TIDMSSE
RNS Number : 2670P
SSE PLC
25 May 2018
SSE plc
Preliminary results for the year to 31 March 2018
25 May 2018
This report sets out the preliminary results for SSE plc for the
year to 31 March 2018. It includes updates on operations and
investments in its Wholesale, Networks and Retail (including
Enterprise) businesses.
Overview of 2017/18
SSE's financial highlights for the year to 31 March 2018 are set
out below and are in line with its Notification of Closed Period
statement of 29 March 2018, with adjusted earnings per share ahead
of expectations at the start of the financial year. Comparisons are
with the previous financial year unless otherwise stated.
-- Recommended full-year dividend up 3.7% to 94.7p;
-- Adjusted earnings per share down 3.6% to 121.1p;
-- Adjusted operating profit down 2.4% to GBP1,828.7m#;
-- Adjusted profit before tax down 6.0% to GBP1,453.2m;
-- Net exceptional charges of GBP213.3m;
-- Investment and capital expenditure down 12.9% to GBP1,503.0m;
-- Adjusted net debt and hybrid capital up 8.7% to GBP9.2bn at 31 March 2018;
-- Reported operating profit down 28.9 % to GBP1,379.2m;
-- Reported profit before tax down 38.9% to GBP1,086.2m; and
-- Reported earnings per share down 48.7% to 81.3p.
# Follows sale by SSE of 16.7% stake in SGN in October 2016.
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
Key developments in 2018/19
In its Notification of Close Period statement on 29 March, SSE
said that the 2018/19 financial year is expected to be one of
transition for the SSE group. Key developments are expected to
include:
-- The planned transaction* relating to SSE's GB household
energy supply and services business (now named SSE Energy
Services), subject to approvals, which remains on track for
completion in the last quarter of 2018 or the first quarter of
2019. SSE shareholders will retain their existing SSE shares and
will also hold one share in the newly-listed business for every
existing SSE share they hold at demerger record date; and from that
point, SSE will no longer derive cash flow or earnings from
supplying energy and services to households in GB.
-- The expected enactment later this year of the Domestic Gas
and Electricity (Tariff Cap) Bill and subsequent introduction of a
temporary cap on the price of standard variable and default
electricity and gas tariffs. It is intended to be in place for the
winter of 2018/19.
*See: Important note: planned SSE Energy Services transaction
above
Outlook for 2018/19 to 2022/23
SSE's strategy is to create value for shareholders and society
from developing, owning and operating energy and related
infrastructure and services in a sustainable way, and at its core
will be regulated energy networks and renewable energy.
The financial objective of this strategy is to remunerate
shareholders' investment through the payment of dividends. SSE
believes that its dividends should be sustainable, based on the
quality and nature of its assets and operations, the earnings
derived from them and the longer-term financial outlook.
In line with this, taking account of the impact of the expected
key developments in 2018/19, and reflecting the underlying quality
and value of its assets and earnings and the cash flows they
deliver, SSE's plan for the dividend for the five years to 2023 is
as follows:
-- For 2018/19, SSE is intending to recommend a full-year
dividend of 97.5 pence per share, an increase of 3% on 2017/18,
which is broadly in line with expectations for RPI inflation. This
provides clarity in a year of transition and is not subject to the
timing of either the SSE Energy Services transaction or the
Domestic Gas and Electricity (Tariff Cap Bill).
-- For 2019/20, SSE is planning to set the first
post-transaction dividend at 80.0 pence per share, which reflects
the impact of the changes in the SSE group expected to take effect
by then. This provides a sustainable basis for future dividend
growth.
-- For 2020/21, 2021/22 and 2022/23 SSE is targeting annual
increases in the full-year dividend that at least keep pace with
RPI inflation. This reflects SSE's confidence in the quality and
value of its assets and earnings and cash flows they deliver.
This plan for the dividend for the five years to March 2023,
when the current electricity distribution Price Control comes to an
end, supersedes SSE's previous reference to a dividend cover range
and is a plan which:
-- Aims to provide shareholders with certainty in 2018/19, a year of transition for SSE;
-- Reflects the changes in the SSE group expected to take effect
by the start of the 2019/20 financial year; and
-- Sets the dividend on a path for sustainable growth for the three years from 2020.
SSE intends to retain a Scrip dividend scheme but where take-up
of the full-year dividend exceeds 20%, SSE now intends to buy back
shares so the dilutive effect of the Scrip is limited.
In addition to the dividend plan above, subject to the necessary
approvals being secured, the transaction relating to SSE Energy
Services announced on 8 November means shareholders in SSE will
receive one share in the planned new independent energy supply and
services company for every one SSE share they hold at the demerger
record date.
Continuing to invest in assets and infrastructure
Over the five years to March 2023, and based on existing plans,
SSE expects its capital and investment expenditure to total around
GBP6bn.
Around 70% of the total capex and investment forecast is
expected to be related to regulated electricity networks and
renewable sources of energy; it also includes GBP350m investment in
a new highly efficient and flexible 840MW gas-fired power station
at Keadby in Lincolnshire (Keadby '2').
In the first of the five years, 2018/19, capital and investment
expenditure is forecast to be around GBP1.7bn. SSE currently
expects its adjusted net debt and hybrid capital to peak at around
GBP10bn and to fall back towards GBP9bn by 2023.
Contributing to the UK and Irish economies
SSE's wider economic contribution is substantially larger than
the profit it makes. In addition to creating value for
shareholders, SSE supports inclusive economic growth across the UK
and Ireland by developing, owning and operating energy and related
infrastructure and services in a sustainable way. Its contribution
to UK Gross Domestic Product in 2017/18 totalled GBP8.6bn, taking
the total for the last seven years to GBP65.2bn (in 2017/18
prices). In Ireland, it was EUR806m in 2017/18. These results are
provided by PwC, which has undertaken SSE's economic contribution
analysis for every financial year since 2011/12.
SSE has today published a summary of its sustainability impacts
in 2017/18, in advance of the publication of its Sustainability
Report 2018 on 15 June 2018.
Richard Gillingwater, Chairman of SSE, said:
"As expected, 2017/18 presented a number of complex challenges
to manage, but SSE's operational performance was generally very
robust and significant progress was achieved in key aspects of the
company's capital investment programme. It is encouraging that the
company's financial results are ahead of expectations at the start
of the financial year.
"The challenges will continue in 2018/19, which is also expected
to be a year of major transition for SSE. A strong operational and
investment focus on meeting the current and future needs of energy
customers is essential, as is preparing the businesses in the SSE
group for the changes that lie ahead.
"SSE's strategic goal is to create value in a sustainable way,
for shareholders and society. The changes we are making as we renew
SSE are intended to have positive outcomes over the long term for
customers, stakeholders and investors.
"For investors, by giving clarity on the dividend for the five
years to March 2023, SSE is demonstrating that remunerating them
for their investment is and will remain its first financial
objective."
SSE's financial performance in 2017/18 at-a-glance
Mar 18 Mar 17 Mar 16
Adjusted operating profit GBPm GBPm GBPm
======== ======== ========
Wholesale 652.4 514.6 442.5
======== ======== ========
Networks 763.1 936.5 926.6
======== ======== ========
Retail 402.8 422.3 455.2
======== ======== ========
Corporate unallocated 10.4 0.6 0.1
======== ======== ========
Total adjusted operating profit 1,828.7 1,874.0 1,824.4
-------- -------- --------
Adjusted profit before tax 1,453.2 1,545.9 1,513.5
======== ======== ========
Pence Pence Pence
======== ======== ========
Adjusted earnings per share (EPS) 121.1 125.7 119.5
======== ======== ========
Full-year dividend per share (DPS) 94.7 91.3 89.4
======== ======== ========
GBPm GBPm GBPm
-------- -------- --------
Investment and capital expenditure (adjusted) 1,503.0 1,726.2 1,618.7
-------- -------- --------
Mar 18 Sept 17 Mar 17
-------- -------- --------
Adjusted net debt and hybrid capital 9,221.8 9,245.8 8,483.0
-------- -------- --------
Mar 18 Mar 17 Mar 16
======== ======== ========
Reported operating profit / (loss) GBPm GBPm GBPm
======== ======== ========
Wholesale 403.1 498.2 (481.3)
======== ======== ========
Networks 669.6 848.8 833.2
======== ======== ========
Retail 328.0 309.6 437.4
======== ======== ========
Corporate unallocated (21.5) 283.9 (3.9)
======== ======== ========
Total reported operating profit 1,379.2 1,940.5 785.4
-------- -------- --------
Reported profit before tax 1,086.2 1,776.6 593.3
======== ======== ========
Pence Pence Pence
======== ======== ========
Reported/basic earnings per share (EPS) 81.3 158.4 46.1
======== ======== ========
Mar 18 Sept 17 Mar 17
======== ======== ========
GBPm GBPm GBPm
-------- -------- --------
Unadjusted net debt 8,378.3 7,338.3 6,655.4
-------- -------- --------
Earning a profit from SSE's businesses
All three of SSE's reportable business areas contributed
adjusted operating profit in 2017/18, as set out above and
described below. Comparisons in these tables are with the previous
two 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.
The three business areas themselves are unchanged, but changes
have been made to the presentation of results within the within the
Wholesale business area, in support of additional transparency, and
within the Retail business area, in anticipation of the planned SSE
Energy Services transaction.
WHOLESALE
-- Generation: adjusted operating profit increased to GBP578.9m
in 2017/18, from GBP510.9m in the previous year, reflecting
increased output in both renewable and thermal generation. This was
partly offset, as expected, by a lower achieved power price than
the previous year and the end of the one-year contract under which
Fiddler's Ferry power station provided Blackstart services to
National Grid.
Within this segment Renewable Generation adjusted operating
profit increased to GBP474.9m, up from GBP391.6m in the previous
year.
-- Energy Portfolio Management: earned an adjusted operating
profit of GBP46.0m in 2017/18, compared to an operating loss of
GBP9.7m in 2016/17, due to an improved trading position.
-- Gas Production: adjusted operating profit increased to
GBP34.0m in 2017/18, from GBP26.4m in the previous year, mainly due
to a higher achieved price, partly offset by slightly lower
production volumes.
-- Gas Storage: adjusted operating loss improved to GBP6.5m in
2017/18, from GBP13.0m in the previous year, due to an improved
trading performance and year on year cost savings.
-- Reported Wholesale Operating Profit: decreased to GBP403.1m
in 2017/18 compared to GBP498.2m the previous year. The increase,
due to the factors outlined above was offset by the impact of
exceptional items and re-measurements. This included an impairment
of Gas Production assets of GBP104.7m, compared to GBP227.5m in
prior year. In addition, there was an GBP89.1m loss on operating
derivatives versus a GBP201.0m gain in the prior year. There was
also a fair value uplift on deconsolidation of Clyde of GBP59.1m in
prior year.
NETWORKS
Transmission: as expected, adjusted operating profit decreased
to GBP195.6m in 2017/18, from GBP263.7m in the previous year. This
was mainly due to the phasing of capital expenditure on significant
projects and the resulting impact on regulatory revenue, along with
the impact of the sharing of the previous year's total expenditure
(totex) underspends with customers.
Distribution: as expected, adjusted operating profit decreased
to GBP402.2m in 2017/18, from GBP433.4m in the previous year. While
base revenue increased in line with the growing RAV (Regulatory
Asset Value), this was offset by the expected net reduction in
under-recoveries and losses incentive income, outlined in the table
below.
This table also gives an indication of the expected impact of
under- or over-recoveries in future years:
FY2016/17 FY2017/18 FY2018/19 FY2019/20
Under/over recovery + GBP38m +GBP5m - c.GBP10m - c. GBP14m
from 2 yr. previous under-recovered from under-recovered from over-recovered from over-recovered from
FY 2014/15 2015/16 2016/17 2017/18. A further
-GBP10m related to
2017/18 over recovery
will be absorbed in
2021/22
====================== ====================== ====================== ======================
DPCR Losses incentive +GBP35m +GBP15m - -
income
====================== ====================== ====================== ======================
There are several factors which contribute to RIIO Price Control
earnings which can be found on the Ofgem website in the
Transmission and Distribution Licence, Price Control Financial
Handbook and Price Control Financial Model.
Gas Distribution: as expected, SSE's share of SGN's adjusted
operating profit fell to GBP165.3m in 2017/18, from GBP239.4m in
the previous year, mainly due to SSE's disposal of a partial equity
stake (16.7%) in October 2016, but also due to the phasing of
regulatory revenue and the sharing of out-performance with
customers, as part of the RIIO Price Control. The impact on
operating profit of the part disposal in the full financial year
2017/18 was GBP55m.
Reported Networks operating profit: decreased to GBP669.6m, from
GBP848.8m, primarily for the reasons outlined above. In addition,
SGN had an exceptional gain in 2016/17 of GBP19.5m due to the
change in Corporation Tax rate.
RETAIL
SSE Energy Services - Energy supply (households in GB): adjusted
operating profit was flat at GBP260.4m in 2017/18 compared to
GBP260.8m in 2016/17. While electricity tariffs increased to
recognise rising non-energy costs, overall profits were also
impacted by customer account losses and the introduction of price
caps for certain customer groups, offset by ongoing efficiency
savings. The business also benefited, in the last quarter of the
financial year, from higher customer energy consumption due to
unseasonably cold weather.
SSE Energy Services - Energy-related services (households in
GB): adjusted and reported operating profit increased to GBP18.3m
in 2017/18, from GBP12.7m in 2016/17, reflecting increased
profitability of SSE's home services and telco businesses, which
was partially offset by a reduction in revenues from the heritage
metering business.
Energy Supply (Business Energy): adjusted operating profit
decreased to GBP64.2m in 2017/18, from GBP89.4m in 2016/17. While
underlying profits remained similar, 2016/17 included a larger
prior year reconciliation catch up.
Energy Supply (SSE Airtricity): adjusted operating profit
decreased to GBP33.0m in 2017/18, from GBP42.7m in the previous
year, due to a combination of increased competition and increased
energy costs.
Enterprise: Adjusted operating profit increased to GBP26.9m in
2017/18, from GBP16.7m in the previous year, due to a combination
of higher revenues and focused cost cutting.
Reported Retail operating profit: increased to GBP328.0m from
GBP309.6m in prior year due to the reasons outlined above in
addition to the impact of exceptional items and certain
re-measurements. In the year, the Group has recorded exceptional
impairments totalling GBP63.0m as a result of its decision to
demerge its UK domestic gas and electricity supply business. In
addition, there was an exceptional impairment of GBP11.8m in the
Heat Networks business due to a re-evaluation of some of the
contracts within the business. In the prior year impairments
totalled GBP112.7m.
Consolidated Segmental Statement
In line with its licence condition, SSE will publish a
Consolidated Segmental Statement(CSS) setting out the revenues,
costs and profit or losses of businesses in its Wholesale and
Retail segments in Great Britain for 2017/18. It is intended to
publish the CSS in late June 2018.
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 in 2017/18 was slightly lower than
the previous year, at 6.8%.
Within this, SSE has previously highlighted an increasing
divergence between gas and electricity margins due to increasing
policy costs being levied predominantly on electricity. However,
following the increase to electricity prices only in April 2017,
margins are more balanced across fuels in 2017/18 than the previous
year.
Corporate Unallocated: Adjusted operating profit increased to
GBP10.4m in 2017/18 up from GBP0.6m the previous year, due to
releases of provisions in the year. Reported operating profit
decreased from a profit of GBP283.9m in the prior year, primarily
due to the exceptional gain on sale of the Group's 16.66% stake in
SGN, to a loss of GBP21.5m in the current year primarily due to
central IT costs impaired as part of the review undertaken in
preparation of the SSE Energy Services transaction.
Outlook for Wholesale, Networks and Retail in 2018/19
In 2018/19 Wholesale's adjusted operating profit will be
affected by the cessation of 'in the money' power purchase
agreements and by the fact renewable energy output is
forward-hedged at a price lower than in 2017/18.
Total adjusted operating profit in the economically-regulated
Networks segment is expected to increase by a mid-single digit
percentage, mainly as a result of the phasing of income recovery in
Electricity Transmission and a higher expected contribution from
SGN.
Retail's adjusted operating profit attributable to SSE will be
subject, amongst other things, to the progress and timing of the
planned SSE Energy Services transaction and the timing and impact
of the Domestic Gas and Electricity (Tariff Cap) Bill.
SSE's actual level of adjusted operating profit and profit
before tax will also be determined 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. These include:
-- 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.
Investing to create long-term value
SSE's strategy is to create value for shareholders and society
from developing, owning and operating energy and related
infrastructure in a sustainable way. This includes capital and
investment expenditure in assets and infrastructure that is needed
by energy customers across the UK and Ireland and which also
supports SSE's earnings and dividends.
In 2017/18, SSE's adjusted investment and capital expenditure
totalled GBP1,503.0m. Economically regulated electricity networks
accounted for 50.6% of this spend and renewable energy in support
of government obligations and targets accounted for 20.1%. As a
result of investment in 2017/18 and in previous years plus planned
investment:
-- the RAV of SSE's networks, including its share of SGN, is
currently GBP8.3bn and this is expected to grow to around GBP9bn by
2020 and to reach GBP10bn by 2023; and
-- the net capacity of SSE's energy from renewable sources,
including pumped storage and biomass, is around 3.8GW and is
expected to reach over 4.2GW by 2020, and to be capable of
generating around 12TWh of electricity in a typical year. As an
example, with an assumed power price of GBP45/MWh and a ROC price
of GBP50/MWh, SSE estimates that this would deliver EBITDA of
around GBP800m by 2020.
SSE's adjusted net debt and hybrid capital was GBP9.2bn at 31
March 2018, compared with GBP9.2bn at 30 September 2017 and
GBP8.5bn at 31 March 2017. The overall level of net debt and hybrid
capital largely reflects SSE's ongoing investment programme. The
movement in net debt also reflects GBP371.6m of share buy-back
completed in 2017/18 being the remainder of the GBP500m share
buy-back programme announced in November 2016.
Further Information
Investor Timetable
Annual Report 2018 on sse.com/investors 15 June 2018
Sustainability Report 2018 on sse.com/investors 15 June 2018
Shareholder Circular on sse.com/investors 27 June 2018
Q1 Trading Statement 19 July 2018
Annual General Meeting (Perth) 19 July 2018
General Meeting (Perth) re SSE Energy Services transaction 19 July 2018
Ex-dividend Date 26 July 2018
Record date 27 July 2018
Final date for receipt of Scrip Elections 23 August 2018
Final dividend payment date 21 September 2018
Notification of Close Period By 28 September 2018
Interim Results for the six months to 30 September 14 November 2018
Investors and Analysts ir@sse.com + 44 (0)345 0760 530
Media media@sse.com + 44 (0)345 0760 530
Webcast facility
SSE will present its 2017/18 Financial Results at 11am UK time,
on Friday 25 May 2018. You can join the webcast by visiting
www.sse.com and following the links on either the homepage or
investor pages; or directly using
https://edge.media-server.com/m6/p/kf279ded. This will also be
available as teleconference, details below. Both facilities will be
available to replay.
Confirmation: 5951898
Location Phone Type Phone Number
United Kingdom Toll-free/Freephone 0800 358 6377
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United Kingdom, Local Local +44 (0)330 336 9105
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United States, Los Angeles Local +1 323-794-2093
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United States/Canada Toll-free/Freephone 866-548-4713
=================== ===================
Online information
News releases and announcements are made available on SSE's
website at www.sse.com. You can also follow the latest news from
SSE at www.twitter.com/sse.
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 to 31 March 2018 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.
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.
Important note: planned SSE Energy Services transaction
On 8 November 2017, the Board of Directors of SSE plc announced
it had entered into an agreement with Innogy SE in respect of a
proposed demerger of SSE's household energy and services business
in Great Britain (now named SSE Energy Services) and immediate
combination of that business with Innogy SE's subsidiary npower to
form a new independent UK-based group - to be held by SSE
shareholders (following the demerger) and (following the
combination) with minority shareholding participation by Innogy SE
(65.6% and 34.4% respectively). Following the combination, the new
independent business will be separately listed on the London Stock
Exchange. SSE shareholders will retain their existing SSE shares
and will also hold one share in the newly-listed business for every
existing SSE plc share they hold at the demerger record date.
In this financial report, this demerger of SSE Energy Services,
combination with npower and listing on the London Stock Exchange is
described as 'the planned SSE Energy Services transaction'. SSE
shareholders are required to approve resolutions relating to the
transaction at a General Meeting on 19 July 2018 and a Shareholder
Circular in relation to this is being issued on 27 June 2018. The
transaction is also subject to regulatory approval. On 8 May 2018,
the Competition and Markets Authority referred the proposed
combination of SSE Energy Services and npower for a so-called
'Phase 2' investigation, by a group of independent panel members.
The deadline for the final report from that investigation is 22
October 2018.
Strategic Overview
The operating environment for energy companies in the UK and
Ireland continues to present a number of complex challenges to
manage. SSE's vision is to be a leading provider of energy and
related services in a low carbon world and its approach to
achieving this is to:
-- maintain a strong operational focus on meeting the needs of energy customers;
-- deliver efficient investment in the energy assets needed now and in the future;
-- engage constructively and effectively with key stakeholders
on all of the key issues affecting energy customers; and
-- embrace change and adapt to the emerging political, economic,
social and technological requirements of energy customers and of
society as a whole.
All of this means taking the necessary decisions to secure the
right outcomes for customers, investors and other stakeholders.
For 2017/18 this approach enabled SSE to deliver financial
results ahead of expectations at the start of the financial year,
while preparing the businesses in the SSE group for important
changes that lie ahead in 2018/19 and beyond.
In making those changes, SSE's strategy is to create value for
shareholders and society from developing, operating and owning
energy and related infrastructure and services in a sustainable
way. The financial objective of this strategy is to remunerate
shareholders' investment through the payment of dividends.
Putting safety first
The safety of the people who work on behalf of SSE is the
company's first priority. SSE's Total Recordable Injury Rate for
employees and employees of other companies working on SSE sites was
0.2 per 100,000 hours worked in a rolling 12-month period to 31
March 2018, compared with 0.22 over the same period to 31 March
2017.
In support of achieving its ultimate goal of injury-free
working, SSE has adopted a new definition for its Safety value that
is intended to emphasise that every employee working on its behalf
has a licence to ensure safe working: If it's not safe, we don't do
it. The adoption of this licence is being supported by an extensive
and enduring commitment to employee engagement in all aspects of
safety throughout the SSE group.
Creating value
SSE's strategic focus on creating value means focusing on
earning returns for shareholders, sustaining skilled jobs and
making a positive economic and social contribution to the countries
in which SSE operates.
Earning returns for shareholders
The financial objective of this strategy is to remunerate
shareholders' investment through the payment of dividends. This
objective is being achieved. The recommended full-year dividend for
2017/18 is 94.7 pence per share, an increase of 3.7%. Looking
ahead, SSE has a clearly-defined five-year plan for the
dividend.
In order to give clarity in respect of what is expected to be a
year of transition for SSE, the target full-year dividend for
2018/19 is 97.5 pence per share, a 3% increase based on forecasts
for RPI inflation. For 2019/20, following the proposed SSE Energy
Services transaction that was announced in November 2017 and the
changes it will mean for the SSE group, SSE is targeting a
full-year dividend of 80.0 pence per share. This reflects the
quality and nature of SSE's assets and operations following the
proposed SSE Energy Services transaction, the earnings derived from
them and the longer-term financial outlook.
SSE is thereafter targeting annual increases in the dividend per
share that at least match RPI inflation in each of the three years
to 2022/23, when the current Electricity Distribution Price Control
will come to an end.
Sustaining skilled jobs
The ability to earn returns for shareholders is dependent on the
shared talent, skills and values of people throughout SSE; and SSE
believes that supporting and creating high quality long-term jobs
is central to its long-term success.
SSE has previously quantified the economic value of the people
it employs; and intends to update this work in the course of
2018/19. In February 2018, the Good Economy, a social advisory firm
focused on the role of business and finance in building a good
economy, rated 150 of the FTSE350 companies on how well they
deliver good jobs growth in Britain. SSE was placed in the number
one spot.
The Good Economy believes that business must create quality,
secure and fulfilling jobs; and in 2017/18 alone, SSE recruited
more than 2,500 people and now has 1,100 employees in structured
programmes designed for school leavers, apprentices, trainee
engineers and graduates.
Making a positive contribution to society
In addition to making dividend payments, which directly or
indirectly are subject to taxation, and which also contribute to
the pension funds of people throughout the UK and Ireland, and
creating sustainable jobs, SSE seeks to make a positive social and
economic contribution.
In particular, SSE remains strongly committed to fairness and
transparency in respect of taxation matters and remains the only
FTSE 100 company to have secured the Fair Tax Mark, which requires
companies to be transparent about their tax affairs in a way that
goes well beyond the current requirements of UK company law.
SSE is also focused on its wider contribution to the economies -
and therefore societies - of the UK and Ireland in 2017/18 this
contribution has been estimated at GBP8.6bn and EUR806m
respectively.
SSE believes that this economic contribution and commitment to
transparency in tax demonstrates its commitment to a social
contract with the societies of which it is part and from which it
benefits from public service provision, skilled and committed
employees and the right to pay dividends.
Taking the right decisions
SSE's ability to make a positive contribution to society and
sustain skilled jobs and so earn returns for shareholders is
dependent on its ability to adapt to the emerging political,
economic, social and technological requirements of energy customers
and of society as a whole. It is also dependent on SSE taking the
necessary decisions to secure the right outcomes for energy
customers, investors and other stakeholders.
The scale of change in the household energy supply and services
market in Great Britain is especially notable, with a rapidly
evolving competitive landscape and fast-changing expectations of
customers, regulators and other stakeholders.
To respond to this evolving landscape and those fast-changing
expectations, SSE concluded that the planned SSE Energy Services
transaction announced in November 2017 has a strong strategic logic
and the potential to drive significant benefits for the business
and its customers.
In particular, SSE believes that creating an efficient new
independent energy supply and services business in Great Britain
and creating a new market model by combining the resources and
experience of two established players with the focus and agility of
an independent supplier will ultimately better serve customers,
employees and other stakeholders. The necessary shareholder and
regulatory approvals for this are being sought, with the aim of the
new independent supplier taking its place in the market in the last
quarter of 2018 or the first quarter of 2019.
Realising the opportunities
SSE believes there are significant opportunities for it to
create value in a changing energy system, and needs to be focused
on realising them in the coming years. The planned SSE Energy
Services transaction should reinforce this focus. SSE's market
focus is the UK and Ireland and it will remain so. Although it has
no plans to do so at present, SSE is open to extending to other
markets its core competencies in areas such as renewable
energy.
Decarbonisation
The momentum behind decarbonisation is continuing to build, with
cross-party support for clean growth and a robust institutional
framework - illustrated by the work of the Committee on Climate
Change and by the publication in October 2017 of the UK
government's Clean Growth Strategy, which is designed to grow
national income while cutting greenhouse gas emissions. Cost
reductions in renewable energy technologies have also increased the
prospects for meeting carbon targets and enhance the long-term
growth prospects for this sector.
SSE believes this presents opportunities for it as the leading
generator of renewable energy across the UK and Ireland; and has
adopted a new ambition to reduce the carbon intensity of the
electricity it generates by 50%, to below 150g/kWh, by 2030.
Electrification
The trend to electrification is clear and is being reinforced by
the focus on air quality, as well as clean growth, illustrated by
changes in the transport sector such as the UK government's
decision to ban the sale of new diesel and petrol cars from 2040.
Over the next few years, it is likely that the scope for
electrification in transport and heat will increase
significantly.
SSE believes this presents opportunities for it as an
electricity generator and distributor and as a utilities services
provider; and is already preparing for the expected increase in
electric vehicles through developments in its Networks and
Enterprise businesses in particular.
Infrastructure
The commitment to a major upgrade of infrastructure is at the
heart of the UK's Industrial Strategy, illustrated by the fact that
public infrastructure investment will have doubled in a decade by
2023. SSE believes that this will provide opportunities for it as a
provider of local energy and utility solutions, telecoms and rail
services.
The developments relating to infrastructure, electrification and
decarbonisation are of huge significance and SSE's Networks,
Enterprise and Wholesale businesses are focused on realising
them.
Meeting the challenges of change
The opportunities presented by decarbonisation, electrification
and infrastructure development are clearly very significant, but
change on this scale brings new challenges as well.
For example, auctions to provide infrastructure and services are
an established and growing part of the energy sector, with lower
strike prices already a feature in the offshore wind sector. The
scrutiny of the cost of energy to customers is extending further
into Networks, with Ofgem's RIIO 2 Price Control process now under
way. In addition, fundamental questions are being asked about the
appropriateness of private provision of energy in the UK.
SSE assets, investment and earnings have focused increasingly on
electricity networks and renewable energy in recent years. By
having a greater focus on core competences of energy infrastructure
and related services; by demonstrating its commitment to creating
value for shareholders and for society; and by listening and
responding to the concerns of all key stakeholders, SSE can deliver
results that are fair to customers, investors and society as a
whole.
