Annual Financial Report

RNS Number : 8710B

SSE PLC

21 June 2016

 

Annual Financial Report

Following the Preliminary Results announcement on 18 May 2016, and in line with the timetable set out then, SSE plc confirms that it has published its Annual Report and Accounts for the year ended 31 March 2016.

The Annual General Meeting (AGM) will be held at the Perth Concert Hall, Mill Street, Perth PH1 5HZ on Thursday, 21 July 2016 at 12 noon.  The mailing to shareholders of the AGM documentation has commenced, and copies of the Annual Report and Accounts and the Notice of Annual General Meeting for 2016 are available to view on the Company's website: www.sse.com.

In accordance with Listing Rule 9.6.1, copies of the Annual Report and Accounts, Notice of Annual General Meeting, and Form of Proxy for 2016 have been submitted to the UK Listing Authority and will shortly be available for inspection from the National Storage Mechanism, which can be accessed at: www.hemscott.com/nsm.do

The information that follows in Sections 1 to 3 is extracted in unedited full text from the 2016 Annual Report and Accounts and is included in this announcement for the purpose of compliance with Disclosure and Transparency Rule 6.3.5.  The information reproduced should be read in conjunction with the Preliminary Results announcement issued on 18 May 2016.  Together these constitute the material required by Disclosure and Transparency Rule 6.3.5 to be communicated to the media in unedited full text through a Regulatory Information Service.  This material is not a substitute for reading the full 2016 Annual Report and Accounts.  Page numbers and cross-references in the extracted information attached refer to page numbers and cross-references in the 2016 Annual Report and Accounts. 

Section 1 - Principal Risks and Uncertainties:  The following information is extracted from pages 16 to 19 of the 2016 Annual Report and Accounts.

Risk management

Overview

Managing risk to deliver long-term value

To help ensure that it is able to provide the energy people need and deliver value over the long term, SSE has continued to develop its Risk Management Framework, including its Principal Risks and its Risk Appetite Statement. For further detail on how SSE manages risk please see the supplementary Group Risk Report.

The component parts of the framework and how it interacts with the wider system of internal control are illustrated in the diagram below.

The Group Risk Management and Internal Control Policy is set by the Board and outlines the principles and responsibilities which underpin SSE's approach to managing risk.

The Board performs a review of the effectiveness of the system of internal control annually. This review is supported by a report from the Director of Group Risk, Audit and Insurance detailing the activity and operation of the system during the year. For further detail on the outcome of the review please see the Directors' Report on page 78.

A new Principal Risk Self Assessment process was introduced during 2015/16. Executive level Committees are now formally identified as owners of each Principal Risk and are required to assess these risks and their associated controls annually.

Following review, the number of Principal Risks to the Group has been reduced from 10 to 9 with Funding Shortfall and Pensions Liabilities being combined into a single risk - "Financial Liabilities". The full list of Principal Risks is on page 18.

The Board determines the nature and extent of risk that the Group is willing to take in pursuit of its strategy and this is detailed in the Risk Appetite Statement.

In order to support its statement of longer term viability as required by the updated UK Corporate Governance Code, the Board has for the first time performed a Viability Assessment. This assessment is based on stress testing the Group's financial model using scenarios relating to SSE's Principal Risks. The resulting Viability Statement can be found on page 17.

As part of the ongoing assessment of the Group's Principal Risks, Key Risk Indicators are reported to the Board on a regular basis. These provide high level insight into the key factors which are likely to influence SSE's exposure to those risks.

The Group Risk Management and Internal Control Policy requires the Managing Director of each Division to implement a Divisional Risk Approach to support their business in identifying, understanding and managing its key risks.

Each division carries out an annual Assurance Evaluation with key Group policies, with the output and any areas of required improvement reported to the Chief Executive.

The Risk Blueprint provides guidance on best practice in risk management and decision making and is designed to be used by people at all levels across the organisation.

