Half Yearly Report

RNS Number : 2711F
SSE PLC
11 November 2015
 

SSE plc
Interim results for the six months to 30 September 2015

11 November 2015

This report sets out the interim results for SSE plc for the six months to 30 September 2015.  SSE's core purpose is to provide the energy people need in a reliable and sustainable way and this report also includes updates on operations and investments in its Wholesale, Networks and Retail (including Enterprise) businesses.

Richard Gillingwater, Chairman of SSE, said:

"In the first half of this financial year SSE expected to deal with a number of challenging issues, such as the outcome of the UK Government's legislative programme and investigations by the Competition and Markets Authority.  SSE has always acknowledged that there is uncertainty associated with these developments.  The road ahead is becoming clearer, however, and there are grounds for cautious optimism that a stable long-term framework can be achieved.  SSE maintains a constructive approach to managing these issues, with a focus on meeting the expectations of its customers and safeguarding the interests of investors.

"There should always be a degree of caution about half-year results, yet SSE has made a solid start to the 2015/16 financial year.  Whilst market conditions can be challenging, SSE is a resilient business built for the long-term.  With its balanced range of business, clear market focus, operational efficiency and strong financial management, this business is well-placed to continue to deliver annual dividend growth of at least RPI inflation.  As I begin my tenure as Chairman I am confident that the foundations are well-laid and that SSE can continue to deliver for all of its customers and be a strong and sustainable long term investment for shareholders." 

Finance - SSE Group

For the six months to 30 September 2015 (comparisons with the same six months in 2014, unless otherwise stated):

·     Adjusted earnings per share* increased by 47.6% to 45.9 pence;

·     Adjusted profit before tax* increased by 48.2% to £548.8m;

·     Reported profit before tax fell by 27.1% to £230.8m;

·     Investment and capital expenditure increased by 11.5% to £757.3m;

·     Adjusted net debt and hybrid capital increased by 4.9% since 31 March 15 to £7,936.8m; and

·     Interim dividend increased by 1.1% to 26.9 pence per share.

In the previous financial year, SSE earned around one quarter of its full-year adjusted profit before tax* in the first six months; in 2015/16, it is more likely to have earned over one third of its full-year adjusted profit before tax* in the first six months.

Adjusted profit before tax* describes profit before tax before exceptional items and re-measurements arising from IAS 39, excluding interest costs on net pension scheme liabilities and after the removal of taxation on profits from joint ventures and associates.

Finance - business-by-business operating profit

Operating Profit* by Segment

Sep 15

Sep 14

Sep 13

 

£m

£m

£m

Wholesale

159.6

26.7

160.4

Networks

451.6

458.4

437.8

Retail( includes Enterprise)

101.5

37.3

(71.4)

Corporate Unallocated

(10.8)

7.4

(8.1)

Total Operating Profit*

701.9

529.8

518.7

Operating profit*, which is stated before interest and tax charges, for the six months to 30 September 2015 is set out above and below.  Comparisons are with the previous financial year, but it should be noted that year on year comparisons may also reflect the cumulative impact of issues arising or decisions taken in earlier financial years.  SSE's objective is not to maximise profit in any one year but to earn a sustainable level of profit over the medium term.

Wholesale - operating profit* of £159.6m

·     Energy Portfolio Management and Electricity Generation operating profit increased from £11.8m to £141.8m, as a result of the 1.1TWh (38%) increase in output of renewable energy to 3.9TWh, reflecting higher rainfall and windier conditions over the six months; market conditions, however, remained challenging for thermal generation;

·     Gas Production operating profit is £14.1m compared to £13.3m for the same period last year.  Day ahead wholesale gas prices were broadly in line with the same period last year, but lower operating costs contributed to a slight increase in operation profit; and

·     Gas Storage continues to face a challenging economic environment, although operating profit did increase slightly, from £1.6m in 2014 to £3.7m, as a result of cost savings.

Networks - operating profit* of £451.6m

·     Electricity Transmission operating profit rose from £98.9m to £142.4m, reflecting continuing major investment in the asset base, including  completion of the construction of the Beauly-Denny transmission line;

·     Electricity Distribution operating profit fell from £215.7m to £178.6m, as expected, due to lower allowed revenue arising from the commencement of the RIIO-ED1 price control period; and

·     Gas Distribution - SSE's share of Scotia Gas Networks' operating profit fell from £143.8m to £130.6m, reflecting an expected reduction in revenue as a result of sharing previously secured efficiencies with customers. 

Retail - operating profit* of £101.5m

·     Energy Supply has returned to profitability compared with a year ago with an operating profit of £73.8m, compared to a loss of £16.9m for the same period last year, following a better performance in the I&C sector, lower than average temperatures leading to an increase in gas consumption, and lower operating costs.  Over the full-year it is expected that SSE will report a  decline in profit in Domestic Energy Supply as a result of lower customer numbers;

·     Energy-related Services operating profit of £11.2m is at a similar level to last year as SSE continues to focus on building scale and increasing customers numbers in its non-energy businesses, particularly Telecoms and Home Services; and

·     Enterprise operating profits were £16.5m for the six months to September compared with £42.9m for the same period last year.  This reduction mainly reflects strategic business disposals in the previous year. 

SSE focuses on results for the financial year as a whole, and manages its energy portfolio and its costs accordingly, because results for six month periods are more variable and more subject to the impact of shorter-term issues than is the case for the full year.  In the previous financial year, SSE earned around one quarter of its full-year adjusted profit before tax* in the first six months; in 2015/16 it is more likely to have earned over one third of its full-year adjusted profit before tax* in the first six months.  The generally negative trend in commodity prices and the generally challenging outlook for market conditions could continue to impact in the second half of the financial year. 

Weather - impact on SSE

As SSE has set out previously, the weather in the UK and Ireland has an effect on its business operations including variations in customer demand for energy, changes in the volume of electricity generated and, potentially, disruption to power supplies as a result of weather-related damage to the electricity networks.  As SSE has also set out, it is one of the principal issues affecting its results in any financial year. 

Average rainfall in the north and west of Scotland, where SSE's hydro electric schemes are situated, was exceptionally high over the first five months of the financial year, being around 20% above the long-term average, and contributing to a high level of output of electricity from the schemes.  Wind speeds across Scotland and Ireland, where most of SSE's wind farms are situated, were generally typical in the first half of the financial year and therefore output from wind farms returned to normal levels, after below average output in the same period last year.  Weather in October 2015 was dry (with rainfall in the north and west of Scotland only around 45% of average) and the mean UK temperature was 0.5C above the 1980-2010 climate normal, ending a spell of five consecutive months of below average temperatures. 

Operations - providing the energy people need

In the six months to 30 September 2015 (comparisons in brackets with the same period in the previous year, unless otherwise stated):

·     Safety: SSE's Total Recordable Injury Rate was 0.12 per 100,000 hours worked (0.12); 

·     Wholesale: total electricity output1 from gas- and oil-fired power stations was 4.7TWh (5.3TWh); from coal-fired power stations output was 0.6TWh (2.6TWh);

·     Wholesale: total electricity output1 from renewable sources (conventional and pumped storage hydro electric schemes, onshore and offshore wind farms and dedicated biomass plant) was 3.9TWh (2.8TWh);

·     Networks: the number of Customer Minutes Lost in the Scottish Hydro Electric Power Distribution area was  24 (29); in the Southern Electric Power Distribution area it was 21 (32); 

·     Networks: the number of Customer Interruptions (power cuts) per 100 customers in the Scottish Hydro Electric Power Distribution area was 31(31); in the Southern Electric Power Distribution area it was 24(32);

·     Retail: SSE's number of electricity and gas customer accounts in markets in Great Britain and Ireland fell from 8.58 million on 31 March 2015 to 8.41million; and

·     Retail: average consumption of electricity by SSE's household customers in Great Britain was estimated to be 1,577kWh (1,623kWh); average consumption of gas by SSE's household customers in Great Britain was estimated to be 115 therms (102 therms).

1Output from electricity generating plant in which SSE has an ownership interest (output based on SSE contractual share).

Investment - funding, upgrading and building assets that energy customers need

In the six months to 30 September 2015, SSE's capital and investment expenditure totalled £757.3m, with Networks accounting for the biggest share of spending.  This compares with £679.3m in the same period in 2014.  Investments included:

·     Wholesale: Investment in generation assets, gas production and gas storage totalled £227.1m with the majority of this spend allocated to SSE's  continued investment in onshore wind projects;

·     Networks: Investment in electricity networks totalled £402.5m, including the Caithness-Moray transmission line, the largest capital project undertaken by SSE, as well as its transmission replacement programme.  As a result of investments such as this, the RAV of the electricity networks is well placed to reach £7bn by 2020; 

·     Retail: Investment in Retail totalled £83.2m, SSE has continued to make significant investment in new systems to deliver enhanced services to customers and support the installation of smart meters in the years to 2020.  Within Retail investment in Enterprise totalled £12.7m, reflecting the need to invest in the growth of these diverse businesses.

SSE's capital investment and expenditure for the full year to 31 March 2016 is forecast to total around £1.75bn (gross), including capital expenditure arising from the gas production assets acquisition completed last month; and although the phasing of investment and value of disposals are subject to variation, it is still expected to total around £5.5bn (net of asset and business disposals) in the four years to March 2018.  In keeping with its established governance framework for investment decision-making, SSE expects to begin agreeing, in the course of 2016, its investment priorities for the period to the end of the decade.

In addition, on 15 October 2015 Standard & Poor's affirmed SSE's 'A-/A-2' credit rating, albeit with a negative outlook, reflecting its opinion on the impact of energy and commodity prices on the sector.

Focusing on value and ensuring that SSE is well-positioned for the future

SSE has continued to recycle capital from business disposals, with the overall objective of streamlining and simplifying the business.  It expects to achieve financial benefit of in excess of £1bn from the disposal of non-core assets and businesses and the sale of existing or in-development onshore wind farms.  Disposals with a total value of just over £600m have already been completed or agreed.  SSE routinely analyses how best to meet its financial objective of annual dividend growth of at least RPI (Retail Price Index) inflation.  SSE continues to believe that there is significant value in operating and investing in a balanced range of energy assets and businesses and that within those businesses there are a range of opportunities to develop new assets and customer propositions.  SSE has a strong track record in controlling costs and securing long-term value from its businesses and acquisitions.  Market conditions can be challenging, but SSE's strengths in the balance of its range of assets, clear market focus, good operational efficiency and strong financial management, mean it is well positioned to deliver annual dividend growth that at least keeps pace with inflation in 2015/16 and in the subsequent years.

Financial outlook

SSE uses adjusted earnings per share* to monitor financial performance over the medium term because it defines the amount of profit after tax that has been earned for each Ordinary share.  Although the nature of energy provision means that its financial results in any single year are always subject to well-documented  uncertainties, SSE is continuing to target adjusted earnings per share* for 2015/16 of at least 115 pence and will update its outlook towards the end of the financial year.

SSE also continues to recognise that adjusted earnings per share* is subject to significant uncertainties which mean that its dividend cover, based on dividend increases that at least keep pace with RPI inflation, could range from around 1.2 times to around 1.4 times over the three years to 2017/18.  Nevertheless, SSE believes that a long-term target for dividend cover of closer to 1.5 times, based on a dividend that at least keeps pace with RPI inflation, is the right one to aim for and the development of the business is geared towards that goal.

Governance

Following the appointment of Crawford Gillies as non-Executive Director and Senior Independent Director of SSE plc on 1 August 2015, the Board currently comprises the Chairman, five non-Executive Directors and two Executive Directors.  Crawford Gillies has joined the Audit, Remuneration and Nomination Committees.  On the 15 October 2015, SSE announced that Helen Mahy CBE will join the Board of SSE plc as non-Executive Director on 1 March 2016.  When Helen takes up her appointment, the Board of SSE plc will comprise the Chairman, six non-Executive Directors and two Executive Directors.

Being a responsible company

SSE provides people with an essential service and therefore acknowledges that it has a responsibility to reach for higher business standards as a result.

In October 2015, SSE again secured independent accreditation with the Fair Tax Mark, the world's first process for identifying companies making a genuine effort to be open and transparent about their tax affairs.  In complying with the Fair Tax Mark criteria, SSE is providing information that moves its disclosure well beyond the current requirements of UK company law and International Financial Reporting Standards to ensure that it provides probity in its tax affairs.

SSE is also an accredited Living Wage employer, a commitment which extends to its supply chain.  In October 2015, SSE published research, carried out with KPMG, which showed that this commitment will benefit around 800 full time employees of companies supplying services to SSE by 2020.

In November 2015 it was announced that SSE had secured a B performance rating in the CDP Climate Change Report 2015 and had secured a place in the Climate Disclosure Leadership Index.

These steps demonstrate SSE's commitment to acknowledging the enhanced social, economic and environmental impact of its core business activities.  SSE is also committed to being a transparent company, and in line with that it will be the subject of a three-part documentary series scheduled to start on BBC4 on Tuesday 17 November 2015.

Further information

Investor Timetable

 

Ex-dividend date

21 January 2016

Record Date

22 January 2016

Q4 Trading Statement

By 7 February 2016

Final date for receipt of Scrip Elections

19 February 2016

Payment Date

18 March 2016

Notification of Close Period

by 31 March 2016

Preliminary Results for the year ended 31 March 2016

18 May 2016

AGM (Perth) and Q1 Trading Statement

21 July 2016

 

 

Enquiries

 

Sally Fairbairn - Company Secretary and Director of Investor Relations, SSE plc

+ 44 (0)845 0760 530

Sam Peacock  - Director of Group Communications, SSE plc

+ 44 (0)845 0760 530

Website

sse.com

Twitter

@sse

Webcast facility

You can join the webcast by visiting www.sse.com and following the link on the homepage or investor pages.

Conference call

UK free phone

0800 279 4992

US free phone 1877 280 2296

 

UK local

+44(0)20 3427 1915

US local +1212 444 0895

 

When asked please provide confirmation code:  9341070

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 through Twitter 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 first half of 2015/16 are reported under IFRS, as adopted by the EU. 

SSE focuses on profit before tax before exceptional items, re-measurements arising from IAS 39, excluding interest costs on net pension liabilities and after the removal of taxation on profits from joint ventures and associates.  SSE believes that in order to focus on underlying performance it is appropriate to exclude them from all adjusted profit measures. 

Throughout  this  interim  statement, the  definitions  laid out below apply; and unless explicit, any reference to Operating Profit, Profit before Tax and Earnings Per Share in the pages  up to the Interim Financial Statements refer to the adjusted definitions below :

Adjusted Operating Profit*- describes operating profit before exceptional items and re-measurements arising from IAS 39 and after the removal of interest and taxation on profits from joint ventures and associates. 

Adjusted Profit before Tax*  - describes profit before tax, before exceptional items and re-measurements arising from IAS 39, excluding interest costs on net pension scheme liabilities and after the removal of taxation on profits from joint ventures and associates.

Adjusted Earnings Per Share* -  describes earnings per share based on adjusted profit after tax which excludes exceptional items and re-measurements arising from IAS 39, deferred tax and interest costs on net pension scheme liabilities.

The tables under 'Measuring Adjusted Profit Before Tax' reconcile SSE's adjusted profit before tax to its reported profit before tax and also set out the adjusted position after tax and in respect of adjusted earnings per share.  The volatility that arises from IAS 39 and the impact of the adjustment relating to non-cash interest costs on net pension liabilities can also be observed.



 

STRATEGY AND FINANCE

Strategy

Maintaining a clearly-defined strategic framework

SSE's core purpose is to provide the energy people need in a reliable and sustainable way.  At the heart of its strategy is delivery of efficient operation of, and investment in, a balanced range of businesses across the energy sector, in production, storage, transmission, distribution, supply and related services, focused on Great Britain and Ireland.  In practice:

·     Operating and investing efficiently is how SSE serves its customers and makes investments to meet the long-term energy needs of energy users and also earn the profit that allows it to give a return to investors;

·     Maintaining a balanced range of businesses across the energy sector means SSE serves customers and operates assets and does not become over-exposed to any one part of the energy sector but can pursue opportunities or manage risk in each of them where appropriate;

·     Production, storage, transmission, distribution, supply and related services means that there is diversity of business activity in SSE but also depth through the focus on a single sector, energy; and

·     Great Britain and Ireland have given SSE a clear geographical focus, and having and deploying strong knowledge and understanding of the markets in which it operates enables SSE to focus on the needs of the customers within those markets.

SSE's first financial objective is to increase annually the dividend payable to shareholders by at least RPI inflation.  This is because shareholders have either invested directly in SSE or, as owners of the company, have enabled it to borrow money from debt investors to finance the investment, mainly in electricity generation and electricity networks, that will help to meet the needs of energy customers, and future energy customers, in the UK and Ireland over the long-term. 

Operating within a clearly-defined financial framework

SSE operates within a clearly-defined financial framework, focused on the dividend, dividend cover and the balance sheet:

Dividend: SSE's financial focus is on the dividend because the ultimate objective of shareholders investing capital in companies is to secure a return; and receiving and reinvesting dividends is the biggest source of a shareholder's return over the long term.  SSE's target of annual increases in the dividend of at least RPI inflation means it is able to look beyond short-term value and profit maximisation in any one year and maintain a disciplined, responsible and long-term approach to the management of, and investment in, business activities and assets.

Dividend cover: Ultimately dividends are paid out of earnings and, over the long term, earnings should increase to support dividend growth.  For this reason, SSE believes that its dividend per share should be covered by adjusted earnings per share at a level that is sustainable.  SSE continues to believe that its dividend cover could be around 1.2 times to around 1.4 times over the three years to 2017/18.  Longer term, it believes that a target dividend cover of closer to 1.5 times, also based on dividend increases which at least keep pace with inflation, is the correct one to aim for, and that will underlie its business decisions in 2016 and beyond.

Balance sheet: Focusing on the dividend and dividend cover are appropriate for a business in a long-term sector such as energy and, as a long-term business, SSE believes that it should maintain a strong balance sheet, illustrated by its commitment to the current criteria for a single A credit rating from Moody's and Standard & Poor's.  SSE believes that a strong balance sheet enables it to borrow money from debt investors at competitive and efficient rates and take decisions that are focused on the long term - all of which support the delivery of annual increases in the dividend of at least RPI inflation and the maintenance of an appropriate level of dividend cover.

Earning profit in a responsible way

Companies don't just need to fulfil their core purpose or deliver their financial objective; SSE believes they should do so in a responsible way.  It is for this reason that SSE adopted in 2006 the SSE SET of core values: Safety; Service; Efficiency; Sustainability; Excellence; and Teamwork.

The first value is Safety, which is defined as: 'We believe all accidents are preventable, so we do everything safely and responsibly, or not at all'.  In the six months to 30 September 2015, SSE's Total Recordable Injury Rate (TRIR) per 100,000 hours worked by employees was 0.12, consistent with the same period last year.  As a result, 22 employees had recordable injuries in the course of their work during the six months.  A further 30 employees of contractors sustained injuries whilst working on SSE sites.  The correct response to work-related injuries is to seek to achieve injury-free working, and that remains SSE's ultimate goal.

At the heart of a business operating in the energy sector, SSE believes that there has to be a strong and embedded commitment to sustainability.  Correspondingly, in 2013 it adopted a new definition for its Sustainability value: 'Our decisions and actions are ethical, responsible and balanced, helping to achieve environmental, social and economic well-being for current and future generations'.

In 2015, SSE reviewed the definition of its Service value to ensure it reflects accurately the extent to which all parts of SSE must be explicitly focused on customers and ensure that customers' perspectives are incorporated in the company's decisions.  The new definition for the Service value is: 'We put the current and future needs of customers at the heart of everything we do'.  This definition is consistent with the development of SSE's Retail, Enterprise and Networks businesses; and recognises the centrality of the customer in energy policy and regulation as they affect those businesses and Wholesale.

Managing energy sector issues

Change in the energy markets and energy sector is often driven by regulation and policy, and they will always represent a degree of risk for SSE's businesses.  The political and regulatory landscape for SSE's businesses over the last six months has been dominated by three particular processes:

·     The outcome of the CMA's look at the ED1 Price Control;

·     the development and implementation of the new UK government's energy policies; and

·     the provisional findings and potential remedies from the CMA market investigation. 

Whilst there remains some uncertainty, the extent of this has reduced and there are cautious grounds for optimism.  As the remaining  processes develops further, SSE argues for an approach whereby Governments and Regulators set the strategic direction, with markets being used to harness the private sector's ability to deliver the necessary customer-centric or technological innovations.  In a sector that is undergoing substantial technological change, SSE believes regulation should not prescribe specific interventions, but be more inclined towards a principles-based approach. 

