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Case Study On Scottish And Southern Energy Plc Engineering Essay

Scottish and Southern Energy plc (SSE) is a UK based energy company formed in 1999 with the merger of Scottish Hydro-Electric and Southern Electric. With the acquisition of SWALEC in 2000 and Atlantic Electric & Gas in 2004, SSE has grown into one of the largest energy supply companies in the UK and now has over nine million customers. It is an integrated multi-utility business engaged in power generation, energy and water supply, energy services, electricity networks management, telecom networks, gas networks and gas storage businesses. It is headquartered in Perth, the UK and employs about 16,900 people Scottish and Southern Energy (SSE) is a vertically integrated energy company operating through its subsidiaries. Much of the focus for SSE’s sector is already on 2020 and the stretching EU and UK targets for renewable energy and carbon emissions reductions. SSE is involved in generating power through conventional and renewable energy sources and distributes it through electricity networks. The company is also carrying out natural gas storage and distribution business. Furthermore, SSE expanded its business portfolio in renewable energy sector through SSE Renewable. The company recorded revenues of £25,424.2 million in the financial year ended March 2010 (FY2009), a decrease of 16.6% over FY2009. The operating profit of the company was £1904 million in FY2010, an increase of £1716 million compared with FY2009. The net profit was £1236 million in FY2010, an increase of 1000% compared with FY2009.

I .Current strategy

SSE's aim is to provide the energy to the people need in a reliable and sustainable way. Their strategy is to deliver sustained payable dividend to their share holders which demands consistent and long term approach to operations, investments and acquisitions. They are focussing on investing in renewable energy in line with other types of power generation, gas storage. While overall investment was down, SSE’s investment in renewable generation was up by 17.6%, from £320.8 million in the six months to the end of September 2009 to £377.4 million in the same period in 2010.It owns and operates around 40% of the total renewable generation capacity available. In 2007 SSE and GD Power development signed agreements to support 4 new wind farms in north east China and also signed agreement with Viking Energy to develop 600 MW wind farm on Shetland’s Central Mainland. (fame)(sse)(datamonitor). It enters into joint venture with Marsh Wind Technology Ltd, to secure the future of Skykon wind turbine tower. These might help them in future dividend growth, SSE is the first utility in the UK to build and monitor its own development of ten zero carbon homes to better understand what customers will need as the UK moves towards a low carbon future. In 2008 SSE planned to double its renewable energy capacity by 2013, as part of this strategy, commissioning 90MW of new onshore wind farm capacity SSE is also developing what will be the world’s biggest offshore wind farm at Greater Gabbard in the North Sea. Strategies can be differentiated as(gmid):

Investing in emerging technologies

Acquisitions

Entering into new markets

Strengthening renewable energy portfolio

II. Economic and Regulatory Information

SSE owns around 10,700 megawatt of electricity generation capacity in the United Kingdom and Ireland consisting around: 4,500 megawatt of gas- and oil-fired capacity; 4,000 megawatt of coal-fired capacity (with biomass co-firing capability) and 2,200 megawatt of hydro, wind and dedicated biomass capacity consisting around: 4,500 megawatt of gas- and oil-fired capacity; 4,000 megawatt of coal-fired capacity (with biomass co-firing capability) and 2,200 megawatt of hydro, wind and dedicated biomass capacity. SSE has been the cheapest ‘big six’ supplier of household gas, with a price 6% cheaper than the average of this group, Since SSE last implemented a package of changes to prices for household gas, in March 2010 Current forward annual wholesale gas prices have increased by over 25%  . Throughout this time, gas supply has been a loss-making activity for SSE and its gas supply business, Southern Electric Gas Ltd, has traded at a loss for several years.

The economic and regulatory information have affected the ratios which have been critically analysed in Financial Ratio Analysis.

III. FINANCIAL ANALYSIS

III.1 PROFITABILITY/PERFORMANCE RATIO

For the performance of SSE in terms of probability, here shows an examination using the following ratios of last five years of SSE and Centrica plc which is one of its competitors. These ratios accesses the relevant cost incurred.

Roce

Profit Margin

Gross margin

Operating profit:

We can see a sudden fall in all the four ratios for SSE in the year 2009. This is mainly because Global meltdown and continuous investments. Company’s Gross margin is decreased also due to increase in fuel and energy cost and Commodity fluctuation due to economic dip and cost pressure. It tells weather the direct costs (Raw material) are under control. Every kind of decrease in profit margin will be due to an increase in overhead costs and vice- versa.

Due to investments there was decrease in operational profit due to which profit margin decreases and further causes ROCE & ROSF to decrease.