Risk Appetite Statement

No business is risk-free, and indeed the achievement of SSE's goals necessarily involves taking risk. SSE will however only accept risk where it is appropriate, well understood, can be effectively managed and offers commensurate reward.

Each of SSE's business divisions has a distinctly different risk profile. For example, the Networks business is heavily regulated and is characterised by stable, inflation linked cashflows whereas the Wholesale business is heavily exposed to energy market and commodity risk. Affordability, transformation and political risk particularly affect the Retail business, while Enterprise is exposed to the risks that come with rapid growth in a highly competitive market place.

The key elements of SSE's strategy - including the diversity of energy businesses within the SSE Group described above, as well as its financial framework - are fully reflective of its risk appetite:

-    SSE seeks to avoid over-exposure to any single part of the energy sector and therefore maintains a balanced range of economically regulated and market-based energy businesses;

-    production, storage, transmission, distribution, supply and related services provide a balanced portfolio of business activities whilst keeping the depth of focus on a single sector - energy; and

-    Great Britain and Ireland gives SSE a geographic markets focus and a clear understanding of the risks and opportunities in those markets.

In areas where SSE is exposed to risks for which it has little or no appetite for, even though it has implemented high standards of control and mitigation, the nature of these risks mean that they cannot be eliminated completely. In determining its appetite for specific risks, the Board is guided by three key principles:

1.    Risks should be consistent with SSE's strategy, financial objective and core values - safety is SSE's number one value and it has no appetite for risks brought on by unsafe actions;

2.    Risks should only be accepted where appropriate reward is achievable on the basis of objective evidence; and

3.    Risks should be actively controlled and monitored through the appropriate allocation of management and other resources.

The Board has overall responsibility for determining the nature and extent of the risk it is willing to take and for ensuring that risks are managed effectively across the Group.

Viability Statement

As required within provision C.2.2 of the UK Corporate Governance Code, the Board has assessed the prospects of the Company over the next 3 financial years to the period ending March 2019. The Directors have determined that as this time horizon aligns with the Group's current capital programme and is within the strategy planning period, a greater degree of confidence over the forecasting assumptions modelled can be established.

In making this statement the Directors have considered the resilience of the Group taking into account its current position, its Risk Appetite, the Principal Risks facing the Group and the control measures in place to mitigate each of them. In particular, the Directors recognise the significance of SSE's strong balance sheet and committed lending facilities of £1.5bn which could be drawn down in most circumstances.

The Group also has a number of highly attractive and relatively liquid assets - including a regulated asset base which benefits from a strong regulated revenue stream as well as the operational wind portfolio - which provide flexibility of options.

Stress tests incorporating severe but plausible scenarios relating to the Principal Risks have been assessed against the forecast cash flow of the business. The scenarios selected were those that most have the potential to affect SSE's ability to deliver its core purpose of providing the energy people need in a reliable and sustainable way.

Upon the basis of the analysis undertaken, the Directors have a reasonable expectation that the Group will be able to continue to meet its liabilities as they fall due in the period to March 2019.

Group Principal Risks

The Board has a responsibility to identify key risks which could threaten the Company's business model, future performance, solvency or liquidity, and determine how these Principal Risks will be managed or mitigated.

During 2015/16, SSE introduced a new Principal Risk Self-Assessment process to support this responsibility, assigning ownership of each Principal Risk to the Executive Committee - or where more appropriate to one of its formal sub-committees. The owning Committee is responsible for assessing any changes in the risk and the effectiveness of the controls in place, reporting on these to the Board.

Emerging risks are also considered as part of this assessment to help identify new exposures as early as possible. While a number of risk areas were identified, after full consideration none of these was felt material enough to meet the required threshold to become a Group Principal Risk. Key elements of some were however incorporated into existing Principal Risks, with the descriptions of these being amended accordingly. For example, "Infrastructure Failure" has been revised to "Cyber and Networks Failure" to more explicitly highlight, in particular, the increasing threat of cyber attack.