In July 2015 the Secretary of State for Energy and Climate Change stated: "DECC's priorities are clear: keeping bills as low as possible for hardworking families and businesses and powering the economy while decarbonising in the most cost-effective way".  This approach, borne out in a number of subsequent policy decisions, is aligned with SSE's.  The pragmatic approach taken by the UK Government to managing the closure of the Renewables Obligation is to be welcomed: there was an opportunity for consultation and the grace period discussions were constructive and collaborative.  As the UK Government continues to consider its approach to energy policy, SSE has been engaging constructively.  It advocates for a market in which the Government and Regulators provide clear and stable mechanisms to underpin investments and guide the market towards the outcomes they desire, rather than prescribe and intervene.  SSE's advocacy always seeks to meet the expectations of its customers and safeguard the interests of investors.

There has been progress regarding the two CMA investigations into the sector.  The CMA's final determination in respect of ED1 generally represented a robust endorsement of Ofgem's original Price Control process, which will deliver value for money for customers. 

In terms of the market investigation, SSE is encouraged by many of the Provisional Findings which have narrowed the scope of the investigation and underlined that many of the features of the market are well-functioning.  However, SSE does not endorse all of the Provisional Findings or Provisional Remedies.  Nevertheless, it is perhaps encouraging that the apparent focus of the investigation is considerably narrower than it was a year ago, with most of the CMA's original 'theories of harm' appearing to be discounted.  SSE also welcomes the consultative tone regarding the language around the possible remedies, and the decision by the CMA to take more time to arrive at its final report is clearly prudent.

More broadly, SSE's business continues to be subject to a number of external political and geopolitical issues including volatile commodity prices and an uncertain macro-economic picture.

Many of these issues are intrinsic to operating in the energy market and whilst some are emerging, this is an environment of which SSE, with its clear market focus, has extensive experience.  SSE's collaborative approach and balanced range of businesses gives it a robustness which stands it in good stead to:

·     deliver good operational performance for customers;

·     deliver solid financial results for investors; and

·     Be well-positioned to succeed in a changing sector.

Dividend Per Share and Adjusted Earnings Per Share

Increasing the dividend for 2015/16

SSE's first financial responsibility to its shareholders is to give them a return on their investment through the payment of dividends.  The Board is recommending an interim dividend of 26.9p per share, to which a Scrip alternative is offered, compared with 26.6p in the previous year, an increase of 1.1%.  This demonstrates SSE's commitment to fulfilling its first financial responsibility to its shareholders; giving them a return on their investment through the payment of dividends.

Targeting dividend increases of at least RPI inflation in 2015/16 and beyond

The stated financial goal of SSE's strategy is, and will remain, to deliver annual increases in the dividend and its target for 2015/16 onwards is to deliver annual dividend increases of at least RPI inflation (measured against the average annual rate of RPI inflation across each of the 12 months to March).

Focusing on Adjusted Earnings Per Share

To monitor its financial performance over the medium term, SSE focuses consistently on adjusted earnings per share, which is calculated by excluding the charge for deferred tax, interest costs on net pension liabilities, exceptional items and the impact of re-measurements arising from International Accounting Standard (IAS) 39.

Adjusted earnings per share has the straightforward benefit of defining the amount of adjusted profit after tax that has been earned for each Ordinary Share and so provides an important measure of underlying financial performance.  In addition to financial performance, however, SSE's adjusted earnings per share is influenced by two specific factors:

·     hybrid capital securities qualify for recognition as equity and so, in SSE's reported results, payments for the coupon associated with them are presented within dividends, but this cost is reflected within adjusted earnings per share; and

·     the Scrip dividend scheme, approved by shareholders in 2010, and again in 2015, results in the issue of additional ordinary shares.

In the six months to 30 September 2015, SSE's adjusted earnings per share was 45.9 pence, based on 993.8million shares, compared with 31.1p, based on 975.7 million shares, in the previous year. 

The nature of energy provision means that SSE's financial results in any single year are always subject to well documented uncertainties (see 'Delivering Adjusted Profit Before Tax in 2015/16 below); meaning it generally seeks to provide a financial outlook later in the financial year.  SSE is targeting adjusted earnings per share for 2015/16 of at least 115 pence and will update its outlook for EPS towards the end of the financial year.

SSE also continues to recognise that adjusted earnings per share will remain subject to significant uncertainties which mean that its dividend cover, based on dividend increases that at least keep pace with RPI inflation, could range from around 1.2 times to around 1.4 times over the three years to 2018.  Nevertheless, SSE believes that a long-term target for dividend cover of a range of closer to 1.5 times, based on a dividend that at least keeps pace with RPI inflation, is the right one to aim for, and the development of the business is geared towards that goal.

 

Adjusted Profit Before Tax

Measuring Adjusted Profit Before Tax

These financial results for the six months to 30 September 2015 are reported under IFRS, as adopted by the EU.  SSE focuses on profit before tax before exceptional items, re-measurements arising from IAS 39, excluding interest costs on net pension liabilities and after the removal of taxation on profits from joint ventures and associates.  These costs are non-cash and SSE believes that in order to focus on underlying performance it is appropriate to exclude them from all adjusted profit measures.

As a result, 'adjusted profit before tax'

·     reflects the underlying profits of SSE's business;

·     reflects the basis on which the business is managed; and

·     avoids the volatility that arises from IAS 39 fair value measurement.

The tables below reconcile SSE's adjusted profit before tax to its reported profit before tax and also set out the adjusted position after tax and in respect of adjusted earnings per share.  The volatility that arises from IAS 39 and the impact of the adjustment relating to non-cash interest costs on net pension liabilities can also be observed.

 

Sep 15

Sep 14

Sep 13

 

£m

£m

£m

Adjusted Profit before Tax

548.8

370.3

354.0

Movement on derivatives (IAS 39)

(284.5)

(17.3)

(42.1)

Exceptional items

(2.2)

-

-

Interest on net pension liabilities (IAS19R)

(11.3)

(14.3)

(14.8)

Share of JVs and Associates tax

(20.0)

(22.1)

40.3

Reported Profit before Tax

230.8

316.6

337.4

 


 

 

Adjusted Profit before Tax

548.8

370.3

354.0

Adjusted Current Tax Charge

(80.2)

(55.6)

(58.2)

Adjusted Profit after Tax

468.6

314.7

295.8

Less: attributable to other equity holders

(12.5)

(11.7)

(12.5)

Adjusted Profit After Tax attributable to ordinary shareholders

456.1

303.0

283.3

Adjusted EPS - pence

45.9

31.1

29.4

 


 

 

Reported Profit after Tax1

192.7

251.3

371.9

Basic EPS - pence

19.4

25.8

38.6

 

 

 

 

Number of shares for basic and adjusted EPS (million)

993.8

975.7

964.4

1After distributions to hybrid capital holders

Delivering Adjusted Profit Before Tax

Operating Profit by Segment

Sep 15

Sep 14

Sep 13

 

£m

£m

£m

Wholesale

159.6

26.7

160.4

Networks

451.6

458.4

437.8

Retail

101.5

37.3

(71.4)

Corporate Unallocated

(10.8)

7.4

(8.1)

Total Operating Profit

701.9

529.8

518.7

Adjusted profit before tax increased from £370.3m to £548.8m in the six months to September 2015 with all SSE's business segments - Wholesale, Networks and Retail - being profitable.  Although comparisons are made with the same period in the previous financial year, it should be noted that year on year comparisons may also reflect the cumulative impact of issues arising or decisions taken in earlier financial years.  In addition, SSE manages its business, including its costs and energy portfolio, on a full year basis.  Moreover, SSE's objective is not to maximise profit in any one year but to earn a sustainable level of profit over the medium term.

In the first half of 2014/15, operating profit in Wholesale was exceptionally low.  The increase in operating profit in Wholesale in the first half of 2015/16 follows this, and reflects in particular: higher output of electricity from renewable sources due to higher rainfall and wind speeds than this period last year.  Very difficult market conditions affecting thermal plant, such as low 'spark' spreads, have, however, persisted for several years.

The decrease in operating profit in Networks reflects the fact that while investment in the asset base supported an increase in operating profit in  Electricity Transmission,  operating profit in Electricity Distribution fell, as expected, due to the introduction of RIIO-ED1 Price Control. 

The increase in operating profit in Retail over the first six months reflected a return to profitability in Energy Supply compared to the first six months of last year.  This follows a better performance in the I&C sector, lower than average temperatures leading to an increase in gas consumption, and lower operating costs.  Over the full-year it is expected that SSE will report a decline in profit in Domestic Energy Supply as a result of lower customer numbers.  

Impact of the movement on derivatives (IAS 39)

The adverse movement on derivatives under IAS 39 of £284.5m shown in the table above and on the face of the Income Statement has arisen primarily from deterioration in the fair value of forward commodity purchase contracts of £276.2m which are accounted for under IAS 39.  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 30 September 2015, primarily for electricity and gas, was a liability of £609.5m compared to a liability on similar contracts at 31 March 2015 of £333.3m.  The actual value of the contracts will be determined as the relevant commodity is delivered to meet customers' energy needs, which will predominately be within the subsequent 12 months.  As a result, SSE believes the movement in fair value of the derivative contracts is not relevant to analysis of underlying performance in the period.

In addition to this, a net adverse movement in the fair valuation of interest and currency derivatives of £8.3m arising from the relative strengthening of Sterling and the net position on interest rate swaps was recognised in the six months to 30 September 2015.  SSE sets out these movements in fair value separately, as re-measurements, as the extent of the actual profit or loss arising over the life of the contracts giving rise to this liability will not be determined until they unwind.

Delivering Adjusted Profit Before Tax in 2015/16

SSE believes profit is not an end in itself, but a means to an end.  In addition to enabling it to provide new services for customers and invest in maintaining, upgrading and building assets and to pay tax, profit also supports the dividend, which is the key means through which SSE gives shareholders a return on their investment.  Shareholders require a return on their investment because they have either invested directly in SSE or, as owners of the company, have enabled it to borrow money from debt investors to finance the investment, mainly in electricity generation and electricity networks, that will help to meet customers' energy needs over the long term. 

Because well-managed economically-regulated networks provide a relatively stable contribution to group results, SSE's adjusted profit before tax for 2015/16 as a whole is likely to be determined mainly by issues in its market-based Wholesale and Retail businesses.  Many of the issues in Wholesale and Retail are influenced by the weather (see above) and SSE's actual level of adjusted profit before tax in 2015/16 is likely to be determined by:

·     the impact of wholesale prices for energy;

·     electricity market conditions, the ability of its operating thermal power stations to generate electricity efficiently and the price achieved for output;

·     the output of renewable energy from its hydro electric stations and wind farms;

·     the output from its gas production assets; and

·     the actual and underlying level of customers' energy consumption.

Investment and Capital Expenditure

Investment and Capex Summary

Sep 15

Sep 15

Sep 14

 

Share %

£m

£m

Thermal Generation

6.0

45.1

93.4

Renewable Generation

22.3

169.2

107.4

Gas Storage

0.4

3.2

1.4

Gas Production

1.3

9.6

6.2

Total Wholesale

30.0

227.1

208.4

Electricity Transmission

38.2

289.3

212.8

Electricity Distribution

14.9

113.2

127.6

Total Networks

53.1

402.5

340.4

Energy Supply and related services

9.3

70.5

48.8

Enterprise

1.7

12.7

22.4

Total Retail

11.0

83.2

71.2

Other

5.9

44.5

59.3

Total investment and capital expenditure

100.0

757.3

679.3

50% of SGN capital/replacement expenditure


79.9

84.0

Delivering investment efficiently

Central to SSE's strategy is efficient investment in a balanced range of economically-regulated and market-based energy businesses.  This means that investment should be:

·     in line with SSE's commitment to strong financial management, including securing returns which are clearly greater than the cost of capital, enhance earnings and support the delivery to shareholders of a return on their investment;

·     complementary to SSE's existing portfolio of assets and consistent with the maintenance of a balanced range of assets within SSE's businesses;

·     consistent with developments in public policy and regulation; and

·     governed, developed, and executed in an efficient and effective manner, consistent with SSE's Major Projects Governance Framework and with the skills and resources available within SSE.

Investing in energy assets that the UK and Ireland need

In March 2014, SSE said that it expected its investment and capital expenditure will total around £5.5bn (net of disposals) over the four years to 2017/18, although the phasing of capital expenditure and the value of disposals may vary.  During the six months to September 2015 there was investment of:

Wholesale:

·     £169.2m in renewable generation, a significant part of which was invested in Strathy North, Dunmaglass, Clyde Extension and Galway onshore wind farms;

·     £45.1m in thermal generation including the completion of Ferrybridge Multi-Fuel;

Networks:

·     £289.3m in electricity transmission, which includes £163m of regulated spend on the Caithness-Moray link, as well as replacement lines between Beauly and Denny and between Beauly and Mossford;

·     £113.2m in electricity distribution, the majority of which was spent on programmes to meet the changing needs of consumers and the changing way in which electricity is produced;

Retail:

·     £70.5m in energy supply and related services which includes work associated with preparation for the roll-out of smart meters and improving digital services for customers; and

Enterprise:

·     £12.7m in Enterprise, mainly on investments in non-regulated networks.

Disposing of assets to support future investment

SSE has an established value programme which aims to deliver the disposal of assets which are not core to its future plans, which result in a disproportionate burden, or which could release capital for future investments.  This includes various streetlighting PFI special purpose entities, a gas pipeline business and the sale of some existing or in-development onshore wind farms.

The disposal of such assets is taken into account in the total expected net capex referred to above of £5.5bn across the four years to March 2018, although the phasing of capital expenditure and value of disposals may vary.  Proceeds and debt reduction from these planned and completed disposals are expected to result in a financial benefit in excess of £1bn, and to date, disposals with a total value of just over £600m have been completed or agreed.

Now completed, and included in the above proceeds, was the sale of SSE's 100% equity interest in the Dorset Streetlighting PFI special purpose entity (SPE) to Equitix MA Infrastructure Limited (Equitix).

The SPE is funded through a mix of senior debt and equity, and its disposal will have the immediate effect of reducing SSE's net debt by £27.6m.  SSE Enterprise Contracting will continue to provide sub-contracting services to the project.

Allocating capital and investment expenditure in 2015/16 and beyond

Looking across its Networks, Retail and Wholesale businesses, SSE expects that its capital and investment expenditure will total around £1.75bn (gross) in 2015/16, including capital expenditure arising from the acquisition of gas production assets completed last month.  The principal reason for the increase is in Electricity Transmission, where construction work on the link between Caithness and Moray is well under way.  Total capital expenditure of around £5.5bn (net) is expected over the four years to 31 March 2018.  This includes:

·     economically-regulated expenditure on electricity transmission networks and on electricity distribution networks;

·     essential maintenance of other assets such as power stations;

·     continued investment in digital communications and smart metering to meet the expectations of retail customers; and

·     expenditure that is already committed to the development and completion of new assets (including around 600MW - in construction- of onshore wind farm capacity) and the enhancement and deployment of systems to improve customer service in Energy Supply and Energy-related Services. 

As stated above, SSE's commitment to financial discipline means that it will monetise value from existing investments and assets in order to support future investment in other assets to which it decides to commit over the next few years, where that will enhance adjusted earnings per share over the long term.

SSE believes that a capital and investment programme on this scale, financed in part by recycling of capital through appropriate asset disposals, and a flexible approach to value-creation, should position it well for the future and will deliver:

·     well maintained existing and new modern capacity for generating electricity;

·     renewable sources of energy, supporting a reduction in the CO2 intensity of electricity generated;

·     a hedge against rising prices for fossil fuels;

·     additions to the asset base in key businesses, including economically-regulated electricity networks; and

·     additional cash flows and profits to support continuing dividend growth.

March 2016 will mark the half-way point in SSE's capital expenditure programme out to March 2018.  In line with its established approach for managing its large capital projects, SSE expects to be able to start confirming in the course of 2016 its investment priorities for the period to the end of the decade. 

Investing in gas distribution through Scotia Gas Networks (SGN)

In addition to its own capital and investment expenditure programme, SSE effectively has a 50% interest in SGN's capital and replacement expenditure, through its 50% equity share in that business.  SGN is self-financing and all external debt relating to it is not consolidated in SSE's balance sheet. 

A total of £79.9m (SSE share) was invested by SGN in the six months, helping to take SSE's share of the RAV of the business to £2.48bn.  That's over £1bn more than when SSE acquired the business in 2005.  SGN has been a very good source of value.  SSE's equity investment in 2005 was £505m; in the decade since it has received distributions from SGN totalling over £600m. 

Financial management and balance sheet

 

Sep 15

Mar 15

Sep 14

Adjusted net debt and hybrid capital (£m)

(7,936.8)

(7,568.1)

(7,907.1)

Average debt maturity (years)

9.4

9.9

10.2

Adjusted interest cover 1 (excluding SGN)

5.7

5.3

3.5

Shares in issue (m)

1,003.8

993.0

986.8

Shares in issue (weighted average) (m)

993.8

981.8

975.7

1 Including hybrid coupon

Managing net debt and maintaining cash flow

SSE's adjusted net debt and hybrid capital was £7.94bn at 30 September 2015, compared with £7.91bn on the same date in 2014, and £7.72bn in 2013. 

Fundamentally, the level of SSE's net debt is significantly influenced by  the quantum and phasing of capital and investment projects to maintain, upgrade and build new assets in the UK and Ireland that energy customers depend on and which support annual increases in the dividend payable to shareholders.  In recent years, it has been contained by a strong focus on:

·     value for money in capital investment projects;

·     effective working capital management;

·     asset disposals (see 'Disposing of assets to support future investment' above); and,

·     a reduced requirement to pay dividends as cash (see 'Keeping SSE well-financed below'). 

As the table below sets out, adjusted net debt excludes finance leases and includes outstanding liquid funds that relate to wholesale energy transactions.  Hybrid capital is accounted for as equity within the Financial Statements but has been included within SSE's 'Adjusted net debt and hybrid capital' to aid comparability.

Adjusted Net Debt and Hybrid Capital

Sep 15

Mar 15

Sep  14

 

£m

£m

£m

Adjusted Net Debt and hybrid capital

(7,936.8)

(7,568.1)

(7,907.1)

Less: hybrid capital 1

3,371.1

3,371.1

2,186.8

Adjusted Net Debt

(4,565.7)

(4,197.0)

(5,720.3)

Less: Outstanding Liquid Funds

(113.3)

(71.7)

(56.1)

Add: Finance Leases

(308.5)

(319.7)

(319.4)

Unadjusted Net Debt

(4,987.5)

(4,588.4)

(6,095.8)

1 On 1st October 2015 hybrid capital reduced by £1,161.4m

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 30 September 2015 was 9.4 years, compared with 9.9 years at 31 March 2015.

SSE's debt structure remains strong, with around £5.5bn of medium/long term borrowings in the form of issued bonds, European Investment Bank debt and long-term project finance and other loans. 

The balance of SSE's adjusted net debt is financed with short-term bank debt.  SSE's adjusted net debt includes cash and cash equivalents totalling £1,678.4m.  Around £1.2bn of medium-to-long term borrowings will mature in the period to March 2017. 

Keeping SSE well-financed

Rating Agency

Rating

Moody's

A3 Negative outlook

Standard and Poor's

A- Negative outlook

SSE believes that maintaining a strong balance sheet, illustrated by its commitment to the current criteria for a single A credit rating, such as a funds from operations/debt ratio of 20%-23% (Standard & Poor's) and a retained cash flow/debt ratio of 13% (Moody's), is a key financial principle.  In October 2015, Standard & Poor's maintained SSE's 'A-' rating but revised the outlook to negative as a result of its opinion on the impact of energy and commodity prices on the sector.  In February 2015, Moody's affirmed SSE's A3 rating with 'negative' outlook.

SSE's principal sources of debt funding at 30 September 2015 were:

·     bonds -  41%;

·     hybrid capital securities - 35%;

·     European Investment Bank loans - 8%;

·     US private placement - 5%; and

·     index-linked debt, long term project finance and other loans - 11%.

SSE has a long-standing commitment to maintaining financial discipline and diversity of funding sources and to moving quickly to select financial options that are consistent with this, including issuing new bonds and loans.  It issued an eight-year/€700m (£514.6m) euro bond, maturing in September 2023, with a coupon of 1.75% and an all-in funding cost when converted back to sterling of 3.19%.  This took SSE's total fund-raising over the last two years to more than £2bn.

On 1 October 2015 the company redeemed the €500m and £750m hybrid capital bonds issued on 20 September 2010.  This will have the effect of reducing the company's hybrid capital by £1,161.4m.

S&P Review of Corporate Hybrid Securities

SSE noted the recent publication by Standard & Poor's Rating Services entitled: "Standard & Poor's Takes Various Rating Actions on review of Corporate Hybrid Equity" in which S&P have revised the equity content that they have assigned on several hybrid capital instruments, including in respect of dual tranche €600m (ISIN: XS1196713298) and £750m (ISIN: XS1196714429) hybrid capital securities issued by SSE on 10 March 2015, to "minimal" from "intermediate" (the Rating Action).

