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Scottish Power Annual Report and Accounts/Form 20-F 1999-00
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Annual Report and Accounts/Form 20-F 1999-00
99-00
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Contents
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Report of the Directors Annual Accounts Investor Information
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1 Financial Highlights 72 Accounting Policies and 124 Historical Share Prices
2 Chairman's Statement Definitions 125 Exchange Rates
4 Chief Executive's Review 77 Group Profit and Loss Account 125 Dividends
10 Business Review 79 Notes to the Group Profit and 126 Taxation
48 Financial Review Loss Account 130 Financial Calendar
60 Board of Directors 84 Group Cash Flow Statement 131 Shareholder Services
62 Corporate Governance 85 Notes to the Group Cash Flow
64 Remuneration Report of the Statement
Directors 88 Group Balance Sheet 132 Index
89 Notes to the Group Balance Sheet 133 Glossary of Terms
118 Company Balance Sheet
119 Notes to the Company
Balance Sheet
120 Principal Subsidiary
Undertakings and Other
Investments
121 Report of the Auditors
122 Five Year Summary
123 Glossary of Terms and US
Equivalents
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Cross Reference to Form 20-F
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Item 1 Item 7 Item 14
Description of Business Taxation Description of Securities
10 General 126 Taxation to be Registered n/a
12 Generation
14 Power Systems Item 8 Item 15
15 Customer Sales and Services Selected Financial Data Defaults on Senior Securities n/a
17 Southern Water 122 Five Year Summary
19 Thus 125 Exchange Rates Item 16
19 Other UK Businesses 125 Dividends Changes in Securities and Changes
20 PacifiCorp in Security for Registered Securities
23 Powercor Item 9 124 Investor Information
23 Other Operations Management's Discussion and
24 Employees Analysis of Financial Condition Item 17
and Results of Operations Financial Statements n/a
Item 2 48 Financial Review
Description of Property Item 18
44 Generation Facilities Item 9A Financial Statements
44 Transmission and Distribution Quantitative and Qualitative 71 Directors' Responsibilities
Facilities Disclosures About Market Risk for the Accounts
44 Water Supply and Wastewater 56 Quantitative and Qualitative 72 Accounting Policies and
Treatment Facilities Disclosures About Market Risk Definitions
45 Appliance Retailing Facilities 77 Group Profit and Loss Account
45 Non-operational Facilities Item 10 79 Notes to the Group Profit and
46 US Business Facilities Directors and Officers Loss Account
of Registrant 84 Group Cash Flow Statement
Item 3 60 Board of Directors 85 Notes to the Group Cash Flow
Legal Proceedings Statement
42 Litigation Item 11 88 Group Balance Sheet
Compensation of Directors 89 Notes to the Group Balance Sheet
Item 4 and Officers 118 Company Balance Sheet
Control of Registrant 64 Remuneration Report of the 119 Notes to the Company
62 Corporate Governance Directors Balance Sheet
125 Control of Company 120 Principal Subsidiary
Item 12 Undertakings and Other
Item 5 Options to Purchase Securities from Investments
Nature of Trading Market Registrant or Subsidiaries 121 Report ofthe Auditors
124 Nature of Trading Market 67 Remuneration Report of the
Directors Item 19
Item 6 101 Share Capital Financial Statements and Exhibits n/a
Exchange Controls and Other
Limitations Affecting Security Holders Item 13
126 Exchange Controls and Other Interest of Management in Certain
Limitations Affecting Security Transactions
Holders 67 Remuneration Report of the
Directors
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Financial Highlights
Turnover (pound)m Operating profit* (pound)m
Increase since 31 March 1996 81% Increase since 31 March 1996 101%
[GRAPH] [GRAPH]
Earnings per share pence Total shareholder return pence
Increase on 31 March 1996 18%
[GRAPH] [GRAPH]
Earnings per share increased to 67.8 Capital appreciation plus dividend
pence after exceptional items and reinvestment for (pound) invested on
goodwill amortisation for the 1 April 1995.
financial year ended 31 March 2000 Source: DATASTREAM
2000 1999
Turnover (pound)4,115m (pound)3,242m
Operating profit* (pound)961m (pound)804m
Profit before tax* (pound)736m (pound)645m
Earnings per share* 41.4p 42.5p
Dividends per share 24.8p 22.5p
*Before exceptional items and goodwill amortisation
1 Annual Report & Accounts/Form 20-F
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Chairman's Statement
[PHOTO]
Charles Miller Smith
Chairman
We have created a group with a unique set of businesses,geographic range and
skilled management. Were main focused firmly on exploiting these advantages to
create outstanding shareholder value.
The past year has been the most eventful and challenging in the 10-year history
of ScottishPower as a public limited company. We completed the merger with
PacifiCorp, floated a minority stake in our Internet and telecommunications
company, Thus,and saw the announcement of tough new electricity and water price
controls.
As we look at the current year,and at the future, we must focus on what we do
best: improving and expanding our products and services; delivering substantial
efficiency gains; and creating value by building upon our high quality customer
base.
We will also continue to look for innovative projects like the joint venture
with The Royal Bank of Scotland, which only serves to underline our consistent
and coherent strategy of seeking to maximise value from the seven million homes
and businesses that we now serve in the UK and the US. Using the Internet in an
innovative manner will clearly play an increasingly important role.
ScottishPower has, in merging with PacifiCorp, once again demonstrated our
ability to exploit 'first mover' advantage to the full. We believe that, as in
the case of the UK acquisitions, this will provide significant benefits in the
future as we develop our business in the United States.
The markets in which we operate are changing at a speed unthinkable only a
few years ago. But we have created a group with a unique set of businesses,
geographic range and skilled management. These should ensure that your company
is in the best position to meet the challenges and exploit the opportunities
presented by further global consolidation,as well as the rapid changes taking
place in the web and Internet technologies. We remain focused firmly on
exploiting these advantages to create outstanding shareholder value.
It was gratifying to see that the group's pursuit of excellence was
recognised in a number of ways during the year. ScottishPower was voted the top
FTSE 100 company in a wide-ranging survey by The Times, and named as the most
admired UK electricity and gas company by the publication Management Today. Your
company was also placed fourth in a Financial Times poll to determine the
world's top-rated utilities.
Operationally, we continued to make good progress during the year. Financial
performance was positively impacted by the partial sale of Thus and by four
months' contribution from PacifiCorp, with profit before tax at (pound)1.16
billion and earnings per share of 67.8 pence. The year was also marked by
further major investment for growth with (pound)886 million of capital
investment across the group. I am pleased to note that the dividend was
increased by 10.2% to 24.8 pence per share.
Going forward, ScottishPower is determined to deliver continued real dividend
growth while maintaining a prudent dividend cover. We are targeting annual
dividend growth of 5% nominal for a three-year period from April 2000.
In addition, to meet the expectations of our US investors, we have moved to
quarterly reporting and dividend payments. This will benefit our UK
shareholders. We have also integrated the UK Annual Report and the US Form 20-F
into a single document that meets the requirements of both the London and New
York Stock Exchanges.
We have now completed our detailed review of the PacifiCorp business
activities. We see many opportunities to bring benefits to PacifiCorp
2 Annual Report & Accounts/Form 20-F
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customers through efficiencies and improved service. Moreover, these service
objectives can be achieved simultaneously with increasing asset utilisation and
a reduction of PacifiCorp costs.
Through the PacifiCorp merger we have a substantial base in a high-growth
region of the US economy. This gives us great opportunities to grow the business
to the benefit of all stakeholders, focusing initially on electricity but also
looking at other opportunities within our capability and experience.
Another outstanding success story of the past year was the partial flotation
of Thus, formerly ScottishTelecom. Completed in November 1999, the sale raised
around (pound)1 billion in cash, a gain of (pound)787 million before tax.
By continuing to own a majority share in Thus, the group benefits from its
involvement in the impressive growth of Thus's business. It also deepens our
understanding of what is happening in the exciting world of the web and
Internet.
The phenomenal growth of e-commerce has been watched closely by the company.
Our joint venture with The Royal Bank of Scotland is designed to exploit these
channels and deliver a wide range of home and small business related offers
across the Internet.
We are also moving towards an e-commerce basis for procurement, a development
which will lead to substantial savings across the group.
It was particularly pleasing to note the continued improvement in customer
service and the enhanced reliability of our network businesses following the
improvements introduced in the wake of the Christmas storm of 1998. Trees
falling on lines were found to be the main cause of storm-related power outages,
and our Rural Care project in which trees are cleared and others planted away
from lines has proved a great success,both in operational and environmental
terms.
This is perhaps an appropriate moment to pay a warm tribute to my
predecessor, Murray Stuart. Under his distinguished chairmanship, your company
has been transformed from a regional, Scottish electricity provider into a major
international utility. It has been an outstanding achievement and I would like
to thank him on your behalf for all his unstinting efforts over the last 10
years, eight of them as Chairman.
In addition, I should like to congratulate Sir Ian Robinson on his knighthood
for services to the electricity industry, an honour that not only recognises his
personal contribution, but that reflects well on the development of the group.
I should like to welcome to the Board Keith McKennon, Nolan Karras and Robert
Miller, our new American directors; and Alan Richardson, Charles Berry and David
Nish, all from within the ScottishPower senior management team.
Open competition, with all the challenges it entails, has helped shape the
ScottishPower of today. Benefits are manifold: lower prices and better service
for our customers, as well as opportunities for business growth and hence added
value for shareholders. With regulation only where appropriate, free and fair
competition should be allowed to drive the utility market of the future.
Looking ahead, the final regulatory determinations for our electricity and
water businesses provide us with a major challenge, adversely impacting 2000-01
operating profit by some (pound)127 million. We have taken steps to meet this
challenge head-on by restructuring our infrastructure businesses and have
identified further cost efficiencies and operational improvements. We believe
that these actions, together with the benefits arising from the integration of
PacifiCorp and increased sales to customers in the UK, will drive earnings
growth post 2000-01.
ScottishPower is committed to growing its business while delivering value to
shareholders. We will continue to make both capital and revenue investments to
optimise operational performance, enhance the products and services we provide
to customers and create value for shareholders. At the same time it is our
stated aim to grow the dividend by 5% in nominal terms for each of the three
financial years commencing 2000-01.
During the 1990's we established a proven track record for growing businesses
and delivering value and we are very confident that the evolution of our
strategy for the 2000's will drive the company forward and deliver continued
success.
/s/ Charles Miller Smith
Charles Miller Smith
Chairman 4 May 2000
3 Annual Report & Accounts/Form 20-F
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Chief Executive's Review
[PHOTO]
Sir Ian Robinson
Chief Executive
Growth will be achieved by deriving best possible value from our assets
worldwide, by continuing to improve efficiency, and by remaining firmly focused
on customer needs in this period of accelerating change.
ScottishPower achieved success this year as a direct result of our long-term
strategy of concentrating on customer service and shareholder value.
Your company is now among the world's top dozen investor-owned electric
utilities and is well positioned to achieve its aim of becoming a world-leading
international utility by 2005.
At the start of the new Millennium, ScottishPower is ideally positioned to
exploit a unique combination of business advantages, as the race intensifies to
establish a strong position in the global market.
With a large and diversified customer base of more than seven million homes
and businesses in the UK and US, ScottishPower's assets now range from low-cost
generation on both sides of the Atlantic to a majority interest in one of the
fastest-growing telecommunications and Internet-related companies.
Every one of our customers offers us the potential to enhance value through
cross-selling services, and our target is to be equally competitive and
customer-focused in every sector of this greatly enlarged marketplace.
The business highlights of the past year include the completion of the merger
with PacifiCorp, one of the biggest utilities in the US, and the highly
successful partial flotation of Thus, formerly our ScottishTelecom subsidiary.
ScottishPower also made strong progress in the now fully competitive UK
energy supply markets, achieving growth in both gas and electricity sales and
firmly establishing the group as a leading UK energy player.
Our ability to exploit 'first mover' advantage to grow shareholder value,
evident in our expansion across the UK, has once again paid off handsomely.
PacifiCorp is the latest example of this successful strategy and we are now well
placed to expand in the biggest market in the world.
Since our move into the US, a number of UK utilities have followed our
example as the full potential of this market emerges.
Growth will be achieved by deriving best possible value from our assets
worldwide, by continuing to improve efficiency, and by remaining firmly focused
on customer needs in this period of accelerating change.
One of the most dramatic changes over the year has been in the pace of
Internet-related developments, and ScottishPower is well positioned to compete
in this vital and growing market.
We retain a controlling interest in Thus, which has re-positioned itself as a
UK-wide provider of telecommunications and Internet services to the business
market, and we have joined forces with The Royal Bank of Scotland to form an
Internet-based joint venture to deliver a range of business and home-based
energy and financial products.
We have also formed two Internet-based trading initiatives with utility
partners, encompassing an e-procurement consortium and a major European Internet
portal.
UK Businesses
Energy Businesses
ScottishPower has established itself as a leading player in the UK electricity
and gas supply markets. The group is now the second-largest player in the
residential energy market.
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ScottishPower has won the greatest number of new electricity customers of any
incumbent electricity supplier in the UK market; and, despite being one of the
earliest entrants, has lost proportionately the fewest. In total, the group has
gained nearly one million customers, and over 450,000 customers have chosen to
take combined gas and electricity packages.
The group has also retained 87% of all residential customers in its original
Scottish and Manweb franchise areas, a better record than that of any other UK
utility.
Our success was driven by a flexible and imaginative approach to sales. As
competition was encouraged in, first, gas and then electricity markets, doorstep
selling was the prime vehicle for new business. That trend has changed as the
market matured. Doorstep sales now account for less than 50% of new business, as
we concentrate effort on telesales, marketing via our growing appliance
retailing stores network and now the Internet.
The move into energy markets across the UK has coincided with an expansion of
our appliance retailing presence, which has included rebranding stores in
England & Wales as ScottishPower.
Apart from offering high visibility in areas where ScottishPower is now
competing to supply energy, these 183 stores occupy a niche in the high
value-added end of a fiercely competitive retailing market.
About 20 million people visit our retailing stores every year, offering
ScottishPower unique potential for cross-selling energy and associated products.
In future, our chain of stores will increasingly be seen as a sales 'outlet' for
the group's products as a whole.
The group is also developing its e-business channels across our range of
activities. For example, ScottishPower was the first UK utility to offer
invoicing via the Internet, a service which has been taken up by more than
10,000 business sites.
Customers are turning increasingly to the Internet and other online
platforms, including digital television, for shopping, information, and other
transactions.
Accordingly, our Customer Sales & Services business is pressing ahead with
plans to provide the widest possible range of our services over the
Internet, including meter readings, billing, payments and appliance retailing
offers.
One major development in this field was the signing in January of a partnership
agreement with The Royal Bank of Scotland, which aims to enhance both
companies' ability to extend services and market share beyond the traditional
divide between energy and financial packages.
This Internet-based joint venture is designed to provide a range of services
to both homes and businesses.
Two brands are to be launched. The first, aimed at consumers, will provide
personalised financial, utility and lifestyle solutions for homes and families.
The second will provide small businesses with a range of tools and services to
help them trade on the Internet, manage key information, and access specially
negotiated deals with suppliers.
ScottishPower's investment programme and its broad mix of energy sources -
including coal, gas, hydro, nuclear and renewables - should ensure that the
group continues to compete successfully and win new customers.
ScottishPower commissioned a major gas storage facility at Hatfield Moors,
North Yorkshire, in February. This project provides a storage point for gas for
some 450,000 residential customers across England.
Contracts were agreed with SAPPI(UK), the South African pulp and paper
company, to build a (pound)35 million, 60 MW, combined heat and power plant at
the company's site in the north of England. ScottishPower is also completing
plants for Pilkington Glass and Ravenhead Glass in the Manweb area.
The 400 MW combined-cycle gas turbine (CCGT) plant near Brighton, a
(pound)200 million joint venture with the US utility, CSW International, Inc.,
is near completion and will begin operations in winter 2000.
As part of our greater focus on core activities in the UK, our Technology and
Contracting businesses are in the process of being sold as going concerns.
The price-controlled regulated businesses of ScottishPower, Manweb and
Southern Water have been set tighter constraints. The price reductions were
tough, but less than for most other companies, a recognition of existing levels
of efficiency and of our history of cost reductions to customers. We believe
that they provide a stable base for our business development going forward.
However, our UK operating profit for 2000-01 will be reduced by some (pound)127
million as a result of the reviews.
5 Annual Report & Accounts/Form 20-F
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Increasing competition and price pressures have forced down profitability in
Generation, though this has been partially countered by success in cutting
controllable costs and in growing output from our own stations.
While we broadly welcome the proposed reforms for generation trading, we
believe that there are two elements required for them to succeed in Scotland.
First, the removal of the restructuring contracts put in place at privatisation,
particularly the Nuclear Energy Agreement, under which we must take some 75% of
British Energy's output in Scotland at above market prices. Secondly, the
arrangements for access to the Scotland-England interconnector need to be fair
and transparent.
In England & Wales, the new trading arrangements to replace the Pool will
provide more balanced trading on a Great Britain basis. We believe that they
will also place more of a premium on flexible generation, for which our power
stations in Scotland, and that under development in Brighton, are ideally
suited.
The upgrade of the 1600 MW Scotland-England transmission link to 2200 MW and
the completion of the 250 MW Northern Ireland link, both within the next two
years, will provide the opportunity for a considerable boost to our generation
sales.
Our wires business, Power Systems, is also undergoing radical changes to
ensure that its operations are run as efficiently as possible. Asset management,
the determination of strategic direction, has been split from network
management - the day-to-day operation of the system.
The Power Systems business main office has been relocated on a new site,
physically separate from our generation and supply activities, in accordance
with the requirements of the regulator.
These changes and further investment will also help continue the network
strengthening programme, improving the quality of supply.
In particular, our Rural Care project was launched as an imaginative and
practical response to the damage caused to our network by the Christmas storm in
1998.
The primary cause of the damage was the number of fallen trees. Rural Care is
therefore running a programme of tree felling, re-routing and upgrading of
vulnerable lines to minimise any repeat. Simultaneously, it has embarked on a
major planting scheme, in partnership with a range of interested parties, to
ensure that the local environment is enhanced.
Such measures help ensure that our customers continue to receive an excellent
service, and it is pleasing to report that the number of failures in meeting
Guaranteed Standards decreased again.
Southern Water
At Southern Water, as with the energy businesses, our track record is of
improving customer service while delivering efficiency gains. This will
continue. Since the acquisition almost four years ago, we have achieved
substantial cost savings. Southern Water last year was number one as measured by
OFWAT for overall operational and customer service performance.
We started our 'Way Ahead' plan in 1998, moving Southern Water from a
regional structure to a functional one. Three control centres have been
centralised into one at Worthing. This central control room provides a direct
link between our customer services call centre and the asset management and
operational teams.
Capital expenditure, some (pound)300 million in 2000-01, will be focused and
targeted to ensure that the investment programme meets OFWAT's output
requirements at minimum cost.
In addition to efficiency gains, we will seek to benefit from the
introduction into the water sector of competition for large industrial
customers. Southern Water has very few such customers, since its area is largely
residential. We therefore have more to gain in the territories served by other
companies, and we will look to create value from this as competition develops.
Thus
Thus remains a key partner in ScottishPower's activities. Prior to its
flotation, Thus restructured into three complementary areas of focus: Internet
and interactive services; data and telecommunications; and call centres,
targeting the UK-wide business market. Its services target some of the fastest
growing areas within the telecommunications industry, including Internet access,
web hosting and e-commerce enabling solutions.
Thus is on track to achieve the fastest ever UK network roll out. This year,
it expanded its fibre optic network by 40% to over 5,200 km. It also
6 Annual Report & Accounts/Form 20-F
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built presence and launched service in a further five cities, adding to its
existing network in Scotland and London. The network makes use of two key new
technologies. The first significantly increases the capacity of the fibre optic
network and the second provides the ability to transmit voice, video and data
using Internet Protocol over a single, integrated network platform at multiple
and guaranteed levels of service.
The company, whose operations include the Demon Internet and Scotland On-Line
brands, had more than 200,000 paying dial-up Internet customers at the year
end. It was independently recognised as the UK's largest host of websites, with
almost 15,500 commercial web hosting customers.
Thus will launch the next generation of Internet Protocol-based transmission
services later this year and is also a key player in emerging access
technologies such as high capacity Asymmetric Digital Subscriber Line (ADSL)
service and Internet to mobile phone Wireless Application Protocol (WAP)
services.
US Businesses Having completed the merger with PacifiCorp, we now have a major
US utility with high quality but under-performing assets.
The sheer scale of our new US operations cannot be over-emphasised. It is one
of the largest generators among investor-owned utilities in the US and is a
major west coast trader of power. PacifiCorp services markets in six western
states and already operates some of the lowest-cost generating plant in the US,
supplying some of the country's lowest-priced electricity.
PacifiCorp's transmission network reaches 1,000 miles north to south and east
to west, and it is one of the largest coal-mining business in the US. It
supplies some 1.5 million customers directly and over 120 other utilities,
municipalities and energy trading companies on a wholesale basis. Demand across
its diverse customer base is split relatively evenly between residential,
commercial and industrial sectors.
As our Transition Plan, published in May, revealed, we will be able to
deliver value from PacifiCorp using the same approach as we did with Manweb and
Southern Water.
The combined team of ScottishPower and PacifiCorp managers have identified
some 200 initiatives or changes which are expected to deliver, by the end of
2004, annual cost savings (from 1998 levels) of $300 million ((pound)190
million) in operating expenses and $250 million ((pound)156 million) in capital
expenditure. In addition, the company intends to invest some $150 million
((pound)94 million) in training and new technology over the same period.
ScottishPower is determined to transform PacifiCorp into one of the 10 most
efficient US investor-owned electric utilities by 2004. The Transition Plan will
deliver improved services for customers, increased investment in communities and
enhanced value for shareholders.
A new management structure has also been established, with key appointments
made from ScottishPower, PacifiCorp and from well-known US companies.
As part of the rationalisation and refocusing of the business, disposal of
the Hazelwood and Powercor assets in Australia is in progress. An agreement was
also signed, with Nor-Cal Electric Authority, for the sale of PacifiCorp's
distribution assets in California.
Deregulation and retail competition are progressing slowly in PacifiCorp's
service territories. Oregon has passed legislation to enable choice for large
customers in late 2001, subject to rule making. Utah may pass similar
legislation next year. Wyoming, Idaho and Washington are not currently reviewing
this issue and in California, which has deregulated, we are in the process of
selling our property to Nor-Cal.
PacifiCorp is a determined competitor in the wholesale market and has
contracted to take 47% of the output from a 484 MW gas-fired cogeneration plant
which is under construction at Klamath Falls on the border between Oregon and
California. PacifiCorp is responsible for the management and operation of the
plant, which will also provide district heating and energy management to the
City of Klamath Falls, and the project will contribute to operating profit after
commissioning in summer 2001.
Environment Across the Group
Legislation favouring sustainable energy projects has offered ScottishPower the
opportunity to exploit its expertise as one of the leading developers and
operators of wind power in the UK and Ireland. These projects require sensitive
7 Annual Report & Accounts/Form 20-F
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management, as exemplified at Beinn an Tuirc in Kintyre, where ScottishPower has
worked closely with landowners and Scottish Natural Heritage to ensure
operations on a 30 MW wind-farm can begin in December 2001. Two further projects
have been approved for Dun Law and Hare Hill in central Scotland.
PacifiCorp, similarly, is at the leading edge of environmentally sustainable
investment, with two major projects underway in Oregon and Wyoming.
The Klamath cogeneration project is the first to be built under the State's
tough new regulations on carbon dioxide emissions.
In addition, Klamath will supply power to nearby industries and will fund the
development of geothermal energy for the local district heating system. The
scheme will also fund the reforesting of more than 6,000 acres of
under-producing land in Oregon and the recovery of methane from coal mines for
conversion into power.
Cash from the project will be provided to the Oregon Climate Trust, and
contributions will also be made to the development of solar energy for poor
rural areas of several developing countries.
One of the biggest wind-power projects outside California was commissioned at
Foote Creek Rim, Wyoming. The 69-turbine plant is sited at one of the windiest
places in the US, and will generate 41 MW: enough to power between 15,000 and
20,000 US homes.
In the UK, ScottishPower was ranked 'top utility' by the prestigious FT/BiE
(Financial Times/Business in the Environment) corporate engagement study.
The company's commitment to the environment, and the initiatives that it is
undertaking in this area, are detailed in a separately published Environment
Report.
Stakeholders
ScottishPower continues to maintain its focus on all of its stakeholders,
including customers, shareholders, its 24,000 employees across the UK and US,
and the communities in which they live and work.
Shareholders have continued to benefit from increased earnings and dividends.
Earnings per share have grown by an average of 4.7% per annum during the last
five years, and dividends per share have increased by 12.7% per annum on average
over the same period.
The group's market capitalisation has increased from (pound)2 billion at the
time of privatisation in 1991 to (pound)9 billion at 31 March 2000.
Low-income households have benefited from our ground-breaking schemes with
EAGA Ltd (formerly the Energy Action Grants Agency) and we have formed a joint
venture, NESTmakers (Neighbourhood Energy Services Team), to provide households
with access to budgeted fuel supplies and help with energy efficiency advice and
grants. The NESTmakers concept is rooted in the belief that everyone -
regardless of social and economic circumstance - has the right to be treated as
an individual, the right to make choices about household services, and the right
to first-class customer service.
Our PowerPartners charity initiative has met its first year fund-raising
target of (pound)360,000 and has already disbursed (pound)230,000 for projects
run by the six major UK charities involved. The PacifiCorp Foundation
distributed some $2.8 million ((pound)1.75 million) in the last year.
Safety is paramount in all our operations and I am pleased to report that the
year was one of our most successful. To give just two examples, at our power
stations, a new record for no lost-time accidents was set at Longannet and
Cruachan achieved five accident-free years.
The group was awarded 17 Gold Awards and two Gold Medals by the Royal Society
for the Prevention of Accidents. The group also won the Best Health and Safety
Achievement Award in the 1999 Financial Times Energy Awards.
Staff development is all the more important now as the group expands, to
encompass the needs and aspirations of employees spread across different
countries and different cultures.
We are developing new Human Resource strategies to meet these challenges and
have implemented a Management Asset Valuation plan to help identify and nurture
the ScottishPower executives of the future. This complements our existing
management programme, which includes MBA courses and business leadership
programmes in conjunction with leading international business schools.
In addition, ScottishPower and Edinburgh Business School have launched a
joint venture to create an intranet learning site for graduate development.
8 Annual Report & Accounts/Form 20-F
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It is gratifying to note that Alan Richardson, Charles Berry and David Nish, who
were all appointed to the main Board during the year, came from within the
company's management ranks.
ScottishPower Learning, now strengthened by pooling business development
resources, continues to involve our staff, their families and the wider
community in lifelong learning. It is being introduced to PacifiCorp where it
has already caught the imagination of local employees.
During the year we have expanded our involvement with the Government's New
Deal programme by opening up opportunities to disadvantaged adults as well as to
young people. Last year ScottishPower offered 300 places and to date over 130
New Deal recruits have gone on to employment with ScottishPower.
As part of our commitment to the promotion of science and education, we are
delighted to sponsor the Glasgow Science Centre, as our main project to mark the
Millennium. We regard the Centre as a long-term national resource which will
benefit future generations.
Conclusion
Going forward, the business outlook for ScottishPower is dependent upon
maintaining our track record of exploiting our assets, now including PacifiCorp,
to the full, while providing world-class service to a growing customer base.
However, we are under no illusions that tough decisions lie ahead on how best
to achieve our objectives in an increasingly complex, competitive and global
energy market.
Our 'Vision for 2005' remains unchanged: to become an internationally
acknowledged leader in utility and related services; in the world top 10 of
utilities and related companies; serving a customer base of 10 million with
multiple products; and recognised for our record of value creating growth and
innovation.
I am pleased to say that we have already gone some considerable way towards
achieving that goal.
/s/ Sir Ian Robinson
Sir Ian Robinson
Chief Executive 4 May 2000
9 Annual Report & Accounts/Form 20-F
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Business Review
[PHOTO]
Ian Russell
Deputy Chief Executive
ScottishPower is a committed builder of businesses in electricity and
utility-related markets, determined to deliver outstanding performance.
Description of Business
General
ScottishPower is a leading multi-utility business, which serves approximately
seven million homes and businesses across the UK and northwest United States.
The group's activities cover electricity generation, transmission, distribution
and supply in both the UK and US, as well as gas supply, water and wastewater
services, telecom-based services, Internet services and appliance retailing in
the UK, and mining in the US. ScottishPower and its subsidiaries comprise one of
the 12 largest electricity groups in the world, with a market capitalisation
of(pound)9 billion. ScottishPower is listed on both the London and New York
Stock Exchanges and had a turnover in 1999-00 of (pound)4.1 billion.
Since its creation upon privatisation in 1991, ScottishPower has grown
rapidly, via a combination of organic growth within the UK electricity, gas and
telecom markets, and key acquisitions in the electricity and water sectors. This
growth extended into the United States, following the merger with US electric
utility PacifiCorp.
[GRAPHIC]
[GRAPHIC]
10 Annual Report & Accounts/Form 20-F
<PAGE>
Mission and Values
ScottishPower's mission is to be a committed builder of businesses, in
electricity and utility-related markets, determined to deliver outstanding
performance. This is achieved by following five values that support every
company activity:
Well-earned customer loyalty
ScottishPower believes customers are at the heart of what they do. New
developments and technology are part of reducing costs and providing the best
possible service.
Enhanced shareholder value
ScottishPower is committed to delivering value for shareholders through
investing to build its businesses, while delivering growing dividends.
Positive working environment
ScottishPower seeks to provide a positive working environment which inspires
employees to fulfil their potential and maximise their contribution.
Trust of communities
ScottishPower wishes to earn the trust and respect of communities through
recognising and responding to the needs of both the local and wider environment.
Teamwork and leadership
ScottishPower recruits and retains the best people, offering everyone
opportunities to realise their potential. This is achieved through working
together to a clear and common purpose.
Business Strategy
ScottishPower's business strategy is based upon the directors' belief that
successful utility companies are those which offer their customers a range of
high quality, competitively priced utility and related services.
ScottishPower's significant growth has been as a 'first mover' in utility
markets. In 1995, ScottishPower completed the first UK electricity to
electricity acquisition when it purchased the regional electricity company,
Manweb. In 1996, ScottishPower completed the first electricity to water
acquisition when it purchased Southern Water. In 1998, ScottishPower completed
the first electricity to Internet acquisition when it purchased Demon Internet.
When electricity competition at the residential level started in 1998,
ScottishPower was the one of the first companies to enter. In 1999,
ScottishPower completed the first UK to US electricity transaction when it
completed the merger with PacifiCorp. In 1999, ScottishPower also successfully
floated a minority share in Thus, formerly ScottishTelecom, its telecom and
Internet business.
Improving the efficiency of the group's businesses through a programme of
cost reductions is a key part of ScottishPower's operating strategy.
In the UK businesses, the cost base has been significantly reduced through a
process of benchmarking operations against other major companies around the
world, both within and outside the utility sector. This process will be utilised
during the restructuring of the PacifiCorp business.
ScottishPower intends to build future business in the UK by selectively
growing its asset and customer base by providing energy and utility-related
services. The partial flotation of Thus will enable ScottishPower to benefit
from the growth in the telecom and Internet services market. In the US,
ScottishPower will reshape the PacifiCorp core business and develop its assets
in order to establish a platform from which to grow in the American market.
11 Annual Report & Accounts/Form 20-F
<PAGE>
Business Review - UK Businesses
UK Businesses
Generation
The group's Generation business ("Generation") operates ScottishPower's
generating stations and deals in the wholesale trading of electricity,
coordinating the latter operations with the wholesale gas trading activities of
the United Kingdom Power Operations' Gas business. The business objective is to
create competitive advantage for ScottishPower by optimising the energy chain.
Generation Portfolio
ScottishPower's owned generation capacity comprises coal, gas, hydro and wind
power and has available more than 3,500 MW, see "Description of Property" (page
44), after taking into account the impact of contractual obligations to supply
Scottish & Southern with a proportion of its coal-fired capacity. In addition to
its own capacity, ScottishPower also has access to nuclear energy, from British
Energy, and gas-fired, oil-fired and hydro power from Scottish & Southern under
contracts established in connection with the restructuring of the UK electricity
industry in 1990 and 1991. Additional information concerning the group's
generating capacity available under contract is set out in Table 1.
These resources combine to give ScottishPower a flexible fuel portfolio and
result in total available capacity of some 6,400 MW. ScottishPower's available
capacity in Scotland is significantly greater than the demand it is required to
meet.
Construction of a 400 MW CCGT station near Brighton is well underway and the
station is on course for commercial operation for winter 2000. The project is a
joint venture, in which ScottishPower has a 50% economic and voting interest,
with CSW International, Inc., the US parent company of SEEBOARD.
Investment continues in ScottishPower's Longannet and Cockenzie power
stations and the first stage of a major new cost savings and business
improvement initiative has been completed. The next stage will involve
consolidation of improvements through the use of key performance indicators and
further benchmarking. Acquisition of additional generation capacity is kept
under consideration.
The development of Hatfield Moors as a gas storage site was completed during
the winter of 1999. Extensive use of it was made during the latter part of the
winter to meet the peak demands of some 450,000 customers as well as exploiting
sales opportunities when market prices rose to high levels in February and March
2000.
Station Performance
The goal of the Generation business is to achieve best practice in terms of
generation performance and costs, while at the same time maintaining the
flexibility to optimise energy trading.
The Generation business has undertaken extensive benchmarking of all its
activities against an international peer group, and has undertaken programmes
to implement its findings. However, it is the intention of the business to drive
costs down further through continued reductions in fixed
<TABLE>
<CAPTION>
Table 1- Sources of Generating Capacity and Output Available Under Contract as at 31 March 2000
---------------------------------------------------------------------------------------------------------
Numbers of
Generating Set
and/or Net Output Maximum
Installed Capacity Capacity Capacity Available
Note MW MW MW
---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Nuclear:
Torness 1 2 x 660 1,260 944
Hunterston B 1 2 x 660 1,220 914
Total Nuclear 1,858
Dual Oil and Gas Fired:
Peterhead 2 2 x 660 1,284 642
Gas Turbine:
Peterhead 3 2 x 120 232 116
Conventional Hydro:
Scottish & Southern 4 200
------------------------------------------- -------------------- ------------------ ------------------
Total 3,996 2,816
=========================================== ==================== ================== ==================
</TABLE>
1 The NEA entitles ScottishPower and Scottish & Southern to 74.9% and
25.1%, respectively, of the electricity generated from British Energy's
Hunterston B and Torness nuclear generating stations. Except in limited
circumstances, the NEA obliges ScottishPower and Scottish & Southern to pay
for all the electricity declared by British Energy to be available from
such nuclear stations, whether or not they take such electricity.
2 Following the end of the Miller Gas Plateau, ScottishPower is entitled to
50% of the net output capacity of Scottish & Southern's Peterhead station
(or such lesser part of that capacity as Scottish & Southern declares to be
available to ScottishPower on any day).
3 The gas turbines installed at Peterhead are primarily for use during an
outage on one of the main units at the station to enable the consumption of
the gas delivered from the Miller gas field. The use of the gas turbines at
these times is subject to agreement with Scottish & Southern.
4 The Hydro Agreement entitles ScottishPower to 400 GWh of electricity from
Scottish & Southern's conventional hydro generating capacity during each
contract year (although this amount may be reduced during periods of
unusually low rainfall or unusually low run-off) and requires ScottishPower
to pay for that amount of electricity, irrespective of how much electricity
it actually takes.
12 Annual Report & Accounts/Form 20-F
<PAGE>
costs, plus improved engineering and operational efficiencies and enhanced
environmental performance. The group has a detailed engineering strategy to
upgrade its existing coal stations. Furthermore, management believes that, as a
result of its ongoing maintenance programme, ScottishPower's portfolio of power
stations is in a condition to support current and expected generation output.
Fuel Strategy and Sourcing
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, gas
and oil.
Coal - ScottishPower currently purchases the majority of its coal from
Scottish suppliers under long-term contracts, with the principal supplier being
The Scottish Coal (Deep Mine) Limited. These purchase commitments secure the
major part of ScottishPower's coal requirements from local sources. The balance
of requirements were sourced during 1999-00 undershort-term competitive
tenders, taking advantage of market conditions.
Gas - ScottishPower purchases gas to meet the needs of the group's generation
and supply businesses.
The group's gas purchasing strategy is based upon a combination of long,
medium and short-term contracts. In accordance with this strategy, the group has
agreed contracts directly with gas producers for the supply of gas on a non-
interruptible basis. The group has two long-term contracts (with terms of,
respectively, 10 and 15 years from 1994) for supply from major gas fields. In
addition, ScottishPower is party to agreements which require Scottish & Southern
to purchase and accept delivery of gas at Peterhead power station from the
Miller gas field. These agreements continue in force until the reserves of the
field have been fully depleted.
Oil - From time to time, ScottishPower purchases heavy fuel oil on the
international spot market when favourable prices are available. Heavy fuel oil
is therefore an opportunity purchase rather than a firm fuel source.
Generation Sales
Generation sales totalled 31,635G Wh in 1999-00. Approximately 20,830 GWh were
attributable to ScottishPower's energy business, with the remaining 10,805 GWh
either being sold to other suppliers or exported via the interconnector to the
Pool in England & Wales.
The average utilisation of ScottishPower's two largest coal-fired stations,
Longannet and Cockenzie, in 1999-00 was approximately 50.1% and 23.8%,
respectively. It is expected that this utilisation will increase as the capacity
of the interconnector is progressively expanded, enabling ScottishPower to trade
greater quantities of electricity in England & Wales.
The Interconnector in England & Wales
ScottishPower has the ability to sell, or purchase electricity through, the Pool
in England & Wales via the interconnector which is shared by Scottish & Southern
and British Nuclear Fuels Limited ("BNFL") under formal agreement. See
"Structure of the Electricity Industry in the United Kingdom-Electricity
Industry Structure in England and Wales" (page 27) for a general discussion of
the Pool. The current maximum capacity of the interconnector is 1,950 MW with an
average capacity in 1999-00 of 1,392 MW. As ScottishPower produces electricity
for significant periods of the year at a cost that is below the price at which
the Pool purchases electricity, ScottishPower is able to take advantage of the
prices at which electricity is purchased and sold by the Pool.
An agreement has been made with the NGC and Scottish & Southern to upgrade
the maximum capacity of the interconnector to 2,200 MW. Planning approval has
now been granted by HM Government for the reinforcement necessary in England &
Wales to give full effect to the upgrade. ScottishPower's completion of work on
the upgrade of the Scotland-England transmission link to 2,200 MW is currently
scheduled for winter 2001. ScottishPower's generation business will provide 75%
of the capital cost of the upgrade and Scottish & Southern the other 25%.
Pursuant to an agreement with Scottish & Southern, ScottishPower has the
contractual right to 54% of the pre-upgrade capacity and up to 75% of the
additional upgrade capacity of the interconnector.
ScottishPower's licence only entitles it to reserve capacity to itself with
the consent of the DGES, and obliges it to offer to enter into an agreement with
a third party applicant for use of the interconnector.
Following an application from BNFL for interconnector capacity to allow it to
continue to export to the Pool from its Chapelcross power station in south west
Scotland, the DGES determined, in December 1998, that ScottishPower should make
available to BNFL 196 MW from its share of the interconnector capacity, for the
period from 1 January 1999 to 31 March 2002. At the same time the DGES declined
to approve a reservation of any interconnector capacity for ScottishPower's own
generation business.
Subsequently, in April 1999, ScottishPower's generation business made a
further application for a reservation to itself of 75% of the additional
interconnector upgrade capacity. In April 2000, the DGES issued a proposed
determination in relation to this application, which again declines to reserve
any of the additional upgrade capacity to ScottishPower's generation business.
ScottishPower will be making a robust response to this draft determination.
As already mentioned, the DGES will be reviewing the arrangements for access
to the interconnector during 2000, as part of a wider review of the wholesale
trading arrangements
13 Annual Report & Accounts/Form 20-F
<PAGE>
Business Review -- UK Businesses
in Scotland. This review will consider alternative approaches to providing
access to the interconnector, such as capacity auctions, in order to promote
competition in Scotland and in England & Wales, and to ensure compliance and
consistency with the EU Directive on electricity market liberalisation.
ScottishPower broadly supports such reform, so long as it forms part of a
package which addresses all aspects of the present Scottish wholesale market.
Trading with Northern Ireland Electricity
ScottishPower has entered into an agreement with Northern Ireland Electricity
("NIE"), a subsidiary of Viridian Group plc, for the construction of a
Scottish-Northern Irish interconnector with a transfer capability of 250 MW; and
an agreement for the supply by ScottishPower of around 1,095 GWh of electricity
per year over a period of 70 months from the date of commissioning. These
agreements amend and restate agreements originally entered into in 1994. Once
completed, the Northern Irish and marine sections of the Scottish-Northern Irish
interconnector will be owned by NIE, and the section from the Scottish converter
station will be owned by ScottishPower. NIE will provide the full capital cost
of this interconnector. It is anticipated that the Scottish-Northern Irish
interconnector will commence commercial operation in winter 2001.
Discussions are underway regarding an increase in the transfer capability
above 250 MW.
Power Systems
ScottishPower owns and manages a substantial electricity network, comprising
both the distribution system to customers in its two authorised areas and, in
Scotland, its high voltage transmission system (132 kV and above). The latter
includes all the assets of the England-Scotland interconnector which are in its
Scottish authorised area. The main function of the Power Systems business
("Power Systems") is to develop and maintain an efficient, co-ordinated and
economical network, including high voltage connections to England to facilitate
competition in generation and supply, and to operate and develop the
distribution system to approved standards of safety and reliability. Within
Power Systems, the focus continues to be on reducing costs and improving
service. Its principal business activities involve the provision of new
connections, construction and refurbishment of the system, maintenance and fault
repair, setting tariffs and collecting revenues for the use of its authorised
networks. Power Systems continues to focus strongly on the efficient delivery of
electricity to customers in its service areas via its overhead and underground
network. Investment in the business has included significant upgrade and
refurbishment of the transmission and distribution systems.
Power Systems has a distribution/transmission network which extends to
approximately 115,000 km, with 65,000 km of underground cables and some 50,000
km of overhead lines. Table 2 shows key information with respect to the group's
transmission and distribution services in 1999-00.
ScottishPower and Manweb each hold a Public Electricity Supplier ("PES")
licence allowing each company to undertake electricity distribution activities
within its authorised area. The income derived from the distribution business is
dependent on changes in the demand for electricity by customers in the home
area. Demand for electricity is affected by such factors as growth and movements
in 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 3 and 4 set out, by customer type, the levels of
electricity distributed in GWh over ScottishPower and Manweb's distribution
systems during the five most recent financial years.
The group is committed to providing its customers with an electricity supply
which is safe and reliable. Both ScottishPower and Manweb operate networks to
provide supplies within the guidelines for reliable electricity supplies set
forth in the European Standard EN50160 entitled "Voltage Characteristics of
Electricity Supplied by Public Distribution Systems".
In order better to meet the regulatory determinations on the Transmission and
Distribution price controls, Power Systems has undertaken major programmes to
restructure radically the operations of the business by adopting the Asset
Manager/Service Provider concept.
Table 2 - Power Systems Key Information 1999-00
--------------------------------------------------------------------------
ScottishPower Manweb Total
--------------------------------------------------------------------------
Franchise area 22,950 km2 12,200 km2 35,150 km2
Number of employees 2,689 1,725 4,414
System maximum demand 4,323 MW 3,016 MW 7,339 MW
Primary substations 448 611 1,059
Secondary substations 40,350 41,167 81,517
Ground mounted 16,484 9,712 26,196
Pole mounted 23,866 31,455 55,321
Transmission network (km)
Underground 247 - 247
Overhead 3,851 - 3,851
Distribution network (km)
Underground 40,337 23,974 64,311
Overhead 24,448 21,447 45,895
============================= ============ ============= ============
14 Annual Report & Accounts/Form 20-F
<PAGE>
Table 3 - Total Units Distributed in ScottishPower's Service Area (GWh)
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------
Year Residential % Commercial % Industrial % Other % Total
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1995-96 8,076 38.1 5,558 26.3 6,765 31.9 782 3.7 21,181
1996-97 8,194 37.8 5,758 26.6 6,983 32.2 751 3.4 21,686
1997-98 8,048 37.1 5,809 26.8 7,103 32.7 752 3.4 21,712
1998-99 8,345 37.3 6,041 27.0 7,217 32.3 765 3.4 22,368
1999-00 8,385 37.5 5,983 26.7 7,218 32.2 795 3.6 22,381
================ ======= ======== ========= ======== ========= ======== ======= ===== =======
<CAPTION>
Table 4 - Total Units Distributed in Manweb's Service Area (GWh)
------------------------------------------------------------------------------------------------------
Year Residential % Commercial % Industrial % Other % Total
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1995-96 4,889 26.4 3,520 19.0 9,689 52.3 421 2.3 18,519
1996-97 4,930 26.8 3,594 19.5 9,476 51.4 417 2.3 18,417
1997-98 4,916 26.5 3,640 19.7 9,536 51.5 430 2.3 18,522
1998-99 5,037 29.1 3,852 22.2 8,018 46.3 417 2.4 17,324
1999-00 5,204 30.3 3,998 23.3 7,549 43.9 430 2.5 17,181
================ ======= ======== ========= ======== ========= ======== ======= ===== =======
</TABLE>
This model is based on managing `whole' processes rather than the traditional
divisions of business units in utilities. The Asset Manager will focus on
effective investment planning to underwrite the regulated assets of the business
and delivery of efficient management of "Business Support", while the service
providers will focus on efficient and effective delivery under market
conditions.
The model will deliver value from the removal of duplication, extraction of
synergies, improved line efficiency and increased commercial focus. The
relocation of the Power Systems main office was completed in January 2000 as
part of this process.
Customer Sales and Services
The group's Customer Sales and Services business ("CSS") is responsible for the
sales and marketing of electricity, gas and related products to customers
throughout the UK. CSS comprises four key business units which reflect the
increasingly divergent external environment within which ScottishPower's
customer facing business operate.
. Energy Supply and Appliance Retailing;
. Electricity Trading;
. Metering; and
. e-business.
The CSS strategy is to continue to defend and grow our existing energy base
while releasing more value from the home through an extended range of products
and services all underpinned by high-quality, low-cost service. New technology
will be the cornerstone of an integrated channel strategy, to market
ScottishPower nationally as a strong and trusted brand. In addition, the group
will continue to meet the electricity supply and service obligations of
ScottishPower and Manweb under their respective PES licences.
Energy Supply
The group is currently the second largest energy supplier in the UK.
Electricity Markets
Energy Supply purchases electricity from a range of sources, including the
group's Generation business, for sale to customers both within its home areas
and outside them. Until September 1998, only public electricity suppliers were
entitled to supply customers in their franchise areas (now home areas) with
demand less than 100 kW. From September 1998 to May 1999, the home areas of all
public electricity suppliers were opened to competition on a phased basis, with
the result that electricity suppliers holding second-tier licences, including
ScottishPower and Manweb, are able to supply electricity to all customers in the
home area of a public electricity supplier. Large industrial or commercial
customers with demand above that threshold have been and continue to be able to
seek supply from other electricity suppliers holding a second-tier licence.
ScottishPower and Manweb's respective home areas were opened to competition in
three phases, commencing in September 1998 and running through to February 1999.
Since September 1998, the strategic focus of the Energy Supply business has
been defence of its existing markets, particularly residential and small
business customers in the ScottishPower and Manweb areas, while exploiting the
opportunity to expand its customer base outside these regional boundaries.
As at 31 March 2000, the Energy Supply business had retained 88% of
residential customers in the ScottishPower area and 85% in Manweb. The business
had also signed up 238,000 electricity customers outside those home areas. In
total, Energy Supply has over three million electricity customers in Great
Britain.
In the highly competitive industrial and commercial energy market, the group
has sought to defend market share and has retained 75% of these volumes in the
ScottishPower area. In Manweb, which comprises some of the largest industrial
electricity users in the country, the group has retained a 21% share of these
volumes.
Gas Markets
The group has a growing gas supply business. The residential gas supply market
has been fully competitive since May 1998.
Energy Supply has firmly established itself as one of the leading challengers
to Centrica (British Gas Trading) in this market, having acquired a total of
700,000 customers. In the business market, the focus has been to renew only
profitable business while pursuing a prudent growth strategy.
15 Annual Report & Accounts/Form 20-F
<PAGE>
Business Review -- UK Businesses
Appliance Retailing
The Appliance Retailing business sells products through a chain of 183 outlets
throughout the UK. In addition to retail sales, the business provides in-home
servicing and repair facilities, and delivery and connection of appliances.
Under a new management team and after rebranding all superstores in England
and Wales as `ScottishPower', the Appliance Retailing business has achieved a
78% increase in operating profit for the year ended 31 March 2000, compared with
1998-99. Like-for-like sales growth in excess of 6% was achieved for the same
period.
The business has continued to drive for market share by incrementally
increasing the overall sales space and product range. It now has 5% of the UK
white goods market and 4% of the UK brown goods market. Plans are in place for a
further 14 superstore openings in 2000-01.
Customer Service
ScottishPower has taken steps to improve all aspects of its customer service
within the energy businesses in response to competition in the energy supply
market, and intends to continue to treat improving customer service as a
priority. The businesses' customer service Guaranteed Standards were maintained
in the year ended 31 March 2000 at the high level set in the previous year, with
over 99.99% of all electricity services provided currently matching or exceeding
regulatory standards.
All service requirements in Scotland are met by a customer service
call-centre, employing modern communications and information technology, and
offering a comprehensive service to customers, including 24-hour faults and
emergency support. In Manweb's home area the group has focused its activities on
improving customer service through the provision of two regional call-centres
and a business call-centre. The group has also established a gas call-centre in
Warrington servicing residential and small business customers.
The performance of ScottishPower and Manweb in the area of Guaranteed
Standards failures over the last five years as reported to Ofgem is shown on
Charts 1 and 2.
Chart 1 -- Scottish Power Guaranteed
Standards failures
[GRAPH]
95-96 145
96-97 150
97-98 117
98-99 89
99-00 45
Residential gas suppliers faced increases in complaints during
the period of market liberalisation. ScottishPower received 3,092 Ofgem and Gas
Consumer Council complaints during 1999-00, which equates to 0.8% of the
customers signed during the year.
Electricity Trading
Electricity trading, within the Energy Trading Centre, secures competitive
advantage for the group through trading and optimising its position across the
electricity value chain and continuously evaluating and managing risk exposure.
The risks identified in electricity trading generally relate to price volatility
arising in the Pool market in England & Wales and the group's exposure as a
generator (seller) and as a supplier (purchaser) of electricity which can (and
does) vary over time. Such exposure can be managed through trading in contracts
for differences with willing parties such as other generators, suppliers or
intermediaries. From 31 October 2000, new electricity trading arrangements will
be introduced in England & Wales. This move from the compulsory Pool trading
system to a bilateral market is expected to result in a more proactive approach
to trading.
New trading arrangements are also proposed for Scotland to enable generators
and suppliers to trade with their counterparts in England & Wales and increase
competition on a cross-border basis. This should reduce the differences between
the two markets and lead to a more liquid market throughout Great Britain.
Metering
The Metering business is a key interface in delivering high-quality customer
service. Reflecting its importance in the delivery of customer service, and to
position the business going forward, ScottishPower has transferred metering
activities from Power Systems to Customer Sales and Services. With the
introduction of competition, Metering was established as a standalone business
on 1 April 2000.
Metering is characterised by a large regional field force, working from home,
and it carries out most of ScottishPower's data management activities
Chart 2 -- Manweb Guaranteed
Standards failures
[GRAPH]
95-96 940
96-97 81
97-98 69
98-99 40
99-00 08
16 Annual Report & Accounts/Form 20-F
<PAGE>
from meter installation through to data collection for our electricity, gas and
water customers.
As the competitive market evolves the business will look to retain market
share, while exploiting opportunities to grow its multi-utility data management
activities across the UK.
e-business
On 11 January 2000, ScottishPower announced the intention to create a joint
venture company with The Royal Bank of Scotland offering a range of products and
services to their combined customer base of some 16 million in the residential
and small business markets. A jointly funded project team has developed two
brands, one aimed at consumers, providing personalised financial, utility and
lifestyle solutions for homes and families, while the other will provide small
businesses with access to a range of tools, information and services to help
trade on the Internet, manage key information and access specially negotiated
deals with suppliers.
The Internet will be used as the preferred channel to market these services,
traditionally sold separately, in one convenient package. The business is
expected to be operational during summer 2000.
Southern Water
Region
The region in which Southern Water operates occupies an area of approximately
10,450 km2 in the counties of Kent, East and West Sussex, Hampshire and the Isle
of Wight, and small parts of Wiltshire, Berkshire and Surrey. The region's
coastline stretches 1,250 km from Swanscombe on the Thames Estuary to just
beyond the Solent at Barton on Sea, including the Isle of Wight. The region has
an estimated population of approximately 4.4 million. The portion of the region
to which Southern Water supplies water covers a total area of some 4,450 km2,
contains approximately 1.0 million premises and has a resident population of
some 2.2 million people. Local water companies supply the rest of the region's
water requirements. Southern Water provides wastewater services to virtually all
of the region, collecting sewage from around 1.7 million premises.
Table 5 sets forth key information with respect to Southern Water's
activities in 1999-00.
Water Supply Business
Southern Water supplies, on average, 588 million litres of water per day, which
is distributed through 13,262 km of water main. Southern Water's 104 water
treatment works treat water from 132 water sources in the region with 70% of
water supplied coming from underground sources. Water is pumped through the
water mains by 413 pumping stations. Southern Water is also responsible for the
operation and maintenance of four impounding reservoirs which have a total
storage capacity of 42,390 million litres.
The volume of water put into supply exhibits a pronounced seasonal variation
between summer and winter. Typically, the peak seven-day demand in the summer is
up to 40% higher than the annual average, and stems from increased residential
usage and the influx of tourists to resort towns along the south coast and on
the Isle of Wight.
The bulk of Southern Water's underground sources are located in chalk, with a
small number of abstractions being made from sandstone aquifers. The water is of
high quality and receives various forms of treatment appropriate to each source.
These provide reductions in the level of pesticides, iron and manganese; the
reduction of plumbosolvency; and in all cases protection against bacteria
throughout the distribution system to the point of use at the customers' taps by
a residual level of chlorine. A single source has treatment to reduce the amount
of nitrates, which is elsewhere kept within acceptable limits by blending output
from various sources where necessary.
The smaller proportion of water from rivers and reservoirs has a more complex
form of treatment. In addition to the processes used for underground supplies,
clarification and filtration processes provide a similar high quality drinking
water.
17 Annual Report & Accounts/Form 20-F
<PAGE>
Business Review -- UK Businesses
Table 5 - Southern Water Key Information 1999-00
-------------------------------------------------------------------------------
Southern Water
-------------------------------------------------------------------------------
Franchise area 10,450 km2
Water supply services 1 million premises
2.2 million people
Water supply 588 million litres per day
Water main 13,262 km
Reservoir storage capacity 42,390 million litres
Wastewater treatment works 393
Wastewater treatment services 1.7 million premises
4.4 million people
Wastewater treated 1,400 million litres per day
Capital expenditure 1999-00 (pound)353 million
================================================ ==============================
Again, in all cases disinfection is maintained by a residual level of
chlorine.
