TIDMSSE
RNS Number : 3515F
SSE PLC
17 May 2017
SSE plc
Preliminary results for the year to 31 March 2017
17 May 2017
This report sets out the preliminary results for SSE plc for the
year to 31 March 2017. It includes updates on operations and
investments in its Wholesale, Networks and Retail (including
Enterprise) businesses.
Overview of 2016/17
Financial highlights for the year to 31 March 2017 are as
follows. Comparisons are with the previous year unless otherwise
stated:
-- Recommended full-year dividend up 2.1% to 91.3p;
-- Adjusted earnings per share up 5.2% to 125.7p;
-- Adjusted dividend cover towards top of expected range at 1.38 times;
-- Adjusted operating profit up 2.7% to GBP1,874.0m;
-- Adjusted profit before tax up 2.1% to GBP1,545.9m;
-- Adjusted profit after tax up 6.1% to GBP1,268.9m;
-- Net exceptional charge of GBP8.2m (net charges of GBP374.6m
offset by GBP366.4m from the gain on sale of SGN stake and the
revaluation of SSE's Clyde wind farm investment);
-- Investment and capital and investment expenditure up 6.6% to GBP1.7bn;
-- Adjusted net debt and hybrid capital up 1.1% to GBP8.5bn at 31 March 2017;and
-- On market share buy backs totalling GBP131m in the period to
31 March 2017, plus an additional GBP65m in April 2017.
Reported results for 2016/17 are significantly higher than those
for 2015/16 due to the impact on reported profit before tax of the
significant exceptional charges incurred in 2015/16. These related
mainly to the write down of wholesale generation, gas storage and
production assets in 2015/16 compared to the gain on sale of a
stake in SGN plus lower asset write downs in 2016/17. This together
with the relative movement in mark to market valuations on forward
purchase contracts for commodities over both years (which at March
2017 were still 'out of the money') contributed to a net reported
gain before tax of GBP247.5m in 2016/17 compared to a loss before
tax on those items of (GBP904.3m) in 2015/16.
This swing is explained in more detail in the relevant sections
throughout this report and is the main driver for:
-- Reported profit before tax increasing to GBP1,776.6m in
2016/17 compared to a GBP593.3m in 2015/16, due to the movement in
non-recurring exceptional items; and
-- Reported earnings per share increasing to 158.4p in 2016/17
compared to 46.1p in 2015/16, again due to the movement in
non-recurring exceptional items.
Outlook for 2017/18
For the 2017/18 financial year, SSE is:
-- Targeting an annual increase in the full-year dividend that
is at least equal to RPI inflation ;
-- Working to keep dividend cover within the expected range of
around 1.2- 1.4 times, although it is likely to be towards the
bottom of it, as stated in SSE's Notification of Pre Close
Statement on 30 March 2017, which also means adjusted earnings per
share is likely to be lower than it was in 2016/17; and
-- Expecting to invest around GBP1.7bn in building, owning and
operating assets, with around two thirds of this in electricity
networks and renewable energy.
As stated on 30 March, the level of dividend cover is subject to
the ongoing factors that influence earnings in SSE's market-based
businesses.
Outlook to 2020
Looking further ahead, over the three years to March 2020, SSE
is:
-- Targeting delivery of annual dividend increases that at least keep pace with RPI inflation;
-- Working towards achievement of dividend cover within a range
of around 1.2 times to 1.4 times;
-- Focusing on progress in its capital and investment
expenditure totalling around GBP6bn across the four years to 2020,
mainly in electricity networks and renewable energy;
-- Targeting an increased RAV of its economically-regulated
networks businesses, to close to GBP9bn;
-- Targeting an increased amount of renewable capacity,
including pumped storage, to 4.3GW; and
-- Working to deliver enhanced customers experience of retail
energy markets through the installation of smart meters and the
provision of digital services.
As stated on 30 March, the level of dividend cover is subject to
the ongoing factors that influence earnings in SSE's market-based
businesses, and is also subject to material change in sector
regulation.
Note: The definitions SSE uses for adjusted measures are
consistently applied and are explained in the Alternative
Performance Measures section of this document, before the Summary
Financial Statements.
SSE's financial performance in 2016/17 at-a-glance
Mar 17 Mar 16 Mar 15
=============================================== ======== ======== ========
Adjusted Operating Profit GBPm GBPm GBPm
=============================================== ======== ======== ========
Wholesale 514.6 442.5 473.8
=============================================== ======== ======== ========
Networks 936.5 926.6 936.8
=============================================== ======== ======== ========
Retail 422.3 455.2 456.8
=============================================== ======== ======== ========
Corporate Unallocated 0.6 0.1 14.0
=============================================== ======== ======== ========
Total adjusted operating profit 1,874.0 1,824.4 1,881.4
=============================================== ======== ======== ========
Adjusted profit before tax 1,545.9 1,513.5 1,564.7
=============================================== ======== ======== ========
Pence Pence Pence
=============================================== ======== ======== ========
Adjusted earnings per share (EPS) 125.7 119.5 124.1
=============================================== ======== ======== ========
Full-year dividend per share (DPS) 91.3 89.4 88.4
=============================================== ======== ======== ========
GBPm GBPm GBPm
=============================================== ======== ======== ========
Investment and capital expenditure (adjusted) 1,726.2 1,618.7 1,475.3
=============================================== ======== ======== ========
Mar 17 Sep 16 Mar 16
=============================================== -------- -------- --------
Adjusted net debt and hybrid capital 8,483.0 8,995.4 8,395.0
=============================================== -------- -------- --------
Mar 17 Mar 16 Mar 15
========================================= ======== ======== ========
Reported Operating Profit / (Loss) GBPm GBPm GBPm
========================================= ======== ======== ========
Wholesale 498.2 (481.3) (301.2)
========================================= ======== ======== ========
Networks 848.8 833.2 805.0
========================================= ======== ======== ========
Retail 309.6 437.4 468.5
========================================= ======== ======== ========
Corporate Unallocated 283.9 (3.9) 13.6
========================================= ======== ======== ========
Total reported operating profit 1,940.5 785.4 985.9
========================================= ======== ======== ========
Reported profit before tax 1,776.6 593.3 735.2
========================================= ======== ======== ========
Pence Pence Pence
========================================= ======== ======== ========
Reported/basic earnings per share (EPS) 158.4 46.1 55.3
========================================= ======== ======== ========
Mar 17 Sep 16 Mar 16
========================================= ======== ======== ========
GBPm GBPm GBPm
========================================= ======== ======== ========
Unadjusted net debt 6,655.4 7,164.8 6,808.6
========================================= -------- -------- --------
Earning a profit from SSE's businesses
SSE has a balanced range of energy-related businesses and all
three reportable business segments contributed adjusted operating
profit in the year to 31 March 2017, as set out above. Comparisons
are with the previous two financial years, but it should be noted
that movements may also reflect the cumulative impact of issues
arising, or decisions taken, in earlier financial years. SSE's
objective is not to maximise profit in any one year but to earn a
sustainable level of profit over the medium-term.
WHOLESALE
Energy Portfolio Management and Electricity Generation: adjusted
operating profit increased to GBP501.2m in 2016/17 compared to
GBP436.3m in 2015/16, despite lower renewable energy output, due to
improved financial performance in thermal generation and Energy
Portfolio Management.
Gas Production: adjusted operating profit increased to GBP26.4m
in 2016/17, compared to GBP2.2m the previous year, due to an
increase in production, as additional West of Shetland fields came
on line, and to improved winter gas prices compared to the previous
year.
Gas Storage: an adjusted operating loss of GBP13.0m was recorded
in 2016/17, compared to an adjusted operating profit of GBP4.0m the
previous year, reflecting sustained challenging market
conditions.
Reported Wholesale operating profit: reported operating profit
for the Wholesale segment was GBP498.2m compared to an operating
loss of GBP481.3m in 2015/16. This improvement was due to the
recognition in the previous year of GBP868m of exceptional charges
relating to thermal generation plants, gas storage facilities and
gas production fields. In 2016/17, net exceptional charges were
significantly lower and included a gain on revaluation of the SSE's
share of Clyde wind farm. In addition, marked-to-market derivatives
were significantly less out of the money at March 2017 than at
March 2016.
NETWORKS
Electricity Transmission: as expected, adjusted operating profit
decreased to GBP263.7m in 2016/17, from GBP287.2m in 2015/16,
reflecting the phasing of capital expenditure and revenue
associated with the growing asset base.
Electricity Distribution: adjusted operating profit rose to
GBP433.4m in 2016/17, from GBP370.7m in 2015/16, reflecting
additional income as a result of the GBP38m under recovery of
revenue from 2014/15, as outlined in customer charges published in
December 2015 for 2016/17. In 2016/17 around GBP35m of DPCR losses
incentive income was also received, with a final instalment of
GBP15m due in 2017/18.
Gas Distribution: SSE's share of SGN's adjusted operating profit
fell to GBP239.4m in 2016/17, from GBP268.7m the previous year,
mainly due to SSE's partial equity disposal in October 2016 and
partly to the phasing of regulatory revenue and the obligation to
share outperformance with customers, which is part of the RIIO
Price Control. The impact on operating profit of the part disposal
is estimated as being GBP37m.
Reported Networks operating profit: reported operating profit
for Electricity Transmission and Distribution is the same as
adjusted operating profit. SSE's share of SGN's reported operating
profit fell to GBP151.7m, compared to GBP175.3m in the previous
year. This is in line with the movement in adjusted operating
profit and, in addition, reflects the change in SSE's share of
SGN's interest and tax.
RETAIL
Energy Supply: adjusted operating profit across Energy Supply as
a whole reduced slightly, to GBP389.5m, in 2016/17, compared to
GBP398.9m in 2015/16. Within this, in GB household supply,
increases in non- energy costs, the impact of the household gas
tariff reduction in March 2016 and falling customer numbers were
offset by the impact of reduced wholesale energy costs and slightly
increased average consumption, leading to a small overall increase
in adjusted operating profit. Over 2016/17 SSE's annual operating
profit margin per dual fuel household customer in GB was around
6.9% (compared to 6.2% in 2015/16). Business Energy profits
decreased in 2016/17, reflecting an increase in non-commodity costs
and a decrease in volumes supplied.
An improvement in estimation confidence in relation to the
judgemental measurement of unbilled energy has enabled an
additional GBP60m of revenue to be recognised in the year. This is
split between household energy (GBP14m) and business energy
(GBP46m).
In 2016/17, GBP27.5m of the bad debt provision was released,
with the majority being allocated against a reduction in aged
debt.
Energy-related services: adjusted operating profit increased
slightly to GBP16.1m in 2016/17, compared to GBP15.4m in 2015/16.
There was a reduction in revenue streams in the heritage metering
business and continued investment in building scale in the
customer-facing broadband and telecoms businesses.
Enterprise: adjusted and reported operating profit fell to
GBP16.7m in 2016/17, from GBP40.9m in 2015/16, reflecting
challenging conditions in a competitive environment, particularly
in Contracting, which was loss making in the year. Enterprise is
now in a key phase of development with the recent appointment of a
new Managing Director.
Reported Retail operating profit: reported operating profit for
the Retail segment was GBP309.6m compared to GBP437.4m in 2015/16.
The reduction was due to exceptional impairments in the year,
particularly the impairment of technology developments projects,
principally relating to an Energy Supply customer billing system
which is no longer being progressed. The reduction in reported
operating profit also reflected the write off of goodwill
associated with the acquisition of the Energy Solutions Group in
the Enterprise business.
Corporate Unallocated: Adjusted operating profit increased by
GBP0.5m to GBP0.6m in 2016/17. Reported Corporate Unallocated
operating profit includes the GBP307.3m gain on sale in relation to
SSE's part disposal of a 16.7% stake in SGN offset by impairment
costs in relation to IT technology development resulting in a
reported operating profit of GBP283.9m in 2016/17 compared to a
loss of (GBP3.9m) in 2015/16.
Investing to create long-term value
In the year to 31 March 2017, SSE's investment and capital
expenditure totalled GBP1.7bn. Economically-regulated electricity
networks accounted for 46% of this spend and renewable energy
mandated by government obligations and targets accounted for 21%.
Investment and capital expenditure included:
-- progressing the Caithness-Moray electricity transmission
link, the largest capital project ever undertaken by SSE, and
investing in customer service and innovation in Electricity
Distribution. This investment further increased the RAV in
Electricity Transmission and Distribution, and the total RAV of
SSE's networks businesses is well placed to reach around GBP9bn by
2020; and
-- expanding SSE's renewable energy portfolio, with 34MW of new
onshore wind farm capacity commissioned during 2016/17 and with a
further 992MW of on and off-shore wind farm capacity in
construction. These capital investment projects are expected to
take SSE's total renewable energy capacity to 4.3GW (including
pumped storage) by March 2020.
Investment and capital expenditure remains on course to be
around GBP6bn across the four years from April 2016 to March 2020;
in 2017/18 it is expected to be around GBP1.7bn and in 2018/19 it
is currently expected to be around a similar level. Around two
thirds of this investment and capital expenditure is expected to be
in electricity networks and renewable sources of energy.
Final investment decisions in building new assets will be
determined by the need to secure returns that are clearly greater
than the cost of capital, enhance earnings and support the delivery
of annual dividend increases that at least keep pace with RPI
inflation.
Contributing to the UK and Irish economies
SSE's contribution to UK Gross Domestic Product in 2016/17
totalled GBP9.3bn, taking the total for the last five years to over
GBP46bn. In Ireland, it was EUR779m in 2016/17. This data is
provided by PwC who have undertaken SSE's economic contribution
analysis for every financial year since 2014/15.
Financial outlook for SSE
SSE continues to fulfil its core purpose of providing the energy
people need in a reliable and sustainable way, with clearly-defined
and long-term strategic and financial frameworks which are built
around the efficient operation of, and disciplined investment in, a
balanced range of businesses across the energy sectors of Great
Britain and Ireland.
SSE believes that the quality of its operations, assets and
investment opportunities means it can continue to deliver a
full-year dividend that at least keeps pace with RPI inflation in
2017/18 and in the subsequent years.
As set out in its Notification of Close Period Statement on 30
March 2017, SSE currently anticipates a number of items that will
have an impact on the operating profit earned by its Networks
businesses, including SGN, which is therefore expected to be around
GBP150m lower in 2017/18 than it was in 2016/17 - or GBP100m on a
like for like basis before including the impact of the SGN
divestment.
This and other challenges, such as a lower than expected
clearing price in the 2017 Capacity Market Year-Ahead Auction, mean
that, subject to the factors that affect profit in its market-based
businesses, SSE continues to expect that its dividend cover for
2017/18 will be within, but towards the bottom of, the expected
range of around 1.2 times to around 1.4 times. This clearly means
that adjusted earnings per share in 2017/18 is expected to be lower
than it was in 2016/17. The dividend cover range is based on
dividend increases that at least keep pace with RPI inflation,
which SSE is continuing to target for 2017/18 and the subsequent
years.
As a result of its investment over the last five years, the
majority of SSE's asset base and operating profit now relates to
economically-regulated Networks and government-mandated renewable
sources of energy. Subject to the factors that affect profit in its
market-based businesses, and material changes to sector regulation,
SSE expects its dividend cover could range from around 1.2 times to
around 1.4 times over the three years to 2019/20, based on dividend
increases that at least keep pace with RPI inflation.
Richard Gillingwater, Chairman of SSE, said:
"The operating environment has presented a number of complex
challenges to manage, but SSE is a resilient business with a
clearly defined and long-term strategic framework comprising
operational efficiency, disciplined investment in new assets and a
balanced range of energy businesses. The complex challenges
continue, but this strategy puts the company in good stead for the
future and SSE is committed to delivering for its customers and its
investors alike in the years ahead; and that means the Board is
committed to continuing to meet SSE's first financial objective of
annual dividend growth of at least RPI inflation in the years
ahead."
Alistair Phillips-Davies, Chief Executive of SSE, said:
"We have been clear for some time that 2017/18 presents
challenges, and the need to engage constructively with a new UK
government as it takes forward energy policy will be a key priority
for the year ahead and beyond. SSE will continue to focus on
securing maximum value from our portfolio of Wholesale assets,
achieving further efficiencies and customer service improvements in
our Networks businesses, responding positively to evolution and
change in our Retail markets and creating long-term value through
investment of around GBP1.7bn in new assets in 2017/18.
"Across the SSE group, we will continue to take the decisions
necessary to secure the right outcomes for customers and investors.
With a strong and growing asset base, and significant index-linked
revenues, we remain committed to delivering annual dividend growth
that at least keeps pace with inflation, and to working towards
ensuring that dividend cover remains within the expected
range."
Further Information
Inside Information
This announcement is being disclosed in accordance with the
Market Abuse Regulation (EU596/2014) and has been determined to
contain inside information in line with the definition therein.
Investor Timetable
Annual report on sse.com/investors 20 June 2017
AGM (Perth) and Q1 Trading Statement 20 July 2017
Ex-dividend date 27 July 2017
Record date 28 July 2017
Final date for receipt of Scrip 25 August 2017
Elections
Payment Date 22 September 2017
Notification of Close Period by 30 September
2017
Results for six months to 30 9 November 2017
September 2017
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Disclaimer
This financial report contains forward-looking statements about
financial and operational matters. Because they relate to future
events and are subject to future circumstances, these
forward-looking statements are subject to risks, uncertainties and
other factors. As a result, actual financial results, operational
performance and other future developments could differ materially
from those envisaged by the forward-looking statements.
SSE plc gives no express or implied warranty as to the
impartiality, accuracy, completeness or correctness of the
information, opinions or statements expressed herein. Neither SSE
plc nor its affiliates assume liability of any kind for any damage
or loss arising from any use of this document or its contents.
This document does not constitute an offer or invitation to
underwrite, subscribe for, or otherwise acquire or dispose of any
SSE shares or other securities and the information contained herein
cannot be relied upon as a guide to future performance.
Definitions
These financial results for the year ending 31 March 2017 are
reported under IFRS, as adopted by the EU.
In order to present the financial results and performance of the
Group in a consistent and meaningful way, SSE applies a number of
adjusted accounting measures throughout this financial report.
These adjusted measures are used for internal management reporting
purposes and are believed to present the underlying performance of
the Group in the most useful manner for ordinary shareholders and
other stakeholders.
The definitions SSE uses for adjusted measures are consistently
applied and are explained in the Alternative Performance Measures
section before the Summary Financial Statements.
In preparing this financial report SSE has been mindful of the
commentary issued in May 2016 by the Financial Reporting Council on
the European Securities and Markets Authority's Guidelines on
Alternative Performance Measures. SSE will monitor developing
practice in the use of Alternative Performance Measures and will
continue to prioritise this, ensuring the financial information in
its results statements is clear, consistent and relevant to the
users of those statements.
Chief Executive's Statement
In 2016/17, SSE achieved its first financial objective of an
annual dividend increase that is at least equal to RPI inflation.
This is the 18(th) consecutive year in which SSE has increased its
dividend in this way. With a long-term strategic framework built
around operational efficiency, disciplined investment in building,
owning and operating assets and a balanced range of energy
businesses, SSE is focused on creating long-term value in a
changing sector.
Overall, this strategic framework enables SSE to be resilient
and to achieve solid performance in a challenging, changing and
competitive energy sector, all with the backdrop of significant
change, exemplified by the UK's forthcoming exit from the European
Union. It also enables SSE to have clear strategic priorities to
2020 and beyond, and these include: efficiency and cost control in
operations, progress with the investment programme in new assets;
and meeting the current and future needs of energy customers.
Focusing on safety
Safety is a core SSE value, and its number one priority. SSE's
Total Recordable Injury Rate for employees and employees of other
companies working on SSE sites was 0.22 per 100,000 hours worked in
the 12 month period ending 31 March 2017, compared with 0.23 over
the same period to March 2016.
This was, however, overshadowed by the very sad death of a
contractor employee while working on an SSE transmission project,
which affected greatly everyone who works with SSE. SSE is
committed to maintaining and reinforcing a 'if it's not safe, we
don't do it' culture throughout its operations.
Providing long-term value
SSE seeks to provide long-term value for its customers,
shareholders and the wider society of which it is part. The 2016/17
financial year saw important progress in many areas, with SSE
delivering key commitments such as the major progress in
constructing new wind farm capacity, the major progress also on the
new Caithness Moray transmission link and the successful sale of a
stake in SGN.
The maintenance of a long-term approach requires SSE to evolve
and adapt, and that's what lay behind the decision to review the
value of SSE's equity stake in SGN, and then to complete a sale.
SSE intends to use around GBP500m of the proceeds from the 16.7%
equity stake divestment in SGN to return value to shareholders by
way of an on-market share buy-back to be completed by the end of
2017; and around GBP100m to support investment in the Stronelairg
onshore wind farm.
In March 2017, SSE completed the sale of its equity holdings in
PFI street lighting programmes. This marked the completion of the
business disposals programme announced in March 2014, which secured
financial benefits totalling over GBP1.1bn. This, along with the
sale of the stake in SGN, confirms that timely disposals to create
value for shareholders will always be an option for SSE, especially
where they help to simplify and streamline the SSE group.
More broadly, SSE works to a strategic framework which outlines
not only what it does, but how the company does it:
-- Efficient operations that put the safety of people first and
the current and future needs of customers at the heart of
everything SSE does;
-- Disciplined investment in building, owning and operating
assets that complement SSE's business and secure returns which are
clearly greater than the cost of capital and enhance adjusted
earnings per share; and
-- A balanced business that operates and invests in both
economically-regulated and market-based energy-related assets and
businesses to avoid over-exposure to any single part of the energy
sector.
The financial objective of this strategic framework is to
increase annually the dividend payable to shareholders, by at least
RPI inflation. This strategic framework and financial objective
enables SSE to maintain a disciplined, responsible and long-term
approach to its business activities.
Adapting to a changing sector
The energy markets in GB and Ireland are undergoing significant
change, due to factors including changing customer expectations,
the emergence of low-carbon technologies and the evolving
priorities of public policy makers and regulators. To succeed in
the future SSE will have to evolve and adapt, as it has in the
past, in order to maximise the opportunities from change, as well
as mitigating any risks.
SSE is working to ensure it can successfully adapt to change,
illustrated by progress being made across all of its
businesses:
-- In Wholesale, it is partnering with Siemens and Mitsubishi UK
at the Hunterston wind turbine test facility to develop wind
turbines that are larger, more efficient and capable of supporting
offshore wind projects in deeper waters, such as the Beatrice
offshore wind farm.
-- In Networks, SSE's Electricity Distribution business has led
the sector in trialling more active network management to prepare
it for an increasingly distributed and flexible energy system; and
its Electricity Transmission business has developed and opened a
new National HVDC Centre, the first of its kind in the UK, to test
and de-risk the use of high voltage direct current on the
electricity network in Great Britain.
-- In Retail, SSE is contributing to the transformation of
energy supply through installation of smart meters and development
of new digital services and has become the first energy supplier in
the GB market to commit to achieving the British Standard for
Inclusive Service Provision.
There are significant opportunities for SSE to invest in
building, owning and operating new assets in the years ahead and
for its businesses to play a central role in the continuing
evolution of energy and related services provision in the UK and
Ireland. So while the changes in the energy sector pose challenges,
they also provide opportunities. In the past, SSE has taken the
operational, financial and investment decisions required to adapt
to a changing sector, and will do so again if that is the right
thing to do.
All of this means that SSE remains well-placed to deliver for
the benefit of customers and investors. SSE is a business focused
on what energy customers require, providing the assets they depend
on and the services they need. While managing risk, its focus is on
identifying the opportunities, using its track record in
operational efficiency, investment discipline and financial
management.
Dealing with political uncertainty
Uncertainty and change in the energy sector is not confined to
technology and customer expectations. In March 2017 the UK
government notified the European Council of its intention to leave
the EU; around the same time the Scottish Parliament voted in
favour of seeking a so-called Section 30 order from the UK
Parliament for a second referendum on Scottish independence before
the UK leaves the EU; and in April 2017 the UK Parliament voted in
favour of a general election in June 2017.
Politics, regulation and compliance represent one of SSE's
principal risks. Whilst these events do not present an immediate
risk to how SSE serves its customers or the progress of its
investment programme, the level of risk could increase if, as a
result of political developments there were to be a prolonged
period of legislative or regulatory uncertainty or negative
material change in sector regulation.
SSE continues to advocate for as much stability in the operating
environment as can be achieved. It supports a stable UK carbon
price, a continued commitment to cost-effective renewable energy,
an evolving role for electricity distribution networks and the
retention of competition at the heart of retail energy supply. It
will continue to engage constructively with governments and
regulators in the jurisdictions in which it operates and act
decisively in response to political and regulatory change affecting
the energy sector where required.
Nevertheless, SSE's balanced business model is designed, amongst
other things, to provide underlying resilience when there is
regulatory uncertainty. In responding to such uncertainty, SSE
engages constructively with governments and regulators. It actively
assesses the potential impacts of any regulatory changes and will
take practical steps to maximise opportunities and mitigate risks;
and will be transparent in its disclosures, when necessary.
Maintaining a culture built on values
It is well-known that public trust in large business is low.
People in SSE work to a consistent and clear set of values. It is
also why paying an accredited Living Wage to both direct and
indirect employees, using local providers of goods and services in
large capital projects where possible and acting as a fair and
responsible tax-payer, including attaining the Fair Tax Mark for
transparent disclosures for three successive years, are all
integral to SSE's strategy.
Focusing on strategic priorities in 2017/18
The energy markets in GB and Ireland are undergoing significant
change, and regulation and politics continue to loom large over the
sector. There will be significant challenges in 2017/18, but SSE is
committed to delivering annual dividend growth that at least keeps
pace with inflation, and to working towards ensuring that dividend
cover for the year remains within the expected range of 1.2 to 1.4
times, albeit towards the bottom of it.
SSE's strategic framework makes it a resilient business and it
will continue to focus on delivering against the key features of
its strategic framework:
-- The safe and efficient operation of assets and providing the
energy products and services that customers rely on;
-- The disciplined investment in new assets, or the upgrading of
existing assets, to support and maintain the balance of the
business;
-- Constructive engagement with regulators and legislators to
advocate for clarity and stability in the regulatory framework for
all business segments.
In addition, SSE is embracing change in each of its businesses,
adapting them to the emerging political, economic, social and
technological requirements of customers and of society as a whole.
This helps ensure that SSE remains a resilient and long-term
business. While the operating environment may be uncertain and
changeable, SSE's focus on investing in longer term assets which
creates long-term value for shareholders and customers is
consistent and clear.
Group Financial Overview
The following tables provide a summary of Group Financial
Performance. The definitions SSE uses for adjusted measures are
consistently applied and are explained in the Alternative
Performance Measures section of this document, before the Summary
Financial Statements.
Key Adjusted Financial Metrics Mar 17 Mar 16 Mar 15
GBPm GBPm GBPm
================================================================= ======== ======== ========
Adjusted Operating Profit 1,874.0 1,824.4 1,881.4
================================================================= ======== ======== ========
Adjusted Net Finance Costs (328.1) (310.9) (316.7)
================================================================= ======== ======== ========
Adjusted Profit before Tax 1,545.9 1,513.5 1,564.7
================================================================= ======== ======== ========
Adjusted Current Tax Charge (157.7) (193.4) (224.8)
================================================================= ======== ======== ========
Adjusted Profit after Tax 1,388.2 1,320.1 1,339.9
================================================================= ======== ======== ========
Less: hybrid equity coupon payments (119.3) (124.6) (121.3)
================================================================= ======== ======== ========
Adjusted Profit After Tax attributable to ordinary shareholders 1,268.9 1,195.5 1,218.6
================================================================= ======== ======== ========
Adjusted EPS - pence 125.7 119.5 124.1
================================================================= ======== ======== ========
Number of shares for basic/reported and adjusted EPS (million) 1,009.7 1,000.0 981.8
================================================================= ======== ======== ========
Shares in issue at 31 March (m) 1,015.6 1,007.6 993.0
================================================================= ======== ======== ========
Key Reported Financial Metrics Mar 17 Mar 16 Mar 15
GBPm GBPm GBPm
Reported Operating Profit 1,940.5 785.4 985.9
Reported Net Finance Costs (163.9) (192.1) (250.7)
Reported Profit before Tax 1,776.6 593.3 735.2
Reported Tax Charge (57.8) (8.1) (70.8)
Reported Profit after Tax 1,718.8 585.2 664.4
Less: hybrid equity coupon payments (119.3) (124.6) (121.3)
Reported Profit After Tax attributable to ordinary shareholders(1) 1,599.5 460.6 543.1
Reported EPS- pence 158.4 46.1 55.3
(1After distributions to hybrid capital holders)
Dividend per Share Mar 17 Mar 16 Mar 15
GBPm GBPm GBPm
Interim Dividend pence 27.4 26.9 26.6
Final Dividend pence 63.9 62.5 61.8
Full Year Dividend pence 91.3 89.4 88.4
Increase % 2.1% 1.1% 2.0%
Dividend Cover times / SSE's adjusted EPS 1.38 x 1.34 x 1.40 x
Adjusted Operating Profit by Segment Mar 17 Mar 16 Mar 15
GBPm GBPm GBPm
EPM and Electricity Generation 501.2 436.3 433.3
Gas Production 26.4 2.2 36.6
Gas Storage (13.0) 4.0 3.9
Wholesale 514.6 442.5 473.8
Electricity Transmission 263.7 287.2 184.1
Electricity Distribution 433.4 370.7 467.7
SGN
(SSE's 50% share reducing to 33% from 26 Oct 2016) 239.4 268.7 285.0
Networks 936.5 926.6 936.8
Energy Supply 389.5 398.9 368.7
Energy related services 16.1 15.4 17.7
Enterprise 16.7 40.9 70.4
Retail 422.3 455.2 456.8
Corporate Unallocated 0.6 0.1 14.0
===================================================== ======== ======== ========
Total Adjusted Operating Profit 1,874.0 1,824.4 1,881.4
===================================================== ======== ======== ========
Reported Operating Profit by Segment Mar 17 Mar 16 Mar 15
GBPm GBPm GBPm
EPM and Electricity Generation 736.1. (174.8) (71.8)
Gas Production (201.1) (159.6) (69.4)
Gas Storage (36.8) (146.9) (160.0)
Wholesale 498.2 (481.3) (301.2)
Electricity Transmission 263.7 287.2 184.1
Electricity Distribution 433.4 370.7 467.7
SGN
(SSE's 50% share) reduced to 33% from 26 Oct 2016 151.7 175.3 153.2
Networks 848.8 833.2 805.0
Energy Supply 313.2 398.9 334.5
Energy Related Services (20.3) (2.4) 33.3
Enterprise 16.7 40.9 100.7
Retail 309.6 437.4 468.5
Corporate Unallocated 283.9 (3.9) 13.6
==================================================== ======== ======== ========
Total Reported Operating Profit 1,940.5 785.4 985.9
==================================================== ======== ======== ========
A reconciliation of adjusted operating profit by segment to
reported operating profit by segment can be found in Note 5 (ii) to
the accounts.