In their announcement, S&P have confirmed that:

·     their criteria for assessing corporate hybrids has not changed; and

·     notwithstanding the Rating Action, their credit rating for SSE remains unchanged.

Since the criteria for assessing corporate hybrids has not changed, SSE notes that the Rating Action does not constitute a "Capital Event" under the conditions outlined in the original Securities documentation and is working to agree amendments to the Security terms to allow the equity content to be re-instated to "intermediate".

Scrip Dividend Scheme

The Scrip Dividend Scheme approved by SSE's shareholders in 2010, and again in 2015, gives them 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 2015, relating to the final dividend for the year to 31 March 2015, was 26% and resulted in a reduction in cash dividend funding of just under £160m. 

Net Finance Costs

The table below reconciles reported net finance costs to adjusted net finance costs, which SSE believes is a more meaningful measure.  In line with this, SSE's adjusted net finance costs in the six months to 30 September 2015 were £153.1m, compared with £159.5m in the same period in 2014 reflecting the lower average interest rate in the period.

 

Sep  15

Sep 14

Sep 13

 

£m

£m

£m

Adjusted net finance costs

153.1

159.5

164.7

add/(less):

 

 

 

Movement on derivatives

11.3

9.7

31.3

Share of JV/Associate interest

(63.4)

(69.3)

(71.6)

Interest on net pension liabilities (IAS 19R)

11.3

14.3

14.8

Reported net finance costs

112.3

114.2

139.2

 

 

 

 

Adjusted net finance costs

153.1

159.5

164.7

Add/(less):

 

 

 

Finance lease interest

(16.2)

(17.1)

(17.9)

Notional interest arising on discounted provisions

(6.9)

(5.3)

(3.9)

Hybrid coupon payment

12.5

11.7

12.5

Adjusted finance costs for interest cover calculation

142.5

148.8

155.4

 

Coupon payments relating to hybrid capital are presented as distributions to other equity holders and are reflected within adjusted earnings per share when paid.

The average interest rate for SSE, excluding JV/Associate interest and hybrid coupons, during the six months to September 2015 was 3.96%, compared with 4.50% in the same period the previous year.  Based on adjusted interest costs, SSE's adjusted interest cover was (previous year's comparison in brackets):

·     5.7 times, excluding interest related to SGN (3.5 times); and

·     4.9 times, including interest related to SGN (3.6 times).

Excluding shareholder loans, SGN's net debt at 30 September 2015 was £3.51bn, and within the adjusted net finance costs of £153.1m, the element relating to SGN's net finance costs was £43.1m compared with £46.0m in the previous year, after netting loan stock interest payable to SSE.  Its contribution to SSE's adjusted profit before tax was £87.5m compared with £97.8m in the same period in 2014.

Contributing to employees' pension schemes

In line with the IAS 19R treatment of pension scheme assets, liabilities and costs, net pension scheme liabilities of £388.3m have been recognised in the balance sheet at 30 September 2015, before deferred tax.  This compares to a liability of £664.6m at 31 March 2015.  The reduction reflects an increase in the market corporate bond rates used to discount the pension liability.  During the six months to 30 September 2015, employer cash contributions amounted to:

·     £24.0m for the Scottish Hydro Electric scheme, including deficit repair contributions of £14.8m; and

·     £34.9m for the Southern Electric scheme, including deficit repair contributions of £23.5m.

Tax

Being a fair tax payer

SSE pays taxes in the United Kingdom and the Republic of Ireland, the only states in which it has trading operations.  Central to SSE's approach to tax is that it should be regarded as a responsible tax payer.  As a consequence, SSE seeks to maintain a good relationship with HM Revenue & Customs and with the Office of the Revenue Commissioners, based on trust and cooperation. 

SSE strives to manage efficiently its total tax liability, and this is achieved through operating within the framework of legislative reliefs.  SSE does not take an aggressive stance in its interpretation of tax legislation, or use so-called 'tax havens' as a means of reducing its tax liability.  SSE's tax policy is to operate within both the letter and spirit of the law at all times.

In October 2014, SSE became the first FTSE 100 Company to be awarded the Fair Tax Mark.  In October 2015 this accreditation was renewed.  In achieving the Fair Tax Mark criteria SSE is providing information that moves its disclosure well beyond the current requirements of UK company law to ensure that it provides all its stakeholders with the information they need to properly appraise its tax affairs. 

Setting out SSE's tax position

To assist the understanding of SSE's tax position, the adjusted current tax charge is presented as follows:


Sep 15

Sep 14

Sep 13


£m

£m

£m

Adjusted current tax charge

80.2

55.6

58.2

Add/(less)

 

 

 

Share of JCE/Associate tax

(20.0)

(22.1)

40.3

Deferred tax including share of JV and Associates

28.9

24.3

(27.2)

Tax on exceptional items/certain re-measurements

(63.5)

(4.2)

(118.3)

Reported tax charge /(credit)

25.6

53.6

(47.0)

For reasons already stated above, SSE's focus is on adjusted profit before tax and in line with that the adjusted current tax charge is the tax measure that best reflects underlying performance.  The effective adjusted current tax rate, based on adjusted profit before tax, is 14.6%, compared with 15.0% in the same period last year.

Priorities and Outlook for 2015/16 and beyond

Setting the right long-term priorities to provide the energy people need

In addition to the safe and efficient management of assets in operation or under maintenance or construction and the safe and efficient delivery of services to Wholesale, Networks and Retail customers, SSE's priorities for the remainder of 2015/16 and beyond are to:

·     Wholesale: ensure the effective operation of all generation plant;

·     Wholesale: ensure that the development and construction of new electricity generation assets makes good progress;

·     Networks: continue the good progress with investments in the transmission system in the north of Scotland, specifically the continued construction of Caithness-Moray, the largest capital project undertaken by SSE;

·     Networks: ensure that the Electricity Distribution business adapts to the changing needs of customers and changes to the way electricity is produced; and

·     Retail: work for a progressive and enduring outcome from the CMA investigation into the energy market in Great Britain, for the benefit of customers and investors alike;

·     Retail: ensure that the transformation of systems required under smart metering makes good progress and continue to develop digital services to a standard which customers expect.

·     Enterprise: ensure that the business has a platform for growth over the next five years

Conclusion

SSE's three business segments - Wholesale, Networks and Retail (including Enterprise) - have one core purpose: to provide the energy people need in a reliable and sustainable way.  SSE believes that success in fulfilling this core purpose enables it to earn a profit which it can then put to good use for the benefit of customers, other stakeholders and investors.  This, in turn, helps to ensure that SSE is in a good position to achieve its first financial objective for shareholders: annual increases in the dividend that at least keep pace with RPI inflation in 2015/16 and beyond.

WHOLESALE


Sep 15

Sep 14

Energy Portfolio Management (EPM) and Electricity Generation



EPM and Generation operating profit - £m

141.8

11.8

EPM and Generation capital expenditure and investment - £m

214.3

200.8




GENERATION



Gas- and oil-fired generation capacity (GB and Ire)  - MW

5,253

5,330

Coal-fired generation capacity (inc. biomass co-firing) - MW

2,519

3,009

Multi-fuel capacity - MW

34

0

Renewable generation capacity GB and Ire (inc. pump storage) - MW

3,393

3,394

Total electricity generation capacity (GB and Ire) - MW

11,199

11,733

 

 

 

Gas power station availability - %

94

95

Coal power station availability - %

92

81

Onshore wind farm availability %

97

98

 

 

 

Hydro storage at end September - %

41

43

 

 

 

Gas- and oil-fired (inc. CHP) output (GB and Ire) - GWh

4,649

5,340

Coal-fired (inc. biomass co-firing) output- GWh

605

2,591

Total output from thermal power stations (GB and Ire) - GWh

5,254

7,931

 

 

 

Conventional hydro output - GWh

1,590

1,210

Wind output (GB and Ire) - GWh

2,188

1,513

Dedicated biomass output - GWh

27

30

Total output of renewable energy (GB and Ire) - GWh

3,805

2,753

 

 

 

Total output from pumped storage - GWh

105

53

 

 

 

Total Generation output  all plant - GWh

9,164

10,737

Note 1: Capacity is wholly-owned and share of joint ventures.

Note 2: Output is electricity from power stations in which SSE has an ownership interest (output based on SSE's contractual share).

Note 3: Gas fired capacity includes 1,180MW at Peterhead (TEC is currently 400MW) and 464MW at Great Island (net increase at the site 224MW). Now excludes 304 MW at Barking.

Note 4: Coal capacity now includes one unit at Ferrybridge and four units at Fiddlers Ferry.

Note5: Wind output excludes 111GWh of constrained off generation in HY15/16 and 43GWh in HY14/15.

 

 

 

GAS PRODUCTION



Gas production operating profit - £m

14.1

13.3

Gas production - m therms

191.3

200.8

Gas production capital investment - £m

9.6

6.2




GAS STORAGE



Gas storage operating profit - £m

3.7

1.6

Gas storage customer nominations met - %

100

100

Gas storage capital investment - £m

3.2

1.4

Sustainably sourcing and producing energy

SSE's long-term objective for its Wholesale segment is for it to make a sustainable contribution to the fulfilment of SSE's core purpose and achievement of its financial goals, through excellence in the flexible provision, storage and delivery of energy and related services for customers in wholesale energy markets in Great Britain and Ireland.

This is achieved through maintaining a diverse portfolio of assets, contracts and innovative energy solutions; and the ability to respond quickly and effectively to changing market conditions and opportunities.

SSE's Wholesale segment delivers this through Energy Portfolio Management (EPM) and Electricity Generation.  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. 

Electricity Generation is responsible for the operation and management of SSE's generation assets, their maintenance and ensuring these assets are available when required and able to meet contractual obligations; and for developing future thermal and renewable opportunities.

In addition, also within Wholesale, Gas Production is responsible for the efficient delivery of gas from the physical gas fields that SSE has a shared ownership in; and Gas Storage is responsible for the operation and management of SSE's gas storage facilities, their maintenance and ensuring they are available for use by its customers.

The markets in which SSE's Wholesale businesses operate continue to be impacted by a number of key long-term trends, including an uncertain macroeconomic environment; volatile commodity prices; government intervention and competition; and the ongoing transition to a low carbon economy. 

This has resulted in an environment that is increasingly dynamic, but which should in turn give rise to opportunities for those who have the assets, contracts, capabilities and attributes required by key stakeholders.  SSE's Wholesale business will therefore continue to review its portfolio in the context of market and regulatory conditions to ensure it can continue to meet its objectives.

In line with its commitment to transparency in performance management and reporting; and in keeping with the ongoing evolution of its business, SSE has completed the incorporation of a new subsidiary company for energy portfolio management, SSE EPM Limited, which sits alongside the separately disclosed Energy Supply and Generation activities of the SSE group and will produce separately audited accounts from 2015/16 onwards.  SSE is also ensuring that the financial arrangements between its companies continue to be clear and transparent.

Financial performance in Wholesale

During the six months to 30 September 2015 operating profit in Wholesale was £159.6m.  This comprised (comparisons with the same period last year): 

Wholesale Operating Profit

Sep 15

Sep 14

Sep 13

EPM and Electricity Generation £m

141.8

11.8

86.2

Gas Production £m

14.1

13.3

69.0

Gas Storage £m

3.7

1.6

5.2

Total Wholesale Operating Profit

159.6

26.7

160.4

In the first half of 2014/15, operating profit in Wholesale was exceptionally low.  The increase in operating profit in Wholesale in the first half of 2015/16 follows this, and reflects in particular: higher output of electricity from renewable sources due to higher rainfall and wind speeds than during this period last year.  Very difficult market conditions affecting thermal plant, such as low 'spark' spreads, have, however, persisted for several years.  This change in the prevailing conditions affecting Wholesale's businesses has resulted in  half year operating profit being restored to a level similar to that reported for the same period in 2013/14.

The principal issues relating to operating profit in SSE's Wholesale businesses are as follows:

EPM and Electricity Generation - Higher output from renewable energy, primarily due to higher average wind speeds and levels of rainfall compared to the previous year, and the commissioning of the Great Island CCGT both contributed to the increase in operating profit.  SSE's coal and gas-fired power station output in GB fell as a result of planned outages, the removal from service of Ferrybridge Unit 4, and market conditions resulting in thermal generation being required to run less than in previous years.

Gas Production - Day ahead wholesale gas prices were broadly in line with the same period last year, but lower operating costs contributed to a slight increase in operating profit.

Gas Storage - Achieved a slight increase in operating profit, but continues to face a challenging economic environment.

Energy Portfolio Management (EPM)

Maintaining a diverse energy portfolio

The wholesale price of energy can fluctuate significantly due to a number of factors including the economy, the weather, customer demand, infrastructure availability, and world events.  EPM seeks to manage the impact of these variables by maintaining a diverse and well-balanced portfolio of contracts, trading positions and assets, both long and short term.  In doing so, SSE has:

·     greater ability to manage wholesale energy price volatility, lower risk from wholesale prices through reduced exposure to volatility in any single commodity; and

·     more scope to deliver the investment needed in Generation and Gas Production because the risks associated with large-scale and long-term investments are contained by the balanced nature of SSE's energy businesses.

In recent years, SSE has typically required around seven million therms of gas per day to supply its customers and to fuel its power stations, and around 130GWh of electricity per day to supply all its customers.  There are three primary routes to competitively and sustainably procure the fuels and energy it needs to meet this demand:

·     assets: including thermal and renewable power generation; and upstream gas exploration and production;

·     contracts: long-term gas producer contracts - including the expanded long-term gas supply contract it signed with Statoil in June 2015 - power purchase agreements (with SSE-owned plant and third parties) and solid fuel contracts; and

·     trading: where energy contracts are transparently traded on international exchanges or through 'over the counter' markets.

Managing risks associated with energy procurement across these three routes is a key challenge for EPM.  By optimising energy procurement through a diverse portfolio, SSE aims to shelter its portfolio from the unavoidable volatility that exists in global markets.

Responding to market opportunities

A number of key long-term trends, including an uncertain macroeconomic picture; volatile commodity prices; intense competition and increasing government intervention; and the continued journey to a low carbon economy, have resulted in wholesale markets which are increasingly dynamic.  This creates attractive opportunities for those who have the assets, capabilities and attributes required by key stakeholders.  EPM will continue to proactively seek out these opportunities through a range of activities including contractual agreements and the provision of system and balancing services through mechanisms such as the Balancing Market and Short-Term Operating Reserve (STOR).

Managing market issues in 2015/16

Global energy prices continued to be volatile the first six months of 2015/16, and have typically been weaker compared to the same period last year.  An oil price recovery in May 2015 turned out to be short-lived, with global over-supply continuing and fears over the global economic situation triggering further dips in oil prices in July and August.

Prompt gas prices in summer 2015 were broadly similar to those seen in summer 2014, however forward prices have been lower.  This reduction in prices has been driven by a combination of the low oil price; and the expectation of greater supplies of Liquefied Natural Gas (LNG) arriving in Europe due to the continued expansion of global supplies combined with weaker underlying demand from Asia.

The UK power system has been well supplied over first half of the 2015/16, reflecting growing solar capacity levels and conducive conditions for wind farms.  As a result 'spark spreads' - the difference between the cost of gas and emissions used by a CCGT (Combined Cycle Gas Turbine) and the value of the power produced - were often negative over the summer.  Coal profitability has also fallen.

Forward 'dark spreads' are notably lower than at this time in 2014/15; whilst forward spark spreads, driven by the reduction in forward gas prices, are stronger compared to forward prices at this time last year.  The long-term trend is for gas to continue to enjoy a comparative advantage over coal. 

SSE continues to actively monitor developments - for example, the implementation of the Markets in Financial Instruments Directive (MIFID) II - which could, in the future, impact the activities of wholesale market participants.

EPM priorities for the remainder of 2015/16 and beyond

EPM's priorities include:

·     securing a stable and predictable supply of energy to meet SSE's needs;

·     driving business change to respond effectively to new UK, RoI and EU regulations;

·     responding to market evolution and change;

·     identifying and agreeing new long term energy supply contracts; and

·     continuing to support improved market transparency and liquidity initiatives.

Generation - Great Britain and Ireland Overview

Managing and developing Generation assets to meet key priorities

SSE's primary objective for its Generation division is to maintain a diverse generation portfolio, including a substantial amount  of renewable energy capacity across the UK and Ireland, that helps keep the lights on by being available, reliable and flexible.  This objective is underpinned by six principles that direct the operation of, and investment in, its Generation portfolio: 

·     compliance: with all safety standards and environmental and regulatory requirements;

·     diversity: to avoid over-dependency on particular fuels or technologies;

·     capacity: that can contribute to the requirements of the GB and Irish electricity systems;

·     availability: to respond to system demand and market conditions;

·     flexibility: to ensure that changes in demand for electricity and the variability of generation from wind farms can be addressed; and

·     sustainability: to support progressive reduction in the CO2 intensity of electricity generated through the cost efficient decarbonisation of its generation fleet.

SSE's generation assets are underpinned by a strong engineering focus on asset life and ongoing equipment monitoring to maximise efficiency.

Maintaining a diverse Generation portfolio

In moving towards a lower carbon generation mix, SSE is transitioning its generation assets from a portfolio weighted towards gas and coal, towards a portfolio more weighted towards gas and renewables.  SSE's generation portfolio at 30 September 2015 comprised:

Electricity generation capacity

Sep 15

Sep 14

Gas -fired generation capacity (GB) - MW

3,961

4,262

Gas- and oil-fired generation capacity (Ire) - MW

1,292

1,068

Coal-fired generation capacity (GB) (inc. biomass co-firing) - MW

2,519

3,009

Multi-fuel capacity - MW

34

0

Renewable generation capacity GB and Ire (inc. pump storage) - MW

3,393

3,394

Total electricity generation capacity (GB and Ire) - MW

11,199

11,733

Gas fired capacity now includes 1,180MW at Peterhead (TEC is 400MW) and excludes 304 MW at Barking.

Coal capacity now includes one unit at Ferrybridge and four units at Fiddlers Ferry 2014.

With this portfolio SSE continues to have significant fuel diversity for producing electricity and retains a very flexible asset fleet.  It also makes SSE the UK and Ireland's largest generator of renewable electricity, in terms of installed capacity.

Generation - Great Britain (thermal)

GB thermal output

Sep 15

Sep 14

Total Gas and oil-fired (inc. CHP) output (GB) - GWh

3,634

5,329

Coal-fired (inc. biomass co-firing) output- GWh

605

2,591

Total output from thermal power stations (GB) - GWh

4,239

7,920

Gas and oil-fired (inc. CHP) output (GB) from fully owned stations included above - GWh

917

1,116

Managing the impact of marketplace conditions and the public policy framework

Uncertainty around market conditions and the public policy framework affecting electricity generation in Great Britain continue to create challenging conditions for SSE's thermal and renewables businesses.  Significant factors include:

·     Market Conditions: As detailed above the UK power system has been well supplied during the first half of the year.  Growing solar capacity levels and conducive conditions for wind farms resulted in large volumes of renewable generation being available to the system.  As a result spark spreads were negative over the summer, and coal profitability also fell.

·     Carbon Price Support: The CPS rate has risen to c. £18/tonne in 2015/16; but the 2014 Budget announced that it would then be frozen until 2019/20, instead of increasing as previously proposed.

·     Capacity Market: In December 2014 the first Capacity Auction for generation capacity in GB was held.  This competitively determined the volume of plant (49.3GW) which would take on a capacity obligation, and the level of capacity payment (£19.40/kW) these will receive for successfully providing capacity.  A total of 4.4GW of SSE's 7.2GW pre-qualified plant were successful in the auction, and will receive a total of £85m if they deliver this capacity in 2018/19.  In October 2015 SSE successfully prequalified 6.1GW of generation capacity for the December 2015 Capacity Auction.

A combination of market conditions (described above); scheduled plant outages at Medway, Marchwood, Fiddler's Ferry and Ferrybridge; and the removal from service of Ferrybridge Unit 4, resulted in SSE's thermal generation fleet generating less output compared to the same period last year.

In addition the combination of more favourable forward gas prices and the April 2015 increase in the Carbon Price Support Rate means the long-term trend in the electricity market is that the running hours and relative profitability of gas stations are increasing at the expense of coal stations.  This 'coal-to-gas switch' is evidenced within SSE's own portfolio by the forthcoming closure of Ferrybridge and the return to service of Keadby (see below); and within the wider market by the closure of other large coal-fired stations.

Managing gas-fired power stations

SSE has three wholly-owned gas-fired power stations: Keadby (Lincolnshire; 735MW); Medway (Kent; 700MW) and Peterhead (Aberdeenshire; 1,180MW).  In addition, SSE has a 50% stake in gas-fired power stations at Marchwood (840MW total capacity) and Seabank (1,164MW total capacity).  Both of these stations' output is 100% contracted to SSE and in HY 2015/16 these two stations generated a total of 2.7GWh of electricity. 