As part of this, it has plans for capital and investment
expenditure of around GBP6bn for the five years to March 2023,
focused on regulated electricity networks and renewable energy.
In all of this, maintaining a values-based approach to business
is key, exemplified by the SSE SET of Safety, Service, Efficiency,
Sustainability, Excellence and Teamwork.
Focusing on the right priorities
As it meets the challenges of change, SSE focuses on realising
the opportunities that lie ahead, takes the right decisions and
works to create value. The way SSE does business will be guided by
the SSE SET of values. Those values will also guide SSE as it
focuses on six strategic priorities for 2018/19. While it is
expected to be a year of major transition for the SSE group, the
priorities are nevertheless clear:
-- safe, responsible and efficient operation of assets,
including a high standard of service for customers;
-- efficient, responsible and successful investment in assets
that customers need now in the future, including progress on the
Beatrice offshore wind farm and the Caithness-Moray transmission
link;
-- completion of the planned SSE Energy Services transaction to
create an efficient new independent energy supplier that works for
customers;
-- development of existing and new growth options, going with the grain of societal focus on decarbonisation, electrification and infrastructure;
-- further enhancement of SSE's core strengths and capabilities
to be as well-placed as possible to analyse and respond to new
opportunities to create value in a fast-changing sector; and
-- effective engagement with politicians, regulators and other
stakeholders in the debates about the future of energy
provision.
Remunerating shareholders' investment
These priorities support the fulfilment of SSE's first financial
objective for 2018/19, which is delivery of a full-year dividend of
97.5 pence per share, and its commitment to creating value
remunerating shareholders' investment through its clearly-defined
five-year plan for the dividend.
The operating environment for energy companies is likely to
remain complex and challenging, and a year of transition lies
ahead, but SSE believes it has the strategic priorities, assets,
opportunities and focus to create value for shareholders and
society in the years ahead.
Alistair Phillips-Davies
Chief Executive
Group Financial Overview 2017/18
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 18 Mar 17 Mar 16
GBPm GBPm GBPm
Adjusted Operating Profit 1,828.7 1,874.0 1,824.4
========= ======== ========
Adjusted Net Finance Costs (375.5) (328.1) (310.9)
========= ======== ========
Adjusted Profit before Tax 1,453.2 1,545.9 1,513.5
========= ======== ========
Adjusted Current Tax Charge (130.7) (157.7) (193.4)
========= ======== ========
Adjusted Profit after Tax 1,322.5 1,388.2 1,320.1
========= ======== ========
Less: hybrid equity coupon payments (98.5) (119.3) (124.6)
========= ======== ========
Adjusted Profit After Tax attributable to ordinary shareholders 1,224.0 1,268.9 1,195.5
========= ======== ========
Adjusted EPS - pence 121.1 125.7 119.5
========= ======== ========
Number of shares for basic/reported and adjusted EPS (million) 1,010.9 1,009.7 1,000.0
========= ======== ========
Shares in issue at 31 March (m) 1,023.0 1,015.6 1,007.6
========= ======== ========
Key Reported Financial Metrics Mar 18 Mar 17 Mar 16
GBPm GBPm GBPm
Reported Operating Profit 1,379.2 1,940.5 785.4
-------- -------- --------
Reported Net Finance Costs (293.0) (163.9) (192.1)
-------- -------- --------
Reported Profit before Tax 1,086.2 1,776.6 593.3
-------- -------- --------
Reported Tax Charge (166.1) (57.8) (8.1)
-------- -------- --------
Reported Profit after Tax 920.1 1,718.8 585.2
-------- -------- --------
Less: hybrid equity coupon payments (98.5) (119.3) (124.6)
-------- -------- --------
Reported Profit After Tax attributable to ordinary shareholders(1) 821.6 1,599.5 460.6
-------- -------- --------
Reported EPS- pence 81.3 158.4 46.1
-------- -------- --------
(1After distributions to hybrid capital holders)
Dividend per Share Mar 18 Mar 17 Mar 16
-------- -------- --------
Interim Dividend pence 28.4 27.4 26.9
-------- -------- --------
Final Dividend pence 66.3 63.9 62.5
-------- -------- --------
Full Year Dividend pence 94.7 91.3 89.4
-------- -------- --------
Increase % 3.7% 2.1% 1.1%
-------- -------- --------
Dividend Cover times / SSE's adjusted EPS 1.28 x 1.38 x 1.34 x
-------- -------- --------
Adjusted Operating Profit by Segment Mar 18 Mar 17 Mar 16
GBPm GBPm GBPm
Generation 578.9 510.9 465.5
======== ======== ========
EPM 46.0 (9.7) (29.2)
======== ======== ========
Gas Production 34.0 26.4 2.2
======== ======== ========
Gas Storage (6.5) (13.0) 4.0
======== ======== ========
Wholesale 652.4 514.6 442.5
======== ======== ========
Electricity Transmission 195.6 263.7 287.2
======== ======== ========
Electricity Distribution 402.2 433.4 370.7
======== ======== ========
SGN
(SSE's 50% share reducing to 33% from 26 Oct 2016) 165.3 239.4 268.7
======== ======== ========
Networks 763.1 936.5 926.6
======== ======== ========
SSE Energy Services - Energy Supply 260.4 260.8 247.9
======== ======== ========
SSE Energy Services - Energy related services 18.3 12.7 15.4
======== ======== ========
Total SSE Energy Services subject to de-merger 278.7 273.5 263.3
======== ======== ========
Business Energy 64.2 89.4 111.6
======== ======== ========
Airtricity 33.0 42.7 39.4
======== ======== ========
Enterprise 26.9 16.7 40.9
======== ======== ========
Total Retail remaining as part of SSE 124.1 148.8 191.9
======== ======== ========
Retail 402.8 422.3 455.2
======== ======== ========
Corporate Unallocated 10.4 0.6 0.1
======== ======== ========
Total Adjusted Operating Profit 1,828.7 1,874.0 1,824.4
======== ======== ========
Reported Operating Profit by Segment Mar 18 Mar 17 Mar 16
GBPm GBPm GBPm
Electricity Generation 523.4 544.8 (114.5)
======== ======== ========
EPM (43.1) 191.3 (60.3)
======== ======== ========
Gas Production (70.7) (201.1) (159.6)
======== ======== ========
Gas Storage (6.5) (36.8) (146.9)
======== ======== ========
Wholesale 403.1 498.2 (481.3)
======== ======== ========
Electricity Transmission 195.6 263.7 287.2
======== ======== ========
Electricity Distribution 402.2 433.4 370.7
======== ======== ========
SGN
(SSE's 50% share) reduced to 33% from 26 Oct 2016 71.8 151.7 175.3
======== ======== ========
Networks 669.6 848.8 833.2
======== ======== ========
SSE Energy Services- Energy Supply 203.5 171.7 247.9
======== ======== ========
SSE Energy Services - Energy related services 18.3 5.5 15.4
======== ======== ========
Total SSE Energy Services subject to de-merger 221.8 177.2 263.3
======== ======== ========
Business Energy 64.2 73.0 93.8
======== ======== ========
Airtricity 26.9 42.7 39.4
======== ======== ========
Enterprise 15.1 16.7 40.9
======== ======== ========
Total Retail remaining as part of SSE 106.2 132.4 174.1
======== ======== ========
Retail 328.0 309.6 437.4
======== ======== ========
Corporate Unallocated (21.5) 283.9 (3.9)
======== ======== ========
Total Reported Operating Profit 1,379.2 1,940.5 785.4
======== ======== ========
A reconciliation of adjusted operating profit by segment to
reported operating profit by segment can be found in Note 6 (ii) to
the Summary Financial Statements.
Tax Mar 18 Mar 17 Mar 16
GBPm GBPm GBPm
Adjusted current tax charge 130.7 157.7 193.4
======= ======= =======
Effective current tax rate based on adjusted profit before tax 9.0% 10.2% 12.8%
======= ======= =======
Total UK taxes paid including taxes on profits, property taxes, environmental taxes and
employment
taxes 484.1 385.0 453.9
======= ======= =======
Investment and Capex Summary (adjusted) Mar 18 Mar 18 Mar 17
Share % GBPm GBPm
======== ======== ========
Thermal Generation 5.9 89.0 108.6
======== ======== ========
Renewable Generation 20.1 301.7 366.4
======== ======== ========
Gas Storage 0.1 1.8 0.2
======== ======== ========
Gas Production 4.4 65.5 72.9
======== ======== ========
Total Wholesale 30.5 458.0 548.1
======== ======== ========
Electricity Transmission 28.9 434.2 505.0
======== ======== ========
Electricity Distribution 21.7 326.1 284.7
======== ======== ========
Total Networks 50.6 760.3 789.7
======== ======== ========
SSE Energy Services - Energy Supply 6.7 100.9 172.4
======== ======== ========
SSE Energy Services - Energy Related Services 0.7 9.9 11.6
======== ======== ========
Business Energy and Airtricity 0.1 1.5 0.3
======== ======== ========
Enterprise 4.1 61.9 58.7
======== ======== ========
Total Retail and Enterprise 11.6 174.2 243.0
======== ======== ========
Other 7.3 110.5 145.4
======== ======== ========
Total investment and capital expenditure (adjusted) 100% 1,503.0 1,726.2
======== ======== ========
Debt metrics Mar 18 Mar 17 Mar 16
GBPm GBPm GBPm
========== ========== ==========
Adjusted net debt and hybrids (GBPm) (9,221.8) (8,483.0) (8,395.0)
========== ========== ==========
Average debt maturity (years) 7.9 8.8 8.9
========== ========== ==========
Adjusted interest cover (excluding SGN) times 5.0 6.0 5.2
========== ========== ==========
Adjusted interest cover (including SGN) times 4.3 4.7 4.7
========== ========== ==========
Average interest rate for the period excluding JV/assoc. interest and all hybrid
coupon payments) 3.56% 3.66% 3.73%
========== ========== ==========
Average cost of debt at period end (including all hybrid coupon payments) 3.84% 4.10% 3.95%
========== ========== ==========
Net finance costs Reconciliation Mar 18 Mar 17 Mar 16
GBPm GBPm GBPm
======= ======= =======
Adjusted net finance costs 375.5 328.1 310.9
======= ======= =======
Add/(less):
======= ======= =======
Finance lease interest (30.8) (33.1) (34.7)
======= ======= =======
Notional interest arising on discounted provisions (16.3) (14.2) (15.7)
======= ======= =======
Hybrid equity coupon payment 98.5 119.3 124.6
======= ======= =======
Adjusted finance costs for interest cover calculation 426.9 400.1 385.1
======= ======= =======
SSE Principal Sources of debt funding Mar 18 Mar 17 Mar 16
Bonds 49% 41% 45%
======= ======= =======
Hybrid debt and equity securities 23% 33% 25%
======= ======= =======
European investment bank loans 13% 11% 8%
======= ======= =======
US private placement 10% 10% 5%
======= ======= =======
Index -linked debt, long term project finance and other loans 5% 5% 17%
======= ======= =======
% of total SSE borrowings secured at a fixed rate 90% 91% 87%
======= ======= =======
Rating Agency Rating Criteria Date of Issue
Moody's A3 Stable outlook Mid-teens% RCF/ Net Debt August 2017
================== ========================= ==============
Standard and Poor's A- Stable outlook 23% FFO/Net Debt August 2017
================== ========================= ==============
Contributing to employees' pension schemes - IAS 19 R Mar 18 Mar 17 Mar 16
GBPm GBPm GBPm
Net pension scheme asset/ (liabilities) recognised in the balance sheet before deferred
tax 334.5 70.5 (394.8)
Employer cash contributions Scottish Hydro Electric scheme 29.0 36.2 33.7
======= ======= ========
Deficit repair contribution included above 14.0 14.0 14.8
======= ======= ========
Employer cash contributions Southern Electric scheme 68.9 76.3 68.3
======= ======= ========
Deficit repair contribution included above 45.9 41.2 44.6
======= ======= ========
Additional information on employee pension schemes can be found
in Note 15 to the Summary Financial Statements.
Group Financial Review 2017/18
This SSE group financial review covers SSE's financial
performance and outlook, capital investment, balance sheet and tax
payments.
Earnings, Dividends and Dividend Cover
Remunerating shareholders' investment through payment of
dividends
The Board is recommending a final dividend of 66.3p per share,
to which a Scrip alternative is offered, compared with 63.9p in the
previous year, an increase of 3.8%. This will make a full-year
dividend of 94.7p per share which is: an increase of 3.7 % compared
with 2016/17, which is in line with RPI inflation; and covered 1.28
times by SSE's adjusted earnings per share.
Focusing on adjusted earnings per share
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 2017/18, SSE's adjusted earnings per share was 121.1 pence,
which was 3.6% lower than in 2016/17 but nevertheless ahead of
expectations at the start of the financial year. As expected, it
reflected the impact on Networks of the phasing of returns in the
Price Control mechanisms for Electricity Distribution and
Transmission and the disposal by SSE in October 2016 of part of its
stake in Scotia Gas Networks Limited (SGN). These reductions were
partly offset by increased earnings from Renewable and Thermal
Generation and a strong operational focus that helped ensure the
overall adjusted earnings per share for 2017/18 was better than
expected.
Delivering adjusted profit before tax in 2017/18
Adjusted profit before tax in 2017/18 fell by 6.0%, to
GBP1,453.2m from GBP1,545.9m. SSE's Wholesale, Networks and Retail
(including Enterprise) Business Areas were all profitable, with
adjusted operating profit increasing in Wholesale, declining, as
expected, in Networks, with a moderate fall also reported in the
Retail division as a whole.
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 three energy
supply businesses and to optimise the value of its Generation and
Gas Production 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 adverse movement on derivatives under IAS39 of GBP89.1m
arose partly from a deterioration in the fair value of forward
commodity purchase contracts and the unwinding of contracts in
2017/18. 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
2018, primarily relating to electricity and gas, was a liability of
GBP252.4m, compared to a liability on similar contracts at 31 March
2017 of GBP163.3m.
In addition to the adverse movement on operating derivatives,
there was an adverse movement on the fair valuation of interest and
currency derivatives of GBP33.0m. This movement is due to the
maturing of in-the-money cross-currency hybrid swaps which were
redeemed in October 2017, offset by a reduction in out-of-the-money
interest swaps due to the increase in swap rates. 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 2018, SSE recognised a net exceptional
charge of GBP213.3m before tax. The following table provides a
summary of the key components making up the net charge
position:
Total net exceptional charges by asset Property, Plant & Equipment Other Exceptional (charges)/credits Total
class
GBPm GBPm GBPm
============================ ==================================== ========
Gas Production (104.7) - (104.7)
============================ ==================================== ========
Retail technology developments (53.3) (9.7) (63.0)
============================ ==================================== ========
Other (20.9) (24.7) (45.6)
============================ ==================================== ========
Total exceptional (charge)/gain (178.9) (34.4) (213.3)
============================ ==================================== ========
By Segment
============================ ==================================== ========
Wholesale (120.3) 12.4 (107.9)
============================ ==================================== ========
Retail (58.6) (16.2) (74.8)
============================ ==================================== ========
Corporate - (30.6) (30.6)
============================ ==================================== ========
Total (178.9) (34.4) (213.3)
============================ ==================================== ========
For a full description of the net exceptional charge see note 7
of the financial statements.
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 reduction in the Proven and Probable (2P) reserves in
the Greater Laggan Area assets. In addition, an impairment charge
has been recognised in relation to Bacton field assets,
predominantly related to higher than previously assessed
decommissioning costs.
The exceptional charges for Retail and other technology
developments reflect impairments of capitalised costs following the
decision to undertake the planned SSE Energy Services transaction.
The impairment charges relate primarily to the development of
certain IT assets to ensure that a new demerged Retail business
would contain assets that would be utilised in its post demerger
operations. This review resulted in impairments of GBP29.3m to
system and software development assets related to SSE's previous
Retail strategic investment in transformation and a further
GBP33.7m of Retail related software developments and programmes
within SSE's central service company and other subsidiaries that it
was identified would no longer be utilised by the demerged or
continuing energy supply businesses.
The other exceptional charges are primarily the impairment of
SSE's investment in BIFAB Limited, following disposal of its
interest in the company in March 2018, an impairment of SSE's 2.2MW
Barkip anaerobic digestion plant to nil, following a review of the
future economic contribution of the site, and other net items
including the reversal of provisions and impairments previously
recognised.
Reported Profit Before Tax and Earnings Per Share
Reported results for 2017/18 are significantly lower than those
for 2016/17 due to the impact on reported profit before tax of the
significant exceptional charges incurred in the year (see above)
compared to lower asset write downs in 2016/17 offset by the gain
on sale of a stake in SGN. This together with the relative movement
in mark to market valuations on forward purchase contracts for
commodities over both years (which at March 2018 remain 'out of the
money') contributed to a net reported loss before tax of GBP332.1m
in 2017/18 compared to a profit before tax on those items of
GBP247.5m in 2016/17.
This movement is explained in more detail in the relevant
sections throughout this report and is the main driver for:
-- Reported profit before tax decreasing to GBP1,086.2m in
2017/18, from GBP1,776.6m in 2016/17, due to the movement in
non-recurring exceptional items; and
-- Reported earnings per share decreasing to 81.3p in 2017/18,
from 158.4p in 2016/17, 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 developing and building a balanced range
of economically-regulated and market-based energy assets that it
generally owns and operates, but from which it also seeks to be
agile in securing value. 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 2017/18
SSE invests only in assets for which returns are expected to be
clearly greater than the cost of capital. All projects are intended
to 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 2017/18, SSE's investment and capital expenditure totalled GBP1,503.0m. This included:
-- A major investment programme in electricity networks
totalling GBP760.3m. This includes ongoing construction of the
Caithness-Moray electricity transmission link and the connection of
the Stronelairg wind farm. 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
totalling GBP301.7m: progress was made in increasing SSE's
renewable energy portfolio, with the delivery during 2017/18 of
onshore wind farm projects with a total capacity of 534MW. A
further 463MW of on- and offshore wind farm capacity is currently
in construction: Stronelairg onshore wind farm (228MW); and the
project-financed Beatrice offshore wind farm (SSE share: 235MW).
Both remain due for completion in calendar year 2019. This capacity
for renewable energy supports the delivery of government targets
relating to climate change and output from it qualifies for either
the Renewables Obligation (RO), which also applies in Northern
Ireland, Contracts for Difference (CfD) and Renewable Energy Feed
in Tariff 2 in Ireland.
-- In addition, SSE is fulfilling a regulatory obligation to
install smart meters for its Energy Supply customers. At 31 March
2018, SSE had installed over 850,000 smart meters on supply in
customers' homes. Post installation, SSE's meters transfer to a
contracted Meter Asset Provider and SSE's investment and capital
expenditure excludes the capital cost of installation and meter
assets.
SSE is continuing to undertake significant investment in assets,
with capital and investment expenditure of around GBP1.7bn planned
for 2018/19, around two thirds of which relates to developing and
maintaining economically-regulated electricity networks and
renewable energy projects. Much of the revenue derived from such
assets is index-linked.
SSE's principal joint ventures and associates
SSE's financial results include contributions from equity
interests in joint ventures ("JVs") and associates. The details of
the most significant of these are included in the table below.
SSE principal JVs and Asset type SSE holding Accounting treatment in Shareholder loans as at
associates SSE's adjusted 31 Mar 2018
performance measures
Seabank Power 1,140MW CCGT 50% Equity accounted no loans outstanding
======================== ============ ======================== =========================
Marchwood Power 840MW CCGT 50% Equity accounted GBP80m
======================== ============ ======================== =========================
Clyde Windfarm 522MW onshore windfarm 65%* Equity accounted GBP357m (inc GBP82m held
for sale)*
======================== ============ ======================== =========================
Walney (UK) Offshore 367MW offshore windfarm 25.1% Equity accounted no loans outstanding
Windfarm
======================== ============ ======================== =========================
Seagreen Phase 1 up to 1,050MW 50% Equity accounted GBP14m
======================== ============ ======================== =========================
Dogger Bank Up to 3,600MW 50% Equity accounted GBP43m
======================== ============ ======================== =========================
Scotia Gas Networks Gas Distribution 33.3% Equity accounted GBP109m
Network
======================== ============ ======================== =========================
Ferrybridge MFE 68MW 50% Equity accounted GBP128m
======================== ============ ======================== =========================
Ferrybridge MFE2 70MW 50% Equity accounted GBP110m
======================== ============ ======================== =========================
Beatrice 588MW offshore windfarm 40% Equity accounted Project financed
======================== ============ ======================== =========================
Cloosh Valley 105MW onshore windfarm 50% Equity Accounted Project financed
part of Galway
======================== ============ ======================== =========================
Greater Gabbard, a 504MW offshore windfarm (SSE share 50%) is
proportionally consolidated and is reported as a Joint Operation
with no loans outstanding.
*SSE's share of Clyde windfarm is expected to reduce to 50.1% in
May 2018.
Financial management and balance sheet
Maintaining a strong balance sheet
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 (RCF) to debt and funds from
operations (FFO) to 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.
In August 2017, Moody's Investor Services reaffirmed SSE's
senior credit rating of A3 with a stable outlook. In the same
month, Standard & Poor's affirmed SSE's A- rating and moved it
to a stable outlook. While they are not fundamental to it, these
ratings help to illustrate the quality and resilience of the SSE
group of businesses.
Managing adjusted net debt and hybrid capital
SSE's adjusted net debt and hybrid capital was GBP9.2bn at 31
March 2018, compared with GBP9.2bn at 30 September 2017 and
GBP8.5bn at 31 March 2017. The overall level of net debt and hybrid
capital largely reflects SSE's ongoing investment programme. The
year on year movement also reflects share buy-backs totalling
GBP371.6m which were completed in 2017/18. This being the remainder
of the GBP500m share buy-back programme announced in November
2016.
Adjusted net debt excludes finance leases and includes
outstanding liquid funds that relate to wholesale energy
transactions. Adjusted net debt at 31 March 2018 also includes an
accounting increase of GBP37.3m as a result of fair value
adjustments.
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 in the Alternative Performance Measures section
of this statement.
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. The hedges ensure that any movement
in the fair value of net debt is offset by an equivalent movement
in the derivative position.
The fair value decrease in net debt was driven by both Sterling
and Euro strength against the US Dollar along with rising interest
rates during the year to 31 March 2018. This benefit is offset by
an equivalent decrease to the 'in the money' derivative position of
SSE's fair value hedges.
Hybrid Bonds summary
Value GBPm Coupon Rate Accounting First Call Date
equivalent per annum Treatment
- parts are
issued in
EUR and $
Hybrid Bonds GBP1bn All in rate Equity accounted Redeemed Oct 2017
September 2012 5.625%
============= ============ ================= ==================
Hybrid Bonds GBP1.2bn All in rate Equity accounted September 2020
March 2015 4.01% & April 2021
============= ============ ================= ==================
Hybrid Bonds GBP1bn All in rate Debt accounted September 2022
March 2017 3.02%
============= ============ ================= ==================
Further details on each hybrid bond can be found in the note 14
to the Summary Financial Statements.
The proceeds from March 2017 GBP1.0bn Hybrid Bonds, all in rate
3.02%, were used on 2 October 2017 to redeem the Hybrid Bonds
issued in 2012, at an all-in rate of 5.6%. The additional costs of
carrying additional hybrids for six months is outweighed by the
savings realised over the life of the new hybrid
In 2017/18, the combined coupon payments on the equity and debt
accounted hybrid bonds was GBP128m, compared to GBP120m in 2016/17.
This increase was mainly due to the temporary position in the first
six months when SSE made coupon payments on three hybrid tranches,
prior to redeeming the 2012 hybrid bonds in October 2017. Total
hybrid payments are expected to fall to around GBP77m in 2018/19 as
the full benefit of the replacement hybrid's lower coupon rate is
realised.
A table noting the amounts, timing and accounting treatment of
coupon payments is shown below.
Hybrid coupon payments 16/17 17/18 18/19
HYa FYa HYa FYa HYe FYe
======= ======== ======= ======== ======= =======
Total equity (cash) accounted GBP74m GBP119m GBP57m GBP99m GBP47m GBP47m
======= ======== ======= ======== ======= =======
Total debt (accrual) accounted - GBP1m GBP15m GBP30m GBP15m GBP30m
======= ======== ======= ======== ======= =======
Total hybrid coupon GBP74m GBP120m GBP72m GBP129m GBP62m GBP77m
======= ======== ======= ======== ======= =======
SSE's September 2012 and March 2015 Hybrid Bonds are perpetual
instruments and are therefore accounted for as part of equity
within the Financial Statements but, as in previous years, have
been included within SSE's 'Adjusted net debt and hybrid capital'
to aid comparability.
The new March 2017 Hybrid Bonds have a fixed redemption date and
are therefore debt accounted and included within Loans and Other
Borrowings.
The coupon payments relating to the September 2012 and March
2015 equity accounted hybrid bonds are presented as distributions
to other equity holders and are reflected within adjusted earnings
per share when paid. The coupon payments on the March 2017 debt
accounted hybrid bonds are treated as finance costs under IFRS.
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.
Managing net finance costs
SSE's adjusted net finance costs, including interest on debt
accounted hybrid bonds but not equity accounted hybrid bonds, were
GBP375.5m in the year to 31 March 2018 compared to GBP328.1m in the
previous year. This reflected the cost of the additional hybrid
debt charges outlined above along with the increase resulting from
higher overall debt levels, albeit SSE's average interest rate has
decreased as a result of efficient treasury management.
Reported net finance costs were GBP293.0m, compared to
GBP163.9m, reflecting the increase in debt and the impact of
changes in the fair value of financing derivatives.
Summarising cash and cash equivalents
At 31 March 2018, SSE's adjusted net debt included cash and cash
equivalents totalling GBP0.2bn, down from GBP1.4bn in March 2017
due to the redemption of GBP1.0bn Hybrids in October 2017 which
were refinanced in March 2017. Medium term borrowings maturing in
2018/19 are estimated at around GBP0.6bn.
Focusing on effective financial management: Treasury facilities
in 2017/18
During the year to March 2018, SSE:
-- exercised the second, and last, one-year extension option on
its GBP1.3bn revolving credit facility and GBP200m bilateral
facility, meaning these facilities now mature in July 2022 and
November 2022 respectively;
-- drew down the GBP200m EIB facility in March 2018 which was
signed in March 2017, as two GBP100m/10-year floating rate loans
priced at 6-month LIBOR plus 64.4bps, alongside five- year forward
starting swaps to swap the full GBP200m to a fixed rate of 2.16%
for the last five years; and
-- rolled a maturing GBP108m term loan for a further two years at 6-month LIBOR plus 57.5bps.
Issuing SSE's inaugural Green Bond
In September 2017, SSE successfully issued its inaugural Green
Bond, an eight year EUR600m bond with a coupon of 0.875% and an
all-in cost of 0.98%. The Bond was almost three times
oversubscribed and had significant interest from Green only funds
whilst also representing the lowest coupon ever achieved by
SSE.
This issuance will help SSE to take a leading role in supporting
the transition towards a low carbon future, through its plans to
continue to invest in renewable energy, and reaffirm its position
as a leader in renewable sources of energy.
Refinancing over the medium term
SSE's next significant refinancing is outlined below:
-- in October 2018 it will redeem its GBP500m/5% coupon bond;
-- in June 2020 it will redeem its EUR600m/2% coupon bond; and
-- September 2020 is the first call date for the GBP750m/3.875%
coupon equity accounted Hybrid.
Maintaining a prudent treasury policy
SSE's treasury policy is designed to be prudent and flexible. In
line with that, cash from operations is first used to finance
regulatory and maintenance capital expenditure and then dividend
payments, with capital and investment expenditure for growth
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 2018, 90% of SSE's borrowings were at
fixed rates.
Borrowings are mainly in Sterling and Euros to reflect the
underlying currency denomination of assets and cash flows within
SSE. All other foreign currency borrowings are swapped back into
either Sterling or Euros. SSE has kept the recent EUR600m Green
Bond in Euros and has swapped EUR400m of the 2% June 2020 bond to
Sterling, increasing the all-in cost of that portion of the 2020
bond to 2.99%. This allows SSE to maintain a level of Euro debt to
match SSE's Euro assets in the Republic of Ireland under a net
investment hedge.
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. 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 UK's EU Referendum in June
2016, it has so far identified no need for change.
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 2018 was 7.9 years, compared with 8.8 years at 31 March
2017.
SSE's debt structure remains strong, and on 31 March 2018 it had
around GBP8.9bn of medium/long term borrowings in the form of
issued bonds, European Investment Bank debt, hybrid securities and
other loans.
Operating a Scrip Dividend Scheme
The Scrip Dividend Scheme, the renewal of which is being sought
at the 2018 AGM, 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 2017 (relating to the final dividend for the year
to 31 March 2017) resulted in a reduction in cash dividend funding
of GBP324.5m, with 23.5 million new ordinary shares, fully paid,
being issued; and
-- In February 2018 (relating to the interim dividend for
2017/18) resulted in a reduction in cash dividend funding of
GBP7.1m, with 0.5m new ordinary shares, fully paid, being
issued.