During 2008/09, there was total investment of £741.8m in Generation, compared with £379.0m in the previous year that causes a sudden fall in all the ratios. 2008/09 represented the first year of SSE’s five-year investment programme, and capital and investment expenditure (excluding SGN) totalled £1,279.8m, compared with £810.3m in the previous year.

At 14 May 2008, the Group acquired the 50% of Greater Gabbard Offshore Winds Limited not already carried, for a net consideration of £33.4m, including cash of £40.0m. At this point, the Group assumed 100% ownership and consequently the carrying value held as investment in jointly controlled entities was transferred with the entity being fully consolidated in the accounts. Transfers (out)/in represent £8.6m of investment in Aquamarine Limited which has been reclassified as an associate from a joint venture following a reduction in our shareholding from 50.0% to 47.8%, £10.0m in relation to RockTron Limited they have increased their shareholding from 17.5% to 49.9%, and £0.2m in relation to Smarter Grid Solutions Limited, which has been transferred to associates as the Group’s shareholding has increased from 12.5% to 29.9%.

In 2010 adjusted pre-tax profits, which take mark-to-market judgements on forward power contracts in account, were up 2.9 per cent to £1.29bn due to an increase of 250,000 energy supply customers to 9.35m; the return to service of Medway power station following a 15-month unplanned outage; and better balance of costs between energy bought and supplied.

Other losses like unusual cold weather caused loss of output, The spreads which were generated from gas and coal fired power stations was the lowest which affected EBIT and ROCE.(annual report, SSE, the guardian)

III.2 OPERATIONAL RATIO

To analyze the operational performance of SSE, we are going to examine using the following

ratios for the last five year of SSE and Centrica Plc (a competitor).

Net asset turnover

Stock turnover

Debtors collection (days)

Creditors payment (days)

It operates economically regulated business than its competitors; it’s because of the huge investments and acquisitions made by the SSE.SSE has joined the other utility giants as through its wholly-owned subsidiary SSE E&P UK Limited, has entered into an agreement with Hess Limited to acquire its natural gas assets and infrastructure in three regions of the North Sea paying $423m (£277m) for the assets.  SSE acquired a 25.1% stake in the 367-megawatt (MW) Walney offshore wind farm being built in the Irish Sea from Danish state-controlled Dong Energy. SSE paid up to about £39million of which about £17million is subject to the operational performance of the wind farm. In December 2009, SSE decided, to accept Ofgem’s final proposals for the electricity Distribution price control for the five years from 1 April 2010 in respect of SHEPD & SEPD , to earn additional revenue through operational efficiency and excellence.

Due to the losses in few of the investments the asset value has fallen short. In the EU policy of 2020 huge investment of 666.6 million pounds have been invested which makes a total of about 51% of all the projects under taken. There are no cash flow problems, debtor collection ratio is less than the competitor.

III.3 Structural Ratios

Current ratio

To analyze SSE’s financial health, we are going to use the following ratios

Liquidity

Gearing

The graphs below show the rate of change of each ratio over last five years

Liquidity Ratio

Gearing Ratio

With so many acquisitions by SSE,the assets for the company increased, can be seen from the graph that the value of liquid ratio rises almost every year which is considered good for a company . In 2009/10 they have taken loans of around 5 billion that affected the structural ratio of SSE. High long term debts that they took from the bank caused increase in gearing ratio. . £1.1bn of debt is currently tied up in assets is under construction as per annual report 2009. SSE in 2009 agrees to new GBP850m bank facility(the herald).

Competitive Analysis

Introduction of alternate source of energy there is increase in M&A activity and cost volatility. SSE concentrate more in renewable energy due to which companies could have to bear the rise in cost of producing energy, while Centrica focus more about expansion, replacement of aging power stations and nuclear power. It would make Centrica more clear and easy-understandable in its strategic with really clear direction. Utilities must be prepared to increase the productivity of their workforce, ensure safe, efficient product delivery. Consumers are more concerned about the environment and security of supply. Companies are now investing more in renewable sources of energy production. SSE entered into joint ventures with many other companies like Etropya and Forth Ports. SSE went in wind joint venture with Gothia. Companies are now expanding geographically. There have been many changes in business and economic environment causing troubles for utility sectors. With the budget 2011tax could shut coal plants five years early. SSE owns gas-fired generation plants in Fife, Keadby, Medway, and Peterhead. EDF dominates the European utilities industry, in terms of revenues and generation capacity. Demographic change, resource scarcity and an increasing focus on environmental protection are most important things affecting the energy and utilities industry. (SSE, Fame)

Strength And Weaknesses

SSE is having better customer services; it offers the price a lot cheaper that any of its competitors. Continuous growth in dividends wins the trust of share holders and make them invest more and for long term. It has got a market position as a leader, it is second largest electricity generator in UK. It operates in range of businesses and uses dual fuel strategy. The challenge is to meet customers need keeping in mind the future needs. The fluctuations in fuel price are the main weakness affects profit margin for SSE. It has business concentrated in UK, unlike other utility companies.The advancements in technological field like using I-phone applications, opens a world of possibilities.