Medway

Medway (700MW) is operational, and has continued to perform well in response to market requirements and contractual obligations, maintaining a good level of availability to generate.  It has taken on a capacity obligation for 2018/19;

Keadby

In March 2013 SSE removed its gas fired power station at Keadby (735MW) from the market.  In May 2015 confirmed its intent for the site to return to service, subject to a final decision.  In October 2015 SSE secured a Limited Duration Transmission Entry Capacity (TEC) contract with National Grid for the period between 1 November 2015 and 31 March 2016, and an annual TEC contract from 1 April 2016.  Commissioning work began on 9 November 2015, with full commercial availability expected by mid December.

Prior to the station being mothballed, extensive upgrades were completed at Keadby meaning the station will be able to operate with improved flexibility in the market.  Keadby has a capacity obligation for 2018/19.

Peterhead

Peterhead (1,180MW) reduced its TEC to 400MW from 1 April 2014, which has prevented the station from participating in the electricity market since then due to its current engineering configuration.  Previously announced investment to alter this configuration is under way, and will allow 400MW of Peterhead's capacity to participate in the market from the middle of November.

In addition Peterhead has secured a number of contracts to provide support services to National Grid including a contract to provide up to 780MW of capacity to National Grid's Supplemental Balancing Reserve (SBR) service over Winter 2015/16; and a contract to provide voltage support to the electricity system in the north of Scotland between April 2016 and September 2017.

Peterhead's ability to successfully support National Grid, together with the ongoing investment in Carbon Capture and Storage at the station (see below), illustrates its strategic, long-term value to Scotland and the UK.  It also demonstrates that there are options for existing assets outside of the Capacity Market process.

Investing in gas-fired generation

Despite experiencing challenges in recent years, and despite expected longer-term changes in the way electricity is generated and used, it is still anticipated that gas-fired power stations will play an increasingly important role in GB electricity generation.  SSE will therefore continue to maintain and operate its existing assets, and continue to monitor market developments.

However the economics of new-build gas generation remain extremely challenging and its strong commitment to financial discipline means SSE has no plans to develop or build any new gas-fired plant in the foreseeable future.

Contributing to the development of Carbon Capture and Storage

SSE remains a strategic partner in the proposed CCS project at its gas-fired power station in Peterhead, which is being led by Shell UK.  The project aims to create the first commercial-scale application of CCS technology at a gas-fired power station anywhere in the world.  Shell is leading the development of the project which has the potential to capture and store up to one million tonnes of CO2 annually and to generate clean electricity for over half a million homes.

A significant milestone on the project was reached in June 2015 when planning permission was granted by Aberdeenshire Council for the onshore elements of the project in Peterhead.  Front-end engineering design work began last year and should be completed by the end of 2015.  The project is a preferred bidder in the UK Government's CCS Commercialisation competition, and the project team is in discussions with the UK Government about securing the next stage of support.

Managing coal-fired power stations

SSE has two wholly-owned coal-fired power stations: Ferrybridge (Yorkshire; 524MW) and Fiddler's Ferry (Lancashire, 1,995MW).

None of Ferrybridge's capacity was successful in the Capacity Market auction, whilst 1,294MW (de-rated) of Fiddler's Ferry (3 out of its 4 units) did take on capacity obligations for 2018/19.  SSE has consistently maintained that challenging market conditions, successive governments' commitment to decarbonisation, and the age and associated operational costs of coal-fired stations have weighed heavily on the long-term viability of these assets.  This reality is now being reflected in the 'coal-to-gas switch' currently being seen in the GB electricity market.

As a result of all of these factors SSE made the difficult decision, in May 2015, to cease coal-fired electricity generation at Ferrybridge by 31 March 2016.  Due to the damage caused by a serious fire at the site in 2014 Unit 4 was removed from service with immediate effect.  Unit 3 returned to service in August 2015 following successful completion of a planned outage which began in April 2015.  Plans to manage the closure and decommissioning of the plant from April 2016 are being developed.

In light of the ongoing challenges faced by coal-fired generation SSE has kept its operations at Fiddler's Ferry under review, including its expected Transmission Entry Capacity (TEC) requirements for the next financial year.

As a consequence of this ongoing review in September 2015 SSE informed National Grid that it would reduce TEC for Fiddlers Ferry to 1,455MW for 2016/17.  This reduction is equivalent to the capacity of one of Fiddlers Ferry's four units and means this capacity will not be available to the market for 2016/17.  However the capacity could still be made available to support system security if National Grid requires it during this period.  SSE will also explore the viability of submitting this capacity into National Grid's Supplemental Balancing Reserve (SBR) auction for Winter 2016/17.

The remaining capacity (1,455MW) - which has capacity obligations for Winter 2018/19 - will continue to be made available to the market.  SSE intends to enter it into the 2015 Capacity Market auction (for delivery in Winter 2019/20) and will consider the options for the future operation of the station after the auction has been completed.  All of the capacity at Fiddler's Ferry is compliant with the Large Combustion Plant Directive (LCPD); and has been opted into the Transitional National Plan (TNP) for emissions and dust under the Industrial Emissions Directive (IED).  Generators will not have visibility of the final TNP rules until December 2015, at which point SSE will be able to consider how Fiddler's Ferry should comply with the IED.

Investing for the future through 'multi-fuel'

SSE's generation strategy is built upon managing risk through owning a diverse range of assets and fuels from which to meet the needs of customers.  Solid fuel remains an important part of that strategy.

Multi-fuel plants use waste derived fuels to generate electricity and therefore benefit from an additional revenue opportunity in the form of a 'gate fee' for taking the waste.  They offer a sustainable energy solution that has lower carbon intensity than other solid fuels and which further diversifies the range of fuels that SSE can deploy in its generation fleet.

In July 2015 the SSE and Wheelabrator Technologies Inc. 50:50 joint venture - Multifuel Energy Ltd (MEL) - fully commissioned a £300m (69MW) multi-fuel generation facility adjacent to SSE's existing Ferrybridge coal power station.  This project, and the potential for a second at the site (see below) illustrates that SSE remains committed to the Ferrybridge site, and the local community in which it sits.  50 full-time jobs have been created at the station, with more in the supply chain.  The station has taken on a capacity obligation for 2018/19.  While SSE reports its 34MW share of capacity, it excludes generation output at Ferrybridge multi-fuel as this is contracted to a third party.  From handover in July to 30 September 2015, 110kTe of waste has been processed and 110GWh of electricity generated. 

Planning consent for a second multi-fuel facility at the Ferrybridge site was granted in October 2015, and a final investment decision is expected to be taken next year. 

Contributing to security of electricity supply this winter and beyond

Ofgem has consistently maintained that during the period to 2018/19 electricity generation capacity margins will be lower than they were in recent years due to weak market economics and the closure of older plant.  National Grid's recently released Winter Outlook confirmed the capacity margin for Winter 2015/16 will be 5.2%, its lowest level for some years.

The UK Government, together with National Grid (as the System Operator) and Ofgem, has decided to address this issue in two ways:

·     in the longer term through the introduction of a Capacity Market, which will begin in 2018/19; and

·     in the intervening period, through the Supplemental Balancing Reserve (SBR) which began last winter (2014/15).

In addition to these mechanisms, National Grid already has the ability to manage moments when demand outstrips supply through a range of different balancing and optimisation tools.

The design, implementation and operation of these mechanisms is ultimately determined by DECC and National Grid.  They determine how much capacity is required to ensure security of supply under each mechanism.  Once this volume has been determined they signal the market, and then procure the necessary capacity through a competitive auction/tender process.

Responsibility for determining the volume of capacity required to ensure a secure electricity supply, and for the timely signalling of this to the market, therefore lies with DECC and National Grid.  National Grid stated in October 2015 that it has taken 'appropriate steps to support security of supply' and the Secretary of State for Energy and Climate Change said 'keeping the lights on is non-negotiable'.  On 4 November 2015, National Grid issued a Notice of Inadequate System Margin and supplies of electricity remained secure.

SSE will play its part by focusing on ensuring that its plant, where practicable, is available to generate at times when demand is highest; and by delivering its contractual obligations, for example through the SBR and voltage control contracts that its Peterhead power station currently has with National Grid.  It will also continue to work openly and constructively with the UK government and National Grid as part pf their ongoing policy development process. 

Generation - Great Britain (renewable)

 

Renewable generation (GB)

Sep 15

Sep 14

Conventional hydro capacity- MW

1,150

1,150

Onshore wind  capacity - MW

1,008

1,008

Offshore  wind capacity -MW

355

355

Dedicated biomass capacity - MW

37

38

Renewable capacity - MW

2,550

2,551

 

 

 

Renewable capacity qualifying for ROCs - MW

c.1900

c.1,900

 

 

 

Pumped storage capacity - MW

300

300

Pumped storage output- GWh

105

53

 

 

 

Conventional hydro output - GWh

1,590

1,210

Onshore wind output  - GWh

1,011

672

Offshore wind output  - GWh

535

425

Biomass output GB - GWh

27

30

Renewable output  - GWh

3,163

2,337

Wind output excludes 111GWh of constrained off generation in six months to September 2015 and 43GWh in the same period last year.

Managing the impact of market conditions and the public policy framework

The first six months of the year saw a significant increase in renewables output compared to the same period in the previous year despite renewable operating capacity, and plant availability, remaining largely unchanged.

The primary driver for this differential was the weather: put simply there has been more rainfall, and windier conditions, in the first half of 2015/16 in Scotland than the first half of 2014/15, a period during which conditions were uncharacteristically dry and still. 

Availability and performance of the renewable portfolio has remained very high through the period, allowing SSE's assets to operate in conducive conditions.

SSE continues to operate under the policy support regime for renewable generation capacity in GB, currently delivered through the Renewables Obligation (RO) (which also applies in Northern Ireland); and the recently introduced Contracts for Difference (CfD) mechanism.

The policy framework for renewable generation has been subject to a number of interventions by the new UK Government since May 2015.  These include:

·     the early closure of the RO to new onshore wind;

·     significant proposed reductions in support levels available under the small-scale Feed-in Tariff (ssFiT);

·     a delay to the 2015 CfD auction round for all low carbon technologies;

·     the clear signal that CfDs in their current form are unlikely to be available to new onshore wind; and

·     the removal of levy-exemption certificates (LECs) for renewable electricity.

In addition the UK government is currently considering the design of its Carbon Floor Price mechanism in the 2020s which could result in further changes impacting the renewable portfolio.

The principal reason for these interventions is to control the costs associated with levy-funded low carbon support mechanisms.  Absolute support for low carbon technologies is limited by the Levy Control Framework (LCF) budget which has the reasonable objective of controlling costs to customers from government energy policies.  The UK Government has stated that under a business as usual scenario, this budget would be overspent by around 20% by 2020, and that intervention is therefore necessary.

For SSE's onshore wind portfolio, clarity regarding which projects are likely to remain eligible for RO support has been provided through the publication of 'grace period' provisions.  However these are subject to legislative scrutiny by the UK Parliament and are not expected to be fully confirmed until 2016, therefore an element of uncertainty remains until then.

The LCF budget, together with the future of the CfD mechanism, has been placed under review with further announcements not expected until the start of 2016.  This has inevitably led to a further degree of uncertainty as regards the future policy framework, and in particular what implications this has for onshore, offshore and Scottish Islands wind under the CfD mechanism.

SSE's development activities (see below) reflect this new political reality.

Developing renewable energy schemes onshore

Onshore wind farm development pipeline (GB)

Sep 15

Mar 15

In operation - MW

1,008

1,008

In construction- MW

441

162

With consent for development (including Stronelairg and Viking)- MW

472

515

Projects in Construction in Scotland include:

·     Strathy North (67MW) - Located in Sutherland, construction is now almost complete and is due to be fully operational in November 2015.

·     Dunmaglass (94MW) - Main construction at this site south of Inverness is progressing well; the site is scheduled for completion in 2016.  It currently meets all the proposed criteria to qualify for an RO grace period.

·     Clyde Extension (up to 172MW) - this project, is an extension of SSE's operational Clyde wind farm.  In May 2015 a final investment decision (FID) was taken to proceed with the project and construction work is progressing.  It is expected to be fully operational in 2017.  It currently meets all the proposed criteria to qualify for an RO grace period.

·     Bhlaraidh (up to 108MW) - located in the Great Glen this project was consented by Scottish Ministers in January 2014.  In June 2015 a final investment decision was taken to proceed with the project and construction work has commenced.  It is expected to be operational in 2017.  It currently meets all the proposed criteria to qualify for an RO grace period.

Projects in Development in Scotland include:

·     Stronelairg (with consent) (up to 240MW) - located in the Great Glen in the Highlands the project was consented by Scottish Ministers in June 2014.  In August 2014 the John Muir Trust announced it had lodged a petition to the Court of Session asking for this decision to be judicially reviewed.  SSE is participating fully in the legal process and a decision is expected before the end of the year.  It currently meets all the proposed criteria to qualify for an RO grace period.

·     Viking (with consent) (up to 457MW - SSE share 50%) - located in Shetland the project has been involved in a prolonged legal dispute since it was consented by Scottish Ministers in April 2012.  In February 2015 the Scottish Supreme Court dismissed the legal challenge.  SSE, along with its Joint Venture partner, will now continue to develop the project.  The project requires State Aid clearance from the European Commission to be eligible to participate in the CfD mechanism; and clarity about when the next CfD auction will be held.

·     Strathy South (in planning) (up to 133MW) - in July 2014 the Highland Council's Northern Planning Committee raised an objection to the project, which is located in Sutherland, adjacent to SSE's Strathy North site.  This objection is now being examined further at a Public Local inquiry, and SSE is participating fully in this process.  As it stands the project does not meet the proposed RO grace period criteria.

Large scale pumped storage could have an important part to play in an electricity system that features a significant amount of electricity from wind.  Current policy and market signals for pumped storage do not favour investment, but SSE continues to explore the conditions for investment to allow progress with its 600MW consented pumped storage scheme at Coire Glas in the Scottish Highlands.  The project was recently placed on the European Commission's Ten-Year Network Development Plan.

Optimising the renewable development portfolio

Since April 2007, SSE has invested over £4bn in renewable sources of generation.  As it moves forward to the next phase of its renewable energy development pipeline, it is focusing on projects that best allow the efficient allocation of resources and economies of scale. 

In order to support future investment in onshore wind assets SSE will, as outlined in March 2014, recycle capital by delivering its programme of selective disposals in operational and in-development onshore wind assets.

Developing renewable energy capacity offshore

In the six months to September 2015, SSE's efforts and resources have been focused on progressing the Beatrice project (now up to 588MW, SSE share 50% currently) planned for the outer Moray Firth.  The project is progressing towards a final investment decision in 2016, subject to a satisfactory resolution with Scottish and UK governments on a Special Area of Conservation (SAC) designation in the Moray Firth.  In addition to Beatrice, SSE has an interest in two further offshore wind farm developments: Seagreen (3,500MW - a 50:50 partnership with Fluor Limited); and Forewind (7,200MW - a four-way partnership with RWE Innogy, Statoil and Statkraft).  In the near-term, SSE will undertake some limited development work on these projects now that relevant planning consents have been secured.

In October 2015 SSE announced that it had agreed exit terms from the Galloper project (340MW, 50:50 partnership with RWE Innogy), following RWE Innogy's announcement that it reached financial close on the project.  This is consistent with SSE's position, outlined in March 2014, that it would not pursue its interest in Galloper further than the development stage.

Generation - Ireland

SSE Irish Generation Capacity and Output 

Sep 15

Sep 14

Onshore wind capacity (NI) - MW

88

88

Onshore wind capacity (ROI) - MW

456

456

All Ireland wind capacity  - MW

544

544

Thermal capacity (ROI) - MW

1,292

1,068

All Ireland generation capacity - MW

1,836

1,612

Now includes 464MW at Great Island (net increase 224MW)  operational from 17 April 2015.

 

 

Onshore wind output (NI) - GWh

94

71

Onshore wind output (ROI) - GWh

548

345

All Ireland wind output  - GWh

642

416

Thermal output  (ROI)  - GWh

1,015

11

All Ireland generation output - GWh

1,657

427

Producing electricity for the Single Electricity Market

SSE is the third largest generator by capacity in the all-island Single Electricity Market, owning and operating 1,836MW of generation capacity, of which 544MW is from renewable sources.  The company also trades across the interconnectors between GB and Ireland.

On 17 April 2015 SSE's new 464MW Great Island CCGT unit (grid connection capacity set at 431MW) commenced commercial operation and coincided with the retirement of the old 240MW heavy fuel oil unit.  Officially opened by An Taoiseach Enda Kenny TD in June 2015, it is now among the cleanest and most efficient natural gas power plants on Ireland's national grid and generates enough electricity to power the equivalent of half a million Irish homes.

Delivering and developing new capacity for electricity generation.

Onshore wind farm development pipeline (All Ireland)

Sep 15

Mar 15

In operation - MW

544

544

In construction- MW

152

120

With consent for development - MW

33

65

SSE is the largest single generator of wind power in Ireland and continues to invest in renewable capacity for electricity generation.  Between now and 2017 SSE will add over 150MW of new Irish wind power generation capacity to its existing fleet.

In the Republic of Ireland, construction of the two-phase 169MW (SSE share 120MW) Galway Wind Park project, being co-developed with JV partners Coillte, has started.  When complete in 2017, it will be the largest single wind farm on the island and qualifies for REFIT II.

In Northern Ireland, SSE is currently constructing the 32MW Tievenameenta Wind Farm in Co. Tyrone, and has planning consent for a 12MW extension to its Slieve Kirk Wind Park in Co. Londonderry.  Both projects are expected to by fully operational in 2017 and currently meet all the criteria to meet the RO grace period.

Engaging in the ISEM reform process

Reform of Ireland and Northern Ireland's SEM market to comply with the EU Electricity Target Model continues with regulators in each jurisdiction progressing the Integrated SEM (I-SEM) project, with the new market due for introduction by the end of 2017.  SSE remains fully involved in all stages of the ongoing consultation process.

Generation priorities in 2015/16 and beyond

·     Comply fully with all safety standards and environmental requirements;

·     Ensure power stations are available to respond to customer demand, market conditions and contractual obligations;

·     Successfully return Keadby to service in the GB electricity market;

·     Operate power stations efficiently to achieve the optimum conversion of primary fuel into electricity;

·     Manage effectively the transition of Ferrybridge power station towards closure and decommissioning; and 

·     Ensure new assets are commissioned and operate successfully.

Gas Production

GAS PRODUCTION

Sep 15

Sep 14

Gas production operating profit - £m

14.1

13.3

Gas production - m therms

191.3

200.8

Gas production capital investment - £m

9.6

6.2

Delivering New Opportunities in Gas Production

SSE has regularly set out its intention to seek new opportunities to increase its asset base to help meet gas demand requirements, with the UK and north west Europe the focus for this activity due to its relatively stable tax and fiscal regime and proximity to SSE's domestic energy supply markets. 

In line with this strategy SSE announced, in July 2015, that it had entered into an agreement with Total E&P UK Limited to acquire: a 20% interest in the four gas fields and surrounding exploration acreage approximately 125km north west of the Shetland Islands, collectively known as the Greater Laggan Area; and a 20% interest in the new Shetland Gas Plant.  The acquisition was completed in October 2015.  Total E&P UK Limited will continue as operator of, and owns a 60% stake in these assets.  The remaining 20% is owned by DONG Energy.

The value of the transaction included initial cash consideration of £666m for the assets (which reflects the value of the assets including associated UK capital allowances) and will be subject to further completion adjustments on delivery of first gas.  SSE's share of forecast capex in the period to 2018 is expected to be £240m to complete the entire development of the four primary fields (Laggan, Tormore, Edradour and Glenlivet) as well as the Shetland Gas Plant.  The acquisition completes SSE's portfolio of gas production assets for the foreseeable future.

In July 2015, SSE said it expected that the acquisition of these assets (including the Shetland Gas Plant) would enhance its adjusted earnings per share in 2016/17 by up to five pence.  The current outlook for commodity prices means SSE do not expect to get to the top end of the possible EPS contribution described then.  Subject to commodity prices and first gas, it is more likely to be around three to four pence. 

SSE estimates it now holds total reserves and resources of over six billion therms or over 100 million barrels of oil equivalent in all of the fields in which it has an ownership interest.  Including the most recent acquisition, SSE's upstream portfolio is predominantly gas weighted, although there are significant gas condensate liquids in the Greater Laggan area.