The average Scrip dividend take-up since 2010 is 24%. 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 GBP1,621 m and has resulted in the
issue of 117.5 million Ordinary shares.
SSE believes the Scrip remains an important option for
shareholders but SSE is entering a new phase in its development and
is confident about the enduring strength of the business. As a
result, SSE believes the Scrip's impact needs to be balanced. That
means that if Scrip take-up of the full-year dividend exceeds 20%,
SSE now intends to buy back shares so that its dilutive effect is
not excessive. SSE believes this strikes the right balance in terms
of giving shareholders choice, potentially securing cash dividend
payment savings and managing the number of additional shares
issued.
Tax
SSE is one of the UK's biggest taxpayers, and in the survey
published in December 2017 was ranked 17th out of the 100 Group of
Companies in 2017 in terms of taxes borne (those which represent a
cost to the company and which are reflected in its financial
results).
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.
In October 2017, SSE published Talking Tax 2017: Being
transparent about tax. It did this because it believes building
trust with stakeholders on issues relating to tax is important to
the long-term sustainability of the business.
In the year to 31 March 2018, SSE paid GBP484.1m of taxes on
profits, property taxes, environmental taxes, and employment taxes
in the UK, compared with GBP385.0m in the previous year. The
increase in total taxes paid in 2017/18 compared with the previous
year was primarily due to:
-- A reduction in the level of asset impairments in 2017 and
2018 on which corporation tax relief was claimed. Asset impairments
in 2016 were particularly high which, due to the timing of
quarterly tax payments, meant corporation tax paid in the first
half of the year to 31 March 2017 was relatively low. Corporation
tax payments then returned to their normal levels for the rest of
2017 and 2018.
-- Increased amounts of business rates being payable on Network
assets, partly due to the continued expansion of the electricity
transmission and distribution network and increased rates.
-- Increased amounts of Climate Change Levy being payable due to
the increased volume of gas used across SSE's fleet of electricity
generating assets.
In 2017/18 SSE also paid EUR22.6m of taxes in Ireland, compared
to EUR16.5m the previous year; being the only country outside the
UK in which it has any trading operations.
As with other key financial indicators, 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 9.0%, as
compared with 10.2% in 2016/17 on the same basis, the reduction
being primarily due to the reduction in the headline rate of UK
corporation tax from 20% to 19%.
As would be expected for a group of SSE's size, SSE 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 Priorities for 2018/19
SSE's financial priorities for 2018/19 include:
-- Delivering an increase in the full-year dividend to 97.5 pence per share;
-- 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 renewable sources of energy; and
-- Maintaining a strong balance sheet, with robust ratios for
retained cash flow to debt and funds from operations to debt.
Group Strategy and Financial Outlook from 2018/19 onwards
SSE expects the planned SSE Energy Services transaction to be
completed in the second half of financial year 2018/19 making this
a year of transition for SSE.
Completion of this transaction is subject to necessary
shareholder and regulatory approvals; which SSE believes will be
secured. In addition to providing benefits for energy customers and
the energy market as a whole, its completion will:
-- give SSE a greater focus on the infrastructure and related
services relied on by energy customers, which is more aligned to
its core competencies; and
-- give investors greater visibility of assets and earnings in
the future, the majority of which will come from regulated networks
and renewables.
Strategy
Purpose, vision and strategy
The reshaped and renewed SSE will have a simple purpose: to
responsibly provide energy and related services needed now and in
the future. Its vision is to be a leading provider of energy and
related services in a low carbon word; and its strategy is to
create value for shareholders and society from developing,
operating and owning energy and related infrastructure and services
in a sustainable way.
-- Create value means focusing on earning returns for
shareholders, sustaining skilled jobs and making a positive
economic and social contribution to the countries in which SSE
operates.
-- Developing, operating and owning means being efficient in developing, operating and owning infrastructure and services and being agile in creating and securing value from them.
-- Energy and related infrastructure and services means
maintaining a range of complementary business activities with a
depth of insight on a core sector and related infrastructure
-- Sustainable way means doing things responsibly
Dividends and earnings
Remunerating shareholders' investment through payment of
dividends
The financial objective of this strategy is to remunerate
shareholders' investment through the payment of dividends. SSE
believes that its dividends should be sustainable, based on the
quality and nature of its assets and operations, the earnings
derived from them and the longer-term financial outlook.
In line with this, taking account of the impact of the expected
key developments in 2018/19, and reflecting the underlying quality
and value of its assets and earnings and the cash flows they
deliver, SSE's plan for the dividend for the five years to 2023 is
as follows:
-- For 2018/19, SSE is intending to recommend a full-year
dividend of 97.5 pence per share, an increase of 3% on 2017/18,
which is broadly in line with expectations for RPI inflation. This
provides clarity in a year of transition. This provides clarity in
a year of transition and is not subject to the timing of either the
SSE Energy Services transaction or the Domestic Gas and Electricity
(Tariff Cap Bill).
-- For 2019/20, SSE is planning to set the first
post-transaction dividend at 80 pence per share, which reflects the
impact of the changes in the SSE group expected to take effect by
then. This provides a sustainable basis for future dividend
growth.
-- For 2020/21, 2021/22 and 2022/23 SSE is targeting annual
increases in the full-year dividend that at least keep pace with
RPI inflation. This reflects SSE's confidence in the quality and
value of its assets and earnings and cash flows they deliver.
This plan for the dividend for the five years to March 2023,
when the current electricity distribution Price Control comes to an
end, supersedes SSE's previous reference to a dividend cover range
and is a plan which:
-- Aims to provide shareholders with certainty in 2018/19, a year of transition for SSE;
-- Reflects the changes in the SSE group expected to take effect
by the start of the 2019/20 financial year; and
-- Sets the dividend on a path for sustainable growth for the three years from 2020.
In addition to the dividend plan above, subject to the necessary
approvals being secured, the transaction relating to SSE Energy
Services announced on 8 November means shareholders in SSE will
receive one share in the planned new independent energy supply and
services company for every one SSE share they hold at the relevant
record date.
Focusing on adjusted earnings per share
To help assess its financial performance over the medium term,
SSE will continue to report 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. It
provides an important and meaningful measure of underlying
financial performance.
Investment and capital expenditure
Investing efficiently in energy assets that the UK and Ireland
need
SSE's strategy is to create value for shareholders and society
from developing, operating and owning energy and related
infrastructure and services in a sustainable way. Central to this
is investing in assets for which returns are expected to be clearly
greater than the cost of capital. New assets should complement
SSE's existing portfolio of assets and their development and
construction should be governed and executed in an efficient manner
and in line with SSE's commitment to strong financial
management.
SSE is currently expecting capital and investment expenditure to
total around GBP6bn across the five years to March 2023.
Economically-regulated electricity networks and
government-supported renewable sources of energy are expected to
account for around 70% of this. As is to be expected, the
investment is weighted more towards the first half of the five-year
period than the second; and includes around GBP1.7bn planned for
2018/19 and around GBP1.2bn currently planned for 2019/20.
Around 80% of the GBP6bn is committed. It includes around
GBP2.8bn of investment in electricity networks investment, which
should support further growth in the RAV to around GBP10bn in 2023.
It also includes investment in electricity generation such as a new
GBP350m highly efficient and flexible gas-fired power station at
Keadby 2 in Lincolnshire, an additional multi-fuel plant and some
potential investment in offshore wind farms.
Final investment decisions 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 dividend commitments.
Indeed, SSE believes that strict financial discipline is more
important than ever as auctions become an increasing feature of
energy networks infrastructure provision and SSE will result taking
on in appropriate risks or accepting returns on investment that are
financially unsustainable.
Supporting investment with effective financial management
SSE's continued investment in 2018/19 and 2019/20 means it
currently expects its adjusted net debt and hybrid capital to peak
at around GBP10bn. With its annual capital and investment
expenditure likely to be at lower levels in the subsequent three
years, SSE's cash flow based on its current plans should allow
adjusted net debt and hybrid capital to fall back towards GBP9bn by
2023.
SSE's debt structure remains strong, with around GBP9.5bn of
medium/long-term borrowings in the form of issued bonds, European
Investment Bank debt and other loans. Of this, around GBP5.5bn of
medium/long term borrowings are scheduled to mature in the period
to March 2023. Medium/long-term borrowings are supported by around
GBP0.3bn of cash and cash equivalents and cash held as collateral,
resulting in adjusted net debt of GBP9.2bn at 31 March 2018.
This outlook is based on completing the planned SSE Energy
Services transaction, the capital and investment expenditure plans
described above, planned changes to the Scrip dividend scheme and
delivering new dividend commitments. At the same time, opportunism
and agility will continue to be important to SSE and if good
opportunities to invest in, or acquire, new assets emerge that are
consistent with SSE's approached to discipline in financial
decision-making, levels of adjusted net debt and hybrid capital may
increase; but this would be in direct support of adjusted earnings
per share and the dividend.
Taskforce on Climate-related Financial Disclosures
In June 2017, the report of the Task Force on Climate-related
Financial Disclosures (TCFD) was published, which included a series
of recommendations for disclosing clear, comparable and consistent
information about the risks and opportunities presented by climate
change.
SSE endorses the recommendations and in November 2017 signed up
to their implementation; and over the next three years, will report
against them in relation to governance, strategy, risk and
targets.
Strategy and Outlook - Conclusions and priorities
The first financial objective of the strategy of the re-shaped
SSE, following the planned SSE Energy Services transaction is
clear: it is to remunerate shareholders' investment through the
payment of dividends. Over the period to 2023, SSE's strategic and
financial priorities are:
-- Effective execution of SSE's agreed strategy, with its focus
on regulated energy networks and renewable energy;
-- Delivery of SSE's five-year dividend plan;
-- Financial and operational discipline in relation to capital
and investment expenditure currently expected to total around
GBP6bn between 2018 and 2023;
-- Maintenance of strong financial management, including robust ratios for RCF and FFO/debt;
-- Progress towards SSE's long-term vision of being a leading
energy provider in a low carbon world.
WHOLESALE
Wholesale Key Performance Indicators
Mar 18 Mar 17
Electricity Generation and Energy Portfolio Management (EPM)
=========== ===========
Generation adjusted operating profit - GBPm 578.9 510.9
=========== ===========
Generation reported operating profit - GBPm 523.4 544.8
=========== ===========
EPM adjusted operating profit/(loss) - GBPm 46.0 (9.7)
=========== ===========
EPM reported operating (loss)/profit - GBPm (43.1) 191.3
=========== ===========
EPM and Generation capital expenditure and investment - GBPm 390.7 475.0
=========== ===========
GENERATION CAPACITY - MW
=========== ===========
Gas- and oil-fired generation capacity (GB) - MW 4,013 4,013
=========== ===========
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 7,334
=========== ===========
Pumped storage capacity (GB) - MW 300 300
=========== ===========
Conventional hydro capacity (GB) - MW 1,150 1,150
=========== ===========
Onshore wind capacity (GB) - MW 1,260 900
=========== ===========
Onshore wind capacity (NI) - MW 141 122
=========== ===========
Onshore wind capacity (ROI) - MW 594 456
=========== ===========
Offshore wind capacity (GB) - MW 344 344
=========== ===========
Biomass capacity (GB) - MW 37 37
=========== ===========
Total renewable generation capacity (inc pumped storage) - MW 3,826 3,309
=========== ===========
Total electricity generation capacity (GB and Ire) - MW 11,160 10,643
=========== ===========
Renewable capacity qualifying for ROCs - MW c2,150 c1,850
=========== ===========
GENERATION OUTPUT - GWh
=========== ===========
Gas- and oil-fired (inc CHP) output (GB) - GWh 19,153 14,977
=========== ===========
Gas- and oil-fired output (Ire) - GWh 2,739 2,463
=========== ===========
Coal-fired (inc biomass co-firing) output - GWh 1,462 901
=========== ===========
Multi-fuel output - GWh 316 0
=========== ===========
Total thermal generation - GWh 23,670 18,341
=========== ===========
Pumped storage output - GWh 259 233
=========== ===========
Conventional hydro output - GWh 3,171 3,101
=========== ===========
Onshore wind output GB - GWh 2,774 1,895
=========== ===========
Onshore wind output NI - GWh 306 251
=========== ===========
Onshore wind output ROI - GWh 1,509 1,211
=========== ===========
Offshore wind output - GWh 1,319 1,172
=========== ===========
Biomass output GB - GWh 90 92
=========== ===========
Total renewable generation (inc pumped storage) - GWh 9,428 7,955
=========== ===========
Total Generation output all plant - GWh 33,098 26,296
=========== ===========
Note 1: Capacity is wholly-owned and share of joint ventures
Note 2: Output is electricity from power stations, including multifuel, in which SSE has an
ownership interest (output based on SSE's power purchase agreements (PPA)). SSE awarded Ferrybridge
Multifuel 1 PPA October 2017.
Note 3: Wind output excludes 406GWh of constrained off generation in 2017/18 and 309GWh in
2016/17
Note 4: Onshore wind capacity and output at March18 includes additions at Clyde (net 165MW)
Bhlaraidh (110 MW) Dunmaglass (94 MW), Galway (120MW), Slieve Divena (19MW) and Leanamore
(18MW) and the disposal of Port of Tilbury (- 9MW)
Note 5: An additional 78MW of Clyde onshore windfarm was sold May 2018
Note6: Slough Heat & Power Biomass Plant's financial results are reported within SSE Enterprise.
Capacity and output included above.
Mar 18 Mar 17
=========== ===========
GAS PRODUCTION
=========== ===========
Gas production adjusted operating profit - GBPm 34.0 26.4
=========== ===========
Gas production reported operating (loss) - GBPm (70.7) (201.1)
=========== ===========
Gas production- M therms 543 618
=========== ===========
Gas production- Mboe 9.05 10.21
=========== ===========
Liquids production - Mboe 0.74 1.05
=========== ===========
Gas production capital investment - GBPm 65.5 72.9
=========== ===========
Total net proven and probable reserves (2P) bn therms 1.9 2.5
=========== ===========
Total net proven and probable reserves (2P) Mboe 33.8 43
=========== ===========
GAS STORAGE
=========== ===========
Gas storage adjusted operating (loss) - GBPm (6.5) (13.0)
=========== ===========
Gas storage reported operating (loss) - GBPm (6.5) (36.8)
=========== ===========
Gas storage customer nominations met - % 100 100
=========== ===========
Gas storage capital investment - GBPm 1.8 0.2
=========== ===========
Financial performance in Wholesale
During the year to 31 March 2018 total adjusted operating profit
in Wholesale was GBP652.4m compared to GBP514.6m in the previous
year. The primary drivers relating to operating profit were as
follows:
Generation: adjusted operating profit increased to GBP578.9m in
2017/18, from GBP510.9m in the previous year, reflecting increased
output in both renewable and thermal generation. This was partly
offset, as expected, by a lower achieved power price than in the
previous year and the end of the one-year contract under which
Fiddler's Ferry power station provided Blackstart services to
National Grid.
Within this segment Renewable Generation adjusted operating
profit increased to GBP473.8m, up from GBP391.6m in the previous
year.
Energy Portfolio Management: earned an adjusted operating profit
of GBP46.0m in 2017/18, compared to an operating loss of GBP9.7m in
2016/17, due to an improved trading position.
Gas Production: adjusted operating profit increased to GBP34.0m
in 2017/18, from GBP26.4m in the previous year, mainly due to a
higher achieved price, partly offset by slightly lower production
volumes.
Gas Storage: adjusted operating loss improved to GBP6.5m in
2017/18, from GBP13.0m in the previous year, due to an improved
trading performance and year on year cost savings.
Reported Wholesale Operating Profit: decreased to GBP403.1m in
2017/18, compared to GBP498.2m the previous year, due to the
factors above, offset by the impact of exceptional items and
re-measurements. In the year, there was an exceptional impairment
of Gas Production assets of GBP104.7m, compared to GBP227.5m in the
previous year. The result on operating derivatives was an GBP89.1m
loss in 2017/18 versus a GBP201.0m gain in the prior year. There
was also a fair value uplift on deconsolidation of Clyde wind farm
of GBP59.1m in prior year.
Wholesale Financial Outlook for 2018/19
In 2018/19 Wholesale's adjusted operating profit will be
affected by the cessation of 'in the money' power purchase
agreements and by the fact renewable energy output is
forward-hedged at a price lower than in 2017/18.
Overview
SSE's Wholesale segment consists of Electricity Generation, Gas
Storage, Gas Production and Energy Portfolio Management. The
businesses within Wholesale are well positioned to support the
trends towards decarbonisation, electrification and
infrastructure.
A diverse and complementary generation portfolio
SSE owns and operates a highly complementary portfolio of
renewable and thermal generation assets. This is in line with its
strategic interest to develop, own and operate renewable generation
and supporting flexible generation.
Low carbon generation from SSE's onshore wind farm, offshore
wind farm and hydro assets creates sustainable returns, with the
majority rewarded through renewable support schemes. Renewable
generation is influenced by weather conditions, but when renewable
output is low, SSE's thermal assets are able to respond quickly,
providing back up to renewables and delivering value from thermal
flexibility.
The diversity of SSE's generation portfolio is fundamental to
achieving the overall earnings in Electricity Generation. Moreover,
maximising portfolio returns requires a deep operational
understanding of all generation assets combined with extensive
commercial experience to secure value in an increasingly volatile
market.
Renewable Energy
Increasing output of renewable energy
Output of electricity from renewable sources, including pumped
storage, increased in 2017/18, compared to the previous year
(9.4TWh compared to 7.9TWh). The primary driver for this
differential was an increase in onshore wind capacity, as new wind
farms came online, along with improved wind conditions. Overall
renewable energy capacity, including conventional hydro and pumped
storage, increased, to 3,826MW as at 31 March 2018, from 3,309MW in
the previous year. The further sale of a 78MW stake in Clyde wind
farm in May 2018 means this stands at 3,748MW at 25 May 2018.
Enhancing management of hydro assets
Hydro is unique in SSE's portfolio, as it can be characterised
as both renewable and flexible. Over the last financial year, SSE's
hydro stations have delivered increased value from their
flexibility, enabled by enhancements to SSE's commercial management
of these assets.
In addition to 400MW of run-of-river hydro, SSE has 750MW of
flexible hydro. Alongside SSE's 300MW of pumped storage, flexible
hydro operates as 'Britain's biggest battery'. Increasing volumes
of wind energy coming onto the UK system will create the need for
more flexibility in the form of energy storage, and SSE's hydro
assets are well placed to provide this in an optimal way.
Generating value from onshore wind
2018 marks ten years since SSE's acquisition of Airtricity, and
over the past decade SSE has developed strengths in the efficient
development, construction and operation of onshore wind. To date,
SSE's focus has been on completing Renewable Obligation (RO)
projects in the UK and REFIT projects in Ireland. Seven new onshore
wind energy projects have been delivered in the last 16 months, and
all have come in under budget. These include Bhlaraidh in Scotland
(110 MW) and Leanamore (18MW) in Ireland, which were both delivered
in the second half of 2017/18.
Following the sale of 78MW of capacity at Clyde, SSE's onshore
wind farm capacity now stands at 1,917MW. Stronelairg (228MW),
SSE's final wind farm to be constructed under the RO, is on track
for completion in 2018. The project reached a significant milestone
on 24 March 2018 when it achieved first export, rendering it
eligible for RO accreditation.
SSE's onshore wind farm pipeline consists of around 800MW of
potential new build projects and extensions, including the joint
venture Viking Wind Farm (up to 457MW - SSE share 50%), located on
Shetland, and Strathy South (up to 133MW). In February 2018, the UK
Government received State Aid clearance from the European
Commission to enable wind projects on the remote islands of
Scotland to compete in the next Contracts for Difference auction
alongside other less established technologies. Confirmation of the
treatment of remote islands projects in the next allocation round
is expected in the coming months.
At present, there is no indication of a further UK Contracts for
Difference auction for onshore wind. In Ireland, SSE awaits the
outcome of the Irish Government's consultation on the development
and design of a new Renewable Electricity Support Scheme (RESS). In
both jurisdictions, SSE continues to explore future development
options for onshore wind and is well placed to take advantage of
future opportunities as they emerge.
Continuing to invest in offshore wind
Part of the value of SSE's offshore wind farm assets is their
geographic diversity around the UK, which provides a spread of wind
capture opportunities. Existing offshore wind continues to hold
possibilities of growth through more efficient operation, better
targeting of operations and maintenance (O&M) investment or
enhancements to revenue streams.
The joint venture operations of SSE's existing offshore assets
have created strong commercial partnerships and resulted in shared
industry learnings.
Offshore wind represents a huge opportunity for SSE to deliver
its own decarbonisation ambitions and contribute to the achievement
of the UK's and Ireland's carbon targets. For example, in the UK,
to meet legally binding carbon targets, the Committee on Climate
Change estimates an additional 80 to 100TWh of low carbon
generation are needed by 2030. In October 2017, the UK Government
announced that GBP557m will be available for future Contracts for
Difference auctions for less established technologies, including
offshore wind. The next auction is expected to take place in Spring
2019. The UK Government also intends to work with industry to
develop an offshore wind Sector Deal, which could result in at
least 10GW of new capacity in the 2020s.
SSE continues to develop its expertise in offshore wind,
primarily through the Beatrice Offshore Windfarm joint venture
(588MW - SSE share 40%), which is making excellent progress towards
its construction milestones and which will contribute to earnings
from mid-2019/20. SSE has interests in three further offshore wind
prospects under development:
Dogger Bank (up to 3.6GW), a 50:50 joint venture formed with
Statoil to develop three projects in the Dogger Bank zone - Creyke
Beck A, Creyke Beck B and Teesside A. The projects are being
progressed in readiness for potential participation in the next CfD
auction.
Seagreen (Phase One up to 1,050MW), a 50:50 partnership with
Fluor Limited, which in November 2017 was cleared of the legal
challenge to its consent. Work is also under way to prepare
Seagreen to potentially enter the next CfD auction.
Arklow Bank (520MW) in Ireland. SSE wholly owns this consented
site and awaits the outcome of the Irish RESS to see whether
offshore wind will be eligible for support.
The Crown Estate and the Crown Estate Scotland have signalled
their intent to make new seabed rights available to offshore wind
developers to ensure new projects can start to operate from the
late 2020s. SSE is following this process closely to prepare for
potential new offshore wind leasing in the form of extensions or
new sites.
Thermal Generation
Complementing renewable energy
Efficient, reliable and flexible thermal back-up offers weather
insurance for SSE's wind farm capacity and allows optimisation of
the portfolio to a higher overall economic return. In addition to
managing variability in renewable production and demand, SSE's
thermal fleet provides an advantage within the wider electricity
market by providing reliably capacity at scale in response to
market changes, for example, unplanned nuclear outages.
SSE's CCGTs are among the most flexible on the GB electricity
system and have increasingly created value from their intra-day
flexibility.
Capacity market auction
In February 2018, the UK Government procured 5.8GW of de-rated
capacity in the year-ahead capacity market auction for delivery in
2018/19. The auction cleared at a price of GBP6.00/kW (kilowatt).
SSE successfully secured an agreement for its CCGT at Peterhead
(1,044MW) worth GBP6.3 million. Below is a summary of the auction
results for capacity which will be delivered in 2018/19 and results
that were decided in 2017/18.
2018/19 Delivery Year Clearing price Successful SSE capacity Total SSE income
(GBP/kW) (MW) (GBP/year)
T-1 auction
(February 2018) 1,044 of gas-fired power generating plant
Total of 5.8GW procured 6.00 (Peterhead) 6.3 million
================ ================================================== =================
T-4 auction (December 2014) 19.40 849MW of hydro electric and pumped storage plant 85.5 million
Total of 49.26GW procured 2,266MW of gas-fired power generating plant;
1,294MW of coal-fired power generating plant
================ ================================================== =================
2021/22 Delivery Year Clearing price Successful SSE capacity Total SSE income
(GBP/kW) (MW) (GBP/year)
T-4 auction 806MW of hydro electric and pumped storage plant
(February 2018 3,371MW of gas-fired power generating plant
Total of 50.6GW procured 8.40 (including all existing CCGTs) 35.1 million
================ ==================================================== =================
The capacity market revenue will be received on a pro-rated
basis throughout the delivery year, which runs October through
September. To secure the revenue arising from the capacity market,
providers of generating capacity must produce electricity when the
system requires during the relevant delivery year; failure to do so
will result in penalties being levied.
Looking to future requirements for electricity
Whilst recent capacity market auctions have not resulted in
new-build CCGT, the mandated closure of coal-fired generation and
continued uncertainty over nuclear life extensions and nuclear new
build mean that new capacity will be required by the mid-2020s.
As a result, SSE, in partnership with Siemens, has decided to
proceed with a unique commercial opportunity to introduce
first-of-a-kind, high efficiency, gas-fired generation technology
to the UK. Work will begin in Spring 2018 on an 840MW CCGT at
Keadby 2. Siemens will provide its 9000H technology and will manage
technical, construction risk until the plant is handed over to SSE
as well as provide appropriate performance guarantees. SSE will
invest around GBP350m in the development and construction of the
project, with a substantial proportion of its financial exposure
deferred until the plant is operational.
Once completed, the station will be the most efficient CCGT on
the system, delivering large-scale capacity from the early 2020s
onward. It will be able to provide the flexible generation needed
to support the integration of large-scale renewables into the
electricity grid.
SSE continues to believe the GB capacity market is the right
mechanism to ensure the electricity system remains secure at the
lowest cost to consumers. Alongside wholesale market and ancillary
services revenues, capacity market payments remain an important
aspect of the economics of Keadby 2, and SSE intends to participate
in future auctions to secure a capacity market agreement.
Additionally, SSE continues to develop a CCGT project at
Ferrybridge D with the view to progressing should market conditions
warrant further investment in high efficiency gas-fired generation.
There is also considerable value in the optionality of the existing
sites at Ferrybridge and Fiddler's Ferry.
Securing capacity contracts in Ireland
In January 2018, the results of the first competitive capacity
auction under Ireland's new Integrated Single Electricity Market
(I-SEM) were published. All units at each of SSE's four thermal
plant in Ireland (Great Island CCGT (464MW), Rhode (104MW),
Tawnaghmore (104MW), and Tarbert (590MW)) secured I-SEM capacity
contracts at the auction clearing price of EUR41.8/kW.
The new I-SEM capacity contracts will be from October 2018 until
September 2019. Capacity market revenue will be received throughout
the delivery year. Generators that fail to provide energy when
called upon will be subject to financial penalties.
Gas Production
SSE has a diverse equity share in over 15 producing fields
across 17 licences in three regions of the UK Continental Shelf:
the Easington Catchment Area, the Bacton Area and Greater Laggan
Area.
Total output in 2017/18 was 543 million therms (9.05 mmboe) of
gas and 0.74 mmboe of liquids, compared with 618 million therms of
gas (10.21 mmboe) and 1.05 mmboe of liquids for 2016/17. This
decline in production was primarily due to the natural decline of
the fields. Average daily gas and liquids production was around
1.6mth/day (gas equivalent) in 2017/18.
Gas Production currently produces enough gas to supply all of
SSE's Business Energy customers as well as SSE Airtricity household
customers in Ireland. This acts as a natural hedge to other parts
of the SSE Group. For example, the availability of fixed price fuel
within the Wholesale portfolio enables SSE to provide sales
contracts to I&C customers which offer longer term price
protection.
Successes over the last financial year included the early
delivery of the Edradour and Glenlivet fields across the Greater
Laggan Area, as well as achieving operational efficiency at the
Shetland Gas Plant (SSE share - 20%) of 95.4%.
SSE does not expect to make further acquisitions; however,
investments to enhance its existing assets may be undertaken. For
example, further exploration and appraisal activities are planned
for the West of Shetland region in financial year 2018/19.
Energy Portfolio Management (EPM)
Energy Portfolio Management provides a route-to-market and
effective risk management for Wholesale and other 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.
As the electricity system changes to integrate intermittent,
inflexible and distributed forms of generation alongside
conventional plant, EPM's ability to realise the value of
flexibility from SSE's thermal and hydro assets is increasingly
important. Building on a foundation of strong asset optionality and
wind forecasting capabilities, EPM's ability to take responsible
trading decisions provides the opportunity to increase value
derived from SSE's onshore and offshore wind portfolio.
Gas Storage
The economic conditions continued to be challenging for gas
storage in 2017/18. Following the closure of Rough capacity, SSE
now holds around 40% of the UK's conventional underground gas
storage capacity, and the overall UK storage duration curve has
shrunk to around 16 days. This loss of energy storage will be
further exacerbated as coal-fired generation shuts over the next
few years, taking with it the storage inherent in coal stocks.
Although the UK has access to diverse gas supply sources, such
as interconnection and LNG, gas storage will play an important role
in safeguarding the UK's gas and electricity security of supply. If
the market or regulatory signals are present, SSE's gas storage
assets are well-placed to provide this service to energy users.
Wholesale - Conclusion and Priorities
SSE's Wholesale directorate comprises a unique portfolio of
complementary, high quality businesses with assets and expertise
that cannot be replicated in the market. It is well placed to
respond to the trends of decarbonisation, electrification and
infrastructure development as outlined in Realising Opportunities
section of the Strategic Overview.
