BUSINESS REPORT

ON
SCOTTISH & SOUTHERN ENERGY

Finance, Funding and Legislative Frameworks for

Success

SUBMITTED BY: MOHAMED NIZAR

STUDENT ID : 3467615
SUBMITTED TO: IAN FREETH

1
To,

The Board of Directors,

From: Mohamed Nizar
Business Management Consultant
Date: 28 March 2011
Report on Scottish and Southern Energy

2
 CONTENTS
1. Executive Summary………………………………………………..4
2. Background…………………………………………………………...5
3. Competitive Analysis………………………………………………7
4. Ratio Analysis……………………………………………………….11
5. Strategy……………………………………………………………….14
6. Recommendations………………………………………………….16
7. Conclusion……………………………………………………………20
8. References…………………………………………………………….21
9. Appendix……………………………………………………………...22

3
EXECUTIVE SUMMARY:
We can’t think about the life without the availability of energy in this
modern world. All people and industries are depends upon energy. They
can’t imagine the life without energy. United Kingdom accounts for the
major part of world’s energy consumption. The main suppliers in the
UK energy markets include Scottish power, Scottish and Southern
energy (SSE), British gas, E.on energy, EDF energy and Npower. This
report focuses on the analysis on SSE.

Objectives of the study:

 To evaluate competitive environment of SSE.
 To measure financial performance by using ratio analysis.
 To evaluate current corporate strategy of SSE.
 To provide future strategic direction for SSE.

4
BACKGROUND:

Scottish and Southern energy plc (SSE) is a British based energy

company with headquarters in Perth and Scotland. SSE is UK's second
largest generation business, with a total capacity of just over
11,300MW. SSE operates primarily in the UK as well as in Ireland and
continental Europe and employs 19000 people. Its operation includes
the process of generating and providing energy, supply of gas, operation
of gas and telecoms networks. And also provides services such as gas
storage and contracting.

Share price of SSE

As per (FAME, 2010)

5
Diagram shows a dramatic fall in 2008 after a consistent growth from
2004. Consistent growth was due to increase in the price of crude oil in
the world market. When the price of crude oil started to fell, it affected
all the energy companies in the world. After 2009, SSE keeps a constant
share price of £11for 2010 as well. Now it gradually started increasing
and expecting to reach 14 by the end of 2013. (FAME, 2010)

6
ANALYSIS:

This part includes evaluation of SSE’s competitive environment,

evaluation of ratio analysis and evaluation of SSE’s current corporate
strategy.

Critical competitive analysis:

UK competitive analysis:

Energy is considered as the need of people rather than their want.

That’s why energy and gas market is less affected in the time of
recession as well. Competition in gas and electricity market with major
6 companies will be a good advantage for customers. Because companies
will be under pressure to reduce their costs to survive in the market.
Major suppliers of energy and gas include British Gas, Scottish and
Southern Energy, E.ON, RWE npower, EDF Energy and Scottish
power. British Gas is the market leader in both Electricity and Gas
markets, but has a far most position in gas. All other major suppliers
are stronger in electricity than in gas.

7
 Figure 1 Estimated Market Share of major Energy and Gas
Suppliers in UK, 2008 (Mintel 2009a)

Electricity Gas

% %

British Gas 22 43

Scottish and Southern Energy 19 16

E.ON 17 13

RWE npower 16 12

EDF Energy 13 7

Scottish Power 13 9

Other * *

Total 100 100

According to the study conducted by Mintel, British Gas holds 22% and
43% market share in Electricity and Gas respectively. In contrast SSE
is just behind in electricity with 19% and far behind in Gas with 16%.

8
Key industry influencing factors:

 Personal disposable income:

Consistency in growth of income and increase in unemployment
rate leads to decrease in customer confidence in 2009 (Mintel,
2009). And later in 2010 personal consumption falls by 0.3% due
to decline in real disposable income. This decline in income was
due to lower wage rates and lower employment. Wage rates fall by
0.2% and employment rate decreases by 0.3% from 2009.
(National archives, 2010)
 Inflation:
Increase in the price of energy depends upon the price of crude oil
in world market. There was a slight increase of 0.5% from 2009,
and then it reduced dramatically due to recession in the world
market. (National archives, 2010)
 Interest rates
Interest rates effects the borrowing power of companies in any
industry. UK government is taking further steps to increase
interest rates after their budget in March 22, 2011 with relation
to the inflation rate in the market.( www.telegraph.co.uk)
 Level of business investments
Business investment and residential construction are negatively
affected by higher price of capital goods, reduced output and lower
real disposable income. (National archives, 2010)
 Level of consumer confidence
Consumer confidence is depends upon their income. If there is a
growth in their income, their confidence will increase and they
won’t worry about consumption on energy and gas. Otherwise they
will make some limit on consumption and it will affect the all
energy industry.