Shetland Gas Plant

The new Shetland Gas Plant, in which SSE will also have a 20% stake, is located close to Sullom Voe and will process and export produced gas and condensate from developments in the west of Shetland for onward delivery to the St Fergus Gas Terminal for gas and via the Sullom Voe Oil Terminal for liquids, making it one of the most important infrastructure developments in the UK.  It is expected to process and export gas and condensate for producers west of Shetland well into the 2030s.

Producing from North Sea assets

Total output in the six months to 30 September 2015 was 191.3 million therms, compared with 200.8 million therms in the previous year.  This slight fall in production in 2015 was due to a natural decline in the field output of existing fields.

The slight increase in operating profit, £14.1m compared to £13.3m, from gas production during the period was mainly as a result of lower operating costs, although this benefit is expected to unwind in the second half of this financial year.

The Greater Laggan Area development is expected to commence production later this year and peak production - at around five million therms of gas per day (SSE share one million therms per day) - is expected to be achieved during 2016 based on the maximum throughput capability of the Shetland Gas Plant.  Production is expected to be sustained at that level until around 2020, before declining over the following 10 years, assuming no further development, making this a long-term investment. 

In 2014/15 the output resulting from SSE's ownership of gas production assets was just under 400 million therms.  The most recent acquisition should allow SSE's average annual volumes of gas produced to be at a higher level than those it reported in 2014/15 until around 2020/21.

Gas Production priorities for 2015/16 and beyond

Gas Production priorities for the 2015/16 financial year include:

·     ensuring the safe operation of all the assets in which it has an ownership interest;

·     stringent cost control on operator budgets and enhanced monitoring and reporting of operator work programmes, especially in the current commodity price environment; and

·     the integration and continued successful development of the Greater Laggan Area in the lead up to first gas.

Gas Storage

GAS STORAGE

Sep 15

Sep 14

Gas storage operating profit - £m

3.7

1.6

Gas storage customer nominations met - %

100

100

Gas storage capital investment - £m

3.2

1.4

Delivering Gas Storage Services from Hornsea and Aldbrough

Both sites have continued to operate to meet the needs of their customers in the six months to September 2015:

·             Hornsea (Atwick) again met 100% of customer nominations with the site 97% available in the six months to 30 September 2015 except in instances of planned maintenance;

·     Aldbrough met 100% of customer nominations and was 82% available overall except in instances of planned maintenance.  Following return to commercial service of two caverns toward the end of the previous period, both caverns have been again removed from service as a result of continuing technical issues. 

The economic environment for gas storage facilities has continued to be challenging.  Operators have been faced with low operating returns due to unfavourable market conditions, combined with an increasing cost base as a result of ageing asset investment requirements and the decision by the Valuation Office Agency (VOA) to effectively double business rates for most gas storage facilities in the UK, imposed in 2014.

In light of these challenges, SSE made the difficult decision to mothball 33% of the withdrawal capacity at Hornsea (Atwick) from 1 May 2015.  The reduction in associated costs, together with SSE's ongoing optimisation of its service and product offerings and phasing of required expenditure, has contributed to a slight recovery in operating profit during the first half of the year although this is not anticipated to be reflected in full year results.

Alongside the requirement to continue to ensure the highest standards of asset management are maintained, SSE will continue to review its gas storage business on an ongoing basis.  Its aim is to continue to provide valuable flexibility and hedging services to its customers and hence the wider UK gas market, while being as well positioned as possible to take advantage of future market developments.

Gas Storage priorities in 2015/16 and beyond

Gas storage priorities for the financial year and beyond include:

·     ensuring on-going high safety standards for operation of the facilities at Hornsea and Aldbrough and the compliant and effective operation of the Gas Storage business; and

·     continuing to listen to existing and potential customers, working with them to shape flexible products which add value to their portfolios. 

Wholesale - Conclusion

Creating sustainable, long-term value from wholesale markets for SSE and its customers is at the heart of SSE's Wholesale businesses.  The responsible production, storage and delivery of energy and related services; a focus on meeting the needs of its customers; ongoing rigour in the development and delivery of new, and re-evaluation of existing, assets to optimise its portfolio, mean that SSE's activities across its Wholesale businesses continue to support the Group's core purpose and first financial objective of annual growth in the dividend payable to shareholders that at least keeps pace with RPI inflation.

NETWORKS

Networks Key Performance Indicators


Sep 15

Sep 14

 

 

 

ELECTRICITY TRANSMISSION

 

 

Operating profit - £m

142.4

98.9

Regulated Asset Value (RAV) - £m

2,009

1,515

Capital expenditure - £m

289.3

212.8

Connection offers provided in required period

41

41

 

 

 

ELECTRICITY DISTRIBUTION

 

 

Operating profit - £m

178.6

215.7

Regulated Asset Value (RAV) - £m

3,133

3,112

Capital expenditure - £m

113.2

127.6

Electricity Distributed TWh

18.3

18.3

Customer minutes lost (SHEPD) average per customer

24

29

Customer minutes lost (SEPD) average per customer

21

32

Customer interruptions (SHEPD) per 100 customers

31

31

Customer interruptions (SEPD) per 100 customers

24

32

 

 

 

SCOTIA GAS NETWORKS

 

 

Operating profit (SSE's share) - £m

130.6

143.8

Regulated Asset Value (SSE's share) - £m

2,477

2,450

Capital and replacement expenditure (SSE's share)- £m

79.9

84.0

Uncontrolled gas escapes attended within one hour %

98.6

98.3

SGN gas mains replaced - km

484

533

Owning, operating and investing in Networks

The performance of SSE's economically-regulated electricity networks businesses is reported within Networks, as is the performance of SGN in which SSE has a 50% stake.

Economically-regulated network companies with a growing Regulated Asset Value

SSE has an ownership interest in four economically-regulated energy network companies:

·     Scottish Hydro Electric Transmission (100%);

·     Scottish Hydro Electric Power Distribution (100%);

·     Southern Electric Power Distribution (100%);

·     SGN (50%).

SSE estimates that the total Regulated Asset Value (RAV) of its economically-regulated businesses is £7,619m, up £269m from £7,350m at 31 March 2015, comprising around:

·     £2,009m for electricity transmission;

·     £3,133m for electricity distribution; and

·     £2,477m for gas distribution (being 50% of SGN's total RAV).

SSE is the only energy company in the UK to be involved in electricity transmission, electricity distribution and gas distribution.  Through Price Controls, Ofgem sets the index-linked revenue the network companies can earn through charges levied on users to cover costs and earn a return on regulated assets.  Although the Price Control mechanism is complex and onerous, these economically-regulated, lower-risk  businesses provide predictability and stability for SSE and balance its activities in the competitive Wholesale and Retail markets.  They are core to SSE's strategy in the short, medium and long term and contribute significantly to its ability to deliver annual dividend increases.

Financial performance in Networks

During the six months to 30 September 2015 operating profit in Networks was £451.6m.  This comprised (comparisons with the same period last year): 

Networks Operating Profit

Sep 15

Sep 14

Sep 13

Transmission operating profit - £m

142.4

98.9

67.6

Distribution operating profit - £m

178.6

215.7

232.0

SGN operating profit (SSE's share) - £m

130.6

143.8

138.2

Total Networks Operating Profit - £m

451.6

458.4

437.8

Electricity Transmission

 

Sep 15

Sep 14

Operating profit - £m

142.4

98.9

Regulated Asset Value (RAV) - £m

2,009

1,515

Capital expenditure - £m

289.3

212.8

Connection offers provided in required period

41

41

Increasing operating profit for Scottish Hydro Electric Transmission

In SHE Transmission, operating profit increased by 44% to £142.4m.  This reflects the continuing delivery of a major programme of capital investment.  Since the current RIIO T1 Price Control started in April 2013, SHE Transmission's capital investment has totalled £1,105.7m.  In the first six months of 2015/16, SHE Transmission has invested £289.3m and expects to invest over £550m by the end of the financial year, including the first full year of construction of the Caithness to Moray transmission link.

Adapting to policy and regulatory change

SHE Transmission is responsible for maintaining and investing in the transmission network that covers around 70% of the land mass of Scotland, including remote and island communities.  In recent years the focus of that work has been delivering increased transmission capacity for new electricity generation, particularly renewables.

While delivering this increased capacity, SHE Transmission has demonstrated continuing expertise in transmission operation and maintenance, performing well when measured against other Transmission Owners in Great Britain and overseas in international studies.

There are two policy and regulation developments which may have an impact on the future development of SHE Transmission: the reduction in support for new renewable generation and the introduction of competition for some elements of onshore transmission development through the Integrated Transmission Planning and Regulation (ITPR) proposals.

The first of these developments is significant but it should be noted that SHE Transmission's core work programme for the next three years is for new generation which is either in construction, or consented and able to access financial support under the proposed grace period for the Renewables Obligation.  Therefore the pipeline of work over the next three years is not significantly impacted by recent UK Government announcements.

ITPR is both a potential risk and an opportunity for SHE Transmission.  The expertise built up in-house and within its supply chain while delivering the transmission project portfolio provides a strong basis on which to build an organisation with the capacity to succeed under a regime which includes a greater element of competition.  To that end SHE Transmission is currently implementing a change programme aimed at creating a sustainable business model after the introduction of the final ITPR reforms.

SHE Transmission will engage constructively with Ofgem, the Department of Energy and Climate Change and the pre-legislative Parliamentary scrutiny intended for the ITPR proposals with the aim of ensuring its long-established development pipeline and other mature projects can be delivered as far as possible under the existing regulatory framework; and to contribute to future arrangements that will deliver the transmission infrastructure required in a way that supports the UK government's policy objectives, delivers value for end consumers and achieves a fair and reasonable return to investors.

Under RIIO T1 there is provision for Ofgem to review performance against outputs at the mid-way point of the eight year price review.  SHE Transmission has demonstrated through the last two Annual Performance Reports that it is efficiently delivering on its RIIO-T1 outputs and as such does not foresee any need to review them.  Nor has there been a change to government policy that would necessitate a review.  SHE Transmission is committed to delivering against its outputs while ensuring value for money for the remainder of RIIO-T1.

Completing projects which add to the RAV

Over the next few months a number of large transmission projects are due for completion representing a total of more than £1bn of value, £289.3m of which has been invested in 2015/16 to date.  These projects are making an important contribution towards achieving the policy objectives of both the UK and Scottish governments by supporting the transition to lower carbon forms of electricity generation.

The completion of these projects marks a significant milestone in the development of SHE Transmission and also serves to highlight the expertise and efficiency now built up in house and within its supply chain.  Overall, SHE Transmission has in place projects that should take its RAV to around £3bn in March 2018.

Delivering the Beauly-Denny line

The largest completed project in SHE Transmission's development programme is its section of the Beauly-Denny transmission line between Beauly and Wharry Burn, near Dunblane.  This extensive and complex project, over some of the most challenging terrain in the UK, has been delivered under the Transmission Investment for Renewable Generation (TIRG) mechanism that preceded the RIIO-T1 price control.

Full energisation of the Beauly-Denny line is anticipated by the end of 2015, upon completion of Scottish Power Transmission's works.  With simultaneous reinforcement of the network between Beauly and Aberdeenshire, the investment has directly enabled the connection of 80 additional renewable generation developments which are expected to have a combined installed capacity of over 1460MW by the end of December 2015.

Remaining works on the Beauly, Amulree and Cairngorms National Park rationalisation schemes; to dismantle the original 132kV overhead line and to reinstate land used during construction are expected to be completed during 2016.

Based on expenditure to date of £636m and known issues, including the interface with Scottish Power Transmission's section of the line, the forecast cost is not expected to exceed £680m.  SHE Transmission is in discussion with Ofgem regarding recovery of efficiently incurred costs following completion of the construction works.

Foyers-Knocknagael

In addition, SHE Transmission has completed the £26m refurbishment of the existing 275kV overhead line between Knocknagael, south of Inverness, and Foyers on time and within the allowed budget.

Beauly-Blackhillock-Kintore

The Beauly-Blackhillock-Kintore project to replace the conductors on the 275kV overhead line between the Highlands and Aberdeenshire has been completed within the capital funding allowance of £94m (nominal prices).

Beauly-Mossford:

All substation and underground cable works are complete.  The replacement 132kV overhead line is on schedule to be completed before the end of 2015, within the capital funding allowance of £68m (nominal prices) for the works.

Kintyre-Hunterston:

In the first six months of 2015/16, SHE Transmission has completed installation of two 220kV submarine cables across Kilbrannan Sound and the Firth of Clyde, between Crossaig in Kintyre and a connection with SP Transmission's network at Hunterston in North Ayrshire.  Onshore works in Kintyre, including a new substation at Crossaig and 13km of new 132kV double circuit overhead line to Carradale, have also been completed.  Reinstatement works are ongoing and are expected to continue into 2016, with full energisation to follow the completion of SP Transmission works at Hunterston.  The project will be delivered within the Ofgem capital funding allowance of £210m (nominal prices).

Caithness-Moray: 

The next major flagship project for SHE Transmission is the transmission link between Caithness and Moray including a High Voltage Direct Current (HVDC) subsea cable beneath the Moray Firth.

The project, which received approval for £1,118m of funding (2013/14 prices) from Ofgem in December 2014, will enable the connection of up to 1,200MW of additional generation capacity in the north of Scotland and the islands.  It is scheduled to be operational by the end of 2018.

Installation of the HVDC land cable in Caithness began in October 2015 and is progressing well with the installation of the first section of cable near Loch Watten.  Land cable construction is due to be completed in Caithness by mid 2016.  Construction is also progressing at seven major substation and convertor station sites in Caithness, Sutherland, Ross-shire and Moray. 

Both land and subsea cable manufacture are continuing ahead of programme, with land cable production due for completion by the end of 2015.  Half of the land cable has been delivered to storage with the remainder due by the end of December.  Subsea cable manufacture is 30% complete and due to be completed by the end of 2016, six months ahead of schedule.  Subsea activities will commence in the first quarter of 2017.  First revenues are now being received.

Fulfilling responsibilities for potential island links

Separately from the approved development pipeline in place for the next three years, SHE Transmission also has two further large projects at advanced stages in the development process: Western Isles and Shetland.  SHE Transmission is working towards being in a position to submit Needs Cases to Ofgem for both projects as early as possible in 2016, if the circumstances allow.  At present the generation developers planning to build on Shetland and Lewis are awaiting EU State Aid clearance, announcements from government on whether Contracts for Difference will be made available for wind generation on the Scottish islands and confirmation of a strike price.  Until an announcement is made, developers cannot commit to final funding decisions on their developments and so Needs Cases cannot be submitted for these projects.

SHE Transmission will remain in close dialogue with Ofgem with the aim of submitting Needs Cases as soon as possible.

Working with stakeholders

Common to all of the RIIO price controls is the requirement to engage effectively with stakeholders and ensure they influence the policies and decisions of energy network companies.  SHE Transmission recognises that this requirement is key to ensuring it is accountable to the communities it serves and responsive to their needs.

Earlier this year, SHE Transmission was recognised by Ofgem for its success in this area when it received a stakeholder engagement assessment score and related financial incentive which was towards the upper end of the range of scores achieved by networks companies.  Notwithstanding that success, SHE Transmission is committed to bringing stakeholders closer still to its decision making processes.

A good example of this is the work done with the Scottish and UK Governments, Comhairle nan Eilean Siar and renewable energy developers on the delivery of a transmission link to the Western Isles through the Scottish Islands Renewables Delivery Forum.  As well as providing a valuable communication forum, this group has also ensured a range of key decisions have been taken with the fullest consideration of the views of all stakeholders.  SHE Transmission is committed to becoming an industry leader in effective and meaningful stakeholder engagement.

Supporting sustainable growth

SHE Transmission is a responsible developer and seeks to maximise the positive economic and social impact of its work as well as the lasting benefits it can deliver for the communities it works in.  In the course of the efficient delivery of its construction programme, it actively promotes opportunities for the local supply chain and supports a diverse range of training and employment opportunities in the local and regional economies.  To measure and enhance its impact, SHE Transmission commissioned work which showed that the Beauly-Denny project is delivering Gross Value Added for the UK of around £528m (2010 prices) and has supported an average of 2,000 jobs each year over seven years.

Electricity Transmission priorities for 2015/16

SHE Transmission's priorities for the rest of 2015/16 and beyond are to:

·     continue to meet the requirements of the 2013-21 Price Control and maintain high levels of system availability;

·     provide an excellent service to all customers who rely on its network;

·     deliver projects under construction, in a way that is consistent with all safety and environmental requirements while consulting with and updating interested parties;

·     work within the changing policy and regulatory framework and, where appropriate, achieve regulatory approval for new links in an efficient and timely manner; and,

·     ensure it has the people, skills, resources and supply chain relationships that will be necessary to support growth.

Electricity Distribution

Performance in Scottish and Southern Energy Power Distribution (SSEPD)

The performance of SSEPD's two electricity distribution companies, Scottish Hydro Electric Power Distribution (SHEPD) and Southern Electric Power Distribution (SEPD), during the six months to 30 September 2015 was as follows (comparisons with the same period in 2014):

ELECTRICITY DISTRIBUTION

Sep 15

Sep 14

Operating profit - £m

178.6

215.7

Regulated Asset Value (RAV) - £m

3,133

3,112

Capital expenditure - £m

113.2

127.6

Electricity distributed TWh

18.3

18.3

Customer minutes lost (SHEPD) average per customer

24

29

Customer minutes lost (SEPD) average per customer

21

32

Customer interruptions (SHEPD) per 100 customers

31

31

Customer interruptions (SEPD) per 100 customers

24

32

The decrease in operating profit is due to the reduction in base revenues under the first year of the RIIO ED1 price control which was set out by Ofgem's Draft Determination in July 2014 and used to set tariffs for 2015/16.

If, in any year, regulated network companies' revenue is greater (over recovery) or lower (under recovery) than is allowed under the relevant Price Control, the difference is carried forward and the subsequent prices the companies may charge are varied.  During 2014/15 there was an under recovery of approximately £38m.  Under the regulatory framework the £38m under recovery in 2014/15 will not be reflected in customer charges until 2016/17.

Investing in network resilience

Capital expenditure in electricity distribution networks was £113.2m in the first six months of the new price control.  The RAV of the electricity distribution networks is estimated at £3,133m and is expected to reach £3,185m by 31 March 2016.

Carefully planned and well targeted investment remains key to delivering lasting improvement to network performance for SSEPD's customers, especially under the new price control.

Moving on after the ED1 appeals to the CMA

On 29 September 2015, the Competition and Market Authority announced its final determination in respect of the concurrent British Gas Trading and Northern Powergrid appeals in relation to the RIIO ED1 price control settlements.  SSEPD welcomed the CMA's determination of the appeals and the validation of the RIIO ED1 price control process which it provides.  The cost to SSEPD of the CMA's final determination amounts to £16m (2012/13 prices) over eight years.

Adapting to the RIIO ED1 price control

The RIIO ED1 price control, which started in April and will run until 2023, is the most significant set of changes to the regulatory regime for electricity distribution since privatisation.  While previous price controls have sought to drive cost savings and ensure best value for end consumers, the RIIO framework also places new obligations on Distribution Network Operators (DNOs) in relation to innovation and customer service.

A plan to maximise achievement of financial incentives and avoid penalties contained within the price control for these new areas of focus is a prerequisite for a sustainable business model.  They are critical to achieving financial targets and ultimately delivering a fair return to investors.

This will require significant change to the approach, processes and standards of SEPD, SHEPD and all other DNOs.  A significant amount of work was done before the start of the new price control, accelerated by new leadership put in place last December, to meet these aims, but further changes are required to ensure progress year on year.  To this end, a significant business change programme is under way aimed at ensuring the strategy, structure and resources are in place to deliver against the demands of RIIO ED1 over the next eight years.

Putting customers first

Many of the changes from the old price control to the new are aimed at delivering a significant improvement in the level of customer service delivered by DNOs.  While the core function of DNOs remains similar - building a resilient network, keeping the lights on and connecting new customers - RIIO ED1 places a far greater emphasis on the approach taken and delivering the best possible experience for customers.  So, for example, while it was common industry practice to take customers off supply to allow for safe and efficient upgrading work, it is now expected that innovative working techniques should be used to complete such work without planned outages wherever possible.

Several incentives and penalties built into ED1 are designed to encourage improvements in customer service.  The most financially significant of these are the incentives and penalties for two measures of loss of supply: Customer Interruptions and Customer Minutes Lost (CIs and CMLs).  In the first six months of the new price control SEPD and SHEPD have undertaken targeted programmes of investment and automation which have delivered improvements in CIs and CMLs and work will continue aimed at further improvements and securing positive financial incentives.

Other incentives within ED1 focus on customers' experience of the service received from their network operator.  This is achieved with monthly surveys of customers who have had contact with their DNO, asking questions including how easy it was to contact their DNO and whether their issue was resolved.  These results, known as Broad Measures of Customer Satisfaction are collated in a way which enables comparison between companies.