Operating Profit Reconciliation Mar 17 Mar 16 Mar 15
GBPm GBPm GBPm
Adjusted Operating Profit 1,874.0 1,824.4 1,881.4
Movement on derivatives 203.1 (28.8) (61.1)
Exceptional items (8.2) (889.8) (674.6)
Share of JVs and Associate interest and tax (128.4) (120.4) (159.8)
============================================== ======== ======== ========
Reported Operating Profit 1,940.5 785.4 985.9
============================================== ======== ======== ========
Profit before Tax Reconciliation Mar 17 Mar 16 Mar 15
GBPm GBPm GBPm
Adjusted Profit before Tax 1,545.9 1,513.5 1,564.7
============================================== ======== ======== ========
Movement on derivatives (IAS 39) 255.7 (14.5) (105.3)
============================================== ======== ======== ========
Exceptional items (8.2) (889.8) (674.6)
============================================== ======== ======== ========
Interest on net pension liabilities (IAS19R) (3.1) (22.3) (14.0)
============================================== ======== ======== ========
Share of JVs and Associates tax (13.7) 6.4 (35.6)
============================================== ======== ======== ========
Reported Profit before Tax 1,776.6 593.3 735.2
============================================== ======== ======== ========
Tax Mar 17 Mar 16 Mar 15
GBPm GBPm GBPm
======================================================================================== ======== ======== ========
Adjusted current tax charge 157.7 193.4 224.8
======================================================================================== ======== ======== ========
Add/(less)
======================================================================================== ======== ======== ========
Share of JVs and Associates tax (13.7) 6.4 (35.6)
======================================================================================== ======== ======== ========
Deferred tax including share of JV and Associates 19.8 80.8 82.0
======================================================================================== ======== ======== ========
Tax on exceptional items and certain re-measurements (106.0) (272.5) (200.4)
======================================================================================== ======== ======== ========
Reported tax charge 57.8 8.1 70.8
======================================================================================== ======== ======== ========
Effective current tax rate based on adjusted profit before tax 10.2% 12.8% 14.4%
======================================================================================== ======== ======== ========
Total UK taxes paid including taxes on profits, property taxes, environmental taxes and
employment
taxes 385.0 453.9 506.2
======================================================================================== ======== ======== ========
Investment and Capex Summary (adjusted) Mar 17 Mar 17 Mar 16
Share % GBPm GBPm
===================================================== ======== ======== ========
Thermal Generation 6.3 108.6 90.8
===================================================== ======== ======== ========
Renewable Generation 21.2 366.4 291.8
===================================================== ======== ======== ========
Gas Storage - 0.2 14.0
===================================================== ======== ======== ========
Gas Production 4.2 72.9 56.1
===================================================== ======== ======== ========
Total Wholesale 31.7 548.1 452.7
===================================================== ======== ======== ========
Electricity Transmission 29.3 505.0 573.4
===================================================== ======== ======== ========
Electricity Distribution 16.5 284.7 258.3
===================================================== ======== ======== ========
Total Networks 45.8 789.7 831.7
===================================================== ======== ======== ========
Energy Supply and Related Services 10.7 184.3 169.0
===================================================== ======== ======== ========
Enterprise 3.4 58.7 48.5
===================================================== ======== ======== ========
Total Retail 14.1 243.0 217.5
===================================================== ======== ======== ========
Other 8.4 145.4 116.8
===================================================== ======== ======== ========
Total investment and capital expenditure (adjusted) 100% 1,726.2 1,618.7
===================================================== ======== ======== ========
Debt metrics Mar 17 Mar 16 Mar 15
================================================================================== ========== ========== ==========
GBPm GBPm GBPm
================================================================================== ========== ========== ==========
Adjusted net debt and hybrids (GBPm) (8,483.0) (8,395.0) (7,568.1)
================================================================================== ========== ========== ==========
Average debt maturity (years) 8.8 8.9 9.9
================================================================================== ========== ========== ==========
Adjusted interest cover (excluding SGN) times 6.0 5.2 5.3
================================================================================== ========== ========== ==========
Adjusted interest cover (including SGN) times 4.7 4.7 4.8
================================================================================== ========== ========== ==========
Average interest rate for the period (excluding JV/assoc. interest and all hybrid
coupon payments) 3.66% 3.73% 4.21%
================================================================================== ========== ========== ==========
Average cost of debt at period end (including all hybrid coupon payments) 4.10% 3.95% 4.55%
================================================================================== ========== ========== ==========
Adjusted Net Debt and Hybrids Reconciliation Mar 17 Mar 16 Mar 15
GBPm GBPm GBPm
Adjusted net debt and hybrids (8,483.0) (8,395.0) (7,568.1)
============================================== ========== ========== ==========
Less: hybrid equity 2,209.7 2,209.7 3,371.1
============================================== ========== ========== ==========
Adjusted net debt and hybrid debt (6,273.3) (6,185.3) (4,197.0)
============================================== ========== ========== ==========
Less: outstanding liquid funds (105.2) (121.8) (71.7)
============================================== ========== ========== ==========
Add: finance leases (276.9) (300.8) (319.7)
============================================== ========== ========== ==========
Less: non-recourse Clyde debt - (200.7) -
============================================== ========== ========== ==========
Unadjusted net debt and hybrid debt (6,655.4) (6,808.6) (4,588.4)
============================================== ========== ========== ==========
Net finance costs Reconciliation Mar 17 Mar 16 Mar 15
======================================================= ======== ======== ========
GBPm GBPm GBPm
======================================================= ======== ======== ========
Adjusted net finance costs 328.1 310.9 316.7
======================================================= ======== ======== ========
add/(less):
======================================================= ======== ======== ========
Movement on financing derivatives (IAS 39) (52.6) (14.3) 44.2
======================================================= ======== ======== ========
Share of JV and Associates interest (114.7) (126.8) (124.2)
======================================================= ======== ======== ========
Interest on pension asset / (liabilities) (IAS 19R) 3.1 22.3 14.0
======================================================= ======== ======== ========
Reported net finance costs 163.9 192.1 250.7
======================================================= ======== ======== ========
Adjusted net finance costs 328.1 310.9 316.7
======================================================= ======== ======== ========
Add/(less):
======================================================= ======== ======== ========
Finance lease interest (33.1) (34.7) (34.2)
======================================================= ======== ======== ========
Notional interest arising on discounted provisions (14.2) (15.7) (14.0)
======================================================= ======== ======== ========
Hybrid equity coupon payment 119.3 124.6 121.3
======================================================= ======== ======== ========
Adjusted finance costs for interest cover calculation 400.1 385.1 389.8
======================================================= ======== ======== ========
SSE Principal Sources of debt funding Mar 17 Mar 16 Mar 15
Bonds 41% 45% 38%
=============================================================== ======= ======= =======
Hybrid debt and equity securities 33% 25% 37%
=============================================================== ======= ======= =======
European investment bank loans 11% 8% 8%
=============================================================== ======= ======= =======
US private placement 10% 5% 5%
=============================================================== ======= ======= =======
Index -linked debt, long term project finance and other loans 5% 17% 12%
=============================================================== ======= ======= =======
% of total SSE borrowings secured at a fixed rate 91% 87% 83%
=============================================================== ======= ======= =======
Rating Agency Rating Criteria Date of Issue
==================== ==================== ========================== ================
Moody's A3 Stable outlook Mid teens% RCF / Net Debt 3 October 2016
==================== ==================== ========================== ================
Standard and Poor's A- Negative outlook 23% FFO/Net Debt 26 October 2016
==================== ==================== ========================== ================
Contributing to employees' pension schemes - IAS 19 R Mar 17 Mar 16 Mar 15
GBPm GBPm GBPm
Net pension scheme asset/ (liabilities) recognised in the balance sheet before deferred
tax 70.5 (394.8) (664.6)
========================================================================================= ======= ======== ========
Employer cash contributions Scottish Hydro Electric scheme 36.2 33.7 57.6
========================================================================================= ======= ======== ========
Deficit repair contribution included above 14.0 14.8 29.5
========================================================================================= ======= ======== ========
Employer cash contributions Southern Electric scheme 76.3 68.3 92.0
========================================================================================= ======= ======== ========
Deficit repair contribution included above 41.2 44.6 58.5
========================================================================================= ======= ======== ========
Additional information on employee pension schemes can be found
in Note13 to the accounts.
Group Financial Review
This group financial review covers SSE's financial performance
and outlook, capital investment, balance sheet and tax
payments.
Earnings, Dividends and Dividend Cover
Focusing on delivering dividend increases that at least keep
pace with inflation
The Board is recommending a final dividend of 63.9p per share,
to which a Scrip alternative is offered, compared with 62.5p in the
previous year, an increase of 2.2%. This will make a full-year
dividend of 91.3p per share which is: an increase of 2.1% compared
with 2015/16, which is in line with RPI inflation; and covered 1.38
times by SSE's adjusted earnings per share.
SSE believes that its strategic framework, opportunities for
growth and the extent to which its revenues in Wholesale and
Networks are index-linked mean it can deliver a full-year dividend
increase that at least keeps pace with RPI inflation in 2017/18 and
in the subsequent years (measured against the average annual rate
of RPI inflation across each of the 12 months to March).
Focusing on adjusted earnings per share and dividend cover
To monitor its financial performance over the medium term, SSE
consistently reports on its adjusted earnings per share (EPS)
measure. This measure is calculated by excluding the charge for
deferred tax, interest costs on net pension liabilities,
exceptional items and the impact of certain re-measurements.
SSE's adjusted EPS measure has been calculated consistently and
provides an important and meaningful measure of underlying
financial performance. In adjusting for exceptional items and
certain re-measurements, adjusted EPS reflects SSE's internal
performance management, avoids the volatility associated with
mark-to-market IAS 39 re-measurements and means that items deemed
to be exceptional due to their nature and scale do not distort the
presentation of SSE's underlying results. For more detail on these
and other adjusted items please refer to the Adjusted Performance
Measures section of this report.
In 2016/17, SSE's adjusted earnings per share increased by 5.2%,
to 125.7 pence, which was ahead of the target of at least 120
pence. Reported EPS was 158.4p, compared to 46.1p in the previous
year. The extent of this increase is predominantly explained by the
impact on reported earnings of the significant exceptional charges
incurred in the previous year and the relative movement in mark to
market valuations on derivative contracts over both years.
As stated in its Notification of Close Period Statement on 30
March 2017, SSE is working to keep dividend cover within the
expected range of around 1.2 to around 1.4 times in 2017/18,
although it is likely to be towards the bottom of it, which also
means adjusted earnings per share is likely to be lower than it was
in 2016/17.
SSE believes that its dividend should be covered by adjusted
earnings per share at a level that is sustainable over time; and it
believes that sustainability is based on the quality of the
operations and assets from which earnings are derived and the
longer-term financial outlook.
As a result of its investment over the last five years, the
majority of SSE's asset base and operating profit now relates to
economically-regulated, and largely index-linked, Networks and
government-mandated renewable sources of energy. Subject to the
range of factors that apply in its market-based businesses (see
below), and to material political or regulatory change, SSE is
working towards achievement of dividend cover a within a range of
around 1.2 times to around 1.4 times over the three years to
2019/20, based on dividend increases that at least keep pace with
RPI inflation, and to be towards the bottom of that range in
2017/18.
Delivering adjusted profit before tax in 2016/17 and 2017/18
Adjusted profit before tax increased by 2.1%, from GBP1,513.5m
to GBP1,545.9m during 2016/17. SSE's Wholesale, Networks and Retail
(including Enterprise) segments were profitable. Nevertheless,
SSE's objective is not to maximise profit in any one year but to
earn a sustainable level of profit over the medium term.
Over 2017/18, SSE's actual level of adjusted profit before tax
will be determined largely by the range of factors set out in
previous years that continue to apply in its market-based
businesses, in which energy portfolio management is a major
influence, including:
-- the impact of wholesale prices for energy;
-- electricity market conditions, the ability of its thermal
power stations to be available and to generate electricity
efficiently;
-- the output of renewable energy from its hydro-electric
stations and wind farms and the price achieved for the output;
-- the output from its gas production assets and the price achieved for the output; and
-- the actual and underlying level of customers' energy consumption.
Summarising the impact of Movements on Derivatives
SSE enters into forward purchase contracts (for power, gas and
other commodities) to meet the future demands of its Energy Supply
business and to optimise the value of its Generation and other
Wholesale assets. Some of these contracts are determined to be
derivative financial instruments under IAS 39 and as such are
required to be recorded at their fair value. SSE shows the change
in the fair value of these forward contracts separately as this
mark-to-market movement is not relevant to the underlying
performance of its operating segments. It will recognise the
underlying value of these contracts as the relevant commodity is
delivered, which will predominantly be within the subsequent 12 to
36 months. Conversely, commodity contracts that are not determined
to be derivative financial instruments under IAS 39 are accounted
for as 'own use' contracts, the cost of which is recognised on
delivery of the underlying commodity.
The favourable movement on derivatives under IAS39 of GBP201.0m
arose partly from an improvement in the fair value of forward
commodity purchase contracts and the unwinding of contracts in
2016/17. The fair value of such contracts is derived by comparing
the contractual delivery price against the prevailing market
forward price at the balance sheet date. The position at 31 March
2017, primarily electricity and gas, was a liability of GBP163.3m
compared to a liability on similar contracts at 31 March 2016 of
GBP364.3m.
Complementing this was a positive movement on the fair valuation
of interest and currency derivatives of GBP52.6m. This movement is
primarily due to the impact of the aftermath of the EU referendum
on cross currency swaps and forward currency contracts. SSE also
reports these fair value re-measurements separately as these do not
represent underlying business performance during the financial
year. The effect of the contracts will be recorded in adjusted
profit measures when the transactions are settled.
Exceptional Items
In the year to 31 March 2017, SSE recognised a net exceptional
charge of GBP8.2m before tax. The following table provides a
summary of the key components making up the net charge
position:
Total net charges Property, Plant & Equipment Gains/(losses) on disposals Total
by asset class
GBPm GBPm GBPm
=================================== ============================ ============================ ========
SGN gain on sale - 307.3 307.3
=================================== ============================ ============================ ========
Clyde fair value uplift - 59.1 59.1
=================================== ============================ ============================ ========
Thermal Generation 31.6 31.6
=================================== ============================ ============================ ========
Gas Production (227.5) (227.5)
=================================== ============================ ============================ ========
Gas Storage (23.8) 23.8
=================================== ============================ ============================ ========
Retail and technology development (120.3) 120.3
=================================== ============================ ============================ ========
Other (34.6) 34.6
=================================== ============================ ============================ ========
Total exceptional (charge)/gain (374.6) 366.4 (8.2)
=================================== ============================ ============================ ========
By Segment
=================================== ============================ ============================ ========
Wholesale (237.9) 59.1 (178.8)
=================================== ============================ ============================ ========
Retail (112.7) (112.7)
=================================== ============================ ============================ ========
Corporate (24.0) 307.3 283.3
=================================== ============================ ============================ ========
Total (374.6) 366.4 (8.2)
=================================== ============================ ============================ ========
For a full description of the net exceptional charge see note 6
of the financial statements.
The Clyde fair value uplift of GBP59.1m relates to the
deconsolidation, in May 2016, following a change to the
shareholders' agreement, of SSE's investment in Clyde Windfarm
(Scotland) Limited ('Clyde'). It is therefore now an
equity-accounted joint venture. This change in accounting treatment
required the investment to be fair valued and the revaluation to be
recorded in the income statement. This has been recorded as an
exceptional credit due to both its quantum and the non-recurring
nature of the item.
The thermal generation credit reflects a reversal of previously
impaired coal inventory, resulting from the unexpected improvement
in winter 2016/17 'dark spreads', partially offset by impairments
at SSE's oil burning stations at Rhode and Tawnaghmor in the
Republic of Ireland due to their age and future competitive
prospects.
The impairment charges recognised for Gas Production assets are
mainly driven by the latest independent Reserves Report, which
takes account of all technical and economic variables, and
estimates a significant reduction in the Proven and Probable (2P)
reserves in the Greater Laggan Area assets that is only partially
offset by an increase in those of SSE's mature asset base in the
Southern North Sea. In addition, an impairment charge has been
recognised in relation to Bacton field assets, predominantly
related to higher than previously assessed decommissioning costs.
The Gas Storage asset impairment relates to higher anticipated
decommissioning costs.
The exceptional charges for Retail and other technology
developments reflect impairments of capitalised costs following the
decision taken to cease development of a replacement customer
service and billing system and related technology development
projects.
The Other exceptional charges are primarily the impairment of
goodwill associated with the purchase of the Energy Solutions Group
and offsetting changes in provisions relating to disputes and
claims.
Reported Profit Before Tax and Earnings Per Share
Reported results for 2016/17 are significantly higher than those
for 2015/16 due to the impact on reported profit before tax of the
significant exceptional charges incurred in 2015/16. These related
mainly to the write down of wholesale generation, gas storage and
production assets in 2015/16 compared to the gain on sale of a
stake in SGN plus lower asset write downs in 2016/17. This together
with the relative movement in mark to market valuations on forward
purchase contracts for commodities over both years (which at March
2017 were still 'out of the money') contributed to a net reported
gain before tax of GBP247.5m in 2016/17 compared to a loss before
tax on those items of (GBP904.3m) in 2015/16.
This swing is explained in more detail in the relevant sections
throughout this report and is the main driver for:
-- Reported profit before tax increasing to GBP1,776.6m in
2016/17 compared to a GBP593.3m in 2015/16, due to the movement in
non-recurring exceptional items; and
-- Reported earnings per share increasing to 158.4p in 2016/17
compared to 46.1p in 2015/16, again due to the movement in
non-recurring exceptional items.
Investment and Capital Expenditure
Central to SSE's strategic framework is efficient and
disciplined investment in building a balanced range of
economically-regulated and market-based energy assets that it also
generally owns and operates. This means that investment should be
in line with SSE's commitment to strong financial management and
consistent with the maintenance of a balanced range of assets
within SSE's businesses.
Investing efficiently in energy assets that the UK and Ireland
need in 2016/17
SSE invests in a balanced range of businesses and invests only
in assets for which returns are expected to be clearly greater than
the cost of capital. All projects complement SSE's existing
portfolio of assets and are governed and executed in an efficient
manner and in line with SSE's commitment to strong financial
management.
During 2016/17, SSE's investment and capital expenditure totalled GBP1,726.2m. This included:
-- A major investment programme in electricity networks: the
switching on of the first section of an overhead link between
Knocknagael and Kintore represented a key milestone in the
Caithness-Moray electricity transmission link project. The project
is the largest capital project ever undertaken by SSE and is on
schedule for completion in 2018. This investment, alongside
continued upgrading of the electricity distribution network to meet
the changing needs of customers, will further increase the total
Regulated Asset Value (RAV) of SSE's networks businesses;
-- Further investment in renewable energy in GB and Ireland:
progress was made to increase SSE's renewable energy portfolio in
GB with projects to be delivered through the Renewables Obligation
(RO), which also applies in Northern Ireland, Contracts for
Difference (CfD) and Renewable Energy Feed in Tariff 2 in Ireland.
Progress has been made at projects including the Clyde Extension
(173MW); Stronelairg (225MW); the Beatrice offshore wind farm (SSE
share 235MW); and Galway Wind Park (SSE share 120MW), which is the
largest wind farm in Ireland. These projects, along with further
onshore wind projects in construction or pre-construction and the
recently delivered Tievenameenta (34MW) wind farm, will add just
over 1GW to SSE's renewable energy portfolio, taking SSE's total
renewable energy capacity 4.3GW including pumped storage;
In addition, SSE is fulfilling a regulatory obligation to
install smart meters for its Energy Supply customers. At 31 March
2017 SSE had installed over 500,000 smart meters in customers'
homes. Post installation, SSE's meters will transfer to a
contracted Meter Asset Provider, therefore SSE's investment and
capital expenditure excludes the capital cost of installation and
meter assets. Subject to the delivery timetable of the critical
central infrastructure, and other GB-wide technical constraints
affecting the progress of smart metering, SSE intends to ramp up
its rollout significantly over 2017/18.
SSE is maintaining investment momentum, with capital and
investment expenditure of around GBP1.7bn planned for
2017/18,similar levels currently expected for 2018/19 and around
GBP6bn as a whole over the four years to 2020. Around GBP5bn of
that is already committed, predominantly in building, owning and
operating economically-regulated electricity networks and
government-mandated renewable energy projects. The revenue derived
from those assets is generally index-linked.
Simplifying and re-shaping the SSE group
As part of its long-standing strategic commitment to efficiency
and disciplined investment, SSE is maintaining the significant
downward pressure on its operating costs that it started in
2014.
Also in 2014 SSE commenced what was called a value programme to
dispose of assets which were not core to its future plans, which
resulted in a disproportionate burden, or which could release
capital for future investment - all in the interests of simplifying
and re-shaping the SSE group. The sale in March 2017 of its equity
holding in the last of 11 PFI streetlighting contracts means the
programme is now complete, and over the period between 2014 and
2017 SSE secured disposal proceeds and debt reduction as a result
of this value programme totalling over GBP1.1bn.
The sale in October 2016 of a 16.7% stake in SGN for GBP621m is
in addition to the GBP1.1bn received as a result of the value
programme launched in 2014; but the SGN stake sale and the value
programme both demonstrate that timely disposals to create value
for shareholders should always be an option for SSE where they help
to simplify and streamline the SSE group.
Financial management and balance sheet
Keeping SSE well-financed
As a long-term business, SSE believes that it should maintain a
strong balance sheet, illustrated by its commitment to robust
ratios for retained cash flow and funds from operations/debt. SSE
believes that a strong balance sheet enables it to secure funding
from debt investors at competitive and efficient rates and take
decisions that are focused on the long term - all of which supports
the delivery of annual increases in the dividend of at least RPI
inflation and the maintenance of an appropriate level of dividend
cover. In October 2016, Moody's Investors Service affirmed SSE's
senior credit rating of A3, changed SSE's outlook from negative to
stable and raised SSE's threshold for retained cash flow/debt ratio
of 'mid teens' (previously 13%). In the same month, Standard &
Poor's affirmed SSE's A-rating and negative outlook, while also
raising SSE's threshold for funds from operations/debt ratio to 23%
(previously 20-23%).
SSE has a long-standing commitment to maintaining financial
discipline and diversity of funding sources and to moving quickly
to select financial options that are consistent with this,
including issuing new bonds and loans. In line with this, in March
2017, it successfully issued GBP1.03bn of Hybrid debt. The dual
tranche issue comprised GBP300m with a coupon of 3.625% and $900m
with a coupon of 4.75%. The $900m tranche has been swapped back to
both Euros and Sterling, bringing the all-in rate down to 2.72% and
resulting in an all-in funding cost for both tranches to SSE of
3.02% per annum. The intent is to use the proceeds to replace SSE's
hybrid issued in 2012 (at an all-in rate of 5.6%), which has an
issuer first call date on 1 October 2017. This will result in an
annualised cash saving of around GBP26m from 2018/19. The combined
hybrid coupon and hybrid interest payments in 2017/18 are expected
to be GBP128m falling to around GBP80m in 2018/19. The new
GBP1.03bn Hybrids have a fixed redemption date and are therefore
debt accounted and included within Loans and Other Borrowings while
the existing GBP2.2bn of Hybrids are perpetual instruments and are
therefore equity accounted.
SSE has confirmed that the criteria applied by the Rating
Agencies, Moody's and Standard and Poor's, will result in broadly
the same value of hybrid equity treatment as that of previous
years.
During the year the GBP300m Scottish Hydro Electric Transmission
plc facility with the European Investment Bank was drawn into a 10
year fixed rate term loan at a rate of 2.076% while a new GBP200m
facility with the European Investment Bank was secured. The new
facility is split evenly between SSE plc and Scottish Hydro
Electric Transmission plc and will be drawn during 2017/18 at which
point it will convert to 10 year term loans. The first of the one
year extension options on the GBP1.5bn of bank facilities was
exercised in 2016 meaning these facilities now mature in 2021 while
the second one year option is likely to be exercised during 2017
which will take these maturities to 2022.
Maintaining a prudent treasury policy following the EU
referendum
SSE's treasury policy is designed to be prudent and flexible. In
line with that, cash from operations is first used to finance
maintenance capital expenditure and then dividend payments, with
further growth in capital expenditure and investment generally
financed by a combination of: cash from operations; bank borrowings
and bond issuance.
As a matter of policy, a minimum of 50% of SSE's debt is subject
to fixed rates of interest. Within this policy framework, SSE
borrows as required on different interest bases, with financial
instruments being used to achieve the desired out-turn interest
rate profile. At 31 March 2017, 91% of SSE's borrowings were at
fixed rates.
Borrowings are mainly made in Sterling and Euros to reflect the
underlying currency denomination of assets and cashflows within
SSE. All other foreign currency borrowings are swapped back into
either Sterling or Euros.
Transactional foreign exchange risk arises in respect of:
procurement contracts; fuel and carbon purchasing; commodity
hedging and energy portfolio management operations; and long-term
service agreements for plant.
SSE's policy is to hedge any material transactional foreign
exchange risks through the use of forward currency purchases and/or
financial instruments. This means that all its major project capex
requirements are hedged, including the Stronelairg wind farm that
was approved in 2016. Translational foreign exchange risk arises in
respect of overseas investments, hedging in respect of such
exposures is determined as appropriate to the circumstances on a
case-by-case basis. Overall, while SSE has kept its treasury policy
under review following the result of the EU Referendum, it has so
far identified no need for change.
Managing net debt and maintaining cash flow
SSE's adjusted net debt and hybrid capital was GBP8.5bn at 31
March 2017, compared with GBP9.0bn at 30 September 2016 and
GBP8.4bn on 31 March 2016. The overall level of net debt and hybrid
capital reflects SSE's ongoing investment programme however it also
includes an accounting increase of around GBP212m as a result of
fair value adjustments. The fair value adjustment relates to
marked-to-market movements on cross currency swaps and floating
rate swaps that are classed as fair value hedges under IFRS and as
a result of Sterling weakness and lower interest rates during
2016/17 these have become more 'in the money' to SSE therefore
increasing the net debt position. This accounting movement in debt
is offset by an equivalent movement in derivative financial
liabilities held on SSE's balance sheet.
Adjusted net debt and hybrids at 31 March 2017 also includes
GBP369m of the GBP500m proceeds identified for the share buy back
from the sale of a 16.7% stake in SGN. Of this, GBP65m was deployed
during the irrevocable, non-discretionary programme that continued
during the close period from 1 April 2017 which means as at 17 May
2017 SSE has directed GBP196m towards the buy back, re-purchasing
around 13.4m shares. It still expects the process to be completed
by the end of December 2017. Adjusted net debt and hybrids is
forecast to be around GBP9.5bn at March 2018.
Adjusted net debt excludes finance leases and includes
outstanding liquid funds that relate to wholesale energy
transactions.
As noted above SSE's existing GBP2.2bn of hybrid equity is
accounted for as equity within the Financial Statements but, as in
previous years, has been included within SSE's 'Adjusted net debt
and hybrid capital' to
aid comparability. SSE's new GBP1.03bn of hybrid debt issued during 2016/17 is treated as debt. A reconciliation of adjusted net debt and hybrid capital to reported net debt is provided in the table headed Adjusted Net Debt and Hybrid Capital, due to the different accounting treatments, only the GBP2.2bn of hybrid equity is part of that reconciliation.
The level of reported net debt also reflects SSE's ongoing
capital expenditure programme along with the impact of movements in
foreign exchange rates.
Ensuring a strong debt structure through medium- and long-term
borrowings
SSE's objective is to maintain a reasonable range of debt
maturities. Its average debt maturity, excluding hybrid securities,
at 31 March 2017 was 8.8 years, compared with 8.9 years at 31 March
2016.
SSE's debt structure remains strong, with around GBP8.7bn of
medium/long term borrowings in the form of issued bonds, European
Investment Bank debt and other loans. This includes GBP1.03bn of
hybrid equity with their first call date on 2 October 2017, which
it is intended will be redeemed using the proceeds of the most
recent hybrid issuance.
The balance of SSE's adjusted net debt is financed with
short-term bank debt. SSE's adjusted net debt includes cash and
cash equivalents totalling GBP1.4bn and around GBP1.2bn of
medium-term borrowings which will mature in the period to March
2018, including the hybrid bonds mentioned above.
Operating a Scrip Dividend Scheme
The Scrip Dividend Scheme, approved by SSE's shareholders most
recently in 2015, gives shareholders the option to receive new,
fully paid Ordinary shares in the company in place of their cash
dividend payments. It therefore reduces cash outflow and so
supports the balance sheet. The Scrip dividend take-up:
-- in August 2016 (relating to the final dividend for the year
to 31 March 2016) resulted in a reduction in cash dividend funding
of GBP142.6m, with 9.4 million new ordinary shares, fully paid,
being issued; and
-- In February 2017 (relating to the interim dividend for
2016/17) resulted in a reduction in cash dividend funding of
GBP95.3m, with 6.3m new ordinary shares, fully paid, being
issued.
This means that the cumulative cash dividend saving or
additional equity capital resulting from the introduction of SSE's
Scrip Dividend Scheme in 2010 now stands at GBP1,289m and has
resulted in the issue of 93.4 million Ordinary shares.
Managing net finance costs
SSE believes adjusted net finance costs provide the most useful
measure of performance and a reconciliation of adjusted and
reported net finance costs is provided in the table headed Net
Finance Costs. SSE's adjusted net finance costs in 2016/17 were
GBP328.1m, compared to GBP310.9m in 2015/16 reflecting the increase
in net debt in the year. Reported net finance costs were GBP163.9m,
compared to GBP192.1m. This reduction reflects a positive movement
in finance derivatives of GBP52.6m in 2016/17 compared to GBP14.3m
in 2015/16.
The coupon payments relating to the existing GBP2.2bn hybrid
equity are presented as distributions to other equity holders and
are reflected within adjusted earnings per share when paid. In
2016/17 these totalled GBP119.3m, compared to GBP124.6m in the
previous year. The coupon payments on the new GBP1.03bn hybrid debt
issuance are treated as finance costs under IFRS and were GBP1.3m
in 2016/17.
