB debt within SP Manweb plc contains
financial covenants relating to interest cover and gearing of SP Manweb plc.
Following the cancellation of SPUK's (Pounds)1,000 million revolving credit
facility there are no other financial covenants within the UK group's debt.
The proceeds of the sale of Southern Water have been partially used to repay
SPUK's short-term borrowings and to redeem the EIB debt of Southern Water as
agreed under the sale and purchase agreement with First Aqua Limited.
The cash received will also be used on an ongoing basis to fund the existing
business and to repay debt as it matures. The investment of surplus cash will be
undertaken to maximise the return within Board approved policies which govern
the ratings criteria, maximum investment and the maturity with any one
counterparty. Counterparties are required to have a short-term rating of at
least A-1, P-1 or F-1 from the three major rating agencies.
Contractual Obligations and Commercial Commitments
ScottishPower enters into various financial obligations and commitments in the
normal course of business. Contractual financial obligations are considered to
comprise known future cash payments that the group is required to make under
contractual arrangements in place at 31 March 2002. Commercial commitments are
defined as those obligations of the group which only become payable if certain
pre-defined events occur.
ScottishPower Annual Report & Accounts/Form 20-F 2001/02 |38
Financial Review continued
Table 23 - Contractual Obligations at 31 March 2002 ((Pounds)m)
--------------------------------------------------------------------------------------------------------------
Between Between
Within 1 and 3 3 and 5 After
1 year years years 5 years Total
--------------------------------------------------------------------------------------------------------------
Loans and other borrowings (including overdrafts) 1,226.8 437.3 599.5 4,306.2 6,569.8
Finance leases - 0.2 0.4 18.8 19.4
Operating leases 16.2 17.2 8.0 13.2 54.6
Firm purchase commitments 1,341.5 2,161.7 1,283.3 3,436.9 8,223.4
Capital commitments 190.4 48.5 - - 238.9
------------------------------------------------- -------- -------- -------- -------- ---------
Total contractual obligations 2,774.9 2,664.9 1,891.2 7,775.1 15,106.1
================================================= ======== ======== ======== ======== =========
The 'Loans and other borrowings' figures in the above table are stated at book
value at 31 March 2002.
Tables 23 and 24 detail the group's contractual obligations and commercial
commitments as of 31 March 2002.
The actual net capital expenditure incurred by the group for the year ended 31
March 2002 was (Pounds)1,229 million. The group's estimated net capital
expenditure, which is subject to continuing review and revision, for the year
ended 31 March 2003 is within the range of (Pounds)700 - (Pounds)750 million.
This estimate is lower than the current year spend and reflects the impact of
the disposal of Southern Water and the demerger of Thus.
Quantitative and Qualitative Disclosures about Market Risk
Market Rate Sensitive Instruments and Risk Management
The following discussion about the group's risk management activities includes
"forward looking" statements that involve risk and uncertainties. Actual results
could differ materially from those projected in the forward looking statements.
The tables in Note 21 (pages 80 to 85) summarise the financial instruments,
derivative instruments and derivative commodity instruments held by the group at
31 March 2002, which are sensitive to changes in interest rates, foreign
exchange rates and commodity prices. The group uses interest rate swaps, forward
foreign exchange contracts and other derivative instruments to manage the
primary market exposures associated with the underlying assets, liabilities and
committed transactions. The group uses these instruments to reduce risk by
essentially creating offsetting market exposures.
In the vast majority of instances, physically settled financial instruments held
by the group match offsetting physical transactions and are not held for
financial trading purposes. Subject to risk management controls, businesses may
enter into financial transactions that are designed to improve the return on
assets and that are structured around the physical assets of the group. Trading
UK is authorised by the Financial Services Authority to undertake investment
activity in the energy markets.
Financial Instruments and Risk Management
Overview
The main financial risks faced by the group are interest rate risk, inflation
risk, foreign exchange risk, liquidity risk, energy price risk and insurance
risk. The Board has reviewed and agreed policies for managing each of these
risks as summarised below. In order to mitigate the risks identified, the Board
has endorsed the use of derivative financial instruments. The derivative
financial instruments endorsed for use by the Board include swaps, both interest
rate and cross currency, swaptions, caps, forward rate agreements, financial and
commodity forward contracts, commodity futures and commodity options and weather
derivatives.
Risk Management
Energy risk is governed globally by the Group Risk Management Committee
("GRMC"), chaired by the Finance Director. The group risk management policies
and procedures as well as the UK and the US policies and procedures are designed
to create consistent risk measurement, monitoring and management standards
throughout the group. The day-to-day monitoring of the level of cover in place
is handled by a corporate risk management function, reporting to the Finance
Director independently of the business. Market exposures are quantified and
controlled using a number of different risk measures. These include Value-at-
risk ("VAR") methods. VAR is a statistically-based measure of the potential loss
on an exposure over a defined period to a given level of confidence. Additional
risk measures are applied to quantify risks beyond the confidence intervals
defined in the VAR methodology and volumetric risks in physical positions and
their impact on business profits in addition to traded position value.
Trading UK is authorised to carry out activities to manage electricity and gas
price risk. Electricity or gas price risk is defined as the possibility that a
change in the cost of electricity or gas will either reduce the proceeds of
electricity or gas sales or increase the costs of electricity or gas purchases.
In the US, wholesale energy sales trading operates within defined policies for
managing PacifiCorp's electricity price and supply risks in meeting load
requirements. Trading UK, and the wholesale energy sales trading function in the
US, report monthly to a risk committee, and also report monthly to the GRMC.
The role of the group's credit function is to set consistent standards for
assessing and scoring the credit risk induced by contractual obligations of
wholesale trading partners and industrial and commercial clients. A group credit
committee provides an umbrella oversight for all credit decisions that overlap
both the US and the UK markets. This ensures that each individual business is
subject to strict concentration rules. The UK and the US credit committees
provide local expertise to understanding the credit environment in each
geographic location. All decisions are supported by a rigorous reporting of
credit exposures and
Table 24 - Commercial Commitments at 31 March 2002 ((Pounds)m)
--------------------------------------------------------------------------------------------------------------
Between Between
Within 1 and 3 3 and 5 After
1 year years years 5 years Total
--------------------------------------------------------------------------------------------------------------
Lines of credit 618.0 - 1,000.0 - 1,618.0
Standby letters of credit 38.5 119.8 50.2 - 208.5
Standby bond purchase agreements 67.8 87.4 - - 155.2
Other commercial commitments 1.6 - - - 1.6
------------------------------------------------- -------- -------- -------- -------- ---------
Total commercial commitments 725.9 207.2 1,050.2 - 1,983.3
================================================= ======== ======== ======== ======== =========
ScottishPower Annual Report & Accounts/Form 20-F 2001/02 |39
sophisticated credit scoring models. Credit approvals are subject to periodical
and/or event driven reviews. Despite mitigation efforts, defaults by
counterparties occur from time to time. To date, no such default has had a
material adverse effect on ScottishPower.
The group treasury is authorised to conduct the day-to-day treasury activities
of the group within policies set out by the Board. The treasury function reports
regularly to the Board, through the monthly group financial review and is
subject to both internal and external audit.
Interest Rate Risk Management
The group continues to access funding opportunities in the major global markets
in a range of currencies at both fixed and floating rates of interest, using
derivatives where appropriate, to convert the obligations and payments into
fixed or floating rate functional currency.
The exposure to fluctuating interest rates is managed by either issuing fixed or
floating rate debt or using a spectrum of financial instruments to create the
desired fixed/floating mix. Flexibility in the fixed/floating mix is maintained
by using interest rate caps that protect the group should rates rise, i.e. above
the strike price, while maintaining the potential benefit should interest rates
fall. The group amended its policy during the year, and now it is to maintain at
least 50% (previously 70%) of its anticipated year-end debt at fixed interest
rates. At 31 March 2002, 66% (2001 71%) of the group's debt was either issued as
fixed or converted to fixed rates using interest rate swaps.
All treasury transactions are undertaken to manage the risks arising from
underlying activities and no speculative trading is undertaken. The
counterparties to these instruments generally consist of financial institutions
and other bodies with good credit ratings, i.e. "AA" rated by at least one of
the following, Standard & Poor's, Moody's or Fitch. Although the group is
potentially exposed to credit risk in the event of non-performance by
counterparties, such credit risk is controlled through credit rating reviews of
the counterparties and by limiting the total amount of exposure to any one party
to levels agreed by the Board. The group does not believe that it is over
exposed to any material concentration of credit risk.
Foreign Exchange Risk Management
Following the PacifiCorp acquisition the significance of foreign exchange has
risen.
Translation Risk
During 2001/02 it was decided to hedge $4,900 million, representing
approximately 80%, of PacifiCorp's net assets, as a long-term strategic hedge of
the investment. As a result liabilities were created by means of cross currency
interest rate and basis swaps and by means of forward foreign exchange
contracts. The resulting interest flow in US dollars acts as a natural partial
hedge to the translation of PacifiCorp's profits but these profits are further
hedged, up to three years into the future, by means of forward sales of US
dollars. All foreign currency derivative contracts are subject to the same
controls as interest rate derivatives referred to above.
Transaction Risk
Transactions denominated in a foreign currency are not numerous in a group that
consists, broadly, of two domestic businesses. Where they arise as a result of
imports of capital or other goods denominated in foreign currencies the exposure
is hedged as soon as it is known.
Liquidity Risk Management
The group's policy is to arrange that debt maturities are spread over a wide
range of dates, thereby ensuring that the group is not subject to excessive
refinancing risk in any one year. The group had undrawn committed revolving
credit facilities totalling (Pounds)1,618 million, as at 31 March 2002, which
provide backstop liquidity should the need arise. SPUK's (Pounds)1,000 million
revolving credit facility, which is included in Table 24, was cancelled
following receipt of the proceeds of the sale of Southern Water in April 2002.
Energy Price Risk Management
UK Business
NETA was introduced in England & Wales on 27 March 2001, replacing the previous
`Pool' mechanism for the sale and purchase of wholesale power in England &
Wales. NETA provides for a bilateral wholesale market, with suppliers, traders
and generators trading firm physical forward contracts for bulk electricity
supply. In addition, a number of power exchanges for the trading of power
futures have been set up, and a `Balancing Mechanism' created for short-term
trading of power. In addition to trading to directly manage our market price
exposure in the England & Wales market, ScottishPower also manages its price
exposure arising from sales within the Scottish market by trading forward
contracts.
The balancing mechanism, operated from 3 1/2 hours ahead of real-time (gate
closure) up to real-time by the National Grid Company, is used to manage the
grid system on a second by second basis. Market participants can participate
actively in this market through the submission of bids and offers to vary their
generation output or customer demand. The mechanism also provides for
calculation and settlement of imbalance charges arising from the differences
between parties' contract positions and their actual physical energy flows.
The group has procedures in place to minimise exposure to uncertain balancing
mechanism prices, that is, the possibility that the group will face high charges
for shortfalls in physical energy or receive low revenues for surplus physical
energy. These procedures involve Trading UK in entering into bilateral contracts
for the sale and purchase of energy across a range of time periods to minimise
exposure to the balancing mechanism. In addition, our portfolio of flexible
generating assets in England and Scotland can be used up to gate closure to
further minimise this exposure and also to attract premium income from providing
flexible power to the balancing mechanism.
The group has also entered into longer-term (in excess of one year) arrangements
to protect against longer-term volatility of power prices. The time periods
covered by these longer-term arrangements are reviewed on a continuous basis to
provide the desired level of price stability.
The group also has procedures in place to minimise exposure to short-term gas
price variations. In a similar manner to our power price exposure management
strategy, gas price risk is managed through the use of longer-term (in excess of
one year) contracts, contracts with flexible delivery profiles and through the
use of flexibility within our portfolio of power generating and gas storage
assets.
Cover against volatile spot prices is built up on a rolling basis through the
year and, at 31 March 2002, a significant proportion of the group's exposure to
power and gas price variations for the following financial year have been
covered.
ScottishPower Annual Report & Accounts/Form 20-F 2001/02 |40
Financial Review continued
A sensitivity analysis has been prepared to estimate the exposure to market risk
related to gas and electricity price exposure of the UK businesses' portfolio of
load, plant and physical and financial instruments for electricity. Based on the
UK businesses' gas and electricity price exposure at 31 March 2002, a near-term
adverse price change of 10.0% would have a negative impact on pre-tax earnings
of (Pounds)5.8 million in 2002/03 based on the then-current (at 31 March 2002)
gas and electricity position over the 12 month period ending 31 March 2003.
US Business
PacifiCorp's market risk to commodity price change is primarily related to its
fuel and electricity purchases and sales arising principally from its
electricity supply obligation in the US. This risk to price change is subject to
fluctuations in weather, economic growth and generation resource availability
which impacts supply and demand. Price risk is managed principally through the
operation of its generation and transmission system in the western US and
through its wholesale energy purchase and sales activities. Physically settled
contracts are used to hedge PacifiCorp's excess or shortage of net electricity
for future months. The changes in market value of such contracts have had a high
correlation to the price changes of the hedged commodity.
While PacifiCorp plans for resources to meet its current and expected retail and
wholesale load obligations, resource availability, price volatility and load
volatility may materially impact the power costs to PacifiCorp and profits from
excess power sales in the future. Prices paid by PacifiCorp to provide certain
load balancing resources to supply its load may exceed the amounts it receives
through retail rates and wholesale prices. Regulatory approval of deferred
accounting treatment for these excess costs mitigates a portion of this price
risk, assuming recovery mechanisms are implemented.
To further mitigate commodity price risk, PacifiCorp has requested power cost
adjustment mechanisms whereby, if granted by the utility commissions, all or
part of actual power costs, above or below the level in rates, will be shared
with customers.
PacifiCorp took steps in the financial year to manage commodity price volatility
and reduce exposure. These steps included adding to its generation portfolio and
entering into transactions that help to shape PacifiCorp's system resource
portfolio, including physical hedging products and financial temperature-related
instruments that reduce resource and price risk on hot summer days. In addition,
hydro-electric hedges were put in place for the next five years to limit volume
and price risks associated with Pacific Northwest hydro-electric generation
availability.
A sensitivity analysis has been prepared to estimate the exposure to market risk
related to gas and electricity price exposure of the US businesses' portfolio of
load, plant and physical and financial instruments for electricity. Based on the
US businesses' gas and electricity price exposure at 31 March 2002, a near-term
adverse price change of 10.0% would have a negative impact on pre-tax earnings
of (Pounds)1.4 million in 2002/03 based on the then-current (at 31 March 2002)
gas and electricity position over the 12 month period ending 31 March 2003.
Fair Value of Derivative Contracts
Table 25 details the changes in the fair value of the group's energy related and
treasury derivative contracts from 1 April 2001 to 31 March 2002 and quantifies
the reasons for the changes. Short-term energy contracts are valued based upon
quoted market prices. Long-term energy contracts are valued using the
appropriate forward market price curve. The forward market price curve is
derived using daily market quotes from independent energy brokers and reporting
services. Where relevant, contracts are separated into their component physical
and financial swap and option legs. For certain contracts extending past 2006,
the forward prices are derived using a fundamentals model (cost-to-build
approach) that is updated as warranted to reflect changes in the market, at
least quarterly. Interest rate swaps are valued by calculating the present value
of future cash flows estimated using forward market curves. Interest rate
swaptions are valued using the market yield curve and implied volatilities at
the period end. Cross currency swaps are valued by adding the present values of
the two sides of each swap: present values are calculated by discounting the
future cash flows, estimated using the appropriate forward market curve for that
currency, at the appropriate market discount rates. Forward foreign exchange
contracts are valued using market forward exchange rates at the period end.
Insurance Risk Management
The insurance industry has undergone dramatic change in the last year which were
exacerbated further by the tragic events of September 11 and were characterised
by restrictions in available capacity, increased costs and a general narrowing
of available coverage.
Despite these changes in the market, the group renegotiated all of its main
insurance policies in March 2002. Although there has been an increase in cost
and in some areas a narrowing of cover, in other areas it has been possible to
enhance the insurance coverage available.
Creditor Payment Policy and Practice
In the UK, the group's current policy and practice concerning the payment of its
trade creditors is to follow the Better Payment Practice Code to which it is a
signatory. Copies of the Code may be obtained from the Department of Trade and
Industry or from the website www.payontime.co.uk.
Table 25 - Fair Value of Energy Related and Treasury Derivative Contracts (Pounds)m
------------------------------------------------------------------------------------------------------------------
Fair value of contracts outstanding at 1 April 2001 64.9
Contracts realised or otherwise settled during the year 47.5
Changes in fair values attributable to changes in valuation techniques
and assumptions 120.1
Other changes in fair value (546.7)
-------------------------------------------------------------------------------------------------------- -------
Fair value of contracts outstanding at 31 March 2002 (314.2)
======================================================================================================== =======
Between Between
Within 1 and 3 3 and 5 After
1 year years years 5 years Total
(Pounds)m (Pounds)m (Pounds)m (Pounds)m (Pounds)m
------------------------------------------------------------------------------------------------------------------
Prices actively quoted (51.4) (18.9) - - (70.3)
Prices based on models and other valuation methods (15.4) (35.4) (37.9) (155.2) (243.9)
----------------------------------------------------- ------- -------- -------- -------- --------
Total (66.8) (54.3) (37.9) (155.2) (314.2)
===================================================== ======= ======= ======= ======== ========
ScottishPower Annual Report & Accounts/Form 20-F 2001/02 |41
The group's policy and practice is to settle terms of payment when agreeing the
terms of the transaction, to include the terms in contracts and to pay in
accordance with its contractual and legal obligations. The group's creditor days
at 31 March 2002 for its UK businesses and US business were 27 days and 40 days,
respectively.
Going Concern
The directors confirm that the company remains a going concern on the basis of
its future cash flow forecasts and has sufficient working capital for present
requirements.
Dividend Policy
In March 2002, the group announced its dividend policy to apply with effect from
the year ending March 2004. ScottishPower reaffirmed its stated aim of growing
dividends by 5% per annum nominal for the period to March 2003. Thereafter, the
Board intends to adopt a dividend policy that reflects both the reduced
proportion of the group's profit derived from the UK regulated infrastructure
businesses and the need to balance future investment with an appropriate
dividend return for shareholders. Accordingly, with effect from the year ending
March 2004, the group intends to target dividend cover, based on earnings before
goodwill amortisation and exceptional items, in the range of 1.5 - 2.0 times,
and ideally towards the middle of that range. The group intends to grow
dividends broadly in line with earnings thereafter.
Accounting Developments
The UK Accounting Standards Board ("ASB") did not issue any new standards during
the year ended 31 March 2002. However, Financial Reporting Standard ("FRS") 17
'Retirement benefits', issued in November 2000, requires certain disclosures
relating to pensions and other post-retirement benefits which have been included
in this year's Accounts. The accounting measurement rules in FRS 17 are not
required to be implemented in the group's Accounts until the year ending 31
March 2004. Had the measurement rules of FRS 17 been applied during the
financial year 2001/02, net assets and reserves at 31 March 2002 would have been
increased by approximately (Pounds)27 million. Pre-tax profits would have been
in line with those reported under the existing standard, with an increase in
operating costs largely offset by a reduction in finance costs.
The Urgent Issues Task Force committee of the ASB issued a number of accounting
pronouncements during the year. These pronouncements had no material impact on
the group's results and financial position.
The group's results are also presented in accordance with US Generally Accepted
Accounting Principles ("US GAAP"). The group's US GAAP results have been
materially impacted by Statement of Financial Accounting Standard ("FAS") 133
'Accounting for Derivative Instruments and Hedging Activities'. The effect of
the implementation of this standard on the group's US GAAP results for the
financial year is set out in Note 34 to the Accounts. The group implemented FAS
141 `Business Combinations' and FAS 144 `Accounting for the Impairment or
Disposal of Long-Lived Assets' during the year. Implementation of these new
standards did not have a material impact on the group's US GAAP results and
financial position. In addition, the group implemented FAS 142 `Goodwill and
Other Intangible Assets' on 1 April 2002. FAS 142 prohibits the amortisation of
goodwill and requires that goodwill be tested annually for impairment (and in
interim periods if certain events occur which indicate that the carrying value
of goodwill may be impaired). Goodwill amortisation charged to the profit and
loss account, under US GAAP, for the year ended 31 March 2002, was (Pounds)172.5
million. The group is currently evaluating the overall impact of adopting this
standard on its results and financial position. FAS 143 `Accounting for Asset
Retirement Obligations' will be effective for the group beginning 1 April 2003.
The group is currently evaluating the impact of adopting FAS 143 on its results
and financial position. FAS 145 `Recission of FASB Statements No. 4, 44 and 64,
Amendment of FASB Statement No. 13 and Technical Corrections' will also be
effective for the group beginning 1 April 2003. This standard is not expected to
have a material impact on the group's results and financial position.
Critical Accounting Policies
The group Accounts are prepared in accordance with UK Generally Accepted
Accounting Principles ("UK GAAP"). This requires the directors to adopt those
accounting policies which are most appropriate for the purpose of the Accounts
giving a true and fair view. The group's material accounting policies are set
out in full on pages 56 to 60. In preparing the Accounts in conformity with UK
GAAP, the directors are required to make estimates and assumptions that impact
on the reported amounts of revenues, expenses, assets and liabilities. Actual
results may differ from these estimates. Certain of the group's accounting
policies have been identified as the most critical accounting policies by
considering which policies involve particularly complex or subjective decisions
or assessments and these are discussed below. The discussion below should be
read in conjunction with the full statement of accounting policies.
Income from the sale of energy and measured water includes an estimate of the
number and value of units supplied to customers between the most recent
measurement and the year end. This is estimated based on the energy and water
delivered each month compared to the amounts billed to customers. Estimates of
unbilled units and debt are reviewed regularly to ensure that income is
recognised only where there is sufficient reliability of the estimates.
The group estimates its provision for doubtful debts relating to trade debtors
by a combination of two methods. Firstly, specific amounts are evaluated where
information is available that a customer may be unable to meet its financial
obligations. In these circumstances, assessment is made based on available
information to record a specific provision against the amount receivable from
that customer to adjust the carrying value of the debtor to the amount expected
to be collected. In addition, a provision for doubtful debts within the
portfolio of other debtors is made using historical experience and ageing
analysis to estimate the provision required to reduce the carrying value of
trade debtors to their estimated recoverable amounts. This process involves the
use of assumptions and estimates which may differ from actual experience.
Management of debt recovery is a key priority for the group and the estimates of
provisions for doubtful debts are reviewed regularly. In late 2001, Enron
declared bankruptcy. The group's debtors due from Enron were not material to the
group and provision has been made for the amount receivable, net of the effect
of applying master netting agreements.
Tangible fixed assets, other than land, are generally depreciated on the
straight line method over their estimated operational lives. Operational lives
are estimated based on a number of factors including the expected usage of the
asset, expected physical
ScottishPower Annual Report & Accounts/Form 20-F 2001/02 |42
Financial Review continued
deterioration and technological obsolescence. Goodwill on acquisitions prior to
31 March 1998 was written off to reserves. Goodwill on subsequent acquisitions
is amortised on a straight-line basis over its estimated useful economic life.
The estimated useful economic life of the goodwill on acquisition of PacifiCorp
is 20 years. This is based on an assessment of the long-term nature of
PacifiCorp's electricity business and the potential impact of change to the
regulatory regime for utility companies in the US. In certain circumstances,
accounting standards require tangible fixed assets and goodwill to be reviewed
for impairment. When a review for impairment is conducted, the recoverable
amount is assessed by reference to the net present value of the expected future
cash flows of the relevant income generating unit ("IGU"), or disposal value if
higher. The discount rate applied is based on the group's weighted average cost
of capital with appropriate adjustments for the risks associated with the IGU.
Estimates of cash flows are consistent with management's plans and forecasts.
Estimation of future cash flows involves a significant degree of judgement.
US regulatory assets are only recognised where they comprise rights or other
benefits which have arisen as a result of past transactions or events which have
created an obligation to transfer economic benefits to a third party. The
interpretation of these principles requires assessment of regulatory events to
determine when an asset should be recognised. The application of this policy has
generally led to US regulatory assets only being recognised when reflected in
customers' bills.
Provision is made for liabilities relating to environmental obligations when the
related environmental disturbance occurs, based on the net present value of
estimated future costs. Estimates of environmental liabilities are principally
based on reports prepared by external consultants. The ultimate cost of
environmental disturbance is uncertain and there may be variances from these
cost estimates, which could affect future results.
Provision is made for the decommissioning of major capital assets where the
costs are incurred at the end of the lives of the assets. Similarly, closure and
reclamation costs are a normal consequence of mining with the majority of the
expenditure incurred at the end of the life of the mine. Although the ultimate
cost to be incurred is uncertain, estimates have been made of the respective
costs based on local conditions and requirements.
The group's tax charge is based on the profits for the year and tax rates in
force. Estimation of the tax charge requires an assessment to be made of the
potential tax treatment of certain items which will only be resolved once
finally agreed with the relevant tax authorities. In particular, the tax returns
of the group's US businesses are examined by the Internal Revenue Service and
state agencies on a several year lag. Assessment of the likely outcome of the
examinations is based upon historical experience and the current status of
examination issues.
The group operates a number of defined benefit pension schemes for its
employees. In addition, other post-retirement benefits are provided to employees
within the group's US businesses. The nature of pensions and other
post-retirement benefits is inherently long-term and future experience may
differ from actuarial assumptions which are used to compute the group's costs
for pensions and other post-retirement benefits. The principal actuarial
assumptions relate to the expected return on assets, future salary increases,
pension increases, interest rates for costing liabilities and health care cost
trends.
In addition to preparing the group Accounts in accordance with UK GAAP, the
directors are also required to prepare a reconciliation of the group's profit or
loss and shareholders' funds between UK GAAP and US GAAP. The adjustments
required to reconcile the group's profit or loss and shareholders' funds from UK
GAAP to US GAAP are explained in Note 34 to the Accounts. Certain of the group's
US GAAP accounting policies have been identified as the most critical US GAAP
accounting policies and these are discussed below. The discussion below should
be read in conjunction with the full explanation of US GAAP accounting policies
set out in Note 34.
The group prepares its US GAAP financial information in accordance with FAS 71
`Accounting for the Effects of Certain Types of Regulation' in respect of its
regulated US business, PacifiCorp.
In order to apply FAS 71, certain conditions must be satisfied, including the
following: an independent regulator must set rates; the regulator must set the
rates to cover the specific costs of delivering service; and the service
territory must lack competitive pressures to reduce rates below the rates set by
the regulator. FAS 71 requires the group to reflect the impact of regulatory
decisions and requires that certain costs be deferred on the balance sheet,
under US GAAP, until matching revenue can be recognised. FAS 71 provides that
regulatory assets may be capitalised, under US GAAP, if it is probable that
future revenues, in an amount at least equal to the capitalised costs, will
result from the inclusion of that cost in allowable costs for rate-making
purposes. In addition the rate actions should permit recovery of the specific
previously incurred costs rather than to provide for expected levels of similar
future costs. An entity applying FAS 71 does not need absolute assurance prior
to capitalising a cost, only reasonable assurance. If the group should determine
that, in future, PacifiCorp no longer meets the criteria for continued
application of FAS 71, the group could be required to write off its regulatory
assets and liabilities, under US GAAP, unless regulators specify some other
means of recovery or refund. PacifiCorp intends to seek recovery of all of its
prudent costs, including stranded costs, in the event of deregulation. However,
due to the current lack of definitive legislation, it is not possible to predict
whether PacifiCorp will be successful.
Because of potential regulatory and/or legislative actions in the various states
in which PacifiCorp operates, the group may have regulatory asset write offs and
charges for impairment of regulatory assets, under US GAAP, in future periods.
Such impairment reviews would involve estimates of future cash flows including
estimated future prices, cash costs of operations, sales and load growth
forecasts and the nature of any legislative or regulatory cost recovery
mechanism.
The group uses derivative instruments in the normal course of business, to
offset fluctuations in earnings, cash flows and equity associated with movements
in exchange rates, interest rates and commodity prices.
On 1 April 2001, the group adopted FAS 133. Certain of the group's derivatives
are treated as normal purchases and normal sales and are therefore excluded from
the requirements of
ScottishPower Annual Report & Accounts/Form 20-F 2001/02 |43
FAS 133. Derivatives falling within the scope of FAS 133 are required to be
recorded in the balance sheet, under US GAAP, at fair value. Changes in the fair
values of derivatives that are not designated as hedges are adjusted through
earnings, under US GAAP, with the exception of long-term energy contracts that
were in existence on 1 April 2001 and are included in PacifiCorp's rate-making
base. For these long-term energy contracts PacifiCorp received regulatory
accounting approvals to adjust the fair value through establishment of
regulatory assets and liabilities until the contracts are settled. For
derivatives designated as effective hedges, the changes in fair values are
recognised, under US GAAP, in accumulated other comprehensive income until the
hedged items are recognised in earnings. The group's future results, under US
GAAP, could be impacted by changes in market conditions to the extent that
changes in contract values are not offset by regulatory or hedge accounting.
To date the Derivatives Implementation Group ("DIG") in the US has issued more
than 100 interpretations to provide guidance in applying FAS 133. As the DIG or
the Financial Accounting Standards Board in the US continue to issue
interpretations, the group may be required to change its accounting treatment
for certain of its derivative instruments and this could impact on the group's
US GAAP financial information in the future.
UK GAAP to US GAAP Reconciliation
The consolidated Accounts of the group are prepared in accordance with UK GAAP
which differ in significant respects from US GAAP. Reconciliations of profit and
equity shareholders' funds between UK GAAP and US GAAP are set out in Note 34 to
the Accounts. Under US GAAP, the loss for the year ended 31 March 2002 was
(Pounds)825 million after charging an extraordinary item, net of tax, of
(Pounds)8 million and before charging a cumulative adjustment for the effect of
implementing FAS 133, net of tax, of (Pounds)62 million compared to a profit of
(Pounds)387 million the previous year. Loss per share under US GAAP, before the
cumulative adjustment for FAS 133, was 44.91 pence per share compared to
earnings of 21.13 pence per share in 2000/01. Under US GAAP, the loss per share
for the year ended 31 March 2002, after the cumulative adjustment for FAS 133,
was 48.26 pence. In accordance with US GAAP, loss/earnings per share are stated
based on US GAAP loss/earnings, without adjustments for the impact of the UK
GAAP exceptional items and goodwill amortisation, as such additional measures of
underlying performance are not permitted under US GAAP. The inclusion of UK GAAP
exceptional items in the determination of earnings per share in accordance with
US GAAP decreased earnings by (Pounds)1,039 million or 56.53 pence per share in
2001/02. The inclusion of goodwill amortisation decreased earnings by
(Pounds)173 million or 9.39 pence per share in 2001/02 and by (Pounds)164
million or 8.93 pence per share in 2000/01. Equity shareholders' funds under US
GAAP amounted to (Pounds)5,850 million at 31 March 2002 compared to
(Pounds)7,463 million at 31 March 2001.
Summary
This has been a difficult year for ScottishPower with the results for the first
six months including additional excess power costs incurred in the US. Results
in the second six months of the year to March 2002 have improved and earnings
per share for that period were 45% higher than the same period last year. With
proceeds from the Southern Water disposal in April 2002, ScottishPower's balance
sheet is also stronger with gearing reduced.
/s/ David Nish
David Nish
Finance Director
1 May 2002
ScottishPower Annual Report & Accounts/Form 20-F 2001/02 |44
Board of Directors & Executive Team
Executive Directors
Ian Russell (49) is Chief Executive, having been appointed to this position in
April 2001. He joined ScottishPower as Finance Director in April 1994, and
became Deputy Chief Executive in November 1998. He is a member of the Institute
of Chartered Accountants of Scotland, having trained with Thomson McLintock, and
has held senior finance positions with Tomkins plc and HSBC. He has a B.Com
(Hons) from the University of Edinburgh.
Charles Berry (50) is Executive Director UK, responsible in this capacity for
the UK energy businesses of Generation, Trading and Supply as well as regulatory
matters. He joined ScottishPower in November 1991, and was appointed to the
Board in April 1999. He is non-executive Chairman of Thus Group plc. Before
joining ScottishPower, he was Group Development Director of Norwest Holst, a
subsidiary of Compagnie Generale des Eaux, and prior to that held management
positions within subsidiaries of Pilkington plc. He holds a BSc (First Class
Hons) in Electrical Engineering from the University of Glasgow and a Masters
Degree in Management from the Massachusetts Institute of Technology.
David Nish (41) is Finance Director, having joined ScottishPower in September
1997 as Deputy Finance Director and then being appointed to the Board as Finance
Director in December 1999. In this capacity, he also has responsibility at Board
level for performance management and information technology. He is a
non-executive director of Thus Group plc. He is a member of the Institute of
Chartered Accountants of Scotland and its Qualifications Board, a non-executive
director of Scottish Knowledge plc and a member of the Scottish Council of the
CBI. Prior to joining ScottishPower, he was a partner with Price Waterhouse. He
has a B.Acc from the University of Glasgow.
Non-executive Directors
Charles Miller Smith (62) joined the Board as Deputy Chairman in August 1999 and
was appointed Chairman in April 2000. Following a career with Unilever for some
30 years, during the last five of which he was Director of Finance and latterly
of the Food Executive, he was appointed Chief Executive of ICI in 1995 and then
served as Chairman from 1999 to December 2001. He is an adviser to Goldman
Sachs, a non-executive director of The Royal Scottish National Orchestra and a
member of the Court of Governors of Henley Management College.
Euan Baird (64) joined the Board in January 2001 and is Chairman and Chief
Executive Officer of Schlumberger Limited. He joined Schlumberger in 1960 and
held various positions worldwide before taking up his present position in 1986.
He is currently a trustee of Tocqueville Alexis Trust and Carnegie Institution
of Washington, and a member of the Comite National de la Science in France and
the Prime Minister's Council of Science and Technology in the UK. He is a
non-executive director of Societe Generale and Areva. His current term of office
will expire at the AGM in 2004.
Mair Barnes (57) joined the Board in April 1998. She is a non-executive director
of Patientline plc, Littlewoods plc and the South African company, Woolworths
Holdings Limited. She has also been a non-executive member of the Departmental
Board of the Department of Trade and Industry ("DTI") and continues to serve as
a member of the DTI's Strategy Board and Services Group Board. She was
previously Managing Director of Woolworths plc in the UK until 1994, and
subsequently she became Chairman of Vantios plc until 1998. She was also
formerly a non-executive director of George Wimpey plc and Abbey National plc.
Her current term of office will expire at the AGM in 2004.
Philip Carroll (64) joined the Board in January 2002. He was formerly Chairman
and Chief Executive Officer of Fluor Corporation, a California-based
international engineering, construction and services company, until his
retirement in February 2002. Previously, he was with Shell Oil for over 35
years, serving as President and Chief Executive Officer from 1993 to 1998. He is
an honorary life member of the Board of the American Petroleum Institute and
holds various posts with the James A Baker III Institute for Public Policy of
Rice University and the University of Houston. His current term of office,
subject to his election in 2002, will expire at the AGM in 2005.
Sir Peter Gregson GCB (65) joined the Board in December 1996 and is the
company's senior independent non-executive director and Chairman of the
Remuneration Committee. He was formerly a career civil servant, having served
latterly as Permanent Secretary of the Department of Energy from 1985 to 1989
and Permanent Secretary of the Department of Trade and Industry until his
retirement in June 1996. He is Deputy Chairman of the Board of Companions of the
Institute of Management and was previously a non-executive director of Woolwich
plc. His current term of office, subject to his re-election in 2002, will expire
at the AGM in 2003.
Nolan Karras (57) joined the Board in November 1999. He continues as a director
of PacifiCorp, having previously (until the merger in November 1999) served as
Chairman of the PacifiCorp Personnel Committee. He is President of The Karras
Company, Inc., and a Registered Principal for Raymond James Financial Services.
He is Chief Executive Officer of Western Hay Company, Inc., and a non-executive
director of Beneficial Life Insurance Company. He is a member of the Utah State
Higher Education Board of Regents and serves on the board of Ogden-Weber Applied
Technology College. He also served as a member of the Utah House of
Representatives from 1981 to 1990, and as Speaker of the Utah House of
Representatives from 1989 to 1990. His current term of office, subject to his
re-election in 2002, will expire at the AGM in 2003.
Ewen Macpherson (60) joined the Board in September 1996 and is Chairman of the
Audit Committee. He had a long career with 3i Group plc, leading to his
appointment as Chief Executive from 1992 until his retirement in 1997. He is
Chairman of Merrill Lynch New Energy Technology plc and a non-executive director
of Foreign & Colonial Investment Trust plc and Pantheon International
Participations plc. He is also Chairman of the Trustees of GlaxoSmithKline
Pension Fund. Previous appointments include non-executive directorships of M&G
Group plc, Booker plc and The Law Debenture Corporation plc. His current term of
office will expire at the AGM in 2003.
ScottishPower Annual Report & Accounts/Form 20-F 2001/02 |45
Executive Team
The Executive Team is a primary committee of the Board and includes not only the
Executive Directors of the Board but also the following key Executives and
Officers from the group:
Julian Brown (52) was appointed Group Director, Strategy in April 1997, having
joined ScottishPower in 1993. He began his commercial career with Exxon Chemical
in Australia and subsequently spent seven years with management consultants
McKinsey and Company. He holds a BSc from the Australian National University and
a PhD in Chemistry from University College London.
Dominic Fry (42) joined ScottishPower in September 2000 as Group Director,
Corporate Communications. He is responsible for investor and media relations,
communications with employees and managing the group's overall reputation. He
has held appointments as Communications Director with J Sainsbury plc and
Eurotunnel. He chairs the Trading Board of the Glasgow Science Centre and is a
communications adviser to the Royal Shakespeare Company and Business in the
Community's Rural Action programme. He was educated at the Universite Paul
Valery III in Montpellier and the University of North Carolina.
Terry Hudgens (47) was appointed Chief Executive Officer of ScottishPower's
competitive US energy business PacifiCorp Power Marketing, Inc., in December
2001 and, at the same time, joined the Executive Team. He joined PacifiCorp as
Senior Vice President of Power Supply in April 2000, having previously spent 25
years with Texaco Inc. He was formerly President of Texaco Natural Gas and
served as Texaco's senior representative and elected officer in the Natural Gas
Supply Association. He has a bachelor's degree in civil engineering from the
University of Houston.
Judi Johansen (43) was appointed President & Chief Executive Officer of
PacifiCorp in June 2001 and joined the Executive Team in December 2001. She is
responsible for the company's mining operations, regulated power generation
facilities, wholesale energy services, transmission, distribution and supply.
She joined PacifiCorp as Executive Vice President of Regulation and External
Affairs in December 2000, having held senior positions with the Bonneville Power
Administration and Washington Water Power. She is involved in several civic and
professional activities. She has a bachelor's degree in political science from
Colorado State University and a law degree from Northwestern School of Law at
Lewis & Clark College in Portland, Oregon.
Ronnie Mercer (58) was appointed Group Director, Infrastructure in April 2001
and is responsible in this role for the UK wires business and, prior to its
sale, Southern Water. He joined the ScottishPower Generation Business in 1994
and was appointed Generation Director in 1996 and then Managing Director of
Southern Water in 1998. Previous career positions include Scottish Director and
Managing Director roles in British Steel. He was educated at Paisley College of
Technology.
Andrew Mitchell (50) was appointed Group Company Secretary in July 1993 and is
responsible in this role for corporate governance, compliance and reporting and
shareholder services. He also serves as Chairman of the trustees of the group's
UK pension schemes. Prior to joining ScottishPower, he held a number of company
secretarial appointments, latterly as Company Secretary of The Laird Group plc
and then Stakis plc, now part of the Hilton Group. He is a graduate in law from
the University of Edinburgh (LLB Hons) and the London School of Economics (LLM)
and is a member of the Institute of Chartered Secretaries and Administrators.
Michael Pittman (49) was appointed Group Director, Human Resources in November
2001. He has groupwide responsibility for Human Resources, leading the focus on
talent management, one of the group's main strategic thrusts. He joined
PacifiCorp in December 1979 and was appointed to the PacifiCorp Board in May
2000. He chairs the PacifiCorp Foundation for Learning Board and is involved in
numerous civic activities. He has held several positions within PacifiCorp,
including safety and health, risk management, and operations. He holds an
advanced degree in environmental health from the University of Washington.
James Stanley (47) was appointed Group Director, Commercial and Legal in March
1996. He is responsible in this role for the provision of all legal, commercial
and associated services throughout the group and particularly the delivery of
M&A projects. In his early career he specialised in commercial litigation in
private practice. In 1986 he moved to the Trafalgar House Group and subsequently
became both Commercial Director of John Brown plc and General Counsel to the
Global Engineering Division of the Group. He is a graduate in law from
Nottingham University and the College of Law in Chester where he qualified as a
solicitor in 1980.
Members of the Audit Committee
Ewen Macpherson, Chairman
Philip Carroll
Sir Peter Gregson
Charles Miller Smith
Members of the Nomination Committee
Charles Miller Smith, Chairman
Mair Barnes
Sir Peter Gregson
Nolan Karras
Ian Russell
Members of the Remuneration Committee
Sir Peter Gregson, Chairman
Euan Baird
Mair Barnes
Nolan Karras
Ewen Macpherson
Members of the Executive Team
Ian Russell
Charles Berry
David Nish
Julian Brown
Dominic Fry
Terry Hudgens
Judi Johansen
Ronnie Mercer
Andrew Mitchell
Michael Pittman
James Stanley
Board changes
Ian Russell succeeded Sir Ian Robinson as Chief Executive on 17 April 2001. Sir
Ian Robinson retired from the Board on 4 May 2001; Keith McKennon and John
Parnaby following the conclusion of last year's Annual General Meeting on 27
July 2001; and Alan Richardson and Ken Vowles on 31 December 2001 and 31 March
2002, respectively. Robert Miller resigned from the Board on 8 June 2001. Allan
Leighton served on the Board throughout the year but resigns with effect from 12
June 2002. Philip Carroll was appointed to the Board on 15 January 2002 and, in
accordance with the Articles of Association, he will retire from office at the
Annual General Meeting and, being eligible, offers himself for election. In
addition, Charles Berry, Sir Peter Gregson and Nolan Karras retire by rotation
and, being eligible, offer themselves for re-election. Charles Berry has a
service contract terminable by either party upon one year's notice.
For the purposes of the Annual Report on Form 20-F, the members of the Executive
Team are regarded as Officers of the company.
ScottishPower Annual Report & Accounts/Form 20-F 2001/02 |46
Corporate Governance
Corporate governance statement
The Company is committed to the highest standards of corporate governance. This
statement, together with the Remuneration Report of the Directors, set out on
pages 48 to 54, describes how, in respect of the financial year ended 31 March
2002, the company has been in compliance with the principles of good governance
set out by the Listing Rules of the Financial Services Authority in Section 1 of
the Combined Code.
Board of directors
There is a well-established division of authority and responsibility at the most
senior level within the company through the separation of the roles of Chairman
and Chief Executive. There are currently three executive and seven non-executive
directors (including a non-executive Chairman) on the Board. Sir Peter Gregson
is the senior independent non-executive director. With the exception of the
Chairman, all non-executive directors are considered by the Board to be
independent.
The non-executive directors are from varied business and other backgrounds, and
all directors have the benefit of induction visits and briefings following their
appointment to the Board. Their experience allows them to exercise independent
judgement on the Board and their views carry substantial weight in Board
decisions. They contribute to the company's strategy and policy formulation, in
addition to monitoring its performance and its executive management. The non-
executive directors are appointed for a specified term; reappointment is not
automatic, and each non-executive director's position is subject to review prior
to the expiry of his or her term of office.
The Board meets on a regular basis and has a schedule of matters concerning key
aspects of the company's activities which are reserved to the Board for
decision. The Board exercises full control over strategy, investment and capital
expenditure. In addition, individual executive directors have specific
responsibilities for such matters as health, safety, environment and regulation.
All directors have access to the Company Secretary, who is responsible for
ensuring that all Board procedures are observed. Any director wishing to do so,
in furtherance of his or her duties, may take independent professional advice at
the company's expense.
Board committees
The Board has four principal standing committees: namely, the Audit Committee,
Nomination Committee, Remuneration Committee and the Executive Team. The
composition, purpose and function of each of these committees are described
below.
Audit Committee
The Audit Committee is comprised of non-executive directors only and has been
chaired by Ewen Macpherson since July 2001. A majority of the members are
independent. It has a remit to review the company's accounting policies,
internal control and financial reporting and makes recommendations on these
matters to the Board for decision. It also considers the appointment and fees of
the external auditors.
Nomination Committee
The Nomination Committee is chaired by the Chairman of the Board with, as
members of the Committee, the Chief Executive and three independent
non-executive directors. It has a remit to consider and make recommendations to
the Board on all new appointments of directors, having regard to the overall
balance and composition of the Board; to consider and approve the remit and
responsibilities of the executive directors; and to review and advise upon
issues of succession planning and organisational development.
Remuneration Committee
The Remuneration Committee is comprised of independent non-executive directors
only and has been chaired by Sir Peter Gregson since July 2001. It has a remit
to consider and make recommendations on Board remuneration policy and, on behalf
of the Board, to determine specific remuneration packages for each of the
executive directors. In discharging its remit, the Committee has regard to the
provisions of the Combined Code and has as an objective the aim of providing
packages to attract, retain and motivate executive directors of the quality
required; to judge the company's position in matters of remuneration policy and
practice relative to other companies; and to take into account wider issues of
pay-setting. It also has responsibility for the company's bonus and incentive
schemes. The Remuneration Report of the Directors for 2001/02 is set out on
pages 48 to 54.
Executive Team
The Executive Team comprises the Chief Executive and other executive directors,
together with the Group Director, Strategy; Group Director, Corporate
Communications; Chief Executive Officer, PacifiCorp Power Marketing, Inc.; Chief
Executive Officer, PacifiCorp; Group Director, Infrastructure; Group Director,
Human Resources; Group Director, Commercial and Legal; and the Group Company
Secretary. Operational control and implementation of group strategy and policy
are responsibilities delegated by the Board to the Chief Executive, who is
supported by the Executive Team (and by divisional and business boards) in the
discharge of these functions. Major issues and decisions are reported to the
Board.
Internal control
The directors of ScottishPower have overall responsibility for the system of
internal controls and for reviewing the effectiveness of the system. The system
of internal controls is designed to manage rather than eliminate the risk of
failure to achieve business objectives. In pursuing these objectives, internal
control can only provide reasonable and not absolute assurance against material
misstatement or loss.
A Group Risk Management Committee ("GRMC"), comprising of members of the
Executive Team, has been established to assist the Board in ensuring that an
appropriate risk and control governance framework is in place. The GRMC meets
monthly and the key responsibilities of this group are to implement the risk
management strategy; to ensure that an appropriate risk management framework is
operating effectively across the company; to embed a risk culture throughout the
group; and to provide the Executive Team, the Audit Committee and the Board with
a consolidated view of the risk profile of the company identifying any major
exposures and mitigating actions.
The risk management framework and internal control system across the group,
which is subject to continuous development, provides the basis on which the
company has complied with the Combined Code provisions on internal control.
Control environment
The company is committed to ensuring that a proper control environment is
maintained. There is a commitment to competence and integrity, and to the
communication of ethical values and control consciousness to managers and
employees. Human Resources policies underpin that commitment by a focus on
enhancing job skills and promoting high standards of probity among staff. In
addition, the appropriate organisational structure has been developed within
which to control the businesses and to delegate authority and accountability,
having regard to acceptable levels of risk.
Identification and evaluation of risks and control objectives
The company's strategy is to follow an appropriate risk policy, which
effectively manages exposures related to the achievement of business objectives.
Each business identifies and assesses the key business risks associated with the
achievement of its strategic objectives. Any key actions needed to further
enhance the
ScottishPower Annual Report & Accounts/Form 20-F 2001/02 |47
control environment are identified along with the person responsible for the
management of the specific risk. Each month a detailed review of the key risks,
controls and action plans within each of the businesses takes place and a Risk
Report is produced for review and challenge by the board of each business. This
monthly Risk Report is a standing item on the agenda of the business boards,
which operate throughout the group. This is a key tool in ensuring the active
management of risk across the organisation.
Business Controls Managers have been appointed within each of the businesses to
help ensure that the risk management and internal control system is consistently
adopted, updated and embedded into the business processes.
The corporate centre also considers those risks to the group's strategic
objectives that may not be identified and managed at a business level.
The GRMC on a monthly basis receives the group-wide Risk Report together with
supporting documentation for review. This report highlights the most significant
risks across the group, the actions being taken to mitigate these and also
identified individuals responsible for the management of these risks. The
information being supplied to the GRMC is continually being developed to include
quantitative measures such as sensitivity analyses and Value-at-risk
calculations for issues reported on the Group Energy Risk Report.
The use of a well-defined risk management methodology across all businesses
allows a consistent and co-ordinated approach to risk reporting for review by
the Board, which also receives regular reports on these matters from the Audit
Committee, to enable the directors to review the effectiveness of the system of
internal controls on a regular basis.
A key element and requirement of the risk evaluation process is that a written
certificate is provided twice per year by the Managing Director of each business
confirming that they have reviewed the effectiveness of the system of internal
controls during the year.
Energy trading
In light of the volatility experienced in the western US power market a number
of enhancements have been implemented to the risk and control framework to
further strengthen the process for identification, assessment and mitigation of
risks in the energy trading market. The key changes in this area include the
enhancement of systems and business processes as well as the appointment of an
Energy Risk Director who sits on the energy and group risk committees. The key
responsibilities of the energy risk committees are to ensure that all risks
pertaining to operating the trading and energy businesses are understood,
quantified, managed and reported on a consistent basis across the group.
Monitoring and corrective action
The Executive Team reviews monthly the key risks facing the group and the
controls and monitoring procedures for these. Operation of the group's control
and monitoring procedures is reviewed and tested by the group's internal audit
function under the supervision of the Director of Internal Audit, reporting to
the Finance Director and with access to the Chairman of the Audit Committee.
Internal audit reports and recommendations on the group's procedures are
reviewed regularly by the Audit Committee. As part of their external audit
responsibilities, the external auditors also provide reports to the Audit
Committee on the operation of the group's internal financial control procedures.
The Audit Committee also receives regular reports on the continued development,
implementation and evaluation of the risk management and internal control
system.
Auditor independence
The Audit Committee and the firm of external auditors have safeguards to avoid
the possibility that the auditors' objectivity and independence could be
compromised. These safeguards include the auditors' report to the directors and
the Audit Committee on the actions they take to comply with the professional and
regulatory requirements and best practice designed to ensure their independence
from ScottishPower.
Where it is deemed that the work to be undertaken is of a nature that is
generally considered reasonable to be completed by the auditor of the group for
sound commercial and practical reasons, including confidentiality, the conduct
of such work will be permissible. Examples of work that would fall into this
category include the completion of regulatory audits, provision of regulatory
advice, reporting to the SEC and the UK Listing Authority and the completion of
financial due diligence work.
With regard to the provision of taxation services, including verification,
compliance and tax planning opportunities, where the Board believes they are
best suited, the firm of external auditors will be used.
This policy, which was approved by the Audit Committee and the Board, came into
effect on 1 May 2002 and specifically prevents the use of the firm of external
auditors from undertaking general consultancy work on behalf of the group.
Social, environmental and ethical risks and opportunities
As a part of the internal control framework, the Board takes regular account of
the significance of social, environmental and ethical ("SEE") matters to the
business of the company. The Board receives full information on SEE matters and
these issues are included in the training offered to directors on their first
appointment. This allows the Board to identify the risks and opportunities
arising from the impact of SEE issues on the company's short- and long-term
value.
Further information regarding the SEE policies and practices of the company can
be found in the separate Corporate Environment Sustainability and Community
Reports.
Political donations and expenditure
In previous Annual Reports, it has been the company's practice to state that no
money has been given by the company for political purposes. This policy has not
changed: ScottishPower remains a politically neutral organisation. However, as
was outlined to shareholders at last year's Annual General Meeting, the company
is now subject to new rules governing political donations and expenditure by
virtue of the Political Parties, Elections and Referendums Act 2000, which came
into force on 16 February 2001. This new legislation defines political
"donations" and "expenditure" in wider terms than would be commonly understood
by these phrases. The definitions include expenditure which the Board believes
it is in the interests of the company to incur. The new Act also requires
companies to obtain prior shareholder approval of this expenditure and, at the
Annual General Meeting in 2001, the company obtained authorisation up to a
maximum amount of (Pounds)100,000.
During the financial year ended 31 March 2002, the company paid a total of
(Pounds)13,000 for activities which may be regarded as falling within the terms
of the new Act. These activities comprised sponsorship of briefings, receptions
and fringe meetings at the Labour, Conservative and Scottish National Party
Conferences and support for other party functions. These occasions present an
important opportunity for the company to represent its views on a non-partisan
basis to politicians from across the political spectrum. The payments made do
not indicate support, and are not intended to influence support, for any
particular political party.
In addition, the company paid (Pounds)36,000 in connection with related
activities such as participation in fuel poverty forums and in the promotion of
sustainable energy.
The Board believes that participation in these events is in the best interests
of the company.
ScottishPower Annual Report & Accounts/Form 20-F 2001/02 |48
Remuneration Report of the Directors
Introduction
The following statement sets out how, during the financial year ended 31 March
2002, the company has been in compliance with the remuneration principles set
out in Part B of the Combined Code. The statement also takes account of the
proposals for reform of remuneration disclosure contained in the Department of
Trade and Industry Consultative Document on Directors' Remuneration of December
2001.