Southern Water has 13,262 km of water main. In order to minimise the loss of
water through leakage, a leakage control initiative was introduced following
privatisation in 1989 and has reduced water loss by 144 million litres per day.
Since privatisation, Southern Water has had one of the best records with respect
to water supply leakage among the Water and Sewerage Companies ("WaSCs"). Losses
through leaks in its distribution system stood at 11.2% in 1998-99, compared to
26% just before the time of privatisation, with a target to achieve 10.8% by
2000-01.
Southern Water monitors water quality through a programme in which samples
are analysed regularly for both microbiological and chemical parameters. In
1999, 99.81% of water sampled passed the EU performance criteria.
Wastewater Business
Southern Water has 393 wastewater treatment works ("WTWs"), which treat sewage
pumped through 20,728 km of sewer by 1,975 pumping stations. WTWs provide
various treatment types as follows: primary, enhanced primary, secondary
biological and tertiary. In addition, as part of the treatment process to meet
current bathing water standards, Southern Water has 24 marine treatment works
and 28 long sea outfalls around the coastline of its region.
Under the Water Resources Act 1991, WTWs are granted consent by the
Environment Agency (the "EA") to discharge sewage effluent to controlled waters.
The conditions attached to each consent can cover quality, quantity and
operational parameters as laid down in the "Standard Clauses" of the Discharge
Consents Manual issued by the EA. The basis of the EA's policy is to maintain
and improve water quality and the aquatic environment.
In addition to the residential population, the businesses in Southern Water's
region discharge industrial effluent having the equivalent strength of an
additional population of about 486,000.
The disposal of sludge produced by WTWs is strictly controlled. Disposal to
landfill is becoming restricted due to the lack of available local sites. In
addition, all sludge disposed in this way is subject to a Landfill Tax.
Disposal at sea ceased by December 1998. It is intended that the majority of the
sludge produced at Southern Water's WTWs will be further processed to produce a
soil conditioner which can be recycled and sold to the agricultural industry and
that any remaining amount will be incinerated. The recycling of treated sludge
to agricultural land is controlled by an EU directive while incineration is
controlled by licences issued by the EA. The sludge produced by Southern Water's
WTWs amounts to 77,500 tonnes of dry solids per year.
In the 2000 bathing season, under the EU Bathing Water Directive, the EA is
testing 79 beaches in the Southern Water region. Under the directive, the EA
takes at least 20 samples during the bathing water season (1 May to 30
September) at each identified bathing beach and compliance is assessed on the
basis of tests for bacteria. Additional tests are carried out for 19
physicochemical parameters in addition to the bacterial test and on two
occasions during each season the bathing water is tested for the presence or
absence of enteroviruses. Results may be published and posted by district
councils on the beaches concerned. In the 1999 bathing season, only 5 beaches
out of 79 failed the compliance tests. Capital schemes are in progress to reduce
the likelihood of failures in future years.
Investment Programme
In common with other WaSCs, Southern Water is to manage a substantial investment
programme for the period 2000 to 2005, estimated to be of some (pound)1.1
billion. This programme is largely driven by the EU Bathing Water Directive, the
Urban Waste Water Treatment Directive ("UWWTD"), a sludge strategy to deal with
cessation of disposal at sea, the increase in the volume of sludge due to the
UWWTD, and the expectation of more stringent environmental constraints relating
to sludge disposal on land.
The programme is dominated by completing the construction of 13 coastal WTWs
as required by the EU Directives. There is also a substantial programme of
improvements to a larger number of small inland wastewater treatment works. In
addition, there are required regulations set by OFWAT, the Drinking Water
Inspectorate and the EA to maintain and improve the security and quality of
service provided.
18 Annual Report & Accounts/Form 20-F
<PAGE>
These outputs include projects to address:
- above and below ground asset maintenance;
- water resources and security of water supply;
- reduced leakage and improved water pressure;
- drinking water quality;
- removal of flooding risk; and
- avoidance of storm overflows on combined sewers.
Southern Water was granted implicit funding in the price determination,
settled in 1999, via an allowed annual rate of return on the OFWAT estimate of
investment of (pound)1.1 billion. Southern Water's investment programme has
therefore essentially been `funded' up front. A key aspect of the group's
business strategy is to seek to deliver all of the required regulatory outputs
of the capital programme as efficiently as possible.
Thus
ScottishPower sold a minority (49.9%) stake in Thus, formerly Scottish Telecom,
which was floated on the London Stock Exchange in November 1999.
Thus remains a key partner in ScottishPower's activities. Prior to its
flotation, the company restructured into three complementary areas of focus:
Internet and interactive services; data and telecommunications; and call centres
targeting the UK-wide business market. Its services target some of the fastest
growing areas within the telecommunications industry, including Internet access,
web hosting and e-commerce enabling solutions.
Thus is on track to achieve the fastest ever UK network roll out. This year,
it expanded its fibre optic network by 40% to over 5,200 km. It also built
presence and launched service in a further five cities, adding to its existing
network in Scotland and London. The network makes use of two key new
technologies. The first significantly increases the capacity of the fibre optic
network and the second provides the ability to transmit voice, video and data
using Internet Protocol over a single, integrated network platform at multiple
and guaranteed levels of service.
The company, whose operations include the Demon Internet and Scotland On-Line
brands, had more than 200,000 paying dial-up Internet customers at the year end.
It was independently recognised as the UK's largest host of websites, with
almost 15,500 commercial web hosting customers.
Thus will launch the next generation of Internet Protocol-based transmission
services later this year and is also a key player in emerging access
technologies such as high capacity Asymmetric Digital Subscriber Line (ADSL)
service and Internet to mobile phone Wireless Application Protocol (WAP)
services.
Other UK Businesses
Contracting Services
In 1999, following an extensive business review, the directors decided to
dispose of the group's Contracting Services business.
Discussions with potential purchasers are ongoing. An announcement on the
future of the business is expected in the summer.
Technology
In 1999, following an extensive business review, the directors decided to
dispose of the group's Technology business.
Discussions with potential purchasers are ongoing. An announcement on the
future of the business is expected in the summer.
Information Systems
In 2000, the directors decided to undertake a joint venture between the group's
Information Systems Division and SAIC, a leading US computer services group. The
50-50 joint venture, called Calanais, will significantly reduce ScottishPower's
Information Technology expenditure. In addition it will exploit the growing
demand for IT expertise in the rapidly changing global utilities sector by
seeking to develop external IT service business. It will also market expertise
in business change and Internet enabling strategy aimed specifically at the
utility sector.
19 Annual Report & Accounts/Form 20-F
<PAGE>
Business Review -- UK Businesses
US Business - PacifiCorp
The Organisation
PacifiCorp is an electricity company in the United States and Australia. In the
United States, PacifiCorp conducts its retail electric utility business as
Pacific Power and Utah Power, and engages in power production and sales on a
wholesale basis under the name PacifiCorp. PacifiCorp Group Holdings Company
("Holdings"), a wholly owned subsidiary of PacifiCorp, holds the stock of
subsidiaries conducting businesses not regulated as domestic electric utilities.
Holdings indirectly owns 100% of Powercor, the largest of the five electric
distribution companies in Victoria, Australia.
US Domestic Electric Operations
Pacific Power and Utah Power provide electric service within their respective
service territories. Power production, wholesale sales, fuel supply and
administrative functions are managed on a co-ordinated basis.
Transition Plan
When the merger with PacifiCorp was completed, ScottishPower put in place a
combined team of ScottishPower and PacifiCorp managers which undertook a
detailed appraisal of the activities and processes of PacifiCorp and produced a
Transition Plan which was published on 4 May 2000. Some 200 initiatives or
changes have been identified which are expected to deliver, by the end of 2004,
annual cost savings (from 1998 levels) of $300 million ((pound)190 million) in
operating expenses and $250 million ((pound)156 million) in capital expenditure.
In addition, the company intends to invest some $150 million ((pound)94 million)
over the same period in training and new technology. PacifiCorp expects to
reduce its work force company-wide by approximately 1,600 over the period,
mainly through early retirement, voluntary severance and attrition.
ScottishPower is determined to transform PacifiCorp into one of the 10 most
efficient US investor-owned utilities by 2004. The Transition Plan will deliver
improved services for customers, increased investment in communities and
enhanced value for shareholders.
A new management structure has also been established with key appointments
from ScottishPower, PacifiCorp and also from well-known US companies.
Presentation of Financial Information on PacifiCorp
Financial information on PacifiCorp included within the Business Review below is
presented in US dollars and UK sterling based on an exchange rate of $1.60 to
(pound)1.00, being the closing rate on 31 March 2000.
Service Area
PacifiCorp serves approximately 1.5 million retail customers in service
territories aggregating about 135,800 square miles in portions of six western
states: Utah, Oregon, Wyoming, Washington, Idaho, and California. PacifiCorp's
service area contains diversified industrial and agricultural economies.
Principal industrial customers include oil and gas extraction, lumber and wood
products, paper and allied products, chemicals, primary metals, mining
companies, high technology, and agribusiness.
The geographical distribution of PacifiCorp's retail electric operating
revenues for the year ended 31 March 2000 was Utah, 38%; Oregon, 33%; Wyoming,
13%; Washington, 8%; Idaho, 6%; and California, 2%.
Customers
Electric utility revenues and energy sales for the year ended 31 March 2000 were
$3,292.2 million ((pound)2,057.6 million) and 81,333 million kWh.
PacifiCorp's service territory has complementary seasonal load patterns. In
the western sector, customer demand peaks in the winter months due to space
heating requirements. In the eastern sector, customer demand peaks in the summer
when irrigation and cooling systems are heavily used. Many factors affect per
customer consumption of electricity. For residential customers, within a given
year, weather conditions are the dominant cause of usage variations from normal
seasonal patterns. However, the price of electricity is also considered a
significant factor.
Competition
During 2000, PacifiCorp continued to operate its electricity distribution and
retail sales business as a regulated monopoly throughout most of its franchise
service territories. However, PacifiCorp anticipates increasing competition,
principally as a result of industry restructuring, deregulation and increased
marketing by alternative energy suppliers.
Beginning in April 1998, California retail electric energy sales have been
subject to open market competition. PacifiCorp's provision of tariffed services
in California will continue to be regulated while any competitive sales of
electricity will be unregulated. The other states in PacifiCorp's service
territory have, to varying degrees, examined retail competition and industry
restructuring, but only Oregon has enacted comprehensive legislation. Generally,
the other states are moving more slowly towards competition than was originally
anticipated by PacifiCorp. PacifiCorp supports increased customer choice and
will work to ensure that it takes place under terms and conditions that are
equitable to all stakeholders.
During July 1999, legislation was enacted in Oregon that requires competition
for industrial and large commercial customers of both PacifiCorp and Portland
General Electric by 1 October 2001. Residential customers will receive a
portfolio of energy commodity rate options. The law generally exempts
publicly-owned utilities and Idaho Power's Oregon service territory. The law
authorises the Oregon Public Utility Commission (the "OPUC")
20 Annual Report & Accounts/Form 20-F
<PAGE>
to make decisions on a variety of important issues, including the method for
valuation of stranded costs/benefits, consumer protections, marketer
certification, environmental issues, and competitive services. The legislation
also calls for the establishment of a code-of-conduct for electric companies and
their affiliates to protect consumers against anti-competitive practices. The
legislation directs the investor-owned utilities to collect a 3% public benefit
charge from all of its distribution customers. PacifiCorp is currently
participating in the OPUC proceedings to establish the rules and procedures that
will implement the new law.
The Energy Policy Act, passed in 1992, opened wholesale competition to energy
brokers, independent power producers and power marketers. In 1996, the Federal
Energy Regulatory Commission (the "FERC") ordered all investor-owned utilities
to allow others access to their transmission systems for wholesale power sales
("open access"). This access must be provided at the same price and terms the
utilities would apply to their own wholesale customers. Competition is also
influenced by availability and price of alternate energy sources and the general
demand for electrical power.
PacifiCorp has formulated strategies to meet these challenges. PacifiCorp is
marketing power supply services to other utilities in the western United States,
including dispatch assistance, daily system load monitoring, backup power, power
storage and power marketing, and services to retail customers that encourage
efficient use of energy. Effective 1 January 1998, the California Public
Utilities Commission (the "CPUC") adopted rules regulating the non-tariffed sale
of energy and energy products and services by utilities and their affiliates.
The rules mandated a 10% rate reduction, which resulted in a $3.5 million
((pound)2.2 million) annual reduction in revenues. PacifiCorp has decided to
refrain from marketing products and services to retail customers in California
but intends to continue limited trading in the wholesale business, selling to
utilities in California and marketers elsewhere in the western United States.
Power Supply
PacifiCorp's generating facilities are interconnected through its own
transmission lines or by contract through the lines of others. Substantially all
generating facilities and reservoirs located within the western states are
managed on a co-ordinated basis to obtain maximum load carrying capability and
efficiency.
PacifiCorp's transmission system connects with other utilities in the Pacific
Northwest having low-cost hydroelectric generation and with utilities in
California and the southwestern United States having higher-cost, fossil-fuel
generation. The transmission system is available for common use consistent with
open access regulatory requirements. In periods of favourable hydroelectric
generation conditions, PacifiCorp utilises lower-cost hydroelectric power to
supply a greater portion of its load and sells its displaced higher-cost thermal
generation to other utilities. In periods of less favourable hydroelectric
generation conditions, PacifiCorp sells its excess thermal generation to
utilities that are more dependent on hydroelectric generation than PacifiCorp.
During the winter, PacifiCorp is able to purchase power from utilities in the
southwestern United States, either for its own peak requirements or for resale
to other regional utilities. During the summer, PacifiCorp is able to sell
excess power to utilities in the southwestern United States to assist them in
meeting their peak requirements. See "Wholesale Sales and Purchased Power".
PacifiCorp owns or has interests in generating plants with an aggregate
nameplate rating of 9,025 MW and plant net capability of 8,466 MW. See
"Description of Property" (page 46). With its present generating facilities,
under average water conditions, PacifiCorp expects that approximately 6% of its
energy requirements for 2001 will be supplied by its hydroelectric plants and
64% by its thermal plants. The balance of 30% is expected to be obtained under
long-term purchase contracts, and interchange and other purchase arrangements.
During 2000, approximately 6% and 61% of PacifiCorp's energy requirements were
supplied by its hydroelectric and thermal generation plants, respectively, and
the remaining 33% by purchased power.
PacifiCorp currently purchases 1,100 MW of firm capacity annually from the
federal Bonneville Power Administration ("BPA") pursuant to a long-term
agreement. The purchase amount declines to 925 MW annually beginning in July
2000, declining to 750 MW annually in July 2003 and again to 575 MW in July 2004
through August 2011. PacifiCorp's payment under this agreement for the twelve
month period ended 31 March 2000 was $74 million ((pound)46.3 million). The
agreement provides for the amount of the payment to decline proportionately as
the amount of power purchased declines and also to change at the rate of change
of BPA's average system cost. The next change to BPA's average system cost is
expected to occur in 2001 and will be determined by BPA in future rate
proceedings.
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 2000, PacifiCorp
purchased an average of 101 MW from qualifying facilities, compared to an
average of 98 MW in 1998.
PacifiCorp plans and manages its capacity, energy purchases and energy
resources based on critical water conditions. Under critical or better water
conditions in the Pacific Northwest, PacifiCorp believes that it has adequate
reserve generation capacity for its requirements.
Wholesale Sales and Purchased Power
Wholesale sales of power contribute significantly to total revenues even though
PacifiCorp has scaled back wholesale sales from 1998 levels.
21 Annual Report & Accounts/Form 20-F
<PAGE>
Business Review -- UK Businesses
PacifiCorp's wholesale sales complement its retail business and enhance the
efficient use of its generating capacity. In the year ended 31 March 2000,
PacifiCorp's wholesale revenues decreased 60% and its wholesale energy volume
sold decreased 64% over the prior year. Wholesale revenues accounted for 42% of
PacifiCorp's total energy sales and 32% of its total energy revenues in the year
ended 31 March 2000. In addition to its base of thermal and hydroelectric
generation assets, PacifiCorp utilises a mix of long-term and short-term firm
power purchases and non-firm purchases to meet its load obligations and to make
sales to other utilities. Long-term firm power purchases supplied 10% of
PacifiCorp's total energy requirements in 2000. Short-term firm and non-firm
power purchases supplied 22% of PacifiCorp's total energy requirements in 2000.
In accordance with PacifiCorp's long-range integrated resource planning
process, PacifiCorp considers various future demand and supply options for
providing customers with reliable, low-cost energy services. See "Projected
Demand."
Proposed Asset Additions and Dispositions
In July 1998, PacifiCorp announced its intention to sell its California electric
distribution assets. On 15 July 1999, PacifiCorp signed a definitive agreement
for the sale of the assets to Nor-Cal Electric Authority. The sale is expected
to close during summer 2000.
On 12 April 2000, PacifiCorp announced the closure of the Trail Mountain Mine
in autumn 2001 after the lease is mined out. This will result in the eventual
displacement of 200 employees. The mine is located in Central Utah and supplies
fuel to the Hunter Plant. The fuel for the Hunter Plant will be provided by
PacifiCorp's Deer Creek Mine and other Utah mines.
Subsequent to the approval of these Accounts and prior to publication,
PacifiCorp sold its 47.5% share in the 1,340 MW coal-fired Centralia Power
Plant. PacifiCorp also sold the adjacent coal mine that it owned and operated.
Projected Demand
PacifiCorp continues to benefit from positive economic conditions in several
portions of its service territory and retail energy sales for PacifiCorp have
experienced compound annual growth of 2.0% since 1995. PacifiCorp is seeing a
turnaround from the downturn in international economic conditions, particularly
in the Far East and Japan, that negatively impacted PacifiCorp's service
territories in the Pacific Northwest and many of the industries PacifiCorp
serves. PacifiCorp is pursuing price increases in jurisdictions where it does
not earn an appropriate rate of return and will seek operating efficiencies as
outlined in the Transition Plan.
For the periods 2001 to 2004, the average annual growth in retail kilowatt
hour ("kWh") sales in PacifiCorp's franchise service territories is estimated to
be about 1.4%. During this period, PacifiCorp may lose retail energy sales to
other suppliers in connection with deregulation of the electric industry. As the
electric industry evolves toward deregulation, PacifiCorp 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 electric industry, economic and demographic growth, and
competition.
PacifiCorp's base of existing resources, in combination with the development
of retail competition and the actions outlined in its integrated resource plan,
are expected to be sufficient to meet load growth expectations through 2012.
Actions outlined in PacifiCorp's integrated resource plan include promoting
efficiency improvements by customers (demand-side management), efficiency
improvements to existing generation, transmission and distribution systems, and
other cost-effective resource acquisition opportunities that meet the future
needs of PacifiCorp, including renewable resources.
22 Annual Report & Accounts/Form 20-F
<PAGE>
Australian Electric Operations - Powercor
General
Powercor, an indirect, wholly owned subsidiary of Holdings, is the largest
electricity distribution company ("Distribution Company") in Victoria,
Australia, based on sales volume, revenues, geographic scope and number of
customers. Powercor's principal business segments are its Distribution Business
and its Supply Business. The Distribution Business consists of the distribution
of electricity to approximately 570,000 customers within Powercor's distribution
area, covering from the western suburbs of Melbourne to central and western
Victoria. The Supply Business consists of the purchase of electricity from
generators and the sale of such electricity to customers in Powercor's
distribution service area and other parts of Victoria, New South Wales ("NSW"),
the Australian Capital Territory ("ACT") and Queensland. Powercor's distribution
service area covers approximately 57,900 square miles (64% of the total area of
Victoria), has a population of approximately 1.5 million (32% of Victoria's
population) and accounts for 26% of Victoria's Gross State Product. In 1999,
Victoria accounted for approximately 25% of Australia's total population,
approximately 32% of Australia's manufacturing industry output and approximately
26% of Australia's Gross Domestic Product, although it represents only
approximately 3% of the total area of Australia.
During January 2000, the directors decided to seek a buyer for Powercor. The
disposal programme is proceeding to plan and a sale is expected to be concluded
in the latter part of 2000.
Other Operations
Financial Services
PFS is a holding company principally engaged in holding investments in tax
advantaged and leveraged lease assets (primarily aircraft). PFS made its last
investment in aircraft or loans relating to aircraft in 1992.
PFS has four Synfuel plants in the Birmingham, Alabama area which produce a
synthetic coal fuel designed to qualify for tax credits under Section 29 of the
Internal Revenue Code. The technology utilised by the plants is licensed from
Covol Technologies, Inc.
US Competitive Energy Businesses
The Klamath Co-generation Project is a 484 MW natural gas-fired power plant
under construction near Klamath Falls, Oregon. The City of Klamath Falls owns
the plant and PacifiCorp Power Marketing, Inc. ("PPM"), a wholly owned
subsidiary of Holdings, is under contract for management, operations and fuel
supply. In addition, upon commercial operation, PPM will purchase 227 MW of
output from the plant for resale to third parties and market on behalf of the
City the remaining output to municipal and commercial buyers in the Pacific
Northwest and northern California. Construction began in June 1999 and the plant
has a planned commercial operation date of July 2001.
23 Annual Report & Accounts/Form 20-F
<PAGE>
Business Review
Research and Development
The group supports research into development of the generation, transmission,
distribution and supply of electricity and continually seeks more innovative and
cost-effective methods of carrying out its water and wastewater activities. It
also continues to contribute, on an industry-wide basis, towards the cost of
research into electricity utilisation, distribution developments and water
purification and wastewater treatment.
In financial years 2000, 1999, and 1998 the group's expenditure on research
and development was (pound)5.5 million, (pound)5.3 million and (pound)5.4
million, respectively.
Employees
UK Businesses
ScottishPower and its UK subsidiaries had 16,325 employees, as of 31 March 2000.
A breakdown of the number of employees employed in the group's main businesses
over the last five years is illustrated in Table 6.
Approximately 45% of employees in the UK are union members, and 66% are
covered by collective bargaining arrangements. This is a reduction by comparison
with previous years. There are a number of different collective agreements in
place throughout the group, reflecting differing market conditions in which the
group's businesses operate. The directors believe that overall relations with
employees are good.
In the energy businesses, ongoing integration of Scottish and Manweb
operations has been largely completed. The group continues to benchmark for
further efficiencies and reduced costs, which will include ongoing reduction in
manpower numbers. However, these reductions have been offset in 1999-00 by
manpower growth within customer-facing businesses to gain new customers in the
fully competitive market place.
Within Southern Water, manpower efficiencies have been achieved and these
will continue as the business is reorganised to focus on core activities,
achieving operating improvements and taking better advantage of technological
advancements.
The other businesses, which include Appliance Retailing, electrical
contracting, engineering consultancy, information systems and corporate
services, have remained relatively stable in manpower numbers since 1997-98.
US Businesses
PacifiCorp and its subsidiaries had 8,832 employees on 31 March 2000. Of these
employees, 7,681 were employed by PacifiCorp and its mining affiliates, 1,043
were employed by Powercor and 108 were employed by PPM, PFS and other
subsidiaries.
Approximately 55% 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 and the United Mine
Workers of America. Due to changes in Australian laws, information concerning
union membership is no longer available to employers.
In the directors' judgement, employee relations are satisfactory.
Equal Opportunity
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, career break schemes are available. ScottishPower is a Gold Card
Member of the Employers' Forum on Disability, and also a member of the
Employers' Forum on Age, the Equal Opportunities Commission Equality Exchange
and the Women's Engineering Society. The latter aims to promote the study and
practice of engineering among women.
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.
Equal opportunities strategy and specific courses have been developed and
implemented during 1999-00.
US Businesses
PacifiCorp has an equal employment opportunity policy which reflects the
company's belief that it can best achieve its objectives by effectively
utilising the skills and abilities of a diverse workforce. Like the UK, the US
has extensive anti-discrimination legislation enacted at federal, state and
local laws which prohibit discrimination in employment for a variety of reasons
including age and disability. As part of its employment opportunity policy,
PacifiCorp has implemented and maintains a programme of `affirmative action' in
order to effectively employ minorities.
Table 6 - Group Employees as at 31 March 2000
-----------------------------------------------------------------------------
Business 2000 1999 1998 1997 1996
-----------------------------------------------------------------------------
Energy businesses 7,271 7,106 7,056 6,877 7,372
Southern Water 2,143 2,262 2,406 3,618 -
Telecoms 2,516 2,383 1,481 706 166
Other 4,395 4,281 4,156 3,817 3,821
PacifiCorp 7,789 - - - -
-----------------------------------------------------------------------------
Group total 24,114 16,032 15,099 15,018 11,359
============================= ========== ========== ========== ==========
24 Annual Report & Accounts/Form 20-F
<PAGE>
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.
Employee Consultation and Negotiation
UK Businesses
ScottishPower has employee consultation and communication arrangements to
encourage the involvement and interest of employees in the UK group, and to
develop an awareness of its business plans and objectives. These include
divisional and local joint bodies, designed to provide regular discussions
between management and staff representatives, and local annual conferences. The
UK group's executive and managing directors and the recognised trade unions meet
informally twice a year to discuss aspects of the business.
Divisional and business bargaining arrangements have been established to
facilitate the development of terms and conditions of employment tailored to the
diverse needs of the business and, through this, to provide employees with a
greater involvement in local employment matters.
US Businesses
PacifiCorp has a sound track record of positive employee and trade union
relationships. The industrial relations scenario has traditionally been one of
stability built on cordial but business-like relationships with trade unions and
their workplace representatives. This has provided a foundation on which to
develop constructive discussions with the trade unions on the changes which will
be necessary for PacifiCorp to achieve top 10 investor-owned utility status by
the end of 2004. The importance which ScottishPower has attached to trade union
participation and involvement in change programmes has been made clear to the
PacifiCorp trade unions and this has been underscored recently by the
establishment of regular liaison meetings between the PacifiCorp CEO and senior
union officials to exchange views and ensure effective joint communication and
consultation on matters of common interest. These events are attended
periodically by the ScottishPower group Chief Executive. In addition,
considerable work has been undertaken to ensure that sound negotiating platforms
are developed with the trade unions which will serve as the basis for future
dialogues on the forthcoming change programmes.
Health and Safety
UK Businesses
ScottishPower's safety strategy is based on a system of corporate determination
of strategy, policy and auditing standards, with devolved responsibility for
implementation and active leadership from the highest levels.
The UK group continues to manage its operations throughout the organisation
to the highest health and safety standards, in the interests of staff, customers
and members of the public.
The UK group has a well-established occupational health service and lifestyle
health care programme. The employees therefore benefit from some of the best
occupational health facilities in the United Kingdom.
US Businesses
PacifiCorp has a safety strategy that focuses on the safety of its employees,
customers and members of the public through the utilisation of sound safety
policies and practices. The commitment of PacifiCorp to strengthen yet further
the safety of its operations is evident in the creation of a new position of
Director of Corporate Safety in the new organisation.
PacifiCorp is also fully committed to the health and well-being of its
employees. PacifiCorp staff enjoy an excellent benefits package to ensure that
they are cared for in all aspects of health care both during employment and, if
they so wish, in retirement.
Charitable and Political Donations
During the financial year donations made by ScottishPower and its UK
subsidiaries for charitable purposes totalled (pound)608,882.
Benchmarking studies recently completed across the ScottishPower and its UK
subsidiaries have identified over (pound)5 million of community support activity
comprising charitable donations, community investment and commercial
initiatives. This support is given in cash, through staff time and in-kind
donations.
In addition, in February 2000, PacifiCorp made a contribution of $5 million
((pound)3.1 million) to the PacifiCorp Foundation, a body established in 1988 as
the major channel for philanthropy for PacifiCorp and its subsidiaries.
There were no contributions for political purposes.
25 Annual Report & Accounts/Form 20-F
<PAGE>
Business Review -- UK Business Regulation
UK Energy Business
Structure of the Electricity Industry in the United Kingdom
The UK electricity industry, which was restructured in March 1990 to introduce
competition into the generation and supply of electricity, consists of the
following activities:
Generation
The production of electricity at power stations.
Transmission
The bulk transfer of electricity across a high voltage transmission system.
Distribution
The transfer of electricity from the high voltage transmission system and its
delivery, across local low voltage distribution systems, to customers.
Supply
The bulk purchase of electricity by suppliers and its sale to customers, with
the associated customer service activities, including sales and marketing,
billing and income collection.
The UK has three distinct geographical systems: Scotland, England & Wales,
and Northern Ireland, each with a different commercial framework. The Scottish
system and the English and Welsh systems are interconnected, and an agreement
has been reached for the construction of a link between Scotland and Northern
Ireland.
In each of Scotland and England & Wales, the electricity industry is
regulated under the Electricity Act 1989 (the "Electricity Act") by the
Secretary of State for Scotland or the Secretary of State for Trade and
Industry, as applicable (collectively, the "Secretary of State"), and by the
Director General of Electricity Supply (the "DGES"). See "Regulation of the
Electricity Industry" (page 27).
Electricity Industry Structure in Scotland
The electricity industry in Scotland is principally composed of two vertically
integrated companies, ScottishPower and Scottish & Southern, each generating,
transmitting, distributing and supplying electricity within their respective
authorised areas. A third, British Energy, is primarily a generator, selling all
the electricity it generates at its two nuclear power stations in Scotland to
ScottishPower and Scottish & Southern under the Nuclear Energy Agreement (the
"NEA"). In addition there are a number of other companies supplying electricity
competitively to customers in Scotland, of which the most significant is British
Gas Trading.
The companies are also obliged to sell wholesale electricity on request to
second-tier suppliers in Scotland at a price which is capped at the England &
Wales Pool price. This arrangement is currently being reviewed by the DGES,
together with the arrangements for access to the interconnector, the
restructuring contracts, and other aspects of the market in Scotland, with the
objective of promoting competition and aligning the trading arrangements in
Scotland with the new arrangements being developed in England & Wales. See
"Electricity Industry Structure in England & Wales - Generation" (page 27).
Generation - ScottishPower and Scottish & Southern generate electricity from
their own portfolios of power stations. In addition, the companies are obliged,
under the NEA, to purchase the entire output from British Energy. A number of
further contractual relationships exist between the two companies, which involve
the sharing of coal-fired, dual oil and gas-fired and conventional
hydro-generating capacity, by allocating part of the capacity of certain
generating stations operated by one company to the other company. See
"Generation - Generation Portfolio" (page 12) for further discussion of these
contractual arrangements. Currently, there exists a surplus of generating
capacity in Scotland which enables the companies to sell electricity to England
& Wales through the interconnector. The quantity of these sales is set to
increase as the current transmission constraints are reduced.
Transmission - The transmission systems of ScottishPower and Scottish &
Southern are each made up of a network comprised of overhead lines, underground
cables and associated equipment, operating at either 275 kV or 132 kV and, in
the case of ScottishPower, 400 kV. This network connects the generating stations
and distribution entry points operating at, or below, 33 kV. ScottishPower's
transmission system is connected to the National Grid in England & Wales by the
interconnector. Both companies have access to this link which enables the
companies to export and import electricity from England & Wales. The available
capacity of the interconnector at any time depends on a number of variable
factors (e.g., the secure thermal rating of the interconnector circuits and the
pattern of scheduled generation on either side of the border). In 1999-00, the
average capacity on the interconnector was 1,392 MW.
Distribution - The distribution systems are each made up of a network of
overhead lines and underground cables, operating at voltages ranging from 33 kV
to 0.23 kV. The distribution voltages and equipment used are determined by end
users' requirements and their location and by the relative economics of
transferring electricity at different voltages. To ensure competition in the
Generation and Supply activities, the companies are required to provide open
access to their transmission and distribution networks on a non-discriminatory
basis.
Supply - The supply businesses of ScottishPower and Scottish & Southern
purchase electricity primarily from their own respective generation businesses,
for sale to customers both within their first-tier home areas and in each
other's area. Other second-tier suppliers generally purchase their electricity
either from ScottishPower or Scottish & Southern at a price
26 Annual Report & Accounts/Form 20-F
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which is currently capped at the England & Wales Pool price, but may also
purchase electricity from independent generators or across the interconnector
from the England & Wales Pool.
Electricity Industry Structure in England & Wales
In England & Wales, electricity is produced by generators, the largest of which
are National Power, PowerGen, British Energy, TXU Europe and Edison Mission.
Electricity is transmitted through the National Grid transmission system by
National Grid Company ("NGC") and distributed by the 12 Regional Electricity
Companies ("RECs"), one of which is Manweb, in their respective authorised
areas. Most customers are currently supplied with electricity by their local
REC, although there are other suppliers holding second-tier supply licences,
including other generators and RECs, who can also compete to supply customers.
Generation - Currently virtually all electricity generated in England & Wales
is sold by generators and bought by suppliers through the Pool. The Pool was
established at the time of privatisation for bulk trading of electricity in
England & Wales between generators and suppliers. As discussed above,
ScottishPower and Scottish & Southern can participate in the Pool by exporting
electricity to or importing electricity from England & Wales via the
interconnector.
Prices for wholesale electricity sales are set by the Pool daily for each
half hour of the following day, based on the bids of the generators and a
complex set of calculations matching supply and demand and taking account of
system stability, security and other costs. Because Pool prices tend to be
volatile and difficult to predict, generators and suppliers often enter into
bilateral arrangements, such as contracts for differences, to provide a degree
of protection against such fluctuations.
In October 1997, HM Government requested the DGES to review the wholesale
trading arrangements in England & Wales. Following an extensive period of
consultation, the DGES issued proposals in July 1998 to replace the Pool with
market-based arrangements more akin to those in commodity markets, 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.
The proposed arrangements will remove the single Pool price at which all
generation in any half hour is presently bought and sold. Instead, all
generators will have to find buyers for their output by offering them
competitive prices, and all suppliers will need to contract with generators to
purchase sufficient electricity to meet their customers' demand. Imbalances
between actual and contracted positions will be settled through the balancing
mechanism. The pay-as-bid and balancing process will expose market participants
to the costs and consequences of their actions, and thus lead to more
cost-reflective prices and more effective management of risk. It is planned to
introduce the new trading arrangements in October 2000.
Transmission - NGC owns and operates the high voltage 275 kV and 400 kV
electricity transmission system in England & Wales, also known as the National
Grid. NGC has a statutory duty to operate a non-discriminatory policy, both in
the day-to-day administration of the system and in the provision of access to
the transmission network.
Distribution - The distribution businesses of the RECs operate and maintain
the assets which carry power from grid supply points to individual customers
within their service areas. This involves a network of overhead lines,
underground cables, switches and transformers operating at voltages ranging from
132 kV down to 0.23 kV in residential premises. To ensure competition in the
supply business, the RECs are required to provide open access to their
distribution networks on a non-discriminatory basis.
Supply - The supply business covers the bulk purchase of electricity through
the Pool and the selling on to customers. RECs can supply customers within their
home areas and holders of second-tier licences, subject to meeting certain
requirements, can supply any customer. Second-tier licences are held by all the
RECs, National Power, PowerGen, British Energy, ScottishPower, Scottish &
Southern, British Gas Trading and some other new suppliers.
UK Electricity Business
Regulation of the Electricity Industry
Introduction
The UK electricity industry is regulated under the provisions of the Electricity
Act 1989 and is anticipated also to be subject to the provisions of the
Utilities Bill introduced in draft form to Parliament in January 2000 and
targeted for implementation in final form in July 2000. The Electricity Act
provided the basis for the restructuring of the electricity supply industry
("ESI") in England & Wales and in Scotland in 1990, including the introduction
of price regulation for transmission and distribution and of competition in
supply and generation.
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 "Golden Share". The Golden Share only affects the
corporate control transactions at the registered holding company level and has
no effect on PacifiCorp.
Regulation of the ESI
The Electricity Act provided for the appointment of the DGES by the Secretary of
State for Trade and Industry. The DGES holds office for renewable periods of
five years and is the head of Ofgem, which is the combined department into which
the
27 Annual Report & Accounts/Form 20-F
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Business Review -- UK Business Regulation
previously regulated functions of OFGAS and OFFER were merged. Under the
Electricity Act, the Secretary of State and the DGES are required to exercise
their respective functions in the manner best calculated to achieve various
objectives, including securing that all reasonable demands for electricity are
satisfied; securing that licence holders are able to finance the carrying on of
the activities for which they are authorised by their licences; and promoting
competition in the generation and supply of electricity. Subject to these
duties, the Secretary of State and the DGES have a number of other duties,
including protecting the interests of consumers of electricity.
The DGES exercises, concurrently with the Director General of Fair Trading,
certain functions relating to monopoly situations in the generation,
transmission, distribution or supply of electricity under the Fair Trading Act
1973 and certain functions relating to anti-competitive conduct under the
Competition Act 1980 and the Competition Act 1998.
The Licensing Regime
The Electricity Act prohibits the generation, transmission or supply of
electricity to any premises unless authorised by a licence or exemption.
Licences are granted for generation, transmission, public electricity supply by
a PES and second-tier supply.
Under the electricity regime, England & Wales was divided into 12 PES
franchise areas, and Scotland into two additional PES franchise areas, for the
purposes of electricity supply and distribution.
Each of the 14 PES licences permits its holder to supply electricity to any
premises within its home area (first-tier licence). Electricity suppliers which
are not the PES licence holder for that home area are known as second-tier
suppliers and have second-tier supply licences (second-tier licence).
Each PES licensee distributes electricity for second-tier suppliers whose
customers are within that PES licensee's authorised area, as well as for its own
supply business. Charges for distribution are made to the PES licensee's own
supply businesses or to second-tier suppliers as appropriate. Each PES licence
prohibits discrimination between its own supply business and other users of its
distribution system.
Each PES licensee is required, among other duties, to develop and maintain an
efficient, co-ordinated and economical system of electricity distribution and
supply and to offer terms for connection to, and use of, its distribution system
on a non-discriminatory basis. In particular, a PES licensee may not
discriminate in favour of its own first- or second-tier supply businesses.
Each PES licence requires the PES licensee to plan and develop its
distribution system to a standard not less than that previously applicable
within the nationalised electricity supply industry and to report annually to
the DGES giving details of the performance of the licensee in maintaining
distribution security, availability and quality of service during the previous
financial year. ScottishPower is licensed under the Electricity Act to generate
electricity, transmit electricity within its authorised transmission area, and
distribute and supply electricity within its authorised supply area. This
licence (a "Composite Licence") regulates each of its generation, transmission,
distribution and supply businesses and certain other related aspects of its
activities. In addition, it has second-tier licences which authorise it to
supply electricity to customers located outside its authorised supply area.
Manweb is licensed under the Electricity Act to distribute and supply
electricity within its authorised supply area pursuant to its PES licence.
Manweb also holds three second-tier licences which authorise it to supply
electricity to users located in the authorised areas of other PESs, in England &
Wales, Scotland and Northern Ireland respectively. Prior to September 1998, PESs
were the only suppliers authorised to supply electricity to franchise customers
(being customers with a maximum demand of less than 0.1 MW) in their respective
home areas. Starting from September 1998, each PES was, at the direction of the
DGES, to open its home area to competition from other suppliers holding second-
tier licences. The scope of the second-tier licences was extended
correspondingly at the direction of the DGES. This process was completed in May
1999.
In addition, in order for a second-tier licence holder to supply a
"designated customer" (being a residential customer or a customer requiring less
than 12,000 kWh per year) in the home area of a PES, the second-tier licence
holder must issue a designated supply notice to Ofgem, and have its codes of
practice (statements of intent about how the supplier will interact with
customers) approved by Ofgem.
Modification of Licences
The DGES is responsible for monitoring compliance with the conditions of
licences and, where necessary, enforcing them through procedures laid down in
the Electricity Act. Licence conditions may be modified, either in accordance
with the terms of the relevant licences or in accordance with the procedures
laid down in the Electricity Act.
Under the Electricity Act, the DGES may modify a licence condition with the
agreement of the licence holders after due notice, public consultation, and
consideration of any representations or objections. In the absence of agreement,
the only means by which the DGES 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 and report on whether matters specified in the reference relating to
the generation, transmission or supply of electricity in pursuance of a licence
operate, or may be expected to operate, against the public interest; and, if so,
whether the adverse public
28 Annual Report & Accounts/Form 20-F
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interest effect of these factors could be remedied or prevented by modification
of the conditions of the licence. In determining whether any particular matter
operates, or may be expected to operate, against the public interest, the
Competition Commission is to have regard to the matters in relation to which
duties are imposed on the Secretary of State and the DGES.
If there is an adverse finding, the Competition Commission's report will
state whether any adverse effects on the public interest could be remedied or
prevented by modification of the licence conditions. If the Competition
Commission so concludes, the DGES must then make such modifications to the
licence as appear to him 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 objections. The Secretary of State has
the power to veto any modification reference.
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 1998.
ScottishPower's acquisition of Manweb in 1995 and of Southern Water in 1996
involved ScottishPower giving assurances to the Secretary of State to modify
Manweb's PES Licence and ScottishPower's Composite Licence (and Southern Water
Services' Water Appointment).
ScottishPower's merger with PacifiCorp in 1999 also involved ScottishPower
giving undertakings to the Secretary of State to agree to modifications to its
Composite Licence.
Term and Revocation of Licences
ScottishPower's Composite Licence and Manweb's PES Licence continue until
terminated by not less than 25 years' notice given by the Secretary of State.
ScottishPower's and Manweb's second-tier licences for England & Wales
continue until terminated by not less than 25 years' notice given by the
Secretary of State on or after 19 November 2000 and 1 April 2001 respectively.
ScottishPower's and Manweb's second-tier licences for Scotland continue until
terminated by not less than 25 years' notice given by the Secretary of State on
or after 30 March 2000 and 1 July 2004 respectively.
Licences under the Electricity Act may be revoked in certain circumstances
specified in the licences, such as the insolvency of the licensee or the
licensee's failure to comply with an enforcement order made by the DGES. In
addition, the Secretary of State for Trade and Industry may revoke each of
ScottishPower's generation, transmission and PES licences if ScottishPower
ceases to carry on the activities authorised by the respective licence.
Principal Conditions of ScottishPower's Composite Licence and Manweb's PES
Licence
ScottishPower's Composite Licence and Manweb's PES Licence require ScottishPower
and Manweb respectively to prepare and publish separate accounts, including on a
current cost accounting basis, for each of ScottishPower's generation,
transmission, distribution and supply businesses (first and second-tier and
wholesaling business) and Manweb's distribution and supply businesses.
It is a further licence requirement that none of ScottishPower's nor of
Manweb's businesses gives any cross-subsidy to, or receives any cross-subsidy
from, any of ScottishPower's or Manweb's other businesses, whether regulated by
the Composite Licence or not.
A number of Composite Licence and PES Licence conditions require
ScottishPower and Manweb, respectively, to be party to certain agreements or
codes which affect their operational activities: for example, the Grid Code,
which includes provisions governing the technical aspects of connections to, and
the operation of, the transmission systems. Each PES licensee must also draw up,
implement and comply with a Distribution Code, which interacts with the Grid
Code and specifies technical requirements for connection to, and the operation
and use of, its distribution system; and Codes of Practice on customer
relations, which require the approval of the DGES. There are also Electricity
Supply Regulations and certain performance standards determined by the DGES
which must be complied with.
The modifications made upon the acquisition of Manweb were designed to
address the fact that, as a result of the acquisition, Manweb became a
subsidiary of ScottishPower. Broadly, the modifications were designed to
ring-fence Manweb's regulated businesses (distribution, supply and second-tier
supply) from its non-regulated businesses and from ScottishPower's other
businesses; to impose certain information reporting requirements on Manweb and
ScottishPower to assist the DGES in his ability to carry out his regulatory
functions; and to address the fact that ScottishPower and Manweb are both
electricity companies.
As a condition for regulatory clearance of ScottishPower's acquisition of
Southern Water, ScottishPower gave assurances to the Secretary of State that it
would not operate any new business which is not regulated under the Electricity
Act and whose annual turnover accounts for more than 5% of ScottishPower's
aggregate annual turnover excluding all subsidiaries, other than as a subsidiary
company; ensure that ScottishPower had sufficient management and financial
resources to fulfil its obligations to enable the introduction of competition in
supply for all customers in its home area; and agree to appropriate
modifications to Southern Water's licence.
The undertakings given to the Secretary of State by ScottishPower as a
condition for regulatory clearance for its merger with PacifiCorp were aimed
principally at ensuring that ScottishPower's UK businesses would not be impacted
financially by the merger. The principal undertakings were therefore that the
holding company established
29 Annual Report & Accounts/Form 20-F
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as a result of the merger would restructure its business in Great Britain as
soon as is reasonably practicable, and in any event before April 2002, so as to
place generation and any non-electricity activities in separate group companies
from the remaining electricity activities; that following restructuring a
financial ring-fence will be placed around the PES and transmission businesses
of ScottishPower, on similar terms to the standard ring-fence developed by the
DGES; and that ScottishPower will ensure that the DGES will continue to have
access to the information which he needs to carry out his duties.
Price Controls
The primary objective of the regulation of the UK 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, such as in
the transmission and distribution of electricity, and that in other areas it
will take time to develop, as in the supply of electricity. In these areas,
regulatory controls are deemed necessary to protect customers in a monopoly
market (by determining inflation-limited price caps) and to encourage
efficiency.
ScottishPower and Manweb's 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. Since 1995,
regulation has tended to restrict price increases to customers to levels below
the increase in the retail price index, through a formula expressed as RPI - X.
The rationale behind the use of the RPI - X formula is that companies are
motivated, during the period of the price control, to maximise efficiencies,
knowing that they can retain any element of overperformance for their
shareholders. 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 DGES. 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.
Since the controls are forward looking (i.e. are based on forecasts), and are
designed to achieve an allowed rate of return (equal to the cost of capital) for
the business, correction factors are also required to adjust tariffs in
subsequent years to allow for any over or under recovery of revenues and ensure
that the allowed revenue is achieved over the period of the control.
The DGES from time to time reviews the price cap formulae applicable to the
transmission, distribution and supply businesses.
ScottishPower and Manweb participate in reviews of price caps applicable to
them by submitting to Ofgem their view of what reasonable efficiency gains and
future investment requirements should be built into the determination of the
revised price control.
As with any modification to licence conditions, the DGES must undertake a
consultation exercise, inviting comments from PES licensees and third parties,
before modifying licences to incorporate new price controls. As described above
under "The Licensing Regime-Modification of Licences" (page 28), licence
conditions may be modified, either with the consent of the licensee or, in the
absence of consent, following a modification reference to the Competition
Commission. The Competition Commission is an independent body whose statutory
duty is to determine whether the matters specified in a reference to it operate,
or may be expected to operate, against the public interest; and, if so, whether
the adverse public interest effect of those factors could be remedied or
prevented by modification of the conditions of the licence.
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.
ScottishPower Transmission Price Control
The maximum transmission revenue that ScottishPower is permitted to earn in any
financial year is limited by an RPI - X constraint. In December 1999, the DGES
announced a revised transmission price control for ScottishPower, to take effect
from 1 April 2000 and to run for five years. The new control has reduced revenue
by 6% from 1 April 2000 and has set the X value at 0 from 1 April 2001 to 31
March 2005.
Distribution Price Control
The maximum distribution revenue is calculated from a formula that is based on
customer numbers as well as units distributed. In December 1999, the DGES
announced revised distribution price controls for ScottishPower and Manweb, to
take effect from 1 April 2000 and to run for five years. The new controls
reduced prices for ScottishPower by 13% and for Manweb by 21% from 1 April 2000,
both of these including cost transfers from distribution to supply. The X value
for both ScottishPower and Manweb is set at 3 from 1 April 2001 to 31 March
2005.
During the period of the revised distribution price control, the DGES will be
carrying out a project aimed at ensuring that revenues and outputs of the
business are more closely matched and meet customers' expectations. This will
require an examination of the appropriate information and incentives, and is
expected to lead to a refinement of the price controls to place less emphasis on
periodic reviews and more emphasis on continuous performance comparisons between
companies. From April 2002, following completion
30 Annual Report & Accounts/Form 20-F
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of the project, it is anticipated that companies' revenues could be adjusted by
up to 2% to reflect better or worse than average performance.
Supply Price Control
All customers are now subject to competitive supply, although certain smaller
customers remain protected. In December 1999, the DGES announced revised supply
price controls for ScottishPower and Manweb, to take effect from 1 April 2000
and run for two years. These controls operate as maximum restraints on tariffs
and are confined to the two major tariffs for residential customers. All
non-residential customers have now been removed from the constraints.
The revised price restraints from April 2000 have been designed by the DGES
to complement, rather than seek to replace, the development of the competitive
market. They are designed to leave scope for competing suppliers to offer prices
below the levels implied by the constraints and to encourage the retention and
new entry of competing suppliers.
The controls reduce the two major residential tariffs for ScottishPower from
1 April 2000 by 3.3% and 0.8%, and those for Manweb by 6.7% and 0.3%. In the
second year of the controls, maximum prices for residential customers on these
tariffs for both ScottishPower and Manweb are required to remain at their
nominal levels.
Separation of Businesses
Following the sale by some RECs of their supply businesses and the review of PES
price controls, the DGES proposed licence modifications in December 1999 which
require all information provided to the distribution business of each PES by
other suppliers to be treated as confidential, other than in limited
circumstances, and as a result, the managerial, operational, and informational
separation of the distribution business from the supply and other businesses of
the PES. In addition, a Compliance Officer must be appointed to monitor the
separation of these businesses. For a limited period the DGES will grant a
derogation from the separation requirements while separation is being
implemented.
In order to comply with the separation requirements of these licence
modifications, which have been accepted by ScottishPower and Manweb, any sharing
of services, systems, premises, personnel, etc., by Power Systems with other
businesses of ScottishPower must not involve any cross-subsidy, or distort or
prevent competition in generation or supply, and must also be the most efficient
and economic obtainable. In addition, Power Systems will not be able to share
the same identity as the supply or other businesses of ScottishPower. The DGES
has granted derogations to ScottishPower and Manweb until April 2002 to allow
time for these requirements to be met, and a further derogation, which will
lapse only in certain limited circumstances, to allow the two distribution
businesses of ScottishPower and Manweb to be managed and operated jointly.
Similar separation licence modifications have also been proposed in relation
to the transmission businesses of ScottishPower and Scottish & Southern, in
order to support compliance with the EU Directive (EC96/92) on the
liberalisation of the internal electricity market in the European Union, in
particular, the requirement that in vertically integrated companies the
transmission system operator is separate at least in management terms from the
company's other electricity activities. These licence modifications impose the
same confidentiality and separation obligations on the transmission business as
apply to PES distribution businesses, and also require the appointment of a
Managing Director for the transmission business who is not a member of the
company's Board. As for distribution, the DGES will grant derogations to allow
time for implementation of the separation requirements and to allow the
transmission and distribution businesses to be managed and operated jointly.
31 Annual Report & Accounts/Form 20-F
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UK Gas Business
Structure of the Gas Industry in the United Kingdom
The UK gas industry, which was privatised in 1986, has the following major
components:
Beach Terminals
Gas is transported from offshore fields on the UK Continental Shelf to one of
seven beach terminals where it is processed before being fed into the onshore
transportation system.
The Onshore Transportation System
The onshore transportation system, most of which is owned and operated by
Transco, the transportation arm of BG plc, and the rest by other public gas
transporters, conveys gas from the beach terminals to consumers. The system
consists of a high pressure National Transmission System and 13 lower pressure
Local Distribution Zones, and is interconnected with the gas transportation
systems of continental Europe, Northern Ireland and the Republic of Ireland.
Gas Storage Facilities
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.
Gas Shippers
Gas shippers contract with public gas transporters to have gas transported
between the beach terminal and the point of supply. Gas shippers can also access
storage facilities.
Supply
Suppliers purchase gas to deliver to their customers by contracting with
producers. Suppliers who do not also hold a shipper's licence pay gas shippers
to have the gas transported from the beach terminal through a public gas
transporter's system to the customer. Larger industrial and commercial
customers, with annual demands exceeding 2,500 therms, have been able to choose
their gas supplier for a number of years and competition is well developed in
this market. The residential market was opened to competition progressively
commencing in April 1996 and completed in May 1998.
In each of Scotland and England & Wales, the gas industry is regulated under
the Gas Act 1995 by the Secretary of State for Trade and Industry, and by the
Director General of Gas Supply (the "DGGS").
Regulation of the Gas Industry
The two main Acts relating to the regulation of the gas industry in Scotland and
England & Wales are the Gas Act 1986 and the Gas Act 1995. The Gas Act 1986
provided for the privatisation of the industry and for the establishment of the
post-privatisation structure. It established the industry's regulatory regime,
creating OFGAS, with the DGGS as its head. The DGGS holds office for renewable
periods of five years and is the head of Ofgem, which is the combined department
into which the previously regulated functions of OFGAS and OFFER were merged.
The 1995 Act amended the 1986 Act and introduced the framework necessary for the
introduction of residential competition.
The DGGS and the Secretary of State are required to exercise their powers in
the manner best calculated to ensure that all gas which is reasonably demanded
by consumers is supplied; ensure that licence-holders are able to finance their
authorised activities; and secure effective competition in gas supply.
The DGGS exercises, concurrently with the Director General of Fair Trading,
certain functions relating to monopoly situations in the conveyance or supply of
gas under the Fair Trading Act 1973 and certain functions relating to
anti-competitive conduct under the Competition Act 1980 and the Competition Act
1998.
The Licensing Regime
The DGGS is responsible for granting new licences or licence extensions. The
1995 Act allows for the licensing of three separate activities - public gas
transporter, shipper and supplier. ScottishPower is licensed to carry out each
of these activities. The DGGS also has powers to modify licence conditions, on a
similar basis to the regime for electricity.
32 Annual Report & Accounts/Form 20-F
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UK Water Business
Structure of the Water Industry in the United Kingdom
Prior to privatisation of the water industry, the provision of water supply and
wastewater services in England & Wales was split between 29 statutory water
companies, each incorporated by separate Acts of Parliament which could only
supply water, and 10 water authorities established under the Water Act 1973
which could provide both water and wastewater services. Pursuant to the Water
Act 1989 (the "WA 1989"), the functions of each water authority relating to
water supply (except in areas where these functions were carried out through
statutory water companies) and the provision of wastewater services were
transferred on 1 September 1989 to a WaSC. At privatisation, certain of the
water authorities' other functions, including pollution control, water resource
management, fisheries, flood protection and alleviation, and land drainage were
transferred to the National Rivers Authority (the "NRA"). See "Environmental
Regulation-Water" (page 39) for further discussion.
The relevant provisions of the WA 1989 were consolidated with other
functional legislative provisions into the Water Industry Act of 1991 ("WIA
1991"). This provides that each company engaged in public water supply or
wastewater services must be licensed by the Secretary of State for the
Environment or by the Director General of Water Services (the "DGWS"), in
accordance with a general authorisation given by the Secretary of State for the
Environment.
Competition
Southern Water welcomes the further opening of the industry to competition.
However the latest move, designed to clear the way for companies to use each
other's infrastructure to supply water and wastewater services, remains
extremely complex.
Southern Water is already looking at ways in which it might be able to expand
its own customer base and business, but any expansion of the business or use of
its network by others must not compromise customers' health and safety,
standards of service, or the environment.
Regulation of the Water Industry
Introduction
The UK Water Industry is principally regulated under the provisions of the WIA
1991 and the Water Resources Act 1991. WIA 1991 consolidates enactments relating
to the supply of water and the provision of wastewater services, including the
WA 1989 and other enactments. WA 1989 provided for the privatisation process
itself and set up the post-privatisation structure and regulation of the
industry.