Tax
SSE is one of the UK's biggest taxpayers, and in the survey
published in November 2016 was ranked 14th out of the 100 Group of
Companies in 2016 in terms of taxes paid. In the year to 31 March
2017, SSE paid GBP385.0m of taxes on profits, property taxes,
environmental taxes, and employment taxes in the UK, compared with
GBP453.9m in the previous year. Total taxes paid in 2016/17 were
lower than the previous year, primarily due to:
-- reduced taxable profits from Gas Production as a result of
lower gas prices and capital allowances from the Greater Laggan
acquisition in 2015/16;
-- the reduction in the Petroleum Revenue Tax rate to 0% from 1 January 2016;
-- a one-off Land & Buildings Transaction Tax liability in
2015/16 on the Greater Laggan acquisition; and
-- lower Climate Change Levy liabilities through reduced coal consumption.
SSE also paid EUR16.5 million of taxes in the Republic of
Ireland, being the only country outside of the UK in which it has
any trading operations.
SSE considers being a responsible taxpayer a core element of
being a responsible member of society. SSE seeks to pay the right
amount of tax on its profits, in the right place, at the right
time, and continues to be the only FTSE 100 company to have been
awarded the Fair Tax Mark. While SSE has an obligation to its
customers and shareholders to efficiently manage its total tax
liability, it does not seek to use the tax system in a way it does
not consider it was meant to operate, or use "tax havens" to reduce
its tax liabilities.
SSE understands it also has an obligation to the society in
which it operates, and from which it benefits - for example, tax
receipts are vital for the public services SSE relies upon.
Therefore SSE's tax policy is to operate within both the letter and
spirit of the law at all times.
For reasons already stated above, SSE's focus is on adjusted
profit before tax, and in line with that, SSE believes that the
adjusted current tax charge on that profit is the tax measure that
best reflects underlying performance. SSE's adjusted current tax
rate, based on adjusted profit before tax, is 10.2%, as compared
with 12.8% in 2015/16 on the same basis.
As would be expected for a Company of SSE's size, the SSE group
has a small number of tax enquiries ongoing with HMRC at any one
time. In addition, under Corporate Tax Self Assessment, SSE adopts
a filing position on matters in its tax returns that may be large
or complex, with the position then being discussed with HMRC after
the tax returns have been filed. SSE engages proactively with HMRC
on such matters, but where SSE considers there to be a risk that
HMRC may disagree with its view, and that additional tax may become
payable as a result, a provision is made for the potential
liability, which is then released once the matter has been agreed
with HMRC. SSE considers this to be in line with the overall
prudent approach to its tax responsibilities.
Group Financial Overview - Conclusion and Priorities
SSE's first financial objective is to deliver annual increases
in the dividend that at least keep pace with RPI inflation. SSE
believes that its strategic framework, opportunities for growth and
effective financial management mean it can continue to deliver this
in 2017/18 and beyond. Its financial priorities for 2017/18 as a
whole include:
-- Delivering an annual increase in the dividend that at least keep pace with RPI inflation;
-- Maintaining dividend cover in a range from around 1.2 times
to around 1.4 times, albeit towards the bottom of it;
-- Continuing a disciplined approach to investment in building,
owning and operating a balanced range of energy related assets and
delivering assets within the established investment programme,
especially in economically-regulated Networks and
government-mandated renewables;
-- Maintaining a strong balance sheet, with robust ratios for
retained cash flow and funds from operations/debt; and
-- Completing deployment of the SGN stake sale proceeds by way
of the on market share buy back, a process which could continue
until the end of 2017.
WHOLESALE
Wholesale Key Performance Indicators
Mar 17 Mar 16
Energy Portfolio Management (EPM) and Electricity Generation
================================================================================= ========= ==========
EPM and Generation adjusted operating profit - GBPm 501.2 436.3
================================================================================= ========= ==========
EPM and Generation reported operating profit/(loss) - GBPm 736.1 (174.8)
================================================================================= ========= ==========
EPM and Generation capital expenditure and investment - GBPm 475.0 382.6
================================================================================= ========= ==========
GENERATION CAPACITY - MW
================================================================================= ========= ==========
Gas- and oil-fired generation capacity (GB) - MW 4,013 3,961
================================================================================= ========= ==========
Gas- and oil-fired generation capacity (Ire) - MW 1,292 1,292
================================================================================= ========= ==========
Coal-fired generation capacity- MW 1,995 1,995
================================================================================= ========= ==========
Multi-fuel capacity - (MW) 34 34
================================================================================= ========= ==========
Total thermal generation capacity - MW 7,334 7,282
================================================================================= ========= ==========
Pumped storage capacity (GB) - MW 300 300
================================================================================= ========= ==========
Conventional hydro capacity (GB) - MW 1,150 1,150
================================================================================= ========= ==========
Onshore wind capacity (GB) - MW 900 900
================================================================================= ========= ==========
Onshore wind capacity (NI) - MW 122 88
================================================================================= ========= ==========
Onshore wind capacity (ROI) - MW 456 456
================================================================================= ========= ==========
Offshore wind capacity (GB) - MW 344 344
================================================================================= ========= ==========
Biomass capacity (GB) - MW 37 37
================================================================================= ========= ==========
Total renewable generation capacity (inc. pumped storage) - MW 3,309 3,275
================================================================================= ========= ==========
Total electricity generation capacity (GB and Ire) - MW 10,643 10,557
================================================================================= ========= ==========
Renewable capacity qualifying for ROCs - MW c1,850 c1,800
================================================================================= ========= ==========
GENERATION OUTPUT - GWh
================================================================================= ========= ==========
Gas- and oil-fired (inc. CHP) output (GB) - GWh 14,977 10,160
================================================================================= ========= ==========
Gas- and oil-fired output ( Ire) - GWh 2,463 1,780
================================================================================= ========= ==========
Coal-fired (inc. biomass co-firing) output - GWh 901 6,141
================================================================================= ========= ==========
Total thermal generation - GWh 18,341 18,081
================================================================================= ========= ==========
Pumped storage output - GWh 233 252
================================================================================= ========= ==========
Conventional hydro output - GWh 3,101 4,074
================================================================================= ========= ==========
Onshore wind output GB - GWh 1,895 2,439
================================================================================= ========= ==========
Onshore wind output NI - GWh 251 235
================================================================================= ========= ==========
Onshore wind output ROI - GWh 1,211 1,308
================================================================================= ========= ==========
Offshore wind output - GWh 1,172 1,312
================================================================================= ========= ==========
Biomass output GB - GWh 92 75
================================================================================= ========= ==========
Total renewable generation (inc. pumped storage) - GWh 7,955 9,695
================================================================================= ========= ==========
Total Generation output all plant - GWh 26,296 27,776
================================================================================= ========= ==========
Note 1: Capacity is wholly-owned and share of joint ventures.
Note 2: Output is electricity from power stations in which SSE has an ownership interest (output
based on SSE's contractual share).
Note 3: Capacity includes 1,180MW at Peterhead (while TEC is 400MW and is due to reduce to
be zero from 1 April 2018)
Note 4: Keadby TEC increased by 20MW to 755MW and Medway TEC increased by 35MW to 735MW from
1 April 2016.
Note 4: Wind output excludes 309GWh of constrained off generation in 2016/17 and 387GWh in
2015/16
Note 5: Onshore wind capacity and output at March17 excludes 175MW related to the Clyde disposal
in March 16
Note 6: Waste to Energy GWh not included above as contracted to third party
Note 7: Slough Heat & Power Biomass Plant's financial results are reported within SSE Enterprise.
Capacity and output included above.
========================================================================================================
Mar 17 Mar 16
================================================================== ======== ========
GAS PRODUCTION
================================================================== ======== ========
Gas production adjusted operating profit - GBPm 26.4 2.2
================================================================== ======== ========
Gas production reported operating profit/(loss) - GBPm (201.1) (159.6)
================================================================== ======== ========
Gas production- M therms 618 403
================================================================== ======== ========
Gas production- Mboe 10.21 6.55
================================================================== ======== ========
Liquids production - Mboe 1.05 0.13
================================================================== ======== ========
Gas production capital investment - GBPm 72.9 56.1
================================================================== ======== ========
Total net proven and probable reserves (2P) bn therms 2.5 3.6
================================================================== ======== ========
Total net proven and probable reserves (2 P) Mboe 43 59
================================================================== ======== ========
GAS STORAGE
================================================================== ======== ========
Gas storage adjusted and reported operating (loss)/profit - GBPm (13.0) 4.0
================================================================== ======== ========
Gas storage reported operating profit/(loss) - GBPm (36.8) (146.9)
================================================================== ======== ========
Gas storage customer nominations met - % 100 100
================================================================== ======== ========
Gas storage capital investment - GBPm - 0.2
================================================================== ======== ========
Sustainably sourcing and producing energy
SSE's Wholesale segment consists of three business areas: Energy
Portfolio Management (EPM) and Electricity Generation; Gas Storage;
and Gas Production. It makes a sustainable contribution to the
fulfilment of SSE's core purpose and achievement of its financial
goals through excellence in the flexible provision, storage and
delivery of energy and related services for customers in wholesale
energy markets in Great Britain and Ireland.
The markets in which SSE's Wholesale businesses operate continue
to be impacted by a number of key long-term trends and
developments, including an uncertain macroeconomic environment;
shifts in commodity prices; government intervention; regulatory
change; and the ongoing transition to a low carbon economy. SSE's
Wholesale business therefore has to continually review its
portfolio of assets, contracts and investment opportunities in the
context of a changing market, spreading risk in order to deliver
returns in varied and challenging conditions.
Financial performance in Wholesale
During the year to 31 March 2017 total adjusted operating profit
in Wholesale was GBP514.6m compared to GBP442.5m in the previous
year. The primary drivers relating to operating profit are as
follows:
-- Energy Portfolio Management and Electricity Generation:
adjusted operating profit increased to GBP501.2m in 2016/17
compared to GBP436.3m in 2015/16, despite lower renewable energy
output, due to improved financial performance in thermal generation
and Energy Portfolio Management;
-- Gas Production: adjusted operating profit increased to
GBP26.4m in 2016/17, compared to GBP2.2m the previous year, due to
an increase in production as additional West of Shetland fields
came on line and improved winter gas prices compared to the
previous year;
-- Gas Storage: an adjusted operating loss of GBP13.0m was
recorded in 2016/17, compared to an adjusted operating profit of
GBP4.0m the previous year, reflecting sustained challenging market
conditions;
-- Reported Wholesale Operating Profit: reported operating
profit for the Wholesale segment was GBP498.2m compared to an
operating loss of (GBP481.3m) in 2015/16. This improvement was due
to the recognition in the previous year of GBP868m of exceptional
charges relating to thermal generation plants, gas storage
facilities and gas production fields. In 2016/17, net exceptional
charges were significantly lower and included a gain on revaluation
of the SSE's Clyde wind farm following part disposal. In addition,
marked -to-market derivatives were significantly less 'out of the
money' at March 2017 than at March 2016.
Energy Portfolio Management (EPM)
The wholesale price of energy can fluctuate significantly due to
a number of factors including the economy, the weather, customer
demand, infrastructure availability, and political and world
events. EPM seeks to manage the impact of these variables by
maintaining a diverse and well-balanced portfolio of contracts, and
trading positions. EPM provides a route-to-market for SSE's
Generation assets and helps Energy Supply manage its commodity
risk. In doing so, SSE has:
-- greater ability to manage the impact from wholesale energy price volatility; and
-- more scope to deliver the investment needed in Generation in
particular because the risks associated with large-scale and
long-term investments are contained by the balanced nature of SSE's
energy businesses.
EPM is responsible for: ensuring SSE has the energy supplies it
requires to meet the needs of customers; procuring the fuel
required by the generation plants that SSE owns or has a
contractual interest in; selling the power output from this plant;
where appropriate, securing value and managing volatility in volume
and price through the risk-managed trading of energy-related
commodities; and providing energy solutions and services to
customers.
Energy Generation (Renewables)
Summarising performance in 2016/17
Output of electricity from renewable sources, including pumped
storage decreased in 2016/17, compared to the previous year (8.0TWh
compared to 9.7TWh). The primary driver for this differential was
the weather; put simply there was lower rainfall and less windy
conditions in 2016/17 than in the previous year. Overall renewable
energy capacity including, conventional hydro and pumped storage,
increased, from 3,275MW to 3,309MW with the delivery of the 34MW
Tievenameenta onshore wind farm in Northern Ireland which entered
commercial operation in February 2017. Availability of the
renewable energy portfolio to generate electricity remained high
throughout the period.
Onshore Wind
SSE continues to operate under the policy support regime for
renewable generation capacity in the UK, currently delivered
through the Renewables Obligation (RO) (which also applies in
Northern Ireland); and the Contracts for Difference (CfD)
mechanism. In Ireland support is provided via REFIT 2.
SSE has four onshore wind projects under construction which will
qualify for the GB or NI RO:
-- Dunmaglass (94MW) - the project is now in the final stages of
construction and is scheduled for completion by summer 2017.
-- Clyde Extension (173MW) - turbine erection is advanced and
the project is expected to be fully operational by autumn 2017.
-- Bhlaraidh (108MW) - turbine erection is advanced and the
project is expected to be fully operational in late 2017.
-- Slieve Divena 2 (19MW) - construction of this project in Co.
Tyrone is progressing well and is expected to be fully operational
in summer 2017.
SSE expects a fifth onshore wind project under construction to
qualify for the GB RO:
-- Stronelairg (225MW) - The Judicial Review appeal was upheld
by the Court of Session in July 2016. Full construction in now
under way and is expected to be completed in 2018.
SSE has two onshore wind projects under construction which will
qualify for ROI REFIT 2 support:
-- Galway Wind Park (SSE Share 120MW) - construction of this
two-phase project totalling 174MW, making it Ireland's largest
onshore wind farm, is due to be completed by autumn 2017.
-- Leanamore (18MW) - a new addition is in Co. Kerry where
construction is under way and is expected to be completed by the
end of 2017.
Future development options for onshore wind projects are being
explored in light of the UK's current policy and regulatory
framework.
SSE is continuing to advance its planning application for the
Doraville development in Northern Ireland. In March 2017, it
confirmed a new design layout which includes a reduction in turbine
numbers and a change in turbine specification to optimise
generation to 119MW.
Offshore Wind
SSE's offshore work and resources are focused on the Beatrice
offshore wind farm (588MW - SSE share 40%) in the outer Moray
Firth. The GBP2.6bn project reached financial close in May 2016 and
is progressing in accordance with the terms of the Investment
Contract awarded to it by the UK government in 2014. SSE's Joint
Venture partners on the project are Copenhagen Infrastructure
Partners (CIP) (35%) and SDIC Power (25%). Both onshore and
offshore construction are now under way and the project is expected
to be fully operational in 2019.
SSE has an interest in two further offshore wind farm
developments: Seagreen (Phase one up to 1050MW, a 50:50 partnership
with Fluor Limited); and Forewind (up to 4,800MW). Seagreen was
subject to a judicial review in the Court of Session which found in
favour of the petitioner, RSPB, in July 2016. This decision was
appealed in February 2017. On 16 May 2017, the Court of Session
ruled in favour of developers and the Scottish government. Forewind
has consent for four separate 1,200MW projects in the Dogger Bank
Zone. In March 2017 SSE and Statoil agreed to acquire Statkraft's
stake in the consortium, taking their share to 37.5% each with
Innogy holding the other 25%. The three Joint Venture partner
organisations will agree the best route forward for the
projects.
Energy Generation (Thermal)
Protecting capacity margins
Ofgem has consistently maintained that during the period to
2018/19 it expects electricity generation capacity margins to be
lower than they have been historically due to weak market economics
and the closure of older plant.
The UK Government, together with Ofgem and National Grid (as the
System Operator), addressed this issue through the implementation
of the Capacity Market. SSE supports the Capacity Market as the
best way to deliver security of supply at the lowest cost to
consumers. It also supports the UK Government's recent changes
which have strengthened the Capacity Market by creating a more
level playing field between participants.
In December 2016 the UK Government procured a revised figure of
52.4GW in the auction for delivery in 2020/21. SSE pre-qualified
7,033MW of capacity and of this 3,239MW successfully secured
agreements worth GBP72.9m.
In January 2017 the UK Government procured 54.4GW in a
supplementary auction for delivery in 2017/18. SSE pre-qualified
5,898MW of capacity and of this 4,451MW successfully secured
agreements worth GBP30.9m.
To secure the revenue arising from the Capacity Market,
providers of generating capacity must produce electricity when the
system requires it; failure to do so will result in penalties being
levied.
Managing developments regarding thermal power stations
SSE has an ownership interest in five gas-fired power stations
that participate in the GB electricity market:
-- Medway (735MW wholly owned) has capacity obligations from 2017 through to 2021.
-- Keadby (755MW wholly owned) has capacity obligations from 2017 through to 2021.
-- Peterhead (1,180MW wholly owned) Up to 400MW can operate in
the market, currently has a voltage control contract with National
Grid until 30 September 2017.
-- Seabank (1,164MW) and Marchwood (840MW) SSE has a 50% stake
in each of these gas-fired power stations, which have both taken on
capacity obligations from 2017 through to 2021.
SSE supports the UK Government policy to encourage investment in
new gas-fired generation. It will continue to take a disciplined
approach to developing options for new stations, including Keadby 2
in Lincolnshire and Abernedd in Port Talbot. SSE submitted an
application to BEIS in August 2016 to vary the Abernedd planning
consent to allow an OCGT station of up to 299MW.
SSE announced in February 2017 that it was undertaking a review
of future options for Peterhead Power Station in Aberdeenshire. The
station's location means it is required to pay significantly higher
Transmission Entry Capacity (TEC) costs than other power stations
on the electricity system. This puts it at a disadvantage in the
Capacity Market auction and it has failed to secure a contract in
any of the auctions to date. TEC has been reduced to zero from 1
April 2018 as a risk mitigation measure to avoid a substantial
cancellation charge which would have applied if TEC had been
cancelled later in the year. Should the review and engagement with
stakeholders conclude that the station has an enduring future SSE
will reapply for TEC and, subject to receiving a satisfactory offer
from National Grid, reinstate it. SSE is considering all possible
options for the site during the review, which is expected to be
concluded in the coming months.
SSE operates one wholly-owned coal-fired power station, at
Fiddler's Ferry (Cheshire, 1,995MW). The station provided ancillary
services to National Grid in a one-year contract secured by tender
which ended on 1 April 2017. Fiddler's Ferry has capacity
obligations for three of the four units from 2017 through to
2019.
In the 12 months to 31 March 2017, SSE's 464MW Great Island CCGT
station in Ireland (grid connection capacity set at 431MW) exported
2.4TWh of electricity, up 40% on the previous year. The improved
generation performance was due to increased power demand and
prevailing market conditions, including the improved position of
gas plant relative to other generation types.
Investing for the future through 'multi-fuel'
SSE's generation strategy is built upon managing risk through
owning a diverse range of assets and fuels from which to meet the
needs of customers. Multifuel is an important part of that
strategy.
Multifuel Energy Ltd (MEL) (the SSE and Wheelabrator
Technologies Inc. 50:50 joint venture) operates a 68MW multifuel
generation facility known as Ferrybridge Multifuel 1 (FM1) in
Knottingley, West Yorkshire. FM1 has now processed over 1 million
tonnes of fuel and the station has taken on capacity obligations
from 2017 through to 2021.
Construction is well under way at SSE's Ferrybridge Multifuel 2
(FM2) project after the Final Investment Decision was taken in June
2016. The project is being built next to the FM1 facility. The
completed plant will be able to generate around 70MW of
electricity, enough to power around 170,000 homes, and is expected
to be in operation from 2019. SSE currently owns 100% of
Ferrybridge MFE 2 Limited but has a contractual agreement, subject
to various contingent matters, to dispose of 50% of the share
capital of the company to the joint venture partner of the initial
multi fuel facility. This transaction is anticipated to take place
within the next year.
Gas Production
Developments in 2016/17
SSE's gas production portfolio comprises stakes in mature assets
in Easington and Bacton Catchment Areas in the Southern North Sea
as well as equity in new fields in the Greater Laggan Area which
are located to the West of Shetland. Total output in 2016/17 was
618 million therms (10.2 mmboe) of gas and 1.0 mmboe of liquids,
compared with 403 million therms of gas (6.6 mmboe) and 0.1 mmboe
of liquids in 2015/16. This significant rise in production was
primarily due to the ramp up of output from the newly commissioned
fields in the Greater Laggan Area partially offset by the natural
decline in output from the more mature fields in Easington and
Bacton Areas.
In the Greater Laggan Area, gas production started in 2016 from
the Laggan and Tormore fields with production rates peaking at up
to 90,000 boe a day. The nearby Edradour and Glenlivet fields are
both expected to start production by the end of 2017 helping to
maintain production at peak rates during 2018.
Following a technical review of SSE's gas asset portfolio
conducted by SSE's independent reserves auditors, the economically
recoverable, Proven plus Probable (2P) Reserves in SSE's gas
production portfolio of assets were assessed as being 2.5bn therms
at 31 March 2017 compared to 3.6bn therms at 31 March 2016. As well
as the production in the year, this movement in estimated reserves
reflects a significant reduction in the estimated 2P reserves in
the Greater Laggan Area assets that is only partially offset by an
increase in those of SSE's mature asset base in the Southern North
Sea. The reduction in the estimated Greater Laggan Area 2P reserves
resulted in an exceptional impairment of GBP180.5m at the year end.
While this is clearly disappointing, movement in the technical
assessment of 2P reserves is a well-known occurrence in the Gas
Production business. Therefore, further reassessments will be
expected in relation to these relatively new fields. For the
Greater Laggan Area fields, the movement in the reserves position
reflects current best, but early stage, understanding of the
fields, where it now appears there is greater compartmentalisation
of gas than expected, which it is assessed, will require some
further capital investment to extract. Consequently, this also
means that the level of Contingent Reserves (2C) has increased
compared to March 2016.
Despite reduced estimated 2P reserves, these gas production
assets are still an important long term asset and are expected to
make an important contribution to EBITDA with SSE's average annual
volumes of gas and liquids produced expected to average around
500million therms (8.1mmboe) of gas per year in the three years to
March 2020. Thereafter, on current reserve estimates, production is
expected to decline to minimal levels by 2025.
Gas Storage
Both of SSE's storage sites have continued to operate to meet
the needs of their customers through 2016/17, following the return
to service of the Hornsea (Atwick) site earlier in the year:
-- Hornsea (Atwick) met 100% of customer nominations with the
site 86% available through the second half of the year, except in
instances of planned maintenance.
-- Aldbrough met 100% of customer nominations and delivered a
record 98% availability, except in instances of planned
maintenance, throughout the year.
Alongside the under-pinning requirements to ensure the highest
standards of safety and asset management are maintained, SSE
continues to respond to the difficult trading conditions with its
overall aim to provide valuable flexibility and hedging services to
its customers and hence the wider UK gas market, while managing its
profitability and being well positioned to take advantage of future
market developments.
Responding to market conditions for Gas Storage
The economic environment for gas storage in the UK continued to
be extremely challenging in 2016/17. SSE's response to these
conditions has combined strict financial discipline regarding
managing expenditure with innovative development of new products to
meet the evolving needs of customers.
The decision to mothball two of the Atwick caverns, along with a
continued focus on reducing operating costs reflects the first
element of this response with good progress being made on the
cavern mothballing project since its announcement. The
commercialisation of further new products during the year, along
with the sale of 100% of the Hornsea (Atwick) site capacity through
the recent auction, reflects the second element of SSE's
response.
SSE remains committed to working with UK government departments
to ensure the critical role of UK storage in relation to security
of supply and stability of gas price is maintained despite the
current threats to the viability of the already low storage levels
operating in the UK when compared to Europe.
Wholesale - Conclusion and Priorities
In addition to their first priority of safety, SSE's Wholesale
businesses aim to create sustainable long-term value through the
responsible production, storage and provision of energy and related
services for energy customers; ongoing rigour in optimising its
portfolio of existing assets and contracts; and developing new
options for building, owning and operating assets and delivering
those in construction.
Wholesale priorities for 2017/18 and beyond
SSE's Wholesale businesses' priorities in 2017/18 and beyond are
to:
-- maintain and operate efficiently and reliably its generation
portfolio across the UK and Ireland;
-- deliver new assets in construction and develop new
opportunities to build, own and operate assets in the future;
-- secure a stable and predictable supply of energy to meet SSE's requirements;
-- secure value, where appropriate, through the risk-managed
trading of energy-related commodities.
-- ensure efficient delivery of gas from the offshore gas fields
in which SSE has a shared ownership.
-- safely, efficiently and reliably operate and maintain SSE's
gas storage facilities, and ensure they are available for use by
its customers.
NETWORKS
Networks Key Performance Indicators
Mar 17 Mar 16
ELECTRICITY TRANSMISSION
=================================== ======= =======
Transmission adjusted and
reported operating profit
- GBPm 263.7 287.2
=================================== ======= =======
Regulated Asset Value (RAV)
- GBPm 2,685 2,287
=================================== ======= =======
Capital expenditure - GBPm 505.0 573.4
=================================== ======= =======
ELECTRICITY DISTRIBUTION
=================================== ======= =======
Electricity distribution adjusted
and reported operating profit
- GBPm 433.4 370.7
=================================== ======= =======
Regulated Asset Value (RAV)
- GBPm 3,246 3,157
=================================== ======= =======
Capital expenditure - GBPm 284.7 258.3
=================================== ======= =======
Electricity Distributed TWh 39.3 39.5
=================================== ======= =======
Customer minutes lost (SHEPD)
average per customer 60 55
=================================== ======= =======
Customer minutes lost (SEPD)
average per customer 43 41
=================================== ======= =======
Customer interruptions (SHEPD)
per 100 customers 68 66
=================================== ======= =======
Customer interruptions (SEPD)
per 100 customers 48 47
=================================== ======= =======
SCOTIA GAS NETWORKS
SSE's 50% share reducing to
33% from 26 Oct 2016
=================================== ======= =======
SGN adjusted operating profit
(SSE's share) - GBPm 239.4 268.7
=================================== ======= =======
SGN reported operating profit
(SSE's share) - GBPm 151.7 175.3
=================================== ======= =======
Regulated Asset Value - GBPm 1,748 2,513
=================================== ======= =======
Uncontrolled gas escapes attended
within one hour % 98.7 98.5
=================================== ======= =======
SGN gas mains replaced - km 457 960
=================================== ======= =======
Owning, operating and investing in Networks
SSE is the only energy company in the UK to be involved in
electricity transmission, electricity distribution and gas
distribution. Its five economically-regulated energy network
companies consist of a 100% ownership of Scottish Hydro Electric
Transmission (SHE Transmission), Scottish Hydro Electric Power
Distribution (SHEPD) and Southern Electric Power Distribution
(SEPD) and, since 26 October 2016, a 33.3% stake in both Scotland
Gas Networks and Southern Gas Networks (SGN).
SSE's interests in economically-regulated energy networks
support the maintenance of a balanced range of assets, operational
efficiency and disciplined investment. The RAV (Regulatory Asset
Value) of SSE's five existing Networks companies is now on course
to reach close to GBP9bn by 2020, which is net of the disposal of a
16.7% stake in SGN in October 2016. (This remains consistent with
the forecast of GBP10bn RAV by 2020 which was in place prior to the
SGN disposal).
Through Price Controls, Ofgem sets the framework through which
network companies can earn index-linked revenue through charges
levied on users to cover costs and earn a return on regulated
assets. While the RIIO Price Control framework is complex, it
provides for revenue to be strongly linked to the delivery of
customer-focused commitments, against which performance is measured
and can be rewarded or penalised.
These economically-regulated, lower-risk businesses provide
relative predictability and stability for SSE and balance its
activities in the competitive Wholesale and Retail markets. While
the overall shape of the networks may evolve, as the recent
expansion of electricity transmission and sale of part of a stake
in SGN show, they are core to SSE's strategy in the short, medium
and long-term and contribute significantly to its ability to
deliver annual dividend increases that at least keep pace with RPI
inflation.
Adopting a clear and distinctive identity through Scottish and
Southern Electricity Networks
In September 2016, SSE's three electricity networks businesses
adopted a common trading name as Scottish and Southern Electricity
Networks (SSEN). This new name and an accompanying rebranding
process were developed following extensive engagement with
customers, employees and other stakeholders.
This change responds to the operating environment under the RIIO
Price Controls which incentivises all network operators to engage
effectively with their customers and stakeholders in developing and
implementing their business plans. SSEN believes that adopting a
clearer, simpler and more distinctive identity will help to deliver
improved accountability to the communities it serves, supporting
its performance against key incentives.
Putting stakeholders at the heart of decision-making
Scottish and Southern Electricity Networks has established an
independent Stakeholder Advisory Panel to work alongside its Board
to help scrutinise business performance and effectiveness in
meeting its commitments under the RIIO-T1 and RIIO-ED1 Price
Controls. The Panel consists of a Chair and six members, recruited
to reflect a broad range of external interests, skills, knowledge
and experience. Through its work, the Panel brings stakeholder
insight and challenge to SSEN's decision-making at the highest
level, helping to drive improvement in key processes and outcomes
for customers.
Financial performance in Networks
During the year to 31 March 2017, total adjusted operating
profit in Networks was GBP936.5m, compared to GBP926.6m in the
previous year, with the principal movements as follows:
Electricity Transmission: as expected, adjusted operating profit
decreased to GBP263.7m in 2016/17, from GBP287.2m in 2015/16,
reflecting the phasing of capital expenditure and revenue
associated with the growing asset base;
Electricity Distribution: adjusted operating profit rose to
GBP433.4m in 2016/17, from GBP370.7m in 2015/16, reflecting
additional income as a result of the GBP38m under recovery of
revenue from 2014/15, as outlined in customer charges published in
December 2015 for 2016/17. In 2016/17, around GBP35m of DPCR losses
incentive income was also received, with a final instalment of
GBP15m due in 2017/18;
Gas Distribution: SSE's share of SGN's adjusted operating profit
fell to GBP239.4m in 2016/17, from GBP268.7m the previous year,
mainly due to SSE's partial equity disposal in October 2016 and
partly to the phasing of regulatory revenue and the obligation to
share outperformance with customers, which is part of the RIIO
Price Control. The impact on operating profit of the part disposal
is estimated as being GBP37m; and
Reported Networks Operating Profit: reported operating profit
for Electricity Transmission and Distribution is the same as
adjusted operating profit. SSE's share of SGN's reported operating
profit fell to GBP151.7m, compared to GBP175.3m. This is in line
with the movement in adjusted operating profit and in addition
reflects the change in SSE's share of SGN's interest and tax.
The GBP307.3m gain on sale of the SGN stake is reflected in
Corporate Unallocated reported operating profit.