The Wholesale businesses have a significant role to play in
delivering SSE's ambition to be a leading provider of energy and
related services in a low carbon world. Having already met its 2020
carbon target and helping the UK to meet its first two carbon
budgets, SSE has a new ambition to further reduce the carbon
intensity of the power it generates by 50%, to around 150gCO(2)
eq/kWh, by 2030. SSE continues to believe that putting a meaningful
price on carbon emissions is a critical part of UK and Irish energy
policy and is one of the most important policy tools that
governments have to help the continued cost-effective delivery of
reliable and low carbon electricity.
Together, SSE's Wholesale businesses have delivered adjusted
operating profit of GBP652.4m and present material opportunities
for further growth. They support SSE's strategic goal of creating
value for shareholders and society. Over the next financial year,
Wholesale will continue to focus on the following priorities:
safe, responsible and efficient operation of all existing
assets;
efficient, responsible and successful investment in assets that
energy customers need now in the future; and
development of existing and new growth options in the UK and
Ireland - with a focus on realising value from SSE's material
offshore wind farm interests, maintaining options for onshore wind
and CCGTs, beginning work to construct Keadby 2; and pursuing new
multifuel capacity.
NETWORKS
Networks Key Performance Indicators
Mar 18 Mar 17
ELECTRICITY TRANSMISSION
======= =======
Transmission adjusted and reported operating profit - GBPm 195.6 263.7
======= =======
Regulated Asset Value (RAV) - GBPm 3,070 2,685
======= =======
Capital expenditure - GBPm 434.2 505.0
======= =======
ELECTRICITY DISTRIBUTION
======= =======
Electricity distribution adjusted and reported operating profit - GBPm 402.2 433.4
======= =======
Regulated Asset Value (RAV) - GBPm 3,406 3,246
======= =======
Capital expenditure - GBPm 326.1 284.7
======= =======
Electricity Distributed TWh 39.2 39.3
======= =======
Customer minutes lost (SHEPD) average per customer 55 60
======= =======
Customer minutes lost (SEPD) average per customer 48 43
======= =======
Customer interruptions (SHEPD) per 100 customers 57 68
======= =======
Customer interruptions (SEPD) per 100 customers 55 48
------------------------------------------------------------------------ ------- -------
SCOTIA GAS NETWORKS (SGN)
SSE's 50% share reducing to 33% from 26 Oct 2016
======= =======
SGN adjusted operating profit (SSE's share) - GBPm 165.3 239.4
======= =======
SGN reported operating profit (SSE's share) - GBPm 71.8 151.7
======= =======
Regulated Asset Value - GBPm 1,828 1,748
======= =======
Uncontrolled gas escapes attended within one hour % 98.2 98.7
======= =======
SGN gas mains replaced - km 1,000 989
======= =======
Owning, operating and investing in Networks
Energy networks continue to play a pivotal role in the
transition to a low carbon economy, providing the critical national
infrastructure required to support the ongoing shift to a
decarbonised energy system and electrification of transport.
SSE is the only energy company in the UK to be involved in
electricity transmission, electricity distribution and gas
distribution. Its electricity networks businesses are collectively
known as Scottish and Southern Electricity Networks (SSEN).
Company Network SSE Ownership Geography Covered
Scottish Hydro Electric Transmission Scottish Hydro Electric 100% North of Scotland
Plc Transmission (SHET)
==================================== ============== =========================
Scottish Hydro Electric Power Scottish Hydro Electric Power 100% North of Scotland
Distribution Plc Distribution (SHEPD)
==================================== ============== =========================
Southern Electric Power Distribution Southern Electric Power 100% Central Southern England
Plc Distribution (SEPD)
==================================== ============== =========================
Scotia Gas Networks Scotland Gas Networks 33% Scotland
------------------------------------ -------------- -------------------------
Southern Gas Networks Southern England
==================================== -------------- =========================
SSE's interests in economically-regulated energy networks
support the maintenance of a balanced range of assets, operational
efficiency and disciplined investment. SSE's capital expenditure
and investment programme for its electricity networks in the five
years to 2023 is forecast to be around GBP2.8bn. This will support
future earnings and growth with the RAV (Regulatory Asset Value) on
course to reach GBP10bn by 2023, across SSE's electricity and gas
networks interests.
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.
These economically-regulated, lower-risk businesses provide
relative predictability and stability for SSE and balance its
activities in the market-based parts of the energy sector. They are
core to SSE's strategy in the short, medium and long-term and
contribute significantly to its commitment to the payment of
dividends to shareholders.
Looking ahead to RIIO-2
On 7 March 2018, Ofgem published a consultation on the
regulatory framework for the next Price Control periods, RIIO-2,
which for SSE will run from April 2021 for its electricity
transmission business and its share in SGN; and from April 2023 for
its two electricity distribution businesses.
In its consultation, Ofgem has set out that it expects the range
of available returns for network businesses to be lower for the
next round of Price Controls, while maintaining high levels of
innovation and reliability. It has also set out its strongly
"minded to" position to revert to five-year price control periods
and confirmed a stronger voice for customers and stakeholders in
the development of Price Control business plans through the
establishment of independent user groups and panels.
Despite its focus on lower returns, Ofgem has confirmed it is
still expected that high performing companies will continue to be
rewarded through outperformance of the incentive based regulatory
framework.
SSE will continue to engage constructively with Ofgem and other
stakeholders as the regulator further develops its proposals for
RIIO-2, helping to ensure the evidence base is robust, the outcomes
are clear and the views of customers, communities, stakeholders and
investors are fully considered.
Engaging stakeholders in decision making
SSEN continues to place its customers and stakeholders at the
forefront of its decision making and during 2017/18 it held three
major stakeholder engagement events for each of its three licenced
electricity networks. The events focused on SSEN's performance
against its business plan and will lead to a number of changes to
its practices and priorities during 2018/19 and beyond as a direct
result of the feedback received.
SSEN's independent Stakeholder Advisory Panel is now firmly
established and working alongside its Board, and continues to
provide key external input to help scrutinise business performance
in meeting SSEN's business plan commitments.
In January 2018, SSEN also established the industry's first
Inclusive Service Panel, bringing together representatives with
expertise ranging from mental and physical disability to religious
diversity and equality. The Panel is already providing invaluable
insight and making practical recommendations to help ensure SSEN
delivers a truly inclusive service for all.
The commitment to place its stakeholders at the heart of its
business will help ensure SSEN is well placed to adapt to the
evolution of the regulatory framework, RIIO2, and to the enhanced
and enduring role its customers and stakeholders will play in the
development of its future business plans.
Financial performance in Networks
As expected, total adjusted operating profit in Networks for
FY2017/18 decreased to GBP763.1m, compared to GBP936.5m in the
previous year, with the principal movements as follows:
Transmission: as expected, adjusted operating profit decreased
to GBP195.6m in 2017/18, from GBP263.7m in the previous year. This
was mainly due to the phasing of capital expenditure on significant
projects and the resulting impact on regulatory revenue, along with
the impact of the sharing of the previous year's total expenditure
(totex) underspends with customers.
Distribution: as expected, adjusted operating profit decreased
to GBP402.2m in 2017/18, from GBP433.4m in the previous year. While
base revenue increased in line with the growing RAV (Regulatory
Asset Value), this was offset by the expected net reduction in
under-recoveries and losses incentive income, outlined in the table
below.
This table also gives an indication of the expected impact of
under- or over-recoveries in future years and also income from
incentives:
FY2016/17 FY2017/18 FY2018/19 FY2019/20
Under/over + GBP38m +GBP5m - c.GBP10m - c. GBP14m
recovery from 2 under-recovered from under-recovered from over-recovered from over-recovered from
yr. previous FY 2014/15 2015/16 2016/17 2017/18. A further
-GBP10m related to
2017/18 over
recovery
will be absorbed in
2021/22
====================== =========================== ======================== ====================
DPCR Losses +GBP35m +GBP15m - -
incentive income
====================== =========================== ======================== ====================
Incentives Performance FY2017/18 (performance FY2018/19 (performance FY2019/20
earned in 2015/16) earned in 2016/17) (performance earned
in 2017/18)
=========================== ======================== ======================
Interruptions Incentive Scheme (IIS) GBP18.45m GBP13.9m GBP6.81m
=========================== ======================== ======================
Customer Satisfaction and Engagement
=========================== ======================== ======================
Customer Satisfaction Survey GBP1.70m GBP2.78m GBP2.73m
=========================== ======================== ======================
Stakeholder Engagement and Vulnerable GBP1.13m GBP0.82m GBP1.15m*
Customers*
=========================== ======================== ======================
Connections GBP2.33m GBP1.73m GBP1.77m
=========================== ======================== ======================
Total GBP23.61m GBP19.23m GBP12.46m
=========================== ======================== ======================
Numbers shown are in the price base of the year in which incentives are earned, and under
the price control are inflated to the price base of the year in which they are recovered.
A requirement for continual improvement is built into the incentives framework, this means
if performance measures do not demonstrate improvement year on year, incentive income falls.
*estimated outturn (actual not determined until later in 2018)
There are several factors which contribute to RIIO Price Control
earnings which can be found on the Ofgem website in the
Transmission and Distribution Licence, Price Control Financial
Handbook and Price Control Financial Model.
Gas Distribution: as expected, SSE's share of SGN's adjusted
operating profit fell to GBP165.3m in 2017/18, from GBP239.4m in
the previous year, mainly due to SSE's disposal of a partial equity
stake (16.7%) in October 2016, but also due to the phasing of
regulatory revenue and the sharing of out-performance with
customers, as part of the RIIO Price Control. The impact on
operating profit of the part disposal in the full financial year
2017/18 was GBP55m.
Reported Networks operating profit: decreased to GBP669.6m, from
GBP848.8m, primarily for the reasons outlined above. In addition,
SGN had an exceptional gain in 2016/17 of GBP19.5m due to the
change in Corporation Tax rate.
Networks Financial Outlook - 2018/19
Total adjusted operating profit in the economically-regulated
Networks segment is expected to increase by a mid-single digit
percentage, mainly as a result of the phasing of income recovery in
Electricity Transmission and a higher expected contribution from
SGN.
Electricity Transmission
SSEN, operating as Scottish Hydro Electric Transmission plc, is
responsible for maintaining and investing in the electricity
transmission network in the North of Scotland.
In addition to the base rate of return (WACC) on the RAV, we are
able to earn incentives as part of the RIIO framework. In RIIO-T1
the financial incentives available are driven primarily by totex
outperformance and the potential to deliver savings in capital
investment to the benefit of customers. Given the significant
capital investment programme that SSEN has undertaken, the outcome
of efficiency savings will be dependent on the successful
completion of multi-year large scale projects and the close out of
RIIO-T1 after 2021. It is currently expected that SSEN will deliver
totex savings over the course of RIIO-T1 of which, under the price
control agreement, 50% will be retained by SSEN, supporting returns
for RIIO-T1, with the remaining 50% returned to customers.
Operating a rapidly growing network
SSEN's first priority is to provide a safe and reliable supply
of electricity to the communities it 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
the connection of large volumes of renewable generation capacity,
SSEN has maintained an impressive reliability of over 99.9% in
2017/18.
Connecting renewable electricity generation
SSEN's strategic priority for the RIIO-T1 period has been to
enable the transition to a low carbon economy through building the
transmission infrastructure necessary to connect and transport
renewable energy.
Since the beginning of RIIO-T1, the installed renewable
electricity generation capacity connected to SSEN's transmission
network has grown significantly, from 3.7GW to over 5GW and is
forecast to grow to over 6GW by the end of the current Price
Control period. This successful and timely connection of renewable
electricity generation is contributing significantly to Government
renewable and climate change targets.
During 2017/18, generation assets connected to SSEN's
transmission network included Stronelairg wind farm (228MW); and
Aberdeen Offshore Windfarm (96MW), both of which were successfully
connected during March 2018.
SSEN continues to work with its generation customers to provide
timely and efficient connections to its network, including Dorenell
wind farm (220MW) due to connect in 2018/19; Beatrice Offshore Wind
Farm (588MW also due to connect in 2018/19; and Moray Offshore
Renewable Limited (MORL) (504MW) due to connect in 2020/21.
Investing to provide the infrastructure to support a
decarbonised energy system
Since the start of the RIIO-T1 Price Control, SSEN's capital
investment in its transmission network has totalled over GBP2.3bn,
with this investment playing a pivotal role in providing the key
national infrastructure to facilitate the UK's transition to a low
carbon economy and a largely decarbonised energy system.
SSEN continues to make progress with the delivery of its
Caithness-Moray transmission link. With an agreed allowance of
GBP1.1bn, the project is the largest single investment undertaken
by any part of the SSE group to date. Construction progress on most
aspects of the project continues to be excellent, although as with
any project of this size and complexity there are challenges to
overcome in terms of construction risk and quality assurance. SSEN
continues to work very closely with its key contractors to make the
necessary progress in the coming months so that the commissioning
and energising of the reinforcement is successful and remains on
track for delivery by the end of 2018.
Despite the changes affecting onshore wind policy, SHE
Transmission still has a healthy pipeline of projects for the
remaining three years of the current price control period. This
comprises:
-- planned projects associated with on- and off-shore wind generation developments; and,
-- projects to renew ageing infrastructure dating back to the 1950s and 1960s.
These projects represent a forecast pipeline of investment of
around GBP900m in the next three years and mean the business is on
track to increase the Transmission RAV to around GBP3.6bn by the
end of the current Price Control period in 2021. This investment
pipeline, plus a further GBP300m of Transmission capital and
investment expenditure in the period to 2023, means the RAV is
forecast to grow to GBP3.8bn by 2023. This total of GBP1.2bn of
spend in the five years to 2023 is one component of SSE's Group
capital and investment plans of GBP6bn over the five years to
2023.
In addition to its base case capital and investment plans of
GBP1.2bn, SHE Transmission has visibility on a further GBP700m of
contingent projects that are dependent on the progress of onshore
wind developments against a continued uncertain policy regime. This
means the timing and ultimate need for them is not yet clear.
Several of these relate to potential onshore reinforcements in
Argyll and Kintyre and across the Highlands. This list also
includes projects which came forward in January 2018, when the
System Operator, National Grid, published its Network Options
Assessment (NOA) report, which gave SSEN the signal to proceed with
plans to reinforce the existing North East and East Coast onshore
transmission system.
Once complete, the reinforcements will provide additional
network capacity to facilitate the planned connection of
significant offshore wind generation across the north east of
Scotland, the increase in transmission entry capacity (TEC) at
Peterhead Power Station and the proposed NorthConnect
interconnector to Norway.
Preparing to connect Scotland's island groups
The potential transmission links to the Scottish islands groups
provide further potential for future growth.
Following confirmation that the UK Government intends to allow
remote island onshore wind to complete in the next Contracts for
Difference auction in spring 2019, SSEN continues to work with its
generation customers and other stakeholders across the three island
groups to take forward proposals to provide transmission
connections to enable the connection of renewable electricity
generation.
In March 2018, SSEN submitted to Ofgem a Needs Case for the
Orkney transmission link. SSEN's proposed solution would deliver a
phased approach to reinforcement, which will initially deliver a
single 220MW subsea cable in October 2022, followed by a second
cable of similar specification once further generation has
committed and the economic case has been made for the further
investment.
SSEN also intends to submit Needs Cases for both the Western
Isles and Shetland during the second half of 2018 and will continue
to engage positively and constructively with developers, Ofgem,
Government and other stakeholders to take forward its proposals in
a timely manner, as soon as developer commitment and all necessary
regulatory and planning approvals are confirmed. Together, these
three island links could provide an investment opportunity of
GBP1.5bn.
Addressing competition in transmission
In January 2018 Ofgem published an update to its plans to
introduce competition into onshore electricity transmission for
new, separable and high value onshore transmission assets.
With a strong track record for connecting renewable energy
developments 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.
SSEN remains supportive in principle of the introduction of
competition, where it can be clearly demonstrated that it delivers
benefits to energy customers and the wider economy as well as
maintaining the efficient delivery of transmission infrastructure.
It does, however, have a number of concerns about its
implementation. In particular, SSEN believes Ofgem's proposals
would effectively reopen the current Price Control without
following due process; and they are not underpinned by legislation
and they risk delays to the delivery of well-established and
advanced projects.
For these reasons, SSEN believes competition should not be
implemented before the beginning of the next Price Control in order
that these material factors be adequately addressed in an open and
transparent manner and SSEN will continue to engage constructively
with Ofgem and other stakeholders as part of this process.
Planning for the RIIO-ET2 price control
Preparations are well under way to gather evidence to support
the development of SSEN's next transmission business plan.
SSEN's main focus during 2017/18 has been on future energy
scenarios across the north of Scotland, with extensive consultation
and engagement with key stakeholders helping SSEN identify the
likely network requirements for the next Price Control. This has
ranged from future energy trends; the future outlook for
electricity generation, including repowering of ageing onshore wind
farms; as well as the likely speed and scale of the electrification
and decarbonisation of heat and transport.
SSEN will undertake further engagement and consultation with key
stakeholders in the year ahead, including its Stakeholder Advisory
Panel and the soon to be established User Group and Industry
Panels, which will form a key component of the RIIO2 framework.
This research and engagement will help SSEN build a credible and
evidence-based business plan for submission to Ofgem in 2019.
Electricity Distribution
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.
Delivering for customers under the incentive based framework
SSEN is now three years into the RIIO-ED1 Price Control and
continues to deliver significant changes to its operations,
processes and standards to ensure the needs of its customers remain
at the forefront of decision making.
SSEN's performance is assessed against the commitments made in
its business plan and this drives the revenue which is earned. The
key areas addressed are: network availability and reliability;
social obligations; safety; environmental impact; connections; and
customer satisfaction.
The outcomes of the incentive based framework within which SSEN
operates are increasingly dependent on customer opinion and
feedback, providing opportunities for additional earnings through a
range of incentive schemes. The additional incentive based
performance is measured against: The Interruption Incentive Scheme;
Ofgem Customer Satisfaction Measures; Complaints Performance;
Stakeholder Engagement and Customer Vulnerability; and Incentive in
Connections Engagement. A requirement for continual improvement is
built into the incentives framework, this means if performance
measures do not demonstrate improvement year on year, incentive
income falls.
By making a 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' for customers
A fundamental responsibility of SSEN is to 'keep the lights on'
for its customers. Through the RIIO-ED1 price control, 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. This is part of the Interruption Incentive Scheme (IIS).
After a good performance in 2016/17, SSEN experienced a fall in
IIS incentive income from GBP13.9m to GBP6.8m in 2017/18. This was
largely due to an unusual and sustained pattern of weather in the
south of England leading to pockets of unplanned supply
interruptions that did not qualify under Ofgem's 'exceptional
event' definition.
In SSEN's central southern England network region, CI increased
to 55 (48 in 2016/17) and the average CML increased to 48 (43 in
2016/17).
In SSEN's north of Scotland network region, CI decreased to 57
(68 in 2016/17) and the average CML decreased to 55 (60 in
2016/17).
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. This includes
the refurbishment and reinforcements of assets; upgrades to
automation which reduces the number of customers affected and the
duration of faults; minimise the impact of tree related damage; as
well as investments in new innovative technologies.
Providing leading customer service and engaging with
stakeholders
Since beginning of the RIIO-ED1 price control, SSEN has
implemented significant changes to its customer services operations
to improve the journey for its customers and respond to the
incentive based framework.
SSEN's continued focus on its customers and doing the right
thing has resulted in a total incentive reward of GBP2.7m for
2017/18 against the Customer Satisfaction (or Broad) Measure
Incentive which is slightly lower than in the previous year
(GBP2.8m).
To benchmark its performance against leading customer service
providers SSEN has become a member of the Institute of Customer
Service and continues to look across a range of sectors to help it
achieve its ambition to be recognised for providing leading
customer service.
SSEN remains fully committed to supporting its customers who
require extra help and ensuring suitable support is provided to its
Priority Services Register (PSR) Customers during network outages.
Supporting vulnerable customers is also a key component of the
Stakeholder Engagement and Consumer Vulnerability (SECV) Incentive
and contributes to 25% of the total award available. In respect of
performance in FY17, SSEN was awarded GBP0.8m under the SECV
incentive against a total available reward of GBP3.1m. The outcome
of the SECV incentive for 2017/18 will not be known until the
second half of 2018 but it is currently estimated to be
GBP1.15m.
A key challenge continues to be identifying customers who are
eligible for support through its PSR. SSEN continues to look at
innovative ways of reaching these customers, from its vulnerability
mapping tool, to working with external partners and trusted
intermediaries building on existing partnerships and forging new
relationships with a broad and diverse range of organisations, such
as the London Sustainability Exchange and NHS Highland, helping
broaden the reach of SSEN's support.
Continuing improvements in connections
Over recent years, SSEN has made significant changes and
improvements to its connections process, informed by the needs and
expectations of customers, which was reflected by an award of
GBP1.8m under the Average Time to Connect Incentive for 2017/18
against a total reward available of GBP2.4m, up from GBP1.7m the
previous year.
This commitment to place its connections customers at the heart
of its processes was also reflected by SSEN avoiding a penalty for
the second consecutive year under the penalty-only Incentive in
Connections Engagement (ICE) for the 2016/17. The outcome of ICE
for 2017/18 will not be known until the second half of 2018.
Targeting frontier incentive performance
Performance in relation to interruptions, customer service and
connections, plus stakeholder engagement, are the subject of an
incentives framework which rewards companies for good performance
but also penalises them where performance does not meet required
standards. In summary, this provides an opportunity for network
operators to share in the rewards from delivering improvements for
its customers. Improved performance against these metrics remains a
key objective for SSEN.
Looking collectively at RIIO-ED1 incentive performance during
2017/18, SSEN earned GBP12.5m from a maximum available award of
GBP43.1m. It also avoided penalty-only awards totalling GBP9.7m.
Whilst this represents progress in incentive performance since the
start of RIIO-ED1, significant headroom remains across each
area.
SSEN is targeting operational improvements across its business
to drive performance, including the increased use of automation,
the monitoring of multiple interruptions and 'at risk' circuits,
and a consistent approach for design and quotation in connections.
A new Customer Relationship Management system will be introduced in
2019, which will provide a platform for effective management of
customer-related issues.
SSEN is confident these incremental improvements in reliability,
customer service and connections, plus stakeholder engagement, will
move it closer to maximising its incentive income as it progresses
through the RIIO-ED1 price control.
Delivering a major programme of capital investment
SSEN continues to undertake a major capital investment delivery
programme across both its distribution licenced networks which will
deliver significant improvements for its customers and provide the
infrastructure required to support economic development, as well as
contributing to sustained and fair returns and increased RAV.
In 2017/18 SSEN invested a total of GBP326.1m in its
distribution networks, bringing the total invested in the first
three years of the ED1 Price Control to GBP869.1m - which is part
of a forecast investment of GBP2.4bn throughout the RIIO-ED1
period.
Good progress is being made to deliver SSEN's Bicester to East
Claydon project which, at GBP24m, is the largest single project
being delivered by SSEN under the RIIO-ED1 Price Control and is one
of the largest electricity distribution investments ever undertaken
in south east England.
In the north of Scotland, SSEN is taking forward a major rolling
programme of investment to replace the existing subsea cables which
have successfully and safely served the Scottish islands for many
decades. With a forecast investment of GBP100m across ED1, subject
to regulatory approval, the responsible and evidenced based
approach SSEN has adopted to inform its subsea cable replacement
programme will deliver RAV growth, whilst minimising the cost
impact to its customers.
SSEN's disciplined and efficient approach, underpinning the
delivery of its capital and strategic investment programme, will
ensure it continues to deliver value for energy consumers and
provide a fair return on investment for shareholders.
Leading on networks innovation
Innovation continues to play a key role in the development and
improvement of the service provided to SSEN's customers and, at the
same time, help inform the wider industry as it prepares for
fundamental changes to the electricity system.
SSEN has a clear track record in progressing innovation through
Ofgem funded structures, securing over GBP95m in regulatory funding
for innovation projects since 2010. This record was strengthened in
July 2017, when SSEN was awarded an additional GBP2m as a
discretionary award from Ofgem for its Tier 1 innovation projects,
the highest amount awarded to any Distribution Network Operator
(DNO) group.
SSEN has also been successful in progressing new initiatives
outside of funding mechanisms, where benefits to the efficiency of
operations or delivery for customers are proven. This includes
investment in aerial scanning of its overhead network using LiDAR
technology, which is now 90% complete. This initiative, which will
give measurements accurate to 2cm, will bring significant benefits
in ensuring safety and asset compliance, efficient vegetation
management and, ultimately, improved fault performance. SSEN is the
first network operator to bring this technology into business-
as-usual operation.
In 2017/18, many of SSEN's innovation projects, such as a trial
of Constraint Managed Zones, were designed to inform the wider
industry on the move to a new, smart, flexible system and the
transition of DNOs to a new Distribution System Operator (DSO)
role.
Supporting the transition to a smart, flexible electricity
system
One of the biggest changes in the energy system is the
flexibility revolution. Distributed generation, electric vehicles,
demand-side response and energy storage are transforming the energy
system and giving customers access to new products and services
from a new range of providers.
DNOs will play a pivotal role in this revolution which will
increase the investment needed across networks, creating new
opportunities in managing this demand.
In November 2017, SSEN published its DSO strategy, Supporting a
Smarter Electricity System, setting out the five key principles it
believes should underpin the transition to a smart, flexible
electricity system. These are: working for all customers; ensuring
cost efficiency; market neutrality; removing barriers to local
solutions; and adopting an approach of learning by doing.
SSEN continues to play a leading role in the influential Open
Networks project, led by the Energy Networks Association, and 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.
Preparing for the electrification of transport
A key aspect of the transition to a smart, flexible electricity
system is the electrification and decarbonisation of transport.
SSEN continues to respond to the growth in electric vehicles (EV)
which is forecast to accelerate in the coming years in response to
ambitious targets set by both the UK and Scottish Governments to
phase out petrol and diesel vehicles by 2040 and 2032
respectively.
To prepare for the likely growth in uptake of EV and Low
Emissions Vehicles, SSEN continues to support the industry in
identifying the challenges and solution to ensure the transition is
a smooth as possible. This includes a consultation SSEN published
in March on 'Managed Electric Vehicle Charging', which seeks views
on proposed solutions to help avoid potential overloads on local
electricity networks caused by sharp increases in the use of
electric vehicles.
The consultation forms part of SSEN's Smart EV project,
undertaken alongside technology partners EA Technology and
supported by GB distribution network operators. The project, funded
by Ofgem's Network Innovation Allowance, sets out to review and
research charging solutions that will allow the transition to
electric vehicles to take place with minimum disruption to
customers and avoiding unnecessary network reinforcement.
SGN
Covering Scotland and the south of England, SGN is the gas
network company distributing natural and green gas to 5.9 million
homes and businesses through a network of 74,000km of mains and
services. Good progress is also being made building a third
distribution network in the west of Northern Ireland comprising
some 700km of new gas pipelines which will allow up to 40,000
customers to connect for the first time to mains natural gas. SGN
now has 36 biomethane plants connected to its GB networks,
supplying enough green gas for the needs of almost 180,000 homes.
This is good progress to achieving its 2021 ambition of supplying
250,000 customers with green gas.
As the current RIIO- GD1 eight-year price control moves closer
to its 2021 conclusion, SGN remains focused on the delivery of all
its outputs under this RIIO framework as well as ensuring it
maximises its regulatory incentives. In November 2017 SGN committed
to Ofgem a voluntary contribution of GBP145m in price control
allowance terms to customers, which was welcomed by Ofgem.
The primary focus of the SGN management team is to ensure all
its operations are run safely for the public at large, its
customers, contractors and employees. SGN continues to invest in
both its network and people, while ensuring: it minimises its
impact on the environment; engages with and communicates with its
customers and stakeholders: and delivers new initiatives to help
reduce fuel poverty and increase awareness of Carbon Monoxide
dangers.
SGN had a good year in all its operations activities, including
emergency repair and gas mains replacement. At the year-end, it
exceeded its 97% emergency response target and dealt with a number
of multiple 'no gas' incidents, many caused by broken water mains
and third-party damage. SGN also achieved its gas mains replacement
year-end targets in both networks with 269km achieved in Scotland
and 731km in its southern network area.
Initiated in 2015, SGN's three-year customer experience
transformation programme is continuing to deliver much improved
customer experience, by leveraging digital technology and adding
value by reducing cost to serve. Through the commitment and hard
work of its operations and field teams, for the second year running
SGN is the UK number one gas network for customer service. It is
also the UK's number one gas network company for complaint
handling, reducing customer complaints on average by 18% each year
and overall by 66% since 2012/13.
Networks - Conclusion and Priorities
SSE's economically-regulated Networks businesses will continue
to play a pivotal role in the transition to a low carbon economy,
providing the critical national infrastructure required to support
the ongoing shift to a decarbonised energy system and
electrification of transport.