The WA 1989 (now WIA 1991) provided for the appointment by the Secretary of
State for the Environment of an industry regulator, the DGWS. The DGWS holds
office for renewable periods of five years, and is the head of OFWAT and its
staff of administrators, economists and accountants.
The EA regulates discharges by water companies into rivers and coastal waters
and the abstraction of water from rivers and ground water. The Drinking Water
Inspectorate regulates the quality of drinking water in accordance with EU
standards.
Under WIA 1991, the DGWS and the Secretary of State for the Environment must
exercise or perform their duties in the manner best calculated to secure that
the functions of a water undertaker and of a sewerage undertaker are properly
carried out as respects every area of England & Wales; and ensure that companies
holding Appointments are able (in particular, by securing reasonable returns on
their capital) to finance the proper carrying out of their functions.
These powers and duties are also to be exercised in a manner best calculated
to ensure that the interests of the customer in relation to the fixing and the
recovery of charges are protected; and, in particular, to ensure that the
interests of customers and potential customers in rural areas are so protected;
that no undue preference is shown; and that there is no undue discrimination in
the fixing of those charges.
The DGWS and the Secretary of State for the Environment are also under a duty
to ensure that the interests of customers are protected as respects benefits
that could be secured for them by applying a share of the proceeds of any
disposals of a WaSC's land in future reviews.
The DGWS exercises, concurrently with the Director General of Fair Trading,
certain functions relating to monopoly situations in the supply of water or the
provision of wastewater services under the Fair Trading Act 1973, and certain
functions relating to anti-competitive conduct in connection with the supply of
water or securing a supply of water or with the provision of, or securing of,
wastewater services under the Competition Act 1980 and the Competition Act 1998.
Duties of Water Undertakers
Under WIA 1991, each water undertaker is under a general duty to develop and
maintain an efficient and economical system of water supply within its licence
area. It must also ensure that all such arrangements have been made for
providing supplies of water to premises in its licence area, for making such
supplies available to people who demand them, and for maintaining, improving and
extending its mains and other pipes, as are necessary to enable it to meet its
water supply obligations under the Act.
Duties of Sewerage Undertakers
Under WIA 1991, each sewerage undertaker is under a general duty to provide,
improve and extend such a system of public sewers and to cleanse and maintain
these sewers to ensure that its sewerage region is effectively drained.
33 Annual Report & Accounts/Form 20-F
<PAGE>
Sewerage undertakers are required to make provision for the emptying of sewers
and whatever further arrangements are necessary from time to time for
effectively dealing with the contents of sewers. In addition, discharges from
wastewater treatment works must be consented to by the Environment Agency
("EA"); and sewerage undertakers are responsible under WIA 1991 for regulating
discharges of industrial effluent into sewers. Contamination of controlled
waters by non-complying effluent being discharged by a treatment works may
involve the sewerage undertaker in liability, including clean-up costs.
The Licensing Regime
Following privatisation of the UK water industry in 1989, each of the water and
sewerage undertakers, while maintaining its effective monopoly supply, became
regulated through an instrument of Appointment. The Appointment confirms the
appointment of the water or sewerage undertaker as supplier in its own area and
provides for the monitoring of its performance by the DGWS and the Secretary of
State for the Environment.
Modification of Licences - Conditions of the Appointment may be modified,
either in accordance with the terms of the relevant licences or in accordance
with the procedures laid down in WIA 1991. Subject to a power of veto by the
Secretary of State, the DGWS may modify the conditions in the Appointment with
the consent of the licensee. Before making the modifications, the DGWS must
publish the proposed modifications as part of a consultation process, giving
third parties the opportunity to make representations and objections which the
DGWS must consider.
In the absence of consent, the only means by which the DGWS 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 and report on whether matters specified in
the reference relating to the carrying out of any function of a company by
virtue of its Appointment 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
Appointment. In determining whether any particular matter operates, or may be
expected to operate, against the public interest, the Competition Commission is
to have regard to the matters in relation to which duties are imposed on the
Secretary of State for Trade and Industry and the DGWS.
If there is an adverse finding, the Competition Commission's report will
state whether any adverse effects on the public interest could be remedied or
prevented by modification of the licence conditions. If the Competition
Commission so concludes, the DGWS must then make such modifications to the
Appointment as appear to him 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 objections. The Secretary of State
for Trade and Industry has the power to veto any modification by agreement.
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 1998.
Southern Water Services' Appointment was modified as a result of assurances
given by ScottishPower as a condition to receiving regulatory clearance for its
acquisition of Southern Water plc in 1996.
Term and Revocation of Licences - Southern Water Services' Appointment
continues until terminated by not less than 10 years' notice given to Southern
Water Services by the Secretary of State for the Environment, expiring not
earlier than 25 years after 1 September 1989, the transfer date. Appointments
may also be revoked or transferred to another company in certain circumstances
specified in WIA 1991 or in the Appointments; for example, the appointee failing
to comply with an enforcement order made by the Secretary of State for the
Environment or the DGWS, or the appointee being unable to pay its debts.
Principal Conditions of Southern Water Services' Appointment - The principal
regulatory provisions which apply to the regulated activities of Southern Water
Services are set out in WIA 1991 and regulations and orders made under it. Other
business activities of Southern Water, such as waste management and other
environmental services, engineering services and systems technology services, if
undertaken, fall outside the direct scope of regulation under WIA 1991. Southern
Water Services is an appointed WaSC and holds an Appointment regulated under WIA
1991 to supply water and sewerage services within its authorised area, which
regulates its appointed activities. Southern Water Services' Appointment
requires Southern Water Services to prepare and publish separate accounts,
including on a current cost accounting basis showing separately its appointed
business from all other businesses and activities. It is a further Appointment
requirement that the regulated business neither gives to, nor receives from, any
other business or activity of Southern Water Services, any cross-subsidy,
whether those businesses are regulated by the Appointment or not.
Southern Water Services' Appointment was modified following assurances given
to the Secretary of State for Trade and Industry by ScottishPower, as a
condition to regulatory clearance of its acquisition of Southern Water plc, to
address regulatory concerns arising out of the merger, in particular to ensure
the management independence of Southern Water Services and strengthen the ring
fencing of its finances.
As a result, the Appointment of Southern Water Services contains an
obligation that it must at all times conduct the businesses regulated
34 Annual Report & Accounts/Form 20-F
<PAGE>
by its Appointment as if such businesses were substantially Southern Water
Services' sole business and Southern Water Services were a separate public
listed company. In particular, Southern Water Services must ensure that its
Board of directors is independent of ScottishPower and includes two
non-executive directors of relevant experience and standing. All directors must
disclose to Southern Water Services and to the DGWS any conflicts with their
duties as directors of Southern Water Services and have regard exclusively to
the interests of Southern Water Services as a water and sewage undertaker, in
the event of a potential conflict with the interests of other group companies.
The DGWS must be informed of any change in the identity and functions of the
directors of Southern Water Services.
In addition, Southern Water Services must not, without the consent of the
DGWS, make a loan to, or guarantee any liability of, any group company, or make
any disposal of any asset of the regulated business. The payment of dividends by
Southern Water Services should not impair its ability to finance its regulated
business. Similarly, any financial support or transfer of assets from Southern
Water Services to a group company must not adversely affect the former's ability
to carry out its functions.
In March 1998, Southern Water issued a (pound)100 million variable rate bond
to help fund capital expenditure. The bond listing provides a form of Stock
Exchange listing for the water business, to compensate OFWAT for the loss of
comparative information (as a result of the discontinuance of Southern Water's
Stock Exchange listing on the acquisition by ScottishPower). The bond listing
imposes an obligation on Southern Water Services to comply with financial
information requirements incumbent on a quoted plc and to maintain an investment
grade rating for all its corporate debt.
As a condition for regulatory clearance of ScottishPower's acquisition of
Southern Water, ScottishPower gave assurances to the Secretary of State that it
would not operate any new business that is not regulated under the Electricity
Act and whose annual turnover accounts for more than 5% of ScottishPower's
aggregate annual turnover excluding all subsidiaries, other than as a subsidiary
company; ensure that ScottishPower had sufficient management and financial
resources to fulfil its obligations to enable the introduction of competition in
supply for all customers in its authorised area; and agree to appropriate
modifications to Southern Water's licence.
Price Controls
Southern Water Services' business is subject to price controls. Southern Water
Services is allowed to increase its standard charges for the provision of water
supply and sewerage services by the percentage change in the RPI plus an
adjustment factor K. In November 1999, the DGWS announced a revised price
control for Southern Water Services to take effect from 1 April 2000 and to run
for five years. The new control reduced prices by 13% from 1 April 2000 and set
values of K to be 0%, 0%, 1.6% and 0.8% for each year respectively from 1 April
2001 to 31 March 2005.
Large industrial users can now choose their own water and sewerage suppliers.
From 1 April 2000, 15 water companies, including Southern Water, have not been
able to recoup from other customers any amounts lost by offering lower tariffs
to such industrial users. The regulated charging base to which price limits
apply will no longer include tariffs to large industrial users.
The Competition Act 1998
The UK has enacted new legislation, the Competition Act 1998, which introduced
into UK law, with effect from 1 March 2000, the EU prohibitions on
anti-competitive agreements and the abuse of a dominant position, in place of
the previous provisions, and applied them fully to utilities. The Competition
Act 1998 replaced the Monopolies and Mergers Commission with a new statutory
body, known as the Competition Commission, with effect from 1 April 1999. The
Competition Act 1998 also provides the Office of Fair Trading with significant
investigative powers and the ability to grant interim measures.
The Competition Act 1998 grants the DGES and the DGWS concurrent powers with
the Director General of Fair Trading in relation to, respectively, "commercial
activities connected with the generation, transmission, or supply of
electricity" and "commercial activities connected with the supply (or securing a
supply) of water or of sewerage services".
Utilities Bill
The UK Government's proposals to reform and modernise utility regulation are
incorporated in the Utilities Bill, which was introduced in draft form to
Parliament in January 2000 and is scheduled to be implemented in final form in
July 2000. The Bill incorporates a new principal objective for regulators to
protect the interest of customers, where appropriate by promoting effective
competition, having regard to the need to ensure that licence holders are able
to finance their functions. The Bill will enable distribution and supply to be
separately licensed and provide the legal framework to enable new electricity
trading arrangements to be implemented in England & Wales. It will also enable
the electricity and gas regulators to be merged as the Gas and Electricity
Markets Authority; establishment of new independent consumer councils; and
provide new powers for Government Ministers to provide statutory guidance on
social and environmental issues, and set energy efficiency targets and
renewables obligations.
35 Annual Report & Accounts/Form 20-F
<PAGE>
US Electricity Industry Regulation
Following the acquisition of PacifiCorp, Scottish Power plc registered as a
holding company under the US federal Public Utility Holding Company Act of 1935
administered by the US federal Securities and Exchange Commission ("SEC"). Bills
have been introduced to repeal this legislation in each of the last several
Congresses, but to date have failed to pass. Until the 1935 Act is repealed,
Scottish Power plc and PacifiCorp and other subsidiaries will be subject to
regulation unless specific subsidiaries or transactions are otherwise exempt by
SEC rules or orders. Scottish Power UK plc, and its subsidiaries including
Manweb, Southern Water and Thus are exempt because Scottish Power UK plc is an
exempt foreign utility as defined in the 1935 Act. Powercor is likewise exempt.
SEC jurisdiction under the 1935 Act includes:
- Issuances of securities by PacifiCorp and ScottishPower will be regulated but
certain exemptions may be available to PacifiCorp because it is also regulated
by state commissions as to the issuance of securities. Foreign utility companies
held as separate subsidiaries will be exempt from regulation;
- Acquisitions of securities and utility assets by PacifiCorp and ScottishPower
will be regulated;
- Any affiliate transactions among members of the group after the merger would
be regulated. It is not expected that there will be many affiliate transactions
due to business separation requirements imposed by regulators in the UK and US
and because PacifiCorp provides most of its own services. The 1935 Act regulates
and, in some cases, prohibits affiliate financing transactions and the pricing
and supply of services and goods among affiliates;
- Later acquisitions of businesses by ScottishPower and PacifiCorp must be
reasonably incidental, economically necessary or appropriate to the operations
of an integrated public utility system;
- In certain cases, the payment of dividends and the repurchase of securities by
PacifiCorp and ScottishPower would be subject to regulation by the SEC;
ScottishPower has filed an application with the SEC to authorise all
contemplated financing needs until March 2005 and to authorise expected
affiliate transactions and internal dividend payments.
While there are increased administrative burdens imposed by 1935 Act
regulation, ScottishPower does not believe increased regulation will have a
harmful effect on ScottishPower or its subsidiaries.
36 Annual Report & Accounts/Form 20-F
<PAGE>
US Business
Regulation
PacifiCorp is subject to the jurisdiction of public utility regulatory
authorities of each of the states in which it conducts retail electric
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 and is, therefore, subject to regulation by
the FERC as to accounting policies and practices, certain prices and other
matters. Most of PacifiCorp's hydroelectric plants are licensed as major
projects under the Federal Power Act and certain of these projects are licensed
under the Oregon Hydroelectric Act. As a result of the merger, PacifiCorp is
also subject to the requirement and restrictions of the Public Utility Holding
Company Act of 1935.
PacifiCorp is currently in the process of relicensing or preparing to
relicense 16 separate hydroelectric projects under the Federal Power Act. These
projects, some of which are grouped together under a single licence, represent
approximately 1,000 MW, or about 94% of PacifiCorp's total hydroelectric
nameplate capacity and about 12% of its total generating capacity.
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. See
"US Environmental Legislation - Endangered Species" (page 42). PacifiCorp is
unable to predict the impact of imposition of such conditions, but capital
expenditures and operating costs are expected to increase in future periods.
In addition, PacifiCorp may refuse to accept renewed licences for certain
projects if the terms of renewal would make the projects uneconomical to
operate, and PacifiCorp is considering removal of certain project facilities as
part of the licensing settlement process.
A summary of the most significant regulatory and legislative developments is
set forth below.
Utah
On 20 September 1999, PacifiCorp filed for a rate increase before the Utah
Public Service Commission (the "UPSC"). PacifiCorp asked for an increase of $67
million ((pound)41.9 million), or 9.9%, based on a test year ended 31 December
1998 and a requested 11.25% return on equity. PacifiCorp's effective date for
this proposed tariff increase is expected to be in May 2000.
On 4 February 2000, the Utah Division of Public Utilities (the "UDPU") and the
Utah Committee of Consumer Services (the "UCCS") filed their positions in the
case. The UDPU has recommended a $15.7 million ((pound)9.8 million) rate
increase and the UCCS is seeking a $37 million ((pound)23.1 million) rate
reduction. On 15 March 2000, PacifiCorp filed its rebuttal case, which adopted
additional adjustments, bringing its revised request to $55.2 million
((pound)34.5 million). The 2000 Utah legislative session passed a bill that
could significantly change the way in which utilities are regulated in the
state. The bill provides guidelines under which the interests of all parties
will be protected and balanced in the ratemaking process. It directs the UPSC to
determine fair rates by balancing the interests of utility customers with the
need of utilities to maintain financial stability. This legislation also
streamlines state government by consolidating the UDPU and the UCCS into one
agency - the Office of Public Advocate.
The bill modifies the nature of UPSC proceedings by encouraging and providing an
opportunity for timely and reasonable settlements without restricting the rights
of all interested persons to participate in a formal administrative process.
Finally, the legislation requires Utah regulators to reflect "known and
measurable" changes to financial data when hearing a rate case.
Oregon
The OPUC and PacifiCorp have agreed to an Alternate Form of Regulation ("AFOR")
for PacifiCorp's Oregon distribution business. The AFOR allows for index-related
price increases in 1998, 1999 and 2000, with an annual cap of 2% of distribution
revenues in any one year and an overall cap of 5% over the three-year period.
The annual revenue increase for the 12 months ended 31 December 1999, was
approximately $6.2 million ((pound)3.9 million). The AFOR also includes
incentives to invest in renewable resources and penalties for failure to
maintain the service quality levels. On 30 April 1999, PacifiCorp filed for
changes in the prices it charges Oregon customers under the AFOR. The filing
also contained a request to increase the revenues collected under PacifiCorp's
system benefits charge. The changes were approved by the OPUC in June 1999, and
became effective on 1 July 1999. This resulted in a price increase of
approximately 1.3%, or $9 million ((pound)5.6 million) annually, in Oregon. On
28 April 2000, PacifiCorp made an additional AFOR filing for a price increase of
1.8%, of $14 million ((pound)8.8 million) annually.
On 5 November 1999, PacifiCorp filed for a general rate increase in Oregon.
PacifiCorp is asking for an increase of $61.8 million ((pound)38.6 million), or
8.5%. PacifiCorp's effective date for this increase is expected to be in autumn
2000. The OPUC staff has submitted a preliminary report raising issues that in
the aggregate could produce a $101 million ((pound)63.1 million) rate reduction
after giving effect to the Centralia sale. The staff testimony is due in June
2000 and hearings are scheduled for August 2000.
During July 1999, legislation was enacted in Oregon that requires competition
for industrial and large commercial customers of both PacifiCorp and Portland
General Electric by 1 October 2001. See "US Business - Competition" (page 20).
37 Annual Report & Accounts/Form 20-F
<PAGE>
Environment
ScottishPower will publish its fifth Environment Report in June 2000. Throughout
its operations, ScottishPower will meet, or better, relevant legislative and
regulatory environmental requirements and codes of practice. Copies of the
Environment Report are available on request from the Company Secretary.
Environmental Regulation - UK businesses
The group's 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").
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. This Electricity
Act requires the group to take into account the conservation of natural features
of beauty and other items of particular interest, when it formulates proposals
for development in connection with certain of its activities. The group is
required, in terms of the Environmental Impact Assessment Regulations, to carry
out an environmental assessment when it intends to lay cables, construct
overhead lines or carry out any other development in connection with its
licensed activities.
The group also prepares formal statements on the `Preservation of Amenity and
Fisheries' in line with the requirements of the Electricity Act.
Possible adverse health effects of electric and magnetic fields ("EMFs") from
various sources, including transmission and distribution lines, have been the
subject of a number of studies and increasing public discussion. Although
scientific research is currently inconclusive as to whether EMFs can cause
adverse health effects, the UK Childhood Cancer Study (UKCCS) - the largest
study ever of its kind - contains the following statement: "The UKCCS provides
no evidence that exposure to magnetic fields associated with electricity supply
in the UK increases the risk of childhood leukemia, cancers of the central
nervous system, or any other childhood cancer."
The Environmental Protection Act of 1990 (the "EPA") requires that
potentially polluting activities such as the operation of combustion processes
(which includes power plant) requires 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.
Environmental Regulation of Generation Activities
The principal emissions from fossil-fuelled electricity generation are sulphur
dioxide (SO\\2\\), oxides of nitrogen (NOx), carbon dioxide (CO2) 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 SO\\2\\, NOx 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 EPA is the primary UK statute governing the environmental regulation of
power stations. It introduced a system of Integrated Pollution Control ("IPC")
in April 1991 for large scale industrial processes, including power stations.
Under the EPA, the authority for enforcing IPC with respect to emissions to
atmosphere in England & Wales is the EA, previously Her Majesty's Inspectorate
of Pollution ("HMIP"), and in Scotland is the Scottish Environment Protection
Agency ("SEPA"), previously Her Majesty's Industrial Pollution Inspectorate
("HMIPI"). Transfer of control from HMIP and HMIPI to EA and SEPA came into
force on 1 April 1996 and was established by the Environment Act of 1995 (the
"1995 Act").
The European Union has agreed a Directive on Integrated Pollution Prevention
and Control. This introduces a system of licensing for industrial processes such
as power stations. This Directive is being implemented via the Pollution
Prevention and Control Regulations 2000 (shortly to be finalised) which will
bring into effect modifications to the IPC regime.
The EU has adopted a framework directive on ambient air quality assessment
and management, which came fully into force in May 1998 (the Air Framework
Directive). This 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 the UNECE, protocols regarding reductions in the
emissions of SO\\2\\ and NOx have been agreed. These are currently implemented
in the EU by means of the Large Combustion Plants Directive (the "LCPD"). The EU
is currently putting forward proposals for a "Ceilings Directive" which will
implement the SO\\2\\ and NOx targets recently agreed in the UNECE Gothenburg
Protocol. The LCPD is currently under review. Emissions limits for existing and
new plants will be introduced via the LCPD, the Air Framework Directive and, in
the future, the EU Directive on Integrated Pollution Prevention and Control.
The United Nations Framework Convention
on Climate Change sets forth standards regarding emissions of greenhouse gases,
the most significant of which is CO\\2\\. Agreement on a Protocol under this
convention was reached in Kyoto in December 1997. This Protocol, when ratified,
38 Annual Report & Accounts/Form 20-F
<PAGE>
calls for mandatory target reductions of "a basket" of six greenhouse gases,
most significantly CO2, in the commitment period 2008-2012. The Protocol also
provides for Joint Implementation ("JI") between signatories, a Clean
Development Mechanism by which signatories may gain credit for actions in
certain non-signatory countries and a provision which would allow for trading of
emissions.
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. This reduction target applies to the EU as a
whole, with each individual Member State being allocated its own target, which
is 12.5% for the UK. HM Government has announced its intention of unilaterally
setting itself a goal of 20% reduction in CO2 emissions by 2010. The UK will
finalise in 2000 a "Climate Change Programme" which will set in place
appropriate policy instruments to deliver the 20% reduction target. These
include targets for renewable energy, targets for combined heat and power, a
climate change levy to be charged on industrial and commercial energy usage, and
residential energy efficiency measures.
Each of ScottishPower's power stations is required to have IPC authorisation.
Under IPC, each power station has a single authorisation which regulates
emissions of certain pollutants and seeks to minimise pollution of the
environment. Each IPC authorisation requires 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. Each authorisation also contains an
improvement programme. ScottishPower's IPC authorisations do not have an expiry
date, but SEPA is required to review the conditions contained within it 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 Directive
on Integrated Pollution Prevention and Control, to be implemented via the
forthcoming Pollution Prevention and Control Regulations, will require that all
emission and pollution control measures be placed onto a "Best Available
Techniques" basis to control impact on the environment.
Under the requirements of the LCPD, HM Government has implemented a Sulphur
Strategy which gives effect to a national programme, the National Plan, to
reduce SO2 and NOx emissions from power stations in Scotland. ScottishPower and
Scottish & Southern have entered into an agreement providing for the sharing of
limits in emissions of SO2 and NOx from existing generating stations in Scotland
set out in the National Plan to meet the targets of the LCPD. It also provides
for the sharing of station-specific limits on emissions of SO2 and NOx imposed
by SEPA at the Peterhead, Longannet and Cockenzie generating stations where
capacity is shared between ScottishPower and Scottish & Southern. Reductions of
CO2, SO2 and NOx per unit of electricity generated have been achieved as a
result of the group's investments in environmental upgrades, such as low NOx
burners and gas reburn, to existing power stations. That proportion of the
group's output generated from renewable energy and gas-fired generation has also
increased, resulting in further reductions in emissions per unit of electricity
produced.
The IPC authorisations granted in 1993 in respect of ScottishPower's existing
power stations limit the levels of atmospheric emissions of SO2 and NOx from
each station. A number of minor variations has taken place with a full four year
IPC review now underway with SEPA. The review commenced in April 1997. Due to
continued UK-wide policy development on the control of SO2, the review has
continued into 2000. The final outcome is awaited. The group is confident that
it will be able to achieve the environmental improvements required by potential
future limits arising from this review without materially constraining
operational and commercial flexibility. In particular, gas reburn technology
offers greater potential to reduce emissions than other technology in use
elsewhere in the UK. Furthermore, planning consent has been gained for flue gas
desulphurisation at Longannet, which will be installed when emissions levels
require its implementation.
Water
Since 1 April 1996, the EA has been responsible in England & Wales for the
control of water pollution and the maintenance and improvement of the quality of
controlled waters, including the regulation of discharges to those waters; for
conserving, redistributing and augmenting water resources, and for securing the
proper use of such resources for land drainage and flood defence. Previously,
this was the responsibility of the NRA in England & Wales. In Scotland, SEPA has
largely replaced the River Purification Boards to fulfil these responsibilities.
The group is also subject to regulations governing drinking water quality,
receiving water quality and wastewater discharges. Although recent cases have
suggested that commercial enterprises may be fined more heavily for pollution
offences than in the past, ScottishPower does not believe that the level of
fines will have a materially adverse impact on its operations.
Within its general water resource management role, the EA has a duty to
operate the system under the Water Resources Act 1991, whereby water undertakers
and other abstractors must have a licence authorising each of their abstractions
and other impoundments. It also has a duty to enter into water resource
management arrangements with water undertakers to secure the proper management
and operation of waters, reservoirs and other works vested in the undertakers.
The EA may, and shall if so directed, consider the setting of minimum acceptable
flows in rivers and make recommendations to the Secretary of State accordingly.
39 Annual Report & Accounts/Form 20-F
<PAGE>
Under the Water Resources Act 1991 and the Control of Pollution Act (COPA) 1974,
the EA may require persons to take precautions against pollution, may prohibit
or restrict certain activities likely to cause pollution in areas designated by
the Secretary of State, and may impose a requirement for a consent to discharge
matter from a drain or sewer. When reviewing existing consents and issuing new
ones, the EA has said that it will seek to set contamination which causes, or is
likely to cause, significant harm to the environment or any pollution of
conditions at the level required to at least maintain and, where appropriate,
improve the quality of the receiving waters.
HM Government's upgrading of minimum levels of wastewater treatment for
coastal works will mean further improvements to recently completed new works
such as Eastbourne and Shoreham, as well as a review of proposed treatment
levels in several long-term investment projects at Dover and Folkestone,
Littlehampton and Bognor, Margate and Broadstairs, and the Isle of Wight. Under
the EPA, the EA is responsible for maintaining registers containing details of
applications for discharge consents, consents granted and the results of samples
of effluent and receiving waters. The registers are open to public inspection.
European Legislation
The activities of the WaSCs are affected by the requirements of EU directives
including the Drinking Water Directive, the Bathing Waters Directive and the
Urban Waste Water Treatment Directive. EU directives are binding on HM
Government, not on the WaSCs, as to the result to be achieved within a specified
period. It is the responsibility of European Member States, including the UK, to
bring into force appropriate national environmental legislation, such as the
Urban Waste Water Treatment Regulations to implement these EU directives.
New requirements will be binding on the WaSCs only when they are translated
into the law of England & Wales. Any expenditure incurred by a WaSC necessitated
by new legislation applying to them in their capacity as water or sewerage
undertakers, or by any change in consents as a result of any changes to existing
EU directives, or adoption of future EU directives, would be eligible for
consideration for a specific K adjustment.
The Water Resources Act and the Urban Waste Water Treatment Regulations are
the main UK statutes governing water abstraction, receiving water quality and
wastewater discharges. This legislation implements the Bathing Waters Directive
and the Urban Waste Water Treatment Directive and requires improvements in the
treatment of wastewater discharges. The Water Supply (Water Quality) Regulations
introduce the requirements of the EU Drinking Water Directive into the UK and
govern drinking water quality. In 1999-00, Southern Water spent approximately
(pound)226 million to comply with the relevant statutes. Fines received by
Southern Water in 1999-00 for violating water quality standards and the terms of
applicable discharge consents were immaterial to the results of operations of
Southern Water.
Southern Water, like other WaSCs in the UK, must have a licence from the EA
authorising each of its abstractions and certain impoundments. For additional
obligations of Southern Water affecting the environment, see the sections of
this document entitled "Southern Water" (page 17) and "Regulation of the Water
Industry" (page 33).
In addition to its other obligations affecting the environment, Southern
Water may be required by the EA to take precautions against pollution, may be
prohibited or restricted by the EA from certain activities likely to cause
pollution in areas designated by the Secretary of State, and may be required by
the EA to obtain a consent to discharge matter (other than sewage or trade
effluent) from a drain or sewer. Further, in the course of its activities, the
EA may carry out anti-pollution works and may recover the cost of such works
from the person responsible for the pollution.
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
Environment Act 1995 (the "1995 Act") requires the polluter (or if the polluter
cannot be found or has legally transferred its responsibilities by disclosure,
the owner or occupant) of contaminated land to clean up any controlled waters,
so that environmental compliance is consistent with the intended use of the
site. Following prolonged consultations, the UK Government has now finalised
regulations to implement the appropriate sections of the 1995 Act. Other
proposals which may impose strict liability for environmental damage are also
under consideration by the EU. The EU are currently seeking views on such
proposals via a White Paper. ScottishPower is not currently aware of any
liability which it may have under the 1995 Act or of proposed EU directives
which will have a materially adverse impact on its operations.
General
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.
40 Annual Report & Accounts/Form 20-F
<PAGE>
US Environmental Legislation
Federal, state and local authorities regulate many of PacifiCorp's activities
pursuant to laws designed to restore, protect and enhance the quality of the
environment. These laws have increased the cost of providing electric service.
The directors are 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.
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.
Air Quality - PacifiCorp's operations, principally its fossil fuel-fired
electric generating plants, are subject to regulation under the Federal Clean
Air Act, individual state clean air requirements and in some cases local air
authority requirements. The primary air pollutants of concern are sulphur
dioxide ("SO2"), nitrogen oxides ("NOx"), particulate matter (currently PM10)
and opacities. In addition, visibility requirements impact the coal-burning
plants. Although not presently regulated, emissions of carbon dioxide ("CO2")
and mercury from coal-burning facilities generally are of increasing public
concern.
The United States Environmental Protection Agency (the "USEPA") has recently
commenced enforcement actions against the owners of certain coal-fired
generating plants in the eastern and midwestern United States. The USEPA is
alleging that the plant owners have failed to obtain the necessary permits under
the Clean Air Act in connection with certain alleged modifications at the plants
and that the owners have failed to install additional pollution control
equipment as required. If the USEPA is successful in asserting its position, the
companies named in the action will be required to make significant capital
expenditures to install pollution control equipment. PacifiCorp does not have an
ownership interest in any of the plants involved in these matters, and
PacifiCorp is not a party to any of these actions. Nevertheless, PacifiCorp has
become aware that the USEPA is engaged in fact-finding with respect to many
coal-fired generating plants in the country. PacifiCorp is unable to predict the
outcome of the USEPA's fact-finding effort.
Pollutants - Emission controls, low sulphur coal, plant operating practices and
continuous emissions monitoring are all utilised to enable coal-burning plants
to comply with opacity, visibility and other air quality requirements. All of
PacifiCorp's coal-burning plants burn low sulphur coal and are equipped with
controls to limit emissions of particulate matter. Many of PacifiCorp's
coal-burning plants, representing the majority of its installed capacity, have
been equipped with controls which reduce the quantity of SO2 emissions. The SO2
emission allowances awarded to PacifiCorp under the Federal Clean Air Act, and
those allowances expected to be awarded annually in the future, are sufficient
to enable PacifiCorp to meet its current and expected future requirements. In
addition, PacifiCorp has taken advantage of opportunities to sell SO2 allowances
to other entities.
Visibility - Various federal and state agencies, as well as private
environmental awareness groups, have raised concerns about perceived visibility
degradation in some areas which are in proximity to some of PacifiCorp's
coal-burning plants. Numerous visibility studies have been completed or are in
the process of completion near PacifiCorp coal-burning plants in Colorado, Utah,
Washington and Wyoming. To date, no additional emission control requirements at
PacifiCorp facilities have resulted directly from these studies, although the
potential exists for significant additional control requirements if visibility
degradation in the study areas is reasonably attributed to PacifiCorp's
coal-burning plants. The USEPA also has implemented new regulations addressing
regional haze. These proposed regulations have the potential to impose
significant new control requirements on certain of PacifiCorp's older
coal-burning plants that are not otherwise subject to the most stringent
emission limits.
Climate Change - CO2 emissions are the subject of growing world-wide
discussion and action in the context of global warming, but such emissions are
not currently regulated. All of PacifiCorp's coal-burning plants emit CO2. In
late 1997, the United States and other parties to the United Nations Framework
Convention on Climate Change adopted the Kyoto Protocol regarding the control
and reduction of so-called greenhouse gas emissions (including CO2). The United
States signed the protocol in November 1998, but the United States Senate has
not yet ratified it. The Kyoto Protocol, if ultimately ratified, has the
potential to impose significant new costs and operational restrictions on
PacifiCorp's coal-burning plants.
Mercury - PacifiCorp's coal-burning plants, along with all other major
coal-burning plants in the United States, are participating in an effort to
gather additional information about mercury emissions pursuant to a request
issued by the USEPA. Based in part on this effort, the USEPA is scheduled to
decide during 2000 whether to regulate mercury emissions from coal-burning
plants. If passed, new mercury emission requirements have the potential to
impose significant new control and operational constraints on PacifiCorp's
coal-burning plants.
Air Operating Permits - PacifiCorp has received Title V Air Operating Permits
for all of its coal and natural gas-fired power plants. In 1998, a citizen group
challenged the issuance of the operating permits for PacifiCorp's Naughton and
Jim Bridger power plants, but the USEPA has not yet acted on that challenge.
PacifiCorp believes that it currently has all required permits and management
41 Annual Report & Accounts/Form 20-F
<PAGE>
systems in place to assure compliance with operating permit requirements.
Enforcement - In addition to general regulation, PacifiCorp is subject to
ongoing enforcement action by regulatory agencies and private citizens regarding
compliance with air quality requirements. A federal lawsuit filed in 1996 by the
Sierra Club against the owners, including PacifiCorp, of units one and two of
the Craig Generating Station alleged, among other things, violations of opacity
requirements. The lawsuit seeks civil monetary penalties and an injunction. See
"Litigation" (below).
Electric and Magnetic Fields - A number of studies continue to examine the
possibility of adverse health effects from EMF, 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 electric facilities.
The CPUC has issued an interim order requiring utilities 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 - Protection of the habitat of endangered and threatened
species makes it difficult and more costly to perform some of the core
activities of PacifiCorp, including the siting, construction and operation of
new and existing transmission and distribution facilities, as well as generating
plants. In addition, endangered species issues impact the relicensing of
existing hydroelectric generating projects, generally raising the price
PacifiCorp must pay to purchase wholesale power from hydroelectric facilities
owned by others and increasing the costs of operating PacifiCorp's own
hydroelectric resources. These actions could also result in further restrictions
on timber harvesting and adversely affect electricity sales to PacifiCorp's
customers in the wood products industry.
Environmental Cleanups - Under the Federal Comprehensive Environmental
Response, Compensation and Liability Act and similar state statutes, entities
that disposed of or arranged for the disposal of hazardous substances may be
liable for cleanup 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 cleanup 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 cleanup
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.
Water Quality - The Federal Clean Water Act and individual state clean water
regulations require a permit for the discharge of waste water, including storm
water runoff from the power plants and coal storage areas, into surface waters.
Also, permits may be required in some cases for discharges into ground waters.
The directors believe that PacifiCorp currently has all required permits and
management systems in place to assure compliance with permit requirements.
Litigation
UK Business
Manweb participates in the industry-wide Electricity Supply Pension Scheme. Two
other members of the scheme, National Power plc and NGC, have been the subject
of legal proceedings in connection with the use of surplus following an
actuarial valuation at 31 March 1992 to fund early retirement benefits. Manweb
also applied surplus following that valuation and the subsequent valuation at 31
March 1995 ((pound)6 million following the 1992 valuation and (pound)32 million
following the 1995 valuation) for the same purpose.
In a decision on 10 February 1999, the Court of Appeal decided that, without
a scheme amendment or trustee agreement, employers could not apply surplus
unilaterally to forgive an accrued liability. This could lead to employers being
required to make additional contributions to the scheme to meet that liability.
A further hearing took place in May 1999 which clarified certain aspects of the
judgement. The judgement indicates that Manweb may be liable for additional
contributions to the scheme. Leave to appeal to the House of Lords was given and
if an appeal is made, it is unlikely to be heard before mid-2000.
There is a range of possible outcomes to the current NGC litigation, any of
which could affect Manweb's own potential liability, if any, to contribute to
the scheme. If amendments can be made to the scheme to perfect the past
arrangements to use surplus, no employer contributions should be required. If
the courts in the NGC case ultimately decide that additional payments are due
from employers to the scheme in respect of all or any part of the surplus used
since the 1992 valuation, Manweb may also be required to make payments. However,
in this event, two further points must be determined before the ultimate cost to
Manweb could be assessed: the effective date for calculating the amounts due,
and whether payments can be spread over a number of years. Both these issues may
affect significantly the ultimate cost to Manweb.
No proceedings have been commenced against Manweb as at 4 May 2000 (being the
latest practicable date prior to the publication of this document) in respect of
the issues raised by the NGC decisions.
42 Annual Report & Accounts/Form 20-F
<PAGE>
US Business
On 9 October 1996, the Sierra Club filed an action against PacifiCorp and the
other joint owners of Units one and two of the Craig Electric Generating Station
(the "Station") under the citizen's suit provisions of the Federal Clean Air Act
alleging, based upon reports from emissions monitors at the Station, that over
14,000 violations of state and federal opacity standards have occurred over a
five-year period at Units one and two of the Station. (Sierra Club v. Tri-State
Generation and Transmission Association, Inc., Public Service Company of
Colorado, Inc., Salt River Project Agricultural Improvement and Power District,
PacifiCorp and Platte River Power Authority, Civil Action No. 96-B2368, US
District Court for the District of Colorado). PacifiCorp has a 19.28% interest
in Units one and two of the Station, which is operated by Tri-State Generation
and Transmission Association and located in Craig, Colorado.
The action seeks injunctive relief requiring the defendants to operate the
Station in compliance with applicable statutes and regulations, the imposition
of civil penalties, litigation costs, attorneys' fees and mitigation. The
Federal Clean Air Act provides for penalties of up to $27,500 ((pound)17,188)
per day for each violation, but the level of penalties imposed in any particular
instance is discretionary. The complaint alleges that PacifiCorp and Public
Service Company of Colorado are responsible for the alleged violations beginning
with the second quarter of 1992, when they acquired their interests in the
Station, and that the other owners are responsible for the alleged violations
during the entire period. The complaint alleges that there were approximately
10,000 violations since the second quarter of 1992. On 18 March 1999, the
district court issued its order regarding summary judgement motions filed by the
parties. The court ruled, among other things, that the emission monitors may be
used by the plaintiff to establish violations of opacity standards, but that the
plant owners are entitled to prove that the reported information is flawed.
PacifiCorp is unable to predict the level of penalties or other remedies that
may be imposed upon the joint owners of the Station or what portion of such
liability may ultimately be borne by PacifiCorp.
Powercor
Over the period from November 1997 to May 1998, Powercor entered into 11
electricity hedging contracts with the NSW State-owned generator Pacific Power
with a face value of approximately AUS $619 million ((pound)235.5 million), for
the notional supply of electricity between 1998 and 2008. The contracts were
designed to support the long-term supply of electricity by Powercor to its
customers and to minimise Powercor's exposure to large fluctuations in the spot
electricity price.
When the wholesale market price for electricity moved against Pacific Power
in May 1998, Pacific Power denied that any final and binding contracts had been
entered into with Powercor, as both parties had not signed final versions of the
confirmations setting out the terms and conditions of each transaction. However,
an ISDA Master Agreement was in place between the parties which governed the
negotiation, contracting and settlement process of individual contracts between
them. Pacific Power refused to honour the contracts and Powercor issued
proceedings against Pacific Power, claiming in the Supreme Court of Victoria
that the contracts were valid and enforceable.
In December 1999, the judge presiding over the case ruled in favour of
Powercor in respect of each of these arguments.
The judge ordered specific performance of the 11 electricity hedge contracts
from 1 July 1998, which were in dispute with Pacific Power. Further, the judge
made the following orders requiring payments by Pacific Power to Powercor:
- Pacific Power made payment of AUS $44.7 million ((pound)17.0 million) on 17
December 1999 attributable to the performance of the contracts from 1 July 1998
to judgment. This amount reflects the difference payments under the hedges plus
interest of AUS $1.4 million ((pound)532,724); and
- Pacific Power make payment of AUS $3.15 million ((pound)1.2 million) on 24
December 1999 as an agreed sum for legal expenses and other costs relating to
the proceedings.
On 21 December 1999, Pacific Power appealed against all the judgments,
declarations and orders made by the trial judge on 80 grounds, including
substantially all of the key aspects of the judges decision. The appeal is
listed for hearing on 2 October 2000 for eight days. Powercor is highly
confident of success in the appeal.
The figures in Australian dollars quoted above have been converted at
AUS$2.628 to (pound)1.00 being the closing exchange rate at 31 March 2000.
Except as discussed above, 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.
43 Annual Report & Accounts/Form 20-F
<PAGE>
Description of Property
UK Business
The properties consist of generating stations, transmission and distribution
facilities, water supply and wastewater treatment facilities, telecommunication
facilities, appliance retailing facilities and certain non-operational
properties in which the group holds freehold or leasehold interests.
Generation Facilities
The group owns eight power stations in Scotland, six of which are operational
with a total net output capacity of 4,035 MW, and one in England. The group also
owns three windfarms in Northern Ireland, one in Scotland, and one in the
Republic of Ireland. In addition, the company has joint venture interests in
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 for
details of assets.
Transmission and Distribution Facilities
As of 31 March 2000, the group's transmission facilities included approximately
3,850 circuit km of overhead lines and 250 circuit km of underground cable
operated at 400 kV, 275 kV and 132 kV.
In addition, the group's distribution facilities included approximately
24,500 circuit km of overhead lines and 40,000 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.
Water Supply and Wastewater Treatment Facilities
Southern Water has freehold and leasehold interest covering a total of
approximately 10,000 acres of land. Of such land, an aggregate of approximately
9,800 acres are specialised properties, consisting chiefly of the raw water
storage reservoirs with surrounding land, water and wastewater treatment works
and pumping stations listed in Tables 8, 9 and 10.
<TABLE>
<CAPTION>
Table 7 - UK Sources of Owned Generating Capacity and Output as at 31 March 2000
---------------------------------------------------------------------------------------------------------------
Number of Generating Sets Net Output Capacity Maximum
and/or Installed Capacity Available
Note MW MW MW
---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Coal:
Longannet 4 x 600 2,304
Cockenzie 4 x 300 1,152
1 3,456 2,880
Methil 2 2 x 30 57 57
Oil:
Inverkip 3 3 x 676 Nil Nil
Gas Turbine:
Knapton 1 x 42 42 42
Pumped Storage:
Cruachan 4 x 100 400 400
Conventional Hydro:
Galloway Scheme 109 106 106
Lanark Scheme 16 16 16
Windfarms:
Barnesmore 25 x 0.6 15 15
Hagshaw Hill 26 x 0.6 16 16
P & L Windfarm 4 103 x 0.3 31 16
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 5 24 x 0.4 10 4
Carland Cross 5 15 x 0.4 6 3
CHP 6 3 3 3
Peaking Plant 6 17 17
--------------------------------- ------------------------------ --------------------- ---------------------
Total 4,190 3,590
================================= ============================== ===================== =====================
</TABLE>
1 Scottish & Southern is entitled to a supply of electricity from part of the
capacity of ScottishPower's coal-fired generating stations at Longannet and
Cockenzie.
2 Methil Power Station capacity is currently held in strategic reserve.
3 The installed capacity at Inverkip is currently on long-term preservation
and is unavailable for generation.
4 The P & L Windfarm is owned by CeltPower Limited, with ScottishPower and
Tomen Power Corporation (U.K.) Limited each having a 50% ownership
interest.
5 The windfarms at Coal Clough and Carland Cross are owned by joint ventures
among Manweb, SWEB and Renewable Energy Systems, with Manweb having 45%
ownership interest.
6 Operation of the CHP and peaking plant was transferred to the Generation
business from Energy Supply in 1999-00.
44 Annual Report & Accounts/Form 20-F
<PAGE>
Table 8 - Southern Water Storage Reservoirs as at 31 March 2000
-----------------------------------------------------------------------
Capacity Approximate
Description Note Location (Ml) acreage
-----------------------------------------------------------------------
Bewl Water Kent 31,000 1,135
Darwell Sussex 4,730 1,091
Powdermill Sussex 1,060 1,132
Weir Wood 1 Sussex 5,600 470
======================== ============ ================= ============
1 includes water treatment works
Table 9 - Southern Water Major Water Treatment Works as at 31 March 2000
------------------------------------------------------------------------
Output Approximate
Description Location (Ml per day) acreage
------------------------------------------------------------------------
Beauport Sussex 27.0 4
Burham Kent 48.8 61
Eastling Kent 48.0 2
Easton Hampshire 27.3 25
Hardham Sussex 75.0 35
Otterbourne Hampshire 102.7 352
Sutton Kent 4.4 2
Testwood Hampshire 90.0 184
Twyford Hampshire 23.0 183
Weir Wood Sussex 21.8 See Table 8
Wingham Kent 20.0 5
======================== ============ ================= ============
Table 10 - Southern Water Major Wastewater Treatment Works as at 31 March 2000
-----------------------------------------------------------------------
Equivalent Approximate
Description Location Population Served acreage
-----------------------------------------------------------------------
Ashford Kent 109,800 90
Aylesford Kent 133,200 40
Brighton Portobello Sussex 268,200 9
Budds Farm Hampshire 173,800 52
Canterbury Kent 113,300 22
Chickenhall Eastleigh Hampshire 102,000 25
Eastbourne Sussex 121,800 5
Eastney Hampshire 235,900 5
Millbrook Hampshire 138,400 17
Motney Hill Kent 286,900 181
Peel Common Hampshire 250,900 77
Worthing East Sussex 136,900 15
======================== ============ ================= ============
Approximately 95% of the above-ground water supply and wastewater assets are on
land in Southern Water's freehold ownership including the assets listed in
Tables 8, 9 and 10, with the remainder being located on land subject to
long-leasehold.
Appliance Retailing Facilities
As of 31 March 2000, the group operated 183 retail outlets, 23 of which are
owned by the group and 160 are leased. The outlets are located both on the main
streets of major metropolitan areas and in out-of-town superstores. The group
also leases two large retail distribution depots, one at Castleford in England
consisting of approximately 8,000 square metres, and another facility of
approximately 12,600 square metres at Mossend near Glasgow. The properties are
generally held on leases of 20 to 25 years.
Non-operational Facilities
In addition to the properties described above, as of 31 March 2000 the group
utilised a number of non-operational properties comprised primarily of offices,
depots, warehouses and workshops. Approximately 50% of these properties are
owned by the group with the remainder being leased. The most significant of
these non-operational properties are Cathcart Business Park, Glasgow, the
corporate office located at Atlantic Quay, Glasgow, the Manweb head office at
Manweb House, Chester Business Park and the Southern Water head office at
Worthing.
45 Annual Report & Accounts/Form 20-F
<PAGE>
US Business
PacifiCorp owns 52 hydroelectric generating plants and has an interest in one
additional plant, with an aggregate nameplate rating of 1,068 MW and plant net
capability of 1,131 MW. It also owns or has interests in 18 thermal electric
generating plants with an aggregate nameplate rating of 7,924 MW and plant net
capability of 7,303 MW. PacifiCorp also jointly owns one wind power generating
plant with an aggregate nameplate rating of 33 MW and plant net capability of 33
MW. Table 11 summarises PacifiCorp's existing generating facilities.
PacifiCorp's generating facilities are interconnected through its own
transmission lines or by contract through the lines of others. Substantially all
generating facilities and reservoirs located within the Pacific Northwest region
are managed on a co-ordinated 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.
For a discussion of the sale of the Centralia plant and mine, see "Proposed
Asset Additions and Dispositions" (page 22).
Substantially all of PacifiCorp's electric utility plants are subject to the
lien of PacifiCorp's Mortgage and Deed of Trust.
Table 12 describes PacifiCorp's recoverable coal reserves as of 31 March
2000. All coal reserves are dedicated to nearby PacifiCorp operated generating
plants. Recoverability by surface mining methods typically ranges between 90%
and 95%. Recoverability by underground mining techniques ranges from 50% to 70%.
PacifiCorp considers that the respective coal reserves assigned to the Craig,
Dave Johnston, Huntington, Hunter and Jim Bridger plants, together with coal
available under both long-term and short-term contracts with external suppliers,
will be sufficient to provide these plants with fuel that meets the Clean Air
Act standards effective in 1999, for their current
<TABLE>
<CAPTION>
Table 11 - PacifiCorp Generating Facilities as at 31 March 2000
----------------------------------------------------------------------------------------------------------------------
Installation Nameplate Plant Net
Location Energy Source Dates Rating Capability
(MW) (MW)
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Hydroelectric Plants:
Swift Cougar, Washington Lewis River 1958 240.0 265.6
Merwin Ariel, Washington Lewis River 1932-1958 135.0 144.0
Yale Amboy, Washington Lewis River 1953 134.0 134.0
Five North Umpqua Plants Toketee Falls,Oregon N. Umpqua River 1949-1956 133.5 138.5
John C. Boyle Keno, Oregon Klamath River 1958 80.0 90.0
Copco Nos. 1 and 2 Plants Hornbrook, California Klamath River 1918-1925 47.0 54.5
Clearwater Nos. 1 and 2 Plants Toketee Falls, Oregon Clearwater River 1953 41.0 41.0
Grace Grace, Idaho Bear River 1914-1923 33.0 33.0
Prospect No. 2 Prospect, Oregon Rogue River 1928 32.0 36.0
Cutler Collinston, Utah Bear River 1927 30.0 29.1
Oneida Preston, Idaho Bear River 1915-1920 30.0 28.0
Iron Gate Hornbrook, California Klamath River 1962 18.0 20.0
Soda Soda Springs, Idaho Bear River 1924 14.0 14.0
Fish Creek Toketee Falls, Oregon Fish Creek 1952 11.0 12.0
33 Minor Hydroelectric Plants Various Various 1896-1990 89.3* 90.9*
--------------------------------- --------------------- ------------------ -------------- ----------- -----------
Subtotal (53 Hydroelectric Plants) 1,067.8 1,130.6
================================= ===================== ================== ============== =========== ===========
Thermal Electric Plants:
Jim Bridger Rock Springs, Wyoming Coal-Fired 1974-1979 1,529.6* 1,406.7*
Huntington Huntington, Utah Coal-Fired 1974-1977 996.0 895.0
Dave Johnston Glenrock, Wyoming Coal-Fired 1959-1972 816.7 772.0
Naughton Kemmerer, Wyoming Coal-Fired 1963-1971 707.2 700.0
Centralia Centralia, Washington Coal-Fired 1972 693.5* 636.5*
Hunter 1 and 2 Castle Dale, Utah Coal-Fired 1978-1980 727.9* 662.5*
Hunter 3 Castle Dale, Utah Coal-Fired 1983 495.6 460.0
Cholla Unit 4 Joseph City, Arizona Coal-Fired 1981 414.0 380.0
Wyodak Gillette, Wyoming Coal-Fired 1978 289.7* 268.0*
Gadsby Salt Lake City, Utah Gas-Fired 1951-1955 251.6 235.0
Carbon Castle Gate, Utah Coal-Fired 1954-1957 188.6 175.0
Craig 1 and 2 Craig, Colorado Coal-Fired 1979-1980 172.1* 165.0*
Colstrip 3 and 4 Colstrip, Montana Coal-Fired 1984-1986 155.6* 144.0*
Hayden 1 and 2 Hayden, Colorado Coal-Fired 1965-1976 81.3* 78.0*
Blundell Milford, Utah Geothermal 1984 26.1 23.0
James River Camas, Washington Black Liquor 1996 52.2 52.0
--------------------------------- --------------------- ------------------ -------------- ----------- -----------
Subtotal (16 Thermal Electric 7,597.7 7,052.7
Plants)
--------------------------------- --------------------- ------------------ -------------- ----------- -----------
Other Plants:
Little Mountain Ogden, Utah Gas Turbine 1971 16.0 14.0
Hermiston Hermiston, Oregon Combined Cycle 1996 310.6* 236.0*
Foote Creek Arlington, Wyoming Wind Turbines 1998 32.6* 32.6*
--------------------------------- --------------------- ------------------ -------------- ----------- -----------
Subtotal (3 Other Plants) 359.2 282.6
--------------------------------- --------------------- ------------------ -------------- ----------- -----------
Total Hydro, Thermal and Other Generating Facilities (72) 9,024.7 8,465.9
================================= ===================== ================== ============== =========== ===========
</TABLE>
*Jointly owned plants; amount shown represents PacifiCorp's share only.
Note Hydro electric project locations are stated by locality and river
watershed.
Subsequent to the approval of these Accounts and prior to publication,
PacifiCorp sold its 47.5% share in the Centralia Plant.
----------------------------------------------------------------------
46 Annual Report & Accounts/Form 20-F
<PAGE>
Table 12 - PacifiCorp Recoverable Coal Reserves as at 31 March 2000
-------------------------------------------------------------------------------
Location Notes Plant Served Recoverable Tons
(in millions)
-------------------------------------------------------------------------------
Centralia, Washington 1, 6 Centralia 36
Craig, Colorado 2 Craig 51
Glenrock, Wyoming 1, 5 Dave Johnston 1
Emery County, Utah 1, 3 Huntington and Hunter 82
Rock Springs, Wyoming 4 Jim Bridger 112
===============================================================================
1 These coal reserves are mined by subsidiaries of PacifiCorp.
2 These coal reserves are leased and mined by Trapper Mining, Inc., a
Delaware non-stock corporation operated on a co-operative basis, in which
PacifiCorp has an ownership interest of approximately 20%.
3 These coal reserves are in underground mines and include the Mill Fork
Track of 36 million tons.
4 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 two-thirds
interest in the joint venture.
5 PacifiCorp ceased mining operations at this location in October 1999.
6 Subsequent to the approval of these Accounts and prior to publication,
- ---------------------------------------------------------------------
PacifiCorp sold its 47.5% share in the Centralia Plant. PacifiCorp also
-----------------------------------------------------------------------
sold the adjacent coal mine that it owned and operated.
------------------------------------------------------
economically useful lives. The sulphur content of the coal reserves ranges from
0.43% to 0.84% and the British Thermal Units value per pound of the reserves
ranges from 7,600 to 11,400. 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 utilisation of such
reserves.
Most of PacifiCorp's coal reserves 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.
47 Annual Report & Accounts / Form 20-F
<PAGE>
Financial Review
ScottishPower's results reflect another year of significant progress for the
group.
[PHOTO]
David Nish
Finance Director
All figures quoted in the Financial Review exclude the impact of goodwill
amortisation and exceptional items unless otherwise stated.
Overview (1999-00)
The financial results for the year to March 2000 reflect, for the first time,
the consolidation of four months trading from our US subsidiary PacifiCorp,
following the acquisition in November 1999. This has a significant impact on the
ongoing results of the group when compared to the previous financial year. Key
group financial information is shown in Table 13.
Group turnover grew during the year by (pound)873 million to (pound)4,115
million, an increase of 27%. Turnover in the UK generation and infrastructure
businesses increased by (pound)153 million as a result of increased revenues
from other electricity suppliers due to the impact of competition in our home
areas, price increases allowed under the regulatory formulae, and growth in
sales of wholesale electricity. In our UK telecom and customer businesses,
turnover increased by (pound)8 million to (pound)2,430 million. Continued growth
in new gas and out of area electricity customers increased turnover by
(pound)111 million, offset by a reduction of (pound)165 million in our home
electricity markets as competition developed. Total Telecoms sales, including
mobile telephone operations which were disposed of in November 1999, increased
by (pound)23 million in the year to (pound)243 million, of which turnover for
Thus increased by 31% to (pound)217 million. The Appliance Retailing business
continued to expand and increased its turnover by (pound)40 million.