Financial Outlook - 2017/18
As previously highlighted in its Notification of Close Period in
March 2017, in 2017/18 SSE currently anticipates that its Networks'
operating profit, including SGN, will be around GBP100m lower than
in 2016/17, on a like-for-like basis (GBP150m on an absolute basis)
as a result of the following:
-- base revenue in Electricity Transmission is expected to
decrease by around GBP40m compared with 2016/17 mainly due to the
phasing of capital expenditure on significant projects and the
resulting impact on regulatory revenue. Base revenue is then
expected to return to 2016/17 levels for the subsequent three
years, although depreciation charges are also expected to increase
as a result of continued investment;
-- Electricity Distribution revenue in 2016/17 included an
additional GBP38m that was 'under-recovered' from 2014/15. The
under recovery from 2015/16, recoverable in 2017/18 was
significantly lower, at approximately GBP5m. As mentioned above,
around GBP35m of DPCR losses incentive income was also received in
2016/17, with a final instalment of GBP15m due in 2017/18; and
-- changes in the Gas Distribution revenue earned by SGN are
likely to have the effect of reducing its operating profit
contribution to SSE by around GBP20m, after taking account of SSE's
sale of a 16.7% stake in the business.
The Electricity Distribution revenue position for 2016/17 is
being finalised and is expected to be an over-recovery of around
GBP10m and will be reflected in lower revenue in 2018/19.
Electricity Transmission
Scottish and Southern Electricity Networks (SSEN), operating as
Scottish Hydro Electric Transmission plc under licence, is
responsible for maintaining and investing in the electricity
transmission network in the north of Scotland.
Maintaining a track record of delivering a major programme of
investment
Since the start of the RIIO T1 price control in 2013, SSEN's
capital investment in its transmission network has totalled close
to GBP1.9bn, playing a pivotal role in providing the supporting
infrastructure to facilitate the UK's transition to a low carbon
economy. With its committed pipeline of investment, it expects to
increase its RAV from GBP2.69bn as at March 2017 to over GBP3bn by
March 2018.
Good progress continues to be made with the delivery of SSEN's
flagship Caithness-Moray transmission link, which remains on
schedule to be delivered on time and within allowed spend. With an
agreed allowance of GBP1,118m (2013/14 prices), the project is the
largest single investment undertaken by the SSE group to date.
A number of key onshore enabling works related to the project
were completed in 2016/17, including the first part of the new
Blackhillock Substation, which was successfully energised in
September 2016; and the first element of the northern part of the
project, which was successfully energised at Dounreay Substation in
March 2017.
The manufacture of the subsea cable is now complete and work to
clear the seabed of rocks and boulders was successfully completed
in March 2017. Work has begun to create a trench on the Moray Firth
seabed in advance of the subsea cable installation, which is due to
be installed by a specialised cable-laying vessel during 2017. The
Caithness-Moray reinforcement remains on course to be commissioned
by the end of 2018.
Recovering the costs of Beauly-Denny
Following the successful energisation of the 220km Beauly-Denny
overhead line replacement in November 2015, SSEN engaged with Ofgem
regarding the recovery of efficiently incurred costs. In January
2017, Ofgem determined that the full GBP58.8m (2009/10 prices) of
additional costs were efficient and will allow GBP27.8m to be
included as an Asset Value Adjustment Event, with the additional
revenue stream starting in 2017/18. The remaining GBP31m will be
recovered at the end of the RIIO-T1 period in 2021/22.
Delivering a record year for connecting new sources of renewable
generation
In advance of the closure of the Renewables Obligations Scheme,
there has been an increased demand for SSEN to provide connections
to its transmission network for renewable energy developers.
In total, including that connected at distribution level, SSEN
connected over 500MW of renewable electricity to its transmission
network in 2016/17, the highest combined capacity to connect to the
north of Scotland transmission network in a single year since
electricity privatisation.
SSEN's delivery of these projects and other strategic
investments has played an essential part in facilitating the rapid
growth of renewable energy within its licence area, bringing the
total connected generation capacity supported by its transmission
network, including that connected at distribution level, to over
5GW, of which over 4.5GW is from low carbon renewable sources.
SSEN expects to connect a significant number of new renewable
energy projects to its transmission network throughout the
remainder of this Price Control to March 2021, subject to those
renewable projects reaching financial close.
Fulfilling responsibilities for potential island links
SSEN remains fully committed to bringing forward proposals for
new transmission links to the Scottish Islands. A UK Government
consultation on the treatment of non-mainland GB onshore wind
projects took place during 2016/17 and SSEN continues to await the
outcome of the consultation and subsequent developer commitment
before it will be in a position to submit a 'Needs Cases' to Ofgem
for the Western Isles and Shetland. SSEN continues to engage with
affected stakeholders in order to progress the development of the
links in anticipation of the consultation outcome.
Adapting to policy and regulatory change
SSEN continues to engage constructively with Ofgem in relation
to the development of the regime for Extending Competition in
onshore Transmission (ECIT). Whilst it is not yet clear when ECIT
might be implemented, the introduction of competition poses some
potential risks to future growth and revenue, but also presents
opportunities. With a strong track record for connecting renewables
on time and within budget, SSEN believes the experience it has
gained both in-house and with its supply chain means that it is
well placed to participate in competitive delivery arrangements
once the regime is implemented.
Innovating to sustain operational success
To support the successful integration of new High Voltage Direct
Current (HVDC) infrastructure on its own network and elsewhere in
Great Britain, SSEN led the development of the National HVDC Centre
in Cumbernauld via Ofgem's Electricity Network Innovation
Competition. The centre, which formally opened in April 2017,
allows engineers to replicate the complexities of the future
transmission system in real time, using powerful computer
simulators to enable potential risks to be identified and
addressed.
Innovation continues to play a key role in meeting the needs of
customers, with SSEN utilising ACCC (Aluminium Conductor Composite
Core) Monte Carlo conductor for the first time on its network to
provide the connection for the combined Bienneun (Blue Energy,
108.8MW) and Bhlaraidh (SSE Renewables, 108MW) wind farms. This
innovative technology enabled SSEN to reduce costs and timescales
whilst also mitigating the visual and environmental impact of the
connection by the use of reconductoring and strengthening of the
existing 132kV steel towers which dispensed with the need for the
erection of new additional trident wood poles. SSEN expects to
deploy this innovative technology on a number of other projects in
the years ahead.
Working with stakeholders
Under the RIIO-T1 price control, Transmission Owners are
encouraged to be more responsive to changing stakeholder needs,
with financial incentives based on performance in this area. The
views of stakeholders have played a key part in SSEN's success in
electricity transmission under the current price control period and
will remain central to its future business plans.
Stakeholders have played a major part in the development of
SSEN's Visual Impact of Scottish Transmission Assets (VISTA)
policy, which seeks to mitigate the impacts of existing
transmission infrastructure in National Parks and National Scenic
Areas. In August 2016, SSEN received Ofgem approval for its
proposed approach and expects to set out a series of proposed
projects to take forward for funding from Ofgem later in 2017.
Operating a rapidly growing network
SSEN's first priority is to provide a safe and reliable supply
of electricity to the communities its transmission network serves.
SSEN has established a dedicated and experienced team within its
transmission business to deliver operational excellence, including
improved asset management and timely preparation for the
introduction of new types of plant and technology. During the
current period of rapid growth in transmission development,
including commissioning of substantial new assets and connection of
large volumes of renewable generation capacity, SSEN has maintained
an impressive reliability of over 99.9%.
Looking ahead to the next Price Control
SSEN is at the midpoint of the RIIO-T1 price control which ends
March 2021 and is now starting to develop its business plan for the
next price control period. During 2017/18 SSEN will undertake a
period of engagement and consultation with key external
stakeholders, including the Stakeholder Advisory Panel, to help
shape and influence its future business plan commitments.
Electricity Distribution
Scottish and Southern Electricity Networks (SSEN), operating as
Scottish Hydro Electric Power Distribution (SHEPD) and Southern
Electric Power Distribution (SEPD) under licence, is responsible
for maintaining the electricity distribution networks supplying
over 3.7 million homes and businesses across central southern
England and north of the central belt of Scotland, the Mull of
Kintyre and the Scottish islands.
Delivering for customers
Now in the second year of the RIIO-ED1 price control, SSEN's
electricity distribution business continues to adapt to the
regulatory framework and has delivered significant changes to its
operations, processes and standards to ensure the needs of its
customers remain at the forefront of decision making.
The outcomes of the incentive based framework within which SSEN
operates are increasingly dependent on customer opinion and
feedback. Financial performance is reflected against: the
Interruption Incentive Scheme; Ofgem Customer Satisfaction
Measures; Incentive in Connections Engagement; Complaints
Performance and Stakeholder Engagement and Customer
Vulnerability.
By making the concerted effort to focus on its people and its
processes, SSEN has made significant changes to ensure it is
meeting its customers' needs and delivering against the measures as
set by the RIIO ED1 price control. This has ensured it is able to
deliver outputs aligned to the expectations of its customers,
stakeholders and the regulator while delivering a fair financial
return to investors.
Keeping the lights on
As part of RIIO-ED1, SSEN is incentivised on its performance
against the loss of electricity supply through the recording of
Customer Interruptions (CI) and Customers Minutes Lost (CML), which
include both planned and unplanned supply interruptions.
During 2016/17, Customer Interruptions rose to 68 (SHEPD; 66 in
15/16) and 48 (SEPD; 47 in 15/16) per 100 customers. Customer
Minutes Lost rose to 60 minutes (SHEPD; 55 in 15/16) and 43 minutes
(SEPD; 41 in 15/16) per customer. Despite this marginal rise in
both CI and CML metrics, SSEN continues to outperform the
pre-determined targets set by Ofgem.
When planned outages, which serve to improve network
reliability, are excluded, both CI and CMLs decreased in comparison
to 2015/16 in the SHEPD licence area, highlighting an improved
performance in restoring power in fault situations. Despite an
increase in extra-high voltage (EHV) faults in the SEPD licence
area, performance improved in the high voltage (HV) and low voltage
(LV) networks reflecting an increased investment in automation
schemes and the implementation of improved business processes
prioritising customer restoration.
SSEN's commitment to providing a safe and secure electricity
supply and to minimise unplanned interruptions requires a
continuous programme of investment in the network. During 2016/17,
SSEN's programme of network investment included reinforcements,
upgrades to automation and tree cutting. The success of the
programme is providing an improved service for customers as well as
a fair return for SSEN through the incentive mechanism.
The regional operations model, now in its second year, continues
to deliver benefits in operational efficiency and in the improved
service SSEN provides to its customers and communities. This
includes faster response times thanks to a focus on speed of fault
restoration and targeting investment in key circuits to improve
network reliability.
Increasing customer satisfaction
In 2016/17 SSEN made significant improvements to its customer
service processes and in the way it engages and communicates with
its customers. This has increased customer awareness of SSEN and
has helped to improve broad measure incentive performance across
the business.
By improving customer contact experience, including the use of
proactive outbound calls, performance against the RIIO-ED1 customer
satisfaction measure increased significantly, from GBP1.6m
(2015/16) to GBP2.75m (2016/17). Complaints performance also rose,
with SSEN resolving 78% of complaints within 24 hours (65% in
2015/16) and 98% within 31 days (95% in 2015/16), resulting in no
incentive penalty (potential -GBP3.1m). This improved performance
will feed into SSEN's regulated income in 2018/19.
Ahead of winter 2016/17, SSEN delivered an awareness campaign,
including advertising on TV, radio and digital outputs. The
campaign promoted the new single emergency power cut number 105;
what to do during a storm; and to promote the services it provides
for customers, including those who may need extra help through
SSEN's Priority Service Register. This was followed up by a
customer communication delivered to all 3.7m customers in its two
distribution areas in January 2017. As well as driving a general
increase in awareness of SSEN, these measures have resulted in a
three-fold increase in sign-ups to SSEN's Priority Service
Register.
Protecting vulnerable customers
SSEN delivered a number of initiatives in 2016/17 to help
protect its most vulnerable customers and seek to improve
performance in the Stakeholder Engagement and Consumer
Vulnerability incentive.
In November 2016 SSEN became the first network operator to meet
the requirements of the British Standard Inclusive Service
Provision (ISP) BS18477:2010 for two years in a row. The
achievement outlines the critical procedures to ensure inclusive
services are available and accessible to all customers equally,
regardless of their personal circumstances.
In 2016/17, SSEN created a vulnerability mapping portal, which
provides it with detailed demographic information about its
communities. The bespoke tool allows SSEN to make informed
decisions about assistance during power cuts, planned supply
interruptions and where to promote its Priority Service
Register.
Preparing for a new, flexible energy system
In their joint Call for Evidence in November 2016, BEIS and
Ofgem put forward their view on the transition from the traditional
Distribution Network Operator model to a prominent Distributed
System Operator (DSO) role. SSEN believes this transition will meet
the needs of a flexible and de-carbonised electricity system,
serving to protect customers' interests whilst ensuring the network
remains resilient and affordable.
In 2016/17 SSEN's innovation projects provided some significant
findings, which will ultimately inform this transition:
-- The New Thames Valley Vision project explored a number of
innovative methods, including network monitoring, battery storage
and thermal storage. This was done to anticipate and manage the
growth of new technologies connecting to the electricity network,
including electric vehicles, heat pumps and solar panels. Its
findings detail how network reinforcement can be avoided by the use
of smart technologies, such as Active Network Management.
-- Following the My Electric Avenue project, which identified
the impact of electric vehicles on the electricity network; SSEN
has taken these findings and launched a new project - Smart EV. The
aim of the project is to create and collaborate with other DNOs,
National Grid, DECC and Ofgem on an industry-accepted solution for
managing future EV charging, in the form of an Engineering
Recommendation. This will help DNOs protect the LV network and
allow EVs to connect to networks.
-- The Shetland-based Northern Isles New Energy Solutions
(NINES) project allowed SSEN to use large and small scale energy
storage solutions and new monitoring and control systems, to
deliver an Active Network Management (ANM) solution on the islands.
It allowed for a 200% increase in renewable energy contribution on
Shetland by helping to manage grid constraints more efficiently in
real time. The project's findings can be modelled across the
wider-GB electricity network and they will play a vital role in it
adapting to a flexible and de-carbonised electricity system.
SSEN's innovation projects are designed to help anticipate and
prepare the electricity network operators for future energy
scenarios. It continues to deploy technologies, such as Constrained
Managed Zones and LiDAR technology, at a business-as-usual level to
develop a system that is transparent, reliable and affordable.
SSEN will continue to engage with industry, policy-makers and
the regulator in support of a phased approach to the DSO transition
whereby impacts can be carefully reviewed and the best interests of
customers maintained.
Making progress on a new energy solution for Shetland
The Shetland isles are not connected to the GB Main Island
Transmission System and all Shetland's energy needs are met from a
range of generation sources located on the islands, underpinned by
the existing Lerwick Power Station. As Lerwick Power Station is
reaching the end of its operational life, SSEN is conducting a
competitive tender to secure the future of Shetland's electricity
supply. This process will identify the most economic and efficient
solution to meet Shetland's needs, as required by the energy
regulator Ofgem. SSEN expects to appoint a preferred bidder in the
summer of 2017 and, following a consultation by Ofgem, contracts
are expected to be signed in late 2017.
Adapting to National Marine Plan in submarine cable replacement
programme
The implementation of Scotland's National Marine Plan has
introduced a number of changes to Marine Planning Policy which may
have implications for the way in which subsea cables are installed
within Scotland's waters. The Marine Plan now includes a clear
preference for burial or protection as opposed to the approach
successfully adopted by SSEN over many decades of surface laying
its subsea cables.
SSEN has developed a Cost Benefit Analysis methodology to
support each subsea cable licence application to Marine Scotland.
The CBA is designed to ensure that all stakeholder views are
considered and factored into the proposed installation method and
that any additional costs are justified through a robust economic
and evidenced based analysis.
SSEN expects to submit its first application to Marine Scotland
under the new marine planning regime, supported by the output of
its CBA methodology, in the summer of 2017.
SGN
SGN manages the networks distributing natural and green gas to
5.9 million homes and businesses across Scotland and the south of
England and is currently building a third distribution network
comprising around 700km of new gas pipelines in the west of
Northern Ireland where some 40,000 customers will be able to
connect to mains natural gas for the first time. In line with its
reduced equity holding, SSE now receives 33.3% of the distributable
earnings from SGN Ltd while, through a managed service agreement,
continues to provide the same level of back-office support.
With the current Gas Distribution Price Control passing its
mid-point review with no material changes from Ofgem, SGN continues
to focus on delivering all its outputs under the RIIO framework. It
is also focused on maximizing regulatory incentives while the focus
of its innovation programme is to ensure gas has a secure future in
the UK energy mix. At the same time, the management team ensures
all its operations are run safely and efficiently providing
customers with a safe and reliable gas network. SGN has invested
significantly across the business, driving the implementation of
innovative technology for the of benefit customers, the gas
industry as a whole and the environment in which it operates,
achieving several industry firsts.
Continued investment enables SGN to deliver a safe and reliable
network for customers; minimise its impact on the environment;
engage with and communicate its work to stakeholders and; deliver
new customer-driven initiatives to help reduce fuel poverty and
increase awareness of Carbon Monoxide dangers. SGN is committed to
developing its workforce, driving diversity and inclusion
throughout the company while building even stronger relationships
within the diverse geographic and demographic communities it
serves.
SGN has embedded a 'One SGN' ethos throughout the company
resulting in outstanding customer satisfaction scores (UK No.1 GDN
in 2016/17), and a reduction in the number of complaints (60%
reduction overall since 2013). In terms of operational performance
and safety, SGN has again exceeded the regulator's 97% emergency
standard of attending uncontrolled public reported gas escapes
within one hour.
Networks - Conclusion and Priorities
In addition to their first priority of safety, SSE's
economically-regulated Networks businesses play a crucial role in
the provision of energy in Scotland and southern England,
delivering value for money for customers and a fair return for
investors. SSE will work, in 2017/18 and beyond, to ensure it
continues to meet the needs of customers and earn returns for
shareholders through focusing on the current and future needs of
customers, disciplined investment and innovation and excellence in
delivery, creating a stable platform for future growth.
Networks priorities for 2017/18 and beyond
SSE's Networks businesses' priorities in 2017/18 and beyond are
to:
-- operate safely and meet all compliance requirements;
-- provide an excellent service to all customers who rely on
their networks and related services;
-- deliver required outputs while maintaining tight controls over expenditure;
-- maintain good progress in the safe delivery of new assets;
-- progress innovations that will improve network reliability,
efficiency and customer service and inform industry-wide
improvements; and
-- develop and maintain effective stakeholder relationships and
conduct constructive engagement with regulators and legislators,
advocating clarity and stability in the regulatory framework.
RETAIL (including Enterprise)
Retail (including Enterprise) Key Performance Indicators
Mar 17 Mar 16
Energy Supply
================================== ============= =============
Energy Supply adjusted operating
profit - GBPm 389.5 398.9
================================== ============= =============
Energy Supply reported operating
profit - GBPm 313.2 398.9
================================== ============= =============
Capital expenditure (Energy
Supply and Energy Related
Services) - GBPm 184.3 169.0
================================== ============= =============
Electricity customer accounts
(GB domestic) - m 4.06 4.16
================================== ============= =============
Gas customer accounts (GB
domestic) - m 2.70 2.79
================================== ============= =============
Energy customers (GB business
sites) - m 0.45 0.47
================================== ============= =============
All-Island energy market
customers (Ire) - m 0.79 0.79
================================== ============= =============
Total energy customer accounts
(GB, Ire) - m 8.00 8.21
================================== ============= =============
Electricity supplied household
average (GB) - kWh 3,793 3,763
================================== ============= =============
Gas supplied household average
(GB) - th 440 426
================================== ============= =============
Household/small business
aged debt (GB, Ireland) -
GBPm 80.2 103.2
================================== ============= =============
Bad debt expense (GB, Ireland)
- GBPm 47.9 44.0
================================== ============= =============
Customer complaints to third
parties (GB)(1) 1,322 1,416
================================== ============= =============
(1 Ombudsman: Energy Services
and Citizens Advice)
================================== ============= =============
Energy Related Services
================================== ============= =============
Energy Related Services adjusted
operating profit- GBPm 16.1 15.4
================================== ============= =============
Energy Related Services reported
operating profit - GBPm (20.3) (2.4)
================================== ============= =============
Home Services customer accounts
(GB) - m 0.47 0.40
================================== ============= =============
Supply customers' bills based
on actual reading % 95.5 95.1
Smart Meters installed Over 500,000 Over 180,000
Enterprise
================================== ============= =============
Enterprise adjusted and reported
operating profit - GBPm 16.7 40.9
================================== ============= =============
Capital expenditure - GBPm 58.7 48.5
================================== ============= =============
SSE Heat network customer Over 6,500 Over 5,000
accounts
================================== ============= =============
Supplying energy and essential services across Great Britain and
Ireland
SSE is one of the largest energy suppliers operating in the
competitive energy markets in Great Britain and Ireland. At 31
March 2017 it supplied electricity and gas to 8 million household
and business accounts. It also provides other related products and
services, including telephone, broadband and boiler care, to 0.5
million household and business customers. The Retail segment
includes the Enterprise business which provides energy-related
services to meet the needs of businesses and public sector
organisations in a reliable and sustainable way. Taken together,
these businesses contribute balance to the SSE group and
demonstrate SSE's commitment to efficient operations and
industry-leading customer service.
The rapidly evolving and increasingly competitive market for
energy and related services presents a number of challenges for
traditional energy supply business models and they must evolve and
adapt in order to be sustainable in the medium to longer term. SSE
has already made significant progress in its transformation from
commodity provider towards becoming a retailer of energy and
essential services, by digitalising and diversifying its business,
and consistently leading the sector in customer service. This
strategy is designed to help improve SSE's ability to retain its
valued customers, offset the impact of the continued reduction in
household energy demand and ensure it is well positioned to
capitalise on market developments in energy and related services in
the short, medium and long term.
Financial performance in Retail
During the 12 months to 31 March 2017, total adjusted operating
profit in Retail including Enterprise fell by 7.2% to GBP422.3m,
the principal movements were as follows:
Energy Supply: adjusted operating profit across Energy Supply as
a whole reduced slightly, to GBP389.5m, in 2016/17, compared to
GBP398.9m in 2015/16. Within this, in GB household supply,
increases in non- energy costs, the impact of the household gas
tariff reduction in March 2016 and falling customer numbers were
offset by the impact of reduced wholesale energy costs and slightly
increased average consumption, leading to a small overall increase
in adjusted operating profit. Business Energy profits decreased in
2016/17, reflecting an increase in non-commodity costs and a
decrease in volumes supplied.
An improvement in estimation confidence in relation to the
judgemental measurement of unbilled energy has enabled an
additional GBP60m of revenue to be recognised in the year. This is
split between household energy (GBP14m) and business energy
(GBP46m).
In 2016/17, GBP27.5m of the bad debt provision was released,
with the majority being allocated against a reduction in aged
debt.
Energy-related services: adjusted operating profit increased
slightly to GBP16.1m in 2016/17, compared to GBP15.4m in 2015/16,
reflecting a reduction in revenue streams in the heritage metering
business and continued investment in building scale in the
customer-facing broadband and telecoms businesses;
Enterprise: adjusted and reported operating profit fell to
GBP16.7m in 2016/17, from GBP40.9m in 2015/16, reflecting
challenging conditions in a competitive environment, particularly
in Contracting which was loss making in the year. Enterprise is now
in a key phase of development with the recent appointment of a new
Managing Director.
Reported Retail Operating Profit: reported operating profit for
the Retail segment was GBP309.6m compared to GBP437.4m, the
reduction was due to exceptional impairments in the year
particularly the impairment of technology developments projects,
principally relating to an Energy Supply customer billing system
which is no longer being progressed. The reduction in reported
operating profit also reflected the impairment of goodwill in the
acquisition of the Energy Solutions Group in the Enterprise
business.
In line with its licence condition, SSE will publish by July
2017 a Consolidated Segmental Statement (CSS) setting out the
revenues, costs and profits or losses of businesses in its
Wholesale and Retail segments in Great Britain for 2016/17. The CSS
will be fully reconciled to SSE's published financial statements
and reviewed by SSE's auditors, KPMG. It is expected to show that
SSE's operating profit margin from supplying electricity and gas to
British households was 6.9% in 2016/17, compared with 6.2% in
2015/16. SSE has previously highlighted a divergence between gas
and electricity margins due to the increasing costs associated with
vital policies designed to modernise and decarbonise Britain's
energy infrastructure, which are levied predominantly against
electricity. This divergence is expected to continue in the 2016/17
CSS, with margins becoming more balanced across fuels in 2017/18
following the changes to household electricity prices from 28 April
2017, detailed below.
Risks
Managing political, compliance and regulatory risk
SSE recognises that energy is an essential service and that
customers rely on its core products of electricity and gas to power
and heat their homes in order to live safely and comfortably. SSE
is mindful that there remains considerable, and legitimate,
political interest in energy supply markets, exemplified by the UK
general election campaign. The sector will continue to be subject
to scrutiny and possible intervention by the new UK government. As
ever, SSE's approach will be to engage actively and constructively
with that government as it develops and takes forward its policies,
as well as continuing its own efforts to engage and reward SSE
customers; however, SSE would caution against potential unintended
consequences of any proposed intervention in what is a rapidly
changing and increasingly competitive market.
It therefore believes that further energy supply market reforms
should be subject to substantive consultation to ensure that any
such reforms are well-founded, supported by objective analysis and
introduced in a way that benefits all customers and supports the
functioning of an effective and sustainable energy supply market.
SSE will participate fully and constructively in any such
consultation process that takes place after the general
election.
One issue that has been extensively debated in the course of the
UK general election campaign is the possible introduction of a
'cap' on the energy prices paid by customers on standard variable
tariffs (SVTs). As at 31 March 2017, of its 6.76 million GB
domestic customer accounts, 4.76 million could be impacted by this.
While the outcome of the general election won't be known until 9
June it appears likely that any price cap would be would be set by
Ofgem, which regulated retail energy prices until 2002. The key
features of any price cap are its core objective, the expected role
of competition in the market featuring a cap, the methodology used
for setting the cap, the frequency with which it is reviewed, the
extent of any regional variations, its implications for other
administered features of energy supply and its duration. The impact
of a price cap on any energy supplier can only be fully determined
once all of those features are clear and once that supplier has
considered its strategy in response, covering the products and
services it wishes to offer in a market featuring a price cap, and
the cost base it is willing to sustain in order to do so.
Until the facts are known, the uncertainty around a possible
price cap would clearly add to the risk for SSE and other energy
suppliers and add to the volume of regulatory changes that need to
be addressed and implemented and the significant consequences for
finances.
The markets for energy supply in GB and Ireland both continue to
be intensely competitive. In GB, for example, political, regulatory
and market factors are all contributing to the rapid growth of new
market entrants and increasing levels of customer engagement in the
market, and there are now more than 50 suppliers operating in the
GB market alone. In addition, efforts to simplify the switching
process for customers mean that, according to Energy UK data, more
than 500,000 customers switched electricity supplier in March 2017,
an increase of 13% on the March 2016. SSE is responding to this
competition by investing in retention, taking additional steps to
engage and reward its customers, and redoubling efforts to
digitalise and diversify its Retail business.
Focusing on energy affordability
Affordability of energy is vitally important but must be
balanced against the need to decarbonise and ensure the reliability
of Britain's energy system. The cost of vital government programmes
designed to achieve these aims by upgrading Britain's ageing energy
infrastructure are predominantly levied against electricity
customers; as a result, SSE regrettably had to take the difficult
decision to increase electricity prices by an average of 14.9%, or
6.9% across a typical dual fuel bill, from 28 April. However, this
was SSE's first price increase for three and a half years and, with
gas prices held at previous levels, the typical dual fuel bill
remains cheaper than in November 2013. Without this increase, SSE
would have been supplying electricity at a financial loss.
However, SSE recognises the impact higher energy costs can have
on customers, particularly the most vulnerable. With that in mind
it is continuing work to deliver efficiencies across its business
to mitigate the impact of rising costs and launched a new GBP5
million fund providing additional financial support for those who
need it most, particularly those who rely on electricity for their
heating. An update on progress in administering this fund will be
provided in SSE's interim results statement for 2017/18.
Development and change: moving towards a smarter market
The energy sector in Great Britain is undergoing a radical
transformation, in particular through the digitalisation of key
infrastructure and services. Customer expectations and behaviours
continue to evolve and this will mean energy suppliers must meet
their needs differently if they are to be sustainable. This risk
also presents an opportunity to enhance service levels, drive
further engagement and reduce costs, and SSE has continued to
invest in enhancing and digitalising its front-end, customer-facing
systems to manage this risk and realise these benefits.
However, these investments need to be balanced against SSE's
other key risks, particularly affordability; with this in mind SSE
confirmed in January 2017 that it would not be replacing its
billing system at this point in time, focusing instead on
improvements to customer-facing systems and channels.
The underlying infrastructure is also being digitalised through
the smart meter roll-out and SSE views this as a unique opportunity
to transform the relationship between customers, their energy
supplier and the energy they use. However, in order to take this
opportunity SSE is focused on delivering its obligations in a way
that is cost-effective and customer-centric, to maximise the net
benefits for customers. As of 31 March 2017 it had installed over
half a million smart meters.
Delays to delivery of critical central infrastructure including
the Data Communications Company (DCC) have, however, impacted on
the industry's ability to make progress and compressed the
timetable for delivery. As with any infrastructure programme with
dependencies and of this complexity and scale, there continue to be
challenges associated with SSE's obligations under the smart meter
roll out but SSE is working hard to mitigate the risks to delivery.
SSE continues to maintain a constructive dialogue with its key
partners and stakeholders including BEIS, Ofgem, Citizens Advice
and Smart Energy GB, in order to raise concerns and share learnings
as the roll-out progresses.
Progress in Energy Supply and Energy-related Services
SSE Retail has a long-standing strategy to respond to these and
other risks by becoming a market-leading retailer of energy and
essential services, by digitalising, diversifying and aiming for
high levels of customer service. This approach will enable SSE to
build stronger, more enduring customer relationships based on
engagement, service and value.
Owing to ongoing competitive pressures, in the 12 months to 31
March 2017, SSE's energy customer accounts in Great Britain and
Ireland fell from 8.21 million to 8 million. While any loss of
customers is disappointing, this represents the smallest decline in
SSE's customer numbers since 2013, due to the impact of efforts to
improve retention and attract more new customers to SSE.
Helping vulnerable customers through inclusive provision
SSE recognises that, as an essential service provider, it must
be both sensitive and flexible in how it deals with customers. With
that goal in mind, in August 2016 SSE became the first energy
supplier in Great Britain to commit to achieving the British
Standard for Inclusive Service Provision. This represents the gold
standard in recognising and catering for vulnerability in all its
forms and SSE is currently working towards achieving this
accreditation in the early part of 2018.
This builds on the additional training SSE has provided to
customer-facing staff in areas like mental health and,
specifically, dementia, to ensure its advisers are equipped to
provide the best possible support.