Responding to the impact of extreme weather events

These Broad Measures scores are another area of focus for SSEPD's change programme and a number of changes, such as new customer call handling methods, have had a positive impact on the figures for the first six months of the new price control.  Work will continue for the rest of the financial year and beyond with the aim of further improving Broad Measures scores.

SSEPD recognises the particular importance to customers of its response when extreme weather events cause significant disruption to power supplies.  It continues to pursue improvements, both in performance and customer communications, building on changes which were delivered successfully in winter 2014/15.  In May 2015, it made the first awards from its £1.3m Resilient Communities Fund established to support local communities in their preparation for emergencies and provision for vulnerable customers.  The fund was part of an agreement with Ofgem to reflect compensation which was not claimed following weather-related disruption over the Christmas period in 2013/14.  During winter 2015/16 SSEPD is delivering its largest ever customer communications campaign to raise awareness of its response to storms and the services it provides for customers, including its Priority Service Register of customers who may need extra help during a power cut.

Keeping costs down

Success over the eight year price control requires continuing commitment to finding sustainable cost reduction and efficiency savings across SSEPD's operations.

An early area of focus has been to identify supply chain efficiencies and process improvements that will deliver improved value for SSEPD and for consumers across the construction and maintenance of underground cables, overhead lines and substations.  The output of this work to date has shown that a range of measures, including optimisation of the supply chain for materials and greatest possible use of in house skills and resources, can deliver targeted savings of around £20m per annum and work has now progressed to realising these significant cost savings by embedding them in business as usual activities.

Improving through innovation

Another requirement of the RIIO ED1 price control is the development and delivery of new technologies and other innovations that lead to improvements in network performance, efficiency and customer service.  SSEPD has a pipeline of new innovations, at various stages of development, and is targeting cost savings of £100m over the period of the price control from their deployment.

One of the first to be rolled out is live line tree harvesting.  Following trials completed in 2012 and 2013 SSEPD has adopted live line tree harvesting as an approved working method on its networks up to 132kV, using customised harvesting machinery which is believed to be the first of its kind in Great Britain.  Over the course of 2015/16 the business anticipates 150 days of live line tree harvesting, delivering estimated net savings of over £1.3m through improved network performance outputs (CIs and CMLs) and reduced reliance on mobile generation.

Engaging stakeholders in decision making

SSEPD recognises that effective stakeholder engagement, where stakeholders have real influence over the decisions made, is key to running accountable and responsive network companies.  It is also vital to maintaining reputation in utilities and a requirement for further regulated incentives.

Both SEPD and SHEPD have demonstrated good practice in stakeholder engagement, for example in relation to the impact of the development and implementation of Scotland's National Marine Plan on the subsea distribution cables which serve customers in 59 island communities.  SHEPD has led detailed consultation on a cost/benefit approach to the protection of subsea cables which, if approved by Marine Scotland and Ofgem, could achieve an effective balance between security of supply, cost to consumers and the interests of other marine stakeholders.

SSEPD is committed to continuing the development of a focused and efficient programme of stakeholder engagement that seeks to deliver better service and enhanced value for its customers.

Co-operating with an investigation

On 20 January 2015, SSE plc was notified that the Gas and Electricity Markets Authority had launched an investigation into whether SSE plc and the energy companies in SSE plc's group which provide electricity connections services had breached Chapter II of the Competition Act 1989 and/or Article 102 Treaty on the Functioning of the European Union in respect of the provision of noncontestable connections services in the Southern Electric Power Distribution area.  The investigation is ongoing.

Electricity Distribution priorities for 2015/16

During 2015/16 and beyond SSE's priorities in Electricity Distribution are to:

·     operate safely and meet all compliance requirements;

·     place customers' needs at the centre of plans for the networks, particularly by improving reliability so that the number and duration of power cuts is kept to a minimum;

·     ensure that the networks are managed as efficiently as possible, delivering required outputs while maintaining tight controls over day-to-day operational expenditure; and

·     continue to progress new technologies and other innovations that improve network reliability, efficiency and customer service.

Gas Distribution

SGN

Sep 15

Sep 14

Operating profit (SSE's share) - £m

130.6

143.8

Regulated Asset Value (SSE's share) - £m

2,477

2,450

Capital and replacement expenditure (SSE's share)- £m

79.9

84.0

Uncontrolled gas escapes attended within one hour %

98.6

98.3

SGN gas mains replaced - km

484

533

Performance in SGN

SSE receives 50% of the distributable earnings from SGN, in line with its equity holding and through a managed service agreement it provides a reducing level of support.  The decrease in SGN's operating profit reflects the timing of allowed revenue recovery.

In terms of operational performance, 98.6% of uncontrolled gas escapes were attended within one hour of notification exceeding the Ofgem standard of 97%.  With improving customer satisfaction performance, SGN's two networks are ranked by Ofgem second (Scotland) and fourth (southern England) of eight with complaints reduced by 11% year-on-year and a total of 61% since 2009.  During the period, Ofgem awarded SGN £2.5m in 2014/15 for its stakeholder engagement submission while also awarding £700,000 for its submission under Ofgem's Discretionary Rewards Submission (DRS).  Stakeholder feedback has given a clear mandate for SGN to continue investing in the long-term safety and reliability of its gas network.

A small but growing part of SGN's operating profit is derived from non-GB regulated activities.  Work is now commencing to build new high, intermediate and low pressure gas pipelines taking natural gas to eight towns in the west of Northern Ireland where large industrial and commercial customers and 40,000 domestic customers will have mains natural gas available for the first time.  Construction is planned to continue into 2017/18, with the first connections taking place towards the end of 2016 and first revenue earned in 2017.

Implementing the new Gas Distribution Price Control

SGN is focused on ensuring its outputs under the new RIIO framework are met, incentives are maximised and innovation is delivered effectively while running an efficient, safe and reliable network.  The company's investment programme is key to this and, within overall cost allowances of over £4.6bn (at 2012/13 prices), Ofgem has allowed around £2.8bn over the eight year price control which runs until 2021 to cover new investment and to manage the risks relating to SGN's existing assets.  This investment will allow SGN to:

·     deliver a safe and reliable network for its customers;

·     minimise the impact on the environment and better communicate its work to customers and communities; and

·     deliver new customer-driven initiatives to help reduce fuel poverty and increase awareness of the dangers of carbon monoxide.

Investing in gas networks and securing growth in its RAV

At 30 September 2015, SGN's total RAV is estimated at £4.95bn (SSE share £2.48bn).  For the six months to September 2015, SGN invested £159.8m (SSE share £79.9m) in capital expenditure and mains and service replacement projects, compared with £168.0m (SSE share £84.0m) in the same period to September 2014.  The majority of its mains replacement expenditure was incurred under the Iron Mains Risk Reduction Programme (IMRRP) which was started in 2002.  This requires iron gas mains within 30 metres of homes and premises to be replaced over a 30 year period.  In the six months to September 2015 SGN replaced 484km of its metallic gas mains with modern polyethylene plastic pipe.

Innovating to deliver sustainability and efficiency

SGN continues to extend the delivery of biogas through its network, with 10 working biogas plants connected to date.  Biogas is expected to play a key role in meeting decarbonisation targets, while also contributing to the security and affordability of the UK's energy supply.  SGN aims to supply 250,000 customers with green gas by 2021 and currently supplies around 67,000 homes.

In response to Ofgem's RIIO price control challenge SGN is seen as the leading gas network on innovation, winning 11 awards in the past 12 months.  It has over 150 projects in development, 64 of them registered with Ofgem.

Through Ofgem's Network Innovation Competition, SGN is also delivering two pioneering projects with potential to deliver substantial benefits to customers in the years ahead - one aimed at widening the range of gases that can be delivered through the network in order to enhance security of supply and deliver a significant annual saving for gas customers; and the other using a robotics tool to enable inspection and maintenance tasks to be carried out inside a live gas main, minimising the requirement for road excavations and avoiding disruption to customers. 

Gas Distribution priorities for 2015/16

During 2015/16 and beyond, SGN's priorities are to:

·     deliver excellent levels of safety and operational performance;

·     create an inclusive and engaged team, proud to work for SGN;

·     shape the future of a low-carbon environment, continuing to lead in the development of green gas;

·     minimise its effect on the environment and have a positive impact on local communities;

·     meet regulatory outputs and maximise incentives, while continuing to deliver value for all stakeholders; and

·     deliver a strong financial performance and an acceptable shareholder return.

Networks - Conclusion

The continuing success of SSE's economically-regulated Networks will be founded on improved customer service, efficiency and innovation in operations and investments, including upgrading the transmission network in the north of Scotland.  This efficiency, innovation and investment, in turn, underpin SSE's ability to target annual dividend increases of at least RPI inflation.

RETAIL

Retail Key Performance Indicators

 

Sep 15

Sep 14

 

 

 

Energy Supply

 

 

Operating Profit/ (Loss)  - £m

73.8

(16.9)

 

 

 

Electricity customer accounts (GB domestic) - m

4.27

4.56

Gas customer accounts (GB domestic) - m

2.88

3.12

Energy customers (GB business sites) - m

0.46

0.43

All-Island energy market customers (Ire) - m

0.80

0.78

Total energy customer accounts (GB, Ire) - m

8.41

8.89

 

 

 

Electricity supplied household average (GB) - kWh

1,577

1,623

Gas supplied household average (GB) - th

115

102

Household/small business aged debt (GB, Ire) - £m

128.3

134.5

Customer complaints to third parties (GB)2

792

670

2 Energy Ombudsman, Consumer Focus and Consumer Direct

 

 

 

 

 

Energy related services

 

 

Operating profit
- £m

11.2

11.3

Home Services customer accounts (GB) - m

0.38

0.35

 

 

 

Enterprise

 

 

Operating profit - £m

16.5

42.9

SSE Contracting Order Book - £m

148

98

Supplying energy and essential services across the Great Britain and Ireland markets

SSE is one of the largest energy suppliers in the competitive markets in Great Britain and in Ireland.  At 30 September 2015, it supplied electricity and gas to 8.41 million household and business accounts.  It also provides other energy-related products and services to 0.38 million household and business customers.

As an energy and essential services supplier, the principal purpose of the Retail business is to meet the needs of its customers in a reliable and sustainable way; in doing so, it is focused on attracting and retaining customers by offering industry-leading customer service, value for money and strong energy and non-energy propositions under a recognised and differentiated brand.

Financial performance in Retail

During the six months to 30 September 2015 operating profit in Retail was £101.5m.  This comprised (comparisons with the same period last year): 

Operating Profit

Sep 15

Sep 14

Sep 13

 

 

 

 

Energy Supply - £m

73.8

(16.9)

(115.4)

Energy related services - £m

11.2

11.3

16.2

Enterprise - £m

16.5

42.9

27.8

Total Retail Operating Profit

101.5

37.3

(71.4)

Financial performance in Retail in six month periods can vary considerably year on year and full-year results therefore represent a more reliable measure of performance because SSE manages its costs and its energy portfolio across the year as a whole.  The relative improvement in Retail performance to 30 September was largely driven by a better performance in the I&C sector, lower than average temperatures leading to an increase in gas consumption, and lower operating costs.  Profit in Energy Supply is naturally volatile and SSE continues to expect Domestic Energy Supply profit to fall during full-year 2015/16 as a whole following its reduction in household gas prices in Great Britain in April 2015.

SSE is an efficient energy supplier committed to maintaining relatively low operating costs in order to make a fair profit.  Analysis of the Consolidated Segmental Statements submitted to Ofgem by obligated energy suppliers and published by SSE in July 2015 shows that SSE's indirect costs per customer are around 20% lower than the average across the rest of the major suppliers and as a result it earned a profit margin of 6%, or £69 for a typical dual fuel customer, in 2014/15.  From this profit, SSE is required to pay tax and interest.  On the strength of running its business efficiently for customers, SSE aims to earn a medium-term (i.e. three to five years) average profit margin of around 5% across the whole of its Energy Supply business. 

It is now two years since SSE's standard household customers in Great Britain last experienced a price increase and SSE is 19 months into a 27 month price freeze commitment.  Guaranteeing such unprecedented price stability and peace of mind for customers would not have been possible without taking a responsible, longer-term approach to managing all its costs; however SSE has reduced prices during this period and continues to do all it can to keep prices competitive as well as stable.  

Operating profit for Energy Related Services remained similar at £11.2m, as SSE continued to focus on building scale and increasing customer numbers in its non-energy businesses, particularly Telecoms and Home Services. 

Operating profits for the new Enterprise division were £16.5m for the six months to September compared with £42.9m for the same period last year.  This reduction mainly reflects strategic business disposals in the previous year including streetlighting PFI companies and the gas connection business

Engaging constructively with the Competition and Markets Authority

Following publication by the Competition and Markets Authority of its Provisional Findings and Notice of Possible Remedies in July, SSE has continued to engage constructively with a view to ensuring that the outcome of the investigation leads to a market that not only works for customers but is also seen and trusted to do so.  It believes that, in order to achieve this, the CMA needs to have reached a well-grounded and properly evidenced analysis of profitability in energy supply.  While SSE welcomes many of the CMA's proposals in the area of consumer engagement, such as unwinding unnecessarily prescriptive regulation governing the content and layout of important customer communications and the development of customer-orientated prompts,  it has warned against suggested remedies that will reduce competition and that could have a negative impact on the customer experience, specifically:

·     The proposed transitional safeguard tariff.  It would regulate prices for customers believed to be vulnerable who have not engaged with the market for a given period.  While SSE agrees that safeguards should be in place to ensure vulnerable customers, particularly those with affordability issues, are supported, it believes that a safeguard tariff would distort the competitive market and risks making those customers less likely to engage in the future, as well as undermining other remedies that will facilitate an effective framework for competition.

·     The proposal to prioritise the roll-out of smart meters to prepayment customers.  SSE's approach to smart metering would be to do it once and do it right; ongoing delays to the delivery of critical central infrastructure mean that suppliers cannot yet install an enduring smart meter (SMETS2) solution for customers.  Prioritising any one customer group in the short term could therefore lead to a suboptimal experience and would increase costs overall as prepayment customers will be geographically dispersed, leading to a less efficient roll-out.

SSE is also emphasising the importance of the customer experience in its response to the recent publication by the CMA of its supplemental notice of possible remedies which includes proposals to prohibit the use of evergreen tariffs.  With the timeframe of the inquiry now extended, SSE hopes to continue its constructive dialogue with the CMA about what steps might tackle the root causes of any issues identified and lead to a market which delivers even better outcomes for customers.

Energy Supply and Energy Related Services

Supplying energy to customers across Great Britain and Ireland

In the six months to 30 September 2015, SSE's energy customer accounts in Great Britain and Ireland fell from 8.58 million to 8.41 million.  This comprised:

SSE Energy Supply customer account numbers

Sep 15

Mar 15

 

 

 

Electricity customer accounts(GB domestic) - m

4.27

4.37

Gas customer accounts (GB domestic) - m

2.88

2.96

Energy customers (GB business sites) - m

0.46

0.45

All-Island energy market customers (Ire) - m

0.80

0.80

Total SSE Energy Customers

8.41

8.58

This further decline in customer account numbers is the result of challenging and highly competitive market conditions in Great Britain which further illustrates the healthy levels of engagement and competition between suppliers.  Against this backdrop, SSE's is responding by offering both new and existing customers:

·     stability and peace of mind through its freeze on standard household energy prices;

·     highly competitive fixed-term deals for those customer who prefer to commit to a contract;

·     best-in-class customer service;

·     industry-leading propositions in home and essential services; and

·     value-adding benefits through its Reward programme.

At the same time, SSE is laying the foundations for future growth and investing in the transformation required to meet customers' needs effectively, and therefore create value, into the future as the competitive market evolves and the regulatory framework becomes clearer.

Investing in becoming a market-leading retailer of energy and essential services

SSE has driven further operational efficiencies through the six months to September 2015 and is targeting further cost savings during the remainder of the financial year.  This is enabling SSE to control its costs while making significant investments in building a Retail business which is sustainable over the long term.

With energy, telephone, broadband, gas boiler and electrical maintenance and installation offers already in place, SSE is uniquely positioned to offer not only energy but a comprehensive suite of essential services in the home, all under a strong brand, with excellent customer service and at a competitive price.  Having launched industry-leading propositions in broadband and home services, SSE is beginning to grow its customer base in these areas.  At the same time, the industry is going through a period of transformation as it makes the transition to a smart, digital future.  During this period, SSE is therefore investing in the key infrastructure that will enable it to deliver its strategy of becoming a market-leading, digital and diversified retailer of energy and essential services and build value in a fiercely competitive market.

To that end, in the six months to September 2015, SSE has:

·     launched new, state-of-the-art digital channels in order to create a simple, seamless and intuitive customer experience;

·     continued to build the capabilities and platforms required to capitalise on the smart opportunity; and

·     introduced a system to facilitate the national expansion of its home services business.

The success of these initiatives is closely linked to SSE's ability to differentiate itself as a brand that customers trust and want to engage with.  As well as launching a further national advertising campaign for the autumn, SSE has continued its high-profile sponsorship programme in areas which appeal to the passions of its customers, including:

·     making a long-term commitment to women's sport by becoming the lead sponsor of the Women's FA Cup;

·     co-sponsoring ITV's coverage of the 2015 Rugby World Cup; and

·     expanding its portfolio of entertainment venue sponsorships by securing the naming rights to the SSE Arena, Belfast.

Meeting customers' need for energy

SSE estimates its household customers in Great Britain used, on average in the six months to 30 September 2015:

 

Sep 15

Sep 14

Electricity supplied household average (GB) - kWh

1,577

1,623

Gas supplied household average (GB) - th

115

102

The average temperature for the six months to 30 September 2015 was 0.4 degrees Celsius below the 30 year (1981-2010) average and 1.3 degrees Celsius colder than the same period in 2013/14.  This led to a year-on-year increase in average household gas consumption of 12.7%.

While annual consumption varies considerably based on the weather, on a weather-corrected basis, SSE estimates that gas and electricity consumption by its household customers in the six months to September 2015 fell by 3.7% and 2.8% respectively compared with the same period in 2014/15.  This was largely due to the ongoing impact of structural, technological and behavioural energy efficiency improvements.

Delivering more for customers

In early October 2015, to emphasise the centrality of customers across all its businesses, SSE decided to redefine of the part of the SSESET of values relating to Service to: we put the current and future needs of customers at the heart of everything we do.  This replaced the previous definition: we give our customers service we are proud of and make commitments that we deliver.

This renewed commitment to service has been evident in the six months to 30 September 15 as SSE was recognised as leading the industry in three independent reports:

·     The Ombudsman: Energy Services reported that, for the three months ending 30 June 15, SSE received the fewest complaints of all ten suppliers covered, including the largest independent suppliers, with 3.98 complaints per 100,000 customers.

·     Citizens Advice reported that SSE was again the best performing major energy supplier for complaints in the Energy Supplier Performance report with a score of 47.7 per 100,000 customers for the period from April to June 15.  For the first time, this report included the 18 largest suppliers, meaning that SSE outperformed both large and independent suppliers alike; to put this into context, SSE's score was 20 times lower than the worst performing supplier and almost 10 times lower than the largest independent supplier.

·     Which? published its 2015 customer service survey of 100 major consumer brands, naming SSE as the best performing major energy supplier following a significant improvement in its score to 74% from 64% in 2014.  This meant SSE also outperformed a number of high-profile consumer brands in fast-moving consumer goods (FMCG) as well as other sectors, testament to the quality of its service and the growing strength of its brand.

SSE continues to perform better than the rest of the industry with fewer complaints, accounting for around 2% of all Ombudsman complaints in September 2015 despite having a market share of around seven times that amount.  That said, disappointingly the absolute number of complaints has increased to 792 from 690 in the same period last year and SSE is therefore working hard to reduce the overall number of customer complaints by the end of 2015/16.

Underpinning SSE's approach to dealing with customers is the principle of treating customers fairly.  This is embedded in SSE's decision-making, from the Board through to the Executive Committee and throughout the organisation.  SSE published its updated Treating Customers Fairly Statement in August 2015, announcing a number of service improvements and forward-looking commitments:

·     Having become in April 2015 the first supplier to advise customers of their ability to take their complaint to the Ombudsman for Energy Services after six weeks instead of the industry standard eight, SSE committed to reducing this time further to just four weeks, twice as fast as any other supplier, by the end of the financial year.  This underlines SSE's ongoing focus on resolving issues quickly and effectively for customers.

·     A commitment to roll out enhanced disability and equality training to ensure customer service advisers can provide the best possible support to elderly or disabled customers.

·     The introduction of new video call facilities to enable real-time, face-to-face conversations with customers who have impaired hearing, as well as new technology to tackle call waiting times by holding a customer's place in the queue for them.

·     An end to charges for the removal of prepayment meters, subject to customers successfully completing a credit check.