Four months trading from PacifiCorp's US operations contributed (pound)712
million to external turnover, (pound)27 million lower than the equivalent four
month period in 1998-99. In PacifiCorp's Domestic Electric business, turnover
totalled (pound)692 million, (pound)14 million lower than in the previous year.
Sales to residential customers for the four month period were (pound)197
million, an increase of (pound)4 million as a result of customer growth of 1.5%.
Sales to commercial customers were increased by (pound)9 million, again as a
result of customer growth, with customer numbers increasing by 3%. Industrial
sector sales increased by 278 GWh and (pound)9 million as a result of the pilot
programme to test competitive markets taking place in the previous financial
year and improved economic conditions. Wholesale sales of electricity were
(pound)48 million lower at (pound)192 million as the revised energy trading
strategy adopted in 1998 took effect. Other Domestic Electric sales increased by
(pound)12 million. Turnover from PacifiCorp's Other US segment was (pound)20
million, largely from sales of synthetic coal.
In line with turnover growth, cost of sales were 30% higher at (pound)2,425
million, largely as a result of the inclusion of PacifiCorp. Transmission and
distribution costs increased by (pound)93 million year-on-year, including
PacifiCorp costs of (pound)91 million. Administrative expenses increased by
(pound)100 million in the year, including PacifiCorp costs of (pound)82 million,
and UK costs increased by (pound)18 million, largely as a result of higher
depreciation charges. The UK infrastructure businesses have further reduced
costs during the year and continue to use benchmarking as a tool to
substantially reduce underlying operating
<TABLE>
<CAPTION>
Table 13 - Key Group Financial Information (1999-00 and 1998-99)
-------------------------------------------------------------------------------------------------------------------------------
1999-00 1998-99 Difference
(pound)m (pound)m (pound)m %
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Turnover 4,115.0 3,242.3 872.7 27
=========================================================================== ========== ========== ========== =========
Operating profit 671.6 802.8 (131.2) (16)
Operating profit (before exceptional items and goodwill amortisation) 961.4 804.0 157.4 20
=========================================================================== ========== ========== ========== =========
Profit before tax 1,158.6 643.8 514.8 80
Profit before tax (before exceptional items and goodwill amortisation) 735.6 645.0 90.6 14
=========================================================================== ========== ========== ========== =========
Free cash flow 705.3 702.2 3.1 --
=========================================================================== ========== ========== ========== =========
Earnings per share 67.81p 42.42p 25.39p 60
Earnings per share (before exceptional items and goodwill amortisation) 41.40p 42.52p (1.12p) (3)
=========================================================================== ========== ========== ========== =========
Dividends per share 24.80p 22.50p 2.30p 10
=========================================================================== ========== ========== ========== =========
</TABLE>
48 Annual Report & Accounts/Form 20-F
<PAGE>
costs and improve performance. The UK customer businesses continue to
invest in brand development, marketing and service, to grow energy and
telecommunications revenues.
The PacifiCorp acquisition, together with continued strong control over
operating costs, led to a significant increase in operating profit to (pound)961
million, up(pound)157 million. Performance in the UK businesses was consistent
with the modest growth trends reported in our interim results, with operating
profit increased to (pound)809 million, compared to (pound)804 million in the
previous financial year. PacifiCorp contributed operating profit of (pound)152
million.
The net interest charge for the UK businesses increased by (pound)16
million to (pound)177 million, excluding (pound)16 million of exceptional
charges incurred on restructuring the debt portfolio. This increase reflects the
rising trend of interest rates, the continuing capital investment in UK
infrastructure businesses and the impact of the share buy-back programme.
Proceeds from the partial flotation of Thus partly offset these increases.
Including PacifiCorp and the exceptional debt restructuring costs, group
interest increased by (pound)82 million to (pound)243 million in the year.
A number of exceptional items are reflected in this year's Accounts. During
November 1999, 49.9% of Thus was floated on the London Stock Exchange giving
rise to an exceptional gain before tax of (pound)787 million. As indicated in
our interim report, exceptional charges of (pound)55 million have been
recognised in respect of withdrawal from the use of fixed radio access
technology in our Telecoms business and from the loss on disposal of our mobile
telephony joint venture. In addition, exceptional charges of (pound)262 million
before tax have been recognised during the second half of the year, including
the costs of restructuring our UK operations, and provisions for the impairment
of fixed assets following the outcome of the regulatory reviews, and provisions
for irrecoverable costs from energy contracts.
Profit before tax, including exceptional items and goodwill amortisation,
increased sharply in the year, by (pound)515 million to (pound)1,159 million.
The underlying profit before tax grew by (pound)91 million to (pound)736
million. The ordinary tax charge represented an effective tax rate of 21.6%,
reduced from 22.0% in the previous year.
Earnings per share, after exceptional items and goodwill amortisation,
increased by 60% in the year to 67.81 pence; underlying earnings per share was
41.40 pence, a reduction of 2.6% on the equivalent figure last year, due to the
relative seasonality of profits earned by PacifiCorp in the period since
acquisition. PacifiCorp is expected to be earnings enhancing in 2000-01 before
exceptional items and goodwill amortisation. The underlying earnings per share
for the UK businesses increased by 1.4% to 43.11 pence.
The final quarter dividend of 6.20 pence per share brought the total
dividend per share for the year to 24.80 pence, an increase of 10.2%. This is in
line with our dividend aim for the period to March 2000. Group dividend cover
decreased to 1.7 times from 1.9 times in the previous year.
Free cash flow for the year was (pound)705 million, (pound)3 million higher
than the equivalent figure last year. The group invested (pound)886 million in
capital projects during the year, (pound)132 million more than in the previous
year, with (pound)94 million relating to PacifiCorp. Expenditure in the UK
infrastructure businesses reduced by (pound)35 million and investment in Energy
Supply and Thus increased by (pound)73 million.
Net debt increased from(pound)2,421 million to (pound)4,842 million as a
result of the PacifiCorp acquisition, offset in part by the proceeds from the
partial flotation of Thus. Gearing (net debt/shareholders' funds) at 31 March
2000 fell to 76% compared to 124% a year ago. Interest cover remained prudent at
4.2 times.
Business Reviews (1999-00)
UK Generation and Infrastructure Businesses
Our UK generation and infrastructure businesses have produced another year of
good earnings growth. The key financial information is shown in Table 14.
Generation Wholesale
Generation Wholesale turnover increased sharply in the year, up 18%
to (pound)258 million, with growth in volumes through higher exports, up by 217
GWh to 6,266 GWh, and increased agency sales as a result of competition in the
Scottish market, offset in part by lower pool prices.
Operating profit in Generation Wholesale was (pound)107 million in the
year, down (pound)8 million compared with the previous year, due to the effects
of competition. Margin reductions have been offset by lower operating costs,
with increased operating efficiency and lower administration costs.
<TABLE>
<CAPTION>
Table 14 - UK Generation and Infrastructure Businesses (1999-00 and 1998-99)
----------------------------------------------------------------------------------------------------------------------
External External Operating Operating
turnover turnover profit profit
1999-00 1998-99 1999-00 1998-99
(pound)m (pound)m % (pound)m (pound)m %
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Generation Wholesale 257.8 219.0 18 106.8 115.3 (7)
Power Systems 172.6 101.4 70 361.2 350.6 3
Southern Water 470.5 439.5 7 286.5 262.2 9
Other UK 72.9 60.7 20 7.5 4.0 88
------------------------------------------- ---------- ---------- --------- ----------- ---------- --------
Total 973.8 820.6 19 762.0 732.1 4
=========================================== ========== ========== ========= =========== ========== ========
</TABLE>
49 Annual Report & Accounts/Form 20-F
<PAGE>
<TABLE>
<CAPTION>
Table 15 - UK Telecom and Customer Businesses (1999-00 and 1998-99)
---------------------------------------------------------------------------------------------------------------------------------
External External Operating Operating
turnover turnover profit/(loss) profit
1999-00 1998-99 1999-00 1998-99
(pound)m (pound)m % (pound)m (pound)m %
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Energy Supply 1,899.3 1,953.4 (3) 50.6 56.7 (11)
Telecoms 202.8 180.7 12 (9.5) 11.5 n/a
Appliance Retailing 327.4 287.6 14 6.6 3.7 78
------------------------------------ ------------ ------------ ------------ ------------ ------------ -----------
Total 2,429.5 2,421.7 - 47.7 71.9 (34)
==================================== ============ ============ ============ ============ ============ ===========
</TABLE>
Power Systems
Sales from the Power Systems business historically have been largely internal to
our Energy Supply business. As a result of competition in home markets, Power
Systems external sales increased by (pound)71 million to (pound)173 million, as
distribution and transmission use of system charges are recovered from other
electricity suppliers.
In Power Systems operating profit increased by (pound)10 million to
(pound)361 million. Transmission operating profit improved by (pound)13 million
to (pound)97 million with price increases allowed under the regulatory formula
and ongoing cost savings partially offset by higher rates and depreciation.
Distribution operating profits reduced by (pound)3 million, with revenues
slightly improved from higher sales volumes in Scotland, and continuing cost
savings offset by increased depreciation charges, costs of tree cutting to
protect network performance and new industry costs associated with the operation
of the competitive electricity market.
Southern Water
Southern Water's contribution to group turnover increased by (pound)31 million
to (pound)470 million due to allowed price increases under the regulatory
formula. New customer connections in the year were just over 13,000, while some
26,000 Southern Water customers opted to switch to metered supply.
Southern Water contributed an additional (pound)24 million of operating
profit, rising to (pound)286 million, from increased revenues and further cost
savings of (pound)16 million delivered by the `Way Ahead' initiative during the
year. These savings offset the additional impact of new cost obligations arising
from the operation of new wastewater treatment plants and higher depreciation.
Other
The group's other UK infrastructure businesses increased their turnover by
(pound)12 million to (pound)73 million, primarily as our Technology business
secured a number of large contracts outside the group. Operating profit
performance in these businesses improved by (pound)3 million compared to the
previous year, primarily due to increased profitability from the Contracting and
Technology businesses.
UK Telecom and Customer Businesses
Our UK telecom and customer businesses have continued to invest heavily in
growing the customer base and in expanding the range of products sold, including
the development of the innovative, Internet-based joint venture with The Royal
Bank of Scotland. In addition, Thus has invested significantly in the
development of a national telecommunications network and in the provision of
e-commerce solutions for business. The key financial information is shown in
Table 15.
Energy Supply
Electricity sales in our home area in Scotland were (pound)1,010 million,
representing a reduction of (pound)106 million on the previous year. In the
ScottishPower home area volumes reduced by 6.9% to 18,461 GWh, primarily due to
the impact of competition in the residential electricity market while there was
further downward pressure on prices in the industrial and commercial sectors. In
the Manweb area turnover fell by (pound)59 million to (pound)487 million, as a
result of the impact of competition and lower prices allowed under the
regulatory formulae. Sales outside our home areas increased by (pound)46 million
to (pound)184 million as we continue to grow the residential and small business
customer bases. Gas and other energy sales also increased significantly, by
(pound)65 million, to (pound)218 million.
In Energy Supply, electricity profit in Scotland, as expected, reduced by
(pound)10 million to (pound)26 million, with lower generation costs more than
offset by price reductions, loss of customers due to competition and increased
systems depreciation. Operating profit from sales in England & Wales outside our
home areas was (pound)1 million, an improvement from last year's break-even
position, despite absorbing (pound)5 million of additional capture costs for new
electricity customers won in this market. In the commercial and residential gas
markets the operating loss, at (pound)6 million, was (pound)10 million better
than in the prior year, after charging continuing customer capture costs of
approximately (pound)15 million and increased costs from serving the expanded
customer base, offset by margin obtained from supplying new gas customers.
Payback on our initial investment in acquiring a new residential gas customer
continues to be favourable. Operating profits for Manweb's Energy Supply
business reduced by (pound)7 million to (pound)30 million, due to a reduction in
tariffs and a loss of customers through competition. Overall, due to the
continued investment for growth, Energy Supply profits reduced by (pound)6
million to (pound)51 million.
50 Annual Report & Accounts/Form 20-F
<PAGE>
Telecoms
Total sales in Telecoms increased by (pound)23 million to (pound)243 million, of
which (pound)217 million related to Thus. Total turnover in Data and
Telecommunication Services increased by (pound)9 million to (pound)79 million,
driven forward by new customers and increased traffic. CallCentre Services
increased turnover by (pound)17 million to (pound)29 million, retaining high
profile customers and winning significant new business. Sales from our Internet
and interactive business continued to show strong growth, increasing by
(pound)25 million to (pound)109 million, an increase of 30%. Within this
segment, Internet services revenues grew by 41% to (pound)75 million and
interactive revenues by 11% to (pound)34 million. External turnover in Telecoms
increased by (pound)22 million to (pound)203 million, of which (pound)177
million related to Thus.
The costs of continued investment in its growth strategy resulted in an
operating loss of (pound)10 million, compared to an operating profit of
(pound)11 million in 1998-99, due to the costs of developing a national network
and increased marketing costs associated with growing the customer base.
Appliance Retailing
The Appliance Retailing business continued to expand and increased its turnover
by (pound)40 million to (pound)327 million, due to increased sales volumes and
new store openings, with appliance sales growing by 10% in the year and
like-for-like sales increasing by 6%.
Operating profits in the Appliance Retailing business were (pound)7
million, (pound)3 million higher than the previous year, due to increased
revenues and improved efficiency in distribution activities.
PacifiCorp
PacifiCorp's results have been consolidated for four months from the date of
acquisition. The key financial information for the four month period is shown in
Table 16.
The group profit and loss account for the year to 31 March 2000 excludes
any results of businesses held for disposal, principally Powercor, PacifiCorp's
Australian subsidiary.
Operating profit from PacifiCorp for the period was (pound)152 million, in
line with expectations and (pound)9 million higher than the equivalent four
month period in the previous year, primarily as a result of lower power purchase
costs in the Domestic Electric business.
Interest, Taxation, Earnings and Dividends (1999-00)
Interest and Taxation
The net interest charge of (pound)243 million was (pound)82 million higher than
in 1998-99 due to the continued investment in capital expenditure and the impact
of our share buy-back programme offset by the benefit of the proceeds received
from the partial flotation of Thus. This interest charge includes (pound)16
million of exceptional charges arising from changes to the group's debt
portfolio. The average interest rate for the UK businesses during the year was
7.9%, versus 8.0% in 1998-99. The inclusion of PacifiCorp increased the interest
charge by (pound)50 million, with an average interest rate in the four month
period of 7.0%. Interest cover before exceptional items and goodwill
amortisation remained prudent at 4.2 times against 5.0 times in the prior year.
Including exceptional items, interest cover was 5.9 times.
The taxation charge for the year was (pound)215 million, (pound)74 million
higher than 1998-99. This amount includes an exceptional tax charge of (pound)56
million, primarily as a result of the gain on the partial flotation of Thus. The
effective tax rate in the UK fell to 21.5% from 22.0% in the previous year.
PacifiCorp's effective rate was 23.4%, resulting in a consolidated effective
rate of 21.6% for the year.
Earnings and Dividends
The profit after tax for the year including the effect of goodwill amortisation
and exceptional items amounted to (pound)943 million, an increase of (pound)441
million. Excluding the impact of exceptional items, profit after tax increased
by (pound)43 million (or 9%) to (pound)545 million. With a weighted average
1,390 million shares in issue during the year, earnings per share were 41.40
pence, a reduction of 2.6% on the previous year. The impact of consolidating
four months trading from PacifiCorp was mildly dilutive, as a result of the
relative seasonality of profitability to our UK businesses. Earnings per share
from the UK businesses were 43.11 pence, 1.4% higher than the equivalent figure
last year.
Net exceptional gains of (pound)470 million before interest and tax
((pound)398 million after interest and tax) are reflected in the Accounts for
the year to March 2000, resulting in an improvement to group earnings per share
of 28.63 pence.
<TABLE>
<CAPTION>
Table 16 - PacifiCorp (1999-00 and 1998-99)
-------------------------------------------------------------------------------------------------------------------------
External External Operating Operating
turnover turnover profit profit/(loss)
1999-00 1998-99 1999-00 1998-99
(pound)m (pound)m % (pound)m (pound)m %
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Domestic Electric 691.9 705.3 (2) 149.5 146.8 2
Other 19.8 33.6 (41) 2.2 (3.9) n/a
---------------------------------------- ----------- ----------- ----------- ----------- ----------- -----------
Total 711.7 738.9 (4) 151.7 142.9 6
---------------------------------------- ----------- ----------- ----------- ----------- ----------- -----------
</TABLE>
Figures for PacifiCorp for 1998-99 represent the external turnover and operating
profit for the four months to 31 March 1999 and have been included for
comparative purposes only.
51 Annual Report & Accounts/Form 20-F
<PAGE>
The final quarter dividend of 6.20 pence per share brought the total dividends
per share for the year to 24.80 pence, an increase of 10.2%, consistent with our
dividend aim for the period to March 2000. Group dividend cover, excluding
exceptional items and goodwill amortisation, decreased to 1.7 times from 1.9
times in the previous year. From April 2000 we aim to grow dividends by 5% per
annum in nominal terms for each of the next three financial years.
Capital Expenditure and Cash Flow
Capital Expenditure
The group continued to invest in its businesses with net capital expenditure for
1999-00 of (pound)886 million, an increase of (pound)132 million over 1998-99,
including four months of PacifiCorp and the continued emphasis on growth in
Thus.
In the UK generation and infrastructure businesses, capital expenditure was
(pound)583 million, a decrease of (pound)35 million on 1998-99. Capital
expenditure in Generation Wholesale was (pound)42 million, of which (pound)9
million related to the development of gas storage facilities at Hatfield Moor
and (pound)11 million on the development of windfarms. In Power Systems, net
capital expenditure for the year amounted to (pound)175 million, a decrease of
(pound)39 million on 1998-99. The Distribution business spent (pound)82 million
to improve the quality and reliability of the electricity supply to customers,
and (pound)69 million on expanding the network to meet demand for new
electricity supply. In Transmission, (pound)24 million was invested to reinforce
and refurbish specific parts of the overhead line system and on network
expansion to support new business opportunities. Capital expenditure in Southern
Water, including infrastructure renewal expenditure, amounted to (pound)353
million, (pound)6 million higher than 1998-99.
This included (pound)226 million as part of the ongoing programme to ensure
compliance with the higher standards set by European Union Directives on the
quality of bathing water, urban wastewater discharges and sludge disposal.
Investment was also undertaken to improve security of supply, increase the
availability of water resources and reduce leakage in line with Water Summit
commitments. Major wastewater treatment works include Dover & Folkestone
((pound)18 million spend in 1999-00) and Hastings bathing water improvements
((pound)15 million spend in 1999-00). Construction is well under way on projects
to improve bathing water quality in the Solent area via the Portsmouth and
Havant scheme ((pound)53 million spend in 1999-00) and the Seaclean Wight scheme
((pound)30 million spend in 1999-00).
In the UK telecom and customer businesses, capital expenditure was (pound)209
million, an increase of (pound)73 million on 1998-99, primarily as a result of
continued network expansion in Thus to deliver the anticipated growth within the
business. In Energy Supply, capital expenditure of (pound)41 million mainly
reflects additional expenditure on the development of information and customer
billing systems within the liberalised electricity and gas markets. Capital
expenditure in Thus amounted to (pound)161 million, with (pound)110 million
associated with the expansion of network reach and capacity. A further(pound)26
million of spend was attributable to the Internet and interactive business, with
(pound)13 million of the remainder spent on information systems. Appliance
Retailing's capital expenditure totalled (pound)7 million, most of which related
to the opening of new stores.
Capital expenditure in PacifiCorp amounted to (pound)94 million in the four
months since the date of acquisition. Of this expenditure, (pound)57 million
related to the electricity network. In the Distribution business the expenditure
focused on improving the quality and reliability of the electricity supply to
customers, and on expanding the network to meet demand for new electricity
supply. In Transmission, investment was made to reinforce and refurbish specific
parts of the overhead line system and on network expansion to support new
business opportunities. The Power Supply business spent (pound)22 million,
primarily on thermal and hydro generation projects, with expenditure in other
PacifiCorp businesses totalling (pound)15 million.
Cash Flow
Net cash inflow from operations increased from (pound)945 million to
(pound)1,118 million, due to the contribution of four months operations of
PacifiCorp.
Net interest paid of (pound)256 million was (pound)106 million higher than
1998-99, with increases due to PacifiCorp and the higher debt level experienced
until the partial flotation of Thus in November 1999. There was an increase in
ordinary tax paid of (pound)61 million, in part due to PacifiCorp taxes. Free
cash flow for the group of (pound)705 million was (pound)3 million higher than
the equivalent figure in 1998-99.
From this was funded the capital expenditure programme of (pound)842 million,
an increase of (pound)159 million on last year due to PacifiCorp, and increases
in Telecoms and Southern Water.
The gain from the partial disposal of Thus generated a net cash inflow of
(pound)1,030 million, after expenses. Dividends paid to shareholders amounted to
(pound)406 million, up from (pound)253 million last year, due to the switch to
quarterly dividend payout and the increase in the shareholder base. A share buy-
back took place in the year to give a more efficient capital structure and cost
a total of (pound)302 million. Further details of the share buy-back are given
on page 125.
Net debt at 31 March 2000 was(pound)4,842 million, an increase of(pound)2,421
million compared with a year ago, principally due to the acquired debt of
PacifiCorp and the share buy-back programme, offset by proceeds from the partial
flotation of Thus.
Gearing (net debt/shareholders' funds) at 31 March 2000 was 76%, reduced from
124% at 31 March 1999.
52 Annual Report & Accounts/Form 20-F
<PAGE>
Overview (1998-99)
Key group financial information is shown in Table 17.
Group turnover grew during the year by (pound)114 million to (pound)3,242
million, an increase of 4%. This was due mainly to growth in the developing
residential gas area and telecommunications business. Gas and other energy sales
were up by (pound)77 million to (pound)240 million, reflecting our continuing
success in gaining new customers in the residential market, and the total sales
of Telecoms were almost doubled at (pound)220 million.
The rise in overall turnover, together with continued strong control over
operating costs, led to higher operating profit of (pound)804 million, up
(pound)19 million.
The net interest charge increased by (pound)14 million to (pound)161 million,
mainly due to the impact on debt of the two windfall tax payments in December
1997 and December 1998, totalling (pound)317 million, and the continued capital
expenditure programme.
Profit before tax grew by (pound)5 million to (pound)645 million. At
(pound)142 million, the ordinary tax charge represented an effective tax rate of
22.0%, reduced from 23.7% in the previous year.
Earnings per share amounted to 42.52 pence, a rise of 3.0% on a comparable
basis. The final dividend of 15.00 pence per share brought the total dividend
per share for the year to 22.50 pence, an increase of 10.3%. This was in line
with our dividend aim for the period to March 2000. Dividend cover reduced
marginally to 1.9 times from 2.0 times the previous year.
Free cash flow for the year, before windfall tax, was (pound)702 million, a
reduction of (pound)32 million, reflecting working capital increases in our
developing gas and telecommunications businesses. The group invested (pound)754
million in capital projects during the year, (pound)97 million more than in the
previous year. This investment was primarily to improve the quality of the
infrastructure assets in our electricity and water and wastewater services
businesses, and to support the growth of our telecommunications business.
Net debt increased from (pound)1,953 million to (pound)2,421 million, mainly
due to the continuing capital investment programme. Gearing at 31 March 1999
increased to 124% compared to 114% in the previous year. Interest cover remained
prudent at 5.0 times.
Business Reviews (1998-99)
UK Generation and Infrastructure Businesses
The key financial information is shown in Table 18.
Generation Wholesale
In the Generation Wholesale business turnover decreased in the year to
(pound)219 million. Wholesale turnover reduced in the year, down 7% to
(pound)185 million, with higher export volumes, up by 442 GWh to 6,049 GWh,
offset by lower Pool prices. Agency sales were 3% lower at 1,010 GWh.
The profit in Generation was (pound)115 million in the year, down (pound)16
million compared with 1997-98. Higher electricity volumes were sold at lower
prices, both to our Energy Supply business and to the wholesale market. In
addition there were higher capacity and transmission charges. Interconnector
capacity was increased in the year, with volumes up by 8%, but with contribution
unchanged due to reductions in Pool prices.
Power Systems
Power Systems increased turnover by (pound)7 million to (pound)101 million and
operating profit by more than (pound)6 million to (pound)351 million.
Transmission increased operating profit by (pound)3 million to (pound)84
million, due to price increases allowed under the regulatory formula.
Distribution profits improved by (pound)3 million, as a result of higher
distribution revenues from allowed price increases, higher sales volumes and a
more favourable mix of units sold. Further business cost reductions were
achieved, which partially offset increased depreciation charges and new industry
costs associated with the operation of the competitive electricity market.
Southern Water
Southern Water's contribution to group turnover fell by(pound)13 million
to(pound)440 million, due entirely to the previous year's disposal of non-core
businesses. Turnover in the regulated business increased to (pound)439 million,
a rise of (pound)19 million compared to the previous year, due to higher prices
to fund the capital expenditure programme.
Southern Water contributed more than (pound)21 million of additional
operating profit, mainly
<TABLE>
<CAPTION>
Table 17 - Key Group Financial Information (1998-99 and 1997-98)
------------------------------------------------------------------------------------------------------------------------
1998-99 1997-98 Difference
(pound)m (pound)m (pound)m %
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Turnover 3,242.3 3,128.2 114.1 4
========================================================================= ======== ======== ======== ========
Operating profit 802.8 785.1 17.7 2
Operating profit (before exceptional items and goodwill amortisation) 804.0 785.1 18.9 2
========================================================================= ======== ======== ======== ========
Profit before tax 643.8 639.6 4.2 1
Profit before tax (before exceptional items and goodwill amortisation) 645.0 639.6 5.4 1
========================================================================= ======== ======== ======== ========
Free cash flow 702.2 733.8 (31.6) (4)
========================================================================= ======== ======== ======== ========
Earnings per share 42.42p 14.41p 28.01p 194
Earnings per share (before exceptional items and goodwill amortisation) 42.52p 41.28p 1.24p 3
========================================================================= ======== ======== ======== ========
Dividends per share 22.50p 20.40p 2.10p 10
========================================================================= ======== ======== ======== ========
</TABLE>
53 Annual Report & Accounts/Form 20-F
<PAGE>
<TABLE>
<CAPTION>
Table 18 - UK Generation and Infrastructure Businesses (1998-99 and 1997-98)
-------------------------------------------------------------------------------------------------------------------------------
External External Operating Operating
turnover turnover profit profit
1998-99 1997-98 1998-99 1997-98
(pound)m (pound)m % (pound)m (pound)m %
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Generation Wholesale 219.0 249.5 (12) 115.3 130.8 (12)
Power Systems 101.4 94.6 7 350.6 344.2 2
Southern Water 439.5 452.6 (3) 262.2 240.7 9
Other 60.7 39.1 55 4.0 14.6 (73)
-------------------------------------------- ---------- ---------- ---------- ---------- ---------- ----------
Total 820.6 835.8 (2) 732.1 730.3 --
===============================================================================================================================
</TABLE>
from increased revenues and continuing cost savings of (pound)10 million
delivered by the acquisition transition plan during 1998-99. These savings
offset the additional (pound)7 million costs of new obligations arising from the
construction and operation of new wastewater treatment plants. Year-on-year,
Southern Water's operating profit increased by 9% from (pound)241 million to
(pound)262 million. All non-core businesses have been sold and, together with
property sales, have realised (pound)129 million, (pound)29 million ahead of the
target set at acquisition.
Other
The group's other UK infrastructure
businesses increased their turnover by(pound)21 million
to (pound)60 million. Underlying operating profit performance in these other
businesses was in line with 1997-98, which was impacted by several one-off
items.
UK Telecom and Customer Businesses The key financial information is shown in
Table 19.
Energy Supply
Sales of electricity to customers in the home area in Scotland were (pound)1,116
million, an increase of (pound)5 million on the previous year. Volumes increased
in the year by 1.4% to 19,831 GWh, primarily due to more normal winter weather
following the unusually mild winter in 1997-98. Sales in the competitive market
in the home area in Scotland were broadly in line with the previous year,
despite prices being lower in the residential and commercial sectors, and
because of continued competition in the industrial sector.
Sales of electricity in England & Wales outside our home areas reduced by
(pound)16 million to (pound)137 million, with lower sales volumes outside our
home territories as a result of exiting from loss-making business in this area.
Manweb area turnover fell by (pound)64 million. The benefits of lower costs
were passed on to residential and business customers through reduced tariffs.
The effect on profit from tariff reductions to the residential and small
business sectors, some (pound)20 million, was more than offset by improved
performance elsewhere in the commercial and industrial sector, arising from
exiting from loss-making business.
Gas and other sales in Energy Supply increased by (pound)93 million to
(pound)154 million, mainly as a result of our success in winning customers in
the new residential gas markets.
Operating profit in Energy Supply increased by (pound)14 million to (pound)57
million due to increasing residential gas margins and improved performance in
the out of area market.
In the home area in Scotland operating profit reduced by (pound)2 million to
(pound)36 million, with lower generation costs more than offset by price
reductions to customers and the costs of operating in the competitive
electricity market. The impact of competition on financial performance in our
home area market was not significant. Outside our home areas in England & Wales
a break-even result was recorded despite absorbing (pound)3 million of capture
costs for new residential electricity customers won in this market. Margins were
improved despite the competitive pressures in the large business sector of this
market, primarily as a result of lower Pool prices and exit from loss-making
contracts.
In the commercial and residential gas markets the operating loss of (pound)16
million reflected customer capture costs of (pound)17 million, increased costs
from serving the expanded customer base, in part offset by the margins obtained
from supplying new gas customers in the residential sector.
Operating profit for Manweb Energy Supply increased by (pound)9 million to
(pound)37 million.
Telecoms
Total sales in Telecoms increased by (pound)107 million to (pound)220 million,
including a contribution to group turnover of (pound)49 million from Demon
Internet for the period since acquisition. External turnover in Telecoms
increased by (pound)99 million to (pound)181 million.
Telecoms' contribution to group operating profit was (pound)11 million, up
from (pound)5 million in 1997-98. The improvement in operating profit reflects
the increased volume of network traffic and growth in the provision of Internet
services, resulting from our acquisition of Demon Internet on 1 May 1998.
Appliance Retailing
The Appliance Retailing business, despite the poor market conditions during the
year, increased its turnover to (pound)288 million due to new store openings,
with like-for-like sales falling by 6%.
Operating profit in the Appliance Retailing business was (pound)4 million,
(pound)4 million lower than the previous year as a result of difficult market
conditions in this sector throughout 1998-99.
54 Annual Report & Accounts/Form 20-F
<PAGE>
<TABLE>
<CAPTION>
Table 19 - UK Telecom and Customer Businesses (1998-99 and 1997-98)
-------------------------------------------------------------------------------------------------------
External External Operating Operating
turnover turnover profit profit
1998-99 1997-98 1998-99 1997-98
(pound)m (pound)m % (pound)m (pound)m %
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Energy Supply 1,953.4 1,935.9 1 56.7 42.4 34
Telecoms 180.7 82.1 120 11.5 4.7 145
Appliance Retailing 287.6 274.4 5 3.7 7.7 (52)
---------------------- ----------- ----------- ----------- ----------- ----------- -----------
Total 2,421.7 2,292.4 6 71.9 54.8 31
====================== =========== =========== =========== =========== =========== ===========
</TABLE>
Interest, Taxation, Earnings and Dividends (1998-99)
Interest and Taxation
The net interest charge of (pound)161 million was (pound)14 million higher than
in 1997-98. This was due mainly to the full-year effect of increased debt on
payment of the first instalment of the windfall tax in December 1997, and
part-year impact from the second instalment, paid in December 1998. Changes to
the group's debt portfolio were made during the year to take advantage of
falling interest rates and to extend the maturity profile of the group's
borrowings. As a result, the average interest rate for the group during the year
was 8.0%, compared to 8.4% in 1997-98. Interest cover remained prudent at 5.0
times, against 5.3 times in the prior year. The effective tax rate was reduced
to 22.0% from 23.7% in the previous year due largely to higher capital
allowances on the current mix and level of capital expenditure.
Earnings and Dividends
The profit after ordinary tax for the year amounted to (pound)503 million, an
increase of (pound)15 million or 3%. Profit after ordinary tax and goodwill
amortisation for the year amounted to (pound)502 million, compared to (pound)488
million in 1997-98. With a weighted average 1,185 million shares in issue during
the year, earnings per share were 42.52 pence, an increase of 3% on a comparable
basis.
The final dividend of 15.00 pence per share brought the total dividend per
share for the year to 22.50 pence, an increase of 10.3%. The full-year dividend
was covered 1.9 times by earnings, versus 2.0 times in 1997-98. This increase in
dividend was in line with our dividend aim for the period to March 2000.
Treasury
The treasury focus during the year was on further refinancing of the group's
debt 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.
Following the acquisition of PacifiCorp the group's external borrowings are
sourced in two separate pools of similar size. In the UK, ScottishPower UK plc
(SPUK) continues to be the finance vehicle for the bulk of the UK activities.
In the US, most of the debt is issued by PacifiCorp. In both cases regulatory
constraints apply to financing activities. Scottish Power plc is not permitted
to borrow from its subsidiaries and is currently financed by way of dividends.
It has no external borrowing facilities at present.
In the UK under SPUK's Euro-Medium Term Note (EMTN) Programme, established in
November 1997, several issues were undertaken during the financial year. These
included a (pound)200 million, 10-year, 6.625% issue in July 1999 and a
(pound)50 million, 5.75%, 40-year issue in December 1999. In addition to these,
there were 11 other smaller issues with maturities between one and 30 years.
Cumulative issues outstanding under the programme now total $2,353 million
against a programme limit of $4,000 million. SPUK will continue to issue bonds
under the programme which allows the UK part of the group continued access to a
variety of funding sources and the ability to tap market demand as and when
appropriate. As part of the UK strategy to develop new funding sources, a
(pound)50 million facility with the European Investment Bank (EIB) was signed
for Manweb plc in February 2000. Total borrowings from the EIB now amount to
just over (pound)300 million with a further (pound)50 million available but
undrawn.
The refinancing activity, together with the partial disposal of Thus, has
reduced short-term debt and permitted a reduction in bank facilities. In March
2000 notice was given to reduce SPUK's revolving credit facility to (pound)1,500
million. This facility matures in June 2001 and it is likely that it will be
refinanced during the financial year ending 31 March 2001. The facility acts
principally as committed support for issues of commercial paper.
55 Annual Report & Accounts/Form 20-F
<PAGE>
In the US there has been no significant financing activity since the completion
of the merger with PacifiCorp.
The group continues to manage its interest rate exposure by maintaining the
majority of its debt at fixed rates of interest, either directly by means of
fixed rate debt issues or by use of interest and cross currency swaps. 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's
continuing policy is to maintain at least 75% of its anticipated year end debt
at fixed interest rates. Following the partial disposal of Thus, mentioned
above, SPUK undertook a series of transactions in order to bring the debt
fixed/variable mix back into line with this policy. PacifiCorp also has a policy
of maintaining at least 75% of its capitalisation at fixed rates of interest. In
recognition of the long life of the group's assets and anticipated indebtedness
and to create financial efficiencies, the group has entered into borrowing
agreements for periods out to 2039. In addition SPUK has entered into derivative
contracts, swaptions, to a notional value of (pound)250 million which may result
in fixed interest rates of between 4.00% and 4.25% for periods out to 2030 on
this notional amount. At 31 March 2000, the interest rate on some 78% (UK 77%,
US 78%) of debt was fixed and the interest rate on a further 3% of total
borrowings was capped (all UK).
The weighted average period of maturity of year end fixed debt and swaps was
11 years (UK 10 years, US 13 years), while the forward cover on capped debt was
for an average period of some two years (all UK). Accordingly, changes in
floating interest rates will have a limited impact on interest payable by the
group.
Credit ratings have now stabilised following the merger and the various
regulatory reviews in the UK. Both SPUK and PacifiCorp have credit ratings
published by Moody's Investor Services, Standard & Poor's and Duff & Phelps
Credit Rating Co. SPUK's long-term ratings are now A1, A and A+ from the three
agencies respectively. PacifiCorp's senior secured debt is rated A2, A+, A and
its unsecured debt is rated A3, A-, A-. Short-term ratings of P-1, A-1 and D-1
apply to both companies. PacifiCorp Group Holdings has slightly lower ratings
although they remain investment grade.
Following the acquisition of PacifiCorp, the significance of foreign currency
risk has risen. The treasury's role in managing the various aspects of this risk
is discussed below.
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 22 (pages 93 to 98) summarise the financial instruments,
derivative instruments and derivative commodity instruments held by the group at
31 March 2000, 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. The instruments held by the group are not leveraged and are not held
for financial trading purposes.
Financial Instruments and Risk Management
Overview
The main financial risks faced by the group are interest rate risk, exchange
rate risk and Pool/electricity price 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 financial
instruments. The financial instruments endorsed for use by the Board include
swaps, both interest rate and cross currency, swaptions, caps, forward rate
agreements, forward contracts and contracts for differences. The group treasury,
which is authorised to conduct the day-to-day treasury activities of the group,
reports annually to the Board and is subject to internal audit. In the UK The
Energy Trading Centre, which is authorised to carry out activities to manage the
group's Pool price risk, reports monthly to a risk committee which is comprised
of three executive directors and an external consultant. Pool price risk is
defined as the possibility that a change in the cost of electricity from the
Pool will either reduce the proceeds of electricity sold to the Pool or increase
the cost of electricity purchased from the Pool.
In the US, Wholesale Energy Services (WES), with assistance from the Risk
Management Group, is authorised to carry out activities to manage PacifiCorp's
market price risk. WES reports monthly to a risk committee comprised of four
executives and an external consultant.
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,
56 Annual Report & Accounts/Form 20-F
<PAGE>
to convert the obligations and payments into fixed or floating rate functional
currencies. The exposure to fluctuating interest rates is managed by using a
spectrum of financial instruments to maintain a majority of the group's debt
portfolio at fixed rates. This involves either issuing fixed rate debt or
swapping floating rate debt obligations into fixed rates by either interest rate
swaps or a string of forward rate agreements ("FRA"). 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 overall policy framework with
regards to the fixed/floating debt mix has been approved by the Board. At 31
March 2000, 78% (1999:77%) of the group's debt was either issued as fixed or
converted to fixed rates using interest rates swaps. No FRAs were outstanding as
at 31 March 2000.
All 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 any one of the following: Standard &
Poor's, Moody's or Fitch IBCA. 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 exposed to any material
concentration of credit risk.
Foreign Exchange Risk Management
Following the acquisition of PacifiCorp the significance of foreign currency
risk has risen. Cross border trade-related cash flows remain limited to the
impact of capital equipment and fuel and are not significant in terms of the
overall size of the group. The dividend stream which flows from PacifiCorp to
the holding company can be sold forward on a graduated basis for periods up to
three years in order to minimise the effect of fluctuations in the (pound)/$
exchange rate. The group's US net assets are not matched by borrowing in US
dollars and all SPUK's debt is either denominated in sterling or, if originally
denominated in currencies other than sterling, is swapped to sterling.
PacifiCorp's debt is almost entirely issued in US dollars, the only exception
being funding for the US group's Australian operations. The Australian
operations have either issued debt directly in Australian dollars or US dollars
swapped into Australian dollars. The functional currency borrowings within
PacifiCorp act as a partial hedge of the foreign currency exposure for the
group.
Liquidity Risk Management
The group's policy is to ensure that debt maturities are spread over a wide
range of maturities, thereby ensuring that the group is not subject to excessive
refinancing risk in any one year. The group has undrawn committed revolving
credit facilities totalling (pound)2,627 million, as at 31 March 2000, which
provide backstop liquidity should the need arise.
Energy Price Risk Management
UK Business
Almost all electricity generated in England & Wales must be sold to the Pool,
and electricity suppliers including Manweb must likewise buy electricity from
the Pool for resale to their customers. The Pool was established at the time of
privatisation in England & Wales for bulk electricity trading between generators
and suppliers. ScottishPower participates in the Pool by exporting/importing
electricity to/from England & Wales via the interconnector. The Pool is operated
under a Pooling and Settlement Agreement to which all licensed generators and
suppliers of electricity in Great Britain are party.
The group has procedures in place to minimise exposure to Pool price
variations, that is, the possibility that a change in Pool prices will reduce
the proceeds of electricity sold to the Pool or increase the cost of electricity
purchased from the Pool. These procedures involve SPUK and its subsidiary Manweb
entering into contracts for differences (CfDs). In general, the terms of CfDs
are such that contracts are settled monthly (or more frequently) in arrears by
reference to actual half-hourly Pool prices. During the year ended 31 March
2000, around 90% of the group's exposure to Pool prices was hedged in this way.
Cover is built up throughout the year and at 31 March 2000 a significant
proportion of the group's exposure to Pool price variations for the following
financial year is covered.
The group has also entered into some longer term (in excess of one year)
arrangements to protect against the volatility of electricity prices. These
arrangements have the potential to be increased as the business grows and the
time period covered will be reviewed on an ongoing basis.
These CfDs involve a degree of credit risk. That is the risk that the
counterparty to the CfD defaults on settlement. The group controls credit risk
arising from holding CfDs through credit approvals, limits and monitoring
procedures.
New Electricity Trading Arrangements (NETA)
The group will continue to minimise exposure to electricity price variations,
that is, the possibility that a change in electricity prices will reduce the
proceeds of electricity sold or increase the cost of electricity purchased when
the new electricity arrangements are introduced.
57 Annual Report & Accounts/Form 20-F
<PAGE>
US Business
PacifiCorp's approach concerning its Domestic Electric operations is to position
its system (resources and loads) within position limits outlined in its internal
risk management policies and procedures. Price risk is mitigated primarily
through the use of forward purchase and sales contracts that balance the system
monthly. Exchange and capacity agreements also help ensure the reliability of
resources.
Creditor Payment Policy and Practice
In the UK, the group's current policy and practice concerning the payment of the
majority of its trade creditors is to follow the Better Payment Practice Code.
Copies of the Code may be obtained from the Department of Trade and Industry.
For all other suppliers, 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 contractural and legal obligations.
The group's creditor days at 31 March 2000 for its UK businesses and US
businesses were 33 days and 35 days, respectively.
Going Concern
The directors confirm that the company remains a going concern on the basis of
its future cash flow forecasts.
Year 2000
ScottishPower established its UK group-wide Year 2000 programme in 1997 and as
at 31 March 2000 had spent approximately (pound)33 million. PacifiCorp commenced
its own Year 2000 programme in 1996 and as at 31 March 2000 had spent $29
million ((pound)18 million). These programmes sought to manage the effects that
Year 2000 issues may have had on the group's operations. The group moved into
the year 2000 and through the 29 February 2000 leap year date without any
significant problems. The directors do not consider there to be any significant
residual risks in relation to Year 2000 issues.
Accounting Developments
During the past year, the Accounting Standards Board (ASB) issued one new
standard, namely FRS 16 `Current taxation'. This standard has no material effect
on this year's Accounts.
The ASB continued to issue a number of exposure drafts and discussion papers
over the last 12 months. These documents, particularly dealing with deferred
taxation and pensions, propose significant changes that could materially impact
future years' accounts. The underlying economics of our business would, however,
not be impacted.
Details of the new accounting pronouncements issued in the United States,
which have been applied for the first time this year in determining our US GAAP
results, are set out in Note 35 on page 117. We also refer, in that note, to
current proposals, which may impact on our future US GAAP results.
European Economic and Monetary Union and the Impact of the euro
European Economic and Monetary Union (EMU) commenced on 1 January 1999 with the
introduction of a new currency, the euro.
The group's businesses are almost totally UK and US focused, with very few
sales or purchases denominated in currencies other than sterling or US dollars.
As a result, while the United Kingdom remains outside EMU, the group will be
affected to only a very minor extent by the introduction of the euro. A project
team has been established to review the impact of the first wave of EMU on
customers and suppliers and to formulate the group's response. The project group
is also considering the implications of potential UK membership of EMU.
The benefits of a new integrated capital market have been recognised and the
group has already issued commercial paper denominated in euros and will consider
issuing bonds in euros in due course.
UK GAAP to US GAAP Reconciliation
The consolidated Accounts of the group are prepared in accordance with UK
Generally Accepted Accounting Principles ("GAAP") which differs in significant
respects from US GAAP. Reconciliations of profit and equity shareholders' funds
between UKGAAP and US GAAP are set out in Note 35 to the Accounts. Under US GAAP
the profit for the year to March 2000, after charging an extraordinary item, net
of tax, of (pound)11 million, was (pound)882 million compared to (pound)455
million in the previous year. Earnings per share, excluding the extraordinary
item, under US GAAP were 64.26 pence compared to 38.39 pence in 1998-99. In
accordance with USGAAP, earnings per share are stated based on US GAAP earnings,
without adjustments for the impact of the exceptional items, other than those
which are classified as extraordinary items under US GAAP, and goodwill
amortisation. The inclusion of exceptional items, other than those which are
classified as extraordinary items under US GAAP, in the determination of
earnings per share in accordance with US GAAP increased earnings by (pound)409
million or 29.43 pence per share for the current financial year. The inclusion
of goodwill amortisation decreased earnings by (pound)71 million or 5.12 pence
per share in 1999-00 and by (pound)30 million or 2.53 pence per share in
1998-99.
Equity shareholders' funds under US GAAP amounted to (pound)7,030 million at
31 March 2000 compared to (pound)2,461 million at 31 March 1999. This increase
reflects principally the acquisition of PacifiCorp during the year.
58 Annual Report & Accounts/Form 20-F
<PAGE>
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
and any rules, regulations or releases of the Securities and Exchange Commission
with respect thereto (the "PSLRA"). Forward-looking statements in this document
include, but are not limited to, statements in: "Business Strategy" relating to
ScottishPower's intent to build future business in the UK and the US; "UK
Businesses - Customer Sales and Services" relating to the strategy to build the
existing energy base while releasing more value from the home and meeting the
electricity supply and service obligations of ScottishPower and Manweb under
their respective PES licences; "Energy Supply - Appliance Retailing" with
respect to the plan to open another 14 superstores in 2000-01; "Energy Supply -
e-business" relating to those Internet businesses' expected operation launch in
the summer of 2000; "Other UK Businesses - Information Systems" with respect to
the joint venture to be undertaken with SAIC; "US Business - Transition Plan"
relating to the initiatives which will give an annual savings of $300 million in
operating expenses and $250 million in capital investment as well as transform
PacifiCorp into one of the 10 most efficient US investor-owned utilities; "US
Business - Proposed Asset Additions and Dispositions" with respect to the
approval sought from FERC, expected to be received during the first half of
2000; "US Business - Projected Demand" relating to the expected annual growth in
retail kWh from 2001-04; "Environment - Environmental Regulation of Generation
Activities" with respect to the group's ability to achieve the environmental
improvements required by potential future limits arising from the pending IPC
review without materially constraining operational and commercial flexibility;
"Environment - General" relating to the belief by ScottishPower that it has
taken and continues to take measures to comply with applicable laws and
regulations for the protection of the environment; "Environment - US
Environmental Legislation" with respect to the belief that the anticipated costs
associated with future remedial actions will not be material to the group's
consolidated financial results; and "Investor Information" with respect to the
stated dividend aim to achieve 5% nominal growth for each of the next three
years; and that PacifiCorp will enhance earnings per share next year before
exceptional items and goodwill amortisation.
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:
- the level of competition within ScottishPower's, and Manweb's home electricity
supply markets, including without limitation competition from other RECs and
generators, the level of competition in the Pool, the level of competition in
PacifiCorp's market and the overall demand for services;
- 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 and economic growth in the relevant areas in which the group has
operations;
- the availability of acceptable quality fuel at favourable prices;
- the ability of ScottishPower and PacifiCorp to integrate their business
successfully; and
- development and use of technology, the actions of competitors, natural
disasters and other changes to business conditions.
Summary
These financial results reflect another year of significant progress for the
group. Value has been created for our shareholders from the partial flotation of
Thus and the impact of the PacifiCorp acquisition, and PacifiCorp is expected to
be earnings enhancing in 2000-01 before exceptional items and goodwill
amortisation. Continued cost efficiency in our energy and water businesses leave
the group well placed to beat efficiency targets set by the regulators and we
continue to perform strongly in the competitive energy markets. Interest and
dividend covers remain prudent and debt remains under tight control. The results
demonstrate the group's ability to create shareholder value in an increasingly
competitive marketplace.
/s/ David Nish
David Nish
Finance Director 4 May 2000
59 Annual Report & Accounts/Form 20-F
<PAGE>
Executive Directors
Sir Ian Robinson (58) was appointed Chief Executive in March 1995. He was
awarded a Knighthood in the Millennium New Year's Honours List for his services
to the Electricity Industry. He was previously with Trafalgar House plc, where
he was Chief Executive of John Brown and a main Board director. He is a Fellow
of the Royal Academy of Engineering and a Fellow of the Institution of Chemical
Engineers. He is a non-executive director of RMC Group plc and Chairman of the
Scottish Advisory Task Force on Welfare to Work.
Ian Russell (47) was appointed Deputy Chief Executive in November 1998, having
previously been appointed Finance Director in April 1994 and serving in both
capacities from November 1998 to December 1999. In his present capacity, he is
responsible for UK and US operations and is also non-executive Chairman of Thus
plc. He is a member of the Institute of Chartered Accountants of Scotland,
having trained with Thomson McLintock, and has held senior finance positions
with HSBC and Tomkins plc. He is a non-executive director of Scottish Investment
Trust plc and Scottish Knowledge plc.
Charles Berry (48) joined ScottishPower in November 1991 and was appointed to
the Board on 1 April 1999. He is Executive Director Customer Sales & Services,
with responsibility for the Energy Supply, Electricity Trading and Appliance
Retailing businesses and also with responsibility at Board level for regulatory
matters. He is also a non-executive director of Thus plc. He was previously
Group Development Director of Norwest Holst, a subsidiary of Compagnie General
des Eaux, and prior to that held management positions within subsidiaries of
Pilkington plc.
David Nish (39) joined ScottishPower in September 1997 as Deputy Finance
Director and was appointed to the Board as Finance Director on 13 December 1999.
He is responsible for the group's Finance, Treasury, Taxation and Internal Audit
functions. Prior to joining ScottishPower, he was a partner with Price
Waterhouse. He is a member of the Institute of Chartered Accountants of Scotland
and a member of its Qualifications Board.
Alan Richardson (53) joined ScottishPower in July 1991 and was appointed to the
Board on 1 April 1999. In November 1999 he was appointed Chief Executive Officer
of PacifiCorp upon completion of the merger. He was formerly Managing Director
Power Systems, with responsibility for the Distribution businesses in Scotland
and Manweb. He was previously Director and General Manager of both The Bushing
Company Limited and Reyrolle Limited. He is a Fellow of the Institution of
Electrical Engineers. Since moving to the US, he has been appointed to the
Oregon Business Council.
Ken Vowles (58) joined ScottishPower in September 1990 and was appointed to the
Board in September 1994. He is Executive Director UK Power Operations and is
responsible in that capacity for Generation, Power Systems, Technology and
Contracting Services, and for safety and environmental policy on a group-wide
basis. He is also Chairman of Manweb. He has over 30 years' experience of the
power generation industry, having previously served with the Central Electricity
Generating Board and with National Power plc. He is a Fellow of the Institution
of Electrical Engineers, a Fellow of the Institution of Mechanical Engineers,
and a member of the Power Generation Committee of the Association of Edison
Illuminating Companies in the US.
Board of Directors
Charles Berry and Alan Richardson joined the Board on 1 April 1999. Sir Ronald
Garrick retired on 30 April 1999 and Duncan Whyte resigned from the Board on 31
May 1999. Charles Miller Smith was appointed Deputy Chairman on 1 August 1999,
and then Chairman on 1 April 2000, following Murray Stuart's retirement. Keith
McKennon, Nolan Karras and Robert Miller joined the Board on 30 November 1999
and on 13 December 1999, David Nish was appointed Finance Director. In
accordance with the Articles of Association, Charles Miller Smith, Keith
McKennon, Nolan Karras, Robert Miller and David Nish retire from office at the
Annual General Meeting and, being eligible, offer themselves for election. In
addition, Sir Peter Gregson, Ewen Macpherson and Sir Ian Robinson retire by
rotation at the Annual General Meeting and, being eligible, offer themselves for
re-election. Sir Ian Robinson has a service contract terminable by the company
upon two years' notice.
For the purposes of the Annual Report on Form 20-F, the following are regarded
as officers of the company.
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------
Name Title Age Date appointed to current post
------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Julian Brown Director of Corporate Strategy 50 1 April 1997
Sue Clark Director of Corporate Affairs 35 1 January 1996
Andrew Mitchell Group Secretary 48 1 July 1993
Paul Pagliari Group Human Resources Director 40 11 January 1999
James Stanley Group Commercial and Legal Director 45 1 March 1996
</TABLE>
60 Annual Report & Accounts/Form 20-F
<PAGE>
Non-executive Directors
Charles Miller Smith (60) joined the Board as Deputy Chairman on 1 August 1999
and was appointed Chairman on 1 April 2000. He is Chairman of ICI and a
non-executive director of HSBC Holdings plc.
Keith McKennon (66) joined the Board as Deputy Chairman on 30 November 1999. He
is a director of PacifiCorp, and formerly served as Chairman from 1994 and as
President and Chief Executive Officer from 1998 until November 1999. Prior to
joining PacifiCorp, he had a long career with Dow Chemical Company until 1994.
He is a director of the Oregon Historical Society and a member of the Oregon
State University President's Advisory Council.
Mair Barnes (55) joined the Board in April 1998. She is a non-executive director
of Abbey National plc and the South African companies, Wooltru Limited and
Woolworths Holdings Limited, and was previously Managing Director of Woolworths
plc.
Sir Peter Gregson GCB (63) joined the Board in December 1996 and was nominated
in 1999 as the senior independent non-executive director. He was previously
Permanent Secretary of the Department of Energy from 1985 to 1989 and then
Permanent Secretary of the Department of Trade and Industry until his retirement
in June 1996. He is a non-executive director of Woolwich plc and Deputy Chairman
of the Board of Companions of the Institute of Management.
Nolan Karras (55) joined the Board as a non-executive director on 30 November
1999. He is a director of PacifiCorp, and formerly served as Chairman of the
PacifiCorp Board's 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 and American General Savings Bank.
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.
Ewen Macpherson (58) joined the Board in September 1996 and is Chairman of the
Remuneration Committee. In July 1997, he retired as Chief Executive of 3i Group
plc, which he joined in 1970. He is Chairman of Glynwed International plc and a
non-executive director of Booker plc, Foreign & Colonial Investment Trust plc,
The Law Debenture Corporation plc and Pantheon International Participations plc.
Robert Miller (56) joined the Board as a non-executive director on 30 November
1999. He is a director of PacifiCorp, and formerly served as Chairman of the
PacifiCorp Board's Finance Committee. He was elected Chairman and Chief
Executive Officer of Rite Aid Corp in December 1999, having previously been Vice
Chairman of The Kroger Company from May to December 1999 and, prior to that,
President and Chief Executive Officer of Fred Meyer, Inc., since 1997, and
Chairman since 1991.