In addition to the GBP5 million fund set up to provide extra
financial assistance to vulnerable customers following SSE's
household energy price increase from 28 April, SSE helps vulnerable
customers manage their energy costs in a number of enduring
ways:
-- Through the Warm Home Discount scheme, as of 31 March 2017
SSE had allocated over 275,000 GBP140 rebates; by the end of the
scheme year on 31 May 2017, SSE expects to spend around GBP46.4m,
helping over 300,000 customers in total ;
-- SSE's customer service advisers proactively identified and
referred over 5000 customers for benefit entitlement checks during
the year, with more than 2700 customers successfully completing the
check, resulting in an average increase in income of more than
GBP3,200 a year per customer.
-- SSE's Priority Assistance Fund provides additional support to
low income and vulnerable customers, including debt relief, free
energy efficiency advice, and help with bespoke payment
arrangements.
-- It also offers a free Careline priority service, dedicated to
helping customers who are elderly, disabled or have special medical
needs.
-- In line with its licence, between the start of October and
the end of March (or longer if the weather is unseasonably cold),
SSE has a no-disconnection policy covering all household customers.
In addition, SSE is a member of Safety Net, which is an additional
voluntary commitment overseen by Energy UK. This commits signatory
suppliers to never knowingly disconnect vulnerable customers at any
time.
Particularly in the context of rising prices, SSE aims to engage
constructively and understandingly with customers in arrears as
early as possible, making sure support is provided for those
struggling with their energy costs and that payment plans are
manageable.
Maintaining high standards in customer service
As outlined in its Treating Customers Fairly Statement,
published in August 2016, SSE works hard to maintain the standards
and quality of service that customers expect: listening to
customers, making it easy for customers to deal with them, looking
after customers when they need extra help and putting things right
if there's a problem. SSE maintained a strong position in the
Citizens Advice Energy Supplier Performance Report through the
course of 2016/17, setting a new record in June with a complaints
score of just 22.5 per 100,000 customers for the quarter, down from
47.7 at the same point in 2015/16. SSE ended the year with an even
better score of 20.5 and aims to maintain high standards in 2017/18
in the new, more holistic energy supplier customer service
comparison tool, which has superseded the Supplier Performance
Report.
Diversifying through energy-related services
As part of efforts to further diversify its Retail business, SSE
expanded its customer base in energy-related services including
boiler cover, electrical wiring and home broadband and telephone to
0.5m. Critically, SSE has now completed work enabling it to offer
its boiler servicing, repair and cover and electrical wiring cover
to all customers across Great Britain for the first time. The
national offer got off to a strong start helped by a range of
value-for-money offers, including free boiler recovery for SSE
energy customers. Meanwhile, SSE's white label partnership with
M&S Energy is also offering M&S Home Services. SSE is
already seeing the retention benefits of providing customers with a
broader range of services and will continue efforts to cross-sell
other home and essential services to add more value for its energy
customers in 2017/18.
Doing more for customers
SSE is clear that its business is built on its customers and
that, for its Retail business to be sustainable in the long term,
it must have active, informed and engaged relationships with them.
In February 2017, SSE published a report, 'Doing more for our
customers', setting out what it is doing to build and sustain those
customer relationships.
As well as providing fair prices and high-quality customer
service, SSE believes in rewarding its customers' loyalty -
recognising that they have chosen SSE from the 50-plus other
suppliers competing for their custom. During 2016 SSE introduced a
range of offers targeted exclusively at loyal SSE customers
including a free 'boiler rescue' potentially worth over GBP300
where customers subsequently sign up to boiler cover and an
innovative 'no-ties' broadband offer.
SSE also aims to engage and reward its customers through the
things that they enjoy most, so the SSE Reward programme engages
customers by offering early access to tickets and money-can't-buy
experiences at some of Britain's biggest entertainment venues.
Meeting the needs of business customers
Business Energy performed strongly during 2016/17, driven by a
continued focus on meeting business customers' core energy needs,
ongoing efforts to control operating costs and an enhanced
proactive approach to its key customers and partners.
Over the year, SSE Business Energy has adapted the way in which
it engages with customers, offering a customer service commitment
which was recognised by Citizens Advice as the best performing
non-domestic energy provider at handling complaints from small
business customers. Business Energy continued to build its offering
in the commercial sector and launched a new 100% renewable energy
proposition known as 'SSE Green'.
For micro business customers, SSE continued its emphasis on
Treating Customers Fairly (TCF) by relaunching its TCF Statement
and establishing a performance team to focus on operational
excellence by driving continuous improvement. Third Party
Intermediaries (TPIs) remain an important channel for Business
Energy growth and SSE continues to provide ongoing support to its
TPIs by providing access to its industry experts via sales
channels, engagement sessions and regular industry updates.
Supplying energy and essential services across Ireland
SSE Airtricity is the second largest provider of energy and
related services in Ireland (ROI) and Northern Ireland (NI), and
the only energy retailer to operate in all of the competitive gas
and electricity markets across the island. At 31 March 2017, SSE
Airtricity supplied electricity and natural gas to 0.79 million
household and business customer accounts in ROI and NI,
representing a 17% share of the total combined gas and electricity
markets.
SSE Airtricity's focus is on excelling in customer service as a
key differentiator in what are highly competitive, price-driven
markets. The company's focus on using digitised platforms to enable
customers to self-serve using their choice of device at times that
suit them is another key differentiator, with 73% of all customer
interactions completed via digital channels.
This continuous drive to deliver excellent customer experience
has received extensive external recognition. In November, SSE
Airtricity was named Customer Contact Centre of the Year by CCMA
Ireland, and in March the company won awards for Best Customer
Service and Best Online Service from leading internet comparison
site Bonkers.ie. In October, SSE Airtricity was named the top
electricity provider for business customer satisfaction in the
Commission for Energy Regulation's (CER) Consumer Survey Report,
receiving an overall satisfaction rating of 91% from SMEs.
In late 2016, SSE Airtricity acquired 50 per cent of Fusion
Heating Ltd., a leading energy services contractor in NI. The
acquisition enhances SSE Airtricity's retail energy offering, and
further progresses the company's diversification to become a
retailer of essential services across the island.
On 31 March 2017, SSE Airtricity increased its regulated natural
gas prices in NI by 7.6% for home and small business customers. The
increase was examined and approved by the Utility Regulator and is
the first increase in the company's prices since April 2013. The
change follows a four-year period during which SSE Airtricity
either held or reduced its standard gas prices in the regulated
market, including a 10% reduction from 1 April 2016.
In deregulated markets, SSE Airtricity reduced its household
electricity prices in NI by 10% from 1 June 2016. In ROI, the
company reduced both its electricity and natural gas prices by 5%
with effect from 1 August 2016.In deregulated markets, SSE
Airtricity reduced its household electricity prices in NI by 10%
from 1 June 2016. In ROI, the company reduced both its electricity
and natural gas prices by 5% with effect from 1 August 2016.
Enterprise
Delivering an efficient and reliable service
SSE Enterprise provides multi-disciplined utility services for
industrial, commercial and public sector customers across the UK.
Its five businesses comprising Telecoms, Utilities, Rail,
Contracting and Slough Heat and Power, serve a broad client base
with a collective focus on delivering efficient, reliable and
bespoke solutions to meet individual client needs.
While the financial performance in the last year reflects the
challenging markets SSE Enterprise operates in, the business has
established strong foundations for future profitability with a
number of stable revenue streams delivering favourably. The
contracting business did not deliver as expected, however a process
of transformation is underway to refine the operating model in an
effort to drive further efficiency and sustainable growth.
Renewing the focus and direction for SSE Enterprise
SSE Enterprise has a renewed focus under the stewardship of its
new Managing Director, and several strategic appointments to the
wider leadership team are targeting leaner operations and improved
business development and execution capabilities. The business is
anticipated to become more efficient and competitive going forward
across a range of sectors whilst continuing to deliver innovative
solutions to meet the evolving needs of its customers. SSE
Enterprise is building a business that's fit for the future and has
made progress in 2016/17 with specific activity detailed below:
-- SSE Enterprise Telecoms has secured important new clients and
continued to grow its network, extending its high bandwidth fibre
broadband services. The business continues to connect major UK
commercial datacentres, providing direct customer access to a
majority of the leading suppliers of Cloud based business services.
It has also invested in developing its London City fibre network to
connect key new commercial buildings.
-- SSE Enterprise Rail delivered a strong performance this year.
Safety performance was optimal, and the business grew with the team
focused on winning work with new clients and associated business
streams including significant contract wins with Network Rail and
Transport for London.
-- SSE Enterprise Utilities now serve almost 7,000 customers
connected to low carbon heat networks across the UK, and over
13,000 connected to water networks. With over 400 electrical
networks contracted, and managing around 178,000 gas connections,
it is firmly established as a market leader in multi-utilities,
with ambitious plans for growth in both existing and new
markets.
-- Slough Heat and Power has further established itself within
the Enterprise business and delivered its highest ever profit in
2016/17. Consistent and focused stakeholder engagement with key
customers has allowed the business to optimise electricity demand
forecasting. It is also in the process of doubling its electricity
import capacity from the main grid to the Slough Heat and Power
network.
-- SSE Enterprise Contracting had a difficult year but has
reinforced its commitment to accelerate critical growth. The
business has recently attracted new and significant contract wins
with considerable opportunities in the pipeline. A new leadership
team is in place to maximise these opportunities in 2017/18.
Retail (including Enterprise) - Conclusion and Priorities
In addition to their first priority of safety, SSE's Energy
Supply, Energy-Related Services and Enterprise business continue to
operate in challenging competitive markets and are each focused on
adapting to meet the changing energy needs of household, commercial
and public sector customers. This means maintaining a clear focus
on delivering the propositions and services that customers need,
while actively managing key risks and leveraging SSE's core
strengths.
Key priorities for 2017/18 and beyond
SSE's Retail priorities in 2017/18 and beyond are to:
-- retain and gain domestic and business energy customer
accounts, minimising losses where possible;
-- actively manage key risks, in particular by responding
positively to challenges from political and regulatory stakeholders
following the General Election;
-- continue to build on SSE's strong culture of customer service
in both GB and Ireland with new products and services;
-- take the smart opportunity by optimising the mass deployment
of smart meters and developing and launching compelling
smart-enabled customer propositions;
-- continue to deliver operational efficiencies by further
digitalising the business and moving towards an operating model
capable of meeting the future needs of customers; and
-- re-focus the Enterprise business so it has the strongest
possible foundations for future growth.
Alternative Performance Measures
When assessing, discussing and measuring the Group's financial
performance, management refer to measures used for internal
performance management. These measures are not defined or specified
under International Financial Reporting Standards (IFRS) and as
such are considered to be Alternative Performance Measures
("APMs").By their nature, APMs are not uniformly applied by all
preparers including other participants in the Group's industry.
Accordingly APMs used by the Group may not be comparable to other
companies within the Group's industry.
By their nature, APMs are not uniformly applied by all preparers
including other participants in the Group's industry. Accordingly
APMs used by the Group may not be comparable to other companies
within the Group's industry.
Purpose
APMs are used by management to aid comparison and assess
historical performance against internal performance benchmarks and
across reporting periods. These measures provide an ongoing and
consistent basis to assess performance by excluding items that are
materially non-recurring, uncontrollable or exceptional. These
measures can be classified in terms of their key financial
characteristics:
-- Profit measures allow management to assess and benchmark
underlying business performance during the year. They are primarily
used by operational management to measure operating profit
contribution and are also used by the Board to assess performance
against business plan.
-- Capital measures allow management to track and assess the
progress of the Group's significant ongoing investment in capital
assets and projects against their investment cases, including the
expected timing of their operational deployment.
-- Debt measures allow management to record and monitor both
operating cash generation and the Group's ongoing financing and
liquidity position.
The following table explains the key APMs applied by the Group
and referred to in these statements:
Closest
Equivalent IFRS
Group APM Purpose measure Adjustments to reconcile to primary financial statements
------------------- ---------------- ------------------ -----------------------------------------------------------
Adjusted Operating Profit measure Operating Profit
Profit * Movement on operating and financing derivatives
('certain remeasurements')
* Exceptional items
* Share of joint ventures and associates interest and
tax
------------------- ---------------- ------------------ -----------------------------------------------------------
Adjusted Profit Profit measure Profit before tax
Before Tax * Movement on operating and financing derivatives
('certain remeasurements')
* Exceptional items
* Interest on net pension assets/liabilities (IAS 19R)
* Share of joint ventures and associates tax
------------------- ---------------- ------------------ -----------------------------------------------------------
Adjusted net Profit measure Net finance costs
finance costs * Movement on financing derivatives
* Share of joint ventures and associates interest
* Interest on net pension assets/liabilities (IAS 19R)
------------------- ---------------- ------------------ -----------------------------------------------------------
Adjusted Current Profit measure Tax charge
Tax Charge * Share of joint ventures and associates tax
* Deferred tax including share of joint ventures and
associates
* Tax on exceptional items and certain re-measurement
------------------- ---------------- ------------------ -----------------------------------------------------------
Adjusted earnings Profit measure Earnings per
per share share * Exceptional items
* Movements on Derivatives ('certain re-measurements')
* Interest on net pension assets/liabilities (IAS 19R)
* Deferred tax including share of joint ventures and
associates
------------------- ---------------- ------------------ -----------------------------------------------------------
Adjusted Net Debt Debt measure Unadjusted net
and Hybrid Capital debt * Hybrid capital
* Outstanding liquid funds
* Finance leases
* Non-recourse Clyde debt
------------------- ---------------- ------------------ -----------------------------------------------------------
Investment and Capital measure Capital additions
Capital to Intangible * Other expenditure
expenditure Assets and
(adjusted) Property, Plant
and Equipment * Customer funded additions (IFRIC 18)
* Allowances and certificates
* Disposed additions
* Joint ventures and associates additions
------------------- ---------------- ------------------ -----------------------------------------------------------
Rationale for adjustments
Adjustments to Profit Measure
1 Movement on operating and financing derivatives ('certain
re-measurements')
This adjustment can be split between operating and financing
derivatives.
Operating derivatives are where the Group enters into forward
contracts to buy (or sell) electricity, gas and other commodities
to meet the future demand requirements of its Energy Supply
business or to optimise the value of its Wholesale assets. Certain
of these contracts are determined to be derivative financial
instruments under IAS 39 and as such are required to be recorded at
their fair value. Changes in the fair value of those commodity
contracts designated as IAS 39 financial instruments are reflected
in the income statement (as part of 'certain re-measurements').The
Group shows the change in the fair value of these forward contracts
separately as this mark-to-market movement is not relevant to the
underlying performance of its operating segments due to the
volatility that can arise. The Group will recognise the underlying
value of these contracts as the relevant commodity is delivered,
which will predominately be within the subsequent 12 to 18 months.
Conversely, commodity contracts that are not financial instruments
under IAS 39 are accounted for as 'own use' contracts.
Financing derivatives include all fair value and cash flow
interest rate hedges, non-hedge accounted (mark-to-market) interest
rate derivatives, cash flow foreign exchange hedges and non-hedge
accounted foreign exchange contracts entered into by the Group to
manage its banking and liquidity requirements as well as risk
management relating to interest rate and foreign exchange
exposures. Changes in the fair value of those financing derivatives
are reflected in the income statement (as part of 'certain
re-measurements').The Group shows the change in the fair value of
these forward contracts separately as this mark-to-market movement
is not relevant to the underlying performance of its operating
segments.
The re-measurements arising from operating and financing
derivatives, and the tax effects thereof, are disclosed separately
to aid understanding of the underlying performance of the
Group.
2 Exceptional Items
Exceptional charges or credits, and the tax effects thereof, are
considered unusual by nature or scale and of such significance that
separate disclosure is required for the underlying performance of
the Group to be properly understood. Further explanation of the
rationale for deciding whether an item is exceptional is included
in Note 3 of the Financial Statements.
3 Share of joint ventures and associates interest and tax
This adjustment can be split between the share of interest and
the share of tax.
The Group is required to report profit before interest and tax
('operating profit') including its share of the profit after tax of
its equity-accounted joint ventures and associates. However, for
internal performance management purposes and for consistency of
treatment, SSE reports its adjusted profit measures before its
share of the interest and/or tax on joint ventures and
associates.
4 Interest on net pension assets/liabilities (IAS 19R)
The Group's interest charges relating to defined benefit pension
schemes are derived from the net assets/liabilities of the schemes
as valued under IAS 19R. This will mean that the charge recognised
in any given year will be dependent on the impact of actuarial
assumptions such as inflation and discount rates. To avoid income
statement volatility derived from this basis of measurement and
reflecting the non-cash nature of these charges, the Group excludes
these from its adjusted profit measures.
5 Deferred tax
The Group adjusts for deferred tax when arriving at adjusted
profit after tax and its adjusted effective rate of tax. Given
deferred tax arises as a result of potential future tax credits or
charges, and is therefore unrelated to the current period tax
charge or payments made, the Group excludes these from its adjusted
profit measures.
Adjustments to Debt measure
6 Hybrid capital
The characteristics of hybrid capital securities mean they
qualify for recognition as equity rather than debt under IFRSs.
Consequently, their coupon payments are presented within dividends
rather than within finance costs. As a result, the coupon payments
are not included in SSE's adjusted PBT measure. In order to present
total funding provided from sources other than ordinary
shareholders, SSE presents its adjusted net debt measure inclusive
of hybrid capital to better reflect the Group's funding
position.
7 Outstanding liquid funds
Outstanding liquid funds are SSE cash balances held by
counterparties as collateral at the year end. SSE includes these as
cash until they are utilised. Loans with a maturity of less than
three months are also included in this adjustment. The Group
includes this adjustment in order to better reflect the immediate
cash resources it has access, which in turn better reflects the
Group's funding position.
8 Finance leases
SSE's reported loans and borrowings include finance lease
liabilities, most significantly in relation to its tolling contract
with Marchwood Power Limited, which are not directly related to the
external financing of the Group. The Group excludes these
liabilities from its adjusted net debt and hybrid capital measure
to better reflect the Group's underlying funding position with its
primary sources of capital.
9 Non-recourse Clyde debt
At 31 March 2016, prior to the change in consolidation treatment
for the venture, an adjustment was made to exclude non-recourse
debt associated with Clyde Windfarm (Scotland) Limited. Further
explanation of the rationale is included in Note 4.2(iii).
Adjustments to Capex Measure
10 Other expenditure
Other expenditure primarily represents subsequently derecognised
development expenditure which is excluded to better reflect the
Group's ongoing capital position.
11 Customer funded additions. Customer funded additions
represents additions to electricity and other networks funded by
customer contributions and accounted for under IFRIC 18. Given this
is directly funded by customers, this has been excluded to better
reflect the Group's underlying investment position.
12 Allowances and certificates
Allowances and certificates consist of purchased carbon
emissions allowances and generated or purchased renewable
obligations certificates (ROCs) and are not included in the Group's
Capital Expenditure and Investment alternative performance measure
to better reflect the Group's investment in enduring operational
assets.
13 Disposed additions
Disposed additions represents capital additions related to smart
meter installations which were subsequently disposed to the Meter
Fit 2 Limited (see Note 10). This has been excluded to better
reflect the Group's net capital investment.
14 Joint ventures and associates additions
Joint ventures and associates additions represent funding
provided to joint venture arrangements in relation to capital
expenditure projects. This has been included to better reflect the
Group's use of directly funded equity-accounted vehicles to grow
the Group's asset base. Project finance raised directly by the
Group's joint ventures and associates is not included in this
adjustment.
The table below reconciles the adjusted performance measures to
the reported measure of the Group.
March 2017 March 2016 March 2015
GBPm GBPm GBPm
Adjusted operating profit 1,874.0 1,824.4 1,881.4
Adjusted net finance costs (328.1) (310.9) (316.7)
------------------------------------------------------------------------- ----------- ----------- -----------
Adjusted profit before tax (PBT) 1,545.9 1,513.5 1,564.7
Adjusted current tax charge (157.7) (193.4) (224.8)
Adjusted profit after tax (PAT) 1,388.2 1,320.1 1,339.9
------------------------------------------------------------------------- ----------- ----------- -----------
Hybrid coupon paid (119.3) (124.6) (121.3)
------------------------------------------------------------------------- ----------- ----------- -----------
Adjusted profit after tax attributable to ordinary shareholders for EPS 1,268.9 1,195.5 1,218.6
Number of shares for EPS 1,009.7 1,000.0 981.8
Adjusted Earnings per Share 125.7 119.5 124.1
------------------------------------------------------------------------- ----------- ----------- -----------
Adjusted operating profit 1,874.0 1,824.4 1,881.4
Movement on operating and financing derivatives 203.1 (28.8) (61.1)
Exceptional items (8.2) (889.8) (674.6)
Share of joint ventures and associates interest and tax (128.4) (120.4) (159.8)
Reported Operating Profit 1,940.5 785.4 985.9
------------------------------------------------------------------------- ----------- ----------- -----------
Adjusted Profit Before Tax PBT 1,545.9 1,513.5 1,564.7
Movement on operating and financing derivatives 255.7 (14.5) (105.3)
Exceptional items (8.2) (889.8) (674.6)
Interest on net pension assets/liabilities (3.1) (22.3) (14.0)
Share of joint ventures and associates tax (13.7) 6.4 (35.6)
Reported profit before tax 1,776.6 593.3 735.2
------------------------------------------------------------------------- ----------- ----------- -----------
Adjusted net finance costs 328.1 310.9 316.7
Movement on financing derivatives (52.6) (14.3) 44.2
Share of joint ventures and associates interest (114.7) (126.8) (124.2)
Interest on net pension assets/liabilities 3.1 22.3 14.0
------------------------------------------------------------------------- ----------- ----------- -----------
Reported net finance costs 163.9 192.1 250.7
------------------------------------------------------------------------- ----------- ----------- -----------
Adjusted current tax charge 157.7 193.4 224.8
Share of joint ventures and associates tax (13.7) 6.4 (35.6)
Deferred tax including share of joint ventures and associates 19.8 80.8 82.0
Tax on exceptional items and certain re-measurement (106.0) (272.5) (200.4)
Reported tax charge 57.8 8.1 70.8
------------------------------------------------------------------------- ----------- ----------- -----------
Adjusted Net Debt and Hybrid Capital (8,483.0) (8,395.0) (7,568.1)
Hybrid Capital 2,209.7 2,209.7 3,371.1
------------------------------------------------------------------------- ----------- ----------- -----------
Adjusted Net Debt (6,273.3) (6,185.3) (4,197.0)
Outstanding liquid funds (105.2) (121.8) (71.7)
Finance leases (276.9) (300.8) (319.7)
Non-recourse Clyde debt - (200.7) -
Unadjusted net debt (6,655.4) (6,808.6) (4,588.4)
------------------------------------------------------------------------- ----------- ----------- -----------
Investment and Capital expenditure (adjusted) 1,726.2 1,618.7 1,475.3
Other expenditure 4.2 6.9 (24.5)
Customer funded additions 112.8 88.3 89.8
Allowances and certificates 633.5 580.4 441.8
Disposed additions 15.6 - -
Joint ventures and associates additions (105.0) (46.2) (85.6)
------------------------------------------------------------------------- ----------- ----------- -----------
Additions to Intangible Assets and Property, Plant and Equipment 2,387.3 2,248.1 1,896.8
------------------------------------------------------------------------- ----------- ----------- -----------
Additions to Intangible Assets 779.5 713.1 527.6
Additions to Property, Plant and Equipment 1,607.8 1,535.0 1,369.2
------------------------------------------------------------------------- ----------- ----------- -----------
Additions to Intangible Assets and Property, Plant and Equipment 2,387.3 2,248.1 1,896.8
------------------------------------------------------------------------- ----------- ----------- -----------
Summary Financial Statements
Consolidated Income Statement
for the year ended 31 March 2017
2017 2016
Before
exceptional Exceptional Before Exceptional
items and items and exceptional items and
certain certain items and certain
re-measure re-measure-ments certain re-measure-ments
ments (note 6) Total re-measure-ments (note 6) Total
Note GBPm GBPm GBPm GBPm GBPm GBPm
Revenue 5 29,037.9 - 29,037.9 28,781.3 - 28,781.3
Cost of sales (25,794.5) 232.6 (25,561.9) (25,859.4) (644.5) (26,503.9)
Gross profit 3,243.4 232.6 3,476.0 2,921.9 (644.5) 2,277.4
Operating
costs (1,707.3) (406.2) (2,113.5) (1,449.8) (334.0) (1,783.8)
Other
operating
income 24.2 366.4 390.6 29.4 57.6 87.0
Operating
profit
before joint
ventures and
associates 1,560.3 192.8 1,753.1 1,501.5 (920.9) 580.6
------------- ---- ----------- ---------------- ---------- ----------------- ---------------- ----------
Joint
ventures and
associates:
Share of
operating
profit /
(loss) 313.7 - 313.7 322.9 - 322.9
Share of
interest (114.7) - (114.7) (126.8) - (126.8)
Share of
movement on
derivatives - 2.1 2.1 - 2.3 2.3
Share of tax (32.8) 19.1 (13.7) (39.9) 46.3 6.4
-----------
Share of
profit on
joint
ventures and
associates 166.2 21.2 187.4 156.2 48.6 204.8
----------- ---------------- ----------
Operating
profit 5 1,726.5 214.0 1,940.5 1,657.7 (872.3) 785.4
Finance
income 7 93.7 - 93.7 101.8 - 101.8
Finance costs 7 (310.2) 52.6 (257.6) (308.2) 14.3 (293.9)
Profit before
taxation 1,510.0 266.6 1,776.6 1,451.3 (858.0) 593.3
Taxation 8 (163.8) 106.0 (57.8) (280.6) 272.5 (8.1)
----------- ---------------- ---------- ----------------- ---------------- ----------
Profit for
the year 1,346.2 372.6 1,718.8 1,170.7 (585.5) 585.2
----------- ---------------- ---------- ----------------- ---------------- ----------
Attributable
to:
Ordinary
shareholders
of the
parent 1,226.9 372.6 1,599.5 1,046.1 (585.5) 460.6
Other equity
holders 119.3 - 119.3 124.6 - 124.6
Earnings per
share
Basic
earnings per
share
(pence) 9 158.4 46.1
Diluted
earnings per
share
(pence) 9 158.2 46.0
Dividends
Interim
dividend
paid per
share
(pence) 9 27.4 26.9
Proposed
final
dividend per
share
(pence) 9 63.9 62.5
---------- ----------
91.3 89.4
---------- ----------
The accompanying notes are an integral part of the financial
information in this announcement.
Consolidated Statement of Comprehensive Income
For the year ended 31 March 2017
2017 2016
GBPm GBPm
Profit for the year 1,718.8 585.2
Other comprehensive income:
Items that will be reclassified subsequently to profit or loss:
Losses on revaluation of available for sale investments, net of taxation - (8.4)
Net gains on cash flow hedges 14.9 79.4
Transferred to assets and liabilities on cash flow hedges 10.6 4.7
Taxation on cashflow hedges (2.8) (15.1)
--------------------------------------------------------------------------------------------- ------- ------
22.7 69.0
Share of other comprehensive (loss)/income of joint ventures and associates, net of taxation (6.0) 3.9
Exchange difference on translation of foreign operations 74.1 85.1
Loss on net investment hedge net of taxation (22.5) (33.4)
------- ------
68.3 116.2
Items that will not be reclassified to profit or loss:
Actuarial gain on retirement benefit schemes, net of taxation 252.5 195.4
Share of other comprehensive (loss)/income of joint ventures and associates, net of taxation (56.4) 76.4
------- ------
196.1 271.8
Other comprehensive gain, net of taxation 264.4 388.0
Total comprehensive income for the period 1,983.2 973.2
Attributable to:
Ordinary shareholders of the parent 1,863.9 848.6
Other equity holders 119.3 124.6
1,983.2 973.2
------- ------
Consolidated Balance Sheet
as at 31 March 2017
2017 2016
Note GBPm GBPm
Assets
Property, plant and equipment 12,622.2 12,525.0
Goodwill and other intangible assets 760.4 859.4
Equity investments in associates and joint ventures 985.8 1,045.1
Loans to associates and joint ventures 788.4 591.6
Other investments 12.5 16.7
Deferred tax assets 322.3 512.0
Derivative financial assets 528.3 537.7
Retirement benefit assets 13 525.4 -
-------- --------
Non-current assets 16,545.3 16,087.5
-------- --------
Intangible assets 580.7 500.1
Inventories 269.1 215.4
Trade and other receivables 3,754.4 3,274.3
Cash and cash equivalents 1,427.0 360.2
Derivative financial assets 1,269.5 1,615.0
Current assets held for sale 10 70.4 134.2
Current assets 7,371.1 6,099.2
-------- --------
Total assets 23,916.4 22,186.7
-------- --------
Liabilities
Loans and other borrowings 11 142.4 923.3
Trade and other payables 4,923.5 4,184.4
Current tax liabilities 294.8 298.2
Provisions 39.7 94.0
Derivative financial liabilities 1,153.2 1,783.8
Liabilities held for sale 10 1.4 115.0
-------- --------
Current liabilities 6,555.0 7,398.7
-------- --------
Loans and other borrowings 11 7,940.0 6,245.5
Deferred tax liabilities 788.9 917.5
Trade and other payables 437.4 452.4
Provisions 764.5 703.3
Retirement benefit obligations 13 454.9 394.8
Derivative financial liabilities 703.2 857.5
-------- --------
Non-current liabilities 11,088.9 9,571.0
-------- --------
Total liabilities 17,643.9 16,969.7
-------- --------
Net assets 6,272.5 5,217.0
-------- --------
Equity
Share capital 12 507.8 503.8
Share premium 885.7 880.4
Capital redemption reserve 26.5 22.0
Hedge reserve 14.5 (2.2)
Translation reserve 33.8 (17.8)
Retained earnings 2,594.5 1,598.6
Equity attributable to ordinary shareholders of the parent 4,062.8 2,984.8
Hybrid equity 12 2,209.7 2,209.7
-------- --------
Total equity attributable to equity holders of the parent 6,272.5 5,194.5
Non-controlling interests - 22.5
-------- --------
Total equity 6,272.5 5,217.0
-------- --------
The accompanying notes are an integral part of the financial
information in this announcement
Consolidated Statement of Changes in Equity
for the year ended 31 March 2017
Total
equity
Total attributable
Capital attributable to equity
Share Share redemption Hedge Translation Retained to ordinary Hybrid holders of Non-controlling Total
capital premium reserve reserve reserve earnings shareholders equity the parent interests equity
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
At 1 April 2016 503.8 880.4 22.0 (2.2) (17.8) 1,598.6 2,984.8 2,209.7 5,194.5 22.5 5,217.0
Total
comprehensive
income for the
year - - - 16.7 51.6 1,795.6 1,863.9 119.3 1,983.2 - 1,983.2
Dividends to
shareholders - - - - - (906.6) (906.6) - (906.6) - (906.6)
Scrip dividend
related share
issue 7.9 (7.9) - - - 237.9 237.9 - 237.9 - 237.9
Distributions to
Hybrid equity
holders - - - - - - - (119.3) (119.3) - (119.3)
Issue of shares 0.6 13.2 - - - - 13.8 - 13.8 - 13.8
Share repurchase (4.5) - 4.5 - - (131.5) (131.5) - (131.5) - (131.5)
Credit in
respect of
employee share
awards - - - - - 13.1 13.1 - 13.1 - 13.1
Investment in
own shares - - - - - (12.6) (12.6) - (12.6) - (12.6)
Non-controlling
interest (i) - - - - - - - - - (22.5) (22.5)
------- ------- ---------- ------- ----------- -------- ------------ ------- ------------ --------------- -------
At 31 March 2017 507.8 885.7 26.5 14.5 33.8 2,594.5 4,062.8 2,209.7 6,272.5 - 6,272.5
------- ------- ---------- ------- ----------- -------- ------------ ------- ------------ --------------- -------
Statement of Total equity
changes in Total attributable
equity Capital attributable to equity
Share Share redemption Hedge Translation Retained to ordinary Hybrid holders of Non-controlling Total
capital premium reserve reserve reserve earnings shareholders equity the parent interests equity
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
At 1 April 2015 496.5 862.7 22.0 (72.1) (69.5) 1,469.8 2,709.4 3,371.1 6,080.5 - 6,080.5
Total
comprehensive
income for the
year - - - 72.9 51.7 724.0 848.6 124.6 973.2 - 973.2
Dividends to
shareholders - - - - - (884.0) (884.0) - (884.0) - (884.0)
Scrip dividend
related share
issue 5.9 (5.9) - - - 175.8 175.8 - 175.8 - 175.8
Distributions to
Hybrid equity
holders - - - - - - - (124.6) (124.6) - (124.6)
Issue of shares 1.4 23.6 - - - - 25.0 - 25.0 - 25.0
Redemption of
Hybrid equity - - - - - (8.5) (8.5) (1,161.4) (1,169.9) - (1,169.9)
Credit in
respect of
employee share
awards - - - - - 13.5 13.5 - 13.5 - 13.5
Investment in
own shares - - - - - (11.1) (11.1) - (11.1) - (11.1)
Disposal of
non-controlling
interest in
Clyde Windfarm - - - - - 138.6 138.6 - 138.6 - 138.6
Non controlling
interest (i) - - - (3.0) - (19.5) (22.5) - (22.5) 22.5 -
At 31 March 2016 503.8 880.4 22.0 (2.2) (17.8) 1,598.6 2,984.8 2,209.7 5,194.5 22.5 5,217.0
------- ------- ---------- ------- ----------- -------- ------------ --------- ------------ --------------- ---------
(i) This represents the recognition and de-recognition of the non-controlling interest in
Clyde Windfarm (Scotland) Limited, the Group's share in which is now accounted as a joint
venture (see Note 4.2(iii)).