9
  Level and extent of regulation
Ofgem’s (Office of the Gas and Electricity Markets) first priority
was promoting competition in Gas and Electricity markets.
Recently, they implemented regulation on 6 major energy and gas
suppliers to reduce tariffs. (Telegraph news, 21 March 2011)

SSE is going through a growth stage in industry life cycle where they
can look at strategies of British Gas and bring strategies to overcome
them in the market of electricity. They can easily overcome sale of
British Gas in electricity which is achievable for them. They have to
follow their current strategy as well as develop future strategy to
become market leader in the UK market.

10
RATIO ANALYSIS
ROCE
The level of returns to the total investments that include fixed assets,
the company’s investments and shareholder investments fell down
dramatically in 2009 due to global recession. Now company almost
reached the position of 2008 and hopefully it will exceed the rate of
2007.

ROCE
20
18
16
14
12
10
8
6
4
2
0
2006 2007 2008 2009 2010

11
Profit Margin:
High profits were witnessed in 2007 and dropping below 1% in 2009 due
to global financial crisis. Huge recovery in 2010 helped SSE to reach
almost 8% in 2010. This growth has contributed to profit of SSE which
increased from £112.3m in 2009 to £947.8m in 2010.

Profit margin
12

10

0
2006 2007 2008 2009 2010

12
Acid test ratio:
As an energy provider, SSE will not be having many accounts payable.
Energy should be provided with collecting monthly bills from
consumers. There was a consistent growth in their liquidity ratio
throughout last 5 year even though there was a slight decrease in 2008.
It shows how quickly SSE can convert their current assets into cash.

Acid test ratio

1.2

0.8

0.6

0.4

0.2

0
2006 2007 2008 2009 2010

13
STRATEGY:
Overall strategy:
SSE is the only company listed on the London stock exchange that has
economically regulated businesses like networks and market based
businesses like electricity generation and energy supply in the UK. SSE
aims to deliver above inflation increases in the dividend every year
through efficient operation of energy business as well as investment in
energy business. (SSE, 2010)

SSE believes dividend is the most important factor to be considered in a

company for their further expansion of the business. SSE has chosen
this strategy because they believe that receiving and reinvesting
dividends is the biggest source of an investor’s return for the long term,
dividend targets provide a transparent means with which to
management to hold to account, dividend provides income for investors
who don’t wish to reinvest them and long term commitment to dividend
growth demands a disciplined, consistent and long term approach to
investment, operations and acquisitions. (SSE, 2010)

Investment strategy:

SSE undertakes investment strategy in agreement with its core purpose

of supplying energy people need in a reliable and sustainable way. The
main focus of this strategy is renewable energy. SSE currently invests
in electricity networks, gas storage and power generation. SSE has a
plan of £6.7 billion investment in renewable energy projects. SSE has
planned this with a full thinking about future considerations such as
changes in technology and inflation. This strategy will give an enhanced
range of assets, additional cash flows and profits which will support
future dividend growth and more fuel for electricity production in the
form of renewable resources. (SSE, 2010), (Mntel, 2010)

14
This strategy also linked with the main strategy of SSE which focuses
on dividend policy. Inflation is the main reasons for choosing both these
as a strategy of SSE.

Key Performance Indicators:

Dividend: it is a key factor for deriving the strategy of SSE. Dividend

share has been increased throughout last 5 years from 46.5p/ share in
2006 to 70p/ share in 2010. It insists SSE to focus more on their
dividend policies.
Operating profit: operating profit of SSE has been increased in all
business areas in 2010 except gas storage business. As I mentioned
earlier, SSE planned to invest more on gas storage due to this fall in
2010.
Capital expenditure: it has been significantly increased from
£810.3m 2008 to £1315.2m in 2010. It shows their investment in fixed
assets. They are focusing to invest more on renewable generation in
coming years.