John Parnaby CBE (62) joined the Board in September 1994 and is Chairman of the
Audit Committee. He retired in October 1997 as Group Director and Director of
Geared Systems Inc. of LucasVarity plc, having previously been Sector Managing
Director and Group Director - Technology. He is a non-executive director of
Jarvis plc. He is also a past President of the Institutions of Electrical and
----
Manufacturing Engineers, a member of the Councils of the Royal Academy of
Engineering and Aston University and a member of the Management Committee of the
UK Government Innovative Manufacturing Initiative.
Members of the Audit Committee
John Parnaby (Chairman)
Sir Peter Gregson
Ewen Macpherson
Robert Miller
Charles Miller Smith
Members of the
Nomination Committee
Charles Miller Smith (Chairman)
Mair Barnes
Sir Peter Gregson
Keith McKennon
Sir Ian Robinson
Members of the
Remuneration Committee
Ewen Macpherson (Chairman)
Mair Barnes
Sir Peter Gregson
Nolan Karras
Keith McKennon
John Parnaby
61 Annual Report & Accounts/Form 20-F
<PAGE>
The company is committed to the highest standards of corporate governance and
this statement describes how the relevant principles of governance are applied
to the company. Throughout the year the company has been in compliance with t he
provisions set out in the Combined Code for Corporate Governance as adopted by
the London Stock Exchange.
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 six executive and eight 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 Executive Management Committee.
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 is chaired
by John Parnaby. 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 exclusively of independent non-executive
directors and is chaired by Ewen Macpherson. 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 for 1999-00 is set out on pages 64 to 70.
Executive Management Committee
The Executive Management Committee comprises the Chief Executive and all other
executive directors, together with the Group Human Resources Director and, in
attendance, the 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 Committee in the discharge of these
functions. Major issues and decisions are reported monthly to the Board.
Internal Control
The Combined Code has introduced a requirement that the directors review the
effectiveness of the group's system of internal control, including operational,
compliance and risk management as well as financial controls. In September 1999,
the Institute of Chartered Accountants in England & Wales issued `Internal
Control: Guidance for Directors on the Combined Code' ("the Guidance") otherwise
referred to as the `Turnbull report'. This Guidance was issued with the support
and endorsement of the London Stock Exchange and provides guidance to permit
compliance with principle D2 of the Combined Code.
In response to the publication of the above Guidance, the directors have
reviewed the existing processes for identifying and evaluating the significant
risks affecting the business and the adequacy of the prevention, monitoring and
modification practices in place for those risks.
62 Annual Report & Accounts/Form 20-F
<PAGE>
As a result of this review the risk management methodology has been enhanced to
provide a clearer link between the management of risk and the achievement of
business objectives, with defined responsibilities for the management of those
risks. The methodology now provides the framework to ensure that key controls
are embedded into business processes. The risk management and internal control
system will allow the directors to fully comply with the Combined Code within
the accounting period ending 31 March 2001.
In November 1999 Thus was floated on the London Stock Exchange and its Annual
Report in respect of the year ended 31 March 2000 describes the system of
internal control in operation. The directors of Thus have adopted the
transitional approach for compliance with the Combined Code as set out in the
letter from the London Stock Exchange at the end of September 1999. The
directors of Thus expect to be fully compliant with the requirements of the
Combined Code as regards internal control by the middle of the year ending 31
March 2001. For PacifiCorp, immediate action was taken to secure controls over
critical areas of risk following completion of the acquisition in November 1999;
the full process of risk management described above will be implemented in the
year ending 31 March 2001.
In reporting on internal control, the directors have adopted the transitional
approach in respect of the Combined Code as set out in the Guidance from the
London Stock Exchange at the end of September 1999 and confirm that they have
reviewed the effectiveness of the group's systems of internal financial control.
The key features of the control system in operation which accord with that
Guidance are described below.
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 a prudent risk policy, effectively managing
exposures where appropriate. The Executive Management Committee undertakes a
specific exercise quarterly to identify and assess the key risks to the group
and to assess the adequacy of the prevention, monitoring and modification
practices in place for those risks. The managing directors of each business and
corporate function heads are required to undertake the same process using a
consistent and well defined methodology in respect of their business or function
and to report the results to the Executive Management Committee which is
responsible for reviewing the output for completeness and accuracy. The
consolidated results of these reviews are reported to the Board to enable the
directors to review the effectiveness of the system of internal control. Regular
reports about significant risks and associated control and monitoring procedures
are made to the Executive Management Committee. It is a key requirement of the
procedures that a written certificate is provided annually by the Managing
Director and Finance Manager of each business confirming that they have reviewed
the effectiveness of the system of internal control during the year.
Information and Communication
Business managing directors report regularly on operating performance to the
relevant executive director with line responsibility. A monthly report is
prepared for the Executive Management Committee and for the Board on the
performance of the group and its businesses. The report compares actual results
with budgets and forecasts and covers key performance indicators, both financial
and non-financial.
Control Procedures
Accounting policies for the group are set out in a finance policies and
procedures manual. There is a formal process throughout the group by which
specific levels of delegated authority to incur capital and revenue expenditure
are set, and there are well-established procedures for the preparation, approval
and monitoring of budgets. The effectiveness of controls over the key
transaction cycles, and the exercise of delegated authority, are subject to
regular internal audit. Periodic detailed review by the Finance Director of the
accounting records of each business reinforces a focused approach to control
throughout the group's finance functions. Energy trading is monitored by the
Risk Committees, and the Investment Committees review major capital expenditure
projects. In addition, the group has established procedures to ensure compliance
with laws and regulations which have significant financial implications and
employs specialist staff to deal with legal, regulatory, environmental, human
resource, health and safety matters.
Monitoring and Corrective Action
The Executive Management Committee reviews quarterly 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 Head 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.
63 Annual Report & Accounts/Form 20-F
<PAGE>
Remuneration Committee
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 Remuneration Committee consists of
independent non-executive directors. Its members, who have no personal financial
interest, other than as shareholders, in the matters considered by the
Committee, are Ewen Macpherson (Chairman), Mair Barnes, Sir Peter Gregson, Nolan
Karras, Keith McKennon and John Parnaby. The Committee is advised internally and
externally, in order to assist in determining and developing its policies.
Committee members are paid a fee and expenses, but do not receive any other
remuneration from the company. Details of the remuneration of all non-executive
directors are set out in Table 20. The Committee's policy and disclosures on
directors and senior management remuneration are set out below. Following the
flotation of Thus in November 1999, in accordance with good corporate governance
principles, the Thus Board has established a separate Remuneration Committee
which determines the details of remuneration arrangements for that company.
Executive Remuneration Policy
ScottishPower's remuneration policy is to ensure that the rewards for executives
and directors attract and retain executives of high quality, who have the
requisite skills and are incentivised to achieve performance which exceeds that
of our competitors. Furthermore, the objective is to ensure that incentive
schemes are in line with best practice and promote the interests of our
shareholders.
The Committee considers the introduction of a Personal Shareholding Policy
for executives and senior managers to be in the best interests of shareholders.
Concurrent with the introduction of proposed changes in the Long Term Incentive
Plan the company proposes to introduce a Personal Shareholding Policy, further
aligning the interests of executives and senior managers with those of
shareholders. Under this policy, executive directors will normally be expected
to build up and retain a minimum holding of shares with a value of the order of
their annual base salary. The Chief Executive will normally be expected to build
up and retain a higher multiple of the order of one and one-half times annual
base salary.
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.
After careful consideration, the Committee is of the view that the
remuneration policy stated for the company is appropriate. In line with its
objectives to build an international multi-utility business, ScottishPower has
recruited a number of executives with key business skills, and hence a reward
structure broadly equivalent to other large UK listed companies with
international operations is necessary.
Competitiveness of Remuneration
The Committee believes that to attract and retain key executives of high
calibre, the remuneration package it offers must be market-competitive. The
remuneration strategy is to adopt a market median position on all senior
management remuneration packages and to provide packages above the market median
only where supported by demonstrably superior personal performance. As the
company evolves and establishes a presence in new business sectors, such as
e-businesses, remuneration packages will be developed to reflect the prevailing
market practice in each business environment. This positioning will be
established drawing on advice from independent remuneration consultants and
internal advisers.
The Committee takes a balanced view of remuneration, considering each element
relative to the market and, in the past, has realigned elements of the package
to reflect market conditions or changes in market practice. In the last five
years, annual bonus arrangements have been further strengthened, so that targets
reflect shareholder value and focus on improvements to business performance. In
July 1996, shareholders approved the introduction of a Long Term Incentive Plan,
which replaced all future grants of executive share options.
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 non-contractual and are subject to the approval of the
Committee.
The 1999-00 scheme for executive directors provided a bonus of a maximum of 50%
of salary, with up to a maximum of 25% of base salary determined by the
company's performance. Measurement is by reference to a matrix of performance
against targets of earnings per share and return on capital employed, to reflect
shareholder value. The balance of the bonus, a maximum of 25% of base salary, is
linked to each executive's achievement of key strategic objectives,
64 Annual Report & Accounts/Form 20-F
<PAGE>
both short-term and long-term. Objectives are set annually and performance
against these is reviewed on a six-monthly basis.
The bonus structure is reviewed annually to ensure that it reflects the
priorities of the business. The 1999-00 review of annual bonus arrangements
confirmed that, while these forms of arrangement are widespread within the UK,
the amounts achievable at the `on target' and maximum levels of performance
required adjustment to bring them more into line with the FTSE 100 comparator
group. As a consequence, the bonus maximum for executive directors in the coming
year (2000-01) will be 75% of base salary. One-half of the bonus will be
determined by measurement against earnings per share performance targets. The
balance of the bonus is linked to each executive's achievement of key strategic
objectives.
Objectives are set annually and performance against these is reviewed on a
six-monthly basis. In order to strengthen the alignment with shareholder
interests, concurrent with this change, two-thirds of any bonus payment will be
paid as previously and the remaining one-third will be paid in shares, the
receipt of which will be deferred for a three-year period.
Executive directors did not participate in the Inland Revenue-approved Profit
Related Pay Scheme which was introduced in April 1995. The Profit Related Pay
Scheme ceased to operate on 31 March 2000.
Share Option Schemes
The company no longer operates an executive share option scheme. The last grant
of executive share options to executive directors was in May 1995. The share
option scheme was replaced by the company's Long Term Incentive Plan. Existing
options remain exercisable.
The company operates a savings-related share option scheme ("the Sharesave
Scheme"), which is open to all UK-based 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 (pound)250 per month over a period of three or five years.
The Sharesave Scheme was introduced in 1991 for a period of 10 years. If the
scheme is to continue beyond 2001, the approval of shareholders is required. A
resolution is therefore proposed for shareholders to approve a new Sharesave
Scheme to replace the existing Scheme. The resolution is contained in the Notice
of the Meeting together with a description of the Scheme.
Long Term Incentive Plan
The company operates a Long Term Incentive Plan for executive directors and
other senior managers. The plan links the management rewards to shareholders'
interests, and focuses on long-term corporate performance.
Under the current plan, awards to acquire shares in ScottishPower at nil or
nominal cost are made to the participants up to a maximum value equal to 60% of
base salary. The award will vest only if the Committee is satisfied that certain
performance measures are met. These relate to the sustained underlying financial
performance of the company and customer service standards, including those set
by Ofgem and OFWAT.
The number of shares which vest is dependent upon the company's comparative
total shareholder return performance, over a three-year performance period. Half
of each award will be measured against the constituent companies of the FTSE 100
Index and half against the electricity and water sectors.
The current arrangements provide for a percentage of each half of the award
to vest depending upon the company's ranking within the relevant comparator
group as follows: 100% if the company ranks in the top decile; 90% if the
company ranks in the second decile; 80% if the company ranks in the third
decile; 60% if the company ranks in the fourth decile; 40% if the company ranks
in the fifth decile; and no award is made if the company ranks in the sixth
decile or lower.
Following vesting, the existing awards must be held for a further year before
they may be exercised. The plan participant may acquire the vested shares at any
time after the fourth year up to the seventh year after the grant of the award.
It is some four years since the current Long Term Incentive Plan was
introduced and since then there have been changes in both market practice and
the structure and scale of our business. With the acquisition of PacifiCorp some
40% of the company's revenues are now generated in the United States. The Board
believes the company must have in place incentive plans that are competitive for
senior executives with international responsibilities.
The approval of shareholders is being sought at the Annual General Meeting on
28 July 2000 for amendments to our Long Term Incentive Plan to bring them more
into line with long-term incentive arrangements operated by major UK companies.
The following amendments are being proposed to shareholders: to make an increase
in the maximum award for executive directors from the current level of 60% to
75% of annual base salary; for awards to become exercisable after the third
anniversary of grant; and to permit, at the discretion of the Remuneration
Committee, the early exercise of an award where a participant, whose employment
has ceased and whose award would have been exercisable, dies prior to the
exercise of that award.
A resolution is contained in the Notice of Meeting, which contains a
description of the proposed amendments.
All-Employee Share Ownership Plan
The Government has announced plans to introduce a new Inland Revenue approved
all-employee share ownership plan for UK-based employees with a minimum of 12
months'
65 Annual Report & Accounts/Form 20-F
<PAGE>
service. The legislation required to establish the plan is expected to be
enacted in July or August 2000. The approval of shareholders to establish an
All-Employee Share Ownership Plan (ESOP) is being sought at the Annual General
Meeting on 28 July 2000, conditional upon Inland Revenue approval, which will
itself be conditional upon the enactment of the enabling legislation.
A resolution is contained in the Notice of Meeting together with a description
of the proposed plan.
Pension
The executive directors, and other senior management 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 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 2000 was (pound)600,000.
The normal retirement age is 63, apart from the Chief Executive who has a
planned retirement age of 60 by special agreement at the time he joined the
company. The planned retirement date for the Chief Executive is May 2002. The
Trustee body of the Executive Top-Up Plan is chaired by the Chairman of the
company. The Committee has reported the pension expense in accordance with the
requirements of the London Stock Exchange. Pension costs detailed in the
Accounts are calculated as the cost of providing benefits accrued in 1999-00.
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. The company provides all levels of UK
staff, including executive directors and certain pensioners, with a discount on
merchandise sold by its Appliance Retailing business.
Service Contracts
Existing executive directors appointed before 1 April 1999 have service
contracts terminable by the company on two years' notice (prior to September
1994, notice periods were three years) and by the individuals concerned on 12
months' notice. The Committee believes that it remains appropriate for these
executive directors to continue to be on two-year rolling contracts. Executive
directors Charles Berry, David Nish and Alan Richardson 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.
None of the executive directors' service contracts provides for
pre-determined amounts of compensation in the event of early termination. The
company'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.
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 ScottishPower. This serves to
add to their personal and professional experience and knowledge, to the benefit
of ScottishPower. 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 scheme and do not participate in any bonus, share option or
other profit or long-term incentive scheme. Full details of the remuneration of
the directors are contained in Table 20.
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 executive officers of
ScottishPower, as a group, was (pound)4,284,126.
During 1999-00 the aggregate amount set aside or accrued by the group to
provide pension, retirement or similar benefits for directors and officers of
ScottishPower pursuant to any existing plan provided or contributed to by the
group was (pound)846,100.
66 Annual Report & Accounts/Form 20-F
<PAGE>
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 ScottishPower or any of its subsidiaries was or is a party
and in which any director or executive 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 executive officer of any parent or
subsidiary of ScottishPower, 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 ScottishPower or any of its
subsidiaries owed or owing by any director or executive officer of the group or
any associate thereof.
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 Executive and Sharesave Schemes and awards under the Long Term
Incentive Plan, are shown on pages 68 to 70.
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 20 provides a breakdown of the total emoluments of the Chairman and all
the directors in office during the year ended 31 March 2000.
Directors' Pension Benefits
Details of pension benefits earned by the executive directors during the year
are shown in Table 21.
Table 20 - Directors' Emoluments 1999-00
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------
Basic Benefits Total Total
salary Bonuses in kind 2000 1999
(pound) (pound) (pound) (pound) (pound)
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Chairman and executive directors
Murray Stuart (retired 31 March 2000) 211,667 - 17,963 229,630 216,863
Sir Ian Robinson 448,000 221,000 19,611 688,611 515,293
Ian Russell 356,667 247,125 24,705 628,497 426,985
Charles Berry (appointed 1 April 1999) 186,667 72,333 15,960 274,960 -
Mike Kinski (resigned 7 April 1998) - - - - 13,276
David Nish (appointed 13 December 1999) 60,109 26,298 4,335 90,742 -
Alan Richardson (appointed 1 April 1999)* 186,667 107,000 1,694 295,361 -
Ken Vowles 256,667 99,458 12,583 368,708 280,193
Duncan Whyte (resigned 31 May 1999) 39,167 - 2,515 41,682 316,920
------------------------------------------------------ --------- ---------- --------- ---------- ----------
1,745,611 773,214 99,366 2,618,191 1,769,530
------------------------------------------------------ --------- ---------- --------- ---------- ----------
Non-executive directors (fees and expenses)
Keith McKennon (appointed 30 November 1999) 21,511 - 11,264 32,775 -
Charles Miller Smith (appointed 1 August 1999) 41,333 - 1,461 42,794 -
Mair Barnes 29,000 - 1,997 30,997 28,462
Sir Ronald Garrick (retired 30 April 1999) 2,958 - - 2,958 30,555
Nolan Karras (appointed 30 November 1999) 9,243 - 10,638 19,881 -
Sir Peter Gregson 32,500 - 2,412 34,912 33,375
Ewen Macpherson 36,500 - 2,007 38,507 36,412
Robert Miller (appointed 30 November 1999) 9,243 - - 9,243 -
John Parnaby 35,875 - 3,748 39,623 31,715
------------------------------------------------------ --------- ---------- --------- ---------- ----------
Total 1,963,774 773,214 132,893 2,869,881 1,930,049
------------------------------------------------------ --------- ---------- --------- ---------- ----------
</TABLE>
Other emoluments - executive directors
* Alan Richardson received an additional (pound)124,300 in respect of foreign
service allowance and other essential costs associated with his assignment as
CEO, PacifiCorp, based in the United States of America.
The emoluments of the highest paid director (Sir Ian Robinson) excluding
pension contributions were (pound)688,611 (1999 (pound)515,293). In addition,
gains on exercise of share options during the year by Sir Ian Robinson
amounted to (pound)nil (1999 (pound)592,966). Pensions contributions made by
the company under approved pension arrangements for Sir Ian Robinson amounted
to (pound)nil (1999 (pound)nil). Sir Ian Robinson also has an entitlement
under the unapproved pension benefits described further in Table 21, note
(iii). The total liabilities for the 15 executives and senior employees
arising in relation to unapproved benefits for service for the year to 31
March 2000 was (pound)600,000 (1999 (pound)448,600). All benefits for the
above are provided on a defined benefit basis.
67 Annual Report & Accounts/Form 20-F
<PAGE>
Remuneration Report of the Directors
Table 21 - Defined Benefits Pension Scheme 1999-00
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------
Transfer value
of increases
Additional after indexation
pension (net of
Transferred in earned in Accrued directors'
benefits the year entitlement contribution)
(pound) (pound) (pound) (pound)
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Chairman and executive directors
Murray Stuart (retired 31 March 2000) -- -- -- --
Sir Ian Robinson 124,990 43,582 226,904 799,754
Ian Russell 9,788 20,331 73,746 249,308
Charles Berry (appointed 1 April 1999) -- 15,391 45,830 193,868
David Nish (appointed 13 December 1999) 16,931 7,297 28,099 66,490
Alan Richardson (appointed 1 April 1999) -- 17,275 55,148 265,504
Ken Vowles 109,347 29,295 154,000 481,960
Duncan Whyte (resigned 31 May 1999) 66,036 62 113,725 --
=============================================== ============== ============ ============ ================
</TABLE>
(i) The accrued entitlement of the highest paid director (Sir Ian Robinson)
was(pound)226,904 (1999(pound)180,080).
(ii) The pension entitlement shown is that which would be paid annually on
retirement based on 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.
(iii) 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. Full
details are included in the Remuneration Report. The pension benefits
disclosed above include approved and unapproved pension arrangements.
(iv) The pension figures for David Nish allow for a full year's pension
accrual.
(v) The increase in accrued pension during the year allows for an increase in
inflation of RPI as measured at December 1999 (1.8%) except in the case of
Duncan Whyte who left service on 31 May 1999.
(vi) The transfer value has been calculated on the basis of actuarial advice in
accordance with Actuarial Guidance Note GN11, less directors'
contributions.
(vii) Transferred in benefits represent pension rights accrued in respect of
previous employments.
Table 22 - Directors' Interests in Shares as at 31 March 2000
<TABLE>
<CAPTION>
Ordinary Shares Share Options Share Options
as at (Executive) as at (Sharesave) as at
31.3.00 1.4.99 31.3.00 1.4.99 31.3.00 1.4.99
or date of or date of or date of
appointment appointment appointment
--------------------------------------- --------------------- -------------------- --------------------
<S> <C> <C> <C> <C> <C> <C>
Murray Stuart (retired 31.3.00) 15,000 15,000 - - - -
--------------------------------------- --------------------- -------------------- --------------------
Sir Ian Robinson 67,412 57,412 - - 6,581 6,581
--------------------------------------- --------------------- -------------------- --------------------
Ian Russell 25,912 15,612 - - - 6,300
--------------------------------------- --------------------- -------------------- --------------------
Charles Berry (appointed 1.4.99) 3,520 - - 5,134 2,232 3,849
--------------------------------------- --------------------- -------------------- --------------------
David Nish (appointed 13.12.99) 2,250 - - - 2,215 2,215
--------------------------------------- --------------------- -------------------- --------------------
Alan Richardson (appointed 1.4.99) 5,107 295 1,450 1,450 4,457 5,404
--------------------------------------- --------------------- -------------------- --------------------
Ken Vowles 119,327 117,327 - - 5,501 5,501
--------------------------------------- --------------------- -------------------- --------------------
Keith McKennon (appointed 30.11.99) 111,462 111,462 580,000+ 580,000+ - -
--------------------------------------- --------------------- -------------------- --------------------
Charles Miller Smith (appointed 1.8.99) 11,000 - - - - -
--------------------------------------- --------------------- -------------------- --------------------
Mair Barnes 1,400 - - - - -
--------------------------------------- --------------------- -------------------- --------------------
Nolan Karras (appointed 30.11.99) 15,331 15,331 - - - -
--------------------------------------- --------------------- -------------------- --------------------
Sir Peter Gregson 975 905 - - - -
--------------------------------------- --------------------- -------------------- --------------------
Ewen Macpherson 5,000 5,000 - - - -
--------------------------------------- --------------------- -------------------- --------------------
Robert Miller (appointed 30.11.99) 9,944 9,944 - - - -
--------------------------------------- --------------------- -------------------- --------------------
John Parnaby 7,002 6,692 - - - -
--------------------------------------- --------------------- -------------------- --------------------
<CAPTION>
Long Term
Incentive Plan as at
31.3.00 1.4.99
or date of
appointment
Vested**Potential*Potential**
--------------------------------------- --------------------------------
<S> <C> <C> <C>
Murray Stuart (retired 31.3.00) -- -- --
--------------------------------------- --------------------------------
Sir Ian Robinson 36,072 142,689 147,295
--------------------------------------- --------------------------------
Ian Russell 27,055 106,617 107,279
--------------------------------------- --------------------------------
Charles Berry (appointed 1.4.99) 9,420 43,346 37,810
--------------------------------------- --------------------------------
David Nish (appointed 13.12.99) -- 22,210 22,210
--------------------------------------- --------------------------------
Alan Richardson (appointed 1.4.99) 9,661 44,863 39,672
--------------------------------------- --------------------------------
Ken Vowles 19,324 78,194 77,869
--------------------------------------- --------------------------------
Keith McKennon (appointed 30.11.99) -- -- --
--------------------------------------- --------------------------------
Charles Miller Smith (appointed 1.8.99) -- -- --
--------------------------------------- --------------------------------
Mair Barnes -- -- --
--------------------------------------- --------------------------------
Nolan Karras (appointed 30.11.99) -- -- --
--------------------------------------- --------------------------------
Sir Peter Gregson -- -- --
--------------------------------------- --------------------------------
Ewen Macpherson -- -- --
--------------------------------------- --------------------------------
Robert Miller (appointed 30.11.99) -- -- --
--------------------------------------- --------------------------------
John Parnaby -- -- --
--------------------------------------- --------------------------------
</TABLE>
* 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.
+ On 9 February 1999, PacifiCorp granted to Keith McKennon under the PacifiCorp
Stock Incentive Plan, stock options to acquire 250,000 shares of PacifiCorp
Common Stock at an option price of $19 with a three-year vesting period,
(commencing one year after the grant date) and a 10-year exercise period.
Following the completion of the merger with PacifiCorp, these options were
converted to options to acquire 145,000 ScottishPower ADSs. One ScottishPower
ADS equates to four ordinary shares and therefore the option, expressed in
ordinary shares is over 580,000 ordinary shares.
68 Annual Report & Accounts/Form 20-F
<PAGE>
Table 23 - Directors' Interests in Performance and Other Share Plans
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
At 1 April 1999 Option Market
(or date of At exercise price Date
appointment 31 March price Date at date of from which
if later) Granted Exercised Lapsed# 2000 (pence) exercised exercise exercisable Expiry date
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Long Term Incentive Plan
Sir Ian Robinson 51,533 - - 15,461 36,072 nil 9 Aug 00 8 Aug 03
53,846 - - - 53,846 nil 16 May 01 15 May 04
41,916 - - - 41,916 nil 7 May 02 6 May 05
46,927 - - 46,927 nil 10 May 03 9 May 06
-------- -------- --------- ------- -------- --------- ----------- ----------- ---------- ------------
147,295 46,927 - 15,461 178,761
========================== ======== ======== ========= ======= ======== ========= =========== =========== ========== ============
Ian Russell 38,650 - - 11,595 27,055 nil 9 Aug 00 8 Aug 03
36,923 - - - 36,923 nil 16 May 01 15 May 04
31,706 - - - 31,706 nil 7 May 02 6 May 05
37,988 - - 37,988 nil 10 May 03 9 May 06
-------- -------- --------- ------- -------- --------- ----------- ----------- ---------- ------------
107,279 37,988 - 11,595 133,672
========================== ======== ======== ========= ======= ======== ========= =========== =========== ========== ============
Charles Berry (appointed
1 April 1999) 13,458 - - 4,038 9,420 nil 9 Aug 00 8 Aug 03
13,269 - - - 13,269 nil 16 May 01 15 May 04
11,083 - - - 11,083 nil 7 May 02 6 May 05
18,994 - - 18,994 nil 10 May 03 9 May 06
-------- -------- --------- ------- -------- --------- ----------- ----------- ---------- ------------
37,810 18,994 - 4,038 52,766
========================== ======== ======== ========= ======= ======== ========= =========== =========== ========== ============
David Nish (appointed 13
December 1999) 10,479 - - - 10,479 nil 7 May 02 6 May 05
11,731 - - - 11,731 nil 10 May 03 9 May 06
-------- -------- --------- ------- -------- --------- ----------- ----------- ---------- ------------
22,210 - - - 22,210
========================== ======== ======== ========= ======= ======== ========= =========== =========== ========== ============
Alan Richardson (appointed
1 April 1999) 13,803 - - 4,142 9,661 nil 9 Aug 00 8 Aug 03
14,423 - - - 14,423 nil 16 May 01 15 May 04
11,446 - - - 11,446 nil 7 May 02 6 May 05
18,994 - - 18,994 nil 10 May 03 9 May 06
-------- -------- --------- ------- -------- --------- ----------- ----------- ---------- ------------
39,672 18,994 - 4,142 54,524
========================== ======== ======== ========= ======= ======== ========= =========== =========== ========== ============
Ken Vowles 27,607 - - 8,283 19,324 nil 9 Aug 00 8 Aug 03
27,692 - - - 27,692 nil 16 May 01 15 May 04
22,570 - - - 22,570 nil 7 May 02 6 May 05
27,932 - - 27,932 nil 10 May 03 9 May 06
-------- -------- --------- ------- -------- --------- ----------- ----------- ---------- ------------
77,869 27,932 - 8,283 97,518
========================== ======== ======== ========= ======= ======== ========= =========== =========== ========== ============
Footnote
Awards made to directors under the Long Term Incentive Plan on 5 May 2000 were
as follows: Sir Ian Robinson 58,153; Ian Russell 45,000; Charles Berry 25,384;
David Nish 23,076; Alan Richardson 25,384; Ken Vowles 31,153.
---------------------------------------------------------------------------------------------------------------------------------
Executive Share Option Scheme
Charles Berry (appointed
1 April 1999) 659 - 659 - - 454.8 11 May 99 554.5 17 Dec 96 16 Dec 03
4,475 - 4,475 - - 335.0 11 May 99 554.5 12 May 98 11 May 05
-------- -------- --------- ------- -------- --------- ----------- ----------- ---------- ------------
5,134 - 5,134 - -
========================== ======== ======== ========= ======= ======== ========= =========== =========== ========== ============
Alan Richardson (appointed
1 April 1999) 1,450 - - - 1,450 454.8 17 Dec 96 16 Dec 03
========================== ======== ======== ========= ======= ======== ========= =========== =========== ========== ============
---------------------------------------------------------------------------------------------------------------------------------
PacifiCorp Stock Incentive Plan+
Keith McKennon (appointed
30 November 1999) 580,000 - - - 580,000 514.7 9 Feb 03 9 Feb 09
========================== ======== ======== ========= ======= ======== ========= =========== =========== ========== ============
</TABLE>
# During the year, the performance period for awards granted under the Long
Term Incentive Plan in 1996 ended and, on the basis of the company's total
shareholder return, 30% of shares under awards lapsed and 70% 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.
+ On 9 February 1999, PacifiCorp granted to Keith McKennon, under the
PacifiCorp Stock Incentive Plan, stock options to acquire 250,000 shares of
PacifiCorp Common Stock at an option price of $19 with a three-year vesting
period (commencing one year after the grant date) and a 10-year exercise
period. Following the completion of the merger with PacifiCorp, these options
were converted to options to acquire 145,000 ScottishPower ADSs. One
ScottishPower ADS equates to four ordinary shares and therefore the option,
expressed in ordinary shares, is over 580,000 ordinary shares. The ADS option
price has been divided by the ADS ratio of four and converted to sterling at
the closing exchange rate on 31 March 2000.
69 Annual Report & Accounts/Form 20-F
<PAGE>
Table 23 - Directors' Interests in Performance and Other Share Plans (continued)
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
At 1 April 1999 Option
(or date of At exercise Market price Date
appointment 31 March price Date at date of from which
if later) Granted Exercised Lapsed# 2000 (pence) exercised exercise exercisable Expiry date
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Sharesave Scheme
------------------ ------------- ------- -------- ------- ------- ---------- ---------- ----------- ----------- -----------
Sir Ian Robinson 6,581 - - - 6,581 262.1 1 Sept 00 28 Feb 01
================== ============= ======= ======== ======= ======= ========== ========== =========== =========== ===========
Ian Russell 6,300 - 6,300 - - 273.8 29 Sept 99 547.0 1 Sept 99 29 Feb 00
================== ============= ======= ======== ======= ======= ========== ========== =========== =========== ===========
Charles Berry 2,520 - 2,520 - - 273.8 6 Sept 99 590.0 1 Sept 99 29 Feb 00
(appointed 1 1,329 - - - 1,329 440.0* 1 Sept 01 28 Feb 02
April 1999) 903 - - 903 429.0* 1 Sept 02 28 Feb 03
------------- ------- -------- ------- ------- ---------- ---------- ----------- ----------- -----------
3,849 903 2,520 - 2,232
================== ============= ======= ======== ======= ======= ========== ========== =========== =========== ===========
David Nish
(appointed
13 December
1999) 2,215 - - - 2,215 440.0 1 Sept 01 28 Feb 02
================== ============= ======= ======== ======= ======= ========== ========== =========== =========== ===========
Alan Richardson
(appointed
1 April 1999) 2,520 - 2,520 - - 273.8 4 Oct 99 557.0 1 Sept 99 29 Feb 00
1,316 - - - 1,316 262.1 1 Sept 00 28 Feb 01
1,568 - - - 1,568 440.0 1 Sept 03 29 Feb 04
1,573 - - 1,573 429.0 1 Sept 04 28 Feb 05
------------- ------- -------- ------- ------- ---------- ---------- ----------- ----------- -----------
5,404 1,573 2,520 - 4,457
================== ============= ======= ======== ======= ======= ========== ========== =========== =========== ===========
Ken Vowles 3,933 - - - 3,933 263.1 1 Sept 01 28 Feb 02
1,568 - - - 1,568 440.0 1 Sept 03 29 Feb 04
------------- ------- -------- ------- ------- ---------- ---------- ----------- ----------- -----------
5,501 - - - 5,501
================== ============= ======= ======== ======= ======= ========== ========== =========== =========== ===========
</TABLE>
* Denotes options granted under a three-year scheme
Notes
(i) The market price of the shares at 31 March 2000 was 508.0 pence and the
range during 1999-00 was 359.5 pence to 601.5 pence.
(ii) The Long Term Incentive Plan supersedes the Executive Share Option Scheme,
and annual awards to acquire shares in ScottishPower at nil or nominal
cost are made to the plan participants up to a maximum value equal to 60%
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 OFFER/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. A percentage of each half of the award will
vest depending upon the company's ranking within each of the relevant
comparator groups. The plan participant may acquire the shares in respect
of the percentage of the award which has vested at any time after the
fourth year up to the seventh year after the grant of the award. No
dividends accrue to participants prior to vesting.
(iii) The option price of executive share options was based on the middle-market
share price on the day immediately preceding the date of grant. For
Sharesave options, the option price is calculated in the same way at the
date of invitation and discounted by 20% in accordance with the Inland
Revenue rules for such schemes.
(iv) The options initially granted to each executive director under the
Executive Share Option Scheme were based on a multiple of three times in
respect of the executive directors, which is in accordance with the limits
set out in current guidelines. Subsequent grants of options were made to
reflect increases in directors' basic salary levels, following periodic
review by the Remuneration Committee of the performance of the company and
the executive directors individually. Executive options are normally
exercisable in a manner which does not attract an income tax liability
provided that exercise occurs between three and 10 years after the date of
grant and at least three years have elapsed from the date of the last `tax
relieved' exercise. Total gains made on exercise of directors' share
options during the year were (pound)42,796 (1999 (pound)592,966).
(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 of (pound)250 per month.
Options under the Sharesave Scheme are, subject to a few exceptions,
exercisable within a period of six months from the date of completion of
the savings contract.
(vi) Duncan Whyte resigned from the Board on 31 May 1999, and his 3,109
Sharesave Options and 93,453 Long Term Incentive Plan awards lapsed.
70 Annual Report & Accounts/Form 20-F
<PAGE>
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
2000. 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 set out on
pages 1 to 70 has been approved by the Board and signed on its behalf by
/s/ Andrew Mitchell
Andrew Mitchell
Secretary 4 May 2000
71 Annual Report & Accounts/Form 20-F>
<PAGE>
Accounts 1999-00
Accounting Policies and 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.
The business segments of the group are defined as follows:
United Kingdom
Generation Wholesale
The generation of electricity from the group's own power stations, the purchase
of external supplies of energy for sale to other business segments of the group
and the sale of electricity to other public electricity suppliers and to the
Pool in England & Wales.
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 England & Wales through the Anglo-Scottish Interconnector.
Energy Supply
The sale of energy to customers, together with related billing and collection
activities.
Southern Water
The provision of water and wastewater services in the south-east of England,
together with related billing and collection activities.
Telecoms
The provision of telecommunications services, Internet access and information
services to national corporates, small and medium-sized enterprises and
residential customers. For the year ended 31 March 2000 this segment comprises
Thus plc as well as the operations of the mobile telephone business which was
sold during the financial year and the fixed radio access telephony operations
from which the group withdrew in 1999-00.
Other
The retailing and servicing of domestic electrical goods and home entertainment
appliances, the provision of electrical contracting, consultancy and corporate
services, gas trading and the businesses of the company's other UK subsidiary
and associated undertakings.
United States
PacifiCorp Domestic Electric
A vertically integrated electric utility that includes the generation,
transmission and distribution and sale of electricity to retail customers in
portions of six western states; Utah, Oregon, Wyoming, Washington, Idaho and
California. The state regulatory commissions and FERC regulate the retail and
wholesale operations. The operations also include wholesale sales and purchase
transactions with various entities.
PacifiCorp Other
Includes the operations of PacifiCorp Financial Services, Inc., a holding
company principally engaged in holding investments in US tax advantaged and
leveraged lease assets (primarily aircraft) and synthetic coal fuel plants. In
addition, this segment includes the businesses of other US subsidiaries not
regulated as electric utilities in the US.
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, telecommunications services, electrical contracting
and consultancy 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 centralised services and rates.
Other definitions
Company or ScottishPower
Scottish Power plc.
Group
Scottish Power plc and its consolidated subsidiaries.
72 Annual Report & Accounts/Form 20-F
<PAGE>
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.
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 35.
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.
One subsidiary undertaking, Powercor, which was acquired as part of the
PacifiCorp group in the year ended 31 March 2000 is excluded from consolidation
because it is held exclusively with a view to resale. This subsidiary is
recorded as a business held for disposal within current assets.
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.
During the year Scottish Power plc (formerly New Scottish Power plc) was
introduced as the new holding company of the ScottishPower group by way of a
Scheme of Arrangement under Section 425 of the Companies Act 1985. This has been
accounted for as a group reconstruction and merger accounting principles have
been applied. As a result of this accounting treatment the share premium account
of the former Scottish Power plc (now renamed Scottish Power UK plc) is
reclassified on consolidation as a merger reserve.
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.
Research and development
Expenditure on research and development is charged to the profit and loss
account as it is incurred.
Interest
Interest on the funding attributable to major 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.
Interest rate swaps
Interest rate swaps are used to manage 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 interest
rate swaps and gains and losses arising on terminations of interest rate swaps
are recognised as returns on investments and servicing of finance. Where
associated debt is not retired in conjunction with the terminations 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.
73 Annual Report & Accounts/Form 20-F
<PAGE>
Accounting Policies and Definitions continued
Interest rate caps
Interest rate caps are used to limit interest rate exposures. The premiums on
these contracts are amortised over the period of the contracts and are disclosed
as interest expense.
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.
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.
Premiums and discounts
Premiums and discounts arising on the early repayment of borrowings are written
off to the profit and loss account as incurred.
Contracts for Differences (CfDs)
The group's objectives, policies and strategy for holding CfDs are outlined in
the Financial Review.
The group uses CfDs to minimise exposure to Pool price variations in England &
Wales. A CfD is a contract between two parties (e.g. a generator and a public
electricity supplier) that requires each party to make or receive payments over
a specific term based on the difference between an agreed price (i.e. the
bilaterally determined strike price) and a price that varies with a specified
commodity index (i.e. the Pool), applied to an agreed quantity (i.e. a number of
kWhs). The average duration for such contracts is approximately one year. The
group's use of such derivative instruments relates directly to the underlying
purchase and sale of electricity to and from the Pool.
The cost or income attributable to CfDs is recorded in the accounting records
when settlement is made. Where delivery under the CfD has taken place prior to
the period end, adjustments are made to account for the known variances between
the contract strike price and the Pool price on the date of delivery.
Taxation
The charge for ordinary taxation is based on the profits for the year and takes
into account deferred taxation, using the liability method, in respect of timing
differences to the extent that it is probable that a liability will crystallise
in the foreseeable future. Such timing differences arise primarily from the
differing treatment for taxation and accounting purposes of provisions and the
depreciation of fixed assets.
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 the merger reserve to reduce it to
zero and thereafter was offset against the profit and loss reserve. 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 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 and other generating stations 35-45
Hydro plant and machinery 20-100
Other buildings 40
Transmission and distribution plant 20-75
Towers, lines and underground cables 40-60
Vehicles, 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. 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 the net interest charge.
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 the net interest
charge.
74 Annual Report & Accounts/Form 20-F
<PAGE>
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.
Long Term Incentive Plan
Shares in the company purchased for the Long Term Incentive Plan 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 Long Term Incentive Plan, 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 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 United
States 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 Statement of Standard Accounting Practice (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 18.
75 Annual Report & Accounts/Form 20-F
<PAGE>
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 the net interest charge.
Foreign currencies
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.
Group
The results and cash flows of overseas subsidiaries are translated to sterling
at the average rate of exchange for the year. The net assets of such
subsidiaries and the goodwill arising on their acquisition are translated to
sterling at the rates of exchange ruling at the balance sheet date. Exchange
differences which relate to the translation of overseas subsidiaries are taken
directly to group reserves and are shown in the Statement of Total Recognised
Gains and Losses.
Exchange rates relevant to the preparation of the Accounts are $1.60/(pound)
(closing rate), $1.61/(pound) (average rate) and $1.61/(pound) (date of
acquisition rate).
A glossary of terms used in the Accounts and their US equivalents is set out on
page 123.
76 Annual Report & Accounts/Form 20-F
<PAGE>
Group Profit and Loss Account
for the year ended 31 March 2000
<TABLE>
<CAPTION>
Continuing Total Except-
operations before ional
before Acquisition exceptional items
acquisition 2000 items 2000
2000 (Note 30) 2000 (Note 4) 2000 1999 1998
Notes (pound)m (pound)m (pound)m (pound)m (pound)m (pound)m (pound)m
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Turnover: group and share of
joint ventures and associates 3,411.4 711.7 4,123.1 - 4,123.1 3,251.5 3,134.1
Less: share of turnover in joint ventures (7.6) - (7.6) - (7.6) (7.3) (3.8)
Less: share of turnover in associates (0.5) - (0.5) - (0.5) (1.9) (2.1)
------------------------------------------------ ---------- ----------- ------------- --------- -------- -------- -------
Group turnover from continuing operations 1 3,403.3 711.7 4,115.0 - 4,115.0 3,242.3 3,128.2
Cost of sales (1,995.4) (429.3) (2,424.7) (173.5) (2,598.2) (1,860.5)(1,850.7)
------------------------------------------------ ---------- ----------- ------------- --------- -------- -------- -------
Gross profit from continuing operations 1,407.9 282.4 1,690.3 (173.5) 1,516.8 1,381.8 1,277.5
Transmission and distribution costs (260.2) (90.7) (350.9) (61.1) (412.0) (258.1) (219.1)
Administrative expenses (366.8) (82.3) (449.1) (24.4) (473.5) (348.8) (303.0)
Other operating income 25.2 15.1 40.3 - 40.3 27.9 29.7
------------------------------------------------ ---------- ----------- ------------- --------- -------- -------- -------
Operating profit from continuing
operations before goodwill
amortisation 809.7 151.7 961.4 (259.0) 702.4 804.0 785.1
Goodwill amortisation (3.6) (27.2) (30.8) - (30.8) (1.2) -
------------------------------------------------ ---------- ----------- ------------- --------- -------- -------- -------
Operating profit from continuing
operations 1,2 806.1 124.5 930.6 (259.0) 671.6 802.8 785.1
Share of operating profit/(loss)
in joint ventures 1.6 - 1.6 (3.3) (1.7) 2.1 1.6
Share of operating profit in associates 0.1 - 0.1 - 0.1 0.2 0.3
------------------------------------------------ ---------- ----------- ------------- --------- -------- -------- -------
807.8 124.5 932.3 (262.3) 670.0 805.1 787.0
Gain on partial disposal of Thus - - - 787.0 787.0 - -
Loss on disposal of and withdrawal
from operations - - - (55.0) (55.0) - -
------------------------------------------------ ---------- ----------- ------------- --------- -------- -------- -------
Profit on ordinary activities before
interest 807.8 124.5 932.3 469.7 1,402.0 805.1 787.0
========== ===========
------------- --------- -------- -------- -------
Net interest charge
- Group (226.1) (15.9) (242.0) (160.8) (147.1)
- Joint ventures (1.4) - (1.4) (0.5) (0.2)
- Associates - - - - (0.1)
------------- --------- -------- -------- -------
5 (227.5) (15.9) (243.4) (161.3) (147.4)
------------------------------------------------ ------------- --------- -------- -------- -------
--------------------------------------------------------------------------------------------------------------------------------
Profit on ordinary activities before
goodwill amortisation and taxation 735.6 453.8 1,189.4 645.0 639.6
Goodwill amortisation (30.8) - (30.8) (1.2) -
--------------------------------------------------------------------------------------------------------------------------------
Profit on ordinary activities before
taxation 704.8 453.8 1,158.6 643.8 639.6
------------- --------- -------- -------- -------
Ordinary taxation
- Group (159.3) (56.0) (215.3) (141.0) (151.5)
- Joint ventures 0.1 - 0.1 (0.5) (0.4)
- Associates - - - (0.1) 0.3
------------- --------- -------- -------- -------
6 (159.2) (56.0) (215.2) (141.6) (151.6)
------------------------------------------------- ------------- --------- -------- -------- -------
Profit after ordinary taxation 545.6 397.8 943.4 502.2 488.0
============= =========
Windfall tax 7 - - (317.0)
------------------------------------------------- -------- -------- -------
Profit after taxation 943.4 502.2 171.0
Minority interests 29 (1.1) 0.6 (0.9)
------------------------------------------------- -------- -------- -------
Profit for the financial year 942.3 502.8 170.1
Dividends 9 (341.4) (267.9) (243.3)
------------------------------------------------- -------- -------- -------
Profit/(loss) retained 28 600.9 234.9 (73.2)
================================================= ======== ======== =======
Earnings per ordinary share 8 67.81p 42.42p 14.41p
Adjusting items - exceptional items (28.63)p - -
- goodwill amortisation 2.22p 0.10p -
- windfall tax - - 26.87p
-------------------------------------------------
Earnings per ordinary share before
exceptional items, goodwill
amortisation and windfall tax 8 41.40p 42.52p 41.28p
================================================= ======== ======== =======
Diluted earnings per ordinary share 8 67.35p 42.00p 14.27p
Adjusting items - exceptional items (28.43)p - -
- goodwill amortisation 2.20p 0.10p -
- windfall tax - - 26.60p
------------------------------------------------- -------- -------- -------
Diluted earnings per ordinary share
before exceptional items, goodwill
amortisation and windfall tax 8 41.12p 42.10p 40.87p
================================================= ======== ========= ========
Dividends per ordinary share 9 24.80p 22.50p 20.40p
================================================= ======== ========= ========
</TABLE>
The Accounting Policies and Definitions on pages 72 to 76, together with the
Notes on pages 79 to 83, 85 to 87, 89 to 117 and 119 to 120 form part of these
Accounts.
77 Annual Report & Accounts/Form 20-F
<PAGE>
Statement of Total Recognised Gains and Losses
for the year ended 31 March 2000
<TABLE>
<CAPTION>
2000 1999 1998
Note (pound)m (pound)m (pound)m
--------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Profit for the financial year 942.3 502.8 170.1
Exchange movement on translation of overseas results and net assets 28 25.1 - -
Surplus on revaluation of assets - - 229.0
----------------------------------------------------------------------------------- ------------ ---------- ----------
Total recognised gains and losses for the financial year 967.4 502.8 399.1
=================================================================================== ============ ========== ==========
</TABLE>
Note of Historical Cost Profits and Losses
for the year ended 31 March 2000
<TABLE>
<CAPTION>
2000 1999 1998
(pound)m (pound)m (pound)m
--------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Profit on ordinary activities before taxation 1,158.6 643.8 639.6
Difference between historical cost depreciation charge
and actual depreciation charge for the year calculated
on the revalued amount of fixed assets 3.4 3.4 1.7
----------------------------------------------------------------------------------- ------------ ---------- ----------
Historical cost profit on ordinary activities before taxation 1,162.0 647.2 641.3
=================================================================================== ============ ========== ==========
Historical cost profit/(loss) retained for the financial year
after taxation, minority interests and dividends 604.3 238.3 (71.5)
=================================================================================== ============ ========== ==========
</TABLE>
Reconciliation of Movements in Shareholders' Funds
for the year ended 31 March 2000
<TABLE>
<CAPTION>
2000 1999 1998
(pound)m (pound)m (pound)m
--------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Profit for the financial year 942.3 502.8 170.1
Dividends (341.4) (267.9) (243.3)
----------------------------------------------------------------------------------- ------------ ---------- ----------
Profit/(loss) retained 600.9 234.9 (73.2)
Other recognised gains and losses 25.1 - 229.0
Share capital issued (net of costs) 4,071.2 3.2 45.5
Share buy-back (including costs) (302.0) - -
Goodwill written off - - (16.2)
Impairment of goodwill previously written off to reserves 7.5 - -
Goodwill realised on disposals 15.3 - -
----------------------------------------------------------------------------------- ------------ ---------- ----------
Net movement in shareholders' funds 4,418.0 238.1 185.1
Opening shareholders' funds 1,945.9 1,707.8 1,522.7
----------------------------------------------------------------------------------- ------------ ---------- ----------
Closing shareholders' funds 6,363.9 1,945.9 1,707.8
=================================================================================== ============ ========== ==========
</TABLE>
The Accounting Policies and Definitions on pages 72 to 76, together with the
Notes on pages 79 to 83, 85 to 87, 89 to 117 and 119 to 120 form part of these
Accounts.
78 Annual Report & Accounts / Form 20-F
<PAGE>
Notes to the Group Profit and Loss Account
for the year ended 31 March 2000
<TABLE>
<CAPTION>
1 Segmental information
------------------------------------------------------------------------------------------------------------------------------------
Total turnover Inter-segment turnover External turnover
2000 1999 1998 2000 1999 1998 2000 1999 1998
(a) Turnover by segment Notes (pound)m (pound)m (pound)m (pound)m (pound)m (pound)m (pound)m (pound)m (pound)m
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
United Kingdom
Generation Wholesale (i) 884.6 914.3 1,014.3 626.8 695.3 764.8 257.8 219.0 249.5
Power Systems (ii) 728.5 716.9 679.8 555.9 615.5 585.2 172.6 101.4 94.6
Energy Supply (ii) 1,908.9 1,985.3 1,949.2 9.6 31.9 13.3 1,899.3 1,953.4 1,935.9
Southern Water 470.5 440.2 453.0 - 0.7 0.4 470.5 439.5 452.6
Telecoms (iii) 243.2 219.9 113.3 40.4 39.2 31.2 202.8 180.7 82.1
Other (i),(ii) 756.5 613.1 410.7 356.2 264.8 97.2 400.3 348.3 313.5
--------------------------------------------------------------------------------------------------- --------- --------- ---------
United Kingdom total 3,403.3 3,242.3 3,128.2
=================================================================================================== ========= ========= =========
United States
PacifiCorp Domestic Electric 691.9 - - - - - 691.9 - -
PacifiCorp Other 19.8 - - - - - 19.8 - -
--------------------------------------------------------------------------------------------------- --------- --------- ---------
United States total 711.7 - -
=================================================================================================== ========= ========= =========
Total (v) 4,115.0 3,242.3 3,128.2
=================================================================================================== ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
Before
goodwill
amortisation
and exceptional Goodwill Exceptional
items amortisation items
2000 2000 2000 2000 1999 1998
(b) Operating profit/(loss) by segment (pound)m (pound)m (pound)m (pound)m (pound)m (pound)m
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
United Kingdom
Generation Wholesale 106.8 - (152.3) (45.5) 115.3 130.8
Power Systems (ii) 361.2 - (57.7) 303.5 350.6 344.2
Energy Supply (ii) 50.6 - (29.4) 21.2 56.7 42.4
Southern Water 286.5 - (8.4) 278.1 262.2 240.7
Telecoms (iii),(iv) (9.5) (3.6) - (13.1) 10.3 4.7
Other (ii) 14.1 - (11.2) 2.9 7.7 22.3
-------------------------------------------------------------------- ------ --------- --------- --------- --------- ---------
United Kingdom total 809.7 (3.6) (259.0) 547.1 802.8 785.1
==================================================================== ====== ========= ========= ========= ========= =========
United States
PacifiCorp Domestic Electric 149.5 (27.2) - 122.3 - -
PacifiCorp Other 2.2 - - 2.2 - -
-------------------------------------------------------------------- ------ --------- --------- --------- --------- ---------
United States total 151.7 (27.2) - 124.5 - -
==================================================================== ====== ========= ========= ========= ========= =========
Total 961.4 (30.8) (259.0) 671.6 802.8 785.1
==================================================================== ====== ========= ========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
Depreciation Impairment
2000 2000 2000 1999 1998
(c) Depreciation by segment (pound)m (pound)m (pound)m (pound)m (pound)m
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
United Kingdom
Generation Wholesale 17.9 44.5 62.4 29.9 19.8
Power Systems (ii) 108.2 25.6 133.8 94.9 79.0
Energy Supply (ii) 20.9 21.9 42.8 6.8 5.4
Southern Water 66.1 - 66.1 59.9 59.7
Telecoms (iii) 23.5 38.5 62.0 15.3 6.1
Other (ii) 7.0 4.9 11.9 17.4 14.6
---------------------------------------------------------------------------- ------- --------- --------- -------- ---------
United Kingdom total 243.6 135.4 379.0 224.2 184.6
============================================================================ ======= ========= ========= ======== =========
United States
PacifiCorp Domestic Electric 75.7 - 75.7 - -
PacifiCorp Other 0.9 - 0.9 - -
---------------------------------------------------------------------------- ------- --------- --------- -------- ---------
United States total 76.6 - 76.6 - -
============================================================================ ======= ========= ========= ======== =========
Total 320.2 135.4 455.6 224.2 184.6
============================================================================ ======= ========= ========= ======== =========
</TABLE>
79 Annual Report & Accounts/Form 20-F
<PAGE>
Notes to the Group Profit and Loss Account
for the year ended 31 March 2000
continued
1 Segmental information continued
--------------------------------------------------------------------------------
(i) The Generation Wholesale segment in 1998 included sales from gas trading
activities which are reported in the Other business segment for 1999 and 2000.
Total turnover for the Generation Wholesale segment in 1998 included
(pound)100.5 million of gas trading sales of which (pound)82.4 million related
to internal sales.
(ii) In view of the continued integration of the Manweb business into existing
ScottishPower businesses, the directors have decided that it is appropriate to
re-classify the former Manweb segmental information for internal management and
group reporting purposes. Prior year comparatives have been restated
accordingly. The effect of this restatement on the previously reported segmental
data is to allocate the former Manweb segment as follows:
<TABLE>
<CAPTION>
Total turnover Inter-segment turnover External turnover Operating profit Depreciation
1999 1998 1999 1998 1999 1998 1999 1998 1999 1998
(pound)m (pound)m (pound)m (pound)m (pound)m (pound)m (pound)m (pound)m (pound)m (pound)m
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Power Systems 246.8 236.8 198.7 194.1 48.1 42.7 88.9 94.7 41.1 35.0
Energy Supply 550.8 613.0 3.1 1.8 547.7 611.2 36.6 27.3 2.0 1.7
Other 0.3 - - - 0.3 - (0.3) 9.3 0.3 0.4
-------------------- -------- --------- --------- --------- -------- --------- --------- --------- --------- ---------
Manweb total 797.9 849.8 201.8 195.9 596.1 653.9 125.2 131.3 43.4 37.1
==================== ======== ========= ========= ========= ======== ========= ========= ========= ========= =========
</TABLE>
(iii) The former ScottishTelecom segment has been re-named as the Telecoms
segment following ScottishTelecom's change of name to Thus plc.
(iv) Goodwill amortisation for the Telecoms segment in 1999 was (pound)1.2
million (1998 (pound)nil).
(v) In the segmental analysis turnover is shown by geographical origin. Turnover
analysed by geographical destination is not materially different.