Consolidated Cash Flow Statement
for the year ended 31 March 2017
2017 2016
Note GBPm GBPm
Operating profit 5 1,940.5 785.4
Less share of profit of joint ventures and associates (187.4) (204.8)
--------- ---------
Operating profit before jointly controlled entities and associates 1,753.1 580.6
Pension service charges less contributions paid (48.0) (35.9)
Movement on operating derivatives (201.0) 31.1
Depreciation, amortisation and impairments 1,135.0 1,633.1
Charge in respect of employee share awards (before tax) 16.2 16.5
Profit on disposal of assets and businesses (391.0) (87.6)
Release of provisions (17.6) (7.8)
Release of deferred income (18.0) (17.9)
--------- ---------
Cash generated from operations before working capital movements 2,228.7 2,112.1
Decrease in inventories 8.6 44.0
(Increase)/decrease in receivables (541.9) 1,098.5
Increase/(decrease) in payables 1,093.1 (879.5)
Decrease in provisions (53.8) (55.7)
--------- ---------
Cash generated from operations 2,734.7 2,319.4
Dividends received from investments 123.4 130.9
Interest paid (178.5) (152.3)
Taxes paid (98.5) (139.1)
--------- ---------
Net cash from operating activities 2,581.1 2,158.9
--------- ---------
Purchase of property, plant and equipment (1,621.1) (1,495.4)
Purchase of other intangible assets (595.4) (444.8)
Deferred income received 36.9 16.1
Proceeds from disposals 10 739.3 312.4
Loans and equity provided to joint ventures and associates (105.0) (60.3)
Purchase of businesses and subsidiaries (15.8) (669.0)
Loans and equity repaid by joint ventures 73.4 18.3
Increase in other investments (0.2) (0.2)
--------- ---------
Net cash from investing activities (1,487.9) (2,322.9)
--------- ---------
Proceeds from issue of share capital 13.8 25.0
Dividends paid to company's equity holders 9 (668.7) (708.2)
Redemption of Hybrid equity - (1,161.4)
Hybrid equity dividend payments 12 (119.3) (124.6)
Employee share awards share purchase (12.6) (11.1)
New borrowings 1,842.5 1,070.1
Repayment of borrowings (950.6) (77.7)
Repurchase of own shares 12 (131.5) -
--------- ---------
Net cash from financing activities (26.4) (987.9)
--------- ---------
Net increase/(decrease) in cash and cash equivalents 1,066.8 (1,151.9)
--------- ---------
Cash and cash equivalents at the start of year 360.2 1,512.1
Net increase/(decrease) in cash and cash equivalents 1,066.8 (1,151.9)
--------- ---------
Cash and cash equivalents at the end of year 1,427.0 360.2
--------- ---------
The accompanying notes are an integral part of these financial
statements.
Notes to the Preliminary Statement
for the year ended 31 March 2017
1. Financial Information
The financial information set out in this announcement does not
constitute the Group's consolidated financial statement for the
years ended 31 March 2017 or 2016, but is derived from those
accounts. Consolidated financial statements for the year ended 31
March 2016 were delivered to the Registrar of Companies, and those
for the year ended 31 March 2017 will be delivered in due course.
The auditors have reported on those accounts and their reports were
(i) unqualified; (ii) did not include a reference to any matters to
which the auditors drew attention by way of emphasis without
qualifying their report; and (iii) did not contain a statement
under section 498 (2) or (3) of the Companies Act 2006. This
preliminary announcement was authorised by the Board on 16 May
2017.
2. Basis of preparation and presentation
2.1 Basis of preparation
The financial information set out in this announcement has been
extracted from the consolidated financial statements of SSE plc for
the year ended 31 March 2017. These consolidated financial
statements were prepared under the historical cost convention,
excepting certain assets and liabilities stated at fair value and
in accordance with International Financial Reporting Standards and
their interpretations, as adopted by the European Union (adopted
IFRS). This consolidated financial information has been prepared on
the basis of accounting policies consistent with those applied in
the consolidated financial statements for the year ended 31 March
2016 unless expressly stated otherwise. All issued standards,
amendments and interpretations of adopted IFRS that require to be
adopted for the first time in these financial statements have been
applied by the Group in the current year and have not had a
material impact on the financial statements. The Directors consider
that the Group has adequate resources to continue in operational
existence for the foreseeable future. The financial information has
therefore been prepared on a going concern basis. The financial
statements are presented in Pounds Sterling.
2.2 Basis of presentation
The Group applies the use of adjusted accounting measures
throughout these statements. These measures enable the Directors to
present the underlying performance of the Group and its segments to
the users of the statements in a consistent and meaningful manner.
The adjustments applied and certain terms such as 'adjusted
operating profit', 'adjusted EPS', 'investment and capital
expenditure' and 'adjusted net debt and hybrid equity' are not
defined under IFRS and are explained in more detail below.
3. Adjusted accounting measures
3.1 Adjusted measures
The Directors assess the performance of the Group and its
reportable segments based on 'adjusted measures'. These measures
are used for internal performance management and are believed to be
appropriate for explaining underlying performance to users of the
accounts. These measures are also deemed the most useful for the
ordinary shareholders of the Company and for other
stakeholders.
The performance of the reportable segments is reported based on
adjusted profit before interest and tax ('adjusted operating
profit'). This is reconciled to reported profit before interest and
tax by adding back exceptional items and certain re-measurements
(see Note 3.2 below) and after the removal of interest and taxation
on profits from equity-accounted joint ventures and associates.
The performance of the Group is reported based on adjusted
profit before tax which excludes exceptional items and certain
re-measurements (see below), the net interest costs associated with
defined benefit schemes and taxation on profits from
equity-accounted joint ventures and associates. The interest costs
removed are non-cash and are subject to variation based on
actuarial valuations of scheme liabilities.
The Group's key performance measure is adjusted earnings per
share (EPS), which is based on basic earnings per share before
exceptional items and certain re-measurements (see below), the net
interest costs associated with defined benefit schemes and after
the removal of deferred taxation. Adjusted profit after tax is
presented on a basis consistent with adjusted EPS except for the
exclusion of payments to holders of hybrid equity.
The financial statements also include an 'adjusted net debt and
hybrid equity' measure. This presents financing information on the
basis used for internal liquidity risk management. This measure
excludes obligations due under finance leases and includes cash
held as collateral on commodity trading exchanges and other short
term loans. At 31 March 2016, prior to the change in consolidation
treatment for the venture, this measure excluded non-recourse debt
associated with Clyde Windfarm (Scotland) Limited (see Note
4.2(iii)). The measure represents the capital owed to investors,
lenders and equity holders other than the ordinary shareholders. As
with 'adjusted earnings per share', this measure is considered to
be of particular relevance to the ordinary shareholders of the
Group as well as other stakeholders and interested parties.
Notes to the Preliminary Statement
for the year ended 31 March 2017
3 Adjusted accounting measures (continued)
3.1 Adjusted measures (continued)
Finally, the financial statements include an 'investment and
capital expenditure' measure. This metric represents the capital
invested by the Group in projects that are anticipated to provide a
return on investment over future years and is consistent with
internally applied metrics. This therefore includes capital
additions to Property, Plant and Equipment and Intangible Assets
and also the Group's funding of joint venture and associates
capital projects. The Group has considered it appropriate to report
these values both internally and externally in this manner due to
its use of equity-accounted investment vehicles to grow the Group's
asset base, where the Group is providing the source of funding to
the vehicle through either loans or equity. The Group does not
include project-funded ventures in this metric. In addition, the
Group excludes from this metric additions to its Property, Plant
and Equipment funded by Customer Contributions and additions to
Intangible Assets associated with Allowances and Certificates. As
with 'adjusted earnings per share', this measure is considered to
be of particular relevance to the ordinary shareholders of the
Group as well as other stakeholders and interested parties.
Reconciliations from reported measures to adjusted measures
along with further description of the rationale for those
adjustments are included in the Alternative Performance Measures
section at pages 48 to 53 before the Summary Financial
Statements.
3.2 Exceptional items and certain re-measurements
Exceptional items are those charges or credits that are
considered unusual by nature and scale and of such significance
that separate disclosure is required for the financial statements
to be properly understood. The trigger points for exceptional items
will tend to be non-recurring although exceptional charges may
impact the same asset class or segment over time. Market conditions
that have deteriorated significantly over time will only be
captured to the extent observable at the balance sheet date.
Examples of items that may be considered exceptional include
material asset or business impairment charges, business
restructuring costs, significant gains or losses on disposal and
contractual settlements following significant disputes and claims.
The Directors consider that any individual gain or loss on disposal
of greater than GBP30.0m would be disclosed as being exceptional by
nature of its scale. Other gains or losses on disposal below this
level may be considered to be exceptional by reference to specific
circumstances which will be explained on a case-by-case basis.
Certain re-measurements are re-measurements arising on certain
commodity, interest rate and currency contracts which are accounted
for as held for trading or as fair value hedges in accordance with
the Group's policy for such financial instruments. The amounts
shown in the before exceptionals and certain re-measurements
results for these contracts is the amount settled in the year as
disclosed in note 14. This excludes commodity contracts not treated
as financial instruments under IAS 39 where held for the Group's
own use requirements which are not recorded until the underlying
commodity is delivered.
3.3 Other additional disclosures
As permitted by IAS 1 'Presentation of financial statements',
the Group's income statement discloses additional information in
respect of joint ventures and associates, exceptional items and
certain re-measurements to aid understanding of the Group's
financial performance and to present results clearly and
consistently.
4. Accounting judgements and estimation uncertainty
In the process of applying the Group's accounting policies,
management necessarily makes judgements and estimates that have a
significant effect on the amounts recognised in the financial
statements. Changes in the assumptions underlying the estimates
could result in a significant impact to the financial statements.
The Group's key accounting judgement and estimation areas are noted
with the most Significant Financial Judgement areas as specifically
discussed by the Audit Committee being highlighted separately.
4.1 Significant Financial Judgements - Estimation Uncertainties
The preparation of the Group's Financial Statements has
specifically considered the following Significant Financial
Judgements all of which are areas of estimation uncertainty.
(i) Impairment testing and valuation of certain Non-Current Assets - Estimation Uncertainty
The Group reviews the carrying amounts of its goodwill, other
intangible assets and specific property, plant and equipment assets
to determine whether any impairment of the carrying value of those
assets requires to be recorded. The specific assets under review in
the year ended 31 March 2017 are goodwill, intangible development
assets and specific property, plant and equipment assets related to
gas production, retail and technology development, gas storage,
thermal power generation and wind power generation. In conducting
its reviews, the Group makes judgements and estimates in
considering both the level of cash generating unit (CGU) at which
common assets such as goodwill are assessed against, as well as the
estimates and assumptions behind the calculation of recoverable
amount of the respective assets or CGUs.
During the year, the Group performed a review of its CGUs based
on the Group operating structure and economic characteristics of
similar assets. The review resulted in two CGUs - GB Wind and
Ireland Wind - being combined into a Wind Generation CGU. The other
CGUs were unchanged following this review.
Notes to the Preliminary Statement
for the year ended 31 March 2017
4 Accounting judgements and estimation uncertainty (continued)
4.1 Significant Financial Judgements - Estimation Uncertainties (continued)
Changes to the estimates and assumptions on factors such as
regulation and legislation changes, power, gas, carbon and other
commodity prices, volatility of gas prices, plant running regimes
and load factors, expected proven and probable reserves, discount
rates and other inputs could impact the assessed recoverable value
of assets and CGUs and consequently impact the Group's income
statement and balance sheet.
(ii) Revenue recognition - estimated energy consumption - Estimation Uncertainty
Revenue from Retail energy supply activities includes an
estimate of the value of electricity or gas supplied to customers
between the date of the last meter reading and the year end. This
estimation will comprise of values for i) billed revenue in
relation to consumption from unread meters based on estimated
consumption taking account of various factors including usage
patterns and weather trends (disclosed as trade receivables) and
ii) unbilled revenue (disclosed as accrued income). The volume of
unbilled electricity or gas is calculated by assessing a number of
factors such as externally notified aggregated volumes supplied to
customers from national settlements bodies, amounts billed to
customers and other adjustments.
Unbilled revenue is therefore calculated by applying the tariffs
associated with estimated customers to the calculated volume of
electricity or gas consumed. This estimation methodology is subject
to an internal corroboration process that provides support for the
judgements made by management. This process requires the comparison
of calculated unbilled volumes to a 'benchmark' measure of unbilled
volumes which is derived using independently verified data and by
assessing historical weather-adjusted consumption patterns and
actual meter data that is used in industry reconciliation processes
for total consumption by supplier. This aspect of the corroboration
process, which requires a comparison of the estimated supplied
quantity of electricity or gas that is deemed to have been
delivered to customers and the aggregate supplied quantity of
electricity or gas applicable to the Group's customers that is
measured by industry system operators, is a key judgement. The
assessment of electricity unbilled revenue is further influenced by
the impact on estimated electricity or gas supplied of national
settlements data or, for electricity only, feed-in-tariff supported
volumes and spill from solar PV generation.
The Group's policy is to recognise unbilled revenue only where
the economic benefits are expected to flow to the Group. As a
result, the judgements applied, and the assumptions underpinning
the judgements, are considered to be appropriate. Change in these
assumptions would have an impact on the amount of revenue
recognised in any given period. In the year, in relation to
electricity, the Group has been able to resolve a number of
long-standing issues relating to the quality of grid supply point
metering and national settlements data. As a result, while
significant estimation uncertainty remains, the aggregate level of
non-half-hourly and half-hourly volume associated with such factors
has reduced in the year. This improvement in confidence in
estimation has enabled an additional revenue amount of c. GBP60m
(1.1% of unbilled energy income) to be recognised in the year. In
relation to unbilled gas revenue estimation, the experience of the
Group is that the industry estimated supplied quantities of gas
consumed have historically been higher than actual metered supply.
To take account of this, the Group has applied a further judgement,
being a percentage reduction to unbilled consumption volume, to the
measurement of its unbilled revenue in the financial statements. It
is expected that this judgement will become less critical as the
industry transitions to smart meter technology.
(iii) Valuation of trade receivables - Estimation Uncertainty
The Group's exposure to credit risk, and therefore the basis of
determining the provisions for bad and doubtful debts, is
controlled by individual business units operating in accordance
with Group polices and procedures. Generally, for significant
contracts, individual business units enter into contracts or
agreements with counterparties having investment grade credit
ratings only, or where suitable collateral or other security has
been provided. Counterparty credit validation is undertaken prior
to contractual commitment. While the provisions are considered to
be appropriate, changes in estimation basis or in economic
conditions could lead to a change in the level of provisions
recorded and consequently on the charge or credit to the income
statement.
(iv) Retirement benefit obligations - Estimation Uncertainty
The assumptions in relation to the cost of providing
post-retirement benefits during the period are based on the Group's
best estimates and are set after consultation with qualified
actuaries. While these assumptions are believed to be appropriate,
a change in these assumptions would impact the level of the
retirement benefit obligation recorded and the cost to the Group of
administering the schemes.
Notes to the Preliminary Statement
for the year ended 31 March 2017
4 Accounting judgements and estimation uncertainty (continued)
4.2 Other key accounting judgements
Other key accounting judgements applied in the preparation of
these Financial Statements include the following:
(i) Business Combinations and acquisitions - Accounting Judgement
Business combinations and acquisitions require a fair value
exercise to be undertaken to allocate the purchase price to the
fair value of the identifiable assets acquired and the liabilities
assumed. The determination of the fair value of the assets and
liabilities is based, to a certain extent, on management's
judgement. The amount of goodwill initially recognised as a result
of a business combination is dependent on the allocation of this
purchase price to the identifiable assets and liabilities with any
unallocated portion being recorded as goodwill. Business
combinations are disclosed in Note 10.
(ii) Treatment of disputes and claims - Accounting Judgement
The Group is exposed to the risk of litigation, regulatory
judgements and contractual disputes through the course of its
normal operations. The Group considers each instance separately in
accordance with legal advice and will provide or disclose
information as deemed appropriate. Changes in the assumptions
around the likelihood of an outflow of economic resources or the
estimation of any obligation would change the values recognised in
the Financial Statements.
(iii) Consolidation of interest in investments and trading arrangements - Accounting Judgement
Judgement is often required in assessing the level of control
held by the Group in its investments or trading arrangements.
Depending on the balance of facts and circumstances in each case,
the Group may either have control, joint control or significant
influence over the entity or arrangement. Where the Group has joint
control of an arrangement, judgement is also required to assess
whether the arrangement is a joint operation or a joint
venture.
Clyde Windfarm (Scotland) Limited
In the prior financial year, the Group completed the sale of
49.9% of the equity in Clyde Windfarm (Scotland) Limited ('Clyde').
Details of this transaction are included at Note 10. As part of the
Group providing project and contract management services for and
100% of the funding for the construction of the 172.8MW extension
of the wind farm, the Group had retained rights around the
engineering, procurement and construction of the extension and
therefore concluded to confer power to control the relevant
activities of Clyde to the Group. As a consequence, this entity was
fully consolidated into the Group's financial statements as a
subsidiary at 31 March 2016.
On 13 May 2016, the Group agreed to waive those contractual
rights which gave rise to the judgement that power to control the
relevant activities existed over Clyde. All other contractual
arrangements remained in place. As a consequence, the Group has
since accounted for its interest in Clyde as that of an investment
in an equity-accounted joint venture. One of the impacts of the
change to the consolidation basis was to remove the equivalent to
the GBP200.7m of non-recourse borrowings held by Clyde at 31 March
2016 from the Group's consolidated balance sheet and from the
Group's 'adjusted net debt and Hybrid equity' measure. The
principal adjustments made to reflect the change in consolidation
basis on the date control was lost are noted below, and comprise
the derecognition of the consolidated subsidiary balances, the
reclassification of borrowings as loans to joint ventures, and the
recognition of an equity investment in a joint venture at fair
value as required by IFRS 10 'Consolidated Financial Statements'.
Subsequent increases in loan, share of profits and other reserves
as part of the normal course of business are also noted, giving a
bridge to the recognised position at 31 March 2017.
The Group retains a 51% equity stake in Clyde at 31 March 2017
and the Group's interest in the entity is expected to remain that
of an equity-accounted joint venture following completion of the
extension. On completion of the extension project, the Group
expects to convert the loans provided relating to the extension to
equity and will consequently hold an increased stake in the venture
at that point.
Following the loss of control the Group recognised a fair value
uplift of GBP51.9m in respect of its share in Clyde. This has been
recognised as an exceptional credit in the current year
Notes to the Preliminary Statement
for the year ended 31 March 2017
4 Accounting judgements and estimation uncertainty (continued)
4.2 Other key accounting judgements (continued)
Consolidation Derecognition Fair value Increase in Consolidation
entries for as subsidiary uplift of equity loan, share of entries for
control of and recognition interest under profits and joint control
Clyde at as joint venture IFRS 10 other reserves of Clyde at 31
conversion date GBPm GBPm GBPm March 2017
GBPm GBPm
Property, plant &
equipment 637.0 (637.0) - - -
Equity investments
in joint ventures
and associates - 85.1 59.1 3.6 147.8
Loans to joint
ventures and
associates - 264.9 - 78.3 343.2
----------------- ------------------ ------------------ ----------------- -----------------
Non current assets 637.0 (287.0) 59.1 81.9 491.0
----------------- ------------------ ------------------ ----------------- -----------------
Current assets 45.9 (45.9) - - -
----------------- ------------------ ------------------ ----------------- -----------------
Current
liabilities1 (378.6) 113.7 - (78.3) (343.2)
----------------- ------------------ ------------------ ----------------- -----------------
Loans and
borrowings (200.7) 200.7 - - -
----------------- ------------------ ------------------ ----------------- -----------------
Non current
liabilities (200.7) 200.7 - - -
----------------- ------------------ ------------------ ----------------- -----------------
Net assets 103.6 (18.5) 59.1 3.6 147.8
----------------- ------------------ ------------------ ----------------- -----------------
1 Closing current liabilities represents the cash paid by parent
companies to Clyde Windfarm (Scotland) Limited as loans.
Other arrangements
Beatrice Offshore Windfarm Limited has been deemed a joint
venture in the current and previous year as following review of the
shareholders agreement it has been assessed that the Group does not
have rights to the assets, nor obligations for the liabilities,
relating to the company. The Group holds a 40% equity stake at 31
March 2017.
The Group's interest in Greater Gabbard Offshore Winds Limited
is that of a joint operation designed to provide output to the
parties sharing control. The liabilities of the arrangement are
principally met by the parties through the contracts for the output
of the wind farm.
(iv) Lease classification for Smart Meter contracts - Accounting Judgement
Following the disposal of smart meter assets to Meter Fit 10
Limited in the period (see Note 10), the Group has entered into an
agreement for the provision of meter asset provider (MAP) services
with that company. During the year, the Group also entered into a
framework agreement with a joint venture company, Maple Topco
Limited, to provide MAP services for further tranches of smart
meter deployment.
The Group has assessed that both arrangements, in common with
all similar arrangements, do not contain leases due to other
parties taking a significant amount of the output from the meters
and due to the Group being unable to control either the operation
or the physical access to the meters.
(v) Pension scheme surplus restrictions - Accounting Judgement
At 31 March 2016, the value of scheme assets recognised were
impacted by the asset ceiling test which (a) restricts the surplus
that could be recognised to assets that can be recovered through
future refunds or reductions in future contributions to the schemes
and (b) may increase the value of scheme liabilities where there
are minimum funding liabilities in relation to agreed
contributions. IFRIC 14 "IAS 19 - The Limit on a Defined Benefit
Asset, Minimum Funding Requirements and their Interaction"
clarifies that future refunds may be recognised in the assessment
of the asset ceiling if the sponsoring entity has an unconditional
right to a refund in certain circumstances.
During the financial year, the rules of the Scottish Hydro
Electric Pension Scheme ('SHEPS') were amended whereby the Group's
rights to any surplus upon final winding up of the scheme were
clarified. This presented a change in circumstances in that the
'asset ceiling' restriction to the SHEPS surplus is no longer
applicable.
Notes to the Preliminary Statement
for the year ended 31 March 2017
4 Accounting judgements and estimation uncertainty (continued)
4.3 Other areas of estimation uncertainty
(i) Provisions and contingencies
The assessments undertaken in recognising provisions and
contingencies have been made in accordance with IAS 37. Provisions
are calculated based on estimations. The evaluation of the
likelihood of the contingent events has required best judgement by
management regarding the probability of exposure to potential loss.
Should circumstances change following unforeseeable developments,
this likelihood could alter.
(ii) Decommissioning costs
The estimated cost of decommissioning at the end of the useful
lives of certain property, plant and equipment assets is reviewed
periodically and has been reassessed in the year to 31 March 2017.
Decommissioning costs in relation to gas exploration and production
assets are periodically agreed with the field Operators and reflect
the latest expected economic production lives of the fields.
Provision is made for the estimated discounted cost of
decommissioning at the balance sheet date. The dates for settlement
of future decommissioning costs are uncertain, particularly for gas
exploration and production assets where reassessment of gas and
liquids reserves can lengthen or shorten the field life as well as
the upward and downward movement in commodity prices and operating
costs, but are currently expected to be incurred predominantly
between 2017 and 2040.
(iii) Gas and liquids reserves
The volume and production profile of proven and probable (2P)
gas and liquids reserves is an estimate that affects the unit of
production depreciation of producing gas and liquids property,
plant and equipment. This is also a significant input estimate to
the associated impairment and decommissioning calculations. The
estimation of gas and liquid reserves is subject to change between
reporting periods, following the review and updating of inputs such
as regional activity, geological data, reservoir performance data,
well drilling activity, commodity prices and production costs.
Proven and probable (2P) reserves, and other reserve
classifications, can both increase and decrease following
assessment of the inputs.
The estimates of gas and liquid reserves are formally reviewed
on an annual basis using an Independent Reserves Auditor, and the
impact of a change in estimated proven and probable reserves is
dealt with prospectively by depreciating the remaining book value
of producing assets over the expected future production. If proven
and probable reserves estimates are revised downwards, earnings
could be affected by an immediate write-down (impairment) of the
asset's book value or a higher future depreciation expense.
Notes to the Preliminary Statement
for the year ended 31 March 2017
5. Segmental information
The Group's operating segments are those used internally by the
Board to run the business and make strategic decisions. The types
of products and services from which each reportable segment derives
its revenues are:
Business Area Reported Segments Description
-------------- -------------------------------------------------- --------------------------------------------------
Networks Electricity Distribution The economically regulated lower voltage
distribution of electricity to customer premises
in the North of Scotland and the South of England
-------------- -------------------------------------------------- --------------------------------------------------
Electricity Transmission The economically regulated high voltage
transmission of electricity from generating plant
to the distribution network in the North of
Scotland
-------------- -------------------------------------------------- --------------------------------------------------
Gas Distribution SSE's share of Scotia Gas Networks, which
operates two economically regulated gas
distribution
networks in Scotland and the South of England
-------------- -------------------------------------------------- --------------------------------------------------
Retail Energy Supply The supply of electricity and gas to residential
and business customers in the UK and Ireland
-------------- -------------------------------------------------- --------------------------------------------------
Enterprise The integrated provision of services in
competitive markets for industrial and commercial
customers including electrical contracting,
private energy networks, lighting services and
telecoms capacity and bandwidth
-------------- -------------------------------------------------- --------------------------------------------------
Energy-related Services The provision of energy-related goods and
services to customers in the UK including meter
reading and installation, boiler maintenance and
installation and domestic telecoms and broadband
services
-------------- -------------------------------------------------- --------------------------------------------------
Wholesale Energy Portfolio Management (EPM) and Electricity The generation of power from renewable and
Generation thermal plant in the UK and Ireland and the
optimisation
of SSE's power and gas and other commodity
requirements
-------------- -------------------------------------------------- --------------------------------------------------
Gas Storage The operation of gas storage facilities in the UK
-------------- -------------------------------------------------- --------------------------------------------------
Gas Production The production and processing of gas and oil from
North Sea fields
-------------- -------------------------------------------------- --------------------------------------------------
The internal measure of profit used by the Board is 'adjusted
profit before interest and tax' or 'adjusted operating profit'
which is arrived at before exceptional items, the impact of
financial instruments measured under IAS 39, the net interest costs
associated with defined benefit pension schemes and after the
removal of taxation and interest on profits from joint ventures and
associates.
Analysis of revenue and operating profit by segment is provided
below. All revenue and profit before taxation arise from operations
within the UK and Ireland.
(i) Revenue by segment
Intra-
External Intra-segment External segment
revenue revenue Total revenue revenue revenue Total revenue
2017 2017 2017 2016 2016 2016
GBPm GBPm GBPm GBPm GBPm GBPm
Networks
Electricity
Distribution 814.8 259.7 1,074.5 689.0 243.6 932.6
Electricity
Transmission 358.2 0.2 358.4 367.9 - 367.9
1,173.0 259.9 1,432.9 1,056.9 243.6 1,300.5
--------------- --------------- -------------- --------------- --------------- --------------
Retail
Energy Supply 7,252.5 102.1 7,354.6 7,548.3 83.2 7,631.5
Enterprise 371.6 99.5 471.1 455.1 96.6 551.7
Energy-related
Services 119.9 151.0 270.9 118.2 112.9 231.1
--------------- --------------- -------------- --------------- --------------- --------------
7,744.0 352.6 8,096.6 8,121.6 292.7 8,414.3
--------------- --------------- -------------- --------------- --------------- --------------
Wholesale
EPM and
Electricity
Generation 20,009.5 3,198.9 23,208.4 19,525.3 3,780.6 23,305.9
Gas Storage 13.5 280.4 293.9 5.7 214.3 220.0
Gas Production 35.5 235.4 270.9 2.2 144.9 147.1
--------------- --------------- -------------- --------------- --------------- --------------
20,058.5 3,714.7 23,773.2 19,533.2 4,139.8 23,673.0
--------------- --------------- -------------- --------------- --------------- --------------
Corporate
unallocated 62.4 273.9 336.3 69.6 258.9 328.5
--------------- --------------- -------------- --------------- --------------- --------------
Total 29,037.9 4,601.1 33,639.0 28,781.3 4,935.0 33,716.3
--------------- --------------- -------------- --------------- --------------- --------------
Notes to the Preliminary Statement
for the year ended 31 March 2017
5 Segmental information (continued)
(i) Revenue by segment (continued)
Revenue within Energy Portfolio Management and Electricity
Generation includes revenues from generation plant output and the
gross value of all wholesale commodity sales including settled
physical and financial trades. These are entered into to optimise
the performance of the generation plants and to manage the Group's
commodity risk exposure. Purchase trades are included in cost of
sales.