After review, the Board has determined that the list below represents the current Principal Risks to SSE. Combining 'Pension Liabilities' and 'Funding Shortfall' into 'Financial Liabilities', reflecting similarities in their nature and impact, has resulted in the list reducing from 10 risks in 2014/15 to 9 in 2015/16.

Further detail on each of the Principal Risks and associated controls can be found in the supplementary Group Risk Report.

The Group Principal Risks are presented here in alphabetical order:

Commodity prices	Risk Owner - Risk and Trading Committee (RTC) The Group is exposed to fluctuations in the physical volume and price of certain commodities, through (i) its requirement to match volumes of purchased gas and electricity with customer demand, and (ii) exposures arising due to long-term investment in generation and Exploration and Production (E&P) assets driven by the cost of fuel and other commodities required for generation, and through revenues realised from these assets.	Key Mitigations: - SSE uses Value at Risk (VaR) measures to monitor and control exposures to commodity price and volume. Trading limits are set by the Board and managed through the Risk and Trading Committee (RTC). - Commodity positions are assessed on a daily basis by a business risk management function that is independent of the trading team.
Cyber and networks failure	Risk Owner - Executive Committee SSE's electricity networks are part of Great Britain's critical national infrastructure assets and as such are central to the functioning of the economy. Additionally, SSE is reliant on a number of key IT systems to support its ongoing operations. A loss of these systems could be caused by malicious cyber attack, software or hardware issues, inadequate investment in maintenance or by poor operational performance.	Key Mitigations: - The Information Security and Privacy Committee (ISPC) meets quarterly and works to ensure that suitable technical, process and people security controls are implemented throughout the Group to protect information, intellectual property and the systems these reside on. - SSE is an active member of a number of security forums including the Energy Emergencies Executive Committee Cyber Security Sub Group (E3CC) and the Centre for the Protection of National Infrastructure (CPNI).
Development and change	Risk Owner - Executive Committee SSE's strategic focus is the efficient operation of, and investment in, a balanced range of energy businesses to support annual dividend growth. SSE strives to be a leading provider of energy and related services within an industry where innovation, de-carbonisation and competition are leading to continual technological advancements and changes in customer expectations and options. To continue to achieve this, a number of strategic change programmes are under way. It is vital that SSE successfully delivers these to meet the current and future needs of customers in the most efficient way possible.	Key Mitigations: - Five year transformation road maps have been developed by each division to ensure that SSE is investing in the capabilities and solutions that deliver the greatest benefit. - The Transformation Governance Framework provides a consistent process and tool-set to manage change within the organisation from first principles to benefit realisation across the Group.
Energy Affordability	Risk Owner - Risk and Trading Committee SSE is involved in a broad range of energy businesses in the UK and Ireland including the production, storage, transmission, distribution and supply of electricity, gas and related services. The decisions taken in operating these contribute to the overall cost of energy to the consumer which is in turn driven by a number of factors including commodity costs, infrastructure costs and energy sector overheads. Costs can also be impacted by public policies aimed at supporting measures for the reduction of carbon emissions, while increased energy efficiency can lead to reduced consumption of energy.	Key Mitigations: - SSE actively encourages public policy makers to ensure that non-commodity costs associated with energy provision and which make up a significant part of the average bill are allocated fairly. - The SSE Board approves retail tariff structures recommended by the RTC. In addition, it approves all long-term generation investment decisions to ensure that a diverse portfolio of assets is maintained, limiting exposure to any one commodity.