2 Operating profit
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
2000 1999 1998
Operating profit is stated after charging/(crediting): (pound)m (pound)m (pound)m
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Depreciation and impairment of tangible fixed assets 417.1 224.2 184.6
Amortisation of goodwill 30.8 1.2 -
Release of customer contributions/grants (15.6) (13.6) (20.6)
Research and development 5.5 5.3 5.4
Hire of plant and equipment - operating leases 0.4 4.6 2.6
Hire of other assets - operating leases 44.7 31.0 25.0
Auditors' remuneration for audit of
- group 1.1 0.7 0.6
- company - - -
=========================================================================================== ========= ========= =========
Non-audit fees paid to auditors:
Regulatory advice 1.2 0.9 0.6
Advice on new systems 0.6 - 0.2
General consultancy 3.3 0.9 0.2
Taxation advice 1.2 - -
Due diligence, London Stock Exchange and SEC reporting 3.8 3.6 0.2
------------------------------------------------------------------------------------------- --------- --------- ---------
Total UK and US non-audit fees 10.1 5.4 1.2
Fees relating to partial disposal of Thus plc and charged to exceptional gain on sale (3.1) - -
Fees relating to acquisition of PacifiCorp and included within costs of acquisition (0.4) (3.1) -
------------------------------------------------------------------------------------------- --------- --------- ---------
Charged to operating profit 6.6 2.3 1.2
=========================================================================================== ========= ========= =========
</TABLE>
Non-audit fees of (pound)5.4 million for PricewaterhouseCoopers in 1999 included
(pound)0.7 million paid to Coopers & Lybrand and (pound)0.4 million paid to
Price Waterhouse prior to the date of appointment of PricewaterhouseCoopers as
auditors. Non-audit fees in 1998 comprise solely amounts paid to the previous
auditors Coopers & Lybrand.
Operating profit for the year ended 31 March 2000 is also stated after crediting
net earnings of (pound)1.3 million 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 (pound)10.8
million less finance costs of (pound)9.5 million.
3 Employee information
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------
2000 1999 1998
(a) Employee costs (pound)m (pound)m (pound)m
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Wages and salaries 464.7 329.3 304.6
Social security costs 33.7 25.9 24.0
Pension costs 20.9 18.0 18.1
----------------------------------------------------------------------------------- ---------- --------- ---------
Total employee costs 519.3 373.2 346.7
Less: charged as capital expenditure (89.4) (71.8) (67.8)
----------------------------------------------------------------------------------- ---------- --------- ---------
Charged to the profit and loss account 429.9 301.4 278.9
=================================================================================== ========== ========= =========
</TABLE>
80 Annual Report & Accounts/Form 20-F
<PAGE>
3 Employee information continued
--------------------------------------------------------------------------------
(b) Employee numbers
The year end and average numbers of employees (full-time and part-time) employed
by the group, including executive directors, were:
<TABLE>
<CAPTION>
At 31 March Annual average
Note 2000 1999 1998 2000 1999 1998
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
United Kingdom
Generation Wholesale 710 913 1,020 872 1,009 1,068
Power Systems (i) 4,414 4,444 4,426 4,394 4,472 4,526
Energy Supply (i) 2,147 1,749 1,610 2,059 1,721 1,454
Southern Water 2,143 2,262 2,406 2,203 2,352 2,856
Telecoms 2,516 2,383 1,481 2,379 2,410 1,147
Other (i) 4,395 4,281 4,156 4,466 4,211 4,028
------------------------------------------------------------------- -------- --------- --------- --------- --------- ---------
United Kingdom total 16,325 16,032 15,099 16,373 16,175 15,079
=================================================================== ======== ========= ========= ========= ========= =========
United States
PacifiCorp Domestic Electric 7,681 - - 7,798 - -
PacifiCorp Other 108 - - 116 - -
------------------------------------------------------------------- -------- --------- --------- --------- --------- ---------
United States total 7,789 - - 7,914 - -
=================================================================== ======== ========= ========= ========= ========= =========
Total 24,114 16,032 15,099 24,287 16,175 15,079
=================================================================== ======== ========= ========= ========= ========= =========
</TABLE>
The year end and average numbers of full-time equivalent staff employed by the
group, including executive directors, were:
<TABLE>
<CAPTION>
At 31 March Annual average
2000 1999 1998 2000 1999 1998
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
United Kingdom 15,176 15,145 14,306 13,525 15,196 14,356
United States 7,742 - - 7,791 - -
------------------------------------------------------------------- -------- --------- --------- --------- --------- ---------
Total 22,918 15,145 14,306 21,316 15,196 14,356
=================================================================== ======== ========= ========= ========= ========= =========
</TABLE>
(i) The former Manweb business segment data has been reclassified between Power
Systems, Energy Supply and Other. The effect of this reclassification on the
previously reported segmental data is as follows:
<TABLE>
<CAPTION>
At 31 March Annual average
1999 1998 1999 1998
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Power Systems 1,769 1,690 1,764 1,769
Energy Supply 361 471 403 472
Other 71 87 78 89
----------------------------------------------------------------------------------------- -------- --------- --------- ---------
Manweb total 2,201 2,248 2,245 2,330
========================================================================================= ======== ========= ========= =========
</TABLE>
(c) Directors' remuneration
Details, for each director, of remuneration, pension entitlements and interests
in share options are set out on pages 67 to 70.
4 Exceptional items
<TABLE>
<CAPTION>
2000 1999 1998
Notes (pound)m (pound)m (pound)m
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
(a) Recognised in arriving at operating profit
Reorganisation costs (i) (55.0) - -
Energy contracts (ii) (107.1) - -
Impairment of assets (iii) (96.9) - -
------------------------------------------------------------------------------------------------ ----------- ---------- ---------
(259.0) - -
================================================================================================ =========== ========== =========
(b) Recognised after operating profit
Share of joint venture impairment of assets (3.3) - -
Gain on partial disposal of Thus (iv) 787.0 - -
Loss on disposal of and withdrawal from other Telecoms operations (v) (55.0) - -
------------------------------------------------------------------------------------------------ ----------- ---------- ---------
728.7 - -
Restructuring of debt portfolio (vi) (15.9) - -
Tax on exceptional items (56.0) - -
Windfall tax (vii) - - (317.0)
------------------------------------------------------------------------------------------------ ----------- ---------- ---------
656.8 - (317.0)
------------------------------------------------------------------------------------------------ ----------- ---------- ---------
Total exceptional items (net of tax) 397.8 - (317.0)
================================================================================================ =========== ========== =========
</TABLE>
81 Annual Report & Accounts/Form 20-F
<PAGE>
Notes to the Group Profit and Loss Account
for the year ended 31 March 2000
continued
4 Exceptional items continued
--------------------------------------------------------------------------------
(i) Following the recent regulatory price reviews in the United Kingdom
electricity and water industries, the group is restructuring a large part of its
UK businesses. The exceptional costs principally comprise employee severance
costs.
(ii) Exceptional charges have been recorded for the onerous costs on contracted
energy and fuel purchases which are not expected to be recoverable.
(iii) Provision has been 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.
(iv) 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 represents 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 is after charging goodwill of (pound)48.0 million
of which (pound)13.4 million represents goodwill previously written off to
reserves. The gain on partial disposal of Thus is stated before a taxation
charge of (pound)80.0 million. The post-tax gain on partial disposal of Thus is
(pound)707.0 million.
(v) An exceptional charge of (pound)47.5 million relates 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
assets of (pound)40.5 million. In November 1999 the group disposed of its mobile
telephone business. There was no gain or loss on disposal after charging
(pound)1.9 million of goodwill relating to this business which was originally
charged to reserves. In addition, during the year and prior to the disposal, an
impairment of goodwill of (pound)7.5 million in respect of this business was
charged to the profit and loss account.
(vi) Finance costs 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.
(vii) Details of the exceptional windfall tax are given in Note 7.
All the above exceptional items relate to continuing operations before
acquisition.
5 Net interest charge
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
2000 1999 1998
Analysis of net interest charge (pound)m (pound)m (pound)m
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest on bank loans and overdrafts 24.6 35.5 45.0
Interest on other borrowings 251.1 144.4 115.1
Unwinding of discount 5.4 - -
Finance leases 0.7 - 0.4
------------------------------------------------------------------------------------------------- ---------- --------- ---------
Total interest payable 281.8 179.9 160.5
Interest receivable (9.6) (3.8) (3.1)
Capitalised interest (28.8) (14.8) (10.0)
================================================================================================= ========== ========= =========
Net interest charge 243.4 161.3 147.4
================================================================================================= ========== ========= =========
Interest cover (times) 4.2 5.0 5.3
================================================================================================= ========== ========= =========
</TABLE>
Interest cover is calculated by dividing profit on ordinary activities before
interest (excluding exceptional items and goodwill amortisation) by the net
interest charge (excluding exceptional interest charges).
6 Tax on profit on ordinary activities
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Before
exceptional Exceptional
items items
2000 2000 2000 1999 1998
(pound)m (pound)m (pound)m (pound)m (pound)m
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Corporation tax at 30% (1999 and 1998 31%) 135.7 56.0 191.7 141.6 151.6
Overseas taxation 26.1 - 26.1 - -
----------------------------------------------------------------------------- --------- --------- --------- --------- ---------
161.8 56.0 217.8 141.6 151.6
Deferred tax (2.6) - (2.6) - -
----------------------------------------------------------------------------- --------- --------- --------- --------- ---------
Total tax on profit on ordinary activities 159.2 56.0 215.2 141.6 151.6
============================================================================= ========= ========= ========= ========= =========
</TABLE>
Total tax on profit on ordinary activities before exceptional items and goodwill
amortisation varied from the amount computed by applying the corporation tax
rate to profit on ordinary activities before exceptional items and goodwill
amortisation. The differences were attributable to the following factors:
<TABLE>
<CAPTION>
Before
exceptional
items
2000 1999 1998
% % %
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
UK corporation tax rate 30.0 31.0 31.0
Deferred taxation not provided
- on accelerated capital allowances (5.6) (6.3) (5.6)
- other timing differences (0.2) - 0.2
Permanent UK differences (3.3) (0.7) 4.2
Net effect of different rates of tax in overseas businesses 0.7 - -
Advance corporation tax written back - (2.0) (6.1)
------------------------------------------------------------------------------------------------ ----------- --------- ---------
Effective tax rate on ordinary activities 21.6 22.0 23.7
================================================================================================ =========== ========= =========
</TABLE>
82 Annual Report & Accounts/Form 20-F
<PAGE>
7 Windfall taxation
--------------------------------------------------------------------------------
This related to the group's share of the windfall tax according to the formula
contained within the Finance (No. 2) Act 1997. The first of two equal
instalments was paid on 1 December 1997 and the second instalment was paid on 1
December 1998.
8 Earnings per ordinary share
--------------------------------------------------------------------------------
(a) Earnings per ordinary share have been calculated for all years by dividing
the profit for the financial year by the weighted average number of ordinary
shares in issue during the financial year, based on the following information:
<TABLE>
<CAPTION>
2000 1999 1998
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Profit for the financial year ((pound)m) 942.3 502.8 170.1
Basic weighted average share capital (number of shares, million) 1,389.6 1,185.2 1,180.1
Diluted weighted average share capital (number of shares, million) 1,399.2 1,197.2 1,191.9
================================================================================================== ========= ========= =========
</TABLE>
The difference between the basic and the diluted weighted average share capital
is wholly attributable to outstanding share options.
(b) The calculation of earnings per ordinary share, on a basis which excludes
exceptional items, goodwill amortisation and the windfall tax, is based on the
following adjusted earnings:
<TABLE>
<CAPTION>
2000 1999 1998
(pound)m (pound)m (pound)m
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Profit for the financial year 942.3 502.8 170.1
Adjusting items - exceptional items (397.8) - -
- goodwill amortisation 30.8 1.2 -
- windfall tax - - 317.0
-------------------------------------------------------------------------------------------------- --------- --------- ---------
Adjusted earnings 575.3 504.0 487.1
================================================================================================== ========= ========= =========
</TABLE>
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.
9 Dividends per ordinary share
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------------
2000 1999 1998
pence per pence per pence per
ordinary ordinary ordinary 2000 1999 1998
share share share (pound)m (pound)m (pound)m
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
First interim dividend paid 8.27 7.50 6.80 95.2 89.9 80.4
Second interim dividend paid 8.10 - - 92.1 - -
Third interim dividend paid 2.23 - - 40.7 - -
Final dividend 6.20 15.00 13.60 113.4 178.0 162.9
------------------------------------------------------------------- --------- --------- --------- -------- --------- ---------
Total dividends 24.80 22.50 20.40 341.4 267.9 243.3
=================================================================== ========= ========= ========= ======== ========= =========
</TABLE>
83 Annual Report & Accounts/Form 20-F
<PAGE>
Group Cash Flow Statement
for the year ended 31 March 2000
<TABLE>
<CAPTION>
2000 1999 1998
Notes (pound)m (pound)m (pound)m
---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash inflow from continuing operating activities 11 1,117.5 944.9 1,014.1
Dividends received from associates and joint ventures 0.5 0.9 0.9
Returns on investments and servicing of finance 10 (258.4) (149.9) (146.7)
Ordinary taxation (154.3) (93.7) (134.5)
-------------------------------------------------------------------------------------- ----------- ---------- ----------
Free cash flow before windfall tax 705.3 702.2 733.8
Windfall tax 7 - (157.8) (157.8)
-------------------------------------------------------------------------------------- ----------- ---------- ----------
Free cash flow 705.3 544.4 576.0
Capital expenditure and financial investment 10 (842.3) (683.0) (592.7)
-------------------------------------------------------------------------------------- ----------- ---------- ----------
Cash flow before acquisitions and disposals (137.0) (138.6) (16.7)
Acquisitions and disposals 10 718.8 (77.4) 67.9
Equity dividends paid (406.0) (252.8) (226.0)
-------------------------------------------------------------------------------------- ----------- ---------- ----------
Cash inflow/(outflow) before use of liquid resources and financing 175.8 (468.8) (174.8)
Management of liquid resources 10,14 (9.8) (12.1) (17.5)
Financing
- Issue of ordinary share capital (net of costs) 10 (29.2) 3.2 8.9
- Issue of ordinary share capital by a subsidiary (net of costs) 10 310.0 - -
- Share buy-back (including costs) 10 (302.0) - -
- (Decrease)/increase in debt 10,14 (100.0) 451.0 252.6
----------- ---------- ----------
(121.2) 454.2 261.5
-------------------------------------------------------------------------------------- ----------- ---------- ----------
Increase/(decrease) in cash in year 14 44.8 (26.7) 69.2
====================================================================================== =========== ========== ==========
</TABLE>
Free cash flow represents cash flow from continuing operating activities after
adjusting for dividends received from associates and 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 2000
<TABLE>
<CAPTION>
2000 1999 1998
Notes (pound)m (pound)m (pound)m
---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Increase/(decrease) in cash in year 44.8 (26.7) 69.2
Cash outflow/(inflow) from decrease/(increase) in debt 100.0 (451.0) (252.6)
Cash outflow from movement in liquid resources 9.8 12.1 17.5
-------------------------------------------------------------------------------------- ----------- ---------- ----------
Change in net debt resulting from cash flows 154.6 (465.6) (165.9)
Net debt acquired (2,565.6) (2.7) (0.1)
Net debt disposed 8.5 - 6.7
Loan notes issued - - (3.0)
Exchange (17.3) - -
Other non-cash movements (0.5) (0.3) -
-------------------------------------------------------------------------------------- ----------- ---------- ----------
Movement in net debt in year (2,420.3) (468.6) (162.3)
Net debt at end of previous year (2,421.2) (1,952.6) (1,790.3)
-------------------------------------------------------------------------------------- ----------- ---------- ----------
Net debt at end of year 14 (4,841.5) (2,421.2) (1,952.6)
====================================================================================== =========== ========== ==========
</TABLE>
The Accounting Policies and Definitions on pages 72 to 76, together with the
Notes on pages 79 to 83, 85 to 87, 89 to 117 and 119 to 120 form part of these
Accounts.
84 Annual Report & Accounts/Form 20-F
<PAGE>
Notes to the Group Cash Flow Statement
for the year ended 31 March 2000
<TABLE>
<CAPTION>
10 Analysis of cash flows
----------------------------------------------------------------------------------------------------------------------------------
2000 1999 1998
(pound)m (pound)m (pound)m
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(a) Returns on investments and servicing of finance
Interest received 9.7 3.5 2.7
Interest paid (265.7) (153.4) (149.0)
Interest element of finance lease rental payments - - (0.4)
Dividends paid to minority interests (2.4) - -
---------------------------------------------------------------------------------------- ----------- ---------- ----------
Net cash outflow for returns on investments and servicing of finance (258.4) (149.9) (146.7)
======================================================================================== =========== ========== ==========
(b) Capital expenditure and financial investment
Purchase of tangible fixed assets (917.7) (745.1) (664.6)
Deferred income received 55.5 47.8 57.9
Sale of tangible fixed assets 26.5 20.4 26.4
Purchase of fixed asset investments (6.6) (6.1) (12.4)
---------------------------------------------------------------------------------------- ----------- ---------- ----------
Net cash outflow for capital expenditure and financial investment (842.3) (683.0) (592.7)
======================================================================================== =========== ========== ==========
(c) Acquisitions and disposals
Purchase of subsidiary undertakings 2.1 (77.4) (0.4)
Sale of subsidiary businesses (3.7) - 68.3
Partial disposal of Thus 720.4 - -
---------------------------------------------------------------------------------------- ----------- ---------- ----------
Net cash inflow/(outflow) from acquisitions and disposals 718.8 (77.4) 67.9
======================================================================================== =========== ========== ==========
(d) Management of liquid resources*
Cash outflow in relation to short-term deposits and other short-term investments (9.8) (12.1) (17.5)
---------------------------------------------------------------------------------------- ----------- ---------- ----------
Net cash outflow for management of liquid resources (9.8) (12.1) (17.5)
======================================================================================== =========== ========== ==========
(e) Financing
----------- ---------- ----------
Issue of ordinary share capital 3.8 3.2 8.9
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) - -
----------- ---------- ----------
(21.2) 3.2 8.9
Debt due within one year:
----------- ---------- ----------
- net repayment of uncommitted facilities (75.0) (39.1) (81.8)
- net commercial paper redeemed (285.8) (174.9) (31.0)
- medium-term notes/private placements (3.3) (62.5) 62.5
- redemption of loan notes (8.0) (1.1) (39.4)
- European Investment Bank loans 0.8 (10.0) 1.3
- mortgages 4.2 - -
Debt due after one year:
- net repayment of committed facilities - - (200.6)
- medium-term notes/private placements 178.1 197.5 240.9
- European Investment Bank loans 86.2 51.2 20.0
- 5.875% euro-US dollar bond issue - - 182.9
- variable coupon bond issue - - 99.6
- 8.375% euro-sterling bond issue - - 0.2
- 6.750% euro-sterling bond issue - 247.0 -
- 5.250% deutschmark bond issue - 245.5 -
- 11.457% sterling bond (142.0) - -
- 6.625% euro-sterling bond issue 197.9 - -
- mortgages (53.1) - -
Capital element of finance lease rental payments - (2.6) (2.0)
----------- ---------- ----------
(Decrease)/increase in debt (100.0) 451.0 252.6
---------------------------------------------------------------------------------------- ----------- ---------- ----------
Net cash (outflow)/inflow from financing (121.2) 454.2 261.5
======================================================================================== =========== ========== ==========
</TABLE>
* Liquid resources include term deposits of less than one year, commercial paper
and other short-term investments.
85 Annual Report & Accounts/Form 20-F
<PAGE>
Notes to the Group Cash Flow Statement
for the year ended 31 March 2000
continued
<TABLE>
<CAPTION>
11 Reconciliation of operating profit to net cash inflow from continuing operating activities
----------------------------------------------------------------------------------------------------------------------------------
2000 1999 1998
(pound)m (pound)m (pound)m
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating profit 671.6 802.8 785.1
Depreciation and amortisation 448.0 225.4 184.6
Profit on sale of tangible fixed assets and disposal of businesses (19.8) (18.6) (21.7)
Release of deferred income (15.6) (13.6) (20.6)
Movements in provisions for liabilities and charges 103.1 (7.3) (5.1)
Decrease/(increase) in stocks 20.1 18.4 (32.0)
(Increase)/decrease in debtors (32.1) (68.7) 81.9
(Decrease)/increase in creditors (57.8) 6.5 41.9
---------------------------------------------------------------------------------------- ---------- --------- ---------
Net cash inflow from continuing operating activities 1,117.5 944.9 1,014.1
======================================================================================== ========== ========= =========
12 Effect of acquisitions and disposals on cash flows
----------------------------------------------------------------------------------------------------------------------------------
Acquisition Disposal Acquisitions Disposals
2000 2000 1999 1998
(pound)m (pound)m (pound)m (pound)m
----------------------------------------------------------------------------------------------------------------------------------
Cash flow from operating activities 242.4 (0.5) 21.1 10.0
Returns on investments and servicing of finance (40.6) (0.5) 0.3 (0.7)
Taxation 7.6 0.5 (0.1) --
Capital expenditure and financial investment (103.1) 0.1 (10.6) (5.3)
Equity dividends paid (9.8) -- -- --
Management of liquid resources -- -- (9.2) --
Financing (71.0) -- (1.6) 2.1
----------------------------------------------------------------------------- ---------- --------- --------- ---------
Increase/(decrease) in cash 25.5 (0.4) (0.1) 6.1
============================================================================= ========== ========= ========= =========
</TABLE>
The analysis of cash flows of the acquisition in 2000 relates to the
post-acquisition cash flows of PacifiCorp. The analysis of cash flows of the
disposal in 2000 relates to the pre-disposal cash flows for the mobile telephone
business that was sold during the year. The analysis of cash flows of the
acquisitions in 1999 relates to the post-acquisition cash flows of Demon
Internet Limited and Watermark Games Limited. There were no disposals in 1999.
The analysis of cash flows from disposals in 1998 relates to the cash flows
during the period for the Southern Water non-core businesses that were sold
during the year. The cash flows from the acquisitions in 1998 were not material.
<TABLE>
<CAPTION>
13 Analysis of cash flows in respect of acquisitions and disposals
----------------------------------------------------------------------------------------------------------------------------------
Acquisition Disposal Acquisitions Disposals
2000 2000 1999 1998
(pound)m (pound)m (pound)m (pound)m
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash consideration including expenses (28.4) - (69.7) 70.2
Cash at bank and in hand acquired/(disposed) 41.4 (3.7) 1.4 (1.9)
Pre-completion dividend to former PacifiCorp shareholders (9.8) - - -
Deferred consideration in respect of prior year acquisitions (1.1) - (9.1) -
----------------------------------------------------------------------------- ---------- --------- --------- ---------
2.1 (3.7) (77.4) 68.3
============================================================================= ========== ========= ========= =========
<CAPTION>
The cash flows arising on the group's partial disposal of its interest in Thus (net of expenses) were as follows:
2000
(pound)m
----------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Cash received on primary issue by Thus 310.0
Cash received on sale of shares by ScottishPower 720.4
-------------------------------------------------------------------------------------------------------------------- ---------
Total 1,030.4
==================================================================================================================== ---------
</TABLE>
86 Annual Report & Accounts/Form 20-F
<PAGE>
<TABLE>
<CAPTION>
14 Analysis of net debt
----------------------------------------------------------------------------------------------------------------------------------
At Acquisitions Other At
1 April (excl. cash & non-cash 31 March
1998 Cash flow overdrafts) changes 1999
1998 - 99 (pound)m (pound)m (pound)m (pound)m (pound)m
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
-----------
Cash at bank 58.8 (20.7) - - 38.1
Overdrafts (9.3) (6.0) - - (15.3)
-----------
(26.7)
-----------
Debt due after 1 year (1,032.4) (741.2) (0.1) 89.2 (1,684.5)
Debt due within 1 year (1,026.4) 287.6 - (89.5) (828.3)
Finance leases - 2.6 (2.6) - -
-----------
(451.0)
Other deposits 56.7 12.1 - - 68.8
--------------------------------------------------------- ----------- ----------- ----------- ----------- -----------
Total (1,952.6) (465.6) (2.7) (0.3) (2,421.2)
========================================================= =========== =========== =========== =========== ===========
</TABLE>
'Other non-cash changes' to net debt represents the movement in debt of
(pound)89.5 million due after more than one year to due within one year and
amortisation of finance costs of (pound)0.3 million.
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------------------
At Acquisition Disposal Other At
1 April (excl. cash & (excl. cash & non-cash 31 March
1999 Cash flow overdrafts) overdrafts) Exchange changes 2000
1999 - 00 (pound)m (pound)m (pound)m (pound)m (pound)m (pound)m (pound)m
--------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
----------
Cash at bank 38.1 68.6 - - - - 106.7
Overdrafts (15.3) (23.8) - - - - (39.1)
----------
44.8
----------
Debt due after 1 year (1,684.5) (267.1) (2,349.6) - (15.9) (0.5) (4,317.6)
Debt due within 1 year (828.3) 367.1 (199.1) 8.5 (1.2) - (653.0)
Finance leases - - (16.9) - (0.2) - (17.1)
----------
100.0
Other deposits 68.8 9.8 - - - - 78.6
--------------------------------------- ---------- ---------- ----------- ---------- ---------- ---------- ----------
Total (2,421.2) 154.6 (2,565.6) 8.5 (17.3) (0.5) (4,841.5)
======================================= ========== ========== =========== ========== ========== ========== ==========
</TABLE>
'Other non-cash changes' to net debt represents amortisation of finance costs of
(pound)0.5 million.
87 Annual Report & Accounts/Form 20-F
<PAGE>
Group Balance Sheet
as at 31 March 2000
<TABLE>
<CAPTION>
2000 1999
Notes (pound)m (pound)m
---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Fixed assets
Intangible assets 17 1,618.0 71.3
Tangible assets 18 10,683.3 5,295.1
Investments
--------------
- Investments in joint ventures:
Share of gross assets 95.9 54.2
Share of gross liabilities (76.3) (29.8)
--------------
19.6 24.4
- Investments in associates 5.4 5.9
- Other investments 207.6 43.4
--------------
19 232.6 73.7
---------------------------------------------------------------------------- -------------- ------------
12,533.9 5,440.1
---------------------------------------------------------------------------- -------------- ------------
Current assets
Businesses held for disposal 30 563.2 -
Stocks 20 202.3 125.8
Debtors 21
-------------
- Gross debtors 1,732.9 559.3
- Less non-recourse financing (271.9) -
-------------
1,461.0 559.3
Short-term bank and other deposits 185.3 106.9
---------------------------------------------------------------------------- -------------- ------------
2,411.8 792.0
---------------------------------------------------------------------------- -------------- ------------
Creditors: amounts falling due within one year
Loans and other borrowings 22 (692.1) (843.6)
Other creditors 23 (2,159.3) (1,332.8)
---------------------------------------------------------------------------- -------------- ------------
(2,851.4) (2,176.4)
---------------------------------------------------------------------------- -------------- ------------
Net current liabilities (439.6) (1,384.4)
---------------------------------------------------------------------------- -------------- ------------
Total assets less current liabilities 12,094.3 4,055.7
Creditors: amounts falling due after more than one year
Loans and other borrowings 22 (4,334.7) (1,684.5)
Provisions for liabilities and charges 24 (669.2) (30.8)
Deferred income 26 (426.8) (393.2)
---------------------------------------------------------------------------- -------------- ------------
Net assets 15 6,663.6 1,947.2
============================================================================ ============== ============
Called up share capital 27,28 923.8 599.4
Share premium 28 3,733.8 -
Revaluation reserve 28 220.5 223.9
Capital redemption reserve 28 18.3 -
Merger reserve 28 406.4 394.0
Profit and loss account 28 1,061.1 728.6
---------------------------------------------------------------------------- -------------- ------------
Equity shareholders' funds 28 6,363.9 1,945.9
Minority interests (including non-equity) 29 299.7 1.3
---------------------------------------------------------------------------- -------------- ------------
Capital employed 6,663.6 1,947.2
============================================================================ ============== ============
Net asset value per ordinary share 16 344.9p 161.2p
============================================================================ ============== ============
</TABLE>
Approved by the Board on 4 May 2000 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 72 to 76, together with the
Notes on pages 79 to 83, 85 to 87, 89 to 117 and 119 to 120 form part of these
Accounts.
88 Annual Report & Accounts/Form 20-F
<PAGE>
Notes to the Group Balance Sheet
as at 31 March 2000
<TABLE>
<CAPTION>
15 Segmental information
2000 1999
(a) Net assets/(liabilities) by segment Notes (pound)m (pound)m
--------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
United Kingdom
Generation Wholesale 201.0 322.7
Power Systems (i) 1,955.2 1,933.9
Energy Supply (i) 200.9 139.3
Southern Water 1,618.0 1,612.4
Telecoms (ii) 377.7 307.6
Other (i), (iii) 56.8 1.6
---------------------------------------------------------------------------- -------------- ------------
United Kingdom total 4,409.6 4,317.5
============================================================================ ============== ============
United States
PacifiCorp Domestic Electric 6,141.7 -
PacifiCorp Other 447.1 -
---------------------------------------------------------------------------- -------------- ------------
United States total 6,588.8 -
============================================================================ ============== ============
Unallocated net liabilities (iv) (4,334.8) (2,370.3)
---------------------------------------------------------------------------- -------------- ------------
Total 6,663.6 1,947.2
============================================================================ ============== ============
<CAPTION>
2000 1999
(b) Capital expenditure by segment (v) (pound)m (pound)m
--------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
United Kingdom
Generation Wholesale 32.0 42.5
Power Systems (i) 216.5 249.4
Energy Supply (i) 41.4 25.7
Southern Water 362.6 356.0
Telecoms (ii) 164.8 103.2
Other (i) 27.8 25.2
---------------------------------------------------------------------------- -------------- ------------
United Kingdom total 845.1 802.0
============================================================================ ============== ============
United States
PacifiCorp Domestic Electric 97.2 -
PacifiCorp Other 0.1 -
---------------------------------------------------------------------------- -------------- ------------
United States total 97.3 -
============================================================================ ============== ============
Total 942.4 802.0
============================================================================ ============== ============
<CAPTION>
2000 1999
(c) Total assets by segment (pound)m (pound)m
--------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
United Kingdom
Generation Wholesale 442.4 489.4
Power Systems (i) 2,496.3 2,442.0
Energy Supply (i) 487.5 432.3
Southern Water 2,575.4 2,291.1
Telecoms (ii) 450.0 412.0
Other (i) 73.4 165.3
---------------------------------------------------------------------------- -------------- ------------
United Kingdom total 6,525.0 6,232.1
============================================================================ ============== ============
United States
PacifiCorp Domestic Electric 7,191.6 -
PacifiCorp Other 1,229.1 -
---------------------------------------------------------------------------- -------------- ------------
United States total 8,420.7 -
============================================================================ ============== ============
Total 14,945.7 6,232.1
============================================================================ ============== ============
</TABLE>
(i) In view of the continued integration of the Manweb business into existing
ScottishPower businesses, the directors have decided that it is appropriate to
re-classify the former Manweb segmental information for internal management and
group reporting purposes. Prior year comparatives have been restated
accordingly. The effect of this restatement on the previously reported segmental
data for 1999 is to allocate the former Manweb segment as follows:
<TABLE>
<CAPTION>
Net Capital Total
assets expenditure assets
1999 1999 1999
(pound)m (pound)m (pound)m
--------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Power Systems 699.2 99.6 930.9
Energy Supply 41.5 1.6 110.8
Other (68.3) - 10.0
---------------------------------------------------------------------------- -------------- ------------
Manweb total 672.4 101.2 1,051.7
============================================================================ ============== ============
</TABLE>
89 Annual Report & Accounts/Form 20-F
<PAGE>
Notes to the Group Balance Sheet
as at 31 March 2000
continued
15 Segmental information continued
--------------------------------------------------------------------------------
(ii) The former ScottishTelecom segment has been re-named as the Telecoms
segment following ScottishTelecom's change of name to Thus plc.
(iii) The net assets of the Appliance Retailing business, included within the
Other business segment, excluding short-term bank and other deposits of
(pound)48.8 million (1999 (pound)37.2 million), are (pound)9.1 million (1999
(pound)18.6 million).
(iv) Unallocated net liabilities include net debt, dividends payable, tax
liabilities, investments and businesses held for disposal.
(v) Capital expenditure by business segment is stated gross of capital grants
and customer contributions.
16 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 years
(after adjusting for the effect of shares held in trust for the group's
Sharesave Scheme):
<TABLE>
<CAPTION>
2000 1999
----------------------------------------------------------------------------------------------------------------------------------
Net assets (as adjusted) ((pound)million) 6,304.4 1,912.1
Number of ordinary shares in issue at year end (as adjusted) (number of shares, million) 1,827.9 1,185.0
========================================================================================================= ========= =========
17 Intangible fixed assets
----------------------------------------------------------------------------------------------------------------------------------
Goodwill
Note (pound)m
----------------------------------------------------------------------------------------------------------------------------------
Cost:
At 1 April 1999 72.5
Acquisition 30 1,601.3
Disposals (36.4)
Exchange 11.0
---------------------------------------------------------------------------------------------------------- -------- ---------
At 31 March 2000 1,648.4
========================================================================================================== ======== =========
Amortisation:
At 1 April 1999 1.2
Amortisation for the year 30.8
Disposals (1.8)
Exchange 0.2
---------------------------------------------------------------------------------------------------------- -------- ---------
At 31 March 2000 30.4
========================================================================================================== ======== =========
Net book value:
At 31 March 2000 1,618.0
At 31 March 1999 71.3
At 31 March 1998 -
---------------------------------------------------------------------------------------------------------- -------- ---------
18 Tangible fixed assets
----------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Water
Land and infrastructure Plant and Vehicles and
buildings assets machinery equipment Total
Year ended 31 March 1999 (pound)m (pound)m (pound)m (pound)m (pound)m
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Cost or valuation:
At 1 April 1998 847.5 852.2 3,644.7 510.7 5,855.1
Additions 100.2 145.2 392.8 163.8 802.0
Acquisitions - - 6.0 1.0 7.0
Grants and contributions - (5.6) - - (5.6)
Disposals (7.0) (0.4) (11.4) (16.8) (35.6)
------------------------------------------------- --------- --------- --------- --------- ---------
At 31 March 1999 940.7 991.4 4,032.1 658.7 6,622.9
================================================= ========= ========= ========= ========= =========
Depreciation:
At 1 April 1998 152.6 29.1 857.3 92.2 1,131.2
Charge for the year 20.3 19.7 119.4 64.8 224.2
Disposals (2.0) (0.4) (9.7) (15.5) (27.6)
------------------------------------------------- --------- --------- --------- --------- ---------
At 31 March 1999 170.9 48.4 967.0 141.5 1,327.8
================================================= ========= ========= ========= ========= =========
Net book value:
At 31 March 1999 769.8 943.0 3,065.1 517.2 5,295.1
At 31 March 1998 694.9 823.1 2,787.4 418.5 4,723.9
================================================= ========= ========= ========= ========= =========
</TABLE>
90 Annual Report & Accounts/Form 20-F
<PAGE>
<TABLE>
<CAPTION>
18 Tangible fixed assets continued
-----------------------------------------------------------------------------------------------------------------------------------
Water
Land and infrastructure Plant and Vehicles and
buildings assets machinery equipment Total
Year ended 31 March 2000 (pound)m (pound)m (pound)m (pound)m (pound)m
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Cost or valuation:
At 1 April 1999 940.7 991.4 4,032.1 658.7 6,622.9
Additions 102.7 109.1 532.9 197.7 942.4
Acquisition 180.5 - 4,268.7 433.4 4,882.6
Grants and contributions - (6.3) - - (6.3)
Disposals (7.4) (0.5) (25.2) (12.3) (45.4)
Exchange 1.3 - 30.0 3.2 34.5
---------------------------------------------------------------- --------- --------------- ---------- ------------- ----------
At 31 March 2000 1,217.8 1,093.7 8,838.5 1,280.7 12,430.7
================================================================ ========= =============== ========== ============= ==========
Depreciation:
At 1 April 1999 170.9 48.4 967.0 141.5 1,327.8
Charge for the year 65.5 20.2 133.7 100.8 320.2
Impairment 2.4 - 59.9 73.1 135.4
Disposals (1.8) (0.5) (25.2) (9.2) (36.7)
Exchange - - 0.5 0.2 0.7
---------------------------------------------------------------- --------- --------------- ---------- ------------- ----------
At 31 March 2000 237.0 68.1 1,135.9 306.4 1,747.4
================================================================ ========= =============== ========== ============= ==========
Net book value:
At 31 March 2000 980.8 1,025.6 7,702.6 974.3 10,683.3
At 31 March 1999 769.8 943.0 3,065.1 517.2 5,295.1
================================================================ ========= =============== ========== ============= ==========
<CAPTION>
2000 1999
Historical cost analysis (pound)m (pound)m
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cost 12,278.7 6,470.9
Depreciation based on cost (1,815.9) (1,399.7)
-------------------------------------------------------------------------------------------------------- ------------- ----------
Net book value based on cost 10,462.8 5,071.2
======================================================================================================== ============= ==========
<CAPTION>
2000 1999
Included in the cost or valuation of tangible fixed assets above are: Notes (pound)m (pound)m
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Major assets in the course of construction 706.4 537.2
Grants and contributions in respect of water infrastructure assets (24.3) (18.0)
Capitalised interest (ii) 61.6 32.8
Assets not subject to depreciation (iii) 59.1 60.6
======================================================================================================== ============= ==========
</TABLE>
(i) The Manweb distribution and Southern Water operational assets were revalued
by the directors on 30 September 1997. The valuations have 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 2000 was (pound)2,253.1 million (1999 (pound)2,311.2 million).
(ii) Interest on the funding attributable to major capital projects was
capitalised during the year at a rate of 8% (1999 9%) in the United Kingdom and
7% in the United States.
(iii) Assets not subject to depreciation are land. Land and buildings held by
the group are predominantly freehold.
(iv) The historical cost of fully depreciated tangible fixed assets still in use
was (pound)256.3 million (1999 (pound)241.2 million).
(v) 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 software costs capitalised are (pound)333.1 million (1999
(pound)190.7 million). The depreciation charge, including impairment, was
(pound)78.3 million (1999 (pound)10.9 million, 1998 (pound)7.9 million).
(vi) The net book value of tangible fixed assets under finance leases at 31
March 2000 was (pound)17.0 million (1999 (pound)nil). The charge for
depreciation against these assets during the year was less than (pound)0.1
million.
(vii) Assets which have been impaired have been valued on the basis of their
estimated recoverable amounts.
The impairment charge of (pound)135.4 million has been charged to the profit and
loss account as follows: cost of sales, (pound)44.5 million, transmission and
distribution costs, (pound)38.5 million, administrative expenses, (pound)13.9
million and loss from withdrawal from operations, (pound)38.5 million.
91 Annual Report & Accounts/Form 20-F
<PAGE>
Notes to the Group Balance Sheet
as at 31 March 2000
continued
<TABLE>
<CAPTION>
19 Fixed asset investments
----------------------------------------------------------------------------------------------------------------------------------
Associated Own
Joint ventures undertaking shares held Other
Shares Loans Shares Loans under trust investments Total
(pound)m (pound)m (pound)m (pound)m (pound)m (pound)m (pound)m
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Cost or valuation:
At 1 April 1998 2.2 13.6 6.7 0.7 41.6 2.5 67.3
Additions - 7.5 - - 2.8 0.1 10.4
Share of retained profit 1.1 - 0.1 - - - 1.2
Disposals and other - - (0.9) (0.7) (2.8) (0.8) (5.2)
----------------------------------------------- -------- --------- --------- --------- ------------- ------------ ---------
At 31 March 1999 3.3 21.1 5.9 - 41.6 1.8 73.7
Additions - 1.0 - - 36.9 12.6 50.5
Acquisitions - - - - 0.4 123.4 123.8
Share of retained (loss)/profit (3.0) - 0.1 - - - (2.9)
Disposals and other - (2.8) (0.6) - (8.5) (1.4) (13.3)
Exchange - - - - - 0.8 0.8
----------------------------------------------- -------- --------- --------- --------- ------------- ------------ ---------
At 31 March 2000 0.3 19.3 5.4 - 70.4 137.2 232.6
=============================================== ======== ========= ========= ========= ============= ============ =========
</TABLE>
The principal subsidiary undertakings, joint ventures and associated
undertakings are listed on page 120.
(a) Shares in the company held under trust during the year are as follows:
<TABLE>
<CAPTION>
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 1998 during year during year 1999 1999 1999
Notes waived (000s) (000s) (000s) (000s) (pound)m (pound)m
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Long Term Incentive Plan (i) no 1,394 483 - 1,877 0.9 10.1
ScottishPower Sharesave Scheme (ii) yes 13,918 - (1,128) 12,790 6.4 69.1
----------------------------------------------------------- --------- ------------ ------------ --------- --------- ---------
15,312 483 (1,128) 14,667 7.3 79.2
=========================================================== ========= ============ ============ ========= ========= =========
<CAPTION>
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 1999 during year during year 2000 2000 2000
Notes waived (000s) (000s) (000s) (000s) (pound)m (pound)m
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Long Term Incentive Plan (i) no 1,877 564 - 2,441 1.2 12.4
ScottishPower Sharesave Scheme (ii) yes 12,790 10,253 (3,402) 19,641 9.8 99.7
PacifiCorp Stock Incentive Plan (iii) no - 108* (50) 58 - 0.3
----------------------------------------------------------- --------- ------------ ------------ --------- --------- ---------
14,667 10,925 (3,452) 22,140 11.0 112.4
=========================================================== ========= ============ ============ ========= ========= =========
</TABLE>
*For the PacifiCorp Stock Incentive Plan this represents the balance of shares
at 29 November 1999.
(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 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 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 27.
(iii) 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. The figures relating to the
PacifiCorp Stock Incentive Plan relate to the period between the date of
acquisition and 31 March 2000 and represent the unvested and unforfeited shares
of restricted stock held.
<TABLE>
<CAPTION>
20 Stocks
-----------------------------------------------------------------------------------------------------------------------------------
2000 1999
pound)m (pound)m
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Raw materials and consumables 98.5 44.8
Fuel stocks 47.0 30.0
Work in progress 11.6 10.2
Finished goods and goods for resale 45.2 40.8
------------------------------------------------------------------------------------------------------------- --------- ---------
202.3 125.8
============================================================================================================= ========= =========
</TABLE>
Fuel stocks include gas delivered to third parties under sale and repurchase
agreements to match gas usage requirements with existing gas purchase
obligations. Under the provisions of FRS 5, the cost under such agreements of
gas delivered to third parties is shown as fuel stocks, and amounts payable to
third parties totalling (pound)6.8 million (1999 (pound)17.4 million) are
included in accrued expenses in Note 23.
92 Annual Report & Accounts/Form 20-F
<PAGE>
21 Debtors
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------------
2000 1999
Notes (pound)m (pound)m
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(a) Amounts falling due within one year:
Trade debtors (i) 482.2 260.1
---------- ----------
Amounts receivable under finance leases (ii) 43.7 0.2
Less non-recourse financing (17.2) -
---------- ----------
26.5 0.2
Prepayments and accrued income 391.6 227.8
US regulatory assets 46.7 -
Other debtors 107.8 64.7
----------------------------------------------------------------------------------------------------------- ---------- ----------
1,054.8 552.8
(b) Amounts falling due after more than one year:
---------- ----------
Amounts receivable under finance leases (ii) 435.5 2.7
Less non-recourse financing (254.7) -
---------- ----------
180.8 2.7
US regulatory assets 71.0 -
Other debtors 154.4 3.8
----------------------------------------------------------------------------------------------------------- ---------- ----------
1,461.0 559.3
=========================================================================================================== ========== ==========
</TABLE>
(i) Trade debtors are stated net of provisions for doubtful debts of(pound)69.6
million (1999(pound)49.0 million).
(ii) The group's finance leases in the United States which are financed by
non-recourse borrowing qualify for linked presentation under FRS 5. 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. Amounts receivable under
finance leases at 31 March 2000 of (pound)435.5 million are due as follows:
within 1-2 years, (pound)36.7 million; within 2-3 years, (pound)98.0 million;
within 3-4 years, (pound)43.0 million; within 4-5 years, (pound)44.5 million and
after 5 years, (pound)213.3 million. Total amounts receivable under finance
leases during the year were (pound)32.0 million (1999 (pound)0.4 million).
22 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 48 to 59. The analyses of financial instruments in this Note do
not include short-term debtors and creditors as permitted by FRS 13.
<TABLE>
<CAPTION>
Weighted
average
interest rate 2000 1999
(a) Analysis by instrument Notes 2000 1999 (pound)m (pound)m
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Unsecured debt of UK businesses
Bank overdraft - - 23.7 15.3
Uncommitted bank loan 5.3% 7.0% 89.3 172.7
Commercial paper (i) 5.4% 7.1% 289.5 553.4
Medium-term notes/private placements (ii) 5.9% 7.1% 613.2 438.4
Loan notes (iii) 5.4% 6.8% 8.7 16.6
European Investment Bank loans (iv) 7.9% 9.1% 304.6 217.6
11.457% sterling bond 2001 (held by HM Treasury) 11.5% 11.5% - 142.0
5.875% euro-US dollar bond 2003 6.9% 6.9% 183.2 183.0
Variable coupon bond 2008 6.8% 6.8% 99.7 99.6
5.250% deutschmark bond 2008 6.8% 6.8% 245.6 245.5
6.625% euro-sterling bond 2010 6.7% - 197.9 -
8.375% euro-sterling bond 2017 8.4% 8.4% 197.1 197.0
6.750% euro-sterling bond 2023 6.8% 6.8% 247.0 247.0
Unsecured debt of US businesses
Bank overdraft - - 15.4 -
Commercial paper (i) 6.2% - 68.3 -
PacifiCorp Group Holdings Senior Notes 6.9% - 156.1 -
Junior subordinated debentures (v) 8.8% - 105.9 -
Preferred securities (vi) 8.6% - 206.9 -
Pollution control revenue bonds (ix) 3.8% - 279.1 -
Finance leases (vii) 11.9% - 17.1 -
----------------------------------------------------------------------------------------------------------- ---------- ----------
Unsecured debt 3,348.3 2,528.1
=========================================================================================================== ========== ==========
Secured debt of US businesses
First mortgage and collateral trust bonds (viii) 7.6% - 1,443.3 -
Pollution control revenue bonds (ix) 4.2% - 177.2 -
Other 7.6% - 58.0 -
----------------------------------------------------------------------------------------------------------- ---------- ----------
Secured debt 1,678.5 -
=========================================================================================================== ========== ==========
5,026.8 2,528.1
=========================================================================================================== ========== ==========
</TABLE>
93 Annual Report & Accounts/Form 20-F
<PAGE>
Notes to the Group Balance Sheet
as at 31 March 2000
continued
22 Loans and other borrowings continued
--------------------------------------------------------------------------------
(i) Commercial paper
Scottish Power UK plc has an established US$2.0 billion (1999 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 million domestic
commercial paper programme. Amounts borrowed under the commercial paper
programme are repayable in less than one year.
(ii) Medium-term notes/private placements
Scottish Power UK plc has an established US$4.0 billion euro-medium-term note
programme. Paper is issued in a range of currencies and swapped back into
sterling. As at 31 March 2000, maturities range from 1 to 40 years.
(iii) Loan notes
All loan notes are redeemable at the holders discretion. Ultimate maturity dates
range from 2000 to 2006.
(iv) European Investment Bank loans
These loans incorporate agreements with various interest rates and maturity
dates. The maturity dates of these arrangements range from 2006 to 2011.
(v) Junior subordinated debentures
The junior subordinated debentures are subordinated to PacifiCorp's first
mortgage and collateral trust bonds, pollution control revenue bonds, commercial
paper, bank debt and any other future indebtedness.
(vi) 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.
(vii) Finance leases
These are facility leases that are accounted for as capital leases, maturity
dates range from 2013 to 2021.
(viii) First mortgage and collateral trust bonds
First mortgage and collateral trust 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 $11.7 billion of the
eligible assets (based on original costs) of PacifiCorp is subject to the lien
of the mortgage.
(ix) 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
Trust Bonds as collateral for repayment.
<TABLE>
<CAPTION>
At 31 March 2000 At 31 March 1999
Book Fair Book Fair
amount value amount value
(b) Fair value of financial instruments (pound)m (pound)m (pound)m (pound)m
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Short-term debt and current portion of long-term debt 692.1 692.1 843.6 843.6
Long-term debt 4,334.7 4,351.3 1,684.5 1,829.3
----------------------------------------------------------------------------------- ---------- ---------- ---------- ----------
Total debt 5,026.8 5,043.4 2,528.1 2,672.9
Interest rate swaps - 18.9 - 80.0
Interest rate swaptions 4.2 1.4 - -
Interest rate caps - (0.9) (3.4) (0.6)
Cross currency interest rate swaps - 11.5 - 1.6
Forward contracts - 1.3 - -
----------------------------------------------------------------------------------- ---------- ---------- ---------- ----------
Total financial instruments 5,031.0 5,075.6 2,524.7 2,753.9
=================================================================================== ========== ========== ========== ==========
</TABLE>
The assumptions used to estimate fair values of debt and other financial
instruments are summarised below:
(i) For cash, short-term deposits and 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 European Investment Bank 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 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.
94 Annual Report & Accounts/Form 20-F
<PAGE>
22 Loans and other borrowings continued
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
2000 1999
(c) Maturity analysis (pound)m (pound)m
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Repayments fall due as follows:
Within one year, or on demand 692.1 843.6
After more than one year 4,334.7 1,684.5
----------------------------------------------------------------------------------------------------------------- -------- --------
5,026.8 2,528.1
================================================================================================================= ======== ========
Repayments due after more than one year are analysed as follows:
Between one and two years 194.4 165.8
Between two and three years 363.9 61.3
Between three and four years 148.7 243.2
Between four and five years 242.0 68.7
More than five years 3,385.7 1,145.5
----------------------------------------------------------------------------------------------------------------- -------- --------
4,334.7 1,684.5
================================================================================================================= ======== ========
Included in the 31 March 2000 "More than five years" figure above is (pound)17.1 million for finance leases.
</TABLE>
<TABLE>
<CAPTION>
2001 2002 2003 2004 2005 Thereafter Total Fair Value
Liabilities: (pound)m (pound)m (pound)m (pound)m (pound)m (pound)m (pound)m (pound)m
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fixed rate (GBP) 74.0 14.7 15.5 41.7 68.1 877.6 1,091.6 1,133.8
Average interest rate (GBP) 7.0% 9.6% 9.6% 7.5% 7.4% 7.0% 7.1%
Fixed rate (USD) - UK group - - 183.2 - - 51.4 234.6 239.0
Average interest rate (USD) - UK group - - 5.9% - - 4.6% 5.6%
Fixed rate (USD) - US group 114.3 121.1 89.9 79.9 144.5 1,432.9 1,982.6 1,990.9
Average interest rate (USD) - US group 6.7% 6.8% 7.4% 7.3% 7.3% 7.9% 7.7%
Fixed rate (CHF) - - - 4.1 - - 4.1 3.5
Average interest rate (CHF) - - - 2.5% - - 2.5%
Fixed rate (JPY) - 17.0 - - - 48.5 65.5 77.9
Average interest rate (JPY) - 0.5% - - - 2.1% 1.7%
Fixed rate (EUR) - 33.0 - 7.0 14.6 282.4 337.0 291.9
Average interest rate (EUR) - 4.6% - 4.9% 4.8% 5.2% 5.1%
Fixed rate (SEK) - - - - 9.8 - 9.8 9.2
Average interest rate (SEK) - - - - 5.4% - 5.4%
Variable rate (GBP) 348.2 - 23.0 16.0 5.0 186.8 579.0 579.2
Average interest rate (GBP) 3m LIBOR - 3m LIBOR 3m LIBOR 3m LIBOR 6m LIBOR 4m LIBOR
Variable rate (USD) - UK group 12.4 - 30.6 - - 21.2 64.2 62.2
Average interest rate (USD) - UK group 6m LIBOR - 3m LIBOR - - 3m LIBOR 4m LIBOR
Variable rate (USD) - US group 83.7 - - - - 407.7 491.4 492.0
Average interest rate (USD) - US group 1m LIBOR - - - - BMA BMA
Variable rate (USD) - US group - - - - - 53.3 53.3 53.4
Average interest rate (USD) - US group - - - - - MCBY MCBY
Variable rate (CHF) - - 5.0 - - - 5.0 3.8
Average interest rate (CHF) - - 3m LIBOR - - - 3m LIBOR
Variable rate (EUR) 59.5 8.6 16.7 - - 18.7 103.5 100.3
Average interest rate (EUR) 1m LIBOR 3m LIBOR 3m LIBOR - - 5m LIBOR 2m LIBOR
Variable rate (JPY) - - - - - 5.2 5.2 6.3
Average interest rate (JPY) - - - - - 6m LIBOR 6m LIBOR
---------------------------------------------------------------------------------------------------------- ---------- -----------
5,026.8 5,043.4
========================================================================================================== ========== ===========
</TABLE>
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, JPY -
Japanese Yen, EUR - Euros, SEK - Swedish Krona, AUD - Australian Dollars, DKK -
Danish Krone. 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. BBSY is the Australian Bank Bill Acceptance
Rates.
Reference to "m" in "mLIBOR" represents months.
95 Annual Report & Accounts/Form 20-F
<PAGE>
Notes to the Group Balance Sheet
as at 31 March 2000
continued
<TABLE>
<CAPTION>
22 Loans and other borrowings continued
----------------------------------------------------------------------------------------------------------------------------
At 31 March 2000 At 31 March 1999
UK US Total UK US Total
(d) Interest rate analysis (pound)m (pound)m (pound)m (pound)m (pound)m (pound)m
----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Fixed rate borrowings 1,925.4 1,982.6 3,908.0 1,944.1 - 1,944.1
Capped rate borrowings 150.0 - 150.0 200.0 - 200.0
Floating rate borrowings 424.1 544.7 968.8 384.0 - 384.0
----------------------------------------------------------- -------- ----------- -------- ---------- -------- --------
2,499.5 2,527.3 5,026.8 2,528.1 - 2,528.1
=========================================================== ======== =========== ======== ========== ======== ========
</TABLE>
<TABLE>
<CAPTION>
Weighted average interest Weighted average
rate at which borrowings period for which interest
are fixed/capped rate is fixed/capped
At 31 March 2000 At 31 March 1999 At 31 March 2000 At 31 March 1999
UK US UK US UK US UK US
% % % % Years Years Years Years
----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fixed rate borrowings 7.3 7.7 7.9 - 10 13 9 -
Capped rate borrowings 7.0 - 7.0 - 2 - 3 -
================================== =========== =========== ======= =========== ======== ========== ======== ========
</TABLE>
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 rate on
short-term borrowings as at 31 March 2000 were as follows: UK operations 5.8%,
US operations 6.2%.
Based on the floating rate net debt of (pound)968.8 million at 31 March 2000
(1999 (pound)384.0 million), a 1% change in interest rates would result in a
(pound)9.7 million change in profit before tax for the year (1999 (pound)3.8
million change).
<TABLE>
<CAPTION>
At 31 March 2000 At 31 March 1999
UK US Total UK US Total
(e) Financial assets (pound)m (pound)m (pound)m (pound)m (pound)m (pound)m
----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Fixed rate financial assets 7.7 204.6 212.3 7.7 - 7.7
Floating rate financial assets 98.1 82.2 180.3 102.1 - 102.1
----------------------------------------------------------- -------- ----------- -------- ---------- -------- --------
105.8 286.8 392.6 109.8 - 109.8
=========================================================== ======== =========== ======== ========== ======== ========
</TABLE>
Included within US fixed rate financial assets at 31 March 2000 are amounts
receivable under finance leases of (pound)476.5 million less non-recourse
finance of (pound)271.9 million. (Refer to Note 21.) The floating rate financial
assets of the group's UK and US operations are principally cash deposits.