Consideration of remuneration matters by the directors
The ScottishPower Board is responsible for determining the remuneration policy
for the ScottishPower group. The Remuneration Committee determines the detail of
remuneration arrangements for executive directors and reviews proposals in
respect of other senior executives. The relationship between the Board and the
Committee is governed by formal Terms of Reference, which are regularly reviewed
and reflect best practice in this field.
The Remuneration Committee consists solely of independent non-executive
directors. Its members are Sir Peter Gregson (Chairman), Euan Baird, Mair
Barnes, Nolan Karras and Ewen Macpherson. These members have no personal
financial interest, other than as shareholders, in the matters considered by the
Committee. They are paid a fee and expenses, but do not receive any other
remuneration from the company. Details of the payments made to all non-executive
directors are set out in Table 26 (page51).
The Terms of Reference require the Chairman of the Committee to attend the
Annual General Meeting in order to account to shareholders for the decisions of
the Committee.
The Chairman of the company, Charles Miller Smith, and the Chief Executive, Ian
Russell, are generally invited to attend meetings and advise, as appropriate, on
the performance of executive directors. They are not, however, present during
any discussion of their own remuneration. The Terms of Reference contain
conflict of interest provisions to ensure that no directors are involved in any
decision relating to their own remuneration.
The Committee is advised internally by the Group Company Secretary, Andrew
Mitchell (who acts as Secretary to the Committee), the Group Director, Human
Resources, Michael Pittman, and the Director, Group Remuneration & Benefits,
James McInally. The Committee is also provided with independent advice from
external remuneration consultants, principally Monks Partnership. The Terms of
Reference empower the Committee to avail itself of external legal and
professional advice at the expense of the company.
During the year, the Board accepted all of the recommendations from the
Committee without significant amendment.
Following the flotation of Thus plc in November 1999, and in accordance with
good corporate governance principles, the Thus Board established a separate
Remuneration Committee which determines the details of remuneration arrangements
for that company. The entire shareholding of ScottishPower in Thus Group plc was
demerged to ScottishPower shareholders on 19 March 2002.
Statement of remuneration policy
Philosophy and policy
ScottishPower seeks to ensure that remuneration and incentive schemes are in
line with best practice and promote the interests of shareholders.
Rewards for executives and directors should attract and retain individuals of
high quality, who have the requisite skills and are incentivised to achieve
performance which exceeds that of competitor companies. As such, remuneration
packages must be market-competitive. All senior management remuneration packages
are set according to a mid-market position, with packages above the mid-market
level provided only where supported by demonstrably superior personal
performance. As the company evolves, remuneration packages will be developed to
reflect the prevailing market practice in each business environment.
Annual bonus arrangements have been structured so that targets reflect
corporate, business unit and individual performance.
The company operates a Personal Shareholding Policy, requiring executives and
senior managers to build-up and retain a shareholding in the company in
proportion to their annual salaries. These proportions are three times salary
for the Chief Executive and two times salary for other executive directors. The
Committee considers this policy to be in the best interests of shareholders.
The Committee takes a balanced view of remuneration, considering each element
relative to market and, in the past, has realigned elements of the package to
reflect market conditions or changes in market practice.
Practical application
In setting remuneration levels, the Committee commissioned an independent
evaluation of the roles of the executive, and also of the next levels of
management within the company. The Committee has also continued to take
independent advice from external remuneration consultants on market-level
remuneration, based on comparison with companies of similar size and complexity.
In considering the comparator companies, the consultants have included a number
of other utilities but have not restricted their study solely to utilities.
Base salaries
The Committee sets the base salary for each executive director by reference to
individual performance through a formal appraisal system, and to external market
data, based on job evaluation principles and reflecting similar roles in other
comparable companies.
Annual performance-related bonus Executive directors and senior management
participate in the company's performance-related pay schemes. All payments
under the schemes are non-pensionable and are subject to the approval of the
Committee.
The 2001/02 scheme for executive directors provided a bonus opportunity of a
maximum of 75% of salary, with half determined by the company's financial
performance. The balance of the bonus is linked to each executive's achievement
of key strategic objectives, both short-term and long-term. Objectives are set
annually by the Board and performance against these is reviewed on a six-monthly
basis.
ScottishPower Annual Report & Accounts/Form 20-F 2001/02 |49
For the 2001/02 performance year, the executive directors indicated that they
did not wish to be considered for a bonus payment, despite the fact that their
personal performance and achievement of strategic objectives would have
warranted such a payment under the rules of the Plan. The Committee decided that
no bonus should be paid to executive directors.
Executive share schemes
The company operates a performance share plan, the Long Term Incentive Plan
("LTIP"), and an Executive Share Option Plan 2001 ("ExSOP") for executive
directors and other senior managers.
The LTIP links the rewards closely between management and shareholders, and
focuses on long-term corporate performance. Under the current LTIP, awards to
acquire shares in ScottishPower at nil or nominal cost are made to the
participants up to a maximum value equal to 75% of base salary. The award will
vest only if the Committee is satisfied that certain gateway performance
measures are met. These relate to the sustained underlying financial performance
of the company and performance in relation to customer service standards,
including those set by Ofgem and OFWAT.
The number of shares which actually vest is dependent upon the company's
comparative total shareholder return performance, over a three-year performance
period. For LTIP awards which have vested during the year, this performance is
measured against that of the FTSE 100 index and an index of the Electricity and
Water sectors of the FTSE All Share Index. For LTIP awards granted during the
year, this performance is measured against a comparator group of 40
international energy companies, as identified below:
AES Corp; American Electric Power Inc; Calpine Corp; Centrica; Chubu Electric
Power Co Inc; CLP Holdings Limited; Constellation Energy Group Inc; Dominion
Resources Inc; Duke Energy Corp; Dynegy Inc; Edison SpA; Edison International;
El Paso Corp; Electricidade de Portugal SA; Electrabel SA; Endesa SA; Enron;
Ente Nazionale per l'Energia Elettrica SpA (Enel); Entergy Corp; Exelon;
FirstEnergy Corp; FPL Group Inc; Gas Natural SDG SA; Iberdrola SA; Kansai
Electric Power Co Inc; Lattice Group plc; National Grid; Powergen; PPL Corp;
Progress Energy Inc; Public Service Enterprise Group Inc; Reliant Energy Inc;
Scottish & Southern Energy; Southern Company Inc; Tenaga Nasional Bhd; The Tokyo
Electric Power Co Inc; TXU; Union Fenosa; Williams Companies Inc; Xcel Energy
Inc.
No shares vest unless the company's performance is at least equal to the median
performance of the comparator group. 100% of the shares vest if the company's
performance is equal to or exceeds the top quartile. The number of shares that
vest for performance between these two points is determined on a straight-line
basis.
During the 2001/02 year, the company introduced a new ExSOP. Options granted
under the ExSOP are subject to the performance criterion that the percentage
increase in the company's annualised earnings per share be at least 3% (adjusted
for any increase in the Retail Price Index). This criterion is assessed at the
end of the third financial year, the first year being the financial year
starting immediately before the date of grant. If the criterion is not satisfied
over this period it is tested again at the end of the fourth financial year. If
the criterion is not satisfied over this period it is tested again at the end of
the fifth financial year. If the criterion is not satisfied over this period
then the options lapse.
A number of legacy share-based incentive plans are also in place in the
company's international operations. These are structured to comply with local
tax and legislation and are established at market-competitive levels. No
executive director participates in any international share incentive arrangement
and no further grants will be made under these plans.
Employee Share Plans
The company operates a savings-related share option scheme, which is open to all
UK permanent employees. Under this scheme, options are granted over
ScottishPower shares at a discount of 20% from the prevailing market price at
the time of grant to eligible employees who agree to save up to (Pounds)250 per
month over a period of three or five years.
In addition, the Government implemented legislation in July 2000 to enable
companies to introduce a new Inland Revenue approved Employee Share Ownership
Plan ("ESOP"). The company was amongst the first to introduce these arrangements
for all UK employees. The ESOP enables employees to purchase shares in the
company from pre-tax income up to the limits specified in the legislation. The
company matches these shares at no cost to the employee on a one-for-one ratio.
The legislation also enables the company to award free shares to employees. No
free shares were awarded during 2001/02.
The graphs below represent the comparative Total Shareholder Return (% growth)
performance of the company during the performance period for Award 3 of the Long
Term Incentive Plan (May 1998 - May 2001) that vested during the financial year.
FTSE 100 Comparators
[GRAPHIC]
Electricity & Water Companies
[GRAPHIC]
ScottishPower Annual Report & Accounts/Form 20-F 2001/02 |50
Remuneration Report of the Directors continued
Pension
The executive directors, and other senior managers of the company, are provided
with pension benefits through the company's main pension scheme, and through an
executive top-up pension plan which provides a maximum pension of two-thirds of
final salary on retirement at age 63, reduced where service to age 63 is less
than 20 years. Pensionable salary is normally base salary in the 12 months prior
to leaving the company.
Individuals who joined the company on or after 1 June 1989 are subject to the
Inland Revenue earnings cap, introduced by the Finance Act 1989. Entitlement
above the cap cannot be provided through the company's approved pension
benefits, and therefore arrangements on an unapproved basis have been made to
provide total benefits for executives affected by the legislation as though
there was no cap. The total liability in respect of executives and senior
employees arising in relation to unapproved benefits accrued for service for the
year to 31 March 2002 was (Pounds)690,000. The Trustee body of the Executive Top
Up Plan is chaired by the Group Company Secretary.
The Committee has reported the pension expense in accordance with the
requirements of the UK Listing Authority. Pension costs detailed in the Accounts
are calculated as the cost of providing benefits accrued in 2001/02.
Benefits
Executive directors are eligible for a range of benefits on which they are
assessed for tax. These include the provision of a company car, fuel, private
medical provision and permanent health insurance. Senior executives, depending
upon grade, are eligible for certain of these benefits.
As with salary, the level of benefits is reviewed annually through surveys from
independent consultants. Practice varies as to the composition of these items
amongst the comparator group and the company's benefits are broadly in line with
the practice of the group.
To summarise the above, the executive directors are required to meet or exceed
performance targets in order to receive bonus payments and to participate in the
Long Term Incentive Plan and the Executive Share Option Plan 2001. Their base
salaries are set in accordance with market competitive levels and performance
assessments. The employee share plans are open to all UK employees. They are
essentially savings vehicles and are not subject to a performance test. Pension
entitlements and other benefits are not performance related.
Service contracts
ScottishPower has reviewed its policy on service contracts and, in accordance
with the best practice recommendation of the Combined Code, has resolved that
new appointees to the Board be offered notice periods of one year. The Committee
recognises however that it may be necessary, in the case of appointments from
outside the company, to offer a longer initial notice period: the intent being
to subsequently reduce this period to one year following an agreed initial
period.
The Committee's policy on early termination is to emphasise the duty to mitigate
to the fullest extent practicable. Senior managers within the company have
notice periods ranging from six months to one year.
Executive directors, Charles Berry and David Nish, were appointed to the Board
on or after 1 April 1999; these appointments have service contracts terminable
on one year's notice from both parties.
Two executive directors appointed before 1 April 1999 had service contracts
terminable by the company on two years' notice (this having been reduced from
the three year period applicable prior to September 1994) and by the individuals
concerned on one year's notice. Ken Vowles retired on 31 March 2002 and
accordingly only one executive director, the Chief Executive, Ian Russell, now
has a service contract terminable by the company on two years' notice. Given
that the Chief Executive agreed, without compensation, to a previous reduction
in the notice period in his service contract, the Committee believes that it
remains appropriate for him to retain a two-year rolling contract.
External non-executive appointments
The company encourages its directors to become non-executive directors of other
companies, provided that these are not with competing companies, are not likely
to lead to any conflicts of interest, and do not require extensive commitments
of time which would prejudice their roles within the company. This serves to add
to their personal and professional experience and knowledge, to the benefit of
the company. Any fees derived from such appointments may be retained by the
executives.
Remuneration policy for non-executive directors
The remuneration of non-executive directors is determined by the Board and
consists of fees for their service in connection with the Board and Board
Committees. Additional fees are also payable for chairing Board Committees. The
non-executive directors do not have service contracts, are not members of the
company's pension schemes and do not participate in any bonus, share option or
other profit or long-term incentive scheme. Full details of the remuneration of
the non-executive directors are contained in Table 26.
Compensation of directors and officers
For US reporting purposes, it is necessary to provide information on
compensation and interests for directors and officers. The aggregate amount of
compensation paid by the group to all directors and officers of the company was
(Pounds)5,482,058.
During 2001/02 the aggregate amount set aside or accrued by the group to provide
pension, retirement or similar benefits for directors and officers of the
company pursuant to any existing plan provided or contributed to by the group
was (Pounds)1,740,336.
Interest of management in certain transactions
There have been no material transactions during the group's three most recent
financial years, nor are there presently proposed to be any material
transactions to which the company or any of its subsidiaries was or is a party
and in which any director or officer, or 10% shareholder, or any relative or
spouse thereof or any relative of such a spouse, who had the same home as such
person or who is a director or officer of any subsidiary of the company has or
is to have a direct or indirect material interest.
During the group's three most recent financial years there has been no, and at
present there is no, outstanding indebtedness to the company or any of its
subsidiaries owed or owing by any director or officer of the group or any
associate thereof.
ScottishPower Annual Report & Accounts/Form 20-F 2001/02 |51
Directors' interests
Other than as disclosed, none of the directors had a material interest in any
contract of significance with the company and its subsidiaries during or at the
end of the financial year. The directors' interests, all beneficial, in the
ordinary shares of the company, including interests in options under the
company's ExSOP and Sharesave Schemes and awards under the LTIP, are shown on
pages 52 to 54.
Directors' and officers' liability insurance
The company maintains liability insurance for the directors and officers of the
company and its subsidiaries.
Directors' emoluments and interests
Total emoluments
Table 26 provides a breakdown of the total emoluments of the Chairman and all
the directors in office during the year ended 31 March 2002.
Directors' pension benefits
Details of pension benefits earned by the executive directors during the year
are shown in Table 27.
Table 26 - Remuneration of directors during 2001/02
------------------------------------------------------------------------------------------------------------------------------------
Basic salary Bonus Benefits in kind Total
(Pounds)000's (Pounds)000's (Pounds)000's (Pounds)000's
2002 2001 2002 2001 2002 2001 2002 2001
------------------------------------------------------------------------------------------------------------------------------------
Chairman and executive directors
Charles Miller Smith 235.0 235.0 - - 13.8 4.7 248.8 239.7
Sir Ian Robinson (retired 4 May 2001) 93.3 522.7 - - 2.9 24.2 96.2 546.9
Ian Russell (appointed Chief Executive 17 April 2001) 542.9 390.0 - - 27.6 34.6 570.5 424.6
Charles Berry 280.0 220.0 - - 19.2 19.3 299.2 239.3
David Nish 325.0 225.0 - - 23.9 28.0 348.9 253.0
Alan Richardson (retired 31 December 2001)* 225.0 245.0 - - 0.8 0.7 225.8 245.7
Ken Vowles (retired 31 March 2002) 300.0 270.0 - - 16.0 14.1 316.0 284.1
------------------------------------------------------- -------- -------- ----- ----- ------ ------ -------- --------
Total 2,001.2 2,107.7 - - 104.2 125.6 2,105.4 2,233.3
======================================================= ======== ======== ===== ===== ====== ====== ======== ========
Fees Bonus Benefits in kind Total
(Pounds)000's (Pounds)000's (Pounds)000's (Pounds)000's
2002 2001 2002 2001 2002 2001 2002 2001
------------------------------------------------------------------------------------------------------------------------------------
Non-executive directors (fees & expenses)
Keith McKennon (retired 27 July 2001) 21.3 64.0 - - 17.4 11.0 38.7 75.0
Euan Baird 28.5 6.5 - - 0.7 - 29.2 6.5
Mair Barnes 32.0 33.0 - - 1.0 2.8 33.0 35.8
Philip Carroll (appointed 15 January 2002) 4.4 - - - 0.6 - 5.0 -
Sir Peter Gregson 40.5 36.5 - - 2.8 2.1 43.3 38.6
Nolan Karras** 32.8 33.5 - - 19.7 6.5 52.5 40.0
Allan Leighton 27.5 6.5 - - 0.1 0.4 27.6 6.9
Ewen Macpherson 39.5 39.5 - - 4.0 2.2 43.5 41.7
Robert Miller (resigned 8 June 2001) 6.1 31.5 - - 2.2 21.0 8.3 52.5
John Parnaby (retired 27 July 2001) 12.8 40.5 - - 3.9 1.9 16.7 42.4
------------------------------------------------------- -------- -------- ----- ----- ------ ------ -------- --------
Total 245.4 291.5 - - 52.4 47.9 297.8 339.4
======================================================= ======== ======== ===== ===== ====== ====== ======== ========
Other emoluments
* Alan Richardson received an additional (Pounds)381,220 (2001 (Pounds)283,220)
in respect of housing, foreign service allowance and other essential costs
associated with his assignment as Executive Director, US, based in Portland,
Oregon. These costs include relocation and repatriation back to the UK.
** Nolan Karras received emoluments in the US of (Pounds)22,613 (2001
(Pounds)26,857) in respect of services to the PacifiCorp and Utah advisory
boards in the form of cash and shares.
(i) The emoluments of the highest paid director (Ian Russell) excluding pension
contributions were (Pounds)570,531. In addition, gains on exercise of share
awards before tax during the year by Ian Russell amounted to (Pounds)138,628.
The emoluments of the highest paid director in 2000/01 (Sir Ian Robinson)
excluding pension contributions were (Pounds)546,862. Details of other share
related incentives are contained in Tables 28 and 29.
(ii) Pension contributions made by the company under approved pension
arrangements for Ian Russell amounted to (Pounds)nil (2001 (Pounds)nil). Ian
Russell also has an entitlement under the unapproved pension benefits described
further in Table 27(i).
(iii) Sir Ian Robinson retired from the Board on 4 May 2001 and as an employee
on 31 May 2001. Alan Richardson retired from the Board and as an employee on
31 December 2001. Ken Vowles retired from the Board and as an employee on 31
March 2002.
(iv) In addition to the above, payments were made to Sir Ian Robinson of
(Pounds)385,000; Alan Richardson of (Pounds)372,099; and Ken Vowles of
(Pounds)405,649, in accordance with the terms of their respective contracts.
Details of pension scheme entitlements and interests in performance and other
share plans are set out overleaf in Tables 27 and 29 respectively.
ScottishPower Annual Report & Accounts/Form 20-F 2001/02 |52
Remuneration Report of the Directors continued
Table 27 - Defined benefits pension scheme 2001/02
------------------------------------------------------------------------------------------------------------------------------------
Transfer value
of increases
after
Additional indexation
pension (net of
Transferred earned Accrued director's
- in benefits in year entitlement contribution)
(Pounds)p.a. (Pounds)p.a. (Pounds)p.a. (Pounds)
------------------------------------------------------------------------------------------------------------------------------------
Charles Miller Smith - - - -
Sir Ian Robinson (retired from the Board on 4 May 2001 and
from the company on 31 May 2001) - - - -
Ian Russell 15,094 52,738 144,159 545,011
Charles Berry - 23,568 82,744 246,993
David Nish 34,938 26,111 67,356 200,946
Alan Richardson (retired 31 December 2001) - 50,263 130,000 633,959
Ken Vowles (retired 31 March 2002) 127,808 14,346 141,570 231,657
================================================================== ============= ============ =========== =============
(i) The accrued entitlement of the highest paid director (Ian Russell) was
(Pounds)144,159. In 2001, the accrued entitlement of the highest paid director
(Sir Ian Robinson) was (Pounds)319,200. During the year, retirement benefits
were accrued under the defined benefits pension scheme in respect of 5 directors
(2001 6 directors). The method of calculation of retirement benefits for Sir Ian
Robinson was agreed prior to his retirement and published in last year's
Remuneration Report.
(ii) The transfer value of the increases after indexation represents the current
capital sum which would be required, using demographic and financial
assumptions, to produce an equivalent increase in accrued pension and ancillary
benefits, excluding the statutory inflationary increase, and after deduction of
members' contributions. Although the transfer value represents a liability to
the pension scheme in respect of approved benefits and to the company in respect
of unapproved benefits, it is not a single sum paid or due to be paid to the
individual director and cannot therefore meaningfully be added to the annual
remuneration. Instead, this value would not be payable until the director's
retirement date, and thereafter would be spread over the remainder of his
lifetime (and also covering the cost of dependants' benefits after his death).
(iii) With respect to Alan Richardson, the figures shown in the table above
reflect the increase in his pension, including contractual changes made to
enable his withdrawal. In addition, the value of allowing him to take his
retirement benefits immediately was (Pounds)850,750.
(iv) The pension entitlement shown is that which would be paid annually on
retirement based upon service to the end of the year. Members of the group's
schemes have the option of paying additional voluntary contributions; neither
the contributions nor the resulting benefits are included in the above table.
(v) Executives who joined the company on or after 1 June 1989 are subject to the
earnings cap, introduced in the Finance Act 1989. Pension entitlements which
cannot be provided through the company's approved schemes due to the earnings
cap are provided through unapproved pension arrangements, details of which are
included in the Remuneration Report. The pension benefits disclosed above
include approved and unapproved pension arrangements.
(vi) The increase in accrued pension during the year allows for an increase in
inflation of RPI as measured at December 2001 (0.7%).
(vii) The value of the increase in Members' entitlements has been calculated on
the basis of actuarial advice in accordance with Actuarial Guidance note GN11,
in two parts: The approved element being based upon the normal cash equivalent
transfer value assumptions less directors' contributions; the unapproved element
is calculated in line with FRS 17 assumptions.
(viii) Transferred in benefits represent pension rights accrued in respect of
previous employments.
(ix) The total liabilities, calculated on an FRS 17 basis, for the 14 executives
and senior employees arising in relation to unapproved benefits for service for
the year to 31 March 2002 was (Pounds)690,000 (2001 (Pounds)500,000). All
benefits for the above are provided on a defined benefit basis.
Table 28 - Directors' interests in shares as at 31 March 2002
---------------------------------------------------------------------------------------------------------------
Ordinary shares Share options (Executive) Share options (Sharesave)
---------------------------------------------------------------------------------------------------------------
1.4.01
(or date of
appointment
31.3.02 if later) 31.3.02 1.4.01 31.3.02 1.4.01
---------------------------------------------------------------------------------------------------------------
Charles Miller Smith 11,000 11,000 - - - -
Ian Russell .86,817 .58,418 227,743 - 4,371 -
Charles Berry .18,958 .14,691 107,660 - 903 2,232
David Nish .7,294 .4,112 124,223 - 2,509 2,215
Ken Vowles .143,410 .138,801 124,223 - 3,073 5,501
Euan Baird 100,000 100,000 - - - -
Mair Barnes 1,400 1,400 - - - -
Philip Carroll - - - - - -
Sir Peter Gregson 1,093 1,024 - - - -
Nolan Karras 31,286 27,347 - - - -
Allan Leighton - - - - - -
Ewen Macpherson 5,000 5,000 - - - -
=========================== ========= ========= ======== ========= ======= =========
--------------------------------------------------------------------------------------
Long Term Incentive Plan
--------------------------------------------------------------------------------------
31.3.02 1.4.01
**Vested *Potential **Vested *Potential
------------------------------------------------------------------------------------
Charles Miller Smith - - - -
Ian Russell 12,682 175,063 27,691 114,694
Charles Berry 4,433 87,904 9,951 55,461
David Nish 4,191 85,030 - 45,286
Ken Vowles 29,796 109,308 20,768 81,655
Euan Baird - - - -
Mair Barnes - - - -
Philip Carroll - - - -
Sir Peter Gregson - - - -
Nolan Karras - - - -
Allan Leighton - - - -
Ewen Macpherson - - - -
=========================== ========== ========== ========= ==========
None of the directors has an interest in ordinary shares which is greater than
1% of the issued share capital of the company.
* These shares represent, in each case, the maximum number of shares which the
directors may receive, dependent on the satisfaction of performance criteria as
approved by shareholders in connection with the Long Term Incentive Plan.
** These shares represent the number of shares the directors are entitled to
receive when the Long Term Incentive Plan award is exercisable after the fourth
anniversary of grant calculated according to the performance criteria measured
over the three-year performance period.
.. These shares include the number of shares which the directors hold in the
Employee Share Ownership Plan, shown below.
Free Partnership Matching Dividend
shares shares shares shares Total
--------------------------------------------------------------------------------
Ian Russell 50 388 388 33 859
Charles Berry 50 388 388 33 859
David Nish 50 388 388 33 859
Ken Vowles 50 388 388 - 826
=================== ======== ========== ======== ======= =======
Between 31 March 2002 and 1 May 2002, Ian Russell, Charles Berry and David Nish
each acquired 34 Partnership Shares and 34 Matching Shares as part of the
regular monthly transactions of the Employee Share Ownership Plan. Otherwise,
there have been no changes in the directors' interests between 31 March 2002 and
1 May 2002.
ScottishPower Annual Report & Accounts/Form 20-F 2001/02 |53
Table 29 - Directors' interests in performance and other share plans at 31 March 2002
------------------------------------------------------------------------------------------------------------------------------------
31 March
2002 Market
(or date of Option price at
retirement exercise date of Date from
1 April as director price Date exercise which Expiry
2001 Granted Exercised Lapsed# if earlier) (pence) exercised (pence) exercisable date
------------------------------------------------------------------------------------------------------------------------------------
Long Term Incentive Plan
Ian Russell - - - - - nil 9 Aug 00 8 Aug 03
27,691 - 27,691 - - nil 29 May 01 500.625 16 May 01 15 May 04
31,706 - - 19,024 12,682 nil 7 May 02 6 May 05
37,988 - - - 37,988 nil 10 May 03 9 May 06
45,000 - - - 45,000 nil 5 May 04 4 May 07
- 92,075 - - 92,075 nil 4 May 04 3 May 08
-------- ------- ------- ------- -------- ------- ---------- -------- ---------- ---------
142,385 92,075 27,691 19,024 187,745
========================= ======== ======= ======= ======= ======== ======= ========== ======== ========== =========
Charles Berry - - - - - nil 9 Aug 00 8 Aug 03
9,951 - 9,951 - - nil 31 May 01 510.25 16 May 01 15 May 04
11,083 - - 6,650 4,433 nil 7 May 02 6 May 05
18,994 - - - 18,994 nil 10 May 03 9 May 06
25,384 - - - 25,384 nil 5 May 04 4 May 07
- 43,526 - - 43,526 nil 4 May 04 3 May 08
-------- ------- ------- ------- -------- ------- ---------- -------- ---------- ---------
65,412 43,526 9,951 6,650 92,337
========================= ======== ======= ======= ======= ======== ======= ========== ======== ========== =========
David Nish - - - - - nil 9 Aug 00 8 Aug 03
- - - - - nil 16 May 01 15 May 04
10,479 - - 6,288 4,191 nil 7 May 02 6 May 05
11,731 - - - 11,731 nil 10 May 03 9 May 06
23,076 - - - 23,076 nil 5 May 04 4 May 07
- 50,223 - - 50,223 nil 4 May 04 3 May 08
-------- ------- ------- ------- -------- ------- ---------- -------- ---------- ---------
45,286 50,223 - 6,288 89,221
========================= ======== ======= ======= ======= ======== ======= ========== ======== ========== =========
Alan Richardson 9,661 - 9,661 - - nil 9 May 01 455.38 9 Aug 00 8 Aug 03
(retired 31 December 2001) 10,816 - 10,816 - - nil 22 May 01 473.25 16 May 01 15 May 04
11,446 - - 6,868 4,578 nil 7 May 02 6 May 05
18,994 - - - 18,994 nil 10 May 03 9 May 06
25,384 - - - 25,384 nil 5 May 04 4 May 07
- 50,223 - - 50,223 nil 4 May 04 3 May 08
-------- ------- ------- ------- -------- ------- ---------- -------- ---------- ---------
76,301 50,223 20,477 6,868 99,179
========================= ======== ======= ======= ======= ======== ======= ========== ======== ========== =========
Sir Ian Robinson 36,072 - - - 36,072 nil 9 Aug 00 8 Aug 03
(retired from the Board
4 May 2001 and 40,383 - - - 40,383 nil 16 May 01 15 May 04
from the company on 31
May 2001) 41,916 - - - 41,916 nil 7 May 02 6 May 05
46,927 - - - 46,927 nil 10 May 03 9 May 06
58,153 - - - 58,153 nil 5 May 04 4 May 07
-------- ------- ------- ------- -------- ------- ---------- -------- ---------- ---------
223,451 - - - 223,451
========================= ======== ======= ======= ======= ======== ======= ========== ======== ========== =========
Ken Vowles - - - - - nil 9 Aug 00 8 Aug 03
(retired 31 March 2002) 20,768 - - - 20,768 nil 16 May 01 15 May 04
22,570 - - 13,542 9,028 nil 7 May 02 6 May 05
27,932 - - - 27,932 nil 10 May 03 9 May 06
31,153 - - - 31,153 nil 5 May 04 4 May 07
- 50,223 - - 50,223 nil 4 May 04 3 May 08
-------- ------- ------- ------- -------- ------- ---------- -------- ---------- ---------
102,423 50,223 - 13,542 139,104
========================= ======== ======= ======= ======= ======== ======= ========== ======== ========== =========
On 16 May 2001, the second awards under the Long Term Incentive Plan became
exercisable. The mid-market closing price on that day was 487 pence and the
value attributable to those awards at that date was (Pounds)533,796. Details of
awards exercised are shown in the table above.
# During the year, the performance period for awards granted under the Long Term
Incentive Plan in 1998 ended and, on the basis of the company's total
shareholder return, 40% of shares under awards vested. However, awards may not
be exercised until the fourth anniversary of the grant and are exercisable until
the seventh anniversary.
In accordance with the rules of the Long Term Incentive Plan, retiring directors
are entitled to retain a portion of Long Term Incentive Plan awards. However,
following retirement, these remain subject to the performance criteria detailed
in (ii) below.
As a result of the retirement of Sir Ian Robinson from the company on 31 May
2001 and in accordance with the rules of the Long Term Incentive Plan, 19,385
shares under the award of 58,153 shares granted in 2000 lapsed leaving a balance
of 38,768. On 7 May 2001, 25,150 shares under the award of 41,916 shares granted
in 1998 lapsed leaving a balance of 16,766 shares.
As a result of the retirement of Alan Richardson from the company on 31 December
2001 and in accordance with the rules of the Plan, 3,526 shares under the award
of 25,384 shares granted in 2000 lapsed leaving a balance of 21,858 shares and
23,717 shares under the award of 50,223 shares granted in 2001 lapsed, leaving a
balance of 26,506 shares.
As a result of the retirement of Ken Vowles from the company on 31 March 2002
and in accordance with the rules of the Plan, 2,791 shares under the award of
50,223 shares granted in 2001 lapsed, leaving a balance of 47,432 shares.
Footnote
Awards granted to directors under the Long Term Incentive Plan on 2 May 2002
were as follows: Ian Russell 101,600; Charles Berry 55,418; and David Nish
64,655.
ScottishPower Annual Report & Accounts/Form 20-F 2001/02 |54
Remuneration Report of the Directors continued
Table 29 - Directors' interests in performance and other share plans at 31 March
2002 continued
31 March
2002 Option
(or date of exercise
1 April retirement price Date
2001 Granted Exercised Lapsed# if earlier) (pence) exercised
--------------------------------------------------------------------------------------------------------------------------------
Executive Share Option Plan 2001
Ian Russell - 227,743 - - 227,743 483.0
-------- -------- --------- ------- ---------- --------- ---------
- 227,743 - - 227,743
=========================================== ======== ======== ========= ======= ========== ========= =========
Charles Berry - 107,660 - - 107,660 483.0
-------- -------- --------- ------- ---------- --------- ---------
- 107,660 - - 107,660
=========================================== ======== ======== ========= ======= ========== ========= =========
David Nish - 124,223 - - 124,223 483.0
-------- -------- --------- ------- ---------- --------- ---------
- 124,223 - - 124,223
=========================================== ======== ======== ========= ======= ========== ========= =========
Alan Richardson (retired 31 December 2001) - 124,223 - - 124,223 483.0
-------- -------- --------- ------- ---------- --------- ---------
- 124,223 - - 124,223
=========================================== ======== ======== ========= ======= ========== ========= =========
Ken Vowles (retired 31 March 2002) - 124,223 - - 124,223 483.0
-------- -------- --------- ------- ---------- --------- ---------
- 124,223 - - 124,223
=========================================== ======== ======== ========= ======= ========== ========= =========
Sharesave Scheme
Ian Russell - 4,371 - - 4,371 386.0
-------- -------- --------- ------- ---------- --------- ---------
- 4,371 - - 4,371
=========================================== ======== ======== ========= ======= ========== ========= =========
Charles Berry 1,329 - 1,329 - - 440.0* 3 Sep 01
903 - - - 903 429.0*
-------- -------- --------- ------- ---------- --------- ---------
2,232 - 1,329 - 903
=========================================== ======== ======== ========= ======= ========== ========= =========
David Nish 2,215 - 2,215 - - 440.0* 3 Sep 01
- 2,509 - - 2,509 386.0*
-------- -------- --------- ------- ---------- --------- ---------
2,215 2,509 2,215 - 2,509
=========================================== ======== ======== ========= ======= ========== ========= =========
Alan Richardson (retired 31 December 2001) 1,568 - - - 1,568 440.0
1,573 - - - 1,573 429.0
- 874 - - 874 386.0*
-------- -------- --------- ------- ---------- --------- ---------
3,141 874 - - 4,015
=========================================== ======== ======== ========= ======= ========== ========= =========
Ken Vowles (retired 31 March 2002) 3,933 - 3,933 - - 263.1 3 Sep 01
1,568 - - - 1,568 440.0
- 1,505 - - 1,505 386.0*
-------- -------- --------- ------- ---------- --------- ---------
5,501 1,505 3,933 - 3,073
=========================================== ======== ======== ========= ======= ========== ========= =========
Market
price at Normal
date of date from Normal
exercise which expiry
(pence) exercisable date
-------------------------------------------------------------------------------------------
Executive Share Option Plan 2001
Ian Russell 21 Aug 04 21 Aug 11
--------- ----------- -----------
============================================ ========= =========== ===========
Charles Berry 21 Aug 04 21 Aug 11
--------- ----------- -----------
============================================ ========= =========== ===========
David Nish 21 Aug 04 21 Aug 11
--------- ----------- -----------
============================================ ========= =========== ===========
Alan Richardson (retired 31 December 2001) 21 Aug 04 21 Aug 11
--------- ----------- -----------
============================================ ========= =========== ===========
Ken Vowles (retired 31 March 2002) 21 Aug 04 21 Aug 11
--------- ----------- -----------
============================================ ========= =========== ===========
Sharesave Scheme
Ian Russell 1 Sep 06 28 Feb 07
--------- ----------- -----------
============================================ ========= =========== ===========
Charles Berry 489.0 1 Sep 01 28 Feb 02
1 Sep 02 28 Feb 03
--------- ----------- -----------
============================================ ========= =========== ===========
David Nish 489.0 1 Sep 01 28 Feb 02
1 Sep 04 28 Feb 05
--------- ----------- -----------
============================================ ========= =========== ===========
Alan Richardson (retired 31 December 2001) 1 Sep 03 29 Feb 04
1 Sep 04 28 Feb 05
1 Sep 06 28 Feb 07
--------- ----------- -----------
============================================ ========= =========== ===========
Ken Vowles (retired 31 March 2002) 489.0 1 Sep 01 28 Feb 02
1 Sep 03 29 Feb 04
1 Sep 04 28 Feb 05
--------- ----------- -----------
============================================ ========= =========== ===========
*Denotes options granted under a three-year scheme.
(i) The market price of the shares at 28 March 2002 (the last trading day before
the financial year end) was 359.50 pence and the range during 2001/02 was 350.00
pence to 521.84 pence.
(ii) The Long Term Incentive Plan makes annual awards to acquire shares in
ScottishPower at nil or nominal cost to the plan participants up to a maximum
value equal to 75% of base salary. The award will vest only if the Remuneration
Committee is satisfied that certain performance measures related to the
sustained underlying financial performance of the company and improvements in
certain Ofgem published Customer Service Standards and OFWAT published levels of
service are achieved over a period of three financial years commencing with the
financial year preceding the date an award is made. Assuming that such targets
have been achieved, the number of shares that can be acquired will be dependent
upon how the company ranks in terms of its total shareholder return performance
over a three-year period, in comparison to the constituent companies of the FTSE
100 index and the Electricity and Water sectors and a group of international
energy companies. A percentage of each half of the award will vest depending
upon the company's ranking within each of the comparator groups. The plan
participant may acquire the shares in respect of the percentage of the award
which has vested at any time after the third or fourth year, as appropriate, up
to the seventh year after the grant of the award. No dividends accrue to
participants prior to vesting.
(iii) During the year, the Executive Share Option Plan 2001 was launched,
whereby options are granted to relevant executives and senior managers. These
options are subject to the performance criterion that the percentage increase in
the company's annualised earnings per share be at least 3% (adjusted for any
increase in the Retail Price Index). This criterion is assessed at the end of
the third financial year, the first year being the financial year starting
immediately before the date of grant. If the criterion is not satisfied over
this period it is tested again at the end of the fourth financial year. If the
criterion is not satisfied over this period, it is tested again at the end of
the fifth financial year. If the criterion is not satisfied over this period,
then the options lapse. In accordance with the Plan rules, directors retiring
during the year are entitled to exercise their executive options within 42
months of the date of grant (21 August 2001).
(iv) The option price for Sharesave options is calculated by reference to the
middle-market quotation on the day immediately preceding the date of invitation
and discounted by 20% in accordance with the Inland Revenue rules for such
schemes. In accordance with the rules of the Scheme, directors retiring during
the year are entitled to exercise Sharesave options within 6 months of the date
of their retirement, over the number of shares which can be purchased using
their savings plus interest.
(v) 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 years under an Inland Revenue approved savings
contract, subject to a current maximum.
(vi) At 1 April 2001, Keith McKennon held options to acquire 145,000
ScottishPower ADSs at an option price of $32.76 exercisable from February 2003
to February 2009. One ScottishPower ADS equates to four ordinary shares, and
therefore the option, expressed in ordinary shares, was over 580,000 ordinary
shares. He retains these options following retirement on 27 July 2001.
(vii) Total gains made on exercise of directors' share options and awards during
the year were (Pounds)295,205 (2001 (Pounds)319,599).
Footnote
Options granted to directors under the Executive Share Option Plan 2001 on 2 May
2002 were as follows: Ian Russell 270,935; Charles Berry 147,783; and David Nish
172,413.
ScottishPower Annual Report & Accounts/Form 20-F 2001/02 |55
Directors' responsibility for the accounts
The directors are required by law to prepare Accounts for each financial year
and to present them annually to the company's members at the Annual General
Meeting. The Accounts, of which the form and content are prescribed by the
Companies Act 1985 and applicable accounting standards, must give a true and
fair view of the state of affairs of the company and of the group as at the end
of the financial year, and of the group's profit or loss for the period.
The directors confirm that suitable Accounting Policies have been used and
applied consistently, and that reasonable and prudent judgements and estimates
have been made in the preparation of the Accounts for the year ended 31 March
2002. The directors also confirm that applicable accounting standards have been
followed and that the Accounts have been prepared on the going concern basis.
The directors are responsible for maintaining proper accounting records and
sufficient internal controls to safeguard the assets of the company and of the
group and to prevent and detect fraud or any other irregularities.
Auditors
PricewaterhouseCoopers have expressed their willingness to continue in office
and a resolution to reappoint PricewaterhouseCoopers as the company's auditors
will be proposed at the Annual General Meeting.
Report of the directors
The Report of the Directors comprising the statements and reports has been
approved by the Board and signed on its behalf by
/s/ Andrew Mitchell
Andrew Mitchell
Secretary
1 May 2002
Cautionary statement for purposes of the "Safe Harbor" provisions of the Private
Securities Litigation Reform Act of 1995
Certain matters discussed in this document are "forward-looking statements"
within the meaning of the US Private Securities Litigation Reform Act of 1995
(the "PSLRA") and any rules, regulations or releases of the Securities and
Exchange Commission with respect thereto. Forward-looking statements in this
document include, but are not limited to, statements in: "Chief Executive's
Review" relating to PacifiCorp's aim to achieve its target return on equity of
approximately 11% by 2004/05 and achieve operating cost savings of $300 million
by 2004/05, improving our cost to serve, investments in new generation,
improvements in recording of the prudency of net power cost purchases and
investments, the approval process for US restructuring, further investments to
improve operational reliability and security of supply, participation in a
Regional Transmission Organization, growth of PPM, expect PPM to be profitable
in 2002/03, integration of generation assets, trading activities and energy
retailing to customers, expect greater demand for gas storage services, customer
service process improvements, expect cost base in 2002/03 to be at or near the
UK regulatory frontier, installation of new network and upgrade of control
systems; "Business Review - US Division" relating to plans to expand energy
business, plans to lower cost and risk of supplying power, expectations for
sources and supplies of energy requirements, prices paid by PacifiCorp to
provide load balancing resources, price changes with the federal Bonneville
Power Administration, forecasts for average annual growth in retail megawatt
hour sales for the period from 2003 to 2006, PacifiCorp's expectations regarding
the effect of deregulation and PPM's target of renewable development
opportunities; "Business Review -UK Division" relating to maximising value of
both generation and supply assets, leveraging benefits of its generation asset
base and commercial trading operations, additional windfarm development; the
ability of ScottishPower's UK power stations to support generation output and
timing of the upgrade of the England-Scotland transmission link and the
commencement of operation of the Scotland-Northern Ireland interconnector;
"Business Review - Infrastructure Division" relating to restructuring the asset-
owner businesses so they now act as an integrated business unit to concentrate
expertise on regulatory issues, effect on the company of the demerger of Thus
Group plc and the sale of Southern Water; "Business Review - Group Employees"
relating to reductions in the PacifiCorp workforce; "Business Review - Group
Environmental Policy" relating to the development and effects of renewable
energy sources and environmental regulations and the goal of pursuing permitting
changes that tend to reduce emissions while allowing for efficient operation of
thermal generating plants; "Business Review - US Business Regulation" relating
to the economic impact of mandates from the Federal Power Act, the effectiveness
of programs aimed at demand side management, the effects and timing of the US
restructuring efforts, the effectiveness of current and future price increases,
replacement agreements are expected to provide savings for residential and
irrigation customers, as well as the impact of compliance costs; "Business
Review - Regulation of the Electricity and Gas Industries in the UK" relating to
implementation of a Great Britain-wide wholesale market for electricity and
revised arrangements in respect of the interconnector between England and
Scotland; "Business Review - Environmental Regulation" relating to
ScottishPower's goal of meeting or bettering environmental requirements;
"Business Review - UK Environmental Regulation" relating to the effects of
changes in the regulations of the UK, EU and United Nations, and the ability to
comply with such regulations, ScottishPower's expectation to meet its target of
10% generation from renewable energy sources by 2010; "Financial Review -
Capital Expenditure and Cash Flow (2001/02)" relating to the description of new
sources of power; "Quantitative and Qualitative Disclosures about Market Risk"
relating to risk management controls and other risk management activities;
"Financial Review - Financial Instruments and Risk Management" relating to the
belief that the group is not exposed to any material concentration of credit
risk, sensitivity analysis and impact of adverse price changes; "Financial
Review -Accounting Developments" relating to the impact on future US GAAP
results for upcoming financial years; and our stated dividend aim is 5% of
nominal growth for each year through to March 2003.
ScottishPower wishes to caution readers, and others to whom forward-looking
statements are addressed, that any such forward-looking statements are not
guarantees of future performance and that actual results may differ materially
from estimates in the forward-looking statements.
ScottishPower undertakes no obligation to revise these forward-looking
statements to reflect events or circumstances after the date hereof. In addition
to the important factors described elsewhere in this document, the following
important factors, among others, could affect the group's actual future:
- any regulatory changes (including changes in environmental regulations) that
may increase the operating costs of the group, may require the group to make
unforeseen capital expenditures or may prevent the regulated business of the
group from achieving acceptable returns;
- future levels of industry generation and supply, demand and pricing, political
stability, competition and economic growth in the relevant areas in which the
group has operations;
- the availability of acceptable quality fuel at favorable prices;
- the availability of operational capacity of plants;
- the success of reorganizational and cost-saving efforts; and
- development and use of technology, the actions of competitors, natural
disasters and other changes to business conditions.
ScottishPower Annual Report & Accounts/Form 20-F 2001/02 |56
Accounts 2001/02
Accounting Policies and Definitions
Definitions
Business segment definitions
ScottishPower defines business segments for management reporting purposes based
on a combination of factors, principally differences in products and services
and the regulatory environment in which the businesses operate.
Business segments have been included under either `continuing operations' or
`discontinued operations' as appropriate.
The business segments of the group are defined as follows:
Continuing operations
United Kingdom
UK Division - Generation, Trading and Supply
The generation of electricity from the group's own power stations, the purchase
of external supplies of electricity and gas for sale to customers, together with
related billing and collection activities, gas storage, sale of gas to
industrial and domestic customers and the sale of electricity to electricity
suppliers, in Scotland and England & Wales and full participation in the New
Electricity Trading Arrangements ("NETA") in England & Wales.
Infrastructure Division - Power Systems
The transmission and distribution businesses in Scotland and the distribution
business of Manweb operating in Merseyside and North Wales and, specifically,
the transportation of units of electricity from the power stations through the
transmission and distribution networks to customers in Scotland and to customers
in Northern Ireland and England & Wales through the Interconnectors.
United States
US Division - PacifiCorp
A vertically integrated electric utility that includes the generation,
transmission and distribution and sale of electricity to retail, industrial and
commercial customers in portions of six western states; Utah, Oregon, Wyoming,
Washington, Idaho and California. The operations also include wholesale sales
and power purchase transactions with various entities. The state regulatory
commissions and Federal Energy Regulatory Commission ("FERC") regulate the
retail and wholesale operations. The US Division also includes businesses of
other US subsidiaries not regulated as electricity utilities in the US,
including PacifiCorp Power Marketing, Inc. ("PPM") which commenced substantive
operations in 2001. PPM is primarily a wind and gas development led,
asset-backed marketer of power to wholesale customers in the western US. PPM
also provides natural gas storage/hub services in North America.
Discontinued operations
United Kingdom
Infrastructure Division - Southern Water
The provision of water and wastewater services in the south-east of England,
together with related billing and collection activities. The decision to dispose
of the Southern Water business was announced on 8 March 2002 and was completed
on 23 April 2002.
Thus
The provision of telecommunications services, internet access and information
services to national corporates, small and medium-sized enterprises and
residential customers. In 1999/00 this segment also included the operations of
the mobile telephone business which was sold in November 1999 and the fixed
radio access telephony operations from which the group withdrew in July 1999.
Thus Group plc ("Thus") was demerged from ScottishPower on 19 March 2002.
Appliance Retailing
The retailing and servicing of domestic electrical goods and home entertainment
appliances. The business was disposed of and withdrawn from during the year
ended 31 March 2002.
Revenue cost definitions
Cost of sales
The cost of sales for the group, excluding Southern Water, reflect the direct
costs of the generation and purchase of electricity, the purchase of natural
gas, appliance retailing and telecommunications services. For Southern Water,
cost of sales represents the cost of extracting water from underground and raw
water surface reservoirs and of its treatment and supply to customers and the
collection of wastewater and its treatment and disposal.
Transmission and distribution costs
The cost of transmitting units of electricity from the power stations through
the transmission and distribution networks to customers. It includes the costs
of metering, billing and debt collection. This heading is considered more
appropriate to the electricity industry than the standard Companies Act heading
of distribution costs.
Administrative expenses
The indirect costs of businesses, the costs of corporate services, property
rates and goodwill amortisation.
Other definitions
Company or ScottishPower
Scottish Power plc.
Group
Scottish Power plc and its consolidated subsidiaries.
Associated undertakings
Entities in which the group holds a long-term participating interest and
exercises significant influence.
Joint ventures
Entities in which the group holds a long-term interest and shares control with
another company external to the group.
Subsidiary undertakings
Entities in which the group holds a long-term controlling interest.
ScottishPower Annual Report & Accounts/Form 20-F 2001/02 |57
Accounting Policies
Basis of accounting
The Accounts have been prepared under the historical cost convention, modified
to include the revaluation of certain tangible fixed assets, and in accordance
with applicable accounting standards in the UK and, subject to the treatment of
water infrastructure grants and contributions described under `Grants and
contributions' below, comply with the requirements of the Companies Act 1985.
In preparing these Accounts, certain items have been included in order to comply
with accounting presentation and disclosure requirements applicable in the
United States in respect of foreign registrants. A reconciliation to US GAAP is
set out in Note 34.
Basis of consolidation
The group Accounts include the Accounts of the company and its subsidiary
undertakings together with the group's share of results and net assets of
associated undertakings and joint ventures.
For commercial reasons certain subsidiaries have a different year end. The
consolidation includes the Accounts of these subsidiaries as adjusted for
material transactions in the period between the year ends and 31 March.
Use of estimates
The preparation of Accounts in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the Accounts and the reported amounts of revenues
and expenses during the reporting period. Actual results can differ from those
estimates.
Turnover
Turnover comprises the sales value of energy, goods, water, wastewater and other
services supplied to customers during the year and excludes Value Added Tax and
intra-group sales. Income from the sale of energy and measured water is the
value of units supplied during the year and includes an estimate of the value of
units supplied to customers between the date of their last meter reading and the
year end.
Interest
Interest on the funding attributable to capital projects is capitalised gross of
tax relief during the period of construction and written off as part of the
total cost over the operational life of the asset. All other interest payable
and receivable is reflected in the profit and loss account as it arises.
Financial instruments
Debt instruments
All borrowings are stated at the fair value of consideration received after
deduction of issue costs. The issue costs and interest payable on bonds are
charged to the profit and loss account at a constant rate over the life of the
bond. Premiums and discounts arising on the early repayment of borrowings are
recognised in the profit and loss account as incurred.
Interest rate swaps/Forward rate agreements
These are used to manage debt interest rate exposures. Amounts payable or
receivable in respect of these agreements are recognised as adjustments to
interest expense over the period of the contracts. The cash flows from, and
gains and losses arising on terminations of, these contracts are recognised as
returns on investments and servicing of finance. Where associated debt is not
retired in conjunction with the termination of an interest swap, gains and
losses are deferred and are amortised to interest expense over the remaining
life of the associated debt to the extent that such debt remains outstanding.
Interest rate caps/Swaptions/Options
Premiums received and payable on these contracts are amortised over the period
of the contracts and are disclosed as interest income and expense. The
accounting for interest rate caps and swaptions is otherwise in accordance with
interest rate swaps detailed above.
Cross currency interest rate swaps
These are used both to hedge foreign exchange and interest rate exposures
arising on foreign currency debt and to hedge overseas net investment. Where
used to hedge debt issues, the debt is recorded at the hedge contracted rate and
accounting is otherwise in accordance with interest rate swaps detailed above.
Where used to hedge overseas net investment, spot gains or losses are recorded
in the statement of total recognised gains and losses, with interest recorded in
the profit and loss account.
Forward contracts
The group enters into forward contracts for the purchase and/or sale of foreign
currencies in order to manage its exposure to fluctuations in currency rates and
to hedge overseas net investment. Unrealised gains and losses on contracts are
not accounted for until the maturity of the contract. The cash flows from
forward purchase contracts are classified in a manner consistent with the
underlying nature of the hedged transaction. Hence, spot gains or losses on
hedges of the overseas net investment are recorded in the statement of total
recognised gains and losses with the interest rate differential reflected in the
profit and loss account. In addition, foreign currency debtors and creditors
that are hedged with forward contracts are translated at the contracted rate at
the balance sheet date. Where a currency forward contract no longer represents a
hedge because either the underlying asset or liability has been derecognised, or
the effectiveness of the hedge has been undermined, it is restated at fair value
and any change in value is taken directly to the profit and loss account and
reported within exchange losses.
Hydro-electric and temperature hedges
These instruments are used to hedge fluctuations in weather and temperature in
the US. On a periodic basis, the group estimates and records a gain or loss in
the profit and loss account corresponding to the total expected future cash
flows from these contracts.
Commodity contracts
Where there is no physical delivery associated with commodity contracts, they
are recorded at fair value on the balance sheet and movements reflected through
the profit and loss account. Gas future contracts are undertaken for hedging and
proprietary trading purposes. Where the instrument is a hedge, the daily margin
calls are initially reflected on the balance sheet and subsequently reflected
through
ScottishPower Annual Report & Accounts/Form 20-F 2001/02 |58
Accounting Policies and Definitions
the profit and loss account to match the recognition of the hedged item. Where
the instrument is for proprietary trading the margin calls are reflected through
the profit and loss account.
Taxation
In accordance with Financial Reporting Standard 19 `Deferred tax', full
provision is made for deferred tax on a non-discounted basis.
Goodwill
Purchased goodwill represents the excess of the fair value of the purchase
consideration over the fair value of the net assets acquired. Goodwill arising
from the purchase of trading entities in accounting periods prior to 31 March
1998 was written off on acquisition against reserves. On disposal of trading
entities, the goodwill previously included in reserves is charged to the profit
and loss account matched by an equal credit to reserves. Goodwill arising on
acquisitions since 1 April 1998 has been capitalised and amortised through the
profit and loss account over its estimated useful economic life. Goodwill
arising on overseas acquisitions is regarded as a currency asset and is
retranslated at the end of each period at the closing rate of exchange.