Financial liabilities	Risk Owner - Risk and Trading Committee SSE ensures that it has funds available at all times to meet its liabilities when these fall due, in both normal and stressed conditions. Around £1.7bn of medium to long-term borrowings will mature in the two years to March 2018. SSE has obligations in respect of three defined benefit pension Schemes (including SGN) and currently, in aggregate, there is an actuarial deficit between the current value of the projected liabilities of these Schemes and the value of the assets that they hold.	Key Mitigations: - The Group ensures that committed borrowings and facilities are available at all times equal to at least 105% of forecast borrowings over a rolling six month period. - The Audit Committee formally reviews treasury exposures, performance and the adequacy of committed borrowing facilities twice a year. - The defined benefit pension schemes each have investment advisors in place who have helped develop road-maps with the aim of the schemes becoming fully funded (i.e. no longer reliant on SSE), within fifteen years.
Human and relationship capital	Risk Owner - Executive Committee SSE's people are its most valuable asset and it is therefore essential that the Group retains, attracts and develops diverse talent and leadership to ensure the continued success of the business. SSE expects its people to comply with all legislation, regulation and internal policies, including the SSESET of values. The current pace of change, combined with the inherent complexity of SSE's activities, makes it increasingly important that everyone at SSE strives for continuous improvement and is able to readily question the status quo.	Key Mitigations: - SSE looks to employ, train, develop and retain a diverse and talented workforce and provide its people with the support they need to deliver objectives in a responsible way. - SSE's business leaders are required to undertake regular succession planning reviews. At a Group level, SSE continues to develop its approach to the management of talent, identifying the current depth across the organisation and developing strategies to enhance it.
Major projects quality	Risk Owner - Large Capital Projects Committee SSE continues to deliver its capital investment programme with a number of major construction and IT projects nearing completion. Its single biggest construction project, the Caithness-Moray high voltage transmission link, is now underway. The operational assets from these projects have long economic lives, typically between 15 and 30 years but often greater, and it is therefore essential that these projects are completed to the quality standards required.	Key Mitigations: - The Large Capital Project Governance Framework Manual ensures that all material capital investment projects for the Group are governed, developed, approved and executed in a consistent and effective manner. - The Large Capital Projects Services function employs quality and assurance teams to perform independent project reviews.
Politics, regulation and compliance	Risk Owner - Executive Committee The markets in which SSE operates are subject to a high degree of regulatory and legislative intervention at both domestic and EU level. Legal and compliance obligations can change explicitly with the introduction of new or revised legislation, or implicitly due to evolving interpretation and legal precedent. The potential impacts to the Group of the referendum in June 2016 on the UK's continued participation in the EU have been considered against this risk.	Key Mitigations: - SSE has dedicated Corporate Affairs, Regulation, Legal and Compliance functions that provide advice and guidance regarding the interpretation of political, regulatory and legislative changes to its Divisions. - The Governance and Disclosure Committee maintains oversight of key legislative, regulatory and governance issues. It meets quarterly and is responsible for ensuring that SSE's objectives are achieved lawfully, ethically and with the appropriate corporate oversight.
Safety and the environment	Risk Owner - Safety, Health and Environment Committee Safety is SSE's first core value. By the nature of its operations, SSE faces a number of significant safety risks - in particular relating to process safety. A major incident at one of SSE's hydro, gas storage or E&P assets could have a material adverse impact on employees, contractors, members of the public, the environment and property.	Key Mitigations: - SSE has crisis management and business continuity plans in place which are designed for the management of, and recovery from, significant safety or environmental events. - For offshore E & P assets where SSE is not the operator, there are a number of assurance measures in place to ensure that the proven and approved operator partners maintain and adopt high standards for their safe management and operation. This includes regular engagement across all aspects of the operation, with an emphasis on safety and technical assurance audits and verification using both internal and third party resources.