Safety, sustainability and teamwork: it is calculated on the basis of

total recordable injury rate, CO2 emissions, reportable environmental
incidents and number of employees. SSE managed to reduce injury rate
in last year but they are not still in control with CO 2 emissions and
environmental incidents. They have to focus more on these factors to
provide a good future strategy.

Energy customer numbers: SSE is the second largest supplier of

electricity and gas in UK market with £9.35m customers in 2010.
Household electricity accounts for more than 50% of these customers.
With increasing population and changing life style, SSE should focus on
retaining existing customers as well as to catch new customers.

Generation capacity: SSE has a generation capacity of 11330 MW

with 40% Gas/oil, 39 % Coal/ biomass and 21 % of renewable. As a
future focus, SSE should increase their renewable capacity through
more capital expenditure.
15
RECOMMENDATIONS:
I would like to give some recommendations for SSE’s future strategy
after evaluating competitive environment, financial ratio analysis and
current strategy.

I recommend a future strategy on the basis of balance score card which

showed in a diagram in the next page. That includes vision & strategy
and how SSE will achieve vision and strategy by considering 4 factors
such as customer, learning and growth, finance and internal business
processes.

Vision and strategy: To become market leader in UK energy industry

by focusing more on London Olympics.

British Gas is the current market leader in UK energy sector but SSE is
not far behind in electricity sales. So our first aim should be overtaking
British Gas in electricity. SSE can make use of coming Olympics to
reach their aim. SSE can take contracts of all accommodations of
Olympic people from their owners. That may be government or any
private sector so still there is one more year for Olympics. SSE should
take further actions to get contracts of the accommodations.

16
 Financial
objectives: Increase sales, increase market
share.
measures: revenue, share price
targets: increase market share by 1 % in
2012, increase sales by 3%by the end of
london Olympics
initiatives: more public campaigns and
expand business all over the UK

Customer
vision & strategy
objectives: Customer Satisfation, Retaining
of existing customers
To become a number Internal business processes
objectives: efficiency
measures: Feedback, Customer Survey and one supplier in UK by measures: more cutomers
Customer Compliants
targets: reduce customer compliants by 2%
focusing more on the targets: increase by 15 % by the end of
2011
in 2013, increase customer loyalty by 1 % in
2012.
coming london initiatives: make tie up with major car
initiatives: Train employees for providing Olympics. manufacturers
better services

Learning and Growth

objectives: expansion of gas storage, and
provide more career opportunities
measures: increase in number of employees,
increase in the number of gas customers
targets: completion of gas storage expansion
by 2012 and maximising employment
opportunities
initiatives: use online recruitment facilities and
start the expansion work of gas storage.

BALANCE SCORECARD

17
Financial prospective:

I recommend that SSE should focus on increasing their sales by 3 % at

the end of London Olympics and it can be measured by checking the
revenue. SSE should take initial step as focusing more on London
Olympics accommodation contracts.

Another financial objective can be increase market share by 1 % in 2012

and it can be measured by looking at share price. Market share should
be increased in order to increase the sales in the time of London
Olympics.

Learning & growth:

As a part of learning, SSE can focus on providing more career

opportunities in the company. It can be measured by looking at the
number of applications for job. SSE should use online recruitment
system as a first step to achieve target

As a part of Growth, SSE can focus on expanding gas storage system

which will help to get more gas customers. SSE should start the process
of expansion as a starting point for completion of the task.

Customer:

Customers are the key element of any business. As an energy sector,

one customer will not buy more than one product from supplier. So it’s a
challenge for supplier to get new customers. Objectives of SSE can be
focused on retaining existing customer and providing maximum
customer satisfaction. Customer satisfaction can be measured by using
feedbacks and customer complaints. SSE can retain their existing
customers by providing gifts annually. As an initiative, SSE should
focus on training their employees to deal with customers in good
manner.

18
Internal Business Process:

SSE can focus on increasing efficiency by 15 % as an objective for next 2

years. Improving efficiency may lead to increase in customers. As an
initiative, SSE should focus on tie up with major car manufactures in
the UK.

19
CONCLUSIONS:
Southern and Scottish Energy is the 2nd largest electricity and gas
supplier in the UK. SSE is not so far behind of British Gas in Electricity
market. SSE should expand their business all over the Europe in order
to capture more brand image. We discussed SSE’s corporate strategy
and recommended future strategies for 2012 and 2013. Analysed
financial data and the affects it has on SSE’s strategy. Analysed the
competitive environment and made recommendations.