Tangible fixed assets
Accounting for non-water infrastructure assets
Tangible fixed assets are stated at cost or valuation and are generally
depreciated on the straight line method over their estimated operational lives.
Tangible fixed assets include capitalised employee, interest and other costs
which are directly attributable to construction of fixed assets.
Land is not depreciated except in the case of mines (see below). The main
depreciation periods used by the group are as set out below.
Years
-------------------------------------------------------------------------------
Coal, oil-fired, gas and other generating stations 22-45
Hydro plant and machinery 20-100
Other buildings 40
Transmission and distribution plant 20-75
Towers, lines and underground cables 40-60
Vehicles, computer software costs, miscellaneous equipment and fittings 3-40
------------------------------------------------------------------------ ------
The carrying values of tangible fixed assets are reviewed for impairment in
periods if events or changes in circumstances indicate the carrying value may
not be recoverable. For those assets with estimated remaining useful economic
lives of more than 50 years, impairment reviews are undertaken annually.
Impairment losses are recognised in the period in which they are identified.
Mine reclamation and closure costs
Provision is made for mine reclamation and closure costs when an obligation
arises out of events prior to the year end. The amount recognised is the present
value of the estimated future expenditure determined in accordance with local
conditions and requirements. A corresponding tangible fixed asset is also
created of an amount equal to the provision. This asset, together with the cost
of the mine, is subsequently depreciated on a unit of production basis. The
unwinding of the discount is included within net interest and similar charges.
Decommissioning costs
Provision is made for the estimated decommissioning costs at the end of the
producing lives of the group's power stations on a discounted basis. Capitalised
decommissioning costs are depreciated over the useful lives of the related
assets. The unwinding of the discount is included within net interest and
similar charges.
Infrastructure accounting
Water infrastructure assets, being mains and sewers, reservoirs, dams, sludge
pipelines and sea outfalls comprise a network of systems. Expenditure on water
infrastructure assets relating to increases in capacity or enhancement of the
network and on maintaining the operating capability of the network in accordance
with defined standards of service is treated as an addition to fixed assets.
The depreciation charge for water infrastructure assets is the estimated level
of annualised expenditure required to maintain the operating capability of the
network and is based on the asset management plan agreed with the water industry
regulator as part of the price regulation process.
The asset management plan is developed from historical experience combined with
a rolling programme of reviews of the condition of the infrastructure assets.
Leased assets
As lessee
Assets leased under finance leases are capitalised and depreciated over the
shorter of the lease periods and the estimated operational lives of the assets.
The interest element of the finance lease repayments is charged to the profit
and loss account in proportion to the balance of the capital repayments
outstanding. Rentals payable under operating leases are charged to the profit
and loss account on a straight line basis.
As lessor
Rentals receivable under finance leases are allocated to accounting periods to
give a constant periodic rate of return on the net cash investment in the lease
in each period. The amounts due from lessees under finance leases are recorded
in the balance sheet as a debtor at the amount of the net investment in the
lease after making provisions for bad and doubtful rentals receivable.
Investments
Investments in subsidiary and associated undertakings and joint ventures are
stated in the balance sheet of the parent company at cost, or nominal value of
shares issued as consideration where applicable, less provision for any
impairment in value. The group profit and loss account includes the group's
share of the operating profits less losses, net interest charge and taxation of
associated undertakings and joint ventures. The group balance sheet includes the
investment in associated undertakings and joint ventures at the group's share of
their net assets. Other fixed asset investments are carried at cost less
provision for impairment in value.
Own shares held under trust
The amount recorded in the balance sheet for shares in the company purchased for
employee sharesave schemes represents the amounts receivable from option holders
on exercise of the options.
The group has taken advantage of the exemption within Urgent Issues Task Force
("UITF") Abstract 17 not to apply the requirements therein to Inland Revenue
approved savings-related share option schemes and equivalent overseas schemes.
ScottishPower Annual Report & Accounts/Form 20-F 2001/02 |59
Long Term Incentive Plan ("LTIP")
Shares in the company purchased for the LTIP are held under trust and are
recorded within investments in the balance sheet at cost. The cost of awards
made by the trust under the LTIP, being the difference between the fair value of
the shares and the option price at the date of grant, is taken to the profit and
loss account on a straight line basis over the period in which performance is
measured.
Stocks
Stocks are valued at the lower of average cost and net realisable value.
US regulatory assets
Statement of Financial Accounting Standard ("FAS") 71 `Accounting for the
Effects of Certain Types of Regulation' establishes US GAAP for utilities in the
US whose regulators have the power to approve and/or regulate rates that may be
charged to customers. Provided that, through the regulatory process, the utility
is substantially assured of recovering its allowable costs by the collection of
revenue from its customers, such costs not yet recovered are deferred as
regulatory assets. Due to the different regulatory environment, no equivalent
GAAP applies in the UK.
Under UK GAAP, the group's policy is to recognise regulatory assets established
in accordance with FAS 71 only where they comprise rights or other access to
future economic benefits which have arisen as a result of past transactions or
events which have created an obligation to transfer economic benefits to a third
party. Measurement of the past transaction or event and hence the regulatory
asset, is determined in accordance with UK GAAP.
Grants and contributions
Capital grants and customer contributions in respect of additions to non-water
infrastructure fixed assets are treated as deferred income and released to the
profit and loss account over the estimated operational lives of the related
assets. Grants and contributions receivable relating to water infrastructure
assets are deducted from the cost or valuation of those assets. While this
treatment is in accordance with SSAP 4, it is not in accordance with the
Companies Act 1985.
The Act requires capital grants and contributions to be shown as deferred income
rather than offset against the cost or valuation of tangible fixed assets.
This departure from the requirements of the Act is, in the opinion of the
directors, necessary for the Accounts to give a true and fair view as, while
provision is made for depreciation of water infrastructure assets, these assets
do not have determinable finite lives and therefore no basis exists on which to
recognise grants and contributions as deferred income. The effect of this
treatment on the value of tangible fixed assets is disclosed in Note 17.
Pensions
The group provides pension benefits through both defined benefit and defined
contribution arrangements. The regular cost of providing pensions and related
benefits and any variations from regular cost arising from the actuarial
valuations for defined benefit schemes are charged to the profit and loss
account over the expected remaining service lives of current employees following
consultations with the actuary. Any difference between the charge to the profit
and loss account and the actual contributions paid to the pension schemes is
included as an asset or liability in the balance sheet. Payments to defined
contribution schemes are charged against profits as incurred.
Post-retirement benefits other than pensions
Certain additional post-retirement benefits, principally healthcare benefits,
are provided to eligible retirees within the group's US businesses. The
estimated cost of providing such benefits is charged against profits on a
systematic basis over the employees' working lives within the group.
Environmental liabilities
Provision for environmental liabilities is made when expenditure on remedial
work is probable and the group is obliged, either legally or constructively
through its environmental policies, to undertake such work. Where the amount is
expected to be incurred over the long-term, the amount recognised is the present
value of the estimated future expenditure and the unwinding of the discount is
included within net interest and similar charges.
Foreign currencies
Group
The results and cash flows of overseas subsidiaries are translated to sterling
at the average rate of exchange for each quarter of the financial year. The net
assets of such subsidiaries and the goodwill arising on their acquisition are
translated to sterling at the closing rates of exchange ruling at the balance
sheet date. Exchange differences which relate to the translation of overseas
subsidiaries and of matching foreign currency borrowings are taken directly to
group reserves and are shown in the statement of total recognised gains and
losses.
Company
Transactions in foreign currencies are recorded at the rate ruling at the date
of the transaction. At the year end, monetary assets and liabilities denominated
in foreign currencies are translated at the rate of exchange ruling at the
balance sheet date or, where applicable, at the contracted rate. Any gain or
loss arising on the restatement of such balances is taken to the profit and loss
account.
Overseas net investments that are partially hedged with foreign currency
borrowings are viewed as a foreign currency asset to the extent that they are
matched with foreign currency borrowings. Exchange differences arising on
re-translation of the investment and the borrowings are taken directly to
reserves. The remaining unhedged element of the investment is recorded at
historical cost at the exchange rate ruling at the date of acquisition without
further re-translation.
ScottishPower Annual Report & Accounts/Form 20-F 2001/02 |60
Accounting Policies and Definitions
Exchange rates
The exchange rates applied in the preparation of the Accounts were as follows:
Year ended 31 March
2002 2001 2000
-------------------------------------------------------------------------------
Average rate for quarters ending:
30 June $1.42/(Pounds) $1.53/(Pounds) -
30 September $1.44/(Pounds) $1.48/(Pounds) -
31 December $1.44/(Pounds) $1.45/(Pounds) $1.62/(Pounds)
31 March $1.43/(Pounds) $1.46/(Pounds) $1.61/(Pounds)
--------------------------------- ------------- ------------- -------------
Closing rate as at 31 March $1.42/(Pounds) $1.42/(Pounds) $1.60/(Pounds)
--------------------------------- ------------- ------------- -------------
A glossary of terms used in the Accounts and their US equivalents is set out on
page 113.
ScottishPower Annual Report & Accounts/Form 20-F 2001/02 |61
Group Profit and Loss Account
for the year ended 31 March 2002
Year ended 31 March 2002
Exceptional Exceptional
item items
-continuing Total -discontinued
Continuing operations continuing Discontinued operations
operations (Note 4) operations operations (Note 4)
2002 2002 2002 2002 2002
Notes (Pounds)m (Pounds)m (Pounds)m (Pounds)m (Pounds)m
---------------------------------------------------------------------------------------------------------------------------------
Turnover: group and share of joint
ventures and associates 5,545.9 - 5,545.9 791.3 -
Less: share of turnover in joint ventures (22.6) - (22.6) - -
Less: share of turnover in associates (0.5) - (0.5) - -
----------------------------------------------------------- --------- ------ --------- ------- ---------
Group turnover 1 5,522.8 - 5,522.8 791.3 -
Cost of sales (3,920.0) - (3,920.0) (490.8) -
----------------------------------------------------------- --------- ------ --------- ------- ---------
Gross profit 1,602.8 - 1,602.8 300.5 -
Transmission and distribution costs (479.3) - (479.3) (33.3) -
Administrative expenses (including goodwill
amortisation) (533.8) (18.5) (552.3) (142.8) -
Other operating income 64.2 - 64.2 3.6 -
Utilisation of Appliance Retailing disposal
provision - - - 13.2 -
----------------------------------------------------------- --------- ------ --------- ------- ---------
-------------------------------------------------------------------------------------------------------------------------------
Operating profit before goodwill amortisation 800.5 (18.5) 782.0 143.6 -
Goodwill amortisation (146.6) - (146.6) (2.4) -
-------------------------------------------------------------------------------------------------------------------------------
Operating profit 1, 2 653.9 (18.5) 635.4 141.2 -
Share of operating profit in joint ventures 2.2 - 2.2 - -
Share of operating profit in associates 0.2 - 0.2 - -
----------------------------------------------------------- --------- ------ --------- ------- ---------
656.3 (18.5) 637.8 141.2 -
-------------------------------------------------------------------------------------------------------------------------------
Loss on disposal of and withdrawal from
Appliance Retailing before goodwill
write back - - - - (105.0)
Goodwill write back - - - - (15.1)
-------------------------------------------------------------------------------------------------------------------------------
Loss on disposal of and withdrawal from
Appliance Retailing - - - - (120.1)
-------------------------------------------------------------------------------------------------------------------------------
Provision for loss on disposal of Southern
Water before goodwill write back - - - - (449.3)
Goodwill write back - - - - (738.2)
-------------------------------------------------------------------------------------------------------------------------------
Provision for loss on disposal of Southern
Water - - - - (1,187.5)
----------------------------------------------------------- --------- ------ --------- ------- ---------
Profit/(loss) on ordinary activities before
interest 656.3 (18.5) 637.8 141.2 (1,307.6)
========= ====== ========= ======= =========
Net interest and similar charges
- Group before exceptional interest and similar
charges
- Exceptional interest and similar charges 4
- Joint ventures
5
-----------------------------------------------------------
-----------------------------------------------------------
Loss on ordinary activities before goodwill
amortisation and taxation
Goodwill amortisation
-----------------------------------------------------------
Loss on ordinary activities before taxation
Taxation
- Group before tax on exceptional items
- Tax on exceptional items 4
- Joint ventures
6
-----------------------------------------------------------
Loss after taxation
Minority interests 28
-----------------------------------------------------------
Loss for the financial year
Dividends
- Cash 8
- Dividend in specie on demerger of Thus 8
-----------------------------------------------------------
Loss retained 27
===========================================================
Loss per ordinary share 7
Adjusting items - exceptional items
- goodwill amortisation
-----------------------------------------------------------
Earnings per ordinary share before exceptional
items and goodwill amortisation 7
===========================================================
Diluted loss per ordinary share 7
Adjusting items - exceptional items
- goodwill amortisation
-----------------------------------------------------------
Diluted earnings per ordinary share before exceptional
items and goodwill amortisation 7
===========================================================
Cash dividends per ordinary share 8
===========================================================
Total
discontinued
operations Total
2002 2002
(Pounds)m (Pounds)m
------------------------------------------------------------------------------
Turnover: group and share of joint
ventures and associates 791.3 6,337.2
Less: share of turnover in joint ventures - (22.6)
Less: share of turnover in associates - (0.5)
------------------------------------------- --------- ---------
Group turnover 791.3 6,314.1
Cost of sales (490.8) (4,410.8)
------------------------------------------- --------- ---------
Gross profit 300.5 1,903.3
Transmission and distribution costs (33.3) (512.6)
Administrative expenses (including goodwill
amortisation) (142.8) (695.1)
Other operating income 3.6 67.8
Utilisation of Appliance Retailing disposal
provision 13.2 13.2
------------------------------------------- --------- ---------
------------------------------------------------------------------------------
Operating profit before goodwill amortisation 143.6 925.6
Goodwill amortisation (2.4) (149.0)
------------------------------------------------------------------------------
Operating profit 141.2 776.6
Share of operating profit in joint ventures - 2.2
Share of operating profit in associates - 0.2
------------------------------------------- -------- --------
141.2 779.0
------------------------------------------------------------------------------
Loss on disposal of and withdrawal from
Appliance Retailing before goodwill
write back (105.0) (105.0)
Goodwill write back (15.1) (15.1)
------------------------------------------------------------------------------
Loss on disposal of and withdrawal from
Appliance Retailing (120.1) (120.1)
-----------------------------------------------------------------------------
Provision for loss on disposal of Southern
Water before goodwill write back (449.3) (449.3)
Goodwill write back (738.2) (738.2)
------------------------------------------------------------------------------
Provision for loss on disposal of Southern
Water (1,187.5) (1,187.5)
------------------------------------------- -------- --------
Profit/(loss) on ordinary activities before
interest (1,166.4) (528.6)
=========================================== ========= ========
Net interest and similar charges
- Group before exceptional interest and similar --------
charges (373.2)
- Exceptional interest and similar charges (30.8)
- Joint ventures (6.2)
--------
(410.2)
--------
Loss on ordinary activities before goodwill --------
amortisation and taxation (789.8)
Goodwill amortisation (149.0)
--------
Loss on ordinary activities before taxation (938.8)
Taxation --------
- Group before tax on exceptional items (123.1)
- Tax on exceptional items 38.8
- Joint ventures 1.1
--------
(83.2)
--------
Loss after taxation (1,022.0)
Minority interests 34.9
--------
Loss for the financial year (987.1)
Dividends --------
- Cash (503.5)
- Dividend in specie on demerger of Thus (436.6)
--------
(940.1)
------------------------------------------------ --------
Loss retained (1,927.2)
================================================ ========
Loss per ordinary share (53.71)p
Adjusting items - exceptional items 71.72p
- goodwill amortisation 8.11p
------------------------------------------------ --------
Earnings per ordinary share before exceptional
items and goodwill amortisation 26.12p
================================================ ========
Diluted loss per ordinary share (53.64)p
Adjusting items - exceptional items 71.63p
- goodwill amortisation 8.10p
------------------------------------------------ --------
Diluted earnings per ordinary share before
exceptional items and goodwill amortisation 26.09p
================================================ ========
Cash dividends per ordinary share 27.34p
================================================ ========
The Accounting Policies and Definitions on pages 56 to 60, together with the
Notes on pages 65 to 70, 72 to 74, 76 to 107 and 109 to 110 form part of these
Accounts.
ScottishPower Annual Report & Accounts/Form 20-F 2001/02 |62
Group Profit and Loss Account
for the year ended 31 March 2001
Year ended 31 March 2001
Exceptional
item
-continuing Total Total
Continuing operations continuing discontinued
operations (Note 4) operations operations Total
2001 2001 2001 2001 2001
Notes (Pounds)m (Pounds)m (Pounds)m (Pounds)m (Pounds)m
-----------------------------------------------------------------------------------------------------------------------------------
Turnover: group and share of joint ventures and associates 5,421.9 - 5,421.9 939.5 6,361.4
Less: share of turnover in joint ventures (11.7) - (11.7) - (11.7)
Less: share of turnover in associates (0.4) - (0.4) - (0.4)
----------------------------------------------------------------- --------- ------ -------- ------- ----------
Group turnover 1 5,409.8 - 5,409.8 939.5 6,349.3
Cost of sales (3,837.0) (62.1) (3,899.1) (570.4) (4,469.5)
----------------------------------------------------------------- --------- ------ -------- ------- ----------
Gross profit 1,572.8 (62.1) 1,510.7 369.1 1,879.8
Transmission and distribution costs (483.2) (45.1) (528.3) (38.4) (566.7)
Administrative expenses (including goodwill amortisation) (446.1) (13.5) (459.6) (182.0) (641.6)
Other operating income 46.6 - 46.6 3.8 50.4
----------------------------------------------------------------- --------- ------ -------- ------- ----------
-----------------------------------------------------------------------------------------------------------------------------------
Operating profit before goodwill amortisation 815.3 (120.7) 694.6 154.9 849.5
Goodwill amortisation (125.2) - (125.2) (2.4) (127.6)
-----------------------------------------------------------------------------------------------------------------------------------
Operating profit 1, 2 690.1 (120.7) 569.4 152.5 721.9
Share of operating loss in joint ventures (9.4) - (9.4) - (9.4)
Share of operating profit in associates 0.1 - 0.1 - 0.1
----------------------------------------------------------------- --------- ------ -------- ------- ---------
Profit on ordinary activities before interest 680.8 (120.7) 560.1 152.5 712.6
========= ====== ======== =======
Net interest and similar charges ----------
- Group (330.0)
- Joint ventures (2.9)
----------
5 (332.9)
----------------------------------------------------------------- ----------
----------------------------------------------------------------- ----------
Profit on ordinary activities before goodwill
amortisation and taxation 507.3
Goodwill amortisation (127.6)
----------------------------------------------------------------- ----------
Profit on ordinary activities before taxation 379.7
Taxation ----------
- Group before tax on exceptional item (139.2)
- Tax on exceptional item 4 45.9
- Joint ventures (1.9)
----------
6 (95.2)
----------------------------------------------------------------- ---------
Profit after taxation 284.5
Minority interests 28 23.0
----------------------------------------------------------------- ---------
Profit for the financial year 307.5
Dividends 8 (477.3)
----------------------------------------------------------------- ---------
Loss retained 27 (169.8)
================================================================= =========
Earnings per ordinary share 7 16.80p
Adjusting items - exceptional item 4.09p
- goodwill amortisation 6.97p
----------------------------------------------------------------- ---------
Earnings per ordinary share before exceptional item
and goodwill amortisation 7 27.86p
================================================================= =========
Diluted earnings per ordinary share 7 16.74p
Adjusting items - exceptional item 4.07p
- goodwill amortisation 6.94p
----------------------------------------------------------------- ---------
Diluted earnings per ordinary share before exceptional item
and goodwill amortisation 7 27.75p
================================================================= =========
Cash dividends per ordinary share 8 26.04p
================================================================= =========
The Accounting Policies and Definitions on pages 56 to 60, together with the
Notes on pages 65 to 70, 72 to 74, 76 to 107 and 109 to 110 form part of these
Accounts.
ScottishPower Annual Report & Accounts/Form 20-F 2001/02 |63
Group Profit and Loss Account
for the year ended 31 March 2000
Year ended 31 March 2000
Exceptional Exceptional
items items
-continuing Total -discontinued
Continuing operations continuing Discontinued operations
operations (Note 4) operations operations (Note 4)
2000 2000 2000 2000 2000
Notes (Pounds)m (Pounds)m (Pounds)m (Pounds)m (Pounds)m
----------------------------------------------------------------------------------------------------------------------------------
Turnover: group and share of joint ventures and
associates 3,117.9 - 3,117.9 1,005.2 -
Less: share of turnover in joint ventures (7.6) - (7.6) - -
Less: share of turnover in associates (0.5) - (0.5) - -
----------------------------------------------------------------- --------- --------- --------- ------- ------
Group turnover 1 3,109.8 - 3,109.8 1,005.2 -
Cost of sales (1,891.4) (173.5) (2,064.9) (533.3) -
----------------------------------------------------------------- --------- --------- --------- ------- ------
Gross profit 1,218.4 (173.5) 1,044.9 471.9 -
Transmission and distribution costs (314.3) (61.1) (375.4) (36.6) -
Administrative expenses (including goodwill amortisation) (300.9) (9.8) (310.7) (157.8) (14.6)
Other operating income 36.4 - 36.4 3.9 -
----------------------------------------------------------------- --------- --------- --------- ------- ------
---------------------------------------------------------------------------------------------------------------------------------
Operating profit before goodwill amortisation 676.4 (244.4) 432.0 285.0 (14.6)
Goodwill amortisation (36.8) - (36.8) (3.6) -
---------------------------------------------------------------------------------------------------------------------------------
Operating profit 1, 2 639.6 (244.4) 395.2 281.4 (14.6)
Share of operating profit/(loss) in joint ventures 1.6 (3.3) (1.7) - -
Share of operating profit in associates 0.1 - 0.1 - -
----------------------------------------------------------------- --------- --------- --------- ------- ------
641.3 (247.7) 393.6 281.4 (14.6)
Gain on partial disposal of Thus - - - - 787.0
Loss on disposal of and withdrawal from other Telecoms operations - - - - (55.0)
----------------------------------------------------------------- --------- --------- --------- ------- ------
Profit on ordinary activities before interest 641.3 (247.7) 393.6 281.4 717.4
========= ========= ======== ======= ======
Net interest and similar charges
- Group before exceptional interest and similar charges
- Exceptional interest and similar charges 4
- Joint ventures
5
-----------------------------------------------------------------
-----------------------------------------------------------------
Profit on ordinary activities before goodwill
amortisation and taxation
Goodwill amortisation
-----------------------------------------------------------------
Profit on ordinary activities before taxation
Taxation
- Group before tax on exceptional items
- Tax on exceptional items 4
- Joint ventures
6
-----------------------------------------------------------------
Profit after taxation
Minority interests
-----------------------------------------------------------------
Profit for the financial year
Dividends 8
-----------------------------------------------------------------
Profit retained 27
=================================================================
Earnings per ordinary share 7
Adjusting items - exceptional items
- goodwill amortisation
-----------------------------------------------------------------
Earnings per ordinary share before exceptional items
and goodwill amortisation 7
=================================================================
Diluted earnings per ordinary share 7
Adjusting items - exceptional items
- goodwill amortisation
-----------------------------------------------------------------
Diluted earnings per ordinary share before exceptional items
and goodwill amortisation 7
=================================================================
Cash dividends per ordinary share 8
=================================================================
Total
discontinued
operations Total
2000 2000
(Pounds)m (Pounds)m
-------------------------------------------------------------------------------------------
Turnover: group and share of joint ventures and 1,005.2 4,123.1
associates
Less: share of turnover in joint ventures - (7.6)
Less: share of turnover in associates - (0.5)
----------------------------------------------------------------- ---------- ---------
Group turnover 1,005.2 4,115.0
Cost of sales (533.3) (2,598.2)
----------------------------------------------------------------- ---------- ---------
Gross profit 471.9 1,516.8
Transmission and distribution costs (36.6) (412.0)
Administrative expenses (including goodwill amortisation) (172.4) (483.1)
Other operating income 3.9 40.3
----------------------------------------------------------------- ---------- ---------
------------------------------------------------------------------------------------------
Operating profit before goodwill amortisation 270.4 702.4
Goodwill amortisation (3.6) (40.4)
------------------------------------------------------------------------------------------
Operating profit 266.8 662.0
Share of operating profit/(loss) in joint ventures - (1.7)
Share of operating profit in associates - 0.1
----------------------------------------------------------------- ---------- ---------
266.8 660.4
Gain on partial disposal of Thus 787.0 787.0
Loss on disposal of and withdrawal from other Telecoms operations (55.0) (55.0)
----------------------------------------------------------------- ---------- ---------
Profit on ordinary activities before interest 998.8 1,392.4
========== ---------
Net interest and similar charges
- Group before exceptional interest and similar charges (226.1)
- Exceptional interest and similar charges (15.9)
- Joint ventures (1.4)
---------
(243.4)
----------------------------------------------------------------- ---------
----------------------------------------------------------------- ---------
Profit on ordinary activities before goodwill
amortisation and taxation 1,189.4
Goodwill amortisation (40.4)
----------------------------------------------------------------- ---------
Profit on ordinary activities before taxation 1,149.0
Taxation
---------
- Group before tax on exceptional items (207.0)
- Tax on exceptional items (56.0)
- Joint ventures 0.1
---------
(262.9)
----------------------------------------------------------------- ---------
Profit after taxation 886.1
Minority interests (1.1)
----------------------------------------------------------------- ---------
Profit for the financial year 885.0
Dividends (341.4)
----------------------------------------------------------------- ---------
Profit retained 543.6
================================================================= =========
Earnings per ordinary share 63.69p
Adjusting items - exceptional items (28.63)p
- goodwill amortisation 2.91p
----------------------------------------------------------------- ---------
Earnings per ordinary share before exceptional items
and goodwill amortisation 37.97p
================================================================= ---------
Diluted earnings per ordinary share 63.25p
Adjusting items - exceptional items (28.43)p
- goodwill amortisation 2.89p
----------------------------------------------------------------- ---------
Diluted earnings per ordinary share before exceptional items
and goodwill amortisation 37.71p
================================================================= =========
Cash dividends per ordinary share 24.80p
================================================================= =========
The Accounting Policies and Definitions on pages 56 to 60, together with the
Notes on pages 65 to 70, 72 to 74, 76 to 107 and 109 to 110 form part of these
Accounts.
ScottishPower Annual Report & Accounts/Form 20-F 2001/02 |64
Statement of Total Recognised Gains and Losses
for the year ended 31 March 2002
2002 2001 2000
Note (Pounds)m (Pounds)m (Pounds)m
-----------------------------------------------------------------------------------------------------------------------------------
(Loss)/profit for the financial year (987.1) 307.5 885.0
Exchange movement on translation of overseas results and net assets 27 (4.2) 493.1 24.9
Currency translation differences on foreign currency hedging 27 (19.5) - -
Unrealised gains on fixed asset disposals 27 4.9 - -
------------------------------------------------------------------------------------------ --------- ------- ------
Total recognised gains and losses for the financial year (1,005.9) 800.6 909.9
========================================================================================== ========= ======= ======
Note of Historical Cost Profits and Losses
for the year ended 31 March 2002
2002 2001 2000
Note (Pounds)m (Pounds)m (Pounds)m
-----------------------------------------------------------------------------------------------------------------------------------
(Loss)/profit on ordinary activities before taxation (938.8) 379.7 1,149.0
Differences between historical cost depreciation charge and actual depreciation
charge for the year calculated on the revalued amount of fixed assets 27 3.4 3.4 3.4
Fixed asset revaluation gains realised on disposal 27 168.2 - -
------------------------------------------------------------------------------------------ ---------- -------- --------
Historical cost (loss)/profit on ordinary activities before taxation (767.2) 383.1 1,152.4
========================================================================================== ========== ======== ========
Historical cost (loss)/profit retained for the financial year after
taxation, minority interest and dividends (1,755.6) (166.4) 547.0
========================================================================================== ========== ======== ========
Reconciliation of Movements in Shareholders' Funds
for the year ended 31 March 2002
2002 2001 2000
(Pounds)m (Pounds)m (Pounds)m
-----------------------------------------------------------------------------------------------------------------------------------
(Loss)/profit for the financial year (987.1) 307.5 885.0
Dividends (including dividend in specie) (940.1) (477.3) (341.4)
------------------------------------------------------------------------------------------ ---------- --------- --------
(Loss)/profit retained (1,927.2) (169.8) 543.6
Exchange movement on translation of overseas results and net assets (4.2) 493.1 24.9
Currency translation differences on foreign currency hedging (19.5) - -
Unrealised gains on fixed asset disposals 4.9 - -
Share capital issued 16.2 6.6 4,071.2
Share buy-back (including costs) - - (302.0)
Impairment of goodwill previously written off to reserves - - 7.5
Goodwill realised on disposals 753.3 - 15.3
Goodwill realised on demerger of Thus 14.7 - -
------------------------------------------------------------------------------------------ ---------- -------- --------
Net movement in shareholders' funds (1,161.8) 329.9 4,360.5
Opening shareholders' funds 5,893.2 5,563.3 1,202.8
------------------------------------------------------------------------------------------ ---------- -------- --------
Closing shareholders' funds 4,731.4 5,893.2 5,563.3
========================================================================================== ========== ======== ========
The Accounting Policies and Definitions on pages 56 to 60, together with the
Notes on pages 65 to 70, 72 to 74, 76 to 107 and 109 to 110 form part of these
Accounts.
ScottishPower Annual Report & Accounts/Form 20-F 2001/02 |65
Notes to the Group Profit and Loss Account
for the year ended 31 March 2002
1 Segmental information
--------------------------------------------------------------------------------------------------------------------------
(a) Turnover by segment Total turnover Inter-segment turnover
2002 2001 2000 2002 2001 2000
Notes (Pounds)m (Pounds)m (Pounds)m (Pounds)m (Pounds)m (Pounds)m
--------------------------------------------------------------------------------------------------------------------------
United Kingdom
UK Division - Generation, Trading and Supply (i) 2,160.7 2,099.1 2,199.2 39.3 35.3 11.3
Infrastructure Division - Power Systems (i) 646.6 666.3 781.6 399.0 442.6 571.4
-------------------------------------------------------------------------------------------------------------------------
United Kingdom total - continuing operations
=========================================================================================================================
United States - continuing operations
US Division - PacifiCorp (ii) 3,153.8 3,122.3 711.7 - - -
-------------------------------------------------------------------------------------------------------------------------
Total continuing operations
=========================================================================================================================
United Kingdom - discontinued operations
Infrastructure Division - Southern Water (i) 430.6 422.9 474.1 0.7 0.5 0.9
Thus (iii) 257.8 233.8 243.2 28.7 34.4 40.4
Appliance Retailing (i) 133.9 325.4 336.2 1.6 7.7 7.0
-------------------------------------------------------------------------------------------------------------------------
United Kingdom total - discontinued operations
=========================================================================================================================
Total (iv)
=========================================================================================================================
----------------------------------------------------------------------------------------
(a) Turnover by segment External turnover
2002 2001 2000
(Pounds)m (Pounds)m (Pounds)m
---------------------------------------------------------------------------------------
United Kingdom
UK Division - Generation, Trading and Supply 2,121.4 2,063.8 2,187.9
Infrastructure Division - Power Systems 247.6 223.7 210.2
------------------------------------------------------ -------- -------- --------
United Kingdom total - continuing operations 2,369.0 2,287.5 2,398.1
====================================================== ======== ======== ========
United States - continuing operations
US Division - PacifiCorp 3,153.8 3,122.3 711.7
------------------------------------------------------ -------- -------- --------
Total continuing operations 5,522.8 5,409.8 3,109.8
====================================================== ======== ======== ========
United Kingdom - discontinued operations
Infrastructure Division - Southern Water 429.9 422.4 473.2
Thus 229.1 199.4 202.8
Appliance Retailing 132.3 317.7 329.2
------------------------------------------------------ -------- -------- --------
United Kingdom total - discontinued operations 791.3 939.5 1,005.2
====================================================== ======== ======== ========
Total 6,314.1 6,349.3 4,115.0
====================================================== ======== ======== ========
(b) Operating profit/(loss) by segment Before Before
goodwill goodwill
amortisation amortisation
and and
exception Goodwill Exceptional exceptional Goodwill Exceptional
item amortisation item item amortisation item
2002 2002 2002 2002 2001 2001 2001
Notes (Pounds)m (Pounds)m (Pounds)m (Pounds)m (Pounds)m (Pounds)m (Pounds)m
------------------------------------------------------------------------------------------------------------------------------------
United Kingdom
UK Division - Generation, Trading
and Supply (i) 78.7 (4.9) (18.5) 55.3 122.7 (0.4) -
Infrastructure Division -
Power Systems (i) 354.9 - - 354.9 341.3 - -
----------------------------------------- ------------ ------------ ---------- --------- --------- ----------- -----------
United Kingdom total -
continuing operations 433.6 (4.9) (18.5) 410.2 464.0 (0.4) -
========================================= ============ ============ ========== ========= ========= =========== ===========
United States - continuing operations
US Division - PacifiCorp 366.9 (141.7) - 225.2 351.3 (124.8) (120.7)
----------------------------------------- ------------ ------------ ---------- --------- --------- ----------- -----------
Total continuing operations 800.5 (146.6) (18.5) 635.4 815.3 (125.2) (120.7)
========================================= ============ ============ ========== ========= ========= =========== ===========
United Kingdom -
discontinued operations
Infrastructure Division -
Southern Water (i) 216.3 - - 216.3 221.6 - -
Thus (iii) (63.7) (2.4) - (66.1) (58.0) (2.4) -
Appliance Retailing (i) (9.0) - - (9.0) (8.7) - -
----------------------------------------- ------------ ------------ ---------- --------- --------- ----------- -----------
United Kingdom total -
discontinued operations 143.6 (2.4) - 141.2 154.9 (2.4) -
========================================= ============ ============ ========== ========= ========= =========== ===========
Total 944.1 (149.0) (18.5) 776.6 970.2 (127.6) (120.7)
========================================= ============ ============ ========== ========= ========= =========== ===========
(b) Operating profit/(loss) by segment Before
goodwill
amortisation
and
exceptional Goodwill Exceptional
items amortisation items
2001 2000 2000 2000 2000
(Pounds)m (Pounds)m (Pounds)m (Pounds)m (Pounds)m
-------------------------------------------------------------------------------------------------------
United Kingdom
UK Division - Generation, Trading
and Supply 122.3 156.3 - (185.5) (29.2)
Infrastructure Division -
Power Systems 341.3 368.4 - (58.9) 309.5
----------------------------------------- --------- ------------ ------------ ----------- ---------
United Kingdom total -
continuing operations 463.6 524.7 - (244.4) 280.3
========================================= ========= ============ ============ =========== =========
United States - continuing operations
US Division - PacifiCorp 105.8 151.7 (36.8) - 114.9
----------------------------------------- --------- ------------ ------------ ----------- ---------
Total continuing operations 569.4 676.4 (36.8) (244.4) 395.2
========================================= ========= ============ ============ =========== =========
United Kingdom -
discontinued operations
Infrastructure Division -
Southern Water 221.6 287.4 - (8.4) 279.0
Thus (60.4) (9.5) (3.6) - (13.1)
Appliance Retailing (8.7) 7.1 - (6.2) 0.9
----------------------------------------- --------- ------------ ------------ ----------- ---------
United Kingdom total -
discontinued operations 152.5 285.0 (3.6) (14.6) 266.8
========================================= ========= ============ ============ =========== =========
Total 721.9 961.4 (40.4) (259.0) 662.0
========================================= ========= ============ ============ =========== =========
(c) Depreciation and impairment by segment Depreciation Impairment Total Depreciation Depreciation
2002 2002 2002 2001 2000
Notes (Pounds)m (Pounds)m (Pounds)m (Pounds)m (Pounds)m
-----------------------------------------------------------------------------------------------------------------------------------
United Kingdom
UK Division - Generation, Trading and Supply (i) 72.9 13.0 85.9 51.6 29.3
Infrastructure Division - Power Systems (i) 108.3 - 108.3 107.6 114.5
-------------------------------------------------------------------- ------------ --------- --------- ------------ ------------
United Kingdom total - continuing operations 181.2 13.0 194.2 159.2 143.8
==================================================================== ============ ========= ========= ============ ============
United States - continuing operations
US Division - PacifiCorp 227.8 - 227.8 203.6 76.6
-------------------------------------------------------------------- ------------ --------- --------- ------------ ------------
Total continuing operations 409.0 13.0 422.0 362.8 220.4
==================================================================== ============ ========= ========= ============ ============
United Kingdom - discontinued operations
Infrastructure Division - Southern Water (i) 77.6 - 77.6 71.2 67.8
Thus (iii) 65.2 - 65.2 36.5 23.5
Appliance Retailing (i) 3.2 - 3.2 9.8 8.5
-------------------------------------------------------------------- ------------ --------- --------- ------------ ------------
United Kingdom total - discontinued operations 146.0 - 146.0 117.5 99.8
==================================================================== ============ ========= ========= ============ ============
Total depreciation and impairment charged to operating profit 555.0 13.0 568.0 480.3 320.2
==================================================================== ============ ========= ========= ============ ============
Impairment within loss on disposal of and withdrawal from other
Telecoms operations - - - - -
Impairment within loss on disposal of and withdrawal from Appliance
Retailing - 32.2 32.2 - -
Impairment within provision for loss on disposal of Southern Water - 449.3 449.3 - -
==================================================================== ============ ========= ========= ============ ============
Total depreciation and impairment 555.0 494.5 1,049.5 480.3 320.2
==================================================================== ============ ========= ========= ============ ============
(c) Depreciation and impairment by segment Impairment Total
2000 2000
(Pounds)m (Pounds)m
----------------------------------------------------------------------------------------------
United Kingdom
UK Division - Generation, Trading and Supply 66.4 95.7
Infrastructure Division - Power Systems 25.6 140.1
-------------------------------------------------------------------- ---------- ------
United Kingdom total - continuing operations 92.0 235.8
==================================================================== ========== ======
United States - continuing operations
US Division - PacifiCorp - 76.6
-------------------------------------------------------------------- ---------- ------
Total continuing operations 92.0 312.4
==================================================================== ========== ======
United Kingdom - discontinued operations
Infrastructure Division - Southern Water - 67.8
Thus - 23.5
Appliance Retailing 4.9 13.4
-------------------------------------------------------------------- ---------- ------
United Kingdom total - discontinued operations 4.9 104.7
==================================================================== ========== ======
Total depreciation and impairment charged to operating profit 96.9 417.1
==================================================================== ========== ======
Impairment within loss on disposal of and withdrawal from other
Telecoms operations 38.5 38.5
Impairment within loss on disposal of and withdrawal from Appliance
Retailing - -
Impairment within provision for loss on disposal of Southern Water - -
==================================================================== ========== ======
Total depreciation and impairment 135.4 455.6
==================================================================== ========== ======
ScottishPower Annual Report & Accounts/Form 20-F 2001/02 |66
Notes to the Group Profit and Loss Account
for the year ended 31 March 2002 - continued
1 Segmental information continued
------------------------------------------------------------------------------------------------------------------------------------
(i) As announced in May 2001, the group operates through three divisions which
are different from the segments presented in the prior year's Accounts. The
former Generation Wholesale and Energy Supply segments have been combined and
the former Other segment (other than Appliance Retailing) has been absorbed into
the new UK business segments. Prior year comparatives have been restated
accordingly. The previously reported external turnover, operating profit,
exceptional items, depreciation and impairment of the Other segment have been
allocated as follows:
Year ended 31 March 2001 Year ended 31 March 2000
External Operating External Operating Exceptional
turnover profit Depreciation turnover profit items Depreciation
(Pounds)m (Pounds)m (Pounds)m (Pounds)m (Pounds)m (Pounds)m (Pounds)m
------------------------------------------------------------------------------------------------------------------------------------
United Kingdom
UK Division - Generation, Trading and Supply 79.9 (6.3) 7.6 30.8 (1.1) (3.8) 4.6
Infrastructure Division
Power Systems 11.1 17.1 6.5 37.6 7.2 (1.2) 6.3
Southern Water 0.8 0.4 - 2.7 0.9 - 1.7
Appliance Retailing 317.7 (8.7) 9.8 329.2 7.1 (6.2) 8.5
-------------------------------------------------- ------ --------- ------------ --------- ---------- ----------- ------------
Other total 409.5 2.5 23.9 400.3 14.1 (11.2) 21.1
================================================== ====== ========= ============ ========= ========== =========== ============
Impairment
(Pounds)m
-------------------------------------------------------------------
United Kingdom
UK Division - Generation, Trading and Supply -
Infrastructure Division
Power Systems -
Southern Water -
Appliance Retailing 4.9
--------------------------------------------- ----------
Other total 4.9
============================================= ==========
(ii) Turnover for PacifiCorp for the year ended 31 March 2000 amounted to
(Pounds) 2,499.6 million.
(iii) The segment previously described as `Telecoms' has been redesignated
`Thus' as historical data for this segment no longer includes data relating to
other Telecoms operations disposed in prior years except that, in the year ended
31 March 2000, this segment included external turnover of (Pounds) 25.7 million
in respect of the group's mobile telephone business which was disposed of in
November 1999.
(iv) In the segmental analysis turnover is shown by geographical origin.
Turnover analysed by geographical destination is not materially different.
(v) As required by the Utilities Act 2000, the group has implemented a new legal
entity structure for certain of its UK businesses to give effect to business
separation. Following the creation of this new legal structure on 1 October
2001, the directors reviewed the group's segments and concluded that no changes
were required to the business segments disclosed above.
2 Operating profit
-------------------------------------------------------------------------------------------------------
2002 2001 2000
Operating profit is stated after charging/(crediting): (Pounds)m (Pounds)m (Pounds)m
-------------------------------------------------------------------------------------------------------
Depreciation and impairment of tangible fixed assets 568.0 480.3 417.1
Amortisation of goodwill 149.0 127.6 40.4
Release of customer contributions/grants (17.8) (15.1) (15.6)
Research and development 3.1 4.2 5.5
Hire of plant and equipment - operating leases 0.1 0.3 0.4
Hire of other assets - operating leases 55.6 54.6 44.7
Auditors' remuneration for audit of
- group 1.5 1.5 1.1
- company - - -
===================================================================== ========= ========= ========
Non-audit fees paid to auditors:
Regulatory advice 0.3 1.3 1.2
Advice on systems and consultancy services 6.9 5.4 3.9
Taxation, compliance and advice 5.2 3.1 1.2
Due diligence, UK Listing Authority and SEC reporting 3.4 0.8 3.7
Other audit and assurances services 0.8 0.8 0.1
--------------------------------------------------------------------- --------- --------- --------
Total UK and US non-audit fees paid to auditors 16.6 11.4 10.1
===================================================================== ========= ========= ========
For the year ended 31 March 2002, (Pounds)15.1 million of the above non-audit
fees were charged to operating profit, (Pounds)0.6 million were charged to
exceptional loss on disposal of and withdrawal from Appliance Retailing and
(Pounds)0.9 million were charged to exceptional provision for loss on disposal
of Southern Water.
For the year ended 31 March 2001, (Pounds)10.7 million of the above non-audit
fees were charged to operating profit and (Pounds)0.7 million were included
within the costs of sale of the businesses held for disposal.
For the year ended 31 March 2000, (Pounds)6.6 million of the above non-audit
fees were charged to operating profit, (Pounds)3.1 million were charged to
exceptional gain on the partial disposal of Thus and (Pounds)0.4 million were
included within costs of acquisition of PacifiCorp.
Operating profit for the years ended 31 March 2002, 31 March 2001 and 31 March
2000 is also stated after crediting net earnings of (Pounds)4.2 million,
(Pounds)4.3 million and (Pounds)1.3 million respectively under finance leases in
the United States, which are financed by non-recourse borrowings and qualify for
linked presentation under FRS 5. Net earnings comprise gross earnings of
(Pounds)32.3 million, (Pounds)33.8 million and (Pounds)10.8 million less finance
costs of (Pounds)28.1 million, (Pounds)29.5 million and (Pounds)9.5 million
respectively.
ScottishPower Annual Report & Accounts/Form 20-F 2001/02 |67
3 Employee information
-----------------------------------------------------------------------------------------------------------------------------------
2002 2001 2000
(a) Employee costs (Pounds)m (Pounds)m (Pounds)m
-----------------------------------------------------------------------------------------------------------------------------------
Wages and salaries 695.6 676.8 464.7
Social security costs 46.9 50.3 33.7
Pension costs 34.8 28.4 20.9
------------------------------------------------------------------------------------------- -------- --------- ---------
Total employee costs 777.3 755.5 519.3
Less: charged as capital expenditure (191.3) (151.2) (89.4)
------------------------------------------------------------------------------------------- -------- --------- ---------
Charged to the profit and loss account 586.0 604.3 429.9
=========================================================================================== ======== ========= =========
(b) Employee numbers
The year end and average numbers of employees (full-time and part-time) employed
by the group, including executive directors, were:
At 31 March Annual average
Notes 2002 2001 2000 2002 2001 2000
-----------------------------------------------------------------------------------------------------------------------------------
United Kingdom
UK Division - Generation, Trading and Supply (i) 4,582 4,278 3,221 4,589 4,178 3,298
Infrastructure Division - Power Systems (i) 3,084 3,265 5,564 3,174 3,332 5,591
-------------------------------------------------------------- -------- ------- ------- -------- --------- ---------
United Kingdom total - continuing operations 7,666 7,543 8,785 7,763 7,510 8,889
============================================================== ======== ======= ======= ======== ========= =========
United States - continuing operations
US Division - PacifiCorp 6,387 6,668 7,789 6,512 7,053 7,914
-------------------------------------------------------------- -------- ------- ------- -------- --------- ---------
Total continuing operations 14,053 14,211 16,574 14,275 14,563 16,803
============================================================== ======== ======= ======= ======== ========= =========
United Kingdom - discontinued operations
Infrastructure Division - Southern Water (i) 2,109 2,138 2,281 2,125 2,160 2,343
Thus - 2,686 2,516 2,392 2,696 2,379
Appliance Retailing (i) - 2,946 2,743 2,391 2,988 2,762
-------------------------------------------------------------- -------- ------- ------- -------- --------- ---------
United Kingdom total - discontinued operations (ii) 2,109 7,770 7,540 6,908 7,844 7,484
============================================================== ======== ======= ======= ======== ========= =========
Total 16,162 21,981 24,114 21,183 22,407 24,287
============================================================== ======== ======= ======= ======== ========= =========
The year end and average numbers of full-time equivalent staff employed by the
group, including executive directors, were:
At 31 March Annual average
Note 2002 2001 2000 2002 2001 2000
-----------------------------------------------------------------------------------------------------------------------------------
United Kingdom
- continuing operations 7,353 7,184 8,336 7,391 7,125 8,516
- discontinued operations (ii) 2,056 7,025 6,840 6,314 7,049 6,708
United States 6,349 6,612 7,742 6,474 6,993 7,791
-------------------------------------------------------------- -------- ------- ------- -------- --------- ---------
Total 15,758 20,821 22,918 20,179 21,167 23,015
============================================================== ======== ======= ======= ======== ========= =========
(i) As announced in May 2001, the group operates through three divisions which
are different from the segments presented in the prior year's Accounts. The
former Generation Wholesale and Energy Supply segments have been combined and
the former Other segment (other than Appliance Retailing) has been absorbed into
the new UK business segments. Prior year comparatives have been restated
accordingly. The previously reported year end and average number of employees
(full-time and part-time) of the Other segment have been allocated as follows:
At 31 March Annual Average
2001 2000 2001 2000
-----------------------------------------------------------------------------------------------------------------------------------
United Kingdom
UK Division - Generation, Trading and Supply 101 364 107 367
Infrastructure Division
Power Systems 84 1,150 91 1,197
Southern Water 35 138 37 140
Appliance Retailing 2,946 2,743 2,988 2,762
------------------------------------------------------------------------------------ ------- -------- --------- ---------
Other total 3,166 4,395 3,223 4,466
==================================================================================== ======= ======== ========= =========
(ii) The annual average for 2002 for discontinued operations is calculated for
the period prior to disposal or demerger. This represents the period to 8
October 2001 for Appliance Retailing and the period to 19 March 2002 for Thus.
(c) Directors' remuneration
Details, for each director, of remuneration, pension entitlements and interests
in share options are set out on pages 51 to 54. This information forms part of
the Accounts.
ScottishPower Annual Report & Accounts/Form 20-F 2001/02 |68
Notes to the Group Profit and Loss Account
for the year ended 31 March 2002 - continued
4 Exceptional items
-----------------------------------------------------------------------------------------------------------------------------------
2002 2001 2000
Notes (Pounds)m (Pounds)m (Pounds)m
-----------------------------------------------------------------------------------------------------------------------------------
(a) Recognised in arriving at operating profit
Continuing operations
Reorganisation costs (i), (iv), (v) (18.5) (120.7) (40.4)
Energy contracts (vi) - - (107.1)
Impairment of assets (vii) - - (96.9)
----------------------------------------------------------------------------------------------- -------- ------ ------
Total continuing operations (18.5) (120.7) (244.4)
=============================================================================================== ========= ======= ======
Discontinued operations
Reorganisation costs (v) - - (14.6)
----------------------------------------------------------------------------------------------- -------- ------ ------
Total recognised in arriving at operating profit (18.5) (120.7) (259.0)
=============================================================================================== ========= ======= ======
(b) Recognised after operating profit
Continuing operations
Share of joint venture impairment of assets - - (3.3)
Discontinued operations
Loss on disposal of and withdrawal from Appliance Retailing (ii) (120.1) - -
Provision for loss on disposal of Southern Water before goodwill write back (iii) (449.3) - -
Goodwill write back relating to Southern Water (iii) (738.2) - -
Gain on partial disposal of Thus (viii) - - 787.0
Loss on disposal of and withdrawal from other Telecoms operations (ix) - - (55.0)
----------------------------------------------------------------------------------------------- -------- ------ ------
Total recognised after operating profit (1,307.6) - 728.7
=============================================================================================== ========= ======= ======
Total exceptional items before interest and taxation (1,326.1) (120.7) 469.7
Restructuring of debt portfolio (iii), (ix) (30.8) - (15.9)
Tax on exceptional items 38.8 45.9 (56.0)
----------------------------------------------------------------------------------------------- -------- ------ ------
Total exceptional items (net of tax) (1,318.1) (74.8) 397.8
=============================================================================================== ======== ====== ======
Year ended 31 March 2002
(i) An exceptional charge of (Pounds)18.5 million was incurred relating to
reorganisation costs for the UK Division - Generation, Trading and Supply and
primarily represents severance and related costs.
(ii) An exceptional charge of (Pounds)120.1 million relates to the loss on
disposal of and withdrawal from the group's Appliance Retailing operations. This
charge includes (Pounds)15.1 million of goodwill previously written off to
reserves. The pre-goodwill loss of (Pounds)105.0 million comprises asset
impairments of (Pounds)54.2 million (including a provision for impairment of
tangible fixed assets of (Pounds)32.2 million) and provisions for trading losses
and closure costs of (Pounds)50.8 million, of which (Pounds)43.5 million had
been incurred by 31 March 2002. The loss on disposal of and withdrawal from
Appliance Retailing is stated before a tax credit of (Pounds)21.0 million.
(iii) On 23 April 2002, the group completed the sale of Aspen 4 Limited (the
holding company of Southern Water plc) to First Aqua Limited for a total
consideration, before expenses, of (Pounds)2.05 billion including repayment and
acquisition of intra-group non-trading indebtedness and assumption by First Aqua
Limited of Southern Water's non-trading debt due to third parties. An
exceptional charge of (Pounds)1,187.5 million relates to the provision for the
loss on disposal of the group's Southern Water business. This charge includes
(Pounds)738.2 million of goodwill previously written off to reserves. Net
exceptional finance costs of (Pounds)30.8 million were incurred comprising
hedging and debt redemption costs associated with the proposed refinancing of
Southern Water and the restructuring of the group's debt portfolio in
anticipation of the disposal of Southern Water. The provision for loss on
disposal of Southern Water is stated before a tax credit of (Pounds)2.9 million.
Year ended 31 March 2001
(iv) The charge of (Pounds)120.7 million related to the cost of the Transition
Plan for PacifiCorp announced on 4 May 2000 and primarily represented severance
and related costs for approximately 1,600 employees.
Year ended 31 March 2000
(v) Following the regulatory price reviews in the United Kingdom electricity
and water industries announced in November 1999, the group commenced
restructuring a large part of its UK businesses. The exceptional costs
principally comprised employee severance costs.
(vi) Exceptional charges were recorded for the onerous costs of contracted
energy and fuel purchases which were not expected to be recoverable.
(vii) Provision was made for impairment of assets following an assessment of
the group's UK generation portfolio and the outcome of the regulatory price
reviews in the United Kingdom electricity industry announced in November 1999.
(viii) In November 1999, the group made Global and Employee Offerings of shares
in its internet and telecommunications services subsidiary, Thus plc. As a
result of these offerings the group's interest in the share capital of Thus was
reduced from 100% to 50.1%. The gain on sale represented the difference between
the carrying amount of the net assets of Thus before the reduction in the
group's interest and the carrying amount attributable to the group's interest
immediately after the reduction and taking into account the net proceeds
received. The gain on disposal was after charging goodwill of (Pounds)48.0
million of which (Pounds)13.4 million represented goodwill previously written
off to reserves. The gain on partial disposal of Thus was stated before a
taxation charge of (Pounds)80.0 million.