Porter’s five forces

Most of the European utilities are vertically integrated from power generation to retail marketing. Large power and gas producing companies are the suppliers. Uniqueness of resources provides suppliers more power.

New environmental regulations passed by the EU that 20% of energy should come from renewable sources by 2020 further add to the capital requirement for investing in new technologies.

Future strategic direction

Some of the challenges they will have to face in future are:

Legislation delays

Economics

Scale of transition

Resources like skilled people, suppliers.

To deal with these kind of challenges we need to make the future strategies. We can develop future strategies with the help of the following techniques:

BCG matrix

Ansoff Matrix:

Balance scorecard

Financial objective of SSE is providing future dividend to their customers. To achieve this investments are being made in assets which will give revenue to support sustained growth. The annual dividend increase by 2% more than RPI for the consumers. The other financial objective is performance ratio and can be checked by looking at the balance sheet at the end of the year, mergers and acquisitions are the initiatives given above have been made by SSE to achieve this target. These targets directly relate to the objectives of internal business process objectives that are acquisitions excellence and zero environmental incidences. It can be measure by declining accident frequency rate that was .7 and reduced to 0.3. to reduce incidents six core values have been set by SSE’SET i.e safety , service, efficiency, sustainability, excellence and team work. The investments are being made in alternate/ future sources of energy to achieve excellence in acquisitions With the development of technology to achieve these targets they need to pace up and we can measure it by faster modes of bill payments and with the use of i-phone in companies initiatives are being made. Objectives keeping in mind the customers are customer satisfaction, environment and safety, which can be measured by surveys and with the increase in use of renewable sources of energy for future needs. Following the above strategies mentioned we think SSE will have value growth to its share holders and customers.

Recommendations

It should invest in nuclear power plant as it has clean fuel that is environment friendly

• Explore other fields of market as well.

• Global expansion and market share price.

• Introduction of new schemes to improve its brand name.

• Can make more acquisitions with companies that reduce the emission of carbon.

References:

 

1.Energy choices (n. d.) Scottish & Southern Energy Suppliers Information [online] available from <http://www.energychoices.co.uk/scottish-and-southern-energy.html> [20 march 2011]

2.Johnson, G., Scholes, K. and Whittington, R. (2007) Exploring Corporate Strategy. (8th Ed) Harlow: FT/Prentice Hall.

Proctor R (2009) Managerial Accounting for Business Decisions (3rd Ed) Harlow. FT/Prentice Hall.

3. The Telegraph (n. d.) SSE buys $423m of North Sea gas [online] available from <http://www.telegraph.co.uk/finance/newsbysector/epic/sse/7545974/SSE-buys-423m-of-North-Sea-gas.html> [26 Mar 2011]

4.GMID. 2011. UK- Energy. [ONLINE] Available at: https://www.portal.euromonitor.com/Portal/ResultsList.aspx. [Accessed 10 March 11].

5.BBC. 2011. Energy giants join up on nuclear. [ONLINE] Available at: http://news.bbc.co.uk/1/hi/scotland/7840496.stm. [Accessed 10 March 11].

6.FAME. 2011. EON UK plc. [ONLINE] Available at: https://fame2.bvdep.com/version-201138/Report.serv?context=1QON5XJ0UZ0LKSR&_cid=28. [Accessed 10 March 11].

7.FAME. 2011. Scottish And Southern Energy PLC. [ONLINE] Available at: https://fame2.bvdep.com/version-8.201138/Report.serv?seqnr=0&context=1QON5XJ0UZ0LKSR&_cid=205. [Accessed 04 March 11].

9.This is money. 2009. Energy deals give SSE a £1.26bn shock. [ONLINE] Available at: http://www.thisismoney.co.uk/markets/article.html?in_article_id=486297&in_page_id=3. [Accessed 04 March 11].

10. DATAMONITOR: Scottish and Southern Energy plc' 2010, Scottish&Southern Energy, PLC SWOT Analysis, pp. 1-10, Business Source Complete, EBSCOhost, viewed 14 March 2011.

11. Mark Smith (2009) 'SSE agrees new GBP850m bank facility'. The Herald Final 34

12. SSE (n. d.) Annual Report 2010 [online] available from <http://www.scottish-southern.co.uk%2FuploadedFiles%2FContent%2F14_Investors%2FReports_and_results%2F2010AnnualReportAndAccounts.pdfyBi0Q&sig2=_LDlf23UHCUuzRYllA79TQ> [20 Mar 2011]


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