<TABLE>
<CAPTION>
Weighted average interest rate Weighted average period for
at which financial assets are fixed which interest is fixed
At 31 March 2000 At 31 March 1999 At 31 March 2000 At 31 March 1999
UK US UK US UK US UK US
% % % % Years Years Years Years
----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fixed rate financial assets 7.0 9.7 7.1 - 4 9 5 -
====================================== ======= =========== ======= =========== ======== ========== ======== ========
</TABLE>
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 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
in respect of which all conditions precedent have been met. Of the facilities
shown (pound)2,000 million relates to operations in the UK. The remaining
(pound)627.0 million relates to operations in the US. During the financial year
Scottish Power UK plc cancelled its (pound)600 million revolving credit facility
that was outstanding, undrawn as at 31 March 1999. With effect from 27 April
2000, (pound)500 million of the UK operations' (pound)2,000 million facility has
been cancelled.
<TABLE>
<CAPTION>
Floating rate Total Total
2000 2000 1999
(pound)m (pound)m (pound)m
----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Expiring within one year 188.1 188.1 600.0
Expiring between one and two years 2,438.9 2,438.9 -
Expiring in more than two years - - 2,000.0
========================================================================================= ============= ======== ========
</TABLE>
Commitment fees on the above facilities were as follows: Scottish Power UK plc
group (pound)4.7 million (1999 (pound)0.3 million); PacifiCorp group (pound)0.3
million for the period 29 November 1999 to 31 March 2000.
96 Annual Report & Accounts/Form 20-F
<PAGE>
<TABLE>
<CAPTION>
22 Loans and other borrowings continued
------------------------------------------------------------------------------------------------------------------------------------
2001 2002 2003 2004 2005 Thereafter Total Fair Value
(g) Maturity analysis of derivatives (pound)m (pound)m (pound)m (pound)m (pound)m (pound)m (pound)m (pound)m
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest rate swaps
Variable to fixed (GBP) 200.0 100.0 25.0 50.0 50.0 450.0 875.0 17.7
Average pay rate 7.0% 7.4% 8.1% 7.7% 6.5% 7.2% 7.2%
Average receive rate 4m LIBOR 3m LIBOR 6m LIBOR 3m LIBOR 6m LIBOR 3m LIBOR 4m LIBOR
Fixed to variable (GBP) 162.0 50.0 - - 50.0 32.0 294.0 1.8
Average pay rate 6m LIBOR 3m LIBOR - - 6m LIBOR 6m LIBOR 5m LIBOR
Average receive rate 6.3% 5.5% - - 6.6% 6.6% 6.3%
Variable to variable (GBP) - - - - 5.0 30.0 35.0 (0.6)
Average pay rate - - - - 6m LIBOR 6m LIBOR 6m LIBOR
Average receive rate - - - - 3m LIBOR 12m LIBOR 11m LIBOR
Interest rate swaptions
Notional amount (GBP) - - - - - 250.0 250.0 1.4
Average pay rate - - - - - 4.2% 4.2%
Average receive rate - - - - - 6m LIBOR 6m LIBOR
Interest rate caps
Notional amount (GBP) - 100.0 - 50.0 - - 150.0 (0.9)
Strike price - 7.0% - 7.0% - - 7.0%
Cross currency interest rate swaps
Receive fixed USD pay fixed GBP - - 183.2 - - - 183.2 2.4
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 (4.9)
Average pay rate (GBP) - - - - - 6m LIBOR 6m LIBOR
Average receive rate (USD) - - - - - 4.6% 4.6%
Receive variable USD pay fixed GBP - - - - - 21.2 21.2 (2.4)
Average pay rate (GBP) - - - - - 4.9% 4.9%
Average receive rate (USD) - - - - - 3m LIBOR 3m LIBOR
Receive variable USD pay variable GBP - - 30.6 - - - 30.6 (0.8)
Average pay rate (GBP) - - 6m LIBOR - - - 6m LIBOR
Average receive rate (USD) - - 3m LIBOR - - - 3m LIBOR
Receive fixed CHF pay variable GBP - - - 4.1 - - 4.1 0.6
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 1.3
Average pay rate (GBP) - - 6m LIBOR - - - 6m LIBOR
Average receive rate (CHF) - - 3m LIBOR - - - 3m LIBOR
Receive fixed JPY pay variable GBP - 17.0 - - - 48.5 65.5 (12.1)
Average pay rate (GBP) - 6m LIBOR - - - 6m LIBOR 6m LIBOR
Average receive rate (JPY) - 0.5% - - - 2.1% 1.7%
Receive variable JPY pay variable GBP - - - - - 5.2 5.2 (1.0)
Average pay rate (GBP) - - - - - 6m LIBOR 6m LIBOR
Average receive rate (JPY) - - - - - 6m LIBOR 6m LIBOR
Receive fixed EUR pay fixed GBP - - - - - 245.6 245.6 30.8
Average pay rate (GBP) - - - - - 6.7% 6.7%
Average receive rate (EUR) - - - - - 5.3% 5.3%
Receive fixed EUR pay variable GBP - 33.0 - 7.0 14.6 36.8 91.4 10.7
Average pay rate (GBP) - 6m LIBOR - 6m LIBOR 6m LIBOR 6m LIBOR 6m LIBOR
Average receive rate (EUR) - 4.6% - 4.9% 4.8% 5.0% 4.8%
Receive variable EUR pay variable GBP 13.2 8.6 16.7 - - 18.7 57.2 3.7
Average pay rate (GBP) 6m LIBOR 3m LIBOR 3m LIBOR - - 6m LIBOR 5m LIBOR
Average receive rate (EUR) 3m LIBOR 3m LIBOR 3m LIBOR - - 5m LIBOR 4m LIBOR
Receive fixed SEK pay variable GBP - - - - 9.8 - 9.8 0.6
Average pay rate (GBP) - - - - 6m LIBOR - 6m LIBOR
Average receive rate (SEK) - - - - 5.4% - 5.4%
Receive variable USD pay variable AUD 37.1 40.8 48.5 - - - 126.4 (23.4)
Average pay rate (AUD) 3m BBSY 3m BBSY 3m BBSY - - - 3m BBSY
Average receive rate (USD) 3m LIBOR 3m LIBOR 3m LIBOR - - - 3m LIBOR
Receive variable AUD pay variable USD 37.1 40.8 48.5 - - - 126.4 6.0
Average pay rate (USD) 3m LIBOR 3m LIBOR 3m LIBOR - - - 3m LIBOR
Average receive rate (AUD) 3m BBSY 3m BBSY 3m BBSY - - - 3m BBSY
Forward contracts
Buy GBP, sell USD 176.3 56.0 - - - - 232.3 1.1
Buy DKK, sell GBP 6.0 6.7 - - - - 12.7 0.1
Buy SEK, sell GBP 12.6 3.7 - - - - 16.3 0.1
------------------------------------------------------------------------------------------------------------ ---------- ---------
2,888.3 32.2
============================================================================================================ ========= ==========
</TABLE>
The abbreviations contained in the table are defined in Note 22(c).
97 Annual Report & Accounts/Form 20-F
<PAGE>
Notes to the Group Balance Sheet
as at 31 March 2000
continued
22 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:
<TABLE>
<CAPTION>
Total net
Gains Losses gains/losses
(pound)m (pound)m (pound)m
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Unrecognised gains and (losses) on hedges at 1 April 1999 0.8 (81.8) (81.0)
Losses arising in previous years that were recognised in 1999-00 4.8 40.9 45.7
------------------------------------------------------------------------------------------ -------- ---------- -------------
Gains and (losses) arising before 1 April 1999 that were not recognised in 1999-00 5.6 (40.9) (35.3)
Gains and (losses) arising in 1999-00 that were not recognised in 1999-00 46.3 (43.2) 3.1
------------------------------------------------------------------------------------------ -------- ---------- -------------
Unrecognised gains and (losses) on hedges at 31 March 2000 51.9 (84.1) (32.2)
========================================================================================== ======== ========== =============
Gains and (losses) expected to be recognised in 2000-01 (3.5) (21.8) (25.3)
========================================================================================== ======== ========== =============
Gains and (losses) expected to be recognised in 2001-02 or later 55.4 (62.3) (6.9)
========================================================================================== ======== ========== =============
</TABLE>
Figures in the table above are calculated by reference to the 31 March 2000 fair
value of the derivative concerned.
(i) Contracts for Differences
United Kingdom
It is difficult to estimate the long-term level of electricity prices with
reasonable accuracy and there is no readily available market through which the
CfDs could be realised in an exchange. However, based on management's
projections of the future prices of electricity, and considering the outcome
under several future price scenarios, the group has determined that the fair
value amount of CfDs, outstanding at the year end, is (pound)1.8 million.
The gross value of outstanding CfDs at 31 March 2000 was (pound)427.2 million
(1999 (pound)467.8 million).
<TABLE>
<CAPTION>
2001 2002 2003 Total
(pound)m (pound)m (pound)m (pound)m
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Notional amount 182.4 121.1 123.7 427.2
================================================================================== ======== ========= ========== ==========
</TABLE>
United States
The gross value of outstanding CfDs in the group's US businesses is not
material.
23 Other creditors
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------------------
2000 1999
(pound)m (pound)m
-------------------------------------------------------------------------------------------------------- --------------------
<S> <C> <C>
Amounts falling due within one year:
Trade creditors 208.3 181.4
Corporate tax 633.4 210.8
Advance corporation tax - 22.1
Other taxes and social security 15.7 9.3
Payments received on account 35.7 35.0
Capital creditors and accruals 217.6 221.6
Other creditors 302.5 80.2
Accrued expenses 632.7 394.4
Proposed dividend 113.4 178.0
------------------------------------------------------------------------------------------------------ ----------- ----------
2,159.3 1,332.8
====================================================================================================== =========== ==========
</TABLE>
For Scottish Power UK plc and Manweb plc price control formulae determine the
maximum revenue of the transmission and distribution businesses. In prior years
if actual revenue exceeded the allowable maximum, the excess was deducted from
turnover and included in creditors where amounts were due to be returned to
customers. This was in line with industry practice prior to FRS 12 `Provisions,
contingent liabilities and contingent assets'. Since the issue of this standard
there has been some uncertainty regarding its impact on the accounting treatment
of over recovery of regulated income. The Urgent Issue Task Force has recently
issued a statement which clarifies the position that over recovery of regulated
income should not be included as a liability. As a result, no over recovery is
included in creditors at 31 March 2000. No adjustments have been made to
comparative figures as the amounts involved are immaterial.
98 Annual Report & Accounts/Form 20-F
<PAGE>
24 Provisions for liabilities and charges
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Released to
At Utilised profit At
1 April New during and loss 31 March
1997 provisions year account 1998
1997 - 98 (pound)m (pound)m (pound)m (pound)m (pound)m
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Reorganisation and restructuring 4.2 0.4 (2.5) (1.0) 1.1
Environmental and health 12.6 - (2.6) - 10.0
Pensions 13.5 2.1 - - 15.6
Other 12.9 4.0 (0.9) (4.6) 11.4
----------------------------------------------------------- ---- --- ---- ---- ----
43.2 6.5 (6.0) (5.6) 38.1
=========================================================== ==== === ==== ==== ====
<CAPTION>
At Utilised At
1 April Transferred New during 31 March
1998 to creditors provisions year 1999
1998 - 99 (pound)m (pound)m (pound)m (pound)m (pound)m
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Reorganisation and restructuring 1.1 - - (0.4) 0.7
Environmental and health 10.0 - 1.5 (1.4) 10.1
Pensions 15.6 (6.8) - - 8.8
Other 11.4 - 2.1 (2.3) 11.2
----------------------------------------------------------- ---- --- ---- ---- ----
38.1 (6.8) 3.6 (4.1) 30.8
=========================================================== ==== === ==== ==== ====
<CAPTION> Unwinding Utilised At
1 April New of during 31 March
1999 Acquisition provisions discount year Exchange 2000
1999 - 00 Notes (pound)m (pound)m (pound)m (pound)m (pound)m (pound)m (pound)m
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Reorganisation and restructuring (a) 0.7 - 55.0 - (11.7) - 44.0
Environmental and health (b) 10.1 74.7 - 1.6 (2.9) 0.5 84.0
Decommissioning costs (c) - 83.5 6.3 1.6 (0.5) 0.6 91.5
Onerous contracts (d) - - 79.0 - - - 79.0
Pensions and post-retirement benefits (e) 8.8 102.8 13.4 - (28.1) 0.7 97.6
Mine reclamation costs (f) - 108.2 - 2.2 (6.3) 0.7 104.8
Deferred tax (g) - 149.4 - - (2.6) 1.0 147.8
Other (h) 11.2 14.5 3.5 - (8.8) 0.1 20.5
-------------------------------------- --- ---- ----- ----- --- ----- --- -----
30.8 533.1 157.2 5.4 (60.9) 3.6 669.2
====================================== === ==== ===== ===== === ===== === =====
</TABLE>
(a) The provisions for reorganisation and restructuring comprise the estimated
costs of restructuring the group's UK businesses following the recent regulatory
price reviews in the United Kingdom electricity and water industries. The
provisions are principally in respect of severance costs, most of which are
expected to be incurred in the financial year 2000-01 with an element arising in
the two years thereafter.
(b) The environmental and health provisions include:
(i) costs which will be incurred in the United Kingdom in complying with
Health and Safety requirements, most of which are expected to be incurred in
the period to 31 March 2001;
(ii) obligations to ensure former operational sites in the UK remain in an
environmentally safe condition, the costs of which are expected to be
incurred in the period to 31 March 2003; and
(iii) in the United States, the costs of notified environmental remediation
work and constructive obligations in respect of potential environmental
remediation costs identified by an external due diligence review. These
costs are expected to be incurred principally over the next 10 years.
(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 relate to the period to 31 March 2005.
(e) Details of the group's pensions and other post-retirement benefits are
disclosed in Notes 31 and 35.
(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) Details of deferred taxation are contained in Note 25.
(h) The Other category comprises various provisions which are not individually
sufficiently material to warrant separate disclosure.
99 Annual Report & Accounts/Form 20-F
<PAGE>
Notes to the Group Balance Sheet
as at March 2000
continued
25 Deferred taxation
--------------------------------------------------------------------------------
Deferred taxation provided in the Accounts and the amounts not provided are as
follows:
<TABLE>
<CAPTION>
Provided Not provided
2000 1999 2000 1999
(pound)m (pound)m (pound)m (pound)m
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Accelerated capital allowances - - 1,491.1 631.6
Other timing differences 147.8 - (243.1) (37.4)
------------------------------------------------------------------------------ ----- ---- ------- -----
Total 147.8 - 1,248.0 594.2
============================================================================== ===== ==== ======= =====
</TABLE>
26 Deferred income
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Released to
At Receivable profit At
1 April during and loss 31 March
1998 year account 1999
(pound)m (pound)m (pound)m (pound)m
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
------------------------------------------------------------------------------------------------------------------------------------
Grants and customer contributions 364.6 42.2 (13.6) 393.2
============================================================================== ===== ==== ======= =====
<CAPTION>
Released to
At Receivable profit At
1 April during and loss 31 March
1999 year account 2000
(pound)m (pound)m (pound)m (pound)m
------------------------------------------------------------------------------------------------------------------------------------
Grants and customer contributions 393.2 49.2 (15.6) 426.8
============================================================================== ===== ==== ======= =====
</TABLE>
Deferred income excludes grants and contributions received in respect of water
infrastructure assets.
<TABLE>
<CAPTION>
27 Share capital
--------------------------------------------------------------------------------
2000 1999
Notes (pound)m (pound)m
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Authorised:
2,999,900,004 (1999 1,700,000,000) ordinary shares of 50p each 1,500.0 850.0
One Special Share of(pound)1 (a) - -
49,998 redeemable shares of(pound)1 each (b) - -
---------------------------------------------------------------------------------------------------- ------- -----
1,500.0 850.0
==================================================================================================== ------- -----
Allotted, called up and fully paid:
1,847,585,937 (1999 1,198,678,222) ordinary shares of 50p each 923.8 599.4
One Special Share of(pound)1 (a) - -
---------------------------------------------------------------------------------------------------- ------- -----
923.8 599.4
==================================================================================================== ------- -----
</TABLE>
100 Annual Report & Accounts/Form20-F
<PAGE>
27 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) On 30 July 1999 under the Scheme of Arrangement between New Scottish Power
plc (now renamed Scottish Power plc) and its shareholders under Section 425 of
the Companies Act 1985, sanctioned by the Court of Session on 29 July 1999, all
issued shares in the former Scottish Power plc (now renamed Scottish Power
UK plc) were cancelled. Following the cancellation, the share capital of
Scottish Power UK plc was restored to its former nominal amount and the credit
arising as a result of the cancellation was applied in paying up in full new
Scottish Power UK plc shares equal in nominal value to the shares cancelled. The
new Scottish Power UK plc shares were issued to New Scottish Power plc (now
renamed Scottish Power plc) which, as a result, became the new holding company
of the ScottishPower group.
On 30 July 1999 the new ordinary shares in Scottish Power plc were admitted to
the Official List of the London Stock Exchange.
As part of the capital reorganisation, New Scottish Power plc (now renamed
Scottish Power plc) issued 49,998 Redeemable shares of (pound)1 each. These
non-equity shares were redeemed, at par, on 18 October 1999.
The application of merger accounting principles to the consolidation of the new
holding company results in the share capital of the group in prior years being
equivalent to the share capital of the former Scottish Power plc.
(c) Employee Share Schemes
The group has four types of share option schemes for employees. Options have
been granted and awards made to eligible employees to subscribe for ordinary
shares in Scottish Power plc in accordance with the rules of each scheme. 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 has been
replaced with the Long Term Incentive Plan and, although it will not affect
options already granted, this plan supersedes executive share options. Options
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.
(i) Summary of movements in share options in ScottishPower shares
<TABLE>
<CAPTION>
Southern Executive
ScottishPower Weighted Water Weighted Share Weighted
Sharesave average Sharesave average Option average
Scheme exercise Scheme exercise Scheme exercise
(number of price (number of price (number of price
shares 000s) (pence) shares 000s) (pence) shares 000s) (pence)
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at 1 April 1997 17,514 252.8 6,692 117.1 1,553 326.4
Granted 5,268 307.0 - - - -
Exercised (2,813) 202.6 (1,956) 87.2 (699) 323.3
Lapsed (974) 264.9 (487) 151.7 - -
-------------------------------- ------ ----- ------ ----- ----- -----
Outstanding at 1 April 1998 18,995 274.6 4,249 126.9 854 328.6
Granted 4,284 440.0 - - - -
Exercised (1,224) 252.6 (1,458) 102.9 (372) 338.1
Lapsed (783) 295.7 (91) 166.6 (50) 380.2
-------------------------------- ------ ----- ------ ----- ----- -----
Outstanding at 1 April 1999 21,272 308.4 2,700 138.5 432 314.4
Acquisition* - - - - - -
Granted 4,745 429.0 - - - -
Exercised (3,674) 272.6 (1,529) 131.9 (168) 344.6
Lapsed (2,398) 345.7 (93) 148.5 (1) 352.1
-------------------------------- ------ ----- ------ ----- ----- -----
Outstanding at 31 March 2000 19,945 339.2 1,078 147.1 263 297.0
================================ ====== ===== ====== ===== ===== =====
</TABLE>
<TABLE>
<CAPTION>
PacifiCorp
Stock Weighted
Incentive average
Plan* exercise Total
(number of price (number of
shares 000s) (pence) shares 000s)
---------------------------------------------------------------------------------
<S> <C> <C> <C>
Outstanding at 1 April 1997 - - 25,759
Granted - - 5,268
Exercised - - (5,468)
Lapsed - - (1,461)
-------------------------------- ------ ----- ------
Outstanding at 1 April 1998 - - 24,098
Granted - - 4,284
Exercised - - (3,054)
Lapsed - - (924)
-------------------------------- ------ ----- ------
Outstanding at 1 April 1999 - - 24,404
Acquisition* 14,534 562.1 14,534
Granted 2,982 422.2 7,727
Exercised - - (5,371)
Lapsed (1,478 578.1 (3,970)
-------------------------------- ------ ----- ------
Outstanding at 31 March 2000 16,038 534.5 37,324
================================ ====== ===== ======
</TABLE>
*PacifiCorp share options as at 29 November 1999.
#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.
101 Annual Report & Accounts/Form 20-F
<PAGE>
27 Share capital continued
--------------------------------------------------------------------------------
(ii) Analysis of share options outstanding at 31 March 2000
<TABLE>
<CAPTION>
Number of Option
Date of Number of shares price
grant participants (000s) (pence) Normal exercisable date
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ScottishPower Sharesave Scheme 22 June 1994 4 3 273.8 6 months to March 2000
20 June 1995 848 1,035 262.1 6 months to March 2001
20 June 1996 3,004 7,036 263.1 6 months to March 2000 or 2002
20 June 1997 3,940 4,001 307.0 6 months to March 2001 or 2003
12 June 1998 4,848 3,499 440.0 6 months to March 2002 or 2004
11 June 1999 5,845 4,371 429.0 6 months to March 2003 or 2005
---------------------------------- ---------------- ----- ----- ----- ---------------------------------------
Southern Water Sharesave Scheme 26 January 1993 69 203 111.0 6 months to September 2000
25 January 1994 50 85 154.9 6 months to September 2001
25 January 1995 55 152 136.1 6 months to September 2000 or 2002
25 January 1996 373 638 160.2 6 months to September 2001 or 2003
---------------------------------- ---------------- ----- ----- ----- ---------------------------------------
Executive Share Option Scheme 18 December 1991 7 110 227.4 1994-2001
25 June 1992 11 19 237.7 1995-2002
1 July 1993 3 42 310.0 1996-2003
17 December 1993 21 36 454.8 1996-2003
27 May 1994 3 3 354.0 1997-2004
18 November 1994 3 22 352.1 1997-2004
12 May 1995 5 31 335.0 1998-2005
---------------------------------- ---------------- ----- ----- ----- ---------------------------------------
PacifiCorp Stock Incentive Plan** 3 June 1997 107 1,785 533.8 29 November 1999 to 3 June 2007
12 August 1997 35 358 574.2 29 November 1999 to 12 August 2007
10 February 1998 145 3,281 648.5 29 November 1999 to 10 February 2008
13 May 1998 7,861 1,814 626.7 29 November 1999 to 13 May 2008
9 February 1999 154 3,888 513.4 9 February 2000 to 9 February 2009##
11 May 1999 8,361 1,930 464.5 11 May 2000 to 11 May 2009***
16 February 2000 131 2,982 422.2 16 February 2001 to 16 February 2010###
---------------------------------- ---------------- ----- ----- ----- ---------------------------------------
</TABLE>
**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
2000 to be quoted in pence in the table above.
##Option becomes exercisable in the proportions of one third on 9 February 2000,
with a further third on 9 February 2001 and the remaining one third on 9
February 2002.
***Option becomes exercisable in the proportions 50% on 11 May 2000 and the
remaining 50% on 11 May 2001.
###Option becomes exercisable in the proportions of one third on 16 February
2001, with a further third on 16 February 2002 and the remaining one third on 16
February 2003.
All options are exercisable over Scottish Power plc ordinary shares. 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 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.
102 Annual Report & Accounts/Form 20-F
<PAGE>
28 Analysis of movements in shareholders' funds
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Capital
Number of Share Share Revaluation redemption Merger
shares capital premium reserve reserve reserve
Notes 000s (pound)m (pound)m (pound)m (pound)m (pound)m
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
At 1 April 1997 - as previously stated 1,177,366 588.7 305.7 - - -
Transfer - - (305.7) - - 305.7
---------------------------------------------------- --------- ------ ------- ----- ----- -----
At 1 April 1997 - as restated 1,177,366 588.7 - - - 305.7
Retained loss for the year - - - - - -
Share capital issued
- Employee sharesave scheme (a) 18,687 9.3 81.1 - - -
- Executive share option scheme 699 0.4 1.9 - - -
Revaluation of fixed assets - - - 229.0 - -
Revaluation surplus realised - - - (1.7) - -
Goodwill written off (b) - - - - - -
Transfers - - (83.0) - - 83.0
---------------------------------------------------- --------- ------ ------- ----- ----- -----
At 1 April 1998 1,196,752 598.4 - 227.3 - 388.7
Retained profit for the year - - - - - -
Share capital issued
- Employee sharesave scheme (a) 1,554 0.8 4.2 - - -
- Executive share option scheme 372 0.2 1.1 - - -
Revaluation surplus realised - - - (3.4) - -
Transfers - - (5.3) - - 5.3
---------------------------------------------------- --------- ------ ------- ----- ----- -----
At 1 April 1999 1,198,678 599.4 - 223.9 - 394.0
Retained profit for the year - - - - - -
Share capital issued
- Employee sharesave scheme (a) 12,044 6.0 49.7 - - -
- 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 (b) - - - - - -
Goodwill realised on disposals (b) - - - - - -
Share buy-back (52,973) (26.5) - - 26.5 -
Exchange movements (c) - - - - - -
Transfers - - (4.2) - (8.2) 12.4
---------------------------------------------------- --------- ------ ------- ----- ----- -----
Balance at 31 March 2000 1,847,586 923.8 3,733.8 220.5 18.3 406.4
==================================================== ========= ====== ======= ===== ===== =====
</TABLE>
<TABLE>
<CAPTION>
Profit
Other and loss
reserve account Total
Notes (pound)m (pound)m (pound)m
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
At 1 April 1997 - as previously stated - 628.3 1,522.7
Transfer - - -
---------------------------------------------------- --------- ------ --------
At 1 April 1997 - as restated - 628.3 1,522.7
Retained loss for the year - (73.2) (73.2)
Share capital issued
- Employee sharesave scheme (a) (5.2) (42.0) 43.2
- Executive share option scheme - - 2.3
Revaluation of fixed assets - - 229.0
Revaluation surplus realised - 1.7 -
Goodwill written off (b) 5.2 (21.4) (16.2)
Transfers - - -
---------------------------------------------------- --------- ------ --------
At 1 April 1998 - 493.4 1,707.8
Retained profit for the year - 234.9 234.9
Share capital issued
- Employee sharesave scheme (a) (3.1) - 1.9
- Executive share option scheme - - 1.3
Revaluation surplus realised - 3.4 -
Transfers 3.1 (3.1) -
---------------------------------------------------- --------- ------ --------
At 1 April 1999 - 728.6 1,945.9
Retained profit for the year - 600.9 600.9
Share capital issued
- Employee sharesave scheme (a) (1.5) (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 (b) - 7.5
7.5
Goodwill realised on disposals (b) - 15.3 15.3
Share buy-back - (302.0) (302.0)
Exchange movements (c) - 25.1 25.1
Transfers 1.5 (1.5) -
---------------------------------------------------- --------- ------ --------
Balance at 31 March 2000 - 1,061.1 6,363.9
==================================================== ========= ======= =======
</TABLE>
(a) The movement on the other reserve reflects the reduction in shares which
were to be issued following the acquisition of Southern Water plc in August
1996. It represented the cost to ScottishPower of transferring existing options
over Southern Water plc shares to the Scottish Power UK plc Sharesave Scheme.
As these options are exercised, the other reserve is reduced for the
attributable cost of the option.
(b) Cumulative goodwill written off to reserves as at 31 March 2000
was(pound)1,013.9 million (1999(pound)1,036.7 million, 1998(pound)1,036.7
million).
(c) The cumulative foreign currency translation adjustments at 31 March 2000
amount to (pound)25.1 million (1999 (pound)nil, 1998 (pound)nil).
(d) 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 UK plc Sharesave
Scheme. As these options were exercised, the merger reserve was reduced for the
attributable cost of the option. Subsequently, on 31 March 1998, the debit
balance on this reserve arising from the write off of goodwill was transferred
to the profit and loss account reserve. However, the movements in the balance
were still shown within merger reserve, with a corresponding transfer to profit
and loss account reserve.
In the year to 31 March 2000, the application of merger accounting principles to
the group reconstruction which involved the creation of a new holding company
(see Accounting Policies and Definitions - Basis of consolidation) gave rise to
a difference which falls to be accounted for as a merger difference and included
within merger reserve. These two items are sufficiently different in nature that
the directors have decided that it would improve the transparency of reserve
movements if these items were shown separately. Accordingly, the movements which
relate to the transfer of the former Southern Water plc share options are now
included within the other reserve with a corresponding transfer to profit and
loss account reserve. Prior year figures have been re-stated accordingly. The
movements and balances shown above under merger reserve represent the effects of
merger accounting for the creation of the new holding company. The balance on
the merger reserve at 31 March 2000 represents the difference between the called
up share capital of the company and the called up share capital, share premium
and capital redemption reserve of the former holding company (now renamed
Scottish Power UKplc) at 30 July 1999, the date of the capital reorganisation.
<PAGE>
Notes to the Group Balance Sheet
as at 31 March 2000
continued
29 Minority interests
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Equity Non-equity Total Equity Non-equity Total
2000 2000 2000 1999 1999 1999
(pound)m (pound)m (pound)m (pound)m (pound)m (pound)m
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
At 1 April 1.3 - 1.3 1.9 - 1.9
Acquisition 0.2 134.8 135.0 - - -
Arising on partial disposal of Thus 162.2 - 162.2 - - -
Disposal (0.8) - (0.8) - - -
Exchange - 0.9 0.9 - - -
Profit and loss account (1.3) 2.4 1.1 (0.6) - (0.6)
--------------------------------------- ----- ----- ----- ---- --- ----
At 31 March 161.6 138.1 299.7 1.3 - 1.3
======================================= ===== ===== ===== ==== === ====
</TABLE>
Non-equity minority interests include 100% of the preferred stock and preferred
stock subject to mandatory redemption of PacifiCorp. 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.
30 Acquisition
--------------------------------------------------------------------------------
On 29 November 1999 the group acquired PacifiCorp for a total consideration of
(pound)4,111.3 million. The acquisition method of accounting has been adopted
and the goodwill arising on the purchase has been capitalised and is being
amortised over 20 years. The directors have estimated the useful economic life
of the goodwill acquired after 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 United States. The details of the
transaction, results and fair value adjustments arising from the change in
ownership are shown below. Share issue costs of (pound)33.0 million relating to
the share issue have been charged to the share premium account.
<TABLE>
<CAPTION>
Book Fair
values at Businesses Accounting values at
29 Nov held for policy 29 Nov
1999 disposal alignment Revaluation 1999
Fair value of PacifiCorp consideration (pound)m (pound)m (pound)m (pound)m (pound)m
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Intangible fixed assets 233.7 (233.7) - - -
Tangible fixed assets 5,726.3 (654.9) 69.5 (258.3) 4,882.6
Investments 207.0 (64.9) (25.7) 7.4 123.8
Businesses held for disposal - 551.0 - - 551.0
Current assets 1,510.6 (102.0) (358.7) (19.6) 1,030.3
Creditors: amounts falling due within one year
- Loans and other borrowings (201.9) - 2.4 0.4 (199.1)
- Other creditors (575.0) (93.5) (92.7) (82.8) (844.0)
Creditors: amounts falling due after more than one year
- Loans and other borrowings (2,945.8) 520.8 20.3 38.2 (2,366.5)
Provisions for liabilities and charges (1,303.3) - 858.3 (88.1) (533.1)
Deferred income (171.4) - (88.0) 259.4 -
Minority interest (135.0) - - - (135.0)
------------------------------------------------------------ -------- ------ ------ ------ --------
Net assets 2,345.2 (77.2) 385.4 (143.4) 2,510.0
============================================================ ======== ====== ====== ======
Goodwill arising on acquisition of PacifiCorp 1,601.3
-------------------------------------------------------------------------------------------------------------------- --------
Purchase consideration 4,111.3
==================================================================================================================== ========
Satisfied by:
Shares allotted 4,065.5
Cash in respect of fractional shares 0.8
Acquisition expenses (excluding share issue costs) 45.0
-------------------------------------------------------------------------------------------------------------------- --------
4,111.3
==================================================================================================================== ========
</TABLE>
(a) Businesses held for disposal
The assets and liabilities of businesses held for disposal have been included
together after adjustment to estimated realisable value and included as current
assets described as `Businesses held for disposal'. Provision has also been
included for estimated tax on disposals. The principal business held for resale
is Powercor, an electricity distribution and supply business in Australia.
(b) Accounting policy alignment
The book values of PacifiCorp's net assets are stated in accordance with US
GAAP. Adjustments have been made to align PacifiCorp's Accounting Policies to
ScottishPower's Accounting Policies under UK GAAP. The principal adjustments are
as follows:
(i) under US GAAP full provision is made for deferred tax. ScottishPower's
Accounting Policy, under UK GAAP, is to provide for deferred tax using the
liability method to the extent tax is expected to become payable in the
foreseeable future. Therefore, an adjustment of (pound)796.7 million has been
made to reverse that part of PacifiCorp's deferred tax provision which is not
required under UK GAAP and of (pound)354.3 million to reverse a regulatory asset
for deferred tax in PacifiCorp's accounts. In addition, included within
PacifiCorp's deferred tax balance is an amount of (pound)92.7 million which has
been transferred to current taxation.
(ii) under US GAAP for regulated industries, tangible fixed assets are
depreciated to a negative amount equal to anticipated decommissioning costs.
Under UK GAAP, the present value of the anticipated decommissioning costs is
included within provisions and added to the fixed asset which is then
depreciated on a straight line basis. Tangible fixed assets and provisions have
been increased by (pound)8.6 million and (pound)76.5 million respectively.
104 Annual Report & Accounts/Form 20-F
<PAGE>
30 Acquisition continued
--------------------------------------------------------------------------------
(iii) under US GAAP customer contributions in respect of the construction of
tangible fixed assets are netted against the cost of the related fixed assets.
Under UK GAAP, such contributions are credited to deferred income. A
re-classification has been made to increase tangible fixed assets and deferred
income by (pound)88.0 million.
(iv) under US GAAP, as applied by regulated electricity utilities, both the cost
of debt and cost of equity applicable to domestic utility properties are
capitalised during construction. Under UK GAAP, interest on the debt funding
attributable to capital projects may be capitalised during the period of
construction. Accordingly, tangible fixed assets have been reduced by
(pound)24.7 million.
(c) Revaluation
Valuation adjustments have been made to the assets and liabilities for
PacifiCorp. The principal adjustments are as follows:
(i) tangible fixed assets have been written down by (pound)282.9 million,
following a review of their recoverability. In addition deferred income has been
reduced by (pound)161.4 million.
(ii) provision of (pound)47.0 million has been made for constructive obligations
in respect of potential environmental remediation costs identified by an
external due diligence review.
(iii) the fair values of the PacifiCorp pension scheme and other post-retirement
benefits arrangements have been based on an independent actuarial assessment of
the market values of the relevant assets and liabilities. The total fair value
adjustments amount to (pound)39.0 million.
(iv) costs of (pound)31.8 million incurred as a direct result of the acquisition
are included in the fair value adjustments in respect of guaranteed merger
credits payable under the regulatory approval process for the acquisition, and
severance costs for senior employees who terminated their contract of employment
as a result of the change in control following the acquisition.
(v) PacifiCorp was recognising through its profit and loss account a gain on
disposal of a business as cash was received under the terms of a commercial
agreement. The fair value of this commercial agreement is (pound)79.3 million
greater than the net book value recognised in PacifiCorp's accounts and
adjustments have been made to recognise this fair value by reducing deferred
income by (pound)98.0 million and current assets by (pound)18.7 million.
(vi) loans and other borrowings have been marked to market based on interest
rates at the date of acquisition. An adjustment of (pound)38.2 million has been
made to reduce the value of debt.
(vii) current liabilities have been increased by (pound)12.5 million for costs
related to the financing of the group's investment in Powercor.
Due to the size and complexity of the acquisition the fair values currently
established are provisional and are subject to review prior to finalisation at
31 March 2001. The factors which may affect the finalisation of the fair value
adjustments include changes to the regulatory regime for electricity utilities
in the states in which PacifiCorp operates, ongoing regulatory rate cases and
depreciation studies in most of the states in which PacifiCorp operates, and
sales of businesses held for disposal. In addition, possible future changes to
the accounting requirements in the UK for provision for deferred taxation may
impact the fair values.
Subsequent to the year end the directors endorsed a decision of the PacifiCorp
Board to undertake a major restructuring of the PacifiCorp businesses. The
estimated employee severance costs of this restructuring will be in excess of
(pound)100 million. A provision will be made for restructuring costs in the
quarter ending 30 June 2000.
The results and total recognised gains and losses of PacifiCorp, based on
PacifiCorp's accounting policies under US GAAP prior to acquisition and
excluding fair value adjustments arising from the acquisition for the year to 31
December 1998 and for the pre-acquisition period from 1 January 1999 to 28
November 1999, are shown below expressed in US dollars:
<TABLE>
<CAPTION>
Period from
1 Jan
1999 to Year to
28 Nov 31 Dec
1999 1998
Results $m $m
---------------------------------------------------------------------------------------------
<S> <C> <C>
Turnover 3,626.2 5,580.4
================================================================== ======== =======
Operating profit 653.8 680.8
================================================================== ======== =======
Profit on ordinary activities before taxation 251.9 196.9
Taxation (146.7) (59.1)
------------------------------------------------------------------ ------- -------
Profit on ordinary activities after taxation 105.2 137.8
Income/(loss) from discontinued operations net of tax benefit 1.1 (146.7)
Minority interests (26.0) (27.2)
------------------------------------------------------------------ ------- -------
Profit/(loss) for the financial year 80.3 (36.1)
Preferred dividends (17.6) (19.3)
------------------------------------------------------------------ ------- -------
Profit/(loss) attributable to shareholders 62.7 (55.4)
================================================================== ======== =======
</TABLE>
Profit on ordinary activities before taxation for the year to 31 December 1998
included $123 million in special charges, $13 million in merger costs, $80
million relating to the write down of investments and $73 million net costs of
the aborted bid for The Energy Group plc. Profit on ordinary activities before
taxation for the period from 1 January 1999 to 28 November 1999 included $23
million for the write down of projects under construction and $157 million in
merger costs.
Period from
1 Jan
1999 to Year to
28 Nov 31 Dec
1999 1998
Statement of total recognised gains and losses $m $m
-----------------------------------------------------------------------------
Profit/(loss) attributable to shareholders 62.7 (55.4)
Exchange movements 9.5 (7.3)
Unrealised gain on available-for-sale securities 1.1 6.2
------------------------------------------------------- ---- -----
Total recognised gains and losses 73.3 (56.5)
======================================================= ==== =====
105 Annual Report & Accounts/Form 20-F
<PAGE>
Notes to the Group Balance Sheet
as at 31 March 2000
continued
31 Pensions
--------------------------------------------------------------------------------
At 31 March 2000, 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. The pension charge for the PacifiCorp arrangements is for the
post-acquisition period only. Details of the principal schemes are set out
below:
<TABLE>
<CAPTION>
Pension charge Prepayment/(provision)
for the year as at 31 March
Scheme Funded or 2000 1999 1998 2000 1999
Pension fund type unfunded (pound)m (pound)m (pound)m (pound)m (pound)m
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
ScottishPower Defined benefit funded - 6.9 6.5 5.0 5.0
Manweb Defined benefit funded 4.2 5.8 5.8 - -
Southern Water Defined benefit funded 4.1 5.3 5.8 - -
Final Salary LifePlan Defined benefit funded 1.0 - - - -
PacifiCorp Defined benefit funded 5.3 - - (32.6) -
============================================================ ==== ==== ==== ===== ====
</TABLE>
The components of the pension charge are as follows:
<TABLE>
<CAPTION>
2000 1999
Interest
(credit)/ Interest
cost on Net credit on Net
Regular prepayment/ Variation pension Regular prepayment/ Variation pension
cost provision credit charge cost provision credit charge
Pension fund (pound)m (pound)m (pound)m (pound)m (pound)m (pound)m (pound)m (pound)m
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ScottishPower* 33.0 (0.3) (47.1) - 28.3 (1.1) (20.3) 6.9
Manweb 5.8 - (1.6) 4.2 5.8 - - 5.8
Southern Water 5.3 - (1.2) 4.1 5.3 - - 5.3
Final Salary LifePlan 1.0 - - 1.0 - - - -
PacifiCorp 4.4 0.9 - 5.3 - - - -
================================== ==== ====== ==== ==== ==== ===== ====
</TABLE>
*The net pension charge is set to a minimum of nil where the variation credit
exceeds regular cost plus interest.
The prepayment/(provision) as at the year end can be reconciled as follows:
<TABLE>
<CAPTION>
Prepayment/
Prepayment (provision) Prepayment
at 1 April Arising on Employer Pension at 31 March at 1 April
1999 acquisition contribution charge 2000 1998
Pension fund (pound)m (pound)m (pound)m (pound)m (pound)m (pound)m
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ScottishPower 5.0 - - - 5.0 11.9
Manweb - - 4.2 (4.2) - -
Southern Water - - 4.1 (4.1) - -
Final Salary LifePlan - - 1.0 (1.0) - -
PacifiCorp - (37.5) 10.2 (5.3) (32.6) -
============================== ==== ===== ==== ==== ===== ====
</TABLE>
Prepayment
Employer Pension at 31 March
Contribution charge 1999
(pound)m (pound)m (pound)m
----------------------------------------------------------------------
ScottishPower - (6.9) 5.0
Manweb 5.8 (5.8) -
Southern Water 5.3 (5.3) -
Final Salary LifePlan - - -
PacifiCorp - - -
============================== ==== ===== ====
106 Annual Report & Accounts/Form 20-F
<PAGE>
31 Pensions continued
--------------------------------------------------------------------------------
The individual scheme funding details and assumptions made are as follows:
<TABLE>
<CAPTION>
Principal actuarial assumptions
Value
Latest of assets Average
full Valuation based on Valuation investment Average Average
actuarial carried valuation method rate of salary pension
Pension fund valuation out by (pound)m adopted return increases increases
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
ScottishPower 31 December 1997 William M Mercer 1,292.0 Projected unit 8.5% 6.5% 4.5%
Manweb 31 March 1998 Bacon & Woodrow 467.6 Projected unit 8.5% 6.5% 4.5%
Southern Water 31 March 1998 Watson Wyatt 231.1 Projected unit 8.5% 6.5% 4.5%
Final Salary LifePlan 31 March 1999 William M Mercer - Projected unit 5.5% 4.0% 2.5%
PacifiCorp 1 January 1999 Hewitt Associates 591.6 Projected unit 9.25%/6.75% 4.0% -
----------------------- ---------------- ----------------- ------- -------------- ----------- ---- ----
</TABLE>
Value
Average of fund
equity assets/
dividend accrued
Pension fund growth benefits
-------------------------------------------------------
ScottishPower 4.5% 123%
Manweb 4.75% 105%
Southern Water 5.5% 108%
Final Salary LifePlan n/a 97%
PacifiCorp n/a 82%
---------------------------- ----- ----
(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 and a defined
contribution plan which are open to continuous contract employees aged between
16 and 60, subject to any qualifying period of service required by the group.
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 2000 are as follows:
Equities Bonds Property Cash Total
% % % % %
--------------------------------------------------------------------------------
ScottishPower 89 4 5 2 100
Manweb 71 29 - - 100
Southern Water 84 12 - 4 100
Final Salary LifePlan 100 - - - 100
PacifiCorp 69 31 - - 100
------------------------------------- --- -- -- -- ---
(b) ScottishPower
This Scheme was open prior to 1 January 1999 to employees of ScottishPower.
Scottish Power UK plc operates a funded pension scheme of the company providing
defined retirement and death benefits based on final pensionable salary. 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 1,038,903
((pound)5.3 million) ScottishPower shares, 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 different assumptions from
those used at the last actuarial valuation of the Scheme. For expensing purposes
the Scheme assets have been taken at market value instead of a calculated
figure, liabilities have been costed on financial assumptions in line with
Government stock yields, and allowance has been made for members leaving the
Scheme with deferred benefits.
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 expensing calculations detailed above resulted in the accounting
rate used for the calculation of the 1999-2000 pension charge being nil. This is
derived from a regular cost of 22.6% 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.
107 Annual Report & Accounts/Form 20-F
<PAGE>
31 Pensions continued
--------------------------------------------------------------------------------
(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 pay 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. On average, the company pays
contributions at twice the rate payable by the member.
The assets are held in a separate trustee administered fund. Included in the
Scheme assets are 202,981 ((pound)1.0 million) ScottishPower shares, purchased
only as part of a pooled strategy to match the relative weightings in the UK
Stock Exchange index. 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 12% of pensionable salaries, 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 three years and an
annual charge in respect of Early Retirement Deficiency Costs payable over 14
years.
(d) Southern Water
Southern Water operates a number of pension schemes. 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 10.3% of pensionable salaries, 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.
(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 Scheme are held in a separate trustee administered
fund. The pension charge for the year, of 10% of pensionable salaries, is based
on the advice of the Scheme's independent qualified actuary, representing the
assessed balance of cost of the accruing benefits after allowing for members'
contributions of 5% of pensionable salaries.
(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 Scheme 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. The provision at 29 November 1999 relates
to the plans' funding position at that time, and therefore there is no variation
cost over the period. PacifiCorp also provides post-retirement benefits and
post-employment benefits to certain employees. Details of these benefits are
disclosed in Note 35.
(g) Additional pension arrangements
The group operates an approved defined contribution pension scheme 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 (pound)0.2 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 35.
108 Annual Report & Accounts/Form 20-F
<PAGE>
32 Contingent liabilities
--------------------------------------------------------------------------------
(a) In November 1999, the group floated a minority stake in its Internet and
telecommunications business, Thus plc. In the event that Thus plc ceases to be a
part of the ScottishPower capital gains tax group before 30 September 2005, Thus
plc will become liable to corporation tax on chargeable gains currently
estimated, after consideration of various uncertainties, at amounts up to
(pound)570 million. Members of the ScottishPower group have agreed to indemnify
Thus plc for any such liability, except in circumstances arising without the
consent of the ScottishPower group.
(b) The group's businesses are parties to various legal claims, actions and
complaints, certain of which involve material amounts. Although the directors
are unable to predict with certainty whether or not the group 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. Details of legal
proceedings involving the group are provided in the Business Review on pages 42
and 43.
(c) The group has contingent liabilities under performance bonds and actual and
potential claims, none of which, in the opinion of the directors, is material to
the group.
33 Financial commitments
--------------------------------------------------------------------------------
2000 1999
(a) Analysis of annual commitments under operating leases (pound)m (pound)m
--------------------------------------------------------------------------------
Leases of land and buildings expiring:
Within one year 0.4 1.0
Between one and two years 1.2 0.2
Between two and three years 1.2 0.3
Between three and four years 1.2 0.2
Between four and five years 0.1 0.2
More than five years 23.4 20.4
-------------------------------------------------------------- ---- ----
27.5 22.3
============================================================== ==== ====
Other operating leases expiring:
Within one year 1.4 2.2
Between one and two years 1.0 0.6
Between two and three years 7.7 3.5
Between three and four years 0.9 0.7
Between four and five years 2.7 0.8
More than five years 1.0 -
-------------------------------------------------------------- ---- ----
14.7 7.8
============================================================== ==== ====
2000 1999
(b) Capital commitments (pound)m (pound)m
--------------------------------------------------------------------------------
Contracted but not provided 286.5 315.8
============================================================== ===== =====
(c) Other contractual commitments
Under contractual commitments in the UK the group has rights and obligations in
relation to the undernoted contracts. The annual value of the purchases and
sales arising from these contracts is provided below:
<TABLE>
<CAPTION>
Purchases/sales in year
under group commitments
Commitment Commitment 2000 1999 1998
Note entered into expires (pound)m (pound)m (pound)m
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
The purchase of electricity from British Energy Generation (UK) Limited 1990 2005 370.1 367.7 365.8
----------------------------------------------------------------------------- ---- --------- ----- ----- -----
The purchase of electricity from Scottish and Southern Energy plc (i) 1990 see below 72.4 78.8 100.5
----------------------------------------------------------------------------- ---- --------- ----- ----- -----
The supply of electricity to Scottish and Southern Energy plc 1990 2005 17.6 18.2 16.8
----------------------------------------------------------------------------- ---- --------- ----- ----- -----
Revenue from the operation of the company's transmission system and No fixed
access by Scottish and Southern Energy plc to the Anglo-Scottish date of
interconnector 1990 expiry 31.0 27.7 26.1
----------------------------------------------------------------------------- ---- --------- ----- ----- -----
Purchase of coal from The Scottish Coal Company Limited 1998 2003 19.0 22.0 76.9
----------------------------------------------------------------------------- ---- --------- ----- ----- -----
Purchase of coal from The Scottish Coal (Deep Mine) Company Limited 1998 2004 49.2 50.5 -
----------------------------------------------------------------------------- ---- --------- ----- ----- -----
Purchase of gas from various fields in the North Sea 1994 2010 125.8 123.6 81.8
============================================================================= ==== ========= ===== ===== =====
</TABLE>
(i) There are two agreements relating to the purchase of electricity from
Scottish and Southern Energy plc. These expire in 2012 and 2039.
In the US, the group 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 (pound)268.3 million, (pound)220.7
million, (pound)210.0 million, (pound)203.1 million and (pound)176.2 million for
the years 2001 to 2005 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 (pound)183.7
million, (pound)174.3 million, (pound)175.5 million, (pound)161.8 million and
(pound)143.6 million for the years 2001 to 2005 respectively. The purchase
contracts include agreements with the Bonneville Power Administration, the
Hermiston Plant and a number of cogenerating facilities.
109 Annual Report & Accounts/Form 20-F
<PAGE>
Notes to the Group Balance Sheet
as at 31 March 2000
continued
34 Related party transactions
--------------------------------------------------------------------------------
Related party transactions and balances with joint ventures and associated
undertakings.
(a) Trading transactions and balances arising in the normal course of business
<TABLE>
<CAPTION>
Sales/(purchases) Amounts due
to/(from) other from/(to) other
group companies group companies
during the year as at 31 March
2000 1999 1998 2000 1999
Related party Related party relationship to group (pound)m (pound)m (pound)m (pound)m (pound)m
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Sales by related parties
Scottish Electricity Settlements Limited 50% owned joint venture 8.7 5.8 - 1.7 2.3
ScotAsh Limited 50% owned joint venture 0.2 - - - -
Purchases by related parties
Scottish Electricity Settlements Limited 50% owned joint venture (0.4) (0.9) (1.3) - (0.8)
South Coast Power Limited 50% owned joint venture (0.3) (8.1) - (0.1) (0.1)
CeltPower Limited 50% owned joint venture (0.4) (0.1) - (0.1) (0.1)
ScotAsh Limited 50% owned joint venture (0.3) - - (0.1) -
======================================== ======================= ==== ==== ==== ==== ====
</TABLE>
In addition to the above, since 30 November 1999 PacifiCorp has made management
and similar charges to Powercor of (pound)2.0 million. At 31 March 2000,
Powercor owed the group (pound)21.9 million.
(b) Funding transactions and balances arising in the normal course of business
<TABLE>
<CAPTION>
Interest payable Amounts due
to other group to other group
companies during companies as
the year at 31 March
2000 1999 2000 1999
Related party Related party relationship to group (pound)m (pound)m (pound)m (pound)m
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Scottish Electricity Settlements Limited 50% owned joint venture (1.4) (1.5) (18.3) (19.1)
South Coast Power Limited 50% owned joint venture - (0.2) - -
CeltPower Limited 50% owned joint venture - - - (2.0)
ScotAsh Limited 50% owned joint venture - - (1.0) -
======================================== ======================= ==== ==== ===== =====
</TABLE>
110 Annual Report & Accounts/Form 20-F
<PAGE>
35 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 profit for the financial year and equity shareholders' funds
are set out in the tables below.
<TABLE>
<CAPTION>
2000 1999 1998
(a) Reconciliation of profit for the financial year to US GAAP: Notes (pound)m (pound)m (pound)m
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Profit for the financial year under UK GAAP 942.3 502.8 170.1
US GAAP adjustments:
Amortisation of goodwill (i) (40.3) (30.0) (29.8)
Deferred tax (ii) (39.3) (33.5) (28.1)
Pensions (iii) 44.8 17.6 22.7
Depreciation on revaluation uplift (iv) 3.4 3.4 1.7
Plant decommissioning and mine reclamation liabilities (v) (6.7) - -
Other (xi) (8.0) - -
Re-classification as extraordinary item (vi) 15.9 - -
---------------------------------------------------------------------------- ----- ----- -----
912.1 460.3 136.6
Deferred tax effect of US GAAP adjustments (ii) (19.2) (5.3) (6.8)
---------------------------------------------------------------------------- ----- ----- -----
892.9 455.0 129.8
Extraordinary item (net of tax) (vi) (11.1) - -
---------------------------------------------------------------------------- ----- ----- -----
Profit for the financial year under US GAAP 881.8 455.0 129.8
============================================================================ ===== ===== =====
Earnings per share - continuing operations 64.26p 38.39p 11.00p
- extraordinary item (net of tax) (vi) (0.80)p - -
---------------------------------------------------------------------------- ----- ----- -----
Earnings per share under US GAAP (x) 63.46p 38.39p 11.00p
============================================================================ ===== ===== =====
Diluted earnings per share - continuing operations 63.81p 38.01p 10.89p
- extraordinary item (net of tax) (vi) (0.79)p - -
---------------------------------------------------------------------------- ----- ----- -----
Diluted earnings per share under US GAAP (x) 63.02p 38.01p 10.89p
============================================================================ ===== ===== =====
</TABLE>
<TABLE>
<CAPTION>
2000 1999
(b) Effect on equity shareholders' funds of differences between UK GAAP and US GAAP: Notes (pound)m (pound)m
--------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Equity shareholders' funds under UK GAAP 6,363.9 1,945.9
US GAAP adjustments:
Goodwill (i) 1,013.9 1,036.7
Business combinations (i) 783.2 163.1
Amortisation of goodwill (i) (132.4) (92.1)
ESOP shares held in trust (viii) (62.3) (33.8)
US regulatory assets (ix) 348.1 -
Pensions (iii) 150.3 116.8
Dividends (vii) 113.4 178.0
Revaluation of fixed assets (iv) (229.0) (229.0)
Depreciation on revaluation uplift (iv) 8.5 5.1
Plant decommissioning and mine reclamation liabilities (v) 123.3 -
Other (xi) 10.2 -
Deferred tax:
Effect of US GAAP adjustments (ii) (213.6) (35.7)
Effect of differences in methodology (ii) (1,248.0) (594.2)
------------------------------------------------------------------------------------------------ -------- -------
Equity shareholders' funds under US GAAP 7,029.5 2,460.8
================================================================================================ ======== =======
</TABLE>
111 Annual Report & Accounts/Form 20-F
<PAGE>
Notes to the Group Balance Sheet
as at 31 March 2000
continued
35 Summary of differences between UK and US Generally Accepted Accounting
Principles ("GAAP") continued
--------------------------------------------------------------------------------
(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 against reserves. Goodwill arising
on acquisitions after 31 March 1998 is capitalised and amortised through the
income statement 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 useful economic 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,
Southern Water 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) Deferred taxation
Under UK GAAP, provision for deferred tax is only required to the extent that it
is probable that a taxation liability or asset will crystallise, in the
foreseeable future, as a result of timing differences between taxable profit and
accounting profit. Provision is made at known rates of tax.