20
REFERENCES
 http://www.computerweekly.com/Articles/2008/02/07/229307/Scotti
sh-amp-Southern-Energy-signs-customer-voice-and-broadband-
deal-with.htm
 http://www.carboncapturejournal.com/displaynews.php?NewsID=6
00
 http://www.scottish-
southern.co.uk/NewsAndMedia/PressReleases/2011/InterimManag
ementStatement/
 http://www.proactiveinvestors.co.uk/columns/trader-
talk/4078/switch-suppliers-to-scottish-southern-energy-4078.html
 http://www.lse.co.uk/ShareChart.asp?sharechart=SSE
 http://www.thegreencarwebsite.co.uk/blog/index.php/2008/08/07/n
ational-helps-scottish-and-southern-energy-reduce-its-carbon-
footprint/
 http://webarchive.nationalarchives.gov.uk/+/http://www.berr.gov.u
k/files/file35876.pdf
 http://www.telegraph.co.uk/earth/energy/8394793/Energy-firms-
ordered-to-simplify-bamboozling-tariffs.html
 Mintel Academic Resources ( 2009,2010)
 SSE Annual Reports
 http://moneycentral.msn.com/investor/invsub/results/statemnt.asp
x?lstStatement=Balance&symbol=US%3aSSEZF&stmtView=Ann

21
 APPENDIX
SWOT & TOWS

Strengths: Weaknesses:
 Government participation:  Cost: providing low cost in
government is emphasizing initial stages will be a
on the use and application of challenge
renewable energy as a  Excess energy: individual
central player to revive UK uses excess energy to cater
economy their life styles which results
 Relief in families: SSE uses in high energy costs
their part of profit to provide  Efficiency standards of
relief to house owners. department of energy
Opportunities: Threats:
 Green house glasses  Adaptability by industries
 New jobs  Investment
 Investment opportunities  competitors
 Opportunity to tackle climate
change

TOWS
Internal factors Strengths: Weaknesses:
 Government  Cost
participation  Excess energy
 Relief in families  Efficiency
standards of
department of
External factors energy
Opportunities: (SO) (WO)
 Green house Make good dealings Participate in
glasses with UK government environment
 New jobs to take opportunity of protection programs to
 Investment green house glasses make awareness of
opportunities using energy
 Opportunity to Borrow money from

22
 tackle climate bank to make use of
change investment
opportunities.
Threats: (ST) (WT)
 Adaptability by Make use of joint Go Europe market and
industries ventures to overcome expand SSE all over
 Investment competition from Europe.
 competition British Gas

PESTEL ANALYSIS:

Political Government rules on energy

industry
Economical  unemployment
 inflation
Social Demographical change
Technological Expansion of internet and
phone based services
Environmental Social responsibility towards
environment
Legal Ofgem’s rules

23
 Porter’s 5 forces:

threat of
competitors
it will not effect
much on SSE due
to less
competitors

industry rival: threat of new

marketing shares are entrants
bargaining power devided among
of suppliers competitors and try there won't be
to gain more market any kind of
it is very low share threat from new
entrants

bargaining power
of buyer
buyer don't have
much buying
power in energy
industry

24
Ratios:
Ratios 2010 2009 2008 2007 2006
ROCE 15.01 0.55 15.34 18.57 15.74
Profit 7.61 0.21 7.11 9.54 8.84
Margin
Acid test 0.97 0.95 0.74 0.86 0.75
ratio

Income Statement & Balance Sheet ( amounts in £m)

Items 2010 2009 2008 2007 2006

Revenue 21,550.4 25,424.2 15,256.3 11,867.1 10,145.2

Total Revenue 21,550.4 25,424.2 15,256.3 11,867.1 10,145.2

Cost of Revenue, Total 19,072.6 24,844.4 13,697.6 10,186.4 8,830.8

Gross Profit 2,477.8 579.8 1,558.7 1,680.7 1,314.4

Selling/General/Administrative Expenses, Total 683.7 576.5 605.7 557.5 482.4

Research & Development 0.0 0.0 0.0 0.0 0.0
Depreciation/Amortization 0.0 0.0 0.0 0.0 0.0
Interest Expense (Income), Net Operating 0.0 0.0 0.0 0.0 0.0
Unusual Expense (Income) 0.0 -102.7 -53.5 -23.3 -69.8
Other Operating Expenses, Total 0.0 0.0 -0.1 0.0 0.0
Operating Income 1,903.9 187.6 1,115.1 1,169.5 942.8