(ix) An exceptional charge of (Pounds)47.5 million related to the costs
arising as a result of the group's decision, in July 1999, to withdraw from the
use of fixed radio access telephony, including a provision for impairment of
tangible fixed assets of (Pounds)38.5 million. In November 1999, the group
disposed of its mobile telephone business. There was no gain or loss on disposal
after charging (Pounds)1.9 million of goodwill relating to this business which
was originally charged to reserves. In addition, during the year ended 31 March
2000 and prior to the disposal, an impairment of goodwill of (Pounds)7.5 million
in respect of this business was charged to the profit and loss account. Net
exceptional finance costs of (Pounds)15.9 million were incurred on the closing
out of swaps and redemption of debt to restructure the group's debt portfolio,
consequent on the receipt of the Thus sale proceeds.
ScottishPower Annual Report & Accounts/Form 20-F 2001/02 |69
5 Net interest and similar charges
-------------------------------------------------------------------------------------------------------------------
2002 2001 2000
Analysis of net interest and similar charges Notes (Pounds)m (Pounds)m (Pounds)m
-------------------------------------------------------------------------------------------------------------------
Interest on bank loans and overdrafts 32.8 38.1 24.6
Interest on other borrowings 379.5 333.7 235.2
Finance leases 2.3 2.2 0.7
-------------------------------------------------------------------------------- ---------- -------- --------
Total interest payable 414.6 374.0 260.5
Interest receivable (15.0) (33.7) (9.6)
Capitalised interest (36.1) (32.2) (28.8)
-------------------------------------------------------------------------------- ---------- -------- --------
Net interest charge 363.5 308.1 222.1
Unwinding of discount on provisions 22.8 16.0 5.4
Foreign exchange (gain)/loss (6.9) 8.8 -
-------------------------------------------------------------------------------- ---------- -------- --------
Net interest and similar charges before exceptional items 379.4 332.9 227.5
-------------------------------------------------------------------------------- ---------- -------- --------
Exceptional interest on bank loans and overdrafts 12.0 - -
Exceptional interest on other borrowings 18.8 - 15.9
-------------------------------------------------------------------------------- ---------- -------- --------
Exceptional interest and similar charges 4(iii), 4(ix) 30.8 - 15.9
-------------------------------------------------------------------------------- ---------- -------- --------
Net interest and similar charges after exceptional items 410.2 332.9 243.4
================================================================================ ========== ======== ========
Interest cover (times) 2.5 3.0 4.2
================================================================================ ========== ======== ========
Interest cover is calculated by dividing profit on ordinary activities before
interest (before exceptional items and goodwill amortisation) by the sum of the
net interest charge (before exceptional interest and similar charges) and the
unwinding of discount on provisions.
6 Tax on (loss)/profit on ordinary activities
------------------------------------------------------------------------------------------------------------------------------------
Before Before Before
exceptional Exceptional exceptional Exceptional exceptional Exceptional
items items item item items items
2002 2002 2002 2001 2001 2001 2000 2000 2000
(Pounds)m (Pounds)m (Pounds)m (Pounds)m (Pounds)m (Pounds)m (Pounds)m (Pounds)m (Pounds)m
------------------------------------------------------------------------------------------------------------------------------------
Current tax:
UK Corporation tax 82.6 (32.5) 50.1 175.3 - 175.3 165.8 56.0 221.8
Foreign tax 17.3 - 17.3 5.7 (8.7) (3.0) 26.1 - 26.1
Double taxation relief - - - (61.2) - (61.2) - - -
--------------------------------- ------- --------- ------- --------- --------- ------- --------- ------- --------
99.9 (32.5) 67.4 119.8 (8.7) 111.1 191.9 56.0 247.9
Adjustments to UK Corporation
tax in respect of prior years (54.4) - (54.4) (29.7) - (29.7) (30.2) - (30.2)
--------------------------------- ------- --------- ------- --------- --------- ------- --------- ------- --------
Total current tax for year 45.5 (32.5) 13.0 90.1 (8.7) 81.4 161.7 56.0 217.7
--------------------------------- ------- --------- ------- --------- --------- ------- --------- ------- --------
Deferred tax:
Origination and reversal of
timing differences 76.5 (6.3) 70.2 86.0 (37.2) 48.8 45.2 - 45.2
Adjustments in respect of
prior years - - - (35.0) - (35.0) - - -
--------------------------------- ------- --------- ------- --------- --------- ------- --------- ------- --------
Total deferred tax for year 76.5 (6.3) 70.2 51.0 (37.2) 13.8 45.2 - 45.2
--------------------------------- ------- --------- ------- --------- --------- ------- --------- ------- --------
Tax on (loss)/profit on
ordinary activities 122.0 (38.8) 83.2 141.1 (45.9) 95.2 206.9 56.0 262.9
================================= ======= ========= ======= ========= ========= ======= ========= ======= ========
Effective rate of tax before
goodwill amortisation 21.5% 22.5% 28.1%
================================= ======= ========= =========
The current tax charge on (loss)/profit on ordinary activities for the year
varied from the standard rate of UK Corporation tax as follows:
2002 2001 2000
(Pounds)m (Pounds)m (Pounds)m
---------------------------------------------------------------------------------------------------------------
Corporation tax at 30% (281.6) 113.9 344.7
Losses and other permanent differences 28.1 6.2 8.3
Effect of tax rate applied to overseas earnings (21.8) 11.2 8.1
Permanent differences on exceptional items 368.2 (9.7) (80.1)
Goodwill amortisation 44.7 38.3 12.1
Adjustments in respect of prior years (54.4) (64.7) (30.2)
--------------------------------------------------------------------------- --------- -------- --------
Tax charge (current and deferred) 83.2 95.2 262.9
Origination and reversal of timing differences - deferred tax charge (70.2) (13.8) (45.2)
--------------------------------------------------------------------------- --------- -------- --------
Current tax charge for year 13.0 81.4 217.7
=========================================================================== ========= ======== ========
ScottishPower Annual Report & Accounts/Form 20-F 2001/02 |70
Notes to the Group Profit and Loss Account
for the year ended 31 March 2002 - continued
7 (Loss)/earnings per ordinary share
---------------------------------------------------------------------------------------------------------------------------------
(a) (Loss)/earnings per ordinary share have been calculated for all years by
dividing the (loss)/profit for the financial year by the weighted average number
of ordinary shares in issue during the financial year, based on the following
information:
2002 2001 2000
---------------------------------------------------------------------------------------------------------------------------------
(Loss)/profit for the financial year ((Pounds) million) (987.1) 307.5 885.0
Basic weighted average share capital (number of shares, million) 1,837.8 1,830.3 1,389.6
Diluted weighted average share capital (number of shares, million) 1,840.1 1,837.4 1,399.2
================================================================================== ========== ========= =========
The difference between the basic and the diluted weighted average share capital
is wholly attributable to outstanding share options and shares held in trust for
the group's Employee Share Ownership Plan. These share options are dilutive by
reference to continuing operations and accordingly a diluted (loss)/earnings per
share has been calculated which has the impact of reducing the net
(loss)/earnings per ordinary share.
(b) The calculation of (loss)/earnings per ordinary share, on a basis which
excludes exceptional items and goodwill amortisation, is based on the following
adjusted earnings:
2002 2001 2000
(Pounds)m (Pounds)m (Pounds)m
---------------------------------------------------------------------------------------------------------------------------------
(Loss)/profit for the financial year (987.1) 307.5 885.0
Adjusting items - exceptional items (net of attributable taxation) 1,318.1 74.8 (397.8)
- goodwill amortisation 149.0 127.6 40.4
---------------------------------------------------------------------------------- ---------- --------- ---------
Adjusted earnings 480.0 509.9 527.6
================================================================================== ========== ========= =========
Adjusted earnings per share has been presented in addition to earnings per share
calculated in accordance with FRS 14 in order that more meaningful comparisons
of financial performance can be made.
8 Dividends
---------------------------------------------------------------------------------------------------------------------------------
(a) Cash dividends 2002 2001 2000
pence per pence per pence per
ordinary ordinary ordinary 2002 2001 2000
share share share (Pounds)m (Pounds)m (Pounds)m
---------------------------------------------------------------------------------------------------------------------------------
First interim dividend paid 6.835 6.51 8.27 125.4 119.1 95.2
Second interim dividend paid 6.835 6.51 8.10 125.9 119.3 92.1
Third interim dividend paid 6.835 6.51 2.23 126.1 119.5 40.7
Final dividend 6.835 6.51 6.20 126.1 119.4 113.4
-------------------------------------------- --------- --------- --------- ---------- --------- ---------
Total cash dividends 27.34 26.04 24.80 503.5 477.3 341.4
============================================ ========= ========= ========= ========== ========= =========
(b) Dividend in specie on demerger of Thus
2002 2001 2000
Note (Pounds)m (Pounds)m (Pounds)m
---------------------------------------------------------------------------------------------------------------------------------
Demerger dividend 33 436.6 - -
=================================================================================== ========== ========= =========
The demerger of Thus was recorded in the group Accounts at the book value of the
net assets which were deconsolidated, of (Pounds)421.9 million, together with
(Pounds)14.7 million of related goodwill which had previously been written off
to reserves, giving a dividend in specie of (Pounds)436.6 million.
The demerger of Thus was recorded in the individual company Accounts of Scottish
Power plc at the book value of the cost of investment in the ordinary and
preference shares of Thus, giving a dividend in specie of (Pounds)396.3 million.
ScottishPower Annual Report & Accounts/Form 20-F 2001/02 |71
Group Cash Flow Statement
for the year ended 31 March 2002
2002 2001 2000
Notes (Pounds)m (Pounds)m (Pounds)m
----------------------------------------------------------------------------------------------------------------------------
Cash inflow from operating activities 10 1,248.4 1,411.6 1,117.5
Dividends received from joint ventures 0.3 2.1 0.5
Returns on investments and servicing of finance 9 (377.8) (373.5) (258.4)
Taxation (85.0) (152.6) (154.3)
----------------------------------------------------------------------------------- ---------- --------- -------
Free cash flow 785.9 887.6 705.3
Capital expenditure and financial investment 9 (1,148.3) (1,081.4) (842.3)
----------------------------------------------------------------------------------- ---------- --------- -------
Cash flow before acquisitions and disposals (362.4) (193.8) (137.0)
Acquisitions and disposals 9 150.0 482.9 718.8
Equity dividends paid (496.8) (471.3) (406.0)
----------------------------------------------------------------------------------- ---------- --------- -------
Cash (outflow)/inflow before use of liquid resources and financing (709.2) (182.2) 175.8
Management of liquid resources 9,13 (38.7) (11.9) (9.8)
Financing
---------- --------- -------
- Issue of ordinary share capital (net of costs) 9 16.2 6.6 (29.2)
- Issue of ordinary share capital by a subsidiary (net of costs) - - 310.0
- Share buy-back (including costs) 9 - - (302.0)
- Redemption of preferred stock of PacifiCorp 9 (69.5) - -
- Increase/(decrease) in debt 9,13 982.4 189.5 (100.0)
---------- --------- -------
929.1 196.1 (121.2)
----------------------------------------------------------------------------------- ---------- --------- -------
Increase in cash in year 13 181.2 2.0 44.8
=================================================================================== ========== ========= =======
Free cash flow represents cash flow from operating activities after adjusting
for dividends received from joint ventures, returns on investments and servicing
of finance and taxation.
Reconciliation of Net Cash Flow to Movement in Net Debt
for the year ended 31 March 2002
2002 2001 2000
Note (Pounds)m (Pounds)m (Pounds)m
------------------------------------------------------------------------------------------------------
Increase in cash in year 181.2 2.0 44.8
Cash (inflow)/outflow from (increase)/decrease in debt (982.4) (189.5) 100.0
Cash outflow from movement in liquid resources 38.7 11.9 9.8
------------------------------------------------------------------ --------- -------- ---------
Change in net debt resulting from cash flows (762.5) (175.6) 154.6
Net debt acquired - - (2,565.6)
Net (funds)/debt disposed (46.9) - 8.5
Exchange (6.3) (264.7) (17.3)
Other non-cash movements (107.6) (3.3) (0.5)
------------------------------------------------------------------ --------- -------- ---------
Movement in net debt in year (923.3) (443.6) (2,420.3)
Net debt at end of previous year (5,285.1) (4,841.5) (2,421.2)
------------------------------------------------------------------ --------- -------- ---------
Net debt at end of year 13 (6,208.4) (5,285.1) (4,841.5)
================================================================== ========= ======== =========
The Accounting Policies and Definitions on pages 56 to 60, together with the
Notes on pages 65 to 70, 72 to 74, 76 to 107 and 109 to 110 form part of these
Accounts.
ScottishPower Annual Report & Accounts/Form 20-F 2001/02 |72
Notes to the Group Cash Flow Statement
for the year ended 31 March 2002
9 Analysis of cash flows
---------------------------------------------------------------------------------------------------------------------------------
2002 2001 2000
(Pounds)m (Pounds)m (Pounds)m
---------------------------------------------------------------------------------------------------------------------------------
(a) Returns on investments and servicing of finance
Interest received 33.1 32.7 9.7
Interest paid (402.8) (395.8) (265.7)
Dividends paid to minority interests (8.1) (10.4) (2.4)
------------------------------------------------------------------------------------ ---------- ---------- ----------
Net cash outflow for returns on investments and servicing of finance (377.8) (373.5) (258.4)
==================================================================================== ========== ========== ==========
(b) Capital expenditure and financial investment
Purchase of tangible fixed assets (1,244.7) (1,143.6) (917.7)
Deferred income received 76.9 97.3 55.5
Sale of tangible fixed assets 17.7 26.4 26.5
Sale/(purchase) of fixed asset investments 1.8 (61.5) (6.6)
------------------------------------------------------------------------------------ ---------- ---------- ----------
Net cash outflow for capital expenditure and financial investment (1,148.3) (1,081.4) (842.3)
==================================================================================== ========== ========== ==========
(c) Acquisitions and disposals
Purchase of businesses and subsidiary undertakings - (230.2) 2.1
Sale of businesses and subsidiary undertakings 150.0 713.1 (3.7)
Partial disposal of Thus - - 720.4
------------------------------------------------------------------------------------ ---------- ---------- ----------
Net cash inflow from acquisitions and disposals 150.0 482.9 718.8
==================================================================================== ========== ========== ==========
(d) Management of liquid resources*
Cash outflow in relation to short-term deposits and other short-term investments (38.7) (11.9) (9.8)
------------------------------------------------------------------------------------ ---------- ---------- ----------
Net cash outflow for management of liquid resources (38.7) (11.9) (9.8)
==================================================================================== ========== ========== ==========
(e) Financing
Issue of ordinary share capital 16.2 6.6 3.8
Expenses paid in connection with share issue - - (33.0)
Issue of ordinary share capital by a subsidiary - - 327.0
Expenses paid in connection with share issue by a subsidiary - - (17.0)
Share buy-back - - (302.0)
Redemption of preferred stock of PacifiCorp (69.5) - -
---------- ---------- ----------
(53.3) 6.6 (21.2)
Debt due within one year:
---------- ---------- ----------
- net drawdown/(repayment) of uncommitted facilities 120.8 6.6 (75.0)
- drawdown of committed bank loan 100.0 - -
- net commercial paper (redeemed)/issued (52.8) 6.1 (285.8)
- medium-term notes/private placements 79.9 (58.9) (3.3)
- (redemption)/issue of loan notes (0.1) 0.4 (8.0)
- European Investment Bank loans 114.8 (4.6) 0.8
- mortgages 72.6 (96.4) 4.2
- non-recourse notes - (147.2) -
- 5.875% euro-US dollar bond 2003 183.5 - -
- other (1.3) 0.5 -
Debt due after one year:
- net repayment of uncommitted facilities (3.8) - -
- medium-term notes/private placements 7.5 594.2 178.1
- European Investment Bank loans (129.2) 42.8 86.2
- 5.875% euro-US Dollar bond (183.3) - -
- 11.457% sterling bond issue - - (142.0)
- 6.625% euro-sterling bond issue - - 197.9
- variable coupon Australian dollar bond issue 233.8 - -
- mortgages 449.5 (25.8) (53.1)
- secured pollution control revenue bonds 2.8 0.2 -
- unsecured pollution control revenue bonds (2.9) 1.9 -
- junior debentures - (117.0) -
- non-recourse notes - (21.2) -
- other (9.7) 8.0 -
Finance leases:
- finance leases 0.3 (0.1) -
---------- ---------- ----------
Increase/(decrease) in debt 982.4 189.5 (100.0)
------------------------------------------------------------------------------------ ---------- ---------- ----------
Net cash inflow/(outflow) from financing 929.1 196.1 (121.2)
==================================================================================== ========== ========== ==========
*Liquid resources include term deposits of less than one year, commercial paper
and other short-term investments.
ScottishPower Annual Report & Accounts/Form 20-F 2001/02 |73
10 Reconciliation of operating profit to net cash inflow from operating
activities
----------------------------------------------------------------------------------------------------------------------------
2002 2001 2000
(Pounds)m (Pounds)m (Pounds)m
----------------------------------------------------------------------------------------------------------------------------
Operating profit 776.6 721.9 662.0
Depreciation and amortisation 717.0 607.9 457.6
Profit on sale of tangible fixed assets and disposal of businesses (7.7) (19.9) (19.8)
Release of deferred income (17.8) (15.1) (15.6)
Movements in provisions for liabilities and charges (93.6) 57.5 103.1
Decrease/(increase) in stocks 10.4 (13.3) 20.1
Decrease/(increase) in debtors 58.4 (137.2) (32.1)
(Decrease)/increase in creditors (194.9) 209.8 (57.8)
---------------------------------------------------------------------------- --------- -------- ---------
Net cash inflow from operating activities 1,248.4 1,411.6 1,117.5
============================================================================ ========= ======== =========
11 Effect of disposals and acquisitions on cash flows
----------------------------------------------------------------------------------------------------------------------------
Disposals Acquisition
2002 2000
(Pounds)m (Pounds)m
----------------------------------------------------------------------------------------------------------------------------
Cash (outflow)/inflow from operating activities (39.5) 242.4
Returns on investments and servicing of finance 0.7 (40.6)
Taxation - 7.6
Capital expenditure and financial investment (93.2) (103.1)
Acquisitions and disposals 3.3 -
Equity dividends paid - (9.8)
Management of liquid resources 4.0 -
Financing - (71.0)
---------------------------------------------------------------------------------- ---------- ---------
(Decrease)/increase in cash (124.7) 25.5
================================================================================== ========== =========
The effect of disposals on cash flows in 2002 principally relates to the group's
demerger of Thus and the disposal of and withdrawal from Appliance Retailing.
The cash flows relating to acquisitions during 2002 were not material.
The effect of acquisitions and disposals on cash flows during 2001 was not
material. The analysis of cash flows of the acquisition in 2000 relates to the
post-acquisition cash flows of PacifiCorp. The cash flows relating to the
disposal during 2000 were not material.
12 Analysis of cash flows in respect of disposals and acquisitions
---------------------------------------------------------------------------------------------------------------------------------
Disposals Acquisitions Disposals Acquisition Disposal
2002 2001 2001 2000 2000
(Pounds)m (Pounds)m (Pounds)m (Pounds)m (Pounds)m
---------------------------------------------------------------------------------------------------------------------------------
Cash consideration including expenses 13.9 (227.7) 716.5 (28.4) -
Cash at bank and in hand (disposed)/acquired (9.2) - - 41.4 (3.7)
Pre-completion dividend to former PacifiCorp shareholders - - - (9.8) -
Deferred consideration in respect of prior year disposals/(acquisitions) 152.1 (2.5) - (1.1) -
Expenses paid in respect of prior year disposals (6.8) - (3.4) - -
------------------------------------------------------------------------- -------- --------- --------- --------- -------
150.0 (230.2) 713.1 2.1 (3.7)
========================================================================= ======== ========= ========= ========= =======
In 2002, the cash flows in respect of disposals principally represent the
collection of a note receivable on the discontinued operations of PacifiCorp's
mining and resource development business, NERCO, which was sold in 1993 and the
disposal of PacifiCorp's synthetic fuel operations.
In 2001, cash flows in respect of acquisitions principally represent the
purchase of Rye House power station. The cash flows in respect of disposals
mainly comprise proceeds from the sale of Centralia and Powercor.
In 2000, acquisition cash flows principally represent the purchase of PacifiCorp
and disposal cash flows represent proceeds received on the sale of other
Telecoms operations.
The cash flows arising on the group's partial disposal of its interest in Thus
(net of expenses) were as follows:
2000
(Pounds)m
----------------------------------------------------------------------------------------------------------------------------
Cash received on primary issue by Thus 310.0
Cash received on sale of shares by ScottishPower 720.4
-------------------------------------------------------------------------------------------------------------- -----------
Total 1,030.4
============================================================================================================== ===========
ScottishPower Annual Report & Accounts/Form 20-F 2001/02 |74
Notes to the Group Cash Flow Statement
for the year ended 31 March 2002 - continued
13 Analysis of net debt
---------------------------------------------------------------------------------------------------------------------------------
At Other At
1 April non-cash 31 March
2000 Cash flow Exchange changes 2001
2000/01 (Pounds)m (Pounds)m (Pounds)m (Pounds)m (Pounds)m
---------------------------------------------------------------------------------------------------------------------------------
---------
Cash at bank 106.7 13.1 19.9 - 139.7
Overdrafts (39.1) (11.1) (2.3) - (52.5)
---------
2.0
---------
Debt due after 1 year (4,317.6) (474.0) (267.8) 191.1 (4,868.3)
Debt due within 1 year (653.0) 284.4 (12.4) (194.4) (575.4)
Finance leases (17.1) 0.1 (2.1) - (19.1)
---------
(189.5)
Other deposits 78.6 11.9 - - 90.5
--------------------------------------------------------------- --------- --------- -------- -------- ----------
Total (4,841.5) (175.6) (264.7) (3.3) (5,285.1)
=============================================================== ========= ========= ======== ======== ==========
`Other non-cash changes' to net debt represents the movement in debt of (Pounds)
194.4 million due after more than one year to due within one year, amortisation
of finance costs of (Pounds)0.5 million and finance costs of (Pounds)2.8 million
representing the effects of the Retail Price Index ("RPI") on bonds carrying an
RPI coupon.
At Disposal Other At
1 April (excl. cash & non-cash 31 March
2001 Cash flow overdrafts) Exchange changes 2002
2001/02 (Pounds)m (Pounds)m (Pounds)m (Pounds)m (Pounds)m (Pounds)m
---------------------------------------------------------------------------------------------------------------------------------
---------
Cash at bank 139.7 163.4 - (0.3) - 302.8
Overdrafts (52.5) 17.8 - 0.1 - (34.6)
---------
181.2
---------
Debt due after 1 year (4,868.3) (364.7) - (3.7) (106.3) (5,343.0)
Debt due within 1 year (575.4) (617.4) 4.4 (2.5) (1.3) (1,192.2)
Finance leases (19.1) (0.3) - - - (19.4)
---------
(982.4)
Other deposits 90.5 38.7 (51.3) 0.1 - 78.0
-------------------------------------------- ----------- --------- --------- -------- -------- ----------
Total (5,285.1) (762.5) (46.9) (6.3) (107.6) (6,208.4)
============================================ =========== ========= ========= ======== ======== ==========
`Other non-cash changes' to net debt represents amortisation of finance costs of
(Pounds)1.5 million, finance costs of (Pounds)5.6 million representing the
effects of the RPI on bonds carrying an RPI coupon and the recognition of the
share of debt in joint arrangements of (Pounds)100.5 million.
ScottishPower Annual Report & Accounts/Form 20-F 2001/02 |75
Group Balance Sheet
as at 31 March 2002
2002 2001
Notes (Pounds)m (Pounds)m
------------------------------------------------------------------------------------------------------------------------------
Fixed assets
Intangible assets 16 2,658.9 2,840.8
Tangible assets 17 11,652.3 11,920.8
Investments
- Investments in joint ventures: -------- --------
Share of gross assets 119.3 118.4
Share of gross liabilities (82.4) (74.6)
-------- --------
36.9 43.8
- Investments in associates 5.2 5.0
- Other investments 223.5 247.5
-------- --------
18 265.6 296.3
------------------------------------------------------------------------------------------------- -------- --------
14,576.8 15,057.9
------------------------------------------------------------------------------------------------- -------- --------
Current assets
Stocks 19 167.0 215.1
Debtors -------- --------
- Gross debtors 1,448.2 1,758.2
- Less non-recourse financing (257.4) (285.7)
-------- --------
20 1,190.8 1,472.5
Short-term bank and other deposits 380.8 230.2
------------------------------------------------------------------------------------------------- -------- --------
1,738.6 1,917.8
------------------------------------------------------------------------------------------------- -------- --------
Creditors: amounts falling due within one year
Loans and other borrowings 21 (1,226.8) (627.9)
Other creditors 22 (1,951.9) (2,375.9)
------------------------------------------------------------------------------------------------- -------- --------
(3,178.7) (3,003.8)
------------------------------------------------------------------------------------------------- -------- --------
Net current liabilities (1,440.1) (1,086.0)
------------------------------------------------------------------------------------------------- -------- --------
Total assets less current liabilities 13,136.7 13,971.9
Creditors: amounts falling due after more than one year
Loans and other borrowings 21 (5,362.4) (4,887.4)
Provisions for liabilities and charges -------- --------
- Deferred tax 24 (1,691.2) (1,625.3)
- Other provisions 23 (713.8) (778.7)
-------- --------
(2,405.0) (2,404.0)
Deferred income 25 (551.2) (501.5)
------------------------------------------------------------------------------------------------- -------- --------
Net assets 14 4,818.1 6,179.0
================================================================================================= ======== ========
Called up share capital 26, 27 926.3 924.5
Share premium 27 2,254.1 3,739.7
Revaluation reserve 27 45.5 217.1
Capital redemption reserve 27 18.3 18.3
Merger reserve 27 406.4 406.4
Profit and loss account 27 1,080.8 587.2
------------------------------------------------------------------------------------------------- -------- --------
Equity shareholders' funds 27 4,731.4 5,893.2
Minority interests (including non-equity) 28 86.7 285.8
------------------------------------------------------------------------------------------------- -------- --------
Capital employed 4,818.1 6,179.0
================================================================================================= ======== ========
Net asset value per ordinary share 15 254.8p 318.7p
================================================================================================= ======== ========
Approved by the Board on 1 May 2002 and signed on its behalf by
/s/ Charles Miller Smith /s/ David Nish
Charles Miller Smith David Nish
Chairman Finance Director
The Accounting Policies and Definitions on pages 56 to 60, together with the
Notes on pages 65 to 70, 72 to 74, 76 to 107 and 109 to 110 form part of these
Accounts.
ScottishPower Annual Report & Accounts/Form 20-F 2001/02 |76
Notes to the Group Balance Sheet
as at 31 March 2002
14 Segmental information
----------------------------------------------------------------------------------------------------------------------------------
2002 2001
(a) Net assets by segment Notes (Pounds)m (Pounds)m
----------------------------------------------------------------------------------------------------------------------------------
United Kingdom
UK Division - Generation, Trading and Supply (i),(iv) 873.4 691.2
Infrastructure Division - Power Systems (i),(iv) 2,070.7 1,979.0
----------------------------------------------------------------------------------------------------------- --------- ---------
United Kingdom total - continuing operations 2,944.1 2,670.2
=========================================================================================================== ========= =========
United States - continuing operations
US Division - PacifiCorp (iv) 7,776.0 7,778.7
----------------------------------------------------------------------------------------------------------- --------- ---------
Total continuing operations 10,720.1 10,448.9
=========================================================================================================== ========= =========
United Kingdom - discontinued operations
Infrastructure Division - Southern Water (i),(iv) 2,347.6 2,590.4
Thus (ii),(iv) - 459.3
Appliance Retailing (i),(iv) - 55.6
----------------------------------------------------------------------------------------------------------- --------- ---------
Total discontinued operations 2,347.6 3,105.3
=========================================================================================================== ========= =========
Unallocated net liabilities
Net debt (6,208.4) (5,285.1)
Deferred tax (1,691.2) (1,625.3)
Corporate tax (293.3) (365.0)
Proposed dividend (126.1) (119.4)
Fixed asset investments 265.6 296.3
Other (iii) (196.2) (276.7)
----------------------------------------------------------------------------------------------------------- --------- ---------
Total unallocated net liabilities (8,249.6) (7,375.2)
=========================================================================================================== ========= =========
Total 4,818.1 6,179.0
=========================================================================================================== ========= =========
2002 2001
(b) Capital expenditure by segment (Note (v)) Notes (Pounds)m (Pounds)m
-----------------------------------------------------------------------------------------------------------------------------------
United Kingdom
UK Division - Generation, Trading and Supply (i) 109.2 160.1
Infrastructure Division - Power Systems (i) 240.1 217.8
----------------------------------------------------------------------------------------------------------- --------- ---------
United Kingdom total - continuing operations 349.3 377.9
=========================================================================================================== ========= =========
United States - continuing operations
US Division - PacifiCorp 599.4 328.8
----------------------------------------------------------------------------------------------------------- --------- ---------
Total continuing operations 948.7 706.7
=========================================================================================================== ========= =========
United Kingdom - discontinued operations
Infrastructure Division - Southern Water (i) 279.5 319.5
Thus (ii) 78.0 158.9
Appliance Retailing (i) 0.1 7.0
----------------------------------------------------------------------------------------------------------- --------- ---------
Total discontinued operations 357.6 485.4
=========================================================================================================== ========= =========
Total 1,306.3 1,192.1
=========================================================================================================== ========= =========
2002 2001
(c) Total assets by segment Notes (Pounds)m (Pounds)m
----------------------------------------------------------------------------------------------------------------------------------
United Kingdom
UK Division - Generation, Trading and Supply (i),(iv) 1,563.6 1,351.6
Infrastructure Division - Power Systems (i),(iv) 2,657.6 2,503.0
----------------------------------------------------------------------------------------------------------- --------- ---------
United Kingdom total - continuing operations 4,221.2 3,854.6
=========================================================================================================== ========= =========
United States - continuing operations
US Division - PacifiCorp (iv) 8,878.9 9,052.7
----------------------------------------------------------------------------------------------------------- --------- ---------
Total continuing operations 13,100.1 12,907.3
=========================================================================================================== ========= =========
United Kingdom - discontinued operations
Infrastructure Division - Southern Water (i),(iv) 2,568.9 2,822.6
Thus (ii),(iv) - 589.2
Appliance Retailing (i),(iv) - 127.7
----------------------------------------------------------------------------------------------------------- --------- ---------
Total discontinued operations 2,568.9 3,539.5
=========================================================================================================== ========= =========
Unallocated total assets (vi) 646.4 528.9
=========================================================================================================== ========= =========
Total 16,315.4 16,975.7
=========================================================================================================== ========= =========
(i) As detailed in Note 1, the group now operates through three divisions which
are different from the segments presented in the prior year's Accounts. Prior
year comparatives have been restated accordingly. The previously reported net
assets, capital expenditure and total assets of the Other segment have been
allocated as follows:
Year ended 31 March 2001
Net Capital Total
assets expenditure assets
(Pounds)m (Pounds)m (Pounds)m
-----------------------------------------------------------------------------------------------------------------------------------
United Kingdom
UK Division - Generation, Trading and Supply 27.9 2.0 5.8
Infrastructure Division
Power Systems 2.3 0.8 4.9
Southern Water 1.5 - -
Appliance Retailing 55.6 7.0 127.7
-------------------------------------------------------------------------------------------------------- ----------- ---------
Other total 87.3 9.8 138.4
======================================================================================================== =========== =========
ScottishPower Annual Report & Accounts/Form 20-F 2001/02 |77
14 Segmental information continued
(ii) The segment previously described as `Telecoms' has been redesignated
`Thus' as historical balance sheet data for this segment no longer includes data
relating to other Telecoms operations disposed in prior years.
(iii) Other unallocated net liabilities principally includes interest.
(iv) As required by the Utilities Act 2000, the group has implemented a new
legal entity structure for certain of its UK businesses to give effect to
business separation. Following the creation of this new legal structure on 1
October 2001, the directors reviewed the group's segments and concluded that no
changes were required to the business segments disclosed above. However, they
also reviewed the items to be included within each segment's net assets and
total assets particularly in relation to intra-group balances. The net assets
and total assets by segment figures above have been presented on this revised
basis and comparative figures have been restated accordingly.
(v) Capital expenditure by business segment is stated gross of capital grants
and customer contributions. Capital expenditure net of contributions amounted to
(Pounds)1,229.4 million (2001 (Pounds)1,094.8 million).
(vi) Unallocated total assets includes investments, interest receivable and
bank deposits.
15 Net asset value per ordinary share
Net asset value per ordinary share has been calculated based on the following
net assets and the number of shares in issue at the end of the respective
financial years (after adjusting for the effect of shares held in trust for the
group's Sharesave Schemes and Employee Share Ownership Plan):
31 March 31 March
2002 2001
------------------------------------------------------------------------------------------------------------------------------
Net assets (as adjusted) ((Pounds)million) 4,692.5 5,841.9
Number of ordinary shares in issue at year end (as adjusted) (number of shares, million) 1,841.9 1,833.0
========================================================================================================= ======= =======
16 Intangible fixed assets
-------------------------------------------------------------------
Goodwill
Year ended 31 March 2001 Notes (Pounds)m
-------------------------------------------------------------------
Cost:
At 1 April 2000 2,228.5
Acquisition (i) 97.1
Revision to provisional fair values 414.0
Exchange 278.3
-------------------------------------------------------- ---------
At 31 March 2001 3,017.9
======================================================== =========
Amortisation:
At 1 April 2000 40.1
Amortisation for the year 127.6
Exchange 9.4
-------------------------------------------------------- ---------
At 31 March 2001 177.1
======================================================== =========
Net book value:
At 31 March 2001 2,840.8
At 31 March 2000 2,188.4
======================================================== =========
Goodwill
Year ended 31 March 2002 (Pounds)m
-------------------------------------------------------- ---------
Cost:
At 1 April 2001 3,017.9
Thus open offer 33 34.4
Demerger of Thus 33 (70.4)
Exchange (4.1)
-------------------------------------------------------- ---------
At 31 March 2002 2,977.8
======================================================== =========
Amortisation:
At 1 April 2001 177.1
Amortisation for the year 149.0
Demerger of Thus 33 (7.8)
Exchange 0.6
-------------------------------------------------------- ---------
At 31 March 2002 318.9
======================================================== =========
Net book value:
At 31 March 2002 2,658.9
At 31 March 2001 2,840.8
======================================================== =========
(i) The provisional fair values attributed to the acquisition of Rye House in
2000/01, that resulted in goodwill of (Pounds)97.1 million, have not required
amendment in the post-acquisition period to March 2002.
Goodwill capitalised is being amortised over its estimated useful economic life
of 20 years. Goodwill capitalised relating to Thus was being amortised over its
estimated useful economic life of 15 years.
ScottishPower Annual Report & Accounts/Form 20-F 2001/02 |78
Notes to the Group Balance Sheet
as at 31 March 2002 - continued
17 Tangible fixed assets
-----------------------------------------------------------------------------------------------------------------------------------
Water
Land and infrastructure Plant and Vehicles and
buildings assets machinery equipment Total
Year ended 31 March 2001 Notes (Pounds)m (Pounds)m (Pounds)m (Pounds)m (Pounds)m
-----------------------------------------------------------------------------------------------------------------------------------
Cost or valuation:
At 1 April 2000 1,217.8 1,093.7 8,838.5 1,280.7 12,430.7
Additions 115.4 90.5 739.2 247.0 1,192.1
Acquisitions 54.2 - 244.7 1.1 300.0
Revision to provisional fair values - - (222.6) - (222.6)
Grants and contributions - (8.7) - - (8.7)
Disposals (24.5) (0.6) (75.3) (103.5) (203.9)
Exchange 22.3 - 529.0 55.0 606.3
---------------------------------------------------------------------- ---------- ------------ -------- ----------- ---------
At 31 March 2001 1,385.2 1,174.9 10,053.5 1,480.3 14,093.9
====================================================================== ========== ============ ======== =========== =========
Depreciation:
At 1 April 2000 237.0 68.1 1,135.9 306.4 1,747.4
Charge for the year 42.4 20.9 259.8 157.2 480.3
Disposals (14.3) (0.6) (6.3) (50.5) (71.7)
Exchange 0.5 - 12.5 4.1 17.1
---------------------------------------------------------------------- ---------- ------------ -------- ----------- ---------
At 31 March 2001 265.6 88.4 1,401.9 417.2 2,173.1
====================================================================== ========== ============ ======== =========== =========
Net book value:
At 31 March 2001 1,119.6 1,086.5 8,651.6 1,063.1 11,920.8
At 31 March 2000 980.8 1,025.6 7,702.6 974.3 10,683.3
====================================================================== ========== ============ ======== =========== =========
Year ended 31 March 2002
-----------------------------------------------------------------------------------------------------------------------------------
Cost or valuation:
At 1 April 2001 1,385.2 1,174.9 10,053.5 1,480.3 14,093.9
Additions 88.5 76.7 986.5 154.6 1,306.3
Impairment (i), (ix) (6.9) (306.3) (136.1) - (449.3)
Valuation adjustment (ii) - (109.1) (207.3) - (316.4)
Grants and contributions - (9.2) - - (9.2)
Disposals (13.7) (0.6) (57.3) (94.9) (166.5)
Demerger of Thus 33 (11.9) - (466.2) (136.8) (614.9)
Exchange (0.3) - (3.7) (0.5) (4.5)
---------------------------------------------------------------------- ---------- ------------ -------- ----------- ---------
At 31 March 2002 1,440.9 826.4 10,169.4 1,402.7 13,839.4
====================================================================== ========== ============ ======== =========== =========
Depreciation:
At 1 April 2001 265.6 88.4 1,401.9 417.2 2,173.1
Reclassification (42.6) - 42.6 - -
Charge for the year 32.8 21.2 323.1 177.9 555.0
Impairment (ix) 1.6 - 12.2 31.4 45.2
Valuation adjustment (ii) - (109.1) (207.3) - (316.4)
Disposals (13.3) (0.5) (29.9) (80.9) (124.6)
Demerger of Thus 33 (3.1) - (78.9) (64.1) (146.1)
Exchange - - 0.6 0.3 0.9
---------------------------------------------------------------------- ---------- ------------ -------- ----------- ---------
At 31 March 2002 241.0 - 1,464.3 481.8 2,187.1
====================================================================== ========== ============ ======== =========== =========
Net book value:
At 31 March 2002 1,199.9 826.4 8,705.1 920.9 11,652.3
At 31 March 2001 1,119.6 1,086.5 8,651.6 1,063.1 11,920.8
====================================================================== ========== ============ ======== =========== =========
2002 2001
Historical cost analysis (Pounds)m (Pounds)m
-----------------------------------------------------------------------------------------------------------------------------------
Cost 13,785.4 13,941.9
Depreciation based on cost (2,178.6) (2,238.2)
----------------------------------------------------------------------------------------------------------- ----------- ---------
Net book value based on cost 11,606.8 11,703.7
=========================================================================================================== =========== =========
2002 2001
Included in the cost or valuation of tangible fixed assets above are: Notes (Pounds)m (Pounds)m
-----------------------------------------------------------------------------------------------------------------------------------
Assets in the course of construction 1,181.1 900.3
Other assets not subject to depreciation (v) 158.1 156.8
Grants and contributions in respect of water infrastructure assets (42.2) (33.0)
Capitalised interest (iv) 130.6 94.5
=========================================================================================================== =========== =========
(i) The impairment of assets of (Pounds)449.3 million represents the provision
for loss on disposal of Southern Water. The total impairment of group assets is
detailed in Note 1(c).
(ii) The valuation adjustment represents elimination of the accumulated
depreciation on the tangible fixed assets of Southern Water which have been
impaired.
(iii) The Manweb distribution and Southern Water operational assets were
revalued by the directors on 30 September 1997 on a market value basis. The
valuation of the Manweb distribution assets has not been and will not be
updated, as permitted under the transitional provisions of FRS 15 `Tangible
fixed assets'. The net book value of tangible fixed assets included at valuation
at 31 March 2002 relates to Manweb distribution assets and was (Pounds)599.6
million (2001 (Pounds)2,198.1 million including Southern Water operational
assets).
(iv) Interest on the funding attributable to major capital projects was
capitalised during the year at a rate of 7% (2001 8%) in the United Kingdom and
4% (2001 7%) in the United States.
(v) Other assets not subject to depreciation are land. Land and buildings held
by the group are predominantly freehold.
(vi) The historical cost of fully depreciated tangible fixed assets still in
use was (Pounds)272.6 million (2001 (Pounds)224.6 million).
(vii) Capitalised computer software costs developed for internal use include
employee, interest and other external direct costs of materials and services
which are directly attributable to the development of computer software.
Cumulative computer software costs capitalised are (Pounds)490.7 million (2001
(Pounds)455.5 million, 2000 (Pounds)333.1 million). The depreciation charge was
(Pounds)109.3 million (2001 (Pounds)52.5 million, 2000 (Pounds)78.3 million
including impairment).
ScottishPower Annual Report & Accounts/Form 20-F 2001/02 |79
17 Tangible fixed assets continued
(viii) The net book value of land and buildings under finance leases at 31 March
2002 was (Pounds)22.3 million (2001 (Pounds)28.0 million). The charge for
depreciation against these assets during the year was (Pounds)2.1 million (2001
(Pounds)0.9 million).
(ix) Assets which were impaired in 2002 were valued on the basis of their
estimated recoverable amounts. The impairment charge for the year ended 31 March
2002 of (Pounds)494.5 million has been charged to the profit and loss account as
follows: cost of sales (Pounds)13.0 million, loss on disposal of and withdrawal
from Appliance Retailing (Pounds)32.2 million and provision for loss on disposal
of Southern Water (Pounds)449.3 million. The impairment charge for the year
ended 31 March 2000 of (Pounds)135.4 million was charged to the profit and loss
account as follows: cost of sales (Pounds)44.5 million, transmission and
distribution costs (Pounds)38.5 million, administrative expenses (Pounds)13.9
million and loss on disposal of and withdrawal from other Telecoms operations,
(Pounds)38.5 million.
18 Fixed asset investments
-----------------------------------------------------------------------------------------------------------------------------------
Associated Own
Joint ventures undertakings shares held Other
Shares Loans Shares under trust investments Total
Note (Pounds)m (Pounds)m (Pounds)m (Pounds)m (Pounds)m (Pounds)m
-----------------------------------------------------------------------------------------------------------------------------------
Cost or valuation:
At 1 April 2000 0.3 19.3 5.4 70.4 137.2 232.6
Additions 23.7 16.8 - 7.5 32.1 80.1
Share of retained (loss)/profit (4.8) (9.4) 0.1 - - (14.1)
Disposals and other (0.4) (1.7) (0.5) (12.6) (3.7) (18.9)
Exchange - - - 0.1 16.5 16.6
-------------------------------------------------- --------- ------ ------- ------- ------- -------
At 31 March 2001 18.8 25.0 5.0 65.4 182.1 296.3
Additions - 16.1 - 25.6 2.3 44.0
Share of retained (loss)/profit (2.4) (0.5) 0.2 - - (2.7)
Disposals and other (16.3) (3.8) - (19.8) (7.7) (47.6)
Demerger of Thus 33 - - - - (24.2) (24.2)
Exchange - - - - (0.2) (0.2)
-------------------------------------------------- --------- ------ ------- ------- ------- -------
At 31 March 2002 0.1 36.8 5.2 71.2 152.3 265.6
================================================== ========= ====== ======= ======= ======= =======
The principal subsidiary undertakings, joint ventures and associated
undertakings are listed on page 110.
Details of listed investments, including own shares held under trust, are given
below:
(Pounds)m
-----------------------------------------------------------------------------------------------------------------------------------
Balance Sheet value at 31 March 2002 115.2
======================================================================================================================= =======
Market value at 31 March 2002 100.0
======================================================================================================================= =======
(a) Shares in the company held under trust during the year are as follows:
Shares Shares Nominal Market
held at Shares Shares held at value at value at
1 April acquired transferred 31 March 31 March 31 March
Dividends 2000 during year during year 2001 2001 2001
2000/01 Notes waived (000s) (000s) (000s) (000s) (Pounds)m (Pounds)m
-----------------------------------------------------------------------------------------------------------------------------------
Long Term Incentive Plan (i) no 2,441 508 (237) 2,712 1.4 12.7
ScottishPower Sharesave Schemes (ii) yes 19,641 - (4,401) 15,240 7.6 71.3
PacifiCorp Stock Incentive Plan (iv) no 58 131 (75) 114 0.1 1.0
Employee Share Ownership Plan (v) no - 747 - 747 0.4 3.5
------------------------------------------------ --------- -------- ---------- ---------- -------- ---------- ---------
22,140 1,386 (4,713) 18,813 9.5 88.5
================================================ ========= ======== ========== ========== ======== ========== =========
Shares Shares Nominal Market
held at Shares Shares held at value at value at
1 April acquired transferred 31 March 31 March 31 March
Dividends 2001 during year during year 2002 2002 2002
2001/02 Notes waived (000s) (000s) (000s) (000s) (Pounds)m (Pounds)m
-----------------------------------------------------------------------------------------------------------------------------------
Long Term Incentive Plan (i) no 2,712 1,355 (379) 3,688 1.8 13.3
ScottishPower Sharesave Schemes (ii) yes 15,240 - (6,917) 8,323 4.2 29.9
Executive Share Option Plan 2001 (iii) yes - 2,360 - 2,360 1.2 8.5
PacifiCorp Stock Incentive Plan (iv) no 114 122 (76) 160 0.1 0.6
Employee Share Ownership Plan (v) no 747 1,659 (224) 2,182 1.1 7.8
------------------------------------------------ --------- -------- ---------- ---------- -------- ---------- ---------
18,813 5,496 (7,596) 16,713 8.4 60.1
================================================ ========= ======== ========== ========== ======== ========== =========
(i) Shares of the company are held under trust as part of the Long Term
Incentive Plan for executive directors and other senior managers (see
Remuneration Report of the Directors on pages 48 to 54 for details of the Plan).
(ii) Shares of the company are held in two Qualifying Employee Share Ownership
Trusts as part of the Scottish Power UK plc Sharesave Scheme, the Scottish Power
plc Sharesave Scheme and the Southern Water Sharesave Scheme. Holders of options
granted under the schemes will be awarded shares by the Trusts upon the exercise
of the options. Details of options granted under these schemes are disclosed in
Note 26.
(iii) Shares of the company are held under trust as part of the Executive Share
Option Plan 2001 for executive directors and other senior managers (see
Remuneration Report of the Directors on pages 48 to 54 for details of the Plan).
(iv) Options granted under the PacifiCorp Stock Incentive Plan are for
ScottishPower ADSs; for the purposes of the table above, options have been
converted to ScottishPower ordinary shares as follows: one ScottishPower ADS
equals four ScottishPower ordinary shares.
(v) Shares of the company are held in the Employee Share Ownership Plan Trust
on behalf of employees of the ScottishPower group. Shares appropriated under the
Free Element and the Matching Element are subject to forfeiture for a period of
three years from the date of appropriation. Shares appropriated under the
Partnership Element of the Employee Share Ownership Plan are not subject to
forfeiture.
19 Stocks
-----------------------------------------------------------------------------------------------------------------------------------
2002 2001
(Pounds)m (Pounds)m
-----------------------------------------------------------------------------------------------------------------------------------
Raw materials and consumables 95.7 103.7
Fuel stocks 48.4 53.1
Work in progress 21.7 8.2
Finished goods and goods for resale 1.2 50.1
--------------------------------------------------------------------------------------------------------- -------- ---------
167.0 215.1
========================================================================================================= ======== =========
ScottishPower Annual Report & Accounts/Form 20-F 2001/02 |80
Notes to the Group Balance Sheet
as at 31 March 2002 - continued
20 Debtors
2002 2001
Notes (Pounds)m (Pounds)m
------------------------------------------------------------------------------------------------------------------
(a) Amounts falling due within one year:
Trade debtors (i) 470.9 620.0
---------- ----------
Amounts receivable under finance leases - US (ii), (iii) 124.1 42.3
Less non-recourse financing (92.9) (22.4)
---------- ----------
31.2 19.9
Amounts receivable under finance leases - UK (iii) 0.1 0.3
Prepayments and accrued income 395.2 428.1
Other debtors 114.7 55.8
-------------------------------------------------------------------------------------- -------- --------
1,012.1 1,124.1
(b) Amounts falling due after more than one year:
---------- ----------
Amounts receivable under finance leases - US (ii), (iii) 318.0 459.0
Less non-recourse financing (164.5) (263.3)
---------- ----------
153.5 195.7
Amounts receivable under finance leases - UK (iii) 4.2 2.2
Other debtors 21.0 150.5
-------------------------------------------------------------------------------------- -------- --------
1,190.8 1,472.5
====================================================================================== ======== ========
(i) Trade debtors are stated net of provisions for doubtful debts of
(Pounds)101.1 million (2001 (Pounds)80.2 million).
(ii) The group's finance lease assets in the United States which are financed
by non-recourse borrowing qualify for linked presentation under FRS 5. The
provider of the finance has agreed in writing in the finance documentation that
it will seek repayment of the finance, as to both principal and interest, only
to the extent that sufficient funds are generated by the specific assets it has
financed and that it will not seek recourse in any other form. The directors
confirm that the group has no obligation to support any losses arising under
these leases nor is there any intention to do so.
(iii) Amounts receivable under finance leases falling due after more than one
year at 31 March 2002 of (Pounds)322.2 million (2001 (Pounds)461.2 million) are
due as follows: within 1-2 years, (Pounds)28.7 million (2001 (Pounds)120.9
million); within 2-3 years, (Pounds)36.8 million (2001 (Pounds)49.8 million);
within 3-4 years, (Pounds)28.6 million (2001 (Pounds)37.1 million); within 4-5
years, (Pounds)38.3 million (2001 (Pounds)28.9 million) and after 5 years,
(Pounds)189.8 million (2001 (Pounds)224.5 million). Total amounts receivable
under finance leases during the year were (Pounds)58.8 million (2001
(Pounds)62.1 million).
21 Loans and other borrowings
Details of the group's objectives, policies and strategy with regard to
financial instruments and risk management are contained within the Financial
Review on pages 30 to 43. The analyses of financial instruments in this Note,
other than currency disclosures, do not include short-term debtors and creditors
as permitted by FRS 13.
Weighted Weighted
average average
interest rate interest rate 2002 2001
(a) Analysis by instrument Notes 2002 2001 (Pounds)m (Pounds)m
---------------------------------------------------------------------------------------------------------------------------------
Unsecured debt of UK businesses
Bank overdraft - - 11.0 23.6
Committed bank loans 5.0% - 100.0 -
Uncommitted bank loans 5.0% 6.0% 212.9 96.0
Commercial paper (i) 5.0% 6.0% 195.0 203.8
Medium-term notes/private placements (ii) 5.6% 6.5% 1,245.1 1,151.3
Loan notes (iii) 4.9% 6.2% 5.9 9.1
European Investment Bank loans (iv) 6.8% 7.2% 328.4 342.8
5.875% euro-US dollar bond 2003 7.0% 6.9% 183.5 183.4
Variable coupon bond 2008 6.9% 6.9% 99.8 99.7
Variable rate Australian dollar bond 2011 5.7% - 233.8 -
5.250% deutschmark bond 2008 6.8% 6.8% 245.7 245.7
6.625% euro-sterling bond 2010 6.7% 6.6% 198.2 198.1
8.375% euro-sterling bond 2017 8.4% 8.4% 197.5 197.1
6.750% euro-sterling bond 2023 6.8% 6.8% 247.1 247.1
Unsecured debt of US businesses
Bank overdraft - - 23.6 28.9
Commercial paper (i) 2.2% 6.2% 124.0 169.1
Preferred securities (v) 8.6% 8.6% 231.9 232.1
Pollution control revenue bonds (vi) 2.1% 3.5% 316.4 315.2
Finance leases (vii) 11.9% 11.9% 19.4 19.1
------------------------------------------------------------------------------------------------------- -------- --------
Unsecured debt 4,219.2 3,762.1
======================================================================================================= ======== ========
Secured debt of US businesses
First mortgage and collateral bonds (viii) 7.5% 7.6% 2,011.1 1,486.4
Pollution control revenue bonds (vi) 2.6% 3.7% 198.9 198.8
Other secured borrowings (ix) 6.6% 7.2% 160.0 68.0
------------------------------------------------------------------------------------------------------- -------- --------
2,370.0 1,753.2
======================================================================================================= ======== ========
6,589.2 5,515.3
======================================================================================================= ======== ========
ScottishPower Annual Report & Accounts/Form 20-F 2001/02 |81
21 Loans and other borrowings continued
(i) Commercial paper
Scottish Power UK plc has an established US$2.0 billion (2001 US$2.0 billion)
euro-commercial paper programme. Paper is issued in a range of currencies and
swapped back into sterling. PacifiCorp has a US$1.5 billion domestic commercial
paper programme and PacifiCorp Group Holdings has a US$200.0 million domestic
commercial paper programme. Amounts borrowed under the commercial paper
programmes are repayable in less than one year.
(ii) Medium-term notes/private placements
Scottish Power UK plc has an established US$7.0 billion (2001 US$4.0 billion)
euro-medium-term note programme. Scottish Power plc has been added as an issuer
under the programme, although no issues have yet been transacted. Paper is
issued in a range of currencies and swapped back into sterling. As at 31 March
2002, maturities range from 1 to 38 years.