SSE's capex and investment programme for electricity networks in
the five years to 2023 is forecast to be around GBP2.8bn, forming a
significant part of the SSE group capital and investment
expenditure plans of GBP6bn over the same period. This will support
future earnings and growth with the RAV (Regulatory Asset Value) on
course to reach GBP10bn by 2023, across SSE's electricity and gas
networks interests, delivering value for money for customers and a
fair return for investors. Additional contingent projects totalling
GBP700m as well as potential island links with a total value of
around GBP1.5bn provide further opportunities for growth in the
2020s.
SSE will work, in 2018/19 and beyond, to ensure it continues to
meet the needs of its customers and stakeholders, and earn fair
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 2018/19 and beyond
SSE's Networks businesses' priorities in 2018/19 and beyond are
to:
-- operate safely and meet all compliance requirements while
providing leading customer service, delivering required outputs and
maintaining tight controls over expenditure;
-- maintain good progress in the safe delivery of new assets and
opportunities for future growth;
-- progress innovations that will improve network reliability,
efficiency and customer service and inform industry-wide
improvements to support the transition to a smart, flexible energy
system;
-- adapt and prepare for the evolution of the regulatory
framework for future Price Control, RIIO-2, including maintaining
effective stakeholder relationships.
RETAIL
Retail Key Performance Indicators
Mar 18 Mar 17
SSE Energy Services
============= =============
SSE Energy Services - Energy Supply
(households GB) adjusted operating profit
- GBPm 260.4 260.8
============= =============
SSE Energy Services - Energy Supply
(households GB) reported operating profit
- GBPm 203.5 171.7
============= =============
SSE Energy Services - Energy Related
Services (households GB) adjusted operating
profit - GBPm 18.3 12.7
============= =============
SSE Energy Services - Energy Related
Services (households GB) reported operating
profit - GBPm 18.3 5.5
============= =============
Total SSE Energy Services adjusted operating
profit 278.7 273.5
============= =============
Total SSE Energy Services reported operating
profit 221.8 177.2
============= =============
Retail Businesses remaining after the
proposed transaction
============= =============
Energy Supply - Business Energy adjusted
operating profit - GBPm 64.2 89.4
============= =============
Energy Supply -Business Energy reported
operating profit - GBPm 64.2 73.0
============= =============
Energy Supply - SSE Airtricity adjusted
operating profit - GBPm 33.0 42.7
============= =============
Energy Supply - SSE Airtricity reported
operating profit - GBPm 26.9 42.7
============= =============
Enterprise adjusted operating profit
- GBPm 26.9 16.7
============= =============
Enterprise reported operating profit
- GBPm 15.1 16.7
============= =============
Total Remaining within SSE adjusted
operating profit - GBPm 124.1 148.8
============= =============
Total Remaining within SSE reported
operating profit - GBPm 106.2 132.4
============= =============
Capital expenditure (SSE Energy Services)
- GBPm 110.8 184.0
============= =============
Capital expenditure (Business, Airtricity
& Enterprise) - GBPm 63.4 59.0
============= =============
Electricity customer accounts (GB domestic)
- m 3.82 4.06
============= =============
Gas customer accounts (GB domestic)
- m 2.53 2.70
============= =============
Energy Related Services (GB domestic)
- m 0.45 0.47
============= =============
Total SSE Energy Services customers
- m 6.80 7.23
============= =============
Energy customers' accounts (Business
Energy sites) - m 0.49 0.45
============= =============
All-Island energy market customers (Ire)
- m 0.74 0.79
============= =============
Total Retail Customer accounts 8.03 8.47
============= =============
Electricity supplied household average
(GB) - kWh 3,788 3,793
============= =============
Gas supplied household average (GB)
- th 454 440
============= =============
Household/small business aged debt (GB,
Ireland) - GBPm 85.8 80.2
============= =============
Bad debt expense (GB, Ireland) - GBPm 46.0 47.9
============= =============
Customer complaints to third parties
(GB)1 1,616 1,322
============= =============
(1 Ombudsman: Energy Services and Citizens
Advice)
============= =============
Smart Meters on supply Over 850,000 Over 500,000
============= =============
Providing energy and related services in 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 2018, it supplied electricity and gas to 7.58 million
household and business accounts. It also provides other related
products and services, including telephone, broadband and boiler
care, to 0.45 million household customers.
The Retail business area includes those businesses which are
subject to the planned SSE Energy Services transaction.
Financial performance in Retail
During the 12 months to 31 March 2018, total adjusted operating
profit in Retail including Enterprise was GBP402.8m compared with
GBP422.3m for 2016/17. The principal movements were as follows:
SSE Energy Services - Energy supply (households in GB): adjusted
operating profit was flat at GBP260.4m in 2017/18 compared to
GBP260.8m in 2016/17. While electricity tariffs increased to
recognise rising non-energy costs, overall profits were also
impacted by customer account losses and the introduction of price
caps for certain customer groups, offset by ongoing efficiency
savings. The business also benefited, in the last quarter of the
financial year, from higher customer energy consumption due to
unseasonably cold weather.
SSE Energy Services - Energy-related services (households in
GB): adjusted operating profit increased to GBP18.3m in 2017/18,
from GBP5.5m in 2016/17, reflecting increased profitability of
SSE's home services and telco businesses, which was partially
offset by a reduction in revenues from the heritage metering
business.
Energy Supply (Business Energy): adjusted operating profit
decreased to GBP64.2m in 2017/18, from GBP89.4m in 2016/17. While
underlying profits remained similar, 2016/17 included a larger
prior year reconciliation catch up.
Energy Supply (SSE Airtricity): adjusted operating profit
decreased to GBP33.0m in 2017/18, from GBP42.7m in the previous
year, due to a combination of increased competition and increased
energy costs.
Enterprise: Adjusted operating profit increased to GBP26.9m in
2017/18, from GBP16.7m in the previous year, due to a combination
of higher revenues and focused cost cutting.
Reported Retail operating profit: increased to GBP328.0m from
GBP309.6m in prior year due to the reasons outlined above in
addition to the impact of exceptional items and certain
re-measurements. In the year, the Group has recorded exceptional
impairments totalling GBP63.0 m as a result of its decision to
demerge its UK domestic gas and electricity supply business. In
addition, there was an exceptional impairment of GBP11.8m in the
Heat Networks business due to a re-evaluation of some of the
contracts within the business. In the prior year impairments
totalled GBP112.7m.
Consolidated Segmental Statement
In line with its licence condition, SSE will publish in June
2018 a Consolidated Segmental Statement(CSS) setting out the
revenues, costs and profit or losses of businesses in its Wholesale
and Retail segments in Great Britain for 2017/18. 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 in 2017/18 was slightly down on the previous
year, at 6.8%.
Within this, SSE has previously highlighted an increasing
divergence between gas and electricity margins due to increasing
policy costs being levied predominantly levied on electricity.
However, following the increase to electricity prices only in April
2017, margins are more balanced across fuels in 2017/18 than the
previous year.
Retail Financial Outlook for 2018/19
Retail's adjusted operating profit attributable to SSE will be
subject, amongst other things, to the progress and timing of the
planned transaction relating to SSE Energy Services and the timing
and impact of the Domestic Gas and Electricity (Tariff Cap)
Bill.
Adapting to a changing environment
Preparing SSE Energy Services for the future
In its full-year results statement for 2016/17, SSE stated that
the rapidly evolving and increasingly competitive market for the
supply of 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. On 8 November 2017, SSE set out that following
discussions with Innogy SE (Innogy), SSE had identified an
opportunity - subject to the necessary regulatory and shareholder
approvals - to combine its household energy and services business
in GB with that of Innogy's subsidiary, npower, to create a new,
independent company to be listed on the London Stock Exchange. Both
SSE and Innogy believe the planned SSE Energy Services transaction
has potential to drive real benefits for customers, employees,
shareholders and the wider energy market by combining the expertise
and resources of two established providers with the focus and
agility of an independent supplier in what would be a unique model
in the market. With its own dedicated Board and expert management
team, the new company would be well positioned to respond to
changing customer and stakeholder expectations by becoming more
efficient, agile and innovative.
The planned SSE Energy Services transaction is subject to
approval by the Competition and Markets Authority (CMA) and a
merger notice was formally submitted to the CMA on 28 February
2018. Following an initial Phase One investigation, on 8 May 2018,
the Competition and Markets Authority referred the planned
transaction for a so-called 'Phase 2' investigation, by a group of
independent panel members. The deadline for the final report from
that investigation is 22 October 2018. The transaction is also
subject to approval by SSE's shareholders and a shareholder
circular will be published on 27 June 2018 in advance of a vote at
a General Meeting to take place immediately after the SSE Annual
General Meeting on 19 July 2018. As stated in November 2018,
significant synergies are also anticipated, and further detail on
these will be set out in the shareholder circular. Taking these
timetables into account, the planned SSE Energy Services
transaction remains on track for completion in the last quarter of
the 2018 calendar year or first quarter of 2019.
Until such time as approval is given and the transaction is
completed, SSE Energy Services and npower remain entirely separate
and compete with one another as normal. However, integration
planning work is under way to make necessary plans and preparations
for the new business, to the extent allowed within the letter and
spirit of competition law. A number of key milestones have already
been reached, including the appointment of Katie Bickerstaffe as
Chief Executive Designate of the future combined business. Katie
will take up her new appointment later this year and will lead the
work to prepare for the formation and listing of the new company.
Her role during that period will not include any involvement in the
leadership or management of either existing organisation.
Facing up to the core challenges
Energy supply businesses in GB face a number of headwinds due to
the rapidly evolving and increasingly competitive nature of the
market. These headwinds can be characterised as four 'core'
challenges to which SSE Energy Services must respond in order to
stay relevant and sustainable:
Competition: the energy supply market continues to intensify
with around 70 suppliers now competing to win and retain customers,
the arrival of new entrants from start-ups to major multi-nationals
such as Shell, Vattenfall and Engie, and record levels of customer
switching, according to Energy UK data. As a result, despite
ongoing efforts to attract and retain customers, in 2017/18 SSE GB
domestic electricity and gas customer accounts numbers fell to
6.35m compared with 6.76m at 31 March 2017.
Operating costs: in this environment, ensuring controllable
costs are as low as possible is key to staying competitive and
offering customers value while delivering for shareholders;
however, the cost of supplying energy is increasing and there is
upward pressure from a number of areas principally the many and
varied impacts of the smart meter roll-out, falling underlying
energy consumption, regulatory intervention and lower customer
numbers.
Regulatory intervention: there will always be intense political
interest in the energy market and this has major implications for
the regulatory environment in which SSE Energy Services operates.
The Domestic Gas and Electricity (Tariff Cap) Bill 2017-19 is
expected to receive royal assent in Summer 2018 and Ofgem is
already consulting on how to implement this market-wide cap on
standard household energy prices. Although SSE has warned against
the unintended consequences of such a significant intervention in a
rapidly evolving and highly competitive market, it is engaging
constructively with Ofgem to help ensure the methodology used to
set and update the cap is robust, fair and takes account of the
real costs and risks of supplying energy to a large and diverse
range of customers. At the same time, transformational regulatory
projects are being undertaken in the form of the smart meter
roll-out and the faster switching programme. As well as introducing
an unprecedented amount of change, implementing these projects
requires a significant commitment of resources.
Evolving customer expectations: the energy market does not exist
in a vacuum and customers' expectations continue to increase,
informed by their experiences of other companies and markets.
Demand is growing for more tailored, personalised services
underpinned by data (used responsibly), seamless customer
experiences across channels and devices, and an enhanced ability to
'self-serve' via user-friendly, intuitive digital platforms. In the
longer term, the development of disruptive technologies from smart
meters to domestic micro-generation, storage and electric vehicles
could change fundamentally the nature of the services customers
require.
Setting and delivering on the right strategic priorities
In the longer term, SSE believes the planned SSE Energy Services
transaction is the right strategic response to these issues,
creating an independent business with singularity of focus and the
ability to be more agile and responsive to changing market and
customer dynamics.
However, this is subject to regulatory and shareholder approvals
and in the interim SSE Energy Services remains focused on its own
internal strategic priorities for addressing these challenges
across both Energy Supply and Energy Related Services:
Attracting and retaining more customers: in a fiercely
competitive market, winning and keeping customers is challenging
and a key area of focus. In 2017/18, SSE Energy Services continued
to leverage its investment in entertainment sponsorship to offer
additional rewards to customers in order to engage and retain them
and more than 2.5m people visited SSE-sponsored venues during this
12-month period alone. In exploring ways to engage customers in new
ways, SSE is developing partnerships with leading retail brands
such as WH Smith, nectar and Argos. It will also soon launch a
'renew 1-year fix' tariff through which it will automatically sign
up customers whose fixed-term deal is ending to a new fixed-term
tariff with no exit fees - giving them price protection and,
critically, introducing a new prompt to engage with their tariff
choices on renewal each year. These efforts are also supported by
innovative new propositions such as offering low-cost unlimited
broadband and the popular 'Boiler Rescue' offer of a free emergency
boiler repair to any customer who then signs up to a new boiler
care subscription. This makes SSE Energy Services the only energy
provider offering to fix their customers' boiler for free, even if
they don't have cover at the point of breakdown. This has
contributed to strong performance in SSE's Energy-Related Services
business and, having successfully completed its transition to a
regulated insurance model in Home Services, SSE sees further
opportunities for growth in this area, as well as improving energy
customer retention through value-adding, bundled propositions.
Reducing our cost to serve: given the competitive environment,
upward pressure on costs and the need to keep energy as affordable
as possible for customers, efforts to drive efficiency improvements
across SSE Energy Services are vitally important. Through further
embedding 'lean' methodology and continuous improvement hubs, with
more than 300 staff now trained as part of the 'lean academy', this
programme continued to deliver cost efficiencies in 2017/18. Also
in 2017/18, SSE Energy Services made further progress in its
efforts to digitalise its front and back-office systems, rolling
out further process automation to reduce administrative costs and
helping more customers to self-serve online, as demonstrated by a
200% uplift in phone and broadband sign-ups online following
improvements to the customer journey.
Delivering smart in a safe, cost-effective and customer-centric
way: the smart meter roll-out represents an opportunity to
transform the relationship between customers, their energy supplier
and the energy they consume. SSE remains committed to delivering on
its obligations under the roll-out in a way that is safe, minimises
where possible costs to customers, and maximises the net benefits
to customers by engaging them with their energy use. To that end,
as of 31 March 2018, SSE had more than 850,000 smart meters on
supply in customers' homes. Despite ongoing challenges associated
with the availability of key enabling technology, generating demand
from customers and timing the ramp-up of its workforce, SSE was
pleased to deliver against its binding targets agreed with Ofgem
for 2017 and is now preparing to make the transition to the
enduring SMETS2 solution, once available. Given the degree of
complexity and up-front investment costs involved, SSE has
consistently argued that the roll-out and associated targets should
be kept under review so that pragmatic, informed decisions can be
made that lead to the highest possible net benefits to customers
from the programme as a whole.
Building on SSE's customer-centric culture: throughout a year of
change, SSE has continued to put customers at the heart of
everything it does. Senior managers met regularly with customers in
SSE's Customer Forums and the company has engaged with over 60,000
consumers through a programme of research which includes its
3,000-strong online Customer Connect community. SSE's focus on
delivering excellent customer service has seen it sign up to the
Energy Switch Guarantee and the Energy UK Billing Code and these
commitments have helped maintain a strong performance in the
Citizens Advice Energy Supplier rating, including SSE once again
being identified as having the lowest levels of complaints to third
parties amongst the major energy suppliers in Great Britain. SSE
remains very mindful of its responsibilities in respect of
supporting customers in vulnerable circumstances; to that end, it
committed to attaining the British Standard for Inclusive Service
Provision, which is widely regarded as the 'gold standard' in
recognising and adapting service to customer vulnerability in all
its forms. SSE achieved the Standard in March 2018, for the key
areas of Complaints, Credit Management and Sales.
Delivering for business energy customers
Business Energy supplies energy to business and public sector
customers throughout Great Britain, to a market which consumes a
total of around 180TWh of electricity and 8 billion therms of gas
annually.
Business Energy continued to perform robustly across all
customer segments, this strong position is built on solid core
competencies in meeting business customers' energy needs.
Competencies such as excellent customer service and sales channels
exist within Business Energy, whilst others are leveraged across
the wider SSE Group, for example, the ability to develop products
that navigate the increasing complexity of the GB energy
market.
In 2018/19 the focus remains on growing Business Energy's core
market segments, whilst broadening into related services such as
energy optimisation and demand side response where there is an
opportunity to use data and technology to improve outcomes for
customers.
Supplying energy and essential services across Ireland
In Ireland's all-island energy market, SSE's retail arm SSE
Airtricity is the second-largest provider of energy and related
services across the Republic of Ireland (ROI) and Northern Ireland
(NI), and the only retail energy brand operating in each of the
competitive gas and electricity markets across the island.
At 31 March 2018, SSE Airtricity supplied electricity and
natural gas to 0.74 million household and business customer
accounts in ROI and NI, reflecting a fall in household customer
numbers due to increased competitive pressures, particularly in
electricity markets.
Focused cost-management alongside competitive product pricing
ensured that SSE Airtricity continued to deliver value to existing
and new home energy customers, while enabling further investment in
digitised service offerings, including the introduction of a new
video-chat customer channel. As a result, SSE Airtricity was named
Best for Customer Service in February 2018 for the second year
running by leading Irish internet comparison site Bonkers.ie.
In NI, SSE Airtricity increased household electricity prices by
7.5% from 1 October 2017 while in ROI electricity prices increased
by 5.6% from 1 November 2017. These were the first such increases
in both markets since 2013 and were as a result of increases in the
cost of supply including wholesale and regulated networks costs. On
1 April 2018, SSE Airtricity increased its regulated natural gas
prices in NI by 7.8% for home and small business customers. This
increase was examined and approved by the NI Utility Regulator.
SSE Airtricity Business Energy increased customer load across
the island by 12% in the 12 months to 31 March 2018, while the
company's Eco team has facilitated energy efficiency initiatives
that are saving businesses almost 110GWh of primary energy
annually. For the second year running SSE Airtricity received the
highest supplier satisfaction rating (81%) in the Irish SME
electricity market, according to the latest Annual Survey published
by the Commission for Regulation of Utilities.
In April 2018, SSE Airtricity announced a 40% acquisition of
Activ8 Solar Energies, a leading supplier of Rooftop Solar systems
to home and business customers, with an option to acquire a further
10 per cent after two years. The acquisition marks yet another step
forward in the development of the company's commercial and domestic
energy services solutions.
SSE's Energy Markets trading team in Ireland is at the final
stages of preparation for the introduction of the Integrated Single
Electricity Market (I-SEM) this year, under which new balancing
obligations will be established.
Retail - Conclusion and Priorities
After a solid performance in the 12 months to 31 March 2018,
2018/19 promises to be another year of change and transition as SSE
continues to adapt to the rapidly evolving competitive markets in
which it operates. At the same time, it must retain a keen focus on
its core operations and delivering on its strategic priorities to
ensure it is well positioned for the future, regardless of the
outcome from the proposed merger.
In Great Britain, SSE Energy Services remains focused on:
-- attracting and retaining more customers;
-- reducing its operating costs;
-- delivering smart in a safe, cost-effective and customer-centric way; and
-- building on its customer-centric culture.
-- In Ireland, SSE's key priorities are to:
-- attract and retain energy supply customers in increasingly competitive markets;
-- deliver customer value through cost-management and investment in digitised services;
-- further expand its commercial and domestic Energy Services solutions; and
-- optimise its Energy Markets capabilities ahead of the
introduction of the Integrated Single Electricity Market
(I-SEM).
In Business Energy, SSE's priorities are to:
-- further strengthen SSE's strong position in meeting the core
energy needs of business and public sector customers
-- leverage internal capabilities across the SSE Group to
broaden the customer offering to include smarter products such as
energy optimisation and demand side response.
Beyond these immediate priorities, work will continue to:
complete the separation of SSE Energy Services within the SSE
Group; engage with shareholders and the CMA to secure the necessary
approvals; plan and prepare for integration; and complete the
planned transaction. This, combined with a continued focus on
delivering strong operational performance in the interim, will help
position both the merged retail business and remaining SSE
businesses for long-term success following the expected completion
of the transaction, subject to approvals, in the last quarter of
2018 or first quarter of the 2019 calendar year.
ENTERPRISE
Enterprise Key Performance Indicators
Enterprise adjusted operating profit - GBPm 26.9 16.7
Enterprise reported operating profit - GBPm 15.1 16.7
=========== ===========
Capital expenditure - GBPm 61.9 58.7
=========== ===========
SSE Heat network customer accounts Over 9,400 Over 6,500
=========== ===========
Number of Enterprise Telecoms infrastructure projects connecting businesses 363 260
=========== ===========
Number of Bollore EV charge points installed to date in London by Enterprise Contracting 583 315
=========== ===========
Number of train stations maintained or improved by Enterprise Rail 1,002 517
=========== ===========
Financial performance in Enterprise
Enterprise: Adjusted operating profit increased to GBP26.9m in
2017/18, compared to GBP16.7m the previous year, due to a
combination of higher revenues and focussed cost cutting.
Reported operating profit decreased to GBP15.1m in 2017/18 from
GBP16.7m in 2016/17 due to the factors above, offset by an
impairment of Heat Networks assets and a provision against future
contracts following an operational review of that area of the
business.
Looking ahead, Enterprise will continue to engage with its
significant restructuring exercise - which is designed to drive out
unnecessary cost and thereby ensure the business is best placed to
seek out and win new growth opportunities. Safety remains a key
priority for Enterprise, with an objective to reduce reported
accidents - in line with the targets of SSE Group.
Playing to the core strengths of Enterprise
SSE Enterprise is a group of businesses that provides energy and
telecoms services to industrial, commercial and public sector
customers across the UK and Ireland. To fulfil that need the
business has developed the capacity to build, own, operate and
maintain assets. Its four business areas are: Contracting,
Utilities, Telecoms and Rail.
There is a pipeline of significant opportunities which the four
Enterprise business streams are well placed to tap into. These
include bigger and better opportunities in mechanical and
electrical, energy storage, distributed energy, electric vehicle
infrastructure, fibre networks, 5G infrastructure, and rail power
and communications infrastructure.
Moving forward, the role of Enterprise, within SSE Group, will
be to consolidate and grow its existing market share as well as
explore new opportunities in areas that are complementary to the
Group's core energy portfolio. Enterprise is one of several
adjacent businesses which can benefit directly and indirectly from
the strength and depth of SSE Group's experience in core energy
markets.
To ensure Enterprise is a growth driver for the SSE Group it
aims to:
-- Focus on growth in its existing core markets;
-- Develop larger projects which give longer term visibility of
earnings and build on the strengths of the company's diverse
business areas and multi utility capabilities;
-- Develop further the capacity of the business to build, own,
operate and maintain assets; and
-- Focus on providing innovative solutions to meet the changing needs of customers.
A dynamic player in an evolving energy environment
Developing strategic partnerships will continue to help
Enterprise deliver value and support SSE Group to meet the changing
needs of the energy and telecoms sector. For example, helping to
deliver electric vehicle infrastructure in the UK represents an
exciting opportunity for Enterprise to build on the success of its
London project for electric buses at Waterloo bus depot. Likewise,
the Utilities business will be aiming to play a bigger role in
distributed energy and energy as a service.
In Rail, work awarded through the national Building and Civils
Framework will transform the size of the business. In Contracting,
there are opportunities arising from supporting the infrastructure
growth agendas and further investments in High Voltage, and large
scale projects across the UK. And finally, the Telecoms business
has secured an important contract agreement with Three UK, which
will see the two companies working together to support the mobile
network's growth and expansion goals.
With national infrastructure investment set to increase, there
are major opportunities within Enterprise's existing core markets.
These include:
-- The move towards distributed energy and energy as a service;
-- The significant spend on rail infrastructure. For example,
the combined value of the spend on such projects as HS2 and Network
Rail's Control Period 6, is expected to be in excess of
GBP100bn;
-- The emergence of the clean growth agenda and the increasing
requirement for EV infrastructure for public and private
vehicles;
-- The migration towards 5G and the fact that broadband is
increasingly seen as a fifth utility; and
-- The development of the smart city agenda, which involves
elements of multi utility, telecoms and contracting.
Performance summary of four business streams
Contracting
On the back of a substantial and successful efficiency
programme, SSE Enterprise Contracting has made further progress in
putting in place the building blocks for future growth. It retains
a clear focus on mechanical and electrical as well as power
activity as the foundations of its success. SSE Enterprise
Contracting is also pursuing larger scale opportunities using a
disciplined approach to pick the right segments and right customers
to engage with.
Utilities
SSE Enterprise Utilities aims to be a leader both in its core
utility infrastructure market and the fast-growing market for
distributed energy networks. It is looking to increase the scale of
the energy assets and networks it currently builds, owns, operates
and maintains. The business is set to target the rapidly growing
electric vehicle market, and is involved in the installation and
power supply of EV infrastructure. In response to demand, it is
seeking to deliver solutions to integrate energy generation,
storage and utility infrastructure. On the back of strong growth by
Slough Heat and Power in its private electricity network, the
business is aiming to recreate this capability across the UK
market.
Telecoms
SSE Enterprise Telecoms continues to accelerate new network
development to help bring major UK data centres "on net" and expand
its commercial footprint throughout the UK and especially on key
strategic routes by unbundling more BT Exchanges. It is winning
long term core network agreements with new clients in the banking,
transportation and service provider markets. It is also supporting
both broadband rollout and Mobile Network Operators with their 5G
network preparation. In Ireland, SSE is a member of a consortium
that has been participating in a competitive tender dialogue
process with the Irish government to deliver Ireland's National
Broadband Plan.
Rail
SSE Enterprise Rail continues to grow thanks to its reputation
for delivering an outstanding quality of work - as evidenced by
recent PRISM scores from Network Rail. SSE Enterprise Rail has a
unique service offering because it can be a local service provider;
whilst retaining the capability to bid for work on major
infrastructure projects such as HS2, drawing on the experience of
SSE Group. The award of a significant quantum of work via the
national Building and Civils Framework shows that the business can
become a 'supplier of choice' for Network Rail through its scale
and quality capabilities.
Enterprise - Conclusion and Priorities
2017/18 represented a very positive year for the Enterprise
business, thanks primarily to its focus on efficiency and
delivering for customers in its core markets. That disciplined
approach will continue into 2018/19, to ensure the Enterprise
business is well placed to deliver further growth to SSE Group.
Enterprise's key priorities are:
-- To continue to improve its safety performance in line with SSE Group objectives;
-- To continue its relentless focus on consolidating and growing its presence in core markets;
-- To ensure it is meeting the changing needs of its customers with innovative solutions; and
-- To ensure that 2018/19 is another year of progress.
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.
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
Group APM Purpose IFRS measure Adjustments to reconcile to primary financial statements
Adjusted EBITDA Profit measure Operating Profit
(Earnings before * Movement on operating and financing derivatives
interest, tax, ('certain re-measurements')
depreciation and
amortisation)
* Exceptional items
* Share of joint ventures and associates interest and
tax
* Depreciation and amortisation before exceptional
charges
* Share of joint ventures and associates depreciation
and amortisation
* Release of deferred income
================ =================== ===========================================================
Adjusted Profit measure Operating Profit
Operating Profit * Movement on operating and financing derivatives
('certain re-measurements')
* 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 re-measurements')
* 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
* Reclassification of tax liabilities
================ =================== ===========================================================
Adjusted earnings Profit measure Earnings per share
per 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 debt * Hybrid equity
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 venture and associate 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 "Financial Instruments: Recognition and
Measurement" 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 36 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 4.2.
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 Share of joint ventures and associates depreciation and
amortisation
For management purposes, the Group considers EBITDA (earnings
before interest, tax, depreciation and amortisation) based on a
sum-of-the-parts derived metric which includes share of EBITDA from
equity-accounted investments. While this is not equal to adjusted
cash generated from operating activities, it is considered useful
by management in assessing a proxy for such a measure given the
complexity of the Group structure and range of investment
structures utilised.
5 Interest on net pension assets/liabilities (IAS 19R "Employee
Benefits")
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.
6 Deferred tax
The Group adjusts for deferred tax when arriving at adjusted
profit after tax, adjusted earnings per share and its adjusted
effective rate of tax. Deferred tax arises as a result of
differences in accounting and tax bases that give rise to potential
future accounting credits or charges. As the Group remains
committed to its ongoing capital programme, the liabilities
associated are not expected to reverse and accordingly the Group
excludes these from its adjusted profit measures. The current tax
APM for 2018 has been presented net of a reclassification
adjustment, from current to deferred tax, in respect of liabilities
related to historic open tax positions.
Adjustments to Debt measure
7 Hybrid equity
SSE plc has a mixture of perpetual and long dated hybrid capital
securities with the perpetual hybrids being treated as equity and
the long-dated hybrids being treated as debt. The characteristics
of the perpetual 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.
8 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. The Group includes this adjustment in
order to better reflect the immediate cash resources it has access
to, which in turn better reflects the Group's funding position.
9 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.