Working with customers to manage energy-related debt

At 30 September 2015, the total aged debt (i.e. debt that is overdue by more than six months) of SSE's domestic and small business electricity and gas customers in Great Britain and Ireland was £128.3m, compared with £134.5m at 30 September 2014.  A bad debt charge of £26.8m was recognised in the period (compared to £27.5m in the same period last year).

Debt levels have continued to reduce, reflecting SSE's efforts to engage with customers with arrears as early as possible, agreeing payment arrangements that have lower balances from the outset and helping to spread the cost of energy across the year.  SSE will continue to work sympathetically and constructively with customers who are struggling with debt, making better use of data and insight to target proactive customer contact more effectively.

Helping vulnerable customers

Energy is an essential service and customers cannot choose whether or not to buy it; SSE therefore takes its responsibility to customers very seriously and helps customers in need to manage their energy costs in a number of ways.

The Warm Home Discount (WHD) scheme enables pensioners and vulnerable customers to receive help with their fuel bills in the form of a yearly £140 rebate.  As part of the WHD Scheme, SSE's Priority Assistance Fund provides additional support to low income and vulnerable customers, including debt relief, free energy efficiency advice, and help with bespoke payment arrangements.  In the six months to 30 September 2015 around 250,000 customers received assistance from SSE worth over £35 million through these initiatives and partnership projects with National Energy Action (NEA), Citizens Advice and the Home Heat Helpline.

The WHD scheme is in its final year and as yet no successor has been announced.  SSE is engaging constructively with the UK Government as it considers its plans and would hope to see a short-term extension to the scheme to ensure support for vulnerable customers is maintained while longer-term changes to simplify the scheme and maximise its effectiveness are considered.

SSE also operates a free Careline priority service, dedicated to helping customers who are elderly, disabled or have special medical needs.  It takes a proactive approach to monitoring top-up behaviour of its prepayment customers to minimise the risk of 'self-disconnection'.  Between the start of December and the end of February (or longer if the weather is unseasonably cold), SSE has a no-disconnection policy covering all household customers.

Following its commitment to use any future unclaimed credit balances which cannot be returned to customers to help provide additional support for vulnerable customers, SSE has now spent more than £8m providing relief to vulnerable customers struggling with debt.

Working to reduce customers' energy consumption

Helping customers use energy more efficiently is the most sustainable way to keep bills low over the longer term.  With that in mind, SSE was pleased to meet, ahead of the 31 March 2015 deadline, all of its targets under the Energy Company Obligation (ECO) for the period 2013 to 2015 and subsequently to receive validation from Ofgem.  SSE is now focused on delivering its targets for the second part of the current scheme (ECO2) before 31 March 2017.

Through ECO, as of 30 September 2015, SSE has:

·     promoted the installation of almost 255,000 energy efficiency measures, including loft, cavity and solid wall insulation and boiler replacements;

·     helped improve the energy efficiency of over 220,000 homes across Great Britain;

·     delivered energy efficiency improvements equivalent to 4.75 MtCO2 saved; and

·     provided just over £860m of notional lifetime bill savings for vulnerable customers.

With the existing ECO scheme coming to an end in 2017 and no successor scheme currently in place, there is a valuable window of opportunity to review and improve upon previous initiatives to drive take-up of energy efficiency measures.  SSE has been engaging positively with the new UK government about ways in which ECO could be improved in both the short and longer term, based on its belief that any new scheme should:

·     be funded progressively through taxation, taking into account an individual's ability to pay;

·     be as cost-effective as possible;

·     ensure that the benefits are targeted primarily at the most vulnerable households, making better use of data sharing for maximum efficiency;

·     minimise administrative complexity, for example by introducing deemed scoring;

·     minimise the risk to customers of fraud; and

·     be designed to ensure a smooth transition between schemes and minimise uncertainty.

Rolling out smart meters to customers across Great Britain

The rollout of smart meters to every home in Great Britain represents a unique opportunity to transform the relationship between customers and the energy they use.  SSE is absolutely committed to the successful delivery of the smart programme with the primary objective of maximising the net benefits to customers.

In preparation for the introduction of the critical Data Communications Company (DCC) infrastructure that will enable mass rollout to begin, currently expected by August 2016 according to the DCC replan, SSE has been focused primarily on building and testing systems and gradually ramping up delivery, in line with its strategy of 'doing it once and doing it right' to ensure an acceptable cost and experience for customers.

In September 2015, SSE celebrated its landmark 100,000th smart meter installation and looks forward to the further ramp up of its workforce and installation volumes. 

In order to meet the common goal of maximising net benefits to customers, it is critical that the programme is delivered in a way which is both cost-effective and customer-centric.  In other words, if the cost of the programme is forced up, or consumers become disengaged with the technology or concept as the result of a bad experience, the business case will be eroded and the opportunity will have been missed.

Ongoing delays to central infrastructure and numerous outstanding constraints on suppliers' ability to roll out an enduring (SMETS2) solution to all customers do present a material threat to the success of smart and SSE is therefore working closely with government and other stakeholders to ensure this is understood and, if necessary, acted upon to protect the interests of customers.  Certainly any further delays to the DCC timetable would necessitate an urgent review of the timetable.

In order to ensure that the crucial smart opportunity is not missed, while remaining supportive of the role of DCC, SSE is calling on government to consider whether a reversion to the EU requirement to deliver smart meters to 80% of homes, with a backstop of 100% by 2025, would lead to greater net benefits for customers by preventing cost escalation and enhancing the customer experience.

Doing more for business energy customers

Business Supply performed strongly in the six months to 30 September, driven by growth in the Industrial and Commercial (I&C) market and ongoing efforts to control operating costs.  SSE has continued to build its offering in the commercial sector with the launch of its new 'Business Energy' brand and its bespoke approach to engagement with customers and their representatives.  This has seen SSE continue to increase its customer numbers for both gas and electricity during the first six months, building on growth the previous year.

Following its tradition of providing additional support for small business customers, SSE has created an energy efficiency guide, which will be incorporated into a package which includes the installation of Automatic Meter Reading (AMR) and access to SSE's new online energy analytics tool, Clarity.

SSE is also engaging actively with business customers via their appointed representatives.  In addition to developing a new Business Energy website and portal, which allows Third Party Intermediaries (TPIs) to submit orders and track order status, SSE has continued its series of face-to-face events ranging from breakfast seminars to group forums.

Key to the continued success of Business Supply is a willingness to listen to customers, review processes and act on what customers are saying.  At the same time, SSE remains focused on giving business customers direct access to people who will support them throughout the lifetime of their contract and build, where appropriate, real understanding and partnership.

Operating a national metering business

SSE's metering business undertakes meter reading operations and meter operator work in all parts of the UK.  The number of SSE electricity and gas supply customers who receive bills based on actual meter readings stands at 95.5%, compared to 96.5% in the same period last year.  SSE Metering has also installed over 26,500 AMR (automatic meter reading) meters which are read remotely and in excess of 100,000 smart meters.  In the six months to 30 September 2015, SSE collected 3.3 million electricity readings and 2.1 million gas readings.

Supplying energy and energy-related services to customers in Ireland

SSE's retail brand SSE Airtricity is the second largest energy provider in Ireland and the only energy supply brand to operate in all of the competitive gas and electricity markets across the island.  At 30 September 2015, SSE Airtricity supplied electricity and gas to 0.8 million  household and business accounts in the Republic of Ireland (ROI) and Northern Ireland (NI), representing a 21% market share (by household and business customer accounts) of the total combined gas and electricity market on the island.  The company's Energy Services business continues to expand in both markets.  As the largest supplier of wind power in the all-island Single Energy Market (SEM), 54% of the electricity SSE Airtricity supplied to customers in 2014 came from renewable sources.

Market conditions in the Republic of Ireland and Northern Ireland remain highly competitive, in particular in Northern Ireland where the regulated electricity market has seen the emergence of new domestic entrants in recent months.  In light of competitive pressures, SSE Airtricity continues to invest in its brand and in June 2015 announced a ten-year naming rights deal to unveil The SSE Arena, Belfast, adding to SSE's existing portfolio.

SSE Airtricity is the regulated supplier of natural gas to 125,000 household and small business accounts in the Greater Belfast area, representing approximately 75% of gas customers in that market.  Following a regular interim review of its pricing by the Northern Ireland Utility Regulator, SSE Airtricity announced a 10% reduction in its regulated natural gas prices for its household and small business customers with effect from 1 October 2015.  The next regular tariff review under the Price Control will be conducted by the company and the Utility Regulator in Spring 2016.

Energy Supply and Energy Related Services priorities in 2015/16 and beyond

As set out in May 2015, SSE's key priorities in Energy Supply and Energy Related Services for 2015/16 are to:

·     acquire and retain customers through competitively priced, compelling propositions, industry-leading customer service, and enhanced Customer Relationship Management (CRM);

·     build the new brand and maximise the opportunity this presents to engage with customers, the public and all of SSE's stakeholders;

·     engage constructively with the CMA with a view to delivering the right outcomes for energy customers and investors;

·     digitalise its business by creating a simple, intuitive online customer experience and developing best-in-class applications, products and services; and

·     take costs out of supplying energy, both internally by driving operational efficiencies and externally, working with the new government to ensure that energy policies are as cost-effective as possible and, ultimately, funded more progressively.

Enterprise

Introduction

SSE Enterprise provides energy and energy management, multi-utility networks, contracting and lighting solutions and telecoms for organisations throughout the UK.  It has a significant self-delivery capability enabling it to provide engineering excellence in sensitive environments including hospitals, data centres, refineries and core utilities.  Its solutions are designed, engineered and delivered to the particular needs of the customer.

Financial performance in SSE Enterprise

Operating profits for the new Enterprise division were £16.5m for the six months to September compared with £42.9m for the same period last year.  This reduction mainly reflects strategic business disposals in the previous year including streetlighting PFI contracts and a gas connection business. 

Building a new division focused on business customers

In the last 18 months, SSE Enterprise has brought together the services SSE offers to compete in competitive markets for industrial, commercial and public sector customers.  SSE Enterprise seeks to provide 'essential services for business, delivered with energy'.  As a nationwide business, SSE Enterprise employs 3,500 skilled engineers and technicians, serving more than 250,000 customers, across more than 50 locations.  Creating a 'shared value' philosophy with customers is a driving force within SSE Enterprise.  It focuses on creating a long-term relationship through key account managers for its larger and more complex customers.

Making progress in providing services for organisations

Since the start of the current financial year, SSE Enterprise has continued to make progress in the provision of services to organisations across the UK.  These include:

·     SSE Enterprise Energy Solutions provided an Energy ICT solution that delivered a 9% saving for Glasgow City Council across its school estate;

·     SSE Enterprise Contracting was named the country's top contractor in the Electrical Times annual survey in October 2015;

·     SSE Enterprise Telecoms has been selected by offshore communications provider Tampnet to upgrade its existing infrastructure with a new high quality network connecting London and Aberdeen;

·     SSE Enterprise Lighting won the Electrical Contractors Association Award for the Best Health and Safety Initiative, which has been adopted by some of its customers

The breadth and depth of SSE Enterprise's activities, supported by a focus on effective key account management, means the business is in a good position to secure growth in the years ahead.

Setting the right priorities for SSE Enterprise

The focus for Enterprise for the rest of 2015/16 and beyond is on realising the benefits from bringing together activities and developing effective customer relationship management and thereby laying the foundations for sustainable business growth in the period to 2020 and beyond.

Retail - Conclusion

The energy market in Great Britain and Ireland is not only fiercely competitive but is also subject to intense political and regulatory scrutiny during what is a period of great transformation for the industry.  SSE has chosen to embrace these challenges, taking a progressive and constructive approach to engaging with customers and stakeholders alike and investing in the technology and systems that will enable it to create value in the future market.  By continuing to put customers at the heart of its business, SSE is well positioned to deliver its strategy of becoming a market-leading, digital and diversified retailer of energy and essential services.

 


SUMMARY FINANCIAL STATEMENTS 2015/16

Consolidated Income Statement

for the period 1 April 2015 to 30 September 2015

 

 

 

2015

 

2014

 

 

 

 

 

 

 

 

 

 

 

Before exceptional items and certain  re-measure-ments

Exceptional items and certain re-measure-ments (note 6)

Total

 

Before exceptional items and certain  re-measure-ments

Exceptional items and certain re-measure-ments (note 6)

Total

 

 

 

 

 

 

 

 

 

 

Note

£m

£m

£m

 

£m

£m

£m

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

5

13,831.5

-

13,831.5

 

12,413.9

-

12,413.9

Cost of sales

 

(12,608.2)

(317.7)

(12,925.9)

 

(11,452.1)

(10.5)

(11,462.6)

Gross profit / (loss)

 

1,223.3

(317.7)

905.6

 

961.8

(10.5)

951.3

Operating costs

 

(682.3)

-

(682.3)

 

(636.0)

-

(636.0)

Other operating income

 

0.8

39.3

40.1

 

33.2

-

33.2

Operating profit / (loss) before joint ventures and associates

 

541.8

(278.4)

263.4

 

359.0

(10.5)

348.5

Joint ventures and associates:

 

 

 

 

 

 

 

 

Share of operating profit

 

160.1

-

160.1

 

170.8

-

170.8

Share of interest

 

(63.4)

-

(63.4)

 

(69.3)

-

(69.3)

Share of movement on derivatives

 

-

3.0

3.0

 

-

2.9

2.9

Share of tax

 

(19.4)

(0.6)

(20.0)

 

(21.4)

(0.7)

(22.1)

Share of profit on joint ventures  and associates

 

77.3

2.4

79.7

 

80.1

2.2

82.3

Operating profit / (loss)

5

619.1

(276.0)

343.1

 

439.1

(8.3)

430.8

Finance income

7

47.6

-

47.6

 

49.7

-

49.7

Finance costs

7

(148.6)

(11.3)

(159.9)

 

(154.2)

(9.7)

(163.9)

Profit / (loss) before taxation

 

518.1

(287.3)

230.8

 

334.6

(18.0)

316.6

Taxation

8

(89.1)

63.5

(25.6)

 

(57.8)

4.2

(53.6)

Profit / (loss) for the period

 

429.0

(223.8)

205.2

 

276.8

(13.8)

263.0

 

 

 

 

 

 

 

 

 

Attributable to:

 

 

 

 

 

 

 

 

Ordinary shareholders of the parent

 

416.5

(223.8)

192.7

 

265.1

(13.8)

251.3

Other equity holders

 

12.5

-

12.5

 

11.7

-

11.7

 

 

 

 

 

 

 

 

 

Basic earnings per share (pence)

10

 

 

19.4

 

 

 

25.8

Diluted earnings per share (pence)

10

 

 

19.3

 

 

 

25.5

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of this interim statement.



 

Consolidated Income Statement

for the year ended 31 March 2015

 

 

 

Before exceptional items and certain
re-measure-ments

Exceptional items and certain re-measure-ments
(note 6)

Total

 

 

 

 

 

 

 

Note

 

£m

£m

£m

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

5

 

31,654.4

-

31,654.4

Cost of sales

 

 

(28,801.3)

(432.8)

(29,234.1)

Gross profit / (loss)

 

 

2,853.1

(432.8)

2,420.3

Operating costs

 

 

(1,361.5)

(358.5)

(1,720.0)

Other operating income

 

 

47.2

74.8

122.0

Operating profit / (loss) before joint ventures and associates

 

 

1,538.8

(716.5)

822.3

Joint ventures and associates:

 

 

 

 

 

Share of operating profit

 

 

342.6

(25.9)

316.7

Share of interest

 

 

(124.2)

-

(124.2)

Share of movement on derivatives

 

 

-

6.7

6.7

Share of tax

 

 

(34.2)

(1.4)

(35.6)

Share of profit on joint ventures and associates

 

 

184.2

(20.6)

163.6

Operating profit / (loss)

5

 

1,723.0

(737.1)

985.9

Finance income

7

 

95.9

-

95.9

Finance costs

7

 

(302.4)

(44.2)

(346.6)

Profit / (loss) before taxation

 

 

1,516.5

(781.3)

735.2

Taxation

8

 

(271.2)

200.4

(70.8)

Profit / (loss) for the year

 

 

1,245.3

(580.9)

664.4

 

 

 

 

 

 

Attributable to:

 

 

 

 

 

Ordinary shareholders of the parent

 

 

1,124.0

(580.9)

543.1

Other equity holders

 

 

121.3

-

121.3

 

 

 

 

 

 

Basic earnings per share (pence)

10

 

 

 

55.3

Diluted earnings per share (pence)

10

 

 

 

55.2

 

 

 

 

 

 

 



 

Consolidated Statement of Other Comprehensive Income

for the period 1 April 2015 to 30 September 2015

Year ended 31 March 2015

 

Six months ended 30 September 2015

Six months ended 30 September 2014

£m

 

£m

£m

 

 

 

 

664.4

Profit  for the period

205.2

263.0

 

Other comprehensive income:

 

 

 

Items that will not be reclassified to profit or loss:

 

 

(79.3)

Actuarial gains/(losses) on retirement benefit schemes

260.3

(32.6)

16.3

Taxation on actuarial (losses)/gains on defined benefit pension schemes

(52.1)

6.8

(63.0)

 

208.2

(25.8)

 

 

 

 

(2.1)

Share of joint ventures actuarial losses on retirement benefit schemes

(25.6)

(0.4)

0.2

Share of joint ventures taxation of actuarial gains on retirement benefit schemes

5.1

0.1

(1.9)

 

(20.5)

(0.3)

 

Items that will be reclassified subsequently to profit or loss:

 

 

(41.9)

Gains/(losses) on effective portion of cash flow hedges

20.6

(16.5)

(4.5)

Transferred to assets and liabilities on cash flow hedges

(1.5)

(2.4)

8.8

Taxation on cashflow hedges

(4.1)

3.5

(37.6)

 

15.0

(15.4)

 

 

 

 

(9.4)

Share of joint ventures and associates gains/(loss) on effective portion of cash flow hedges

7.5

(1.5)

1.9

Share of joint ventures and associates taxation on cashflow hedges

(1.5)

0.3

(7.5)

 

6.0

(1.2)

 

 

 

 

(3.2)

Losses on revaluation of available for sale investments, net of taxation

-

-

 

 

 

 

(119.7)

Exchange gain/(loss) on translation of foreign operations

21.4

(66.1)

61.7

(Loss)/gain on net investment hedge

(14.8)

34.0

(13.0)

Taxation on net investment hedge

3.0

(5.7)

(71.0)

 

9.6

(37.8)

 

 

 

 

(184.2)

Other comprehensive income/(loss), net of taxation

218.3

(80.5)

 

 

 

 

480.2

Total comprehensive income for the period

423.5

182.5

 

 

 

 

 

Attributable to:

 

 

358.9

Ordinary shareholders of the parent

411.0

170.8

121.3

Other equity holders

12.5

11.7

480.2

 

423.5

182.5



 

Consolidated Balance Sheet

as at 30 September 2015

At

 31 March

2015

 

 

At 30  September 2015

At

30 September 2014

 

 

 

 

 

£m

 

Note

£m

£m

 

Assets

 

 

 

11,303.9

Property, plant and equipment

 

11,752.3

11,335.1

-

Biological assets

 

1.8

-

 

Intangible assets:

 

 

 

598.0

Goodwill

 

600.4

643.8

170.4

Other intangible assets

 

185.3

333.3

875.2

Equity investments in joint ventures and associates

 

963.5

910.6

559.4

Loans to joint ventures and associates

 

544.3

529.4

26.4

Other investments

 

26.4

29.7

270.2

Deferred tax assets

 

250.1

256.4

566.8

Derivative financial assets

16

582.0

302.3

14,370.3

Non-current assets

 

14,906.1

14,340.6

 

 

 

 

 

433.5

Other intangible assets

 

198.8

224.2

342.3

Inventories

 

339.1

483.6

4,527.0

Trade and other receivables

 

3,332.3

2,944.3

1,512.3

Cash and cash equivalents

 

1,678.4

244.4

1,999.9

Derivative financial assets

16

2,051.8

1,189.9

110.3

Current assets held for sale

12

97.7

353.7

8,925.3

Current assets

 

7,698.1

5,440.1

23,295.6

Total assets

 

22,604.2

19,780.7

 

 

 

 

 

 

Liabilities

 

 

 

732.8

Loans and other borrowings

13

734.3

852.8

5,277.1

Trade and other payables

 

3,960.8

3,936.0

308.4

Current tax liabilities

 

307.9

301.0

99.5

Provisions

 

111.6

61.9

2,297.3

Derivative financial liabilities

16

2,496.3

1,405.9

11.1

Liabilities held for sale

12

0.3

33.6

8,726.2

Current liabilities

 

7,611.2

6,591.2

 

 

 

 

 