(iii) Loan notes
All loan notes are redeemable at the holders discretion. Ultimate maturity dates
range from 2002 to 2006.
(iv) European Investment Bank ("EIB") loans
These loans incorporate agreements with various interest rates and maturity
dates. The maturity dates of these arrangements range from 2006 to 2011.
Following the sale of Aspen 4 Limited (the holding company of Southern Water
plc) in April 2002, the EIB loans relating to Southern Water were repaid.
(v) Preferred securities
Wholly-owned subsidiary trusts of PacifiCorp ("the Trusts") have issued
redeemable preferred securities representing preferred undivided beneficial
interests in the assets of the Trusts. The sole assets of the Trusts are junior
subordinated deferrable interest debentures of PacifiCorp that bear interest at
the same rates as the preferred securities to which they relate, and certain
rights under related guarantees by PacifiCorp.
(vi) Pollution control revenue bonds
Bonds issued by qualified tax exempt entities to finance, or refinance, the cost
of certain pollution control, solid waste disposal and sewage facilities.
PacifiCorp has entered into agreements with the issuers pursuant to which
PacifiCorp received the proceeds of the issuance and agreed to make payments
sufficient to pay principal of, interest on, and certain additional expenses.
The interest on the bonds is not subject to federal income taxation for most
bondholders. In some cases, PacifiCorp has issued first mortgage and collateral
bonds as collateral for repayment.
(vii) Finance leases
These are facility leases that are accounted for as capital leases, maturity
dates range from 2013 to 2022.
(viii) First mortgage and collateral bonds
First mortgage and collateral bonds of PacifiCorp may be issued in amounts
limited by its Domestic Electric operation's property, earnings and other
provisions of the mortgage indenture. Approximately US$11.5 billion of the
eligible assets (based on original costs) of PacifiCorp is subject to the lien
of the mortgage.
(ix) Other secured borrowings
Included within other secured borrowings is ScottishPower's share of debt in a
joint arrangement for the Klamath co-generation plant. The borrowings are the
subject of a guarantee, for US$60.0 million, provided by NA General Partnership
in respect of second lien revenue bonds.
At 31 March 2002 At 31 March 2001
Book Fair Book Fair
amount value amount value
(b) Fair value of financial liabilities (Pounds)m (Pounds)m (Pounds)m (Pounds)m
----------------------------------------------------------------------------------------------------------------------------
Short-term debt and current portion of long-term debt 1,263.1 1,263.1 631.7 631.7
Long-term debt 5,356.0 5,555.2 4,918.3 5,097.5
Cross currency interest rate swaps (29.9) (26.0) (34.7) (25.5)
------------------------------------------------------------------------ ----------- ---------- ------- ----------
Total debt 6,589.2 6,792.3 5,515.3 5,703.7
Interest rate swaps - 22.6 - 54.8
Interest rate swaptions 4.0 1.4 4.0 1.9
Forward rate agreements - - - 0.1
Forward contracts 16.8 10.8 8.1 16.0
Energy hedge contracts (0.3) 60.3 - -
Energy trading contracts (1.0) (1.0) 0.4 0.4
------------------------------------------------------------------------ ----------- ---------- ---------- ----------
Total financial liabilities 6,608.7 6,886.4 5,527.8 5,776.9
------------------------------------------------------------------------ ----------- ---------- ---------- ----------
The assumptions used to estimate fair values of debt and other financial
instruments are summarised below:
(i) For short-term borrowings (uncommitted borrowing, commercial paper and
short-term borrowings under the committed facilities), the book value
approximates to fair value because of their short maturities.
(ii) The fair values of all quoted euro bonds are based on their closing clean
market price converted at the spot rate of exchange as appropriate.
(iii) The fair values of the EIB loans have been calculated by discounting their
future cash flows at market rates adjusted to reflect the redemption adjustments
allowed under each agreement.
(iv) The fair values of unquoted debt have been calculated by discounting the
estimated cash flows for each instrument at the appropriate market discount rate
in the currency of issue in effect at the balance sheet date.
(v) The fair values of the sterling interest rate swaps, sterling forward rate
agreements and sterling interest rate caps have been estimated by calculating
the present value of estimated cash flows.
(vi) The fair values of the sterling interest rate swaptions are estimated using
the sterling yield curve and implied volatilities as at 31 March.
(vii) The fair values of the cross currency interest rate swaps have been
estimated by adding the present values of the two sides of each swap. The
present value of each side of the swap is calculated by discounting the
estimated future cash flows for that side, using the appropriate market discount
rates for that currency in effect at the balance sheet date.
(viii) The fair values of the forward contracts are estimated using market
forward exchange rates on 31 March.
(ix) The fair values of gas futures are the margin calls under those contracts.
(x) The fair values of weather derivatives have been estimated assuming for
water related derivatives a normal water year in several water basins, and for
temperature related derivatives a normal daily high temperature of certain
cities in the US.
ScottishPower Annual Report & Accounts/Form 20-F 2001/02 |82
Notes to the Group Balance Sheet
as at 31 March 2002 - continued
21 Loans and other borrowings continued
------------------------------------------------------------------------------------------------------------------------------------
2002 2001
(c) Maturity analysis (Pounds)m (Pounds)m
------------------------------------------------------------------------------------------------------------------------------------
Repayments fall due as follows:
Within one year, or on demand 1,226.8 627.9
After more than one year 5,362.4 4,887.4
----------------------------------------------------------------------------------------------------------- ---------- ----------
6,589.2 5,515.3
=========================================================================================================== ========== ==========
Repayments due after more than one year are analysed as follows:
Between one and two years 198.9 434.9
Between two and three years 238.6 213.7
Between three and four years 340.4 259.2
Between four and five years 259.5 349.2
More than five years 4,325.0 3,630.4
----------------------------------------------------------------------------------------------------------- ---------- ----------
5,362.4 4,887.4
=========================================================================================================== ========== ==========
Included in the between two and five years figures above is (Pounds)0.6 million
and in the more than five years figure is (Pounds)18.8 million relating to
finance leases (2001 (Pounds)0.2 million and (Pounds)19.1 million respectively).
2003 2004 2005 2006 2007 Thereafter Total Fair Value*
Liabilities (Pounds)m (Pounds)m (Pounds)m (Pounds)m (Pounds)m (Pounds)m (Pounds)m (Pounds)m
------------------------------------------------------------------------------------------------------------------------------------
Fixed rate (GBP) 129.3 58.0 50.0 - 100.0 1,139.6 1,476.9 1,537.3
Average interest rate (GBP) 8.4% 6.4% 6.6% - 6.5% 6.6% 6.8%
Fixed rate (USD) - UK group 183.5 - - - - 51.4 234.9 272.8
Average interest rate (USD) - UK group 5.9% - - - - 4.6% 5.6%
Fixed rate (USD) - US group 126.8 97.2 169.0 186.6 143.7 1,722.9 2,446.2 2,566.0
Average interest rate (USD) - US group 7.2% 7.3% 7.3% 7.4% 7.6% 7.7% 7.6%
Fixed rate (CHF) - 4.1 - - - - 4.1 4.1
Average interest rate (CHF) - 2.5% - - - - 2.5%
Fixed rate (CZK) - - - 34.2 - - 34.2 41.6
Average interest rate (CZK) - - - 6.9% - - 6.9%
Fixed rate (EUR) - 7.0 8.1 - - 282.5 297.6 265.9
Average interest rate (EUR) - 4.9% 4.5% - - 5.2% 5.2%
Fixed rate (JPY) - - - 20.4 - - 20.4 22.6
Average interest rate (JPY) - - - 2.2% - - 2.2%
Index-linked (GBP) - - - - - 181.5 181.5 183.5
Average interest rate (GBP) - - - - - 3.49 x RPI 3.49 x RPI
Variable rate (GBP) 415.2 16.0 5.0 - - 179.8 616.0 619.1
Average interest rate (GBP) 1m LIBOR 3m LIBOR 3m LIBOR - - 6m LIBOR 3m LIBOR
Variable rate (USD) - UK group 117.8 16.6 - 66.3 - 21.2 221.9 237.7
Average interest rate (USD) - UK group 3m LIBOR 6m LIBOR - 3m LIBOR - 3m LIBOR 3m LIBOR
Variable rate (USD) - US group 123.9 - - 11.0 15.8 432.8 583.5 581.9
Average interest rate (USD) - US group 1m LIBOR - - BMA BMA BMA BMA
Variable rate (USD) - US group - - - - - 55.6 55.6 55.6
Average interest rate (USD) - US group - - - - - MCBY MCBY
Variable rate (AUD) 4.2 - - - - 233.8 238.0 256.6
Average interest rate (AUD) 6m LIBOR - - - - 3m BBSW 3m BBSW
Variable rate (CHF) 5.0 - - - - - 5.0 4.2
Average interest rate (CHF) 3m LIBOR - - - - - 3m LIBOR
Variable rate (EUR) 117.8 - 6.5 - - 18.7 143.0 141.7
Average interest rate (EUR) 2m LIBOR - 3m LIBOR - - 5m LIBOR 2m LIBOR
Variable rate (JPY) 3.3 - - 21.9 - 5.2 30.4 27.7
Average interest rate (JPY) 2m LIBOR - - 6m LIBOR - 6m LIBOR 6m LIBOR
----------------------------------------------------------------------------------------------------------- ---------- ----------
6,589.2 6,818.3
=========================================================================================================== ========== ==========
* Fair value represents the fair value of the total debt excluding the fair
value of related cross currency interest rate swaps, details of which are set
out in Note 21(g).
The average variable rates above, LIBOR, exclude margins. LIBOR is the London
Inter Bank Offer Rate.
GBP - Pounds Sterling, USD - American Dollars, CHF - Swiss Francs, CZK - Czech
Koruna, EUR - Euros, JPY - Japanese Yen, AUD - Australian Dollars, CAD -Canadian
Dollars. BMA is a weekly high grade market index comprised of 7-day tax exempt
variable rate demand notes produced by municipal market data. MCBY is the
Moody's Corporate Bond Yield. It is derived from the pricing data of 100
corporate bonds in the US market, each with current outstandings of over $100
million and maturities of 30 years. BBSW is the Australian Bank Bill Rate.
Reference to `m' in `m LIBOR' represents months.
ScottishPower Annual Report & Accounts/Form 20-F 2001/02 |83
21 Loans and other borrowings continued
---------------------------------------------------------------------------------------------------------------------------------
At 31 March 2002 At 31 March 2001
UK US Total UK US Total
(d) Interest rate analysis (Pounds)m (Pounds)m (Pounds)m (Pounds)m (Pounds)m (Pounds)m
---------------------------------------------------------------------------------------------------------------------------------
Fixed rate borrowings 1,920.2 2,446.2 4,366.4 2,090.1 1,801.9 3,892.0
Capped rate borrowings - - - 150.0 - 150.0
Floating rate borrowings 1,583.7 639.1 2,222.8 757.6 715.7 1,473.3
------------------------------------------------------------------- --------- --------- --------- -------- -------- ---------
3,503.9 3,085.3 6,589.2 2,997.7 2,517.6 5,515.3
=================================================================== ========= ========= ========= ======== ======== =========
Weighted average interest Weighted average
rate at which borrowings period for which interest
are fixed/capped rate is fixed/capped
At 31 March 2002 At 31 March 2001 At 31 March 2002 At 31 March 2001
UK US UK US UK US UK US
% % % % Years Years Years Years
---------------------------------------------------------------------------------------------------------------------------------
Fixed rate borrowings 6.9 7.6 7.1 7.8 10 13 10 13
Capped rate borrowings - - 7.0 - - - 1 -
========================================== ========= ======== ====== ======== ====== ======== ====== =========
All amounts in the analysis above take into account the effect of interest rate
swaps and caps and currency swaps. Floating rate borrowings bear interest at
rates based on LIBOR, certificate of deposit rates, interbank borrowing rates,
prime rates or other short-term market rates. The average interest rates on
short-term borrowings as at 31 March 2002 were as follows: UK operations 4.3%,
US operations 2.2% (2001 6.0% and 5.7% respectively).
Based on the floating rate net debt of (Pounds)2,222.8 million at 31 March 2002
(2001 (Pounds)1,473.3 million), a 100 basis point change in interest rates would
result in a (Pounds)22.2 million change in (loss)/profit before tax for the year
(2001 (Pounds)14.7 million change).
At 31 March 2002 At 31 March 2001
UK US Total UK US Total
(e) Financial assets (Pounds)m (Pounds)m (Pounds)m (Pounds)m (Pounds)m (Pounds)m
-----------------------------------------------------------------------------------------------------------------------------------
Fixed rate financial assets 7.4 184.7 192.1 11.4 330.2 341.6
Floating rate financial assets 219.0 196.8 415.8 121.1 100.2 221.3
----------------------------------------------------------------- ------- ------- ------- ------- ------- -------
226.4 381.5 607.9 132.5 430.4 562.9
================================================================= ======= ======= ======= ======= ======== =======
Included within US fixed rate financial assets at 31 March 2002 are amounts
receivable under finance leases of (Pounds)442.1 million (2001 (Pounds)501.3
million) less non-recourse finance of (Pounds)257.4 million (2001 (Pounds)285.7
million) and US fixed rate financial assets at 31 March 2001 included amounts
relating to a finance note of (Pounds)114.6 million which was repaid during the
year. The floating rate financial assets of the group's UK and US operations are
principally cash deposits of which (Pounds)2.1 million in the UK and
(Pounds)24.5 million in the US, are subject to either a legal assignment or a
charge in favour of a third party.
Weighted average interest rate Weighted average period for
at which financial assets are fixed which interest is fixed
At 31 March 2002 At 31 March 2001 At 31 March 2002 At 31 March 2001
UK US UK US UK US UK US
% % % % Years Years Years Years
-----------------------------------------------------------------------------------------------------------------------------------
Fixed rate financial assets 8.4 9.4 6.5 10.8 7 9 4 5
------------------------------------------ ======== ======= ======= ======== ====== ====== ===== ======
All amounts in the analysis above take into account the effect of interest rate
swaps and currency swaps. Floating rate investments pay interest at rates based
on LIBOR, certificate of deposit rates, prime rates or other short-term market
rates. The average interest rates on short-term financial assets as at 31 March
2002 were as follows: UK operations 3.7%, US operations 2.0% (2001 6.1% and 5.2%
respectively).
The fair values of the financial assets are not materially different from their
book values.
(f) Borrowing facilities
The group has the following undrawn committed borrowing facilities at 31 March
2002 in respect of which all conditions precedent have been met. Of the
facilities shown (Pounds)1,000.0 million relates to operations in the UK. The
remaining (Pounds)618.0 million relates to operations in the US. Both facilities
are floating rate facilities.
At 31 March At 31 March
2002 2001
(Pounds)m (Pounds)m
-------------------------------------------------------------------------------------------------
Expiring within one year 618.0 1,351.7
Expiring between two and five years 1,000.0 -
=================================================================== =========== ===========
Commitment fees on the above facilities were as follows: Scottish Power UK plc
group (Pounds)4.1 million (2001 (Pounds)2.6 million); PacifiCorp group
(Pounds)0.6 million (2001 (Pounds)0.5 million).
Following completion of the sale of Southern Water in April 2002, the
(Pounds)1,000.0 million Revolving Credit Facility of Scottish Power UK plc,
included in the table above, was cancelled.
ScottishPower Annual Report & Accounts/Form 20-F 2001/02 |84
Notes to the Group Balance Sheet
as at 31 March 2002 - continued
21 Loans and other borrowings continued
-----------------------------------------------------------------------------------------------------------------------------------
2003 2004 2005 2006 2007 Thereafter Total Fair Value
(g) Maturity analysis of derivatives (Pounds)m (Pounds)m (Pounds)m (Pounds)m (Pounds)m (Pounds)m (Pounds)m (Pounds)m
-----------------------------------------------------------------------------------------------------------------------------------
Interest rate swaps
Variable to fixed (GBP) 125.0 100.0 - - 50.0 50.0 325.0 8.4
Average pay rate 6.5% 6.8% - - 5.5% 6.3% 6.4%
Average receive rate 4m LIBOR 4m LIBOR - - 3m LIBOR 3m LIBOR 4m LIBOR
Fixed to index-linked (GBP) - - - - - 100.0 100.0 6.6
Average pay rate - - - - - 3.35xRPI 3.35xRPI
Average receive rate - - - - - 6.2% 6.2%
Fixed to variable (GBP) - 50.0 150.0 50.0 220.0 1,062.0 1,532.0 8.1
Average pay rate - 6m LIBOR 6m LIBOR 6m LIBOR 6m LIBOR 6m LIBOR 6m LIBOR
Average receive rate - 5.0% 5.7% 5.3% 5.9% 6.3% 6.1%
Variable to variable (GBP) - - 5.0 - - 30.0 35.0 (0.5)
Average pay rate - - 6m LIBOR - - 6m LIBOR 6m LIBOR
Average receive rate - - 3m LIBOR - - 12m LIBOR 11m LIBOR
Swaptions
Notional amount (GBP) - - - - - 100.0 100.0 1.4
Average pay rate - - - - - 4.3% 4.3%
Average receive rate - - - - - 6m LIBOR 6m LIBOR
Cross currency swaps
Receive fixed USD pay fixed GBP 183.7 - - - - - 183.7 (28.8)
Average pay rate (GBP) 6.8% - - - - - 6.8%
Average receive rate (USD) 5.9% - - - - - 5.9%
Receive fixed USD pay variable GBP - - - - - 51.4 51.4 (8.7)
Average pay rate (GBP) - - - - - 6m LIBOR 6m LIBOR
Average receive rate (USD) - - - - - 4.6% 4.6%
Receive variable USD pay fixed GBP - - - 33.1 - 21.2 54.3 (4.9)
Average pay rate (GBP) - - - 6.7% - 4.9% 6.0%
Average receive rate (USD) - - - 3m LIBOR - 3m LIBOR 3m LIBOR
Receive variable USD pay variable GBP 93.8 16.6 - 33.3 - - 143.7 (14.3)
Average pay rate (GBP) 4m LIBOR 6m LIBOR - 6m LIBOR - - 5m LIBOR
Average receive rate (USD) 3m LIBOR 6m LIBOR - 3m LIBOR - - 3m LIBOR
Receive variable AUD pay variable GBP - - - - - 237.8 237.8 (7.1)
Average pay rate (GBP) - - - - - 6m LIBOR 6m LIBOR
Average receive rate (AUD) - - - - - 3m BBSW 3m BBSW
Receive fixed CHF pay variable GBP - 4.1 - - - - 4.1 (0.1)
Average pay rate (GBP) - 3m LIBOR - - - - 3m LIBOR
Average receive rate (CHF) - 2.7% - - - - 2.7%
Receive variable CHF pay variable GBP 5.0 - - - - - 5.0 0.9
Average pay rate (GBP) 6m LIBOR - - - - - 6m LIBOR
Average receive rate (CHF) 3m LIBOR - - - - - 3m LIBOR
Receive fixed CZK pay variable GBP - - - 34.3 - - 34.3 (7.2)
Average pay rate (GBP) - - - 6m LIBOR - - 6m LIBOR
Average receive rate (CZK) - - - 6.9% - - 6.9%
Receive fixed EUR pay fixed GBP - - - - - 246.6 246.6 32.2
Average pay rate (GBP) - - - - - 6.7% 6.7%
Average receive rate (EUR) - - - - - 5.3% 5.3%
Receive fixed EUR pay variable GBP - 7.0 14.6 - - 36.8 58.4 4.6
Average pay rate (GBP) - 6m LIBOR 6m LIBOR - - 6m LIBOR 6m LIBOR
Average receive rate (EUR) - 4.9% 4.8% - - 5.0% 5.0%
Receive variable EUR pay variable GBP 16.7 - - - - 18.7 35.4 1.3
Average pay rate (GBP) 3m LIBOR - - - - 6m LIBOR 5m LIBOR
Average receive rate (EUR) 3m LIBOR - - - - 5m LIBOR 4m LIBOR
Receive fixed JPY pay variable GBP - - - 20.4 - - 20.4 (2.1)
Average pay rate (GBP) - - - 6m LIBOR - - 6m LIBOR
Average receive rate (JPY) - - - 2.2% - - 2.2%
Receive variable JPY pay variable GBP - - - 21.9 - 5.2 27.1 2.8
Average pay rate (GBP) - - - 6m LIBOR - 6m LIBOR 6m LIBOR
Average receive rate (JPY) - - - 6m LIBOR - 6m LIBOR 6m LIBOR
Receive fixed GBP pay fixed USD - - 70.0 - - - 70.0 (0.2)
Average pay rate (USD) - - 4.1% - - - 4.1%
Average receive rate (GBP) - - 5.2% - - - 5.2%
Receive fixed GBP pay variable USD - - - - 35.0 - 35.0 0.5
Average pay rate (USD) - - - - 6m LIBOR - 6m LIBOR
Average receive rate (GBP) - - - - 5.3% - 5.3%
Receive variable GBP pay fixed USD 700.0 352.2 352.0 175.8 - - 1,580.0 (39.1)
Average pay rate (USD) 2.7% 3.7% 3.6% 4.3% - - 3.3%
Average receive rate (GBP) 6m LIBOR 6m LIBOR 6m LIBOR 6m LIBOR - - 6m LIBOR
Receive variable GBP pay variable USD - - 105.3 317.0 105.7 2,107.7 2,635.7 44.2
Average pay rate (USD) - - 6m LIBOR 6m LIBOR 6m LIBOR 6m LIBOR 6m LIBOR
Average receive rate (GBP) - - 6m LIBOR 6m LIBOR 6m LIBOR 6m LIBOR 6m LIBOR
Forward contracts
Buy GBP, sell USD 768.5 267.5 108.5 - - - 1,144.5 10.6
Buy USD, sell GBP 160.9 - - - - - 160.9 (0.2)
Buy GBP, sell CAD 20.9 - - - - - 20.9 0.1
Buy AUD, sell GBP 4.3 - - - - - 4.3 (0.2)
Buy EUR, sell GBP 101.6 - - - - - 101.6 0.5
Buy JPY, sell GBP 3.3 - - - - - 3.3 -
----------------------------------------------------------------------------------------------------------- --------- --------
8,950.4 8.8
=========================================================================================================== ========= ========
The abbreviations contained in the table are defined in Note 21(c). The above
table includes derivatives relating to the partial hedging of the net assets of
PacifiCorp and the implementation of the change in policy regarding the interest
rate mix of the group's debt.
ScottishPower Annual Report & Accounts/Form 20-F 2001/02 |85
21 Loans and other borrowings continued
(h) Hedges
Gains and losses on instruments used for hedging are not recognised until the
exposure that is being hedged is itself recognised. Unrecognised gains and
losses on instruments used for hedging, and the movements therein, are as
follows:
Total net
Gains Losses gains/losses
Note (Pounds)m (Pounds)m (Pounds)m
---------------------------------------------------------------------------------------------------------------------------------
Unrecognised gains and (losses) on hedges at 1 April 2000 51.9 (84.1) (32.2)
Transfer from gains to losses (i) (5.8) 5.8 -
Transfer from losses to gains (i) (4.5) 4.5 -
(Gains) and losses arising in previous years that were recognised in 2000/01 (20.6) 22.3 1.7
----------------------------------------------------------------------------------------- ---------- --------- ---------
Gains and (losses) arising before 1 April 2000 that were not recognised in 2000/01 21.0 (51.5) (30.5)
Gains and (losses) arising in 2000/01 that were not recognised in 2000/01 87.7 (127.1) (39.4)
----------------------------------------------------------------------------------------- ---------- --------- ---------
Unrecognised gains and (losses) on hedges at 31 March 2001 108.7 (178.6) (69.9)
========================================================================================= ========== ========= =========
Gains and (losses) expected to be recognised in 2001/02 (4.6) (20.9) (25.5)
========================================================================================= ========== ========= =========
Gains and (losses) expected to be recognised in 2002/03 or later 113.3 (157.7) (44.4)
========================================================================================= ========== ========= =========
(i) Figures in the table above are calculated by reference to the 31 March 2001
fair value of the derivative concerned.
Total net
Gains Losses gains/losses
Note (Pounds)m (Pounds)m (Pounds)m
-----------------------------------------------------------------------------------------------------------------------------------
Unrecognised gains and (losses) on hedges at 1 April 2001 108.7 (178.6) (69.9)
Transfer from gains to losses (ii) (0.2) 0.2 -
Transfer from losses to gains (ii) (0.1) 0.1 -
(Gains) and losses arising in previous years that were recognised in 2001/02 3.3 8.2 11.5
----------------------------------------------------------------------------------------- ---------- -------- ----------
Gains and (losses) arising before 1 April 2001 that were not recognised in 2001/02 111.7 (170.1) (58.4)
Gains and (losses) arising in 2001/02 that were not recognised in 2001/02 (47.6) 27.5 (20.1)
----------------------------------------------------------------------------------------- ----------- -------- ----------
Unrecognised gains and (losses) on hedges at 31 March 2002 64.1 (142.6) (78.5)
========================================================================================= =========== ======== ==========
Gains and (losses) expected to be recognised in 2002/03 14.4 (17.7) (3.3)
========================================================================================= =========== ======== ==========
Gains and (losses) expected to be recognised in 2003/04 or later 49.7 (124.9) (75.2)
========================================================================================= =========== ======== ==========
(ii) Figures in the table above are calculated by reference to the 31 March 2002
fair value of the derivative concerned.
(i) Fair value of financial assets and liabilities held for trading
2002 2001
(Pounds)m (Pounds)m
----------------------------------------------------------------------------------------------------------------------------------
Net realised and unrealised gains/(losses) included in profit and loss account 4.5 (0.3)
==================================================================================================== =========== ==========
Fair value of financial assets held for trading at 31 March 3.7 0.7
==================================================================================================== =========== ==========
Fair value of financial liabilities held for trading at 31 March (2.7) (1.1)
==================================================================================================== =========== ==========
In the UK and US a limited amount of proprietary trading within the limits and
guidelines of the risk management framework is undertaken.
(j) Currency exposures
As explained in the Financial Review on pages 30 to 43 the group uses forward
contracts and cross currency interest rate swaps to mitigate the currency
exposures arising from its net investment overseas. Gains and losses arising on
net investment overseas and the forward contracts and cross currency interest
rate swaps used to hedge the currency exposures, are recognised in the statement
of total recognised gains and losses.
The group did not hold material net monetary assets or liabilities in currencies
other than local currency at 31 March 2002 and 31 March 2001.
22 Other creditors
-----------------------------------------------------------------------------------------------------------------------------------
2002 2001
(Pounds)m (Pounds)m
-----------------------------------------------------------------------------------------------------------------------------------
Amounts falling due within one year:
Trade creditors 172.0 214.5
Corporate tax 293.3 365.0
Other taxes and social security 56.9 45.5
Payments received on account 29.3 28.7
Capital creditors and accruals 135.4 234.1
Other creditors 395.6 387.3
Accrued expenses 743.3 981.4
Proposed dividend 126.1 119.4
-------------------------------------------------------------------------------------------------- -------- --------
1,951.9 2,375.9
================================================================================================== ======== ========
ScottishPower Annual Report & Accounts/Form 20-F 2001/02 |86
Notes to the Group Balance Sheet
as at 31 March 2002 - continued
23 Provisions for liabilities and charges - Other provisions
At Unwinding Utilised At
1 April New of during 31 March
1999 Acquisition provisions discount year Exchange 2000
1999/00 (Pounds)m (Pounds)m (Pounds)m (Pounds)m (Pounds)m (Pounds)m (Pounds)m
------------------------------------------------------------------------------------------------------------------------------------
Reorganisation and restructuring 0.7 - 55.0 - (11.7) - 44.0
Environmental and health 10.1 74.7 - 1.6 (2.9) 0.5 84.0
Decommissioning costs - 83.5 6.3 1.6 (0.5) 0.6 91.5
Onerous contracts - - 79.0 - - - 79.0
Pensions and post-retirement benefits 8.8 102.8 13.4 - (28.1) 0.7 97.6
Mine reclamation costs - 108.2 - 2.2 (6.3) 0.7 104.8
Other 11.2 14.5 3.5 - (8.8) 0.1 20.5
------------------------------------------------------ --------- ----------- ---------- --------- --------- --------- ---------
30.8 383.7 157.2 5.4 (58.3) 2.6 521.4
====================================================== ========= =========== ========== ========= ========= ========= =========
Acquisition/
At revision to Unwinding Utilised At
1 April provisional New of during 31 March
2000 fair values Disposal provisions discount year Exchange 2001
2000/01 (Pounds)m (Pounds)m (Pounds)m (Pounds)m (Pounds)m (Pounds)m (Pounds)m (Pounds)m
------------------------------------------------------------------------------------------------------------------------------------
Reorganisation and restructuring 44.0 - - 54.7 - (17.8) 4.2 85.1
Environmental and health 84.0 - - 3.7 2.3 (2.4) 9.2 96.8
Decommissioning costs 91.5 (15.2) (6.7) - 3.9 (0.8) 9.4 82.1
Onerous contracts 79.0 171.5 - - 6.3 (12.7) - 244.1
Pensions and post-retirement benefits 97.6 - - 98.6 - (47.6) 16.3 164.9
Mine reclamation costs 104.8 - (17.3) - 3.5 (11.8) 11.1 90.3
Other 20.5 - - 6.9 - (13.3) 1.3 15.4
------------------------------------------ --------- --------- ----------- ---------- --------- --------- --------- ---------
521.4 156.3 (24.0) 163.9 16.0 (106.4) 51.5 778.7
========================================== ========= ========= =========== ========== ========= ========= ========= =========
At Demerger Unwinding Utilised At
1 April of Thus New of during 31 March
2001 (Note 33) provisions discount year Exchange 2002
2001/02 Notes (Pounds)m (Pounds)m (Pounds)m (Pounds)m (Pounds)m (Pounds)m (Pounds)m
------------------------------------------------------------------------------------------------------------------------------------
Reorganisation and restructuring (a) 85.1 - 18.5 - (40.8) (0.2) 62.6
Environmental and health (b) 96.8 - 0.1 5.7 (4.4) - 98.2
Decommissioning costs (c) 82.1 - - 4.8 (0.3) - 86.6
Onerous contracts (d) 244.1 - - 8.5 (67.3) - 185.3
Pensions and post-retirement benefits (e) 164.9 - 17.3 - (19.3) (0.2) 162.7
Mine reclamation costs (f) 90.3 - - 3.8 (9.1) (0.1) 84.9
Disposal of and withdrawal from Appliance
Retailing (g) - - 50.8 - (43.5) - 7.3
Other (h) 15.4 (0.9) 22.6 - (10.9) - 26.2
----------------------------------------------------- --------- ----------- ---------- --------- --------- --------- ---------
778.7 (0.9) 109.3 22.8 (195.6) (0.5) 713.8
===================================================== ========= =========== ========== ========= ========= ========= =========
(a) The provisions for reorganisation and restructuring comprise certain costs
relating to the PacifiCorp Transition Plan announced in May 2000, the estimated
costs of restructuring the group's UK businesses following the regulatory price
reviews in the United Kingdom electricity and water industries announced in
November 1999 and reorganisation provisions established in 2001/02 for the UK
Division - Generation, Trading and Supply. The provisions are principally in
respect of severance costs, most of which are expected to be incurred in the
period up to March 2004. The PacifiCorp Transition Plan, upon completion, will
result in a reduction in employee numbers of approximately 1,600 from the 1998
levels. At 31 March 2002, PacifiCorp had reduced its employees by approximately
750 under this Plan. The reorganisation provisions established in 2001/02 for
the UK Division - Generation, Trading and Supply will result in a reduction in
employee numbers of approximately 500 from 2002/03 onwards.
(b) The environmental and health provisions principally comprise the costs of
notified environmental remediation work and constructive obligations in respect
of potential environmental remediation costs identified by an external due
diligence review in the United States. These costs are expected to be incurred
in the period up to March 2010.
(c) The provision for decommissioning costs is the discounted future estimated
costs of decommissioning the group's power plants, principally in the United
States, but also in the United Kingdom. The decommissioning of these plants is
expected to occur over the period between 2005 and 2047.
(d) The provision for onerous contracts comprises the costs of contracted energy
purchases. The costs provided are expected to be incurred in the period up to 31
March 2009 as follows: less than 1 year (Pounds)26.6 million, between 1 and 2
years (Pounds)35.3 million, between 2 and 5 years (Pounds)86.6 million, and the
remainder after 5 years (Pounds)36.8 million.
(e) Details of the group's pensions and other post-retirement benefits are
disclosed in Notes 29 and 34.
(f) The provision for mine reclamation costs comprises the discounted future
estimated costs of reclaiming the group's mines in the United States. The costs
are expected to be incurred in the period up to 2031.
(g) The Appliance Retailing provision comprises closure costs, principally
property lease termination premia, expected to be incurred in the period up to
2004.
(h) The Other category comprises various provisions which are not individually
sufficiently material to warrant separate disclosure.
ScottishPower Annual Report & Accounts/Form 20-F 2001/02 |87
24 Provisions for liabilities and charges - Deferred tax
Deferred tax provided in the Accounts is as follows:
Provided
2002 2001
(Pounds)m (Pounds)m
---------------------------------------------------------------------------------------------------------------------------------
Accelerated capital allowances 1,978.5 1,963.1
Other timing differences (287.3) (337.8)
------------------------------------------------------------------------------------------------------- --------- ----------
1,691.2 1,625.3
======================================================================================================= ========= ==========
(Pounds)m
---------------------------------------------------------------------------------------------------------------------------------
Deferred tax provided at 1 April 1999 743.1
Charge to profit and loss account 45.2
Movements arising from acquisition 818.1
Exchange 5.7
-------------------------------------------------------------------------------------------------------------------- ----------
Deferred tax provided at 1 April 2000 1,612.1
Charge to profit and loss account 13.8
Movements arising from revisions to fair values (98.5)
Exchange 97.9
-------------------------------------------------------------------------------------------------------------------- ----------
Deferred tax provided at 1 April 2001 1,625.3
Charge to profit and loss account 70.2
Other movements (4.3)
-------------------------------------------------------------------------------------------------------------------- ----------
Deferred tax provided at 31 March 2002 1,691.2
==================================================================================================================== ==========
25 Deferred income
Released to
At Receivable profit At
1 April during and loss 31 March
2000 year account Exchange 2001
(Pounds)m (Pounds)m (Pounds)m (Pounds)m (Pounds)m
---------------------------------------------------------------------------------------------------------------------------------
Grants and customer contributions 426.8 88.6 (15.1) 1.2 501.5
=========================================================== ============ ============ =========== ========= ==========
Released to
At Receivable profit At
1 April during and loss 31 March
2001 year account Disposal Exchange 2002
(Pounds)m (Pounds)m (Pounds)m (Pounds)m (Pounds)m (Pounds)m
---------------------------------------------------------------------------------------------------------------------------------
Grants and customer contributions 501.5 67.7 (17.8) (0.1) (0.1) 551.2
============================================ ============ ============ ============ =========== ========= ==========
Deferred income excludes grants and contributions received in respect of water
infrastructure assets.
26 Share capital
2002 2001
Note (Pounds)m (Pounds)m
---------------------------------------------------------------------------------------------------------------------------------
Authorised:
3,000,000,000 (2001 3,000,000,000) ordinary shares of 50p each 1,500.0 1,500.0
One Special Share of (Pounds)1 (a) - -
------------------------------------------------------------------------------------------------------- --------- ----------
1,500.0 1,500.0
======================================================================================================= ========= ==========
Allotted, called up and fully paid:
1,852,646,984 (2001 1,849,025,792) ordinary shares of 50p each 926.3 924.5
One Special Share of (Pounds)1 (a) - -
------------------------------------------------------------------------------------------------------- --------- ----------
926.3 924.5
======================================================================================================= ========= ==========
ScottishPower Annual Report & Accounts/Form 20-F 2001/02 |88
Notes to the Group Balance Sheet
as at 31 March 2002 - continued
26 Share capital continued
(a) Special Share
The `Special Share', which can be held only by one of the Secretaries of State
or any other person acting on behalf of HM Government, does not carry rights to
vote at the general or separate meetings but entitles the holder to attend and
speak at such meetings. Written consent of the Special Shareholder is required
before certain provisions of the company's Articles of Association or certain
rights attaching to the Special Share are varied. This share shall confer no
rights to participate in the capital or profits of the company, except that in a
winding up the Special Shareholder 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 after consultation with the company.
(b) Employee Share Plans
The group has six types of share based plans for employees. Options have been
granted and awards made to eligible employees to subscribe for ordinary shares
or ADSs in Scottish Power plc in accordance with the rules of each plan. The
ScottishPower and Southern Water Sharesave Schemes are savings related and under
normal circumstances share options are exercisable on completion of a three,
five or seven year save-as-you-earn contract as appropriate.
The PacifiCorp Stock Incentive Plan relates to options over ScottishPower ADSs
and vest over two or three years, as appropriate. The Executive Share Option
Scheme applied to executive directors and certain senior managers. However, this
Scheme was replaced with the Long Term Incentive Plan and, although it will not
affect options already granted, this plan supersedes the Executive Share Option
Scheme. Awards granted under the Long Term Incentive Plan will vest only if the
Remuneration Committee is satisfied that certain performance measures related to
the sustained underlying financial performance of the group and improvements in
customer service standards are achieved over a period of three financial years
commencing with the financial year preceding the date an award is made. During
the year, the company introduced the Executive Share Option Plan 2001 ("ExSOP").
Options granted under the ExSOP to executive directors and certain senior
managers are subject to the performance criterion that the percentage increase
in the company's annualised earnings per share be at least 3% (adjusted for any
increase in the RPI).
The Employee Share Ownership Plan ("ESOP") allows eligible employees to make
contributions from pre-tax salary to buy shares in ScottishPower which are held
in trust (Partnership Shares). These shares are matched by the company (Matching
Shares) which are also held in trust. At the launch of the ESOP, Free Shares
were offered to employees.
The K Plus Plan consists of the K Plus Employee Savings Plan and the K Plus
Employee Stock Ownership Plan. The K Plus Employee Savings Plan is a 401(k)
based qualified retirement plan designed to provide income during employees'
retirement. The K Plus Employee Stock Ownership Plan provides for matching
contributions by PacifiCorp based on employees' contributions, plus additional
discretionary employer contributions made to all eligible employees.
(i) Summary of movements in share options in ScottishPower shares
Southern Executive PacifiCorp
ScottishPower Weighted Water Weighted Share Weighted Stock
Sharesave average Sharesave average Option average Incentive
Schemes exercise Schemes exercise Schemes# exercise Plan##
(number of price (number of price (number of price (number of
shares 000s) (pence) shares 000s) (pence) shares 000s) (pence) shares 000s)
-----------------------------------------------------------------------------------------------------------------------------------
Outstanding at 1 April 1999 21,272 308.4 2,700 138.5 432 314.4 -
Acquisition* - - - - - - 14,534
Granted 4,745 429.0 - - - - 6,016
Exercised (3,674) 272.6 (1,529) 131.9 (168) 344.6 -
Lapsed (2,398) 345.7 (93) 148.5 (1) 352.1 (1,477)
---------------------------------- ------ ----- ------ ----- ----- ----- ------
Outstanding at 1 April 2000 19,945 339.2 1,078 147.1 263 297.0 19,073
Granted 2,459 453.0 - - - - 457
Exercised (3,615) 299.0 (786) 145.7 (122) 274.6 (304)
Lapsed (2,577) 400.7 (13) 159.9 (1) - (4,318)
---------------------------------- ------ ----- ------ ----- ----- ----- ------
Outstanding at 1 April 2001 16,212 355.6 279 149.3 140 316.1 14,908
Granted 4,378 386.0 - - 2,354 483.0 3,299
Exercised (6,718) 283.3 (189) 144.7 (78) 278.4 (99)
Lapsed (2,115) 420.6 (7) 154.9 (19) 483.0 (2,240)
---------------------------------- ------ ----- ------ ----- ----- ----- ------
Outstanding at 31 March 2002 11,757 396.7 83 159.1 2,397 479.9 15,868
================================== ====== ===== ====== ===== ===== ===== ======
Weighted
average
exercise Total
price (number of
(pence) shares 000s)
---------------------------------------------------------------
Outstanding at 1 April 1999 - 24,404
Acquisition* 562.1 14,534
Granted 460.2 10,761
Exercised - (5,371)
Lapsed 578.1 (3,969)
---------------------------------- ----- ------
Outstanding at 1 April 2000 528.5 40,359
Granted 440.6 2,916
Exercised 528.2 (4,827)
Lapsed 596.0 (6,909)
---------------------------------- ----- ------
Outstanding at 1 April 2001 588.8 31,539
Granted 452.1 10,031
Exercised 474.3 (7,084)
Lapsed 576.4 (4,381)
---------------------------------- ----- ------
Outstanding at 31 March 2002 563.6 30,105
================================== ===== ======
* PacifiCorp share options as at 29 November 1999.
# The Executive Share Option figures shown for 2001/02 are a combination of the
options outstanding under the Executive Share Option Scheme and the Executive
Share Option Plan 2001.
## PacifiCorp Stock Incentive Plan are options over ScottishPower ADSs; for the
purpose of the table above, options have been converted to ScottishPower shares
as follows: one ScottishPower ADS equals four ScottishPower shares.
ScottishPower Annual Report & Accounts/Form 20-F 2001/02 |89
26 Share capital continued
--------------------------------------------------------------------------------------------------------------------------------
(ii) Analysis of share options outstanding at 31 March 2002
Number of Option
Date of Number of shares price
grant participants (000s) (pence) Normal exercisable date
--------------------------------------------------------------------------------------------------------------------------------
ScottishPower Sharesave Schemes 20 June 1996 5 7 263.1 6 months to March 2002
20 June 1997 1,697 2,130 307.0 6 months to March 2003
12 June 1998 1,743 1,578 440.0 6 months to March 2002 or 2004
11 June 1999 3,465 2,592 429.0 6 months to March 2003 or 2005
9 June 2000 2,440 1,459 453.0 6 months to March 2004 or 2006
8 June 2001 3,492 3,991 386.0 6 months to March 2005 or 2007
---------------------------------- ------------------ ------------ --------- ------- --------------------------------------
Southern Water Sharesave Scheme 25 January 1995 3 4 136.1 6 months to September 2002
26 January 1996 49 79 160.2 6 months to September 2003
---------------------------------- ------------------ ------------ --------- ------- --------------------------------------
Executive Share Option Scheme 25 June 1992 3 2 237.7 1995-2002
1 July 1993 1 13 310.0 1996-2003
17 December 1993 14 20 454.8 1996-2003
27 May 1994 1 1 354.0 1997-2004
12 May 1995 3 26 335.0 1998-2005
---------------------------------- ------------------ ------------ --------- ------- --------------------------------------
Executive Share Option Plan 2001 21 August 2001 269 2,335 483.0 21 August 2004 to 21 August 2011
---------------------------------- ------------------ ------------ --------- ------- --------------------------------------
PacifiCorp Stock Incentive Plan** 3 June 1997 67 1,262 599.6 29 November 1999 to 3 June 2007
12 August 1997 18 177 645.1 29 November 1999 to 12 August 2007
10 February 1998 94 2,231 728.5 29 November 1999 to 10 February 2008
13 May 1998 5,104 1,178 704.0 29 November 1999 to 13 May 2008
9 February 1999 102 2,910 576.8 9 February 2000 to 9 February 2009##
11 May 1999 5,391 1,242 521.8 11 May 2000 to 11 May 2009***
16 February 2000 101 2,143 474.3 16 February 2001 to 16 February 2010###
24 March 2000 4 1,343 559.0 24 March 2001 to 24 March 2010
25 January 2001 2 457 441.3 25 January 2002 to 25 January 2011####
24 April 2001 108 2,717 452.5 24 April 2002 to 24 April 2011
11 September 2001 1 208 448.1 11 September 2002 to 11 September 2011
---------------------------------- ------------------ ------------ --------- ------- --------------------------------------
** Options granted under the PacifiCorp Stock Incentive Plan are for
ScottishPower ADSs; for the purpose of the table above, options have been
converted to ScottishPower ordinary shares as follows: one ScottishPower ADS
equals four ScottishPower ordinary shares. The US$ ADS option price was
converted so that it may be represented in terms of ScottishPower ordinary
shares. The price was further converted at the closing exchange rate on 31 March
2002 to be quoted in pence in the table above.
## Options became exercisable in the proportions of one-third on 9 February
2000, one-third on 9 February 2001 and the remaining one-third on 9 February
2002.
*** Options became exercisable in the proportions 50% on 11 May 2000 and the
remaining 50% on 11 May 2001.
### Options became exercisable in the proportions of one-third on 16 February
2001, one-third on 16 February 2002 and the remaining one-third becomes
exercisable on 16 February 2003.
#### Options became exercisable in the proportions of one-third on 25 January
2002, with a further third becoming exercisable on 25 January 2003 and the
remaining one-third becomes exercisable on 25 January 2004.
Where reference is made to Southern Water, this is to identify the Sharesave
Scheme under which the options over Scottish Power plc ordinary shares have been
granted. The exercise prices of options granted prior to the rights issue on 30
August 1996 were adjusted to reflect the bonus element inherent in the rights
issue.
For the Southern Water Sharesave Scheme, the date of grant refers to the date
the original Southern Water Sharesave Scheme share options were granted. These
options were exchanged for options over ScottishPower shares following
acquisition in 1996.
Where reference is made to the PacifiCorp Stock Incentive Plan, this is to
identify the scheme under which the options over Scottish Power plc ADSs have
been granted. For the PacifiCorp Stock Incentive Plan, the date of grant refers
to the date the original PacifiCorp Common Stock options were granted. These
options were exchanged for options over ScottishPower ADSs following the
acquisition on 29 November 1999.
ScottishPower Annual Report & Accounts/Form 20-F 2001/02 |90
Notes to the Group Balance Sheet
as at 31 March 2002 - continued
27 Analysis of movements in shareholders' funds
------------------------------------------------------------------------------------------------------------------------------------
Capital
Number of Share Share Revaluation redemption Merger Other
shares capital premium reserve reserve reserve reserve
Notes 000s (Pounds)m (Pounds)m (Pounds)m (Pounds)m (Pounds)m (Pounds)m
------------------------------------------------------------------------------------------------------------------------------------
At 1 April 1999 1,198,678 599.4 - 223.9 - 394.0 -
Retained profit for the year - - - - - - -
Share capital issued
- Employee sharesave scheme 12,044 6.0 49.7 - - - (1.5)
- Executive share option scheme 168 0.1 0.5 - - - -
- Acquisition 689,669 344.8 3,687.8 - - - -
Revaluation surplus realised - - - (3.4) - - -
Impairment of goodwill previously written off
to reserves - - - - - - -
Goodwill realised on disposals - - - - - - -
Share buy-back (52,973) (26.5) - - 26.5 - -
Exchange movement on translation of overseas
results and net assets (b) - - - - - - -
Transfers - - (4.2) - (8.2) 12.4 1.5
------------------------------------------------- ---------- --------- --------- ----------- ---------- --------- ---------
At 1 April 2000 1,847,586 923.8 3,733.8 220.5 18.3 406.4 -
Retained loss for the year - - - - - - -
Share capital issued
- Employee sharesave scheme 304 0.1 1.4 - - - -
- Executive share option scheme 122 0.1 0.1 - - - -
- ESOP 1,014 0.5 4.4 - - - -
Revaluation surplus realised - - - (3.4) - - -
Exchange movement on translation of overseas
results and net assets (b) - - - - - - -
------------------------------------------------- ---------- --------- --------- ----------- ---------- --------- ---------
At 1 April 2001 1,849,026 924.5 3,739.7 217.1 18.3 406.4 -
Retained loss for the year - - - - - - -
Share capital issued
- Employee sharesave scheme 99 0.1 0.5 - - - -
- Executive share option scheme 78 - 0.2 - - - -
- ESOP 3,444 1.7 13.7 - - - -
Goodwill realised on disposals (c) - - - - - - -
Goodwill realised on demerger of Thus 33 - - - - - - -
Reduction of share premium (d) - - (1,500.0) - - - -
Unrealised gains on fixed asset disposals - - - - - - 4.9
Gains realised on Thus demerger - - - - - - (4.9)
Revaluation surplus realised - - - (3.4) - - -
Fixed asset revaluation gains realised on
disposal - - - (168.2) - - -
Exchange movement on translation of overseas
results and net assets (b) - - - - - - -
Currency translation differences on foreign
currency hedging (b) - - - - - - -
------------------------------------------------- ---------- --------- --------- ----------- ---------- --------- ---------
Balance at 31 March 2002 1,852,647 926.3 2,254.1 45.5 18.3 406.4 -
================================================= ========== ========= ========= =========== ========== ========= =========
Profit
and loss
account Total
(Pounds)m (Pounds)m
------------------------------------------------------------------------------
At 1 April 1999 (14.5) 1,202.8
Retained profit for the year 543.6 543.6
Share capital issued
- Employee sharesave scheme (16.2) 38.0
- Executive share option scheme - 0.6
- Acquisition - 4,032.6
Revaluation surplus realised 3.4 -
Impairment of goodwill previously written off
to reserves 7.5 7.5
Goodwill realised on disposals 15.3 15.3
Share buy-back (302.0) (302.0)
Exchange movement on translation of overseas
results and net assets 24.9 24.9
Transfers (1.5) -
------------------------------------------------- -------- --------
At 1 April 2000 260.5 5,563.3
Retained loss for the year (169.8) (169.8)
Share capital issued
- Employee sharesave scheme - 1.5
- Executive share option scheme - 0.2
- ESOP - 4.9
Revaluation surplus realised 3.4 -
Exchange movement on translation of overseas
results and net assets 493.1 493.1
------------------------------------------------- -------- --------
At 1 April 2001 587.2 5,893.2
Retained loss for the year (1,927.2) (1,927.2)
Share capital issued
- Employee sharesave scheme - 0.6
- Executive share option scheme - 0.2
- ESOP - 15.4
Goodwill realised on disposals 753.3 753.3
Goodwill realised on demerger of Thus 14.7 14.7
Reduction of share premium 1,500.0 -
Unrealised gains on fixed asset disposals - 4.9
Gains realised on Thus demerger 4.9 -
Revaluation surplus realised 3.4 -
Fixed asset revaluation gains realised on
disposal 168.2 -
Exchange movement on translation of overseas
results and net assets (4.2) (4.2)
Currency translation differences on foreign
currency hedging (19.5) (19.5)
------------------------------------------------- -------- --------
Balance at 31 March 2002 1,080.8 4,731.4
================================================= ======== ========
(a) Cumulative goodwill written off to the profit and loss account reserve as at
31 March 2002 was (Pounds)572.3 million (2001 (Pounds)1,349.9 million, 2000
(Pounds)1,349.9 million).
(b) The cumulative foreign currency translation adjustments at 31 March 2002
amount to (Pounds)494.3 million (2001 (Pounds)518.0 million, 2000 (Pounds)24.9
million).
(c) The goodwill realised on disposals relates to the disposal of Appliance
Retailing ((Pounds)15.1 million) and the impairment of goodwill in connection
with the provision for loss on disposal of Southern Water ((Pounds)738.2
million).
(d) The company applied to the Court of Session (`the Court') to approve a
reduction in the share premium account which had previously been approved by the
company's shareholders at an Extraordinary General Meeting on 21 January 2002.
On 5 March 2002, the Court approved the reduction of the company's share premium
account by (Pounds)1,500 million. This amount has been transferred to the
company's profit and loss account reserve. The reduction in the share premium
account created sufficient distributable reserves to facilitate payment of a
dividend in specie to demerge Thus.
(e) When ScottishPower acquired Southern Water plc, a balance was established
under merger reserve for the cost to ScottishPower of transferring existing
options over Southern Water plc shares to the Scottish Power plc Share Option
Scheme. Prior to 1 April 2000, transfers were made between the Other reserve and
the Profit and loss account reserve to reflect the exercise of these options as
new shares were issued. However, the shares to satisfy the exercise of these
options have now been acquired by a Qualifying Employee Share Ownership Trust
and, accordingly, no further such transfers between reserves are required.
ScottishPower Annual Report & Accounts/Form 20-F 2001/02 |91
28 Minority interests
-----------------------------------------------------------------------------------------------------------------------------------
Equity Non-equity Total Equity Non-equity Total
2002 2002 2002 2001 2001 2001
Note (Pounds)m (Pounds)m (Pounds)m (Pounds)m (Pounds)m (Pounds)m
-----------------------------------------------------------------------------------------------------------------------------------
At 1 April 128.2 157.6 285.8 161.6 138.1 299.7
Exchange - (1.7) (1.7) - 19.5 19.5
Additions 1.0 - 1.0 - - -
Disposals 2.2 - 2.2 - - -
Thus open offer 34.4 - 34.4 - - -
Demerger of Thus 33 (127.4) - (127.4) - - -
Redemption of preferred stock of PacifiCorp - (69.5) (69.5) - - -
Profit and loss account (41.8) 6.9 (34.9) (33.4) 10.4 (23.0)
Unrealised gains on fixed asset disposals 4.9 - 4.9 - - -
Dividends paid to minority interests - (8.1) (8.1) - (10.4) (10.4)
-------------------------------------------------------- --------- ---------- --------- --------- --------- ---------
At 31 March 1.5 85.2 86.7 128.2 157.6 285.8
======================================================== ========= ========== ========= ========= ========= =========
Non-equity minority interests include 100% of the preferred stock and preferred
stock subject to mandatory redemption of PacifiCorp. Of the total preferred
stock subject to mandatory redemption at 31 March 2002, (Pounds)2.6 million
(2001 (Pounds)75.7 million) is due to be redeemed within 1 year, (Pounds)2.6
million (2001 (Pounds)2.6 million) is due to be redeemed in each of the next 4
years with the remaining (Pounds)39.2 million (2001 (Pounds)42.4 million) being
redeemable after 5 years.