10 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. Following
the change in consolidation treatment, that non-recourse debt is
not held on SSE's balance sheet and hence the adjustment is no
longer required to the APM.
Adjustments to Capex Measure
11 Other expenditure
Other expenditure primarily represents subsequently derecognised
development expenditure which is excluded to better reflect the
Group's ongoing capital position.
12 Customer funded additions.
Customer funded additions represents additions to electricity
and other networks funded by customer contributions and accounted
for under IFRIC 18 'Transfers of Assets from Customers'. Given
these additions are directly funded by customers, these have been
excluded to better reflect the Group's underlying investment
position.
13 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 APM to better reflect the
Group's investment in enduring operational assets.
14 Disposed additions
Disposed additions represents capital additions related to the
Group's MFE2 plant at Ferrybridge prior to disposal of 50% interest
on 4 September 2017. Prior year disposed additions represent smart
meter installations which were subsequently disposed to the Meter
Fit 10 Limited in 2017 (see Note 12). This has been excluded to
better reflect the Group's net capital investment.
15 Joint venture and associate additions
Joint ventures and associates additions represent funding
provided as equity and loans to joint ventures and associates
directly related to large 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 by the Group's joint ventures and associates for
capital expenditure is not included in this adjustment.
The table below reconciles the adjusted performance measures to
the reported measure of the Group.
March 2018 March 2017 March 2016
GBPm GBPm GBPm
Adjusted operating profit 1,828.7 1,874.0 1,824.4
Adjusted net finance costs (375.5) (328.1) (310.9)
------------------------------------------------------------------------- ----------- ----------- -----------
Adjusted profit before tax (PBT) 1,453.2 1,545.9 1,513.5
Adjusted current tax charge (130.7) (157.7) (193.4)
Adjusted profit after tax (PAT) 1,322.5 1,388.2 1,320.1
------------------------------------------------------------------------- ----------- ----------- -----------
Hybrid coupon paid (98.5) (119.3) (124.6)
------------------------------------------------------------------------- ----------- ----------- -----------
Adjusted profit after tax attributable to ordinary shareholders for EPS 1,224.0 1,268.9 1,195.5
Number of shares for EPS 1,010.9 1,009.7 1,000.0
Adjusted Earnings per Share 121.1 125.7 119.5
------------------------------------------------------------------------- ----------- ----------- -----------
Adjusted EBITDA 2,721.1 2,723.2 2,592.6
Depreciation and amortisation before exceptional charges (796.9) (751.4) (679.1)
Release of deferred income 20.6 18.0 17.9
Share of JV and associate depreciation and amortisation (116.1) (115.8) (107.0)
Adjusted operating profit 1,828.7 1,874.0 1,824.4
------------------------------------------------------------------------- ----------- ----------- -----------
Adjusted operating profit 1,828.7 1,874.0 1,824.4
Movement on operating and financing derivatives (85.8) 203.1 (28.8)
Exceptional items (213.3) (8.2) (889.8)
Share of joint ventures and associates interest and tax (150.4) (128.4) (120.4)
Reported Operating Profit 1,379.2 1,940.5 785.4
------------------------------------------------------------------------- ----------- ----------- -----------
Adjusted Profit Before Tax PBT 1,453.2 1,545.9 1,513.5
Movement on operating and financing derivatives (118.8) 255.7 (14.5)
Exceptional items (213.3) (8.2) (889.8)
Interest on net pension assets/(liabilities) 2.9 (3.1) (22.3)
Share of joint ventures and associates tax (37.8) (13.7) 6.4
Reported profit before tax 1,086.2 1,776.6 593.3
------------------------------------------------------------------------- ----------- ----------- -----------
Adjusted net finance costs 375.5 328.1 310.9
Movement on financing derivatives 33.0 (52.6) (14.3)
Share of joint ventures and associates interest (112.6) (114.7) (126.8)
Interest on net pension (assets)/liabilities (2.9) 3.1 22.3
------------------------------------------------------------------------- ----------- ----------- -----------
Reported net finance costs 293.0 163.9 192.1
------------------------------------------------------------------------- ----------- -----------
Adjusted current tax charge 130.7 157.7 193.4
Share of joint ventures and associates tax (37.8) (13.7) 6.4
Deferred tax including share of joint ventures and associates 288.0 19.8 80.8
Reclassification of tax liabilities (101.3) - -
Tax on exceptional items and certain re-measurement (113.5) (106.0) (272.5)
Reported tax charge 166.1 57.8 8.1
------------------------------------------------------------------------- ----------- ----------- -----------
Adjusted Net Debt and Hybrid Capital (9,221.8) (8,483.0) (8,395.0)
Hybrid Capital 1,169.7 2,209.7 2,209.7
------------------------------------------------------------------------- ----------- ----------- -----------
Adjusted Net Debt (8,052.1) (6,273.3) (6,185.3)
Outstanding liquid funds (75.1) (105.2) (121.8)
Finance leases (251.1) (276.9) (300.8)
Non-recourse Clyde debt - - (200.7)
Unadjusted net debt (8,378.3) (6,655.4) (6,808.6)
------------------------------------------------------------------------- ----------- ----------- -----------
Investment and Capital expenditure (adjusted) 1,503.0 1,726.2 1,618.7
Other expenditure - 4.2 6.9
Customer funded additions 82.0 112.8 88.3
Allowances and certificates 712.9 633.5 580.4
Disposed additions 60.6 15.6 -
Joint ventures and associates additions (110.3) (105.0) (46.2)
------------------------------------------------------------------------- ----------- ----------- -----------
Additions to Intangible Assets and Property, Plant and Equipment 2,248.2 2,387.3 2,248.1
------------------------------------------------------------------------- ----------- ----------- -----------
Additions to Intangible Assets 794.0 779.5 713.1
Additions to Property, Plant and Equipment 1,454.2 1,607.8 1,535.0
------------------------------------------------------------------------- ----------- ----------- -----------
Additions to Intangible Assets and Property, Plant and Equipment 2,248.2 2,387.3 2,248.1
------------------------------------------------------------------------- ----------- ----------- -----------
Summary Financial Statements
Consolidated Income Statement
for the year ended 31 March 2018
2018 2017
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 7) Total re-measure-ments (note 7) Total
Note GBPm GBPm GBPm GBPm GBPm GBPm
Revenue 6 31,226.4 - 31,226.4 29,037.9 - 29,037.9
Cost of sales (27,954.3) (89.1) (28,043.4) (25,794.5) 232.6 (25,561.9)
Gross profit 3,272.1 (89.1) 3,183.0 3,243.4 232.6 3,476.0
Operating costs (1,774.7) (213.3) (1,988.0) (1,707.3) (406.2) (2,113.5)
Other operating
income 38.0 - 38.0 24.2 366.4 390.6
Operating profit
before joint
ventures and
associates 1,535.4 (302.4) 1,233.0 1,560.3 192.8 1,753.1
------------------- ---- ------------- ---------------- ---------- ---------------- ---------------- ----------
Joint ventures and
associates:
Share of operating
profit 293.3 - 293.3 313.7 - 313.7
Share of interest (112.6) - (112.6) (114.7) - (114.7)
Share of movement
on derivatives - 3.3 3.3 - 2.1 2.1
Share of tax (37.2) (0.6) (37.8) (32.8) 19.1 (13.7)
-------------
Share of profit on
joint ventures and
associates 143.5 2.7 146.2 166.2 21.2 187.4
------------- ---------------- ----------
Operating profit 6 1,678.9 (299.7) 1,379.2 1,726.5 214.0 1,940.5
Finance income 8 102.1 - 102.1 93.7 - 93.7
Finance costs 8 (362.1) (33.0) (395.1) (310.2) 52.6 (257.6)
Profit before
taxation 1,418.9 (332.7) 1,086.2 1,510.0 266.6 1,776.6
Taxation 9 (279.6) 113.5 (166.1) (163.8) 106.0 (57.8)
------------- ---------------- ---------- ---------------- ---------------- ----------
Profit for the year 1,139.3 (219.2) 920.1 1,346.2 372.6 1,718.8
------------- ---------------- ---------- ---------------- ---------------- ----------
Attributable to:
Ordinary
shareholders of
the parent 1,040.8 (219.2) 821.6 1,226.9 372.6 1,599.5
Other equity
holders 98.5 - 98.5 119.3 - 119.3
Earnings per share
Basic earnings per
share (pence) 11 81.3 158.4
Diluted earnings
per share (pence) 11 81.2 158.2
Dividends
Interim dividend
paid per share
(pence) 10 28.4 27.4
Proposed final
dividend per share
(pence) 10 66.3 63.9
---------- ----------
94.7 91.3
---------- ----------
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 2018
2018 2017
GBPm GBPm
Profit for the year 920.1 1,718.8
Other comprehensive income:
Items that will be reclassified subsequently to profit or loss:
Net (losses)/gains on cash flow hedges (29.5) 14.9
Transferred to assets and liabilities on cash flow hedges 1.4 10.6
Taxation on cashflow hedges 5.0 (2.8)
----------------------------------------------------------------------------------------------- ------- -------
(23.1) 22.7
Reversal of unrealised losses following disposal of investments recognised in income statement 14.4 -
Share of other comprehensive loss of joint ventures and associates, net of taxation (6.9) (6.0)
Exchange difference on translation of foreign operations 27.8 74.1
Loss on net investment hedge net of taxation (18.3) (22.5)
------- -------
(6.1) 68.3
Items that will not be reclassified to profit or loss:
Actuarial gain on retirement benefit schemes, net of taxation 178.6 252.5
Share of other comprehensive income/(loss) of joint ventures and associates, net of taxation 47.3 (56.4)
------- -------
225.9 196.1
Other comprehensive gain, net of taxation 219.8 264.4
Total comprehensive income for the period 1,139.9 1,983.2
Attributable to:
Ordinary shareholders of the parent 1,041.4 1,863.9
Other equity holders 98.5 119.3
1,139.9 1,983.2
------- -------
Consolidated Balance Sheet
as at 31 March 2018
2018 2017
Note GBPm GBPm
Assets
Property, plant and equipment 13,121.7 12,622.2
Goodwill and other intangible assets 707.7 760.4
Equity investments in associates and joint ventures 977.0 985.8
Loans to associates and joint ventures 781.0 788.4
Other investments 4.8 12.5
Deferred tax assets 294.7 322.3
Derivative financial assets 336.4 528.3
Retirement benefit assets 15 572.1 525.4
-------- --------
Non-current assets 16,795.4 16,545.3
--------
Intangible assets 712.5 580.7
Inventories 225.9 269.1
Trade and other receivables 4,071.7 3,754.4
Cash and cash equivalents 232.2 1,427.0
Derivative financial assets 1,060.1 1,269.5
Current assets held for sale 12 117.2 70.4
Current assets 6,419.6 7,371.1
-------- --------
Total assets 23,215.0 23,916.4
-------- --------
Liabilities
Loans and other borrowings 13 650.3 142.4
Trade and other payables 4,977.6 4,923.5
Current tax liabilities 117.9 294.8
Provisions 20.6 39.7
Derivative financial liabilities 1,253.1 1,153.2
Liabilities held for sale 12 - 1.4
-------- --------
Current liabilities 7,019.5 6,555.0
-------- --------
Loans and other borrowings 13 7,960.2 7,940.0
Deferred tax liabilities 1,002.8 788.9
Trade and other payables 385.3 437.4
Provisions 812.5 764.5
Retirement benefit obligations 15 237.6 454.9
Derivative financial liabilities 566.9 703.2
-------- --------
Non-current liabilities 10,965.3 11,088.9
-------- --------
Total liabilities 17,984.8 17,643.9
-------- --------
Net assets 5,230.2 6,272.5
-------- --------
Equity
Share capital 14 511.5 507.8
Share premium 890.3 885.7
Capital redemption reserve 34.8 26.5
Hedge reserve (15.5) 14.5
Translation reserve 43.3 33.8
Retained earnings 2,596.1 2,594.5
Equity attributable to ordinary shareholders of the parent 4,060.5 4,062.8
Hybrid equity 14 1,169.7 2,209.7
-------- --------
Total equity 5,230.2 6,272.5
-------- --------
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 2018
Total
equity
Total attributable
Capital attributable to equity
Share Share redemption Hedge Translation Retained to ordinary Hybrid holders of
capital premium reserve reserve reserve earnings shareholders equity the parent
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
At 1 April
2017 507.8 885.7 26.5 14.5 33.8 2,594.5 4,062.8 2,209.7 6,272.5
Total
comprehensive
income for
the year - - - (30.0) 9.5 1,061.9 1,041.4 98.5 1,139.9
Dividends to
shareholders - - - - - (926.1) (926.1) - (926.1)
Scrip dividend
related share
issue 12.0 (12.0) - - - 331.6 331.6 - 331.6
Distributions
to Hybrid
equity
holders - - - - - - - (98.5) (98.5)
Redemption of
hybrid - - - - (92.4) (92.4) (1,040.0) (1,132.4)
Issue of
shares - 16.6 - - - - 16.6 - 16.6
Share
repurchase (8.3) - 8.3 - - (371.6) (371.6) - (371.6)
Credit in
respect of
employee
share awards - - - - - 18.0 18.0 - 18.0
Investment in
own shares - - - - - (19.8) (19.8) - (19.8)
At 31 March
2018 511.5 890.3 34.8 (15.5) 43.3 2,596.1 4,060.5 1,169.7 5,230.2
-------- -------- ---------- -------- ----------- -------- ------------ --------- ------------
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 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 - - - - - - - - - (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
------- ------- ---------- ------- ----------- -------- ------------ ------- ------------ --------------- -------
Consolidated Cash Flow Statement
for the year ended 31 March 2018
2018 2017
Note GBPm GBPm
Operating profit 6 1,379.2 1,940.5
Less share of profit of joint ventures and associates (146.2) (187.4)
--------- ---------
Operating profit before jointly controlled entities and associates 1,233.0 1,753.1
Pension service charges less contributions paid (39.5) (48.0)
Movement on operating derivatives 89.1 (201.0)
Depreciation, amortisation, write downs and impairments 1,036.8 1,135.0
Charge in respect of employee share awards (before tax) 21.7 16.2
Profit on disposal of assets and businesses (34.9) (391.0)
Release of provisions (20.5) (17.6)
Release of deferred income (20.6) (18.0)
--------- ---------
Cash generated from operations before working capital movements 2,265.1 2,228.7
Decrease in inventories 43.2 8.6
Increase in receivables (313.1) (541.9)
(Decrease)/increase in payables (i) (97.8) 644.0
Decrease in provisions (7.9) (53.8)
--------- ---------
Cash generated from operations 1,889.5 2,285.6
Dividends received from investments 171.9 123.4
Interest paid (201.8) (178.5)
Taxes paid (132.2) (98.5)
--------- ---------
Net cash from operating activities 1,727.4 2,132.0
--------- ---------
Purchase of property, plant and equipment (1,486.6) (1,621.1)
Purchase of other intangible assets (i) (71.7) (146.3)
Deferred income received 12.2 36.9
Proceeds from disposals 12 151.5 739.3
Loans and equity provided to joint ventures and associates (140.4) (105.0)
Purchase of businesses and subsidiaries - (15.8)
Loans and equity repaid by joint ventures 128.0 73.4
Increase in other investments - (0.2)
--------- ---------
Net cash from investing activities (1,407.0) (1,038.8)
--------- ---------
Proceeds from issue of share capital 16.6 13.8
Dividends paid to company's equity holders 10 (594.5) (668.7)
Redemption of Hybrid equity (1,132.4) -
Hybrid equity dividend payments 14 (98.5) (119.3)
Employee share awards share purchase (19.8) (12.6)
New borrowings 859.0 1,842.5
Repayment of borrowings (175.4) (961.2)
Settlement of cashflow hedges 1.4 10.6
Repurchase of own shares 14 (371.6) (131.5)
--------- ---------
Net cash from financing activities (1,515.2) (26.4)
--------- ---------
Net (decrease)/increase in cash and cash equivalents (1,194.8) 1,066.8
--------- ---------
Cash and cash equivalents at the start of year 1,427.0 360.2
Net (decrease)/increase in cash and cash equivalents (1,194.8) 1,066.8
--------- ---------
Cash and cash equivalents at the end of year 232.2 1,427.0
--------- ---------
(i)Re-presented to reclassify the purchase of carbon allowances
and certificates from investing to operating activities.
The accompanying notes are an integral part of these financial
statements.
Notes to the Preliminary Statement
for the year ended 31 March 2018
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 2018 or 2017, but is derived from those
accounts. Consolidated financial statements for the year ended 31
March 2017 were delivered to the Registrar of Companies, and those
for the year ended 31 March 2018 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 24 May
2018.
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 2018. These consolidated summary 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
2018 unless expressly stated otherwise.
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', 'adjusted EBITDA' and 'adjusted net debt and hybrid
equity' are not defined under IFRS and are explained in more detail
in note 4.
2.3 Changes to presentation
During the year, the Group reviewed the presentation of its
operating segments following the announcement of its intention to
dispose of its GB domestic energy supply and energy related service
activities through a demerger with npower. The change to operating
segments is a result of changes to management structure and
internal reporting to the Board following the announcement. Further
information on the change to presentation of the operating segments
is provided in note 6.
3. New accounting policies and reporting changes
The basis of consolidation and principal accounting policies
applied in the preparation of these financial statements are set
out below and will be included within A1 Accompanying Information
to the Group's consolidated Financial Statements.
All issued standards, amendments and interpretations of adopted
IFRS, mandatory for the year ended 31 March 2018 and not early
adopted, have been applied by the Group in the current year and
have not had a material impact on the financial statements.
A number of standards have been issued but not yet adopted by
the Group within these financial statements, because application is
not yet mandatory or because adoption by the EU remains outstanding
at this point in time:
3.1 IFRS 9 'Financial instruments' which has been endorsed by
the European Union (EU) and will be effective from 1 January 2018
(and thus 1 April 2018 for the Group);
This standard replaces IAS 39 'Financial Instruments:
Recognition and Measurement' and sets out the requirements for
recognising and measuring financial assets, financial liabilities
and some contracts to buy or sell non-financial items. The impact
of adopting this standard can be summarised with reference to the
three project phases:
(i) Classification and measurement
The standard adopts a principles based approach to classify
financial assets on the basis of the business model within which
they are held and their contractual cash flow characteristics.
Following this approach, financial assets will be classified as
measured at amortised cost, fair value through profit and loss or
fair value through other comprehensive income. For financial
liabilities, the classification and measurement requirements under
IAS 39 have been carried forward essentially unchanged, with the
majority of financial liabilities being classified as measured at
amortised cost.
Whilst financial assets and liabilities will be classified into
the categories required by IFRS 9, there is not expected to be any
resulting measurement impact. The Group will continue to measure
equity instruments at fair value through other comprehensive
income, as an election on an instrument-by-instrument basis on
initial recognition.
Notes to the Preliminary Statement
for the year ended 31 March 2018
3. New accounting policies and reporting changes (continued)
(ii) Impairment
The standard includes the requirement that impairment models
also consider the expected credit losses on an entity's financial
assets held at amortised cost and commitments to extend credit. As
a result of this forward looking model - which removes the
requirement for a "trigger event" to have occurred - earlier
recognition of credit losses may occur.
The Group has reviewed existing impairment models - principally
counterparty specific provision models applied to Wholesale Trade
Receivables and provision matrix models applied to Retail Trade
Receivables - including the credit risk management processes which
will be described in A6.1 Accompanying Information to the Group's
consolidated Financial Statements. Given the short term nature of
the majority of affected financial assets, and the Group's focus on
mitigating significant credit risk through regular monitoring and
securitisation, the inclusion of forward looking information within
these models is expected to reduce Group Reported Profit by less
than 1%.
(iii) Hedge accounting
The standard does not materially change the amounts recognised
in relation to existing hedging arrangements but does simplify the
requirements for measuring hedge effectiveness, and thus the
eligibility conditions for hedge accounting. The new hedge
accounting model is intended to enable companies to reflect better
their risk management activities in the financial statements.
The Group's review of the IFRS 9 hedge accounting model
concluded that whilst adoption would not change the treatment of
existing hedging arrangements, the changes made would not result in
any additional hedge designations either. As such, the existing
hedge accounting model under IAS 39 appropriately reflects our risk
management activities in the financial statements. Therefore, as
permitted by IFRS 9, the Group has elected to continue to apply the
hedge accounting requirements of IAS 39. This policy choice will be
periodically reviewed to consider any changes in our risk
management activities.
Upon adoption of IFRS 9, the Group intends to apply the
exemption from the requirement to restate comparative information
about classification and measurement, including impairment. The
opening retained earnings will be adjusted for any difference
between financial instrument carrying amounts before and after
adoption of IFRS 9, which is expected to be less than 1% of Group
Reported Profit.
3.2 IFRS 15 'Revenue from contracts with customers' which has
been endorsed by the EU and will be effective from 1 January 2018
(and thus 1 April 2018 to the Group);
This standard replaces IAS 11 'Construction contracts', IAS 18
'Revenue', IFRIC 18 'Transfers of Assets from Customers' and a
number of other revenue related interpretations previously adopted
by the Group. The core principle of IFRS 15 is that an entity
recognises revenue that reflects the expected consideration for
goods or services provided to a customer under contract, over the
performance obligations they are being provided. The standard has
introduced a five-step model as the framework for applying that
core principle.
The Group's assessment of changes to the current revenue
recognition policy, which will be described in A1.2 Accompanying
Information to the Group's consolidated Financial Statements, can
be summarised for each Business Area as follows:
Networks
Revenue relating to distribution connections will be recognised
"over time" with reference to the ongoing obligation to provide
connection access to the distribution network, rather than at the
point of time the connection was completed under IFRIC 18. This
will reduce revenue and operating profit from this revenue
stream.
Retail
The clarifications on assessing principal versus agent
relationships will result in revenue and costs relating to third
party intermediary companies (used by Business customers to support
and advise them in changing supplier), as well as customer support
schemes (such as the Warm Home Discount), being offset within the
Income Statement, rather than recognised gross as currently
applied. This will reduce revenue but have no impact on operating
profit.
A review of the "percentage of completion" methodology currently
applied by the Enterprise Segment concluded that certain process
changes are required, specifically to ensure contract costs are
expensed as they occur (thereby removing Work in Progress from the
Balance Sheet) and calculating revenue recognised on a "costs
incurred" input basis (rather than the margin mark-up basis
currently applied). This may either increase or reduce revenue and
operating profit from this segment, depending on the underlying
contractual terms.
For certain equipment provided to customers on inception of a
contract - for example, internet routers delivered to a customer on
inception of a broadband contract - IFRS 15 requires recognition of
revenue when the equipment is delivered rather than over the
contract period as currently applied. This will increase revenue
and operating profit from this revenue stream.
Notes to the Preliminary Statement
for the year ended 31 March 2018
3. New accounting policies and reporting changes (continued)
Wholesale
The majority of revenue within this business area relates to
sales through optimisation trades in physical and financial energy
and commodity contracts ("commodity trades") within the scope of
IFRS 9 "Financial Instruments" and therefore outwith the scope of
IFRS 15. No changes to revenue recognition under IFRS 15 have been
noted in this area.
Adoption
Applying the IFRS 15 revenue recognition policy changes noted
above to the Group for the year ended 31 March 2018 - either
separately or in combination - would have resulted in a less than
1% change in Group Revenue, less than 1% change in Group Reported
Profit and less than 1% change in Group Net Assets. Adoption of
IFRS 15 will not affect the cashflows generated by the Group. The
full impact of adopting IFRS 15 on the Group's consolidated
Financial Statements for the year ended 31 March 2019 will depend
on the contractual arrangements entered into by the Group during
the forthcoming financial year, however, it is the Group's
expectation that the impact will be broadly equivalent.
The Group will apply the "Modified Retrospective" approach, with
the cumulative effect of initially applying IFRS 15 recognised at
the date of initial application as allowed by the standard. The
Group has also elected to take advantage of the practical expedient
whereby contracts that have been completed under the current
accounting policies at the beginning of the earliest period are not
restated.
Whilst not within the scope of IFRS 15 and with no changes to
revenue recognition under IFRS 15 being identified for revenue in
the Energy Portfolio Management (EPM) business, the Group has noted
that presentation of sales and purchases of commodity optimisation
trades on a gross or net basis varies across its industry peer
group. Therefore, in connection with the future adoption of IFRS
15, the Group will undertake a review in the forthcoming financial
year of whether a gross or net presentation of commodity trades,
provides a more relevant reflection of their underlying economic
reality of the activities in the EPM business to users of the
financial statements. Therefore, the Group currently presents sales
and purchases on a gross basis, a net presentation could have
reduced revenue and cost of sales for the year ended 31 March 2018
by up to GBP22bn with no impact on reported profit, net assets or
cashflows.
3.3 IFRS 16 'Leases' which has been endorsed by the EU and will
be effective from 1 January 2019 (and thus 1 April 2019 to the
Group).
This standard replaces IAS 17 'Leases' and sets out the
principles for the recognition, measurement, presentation and
disclosure of leases. The principal change from the previous
standard is the introduction of a single lessee accounting model
which requires a lessee to recognise assets and liabilities for all
leases with a term of more than 12 months, unless the underlying
asset is of low value.
The Group commenced its project on adoption of this standard
during the year, with current activity still focussed on data
collection and analysis of contracts for lease features. The Group
continues to anticipate that the impact from adopting the standard
can be summarised in two areas:
(i) Identification of a lease
The standard introduces a distinction between a lease and a
service contract on the basis of whether a customer is able to
control an identifiable asset. The Group anticipates some existing
operating and finance leases may fail to meet this definition, and
therefore would be treated as service contracts. Likewise, some
existing service contracts may now meet this definition, and
therefore would be treated as leases. However, the Group does not
believe this will have a material impact on the Group's results,
given the low number of affected contracts identified to date.
(ii) Recognition of right-of-use assets and lease liabilities for existing operating leases
The standard removes the previous distinction between operating
leases and finance leases and requires that, where a lease is
identified in a contract, a right-of-use asset and lease liability
are recognised. The Group anticipates that adoption is likely to
result in the majority of arrangements currently accounted for as
operating leases (GBP174.6m of operating lease commitments at 31
March 2018) being recognised on the Consolidated Balance Sheet as
right-of-use assets and lease liabilities.
The project will be completed during the forthcoming financial
year and, given the number of leases in place, the data capture
requirements and the variety of transition approaches available on
adoption, the full implementation effect of the standard will only
be determined once the project has completed.
However, the Group has concluded that the arrangements for Smart
Meter contracts - as described in Accounting Judgement Note 5.2(iv)
- do not contain a lease under IFRS 16, given the Suppliers'
inability to direct the use of the asset.
Notes to the Preliminary Statement
for the year ended 31 March 2018
4. Adjusted accounting measures
4.1 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
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 also uses adjusted earnings before interest, taxation,
depreciation and amortisation ('adjusted EBITDA') as an alternative
operating performance measure which acts as a management proxy for
cash generated from operating activities. This does not take into
account the rights and obligations that SSE has in relation its
equity-accounted joint ventures and associates. This measure
excludes exceptional items and certain re-measurements (see below),
the net interest costs associated with defined benefit schemes,
depreciation and amortisation from equity-accounted joint ventures
and associates and interest and taxation on profits from
equity-accounted joint ventures and associates.
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 and other taxation exceptional
items. Deferred taxation is excluded from the Group's adjusted EPS
because of the Group's significant ongoing capital investment
programme, which means that the deferred tax is unlikely to
reverse. 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. 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.
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 direct 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, or other capital
invested in joint ventures or associates. 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 57 to 63 before the Summary Financial
Statements.
Notes to the Preliminary Statement
for the year ended 31 March 2018
4.2 Exceptional items and certain re-measurements
Exceptional items are those charges or credits that are
considered unusual by nature and/or 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 and reorganisation costs, significant gains or losses
on disposal and provisions in relation to contractual settlements
associated with 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.
Impairments of intangible development projects as part of the
normal course of business are not considered exceptional.
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. 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.
4.3 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.
5. 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.
5.1 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 2018 are intangible development assets and
specific property, plant and equipment assets related to gas
production, thermal power generation and hydro 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. At 31 March 2018, the
Group has assessed that its Gas Production assets, Glendoe
hydro-electric generation plant and its Great Island CCGT plant
displayed indicators of impairment and were accordingly tested for
impairment.
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.
Notes to the Preliminary Statement
for the year ended 31 March 2018
5. Accounting judgements and estimation uncertainty (continued)
5.1 Significant Financial Judgements - Estimation Uncertainties (continued)
(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 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 (disclosed as accrued income).
Given the non-routine process, number of differing inputs and the
extent of management judgement as noted below, the unbilled revenue
estimate is considered a significant estimate made by management in
preparing the financial statements.