Section 2 - Directors' Responsibility Statement:  The following information is extracted from page 116 of the 2016 Annual Report and Accounts.

Statement of Directors' responsibilities in respect of the Annual Report and the financial statements

The directors are responsible for preparing the Annual Report and the group and parent company financial statements in accordance with applicable law and regulations.

Company law requires the directors to prepare group and parent company financial statements for each financial year. Under that law they are required to prepare the group financial statements in accordance with IFRSs as adopted by the EU and applicable law and have elected to prepare the parent company financial statements on the same basis.

Under company law the directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the group and parent company and of their profit or loss for that period. In preparing each of the group and parent company financial statements, the directors are required to:

-    select suitable accounting policies and then apply them consistently;

-    make judgements and estimates that are reasonable and prudent;

-    state whether they have been prepared in accordance with IFRSs as adopted by the EU; and

-    prepare the financial statements on the going concern basis unless it is inappropriate to presume that the group and the parent company will continue in business.

The directors are responsible for keeping adequate accounting records that are sufficient to show and explain the parent company's transactions and disclose with reasonable accuracy at any time the financial position of the parent company and enable them to ensure that its financial statements comply with the Companies Act 2006. They have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the group and to prevent and detect fraud and other irregularities.

Under applicable law and regulations, the directors are also responsible for preparing a Strategic Report, Directors' Report, Directors' Remuneration Report and Corporate Governance Statement that complies with that law and those regulations.

The directors are responsible for the maintenance and integrity of the corporate and financial information included on the company's website. Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

Responsibility statement of the directors in respect of the annual financial report

We confirm that to the best of our knowledge:

-    the financial statements, prepared in accordance with the applicable set of accounting standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the company and the undertakings included in the consolidation taken as a whole; and

-    the strategic report includes a fair review of the development and performance of the business and the position of the issuer and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face.

-    We consider the annual report and accounts, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the group's position and performance, business model and strategy.

For and on behalf of the Board

Alistair Phillips-Davies                                  Gregor Alexander

Chief Executive                                               Finance Director

17 May 2016

Section 3 - Related Party Transactions: The following information is extracted from Note 35 on page 188 of the 2016 Annual Report and Accounts.  A condensed version of this extract was published as Note 19 in the Preliminary Results Statement for the year ended 31 March 2016.

35. Related party transactions

The immediate parent and ultimate controlling party of the Group is SSE plc (incorporated in Scotland). Balances and transactions between the Company and its subsidiaries, which are related parties of the Company, have been eliminated on consolidation and are not disclosed in this note.

Details of transactions between the Group and other related parties are disclosed below.

Trading 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.

	2016 Sale of goods and services £m	2016 Purchase of goods and services £m	2016 Amounts owed from £m	2016 Amounts owed to £m	2015 Sale of goods and services £m	2015 Purchase of goods and services £m	2015 Amounts owed from £m	2015 Amounts owed to £m
Joint ventures:
Seabank Power Ltd	13.7	(125.8)	-	18.2	20.1	(115.5)	1.8	11.1
Marchwood Power Ltd	12.7	(108.7)	0.1	15.5	28.7	(114.4)	3.4	12.7
Scotia Gas Networks Ltd	46.3	(155.8)	15.9	0.9	49.0	(166.4)	7.7	0.3
Other Joint Ventures	8.1	(1.2)	8.4	-	27.6	(6.0)	3.0	-
Associates	0.5	(59.7)	2.4	3.9	0.8	(41.9)	1.9	2.5

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. Aggregate capital loans to joint ventures and associates are shown in note 17.

Remuneration of key management personnel

The remuneration of the key management personnel of the Group (excluding amounts equivalent to pension value increases as set out in the Remuneration Report), is set out below in aggregate.

							2016 £m	2015 £m
Short-term employment benefits
Executive Directors							2.2	2.8
Other Executive Committee members							2.4	2.5
							4.6	5.3

Key management personnel are responsible for planning, directing and controlling the operations of the Group. These activities were conducted by the Executive Committee, comprising the two Executive Directors and the Managing Directors of the Networks, Retail, Wholesale and Enterprise businesses.

In addition, the key management personnel receive share based remuneration, details of which are found at note 33. Further information about the remuneration of individual directors is provided in the audited part of the Remuneration Report. The Executive Directors are employed by the Company.

Information regarding transactions with post-retirement benefit plans is included in note 32.

 

END

 

 

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