The fair value of preferred stock subject to mandatory redemption is
(Pounds)57.4 million (2001 (Pounds)130.5 million). The fair value of other
preferred stock is not materially different from book value.
The weighted average rate of return on preferred stock subject to mandatory
redemption is 7.6% (2001 7.6%) and on other preferred stock is 5.1% (2001 5.1%).
Preferred stockholders have first preference in the event of a liquidation of
PacifiCorp and first rights to dividends. The holders of these shares only have
rights against the PacifiCorp group of companies.
29 Pensions
At 31 March 2002, ScottishPower had eight statutorily approved defined benefit
pension schemes and one statutorily approved defined contribution scheme. The
pension charge for the PacifiCorp arrangements in the year to 31 March 2000 is
for the post-acquisition period only. Details of the principal schemes are set
out below:
Prepayment/
Pension charge (provision)
for the year as at 31 March
Scheme Funded or 2002 2001 2000 2002 2001
Pension fund type unfunded (Pounds)m (Pounds)m (Pounds)m (Pounds)m (Pounds)m
-----------------------------------------------------------------------------------------------------------------------------------
ScottishPower Defined benefit funded - - - 5.0 5.0
Manweb Defined benefit funded 3.6 4.3 4.2 - -
Southern Water Defined benefit funded 4.1 3.7 4.1 - -
Final Salary LifePlan Defined benefit funded 3.4 3.0 1.0 - -
PacifiCorp* Defined benefit funded 7.5** 63.7*** 5.3**** (88.4) (85.9)
====================================================================== ========= ========= ========= ======== ========
* The PacifiCorp figures include the unfunded Supplementary Executive Retirement
Plan ("SERP"). The SERP accounts for less than 5% of the PacifiCorp liabilities.
** Includes (Pounds)0.6 million charge in the year relating to Special
Termination Benefits.
*** Includes (Pounds)54.8 million charge in the year relating to Special
Termination Benefits.
**** In relation to the post-acquisition period only.
The components of the pension charge are as follows:
2002 2001
Interest Interest
(credit)/ (credit)/
cost on Net cost on Net
Regular prepayment/ Variation pension Regular prepayment/ Variation pension
cost provision credit charge cost provision credit charge
Pension fund (Pounds)m (Pounds)m (Pounds)m (Pounds)m (Pounds)m (Pounds)m (Pounds)m (Pounds)m
-----------------------------------------------------------------------------------------------------------------------------------
ScottishPower* 21.8 (0.3) (32.5) - 26.5 (0.3) (39.5) -
Manweb 5.1 - (1.5) 3.6 5.8 - (1.5) 4.3
Southern Water 4.8 - (0.7) 4.1 4.7 - (1.0) 3.7
Final Salary LifePlan 3.4 - - 3.4 3.0 - - 3.0
PacifiCorp 10.4 6.7 (9.6)** 7.5 12.6 5.8 45.3*** 63.7
===================================== ======== ======== ======== ======= ======= ======= ======= ======
* The net pension charge is set to a minimum of nil where the variation credit
exceeds regular cost plus interest.
** Being a normal variation credit of (Pounds)10.2 million decreased by the cost
of Special Termination Benefits of (Pounds)0.6 million.
*** Being a normal variation credit of (Pounds)9.5 million increased by the cost
of Special Termination Benefits of (Pounds)54.8 million.
The prepayment/(provision) as at the year end can be reconciled as follows:
Prepayment/ Prepayment/ Prepayment/
(provision) (provision) (provision)
at 1 April Employer Pension at 31 March at 1 April
2001 contribution charge Exchange 2002 2000
Pension fund (Pounds)m (Pounds)m (Pounds)m (Pounds)m (Pounds)m (Pounds)m
------------------------------------------------------------------------------------------------------------------------
ScottishPower 5.0 - - - 5.0 5.0
Manweb - 3.6 (3.6) - - -
Southern Water - 4.1 (4.1) - - -
Final Salary LifePlan - 3.4 (3.4) - - -
PacifiCorp (85.9) 5.1 (7.5) (0.1) (88.4) (32.6)
============================= ======= ========= ======== ======== ========= =========
Prepayment/
(provision)
Employer Pension at 31 March
contribution charge Exchange 2001
Pension fund (Pounds)m (Pounds)m (Pounds)m (Pounds)m
-----------------------------------------------------------------------------------------
ScottishPower - - - 5.0
Manweb 4.3 (4.3) - -
Southern Water 3.7 (3.7) - -
Final Salary LifePlan 3.0 (3.0) - -
PacifiCorp 16.6 (63.7) (6.2) (85.9)
============================= ======= ========= ======== ========
ScottishPower Annual Report & Accounts/Form 20-F 2001/02 |92
Notes to the Group Balance Sheet
as at 31 March 2002 - continued
29 Pensions continued
------------------------------------------------------------------------------------------------------------------------------------
The individual scheme funding details based on the latest full actuarial valuations are as follows:
Principal actuarial assumptions
Value Value
Latest of assets Market Average of fund
full Valuation based on value of Valuation investment Average Average assets/
actuarial carried valuation assets method rate of salary pension accrued
Pension fund valuation out by (Pounds)m (Pounds)m adopted return increases increases benefits
------------------------------------------------------------------------------------------------------------------------------------
ScottishPower 31 March 2000 William M Mercer 1,930.4 2,090.4 Projected unit 6.0% 4.5% 2.5% 129%
Manweb 31 March 2001 Bacon & Woodrow 640.8 623.6 Projected unit 6.8%* 4.3% 2.5% 111%
Southern Water 31 March 2001 Watson Wyatt 296.0 296.0 Projected unit 6.2% 4.5% 2.5% 107%
Final Salary LifePlan 31 March 1999 William M Mercer 0.1 0.1 Projected unit 5.5% 4.0% 2.5% 97%
PacifiCorp 1 January 2001 Hewitt Associates 760.6 760.6 Projected unit 7.75%** 4.0% - 100%
------------------------------------ ----------------- -------- --------- -------------- --------- -------- -------- -------
* 4.8% post-retiral
** 7.75% represents the liability discount rate.
(a) Group pension arrangements
Following a review of the group's UK pension arrangements, the ScottishPower
Pension Scheme, Manweb Pension Scheme and Southern Water Pension Scheme were
closed to new members from 31 December 1998.
The group introduced two new group pension plans for new UK employees effective
from 1 January 1999. The new plans are a defined benefit plan (Final Salary
LifePlan) and a defined contribution plan (Money Purchase LifePlan) which are
open to continuous contract employees aged between 16 and 60.
Following the acquisition of PacifiCorp on 29 November 1999, the associated US
pension arrangements are now included in the group's Accounts. Further details
of these US arrangements are given in sub-note (f) below.
Each of the pension schemes' assets are invested in an appropriate diversified
range of equities, bonds, property and cash. The broad proportions invested in
each asset class at 31 March 2002 are as follows:
Equities Bonds Property Cash Total
% % % % %
--------------------------------------------------------------------
ScottishPower 72 18 9 1 100
Manweb 70 29 - 1 100
Southern Water 74 24 - 2 100
Final Salary LifePlan 94 - - 6 100
PacifiCorp 65 35 - - 100
------------------------------- ----- ----- ------- ---- -----
(b) ScottishPower
Scottish Power UK plc operates a funded pension scheme of the company providing
defined retirement and death benefits based on final pensionable salary. This
scheme was open prior to 1 January 1999 to employees of ScottishPower. Members
are required to contribute to the Scheme at a rate of 5% of pensionable salary.
Scottish Power UK plc meets the balance of cost of providing benefits, and
company contributions paid are based on the results of the actuarial valuation
of the Scheme and are agreed by Scottish Power UK plc and the Scheme Trustees.
The assets of the Scheme are held separately from those of the company in a
trustee administered fund. Included in the Scheme assets are 133,602
ScottishPower shares ((Pounds)480,967, based on market value as at 31 March
2002), purchased only as part of a pooled strategy to match the relative
weightings in the UK Stock Exchange index.
The pension charge for the year is based on the advice of the Scheme's
independent qualified actuary and is calculated using the same assumptions as
those used at the last actuarial valuation of the Scheme. The Scheme assets have
been taken at an adjusted market value.
The prepayment included in the balance sheet represents the accumulated
excess of the actual contributions paid to the Scheme over the pension
accounting charge. The net pension charge is set to a minimum of (Pounds)nil
which is derived from a regular cost of 19.8% of salaries, fully offset by a
variation credit. The variation credit is calculated as the assessed surplus,
less the prepayment, spread as a fixed percentage of pensionable salary roll
over nine years.
The actual contributions payable by participating employers during the year were
(Pounds)nil, except where required by a business transfer agreement. There are
no planned changes to employer contribution requirements.
(c) Manweb
Prior to 1 January 1999, most of the Manweb employees were entitled to join the
Manweb Group of the Electricity Supply Pension Scheme, which provides pension
and other related benefits based on final pensionable salary to employees
throughout the Electricity Supply Industry in England & Wales. The ongoing
contributions to the Scheme are based on the results of the actuarial valuation
of the Scheme and the advice of the Scheme Actuary.
The assets are held in a separate trustee administered fund. The Scheme assets
no longer include any ScottishPower shares. For funding and expensing purposes
the Scheme assets are valued by discounting the income which can be expected
from a national portfolio of assets at the valuation rate of interest.
ScottishPower Annual Report & Accounts/Form 20-F 2001/02 |93
29 Pensions continued
The most recent formal funding valuation was carried out as at 31 March 2001.
However, the results and recommendations of this valuation were not completed
and implemented until 1 April 2002. Consequently the actual funding amounts
payable and the corresponding expensing amounts for the year ended 31 March 2002
have been calculated using the assumptions of the 1998 actuarial valuation of
the scheme. The 1998 assumptions are detailed as follows:
1998 valuation assumptions
-------------------------------------------------------------------------
Value of plan assets (Pounds)467.6m
Market value of assets (Pounds)613.7m
Valuation method adopted Projected unit
Average investment rate of return 8.5%
Average salary increases 6.5%
Average pension increases 4.5%
Average equity dividend growth 4.75%
Value of fund assets/accrued benefits 105%
======================================================== =============
The pension charge for the year, of 12% of pensionable salaries, is based on the
advice of the Scheme's independent qualified actuary and is calculated using the
1998 assumptions detailed above. Based on the results of the 2001 valuation, the
pension charge in respect of future benefits accruing is 14% of pensionable
salary. However, due to the surplus revealed in the 2001 valuation, the company
will take a contribution holiday which will continue until the results of the
next actuarial valuation. The variation credit is calculated as a spreading of
the combination of the assessed surplus and Early Retirement Deficiency Costs
payable over 14 years.
The actual contributions payable by participating employers during the year were
12% of pensionable salaries adjusted as described above or as required by a
business transfer agreement. The employer contribution rate changed with effect
from 1 April 2002 to (Pounds)nil (except as required by a business transfer
agreement).
(d) Southern Water
Southern Water operates a funded pension scheme. The Scheme details above relate
to the principal defined benefit scheme which covers the majority of the
Southern Water employees. Members are required to contribute to the Scheme at
varying rates of pensionable salary depending upon category of membership. The
company meets the balance of the cost of the accruing benefits. Contributions
paid are based on the results of the actuarial valuation of the Scheme and are
agreed by the company and the Scheme Trustees.
The assets are held in a separate trustee administered fund. For funding and
expensing purposes, the scheme assets are valued by discounting the income which
can be expected from a notional portfolio of assets at the valuation rate of
interest.
The pension charge for the year, of 10% of pensionable salaries, plus employer
augmentation costs, is based on the advice of the Scheme's independent qualified
actuary and is calculated using the same assumptions as at the last actuarial
valuation of the Scheme. The variation credit is calculated as the assessed
surplus spread over 17 years.
The actual contributions payable by participating employers during the year were
11.4% of pensionable salaries, except where required by a business transfer
agreement. This rate continues with effect from 1 April 2002 following the
formal actuarial valuation of the scheme as at 31 March 2001.
(e) Final Salary LifePlan
The group operates a funded pension scheme providing defined retirement and
death benefits based on final pensionable salary for eligible UK employees of
the group. The assets of the LifePlan are held in a separate trustee
administered fund. The pension charge for the year, of 11.4% of pensionable
salaries, is based on the advice of the LifePlan's independent qualified
actuary, representing the assessed balance of cost of the accruing benefits
after allowing for members' contributions of 5% of pensionable salaries. The
same actuarial assumptions have been adopted for both funding and expensing
purposes.
The actual contributions payable by participating employers during the year were
10.0% of pensionable salaries, except where required by a business transfer
agreement. There are no planned changes to employer contribution requirements,
although this is subject to the results of the actuarial valuation as at 31
March 2002 when these become known.
(f) PacifiCorp
PacifiCorp operates pension plans covering substantially all its employees.
Benefits are based on the employee's years of service and final pensionable
salary, adjusted to reflect estimated social security benefits. Pension costs
are funded annually by no more than the maximum amount of pension expense which
can be deducted for federal income tax purposes. The PacifiCorp pensions figures
in these Accounts include the unfunded Supplementary Executive Retirement Plan
("SERP"). The SERP accounts for less than 5% of the PacifiCorp liabilities.
PacifiCorp meets the entire cost of accruing benefits under PacifiCorp plans.
The assets for the funded Plan are held in a separate fund. For funding and
expensing purposes, the Plan assets are valued at market levels, and liabilities
costed on financial assumptions in line with market return expectations. The
pension charge for the period is based on the advice of the Plan's independent
qualified actuary. PacifiCorp also provides post-retirement benefits and post-
employment benefits to certain employees. Details of these benefits are
disclosed in Note 34.
The actual contributions payable by participating employers during the year were
1.8% of pensionable earnings. The planned contribution for 2002/03 is expected
to increase to 8.9% of pensionable earnings.
(g) Additional pension and other post-retirement benefit arrangements
The group operates an approved defined contribution pension scheme (Money
Purchase LifePlan) for eligible employees. Contributions are paid by the member
and employer at fixed rates. The benefits secured at retirement or death reflect
each employee's accumulated fund and the cost of purchasing benefits at that
time. The assets of the scheme are held in a separate trustee administered fund.
The pension charge for the year represents the defined employer contribution and
amounted to (Pounds)0.3 million. The group also operates pension schemes for a
number of other groups of employees; details of these have been omitted from the
Accounts on the grounds of materiality.
Further details of the group's pensions arrangements are disclosed in Note 34,
together with details of the group's other post-retirement benefits for
PacifiCorp employees.
ScottishPower Annual Report & Accounts/Form 20-F 2001/02 |94
Notes to the Group Balance Sheet
as at 31 March 2002 - continued
29 Pensions continued
(h) Financial Reporting Standard ("FRS") 17 `Retirement benefits'
The pension figures shown above comply with the current pension accounting
standard, Statement of Standard Accounting Practice ("SSAP") 24. A new
accounting standard, FRS 17, must be used for the pension and other post-
retirement benefits figures that will be recorded in the group's Accounts for
the year ending 31 March 2004 and subsequent years. Under transitional
arrangements the group is required to disclose the following information about
the schemes and the figures that would have been shown under FRS 17 in the
balance sheet as at 31 March 2002.
The major assumptions used by the actuary for both the pensions and other post-
retirement benefits arrangements were:
UK US
arrangements arrangements
at 31 March at 31 March
2002 2002
-------------------------------------------------------------------------------------------------------------------------------
Rate of increase in salaries 4.3% p.a. 4.0% p.a.
Rate of increase in deferred pensions 2.8% p.a. n/a
Rate of increase in pensions in payment 2.8% p.a. n/a
Discount rate 6.0% p.a. 7.5% p.a.
Inflation assumption 2.8% p.a. 4.0% p.a.
=========================================================================================== ============= ==================
Pensions
The group operates defined benefit and defined contribution pension schemes as
described earlier in this Note. Full actuarial valuations were carried out as
described earlier and updated to 31 March 2002 by a qualified independent
actuary. Figures are shown separately for the UK and US arrangements.
The assets in the schemes and the expected long-term rates of return were as
follows:
UK pension US pension
arrangements arrangements
Value at Value at
31 March 2002 31 March 2002
(Pounds)m (Pounds)m
-------------------------------------------------------------------------------------------------------------------------------
Equities 1,881.4 375.1
Bonds 551.1 206.8
Property 159.3 -
Other 31.0 -
------------------------------------------------------------------------------------------- ------------- ------------------
Total market value of assets 2,622.8 581.9
Present value of schemes' past service liabilities (2,352.1) (760.1)
------------------------------------------------------------------------------------------- ------------- ------------------
Excess/(deficit) of schemes' assets over past service liabilitites 270.7 (178.2)
=========================================================================================== ============= ==================
Resulting balance sheet asset/(liability) 186.4* (178.2)
Related deferred tax (liability)/asset (55.9) 67.7
------------------------------------------------------------------------------------------- ------------- ------------------
Net pension asset/(liability) 130.5 (110.5)
=========================================================================================== ============= ==================
* The balance sheet asset which would have arisen under FRS 17 is lower than the
total calculated excess of schemes' assets over past service liabilities, due to
part of the ScottishPower Pension Scheme's past service `surplus' being
designated as "non-recoverable" in FRS 17 terms and therefore excluded from the
balance sheet.
The UK pension arrangements net pension asset comprises assets (net of deferred
tax) of (Pounds)159.1 million and liabilities (net of deferred tax) of
(Pounds)28.6 million.
UK pension US pension
arrangements arrangements
Long-term rates Long-term rates
of return expected of return expected
at 31 March 2002 at 31 March 2002
-------------------------------------------------------------------------------------------------------------------------------
Equities 8.0% p.a. 10.75% p.a.
Bonds 5.3% p.a. 6.5% p.a.
Property 7.0% p.a. n/a
====================================================================================== ================== ==================
Other post-retirement benefits
PacifiCorp provides post-retirement healthcare and life insurance benefits as
described in Note 34(e). Actuarial valuations were carried out as at 31 March
2002 by a qualified independent actuary. The major assumptions used by the
actuary are described in Note 34(e).
The assets in the schemes and the expected long-term rates of return were as
follows:
Value at
31 March 2002
(Pounds)m
-------------------------------------------------------------------------------------------------------------------------------
Equities 117.6
Bonds 67.3
--------------------------------------------------------------------------------------------------------- ------------------
Total market value of assets 184.9
Present value of schemes' liabilities (331.3)
--------------------------------------------------------------------------------------------------------- ------------------
Deficit in the schemes (146.4)
Related deferred tax asset 55.6
--------------------------------------------------------------------------------------------------------- ------------------
Net other post-retirement benefits liability (90.8)
========================================================================================================= ==================
Long-term rates
of return expected
at 31 March 2002
-------------------------------------------------------------------------------------------------------------------------------
Equities 10.75% p.a.
Bonds 6.5% p.a.
========================================================================================================= ==================
ScottishPower Annual Report & Accounts/Form 20-F 2001/02 |95
29 Pensions continued
------------------------------------------------------------------------------------------------------------------------------------
Summary
If the above FRS 17 pensions and other post-retirement benefits assets and
liabilities (net of deferred tax) were recognised in the balance sheet as at 31
March 2002, the group's net assets and profit and loss reserve would be as
follows:
At 31 March
2002
(Pounds)m
-----------------------------------------------------------------------------------------------------------------------------------
Net assets 4,818.1
Reversal of SSAP 24 net pensions/other post-retirement benefits liability (net of deferred tax) 97.4
-------------------------------------------------------------------------------------------------------------------- -----------
Net assets excluding FRS 17 pensions/other post-retirement benefits assets and liabilities (net of deferred tax) 4,915.5
FRS 17 pensions assets (net of deferred tax) 159.1
FRS 17 pensions/other post-retirement benefits liabilities (net of deferred tax) (229.9)
-------------------------------------------------------------------------------------------------------------------- -----------
Net assets including FRS 17 pensions/other post-retirement benefits assets and liabilities (net of deferred tax) 4,844.7
==================================================================================================================== ===========
Profit and loss reserve 1,080.8
Reversal of SSAP 24 net pensions/other post-retirement benefits liability (net of deferred tax) 97.4
-------------------------------------------------------------------------------------------------------------------- -----------
Profit and loss reserve excluding FRS 17 pensions/other post-retirement benefits assets and liabilities
(net of deferred tax) 1,178.2
FRS 17 pensions/other post-retirement benefits assets and liabilities (net of deferred tax) (70.8)
-------------------------------------------------------------------------------------------------------------------- -----------
Profit and loss reserve including FRS 17 pensions/other post-retirement benefits assets and liabilities
(net of deferred tax) 1,107.4
==================================================================================================================== ===========
30 Contingent liabilities
Thus Flotation
In November 1999, the group floated a minority stake in its internet and
telecommunications business, Thus plc. This gave rise to a contingent liability
to corporation tax on chargeable gains, estimated at amounts up to (Pounds)570
million.
On 19 March 2002, the group demerged its residual holding in Thus Group plc (the
new holding company of Thus plc). The charge referred to above could still
arise, in certain circumstances, before 19 March 2007. Members of the
ScottishPower group have agreed to indemnify Thus Group plc for any such
liability, except in circumstances arising without the consent of the
ScottishPower group.
Legal proceedings
The group's businesses are parties to various legal claims, actions and
complaints, certain of which involve material amounts. Although the group is
unable to predict with certainty whether or not it will ultimately be successful
in these legal proceedings or, if not, what the impact might be, the directors
currently believe that disposition of these matters will not have a materially
adverse effect on the group's consolidated Accounts.
31 Financial commitments
------------------------------------------------------------------------------------------------------------------------------------
2002 2001
(a) Analysis of annual commitments under operating leases (Pounds)m (Pounds)m
------------------------------------------------------------------------------------------------------------------------------------
Leases of land and buildings expiring:
Within one year 0.2 0.6
Between one and two years 1.3 1.7
Between two and three years 0.1 0.6
Between three and four years - 0.5
Between four and five years 1.8 0.8
More than five years 1.0 28.7
------------------------------------------------------------------------------------------------- ---------- -----------
4.4 32.9
================================================================================================= ========== ===========
Other operating leases expiring:
Within one year 3.9 5.5
Between one and two years 3.6 5.4
Between two and three years 2.5 5.2
Between three and four years 0.7 1.2
Between four and five years 0.9 0.8
More than five years 0.2 0.4
------------------------------------------------------------------------------------------------- ---------- -----------
11.8 18.5
================================================================================================= ========== ===========
2002 2001
(b) Capital commitments (Pounds)m (Pounds)m
-----------------------------------------------------------------------------------------------------------------------------------
Contracted but not provided 238.9 174.9
================================================================================================= ========== ===========
(c) Other contractual commitments
(i) Under contractual arrangements in the UK, the group has the following
purchase commitments at 31 March 2002:
2003 2004 2005 2006 2007 Thereafter Total
(Pounds)m (Pounds)m (Pounds)m (Pounds)m (Pounds)m (Pounds)m (Pounds)m
----------------------------------------------------------------------------------------------------------------------------------
Commitments to purchase in year 789.7 696.3 684.1 270.1 263.1 1,292.2 3,995.5
======================================= ========= ========= ========= ========= ========= ========= =========
(ii) In the US, PacifiCorp manages its energy resource requirements by
integrating long-term firm, short-term and spot market purchases with its own
generating resources to economically operate the system (within the boundaries
of Federal Energy Regulatory Commission requirements) and meet commitments for
wholesale sales and retail load growth. The long-term wholesale sales
commitments include contracts with minimum sales requirements of (Pounds)237.6
million, (Pounds) 219.5 million, (Pounds)188.3 million, (Pounds)161.2 million
and (Pounds)134.5 million for the years 2003 to 2007 respectively. As part of
its energy resource portfolio, PacifiCorp acquires a portion of its power
through long-term purchases and/or exchange agreements which require minimum
fixed payments of (Pounds)244.1 million, (Pounds)234.6 million, (Pounds)237.6
million, (Pounds)235.3 million and (Pounds)242.3 million for the years 2003 to
2007 respectively. The purchase contracts include agreements with the Bonneville
Power Administration, the Hermiston Plant and a number of co-generating
facilities.
Excluded from the minimum fixed annual payments above are commitments to
purchase power from several hydro-electric projects under long-term arrangements
with public utility districts. These purchases are made on a `cost-of-service'
basis for a stated percentage of project output and for a like percentage of
project annual costs (operating expenses and debt service). PacifiCorp is
required to pay its portion of operating expenses and its portion of the debt
service, whether or not any power is produced.
ScottishPower Annual Report & Accounts/Form 20-F 2001/02 |96
Notes to the Group Balance Sheet
as at 31 March 2002 - continued
31 Financial commitments continued
-------------------------------------------------------------------------------
The arrangements provide for non-withdrawable power and the majority also
provide for additional power, withdrawable by the public utility districts upon
one to five years' notice. For 2002, these purchases represented approximately
1.9% of PacifiCorp's energy requirements. At 31 March 2002, PacifiCorp's share
of long-term arrangements with public utility districts were as follows:
Annual
Year contract Percentage costs*
Generating Facility expires of output Capacity (kw) (Pounds)m
-------------------------------------------------------------------------------
Wanapum 2009 18.9% 155,444 4.9
Priest Rapids 2005 13.9% 109,602 2.8
Rocky Reach 2011 5.3% 64,297 2.2
Wells 2018 6.9% 59,617 1.4
----------------------------------------------------- ----------- -------
Total 388,960 11.3
===================================================== =========== =======
*The annual costs include debt service costs of (Pounds)4.4 million.
PacifiCorp's minimum debt service obligation at 31 March 2002 was (Pounds)6.3
million, (Pounds)6.3 million, (Pounds)5.6 million, (Pounds)7.0 million and
(Pounds)7.0 million for the years 2003 to 2007, respectively.
(iii) Short-term wholesale sales and purchased power contracts
At 31 March 2002, PacifiCorp had short-term wholesale forward sales commitments
that included contracts with minimum sales requirements of (Pounds)107.6 million
for 2003. At 31 March 2002, short-term forward purchase agreements require
minimum fixed payments of (Pounds)162.4 million for 2003.
(iv) Fuel contracts
PacifiCorp has `take or pay' coal and natural gas contracts that require minimum
fixed payments of (Pounds)113.1 million, (Pounds)109.8 million, (Pounds)103.0
million, (Pounds)92.3 million and (Pounds)81.0 million for the years 2003 to
2007 respectively.
(v) At 31 March 2002, PPM had purchase commitments of (Pounds)340.7 million of
which (Pounds)227.8 million relates to the years 2003 to 2007.
32 Related party transactions
-----------------------------------------------------------------------------------------------------------------------------------
(a) Trading transactions and balances arising in the normal course of business
Sales/
(purchases)
to/(from)
other group Amounts due
companies from/(to) other
during the group companies
year as at 31 March
2002 2001 2000 2002 2001
Related party Related party relationship to group (Pounds)m (Pounds)m (Pounds)m (Pounds)m (Pounds)m
-----------------------------------------------------------------------------------------------------------------------------------
Sales by related parties
Scottish Electricity Settlements Limited 50% owned joint venture 5.3 6.2 8.7 1.1 1.4
ScotAsh Limited 50% owned joint venture 0.6 0.4 0.2 0.2 0.4
South Coast Power Limited 50% owned joint venture 46.5 25.1 - 3.0 3.5
CeltPower Limited 50% owned joint venture 1.7 1.7 1.8 0.3 0.1
Calanais Limited* 50% owned joint venture - 69.0 - - 0.6
Thus** Subsidiary 0.9 - - 12.0 -
Purchases by related parties
Scottish Electricity Settlements Limited 50% owned joint venture (0.2) (0.2) (0.4) - -
ScotAsh Limited 50% owned joint venture (0.2) (0.2) (0.3) - (0.2)
South Coast Power Limited 50% owned joint venture (7.8) (3.2) (0.3) (0.5) (0.6)
Klamath co-generation plant Joint arrangement (24.1) - - (2.2) -
CeltPower Limited 50% owned joint venture (0.3) (0.3) (0.4) - -
Calanais Limited* 50% owned joint venture - (13.0) - - (0.8)
Thus** Subsidiary (0.1) - - (5.2) -
N.E.S.T. Makers Limited 50% owned joint venture (0.3) - - - -
============================================================================= ======== ======= ======== ========= ========
In addition to the above, during the year ended 31 March 2002, PacifiCorp made
management and similar charges to Powercor of (Pounds)nil as a result of the
disposal of Powercor by PacifiCorp in September 2000 (31 March 2001 (Pounds)1.4
million, 30 November 1999 to 31 March 2000 (Pounds)2.0 million). At 31 March
2002, Powercor owed the group (Pounds)nil (2001 (Pounds)nil, 2000 (Pounds)21.9
million).
During the year ended 31 March 2002, ScottishPower made management and similar
charges to ScotAsh Limited of (Pounds)0.4 million (2001 (Pounds)0.2 million,
2000 (Pounds)0.1 million).
*On 23 March 2001 the group disposed of its 50% holding in Calanais Limited; as
a result it ceased to be a joint venture from this date.
ScottishPower Annual Report & Accounts/Form 20-F 2001/02 |97
32 Related party transactions continued
-----------------------------------------------------------------------------------------------------------------------------------
(b) Funding transactions and balances arising in the normal course of business
Interest payable Amounts due
to other group to other group
companies during companies as
the year at 31 March
2002 2001 2002 2001
Related party Related party relationship to group Note (Pounds)m (Pounds)m (Pounds)m (Pounds)m
-----------------------------------------------------------------------------------------------------------------------------------
Scottish Electricity Settlements Limited 50% owned joint venture (1.1) (1.4) (14.7) (16.6)
ScotAsh Limited 50% owned joint venture - - (2.4) (3.0)
South Coast Power Limited 50% owned joint venture (1.1) - (13.5) -
RoboScot (38) Limited 50% owned joint venture - - (5.4) (5.4)
Thus** Subsidiary (i) - - (5.4) -
N.E.S.T. Makers Limited 50% owned joint venture - - (0.8) -
===================================================================================================================================
(i) This balance represents (Pounds)1.1 million of loans and (Pounds)4.3 million
payable in respect of finance leases.
**On 19 March 2002 the group demerged Thus. The related party sales and
purchases represent those transactions between ScottishPower and Thus for the
period from 20 March to 31 March 2002.
33 Thus Group plc demerger
-------------------------------------------------------------------------------
On 19 March 2002, the group demerged Thus Group plc ("Thus"). The demerger of
Thus was preceeded by an open offer of approximately (Pounds)275 million of new
equity shares in Thus which resulted in ScottishPower's equity interest in Thus
temporarily increasing from 50.1% to 72.4%, and an increase in goodwill of
(Pounds)34.4 million. Thus' results for the period to 19 March 2002 have been
reported under discontinued operations in the ScottishPower accounts for the
year ended 31 March 2002 and prior years. The demerger of Thus was accounted for
as a dividend in specie.
Notes (Pounds)m
-------------------------------------------------------------------------------
Intangible fixed assets - goodwill 16 62.6
Tangible fixed assets 17 468.8
Fixed assets investments 18 24.2
Current assets 104.5
Creditors: amounts falling due within one year (109.9)
Provisions for liabilities and charges
- Other provisions 23 (0.9)
------------------------------------------------------------------- --------
Book value of Thus net assets disposed 549.3
Minority interest share of net assets 28 (127.4)
------------------------------------------------------------------- --------
ScottishPower's share of Thus net assets disposed 421.9
Goodwill previously charged to reserves written back 27 14.7
------------------------------------------------------------------- --------
Dividend in specie 436.6
=================================================================== ========
34 Summary of differences between UK and US Generally Accepted Accounting
Principles (`GAAP')
-----------------------------------------------------------------------------------------------------------------------------------
The consolidated Accounts of the group are prepared in accordance with UK GAAP which differs in certain significant respects from
US GAAP. The effect of the US GAAP adjustments to (loss)/profit for the financial year and equity shareholders' funds are set out
in the tables below.
Year ended 31 March
2002 2001 2000
(a) Reconciliation of (loss)/profit for the financial year to US GAAP: Notes (Pounds)m (Pounds)m (Pounds)m
--------------------------------------------------------------------------------------------------------------------------------
(Loss)/profit for the financial year under UK GAAP (987.1) 307.5 885.0
US GAAP adjustments:
Amortisation of goodwill (i) (23.5) (35.9) (34.4)
Disposal of businesses (ii) 279.1 - -
US regulatory assets (iii) 95.3 73.8 -
Pensions (iv) 40.0 95.5 44.8
Impairment on demerger of Thus (v) (243.7) - -
Depreciation on revaluation uplift (vi) 3.4 3.4 3.4
Decommissioning and mine reclamation liabilities (vii) (21.8) (32.3) (6.7)
PacifiCorp Transition Plan costs (viii) (29.9) 108.2 -
FAS 133 adjustment (ix) 144.5 - -
Other (xvi) (17.7) (0.4) (8.0)
Re-classification as extraordinary item (x) 12.0 - 15.9
--------------------------------------------------------------------------------------------- --------- -------- ---------
(749.4) 519.8 900.0
Deferred tax effect of US GAAP adjustments (xi) (67.6) (133.0) (19.2)
--------------------------------------------------------------------------------------------- --------- -------- ---------
(817.0) 386.8 880.8
Extraordinary item (net of tax) (x) (8.4) - (11.1)
--------------------------------------------------------------------------------------------- --------- -------- ---------
(Loss)/profit for the financial year under US GAAP before cumulative adjustment
for FAS 133 (825.4) 386.8 869.7
Cumulative adjustment for FAS 133 (ix) (61.6) - -
============================================================================================= ========= ======== =========
(Loss)/profit for the financial year under US GAAP (887.0) 386.8 869.7
============================================================================================= ========= ======== =========
(Loss)/earnings per share under US GAAP (xiv) (44.91)p 21.13p 62.59p
============================================================================================= ========= ======== =========
Diluted (loss)/earnings per share under US GAAP (xiv) (44.91)p 21.05p 62.16p
============================================================================================= ========= ======== =========
(Loss)/earnings per share under US GAAP have been calculated before the
cumulative adjustment for FAS 133.
ScottishPower Annual Report & Accounts/Form 20-F 2001/02 |98
Notes to the Group Balance Sheet
as at 31 March 2002 - continued
34 Summary of differences between UK and US Generally Accepted Accounting
Principles (`GAAP') continued
---------------------------------------------------------------------------------------------------------------------------------
31 March 31 March
2002 2001
(b) Effect on equity shareholders' funds of differences between UK GAAP and US GAAP: Notes (Pounds)m (Pounds)m
---------------------------------------------------------------------------------------------------------------------------------
Equity shareholders' funds under UK GAAP 4,731.4 5,893.2
US GAAP adjustments:
Goodwill (i) 572.3 1,349.9
Business combinations (i) (174.2) (188.7)
Amortisation of goodwill (i) (84.2) (172.7)
ESOP shares held in trust (xii) (38.9) (51.1)
US regulatory assets (iii) 1,042.8 661.2
Pensions (iv) 222.9 245.0
Cash dividends (xiii) 126.1 119.4
Revaluation of fixed assets (vi) (54.0) (229.0)
Depreciation on revaluation uplift (vi) 8.5 11.9
Decommissioning and mine reclamation liabilities (vii) 60.7 82.5
PacifiCorp Transition Plan costs (viii) 86.9 117.2
FAS 133 adjustment (ix) (308.2) -
Other (xvi) (3.4) 12.1
Deferred tax:
Effect of US GAAP adjustments (xi) (316.9) (351.0)
Effect of differences in methodology (xi) (21.3) (37.0)
---------------------------------------------------------------------------------------------------------- ------- -------
Equity shareholders' funds under US GAAP 5,850.5 7,462.9
========================================================================================================== ======= =======
(i) Goodwill and business combinations
Goodwill
Under UK GAAP, goodwill arising from the purchase of operating entities before
31 March 1998 has been written off directly to reserves. Additionally, UK GAAP
requires that on subsequent disposal of these entities any goodwill previously
taken directly to reserves is then charged in the profit and loss account
against the profit or loss on disposal. Goodwill arising on acquisitions after
31 March 1998 is capitalised and amortised through the profit and loss account
over its useful economic life.
Under US GAAP, goodwill arising from the purchase of operating entities should
be held as an intangible asset in the balance sheet and amortised over its
expected useful life.
The goodwill adjustment is made to recognise goodwill previously written off to
reserves under UK GAAP as an intangible asset under US GAAP.
This goodwill, which is capitalised under US GAAP, is then amortised on a
straight line basis over its estimated useful life of 40 years with the effect
being a reduction in profit reflecting the amortisation charge for the period.
Business combinations
In addition to re-instating the goodwill calculated under UK GAAP as described
above, goodwill must also be recalculated in accordance with US GAAP. This is
required due to differences between UK GAAP and US GAAP in the determination of
acquisition price and valuation of assets and liabilities at the acquisition
date. The adjustment referred to as business combinations reflects principally
the impact of recalculating the goodwill arising on the acquisitions of Manweb
and PacifiCorp under US GAAP.
In cases where traded equity securities are exchanged as consideration, UK GAAP
requires the fair value of consideration to be determined at the date the
transaction is completed, while US GAAP requires the fair value of such
consideration to be determined at the date the acquisition is announced.
(ii) Disposal of businesses
Under UK GAAP the loss on disposal of and withdrawal from Appliance Retailing
and the provision for loss on disposal of Southern Water were calculated based
on net asset value, together with the goodwill previously written off to
reserves.
Under US GAAP the same methodology was applied, however the net asset value
under US GAAP differed from that under UK GAAP. The principal differences relate
to the amortisation of goodwill which had been recognised as an intangible asset
under US GAAP but had been written off to reserves under UK GAAP and the
revaluation of certain tangible fixed assets, which is not permitted under US
GAAP but is permitted under UK GAAP.
(iii) US regulatory assets
Statement of Financial Accounting Standards ("FAS") 71 `Accounting for the
Effects of Certain Types of Regulation' establishes US GAAP for utilities in the
US whose regulators have the power to approve and/or regulate rates that may be
charged to customers. Provided that, through the regulatory process, the utility
is substantially assured of recovering its allowable costs by the collection of
revenue from its customers, such costs not yet recovered are deferred as
regulatory assets. Due to the different regulatory environment, no equivalent
GAAP applies in the UK.
Under UK GAAP, the group's policy is to recognise regulatory assets established
in accordance with FAS 71 only where they comprise rights or other access to
future economic benefits which have arisen as a result of past transactions or
events which have created an obligation to transfer economic benefits to a third
party.
The impact of the application of different accounting policies is that US
regulatory assets amounting to (Pounds)1,042.8 million (2001 (Pounds)661.2
million) are not recognised under UK GAAP, including deferred excess power costs
and certain FAS 133 balances.
Profits under US GAAP are consequently increased by (Pounds)95.3 million in 2002
(2001 (Pounds)73.8 million), representing the deferral of costs expensed under
UK GAAP net of amortisation of regulatory assets recognised under US GAAP.
US regulatory assets relating to the PacifiCorp Transition Plan costs are
discussed in note (viii) below.
(iv) Pension costs
The fundamental differences between UK GAAP and US GAAP are as follows:
(a) Under UK GAAP, the annual pension charge is determined so that it is a
substantially level percentage of the current and expected future payroll. Under
US GAAP, the aim is to accrue the cost of providing pension benefits in the year
in which the employee provides the related service in accordance with FAS 87,
which requires readjustment of the significant actuarial assumptions annually to
reflect current market and economic conditions.
(b) Under UK GAAP, pension liabilities are usually discounted using an interest
rate that represents the expected long-term return on plan assets. Under US
GAAP, pension liabilities are discounted using the current rates at which the
pension liability could be settled.
(c) Under UK GAAP, variations from plan can be aggregated and amortised over the
remaining employee service lives. Under US GAAP, variations from plan must be
amortised separately over remaining service lives.
(d) Under UK GAAP, alternative bases can be used to value plan assets. Under US
GAAP, plan assets should be valued at market or at market related values.
(v) Impairment on demerger of Thus
Under UK GAAP, the demerger dividend is calculated based on the book value of
the net assets disposed of as a result of the demerger.
Under US GAAP, the demerger dividend is calculated based on the market value of
the shares at the demerger date and the difference between this and the book
value of net assets disposed of is disclosed as an impairment charge under US
GAAP.
ScottishPower Annual Report & Accounts/Form 20-F 2001/02 |99
34 Summary of differences between UK and US Generally Accepted Accounting
Principles (`GAAP') continued
(vi) Revaluation of fixed assets
The revaluation of assets is not permitted under US GAAP. Accordingly, the
reconciliation restates fixed assets to historical cost and the depreciation
charge has been adjusted.
(vii) Decommissioning and mine reclamation liabilities
Under UK GAAP, future decommissioning costs are provided for, on a discounted
basis, generally at the inception of the asset life with a corresponding
increase to the cost of the asset. This increased cost is depreciated over the
useful life of the asset. Under US GAAP, for regulated industries,
decommissioning costs are accounted for by depreciating the related tangible
fixed asset to a negative amount which equates to the estimated decommissioning
costs. In respect of mine reclamation costs UK GAAP requires the discounted
future costs of reclamation to be provided for, with a corresponding increase to
the cost of the mine assets. Under US GAAP, anticipated mine reclamation costs
are accrued over the life of the mine asset.
(viii) PacifiCorp Transition Plan costs
Under UK GAAP, PacifiCorp Transition Plan costs were recognised as an expense in
the profit and loss account at the date of the announcement of the Plan. Costs
were provided for in accordance with FRS 12 `Provisions, contingent liabilities
and contingent assets'.
Under US GAAP, PacifiCorp Transition Plan costs are accounted for as regulatory
assets and are being amortised through the income statement. Costs have been
provided for in accordance with Emerging Issues Task Force No. 94-3 `Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)' and FAS 88
`Employers' Accounting for Settlements and Curtailments of Defined Benefit
Pension Plans and for Termination Benefits'.
(ix) FAS 133 - derivative instruments and hedging activities
Under UK GAAP derivatives designated as used for non-trading purposes are
accounted for on a consistent basis with the asset, liability or position being
hedged. Under US GAAP, the group adopted FAS 133 `Accounting for Derivative
Instruments and Hedging Activities,' as amended by FAS 137 'Accounting for
Derivative Instruments and Hedging Activities - Deferral of the Effective Date
of FASB Statement No. 133' and FAS 138 `Accounting for Certain Derivative
Instruments and Certain Hedging Activities', with effect from 1 April 2001. The
transitional adjustment at this date has been reported as the cumulative
adjustment for FAS 133. FAS 133 requires recognition of all derivatives, as
defined in the standard, on the balance sheet at fair value. Derivatives, or any
portion thereof, that are not an effective hedge, are adjusted to fair value
through income. If a derivative qualifies as an effective hedge, changes in the
fair value of the derivative are either offset against the change in fair value
of the hedged asset, liability, or firm commitment recognised in income, or are
recognised in accumulated other comprehensive income until the hedged items are
recognised in earnings. The effects of changes in fair value of certain
derivative instruments entered into to hedge future retail resource requirements
in the group's US regulated business are subject to regulation and therefore are
deferred pursuant to FAS 71. Contracts that qualify as normal purchases and
normal sales are excluded from the requirements of FAS 133. The realised gains
and losses on these contracts are reflected in the income statement at the
contract settlement date. The total FAS 133 adjustment included within equity
shareholders' funds of (Pounds)308.2 million at 31 March 2002 is offset by
(Pounds)328.9 million included within US regulatory assets relating to
PacifiCorp's regulated activities which have been deferred as a regulatory asset
under FAS 71 on the basis of approvals received from Public Utility Commissions
to adopt this accounting treatment.
(x) Extraordinary item
Under UK GAAP, certain costs of early debt repayment have been treated as
exceptional interest costs. Under US GAAP, costs of early debt repayment are
classified as extraordinary items. The tax credit on the extraordinary item was
(Pounds)3.6 million for the year ended 31 March 2002 and (Pounds)4.8 million for
the year ended 31 March 2000.
(xi) Deferred tax
Under UK GAAP, FRS 19 `Deferred tax', requires full provision for deferred tax
at future enacted rates. Provision is only made in respect of assets revalued
for accounting purposes where a commitment exists to sell the asset at the
balance sheet date.
Under US GAAP, full provision for deferred tax is required to the extent that
accounting profit differs from taxable profit due to temporary timing
differences. Provision is made based on enacted tax law.
The item effect of US GAAP adjustments' reflects the additional impact of
making full provision for deferred tax in respect of adjustments made in
restating the balance sheet to US GAAP.
The item `effect of differences in methodology' reflects the impact of making
full provision for deferred tax under US GAAP compared to UK GAAP.
(xii) ESOP shares held in trust
Under UK GAAP, shares held by employee share ownership trusts are recorded as
fixed asset investments at cost less amounts written off. Under US GAAP, shares
held in trust are recorded at cost in the balance sheet as a deduction from
shareholders' funds. Details of the group's employee share ownership trusts are
set out in Note 18.
(xiii) Cash dividends
Under UK GAAP, final ordinary cash dividends are recognised in the financial
year in respect of which they are proposed by the Board of Directors. Under US
GAAP, such dividends are not recognised until they are formally declared by the
Board of Directors.
(xiv) (Loss)/earnings per share
(Loss)/earnings per ordinary share have been calculated by dividing the
(loss)/profit for the financial year under US GAAP by the weighted average
number of ordinary shares in issue during the financial year, based on the
following information:
2002 2001 2000
--------------------------------------------------------------------------------------------------------------------------------
(Loss)/profit for the financial year under US GAAP ((Pounds) million) (887.0) 386.8 869.7
Basic weighted average share capital (number of shares, millions) 1,837.8 1,830.3 1,389.6
Diluted weighted average share capital (number of shares, millions) 1,840.1 1,837.4 1,399.2
================================================================================================= ======== ======== ========
(Loss)/earnings per share
Earnings per share under US GAAP - continuing operations 19.15p 13.48p 4.89p
(Loss)/earnings per share under US GAAP - discontinued operations (63.60)p 7.65p 58.49p
Loss per share under US GAAP - extraordinary item (net of tax) (0.46)p - (0.79)p
------------------------------------------------------------------------------------------------- -------- -------- --------
(Loss)/earnings per share under US GAAP before cumulative adjustment for FAS 133 (44.91)p 21.13p 62.59p
Loss per share under US GAAP - cumulative adjustment for FAS 133 (3.35)p - -
------------------------------------------------------------------------------------------------- -------- -------- --------
(Loss)/earnings per share under US GAAP (48.26)p 21.13p 62.59p
================================================================================================= ======== ======== ========
Diluted (loss)/earnings per share
Diluted earnings per share under US GAAP - continuing operations 19.15p 13.43p 4.86p
Diluted (loss)/earnings per share under US GAAP - discontinued operations (63.60)p 7.62p 58.09p
Diluted loss per share under US GAAP - extraordinary item (net of tax) (0.46)p - (0.79)p
------------------------------------------------------------------------------------------------- -------- -------- --------
Diluted (loss)/earnings per share under US GAAP before cumulative adjustment for FAS 133 (44.91)p 21.05p 62.16p
Diluted loss per share under US GAAP - cumulative adjustment for FAS 133 (3.35)p - -
------------------------------------------------------------------------------------------------- -------- -------- --------
Diluted (loss)/earnings per share under US GAAP (48.26)p 21.05p 62.16p
================================================================================================= ======== ======== ========
ScottishPower Annual Report & Accounts/Form 20-F 2001/02 |100
Notes to the Group Balance Sheet
as at 31 March 2002 - continued
34 Summary of differences between UK and US Generally Accepted Accounting
Principles (`GAAP') continued
The difference between the basic and the diluted weighted average share capital
is wholly attributable to outstanding share options and shares held in trust for
the group's Employee Share Ownership Plan. In accordance with FAS 128 `Earnings
per Share' the diluted loss per share for the year ended 31 March 2002 does not
assume the exercise of securities that have an antidilutive effect on the loss
per share. The (loss)/earnings per share detailed above for discontinued
operations have been calculated based on US GAAP earnings which are net of
(Pounds)37.0 million (2001 (Pounds)36.3 million, 2000 (Pounds)18.0 million) of
interest and similar charges and tax charges of (Pounds)18.8 million (2001
(Pounds)5.8 million tax credit, 2000 (Pounds)149.3 million tax charge). The
group's charge for interest and similar charges has been allocated between
continuing and discontinued operations on the basis of external and internal
borrowings of the respective operations.
(xv) Additional measures of performance
As permitted under UK GAAP, (loss)/earnings per share have been presented
including and excluding the impact of exceptional items and goodwill
amortisation to provide an additional measure of underlying performance. UK GAAP
permits the presentation of more than one measure of (loss)/earnings per share
provided that all such measures are clearly explained and given equal prominence
on the face of the profit and loss account. In accordance with US GAAP,
(loss)/earnings per share have been presented above based on US GAAP
(loss)/earnings, without adjustments for the impact of UK GAAP exceptional items
and goodwill amortisation. Such additional measures of underlying performance
are not permitted under US GAAP.
(xvi) Other
Other differences between UK and US GAAP are not individually material and
relate to post-retirement benefits other than pensions, capitalisation of
finance costs, available-for-sale securities, energy exchange contracts and
stock based compensation expense.
UK GAAP permits the use of long-term discount rates in determining the provision
for post-retirement benefits other than pensions. US GAAP requires the use of
current market rates.
Under UK GAAP, only interest on debt funding may be capitalised during the
period of construction. Under US GAAP, as applied by regulated electricity
utilities, both the cost of debt and the cost of equity applicable to domestic
utility properties are capitalised during the period of construction.
Under UK GAAP, obligations under energy exchange contracts are valued based on
the forecast cost at the balance sheet date of delivering energy under the
contract. Under US GAAP, for regulated utilities, obligations under energy
exchange contracts are valued based on the cost avoided in receiving delivery of
energy under the contract.
Available-for-sale securities
UK GAAP permits current asset investments to be valued at the lower of cost and
net realisable value. US GAAP requires that such investments, insofar as they
are available-for-sale securities, are marked-to-market with movements in market
value being included in other comprehensive income.
The book value and estimated fair value of available-for-sale securities were as
follows:
At 31 March 2002
Gross Gross
unrealised unrealised Estimated
Book value gains losses fair value
(Pounds)m (Pounds)m (Pounds)m (Pounds)m
--------------------------------------------------------------------------------
Money market account 1.9 - - 1.9
Debt securities 14.4 0.3 (1.8) 12.9
Equity securities 27.7 2.7 (5.3) 25.1
-------------------------------- --------- --------- ---------- ---------
Total 44.0 3.0 (7.1) 39.9
================================ ========= ========= ========== =========
At 31 March 2001
Gross Gross
unrealised unrealised Estimated
Book value gains losses fair value
(Pounds)m (Pounds)m (Pounds)m (Pounds)m
--------------------------------------------------------------------------------
Money market account 1.9 - - 1.9
Debt securities 13.6 0.3 (1.7) 12.2
Equity securities 29.7 3.8 (6.7) 26.8
-------------------------------- --------- ---------- ---------- ---------
Total 45.2 4.1 (8.4) 40.9
================================ ========= ========== ========== =========
The quoted market price of securities at 31 March is used to estimate the
securities' fair value.
The book value and estimated fair value of debt securities by contractual
maturities at 31 March 2002 and 2001 are shown below. Actual maturities may
differ from contractual maturities because borrowers may have the right to call
or pre-pay obligations with or without call or prepayment penalties.