Unbilled revenue is calculated by applying the tariffs
applicable to customers to the calculated estimated 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 corroboration process requires
the comparison of calculated unbilled volumes to a 'benchmark'
measure of unbilled volumes (in GWh and millions of therms) which
is derived from historical weather-adjusted consumption patterns
and aggregated, independently validated but unreconciled, metering
data that is used in industry reconciliation processes for total
consumption by supplier. This comparison of the estimated supplied
quantity of electricity or gas that is deemed to have been
delivered to customers against 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
estimation 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, judgements applied for
domestic and business electricity, the Group's confidence in the
quality of grid supply point metering and national settlements data
it uses as part of its estimation process has improved which has
enabled an additional revenue amount of c. GBP42m (2017 - GBP60m)
to be recognised in the year. The unbilled gas revenue estimation
process has required the Group to take account of industry
estimated supplied quantities of gas consumed have historically
been higher than actual metered supply. To address 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. While it is expected that this
judgement will become less critical as the industry transitions to
smart meter technology, the percentage reduction applied has been
increased in the year following the entering into operation of the
new national settlements system, Nexus, and data issues associated
with that; the impact of this change in estimation is c. GBP12m
reduction in revenue. The sensitivity associated with this
judgement factor will be disclosed at Note 18 of the Group's
consolidated financial statements.
(iii) 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.
Changes from prior year
In addition to the three significant financial judgements noted
above, the Group disclosed the valuation of trade receivables as a
significant financial judgement at 31 March 2017. The Group has
assessed that the judgements applied in arriving at the provisions
for bad and doubtful debt do not have a material impact on these
financial statements at 31 March 2018.
Notes to the Preliminary Statement
for the year ended 31 March 2018
5. Accounting judgements and estimation uncertainty (continued)
5.2 Other key accounting judgements
(i) Accounting for Capacity Market payments - Accounting Judgement
The Group's UK Supply businesses are required to make payments
to an independent Settlement Body to ensure sufficient reliable
electricity capacity is available throughout the year. This charge
is based on the Supplier's forecast energy demands between November
and February, and is charged over the course of the delivery
year.
In accordance with IFRIC 21 "Levies", a liability for the full
year charge is recognised progressively between November and
February. The Group has assessed that this represents a regulatory
operating cost to the business for its operations throughout the
year and therefore recognises the cost over the course of the year.
Any difference between the liability and charge is recognised as a
settlement prepaid asset.
(ii) Accounting for costs of the smart meter infrastructure programme - Accounting Judgement
Through its participation in the UK smart metering programme,
the Group is required to make payments to the Data Communications
Company ("DCC") as it develops infrastructure to support the UK
smart meter roll-out. The Group has assessed that the DCC costs
incurred are capital in nature as they will provide future economic
benefit and the Group has the power to control certain assets
through the terms of the Smart Meter Code. These assets relate to
the centralised infrastructure costs of the UK's smart meter
programme. At 31 March 2018 the costs capitalised to date total
GBP86.6m (2017: GBP54.4m). SSE is aware that other market
participants have elected to expense these costs as incurred,
however, given that it has been assessed that control exists over
these assets, they have been capitalised.
(iii) Presentation of SSE's household energy and services
business in Great Britain - Accounting Judgement
On 8 November 2017 the Group announced that it had entered into
an agreement with innogy SE ("innogy") in respect of a proposed
demerger of SSE's household energy and services business in Great
Britain and combination with innogy's subsidiary, npower Group plc,
to form a new independent UK incorporated company. At 31 March 2018
it has been assessed that the business activity subject to the
demerger does not meet the criteria to be disclosed as held for
sale, because the transaction is subject to a UK Competition and
Markets Authority investigation and the approval of SSE's
shareholders, neither of which have been completed at 31 March
2018. It has been assessed that because these approvals have not
been granted it is not reasonably certain that the business
activity will be disposed of in the next 12 months. SSE therefore
continues to present its household energy and services businesses
as continuing operations within the Retail operating segment.
(iv) Lease classification for Smart Meter contracts - Accounting Judgement
Following the disposal of smart meter assets to Meter Fit 10
Limited in the prior period (see Note 12), the Group entered into
an agreement for the provision of meter asset provider (MAP)
services with that company. During the prior 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 of the smart meters
owned by the MAP 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.
The IFRS 16 "Leases" implementation project has concluded that this
assessment will not change upon adoption of that standard (see Note
3.3).
Changes from prior year
At 31 March 2017 the Group also disclosed business combinations
and acquisitions; treatment of disputes and claims; consolidation
of interest in investments and trading arrangements; and pension
scheme surplus restrictions as accounting judgements. Following a
review of transactions during the year, it has been assessed that
the judgements applied no longer have a significant impact on the
presentation of these financial statements. Further information of
the non-significant judgements applied can be found in the relevant
notes to the financial statements.
5.3 Other areas of estimation uncertainty
(i) Tax provisioning
The Group has a number of open tax issues with the tax
authorities in the UK and Republic of Ireland, the two
jurisdictions in which the Group operates. Where management makes a
judgement that an outflow of funds is probable, and a reliable
estimate of the dispute can be made, provision is made for the best
estimate of the most likely liability.
In estimating any such liability, the Group applies a risk-based
approach, taking into account the specific circumstances of each
dispute based on management's interpretation of tax law and
supported, where appropriate, by discussion and analysis by
external tax advisors. These estimates are inherently judgemental
and could change substantially over time as each dispute progresses
and new facts emerge. Provisions are reviewed on an ongoing basis,
however the resolution of tax issues can take a considerable period
of time to conclude and it is possible that amounts ultimately paid
will be different from the amounts provided. Provisions for
uncertain tax positions are included in current tax liabilities,
and total GBP66.1m at 31 March 2018 (2017 GBP131.6m). The Group
estimates that a reasonably possible range of settlement outcomes
for the uncertain tax positions could be in the range from nil to
the full value of the provision
Notes to the Preliminary Statement
for the year ended 31 March 2018
5 Accounting judgements and estimation uncertainty (continued)
5.3 Other areas of estimation uncertainty (continued)
IFRIC 23 "Uncertainty over Income Tax Treatments", issued by the
IASB with an effective date for the Group of 1 April 2019 but yet
to be endorsed by the EU, clarifies the application of IAS 12
"Income Taxes" regarding recognition and measurement when there is
uncertainty over the income tax treatment. Analysis of the
potential impact from adopting this interpretation is ongoing,
however adoption may result in changes to the judgements or
estimates made for tax provisions.
(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 2018.
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 beginning in 2019
and increasing into the subsequent decade and out to 2040.
Further detail on the assumptions made and movement in
decommissioning costs during the year will be disclosed at Note 20
of the Group's consolidated financial statements.
(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 out-with 2P, 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 reservoir 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 2018
6. Segmental information
The Group's operating segments are those used internally by the
Board to run the business and make strategic decisions. On 8
November 2017, SSE announced its intention to dispose of its GB
domestic supply and energy related services business in a demerger
with npower. Following this announcement the presentation of
financial information to the Board changed, resulting in a change
of the operating segments with the activities subject to the
demerger being presented as SSE Energy Services. During the review
of operating segments triggered by the Retail transaction, it was
also assessed that the Energy Portfolio Management activity should
also be presented as a standalone segment to reflect its
contribution to the Group.
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 SSE Energy Services - Supply The supply of electricity and gas to residential
customers in GB
---------------------------------------------- ------------------------------------------------------
SSE Energy Services - Energy Related Services The provision of energy related goods and services to
residential customers in GB including
meter reading and installation, boiler maintenance
and installation and domestic telecoms
and broadband services.
---------------------------------------------- ------------------------------------------------------
Business Energy The supply of electricity and gas to business
customers in GB
---------------------------------------------- ------------------------------------------------------
Airtricity The supply of electricity, gas and energy related
services to residential and business customers
in the Republic of Ireland and Northern 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.
---------------------------------------------- ------------------------------------------------------
Wholesale Electricity Generation The generation of power from renewable and thermal
plant in the UK and Ireland.
---------------------------------------------- ------------------------------------------------------
Energy Portfolio Management (EPM) 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.
Notes to the Preliminary Statement
for the year ended 31 March 2018
6 Segmental information (continued)
(i) Revenue by segment
Intra-
External Intra-segment External segment
revenue revenue Total revenue revenue revenue Total revenue
2018 2018 2018 2017 2017 2017
GBPm GBPm GBPm GBPm GBPm GBPm
Networks
Electricity
Distribution 777.0 252.4 1,029.4 814.8 259.7 1,074.5
Electricity
Transmission 325.7 0.2 325.9 358.2 0.2 358.4
1,102.7 252.6 1,355.3 1,173.0 259.9 1,432.9
--------------- --------------- -------------- --------------- --------------- --------------
Retail
SSE Energy
Services -
Energy Supply 3,840.5 10.1 3,850.6 3,796.6 - 3,796.6
SSE Energy
Services -
Energy Related
Services 135.5 168.5 304.0 130.7 151.0 281.7
Business Energy 2,517.3 22.1 2,539.4 2,579.6 19.2 2,598.8
Airtricity 917.6 119.1 1,036.7 865.5 82.9 948.4
Enterprise 431.1 104.0 535.1 371.6 99.5 471.1
--------------- --------------- -------------- --------------- --------------- --------------
7,842.0 423.8 8,265.8 7,744.0 352.6 8,096.6
--------------- --------------- -------------- --------------- --------------- --------------
Wholesale
Electricity
Generation 498.6 1,919.1 2,417.7 477.0 1,731.8 2,208.8
EPM 21,710.1 3,670.0 25,380.1 19,532.5 3,738.0 23,270.5
Gas Storage 11.1 306.5 317.6 13.5 280.4 293.9
Gas Production 30.3 221.7 252.0 35.5 235.4 270.9
--------------- --------------- -------------- --------------- --------------- --------------
22,250.1 6,117.3 28,367.4 20,058.5 5,985.6 26,044.1
--------------- --------------- -------------- --------------- --------------- --------------
Corporate
unallocated 31.6 316.9 348.5 62.4 273.9 336.3
--------------- --------------- -------------- --------------- --------------- --------------
Total 31,226.4 7,110.6 38,337.0 29,037.9 6,872.0 35,909.9
--------------- --------------- -------------- --------------- --------------- --------------
Revenue within Energy Portfolio Management ('EPM') represents
the gross value of all wholesale commodity sales including settled
physical and financial trades entered into to optimise the
performance of the generation plants and to manage the Group's
commodity risk exposure. The gross value of purchase trades are
included in cost of sales. In connection with the future adoption
of IFRS 15 "Revenue from contracts with customers", as highlighted
in Note 3.2, the Group will undertake a review in the financial
year ended 31 March 2019 of whether a gross or net presentation of
commodity trades provides a more relevant reflection of their
underlying economic reality to users of the financial statements.
Whilst the Group currently presents sales and purchases on a gross
basis, a net presentation could have reduced revenue and cost of
sales for the year ended 31 March 2018 by up to GBP22bn with no
impact on reported profit, net assets or cashflows.
Revenue from the Group's investment in Scotia Gas Networks
Limited SSE share being GBP391.5m (2017: GBP486.7m) is not recorded
in the revenue line in the income statement.
Revenue by geographical location is as follows:
2018 2017
GBPm GBPm
UK 30,407.6 28,291.3
Ireland 818.8 746.6
--------- ---------
31,226.4 29,037.9
--------- ---------
Notes to the Preliminary Statement
for the year ended 31 March 2018
6 Segmental information (continued)
(ii) Operating profit/(loss) by segment
2018
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 402.2 - 402.2 - 402.2
Electricity
Transmission 195.6 - 195.6 - 195.6
Gas Distribution 165.3 (96.2) 69.1 2.7 71.8
-------------------- -------------------- ------------------- -------------------- --------
763.1 (96.2) 666.9 2.7 669.6
Retail
SSE Energy Services
- Energy Supply 260.4 - 260.4 (56.9) 203.5
SSE Energy Services
- Energy-related
Services 18.3 - 18.3 - 18.3
Business Energy 64.2 - 64.2 - 64.2
Airtricity 33.0 - 33.0 (6.1) 26.9
Enterprise 26.9 - 26.9 (11.8) 15.1
-------------------- -------------------- ------------------- -------------------- --------
402.8 - 402.8 (74.8) 328.0
Wholesale
Electricity
Generation 578.9 (52.3) 526.6 (3.2) 523.4
EPM 46.0 - 46.0 (89.1) (43.1)
Gas Storage (6.5) - (6.5) - (6.5)
Gas Production 34.0 - 34.0 (104.7) (70.7)
-------------------- -------------------- ------------------- -------------------- --------
652.4 (52.3) 600.1 (197.0) 403.1
Corporate
unallocated 10.4 (1.3) 9.1 (30.6) (21.5)
-------------------- -------------------- ------------------- -------------------- --------
Total 1,828.7 (149.8) 1,678.9 (299.7) 1,379.2
-------------------- -------------------- ------------------- -------------------- --------
Notes to the Preliminary Statement
for the year ended 31 March 2018
6 Segmental information (continued)
(ii) Operating profit/(loss) by segment (continued)
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
SSE Energy Services
- Energy Supply 260.8 - 260.8 (89.1) 171.7
SSE Energy Services
- Energy-related
Services 12.7 - 12.7 (7.2) 5.5
Business Energy 89.4 - 89.4 (16.4) 73.0
Airtricity 42.7 - 42.7 - 42.7
Enterprise 16.7 - 16.7 - 16.7
-------------------- -------------------- ------------------- -------------------- --------
422.3 - 422.3 (112.7) 309.6
Wholesale
Electricity
Generation 510.9 (38.6) 472.3 72.5 544.8
EPM (9.7) - (9.7) 201.0 191.3
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
-------------------- -------------------- ------------------- -------------------- --------
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 7). 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,
GBP15.2m (2017 - GBP12.7m), as finance income (Note 8).
Notes to the Preliminary Statement
for the year ended 31 March 2018
6 Segmental information (continued)
(iii) Earnings before interest, taxation, depreciation and amortisation ('EBITDA')
2018
Adjusted
operating profit JV/ Associate
reported to the Depreciation/Impairment/ share of
Board amortisation before depreciation and Release of
(Note 6 (ii)) exceptional charges amortisation Deferred income Adjusted EBITDA
GBPm GBPm GBPm GBPm GBPm
Networks
Electricity
Distribution 402.2 248.7 - (13.4) 637.5
Electricity
Transmission 195.6 63.1 - (2.6) 256.1
Gas Distribution 165.3 - 55.8 - 221.1
763.1 311.8 55.8 (16.0) 1,114.7
Retail
SSE Energy
Services -
Energy Supply 260.4 37.8 - - 298.2
SSE Energy
Services -
Energy-related
Services 18.3 14.2 - - 32.5
Business Energy 64.2 0.3 - - 64.5
Airtricity 33.0 7.8 - - 40.8
Enterprise 26.9 31.4 - (1.5) 56.8
---------------- ------------------------ ---------------- ----------------- ---------------
402.8 91.5 - (1.5) 492.8
Wholesale
Electricity
Generation 578.9 219.7 59.6 (2.5) 855.7
EPM 46.0 - - - 46.0
Gas Storage (6.5) 0.9 - - (5.6)
Gas Production 34.0 119.0 - - 153.0
---------------- ------------------------ ---------------- ----------------- ---------------
652.4 339.6 59.6 (2.5) 1,049.1
Corporate
unallocated 10.4 54.0 0.7 (0.6) 64.5
Total 1,828.7 796.9 116.1 (20.6) 2,721.1
---------------- ------------------------ ---------------- ----------------- ---------------
The Electricity Generation adjusted EBITDA measure of GBP855.7m
(2017 - GBP749.3m) can be attributed to Renewable (GBP692.2m, 2017
- GBP580.3m) and Thermal/Other (GBP163.5m, 2017 - GBP169.0m)
sources.
(iii) Earnings before interest, taxation, depreciation and amortisation ('EBITDA') (continued)
2017
Depreciation/
Adjusted operating Impairment / JV/ Associate
profit reported to amortisation share of
the Board before exceptional depreciation and Release of deferred
(Note 6 (ii) charges amortisation income Adjusted EBITDA
GBPm GBPm GBPm GBPm GBPm
Networks
Electricity
Distribution 433.4 250.6 - (13.4) 670.6
Electricity
Transmission 263.7 52.5 - (2.6) 313.6
Gas Distribution 239.4 - 70.9 - 310.3
936.5 303.1 70.9 (16.0) 1,294.5
Retail
SSE Energy Services
- Energy Supply 260.8 8.2 - - 269.0
SSE Energy Services
- Energy-related
Services 12.7 12.0 - - 24.7
Business Energy 89.4 0.3 - - 89.7
Airtricity 42.7 6.3 - - 49.0
Enterprise 16.7 45.1 - (1.5) 60.3
------------------ ------------------ ------------------ ------------------- ---------------
422.3 71.9 - (1.5) 492.7
Wholesale
Electricity
Generation 510.9 193.9 44.9 (0.4) 749.3
EPM (9.7) - - - (9.7)
Gas Storage (13.0) 0.9 - - (12.1)
Gas Production 26.4 144.2 - - 170.6
------------------ ------------------ ------------------ ------------------- ---------------
514.6 339.0 44.9 (0.4) 898.1
Corporate
unallocated 0.6 37.4 - (0.1) 37.9
Total 1,874.0 751.4 115.8 (18.0) 2,723.2
------------------ ------------------ ------------------ ------------------- ---------------
Notes to the Preliminary Statement
for the year ended 31 March 2018
7. Exceptional items and certain re-measurements
2018 2017
GBPm GBPm
Exceptional items
Asset impairments and related charges and credits (205.3) (376.4)
Provisions for restructuring and other liabilities (8.0) 1.8
-------- --------
(213.3) (374.6)
Net gains on disposals of businesses and other assets
- 307.3
Fair value uplift on loss of control of Clyde - 59.1
(213.3) (8.2)
Share of effect of change in UK corporation tax on deferred tax liabilities and assets of
associate and joint venture investments - 19.5
--------
Total exceptional items (213.3) 11.3
-------- --------
Certain re-measurements
Movement on operating derivatives (note 16) (89.1) 201.0
Movement on financing derivatives (note 16) (33.0) 52.6
Share of movement on derivatives in jointly controlled entities (net of tax) 2.7 1.7
-------- --------
Total certain re-measurements (119.4) 255.3
-------- --------
Exceptional items and certain re-measurements before taxation (332.7) 266.6
-------- --------
Taxation
Effect of change in UK corporation tax rate on deferred tax liabilities and assets - 35.4
Taxation on other exceptional items 105.6 118.7
-------- --------
105.6 154.1
Taxation on certain re-measurements 7.9 (48.1)
-------- --------
Taxation 113.5 106.0
-------- --------
Exceptional items after certain re-measurements after taxation (219.2) 372.6
-------- --------
Exceptional items are disclosed across the following categories within the income statement:
2018 2017
GBPm GBPm
Cost of sales:
Thermal Generation related charges - 31.6
Movement on operating derivatives (note 16) (89.1) 201.0
-------- --------
(89.1) 232.6
Operating costs:
Gas Production related charges (104.7) (227.5)
Gas Storage related charges - (23.8)
Retail and technology development related charges (62.5) (120.3)
Other exceptional provisions and charges (46.1) (34.6)
-------- --------
(213.3) (406.2)
Operating income:
Net gains on disposals of businesses and other assets - 307.3
Fair value uplift on loss of control of Clyde - 59.1
-------- --------
- 366.4
Joint ventures and associates:
Effect of change in UK corporation tax rate on deferred tax liabilities and assets - 19.5
Share of movement on derivatives in jointly controlled entities (net of tax) 2.7 1.7
-------- --------
2.7 21.2
Operating profit/(loss) (299.7) 214.0
-------- --------
Finance costs
Movement on financing derivatives (note 16) (33.0) 52.6
-------- --------
Profit/(loss) before taxation (332.7) 266.6
-------- --------
Notes to the Preliminary Statement
for the year ended 31 March 2018
Exceptional items and certain re-measurements (continued)
7.1 Exceptional items
In the year to 31 March 2018, the Group recognised a net
exceptional charge of GBP213.3m. This consisted of asset and
investment impairment charges totalling GBP208.1m and net
exceptional charges for provisions of GBP5.2m.
The net exceptional charges excluding gains on disposal
recognised can be summarised as follows:
Goodwill
Property, & Other
Plant & Equipment Intangibles Other charges Total charges
GBPm GBPm GBPm GBPm
Gas Production (i) 104.7 - - 104.7
Retail and technology
development (ii) 53.3 9.7 - 63.0
Other (iii) 20.9 (4.4) 29.1 45.6
------------------- ------------- -------------- --------------
178.9 5.3 29.1 213.3
------------------- ------------- -------------- --------------
(i) Gas Production
In the year, the Group recognised net impairment charges of
GBP104.7m related to its North Sea Gas Production assets following
an increase in projected costs at certain fields and revised
assessments of hydrocarbon reserves. The impairment charges were
recognised on the Greater Laggan fields (GBP104.2m) and Bacton
fields (GBP19.3m) due to lower than previously forecast
independently assessed proved and probable (2P) hydrocarbon
reserves and, at Greater Laggan, increased projected costs to
extract those reserves as a result of enhanced clarity over the
interconnectivity of the field resources. These charges were offset
by a GBP18.8m reversal of previous exceptional impairments on the
ECA field following an increase to estimated hydrocarbon reserves.
Following these charges and credit, the residual value in the
Group's gas production assets is GBP517.8m.
(ii) Retail and other technology developments
The Group has undertaken an internal restructuring exercise
following the announcement on 8 November 2017 that SSE plans to
demerge its UK domestic supply business in a transaction with
npower. That restructuring, which was concluded on 1 April 2018,
resulted in the transfer of assets and contracts between wholly
owned subsidiaries of the Group, and necessitated a detailed
impairment review. This impairment review was performed to ensure
that a new demerged Retail business would contain assets that would
be utilised in its post-demerger operations. This review resulted
in GBP29.3m of software development costs impairment charges,
related to the Group's previous Retail strategic investment in
transformation and a further GBP33.7m of charges in relation to
Retail related software developments and programmes within the
Group's central service company and other subsidiaries that it was
identified would no longer be utilised by the demerged or
continuing energy supply businesses.
(iii) Other
In the year, SSE disposed of its 1.8% shareholding in Faroe
Petroleum Limited for cash consideration of GBP4.0m, crystallising
GBP7.2m of losses on disposal and disposed of its 15% shareholding
in BIFAB Ltd for consideration of GBP1. The sale of shareholding in
Burntisland Fabrication Limited ('BIFAB') resulted in an
exceptional charge of GBP16.5m, including GBP10.0m of losses
previously recognised in the statement of other comprehensive
income. These losses represent costs of exit from non-controlling
financial interests in investments totalling GBP23.7m. These
investments are not-related to SSE's core operating activities and
are considered exceptional in nature.
The Group also recognised an impairment charge of GBP15.6m on
its Barkip anaerobic digestion plant following experience of
operational issues and assessment of future economic prospects. The
plant represented an investment in emergent and economically
unproven technology and its impairment is considered exceptional
due to the nature of that historic investment.
The Group recognised combined charges of GBP11.8m in its
Enterprise Utilities business following detailed review and
assessment of the assets and contracts in its Heat Network
portfolio. These charges are considered exceptional as part of the
restructure and realignment of that business under new management.
As part of its preparation for the proposed demerger, the Group has
also incurred GBP11.8m of transaction-related costs in the year to
31 March 2018.
Offsetting these exceptional charges, the Group recognised a
reversal in impairment in its Doggerbank offshore windfarm prospect
of GBP7.9m following a renewed commitment to the project by the
joint venture partners. The Group also released GBP9.3m of
provisions related to historic regulatory investigations and legal
disputes following satisfaction of remedies and reassessment of
liability in relation to the Glendoe dispute. These reversal
credits are related to provisions and impairments previously
disclosed as exceptional.
Notes to the Preliminary Statement
for the year ended 31 March 2018
7 Exceptional items and certain re-measurements (continued)
7.1 Exceptional Items (continued)
31 March 2017
In the previous financial year, the Group recognised a net
exceptional charge of GBP8.2m. This consisted of asset impairment
and related charges totalling GBP374.6m, net exceptional credits
for provisions of GBP1.8m, net exceptional gains on disposal of
GBP307.3m and net fair value uplift following loss of control of
GBP59.1m. The GBP307.3m gain was related to the part disposal of
the Group's stake in Scotia Gas Networks.
The exceptional charges recognised can be summarised as
follows:
Property, Plant & Goodwill & Other Other
Equipment Intangibles Inventories charges/(credits) Total charges
GBPm GBPm GBPm GBPm GBPm
Gas Production 244.3 (20.0) - 3.2 227.5
Retail & technology
developments 42.2 78.1 - - 120.3
Gas Storage 23.8 - - - 23.8
Thermal Generation 30.7 - (62.3) - (31.6)
Other 12.0 36.4 - (13.8) 34.6
-------------------- -------------------- ------------ --------------------- --------------
353.0 94.5 (62.3) (10.6) 374.6
-------------------- -------------------- ------------ --------------------- --------------
In the previous year, the Group recorded significant impairment
charges associated with its North Sea Gas Production assets, in
particular at Greater Laggan, in relation to 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
2016/17, the Group also decided to cease the development of its
replacement customer service and billing system and incurred an
exceptional charge of GBP83.1m as a consequence, which was
augmented by the discontinuation of related technology development
projects totalling GBP37.2m. In addition, revised estimated
decommissioning costs associated with the Aldbrough and Atwick Gas
Storage sites led to an impairment of GBP23.8m in relation to Gas
Storage. In thermal generation, the Group reassessed the
value-in-use of its portfolio in Ireland and concluded that the
Group's oil burning stations at Rhode and Tawnaghmor were impaired
due to their age and future competitive prospects by GBP30.7m.
Against this, the Group reversed previous stock impairments at
Fiddler's Ferry following the success in securing a one year
contract to provide ancillary capacity services.
31 March 2016
The exceptional charges recognised are 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. The subsequent
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 exceptional 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.
Notes to the Preliminary Statement
for the year ended 31 March 2018
Exceptional items and certain re-measurements (continued)
7.2 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 16.
7.3 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% 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 had the effect of reducing the Group's deferred
tax liabilities by GBP34.6m in the year ended 31 March 2017,
including the impact of changes recognised in the statement of
other comprehensive income. In the year to 31 March 2018, the rate
change enacted on 15 September 2016 which is effective from 1 April
2020, has the effect of increasing the group's deferred tax
liabilities by GBP12.8m. This impact results from items arising in
the year to 31 March 2018, which were therefore not rebased to 17%
at the previous balance sheet date.
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 2018
8. Finance income and costs
2018 2017
Before Exceptional Exceptional items Before Exceptional Exceptional items
items and certain and certain items 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 5.2 - 5.2 1.8 - 1.8
Foreign exchange
translation - - - 20.5 - 20.5
Interest on pension
scheme assets (I) 2.7 - 2.7 - - -
------------------ ------------------ ------- ------------------ ------------------- -------
Other interest
receivable:
Scotia Gas Networks
loan stock 15.2 - 15.2 12.7 - 12.7
Other joint
ventures and
associates 38.2 - 38.2 33.2 - 33.2
Other receivable 40.8 - 40.8 25.5 - 25.5
------------------- ------------------ ------------------ ------- ------------------ ------------------- -------
94.2 - 94.2 71.4 - 71.4
------------------ ------------------ ------- ------------------ ------------------- -------
Total finance
income 102.1 - 102.1 93.7 - 93.7
------------------ ------------------ ------- ------------------ ------------------- -------
Finance costs:
Bank loans and
overdrafts (26.5) - (26.5) (28.9) - (28.9)
Other loans and
charges (324.2) - (324.2) (275.4) - (275.4)
Interest on pension
scheme liabilities
(I) - - - (4.0) - (4.0)
Notional interest
arising on
discounted
provisions (16.3) - (16.3) (14.2) - (14.2)
Foreign exchange
translation (6.5) - (6.5)
Finance lease
charges (30.8) - (30.8) (33.1) - (33.1)
Less: interest
capitalised (II) 42.2 - 42.2 45.4 - 45.4
Total finance costs (362.1) - (362.1) (310.2) - (310.2)
------------------ ------------------ ------- ------------------ ------------------- -------
Changes in fair
value of financing
derivatives at
fair value through
profit or loss - (33.0) (33.0) - 52.6 52.6
Net finance costs (260.0) (33.0) (293.0) (216.5) 52.6 (163.9)
------------------ ------------------ ------- ------------------ ------------------- -------
Presented as:
Finance income 102.1 - 102.1 93.7 - 93.7
Finance costs (362.1) (33.0) (395.1) (310.2) 52.6 (257.6)
Net finance costs (260.0) (33.0) (293.0) (216.5) 52.6 (163.9)
------------------ ------------------ ------- ------------------ ------------------- -------
i) The interest on net pension assets/(liabilities) for the year
ended 31 March 2018 of GBP2.7m credit (2017- GBP4.0m charge)
represents the respective credits/(charges) under IAS 19R.
ii) The capitalisation rate applied in determining the amount of
borrowing costs to capitalise in the period was 4.01% (2017 -
4.23%).