Revenue from the Group's investment in Scotia Gas Networks SSE
share being GBP486.7m (2016 - GBP549.8m) is not recorded in the
revenue line in the income statement.
Revenue by geographical location is as follows:
2017 2016
GBPm GBPm
UK 28,291.3 28,035.4
Ireland 746.6 745.9
--------- ---------
29,037.9 28,781.3
--------- ---------
(ii) Operating profit/(loss) by segment
2017
Exceptional items
Adjusted operating JV/ Associate share Before exceptional and
profit reported to of interest and tax items and certain certain
the Board (i) re-measurements re-measurements Total
GBPm GBPm GBPm GBPm GBPm
Networks
Electricity
Distribution 433.4 - 433.4 - 433.4
Electricity
Transmission 263.7 - 263.7 - 263.7
Gas Distribution 239.4 (108.9) 130.5 21.2 151.7
-------------------- -------------------- ------------------- -------------------- --------
936.5 (108.9) 827.6 21.2 848.8
Retail
Energy Supply 389.5 - 389.5 (76.3) 313.2
Enterprise 16.7 - 16.7 - 16.7
Energy-related
Services 16.1 - 16.1 (36.4) (20.3)
-------------------- -------------------- ------------------- -------------------- --------
422.3 - 422.3 (112.7) 309.6
Wholesale
EPM and Electricity
Generation 501.2 (38.6) 462.6 273.5 736.1
Gas Storage (13.0) - (13.0) (23.8) (36.8)
Gas Production 26.4 - 26.4 (227.5) (201.1)
-------------------- -------------------- ------------------- -------------------- --------
514.6 (38.6) 476.0 22.2 498.2
Corporate
unallocated 0.6 - 0.6 283.3 283.9
-------------------- -------------------- ------------------- -------------------- --------
Total 1,874.0 (147.5) 1,726.5 214.0 1,940.5
-------------------- -------------------- ------------------- -------------------- --------
Notes to the Preliminary Statement
for the year ended 31 March 2017
5 Segmental information (continued)
(ii) Operating profit/(loss) by segment (continued)
2016
Exceptional items
Adjusted operating JV/ Associate share Before exceptional and
profit reported to of interest and tax items and certain certain
the Board (i) re-measurements re-measurements Total
GBPm GBPm GBPm GBPm GBPm
Networks
Electricity
Distribution 370.7 - 370.7 - 370.7
Electricity
Transmission 287.2 - 287.2 - 287.2
Gas Distribution 268.7 (142.0) 126.7 48.6 175.3
-------------------- -------------------- ------------------- -------------------- --------
926.6 (142.0) 784.6 48.6 833.2
Retail
Energy Supply 398.9 - 398.9 - 398.9
Enterprise 40.9 - 40.9 - 40.9
Energy-related
Services 15.4 - 15.4 (17.8) (2.4)
-------------------- -------------------- ------------------- -------------------- --------
455.2 - 455.2 (17.8) 437.4
Wholesale
EPM and Electricity
Generation 436.3 (24.7) 411.6 (586.4) (174.8)
Gas Storage 4.0 - 4.0 (150.9) (146.9)
Gas Production 2.2 - 2.2 (161.8) (159.6)
-------------------- -------------------- ------------------- -------------------- --------
442.5 (24.7) 417.8 (899.1) (481.3)
Corporate
unallocated 0.1 - 0.1 (4.0) (3.9)
-------------------- -------------------- ------------------- -------------------- --------
Total 1,824.4 (166.7) 1,657.7 (872.3) 785.4
-------------------- -------------------- ------------------- -------------------- --------
i) The adjusted operating profit of the Group is reported after
removal of the Group's share of interest, fair value movements on
financing derivatives and tax from joint ventures and associates
and after adjusting for exceptional items (see Note 6). The share
of Scotia Gas Networks Limited interest includes loan stock
interest payable to the consortium shareholders (included in Gas
Distribution). The Group has accounted for its 33% share of this,
GBP12.7m (2016 - 50% share; GBP24.3m), as finance income (Note
7).
The Group's share of operating profit from joint ventures and
associates has been recognised in the Energy Portfolio Management
and Electricity Generation segment other than that for Scotia Gas
Networks Limited, which is recorded in Gas Distribution.
Notes to the Preliminary Statement
for the year ended 31 March 2017
6. Exceptional items and certain re-measurements
2017 2016
GBPm GBPm
Exceptional items
Asset impairments and related charges and credits (376.4) (892.5)
Provisions for restructuring and other liabilities 1.8 (54.9)
-------- --------
(374.6) (947.4)
Net gains on disposals of businesses and other assets
307.3 57.6
Fair value uplift on loss of control of Clyde 59.1 -
(8.2) (889.8)
Share of effect of change in UK corporation tax on deferred tax liabilities and assets of
associate and joint venture investments 19.5 46.7
Total exceptional items 11.3 (843.1)
-------- --------
Certain re-measurements
Movement on operating derivatives (note 14) 201.0 (31.1)
Movement on financing derivatives (note 14) 52.6 14.3
Share of movement on derivatives in jointly controlled entities (net of tax) 1.7 1.9
-------- --------
Total certain re-measurements 255.3 (14.9)
-------- --------
Exceptional items and certain re-measurements before taxation 266.6 (858.0)
-------- --------
Taxation
Effect of change in UK corporation tax rate on deferred tax liabilities and assets 35.4 41.5
Taxation on other exceptional items 118.7 227.6
-------- --------
154.1 269.1
Taxation on certain re-measurements (48.1) 3.4
-------- --------
Taxation 106.0 272.5
-------- --------
Exceptional items after certain re-measurements after taxation 372.6 (585.5)
-------- --------
Exceptional items are disclosed across the following categories within the income statement:
2017 2016
GBPm GBPm
Cost of sales:
Thermal Generation related charges 31.6 (613.4)
Movement on operating derivatives (note 14) 201.0 (31.1)
-------- --------
232.6 (644.5)
Operating costs:
Gas Production related charges (227.5) (161.8)
Gas Storage related charges (23.8) (150.9)
Retail and technology development related charges (120.3) -
Other exceptional provisions and charges (34.6) (21.3)
-------- --------
(406.2) (334.0)
Operating income:
Net gains on disposals of businesses and other assets 307.3 57.6
Fair value uplift on loss of control of Clyde 59.1 -
-------- --------
366.4 57.6
Joint ventures and associates:
Effect of change in UK corporation tax rate on deferred tax liabilities and assets 19.5 46.7
Share of movement on derivatives in jointly controlled entities (net of tax) 1.7 1.9
-------- --------
21.2 48.6
Operating profit/(loss) 214.0 (872.3)
-------- --------
Finance costs
Movement on financing derivatives (note 14) 52.6 14.3
-------- --------
Profit/(loss) before taxation 266.6 (858.0)
-------- --------
Notes to the Preliminary Statement
for the year ended 31 March 2017
6 Exceptional items and certain re-measurements (continued)
6.1 Exceptional items
In the year to 31 March 2017, the Group recognised a net
exceptional charge of GBP8.2m. This consisted of asset impairment
and related charges totalling GBP376.4m, net exceptional credits
for provisions of GBP1.8m, net exceptional gains on disposal of
GBP307.3m (2016: GBP57.6m) and net fair value uplift following loss
of control of Clyde, GBP59.1m (2016: GBPnil). The GBP307.3m gain on
the part disposal of the Group's stake in Scotia Gas Networks is
commented upon at Note 10.
The net exceptional charges excluding gains on disposal
recognised can be summarised as follows:
Property, Plant & Goodwill & Other Inventories Provisions & other Total
Equipment Intangibles GBPm charges GBPm
GBPm GBPm GBPm
Gas Production (i) 244.3 (20.0) - 3.2 227.5
Retail and technology
development (ii) 42.2 78.1 - - 120.3
Gas Storage(iii) 23.8 - - - 23.8
Thermal Generation
(iv) 30.7 - (62.3) - (31.6)
Other (v) 12.0 36.4 - (13.8) 34.6
---------------------- ---------------------- ------------ ---------------------- -------
353.0 94.5 (62.3) (10.6) 374.6
---------------------- ---------------------- ------------ ---------------------- -------
i) Gas Production. Significant impairment charges associated
with the Group's North Sea Gas Production assets have been
recognised in 2016/17. An exceptional charge of GBP180.5m has been
recognised in relation to the Greater Laggan field following a
reduction in the independently assessed quantity of available
proved and probable (2P) hydrocarbon resources. This reserves
re-assessment considered the reserves recognisable under likely
production and took into account reserve shrinkage and contingent
resource increases. In addition, an impairment charge of GBP63.8m
has been recognised in relation to Bacton field assets,
predominantly as a result of higher than previously assessed
decommissioning costs for the field which were deemed to be
irrecoverable through the remaining economic life. Against these
charges, an exceptional credit of GBP20.0m has been recognised in
relation to previously impaired intangible development assets in
the Greater Laggan development area. This followed the
identification of additional prospective resources for that
development which, on a risk adjusted basis, has resulted in the
reversal of prior year exceptional charges. The exceptional charges
recognised in 2016/17 primarily relate to revised assessments of
economic reserves as opposed to the market price driven impairment
charges recognised in 2015/16. Following these charges and credit
and the utilisation of field resources in the year, the residual
value of the Group's gas production assets is GBP679.8m.
ii) Retail and other technology developments. During the year
the Group decided to cease the development of its replacement
customer service and billing system. As a result of this strategic
decision, all amounts capitalised in relation to the development of
the system and related software and hardware have been impaired
with the resulting impact being recognised as an exceptional charge
of GBP83.1m. At the same time, the Group conducted a detailed
review of related technology development projects and identified a
further GBP37.2m of projects development which would be
discontinued. Due to the significant nature of this assessment, a
combined charge of GBP120.3m has been recognised. These impairment
charges are recognised against both intangible development projects
(GBP78.1m) and property, plant and equipment (GBP42.2m).
iii) Gas Storage. During the course of the year management
revised their assessment of the anticipated decommissioning costs
associated with the Aldbrough and Atwick Gas Storage sites. This
concluded that an additional decommissioning provision of GBP23.8m
was required. Due to the ongoing issues at the plants and in common
with previous assessments of those facilities, the consequential
increase in asset values has been impaired. The carrying value of
Gas Storage assets at 31 March 2017 is GBP19.6m, with a discounted
decommissioning provision of GBP41.9m.
iv) Thermal Generation. As part of the Group's impact assessment
of the imminent changes to the Integrated Single Electricity Market
(I-SEM) on the island of Ireland, it reassessed the value-in-use of
its thermal generation portfolio in Ireland. This review concluded
that the Group's oil burning stations at Rhode and Tawnaghmor were
impaired due to their age and future competitive prospects. The
impairment for these assets amounted to GBP30.7m. The residual
value of thermal plants in Ireland is GBP384.4m. In its financial
statements to March 2016, the Group recognised significant
impairments relating to the Fiddlers Ferry power station due to
ongoing uncertainty relating to its future operations despite the
success in securing a contract to provide ancillary capacity
services for one year to March 2017. In the financial year to March
2017 the plant was able to operate more than projected due to
positive dark spread margins being available in winter 2016/17. As
a result of this unexpected running, the plant has been able to
utilise the coal stocks it had previously impaired and has
consequently reversed its previous impairment of inventory creating
an exceptional credit of GBP62.3m in 2016/17. However, in the
context of the low settlement price in the January 2017 capacity
auction for coal plants for 2017/18, the future prospects for the
plant remain uncertain and consequently the net book value of
Fiddler's Ferry remains GBPnil. The carrying value of GB gas-fired
power stations at 31 March 2017 was GBP181.2m.
v) Other. Following reassessment of The Energy Services Group
('ESG)'s deployment within SSE, the Group has concluded that an
impairment adjustment against the goodwill recognised on
acquisition of GBP36.4m is necessary. In addition, the Group has
assessed its position in relation to various legal claims and
disputes. Consequently, a number of exceptional charges (GBP18.2m)
and credits (GBP20.0m) have been recognised. These have been
classified as exceptional due to their previous recognition as such
in previous financial years or based on their characteristics. The
net impact of these items is an exceptional credit of GBP1.8m.
Notes to the Preliminary Statement
for the year ended 31 March 2017
6 Exceptional items and certain re-measurements (continued)
6.1 Exceptional items (continued)
31 March 2016
In the previous financial year, the Group recognised exceptional
charges arising from and related to asset impairments amounting to
GBP892.5m and provisions of GBP54.9m. The exceptional charges
recognised can be summarised as follows:
Property, Goodwill & Total
Plant & Other Impairment
Equipment Intangibles Inventories Other charges related Provisions Total charges
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Coal
Generation 67.6 - 87.9 83.2 238.7 48.3 287.0
Gas Generation 302.5 2.2 3.7 18.0 326.4 - 326.4
Gas Production 125.0 27.2 - 9.6 161.8 - 161.8
Gas Storage 150.9 - - - 150.9 - 150.9
Other - 11.2 - 3.5 14.7 6.6 21.3
------------- ------------- ------------ -------------- ------------ ----------- --------------
646.0 40.6 91.6 114.3 892.5 54.9 947.4
------------- ------------- ------------ -------------- ------------ ----------- --------------
In 2015/16, the Group announced the closure of Ferrybridge and
highlighted significant uncertainty in relation to ongoing
operations at Fiddlers Ferry. These consequently gave rise to
impairment and other charges totalling GBP287.0m. As noted, the
2016/17 operational performance at Fiddler's Ferry outturn was more
positive than previously anticipated and gave rise to certain
impairment reversals. The Group's gas-fired generation plants at
Peterhead, Medway and Marchwood were impaired in 2015/16 due to
difficult economic conditions and factors such as the withdrawal of
support for the proposed carbon capture and storage project at
Peterhead. More broadly, no observable recovery in "spark spread"
margins were forecast. In total, impairment and other charges of
GBP326.4m were recognised in relation to gas generation. No further
deterioration in the values of GB gas plants was observed in the
financial year to 31 March 2017. In 2015/16, impairment charges
totalling GBP161.8m were recognised in relation to the Group's Gas
Exploration and Production assets in the North Sea, predominately
due to declining wholesale gas prices. The exceptionals charges
recognised included an element (GBP121.2m) relating to the
impairment of Greater Laggan field assets acquired at 28 October
2016 which reflected the impact of the decline in expected long
term gas prices between the acquisition date and the financial year
end. The group's gas storage assets at Hornsea (Atwick) and
Aldbrough saw reduced short term price volatility and seasonal
spreads in the wholesale gas market, which created exceptional
charges relating to plant value.
31 March 2015
In the year to 31 March 2015, the Group recognised exceptional
charges arising from and related to asset impairments amounting to
GBP667.5m and provisions of GBP56.0m. The exceptional charges
recognised can be summarised as follows:
Property, Goodwill & Total
Plant & Other Impairment
Equipment Intangibles Inventories Other charges related Provisions Total charges
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Coal
Generation 222.7 - 41.0 45.8 309.5 4.0 313.5
Gas
Generation 14.9 51.5 - - 66.4 10.0 76.4
Gas
Production 61.9 44.1 - 0.1 106.1 - 106.1
Gas Storage 162.4 - - - 162.4 1.5 163.9
Other 16.9 - - 6.2 23.1 40.5 63.6
------------- ------------- ------------ -------------- ------------- ----------- --------------
478.8 95.6 41.0 52.1 667.5 56.0 723.5
------------- ------------- ------------ -------------- ------------- ----------- --------------
The impairments of Coal generation plants followed the 31 July
2015 fire at Ferrybridge and the inability of both units at
Ferrybridge and one unit at Fiddler's Ferry to secure agreements to
provide capacity under the auction process run by DECC in December
2015. The impairments of Gas generation plants predominately
related to development sites at Abernedd and Seabank. The
impairments of Gas Production assets related to the impact of
declining wholesale prices on the Group's Sean, ECA and Lomond
fields. The charges associated with Gas Storage followed the
strategic review of the Group's operations in that segment the
results of which were announced on 26 March 2016. The other charges
mainly relate to asset impairments, other charges in non-core
businesses and provisions for certain disputes and claims. The
exceptional disposal gains recorded related to the sale of seven
street lighting PFI companies to Equitix (GBP38.0m), the Group's
share of the dividend from the Environmental Energy Fund's disposal
of its stake in Anesco (GBP19.6m) and the gain on disposal of
non-core retail assets (GBP17.2m).
Notes to the Preliminary Statement
for the year ended 31 March 2017
6 Exceptional items and certain re-measurements (continued)
6.2 Certain re-measurements
The Group enters into forward commodity purchase (and sales)
contracts to meet the future demand requirements of its Energy
Supply business and to optimise the value of its Generation and
other Wholesale assets. Certain of these contracts are determined
to be derivative financial instruments under IAS 39 and as such are
required to be recorded at their fair value. Changes in the fair
value of those commodity contracts designated as IAS 39 financial
instruments are reflected in the income statement (as part of
'certain re-measurements'). The Group shows the change in the fair
value of these forward contracts separately as this mark-to-market
movement is not relevant to the underlying performance of its
operating segments. The Group will recognise the underlying value
of these contracts as the relevant commodity is delivered, which
will predominately be within the subsequent 12 to 18 months.
Conversely, commodity contracts that are not financial instruments
under IAS 39 are accounted for as 'own use' contracts. The
re-measurements arising from IAS 39 are disclosed separately to aid
understanding of the underlying performance of the Group. This
category also includes the income statement movement on financing
derivatives (and hedged items) as described in note 14.
6.3 Change in UK corporation tax rates
Finance (No.2) Act 2015 which received royal assent on 18
November 2015 enacted a corporation tax rate of 19% (currently 20%)
from 1 April 2017, and a rate of 18% from 1 April 2020. A further
change to reduce the rate of corporation tax to 17% from 1 April
2020 was announced in Finance Act 2016, as this change was enacted
on 15 September 2016 it has the effect of reducing the Group's
deferred tax liabilities by GBP34.6m including the impact of
changes recognised in the statement of other comprehensive
income.
Finance Act 2016 announced a reduction in the rate of
Supplementary Charge on ring-fenced profits to 10% (previously 20%)
with effect from 1 January 2016. As this change was substantively
enacted on 15 September 2016 it has the effect of reducing the
Group's deferred tax liabilities by GBP0.8m.
The Group has separately recognised the tax effect of the
exceptional items and certain re-measurements summarised above.
Notes to the Preliminary Statement
for the year ended 31 March 2017
7. Finance income and costs
2017 2016
Before Before
Exceptional items Exceptional items Exceptional items Exceptional items
and certain and certain and certain and certain
re-measurements re-measurements Total re-measurements re-measurements Total
GBPm GBPm GBPm GBPm GBPm GBPm
Finance income:
Interest income
from short term
deposits 1.8 - 1.8 4.7 - 4.7
Foreign exchange
translation of
monetary assets
and liabilities 20.5 - 20.5 9.0 - 9.0
------------------ ------------------ ------------------ -------- ------------------ ------------------ --------
Other interest
receivable:
Scotia Gas
Networks loan
stock 12.7 - 12.7 24.3 - 24.3
Other joint
ventures and
associates 33.2 - 33.2 18.8 - 18.8
Other receivable 25.5 - 25.5 45.0 - 45.0
------------------ ------------------ ------------------ -------- ------------------ ------------------ --------
71.4 - 71.4 88.1 - 88.1
Total finance
income 93.7 - 93.7 101.8 - 101.8
------------------ ------------------ -------- ------------------ ------------------ --------
Finance costs:
Bank loans and
overdrafts (28.9) - (28.9) (27.9) - (27.9)
Other loans and
charges (275.4) - (275.4) (257.1) - (257.1)
Interest on
pension scheme
liabilities (I) (4.0) - (4.0) (20.4) - (20.4)
Notional interest
arising on
discounted
provisions (14.2) - (14.2) (15.7) - (15.7)
Finance lease
charges (33.1) - (33.1) (34.7) - (34.7)
Less: interest
capitalised (II) 45.4 - 45.4 47.6 - 47.6
Total finance
costs (310.2) - (310.2) (308.2) - (308.2)
------------------ ------------------ -------- ------------------ ------------------ --------
Changes in fair
value of
financing
derivative
assets or
liabilities at
fair value
through
profit or loss - 52.6 52.6 - 14.3 14.3
Net finance costs (216.5) 52.6 (163.9) (206.4) 14.3 (192.1)
------------------ ------------------ -------- ------------------ ------------------ --------
Presented as:
Finance income 93.7 - 93.7 101.8 - 101.8
Finance costs (310.2) 52.6 (257.6) (308.2) 14.3 (293.9)
Net finance costs (216.5) 52.6 (163.9) (206.4) 14.3 (192.1)
------------------ ------------------ -------- ------------------ ------------------ --------
i) The interest on net pension liabilities for the year ended 31
March 2017 of GBP4.0m (2016 - GBP20.4m) represents the respective
charges under IAS 19R.
ii) The capitalisation rate applied in determining the amount of
borrowing costs to capitalise in the period was 4.23% (2016 -
4.24%).
Adjusted net finance costs are arrived at after the following adjustments:
2017 2016
GBPm GBPm
Net finance costs (163.9) (192.1)
(add)/less:
Share of interest from joint ventures and associates:
Scotia Gas Networks loan stock (12.7) (24.3)
Other joint ventures and associates (102.0) (102.5)
-------- --------
(114.7) (126.8)
Interest on pension scheme liabilities 4.0 20.4
Share of interest on net pension liabilities in joint ventures (0.9) 1.9
Movement on financing derivatives (Note 14) (52.6) (14.3)
-------- --------
Adjusted net finance costs (328.1) (310.9)
Notional interest arising on discounted provisions 14.2 15.7
Finance lease charges 33.1 34.7
Hybrid coupon payment (Note 12) (119.3) (124.6)
-------- --------
Adjusted net finance costs for interest cover calculations (400.1) (385.1)
-------- --------
Notes to the Preliminary Statement
for the year ended 31 March 2017
8. Taxation
Analysis of charge recognised in the income statement
Before Exceptional Before Exceptional
Exceptional items items and Exceptional items items and
and certain certain and certain certain
re-measure-ments re-measure-ments 2017 re-measure-ments re-measure-ments 2016
GBPm GBPm GBPm GBPm GBPm GBPm
Current tax
UK corporation tax 188.0 (1.5) 186.5 180.5 (44.2) 136.3
Adjustments in
respect of
previous years (61.1) (9.0) (70.1) (21.2) - (21.2)
------------------ ------------------ ------- ------------------ ------------------ --------
Total current tax 126.9 (10.5) 116.4 159.3 (44.2) 115.1
------------------ ------------------ ------- ------------------ ------------------ --------
Deferred tax
Current year 11.8 (60.1) (48.3) 74.9 (186.8) (111.9)
Effect of change
in tax rate - (35.4) (35.4) - (41.5) (41.5)
Losses carried
forward
recognised 86.4 - 86.4 - - -
Adjustments in
respect of
previous years (61.3) - (61.3) 46.4 - 46.4
------------------ ------------------ ------- ------------------ ------------------ --------
Total deferred tax 36.9 (95.5) (58.6) 121.3 (228.3) (107.0)
------------------ ------------------ ------- ------------------ ------------------ --------
Total taxation
charge 163.8 (106.0) 57.8 280.6 (272.5) 8.1
------------------ ------------------ ------- ------------------ ------------------ --------
Adjusted current tax charge
The adjusted current tax charge is arrived at after the
following adjustments:
2017 2017 2016 2016
GBPm % GBPm %
Group tax charge and effective rate 57.8 3.6 8.1 2.1
Add: reported deferred tax credit and effective rate 58.6 3.7 107.0 27.5
------ ----- ------ -------
Current tax charge and effective rate 116.4 7.3 115.1 29.6
Effect of adjusting items (see below) - 0.2 - (22.0)
------ ----- ------ -------
Current tax charge and effective rate on adjusted basis 116.4 7.5 115.1 7.6
add/(less):
Share of current tax from joint ventures and associates 30.8 2.0 34.1 2.3
Current tax on exceptional items 10.5 0.7 44.2 2.9
------ ----- ------ -------
Adjusted current tax charge and effective rate 157.7 10.2 193.4 12.8
------ ----- ------ -------
The adjusted effective rate is based on adjusted profit before
tax being:
2017 2016
GBPm
Profit before tax 1,776.6 593.3
Add/(less):
Exceptional items and certain re-measurements (266.6) 858.0
Share of tax from joint ventures/associates before exceptional items and certain re-measurements 32.8 39.9
Interest on pension scheme liabilities 4.0 20.4
Share of interest on net pension liabilities in jointly controlled entities and associates (0.9) 1.9
-------- --------
Adjusted profit before tax 1,545.9 1,513.5
-------- --------
Notes to the Preliminary Statement
for the year ended 31 March 2017
9. Dividends
9.1 Ordinary dividends
Year ended 31 Year ended 31
March 2017 Settled via Pence per March 2016 Settled via Pence per
Total scrip ordinary share Total scrip ordinary share
GBPm GBPm GBPm GBPm
Interim - year
ended 31 March
2017 277.1 95.3 27.4 - - -
Final - year
ended 31 March
2016 629.5 142.6 62.5 - - -
Interim - year
ended 31 March
2016 - - - 270.5 16.3 26.9
Final - year
ended 31 March
2015 - - - 613.5 159.5 61.8
906.6 237.9 884.0 175.8
--------------- --------------- --------------- ---------------
The final dividend of 62.5p per ordinary share declared in the
financial year ended 31 March 2016 (2015- 61.8p) was approved at
the Annual General Meeting on 21 July 2016 and was paid to
shareholders on 23 September 2016. Shareholders were able to elect
to receive ordinary shares credited as fully paid instead of the
cash dividend under the terms of the Company's scrip dividend
scheme.
An interim dividend of 27.4p per ordinary share (2016 - 26.9p)
was declared and paid on 17 March 2017 to those shareholders on the
SSE plc share register on 20 January 2017. Shareholders were able
to elect to receive ordinary shares credited as fully paid instead
of the interim cash dividend under the terms of the Company's scrip
dividend scheme.
The proposed final dividend of 63.9p per ordinary share based on
the number of issued ordinary shares at 31 March 2017 is subject to
approval by shareholders at the Annual General Meeting and has not
been included as a liability in these financial statements. Based
on shares in issue at 31 March 2017, this would equate to a final
dividend of GBP649.0m.
9.2 Earnings per Share
(i) Basic earnings per share
The calculation of basic earnings per ordinary share at 31 March
2017 is based on the net profit attributable to ordinary
shareholders and a weighted average number of ordinary shares
outstanding during the year ended 31 March 2017. All earnings are
from continuing operations.
(ii) Adjusted earnings per share
Adjusted earnings per share has been calculated by excluding the
charge for deferred tax, interest on net pension liabilities under
IAS 19R and the impact of exceptional items and certain
re-measurements (Note 6).
Year ended 31 March Year ended 31 March Year ended 31 March Year ended 31 March
2017 2017 2016 2016
Earnings Earnings per share Earnings Earnings per share
GBPm pence GBPm pence
Basic 1,599.5 158.4 460.6 46.1
Exceptional items and
certain
re-measurements (Note
6) (372.6) (36.9) 585.5 58.5
---------------------- ---------------------- ---------------------- ----------------------
Basic excluding
exceptional items and
certain
re-measurements 1,226.9 121.5 1,046.1 104.6
Adjusted for:
Interest on net
pension scheme
liabilities (Note 7) 4.0 0.4 20.4 2.0
Share of interest on
net pension scheme
liabilities in joint
venture (Note 7) (0.9) (0.1) 1.9 0.2
Deferred tax (Note 8) 36.9 3.7 121.3 12.1
Deferred tax from
share of joint
ventures and
associates 2.0 0.2 5.8 0.6
Adjusted 1,268.9 125.7 1,195.5 119.5
---------------------- ---------------------- ---------------------- ----------------------
Basic 1,599.5 158.4 460.6 46.1
Dilutive effect of outstanding share options - (0.2) - (0.1)
------- ----- ----- -----
Diluted 1,599.5 158.2 460.6 46.0
Notes to the Preliminary Statement
for the year ended 31 March 2017
9 Dividends (continued)
9.2 Earnings per share (continued)
(ii) Adjusted earnings per share (continued)
The weighted average number of shares used in each calculation
is as follows:
31 March 2017 31 March 2016
Number of shares Number of shares
(millions) (millions)
For basic and adjusted earnings per share 1,009.7 1,000.0
Effect of exercise of share options 1.4 1.2
----------------- -----------------
For diluted earnings per share 1,011.1 1,001.2
----------------- -----------------
9.3 Dividend cover
The Group's adjusted dividend cover metric is calculated by
comparing adjusted earnings per share to the projected dividend per
share payable to ordinary shareholders.
2017 2017 2017 2016 2016 2016
Earnings per Dividend per Dividend Cover Earning per share Dividend per Dividend cover
share share share
(pence) (pence) (times) (pence) (pence) (times)
Reported 158.4 91.3 1.74 46.1 89.4 0.51
Adjusted 125.7 91.3 1.38 119.5 89.4 1.34
---------------- ----------------- --------------- ----------------- ----------------- ---------------
10. Acquisitions, disposals and held-for-sale assets
10.1 Acquisitions
The Group increased its share in the Dogger Bank Offshore Wind
development on 24 March 2017 following the acquisition of an
additional 12.5% stake from former consortium partner Statkraft for
consideration of GBP15.8m. This takes SSE's share of the project to
37.5%. Following this the Group reversed a previous impairment of
GBP10.7m in respect of the project within other intangible assets.
The Dogger Bank offshore wind development comprises four projects
which are located in the North Sea off the east coast of England
and has a potential generating capacity of up to 4,800MW. Due to
the development being assessed as being a joint operation, the
purchase price has been wholly allocated against intangible
development assets.