At 31 March 2002 At 31 March 2001
Estimated Estimated
Book value fair value Book value fair value
(Pounds)m (Pounds)m (Pounds)m (Pounds)m
--------------------------------------------------------------------------------------------------
Debt securities
Due within one year - - 0.4 0.4
Due between one and five years 3.2 2.9 3.5 3.2
Due between five and ten years 4.6 4.4 3.8 3.4
Due after ten years 6.6 5.6 5.9 5.2
Money market account 1.9 1.9 1.9 1.9
Equity securities 27.7 25.1 29.7 26.8
---------------------------------------------- -------- --------- ---------- ---------
Total 44.0 39.9 45.2 40.9
============================================== ======== ========= ========== =========
Proceeds, gross gains and gross losses from realised sales of available-for-sale
securities using the specific identification method were as follows:
Year ended 31 March
2002 2001 2000
(Pounds)m (Pounds)m (Pounds)m
-------------------------------------------------------------------------
Proceeds 56.4 54.0 52.0
=================================== ======== ======= =======
Gross gains 2.1 5.3 3.4
Gross losses (5.6) (3.6) (2.1)
----------------------------------- -------- ------- -------
Net (losses)/gains (3.5) 1.7 1.3
=================================== ======== ======= =======
ScottishPower Annual Report & Accounts/Form 20-F 2001/02 |101
34 Summary of differences between UK and US Generally Accepted Accounting
Principles (`GAAP') continued
-------------------------------------------------------------------------------------------------------
FAS 123 Stock-Based Compensation
Under US GAAP, the group applies Accounting Principles Board Opinion No. 25
("APB 25"), `Accounting for Stock Issued to Employees', and related
interpretations in accounting for its plans and a compensation expense has been
recognised accordingly for its Share Option Schemes. As the group applies APB 25
in accounting for its plans, under FAS 123, `Accounting for Stock-Based
Compensation', it has adopted the disclosure only option in relation to its
Share Option Schemes. Had the group determined compensation cost based on the
fair value at the grant date for its share options under FAS 123, the group's
(loss)/profit for financial year under US GAAP and (loss)/earnings per share
under US GAAP would have been reduced to the pro forma amounts below:
2002 2001 2000
-------------------------------------------------------------------------------------------------------
(Loss)/profit for financial year under US GAAP ((Pounds)million) (887.0) 386.8 869.7
Pro forma ((Pounds)million) (890.0) 380.6 864.6
(Loss)/earnings per share under US GAAP (48.26)p 21.13p 62.59p
Pro forma (48.43)p 20.79p 62.22p
-------------------------------------------------------------------------- -------- ------ -------
The weighted average fair value of options granted during the year was
(Pounds)8.6 million (2001 (Pounds)1.6 million, 2000 (Pounds)8.7 million). The
fair value of each option grant was estimated on the date of grant using the
Black-Scholes option-pricing model with the following assumptions used:
2002 2001 2000
------------------------------------------------------------------------------
Dividend yield 6.7% 6.4% 4.5%
Risk-free interest rate 4.8% 4.9% 6.0%
Volatility 30.0% 24.0% 30.0%
Expected life of the options (years) 4 4 4
------------------------------------------------------ ----- ------ -------
The weighted average life of the share options outstanding as at 31 March 2002,
March 2001 and March 2000 was as follows:
2002 2001 2000
(years) (years) (years)
------------------------------------------------------------------------------
ScottishPower Sharesave Schemes 3 2 3
Southern Water Sharesave Scheme 2 2 2
Executive Share Option Scheme 2 2 2
Executive Share Option Plan 2001 9 - -
PacifiCorp Stock Incentive Plan 6 6 8
------------------------------------------------------ ----- ------ -------
(xvi) Reclassifications
The reconciliations of (loss)/profit for the financial year and equity
shareholders' funds at the year end from UK GAAP to US GAAP only include those
items which have a net effect on (loss)/profit or equity shareholders' funds.
There are other GAAP differences, not included in the reconciliations, which
would affect the classification of assets and liabilities or of income and
expenditure. The principal items which would have such an effect are as follows:
- under UK GAAP debt issue costs are deducted from the carrying value of the
related debt instrument. US GAAP requires such costs to be included as an
asset
- under UK GAAP customer contributions in respect of fixed assets are
generally credited to a separate deferred income account. Under US GAAP such
contributions are netted off against the cost of the related fixed assets
- items included as exceptional items under UK GAAP are either classified as
extraordinary items or operating items under US GAAP
- under US GAAP, transmission and distribution costs would be included in
cost of sales, and gross profit from continuing operations would be
calculated after deducting these expenses
- under UK GAAP, the investor's interest in the turnover and results of a
joint venture or associate are disclosed gross. The investor's share of the
interest and taxation are disclosed separately as a component of the group
interest and taxation lines. Under US GAAP, the investor's interest in the
net results of joint ventures and associates is disclosed as a single line in
the income statement, net of interest and taxation.
Consolidated statement of comprehensive income
Under US GAAP, certain items shown as components of common equity must be more
prominently reported in a separate statement as components of comprehensive
(loss)/income.
The consolidated statement of comprehensive (loss)/income is set out below:
2002 2001 2000
(Pounds)m (Pounds)m (Pounds)m
---------------------------------------------------------------------------------------------------------------------------------
(Loss)/profit for the financial year under US GAAP after cumulative adjustment for FAS 133 (887.0) 386.8 869.7
Other comprehensive (loss)/income
- Foreign currency translation adjustment (29.7) 671.2 25.1
- Unrealised (loss)/gain on available-for-sale securities, net of tax credit/(charge)
of (Pounds)0.1 million (2001 (Pounds)4.0 million), 2000 (Pounds)(2.1) million) (0.1) (6.5) 3.4
- Pensions, net of tax credit of (Pounds)23.6 million (38.5) - -
- Cumulative effect of accounting change - FAS 133, net of tax charge of (Pounds)261.4 million 421.3 - -
- FAS 133 - loss on derivative financial instruments recognised in net income, net of tax credit
of (Pounds)47.6 million (76.6) - -
- FAS 133 - unrealised loss on derivative financial instruments, net of tax credit of(Pounds)
219.9 million (354.7) - -
--------------------------------------------------------------------------------------------------- ------- -------- -------
Total comprehensive (loss)/income under US GAAP (965.3) 1,051.5 898.2
=================================================================================================== ======= ======== =======
The accumulated balances related to each component of other comprehensive
(loss)/income are as follows:
2002 2001 2000
(Pounds)m (Pounds)m (Pounds)m
----------------------------------------------------------------------------------------------------------------------------------
Foreign currency translation adjustment 666.6 696.3 25.1
Unrealised (loss)/gain on available-for-sale securities, net of tax credit of (Pounds)2.0 million (3.2) (3.1) 3.4
Pensions, net of tax credit of (Pounds)23.6 million (38.5) - -
Unrealised loss on derivative financial instruments, net of tax credit of (Pounds)6.1 million (10.0) - -
=================================================================================================== ======= ====== ======
Consolidated statement of cash flows
The consolidated statement of cash flows prepared in accordance with FRS 1
(Revised) presents substantially the same information as that required under US
GAAP. Under US GAAP, however, there are certain differences from UK GAAP with
regard to the classification of items within the cash flow statement and with
regard to the definition of cash and cash equivalents.
Under UK GAAP, cash flows are presented separately for operating activities,
dividends received from joint ventures, returns on investments and servicing of
finance, taxation, capital expenditure and financial investment, acquisitions
and disposals, equity dividends paid, management of liquid resources, and
financing.
Under US GAAP, only three categories of cash flow activity are reported;
operating activities, investing activities and financing activities. Cash flows
from dividends received from joint ventures, returns on investments and
servicing of finance and taxation would be included as operating activities
under US GAAP. Equity dividends paid would be included under financing
activities under US GAAP.
Under US GAAP, cash and cash equivalents are not offset by bank overdrafts
repayable within 24 hours from the date of the advance, as is the case under UK
GAAP and instead such bank overdrafts are classified within financing
activities.
ScottishPower Annual Report & Accounts/Form 20-F 2001/02 |102
Notes to the Group Balance Sheet
as at 31 March 2002 - continued
34 Summary of differences between UK and US Generally Accepted Accounting
Principles (`GAAP') continued
The consolidated cash flow statement prepared in conformity with UK GAAP is set
out on page 71. In this statement an additional measure, free cash flow, is
included which is not an accepted measure under US GAAP. This measure represents
cash flow from operations after adjusting for dividends received from joint
ventures, returns on investments and servicing of finance and taxation. UK
investors regard free cash flow as the money available to management annually to
be allocated among a number of options including capital expenditure, payments
of dividends and the financing of acquisitions.
The consolidated statement of cash flows under US GAAP is set out below:
2002 2001 2000
(Pounds)m (Pounds)m (Pounds)m
---------------------------------------------------------------------------------------------------------------------------------
Cash inflow from operating activities 1,248.4 1,411.6 1,117.5
Dividends received from joint ventures 0.3 2.1 0.5
Returns on investments and servicing of finance (377.8) (373.5) (258.4)
Taxation (85.0) (152.6) (154.3)
-------------------------------------------------------------------------------------- --------- --------- ----------
Net cash provided by operating activities 785.9 887.6 705.3
-------------------------------------------------------------------------------------- --------- --------- ----------
Capital expenditure and financial investment (1,148.3) (1,081.4) (842.3)
Acquisitions and disposals 98.7 482.9 718.8
-------------------------------------------------------------------------------------- --------- --------- ----------
Net cash used in investing activities (1,049.6) (598.5) (123.5)
-------------------------------------------------------------------------------------- --------- --------- ----------
Financing 929.1 196.1 (121.2)
Movement in bank overdrafts (17.8) 11.1 23.8
Equity dividends paid (496.8) (471.3) (406.0)
-------------------------------------------------------------------------------------- --------- --------- ----------
Net cash provided/(required) by financing activities 414.5 (264.1) (503.4)
-------------------------------------------------------------------------------------- --------- --------- ----------
Net increase in cash and cash equivalents 150.8 25.0 78.4
Exchange movement on cash and cash equivalents (0.2) 19.9 -
Cash and cash equivalents at beginning of financial year 230.2 185.3 106.9
-------------------------------------------------------------------------------------- --------- --------- ----------
Cash and cash equivalents at end of financial year 380.8 230.2 185.3
====================================================================================== ========= ========= ==========
All liquid investments with maturities of three months or less at the time of
acquisition are considered to be cash equivalents.
2002 2001 2000
Significant non-cash investing or financing activities (Pounds)m (Pounds)m (Pounds)m
---------------------------------------------------------------------------------------------------------------------------------
On acquisition of subsidiary: shares allotted as part of purchase consideration - - 4,065.5
Share of debt in joint arrangement 100.5 - -
====================================================================================== ========= ========= ==========
Additional information required under US GAAP
(a) Infrastructure accounting
The group's accounting policy in respect of Southern Water's infrastructure
assets and related maintenance and renewals expenditure, as set out and
explained in the accounting policies, is not generally accepted under US GAAP
which requires historical cost depreciation accounting for these assets. The
difference between the infrastructure renewals depreciation charge and
depreciation accounting under US GAAP is not material to profit and equity
shareholders' funds.
(b) Doubtful debts
The group provided (Pounds)57.5 million, (Pounds)29.7 million and (Pounds)45.2
million for doubtful debts in 2002, 2001 and 2000 respectively. Write-offs
against the provision for doubtful debts for uncollectable amounts were
(Pounds)36.6 million, (Pounds)26.1 million and (Pounds)31.3 million in 2002,
2001 and 2000 respectively.
(c) Deferred tax
The additional components of the estimated net deferred tax liability that would
be recognised under US GAAP are as follows:
2002 2001
(Pounds)m (Pounds)m
---------------------------------------------------------------------------------------------------------------------------------
Deferred tax liabilities:
Excess of book value over taxation value of fixed assets 142.6 186.0
Other temporary differences 200.7 208.0
--------------------------------------------------------------------------------------------------- --------- ----------
343.3 394.0
Deferred tax assets:
Other temporary differences (5.1) (6.0)
--------------------------------------------------------------------------------------------------- --------- ----------
Net deferred tax liability 338.2 388.0
=================================================================================================== ========= ==========
Analysed as follows:
Current (5.1) (6.0)
Non-current 343.3 394.0
--------------------------------------------------------------------------------------------------- --------- ----------
338.2 388.0
=================================================================================================== ========= ==========
The deferred tax balance in respect of leveraged leases at the year end is
(Pounds)145.1 million (2001 (Pounds)162.7 million).
Investment tax credits for PacifiCorp are deferred and amortised to income over
periods prescribed by the group's various regulatory jurisdictions under US
GAAP.
(d) Pensions
At 31 March 2002, ScottishPower had eight statutorily approved defined benefit
pension schemes and one statutorily approved defined contribution scheme. The
PacifiCorp arrangements are included following the acquisition of PacifiCorp on
29 November 1999.
Benefits under the UK defined benefit plans reflect each employee's basic
earnings, years of service and age at retirement. Funding of the defined benefit
plans is based upon actuarially determined contributions, with members paying
contributions at fixed rates and the employers meeting the balance of cost as
determined by the scheme actuaries.
Under the defined contribution plan, contributions are paid by the member and
employer at a fixed rate. Benefits under the defined contribution plan reflect
each employee's fund at retirement and the cost of purchasing benefits at that
time.
ScottishPower Annual Report & Accounts/Form 20-F 2001/02 |103
34 Summary of differences between UK and US Generally Accepted Accounting
Principles (`GAAP') continued
Reconciliations of the beginning and ending balances of the projected pension
benefit obligation and the funded status of these plans for the years ending 31
March 2002, 31 March 2001 and 31 March 2000 are as follows:
2002 2001 2000
Change in benefit obligation (Pounds)m (Pounds)m (Pounds)m
-----------------------------------------------------------------------------------------------------------------------
Benefit obligation at beginning of year 3,051.0 2,827.6 2,074.2
Additional obligation from acquisition - - 673.6
Service cost (excluding plan participants' contributions) 62.2 66.6 57.6
Interest cost 182.5 179.8 137.7
Plan amendments 12.6* (15.7) -
Special termination benefits 0.6** 54.8 -
Plan participants' contributions 11.9 12.9 12.9
Actuarial loss/(gain) 29.0 27.4 (8.3)
Benefits paid (209.5) (187.0) (124.9)
Transfers (29.0)*** - -
Exchange 0.9 84.6 4.8
-------------------------------------------------------------------------- ---------- ------------- ---------------
Benefit obligation at end of year 3,112.2 3,051.0 2,827.6
========================================================================== ========== ============= ===============
* Ad hoc cost of living benefit increase for certain retired employees that was
approved 13 March 2002.
** The acquisition of PacifiCorp by ScottishPower triggered special termination
benefits from the SERP during 2002.
*** Assets and liabilities were transferred to the PacifiCorp/International
Brotherhood of Electrical Workers Local Union 57 Retirement Trust Fund.
2002 2001 2000
Change in plans' assets (Pounds)m (Pounds)m (Pounds)m
------------------------------------------------------------------------------------------------------------------------------
Fair value of plans' assets at beginning of year 3,586.6 3,886.8 2,781.4
Additional fair value of assets from acquisition - - 636.1
Actual return on plans' assets (163.0) (248.2) 558.3
Employer contributions 18.5 32.7 17.7
Plan participants' contributions 11.9 12.9 12.9
Benefits paid (209.5) (187.0) (124.9)
Transfers (39.4) - -
Exchange (0.5) 89.4 5.3
------------------------------------------------------------------------------------- --------- ----------- -------------
Fair value of plans' assets at end of year 3,204.6 3,586.6 3,886.8
===================================================================================== ========= =========== =============
2002 2001 2000
Reconciliation of funded status to prepaid benefit cost (Pounds)m (Pounds)m (Pounds)m
------------------------------------------------------------------------------------------------------------------------------
Funded status 92.4 535.6 1,059.2
Unrecognised net actuarial loss/(gain) 121.9 (348.9) (933.5)
Unrecognised prior service cost (1.5) (15.2) -
Unrecognised Transition Obligation Asset (1.6) (2.5) (3.3)
------------------------------------------------------------------------------------- --------- ----------- -------------
Prepaid benefit cost 211.2 169.0 122.4
===================================================================================== ========= =========== =============
Amounts recognised in balance sheet 2002 2001 2000
(UK arrangements) (Pounds)m (Pounds)m (Pounds)m
------------------------------------------------------------------------------------------------------------------------------
Prepaid benefit cost 270.4 237.4 151.5
------------------------------------------------------------------------------------- --------- ----------- -------------
Total recognised 270.4 237.4 151.5
===================================================================================== ========= =========== =============
Amounts recognised in balance sheet 2002 2001 2000
(US arrangements) (Pounds)m (Pounds)m (Pounds)m
------------------------------------------------------------------------------------------------------------------------------
Accrued benefit liability (121.3) (68.4) (29.1)
Accumulated other comprehensive income 62.1 - -
------------------------------------------------------------------------------------- --------- ----------- -------------
Total recognised (59.2) (68.4) (29.1)
===================================================================================== ========= =========== =============
The value of plan assets exceed the accumulated benefit obligation at the end of
the year except in the following cases:
Value of Accumulated
plan assets at benefit obligation
31 March 2002 at 31 March 2002
Plan (Pounds)m (Pounds)m
-----------------------------------------------------------------------------------------------------------------------------
Southern Water 278.3 284.3
PacifiCorp 581.8 700.8
=========================================================================================== ========= ====================
For all plans in 2000/01, the value of plan assets exceeded the accumulated
benefit obligation at the end of the year.
The value of plan assets exceed the projected benefit obligation at the end of
the year except in the following cases:
Value of Projected
plan assets at benefit obligation
31 March 2002 at 31 March 2002
Plan (Pounds)m (Pounds)m
-----------------------------------------------------------------------------------------------------------------------------
Final Salary LifePlan 10.2 11.6
Southern Water 278.3 317.7
PacifiCorp 581.8 760.1
====================================================================================================== ===================
ScottishPower Annual Report & Accounts/Form 20-F 2001/02 |104
Notes to the Group Balance Sheet
as at 31 March 2002 - continued
34 Summary of differences between UK and US Generally Accepted Accounting
Principles (`GAAP') continued
The components of pension benefit costs for the years ended 31 March 2002, 2001
and 2000 were as follows (figures for 2000 include post-acquisition period only
for PacifiCorp):
31 March 31 March 31 March
2002 2001 2000*
(Pounds)m (Pounds)m (Pounds)m
-----------------------------------------------------------------------------------------------------------------------------------
Service cost 62.2 66.6 57.6
Interest cost 182.5 179.8 137.7
Expected return on plans' assets (261.2) (287.2) (211.1)
Amortisation of experience gains (5.8) (36.0) (22.8)
Amortisation of prior service cost (1.1) (1.1) -
Amortisation of Transition Obligation Asset (0.9) (0.8) (0.8)
-------------------------------------------------------------------------------------------------- --------- --------- ---------
Net periodic benefit credit (24.3) (78.7) (39.4)
================================================================================================== ========= ========= =========
* For the post-acquisition period (29 November 1999 to 31 March 2000)
The actuarial assumptions adopted in arriving at the above figures are as
follows:
31 March 31 March 31 March
UK arrangements - assumptions at: 2002 2001 2000
------------------------------------------------------------------------------------------------------------------------------------
Expected return on plans' assets 7.5% p.a. 7.0% p.a. 7.0% p.a.
Discount rate 6.0% p.a. 5.75% p.a. 6.0% p.a.
Rate of earnings increase 4.3% p.a. 4.5% p.a. 5.0% p.a.
Pension increases 2.8% p.a. 2.5% p.a. 3.0% p.a.
================================================================================================== ========= ========= ==========
31 March 31 March 31 March
US arrangements - assumptions at: 2002 2001 2000
-----------------------------------------------------------------------------------------------------------------------------------
Expected return on plans' assets 9.25% p.a. 9.25% p.a. 9.25% p.a.
Discount rate 7.5% p.a. 7.75% p.a. 7.5% p.a.
Rate of earnings increase 4.0% p.a. 4.0% p.a. 4.0% p.a.
Inflation rates 4.0% p.a. 4.0% p.a. 4.0% p.a.
================================================================================================== ========= ========== =========
(e) Other post-retirement benefits
PacifiCorp provides healthcare and life insurance benefits through various plans
for eligible retirees on a basis substantially similar to those who are active
employees. The cost of post-retirement benefits is accrued over the active
service period of employees. For those employees retired at 1 January 1994,
PacifiCorp funds post-retirement benefit expense on a pay-as-you-go basis and
has an unfunded accrued liability of (pound)127.9 million at 31 March 2002. For
those employees retiring on or after 1 January 1994, PacifiCorp funds
post-retirement benefit expense through a combination of funding vehicles:
PacifiCorp did not fund over the period 1 April 2001 to 31 March 2002. These
funds are invested in common stocks, bonds and US government obligations. The
figures below relate to the combined position for the unfunded and funded
arrangements.
The net periodic post-retirement benefit cost and significant assumptions are
summarised as follows:
2002 2001 2000*
(Pounds)m (Pounds)m (Pounds)m
------------------------------------------------------------------------------------------------------------------------------------
Service cost 3.6 3.5 1.2
Interest cost 20.0 18.8 5.1
Expected return on plan assets (20.4) (19.1) (4.6)
-------------------------------------------------------------------------------------------------- --------- --------- ---------
Net periodic post-retirement benefit cost 3.2 3.2 1.7
================================================================================================== ========= ========= =========
* For the post-acquisition period (29 November 1999 to 31 March 2000)
The change in the accumulated post-retirement benefit obligation, change in plan
assets and funded status are as follows:
2002 2001 2000*
Change in accumulated post-retirement benefit obligation (Pounds)m (Pounds)m (Pounds)m
------------------------------------------------------------------------------------------------------------------------------------
Accumulated post-retirement benefit obligation at beginning of year 268.0 220.3 215.9**
Service cost 3.6 3.5 1.2
Interest cost 20.0 18.8 5.1
Plan participants' contributions 3.8 3.2 0.6
Special termination benefit loss - 11.4 -
Actuarial loss/(gain) 53.8 (3.1) (0.3)
Benefits paid (18.8) (13.6) (3.7)
Exchange 0.9 27.5 1.5
-------------------------------------------------------------------------------------------------- --------- --------- ---------
Accumulated post-retirement benefit obligation at end of year 331.3 268.0 220.3
-------------------------------------------------------------------------------------------------- --------- --------- ---------
2002 2001 2000*
Change in plan assets (Pounds)m (Pounds)m (Pounds)m
------------------------------------------------------------------------------------------------------------------------------------
Plan assets at fair value at beginning of year 201.9 200.2 163.9**
Actual return on plan assets (12.6) (18.2) 31.0
Company contributions 10.4 6.8 7.0
Plan participants' contributions 3.8 3.2 0.6
Benefits paid (18.8) (13.6) (3.7)
Exchange 0.2 23.5 1.4
-------------------------------------------------------------------------------------------------- --------- ---------- ---------
Plan assets at fair value at end of year 184.9 201.9 200.2
-------------------------------------------------------------------------------------------------- --------- ---------- ---------
* For the post-acquisition period (29 November 1999 to 31 March 2000)
** As at acquisition - 29 November 1999
2002 2001 2000
Reconciliation of accrued post-retirement costs and total amount recognised (Pounds)m (Pounds)m (Pounds)m
-----------------------------------------------------------------------------------------------------------------------------------
Funded status of plan (146.4) (66.1) (20.1)
PacifiCorp unrecognised net loss/(gain) 93.5 6.0 (26.4)
-------------------------------------------------------------------------------------------------- --------- ---------- ----------
Accrued post-retirement benefit cost (52.9) (60.1) (46.5)
================================================================================================== ========= ========== ==========
ScottishPower Annual Report & Accounts/Form 20-F 2001/02 |105
34 Summary of differences between UK and US Generally Accepted Accounting
Principles (`GAAP') continued
The actuarial assumptions adopted in arriving at the above figures are as
follows:
31 March 31 March 31 March
US arrangements - assumptions at: 2002 2001 2000
-----------------------------------------------------------------------------------------------------------------------------------
Expected return on plans' assets 9.25% p.a. 9.25% p.a. 9.25% p.a.
Discount rate 7.50% p.a. 7.75% p.a. 7.50% p.a.
Initial healthcare cost trend - under 65 10.50% p.a. 6.00% p.a. 6.60% p.a.
Initial healthcare cost trend - over 65 12.50% p.a. 6.50% p.a. 6.80% p.a.
Initial healthcare cost trend rate 5.00% p.a. 4.50% p.a. 4.50% p.a.
=============================================================================================== ============ =========== ==========
The assumed healthcare cost trend rate gradually decreases over five to eight
years. The healthcare cost trend rate assumption has a significant effect on the
amounts reported. Increasing the assumed healthcare cost trend rate by one
percentage point would have increased the accumulated post-retirement benefit
obligation (the "APBO") as of 31 March 2002 by (Pounds)18.5 million (2001
(Pounds)13.1 million, 2000 (Pounds)15.7 million) and the annual net periodic
post-retirement benefit costs by (Pounds)1.3 million (2001 (Pounds)1.1 million,
2000 (Pounds)1.4 million). Decreasing the assumed healthcare cost trend rate by
one percentage point would have reduced the APBO as of 31 March 2002 by
(Pounds)17.1 million (2001 (Pounds)16.0 million, 2000 (Pounds)14.9 million), and
the annual net periodic post-retirement benefit costs by (Pounds)1.2 million
(2001 (Pounds)1.4 million, 2000 (Pounds)1.3 million).
Post-employment benefits
PacifiCorp provides certain post-employment benefits to former employees and
their dependants during the period following employment but before retirement.
The costs of these benefits are accrued as they are incurred. Benefits include
salary continuation, severance benefits, disability benefits and continuation of
healthcare benefits for terminated and disabled employees and workers
compensation benefits. The provision for post-employment benefits was
(Pounds)13.5 million at 31 March 2002 (2001 (Pounds)12.0 million).
Employee savings and stock ownership plan
PacifiCorp has an employee savings and stock ownership plan that qualifies as a
tax-deferred arrangement under Section 401(a), 401(k), 409, 501 and 4975(e)(7)
of the Internal Revenue Code. Participating US employees may defer up to 20% of
their compensation, subject to certain regulatory limitations. PacifiCorp
matches a portion of employee contributions with ScottishPower ADSs, vesting
that portion over five years. PacifiCorp makes an additional contribution of
ScottishPower ADSs to qualifying employees equal to a percentage of the
employee's eligible earnings. These contributions are immediately vested.
Employer contributions to the savings plan were (Pounds)14.7 million for the
year ended 31 March 2002 (2001 (Pounds)12.2 million).
(f) Southern Water disposal
In April 2002, the group completed the sale of Aspen 4 Limited (the holding
company of Southern Water plc) to First Aqua Limited. A summary of the net
assets to be disposed of as at 31 March 2002, calculated under US GAAP, are
detailed in the table below:
(Pounds)m
------------------------------------------------------------------------------------------------------------------------------------
Tangible fixed assets 2,482.2
Current assets 97.4
Creditors: amounts falling due within one year (937.1)
Creditors: amounts falling due after more than one year
Loans and other borrowings (99.8)
Provisions for liabilities and charges (342.4)
Deferred income (37.4)
------------------------------------------------------------------------------------------------------------------------- ----------
Net assets 1,162.9
========================================================================================================================= ==========
(g) Environmental, decommissioning and mine reclamation costs
The group's mining operations in the US are subject to reclamation and closure
requirements. Reclamation and closure costs are estimated based on engineering
studies. The group monitors these requirements and periodically revises its cost
estimates to meet existing legal and regulatory requirements of the various
jurisdictions in which it operates.
The group believes that it has adequately provided for its reclamation
obligations, assuming ongoing operations of its mines. Total estimated final
reclamation costs, including joint owners' portions, for all mines with which
the group is involved was (pound)129.8 million at 31 March 2002. These amounts
are expected to be paid over the next 40 years.
The liabilities for environmental, decommissioning and mine reclamation costs
are generally recorded on an undiscounted basis. These liabilities are recorded
in the UK GAAP balance sheet within `Provisions for liabilities and charges',
and balances under US GAAP are detailed below:
Balance sheet liability
31 March 31 March
2002 2001
Notes (Pounds)m (Pounds)m
-----------------------------------------------------------------------------------------------------------------------
Environmental costs (i) 39.5 43.1
Decommissioning costs (ii) 13.2 13.2
Mine reclamation costs (iii) 102.4 114.8
-------------------------------------------------------------------------------------------- --------- ------------
Total costs 155.1 171.1
============================================================================================ ========= ============
(i) Expected to be paid over 19 years
(ii) Expected to be paid over 22 years
(iii) Amounts include the group's and joint owners' portion of mine reclamation
costs
The group had trust fund assets of (Pounds)57.0 million and (Pounds)58.5 million
at 31 March 2002 and 2001, respectively, relating to mine reclamation, including
joint owners' portions.
(h) Leveraged leases
The pre-tax income from leveraged leases during the year was (pound)4.2 million
(2001 (Pounds)4.3 million), the tax effect of the pre-tax income was (Pounds)1.4
million (2001 (Pounds)1.1 million) and the investment tax credit recognised in
the income statement was (pound)1.0 million (2001 (Pounds)0.9 million).
(i) Commitments and contingencies
(i) Environmental issues
UK businesses
The group's UK businesses are subject to numerous regulatory requirements with
respect to the protection of the environment, including environmental laws which
regulate the construction, operation and decommissioning of power stations,
pursuant to legislation implementing environmental directives adopted by the EU
and protocols agreed under the auspices of international bodies such as the
United Nations Economic Commission for Europe. The group believes that it has
taken and continues to take measures to comply with applicable laws and
regulations for the protection of the environment. Applicable regulations and
requirements pertaining to the environment change frequently, however, with the
result that continued compliance may require material investments, or that the
group's costs and results of operation are less favourable than anticipated.
US Division - PacifiCorp
PacifiCorp is subject to numerous environmental laws including: the Federal
Clean Air Act, as enforced by the Environmental Protection Agency and various
state agencies; the 1990 Clean Air Act Amendments; the Endangered Species Act,
particularly as it relates to certain potentially endangered species of salmon;
the Comprehensive Environmental Response, Compensation and Liability Act,
relating to environmental cleanups; along with the Federal Resource Conservation
and Recovery Act
ScottishPower Annual Report & Accounts/Form 20-F 2001/02 |106
Notes to the Group Balance Sheet
as at 31 March 2002 - continued
34 Summary of differences between UK and US Generally Accepted Accounting
Principles (`GAAP') continued
and the Clean Water Act relating to water quality. These laws could
potentially impact future operations. For those contingencies identified at 31
March 2002 principally the Superfund sites where PacifiCorp has been or may be
designated as a potentially responsible party and Clean Air Act matters, future
costs associated with the disposition of these matters are expected to be
addressed in future regulatory requests and, therefore, are not expected to have
a material impact on the group's results and financial position.
(ii) Mine reclamation
US Division - PacifiCorp
All of PacifiCorp's mining operations are subject to reclamation and closure
requirements. Compliance with these requirements could result in higher
expenditures for both capital improvements and operating costs.
(iii) Deferred net power costs
US Division - PacifiCorp
At 31 March 2002, PacifiCorp had deferred net power costs for the states of
Utah, Oregon, Wyoming and Idaho. While PacifiCorp is pursuing full recovery of
these costs, there can be no assurance that this will be achieved. Denial of
recovery would result in the write-off of deferred net power costs, under US
GAAP, reported under US regulatory assets in the UK/US GAAP reconciliation of
equity shareholders' funds.
(iv) Regulation
US Division - PacifiCorp
The Emerging Issues Task Force ("EITF") of the FASB concluded in 1997 that FAS
71 should be discontinued when detailed legislation or regulatory orders
regarding competition are issued. Additionally, the EITF concluded that
regulatory assets and liabilities applicable to businesses being deregulated
should be written-off unless their recovery is provided through future regulated
cash flows. PacifiCorp continuously evaluates the appropriateness of applying
FAS 71 to each of its jurisdictions. At 31 March 2002, the group concluded that
FAS 71 was appropriate. However, if efforts to deregulate progress, the group
may in the future be required to discontinue its application of FAS 71 to all or
a portion of its business.
(j) Derivative Instruments and Hedging Activities
The group uses derivative instruments in the normal course of business, to
offset fluctuations in earnings, cash flows and equity associated with movements
in exchange rates, interest rates and commodity prices.
FAS 133, `Accounting for Derivative Instruments and Hedging Activities', as
amended by FAS 137 and FAS 138 was adopted by the group with effect from 1 April
2001. FAS 133 establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts (collectively referred to as derivatives) and for hedging activities.
FAS 133 requires that an entity recognise all derivatives as either assets or
liabilities in the consolidated balance sheet and measure those instruments at
fair value. FAS 133 prescribes requirements for designation and documentation of
hedging relationships and ongoing assessments of effectiveness in order to
qualify for hedge accounting.
Hedge effectiveness is assessed consistently with the method and risk management
strategy documented for each hedging relationship. On at least a quarterly
basis, the group assesses the effectiveness of each hedging relationship
retrospectively and prospectively to ensure that hedge accounting was
appropriate for the prior period and continues to be appropriate for future
periods. The group applies the short cut method of assessing effectiveness when
possible. The group considers hedge accounting to be appropriate if the
assessment of hedge effectiveness indicates that the change in fair value of the
designated hedging instrument is 80% to 125% effective at offsetting the change
in fair value arising on the hedged risk of the hedged item or transaction.
The effect of changes in fair value of certain derivative instruments entered
into to hedge PacifiCorp's future retail resource requirements are subject to
regulation in the US and therefore are deferred pursuant to FAS 71. PacifiCorp
requested and received deferred accounting orders for the effects of FAS 133 as
it relates to the change in value of long-term wholesale electricity contracts
not meeting the definition of normal purchases and normal sales contracts.
Categories of derivatives
Derivatives are classified into four categories: fair value hedges, cash flow
hedges, overseas net investment hedges and trading.
If a derivative instrument qualifies as a fair value hedge the change in the
fair value of the derivative and the change in the fair value of the hedged risk
arising on the hedged item is recorded in earnings. The corresponding change is
recorded against the book values of the derivative and hedged item on the
balance sheet.
If a derivative instrument qualifies as a cash flow hedge, the effective portion
of the hedging instrument's gain or loss is reported in shareholders' funds
under US GAAP (as a component of accumulated other comprehensive income) and is
recognised in earnings in the period during which the transaction being hedged
affects earnings. The ineffective portion of the derivative's fair value change
is recorded in earnings.
For derivative instruments designated as a hedge of the foreign currency risk in
an overseas net investment, gains or losses due to fluctuations in foreign
exchange rates are recorded in the cumulative translation adjustment within
shareholders' funds under US GAAP (as a component of accumulated other
comprehensive income).
If a derivative instrument does not qualify as either a net investment hedge or
a cash flow hedge under the applicable guidance, the change in the fair value of
the derivative is immediately recognised in earnings or as an adjustment to the
FAS 71 regulatory asset as appropriate.
Derivative instruments are not generally held by the company for speculative
trading purposes. To the extent such instruments are held they are measured at
fair value with gains or losses recorded in earnings. The fair value of trading
derivatives at 31 March 2002 was (Pounds)1.0 million.
Certain contracts that meet the definition of a derivative under FAS 133 may
qualify as a normal purchase or a normal sale and be excluded from the scope of
FAS 133. Specific criteria must be met in order for a contract that would
otherwise be regarded as a derivative to qualify as a normal purchase or a
normal sale. The group has evaluated all commodity contracts to determine if
they meet the definition of a derivative and qualify as a normal purchase or a
normal sale.
The group also evaluates contracts for "embedded" derivatives, and considers
whether any embedded derivatives have to be separated from the underlying host
contract and accounted for separately in accordance with FAS 133 requirements.
Where embedded derivatives have terms that are not clearly and closely related
to the terms of the host contract in which they are included, they are accounted
for separately from the host contract as derivatives, with changes in the fair
value recorded in earnings, to the extent that the hybrid instrument is not
already accounted for at fair value.
Discontinued hedge accounting
When hedge accounting is discontinued due to the group's determination that the
derivative no longer qualifies as an effective fair value hedge, the group will
continue to carry the derivative on the balance sheet at its fair value. The
related hedged asset or liability will cease to be adjusted for changes in fair
value relating to the previously hedged risk.
When the group discontinues hedge accounting in a cash flow hedge because it is
no longer probable that the forecasted transaction will occur in the expected
period, the gain or loss on the derivative remains in accumulated other
comprehensive income and is reclassified into earnings when the forecasted
transaction affects earnings. However, if it is probable that a forecasted
transaction will not occur by the end of the originally specified time period or
within an additional two-month period of time thereafter, the gains and losses
that were accumulated in other comprehensive income will be recognised in
earnings.
Where a derivative instrument ceases to meet the criteria for hedge accounting,
any subsequent gains and losses are recognised in earnings.
ScottishPower Annual Report & Accounts/Form 20-F 2001/02 |107
34 Summary of differences between UK and US Generally Accepted Accounting
Principles (`GAAP') continued
Impact of FAS 133
The cumulative effect of adopting FAS 133 at 1 April 2001, representing the
initial valuation of derivatives and other items as described above, was an
after-tax charge of (Pounds)61.6 million included in earnings; an after-tax gain
of (Pounds)421.3 million included in other comprehensive income, a component of
shareholders' funds under US GAAP; and recognition of a regulatory asset
relating to the fair value of long-term wholesale contracts subject to
regulation in the US of (Pounds)508.0 million.
Fair value hedges
The group seeks to maintain a desired level of floating rate debt, and uses
interest rate and cross currency interest rate swaps to manage interest rate and
foreign currency risk arising from long-term debt obligations denominated in
sterling and foreign currencies. The group does not exclude any component of
derivative gains and losses from the assessment of hedge effectiveness. The
ineffective portion of fair value hedges as at 31 March 2002 resulted in a loss
of (Pounds)0.8 million.
Cash flow hedges
On adoption of FAS 133 short-term wholesale electricity purchase contracts not
meeting the definition of normal purchases and normal sales contracts were
designated as cash flow hedges to hedge the risk of changes in the cost of
providing electricity to serve PacifiCorp's retail load. In June 2001, the
Derivatives Implementation Group issued guidance which provided that certain
forward power purchase agreements, including capacity contracts, could be
excluded from the requirements of FAS 133 by expanding the definition of normal
purchases and normal sales exclusion. The group implemented this new guidance,
on a prospective basis, with effect from 1 July 2001. As a result, substantially
all of PacifiCorp's short-term wholesale electricity contracts were determined
to meet the normal purchases and normal sales exclusion. No further market value
changes were recognised for those excluded contracts with unrealised gains or
losses in other comprehensive income relating to the existing cash flow hedges
as of 1 July 2001 reversed prospectively when the related contract is settled.
As of 31 March 2002 the company anticipates that (Pounds)27.1 million of the
unrealised net losses on these derivative instruments in other comprehensive
income will reverse during 2002/03 as the underlying contracts are settled.
A desired level of fixed rate debt is maintained through the use of interest
rate and cross currency interest rate swaps. Foreign currency forward contracts
are used to fix the exchange rate on future contracted purchases of assets.
These transactions are accounted for as cash flow hedges. The group does not
exclude any component of derivative gains and losses from the assessment of
ineffectiveness. The amount of ineffectiveness for cash flow hedges recorded for
the year ended 31 March 2002 was a loss of (Pounds)0.1 million. Net realised
losses on cash flow hedges totalling (Pounds)6.3 million were transferred from
accumulated other comprehensive income into income during the year to match the
underlying hedged items recognised in the income statement. The group estimates
that losses of (Pounds)6.9 million on cash flow hedges in place at the year end
will be transferred from accumulated other comprehensive income into income
during 2002/03.
Net investment hedges
The group uses foreign currency forwards and cross currency swaps to protect the
value of its investments in operations denominated in foreign currencies. The
group excludes the spot-forward difference from the assessment of hedge
effectiveness. In the year ended 31 March 2002 the group recorded a (Pounds)2.4
million translation adjustment gain related to net investment hedges.
Recent US accounting pronouncements
In June 2001, the FASB issued FAS 141, `Business Combinations'. FAS 141 requires
that the purchase method of accounting be used for all business combinations
initiated after 30 June 2001, provides specific criteria for the initial
recognition and measurement of intangible assets apart from goodwill and
requires that unamortised negative goodwill be written off immediately as an
extraordinary gain instead of being deferred and amortised. This statement
supersedes APB No. 16 `Business Combinations'. There have been no material
acquisitions in the current year and hence the adoption of this standard has had
no material effect in the current year.
In June 2001, the FASB issued FAS 142, `Goodwill and Other Intangible Assets'
which became effective for the group on 1 April 2002. This statement addresses
financial accounting and reporting for acquired goodwill and other intangible
assets and supersedes APB Opinion No.17, `Intangible Assets'. FAS 142
specifically states that it does not change the accounting prescribed by FAS 71,
`Accounting for the Effects of Certain Types of Regulation'. FAS 142 prohibits
the amortisation of goodwill and requires that goodwill be tested annually for
impairment (and in interim periods if certain events occur which indicate that
the carrying value of goodwill may be impaired). Goodwill amortisation charged
to the profit and loss account under US GAAP for the year ended 31 March 2002
was (Pounds)172.5 million. The group is currently evaluating the overall impact
of adopting this statement on its results and financial position under US GAAP.
In June 2001, the FASB issued FAS 143, `Accounting for Asset Retirement
Obligations' which will be effective for the group beginning 1 April 2003. The
statement requires the fair value of an asset retirement obligation to be
recorded as a liability in the period in which the obligation was incurred. At
the same time the liability is recorded, the costs of the asset retirement
obligation will be recorded as an addition to the carrying amount of the related
asset. Over time, the liability is accreted to its present value and the
addition to the carrying amount of the asset is depreciated over the asset's
useful life. Upon retirement of the asset, the group will settle the retirement
obligation against the recorded balance of the liability. Any difference in the
final retirement obligation cost and the liability will result in either a gain
or loss. The group is currently evaluating the impact of adopting this statement
on its results and financial position under US GAAP.
In August 2001, the FASB issued FAS 144, `Accounting for the Impairment or
Disposal of Long-Lived Assets' which supercedes FAS 121 `Accounting for the
Impairment of Long-lived Assets and for Long-lived Assets to be disposed of'.
The group adopted FAS 144 in February 2002 effective from 1 April 2001. FAS 144
modifies and expands the financial accounting and reporting for the impairment
or disposal of long-lived assets other than goodwill. The adoption of FAS 144
did not have a material effect on the group's results and financial position
under US GAAP.
In April 2002, the FASB issued FAS 145, `Recission of FASB Statements No. 4, 44
and 64, Amendment of FASB Statement No. 13 and Technical Corrections'. FAS 145
will be effective for the group beginning 1 April 2003. This statement is not
expected to have a material impact on the group's results and financial position
under US GAAP.
In 2001 the Derivatives Implementation Group issued guidance under Issue C16
`Applying the Normal Purchases and Normal Sales Exception to Contracts that
Combine a Forward Contract and a Purchased Option Contract'. The guidance
disallows normal purchases and normal sales treatment for commodity contracts
(other than power contracts) that contain volumetric variability or optionality.
As a result, these contracts will be required to be marked-to-market through
earnings. Issue C16 became effective for the group on 1 April 2002. The group is
currently reviewing its contracts to determine which contracts, if any, will no
longer qualify as normal purchase and normal sales contracts.
ScottishPower Annual Report & Accounts/Form 20-F 2001/02 |108
Company Balance Sheet
as at 31 March 2002
2002 2001
Notes (Pounds)m (Pounds)m
--------------------------------------------------------------------------------------------------------------
Fixed assets
Investments 35 4,769.4 4,746.4
------------------------------------------------------------------------------------- -------- --------
Current assets
Debtors 36 141.0 718.8
------------------------------------------------------------------------------------- -------- --------
Creditors: amounts falling due within one year
Loans and other borrowings 37 (266.3) -
Other creditors 38 (137.3) (166.6)
------------------------------------------------------------------------------------- -------- --------
(403.6) (166.6)
------------------------------------------------------------------------------------- -------- --------
Net current (liabilities)/assets (262.6) 552.2
------------------------------------------------------------------------------------- -------- --------
Net assets 4,506.8 5,298.6
===================================================================================== ======== ========
Called up share capital 39 926.3 924.5
Share premium 39 2,254.1 3,739.7
Capital redemption reserve 39 18.3 18.3
Profit and loss account 39 1,308.1 616.1
------------------------------------------------------------------------------------- -------- --------
Equity shareholders' funds 39 4,506.8 5,298.6
===================================================================================== ======== ========
Approved by the Board on 1 May 2002 and signed on its behalf by
/s/ Charles Miller Smith /s/ David Nish
Charles Miller Smith David Nish
Chairman Finance Director
The Accounting Policies and Definitions on pages 56 to 60, together with the
Notes on pages 65 to 70, 72 to 74, 76 to 107 and 109 to 110 form part of these
Accounts.
ScottishPower Annual Report & Accounts/Form 20-F 2001/02 |109
Notes to the Company Balance Sheet
as at 31 March 2002
35 Fixed asset investments
------------------------------------------------------------------------------------------------------------------
Subsidiary Own shares
undertakings held under
Shares Loans trust Total
(Pounds)m (Pounds)m (Pounds)m (Pounds)m
------------------------------------------------------------------------------------------------------------------
Cost or valuation:
At 1 April 2001 1,667.1 3,049.9 29.4 4,746.4
Additions 962.8 - 19.4 982.2
Demerger of Thus (396.3) - - (396.3)
Disposals and other - (558.6) (4.3) (562.9)
----------------------------------------------------------- -------- ------- ---- -------
At 31 March 2002 2,233.6 2,491.3 44.5 4,769.4
=========================================================== ======== ======= ==== =======
36 Debtors
------------------------------------------------------------------------------------------------------------------
2002 2001
(Pounds)m (Pounds)m
------------------------------------------------------------------------------------------------------------------
Amounts falling due within one year:
Loans to subsidiary undertakings 140.2 633.8
Interest due from subsidiary undertakings 0.8 85.0
----------------------------------------------------------------------------------- ----- -----
141.0 718.8
=================================================================================== ===== =====
37 Loans and other borrowings due within one year
------------------------------------------------------------------------------------------------------------------
2002 2001
(Pounds)m (Pounds)m
------------------------------------------------------------------------------------------------------------------
Loans from subsidiary undertakings 166.3 -
Committed bank loans 100.0 -
----------------------------------------------------------------------------------- ----- -----
266.3 -
=================================================================================== ===== =====
38 Other creditors
------------------------------------------------------------------------------------------------------------------
2002 2001
(Pounds)m (Pounds)m
------------------------------------------------------------------------------------------------------------------
Amounts falling due within one year:
Corporation tax - 31.7
Accrued expenses 11.2 15.5
Proposed dividend 126.1 119.4
----------------------------------------------------------------------------------- ----- -----
137.3 166.6
=================================================================================== ===== =====
39 Analysis of movements in shareholders' funds
-------------------------------------------------------------------------------------------------------------------------------
Capital Profit
Number Share Share redemption and loss
of shares capital premium reserve account Total
Note 000s (Pounds)m (Pounds)m (Pounds)m (Pounds)m (Pounds)m
-------------------------------------------------------------------------------------------------------------------------------
At 1 April 2001 1,849,026 924.5 3,739.7 18.3 616.1 5,298.6
Retained loss for the year - - - - (808.0) (808.0)
Share capital issued
- Employee sharesave scheme 99 0.1 0.5 - - 0.6
- Executive share option scheme 78 - 0.2 - - 0.2
- ESOP 3,444 1.7 13.7 - - 15.4
Reduction of share premium (a) - - (1,500.0) - 1,500.0 -
------------------------------------------------------- --------- ----- -------- ---- ------- -------
At 31 March 2002 1,852,647 926.3 2,254.1 18.3 1,308.1 4,506.8
======================================================= ========= ===== ======== ==== ======= =======
(a) The company applied to the Court of Session (`the Court') to approve a
reduction in the share premium account which had previously been approved by the
company's shareholders at an Extraordinary General Meeting on 21 January 2002.
On 5 March 2002, the Court approved the reduction of the company's share premium
account by (Pounds)1,500 million. This amount has been transferred to the
company's profit and loss account reserve. The reduction in the share premium
account created sufficient distributable reserves to facilitate payment of a
dividend in specie to demerge Thus.
40 Profit and loss account
As 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 by the Board on 1 May 2002. The profit for the financial year per
the Accounts of the company was (Pounds)91.8 million (2001 (Pounds)512.3
million). The retained loss for the year of (Pounds)808.0 million is stated
after cash dividends of (Pounds)503.5 million and a dividend in specie on the
demerger of Thus of (Pounds)396.3 million.
ScottishPower Annual Report & Accounts/Form 20-F 2001/02 |110
Principal Subsidiary Undertakings and Other Investments
Proportion
Class of share of shares
Subsidiary undertakings capital held
---------------------------------------------------------------------------------------------
Core Utility Solutions Limited `A' Ordinary shares (Pounds)1* 100%
CRE Energy Limited Ordinary shares (Pounds)1 100%
NA General Partnership** n/a 100%
PacifiCorp (USA) Common stock 100%
PacifiCorp Financial Services, Inc. (USA) Common stock 100%
PacifiCorp Group Holdings Company (USA) Common stock 100%
PacifiCorp Holdings, Inc. (USA) Common stock 100%
PacifiCorp Power Marketing, Inc. (USA) Common stock 100%
ScottishPower Energy Retail Limited Ordinary shares (Pounds)1 100%
ScottishPower Energy Trading Limited Ordinary shares (Pounds)1 100%
ScottishPower Energy Trading (Agency) Limited Ordinary shares (Pounds)1 100%
ScottishPower Insurance Limited (Isle of Man) Ordinary shares (Pounds)1 100%
Scottish Power Generation Limited Ordinary shares (Pounds)1 100%
Scottish Power UK plc*** Ordinary shares 50p 100%
SP Dataserve Limited Ordinary shares (Pounds)1 100%
SP Distribution Limited Ordinary shares (Pounds)1 100%
SP Manweb plc Ordinary shares 50p 100%
SP Power Systems Limited Ordinary shares (Pounds)1 100%
SP Transmission Limited Ordinary shares (Pounds)1 100%
Southern Water Services Finance plc**** Ordinary shares (Pounds)1 100%
Southern Water Services Limited**** Ordinary shares (Pounds)1 100%
---------------------------------------------------------------------------------------------
Fixed asset investments
Joint ventures
CeltPower Limited Ordinary shares (Pounds)1 50%
N.E.S.T. Makers Limited Ordinary shares (Pounds)1 50%
ScotAsh Limited Ordinary shares (Pounds)1 50%
Scottish Electricity Settlements Limited Ordinary shares (Pounds)1 50%
Shoreham Operations Company Limited Ordinary shares (Pounds)1 50%
South Coast Power Limited Ordinary shares (Pounds)1 50%
Associated undertaking
Wind Resources Limited Ordinary shares (Pounds)1 45%
Other investments
Folkestone & Dover Water Services Limited**** Ordinary shares (Pounds)1 25%
Preference shares (Pounds)1 22%
Deferred shares (Pounds)1 12%
---------------------------------------------------------------------------------------------
Subsidiary undertakings Activity
-----------------------------------------------------------------------------------------------------------
Core Utility Solutions Limited Multi-utility design and construction service
CRE Energy Limited Wind-powered electricity generation
NA General Partnership** Investment holding
PacifiCorp (USA) Regional electricity company
PacifiCorp Financial Services, Inc. (USA) Finance company
PacifiCorp Group Holdings Company (USA) Investment holding
PacifiCorp Holdings, Inc. (USA) US holding company
PacifiCorp Power Marketing, Inc. (USA) Wholesale power marketer, developer of
wind-power projects and provider of natural
gas/hub services
ScottishPower Energy Retail Limited Supply of electricity and gas to domestic
and business customers
ScottishPower Energy Trading Limited Wholesale trading company engaged in
purchase and sale of electricity, gas and coal
ScottishPower Energy Trading (Agency) Limited Agent for trading activity of ScottishPower
Energy Trading Limited and Scottish Power UK plc
ScottishPower Insurance Limited (Isle of Man) Insurance
Scottish Power Generation Limited Electricity generation
Scottish Power UK plc*** Holding company
SP Dataserve Limited Data collection, data aggregation, meter
operation and revenue protection
SP Distribution Limited Ownership and operation of distribution
network within the ScottishPower area
SP Manweb plc Ownership and operation of distribution
network within the Mersey and North Wales area
SP Power Systems Limited Provision of asset management services
SP Transmission Limited Ownership and operation of transmission
network within the ScottishPower area
Southern Water Services Finance plc**** Finance company
Southern Water Services Limited**** Water supply and wastewater services
-----------------------------------------------------------------------------------------------------------
Fixed asset investments
Joint ventures
CeltPower Limited Wind-powered electricity generation
N.E.S.T. Makers Limited Energy efficiency agent for the
`fuel poor'/benefit market
ScotAsh Limited Sales of ash and ash-related cementitious products
Scottish Electricity Settlements Limited Scottish electricity settlements
Shoreham Operations Company Limited Management services
South Coast Power Limited Electricity generation
Associated undertaking
Wind Resources Limited Wind-powered electricity generation
Other investments
Folkestone & Dover Water Services Limited**** Water supply
-----------------------------------------------------------------------------------------------------------
Notes
* Represents 50% of the total issued share capital.
** NA General Partnership is a partnership and therefore has no defined class
of share capital.
*** The investment in this company is a direct holding of Scottish Power plc.
**** These investments were disposed of as a result of the sale of Southern
Water on 23 April 2002.
The directors consider that to give full particulars of all undertakings would
lead to a statement of excessive length. The information above includes the
undertakings whose results or financial position, in the opinion of the
directors, principally affect the results or financial position of the group.
All companies are incorporated in Great Britain, unless otherwise stated.
ScottishPower Annual Report & Accounts/Form 20-F 2001/02 |111
Independent Auditors' Report
to the members of Scottish Power plc
We have audited the Accounts which comprise the Accounting Policies and
Definitions, the Group Profit and Loss Accounts, the Statement of Total
Recognised Gains and Losses, the Note of Historical Cost Profits and Losses, the
Reconciliation of Movements in Shareholders' Funds, the Group Cash Flow
Statement, the Reconciliation of Net Cash Flow to Movement in Net Debt, the
Group Balance Sheet, the statement of Principal Subsidiary Undertakings and
Other Investments, the Company Balance Sheet and the related notes.
Respective responsibilities of directors and auditors
The directors' responsibilities for preparing the Annual Report and
Accounts/Form 20-F in accordance with applicable United Kingdom law and
accounting standards are set out in the statement of directors'
responsibilities.
Our responsibility is to audit the Accounts in accordance with relevant legal
and regulatory requirements, United Kingdom Auditing Standards issued by the
Auditing Practices Board and the Listing Rules of the Financial Services
Authority.
We report to you our opinion as to whether the Accounts give a true and fair
view and are properly prepared in accordance with the Companies Act 1985. We
also report to you if, in our opinion, the Report of the Directors is not
consistent with the Accounts, if the company has not kept proper accounting
records, if we have not received all the information and explanations we require
for our audit, or if information specified by law or the Listing Rules regarding
directors' remuneration and transactions is not disclosed.