Adjusted net finance costs are arrived at after the following adjustments: 2018 2017
GBPm GBPm
Net finance costs (293.0) (163.9)
(add)/less:
Share of interest from joint ventures and associates:
Scotia Gas Networks loan stock (15.2) (12.7)
Other joint ventures and associates (97.4) (102.0)
-------- --------
(112.6) (114.7)
Interest on pension scheme liabilities (2.7) 4.0
Share of interest on net pension liabilities in joint ventures (0.2) (0.9)
Movement on financing derivatives (Note 16) 33.0 (52.6)
-------- --------
Adjusted net finance costs (375.5) (328.1)
Notional interest arising on discounted provisions 16.3 14.2
Finance lease charges 30.8 33.1
Hybrid coupon payment (Note 14) (98.5) (119.3)
-------- --------
Adjusted net finance costs for interest cover calculations (426.9) (400.1)
-------- --------
Notes to the Preliminary Statement
for the year ended 31 March 2018
9. Taxation
Analysis of charge recognised in the income statement
Before Before
Exceptional items Exceptional items Exceptional items Exceptional items
and certain and certain and certain and certain
re-measure-ments re-measure-ments 2018 re-measure-ments re-measure-ments 2017
GBPm GBPm GBPm GBPm GBPm GBPm
Current tax
UK corporation tax 162.7 (9.2) 153.5 188.0 (1.5) 186.5
Adjustments in
respect of
previous years (40.8) (29.1) (69.9) (61.1) (9.0) (70.1)
Reassessment of
capital
allowances for
previous years
(a) (101.3) - (101.3) - - -
Carry back of E&P
losses (24.0) - (24.0) - - -
------------------ ------------------ -------- ------------------ ------------------ -------
Total current tax (3.4) (38.3) (41.7) 126.9 (10.5) 116.4
------------------ ------------------ -------- ------------------ ------------------ -------
Deferred tax
Current year 103.3 (75.2) 28.1 11.8 (60.1) (48.3)
Effect of change
in tax rate 12.8 - 12.8 - (35.4) (35.4)
Losses carried
forward
recognised - - - 86.4 - 86.4
Reassessment of
capital
allowances for
previous years
(I) 101.3 - 101.3 - - -
Adjustments in
respect of
previous years 65.6 - 65.6 (61.3) - (61.3)
------------------ ------------------ -------- ------------------ ------------------ -------
Total deferred tax 283.0 (75.2) 207.8 36.9 (95.5) (58.6)
------------------ ------------------ -------- ------------------ ------------------ -------
Total taxation
charge 279.6 (113.5) 166.1 163.8 (106.0) 57.8
------------------ ------------------ -------- ------------------ ------------------ -------
I) Reclassification of historic tax liabilities from current to
deferred tax following a review of the position taken in the
Group's tax accrual calculations for earlier open years.
Adjusted current tax charge
The adjusted current tax charge is arrived at after the
following adjustments:
2018 2018 2017 2017
GBPm % GBPm %
Group tax charge and effective rate 166.1 11.4 57.8 3.6
Add: reported deferred tax credit and effective rate (207.8) (14.3) 58.6 3.7
-------- ------- ------ -----
Current tax charge and effective rate (41.7) (2.9) 116.4 7.3
Effect of adjusting items (see below) - - - 0.2
-------- ------- ------ -----
Current tax charge and effective rate on adjusted basis (41.7) (2.9) 116.4 7.5
add:
Share of current tax from joint ventures and associates 32.9 2.3 30.8 2.0
Effect of reclassification 101.3 7.0 - -
Less:
Current tax on exceptional items 38.2 2.6 10.5 0.7
-------- ------- ------ -----
Adjusted current tax charge and effective rate 130.7 9.0 157.7 10.2
-------- ------- ------ -----
The adjusted effective rate is based on adjusted profit before
tax being:
2018 2017
GBPm
Profit before tax 1,086.2 1,776.6
Add/(less):
Exceptional items and certain re-measurements 332.7 (266.6)
Share of tax from joint ventures/associates before exceptional items and certain re-measurements 37.2 32.8
Interest on pension scheme liabilities (2.7) 4.0
Share of interest on net pension liabilities in jointly controlled entities and associates (0.2) (0.9)
-------- --------
Adjusted profit before tax 1,453.2 1,545.9
-------- --------
Notes to the Preliminary Statement
for the year ended 31 March 2018
10. Dividends
10.1 Ordinary dividends
Year ended 31 Year ended 31
March 2018 Settled via Pence per March 2017 Settled via Pence per
Total scrip ordinary share Total scrip ordinary share
GBPm GBPm GBPm GBPm
Interim - year
ended 31 March
2018 287.8 7.1 28.4 - - -
Final - year
ended 31 March
2017 638.3 324.5 63.9 - - -
Interim - year
ended 31 March
2017 - - - 277.1 95.3 27.4
Final - year
ended 31 March
2016 - - - 629.5 142.6 62.5
926.1 331.6 906.6 237.9
--------------- --------------- --------------- ---------------
The final dividend of 63.9p per ordinary share declared in
respect of the financial year ended 31 March 2017 (2016: 62.5p) was
approved at the Annual General Meeting on 20 July 2017 and was paid
to shareholders on 22 September 2017. 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 28.4p per ordinary share (2017: 27.4p)
was declared and paid on 16 March 2018 to those shareholders on the
SSE plc share register on 19 January 2018. 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 66.3p per ordinary share based on
the number of issued ordinary shares at 31 March 2018 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 2018, this would equate to a final
dividend of GBP678.3m.
11. Earnings per Share
11.1 Basic earnings per share
The calculation of basic earnings per ordinary share at 31 March
2018 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 2018. All earnings are
from continuing operations.
11.2 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 7).
Year ended 31 March Year ended 31 March Year ended 31 March Year ended 31 March
2018 2018 2017 2017
Earnings Earnings per share Earnings Earnings per share
GBPm pence GBPm pence
Basic 821.6 81.3 1,599.5 158.4
Exceptional items and
certain
re-measurements (Note
7) 219.2 21.7 (372.6) (36.9)
---------------------- ---------------------- ---------------------- ----------------------
Reclassification of
capital allowances
from prior years (101.3) (10.0) - -
---------------------- ---------------------- ---------------------- ----------------------
Basic excluding
exceptional items and
certain
re-measurements 939.5 93.0 1,226.9 121.5
Adjusted for:
Interest on net
pension scheme
liabilities (2.7) (0.3) 4.0 0.4
Share of interest on
net pension scheme
liabilities in joint
venture (0.2) - (0.9) (0.1)
Deferred tax (Note 8) 283.0 28.0 36.9 3.7
Deferred tax from
share of joint
ventures and
associates 4.4 0.4 2.0 0.2
Adjusted 1,224.0 121.1 1,268.9 125.7
---------------------- ---------------------- ---------------------- ----------------------
Basic 821.6 81.3 1,599.5 158.4
Dilutive effect of outstanding share options - (0.1) - (0.2)
----- ----- ------- -----
Diluted 821.6 81.2 1,599.5 158.2
Notes to the Preliminary Statement
for the year ended 31 March 2018
11.2 Earnings per share (continued)
Adjusted earnings per share (continued)
The weighted average number of shares used in each calculation
is as follows:
31 March 2018 31 March 2017
Number of shares Number of shares
(millions) (millions)
For basic and adjusted earnings per share 1,010.9 1,009.7
Effect of exercise of share options 0.8 1.4
----------------- -----------------
For diluted earnings per share 1,011.7 1,011.1
----------------- -----------------
11.3 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.
2018 2018 2018 2017 2017 2017
Earnings per Dividend per Dividend Cover Earnings per Dividend per Dividend cover
share share share share
(pence) (pence) (times) (pence) (pence) (times)
Reported 81.3 94.7 0.86 158.4 91.3 1.74
Adjusted 121.1 94.7 1.28 125.7 91.3 1.38
---------------- ----------------- --------------- ----------------- ----------------- ---------------
12. Acquisitions, disposals and held-for-sale assets
12.1 Acquisitions
There have been no significant acquisitions in the year.
12.2 Disposals
Significant disposals
Clyde windfarm - On 28 August 2017 the Clyde Extension windfarm,
comprising 54 turbines generating an additional 172.8MW, reached
its Commercial Operation Date. In March 2016, SSE announced the
initial sale of 49.9% of Clyde Windfarm (Scotland) Limited
("Clyde") equating to 349.6MW of the existing operational wind
farm. It was agreed between the partners that when Commercial
Operation began, the equity stake in Clyde jointly owned by
Greencoat UK Wind Plc (UKW) and GLIL Infrastructure LLP ("GLIL")
would be diluted from 49.9% to 30%, with the Group retaining 70%.
Due to the contractual agreement between the parties, the Group
assessed that dilution did not give rise to a change in control,
therefore Clyde remains an equity accounted joint venture.
On 4 September 2017, the Group completed the disposal of a
further 5.0% equity stake in Clyde to the existing joint venture
partners for consideration of GBP67.8m, recognising a gain on sale
of GBP24.0m. At 31 March 2018, the Group's shareholding in Clyde
was therefore 65% with UKW and GLIL jointly owning 35%. In the
period prior to disposal, the 5% equity stake in the windfarm
contributed GBP0.2m to profit before tax of the Group.
As part of that disposal agreement, UKW and GLIL also have the
option to buy a further 14.9% of Clyde, equating to 77.8MW, for a
cash consideration of GBP202.2 million, before costs. This option
can be exercised between 1 April 2018 and 30 June 2018 and would
result in SSE's equity share in Clyde reducing to 50.1% with UKW
and GLIL owning the remaining 49.9%. As a result, 14.9% of the
Group's investment in Clyde has been presented as held for sale at
31 March 2018.
On 8(th) of May 2018, subsequent to the financial year end, UKW
and GLIL announced that they will exercise their option to purchase
14.9% of on the 30(th) of May 2018 for consideration of GBP202.0m.
Following the sale of this stake, the Group will retain 50.1% in
the equity accounted joint venture. The gain on sale will be
calculated following completion of the sale.
Ferrybridge MFE2 - On 7 September 2017, the Group disposed of a
50% equity stake in its subsidiary Ferrybridge MFE2 Limited to
Wheelabrator Technologies Inc. for consideration of GBP62.5m,
recognising nil gain/(loss) on disposal of the subsidiary. The
Group disposed of a subsidiary on the date it lost control and
acquired a joint venture which it then recognised at fair value
under the principles of both IFRS 3 'Business Combinations' and
IFRS 11 'Joint Arrangements'. A gain of GBP6.7m was recognised on
acquisition of the joint venture following the fair value
assessment. The Group's 50% interest in Ferrybridge MFE2 was
classified as held for sale at 31 March 2017.
Notes to the Preliminary Statement
for the year ended 31 March 2018
12.2 Acquisitions, disposals and held-for-sale assets
(continued)
12.3 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.
2018 2018 2017
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 63.6 21.8 85.4 15.5
Intangible and biological assets - 3.2 3.2 43.5
Investments and loans - joint
ventures - 34.7 34.7 326.9
Trade and other receivables - - - 105.8
Trade and other payables - - - (7.3)
Provisions - - - 16.2
Loans and borrowings - - - (90.4)
Net assets 63.6 59.7 123.3 410.2
----------------------------
Proceeds of disposal:
Consideration 66.6 84.9 151.5 886.0
Fair value uplift 6.7 - 6.7 -
Debt reduction - - - (129.4)
Costs of disposal - - - (11.7)
Provisions - - - (2.8)
Net proceeds 73.3 84.9 158.2 742.1
----------------------------
Gain on disposal after provisions 9.7 25.2 34.9 331.9
---------------------------- -------------------------------- ------ --------
Presentation:
Income statement exceptional credit - - - 307.3
Income statement non exceptional
credit 9.7 25.2 34.9 24.6
---------------------------- -------------------------------- ------ --------
2018 2017
GBPm GBPm
Net proceeds of disposal 158.2 742.1
Fair value uplift (6.7) -
Provisions - (2.8)
------ ------
Total cash proceeds 151.5 739.3
The debt reduction items in 2017 of GBP129.4m are associated
with the disposal of PFI Lighting Services companies.
Notes to the Preliminary Statement
for the year ended 31 March 2018
12 Acquisitions, disposals and held-for-sale assets (continued)
12.4 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:
2018 2017
GBPm GBPm
Property plant and equipment - 63.6
Equity investments in joint ventures and associates 35.3 -
Loans to joint ventures and associates 81.9 -
Derivative financial assets - 2.7
Non-current assets 117.2 66.3
----- -----
Derivative financial assets - 4.1
Current assets - 4.1
----- -----
Total assets 117.2 70.4
----- -----
Deferred tax liabilities - (1.4)
Non-current liabilities - (1.4)
----- -----
Total liabilities - (1.4)
----- -----
Net assets 117.2 69.0
----- -----
The assets and liabilities classified as held for sale at 31
March 2018 are the Group's 14.9% equity interest in Clyde Windfarm
(Scotland) Limited (see 'Significant Disposals'). The joint venture
partners Greencoat UK Wind Plc and GLIL Infrastructure LLP have a
non-transferrable option to purchase a further 14.9% equity stake
in the joint venture for consideration of GBP202.2m between 1 April
2018 and 30 June 2018.
The aggregated pre-tax profit contribution of the held for sale
assets and businesses in the year to 31 March 2018 was GBP6.6m
(2017: nil).
GBP14.3m of operating wind farm assets were held for sale at 31
March 2017. The other held for sale items in prior year related to
50% of the assets and liabilities of Ferrybridge MFE 2 Limited
which was disposed on 7 September 2017 (Note 12.2).
12.5 Acquisitions and disposals in the previous year
(i) Acquisitions in the previous year
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.
Notes to the Preliminary Statement
for the year ended 31 March 2018
12 Acquisitions, disposals and held-for-sale assets (continued)
(ii) Disposals in the previous year
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 prior
financial year.
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 4.2).
Other disposals included 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 the disposal of
its stake in three Lighting Services PFI joint ventures DIF Infra 4
UK Limited for net consideration of GBP40.4m, resulting in a gain
on sale of GBP2.2m.
13. Sources of finance
13.1 Capital management
The Board's policy is to maintain a strong balance sheet and
credit rating 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 2018,
the Group's long term credit rating was A- stable 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 underpin regular
updates to the Board and include the ratios used by the rating
agencies in assessing the Group's credit ratings.
During the year, the Group completed its discretionary share
buyback programme announced on 11 November 2016 to reduce the share
capital of the Company. In total 34.8m shares were purchased for
consideration of GBP499.7m (excluding stamp duty and commission),
of which 9.2m (GBP125.0m) were retained as treasury shares to
settle some of the Group's obligations under the Sharesave scheme
in the UK and 25.6m shares were cancelled.
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, SSE successfully
issued its inaugural Green Bond, an eight year EUR600m bond with a
coupon of 0.875% and an all-in cost of 0.98%, which represented the
lowest coupon ever achieved by SSE. In March 2018, SSE drew the
GBP200m EIB facility, signed in March 2017, as two GBP100m, 10 year
floating rate loans and rolled the maturing GBP105m term loan for a
further two years. SSE also exercised the second, and last, one
year extension option on its GBP1.3bn revolving credit facility and
GBP200m bilateral facility meaning these facilities now mature in
July 2022 and November 2022 respectively. The GBP1.5bn of committed
bank facilities 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 Group capital comprises:
2018 2017
GBPm GBPm
Total borrowings (excluding finance leases) 8,359.4 7,805.5
Less: Cash and cash equivalents (232.2) (1,427.0)
--------- ----------
Net debt (excluding hybrid equity) 8,127.2 6,378.5
Hybrid equity 1,169.7 2,209.7
Cash held as collateral and other short term loans (75.1) (105.2)
Adjusted Net Debt and Hybrid Equity #APM 9,221.8 8,483.0
Equity attributable to shareholders of the parent 4,060.5 4,062.8
--------- ----------
Total capital excluding finance leases 13,282.3 12,545.8
--------- ----------
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 2018
13. Sources of finance (continued)
13.2 Loans and borrowings
2018 2017
GBPm GBPm
Current
Other short-term loans 626.3 118.8
Obligations under finance leases 24.0 23.6
------
650.3 142.4
------ ------
Non current
Loans 7,733.1 7,686.7
Obligations under finance leases 227.1 253.3
7,960.2 7,940.0
-------- --------
Total loans and borrowings 8,610.5 8,082.4
Add:
Cash and cash equivalents (232.2) (1,427.0)
-------- ----------
Unadjusted Net Debt 8,378.3 6,655.4
Add/(less):
Hybrid equity (Note 14) 1,169.7 2,209.7
Obligations under finance leases (251.1) (276.9)
Cash held as collateral and other short term loans (75.1) (105.2)
Adjusted Net Debt and Hybrid Capital 9,221.8 8,483.0
-------- ----------
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 lower year on
year due to the repayment of GBP1.0bn Hybrids maturing in October
17, which were refinanced in March 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 2018 no commercial paper was
outstanding (2017: GBPnil). During the year, the Group extended its
existing GBP1.5bn revolving credit and bilateral facilities by
invoking the second of the two, one year extension options with the
facilities now maturing in July 2022 (GBP1.3bn) and November 2022
(GBP0.2bn). These facilities continue to provide back up to the
commercial paper programme and, as at 31 March 2018, they were
undrawn.
Hybrid Debt
On 16 March 2017, the Group issued GBP1.0bn of new hybrid debt
securities. The securities have an issuer first call date on 16
September 2022 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 proceeds were used to repay
SSE's hybrid issued in 2012 (at an all-in rate of 5.6%) on 1
October 2017. Due to the hybrid instruments issued in March 2017
having a fixed redemption date, they have been accounted for as a
debt item and are included within Loans and Other Borrowings. This
is in contrast to the previous Hybrid instruments which have no
fixed redemption date and are accounted for as Equity, see Note
14.
Notes to the Preliminary Statement
for the year ended 31 March 2018
14. Equity
14.1 Share capital
Number
(millions) GBPm
Allotted, called up and fully paid:
At 31 March 2017 1,015.6 507.8
Issue of shares (i) 24.1 12.0
Shares repurchased (ii) (16.7) (8.3)
------------ ------
At 31 March 2018 1,023.0 511.5
------------ ------
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 63.9p per ordinary share (in
relation to year ended 31 March 2017) and the interim dividend of
28.4p (in relation to the current year under the terms of the
Company's scrip dividend scheme. This resulted in the issue of
23,497,675 and 546,613 new fully paid ordinary shares respectively
(2017: 9,395,092 and 6,324,986). In addition, the Company issued
1.4m (2017- 1.2m) shares during the year under the savings-related
share option schemes (of which 1.3m were settled by shares held in
Treasury) for a consideration of GBP16.6m (2017: GBP13.8m)
ii. Under the share buyback programme announced on 11 November
2016, 16.7m shares were repurchased and cancelled in the year to 31
March 2018 for a total consideration of GBP245.5m (2017: 8.9m
shares repurchased and cancelled for a total consideration of
GBP131.5m). The nominal value of share capital repurchased and
cancelled is transferred out of share capital and into the capital
redemption reserve.
As part of the same share buyback programme the Group has
purchased 9.2m shares (2017: nil) for total consideration of
GBP126.1m (including stamp duty and commission) in the year to 31
March 2018 to be retained as treasury shares. These shares will be
held by the Group and used to award shares to employees under the
Sharesave scheme in the UK.
In total, since the announcement of the share buyback scheme on
11 November 2016, the Group has purchased 34.8m shares for
consideration of GBP503.1m (inclusive of stamp duty and
commission).
During the year, on behalf of the Company, the employee share
trust purchased 1.4m shares for a total consideration of GBP19.8m
(2017: 0.8m shares, consideration of GBP12.6m). At 31 March 2018,
the trust held 3.3m shares (2017: 2.9m) which had a market value of
GBP41.8m (2017: GBP42.5m).
14.1 Hybrid Equity
2018 2017
GBPm GBPm
USD 700m 5.625% perpetual subordinated capital securities - 427.2
EUR 750m 5.625% perpetual subordinated capital securities - 598.2
GBP 750m 3.875% perpetual subordinated capital securities 748.3 748.3
EUR 600m 2.375% perpetual subordinated capital securities 421.4 436.0
-------- --------
1,169.7 2,209.7
-------- --------
(i) 18 September 2012 EUR750m and US$700m Hybrid Equity Bonds
On 2 October 2017, the Group redeemed all of the capital
securities at their principal amount. The securities were redeemed
in their functional currency with the additional net Sterling cost
of redemption of GBP92.4m being recognised in retained earnings.
The funding has been replaced by a debt accounted GBP1.0bn
instrument issued on 16 March 2017.
Each bond had no fixed redemption date but the Company was able,
at its sole discretion, redeem all, but not part, of these capital
securities at their principal amount. The first date for
discretionary redemption of the capital issued on 18 September 2012
was 1 October 2017.
(ii) 10 March 2015 GBP750m and EUR600m Hybrid Equity Bonds
The March 2015 hybrid equity bonds have 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 every 5
years thereafter. The date for the first discretionary redemption
of the EUR600m hybrid equity bond is 1 April 2021 and then every 5
years thereafter.
For the GBP750m capital issued coupon payments are made annually
on 10 September and for the EUR600m capital issued coupon payments
are made annually on 1 April.
Notes to the Preliminary Statement
for the year ended 31 March 2018
14 Equity (continued)
(iii) Coupon Payments
In relation to the $700m hybrid equity bond coupon payments were
made on 1 April 2017 and 2 October 2017 totalling GBP21.2m (2017:
GBP23.3m). In relation to the EUR750m hybrid equity bond a coupon
payment of GBP30.6m (2017: GBP33.6m) was made on 2 October
2017.
In relation to the EUR600m hybrid equity bond a coupon payment
of GBP17.6m (2017: GBP18.6m) was made on 1 April 2017 and for the
GBP750m hybrid equity bond a coupon payment of GBP29.1m (2017:
GBP43.8m) was made on 10 September 2017.
The coupon payments in the year to 31 March 2018 consequently
totalled GBP98.5m (2017: GBP119.3m).
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.
15. Retirement Benefit Obligations
15.1 Valuation of combined Pension Schemes
Value Value
Quoted Unquoted at 31 March 2018 Quoted Unquoted at 31 March 2017
GBPm GBPm GBPm GBPm GBPm GBPm
Equities 891.5 - 891.5 1,203.9 - 1,203.9
Government bonds 1,222.7 - 1,222.7 1,079.9 - 1,079.9
Corporate bonds 1,285.0 - 1,285.0 1,288.6 - 1,288.6
Insurance contracts - 210.8 210.8 - 221.3 221.3
Other investments 587.3 - 587.3 591.9 - 591.9
-------- -----------------
Total fair value of plan assets 4,197.3 4,385.6
Present value of defined benefit
obligation (3,862.8) (4,315.1)
----------------- -----------------
Surplus in the schemes 334.5 70.5
Deferred tax thereon (i) (159.8) (106.6)
----------------- -----------------
Net pension asset/(liability) (ii) 174.7 (36.1)
----------------- -----------------
(i) Deferred tax rate of 35% applied to pension surpluses,
whilst 17% applied to pension deficits.
(ii)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
2018 Balance sheet presentation 2017
GBPm GBPm
Retirement benefit asset 572.1 525.4
Retirement benefit liability (237.6) (454.9)
-------------------------- -------------------------------
Net pension asset/(liability) 334.5 70.5
-------------------------- -------------------------------
Notes to the Preliminary Statement
for the year ended 31 March 2018
15 Retirement Benefit Obligations (continued)
Movements in the defined benefit asset obligations and assets
during the year:
2018 2017
Assets Obligations (i) Total Assets Obligations (i) Total
GBPm GBPm GBPm GBPm GBPm GBPm
at 1 April 4,385.6 (4,315.1) 70.5 3,702.9 (3,835.0) (132.1)
Included in Income Statement
Current service cost - (55.2) (55.2) - (50.9) (50.9)
Past service cost - (3.2) (3.2) - (13.6) (13.6)
Interest income/(cost) 112.3 (109.6) 2.7 130.9 (134.9) (4.0)
112.3 (168.0) (55.7) 130.9 (199.4) (68.5)
Included in Other Comprehensive Income
Actuarial (loss)/gain arising from:
Demographic assumptions - 118.0 118.0 - 259.6 259.6
Financial assumptions - 66.4 66.4 - (807.9) (807.9)
Experience assumptions - (2.6) (2.6) - 31.4 31.4
Return on plan assets excluding interest income 40.0 - 40.0 675.5 - 675.5
40.0 181.8 221.8 675.5 (516.9) 158.6
Other
Contributions paid by the employer 97.9 - 97.9 112.5 - 112.5
Scheme participants' contributions 0.2 (0.2) - 0.2 (0.2) -
Benefits paid (438.7) 438.7 - (236.4) 236.4 -
(340.6) 438.5 97.9 (123.7) 236.2 112.5
Balance at 31 March 4,197.3 (3,862.8) 334.5 4,385.6 (4,315.1) 70.5
I) The retirement benefit obligations are stated before IFRIC 14
liabilities.
Charges / (credits) recognised:
2018 2017
GBPm GBPm
Current service cost (charged to operating profit) 58.4 64.5
58.4 64.5
(Credited)/charged to finance costs:
Interest on pension scheme assets (112.3) (130.9)
Interest on pension scheme liabilities 109.6 134.9
(2.7) 4.0
Notes to the Preliminary Statement
for the year ended 31 March 2018
16. Financial risk management
16.1 Financial risk management
The Board has overall responsibility for the establishment and
oversight of the Group's risk management framework. The Risk
Committees 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 Committees 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 Committees 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:
2018 2017
GBPm GBPm
Operating derivatives
Total result on operating derivatives (i) (445.9) (438.6)
Less: amounts settled (ii) 356.8 639.6
Movement in unrealised derivatives (89.1) 201.0
Financing derivatives (and hedged items)
Total result on financing derivatives (i) (95.6) (136.3)
Less: amounts settled (ii) 62.6 188.9
Movement in unrealised derivatives (33.0) 52.6
Net income statement impact (122.1) 253.6
(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 2018
16 Financial risk management (continued)
16.2 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 246.3 839.4 - 1,085.7
Interest rate derivatives - 301.9 - 301.9
Foreign exchange derivatives - 8.9 - 8.9
246.3 1,150.2 - 1,396.5
---------- ----------
Financial Liabilities
Energy derivatives (249.7) (1,088.4) - (1,338.1)
Interest rate derivatives - (480.0) - (480.0)
Foreign exchange derivatives - (1.9) - (1.9)
Loans and borrowings - (37.3) - (37.3)
---------- ----------
(249.7) (1,607.6) - (1,857.3)
---------- ----------
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
2018.
17. Capital commitments
2018 2017
GBPm GBPm
Capital expenditure:
Contracted for but not provided 527.3 949.0
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 2018
18. 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.
2018 2018 2018 2018 2017 2017 2017 2017
Sale of Purchase
goods of Sale of Purchase of
and goods and Amounts owed Amounts owed goods and goods Amounts Amounts
services services from to services and services owed from owed to
Joint
ventures: GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Seabank
Power Ltd 14.4 (155.0) 0.1 16.2 11.0 (134.0) 0.1 17.0
Marchwood
Power Ltd 8.5 (132.3) 0.2 10.6 16.8 (144.5) 0.5 12.6
Scotia Gas
Networks
Ltd 41.4 (144.8) 0.6 14.2 45.5 (158.0) 0.9 0.9
Clyde
Windfarm
(Scotland)
Ltd 4.8 (129.3) 6.5 37.7 5.7 (0.1) - 11.1
Other Joint
Ventures 23.3 (186.2) 17.1 52.3 10.4 - 2.3 -
Associates - (34.7) 4.5 - 1.4 (53.4) 3.6 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.
19. Post balance sheet events
19.1 Disposal of 14.9% equity stake in Clyde Windfarm (Scotland)
Limited
On the 8(th) of May 2018, the Group's joint venture partners
Greencoat UK Wind Plc ("UKW") and GLIL Infrastructure LLP ("GLIL")
announced they would exercise their option to purchase a 14.9%
equity stake in Clyde (Windfarm) Scotland Limited for consideration
of GBP202.0m on the 30(th) of May 2018. Following the sale of this
stake, the Group will retain 50.1% in the equity accounted joint
venture. The gain on sale will be calculated following completion
of the sale.
19.2 Ruling on the Group's claim for damages following a tunnel
collapse on the Glendoe hydro power station
On the 10(th) of April 2018, a ruling was passed in the Court of
Session in Edinburgh to award SSE damages of GBP108.6m plus
interest in its case against the main building contractor of the
Glendoe hydro power station, following the collapse of a tunnel in
2009. As this award remains subject to appeal by the contractor,
receipt of the award is not yet virtually certain and these
financial statements have not been adjusted to recognise receipt of
the award. However, SSE considers that receipt of the award is
highly likely and has considered the award of damages when testing
the power station for impairment on 31 March 2018.
This information is provided by RNS, the news service of the
London Stock Exchange. RNS is approved by the Financial Conduct
Authority to act as a Primary Information Provider in the United
Kingdom. Terms and conditions relating to the use and distribution
of this information may apply. For further information, please
contact rns@lseg.com or visit www.rns.com.
END
FR KMGZKMDRGRZZ
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