10.2 Disposals
(i) Significant disposals
On 26 October 2016, the Group completed the disposal of a 16.7%
equity stake in Scotia Gas Networks (SGN) to wholly owned
subsidiaries of the Abu Dhabi Investment Authority (ADIA). After
transaction costs and adjustments, cash consideration received was
GBP615.1m and an exceptional gain on sale of GBP307.3m was
recognised on disposal. Following the divestment, the Group will
retain a 33.3% equity stake in SGN. These assets were not held for
sale at 31 March 2016. The disposed 16.7% stake of SGN sold
contributed GBP34.2m to the Group's reported profits in the current
financial year.
(ii) Other disposals
On 21 January 2016, the company sold a 10% share in Beatrice
Offshore Windfarm Limited to CI Beatrice I Limited and CI Beatrice
II Limited split equally between the two entities for total
consideration of GBP31.7m of which GBP21.2m was deferred. The
deferred element of the consideration was contingent on certain
events occurring after the balance sheet date. Following
confirmation of those events, in May 2016, the Group received net
cash proceeds of GBP31.7m which also included an element of
deferred consideration associated with a prior divestment
(GBP10.5m). The Group consequently recognised a GBP20.3m gain on
disposal in the current year. This was deemed not to be exceptional
due to the value being below the Group's stated criteria for such
items (see Note 3.2).
On 26 May 2016, the Group disposed of GBP43.5m of smart meter
assets to Meter Fit 10 Limited for cash consideration equal to book
value resulting in nil gain/(loss) on disposal and, at the same
time, entered into a contract with the purchaser for meter asset
services. The assets disposed were held for sale at 31 March
2016.
On 30 March 2017, the Group completed the disposal of its stake
in three Lighting Services PFI joint ventures in Leeds, Stoke and
Newcastle to DIF Infra 4 UK Limited for net consideration of
GBP40.4m, resulting in a gain on sale of GBP2.3m. This was deemed
not to be exceptional due to the value being below the Group's
stated criteria for such items (see Note 3.2). This disposal
reduced the Group's reported net debt by GBP129.4m. These assets
were held for sale at 31 March 2016.
Notes to the Preliminary Statement
for the year ended 31 March 2017
10 Acquisitions, disposals and held-for-sale assets (continued)
10.3 Disposal reconciliation
The following table summarises all businesses and assets
disposed of during the financial year, including those not
previously 'held for sale' and including other assets and
investments disposed of as part of the normal course of business
and which are noted in the relevant respective notes to the
financial statements.
2017 2017 2016
Held for sale at March 2017 Not Held for Sale at March 2017 Total Total
Net assets disposed: GBPm GBPm GBPm GBPm
Property, plant and equipment - 15.5 15.5 44.3
Intangible and biological assets 43.5 - 43.5 11.7
Investments - joint venture and
other - 326.9 326.9 -
Trade and other receivables 104.5 1.3 105.8 1.4
Trade and other payables (0.9) (6.4) (7.3) 28.8
Provisions 16.2 - 16.2 -
Loans and borrowings (90.4) - (90.4) -
Net assets 72.9 337.3 410.2 86.2
---------------------------- -------------------------------- -------- --------
Proceeds of disposal:
Consideration 213.4 672.6 886.0 542.2
Debt reduction (129.4) - (129.4) (23.5)
Non-recourse loan (i) - - - (200.7)
Costs of disposal (6.1) (5.6) (11.7) (5.6)
Provisions (2.8) - (2.8) -
Net proceeds 75.1 667.0 742.1 312.4
---------------------------- -------------------------------- -------- --------
-
---------------------------- -------------------------------- -------- --------
Gain on disposal after provisions 2.2 329.7 331.9 226.2
---------------------------- -------------------------------- -------- --------
Presentation:
Equity - - - 138.6
Income statement exceptional
credit - 307.3 307.3 57.6
Income statement non exceptional
credit 2.2 22.4 24.6 30.0
---------------------------- -------------------------------- -------- --------
2017 2016
GBPm GBPm
Net proceeds of disposal 742.1 312.4
Provisions (2.8) -
------ ------
Proceeds of disposal per cash flow statement 739.3 312.4
Cash from Clyde transaction recorded as New Borrowings in cash flow statement - 200.7
------ ------
Total cash proceeds 739.3 513.1
------ ------
The debt reduction items GBP129.4m (2016- GBP23.5m) are
associated with the disposal of PFI Lighting Services
companies.
(i) Due to the consolidation, at 31 March 2016, of Clyde
Windfarm (Scotland) Limited, the Group required to recognise
GBP200.7m of non-recourse borrowings due from Clyde to other
shareholders. Consequently, this balance was excluded from adjusted
net debt and hybrids at that date with cash proceeds from the Clyde
transaction being presented gross. The change in consolidation
status of Clyde from 13 May 2016 means that this presentation is
not applicable to the 31 March 2017. Further commentary is provided
at Note 4.2 (iii).
Notes to the Preliminary Statement
for the year ended 31 March 2017
10 Acquisitions, disposals and held-for-sale assets (continued)
10.4 Held-for-sale assets and liabilities
A number of assets and liabilities associated with activities
are deemed available for immediate sale and have been separately
presented on the face of the balance sheet at 31 March 2017. The
assets have been stated at their fair value less costs to sell.
The assets and liabilities classified as held for sale, and the
comparative balances at 31 March 2017, are as follows:
2017 2016
GBPm GBPm
Property plant and equipment 63.6 -
Other intangible - 27.9
Derivative financial assets 2.7 -
Non-current assets 66.3 27.9
----- -------
Trade and other receivables - 106.3
Derivative financial assets 4.1 -
Current assets 4.1 106.3
----- -------
Total assets 70.4 134.2
----- -------
Loans and borrowings - (11.2)
Trade and other payables - (5.9)
Current liabilities - (17.1)
----- -------
Loans and borrowings - (97.9)
Deferred tax liabilities (1.4) -
Non-current liabilities (1.4) (97.9)
----- -------
Total liabilities (1.4) (115.0)
----- -------
Net assets 69.0 19.2
----- -------
The Group has recognised GBP14.3m of operating wind farm assets
as held for sale at 31 March 2017. The other held for sale items
relate to 50% of the assets and liabilities of Ferrybridge MFE 2
Limited. This subsidiary is responsible for the development of a
70MW multi fuel power plant situated close to the Group's operating
multi fuel joint venture at Ferrybridge. SSE currently owns 100% of
Ferrybridge MFE 2 Limited but has a contractual agreement, subject
to various contingent matters, to dispose of 50% of the share
capital of the company to the joint venture partner of the initial
multi fuel facility. This transaction is anticipated to take place
within the next year.
The aggregated pre-tax profit contribution of the held for sale
assets and businesses in the year to 31 March 2017 was GBPnil
(2016: GBP1.8m).
During the prior items held for sale related to the remaining
streetlighting activities of the group, these assets were sold
during March 2017. Other assets held for sale were smart meter
assets, these were sold to Meter Fit 10 Limited in April 2016.
10.5 Acquisitions and disposals in the previous year
(i) Acquisitions in the previous year
On 28 October 2016, the Group through its wholly owned
subsidiary, SSE E&P UK Limited, acquired a 20% interest in the
four gas fields known as the Greater Laggan Area, along with a 20%
interest in the Shetland Gas Terminal, from Total E&P UK
Limited. The cash consideration paid for the business was
GBP669.0m.
Notes to the Preliminary Statement
for the year ended 31 March 2017
10 Acquisitions, disposals and held-for-sale assets (continued)
10.6 Disposals in the previous year
On 29 October 2015, the Group agreed to sell its shareholding in
Galloper Wind Farm to its co-venturer RWE Innogy for cash
consideration of GBP18.3m. The gain on the disposal of GBP18.3m was
recorded as an exceptional item. On 28 May 2015, the Group also
agreed to sell three onshore wind development sites (Cour,
Blackcraig, Whiteside Hill, 98MW) to Blue Energy. Total
consideration for these assets was GBP52.4m. Consequently, an
exceptional gain on disposal of GBP39.3m was recorded.
On 18 March 2016, the Group sold a 49.9% stake in its wholly
owned operational 349.6MW Clyde Wind Farm to Greencoat UK Wind
Holdco Limited ("UKW") and GLIL Corporate Holdings Limited("GLIL")
for cash consideration of GBP339.2 million after costs. At 31 March
2016, the stake held by the co-investors was deemed to be that of a
non-controlling interest in an entity under the Group's control
.This key accounting judgement is explained at note 4.2 (iii). The
consequence of that judgement was that the gain recorded on
disposal of GBP138.6m was recognised directly in equity instead of
in the income statement and the non-recourse to SSE loans in the
entity required to be recorded on the Group balance sheet.
Following amendments to the shareholders agreements between SSE,
UKW and GLIL on 13 May 2016, SSE changed it's accounting of Clyde
Windfarm to an equity accounted joint venture.
11. Sources of finance
11.1 Capital management
The Board's policy is to maintain a strong balance sheet and
credit rating so as to support investor, counterparty and market
confidence in the Group and to underpin future development of the
business. The Group's credit ratings are also important in
maintaining an efficient cost of capital and in determining
collateral requirements throughout the Group. As at 31 March 2017,
the Group's long term credit rating was A- negative outlook for
Standard & Poor's and A3 stable outlook for Moody's.
The maintenance of a medium-term corporate model is a key
control in monitoring the development of the Group's capital
structure, and allows for detailed scenarios and sensitivity
testing. Key ratios drawn from this analysis support and inform
regular updates to the Board and include the ratios used by the
rating agencies in assessing the Group's credit ratings.
The Group has the option to purchase its own shares from the
market. The timing of these purchases will depend on market prices
and economic conditions. As part of the utilisation of the proceeds
from its disposal of a 16.7% stake in Scotia Gas Networks, the
Group had announced on 11 November 2016 that it would commence a
discretionary programme to purchase its shares for cancellation or
to be held in treasury. This programme commenced on 11 November
2016 and is due to complete no later than 31 December 2017. The
aggregate purchase price of all shares acquired under the programme
will be no greater than GBP500.0m and no more than 100,759,681
shares. The purpose of the programme is to reduce the share capital
of the Company. As at 31 March 2017, the Group had completed the
on-market repurchase and cancellation of 8.9million of its shares
in the period to 31 March 2017 for total cash outlay of GBP131.5m.
See further detail within Note 12.
The Group's debt requirements are principally met through
issuing bonds denominated in Sterling and Euros as well as private
placements and medium term bank loans including those with the
European Investment Bank. In the financial year the group received
GBP501m relating to a US private placement which was signed ahead
of the 31 March 2016 year end. Also during the financial year, the
Group issued hybrid securities which bring together features of
both debt and equity of GBP1.0bn. As these securities have a fixed
redemption date these are accounted for as debt. The securities are
different from the hybrid securities previously issued which were
perpetual and subordinate to all senior creditors and which are
accounted for as equity.The Group currently has GBP1.7bn of
committed bank facilities of which GBP1.5bn relates to the Group's
revolving credit and bilateral facilities that can be accessed at
short notice for use in managing the Group's short term funding
requirements however these committed facilities remain undrawn for
the majority of the time. The remaining GBP0.2bn relates to a new
EIB facility that was signed in March 17 with a 12 month drawing
period that, once drawn, will convert
to being a 10 year term loan. The Group's capital comprises:
2017 2016
GBPm GBPm
Total borrowings (excluding finance leases) 7,805.5 6,868.0
Less : Cash and cash equivalents (1,427.0) (360.2)
---------- ---------
Net debt (excluding hybrid equity) 6,378.5 6,507.8
Hybrid equity 2,209.7 2,209.7
Cash held as collateral and other short term loans (105.2) (121.8)
Balances due to non-controlling interest partners in Clyde Windfarm (Scotland) Ltd - (200.7)
---------- ---------
Adjusted Net Debt and Hybrids 8,483.0 8,395.0
Equity attributable to shareholders of the parent 4,062.8 2,984.8
---------- ---------
Total capital excluding finance leases 12,545.8 11,379.8
---------- ---------
In summary, the Group's intent is to balance returns to
shareholders between current returns through dividends and
long-term capital investment for growth. In doing so, the Group
will maintain its capital discipline and will continue to operate
within the current economic environment prudently. There were no
changes to the Group's capital management approach during the
year.
Notes to the Preliminary Statement
for the year ended 31 March 2017
11 Sources of finance (continued)
11.2 Loans and borrowings
2017 2016
GBPm GBPm
Current
Other short-term loans 118.8 898.8
Obligations under finance leases 23.6 24.5
------ ------
142.4 923.3
------ ------
Non current
Loans 7,686.7 5,969.2
Obligations under finance leases 253.3 276.3
7,940.0 6,245.5
-------- --------
Total loans and borrowings 8,082.4 7,168.8
Add:
Cash and cash equivalents (1,427.0) (360.2)
---------- --------
Unadjusted Net Debt 6,655.4 6,808.6
Add/(less):
Hybrid equity (Note 12) 2,209.7 2,209.7
Obligations under finance leases (276.9) (300.8)
Cash held as collateral and other short term loans (105.2) (121.8)
Balances due to non-controlling interest partners in Clyde Windfarm (Scotland) Limited - (200.7)
---------- --------
Adjusted Net Debt and Hybrid Capital 8,483.0 8,395.0
---------- --------
Cash and cash equivalents (which are presented as a single class
of assets on the face of the balance sheet) comprise cash at bank
and short term highly liquid investments with a maturity of six
months or less. The cash and cash equivalents are higher year on
year due to the early refinancing of GBP1.0bn Hybrids in October
17.
Borrowing facilities
The Group has an established EUR1.5bn Euro commercial paper
programme (paper can be issued in a range of currencies and swapped
into sterling) and as at 31 March 2017 no commercial paper was
outstanding (2016 - GBP198.8m). During the year the Group extended
its existing GBP1.5bn revolving credit and bilateral facilities by
invoking the one year extension options with the facilities now
maturing in August 2021 (GBP1.3bn) and November 2021 (GBP0.2bn).
These facilities continue to provide back up to the commercial
paper programme and, as at 31 March 2017, they were undrawn. The
Group has a further GBP200m facility available with the European
Investment Bank which will be fully drawn during 2017 when it will
become a 10 year term loan.
Hybrid Debt
On 16 March 2017, the Group issued GBP1.0bn of new hybrid debt
securities. Those hybrid equity securities have an issuer first
call date on 1 October 2017 and are able to be redeemed at the
Group's discretion. This dual tranche issue comprises GBP300m with
a coupon of 3.625% and $900m with a coupon of 4.75%. The $900m
tranche has been swapped back to both Euros and Sterling, bringing
the all-in rate down to 2.72% and resulting in an all-in funding
cost for both tranches to SSE of 3.02% per annum. This compares
favourably to the all-in funding cost of 4.02% achieved on SSE's
most recent Hybrid equity securities issued in 2015. The intent is
to use the proceeds to replace SSE's hybrid issued in 2012 (at an
all-in rate of 5.6%), which has an issuer first call date on 1
October 2017. Due to the hybrids having a fixed redemption date,
they have been accounted for as a debt item and are included within
Loans and Other Borrowings in the table above. This is in contrast
to the previous Hybrid issues which have no fixed redemption date
and are accounted for as Equity, see Note 12.
Notes to the Preliminary Statement
for the year ended 31 March 2017
12. Equity
12.1 Share capital
Number
(millions) GBPm
Allotted, called up and fully paid:
At 31 March 2016 1,007.6 503.8
Issue of shares (i) 16.9 8.5
Shares repurchased (ii) (8.9) (4.5)
------------ ------
At 31 March 2017 1,015.6 507.8
------------ ------
The Company has one class of ordinary share which carries no
right to fixed income. The holders of ordinary shares are entitled
to receive dividends as declared and are entitled to one vote per
share at meetings of the Company.
i. Shareholders were able to elect to receive ordinary shares in
place of the final dividend of 62.5p per ordinary share (in
relation to year ended 31 March 2016) and the interim dividend of
27.4p (in relation to the current year) under the terms of the
Company's scrip dividend scheme. This resulted in the issue of
9,395,092 and 6,324,986 new fully paid ordinary shares respectively
(2016: 10,600,639 and 1,172,973). In addition, the Company issued
1.2m (2016 - 2.8m) shares during the year under the savings-related
share option schemes for a consideration of GBP13.8m (2016 -
GBP25.0m)
ii. During the current financial year the company began a
programme of share repurchases 8.9m shares were repurchased for
total consideration of GBP131.5m. The programme was announced on 11
November 2016 and the Group plan to continue this activity until
December 2017. The nominal value of share capital repurchased and
cancelled is transferred out of share capital and into the capital
redemption reserve.
During the year, on behalf of the Company, the employee share
trust purchased 0.8m shares for a total consideration of GBP12.6m
(2016 - 0.8m shares, consideration of GBP11.1m). At 31 March 2017,
the trust held 2.9m shares (2016 - 3.0m) which had a market value
of GBP42.5m (2016 - GBP45.5m).
12.2 Hybrid Equity
2017 2016
GBPm GBPm
USD 700m 5.625% perpetual subordinated capital securities 427.2 427.2
EUR 750m 5.625% perpetual subordinated capital securities 598.2 598.2
GBP 750m 3.875% perpetual subordinated capital securities 748.3 748.3
EUR 600m 2.375% perpetual subordinated capital securities 436.0 436.0
-------- --------
2,209.7 2,209.7
-------- --------
(i) 18 September 2012 EUR750m and US$700m Hybrid Equity Bonds
Each bond has no fixed redemption date but the Company may, at
its sole discretion, redeem all, but not part, of these capital
securities at their principal amount. The date for the
discretionary redemption of the capital issued on 18 September 2012
is 1 October 2017 and every five years thereafter. The Group
anticipate that proceeds from the 16 March 2017 issuance of hybrid
debt securities will be utilised in the discretionary redemption of
both 2012 bonds.
For the EUR750m capital issued on 18 September 2012, coupon
payments are expected to be made annually in arrears on 1 October
in each year. For the US$700m capital issued on 18 September 2012,
coupon payments are expected to be made bi-annually in arrears on 1
April and 1 October each year.
(ii) 10 March 2015 GBP750m and EUR600m Hybrid Equity Bonds
On 10 March 2016, the Company issued GBP750m and EUR600m hybrid
equity bonds with no fixed redemption date, but the Company may, at
its sole discretion, redeem all, but not part, of the capital
securities at their principal amount. The date for the first
potential discretionary redemption of the GBP750m hybrid equity
bond is 10 September 2020 and then these can occur every 5 years
thereafter. The date for the first discretionary redemption of the
EUR600m hybrid equity bond is 1 April 2021 and then these can occur
every 5 years thereafter. The purpose of the outstanding issues was
to strengthen SSE's capital base and fund the Group's ongoing
capital investment and acquisitions.
For the GBP750m hybrid equity bond issued on 10 March 2015 the
first coupon payment was made on 10 September 2016 and are expected
to be made annually in arrears thereafter, and for the EUR600m
hybrid equity bond issued on 10 March 2015, the first coupon
payment was made on 1 April 2016 and expected to be made annually
in arrears thereafter.
Notes to the Preliminary Statement
for the year ended 31 March 2017
12 Equity (continued)
(iii) Coupon Payments
Coupon payments in relation to the $700m hybrid equity bond were
paid on 1 April 2016 and 1 October 2016 totalling GBP23.3m (2016 -
GBP24.9m). A coupon payment of GBP33.6m (2016 - GBP36.2m) in
relation to the EUR750m hybrid equity bond was paid on 1 October
2016.
For the EUR600m hybrid equity bond the first coupon payment of
GBP18.6m was paid on 1 April 2016 and for the GBP750m hybrid equity
bond the first coupon payment of GBP43.8m was paid on 10 September
2016, both were for first long coupon periods from 10 March
2016.
The Company has the option to defer coupon payments on the bonds
on any relevant payment date, as long as a dividend on the ordinary
shares has not been declared. Deferred coupons shall be satisfied
only in the following circumstances, all of which occur at the sole
option of the Company:
-- redemption; or
-- dividend payment on ordinary shares.
Interest will accrue on any deferred coupon.
13. Retirement Benefit Obligations
13.1 Valuation of combined Pension Schemes
Long- term rate of return Value Long- term rate of return Value
expected at 31 March 2017 at 31 March 2017 expected at 31 March 2016 at 31 March 2016
% GBPm % GBPm
Equities 5.5 1,203.9 5.5 1,049.6
Government bonds 0.0 1,079.9 1.2 1,001.7
Corporate bonds 2.7 1,288.6 3.0 1,069.7
Insurance contracts 2.7 221.3 - -
Other investments 3.4 591.9 1.7 581.9
Total fair value of plan
assets 4,385.6 3,702.9
Present value of defined
benefit obligation (4,315.1) (3,835.0)
----------------- -----------------
Pension asset/(liability)
before IFRIC 14 70.5 (132.1)
IFRIC 14 liability (i) - (262.7)
Surplus/(deficit) in the
schemes 70.5 (394.8)
Deferred tax thereon (ii) (106.6) 71.0
----------------- -----------------
Net pension liability
(iii) (36.1) (323.8)
----------------- -----------------
(i) The IFRIC 14 adjustment represents the restriction on the
Group's ability to recognises scheme surplus under the 'asset
ceiling' test. The application of this adjustment changed in the
current year following a change to scheme rules (see note
4.2(v)).
(ii) Deferred tax rate of 35% applied to pension surpluses,
whilst 17% applied to pension deficits.
(iii)The two pensions schemes of the group, Scottish Hydro
Electric pension scheme and the Southern Electric pension scheme
are in individual in net asset and liability positions
respectively, and as such these positions have been presented
separately on the balance sheet, see below
Balance Sheet presentation
2017 Balance sheet presentation 2016
GBPm GBPm
Retirement benefit asset 525.4 -
Retirement benefit liability (454.9) (394.8)
-------------------------- -------------------------------
Net pension asset/(liability) 70.5 (394.8)
-------------------------- -------------------------------
Notes to the Preliminary Statement
for the year ended 31 March 2017
13 Retirement Benefit Obligations (continued)
Movements in the defined benefit asset obligations and assets
during the year:
2017 2016
Assets Obligations (i) Total Assets Obligations (i) Total
GBPm GBPm GBPm GBPm GBPm GBPm
at 1 April 3,702.9 (3,835.0) (132.1) 3,751.0 (4,209.1) (458.1)
Included in Income Statement
Current service cost - (50.9) (50.9) - (61.8) (61.8)
Past service cost - (13.6) (13.6) - (4.3) (4.3)
Interest income/(cost) 130.9 (134.9) (4.0) 121.2 (134.9) (13.7)
-------- ---------------- -------- -------- ---------------- --------
130.9 (199.4) (68.5) 121.2 (201.0) (79.8)
-------- ---------------- -------- -------- ---------------- --------
Included in Other Comprehensive Income
Actuarial (loss)/gain arising from:
Demographic assumptions - 259.6 259.6 - 48.0 48.0
Financial assumptions - (807.9) (807.9) - 277.4 277.4
Experience assumptions - 31.4 31.4 - 101.5 101.5
Return on plan assets excluding interest
income 675.5 - 675.5 (123.1) - (123.1)
675.5 (516.9) 158.6 (123.1) 426.9 303.8
-------- ---------------- -------- -------- ---------------- --------
Other
Contributions paid by the employer 112.5 - 112.5 102.0 - 102.0
Scheme participants contributions 0.2 (0.2) - 0.3 (0.3) -
Benefits paid (236.4) 236.4 - (148.5) 148.5 -
-------- ---------------- -------- -------- ---------------- --------
(123.7) 236.2 112.5 (46.2) 148.2 102.0
-------- ---------------- -------- -------- ---------------- --------
Balance at 31 March 4,385.6 (4,315.1) 70.5 3,702.9 (3,835.0) (132.1)
-------- ---------------- -------- -------- ---------------- --------
I) The IFRIC 14 adjustment represents the restriction on the
Group's ability to recognises scheme surplus under the 'asset
ceiling' test. The application of this adjustment changed in the
current year following a change to scheme rules (see note
4.2(v)).
Charges / (credits) recognised:
2017 2016
GBPm GBPm
Current service cost (charged to operating profit) 64.5 66.1
-------- --------
64.5 66.1
-------- --------
(Credited)/charged to finance costs:
Interest on pension scheme assets (130.9) (121.2)
Interest on pension scheme liabilities 134.9 134.9
IFRIC 14 impact on net interest - 6.7
-------- --------
4.0 20.4
-------- --------
Notes to the Preliminary Statement
for the year ended 31 March 2017
14. Financial risk management
14.1 Financial risk management
The Board has overall responsibility for the establishment and
oversight of the Group's risk management framework. The Risk
Committee in the Wholesale and Retail divisions, both of, which
report directly to the Executive Committee to support the Group's
risk management responsibilities by reviewing the strategic,
market, credit operational and liquidity risks and exposures that
arise from the Group's energy portfolio management, generation,
energy supply and treasury operations. The Risk Committee's of
Wholesale and Retail are designed to ensure strict business
separation requirements are maintained.
The Group's policies for risk management are established to
identify the risks faced by the Group, to set appropriate risk
limits and controls, and to monitor risks and adherence to limits.
These policies, and the systems used to monitor activities, are
reviewed regularly by the Risk Committee's in Wholesale and
Retail.
Exposure to the commodity, currency and interest rate risks
noted arise in the normal course of the Group's business and
derivative financial instruments are entered into to hedge exposure
to these risks. The objectives and policies for holding or issuing
financial instruments and similar contracts, and the strategies for
achieving those objectives that have been followed during the year
are explained below .
For financial reporting purposes, the Group has classified
derivative financial instruments into two categories, operating
derivatives and financing derivatives. Operating derivatives relate
to qualifying commodity contracts which includes certain contracts
for electricity, gas, oil, coal and carbon. Financing derivatives
include all fair value and cash flow interest rate hedges,
non-hedge accounted (mark-to-market) interest rate derivatives,
cash flow foreign exchange hedges and non-hedge accounted foreign
exchange contracts. Non-hedge accounted contracts are treated as
held for trading.
The net movement reflected in the interim income statement can
be summarised thus:
2017 2016
GBPm GBPm
Operating derivatives
Total result on operating derivatives (i) (438.6) (1,375.4)
Less: amounts settled (ii) 639.6 1,344.3
------- ---------
Movement in unrealised derivatives 201.0 (31.1)
------- ---------
Financing derivatives (and hedged items)
Total result on financing derivatives (i) (136.3) (214.9)
Less: amounts settled (ii) 188.9 229.2
------- ---------
Movement in unrealised derivatives 52.6 14.3
------- ---------
Net income statement impact 253.6 (16.8)
------- ---------
(i) Total result on derivatives in the income statement
represents the total amounts (charged) or credited to the income
statement in respect of operating and financial derivatives.
(ii) Amounts settled in the year represent the result on
derivatives transacted which have matured or been delivered and
have been included within the total result on derivatives.
Notes to the Preliminary Statement
for the year ended 31 March 2017
14 Financial risk management (continued)
14.2 Fair Value Hierarchy
The following table provides an analysis of financial
instruments that are measured subsequent to initial recognition at
fair value, grouped into Levels 1 to 3 based on the degree to which
the fair value is observable.
-- Level 1 fair value measurements are those derived from
unadjusted quoted market prices for identical assets or
liabilities.
-- Level 2 fair value measurements are those derived from inputs
other than quoted prices included within level 1 that are
observable for the asset or liability, either directly (i.e. as
prices) or indirectly (i.e. derived from prices)
-- Level 3 fair value measurements are those derived from
valuation techniques that include inputs for the asset or liability
that are not based on observable market data.
Level 1 Level 2 Level 3 Total
Financial Assets GBPm GBPm GBPm GBPm
Energy derivatives 335.9 943.9 - 1,279.8
Interest rate derivatives - 471.8 - 471.8
Foreign exchange derivatives - 46.2 - 46.2
Equity investments - 12.5 - 12.5
-------- ---------- -------- ----------
335.9 1,474.4 - 1,810.3
-------- ---------- -------- ----------
Financial Liabilities
Energy derivatives (341.9) (1,101.2) - (1,443.1)
Interest rate derivatives - (403.5) - (403.5)
Foreign exchange derivatives - (9.8) - (9.8)
Loans and Borrowings - 257.4 - 257.4
-------- ---------- -------- ----------
(341.9) (1,257.1) - (1,599.0)
-------- ---------- -------- ----------
There were no significant transfers out of level 1 into level 2
and out of level 2 into level 1 during the year ended 31 March
2017.
15. Capital commitments
2017 2016
GBPm GBPm
Capital expenditure:
Contracted for but not provided 949.0 898.4
----- -----
Contracted for, but not provided capital commitments, include
the fixed contracted costs of the Group's major capital projects.
In practice, contractual variations may arise on the final
settlement of these contractual costs.
Notes to the Preliminary Statement
for the year ended 31 March 2017
16. Related party transactions
The following transactions took place during the year between
the Group and entities which are related to the Group but which are
not members of the Group. Related parties are defined as those in
which the Group has control, joint control or significant influence
over.
2017 2017 2017 2017 2016 2016 2016 2016
Purchase
Sale of Purchase of
goods Of Amounts Amounts Sale of goods
and goods and owed owed goods and and Amounts Amounts
services services from to services services owed from owed to
Joint
ventures: GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Seabank
Power Ltd 11.0 (134.0) 0.1 17.0 13.7 (125.8) - 18.2
Marchwood
Power Ltd 16.8 (144.5) 0.5 12.6 12.7 (108.7) 0.1 15.5
Scotia Gas
Networks
Ltd 45.5 (158.0) 0.9 0.9 46.3 (155.8) 15.9 0.9
Clyde
Windfarm
(Scotland)
Ltd 5.7 (0.1) - 11.1 - - - -
Other Joint
Ventures 10.4 - 2.3 - 8.1 (1.2) 8.4 -
----------- ----------- ------------ ------------ ----------- ----------- ----------- -----------
Associates 1.4 (53.4) 3.6 3.9 0.5 (59.7) 2.4 3.9
----------- ----------- ------------ ------------ ----------- ----------- ----------- -----------
The transactions with Seabank Power Limited and Marchwood Power
Limited relate to the contracts for the provision of energy or the
tolling of energy under power purchase arrangements. Scotia Gas
Networks Limited has operated the gas distribution networks in
Scotland and the South of England from 1 June 2005. The Group's gas
supply activity incurs gas distribution charges while the Group
also provides services to Scotia Gas Networks in the form of a
management service agreement for corporate services, stock
procurement services and the provision of the capital expenditure
on the development of front office management information
systems.
The amounts outstanding are trading balances, are unsecured and
will be settled in cash. No guarantees have been given or received.
No provisions have been made for doubtful debts in respect of the
amounts owed by related parties.
This information is provided by RNS
The company news service from the London Stock Exchange
END
FR DGGDUXDBBGRL
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May 17, 2017 02:00 ET (06:00 GMT)
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