We read the Chairman's Statement, the Chief Executive's Review, the Business
Review, the Financial Review, the Corporate Governance statement, the
Remuneration Report of the Directors and the other information contained in the
Annual Report and Accounts/Form 20-F and consider the implications for our
report if we become aware of any apparent misstatements or material
inconsistencies with the Accounts.
We review whether the Corporate Governance statement reflects the company's
compliance with the seven provisions of the Combined Code specified for our
review by the Listing Rules, and we report if it does not. We are not required
to consider whether the board's statements on internal control cover all risks
and controls, or to form an opinion on the effectiveness of the company's or
group's corporate governance procedures or its risk and control procedures.
Basis of audit opinion
We conducted our audit in accordance with Auditing Standards issued by the
United Kingdom Auditing Practices Board and with Auditing Standards generally
accepted in the United States. An audit includes examination, on a test basis,
of evidence relevant to the amounts and disclosures in the Accounts. It also
includes an assessment of the significant estimates and judgements made by the
directors in the preparation of the Accounts, and of whether the accounting
policies are appropriate to the group's circumstances, consistently applied and
adequately disclosed.
We planned and performed our audit so as to obtain all the information and
explanations which we considered necessary in order to provide us with
sufficient evidence to give reasonable assurance that the Accounts are free from
material misstatement, whether caused by fraud or other irregularity or error.
In forming our opinion we also evaluated the overall adequacy of the
presentation of information in the Accounts.
United Kingdom opinion
In our opinion the Accounts give a true and fair view of the state of affairs of
the company and the group at 31 March 2002 and of the loss and cash flows of the
group for the year then ended and have been properly prepared in accordance with
the United Kingdom Companies Act 1985.
United States opinion
In our opinion the Accounts referred to above present fairly, in all material
respects, the consolidated financial position of the group at 31 March 2002 and
31 March 2001, and the results of its operations and its cash flows for the
years ended 31 March 2002, 31 March 2001 and 31 March 2000 in conformity with
accounting principles generally accepted in the United Kingdom. These principles
differ in certain respects from accounting principles generally accepted in the
United States. The effect of the differences in the determination of net
loss/income, shareholders' equity and cash flows is shown in Note 34 to the
Accounts.
/s/ PricewaterhouseCoopers
PricewaterhouseCoopers
Chartered Accountants and
Registered Auditors
Glasgow
1 May 2002
ScottishPower Annual Report & Accounts/Form 20-F 2001/02 |112
Five Year Summary
Years ended 31 March
-----------------------------------------------------------------------------------------------------------------------------
2002 2002 2001 2000
Notes $m (Pounds)m (Pounds)m (Pounds)m
-----------------------------------------------------------------------------------------------------------------------------
UK GAAP Information
Profit and Loss Account Information:
Turnover
- continuing operations (a) 7,843 5,523 5,410 3,110
- discontinued operations 1,123 791 939 1,005
------------------------------------------------------------ --------- ------------- ------------ ------------
Total turnover 8,966 6,314 6,349 4,115
============================================================ ========= ============= ============ ============
Operating profit
- continuing operations (a) 903 636 569 395
- discontinued operations 200 141 153 267
------------------------------------------------------------ --------- ------------- ------------ ------------
Total operating profit 1,103 777 722 662
============================================================ ========= ============= ============ ============
Operating profit (as adjusted) (b)
- continuing operations (a) 1,137 801 815 676
- discontinued operations 203 143 155 285
------------------------------------------------------------ --------- ------------- ------------ ------------
Total operating profit (as adjusted) 1,340 944 970 961
============================================================ ========= ============= ============ ============
(Loss)/profit before taxation (1,333) (939) 380 1,149
Profit before taxation (as adjusted) (b) 805 567 628 736
(Loss)/profit after taxation (1,451) (1,022) 285 886
(Loss)/profit for financial year (c) (1,401) (987) 308 885
Cash dividends (714) (503) (477) (341)
Dividend in specie on demerger of Thus (621) (437) - -
Balance Sheet Information:
Total assets 23,167 16,315 16,976 15,516
Capital expenditure (net) (d) 1,745 1,229 1,095 887
Long-term liabilities 11,811 8,318 7,793 6,895
Net debt 8,815 6,208 5,285 4,842
Equity shareholders' funds 6,718 4,731 5,893 5,563
Net assets 6,842 4,818 6,179 5,863
Basic weighted average share capital
(number of shares, million) 1,838 1,838 1,830 1,390
Diluted weighted average share capital
(number of shares, million) 1,840 1,840 1,837 1,399
Ratios and statistics:
(Loss)/earnings per ordinary share $(0.7627) (53.71)p 16.80p 63.69p
Earnings per ordinary share (as adjusted) (f) $ 0.3709 26.12p 27.86p 37.97p
Diluted (loss)/earnings per ordinary share $(0.7617) (53.64)p 16.74p 63.25p
(Loss)/earnings per ScottishPower ADS (e) $ (3.05) (Pounds)(2.15) (Pounds)0.67 (Pounds)2.55
Earnings per ScottishPower ADS (as adjusted) (e),(f) $ 1.48 (Pounds) 1.04 (Pounds)1.11 (Pounds)1.52
Diluted (loss)/earnings per ScottishPower ADS (e) $ (3.05) (Pounds)(2.15) (Pounds)0.67 (Pounds)2.53
Cash dividends per ScottishPower ordinary share $ 0.3882 27.34p 26.04p 24.80p
Cash dividends per ScottishPower ADS (e) $ 1.57 (Pounds) 1.09 (Pounds)1.04 (Pounds)0.99
Dividend cover (as adjusted) (f) 1.0x 1.0x 1.1x 1.5x
Interest cover (as adjusted) (f) 2.5x 2.5x 3.0x 4.2x
Gearing (g) 131% 131% 90% 87%
US GAAP Information
Turnover
- continuing operations (a) 7,843 5,523 5,410 3,110
- discontinued operations 1,123 791 939 1,005
------------------------------------------------------------ --------- ------------- ------------ ------------
Total turnover 8,966 6,314 6,349 4,115
============================================================ ========= ============= ============ ============
(Loss)/profit for the financial year (c) (1,260) (887) 387 870
(Loss)/earnings per ordinary share (h) $(0.6853) (48.26)p 21.13p 62.59p
Diluted (loss)/earnings per ordinary share $(0.6853) (48.26)p 21.05p 62.16p
(Loss)/earnings per ScottishPower ADS (e),(h) $ (2.74) (Pounds)(1.93) (Pounds)0.85 (Pounds)2.50
Diluted (loss)/earnings per ScottishPower ADS (e) $ (2.74) (Pounds)(1.93) (Pounds)0.84 (Pounds)2.49
Total assets 25,302 17,818 18,646 16,971
Equity shareholders' funds under US GAAP 8,307 5,850 7,463 7,001
============================================================ ========= ============= ============ ============
------------------------------------------------------------------------------------
1999 1998
(Pounds)m (Pounds)m
------------------------------------------------------------------------------------
UK GAAP Information
Profit and Loss Account Information:
Turnover
- continuing operations 2,334 2,319
- discontinued operations 908 809
------------------------------------------------- ------------ ------------
Total turnover 3,242 3,128
================================================= ============ ============
Operating profit
- continuing operations 527 532
- discontinued operations 276 253
------------------------------------------------- ------------ ------------
Total operating profit 803 785
================================================= ============ ============
Operating profit (as adjusted)
- continuing operations 527 532
- discontinued operations 277 253
------------------------------------------------- ------------ ------------
Total operating profit (as adjusted) 804 785
================================================= ============ ============
(Loss)/profit before taxation 644 640
Profit before taxation (as adjusted) 645 640
(Loss)/profit after taxation 469 460
(Loss)/profit for financial year 469 142
Cash dividends (268) (243)
Dividend in specie on demerger of Thus - -
Balance Sheet Information:
Total assets 6,232 5,577
Capital expenditure (net) 754 657
Long-term liabilities 2,852 2,145
Net debt 2,421 1,953
Equity shareholders' funds 1,203 998
Net assets 1,204 1,000
Basic weighted average share capital
(number of shares, million) 1,185 1,180
Diluted weighted average share capital
(number of shares, million) 1,197 1,192
Ratios and statistics:
(Loss)/earnings per ordinary share 39.60p 12.03p
Earnings per ordinary share (as adjusted) 39.70p 38.90p
Diluted (loss)/earnings per ordinary share 39.20p 11.91p
(Loss)/earnings per ScottishPower ADS (Pounds)1.58 (Pounds)0.48
Earnings per ScottishPower ADS (as adjusted) (Pounds)1.59 (Pounds)1.56
Diluted (loss)/earnings per ScottishPower ADS (Pounds)1.57 (Pounds)0.48
Cash dividends per ScottishPower ordinary share 22.50p 20.40p
Cash dividends per ScottishPower ADS (Pounds)0.90 (Pounds)0.82
Dividend cover (as adjusted) 1.8x 1.9x
Interest cover (as adjusted) 5.0x 5.3x
Gearing 201% 196%
US GAAP Information
Turnover
- continuing operations 2,334 2,319
- discontinued operations 908 809
------------------------------------------------- ------------ ------------
Total turnover 3,242 3,128
================================================= ============ ============
(Loss)/profit for the financial year 451 126
(Loss)/earnings per ordinary share 38.08p 10.70p
Diluted (loss)/earnings per ordinary share 37.70p 10.59p
(Loss)/earnings per ScottishPower ADS (Pounds)1.52 (Pounds)0.43
Diluted (loss)/earnings per ScottishPower ADS (Pounds)1.51 (Pounds)0.42
Total assets 7,344 6,695
Equity shareholders' funds under US GAAP 2,457 2,249
================================================= ============ ============
(a) The results for the financial year ended 31 March 2000 included turnover of
(Pounds)711.7 million, operating profit of (Pounds)114.9 million and
operating profit, before goodwill amortisation, of (Pounds)151.7 million in
respect of PacifiCorp for the period of the year following its acquisition
on 29 November 1999.
(b) Operating profit (as adjusted) and profit before taxation (as adjusted)
exclude the effect of exceptional items and goodwill amortisation.
(c) Profit for the financial year ended 31 March 1998 is stated after charging
windfall tax of (Pounds)317 million.
(d) Capital expenditure is stated net of capital grants and customer
contributions.
(e) (Loss)/earnings and cash dividends per ScottishPower ADS have been
calculated based on a ratio of four ScottishPower ordinary shares to one
ScottishPower ADS. Cash dividends per ScottishPower ADS are shown based on
the actual amounts in US dollars.
(f) The adjusted figures for Earnings per ordinary share, Earnings per
ScottishPower ADS, Dividend cover and Interest cover exclude the effects of
exceptional items, goodwill amortisation and windfall tax as applicable.
(g) Gearing is calculated by dividing net debt by equity shareholders' funds.
(h) As permitted under UK GAAP, (loss)/earnings per share have been presented
including and excluding the impact of the exceptional items, goodwill
amortisation and windfall tax to provide an additional measure of
underlying performance. In accordance with US GAAP, (loss)/earnings per
share have been presented based on US GAAP earnings, without adjustments
for the impact of UK GAAP exceptional items, goodwill amortisation and
windfall tax. Such additional measures of underlying performance are not
permitted under US GAAP.
(i) Amounts for the financial year ended 31 March 2002 have been translated,
solely for the convenience of the reader, at $1.42 to (Pounds)1.00, the
closing exchange rate on 31 March 2002.
ScottishPower Annual Report & Accounts/Form 20-F 2001/02 |113
Glossary of Financial Terms and US Equivalents
UK Financial Terms used in the Annual Report & Accounts US equivalent or definition
------------------------------------------------------------------------------------------------------------------------------------
Accounts Financial statements
Associates Equity investees
Capital allowances Tax depreciation
Capital redemption reserve Other additional capital
Creditors Accounts payable and accrued liabilities
Creditors: amounts falling due within one year Current liabilities
Creditors: amounts falling due after more than one year Long-term liabilities
Employee share schemes Employee stock benefit plans
Employee costs Payroll costs
Finance lease Capital lease
Financial year Fiscal year
Fixed asset investments Non-current investments
Freehold Ownership with absolute rights in perpetuity
Gearing Leverage
Investment in associates and joint ventures Securities of equity investees
Loans to associates and joint ventures Indebtedness of equity investees not current
Net asset value Book value
Operating profit Net operating income
Other debtors Other current assets
Own work capitalised Costs of group's employees engaged in the construction
of plant and equipment for internal use
Profit Income
Profit and loss account (statement) Income statement
Profit and loss account (in the balance sheet) Retained earnings
(Loss)/profit for financial year Net (loss)/income
Profit on sale of fixed assets Gain on disposal of non-current assets
Provision for doubtful debts Allowance for bad and doubtful accounts receivable
Provisions Long-term liabilities other than debt and specific
accounts payable
Recognised gains and losses (statement) Comprehensive income
Reserves Shareholders' equity other than paid-up capital
Severance costs Early release scheme expenses
Share premium account Additional paid-in capital or paid-in surplus (not
distributable)
Shareholders' funds Shareholders' equity
Stocks Inventories
Tangible fixed assets Property, plant and equipment
Trade debtors Accounts receivable (net)
Turnover Revenues
ScottishPower Annual Report & Accounts/Form 20-F 2001/02 |114
Investor Information
Nature of trading market
The principal trading market for the ordinary shares of ScottishPower is the
London Stock Exchange. In addition, American Depositary Shares ("ADSs") (each of
which represents four ordinary shares) have been issued by JPMorgan Chase Bank,
as depositary (the "Depositary"), for the company's ADSs and are traded on the
New York Stock Exchange following listing on 8 September 1997.
Table 30 sets out, for the periods indicated, the highest and lowest middle
market quotations for the ordinary shares, as derived from the Daily Official
List of the London Stock Exchange and the range of high and low closing sale
prices for ADSs, as reported on the New York Exchange Composite Tape.
On 31 March 2002, there were 516 registered holders of 306,800 ordinary shares
with addresses in the US and 66,234 registered holders of 71,774,628 ADSs
(equivalent to 287,098,512 ordinary shares). The combined holdings of these
shareholders represented 15.51% of the total number of ordinary shares
outstanding as at 31 March 2002. UK registered shareholders held 84.10% of the
total number of ordinary shares, and all shareholders other than those
registered in the UK or the US held 0.39% of the total number of ordinary shares
outstanding as at 31 March 2002. As certain of the ordinary shares and ADSs are
held by brokers and other nominees, these numbers may not be representative of
the actual number of beneficial owners in the US or elsewhere or the number of
ordinary shares or ADSs beneficially held by US persons.
Table 31 - Analysis of Ordinary Shareholdings
at 31 March 2002
-------------------------------------------------
Range of No. of
holdings shareholdings No. of shares
-------------------------------------------------
1-100 17,902 719,649
101-200 180,363 29,853,325
201-600 183,885 56,171,701
601-1,000 40,836 31,890,040
1,001-5,000 49,640 92,046,923
5,001-100,000 4,229 61,954,351
100,001 and above 773 1,580,010,995
-------------------------------------------------
Total 477,628 1,852,646,984
-------------------------------------------------
Share capital and options
As a result of the exercise of options under the Executive Share Option Scheme
and the PacifiCorp Stock Incentive Plan and the issue of shares to the Trustee
of the Employee Share Ownership Plan, a total of 3,621,192 ordinary shares of
50p each were issued during the year. Accordingly, the number of ordinary shares
in issue was 1,852,646,984 as at 31 March 2002. During the year, 4,378,366
options over ordinary shares were granted to 3,902 employees under the
ScottishPower Sharesave Scheme. A total of 2,353,775 options were granted under
the Executive Share Option Plan 2001, which was introduced during the year. No
options were granted under the Executive Share Option Scheme, which was replaced
in 1996 by the introduction of the Long Term Incentive Plan. Awards in respect
of 1,291,333 shares were made under the Plan during the year and these awards
are subject to the achievement of specified performance criteria. Details are
contained in the Remuneration Report. During the year ended 31 March 2002,
options were granted to 121 employees under the PacifiCorp Stock Incentive Plan
over a total of 3,547,600 ordinary shares.
Between 31 March 2002 and 1 May 2002, a further 340,044 ordinary shares have
been issued as a result of the allotments in respect of the Employee Share
Ownership Plan and of the exercise of options under the aforementioned share
option schemes. At the Annual General Meeting of the company last year,
shareholders granted authority to the directors to purchase up to 184,930,589
ordinary shares. The directors have not exercised this authority.
Table 30 - Historical share prices
------------------------------------------------------------------------------------------------------------------------------------
Ordinary shares/1/ American Depositary Shares/2/
Period High (p) Low (p) High ($) Low ($)
------------------------------------------------------------------------------------------------------------------------------------
1997/98 582.00 352.00 38.74 23.18
------------------------------------------------------------------------------------------------------------------------------------
1998/99 675.00 521.00 44.63 34.13
------------------------------------------------------------------------------------------------------------------------------------
1999/00 601.50 359.50 39.11 22.97
------------------------------------------------------------------------------------------------------------------------------------
2000/01
First quarter 576.00 498.00 33.88 33.44
Second quarter 576.00 495.00 30.69 29.88
Third quarter 567.00 483.50 30.75 30.06
Fourth quarter 529.00 422.00 26.65 26.15
------------------------------------------------------------------------------------------------------------------------------------
2001/02
First quarter 521.84 430.64 30.24 24.90
Second quarter 513.06 351.14 29.66 20.90
Third quarter 412.59 355.78 24.51 21.05
Fourth quarter 426.49 350.00 24.75 20.10
------------------------------------------------------------------------------------------------------------------------------------
October 2001 398.94 377.48 23.65 22.35
November 2001 412.59 372.60 24.51 22.14
December 2001 381.38 355.78 22.38 21.05
January 2002 418.45 370.65 24.29 21.99
February 2002 426.49 409.67 24.75 23.75
March 2002 406.74 350.00 23.80 20.10
------------------------------------------------------------------------------------------------------------------------------------
Notes:
1 The past performance of the ordinary shares is not necessarily indicative of
future performance.
2 Calculated using a ratio of four ordinary shares to one ADS, the ratio which
took effect on the listing of the ADSs on the New York Stock Exchange on 8
September 1997. Until that time, each ADS represented 10 ordinary shares.
ScottishPower Annual Report & Accounts/Form 20-F 2001/02 |115
Substantial shareholdings
As at 1 May 2002, the company had been notified that the following companies
were substantial shareholders:
Capital Research and Management Company 5.83%
Putnam Investment Management 3.30%
Control of company
As far as is known to the company, it is not directly or indirectly owned or
controlled by another corporation or by any foreign government.
As at 1 May 2002, no person known to the company, other than as shown above,
owned more than 5% of any class of the group's voting securities.
As at 1 May 2002, the total amount of voting securities owned by directors and
executive officers of ScottishPower as a group is shown in Table 32 below.
Table 32 - Voting securities
Title of Class Amount Percentage
Identity of Group Owned of Class
------------------------------------------------------
Ordinary shares
Directors and officers
(19 persons) 378,395 0.02%
=========================== ========= ==============
Full details of the directors' interests in ScottishPower shares are shown in
Tables 28 and 29 in the Remuneration Report.
None of the officers had a beneficial interest in 1% or more of the issued share
capital.
In addition, as at 1 May 2002, the directors and officers of the company, as a
group, held options to purchase 2,685,192 ordinary shares, all of which were
issued pursuant to the Long Term Incentive Plan, Executive Share Option
Scheme,Executive Share Option Plan 2001, ScottishPower's Sharesave Schemes,
Deferred Plan Share or the PacifiCorp Stock Incentive Plan.
The company does not know of any arrangements the operation of which might
result in a change in control of the group.
Exchange rates
The group publishes its consolidated Accounts in pounds sterling. In this
document, references to "pounds sterling", "pounds", "pence" or "p" are to UK
currency and references to "US dollars", " "US$" or "$ are to US currency.
Solely for the convenience of the reader, this report contains translations of
certain pounds sterling amounts into US dollars at specified rates, or, if not
so specified, at the Noon Buying Rate in New York City for cable transfers in
pounds sterling as certified for customs purposes by the Federal Reserve Bank of
New York ("Noon Buying Rate") on 31 March 2002 of (Pound)1.00 = $1.42.1 on May
2002, the Noon Buying On Rate $1.46 to (Pound)1.00. No was $ representation is
made that the Pounds sterling amounts have been, could have been or could be
converted into US dollars at the rates indicated or at any other rates.
Table 33 sets out, for the periods indicated, certain information concerning the
Noon Buying Rate for US dollars per (Pound)1.00.
Table 33 - Historical exchange rates
---------------------------------------------------------------
Period High Low Average/1/ Year end
---------------------------------------------------------------
1997/98 $1.69 $1.61 $1.65 $1.68
1998/99 $1.72 $1.60 $1.65 $1.61
1999/00 $1.68 $1.55 $1.61 $1.59
2000/01 $1.61 $1.40 $1.52 $1.42
2001/02 $1.48 $1.37 $1.43 $1.42
October 2001 $1.48 $1.42 $1.45
November 2001 $1.46 $1.41 $1.43
December 2001 $1.46 $1.42 $1.45
January 2002 $1.45 $1.41 $1.41
February 2002 $1.43 $1.41 $1.41
March 2002 $1.43 $1.41 $1.42
------------------------- ------- ------ -------- -----------
Note:
/1/ The average of the Noon Buying Rates on the last day of each month during
the relevant period.
Dividends
Although dividends were historically declared and paid and financial reports
published semi-annually, following completion of the merger with PacifiCorp, the
company moved to quarterly reporting and the quarterly payment of dividends.
A dividend of 6.835 pence per share on the ordinary shares will be paid on 14
June 2002 to shareholders on the register on 10 May 2002. This makes total
dividends for the year of 27.34 pence per share. A dividend of $ 0.3972 per ADS
will also be paid on 14 June 2002 to ADS holders of record on 10 May 2002.This
makes total dividends for the year of $1.5721 per ADS.
On 19 March 2002, the company completed the demerger of its interest in Thus
Group plc ("Thus"). As a result of the demerger, and the subsequent conversion
of Thus participating preference shares into Thus ordinary shares, ScottishPower
shareholders received a special dividend on Thus ordinary shares of
approximately 53.76 for every 100 ScottishPower ordinary shares held at 5.00pm
on 15 March 2002, subject to the deduction of fractional entitlements arising
from the demerger and subsequent conversion. The total value of this dividend as
disclosed in the Group Profit and Loss Account was some (Pounds)437 million.
The company remains committed to its stated aim of growing dividends by 5% per
annum nominal for the period to March 2003.
Thereafter the Board intends to adopt a dividend policy which reflects both the
reduced proportion of the ScottishPower group's profits derived from UK
regulated infrastructure businesses and the need to balance future investment
with an appropriate dividend return for shareholders.
Accordingly, with effect from the year ending March 2004 the company intends to
target dividend cover, based on earnings before goodwill amortisation and
exceptional items, in the range 1.5 - 2.0 times, and ideally towards the middle
of that range. ScottishPower will aim to grow dividends broadly in line with
earnings thereafter.
Future dividends will be dependent upon the group's earnings, financial
condition and other factors. Dividends paid in the past are not necessarily
indicative of future dividends.
Table 34 sets out the dividends paid on ordinary shares and ADSs in respect of
the past five financial years, excluding any associated UK tax credit in respect
of such dividends. A person resident in the UK for tax purposes who receives a
dividend from the company is generally entitled to a tax credit, currently at a
rate of 1/9th of the dividend ("associated UK tax credit"). For further
information, see "Taxation of Dividends".
ScottishPower Annual Report & Accounts/Form 20-F 2001/02 |116
Investor Information continued
Table 34 - Historical Dividend Payments
----------------------------------------------------------------------------------------------------------------------------------
Notes 2001/02 2000/01 1999/00 1998/99 1997/98
Pence per ordinary share 1
----------------------------------------------------------------------------------------------------------------------------------
Interim - - 8.27p 7.50p 6.80p
Pre-completion - - 8.10p - -
Quarter (29 Nov 1999 - 31 Dec 1999) - - 2.23p - -
Quarter (1 Jan 2000 - 31 Mar 2000) - - 6.20p - -
Quarter (1 April - 30 June) 6.835p 6.51p - - -
Quarter (1 July - 30 Sept) 6.835p 6.51p - - -
Quarter (1 Oct - 31 Dec) 6.835p 6.51p - - -
Quarter (1 Jan - 31 Mar) 6.835p 6.51p - - -
Final - - - 15.00p 13.60p
------------------------------------------------------------------ -------- -------- --------- ------- -------
Total 27.34p 26.04p 24.80p 22.50p 20.40p
================================================================== ======== ======== ========= ======= =======
US dollars per ADS 1,2
Interim - - $ 0.5324 $ 0.48 $ 0.46
Pre-completion - - $ 0.5215 - -
Quarter (29 Nov 1999 - 31 Dec 1999) - - $ 0.1413 - -
Quarter (1 Jan 2000 - 31 Mar 2000) - - $ 0.3856 - -
Quarter (1 April - 30 June) $ 0.3907 $ 0.3928 - - -
Quarter (1 July - 30 Sept) $ 0.3979 $ 0.3702 - - -
Quarter (1 Oct - 31 Dec) $ 0.3863 $ 0.3805 - - -
Quarter (1 Jan - 31 Mar) $ 0.3972 $ 0.3721 - - -
Final - - - $ 0.97 $ 0.91
------------------------------------------------------------------ -------- -------- --------- ------- -------
Total $ 1.5721 $ 1.5156 $ 1.5808 $ 1.45 $ 1.37
================================================================== ======== ======== ========= ======= =======
Notes:
1 Dividends per share and per ADS are shown net of any associated UK tax credit
available to certain holders of ordinary shares and ADSs. See "Taxation of
Dividends". Dividends paid by the Depositary in respect of ADSs are paid in US
dollars based on a market rate of exchange that differs from the Noon Buying
Rate.
2 Calculated based on a ratio of four ordinary shares for one ADS.
Memorandum and Articles of Association
A summary of certain provisions of the company's Memorandum and Articles of
Association will be filed with the company's report to the US Securities and
Exchange Commission on Form 20-F.
Exchange controls and other limitations affecting security holders
There are currently no UK laws, decrees or regulations that restrict the export
or import of capital, including, but not limited to, foreign exchange capital
restrictions, or that affect the remittance of dividends or other payments to
non-UK resident holders of the company's securities except as otherwise set
forth in "Taxation".
There are no limitations imposed by UK law or by the company's Memorandum and
Articles of Association that restrict the right of non-UK resident or non-UK
citizen owners to hold or to vote the ordinary shares.
Taxation
The following discussion of UK tax and US federal income tax consequences is set
forth with respect to US tax considerations in reliance upon the advice of
Milbank, Tweed, Hadley & McCloy LLP, special US counsel to the company, and with
respect to UK tax considerations in reliance upon the advice of Freshfields
Bruckhaus Deringer, the company's UK lawyers. The discussion is intended only as
a summary of the principal US federal income tax and UK tax consequences to
investors who hold the ADSs or ordinary shares as capital assets and does not
purport to be a complete analysis or listing of all potential tax consequences
of the purchase, ownership and disposition of ADSs or ordinary shares. The
summary does not discuss special tax rules that may be applicable to certain
classes of investors, including banks, insurance companies, tax exempt entities,
dealers, traders who elect to mark to market, investors with a functional
currency other than the US dollar, persons who hold ADSs as part of a hedge,
straddle or conversion transaction, or holders of 10% or more of the voting
stock of the company. The statements of UK and US tax laws and practices set out
below are based on the laws in force and as interpreted by the relevant taxation
authorities as of the date of this report. The statements are subject to any
changes occurring after that date in UK or US law or practice, in the
interpretation thereof by the relevant taxation authorities, or in any double
taxation convention between the US and the UK. On July 24, 2001, the US and the
UK signed a new convention between the two countries for the avoidance of double
taxation with respect to taxes on income and capital gains. This new convention
is not yet in force since it has not yet been ratified by the US and UK. The
following discussion is based on the relevant provisions of the existing
convention ("Income Tax Convention"). The company believes, and the discussion
therefore assumes, that it is
ScottishPower Annual Report & Accounts/Form 20-F 2001/02 |117
not a passive foreign investment company for US federal income tax purposes.
Each investor is urged to consult their own tax adviser regarding the tax
consequences of the purchase, ownership and disposition of ordinary shares or
ADSs under the laws of the US, the UK and their constituent jurisdictions and
any other jurisdiction where the investor may be subject to tax.
If the obligations contemplated by the Deposit Agreement are performed in
accordance with its terms, a beneficial owner of ADSs will be treated as the
owner of the underlying ordinary shares for the purposes of the Income Tax
Convention and the US Internal Revenue Code of 1986, as amended ("Code").
For the purposes of this summary, the term "US Holder" means a beneficial owner
of the ADSs that is a US citizen or resident, a domestic corporation or
partnership, a trust subject to the control of a US person and the primary
supervision of a US court, or an estate, the income of which is subject to US
federal income tax regardless of its source.
For the purposes of this summary, the term "Eligible US Holder" means a US
holder that is a resident of the US for the purposes of the Income Tax
Convention and that satisfies the following conditions:
.. is not also resident in the UK for UK tax purposes;
.. is not a corporation which, alone or together with one or more associated
corporations, controls, directly or indirectly, 10% or more of the voting stock
of the company;
.. whose holding of the ADSs is not attributable to a permanent establishment in
the UK through which such holder carries on a business or with a fixed base in
the UK from which such holder performs independent personal services; and
.. under certain circumstances, is not a company 25% or more of the capital of
which is owned, directly or indirectly, by persons that are neither individual
residents of, nor nationals of the US.
Taxation of dividends
The company is not required to withhold any UK taxes from its dividend payments
to US Holders. Therefore the amount of a dividend paid to a US Holder will not
be reduced by any UK withholding tax. Under UK tax law and the Income Tax
Convention, an Eligible US Holder is in theory entitled to an additional payment
from the UK ("UK tax credit") equal to 1/9th of the amount of any dividend paid
by the company to the holder. While, as noted above, the dividend paid by the
company is not subject to any UK withholding tax, under current UK law, the UK
tax credit that otherwise would be payable by the UK is completely offset by a
UK withholding tax equal to 100% of that UK tax credit. Accordingly, US Holders
will receive the full amount of any dividend declared by the company (without
deduction for UK tax) but will not be entitled to an additional cash payment
from the UK in respect of the UK tax credit. An Eligible US Holder who elects to
claim a credit (as described below) against the holder's US federal income tax
liability with respect to the UK withholding tax imposed on the UK tax credit
amount, is required to include, in addition to the gross amount of the dividend
paid by the company, the amount of UK tax credit in taxable income for US
federal income tax purposes, even though none of the amount of the UK tax credit
is paid by the UK. An Eligible US Holder who so elects to include the amount of
the UK tax credit in taxable income, generally will be entitled to credit
against the holder's US tax liability, the amount of the UK tax credit that the
holder is deemed to have received, which US tax credit may result in a reduction
in the holder's effective US tax rate on the cash dividend received. Following
is a simplified numerical example of the US tax treatment of dividends paid to
an Eligible US Holder who is subject to tax at a rate of 35% and is eligible for
and claims a US tax credit for the complete amount of the UK tax credit:
$
-----------------------------------------------
Dividend received 90.00
UK tax credit 10.00
---------------------------------------- ------
US taxable income 100.00
---------------------------------------- ------
US tax @ 35% 35.00
US tax credit for UK withholding tax (10.00)
---------------------------------------- ------
US tax liability 25.00
---------------------------------------- ------
Cash dividend received 90.00
US tax liability (25.00)
---------------------------------------- ------
After-tax cash amount 65.00
======================================== ======
Approximate effective US tax rate
on cash received 27.8%
======================================== ======
Note that the US federal income tax consequences of dividends paid to an
Eligible US Holder will depend upon the holder's particular circumstances and,
consequently, the US federal income tax consequences applicable to a particular
holder may differ from those set out in the above example. Eligible US Holders
are urged to consult their own tax advisers regarding the tax consequences to
them of the payment of a dividend by the company.
The full procedures for determining and claiming a US tax credit, with respect
to dividends received from a UK corporation, are outlined in US Internal Revenue
Service Revenue Procedure 2000 - 13, 2000 - 6 I.R.B. 1.
A US Holder recognises income when the dividend is actually or constructively
received by the holder, in the case of ordinary shares, or by the Depositary, in
the case of ADSs. The dividend will not be eligible for the dividends received
deduction generally allowed to US corporations in respect of dividends received
from other US corporations. Distributions in excess of current and accumulated
earnings and profits, as determined for US federal income tax purposes, will be
treated as a return of capital to the extent of the Eligible US Holder's basis
in the ordinary shares or ADSs and thereafter as a capital gain. In determining
the amount of the distribution, a US Holder will use the spot currency exchange
rate on the date the dividend is included in income. Any difference between that
amount and the dollars actually received may constitute a foreign currency gain
or loss. However, individual Eligible US Holders are not required to recognise a
gain of less than $200 from the exchange of foreign currency in a "personal
transaction" as defined in Section 988(e) of the Code.
Subject to certain limitations and requirements, an Eligible US Holder will be
entitled under the Income Tax Convention to credit the UK withholding tax
imposed on the amount of the UK tax credit against the Eligible US Holder's US
federal income tax liability, provided the holder includes the gross amount of
the UK tax credit in the holder's gross income as described above. Claiming a US
foreign tax credit with respect to the UK withholding tax imposed under the
Income Tax Convention upon the UK tax credit, may result in a lower effective US
ScottishPower Annual Report & Accounts/Form 20-F 2001/02 |118
Investor Information continued
federal income tax rate on dividends paid by the company for certain Eligible US
Holders as demonstrated in the above numbered example. An Eligible US Holder is
not required to affirmatively make a claim to the UK Inland Revenue to be
entitled to the US foreign tax credit, although an Eligible US Holder electing
to claim the credit must complete an Internal Revenue Service Form 8833 (Treaty
Based Return Position Disclosure) and file such Form with the holder's US
federal income tax return. Eligible US Holders that include the amount of the UK
tax credit in gross income, but do not elect to claim foreign tax credits may
instead claim a deduction for UK withholding tax. For foreign tax credit
limitation purposes, the dividend will be income from sources outside the US.
The rules relating to the computation of foreign tax credits are complex and
Eligible US Holders should consult their own tax advisers to determine whether,
and to what extent, a credit would be available and whether any filings or other
actions may be required to substantiate an Eligible US Holder's foreign tax
credit claim.
If the US Holder is a US partnership, trust or estate, the UK tax credit will be
available only to the extent that the income derived by such partnership, trust
or estate is subject to US federal income tax as the income of a resident either
in its hands or in the hands of its partners or beneficiaries, as the case may
be. Whether holders of ADSs who reside in countries other than the US are
entitled to a tax credit in respect of dividends on ADSs depends in general upon
the provisions of conventions or agreements, if any, as may exist between such
countries and the UK.
Taxation of capital gains
In general, for US tax purposes, US Holders of ADSs will be treated as the
owners of the underlying ordinary shares that are represented by such ADSs and
deposits and withdrawals of ordinary shares by US Holders in exchange for ADSs
will not be treated as a sale or other disposition for US federal income tax
purposes. Upon a sale or other disposition of ordinary shares or ADSs, US
Holders will recognise a gain or loss for US federal income tax purposes in an
amount equal to the difference between the US dollar value of the amount
realised and the US Holder's tax basis (determined in US dollars) in such
ordinary shares or ADSs. Generally, such gain or loss will be a long-term
capital gain or loss if the US Holder's holding period for such ordinary shares
or ADSs exceeds one year. Any such gain or loss generally will be income from
sources within the US for foreign tax credit limitation purposes. Long-term
capital gain for an individual US Holder is generally subject to a maximum tax
rate of 20%.
A US Holder who is not resident or ordinarily resident for UK tax purposes in
the UK will not generally be liable for UK tax on capital gains recognised on
the sale or other disposition of ADSs or ordinary shares, unless the ADS holder
carries on a trade, profession or vocation in the UK through a branch or agency
and the ADSs are, or have been, used, held or acquired for the purposes of such
trade, profession or vocation or such branch or agency.
US citizens resident or ordinarily resident in the UK, US corporations resident
in the UK by reason of their business being managed or controlled in the UK and
US citizens who or US corporations which, are trading or carrying on a trade,
profession or vocation in the UK through a branch or agency and who or which
have used, held or acquired ADSs or ordinary shares for the purposes of such
trade, profession or vocation or such branch or agency may be liable for both UK
and US tax in respect of a gain on the disposal of the ADSs. Such holders may
not be entitled to a tax credit against their US federal income tax liability
for the amount of UK capital gains tax or UK corporation tax on chargeable
gains, as the case may be, paid in respect of such gain unless the holder
appropriately can apply the credit against tax due on income from foreign
sources.
US information reporting and backup withholding
In general, information reporting requirements will apply to dividend payments
(or other taxable distributions) in respect of ordinary shares or ADSs made
within the US to a non-corporate US person. Accordingly, individual US Holders
will receive an annual statement showing the amount of taxable dividends (or
other reportable distributions) paid to them during the year. "Backup
withholding" at the rate of 30% will apply to such payments (i) if the holder or
beneficial owner fails to provide an accurate taxpayer identification number in
the manner required by US law and applicable regulations, (ii) if there has been
notification from the Internal Revenue Service of a failure by the holder or
beneficial owner to report all interest or dividends required to be shown on its
federal income tax returns or, (iii) in certain circumstances, if the holder or
beneficial owner fails to comply with applicable certification requirements.
In general, payment of the proceeds from the sale of ordinary shares or ADSs to
or through a US office of a broker is subject to both US backup withholding and
information reporting requirements, unless the holder or beneficial owner
establishes an exemption. Different rules apply to payments made outside the US
through an office outside the US.
UK inheritance tax
An individual who is domiciled in the US for the purposes of the convention
between the US and the UK for the avoidance of double taxation with respect to
estate and gift taxes ("Estate Tax Convention") and who is not a national of the
UK for the purposes of the Estate Tax Convention will not generally be subject
to UK inheritance tax in respect of the ADSs or ordinary shares on the
individual's death or on a gift of the ADSs or ordinary shares during the
individual's lifetime, unless the ADSs or ordinary shares are part of the
business property of a permanent establishment of the individual in the UK or
pertain to a fixed base in the UK of an individual who performs independent
personal services. Special rules apply to ADSs held in trust. In the exceptional
case where the shares are subject both to UK inheritance tax and to US federal
gift or estate tax, the Estate Tax Convention generally provides for the tax
paid in the UK to be credited against tax paid in the US.
UK stamp duty and stamp duty reserve tax
In practice, no UK stamp duty need be paid on the acquisition or transfer of
ADSs provided that the instrument of transfer is executed outside the UK and
subsequently remains at all times outside the UK. An agreement to transfer ADSs
will not give rise to a liability to stamp duty reserve tax.
ScottishPower Annual Report & Accounts/Form 20-F 2001/02 |119
Subject to certain exceptions, a transfer on sale of ordinary shares, as opposed
to ADSs will generally be subject to UK stamp duty at a rate of 0.5% (rounded
up, if necessary, to the nearest (Pounds)5) of the consideration given for the
transfer. An agreement to transfer such shares will normally give rise to a
charge to UK stamp duty reserve tax at a rate of 0.5% of the consideration
payable for the transfer, provided that stamp duty reserve tax will not be
payable if stamp duty has been paid. Where such ordinary shares are later
transferred to the Depositary's nominee, further stamp duty or stamp duty
reserve tax will normally be payable at the rate of 1.5% (rounded up, if
necessary, to the nearest (Pounds)5) of the value of the ordinary shares at the
time of the transfer.
A transfer of ordinary shares by the Depositary or its nominee to the relative
ADS holder when the ADS holder is not transferring beneficial ownership gives
rise to a UK stamp duty liability of (Pounds)5 per transfer.
Taxation of Thus demerger dividend in specie
Information pertaining to the tax position of shareholders following the
demerger of Thus can be obtained from the Company Secretary at the company's
registered office.
ScottishPower Annual Report & Accounts/Form 20-F 2001/02 |120
Financial Calendar
14 June 2002 Dividend payment date - US and UK (final dividend for the
year ended 31 March 2002)
25 July 2002 Announcement of results for quarter ending 30 June 2002 - Q1
26 July 2002 Annual General Meeting
August 2002 Shares ex-dividend
September 2002 Q1 Dividend payable
November 2002 Announcement of results for quarter ending 30 September
2002 - Q2
November 2002 Shares ex-dividend
December 2002 Q2 Dividend payable
February 2003 Announcement of results for quarter ending 31 December
2002 - Q3
February 2003 Shares ex-dividend
March 2003 Q3 Dividend payable
May 2003 Announcement of Preliminary Results for the year ending 31
March 2003
May 2003 Shares ex-dividend
June 2003 Q4 Dividend payable (final dividend for the year ending 31
March 2003)
Annual General Meeting
The Annual General Meeting will be held at the Edinburgh Festival Theatre, 13/29
Nicolson Street, Edinburgh on Friday 26 July 2002 at 11.00 am. Details of the
resolutions to be proposed at the Annual General Meeting are contained in the
Notice of Meeting.
Quarterly results
Copies of the quarterly results may be obtained, free of charge, on request from
the Company Secretary at the company's registered office. Quarterly results will
also be published on the company's website: www.scottishpower.com
Half-year results
The company, as permitted by the London Stock Exchange, publishes its half-year
results in one UK national newspaper. In 2002, it is expected that the half-year
results will be published in The Times and on the company's website. Copies of
the half-year results may be obtained, free of charge, on request from the
Company Secretary at the company's registered office.
Environment and Community reports
Copies of the Corporate Environment Sustainability Report and the Community
Report may be obtained, free of charge, on request from the Company Secretary at
the company's registered office. The Corporate Environment Sustainability
Report, the Corporate Environment Performance Report and Community Report are
published on the company's website.
Press releases and up-to-date information on the company can be found on the
company's website.
The Annual Review 2001/02 is also available on audio tape, free of charge, from
the Company Secretary at the company's registered office.
ScottishPower Annual Report & Accounts/Form 20-F 2001/02 |121
Shareholder Services
Ordinary Shares
Share registration enquiries
The Registrar
Lloyds TSB Registrars Scotland
PO Box 28448
Edinburgh EH4 1WQ
Tel: +44 (0)870 600 3999
Fax: +44 (0)870 900 0030
Textphone: +44 (0)870 600 3950
Website: www.shareview.co.uk
Dividend Reinvestment Plan
The Dividend Reinvestment Plan provides UK ordinary shareholders with the
facility to invest cash dividends by purchasing further ScottishPower shares.
For further details, please contact Lloyds TSB on telephone number 0870 241
3018.
Share consolidation and ISAs
Share consolidation is a facility which allows a number of holdings, and
especially family holdings, to be consolidated into one holding. This service is
provided free of charge.
Individual Savings Accounts ("ISAs") are suitable for UK resident private
investors who wish to shelter their ScottishPower shares from Income and Capital
Gains Tax. Details of the ScottishPower ISA service are available from Lloyds
TSB at the following address. Alternatively, please call the ISA helpline on
0870 242 4244.
Lloyds TSB Registrars ISAs
The Causeway
Worthing BN99 6UY
Share dealing
ScottishPower ordinary shares may be bought or sold at competitive rates by post
or telephone. For further details, please contact Stocktrade on 0845 601 0979,
quoting LOW C0070.
American Depositary Shares ("ADSs")
Exchange and stock transfer enquiries
JPMorgan Chase Bank
Shareholder Relations
PO Box 43013
Providence, RI 02940-3013
Tel: 1 (866) SCOTADR (Toll Free)
1 (866) 726 8237 (Toll Free)
+1 (781) 575 2678 (Outside US not Toll Free)
Fax: +1 (781) 575 4082
Website: www.adr.com/shareholder
Dividend Reinvestment Plan
Global Invest Direct
Global Invest Direct is the Direct Share Purchase and Dividend Reinvestment Plan
for ADS holders which allows existing and first time investors to purchase ADSs
without a broker. Global Invest Direct encourages investors to make initial and
ongoing investments in the company by providing investors with the convenience
of investing directly in ScottishPower's ADSs, with reduced brokerage
commissions and service costs. For further details, please contact JPMorgan
Chase Bank as detailed above.
Agent for US federal securities laws
The agent for ScottishPower for US federal securities law purposes is:
Puglisi & Associates,
850 Library Avenue, Suite 204
PO Box 885
Newark
Delaware 19715
ScottishPower Annual Report & Accounts/Form 20-F 2001/02 |122
Index
Accounting
developments 41
policies and definitions 41-43, 56-60
Acquisition 34, 73 (11,12), 77 (16)
American Depositary Shares 121
Annual General Meeting 120
Audit Committee 45, 46
Audit Report 111
Balance sheets
company 108
group 75
Board of Directors 44
Borrowings 80-85 (21)
Business
description of 10-17
reviews - 2000/01 34-36
reviews - 2001/02 31-34
strategy 3, 10
Capital commitments 95 (31b)
Capital expenditure 33, 76 (14b)
Capital gains tax 118
Cash flow
acquisitions and disposals 73 (11, 12)
analysis 72 (9)
commentary 33
group statement 71
US GAAP 102 (34)
Chairman's Statement 2
Charitable donations 16
Chief Executive's Review 3-9
Contingent liabilities 95 (30)
Corporate governance 46
Creditor payment policy and practice 40
Creditors 85 (22), 109 (38)
Currencies, accounting policy 59
Debt (net)
analysis 74 (13)
reconciliation to net cash flow 71
Debtors 80 (20), 109 (36)
Deferred income 87 (25)
Deferred tax 69 (6), 87 (24)
Depreciation
accounting policy 58
by segment 65 (1c)
Directors
executive 44
non-executive 44
pensions 50
remuneration 48-54
report 1-55
responsibilities for accounts 55
service contracts 50
share options 49, 52
shareholdings 52
Dividends
in specie 33, 70 (8)
per ADS 116
per ordinary share 3, 70 (8), 116
payment dates 120
Divisions
Infrastructure 7, 14
UK 6, 12
US 3, 10
Earnings and dividends
2001/02 33
2000/01 36
Earnings per ordinary share 1, 70 (7)
Employees
numbers and costs 15, 67 (3)
policies, UK and US 25
Environment
accounting policy 59
policy approach 9, 16
regulation 22-25
Exceptional items 2, 30, 68 (4)
Executive Team 45, 46
Financial
commitments 37, 95 (31)
highlights 1
review 30-43
Financial instruments
accounting policies 57
analysis 80-85 (21)
Five Year Summary 112
Fixed assets
intangible 77 (16)
investments 58, 79 (18), 109 (35)
tangible 58, 78 (17)
Glossary
of financial terms 113
of general terms 123
Going concern 41
Goodwill
accounting policy 58
analysis 77 (16)
Grants and contributions
accounting policy 59
analysis 87 (25)
Health and safety 25
Inheritance tax 118
Interest charge (net)
accounting policy 57
analysis 69 (5)
Interest and Taxation
2000/01 36
2001/02 32
Internal control 46
Investor information 114-119
Leased assets, accounting policy 58
Litigation 26
Loans and other borrowings 80-85 (21)
Long Term Incentive Plan 49, 52, 53, 59
Minority interests 91 (28)
Net asset value per share 77 (15)
Net assets by segment 76 (14a)
Nomination Committee 45, 46
Operating profit
analysis 66 (2)
by segment 65 (1b)
highlights 1
reconciliation to net operating
cash flows 73 (10)
Own shares held under trust 58
PacifiCorp 3-5, 10-12, 18-20
PacifiCorp Power Marketing, Inc. 5, 12
Pensions costs
accounting policy 59
analysis 91-95 (29), 102 (34d)
Post-retirement benefits
accounting policy 59
analysis 94 (29h), 104 (34e)
Profit and loss account
company 109 (40)
group 61-63
Property 16
Provisions for liabilities
and charges 86 (23), 87 (24)
Recognised gains and losses 64
Registrar 121
Regulation
electricity and gas UK 20
electricity US 18
environmental UK 23
environmental US 22
Related party transactions 96 (32)
Remuneration Committee
membership 45, 46, 48
report 48-54
Research and development 16, 66 (2)
Reserves 90 (27), 109 (39)
Risk management 38-40, 46
Segmental information 65 (1), 76 (14)
Share capital 87 (26), 109 (39)
Share options 88 (26b), 114
Share premium 90 (27), 109 (39)
Shareholder services 121
Shareholders' funds
analysis 90 (27), 109 (39)
reconciliation 64
Shareholdings, analysis 114
Southern Water 9, 15
Stocks
accounting policy 59
analysis 79 (19)
Substantial shareholdings 115
Taxation
accounting policy 58
analysis 69 (6)
commentary 32, 36
deferred 69 (6), 87 (24)
of dividends 116-119
Thus 9, 15
Total assets by segment 76 (14c)
Treasury 36
Turnover
accounting policy 57
by segment 65 (1a)
highlights 1
US GAAP 97-107 (34)
US regulatory assets 59
Figures in brackets refer to Notes to the Accounts
ScottishPower Annual Report & Accounts/Form 20-F 2001/02 |123
Glossary of Terms
Term - Definition
ADS - American Depositary Share (US)
The Authority - The Gas and Electricity Markets Authority, the body which
determines energy market regulation in Great Britain (UK)
BE - British Energy plc (UK)
BETTA - British Electricity Trading and Transmission Arrangements (UK)
BPA - Bonneville Power Administration (US)
btu - British thermal unit (UK)
Billion - One thousand million (1,000,000,000)
Churn - The turnover of existing customers leaving, and new customers joining,
the company's customer list
CO\\2\\ - Carbon Dioxide
Combined Code - Guidelines setting out corporate governance principles regarded
as good practice for UK registered companies (UK)
Company - Scottish Power plc
Competition Commission - The UK regulatory body concerned with competition
policy and the abuse of market power (UK)
Demand side management - Encouraging customers to reduce their power consumption
Distribution - The transfer of electricity from the transmission system to
customers (US equivalent is Power Distribution)
DTI - Department of Trade and Industry (UK)
EA - Environment Agency (UK)
EBITDA - Earnings before interest, tax, depreciation and amortisation
EU - European Union
EPA - Environmental Protection Agency (US)
EMFs - Electric and Magnetic Fields
Energy supply - Sales of electricity and gas to residential, commercial and
industrial customers (UK)
ESOP - Employee Share Ownership Plan (UK)
ExSOP - Executive Share Option Scheme open to the company's executive directors
and senior managers
FERC - Federal Energy Regulatory Commission (US)
GAAP - Generally Accepted Accounting Principles
Gas - Natural gas
Giga (G) - One thousand million (1,000,000,000) units
Great Britain - England, Scotland and Wales
Group - Scottish Power plc and its consolidated subsidiaries
Guaranteed Standards - Standards of performance agreed between the company and
Ofgem for transmission, distribution and supply (UK)
Home area - The geographical area in which a company was previously the sole
licenced supplier of residential customers (UK)
Interconnectors - The high voltage links connecting the transmission system of
Scotland with those of England & Wales and Northern Ireland (UK)
ISA - Individual Savings Account (UK)
Kilo (k) - One thousand (1,000) units
LTIP - Long Term Incentive Plan
Mega (M) - One million (1,000,000) units
MSP - The multi-state process through which PacifiCorp and the six states it
serves are working to clarify roles and responsibilities concerning the
regulation of PacifiCorps' business activities (US)
NEA - Nuclear Energy Agreement, between British Energy, ScottishPower and
Scottish & Southern (UK)
NETA - New Electricity Trading Arrangements (UK)
NOx - Oxides of Nitrogen
Ofgem - Office of Gas and Electricity Markets, the gas and electricity regulator
in Great Britain (UK)
OFWAT - Office of Water Services, the water regulator in England & Wales (UK)
PED - Public Electricity Distributor (UK)
plc - Public limited company (UK)
Power production - The US term for the generation of electricity
PSCs - Public Services Commissions, the individual bodies which regulate
utilities in each of the states (US)
Rates - The US term for Tariffs
Retail sales - Sales of electricity to residential, commercial and industrial
customers (US)
ROSPA - Royal Society for the Prevention of Accidents (UK)
RPI - Retail Price Index, the equivalent of the US Consumer Price Index - CPI
(UK)
SEC - Securities and Exchange Commission (US)
SEE - Social, environmental and ethical
SEPA - Scottish Environment Protection Agency (UK)
SO\\2\\ - Sulphur Dioxide
Tera (T) - Indicates a measure of 10/12/, for example terawatthours
Transmission - The transfer of electricity from power stations to the
distribution system
Transportation (of gas) - Transfer of gas from on-shore terminals to consumers
through the national pipeline network (UK)
UK - United Kingdom, comprising England, Scotland, Wales and Northern Ireland
US - United States of America
Volt (V) - Unit of electrical potential
Watt (W) - Unit of electrical power, the rate at which electricity is produced
or used
Watt hour (Wh) - Unit of electrical energy, the production or consumption of one
Watt for one hour
WECC - Western Electricity Coordinating Council (US)
Wholesale - The dealing of bulk power with another power supplier
Windfarm - A group of wind-driven turbines intended to generate electricity
(US) or (UK) in the definitions above indicates that the term is applicable to
the United States or the United Kingdom, respectively.
-----------------------------------------
Conversion Metres Yards
Factors 0.91 1 1.09
Km Miles
1.61 1 0.62
Litres US Gallons
3.78 1 0.26
-----------------------------------------