Interest Income (Expense), Net Non-Operating 0.0 0.0 0.0 0.0 0.0
Gain (Loss) on Sale of Assets 0.0 0.0 0.0 0.0 0.0
Other, Net 0.0 0.0 0.0 0.0 0.0
Income Before Tax 1,638.6 53.3 1,083.8 1,132.0 896.9

Income Tax - Total 403.1 -59.0 210.6 301.5 254.6

Income After Tax 1,235.5 112.3 873.2 830.5 642.3

Minority Interest -0.2 0.0 -0.3 0.0 0.0

Equity In Affiliates 0.0 0.0 0.0 0.0 0.0
U.S. GAAP Adjustment 0.0 0.0 0.0 0.0 0.0
Net Income Before Extra. Items 1,235.3 112.3 872.9 830.5 642.3

Total Extraordinary Items 0.0 0.0 0.0 0.0 0.0

Net Income 1,235.3 112.3 872.9 830.5 642.3

25
Assets
Cash and Short Term Investments 261.7 295.9 255.3 56.149.9
Total Receivables, Net 4,450.4 3,922.3 2,431.6 1,591.7 1,323.8
Total Inventory 272.5 366.7 251.2 214.1 164.2
Prepaid Expenses 0.0 1,650.4 963.1 675.0 339.1
Other Current Assets, Total 1,681.6 1,838.5 1,251.0 630.6 571.9
Total Current Assets 6,666.2 8,073.8 5,152.2 3,167.5 2,448.9

Property/Plant/Equipment, Total - Net 8,204.2 7,232.2 6,334.3 5,042.1 4,646.6

Goodwill, Net 726.3 724.0 659.0 293.2 293.4
Intangibles, Net 288.2 253.0 256.9 12.9 12.5
Long Term Investments 1,614.9 937.0 923.8 706.4 706.4
Note Receivable - Long Term 0.0 0.0 0.0 0.0 0.0
Other Long Term Assets, Total 627.8 549.3 447.8 248.6 210.6
Other Assets, Total 0.0 0.0 0.0 0.0 0.0
Total Assets 18,127.6 17,769.3 13,774.0 9,470.7 8,318.4

Liabilities and Shareholders' Equity

Accounts Payable 4,064.5 2,603.6 1,849.0 1,412.2 1,834.6
Payable/Accrued 0.0 0.0 0.0 0.0 0.0
Accrued Expenses 0.0 738.3 842.5 402.1 0.0
Notes Payable/Short Term Debt 0.0 1,060.0 1,847.5 0.0 0.0
Current Port. of LT Debt/Capital Leases 903.7 0.1 0.1 474.8 417.3
Other Current Liabilities, Total 2,244.1 3,742.4 2,168.1 1,085.2 373.4
Total Current Liabilities 7,212.3 8,144.4 6,707.2 3,374.3 2,625.3

Total Long Term Debt 5,143.3 4,336.1 2,073.6 1,803.8 1,797.6

Deferred Income Tax 624.0 594.7 967.3 923.7 919.1
Minority Interest -3.8 -2.3 0.3 0.0 0.0
Other Liabilities, Total 2,027.0 1,719.2 1,045.6 773.0 831.0
Total Liabilities 15,002.8 14,792.1 10,794.0 6,874.8 6,173.0

Redeemable Preferred Stock 0.0 0.0 0.0 0.0 0.0

Preferred Stock - Non Redeemable, Net 0.0 0.0 0.0 0.0 0.0
Common Stock 461.5 460.2 435.1 431.0 430.2
Additional Paid-In Capital 857.5 835.3 315.7 99.1 90.7
Retained Earnings (Accumulated Deficit) 1,692.4 1,535.1 2,203.8 2,065.8 1,624.5
Other Equity, Total 113.4 146.6 25.4 0.0 0.0
Total Equity 3,124.8 2,977.2 2,980.0 2,595.9 2,145.4

Total Liabilities & Shareholders’ Equity 18,127.6 17,769.3 13,774.0 9,470.7 8,318.4

26