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.
(iii) 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.
(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.
(iv) Revaluation of fixed assets
The revaluation of Manweb distribution assets and Southern Water operational
assets is not permitted under US GAAP. Accordingly, the reconciliation restates
fixed assets to historical cost and the depreciation charge has been adjusted.
Refer to Note 18 (i) for further information relating to the fixed assets
revaluation.
(v) Plant 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.
(vi) Extraordinary item
Under UK GAAP, 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. Earnings per share under US GAAP are shown both before and
after extraordinary items.
(vii) Ordinary dividends
Under UK GAAP, final ordinary 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.
(viii) ESOP shares held in trust
Under UK GAAP, shares held by an Employee Share Ownership Plan ("ESOP") 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. No dividends have been paid on the shares
held by the ScottishPower ESOP and future dividends have been waived.
112 Annual Report & Accounts/Form 20-F
<PAGE>
35 Summary of differences between UK and US Generally Accepted Accounting
Principles ("GAAP") continued
--------------------------------------------------------------------------------
(ix) 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 United
States 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.
(x) Earnings per share
Under UK GAAP, earnings per share is calculated by dividing the net profit or
loss for the period by the weighted average number of shares (for basic and
diluted number of shares) outstanding for the period. UK GAAP permits the
presentation of more than one measure of earnings per share provided that all
such measures are clearly explained and are given equal prominence on the face
of the income statement.
Under US GAAP, earnings per share is calculated by dividing earnings from
continuing operations, excluding extraordinary items, by the weighted average
number of shares (for basic and diluted number of shares) outstanding for the
period. US GAAP permits only one measure of earnings per share as a performance
measure.
(a) Earnings per ordinary share have been calculated by dividing the 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:
<TABLE>
<CAPTION>
2000 1999 1998
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Profit for the financial year under US GAAP ((pound)m) 881.8 455.0 129.8
Basic weighted average share capital (number of shares, millions) 1,389.6 1,185.2 1,180.1
Diluted weighted average share capital (number of shares, millions) 1,399.2 1,197.2 1,191.9
---------------------------------------------------------------------- -------- --------- ---------
</TABLE>
The difference between the basic and the diluted weighted average share capital
is wholly attributable to outstanding share options.
(b) As permitted under UK GAAP, earnings per share have been presented including
and excluding the impact of exceptional items, goodwill amortisation and the
windfall tax to provide an additional measure of underlying performance. In
accordance with US GAAP, earnings per share have been presented above based on
US GAAP earnings, without adjustments for the impact of exceptional items, other
than those which are classified as extraordinary items under US GAAP, goodwill
amortisation and the windfall tax. Such additional measures of underlying
performance are not permitted under US GAAP. The inclusion of exceptional items,
other than those which are classified as extraordinary items under US GAAP, in
the determination of earnings per share in accordance with US GAAP increased
earnings by (pound)408.9 million or 29.43 pence per share for the year ended 31
March 2000. The inclusion of goodwill amortisation decreased earnings by
(pound)71.1 million or 5.12 pence per share for the year ended 31 March 2000, by
(pound)31.2 million or 2.63 pence per share for the year ended 31 March 1999 and
by (pound)29.8 million or 2.53 pence per share for the year ended 31 March 1998.
The inclusion of the windfall tax decreased earnings by (pound)317.0 million or
26.86 pence per share for the year ended 31 March 1998.
(xi) 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, marketable securities and stock option 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.
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.
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 profit
for the financial year under US GAAP and earnings per share under US GAAP would
have been reduced to the pro forma amounts below:
For the year 2000
----------------------------------------------------------------------------
Profit for financial year under US GAAP ((pound)m) 881.8
Pro forma ((pound)m) 878.8
Earnings per share under US GAAP 63.46p
Pro forma 63.24p
--------------------------------------------------------------------- -------
The effect on 1999 and 1998 profit for the financial year under US GAAP and
earnings per share would have been immaterial.
The weighted average fair value of options granted during the year was
(pound)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:
For the year 2000
----------------------------------------------------------------------------
Dividend yield 4.5%
Risk-free interest rate 6.0%
Volatility 30.0%
Expected life of the options (years) 4
---------------------------------------------------------------------- -----
113 Annual Report & Accounts/Form 20-F
<PAGE>
Notes to the Group Balance Sheet
as at 31 March 2000
continued
35 Summary of differences between UK and US Generally Accepted Accounting
Principles ("GAAP") continued
--------------------------------------------------------------------------------
(xii) Reclassifications
The reconciliations of 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 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 special charges 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
income.
The consolidated statement of comprehensive income is set out below:
<TABLE>
<CAPTION>
2000 1999 1998
(pound)m (pound)m (pound)m
------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Profit for the financial year under US GAAP 881.8 455.0 129.8
Other comprehensive income
- Foreign currency translation adjustment 25.1 - -
- Unrealised gain on available-for-sale securities 2.0 - -
----------------------------------------------------------- ------- ------- --------
Total comprehensive income under US GAAP 908.9 455.0 129.8
=========================================================== ======= ======= ========
</TABLE>
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 associates and joint ventures, returns on investments
and servicing of finance, taxation, capital expenditure and financial
investment, acquisition 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 associates and
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.
The consolidated cash flow statement prepared in conformity with UK GAAP is set
out on page 84. 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 associates
and 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:
<TABLE>
<CAPTION>
2000 1999 1998
(pound)m (pound)m (pound)m
-------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash inflow from continuing operating activities 1,117.5 944.9 1,014.1
Dividends received from associates and joint ventures 0.5 0.9 0.9
Returns on investments and servicing of finance (258.4) (149.9) (146.7)
Ordinary taxation (154.3) (93.7) (134.5)
Windfall tax - (157.8) (157.8)
----------------------------------------------------------- ------- ------- ---------
Net cash provided by operating activities 705.3 544.4 576.0
----------------------------------------------------------- ------- ------- ---------
Capital expenditure and financial investment (842.3) (683.0) (592.7)
Acquisitions and disposals 718.8 (77.4) 67.9
----------------------------------------------------------- ------- ------- ---------
Net cash used in investing activities (123.5) (760.4) (524.8)
----------------------------------------------------------- ------- ------- ---------
Financing (121.2) 454.2 261.5
Add: movement in bank overdrafts 23.8 6.0 (12.9)
Equity dividends paid (406.0) (252.8) (226.0)
----------------------------------------------------------- ------- ------- ---------
Net cash (required)/provided by financing activities (503.4) 207.4 22.6
----------------------------------------------------------- ------- ------- ---------
Net increase/(decrease) in cash and cash equivalents 78.4 (8.6) 73.8
----------------------------------------------------------- ------- ------- ---------
Cash and cash equivalents at beginning of financial year 106.9 115.5 41.7
----------------------------------------------------------- ------- ------- ---------
Cash and cash equivalents at end of financial year 185.3 106.9 115.5
=========================================================== ======= ======= =========
</TABLE>
All liquid investments with maturities of three months or less at the time of
acquisition are considered to be cash equivalents.
114 Annual Report & Accounts/Form 20-F
<PAGE>
35 Summary of differences between UK and US Generally Accepted Accounting
Principles ("GAAP") continued
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
2000 1999 1998
Significant non-cash investing or financing activities (pound)m (pound)m (pound)m
----------------------------------------------------------------------------------------
<S> <C> <C> <C>
On acquisition of subsidiaries:
Shares allotted as part of purchase consideration 4,065.5 - -
Loan notes - - 3.0
====================================================== ========= ======== ========
</TABLE>
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) Deferred taxation
UK GAAP requires provision for deferred taxation only when it is expected that a
liability will become payable or an asset will crystallise in the foreseeable
future and then at the known future rates of tax. US GAAP requires full
provision for deferred taxes to be made using enacted future tax rates.
The components of the estimated net deferred tax liability that would be
recognised under US GAAP are as follows:
2000 1999
(pound)m (pound)m
--------------------------------------------------------------------------------
Deferred taxation liabilities
Excess of book value over taxation value of fixed assets 1,286.6 631.6
Other temporary differences 395.2 39.5
----------------------------------------------------------- -------- ------
1,681.8 671.1
Deferred taxation assets
Other temporary differences (220.2) (41.2)
----------------------------------------------------------- -------- ------
Net deferred tax liability 1,461.6 629.9
=========================================================== ======== ======
Analysed as follows:
Current (8.0) (24.8)
Non-current 1,469.6 654.7
----------------------------------------------------------- -------- ------
1,461.6 629.9
=========================================================== ======== ======
(c) Pensions
At 31 March 2000, 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 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.
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 2000, 31 March 1999 and 31 March 1998 are as follows:
<TABLE>
<CAPTION>
2000 1999 1998
Change in benefit obligation (pound)m (pound)m (pound)m
----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Benefit obligation at beginning of year 2,074.2 1,882.4 1,847.6
Additional obligation from acquisition 673.6 - -
Service cost (excluding plan participants" contributions) 57.6 36.4 29.5
Interest cost 137.7 149.6 144.6
Plan participants" contributions 12.9 13.0 13.2
Actuarial (gain)/loss (8.3) 97.2 (57.3)
Benefits paid (124.9) (104.4) (95.2)
Exchange 4.8 - -
---------------------------------------------------------- ---------- ---------- ----------
Benefit obligation at end of year 2,827.6 2,074.2 1,882.4
========================================================== ========== ========== ==========
<CAPTION>
2000 1999 1998
Change in plans" assets (pound)m (pound)m (pound)m
----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Fair value of plans" assets at beginning of year 2,781.4 2,372.1 2,045.1
Additional fair value of assets from acquisition 636.1 - -
Actual return on plans" assets 558.3 488.7 395.8
Employer contributions 17.7 12.0 13.2
Plan participants" contributions 12.9 13.0 13.2
Benefits paid (124.9) (104.4) (95.2)
Exchange 5.3 - -
---------------------------------------------------------- ---------- ---------- ----------
Fair value of plans" assets at end of year 3,886.8 2,781.4 2,372.1
========================================================== ========== ========== ==========
<CAPTION>
2000 1999 1998
Reconciliation of funded status to prepaid benefit cost (pound)m (pound)m (pound)m
----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Funded status 1,059.2 707.2 489.7
Unrecognised net actuarial gain (933.5) (600.0) (393.3)
Unrecognised transition asset (3.3) (4.2) (5.0)
---------------------------------------------------------- ---------- ---------- ----------
Prepaid benefit cost 122.4 103.0 91.4
========================================================== ========== ========== ==========
</TABLE>
115 Annual Report & Accounts /Form 20-F
<PAGE>
Notes to the group Balance Sheet
as at March 2000
continued
35 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 2000, 1999
and 1998 were as follows:
<TABLE>
<CAPTION>
2000 1999 1998
(pound)m (pound)m (pound)m
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost 57.6 49.4 42.7
Interest cost 137.7 149.6 144.6
Expected return on plans" assets (211.1) (184.4) (181.7)
Amortisation of transition asset (0.8) (0.8) (0.8)
Amortisation of experience gains (22.8) (13.4) (0.2)
-------------------------------------------------------------------------------- --------- --------- ---------
Net periodic benefit (credit)/cost (39.4) 0.4 4.6
================================================================================ ========= ========= =========
<CAPTION>
The actuarial assumptions adopted in arriving at the above figures are as
follows:
UK arrangements 2000 1999 1998
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Expected return on plans" assets n/a 7% p.a. 8% p.a.
Discount rate 6% p.a. 6% p.a. 8% p.a.
Rate of earnings increase 5% p.a. 5% p.a. 7% p.a.
Pension increases 3% p.a. 3% p.a. 5% p.a.
================================================================================ ======== ========== =========
<CAPTION>
29 Nov
US arrangements 2000 1999
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Expected return on plans" assets n/a 9.25% p.a.
Discount rate 7.5% p.a. 7.5% p.a.
Rate of earnings increase 4% p.a. 4% p.a.
Inflation rate 4% p.a. 4% p.a.
=========================================================================================== ========= ===========
</TABLE>
(d) Other post-retirement benefits
PacifiCorp Domestic Electric 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. The details shown below are in
respect of the period from date of acquisition, 29 November 1999, to 31 March
2000.
The net periodic post-retirement benefit cost and significant assumptions are
summarised as follows:
<TABLE>
<CAPTION>
2000
(pound)m
----------------------------------------------------------------------------------------------
<S> <C>
Service cost 1.2
Interest cost 5.1
Expected return on plan assets (4.6)
---------------------------------------------------------------------------------- ----------
Net periodic post-retirement benefit cost 1.7
================================================================================== ==========
Discount rate 7.5%
Initial healthcare cost trend rate _ under 65 6.6%
Initial healthcare cost trend rate _ over 65 6.8%
Ultimate healthcare cost trend rate 4.5%
================================================================================== ==========
<CAPTION>
The change in the accumulated post-retirement benefit obligation, change in plan
assets and funded status are as follows:
2000
(pound)m
----------------------------------------------------------------------------------------------
<S> <C>
Accumulated post-retirement benefit obligation on acquisition 215.9
Service cost 1.2
Interest cost 5.1
Plan participants" contributions 0.6
Actuarial gain (0.3)
Benefits paid (3.7)
Exchange 1.5
---------------------------------------------------------------------------------- ----------
Accumulated post-retirement obligation at end of year 220.3
================================================================================== ==========
<CAPTION>
2000
Change in plan assets (pound)m
----------------------------------------------------------------------------------------------
<S> <C>
Plan assets at fair value on acquisition 163.9
Actual return on plan assets 31.0
Company contributions 7.6
Benefits paid (3.7)
Exchange 1.4
---------------------------------------------------------------------------------- ----------
Plan assets at end of year 200.2
================================================================================== ==========
</TABLE>
116 Annual Report & Accounts /Form 20-F
<PAGE>
35 Summary of differences between UK and US Generally Accepted Accounting
Principles ("GAAP") continued
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
2000
Reconciliation of accrued post-retirement costs and total amount recognised (pound)m
------------------------------------------------------------------------------------------
<S> <C>
Funded status of plan (20.1)
PacifiCorp unrecognised net gain (26.4)
------------------------------------------------------------------------------ ---------
Accrued post-retirement benefit cost (46.5)
============================================================================== =========
</TABLE>
The assumed healthcare cost trend rate gradually decreases over 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 2000 by (pound)15.7 million, and the annual net
periodic post-retirement benefit costs by (pound)1.4 million. Decreasing the
assumed healthcare cost trend rate by one percentage point would have reduced
the APBO as of 31 March 2000 by (pound)14.9 million, and the annual net periodic
post-retirement benefit costs by (pound)1.3 million.
Post-employment benefits
PacifiCorp Domestic Electric 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 (pound)11.5 million at 31 March 2000.
(e) Acquisition - Unaudited pro forma information
The following unaudited pro forma information shows the consolidated results of
operations, under US GAAP, for the years ended 31 March 2000 and 31 March 1999
assuming that the acquisition of PacifiCorp had taken place on 1 April 1998. The
pro forma results for the year ending 31 March 1999 include the results of
PacifiCorp for the 12 months ended 31 December 1998. Adjustments have been made
for permitted pro forma purchase accounting adjustments and to exclude the
effects of discontinued operations and businesses held for disposal. Permitted
pro forma adjustments include only the effect of events directly attributable to
a transaction that are factually supportable and expected to have a continuing
impact. Pro forma adjustments reflecting anticipated efficiencies resulting from
a transaction are, under most circumstances, not permitted. As a result of the
limitations imposed with regard to the types of permitted pro forma adjustments,
the directors believe that the unaudited pro forma information is not indicative
of future results of operations, nor the results of historical operations had
the acquisition of PacifiCorp been consummated as of the assumed date.
Year ended 31 March
2000 1999
(pound)m (pound)m
-------------------------------------------------------------------------
Turnover 5,494.3 6,238.0
------------------------------------------------ ------- ---------
Profit before taxation 1,225.6 639.0
------------------------------------------------ ------- ---------
Net income 965.1 463.8
------------------------------------------------ ------- ---------
Net income per ordinary share 69.45p 39.13p
------------------------------------------------ ------- ---------
Net income per ADS* 277.80p 156.52p
================================================ ======= =========
*Net income per ADS has been calculated by multiplying the net income per
ordinary share by four, the number of Ordinary Shares represented by each ADS.
The results of businesses held for disposal are not included in the consolidated
profit and loss account, as required under UK GAAP. The operating profit of
Powercor, the principal business held for disposal, for the period from
acquisition until 31 March 2000 was (pound)41.8 million.
New US accounting standards adopted
(a) Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use
SOP98-1: Statement of Position 98-1, Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use was issued during January 1998
by the American Institute of Certified Public Accountants (AICPA) and is
effective for all fiscal years beginning after 15 December 1998. The information
set out in Note 18 reflects the disclosure requirements of SOP 98-1.
(b) Accounting for Contracts Involved in Energy Trading and Risk Management
Activities
In December 1998 the FASB Emerging Issues Task Force (EITF) reached a
consensus on Issue No 98-10, Accounting for Contracts Involved in Energy Trading
and Risk Management Activities. The guidance has had minimal impact for the
majority of UK energy contracts as they fall outside the scope of this
consensus. The effect of the adoption of this consensus on US energy contracts
is not material.
Recent US accounting pronouncements
(a) Accounting for Derivative Instruments and Hedging Activities
In June 1998, the FASB issued Statement of Financial Accounting Standards No.
133 (FAS 133) which, as amended will be effective for ScottishPower in April
2001. The Statement establishes accounting and reporting standards requiring
that every derivative instrument be recorded in the balance sheet as either an
asset or liability measured at fair value. Changes in the derivative's fair
value will be recognised currently in earnings unless specific hedge accounting
criteria are met. A derivative's gains and losses for qualifying hedges offset
related results on the hedged item in the income statement and a company must
formally document, designate and periodically assess the effectiveness of
transactions that receive hedge accounting. The impact of adopting FAS 133 on
ScottishPower is currently being considered.
(b) Accounting for Asset Retirement Obligations
The FASB issued a revised exposure draft in February 2000 on the proposed
Statement which would establish standards for accounting for an obligation
associated with the retirement of a tangible long-lived asset. The obligations
included within the scope are those that are unavoidable as a result of either
the acquisition or the normal operation of a long-lived asset. The obligation
associated with the retirement of a tangible long-lived asset would be
recognised as a liability when incurred and initially measured at fair value.
Additionally, the proposed statement would establish standards for accounting
for the cost associated with an asset retirement obligation. It would require
that, upon initial recognition of a liability for an asset retirement
obligation, an entity capitalise that cost by recognising an increase in the
carrying amount of the related long-lived asset. Based upon the current exposure
draft, this proposed Statement would be effective for ScottishPower in April
2002 and the impact will be considered once the final Statement has been issued.
117 Annual Report & Accounts/Form 20-F
<PAGE>
Company Balance Sheet
as at 31 March 2000 2000 1999
Notes (pound)m (pound)m
------------------------------------------------------------------------------
Fixed assets
Investments 37 4,746.3 -
------------------------------------------------------- --------- --------
Current assets
Debtors 38 642.8 -
------------------------------------------------------- --------- --------
Creditors: amounts falling due within one year 39 (135.7) -
------------------------------------------------------- --------- --------
Net current assets 507.1 -
------------------------------------------------------- --------- --------
Net assets 5,253.4 -
======================================================= ========= ========
Called up share capital 40 923.8 -
Share premium 40 3,733.8 -
Capital redemption reserve 40 18.3 -
Profit and loss account 40 577.5 -
------------------------------------------------------- --------- --------
Shareholders" funds 40 5,253.4 -
======================================================= ========= ========
Approved by the Board on 4 May 2000 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 72 to 76, together with the
Notes on pages 79 to 83, 85 to 87, 89 to 117 and 119 to 120 form part of these
Accounts.
118 Annual Report & Accounts/Form 20-F
<PAGE>
Notes to the Company Balance Sheet
as at 31 March 2000
36 Company balance sheet at 31 March 1999
--------------------------------------------------------------------------------
The Company was incorporated on 19 February 1999. At 31 March 1999, its balance
sheet comprised debtors of (pound)37,500, cash of (pound)12,500, ordinary share
capital of (pound)2 and Redeemable shares of (pound)49,998.
37 Fixed asset investments
--------------------------------------------------------------------------------
Subsidiary Own shares
undertakings held under
Shares Loans trust Total
(pound)m (pound)m (pound)m (pound)m
-----------------------------------------------------------------------------
Cost or valuation:
At 1 April 1999 - - - -
Additions 1,663.5 3,049.9 33.9 4,747.3
Disposals and other - - (1.0) (1.0)
---------------------------- -------- -------- ------- ----------
At 31 March 2000 1,663.5 3,049.9 32.9 4,746.3
============================ ======== ======== ======= ==========
38 Debtors
-----------------------------------------------------------------------------
2000 1999
(pound)m (pound)m
-----------------------------------------------------------------------------
Amounts falling due within one year:
Loans to subsidiary undertakings 572.5 -
Interest due from subsidiary undertakings 70.3 -
------------------------------------------------------ ------- ----------
642.8 -
====================================================== ======= ==========
39 Creditors
-----------------------------------------------------------------------------
2000 1999
(pound)m (pound)m
-----------------------------------------------------------------------------
Amounts falling due within one year:
Proposed dividend 113.4 -
Corporation tax 5.3 -
Accrued expenses 17.0 -
------------------------------------------------------ ------- ----------
135.7 -
====================================================== ======= ==========
40 Analysis of movements in share capital and reserves
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Capital Profit
Number Share Share redemption and loss
of shares capital premium reserve account Total
000s (pound)m (pound)m (pound)m (pound)m (pound)m
------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
At 1 April 1999 - - - - - -
Retained profit for the year - - - - 803.0 803.0
Share capital issued
- Scheme of Arrangement 1,182,990 591.5 - - - 591.5
- Employee sharesave scheme 11,368 5.7 45.7 - (16.2) 35.2
- Executive share option scheme 89 0.1 0.3 - - 0.4
- Acquisition 689,669 344.8 3,687.8 - - 4,032.6
Share buy-back (36,530) (18.3) - 18.3 (209.3) (209.3)
---------------------------------- ----------- -------- -------- ----------- --------- ---------
At 31 March 2000 1,847,586 923.8 3,733.8 18.3 577.5 5,253.4
================================== =========== ======== ======== =========== ========= =========
</TABLE>
Details of the Scheme of Arrangement under which the company became the new
holding company of the ScottishPower group and of the company's share capital
are set out in Note 27.
41 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 4 May 2000. The profit for the financial year per
the Accounts of the company was (pound)1,144.4 million (1999 (pound)nil).
119 Annual Report & Accounts / Form 20-F
<PAGE>
Principal Subsidiary Undertakings
and Other Investments
<TABLE>
<CAPTION>
Proportion
Class of share of shares
Subsidiary undertakings capital held Activity
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CRE Energy Limited Ordinary shares(pound)1 100% Wind-powered electricity generation
Domestic Appliance Insurance Limited (Isle of Man) Ordinary shares(pound)1 100% Insurance
Manweb plc Ordinary shares 50p 100% Regional electricity company
NA General Partnership* n/a 100% Investment holding
PacifiCorp (USA) Common stock 100% Regional electricity company
PacifiCorp Financial Services Inc (USA) Common stock 100% Finance company
PacifiCorp Group Holdings (USA) Common stock 100% Investment holding
Powercor Australia Limited (Australia) Ordinary shares A$1 100% Regional electricity company
Redeemable preference shares A$1 100%
Scottish Power UK plc** Ordinary shares 50p 100% Generation, transmission, distribution and
supply of electricity and gas supply
ScottishPower Insurance Limited (Isle of Man) Ordinary shares(pound)1 100% Insurance
Southern Water Services Finance plc Ordinary shares(pound)1 100% Finance company
Southern Water Services Limited Ordinary shares(pound)1 100% Water supply and wastewater services
Thus plc Ordinary shares 2.5p 50.1% Internet and telecommunications
------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Fixed asset investments
<S> <C> <C> <C>
Joint ventures
CeltPower Limited Ordinary shares(pound)1 50% Wind-powered electricity generation
ScotAsh Limited Ordinary shares(pound)1 50% Ash sales
Scottish Electricity Settlements Limited Ordinary shares(pound)1 50% Scottish electricity settlements
Shoreham Operations Company Limited Ordinary shares(pound)1 50% Management services
South Coast Power Limited Ordinary shares(pound)1 50% Electricity generation
Associated undertaking
Wind Resources Limited Ordinary shares(pound)1 45% Wind-powered electricity generation
Other investments
Folkestone & Dover Water Services Limited Ordinary shares(pound)1 25% Water supply
Preference shares(pound)1 22%
Deferred shares(pound)1 12%
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Notes
A$ represents Australian dollar
*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.
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 and
subsidiary undertakings excluded from consolidation on the grounds that they are
held exclusively for resale.
All companies are incorporated in Great Britain, unless otherwise stated.
120 Annual Report & Accounts / Form 20-F
<PAGE>
Report of the Auditors
to the members of Scottish Power plc
We have audited the Accounts on pages 72 to 120 including the disclosures in
respect of directors' remuneration contained in Note 3(c) on page 81.
Respective Responsibilities of Directors
and Auditors
The directors are responsible for preparing the Annual Report and Accounts/Form
20-F. As described on page 71, this includes responsibility for preparing the
Accounts in accordance with applicable United Kingdom accounting standards. Our
responsibilities, as independent auditors, are established in the United Kingdom
by statute, the Auditing Practices Board, the Listing Rules of the Financial
Services Authority and our profession's ethical guidance.
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 United Kingdom Companies
Act. 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 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 statement on pages 62 and 63 reflects the company's
compliance with the seven provisions of the Combined Code specified for our
review by the Financial Services Authority, 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 generally accepted
in the United Kingdom which are substantially consistent with generally accepted
Auditing Standards 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.
UK 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 2000 and of the profit and cash flows of
the group for the year then ended and have been properly prepared in accordance
with the Companies Act 1985.
US Opinion
In our opinion, the Accounts referred to above present fairly, in all material
respects, the consolidated financial position of the group as at 31 March 2000
and 31 March 1999, and the results of their operations and their cash flows for
the years ended 31 March 2000, 31 March 1999 and 31 March 1998 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 determination of
net income, shareholders' equity and cash flows is shown in Note 35 to the
Accounts.
/s/ PricewaterhouseCoopers
PricewaterhouseCoopers
Chartered Accountants and Registered Auditors
Glasgow 4 May 2000
121 Annual Report & Accounts/Form 20-F
<PAGE>
Five Year Summary
<TABLE>
<CAPTION>
Years ended 31 March
-----------------------------------------------------------------
2000 2000 1999 1998 1997
Notes $m (pound)m (pound)m (pound)m (pound)m
-----------------------------------------------------------------------------------------------------------------------------
UK GAAP Information
Profit and Loss Account Information:
<S> <C> <C> <C> <C> <C> <C>
Turnover (a) 6,584 4,115 3,242 3,128 2,941
Operating profit (a) 1,075 672 803 785 664
Operating profit (as adjusted) (a),(b) 1,538 961 804 785 685
Profit before taxation 1,854 1,159 644 640 558
Profit before taxation (as adjusted) (b) 1,177 736 645 640 579
Profit after ordinary taxation 1,509 943 502 488 422
Profit for the financial year (c) 1,508 942 503 170 421
Dividends (546) (341) (268) (243) (218)
Balance Sheet Information:
Total assets 23,913 14,946 6,232 5,577 4,848
Capital expenditure (net) (d) 1,419 887 754 657 471
Long-term liabilities 8,690 5,431 2,108 1,435 1,076
Net debt 7,746 4,842 2,421 1,953 1,790
Equity shareholders' funds 10,182 6,364 1,946 1,708 1,523
Ratios and Statistics:
Earnings per ordinary share $1.0850 67.81p 42.42p 14.41p 38.11p
Earnings per ordinary share (as adjusted) (f) $0.6624 41.40p 42.52p 41.28p 39.88p
Earnings per ScottishPower ADS (e) $ 4.34 (pound)2.71 (pound)1.70 (pound)0.58 (pound)1.52
Earnings per ScottishPower ADS (as adjusted) (e),(f) $ 2.66 (pound)1.66 (pound)1.70 (pound)1.65 (pound)1.59
Dividends per ordinary share $0.3968 24.80p 22.50p 20.40p 18.50p
Dividends per ScottishPower ADS (e) $ 1.58 (pound)0.99 (pound)0.90 (pound)0.82 (pound)0.74
Dividend cover (as adjusted) (f) 1.7x 1.7x 1.9x 2.0x 2.2x
Interest cover (as adjusted) (f) 4.2x 4.2x 5.0x 5.3x 6.4x
Gearing (g) 76% 76% 124% 114% 118%
USGAAP Information
Turnover 6,584 4,115 3,242 3,128 2,941
Profit for the financial year (c) 1,411 882 455 130 353
Earnings per ordinary share (h) $1.0154 63.46p 38.39p 11.00p 31.94p
Earnings per ScottishPower ADS (e),(h) $ 4.06 (pound)2.54 (pound)1.54 (pound)0.44 (pound)1.28
Total assets 26,937 16,836 7,199 6,550 6,065
Equity shareholders' funds under USGAAP 11,248 7,030 2,461 2,253 2,340
====================================================== ========= ========== ========== ========== ==========
</TABLE>
1996
Notes (pound)m
---------------------------------------------------------------------
UK GAAP Information
Profit and Loss Account Information:
Turnover (a) 2,271
Operating profit (a) 434
Operating profit (as adjusted) (a),(b) 477
Profit before taxation 404
Profit before taxation (as adjusted) (b) 447
Profit after ordinary taxation 295
Profit for the financial year (c) 296
Dividends (146)
Balance Sheet Information:
Total assets 2,861
Capital expenditure (net) (d) 227
Long-term liabilities 785
Net debt 632
Equity shareholders' funds 1,208
Ratios and Statistics:
Earnings per ordinary share 33.12p
Earnings per ordinary share (as adjusted) (f) 36.61p
Earnings per ScottishPower ADS (e) (pound)1.32
Earnings per ScottishPower ADS (as adjusted) (e),(f) (pound)1.46
Dividends per ordinary share 15.50p
Dividends per ScottishPower ADS (e) (pound)0.62
Dividend cover (as adjusted) (f) 2.4x
Interest cover (as adjusted) (f) 15.4x
Gearing (g) 52%
US GAAP Information
Turnover 2,271
Profit for the financial year (c) 271
Earnings per ordinary share (h) 30.39p
Earnings per ScottishPower ADS (e),(h) (pound)1.22
Total assets 3,480
Equity shareholders' funds under USGAAP 1,510
============================================== ====== ===========
(a) The results for the financial year ended 31 March 1996 included turnover of
(pound)439.4 million, operating profit of (pound)37.7 million and operating
profit, before exceptional reorganisation costs, of (pound)80.4 million in
respect of Manweb for the period of the year following its acquisition on 6
October 1995. The results for the financial year ended 31 March 1997
included turnover of (pound)316.2 million, operating profit of (pound)114.4
million and operating profit, before exceptional reorganisation costs, of
(pound)135.6 million in respect of Southern Water for the period of the
year following its acquisition on 6 August 1996. The results for the
financial year ended 31 March 2000 included turnover of (pound)711.7
million, operating profit of (pound)124.5 million and operating profit,
before goodwill amortisation of (pound)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(pound)317 million.
(d) Capital expenditure is stated net of capital grants and customer
contributions.
(e) Earnings and dividends per ScottishPower ADS have been calculated based on
a ratio of four ScottishPower ordinary shares to one ScottishPower ADS.
(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, earnings per share have been presented
including and excluding the impact of the exceptional items, goodwill
amortisation and the windfall tax to provide an additional measure of
underlying performance. In accordance with US GAAP, earnings per share have
been presented based on US GAAP earnings, without adjustments for the
impact of exceptional items, other than those which are classified as
extraordinary items under US GAAP, goodwill amortisation and the windfall
tax. Such additional measures of underlying performance are not permitted
under US GAAP. The inclusion of exceptional items, other than those which
are classified as extraordinary items under US GAAP, in the determination
of earnings per share in accordance with US GAAP increased earnings by
(pound)408.9 million or 29.43 pence per share/(pound)1.18 per ADS for the
year ended 31 March 2000. The inclusion of goodwill amortisation decreased
earnings by (pound)71.1 million or 5.12 pence per share/(pound)0.20 per ADS
for the year ended 31 March 2000, by (pound)31.2 million or 2.63 pence per
share/(pound)0.11 per ADS for the year ended 31 March 1999, by (pound)29.8
million or 2.53 pence per share/(pound)0.10 per ADS for the year ended 31
March 1998, by (pound)23.7 million or 2.14 pence per share/(pound)0.09 per
ADS for the year ended 31 March 1997 and by (pound)7.5 million or 0.84
pence per share/(pound)0.03 per ADS for the year ended 31 March 1996. The
inclusion of windfall tax decreased earnings by (pound)317.0 million or
26.86 pence per share/(pound)1.07 per ADS for the year ended 31 March 1998.
(i) Amounts for the financial year ended 31 March 2000 have been translated,
solely for the convenience of the reader, at $1.60 to (pound)1.00, the
closing exchange rate on 31 March 2000.
122 Annual Report & Accounts / Form 20-F
<PAGE>
Glossary of Terms and US Equivalents
<TABLE>
<CAPTION>
Term used in UK annual report US equivalent or definition
<S> <C>
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
Profit for the financial year Net 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
</TABLE>
123 Annual Report & Accounts / Form 20-F
<PAGE>
Investor Information
New Holding Company
An announcement was made on 25 February 1999 that the directors had decided that
the group would be more effective if it were structured with a holding company
that did not have any operating activities.
On 15 June 1999, ScottishPower shareholders approved a scheme of arrangement
under Section 425 of the Companies Act 1985, the purpose of which was to
introduce the new holding company for the ScottishPower group. The scheme was
subsequently sanctioned by the Court of Session and became effective on 30 July
1999.
In particular, the introduction of the new holding company facilitates:
- a clearer demarcation between certain of the group's activities; and
- the financial independence of different operating areas of the group.
It is also believed that the creation of the new holding company for the
group assisted the regulatory review process of the PacifiCorp merger in the UK
and in the US.
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 The Bank of New York,
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 24 sets forth, for the calendar quarters of the financial years
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
over-the-counter prior to 8 September 1997 and as reported on the New York
Exchange Composite Tape following that date.
Table 24 - Historical Share Prices
--------------------------------------------------------------------------------
Ordinary Shares1 American Depositary Shares2
Financial Year High (p) Low (p) High ($) Low ($)
--------------------------------------------------------------------------------
1999
First 576.00 521.00 37.50 35.25
Second 620.00 528.00 41.28 35.25
Third 675.00 532.00 44.63 37.00
Fourth 664.00 529.00 44.02 34.13
======================= =========== ============= ============= ============
Ordinary Shares1 American Depositary Shares2
Financial Year High (p) Low (p) High ($) Low ($)
--------------------------------------------------------------------------------
2000
First 575.50 508.50 36.55 32.68
Second 601.50 518.00 39.06 33.62
Third 595.00 458.50 39.11 29.66
Fourth 528.50 359.50 33.55 22.97
======================= =========== ============= ============= ============
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.
Table 25 - Analysis of Ordinary Shareholdings at 31 March 2000
--------------------------------------------------------------------------------
Range of No. of No. of
holdings shareholdings shares
--------------------------------------------------------------------------------
1-100 18,530 836,744
101-200 222,828 37,128,579
201-600 186,281 58,217,257
601-1,000 45,733 35,755,736
1,001-5,000 53,168 97,269,107
5,001-100,000 4,287 68,666,571
100,001 and above 811 1,549,711,943
--------------------------------------------------------------------------------
531,638 1,847,585,937
================================================================================
On 31 March 2000, there were 507 registered holders of 360,957 ordinary shares
with addresses in the US and 53,847 registered holders of 98,204,289 ADSs
(equivalent to 392,817,156 ordinary shares). The combined holdings of these
shareholders represented 21.26% of the total number of ordinary shares
outstanding as at 31 March 2000. UK registered shareholders represented 78.64%
of the total number of ordinary shareholders, and all shareholders other than
those registered in the UK or the US represented 0.1% of the total number of
ordinary shareholders outstanding as at 31 March 2000. 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.
Share Capital and Options
As a result of the exercise of options under the employee Sharesave and
Executive Share Option Schemes, a total of 1,959,261 ordinary shares of 50p each
were issued during the year. Accordingly, the number of ordinary shares in issue
was 1,847,585,937 as at 31 March 2000. During the year, 4,744,818 options over
ordinary shares were granted to 6,273 employees under the
124 Annual Report & Accounts/Form 20-F
<PAGE>
ScottishPower Sharesave Scheme. The company also established a Qualifying
Employee Share Ownership Trust and, on 16 March 2000, 10,252,965 ordinary shares
were issued to the trustee (ScottishPower Sharesave Trustees Limited) to hold in
trust; these shares will be transferred on exercise to the holders of options
granted under the Scottish Power UK plc Sharesave Scheme between 20 June 1997
and 11 June 1999, and the Southern Water Sharesave Scheme between 26 January
1993 and 25 January 1996. 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 564,080 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 on pages
64 to 70. During the period between 30 November 1999 and 31 March 2000,
2,982,000 options were granted to 131 employees under the PacifiCorp Stock
Incentive Plan.
Between 31 March 2000 and 4 May 2000, being the latest practicable date prior
to publication of this report, a further 33,176 ordinary shares have been issued
as a result 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 119,932,395 ordinary
shares. As intended, the Board exercised this authority to purchase, on market,
52,973,200 ordinary shares, totalling (pound)302 million of the intended
(pound)500 million, to give a more efficient capital structure. The shares
bought back represent 2.87% of the ordinary issued share capital as at 31 March
2000.
Substantial Shareholding
As at 4 May 2000, the company had been notified that Prudential Corporation
group of companies held 69,940,973 ordinary shares representing 3.79% of the
issued share capital.
Control of Company
As far as is known to ScottishPower, ScottishPower is not directly or indirectly
owned or controlled by another corporation or by any foreign government.
As of 4 May 2000, no person known to ScottishPower owned more than 10% of any
class of the group's voting securities.
As of 4 May 2000, the total amount of voting securities owned by directors
and executive officers of ScottishPower as a group is shown in Table 26.
Table 26 - Voting securities
--------------------------------------------------------------------------------
Title of Class Amount Percentage
Identity of Group Owned of Class
--------------------------------------------------------------------------------
Ordinary shares
Directors and executive officers
(19 persons) 404,053 0.02%
======================================================= =========== ==========
In addition, as of 4 May 2000, the directors and executive officers of
ScottishPower, as a group, held options to purchase 1,323,265 ordinary shares,
all of which options were issued pursuant to ScottishPower's Long Term Incentive
Plan, ScottishPower's Executive Share Option Scheme, ScottishPower's Sharesave
Scheme or the PacifiCorp Stock Incentive Plan.
ScottishPower 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
United Kingdom 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 (the "Noon Buying Rate") on 31 March 2000 of
(pound)1.00 = $1.5922. On 4 May 2000, the Noon Buying Rate was $1.5435 to
(pound)1.00. No representation is made that the pound sterling amounts have
been, could have been or could be converted into US dollars at the rates
indicated or at any other rates.
Table 27 sets forth, for the financial year indicated, certain information
concerning the Noon Buying Rate in New York City for pounds sterling and US
dollars per (pound)1.00.
Dividends
Although dividends have historically been declared and paid and financial
reports published semi-annually, following completion of the merger with
PacifiCorp ScottishPower has moved to quarterly reporting and expects to
announce its first set of quarterly results in August 2000. ScottishPower has
also commenced payment of quarterly dividends. The first quarterly dividend of
2.23 pence was in respect of the period 29 November (the day the merger became
effective) to 31 December 1999 and was paid on 15 February 2000.
Table 27 - Historical Exchange Rates
--------------------------------------------------------------------------------
Financial Year Ended March 31 High Low Average1 Year-end
--------------------------------------------------------------------------------
1996 $1.62 $1.50 $1.57 $1.53
1997 $1.71 $1.49 $1.60 $1.64
1998 $1.69 $1.61 $1.65 $1.68
1999 $1.72 $1.60 $1.65 $1.61
2000 $1.68 $1.55 $1.61 $1.59
============================ ============ =========== =========== ==========
1 The average of the Noon Buying Rates on the last day of each month during
the relevant period.
125 Annual Report & Accounts/Form 20-F
<PAGE>
Investor Information
<TABLE>
<CAPTION>
Table 28 - Historical Dividend Payments
---------------------------------------------------------------------------------------------------------------
Financial Years
Notes 2000 1999 1998 1997 1996
---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Pence per ordinary share: 1
Interim 8.27p 7.50p 6.80p 6.17p 5.17p
Pre-completion 8.10p - - - -
Quarter (29 Nov 1999 - 31 Dec 1999) 2.23p - - - -
Quarter (1 Jan 2000 - 31 Mar 2000) 6.20p - - -
Final - 15.00p 13.60p 12.33p 10.33p
--------------------------------------------- ----------- ------------ ----------- ----------- -----------
Total 24.80p 22.50p 20.40p 18.50p 15.50p
============================================= =========== ============ =========== =========== ===========
Pence per ADS 2
Interim 33.08p 30.00p 27.20p 24.68p 20.68p
Pre-completion 32.40p - - - -
Quarter (29 Nov 1999 - 31 Dec 1999) 8.92p - - - -
Quarter (1 Jan 2000 - 31 Mar 2000) 24.80p - - -
Final - 60.00p 54.40p 49.32p 41.32p
--------------------------------------------- ----------- ------------ ----------- ----------- -----------
Total 99.20p 90.00p 81.60p 74.00p 62.00p
============================================= =========== ============ =========== =========== ===========
US dollars per ADS 2
Interim $0.5324 $0.48 $0.46 $0.40 $0.34
Pre-completion $0.5215 - - - -
Quarter (29 Nov 1999 - 31 Dec 1999) $0.1413 - - - -
Quarter (1 Jan 2000 - 31 Mar 2000) $0.3856* - - - -
Final - $0.97 $0.91 $0.81 $0.68
--------------------------------------------- ----------- ------------ ----------- ----------- -----------
Total $1.5808 $1.45 $1.37 $1.21 $1.02
============================================= =========== ============ =========== =========== ===========
</TABLE>
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-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.
* The US dollar dividend for the quarter (1 January 2000 - 31 March 2000) is
approximate. The actual figure will depend on the exchange rate on 16 June
2000.
This was in addition to the interim dividend of 8.27 pence per share and the
pre-completion dividend of 8.10 pence per share which were paid on 1 February
2000.
A dividend of 6.20 pence per share on the ordinary shares will be paid on 16
June 2000 to shareholders on the register on 19 May 2000. This dividend will be
paid to ADS holders on 26 June 2000. This makes a total dividend for the year of
24.80 pence per share. It is intended to pay dividends quarterly thereafter.
Future dividends will be dependent upon the group's earnings, financial
condition and other factors. Interim and final dividends paid in the past are
not necessarily indicative of future dividends.
ScottishPower's stated dividend aim is to achieve 5% nominal growth for each
of the next three years.
Table 28 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
ScottishPower is generally entitled to a tax credit, currently at a rate of
1/9th of the dividend (the "associated UK tax credit"). For further information,
see "Taxation-Taxation of Dividends".
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 vote the ordinary shares.
Taxation
The following discussion of UK 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, 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 the 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
126 Annual Report & Accounts/Form 20-F
<PAGE>
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. The US and the UK have entered into negotiations to update the current
convention between the two countries for the avoidance of double taxation with
respect to taxes on income and capital gains (the "Income Tax Convention"). The
company believes, and the discussion therefore assumes, that it is 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 of the US Internal Revenue Code of 1986, as amended (the "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 effectively connected with 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 (the "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 of 100% on 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 the 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 includes 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, as discussed below, 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 forth in the above example. 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 procedures for claiming a credit are outlined in US Internal Revenue
Service Revenue Procedure 2000 - 13, 2000 - 6 I.R.B. 1.
127 Annual Report & Accounts/Form 20-F
<PAGE>
Investor Information
An Eligible US Holder recognises income when the dividend is actually or
constructively received by the holder, in the case of ordinary shares, or by the
Depository, 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
capital gain. In determining the amount of dividend income, an Eligible 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 foreign currency gain or loss, which is ordinary gain or
loss. Individual Eligible US Holders, however, are not required to recognise
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
federal income tax rate on dividends paid by ScottishPower 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 without the US.
The rules relating to the computation of foreign taxes 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, an
Eligible US Holder will recognise gain or loss for United States federal income
tax purposes in an amount equal to the difference between the US dollar value of
the amount realised and the Eligible 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 Eligible US Holder's holding period for
such ordinary shares or ADSs exceeds one year. Any such gain and loss generally
will be income from sources within the United States for foreign tax credit
limitation purposes. Long-term capital gain for a 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 United Kingdom 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 United Kingdom
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 United Kingdom, US
corporations resident in the United Kingdom by reason of their business being
managed or controlled in the United Kingdom and US citizens who or US
corporations which, are trading or carrying on a trade, profession or vocation
in the United Kingdom through a branch or agency and who or which have used,
held or acquired the 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 United States 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.
128 Annual Report & Accounts/Form 20-F
<PAGE>
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 paid to
them during the year. "Backup withholding" at the rate of 31% 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 (the "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
No UK stamp duty will be payable 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.
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 (pound)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 Depository'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 (pound)5) of the value of the ordinary shares at the
time of the transfer.
A transfer of ordinary shares by the Depository 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 (pound)5 per transfer.
129 Annual Report & Accounts/Form 20-F
<PAGE>
Financial Calendar
The year ahead
--------------------------------------------------------------------------------
16 June 2000 Dividend payment date - UK (final dividend for the year
ended 31 March 2000)
--------------------------------------------------------------------------------
26 June 2000 ADS dividend payment date - US (final dividend for the
year ended 31 March 2000)
--------------------------------------------------------------------------------
28 July 2000 Annual General Meeting
--------------------------------------------------------------------------------
August 2000 Announcement of results for quarter ending 30 June
2000 - Q1
--------------------------------------------------------------------------------
August 2000 Shares ex-dividend
--------------------------------------------------------------------------------
September 2000 Q1 Dividend payable
--------------------------------------------------------------------------------
November 2000 Announcement of results for quarter ending 30 September
2000 - Q2
--------------------------------------------------------------------------------
November 2000 Shares ex-dividend
--------------------------------------------------------------------------------
December 2000 Q2 Dividend payable
--------------------------------------------------------------------------------
February 2001 Announcement of results for quarter ending 31 December
2000 - Q3
--------------------------------------------------------------------------------
February 2001 Shares ex-dividend
--------------------------------------------------------------------------------
March 2001 Q3 Dividend payable
--------------------------------------------------------------------------------
Annual General Meeting
The Annual General Meeting will be held at The Edinburgh Festival Theatre, 13-29
Nicolson Street, Edinburgh, on Friday 28 July 2000 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.
Half-Year Results
The company, as permitted by the London Stock Exchange, publishes its Half-Year
Results in one UK national newspaper. In 2000, it is expected that the Half-Year
Results will be published in The Times and on the company 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 ScottishPower Environment and Community Reports may be obtained,
free of charge, on request from the Company Secretary at the company's
registered office. The Environment and Community Reports are also published on
the company's website.
Press releases and up-to-date information on the company can be found on the
ScottishPower website - www.scottishpower.com.
The ScottishPower 1999-00 Annual Review is also available on audio tape, free of
charge, from the Company Secretary at the company's registered office.
130 Annual Report & Accounts/Form 20-F
<PAGE>
Shareholder Services
Ordinary Shares
Share Registration Enquiries
The Registrar
Lloyds TSB Registrars Scotland
117 Dundas Street
Edinburgh EH3 5ED
Tel: +44 (0)870 600 3999
Fax: +44 (0)870 900 0020
Textphone: +44 (0)870 600 3950
Dividend Reinvestment Plan
ScottishPower has introduced a Dividend Reinvestment Plan which will be
effective from the quarterly dividend payable in September 2000. The Dividend
Reinvestment Plan will provide 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 600 3970.
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
Exchange and Stock Transfer Enquiries
The Bank of New York
Shareholder Relations
PO Box 11258
Church Street Station
New York, NY 10286-1258, USA
Tel: 1(800) 233-5453 (Toll Free)
(908) 769-9835 (Outside USA)
Dividend Reinvestment Plan
Global BuyDIRECT
Global BuyDIRECT 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 BuyDIRECT 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 The Bank of
New York as detailed above.
131 Annual Report & Accounts/Form 20-F
<PAGE>
Index
Accounting
developments 58
policies and definitions 72-76
Acquisition 49, 86 (12, 13), 104 (30)
American Depositary Shares 131
Annual General Meeting 130
Audit Committee 61, 62
Audit Report 121
Balance sheets
company 118, 119 (36)
group 88
Board of Directors 60-61
Borrowings 93-98 (22)
Business
description of 10
reviews - 1998-99 53
reviews - 1999-00 49-51
strategy 11
UK 12, 19, 26, 27, 32, 33, 44
US 7, 20, 22, 36, 37, 43, 46
Capital expenditure by segment 89 (15b)
Capital commitments 109 (33)
Capital gains tax, shareholders 128
Cash flow
acquisitions and disposals 86 (12, 13)
analysis 85 (10)
commentary 52
group statement 84
US GAAP 114 (35)
Chairman's statement 2
Charitable donations 25
Chief Executive's statement 4
Contingent liabilities 109 (32)
Corporate governance 62
Creditor payment policy and practice 58
Creditors 98 (23), 119 (39)
Currencies, accounting policy 76
Debt (net)
analysis 87 (14)
reconciliation 84
Debtors 93 (21), 119 (38)
Deferred taxation 100 (25)
Deferred income 100 (26)
Demon Internet 11
Depreciation
accounting policy 74
by segment 79 (1c)
Directors
executive 60
non-executive 61
pensions 66
remuneration 64-70
report 1-70
responsibilities for accounts 71
service contracts 66
share options 65, 68
shareholdings 69
Dividends
per ADS 126
per ordinary share 83 (9), 126
payment dates 130
Earnings and dividends
1998-99 55
1999-00 51
Earnings per share 1, 83 (8)
Employees
numbers and costs 24, 80 (3)
policies, UK and US 24, 25
Environment
accounting policy 76
commentary 38-40
regulation 38, 41, 42
Euro 58
Exceptional items 81 (4)
Executive management committee 62
Financial
commitments 109 (33)
highlights 1
review 48-59
Financial instruments
accounting policies 73
analysis 93-98 (22)
Financial risk management 56
Five Year Summary 122
Fixed assets
intangible 90 (17)
investments 92 (19), 114 (37)
tangible 74, 90 (18)
Glossary
financial 123
of terms 133
Going concern 58
Goodwill
accounting policy 74
analysis 90 (17)
Grants and contributions
accounting policy 75
analysis 100 (26)
Health and safety 25
Inheritance tax 129
Interest charge (net)
accounting policy 73
analysis 82 (85)
Interest and Taxation
1998-99 55
1999-00 51
Internal control 62
Investor information 124
Leased assets, accounting policy 75
Litigation 42
Loans and other borrowings 93-98 (22)
Long Term Incentive Plan 65, 75
Minority interests 104 (29)
Net asset value per share 90 (16)
Nomination committee 61, 62
Operating assets by segment 89 (15a)
Operating profit
analysis 80 (20)
by segment 79 (1b)
highlights 1
reconciliation to
operating cash flows 86 (11)
Own shares held under trust 75
PacifiCorp 2-4, 20-22, 51
Pensions costs
accounting policy 76
analysis 106 (31)
Post-retirement benefits
accounting policy 76
analysis 116 (35d)
Powercor 23, 73
Profit and loss account
company 119 (41)
group 77
Property 44-47
Provisions for liabilities
and charges 99 (24)
Recognised gains and losses 78
Registrar 131
Regulation
electricity UK 26-31
electricity US 36, 37
gas UK 32
water UK 33-35
Related party transactions 110 (34)
Remuneration Committee
membership 61, 62
report 64
Research and development 24, 73
Reserves 103 (28), 119 (40)
Segmental information 79 (1), 89 (15)
Southern Water 6, 11, 17
Share capital 100 (27), 119 (40)
Shareholders' funds
reconciliation 78
analysis 103 (28), 119 (40)
Shareholder services 131
Shareholdings, analysis 124
Share options 101 (27), 124
Stocks
accounting policy 75
analysis 92 (20)
Substantial shareholding 125
Taxation
accounting policy 74
analysis 82 (6)
commentary 126
deferred 100 (25)
windfall 83 (7)
Thus 2, 3, 4, 19
Total assets by segment 89 (15c)
Treasury 55-57
Turnover
accounting policy 73
by segment 79 (1a)
highlights 1
US GAAP 111-117 (35)
US regulatory assets 75
Year 2000 58
Figures in brackets refer to Notes to the Accounts
132 Annual Report & Accounts/Form 20-F
<PAGE>
--------------------------------------------------------------------------------
Glossary of Terms
<TABLE>
<S> <C> <C> <C>
Term Definition Term Definition
Affiliate Inter-company Industrial customers Customers with high
demand or consumption
Authorised franchise areas Geographic area of
public electricity supply Interconnector A link that connects
or distribution as set out separate transmission
at privatisation in the UK networks
Billion One thousand million Ofgem Office of Gas and
Electricity Markets,
Commercial customers Business customers with being the office ofthe
small to medium gas and electricity
demand or consumption regulator
Company Scottish Power UK plc OFWAT Office of Water Services,
being the office ofthe
DGES The Director General water regulator
of Electricity Supply
plc Public Limited Company
DGGS The Director General
of Gas Supply Portal A door into the Internet,
typically containing links
Dispositions Disposals to websites and a search
engine
Distribution service area The geographic area
where PacifiCorp Power production The US term for the
provides retail electric generation of electricity
service to customers
Rates Tariffs
Domestic Within the US mainland
Residential customers Customers based in
e-procurement Procurement of goods houses, as distinct from
and services, principally commercial or industrial
using the Internet customers
Energy commodity Electricity pricing Retail sales Sales of electricity to
rate options choices available to residential, commercial
residential customers and industrial customers
following deregulation in the US
in Oregon
Retail Price Index;RPI Index ofa range ofgoods
First-tier supply Public electricity supply and services in
within the authorised the UK. US equivalent
franchise areas is the Consumer Price
Index (CPI)
Franchise service territories Geographic area of
public electricity supply Second-tier supply Public electricity supply
or distribution in the US outside of the authorised
franchise areas
FTSE 100 The index of the top 100
UK companies by market Wholesale The dealing of bulk
capitalisation listed power with another
on the London Stock power supplier
Exchange
Gas Natural gas
Group Scottish Power UK plc Conversion Factors
and its consolidated
subsidiaries Metres Yards
0.91 1 1.09
Guaranteed Standards Standards of
performance agreed Km Miles
between the company 1.61 1 0.62
and the relevant
regulator Litres US Gallons
3.78 1 0.26
Home markets Term to replace franchise
markets now that
competition has been
introduced in supply
</TABLE>
133 Annual Report & Accounts/Form 20-F
<PAGE>
ScottishPower Annual Report and Account/Form 20-F 1999-00
Registered office
1 Atlantic Quay Glasgow GS 8SP
www.scottishpower.com
Designed and produced by Bamber Forsyth Limited. Printed by Waddies Print Group
Limited. The paper used in this Report is made from virgin fibre from
sustainable forests and saw mill residues. (It is elemental chlorine-free.)