5,367.9

Loans and other borrowings

13

5,931.6

5,487.4

716.0

Deferred tax liabilities

 

694.9

801.6

424.6

Trade and other payables

 

476.7

418.0

382.4

Provisions

 

393.9

319.9

664.6

Retirement benefit obligations

17

388.3

644.4

933.4

Derivative financial liabilities

16

1,067.7

641.2

8,488.9

Non-current liabilities

 

8,953.1

8,312.5

17,215.1

Total liabilities

 

16,564.3

14,903.7

6,080.5

Net assets

 

6,039.9

4,877.0

 

 

 

 

 

 

Equity:

 

 

 

496.5

Share capital

15

501.9

493.4

862.7

Share premium

 

858.4

856.6

22.0

Capital redemption reserve

 

22.0

22.0

(72.1)

Hedge reserve

 

(51.1)

(43.6)

(69.5)

Translation reserve

 

(59.9)

(36.3)

1,469.8

Retained earnings

 

1,397.5

1,398.1

2,709.4

Equity attributable to ordinary shareholders of the parent

 

2,668.8

2,690.2

3,371.1

Hybrid capital

14

3,371.1

2,186.8

6,080.5

Total equity attributable to equity holders of the parent

 

6,039.9

4,877.0



 

Consolidated Statement of Changes in Equity

for the period 1 April 2015 to 30 September 2015

Statement of changes in equity

Share capital

Share premium account

Capital redemption

reserve

Hedge reserve

Translation

reserve

Retained earnings

Total attributable to ordinary shareholders

Hybrid capital

Total

 

£m

£m

£m

£m

£m

£m

£m

£m

£m

At 1 April 2015

496.5

862.7

22.0

(72.1)

(69.5)

1,469.8

2,709.4

3,371.1

6,080.5

 

 

 

 

 

 

 

 

 

 

Profit for the period

-

-

-

-

-

192.7

192.7

12.5

205.2

Other comprehensive income

-

-

-

15.0

9.6

208.2

232.8

-

232.8

Share of joint ventures and associates other comprehensive income

-

-

-

6.0

-

(20.5)

(14.5)

-

(14.5)

Total comprehensive income for the period

-

-

-

21.0

9.6

380.4

411.0

12.5

423.5

 

 

 

 

 

 

 

 

 

 

Dividends to shareholders

-

-

-

-

-

(613.5)

(613.5)

-

(613.5)

Scrip dividend related share issue

5.3

(5.3)

-

-

-

159.5

159.5

-

159.5

Distributions to hybrid capital holders

-

-

-

-

-

-

-

(12.5)

(12.5)

Issue of shares

0.1

1.0

-

-

-

-

1.1

-

1.1

Credit in respect of employee share awards

-

-

-

-

-

8.7

8.7

-

8.7

Investment in own shares

-

-

-

-

-

(7.4)

(7.4)

-

(7.4)

At 30 September 2015

501.9

858.4

22.0

(51.1)

(59.9)

1,397.5

2,668.8

3,371.1

6,039.9

 

Statement of changes in equity

Share capital

Share premium account

Capital redemption reserve

Hedge reserve

Translation

reserve

Retained earnings

Total attributable to ordinary shareholders

Hybrid capital

Total

 

£m

£m

£m

£m

£m

£m

£m

£m

£m

At 1 April 2014

487.4

861.5

22.0

(27.0)

1.5

1,587.3

2,932.7

2,186.8

5,119.5

 

 

 

 

 

 

 

 

 

 

Profit for the period

-

-

-

-

-

251.3

251.3

11.7

263.0

Other comprehensive income

-

-

-

(15.4)

(37.8)

(25.8)

(79.0)

-

(79.0)

Share of joint ventures and associates other comprehensive income

-

-

-

(1.2)

-

(0.3)

(1.5)

-

(1.5)

Total comprehensive income for the period

-

-

-

(16.6)

(37.8)

225.2

170.8

11.7

182.5

 

 

 

 

 

 

 

 

 

 

Dividends to shareholders

-

-

-

-

-

(591.6)

(591.6)

-

(591.6)

Scrip dividend related share issue

5.9

(5.9)

-

-

-

174.0

174.0

-

174.0

Distributions to hybrid capital holders

-

-

-

-

-

-

-

(11.7)

(11.7)

Issue of shares

0.1

1.0

-

-

-

-

1.1

-

1.1

Credit in respect of employee share awards

-

-

-

-

-

7.5

7.5

-

7.5

Investment in own shares

-

-

-

-

-

(4.3)

(4.3)

-

(4.3)

At 30 September 2014

493.4

856.6

22.0

(43.6)

(36.3)

1,398.1

2,690.2

2,186.8

4,877.0

 



 

Consolidated Statement of Changes in Equity

for the year ended 31 March 2015

Statement of changes in equity

Share capital

Share premium account

Capital redemption

reserve

Hedge reserve

Translation reserve

Retained earnings

Total attributable to ordinary shareholders

Hybrid capital

Total

 

£m

£m

£m

£m

£m

£m

£m

£m

£m

At 1 April 2014

487.4

861.5

22.0

(27.0)

1.5

1,587.3

2,932.7

2,186.8

5,119.5

 

 

 

 

 

 

 

 

 

 

Profit for the year

-

-

-

-

-

543.1

543.1

121.3

664.4

Other comprehensive income

-

-

-

(37.6)

(71.0)

(66.2)

(174.8)

-

(174.8)

Share of joint ventures and associates other comprehensive income

-

-

-

(7.5)

-

(1.9)

(9.4)

-

(9.4)

Total comprehensive income for the year

-

-

-

(45.1)

(71.0)

475.0

358.9

121.3

480.2

 

 

 

 

 

 

 

 

 

 

Dividends to shareholders

-

-

-

-

-

(854.1)

(854.1)

-

(854.1)

Scrip dividend related share issue

8.6

(8.6)

-

-

-

255.6

255.6

-

255.6

Distributions to hybrid capital holders

-

-

-

-

-

-

-

(121.3)

(121.3)

Issue of hybrid capital

-

-

-

-

-

-

-

1,184.3

1,184.3

Issue of shares

0.5

9.8

-

-

-

-

10.3

-

10.3

Credit in respect of employee share awards

-

-

-

-

-

15.0

15.0

-

15.0

Investment in own shares

-

-

-

-

-

        (9.0)

(9.0)

-

(9.0)

At 31 March 2015

496.5

862.7

22.0

(72.1)

(69.5)

1,469.8

2,709.4

3,371.1

6,080.5



 

Consolidated Cash Flow Statement

for the period 1 April 2015 to 30 September 2015

Year

ended 31 March 2015

 

Note

Six months ended 30 September 2015

Six months ended 30 September 2014

£m

 

 

£m

£m

2,080.7

Cash generated from operations before working capital movements

11

800.4

599.9

(8.5)

Decrease/(increase) in inventories

 

3.2

(90.8)

(243.1)

Decrease/(increase) in receivables

 

1,290.7

1,281.0

394.0

(Decrease)/increase in payables

 

(964.2)

(652.7)

(66.2)

Decrease in provisions

 

(31.7)

(67.2)

2,156.9

Cash generated from operations

 

1,098.4

1,070.2

 

 

 

 

 

110.1

Dividends received from joint ventures and associates

 

17.5

2.2

95.9

Interest received

 

47.6

49.7

(227.8)

Interest paid

 

(125.4)

(129.5)

(164.8)

Income taxes paid

 

(84.9)

(57.7)

(12.0)

Payment  for consortium relief

 

(0.2)

(3.7)

1,958.3

Net cash from operating activities

 

953.0

931.2

 

 

 

 

 

 

Cash flows from investing activities

 

 

 

(1,345.3)

Purchase of property, plant and equipment

 

(682.8)

(645.9)

(241.8)

Purchase of other intangible  assets

 

(146.3)

(134.6)

2.9

Deferred income received

 

-

3.6

25.3

Proceeds from sale of property, plant and equipment

 

0.7

14.1

167.2

Proceeds from sale of held for sale assets

 

9.4

52.6

5.3

Proceeds from sale of business and subsidiaries

 

-

-

36.0

Proceeds from sale of other investments

 

-

12.6

(33.9)

Loans to joint ventures and associates

 

(38.5)

(17.1)

(66.0)

Purchase of businesses and subsidiaries

 

-

(66.0)

15.0

Loans and equity repaid by joint ventures

 

10.9

9.6

(20.0)

Investment in joint ventures and associates

 

(2.9)

(15.5)

(0.1)

Increase in other investments

 

-

(0.3)

(1,455.4)

Net cash from investing activities

 

(849.5)

(786.9)

 

 

 

 

 

 

Cash flows from financing activities

 

 

 

10.3

Proceeds from issue of share capital

 

1.1

1.1

(598.5)

Dividends paid to shareholders of the parent

 

(454.0)

(417.6)

1,184.3

Issue of hybrid capital

 

-

-

        (121.3)

Hybrid capital dividend payments

 

(12.5)

(11.7)

(9.0)

Employee share awards share purchase

 

(7.4)

(4.3)

151.1

New borrowings

 

541.1

104.1

(66.3)

Repayment of borrowings

 

(5.5)

(30.2)

550.6

Net cash from financing activities

 

62.8

(358.6)

 

 

 

 

 

1,053.5

Net increase/(decrease) in cash and cash equivalents

 

166.3

(214.3)

 

 

 

 

 

458.6

Cash and cash equivalents at the start of period

 

1,512.1

458.6

1,053.5

Net  increase/(decrease) in cash and cash equivalents

 

166.3

(214.3)

1,512.1

Cash and cash equivalents at the end of period

 

1,678.4

244.3

 

 

 

 

 


 

 

Notes on the Condensed Interim Statements
for the period 1 April 2015 to 30 September 2015

 

1.     Condensed Financial Statements

SSE plc (the Company) is a company domiciled in Scotland. The condensed interim statements comprise those of the Company and its subsidiaries (together referred to as the Group).

The financial information set out in these condensed interim statements does not constitute the Group's statutory accounts for the periods ended 30 September 2015, 31 March 2015 or 30 September 2014 within the meaning of Section 435 of the Companies Act 2006. Statutory accounts for the year ended 31 March 2015, which were prepared in accordance with International Financial Reporting Standards as adopted by the EU (adopted IFRS), have been reported on by the Group's auditors and delivered to the Registrar of Companies. The financial information set out in these interim statements has been prepared in accordance with the Disclosure and Transparency Rules of the Financial Conduct Authority and IAS 34 Interim Financial Reporting as adopted by the EU.

The report of the auditor was (i) unqualified (ii) did not include reference to any matters to which the auditors drew attention by way of emphasis without qualifying their report and (iii) did not contain statements under section 498 (2) or (3) of the Companies Act 2006.  The interim financial information is unaudited but has been formally reviewed by the auditor and its report to the Company is set out on page 79.

These interim statements were authorised by the Board on 10 November 2015.

2.     Basis of preparation

These condensed interim statements for the period to 30 September 2015 and the comparative information for the period to 30 September 2014 have been prepared applying the accounting policies and presentation used in the Group's consolidated financial statements for the year ended 31 March 2015.

3.     Standards, amendments and interpretations

The Group is assessing the impact that the following issued standards which have not yet been adopted by the Group may have on its future financial statements:

·        IFRS 15 'Revenue from contracts with customers' is effective on 1 January 2018 subject to European Union (EU) endorsement;

·        the amendments to IFRS 11 'Accounting for acquisitions of interests in joint operations' which are effective on 1 January 2016, subject to EU endorsement, and;

·        IFRS 9: 'Financial instruments' which will be effective on 1 January 2018, subject to EU endorsement.

It is not yet practicable to quantify the impact these standards will have on the Group's consolidated financial statements on adoption. In addition to these, there are a number of other amendments and annual improvement project recommendations that are not yet effective but which are not anticipated to have a material impact on the Group's consolidated financial statements.

4.     Critical accounting judgements and key sources of estimation uncertainty

In the process of applying the Group's accounting policies, management necessarily makes judgements and estimates that have a significant effect on the amounts recognised in the financial statements. Changes in the assumptions underlying the estimates could result in a significant impact to the financial statements. The Group's key accounting judgement and estimation areas are noted with the most Significant Financial Judgement areas as specifically discussed by the Audit Committee being highlighted separately.

4.1   Significant Financial Judgements

The condensed interim statements have been prepared with consideration given to the following Significant Financial Judgements which include areas of estimation uncertainty and accounting judgement:

(i)     Revenue recognition - 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 period end. This estimation will comprise of values for 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 for unbilled revenue (disclosed as accrued income). The volume of unbilled electricity or gas is calculated by assessing a number of factors such as externally notified volumes supplied to customers, amounts billed to customers and other adjustments. Unbilled income is calculated by applying the tariffs relevant to the customer type to the calculated volume of electricity or gas. This estimation methodology is subject to an internal corroboration process that provides support for the judgements made by management. This process requires the comparison of calculated unbilled volumes to a benchmark measure of unbilled volumes which is derived using independently verified data and by assessing historical weather-adjusted consumption patterns and actual meter data that is used in the industry reconciliation processes for total consumption by supplier. This aspect of the corroboration process, which requires a comparison of the estimated supplied quantity of gas and electricity that is deemed to have been delivered to customers and the aggregate supplied quantity of gas and electricity applicable to the Group's customers that is measured by industry system operators, is a key judgement. The experience of the Group is that following the reconciliation procedures the industry deemed supplied quantities in gas have historically been higher than actual metered supply. As a result, and through a continuous process of investigation into root cause, the Group applies a further judgement being a percentage reduction to unbilled consumption volumes to the measurement of its unbilled revenue in the financial statements. A change in this judgement would impact upon the amount of revenue recognised.

4.     Critical accounting judgements and key sources of estimation uncertainty (continued)

4.1   Significant Financial Judgements (continued)

(ii)    Valuation of trade receivables  - Estimation Uncertainty

The basis of determining the provisions for bad and doubtful debts was explained in Note 32 of the Group's financial statements for the year ended 31 March 2015. While the level of the provisions at 30 September 2015 are considered to be appropriate, changes in estimation basis or in economic conditions could lead to a change in the level of provisions recorded and consequently on the charge or credit to the income statement.

(iii)   Retirement benefits - 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.  The value of scheme assets are impacted by the asset ceiling test which (a) restricts the surplus that can be recognised to assets that can be recovered fully through refunds and (b) may increase the value of scheme liabilities where there are minimum funding liabilities in relation to agreed contributions.

(iv)   Impairment testing and valuation of certain Non-Current Assets - Estimation Uncertainty

The Group reviews the carrying amounts of its goodwill, other intangible assets and property, plant and equipment to determine whether there is any indication that the value of those assets is impaired. In conducting its reviews, the Group makes judgements and estimates in considering the recoverable amount of the respective assets or cash-generating units (CGUs). The specific assets under review in the period ending 30 September 2015 were goodwill, thermal power generation assets, wind farm CGUs, gas storage assets, and exploration and production (E&P) assets.

Changes to the estimates and assumptions on factors such as regulation legislation changes, power, gas, carbon and other commodity prices, volatility of gas prices, plant running regimes and load factors, expected 2P reserves, (highly probable) 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.

(v)    Treatment of disputes and claims - Accounting Judgement

The Group is exposed to the risk of litigation, regulatory inquiries and contractual disputes through the course of its normal operations. The Group considers each instance separately in accordance with legal advice and will provide or disclose information as deemed appropriate. Changes in the assumptions around the likelihood of an outflow of economic resources or the estimation of any obligation would change the values recognised in the condensed interim statements.

4.2   Other key accounting judgements

Other key accounting judgements and presentation applied in the preparation of these condensed interim statements include the following:

(i)     Exceptional items and certain re-measurements

As permitted by IAS 1 'Presentation of financial statements', the Group has disclosed additional information in respect of joint ventures and associates, exceptional items and certain re-measurements on the face of the income statement to aid understanding of the Group's financial performance.

An item is treated as exceptional if it is considered unusual by nature and scale and of such significance that separate disclosure is required for the financial statements to be properly understood. These items will be non-recurring and may include items such as asset or CGU impairment charges, restructuring costs, contractual settlements or gains on sale of assets or businesses. 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. This excludes commodity contracts not treated as financial instruments under IAS 39 where held for the Group's own use requirements.

(ii)    Adjusted measures

The Directors assess the performance of the reportable segments ('Operating profit/(loss) by segment', Note 5(b)) based on an 'adjusted profit before interest and tax' measure.  This is the basis used for internal performance management and is believed to be appropriate for explaining underlying performance. The adjusted profit before interest and tax is reconciled to reported profit before interest and tax by adding back exceptional items, the net interest costs associated with defined benefit schemes, remeasurements arising from IAS 39 and after the removal of taxation on profits from joint ventures and associates. In addition, adjusted profit after tax will be reported on a basis consistent with this change.

The Directors also present details of an 'adjusted earnings per share' measure, which is based on basic earnings per share before exceptional items, the net interest costs associated with defined benefit pension schemes, remeasurements arising from IAS 39 and after the removal of deferred taxation. The adjusted measures are considered more reflective of the Group's underlying performance, are consistent with way the Group is managed and avoids volatility arising from IAS 39 fair value measurements. This measure is also deemed the most useful for the ordinary shareholders of the Group.

4.     Critical accounting judgements and key sources of estimation uncertainty (continued)

4.2   Other Key Accounting Judgements (continued)

(iii)   Adjusted measures (continued)

The financial statements also include an 'adjusted net debt and hybrid capital' measure. This presents the information on the basis used for internal liquidity risk management. This measure, which excludes obligations due under finance leases, 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.

(iv)   Energy Company Obligation (ECO) costs

The Energy Company Obligation ('ECO') legislation, in force since 1 January 2014, requires qualifying energy suppliers to meet defined targets by providing measures to improve the energy efficiency of and level of carbon emissions from UK domestic households. The targets for the Group's Energy Supply business are set based on historic customer information with delivery of the measures being required by 31 March 2017. The Group believes it is not technically obligated to provide those measures until the end of the delivery period. As a consequence and applying applicable accounting standards, the costs of ECO are recorded when measures are delivered or other qualifying expenditure has been incurred. 

4.3   Other areas of estimation uncertainty

(v)    Provisions and contingencies

The assessments undertaken in recognising provisions and contingencies have been made in accordance with IAS 37. Provisions are calculated based on estimations. The evaluation of the likelihood of the contingent events has required best judgement by management regarding the probability of exposure to potential loss. Should circumstances change following unforeseeable developments, this likelihood could alter.

(vi)   Decommissioning costs

The estimated costs of decommissioning at the end of the useful lives of the assets is reviewed periodically.  Decommissioning costs in relation to gas exploration and production assets are based on expected lives of the fields and costs of decommissioning and are currently expected to be incurred predominantly between 2017 and 2030.

(vii)  Gas and liquids reserves

The volume of proven and probable 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 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 higher depreciation expense or an immediate write-down (impairment) of the asset's book value.

5.     Segmental information

The Group's operating segments are those used internally by the Board to run the business and make strategic decisions. The Group's main businesses and operating segments are the Networks business compromising Electricity Distribution, Electricity Transmission and Gas Distribution; the Retail business compromising Energy Supply, Enterprise and Energy-related Services, and; Wholesale comprising Energy Portfolio Management and Electricity Generation, Gas Storage and Gas Production.

The types of products and services from which each reportable segment derives its revenues are:

Business Area

Reported Segments

Description

Networks

Electricity Distribution

The economically regulated lower voltage distribution of electricity to customer premises in the North of Scotland and the South of England

 

Electricity Transmission

The economically regulated high voltage transmission of electricity from generating plant to the distribution network in the North of Scotland

 

Gas Distribution

SSE's share of Scotia Gas Networks, which operates two economically regulated gas distribution networks in Scotland and the South of England

Retail

Energy Supply

The supply of electricity and gas to residential and business customers in the UK and Ireland

 

Enterprise

The integrated provision of services in competitive markets for industrial and commercial customers including electrical and mechanical contracting, private energy networks, energy solutions, lighting, utilities  and telecoms

 

Energy-related Services

The provision of energy-related goods and services to customers in the UK including meter reading and installation, boiler maintenance and installation and domestic telecoms and broadband services

Wholesale

Energy Portfolio Management and Electricity Generation

The generation of power from renewable and thermal plant in the UK, Ireland and Europe and the optimisation of SSE's power and gas and other commodity requirements

 

Gas Storage

The operation of gas storage facilities in the UK

 

Gas Production

The production and processing of gas and oil from North Sea fields

As noted in Note 4 Critical accounting judgements and key sources of estimation uncertainty, the measure of profit used by the Board is adjusted operating profit which is before exceptional items, the impact of financial instruments measured under IAS 39, the net interest costs associated with defined benefit pensions 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 United Kingdom and Ireland.

(a)  Revenue by segment

 

Six months ended 30 September  2015

Six months ended 30 September 2014

 

External revenue

Intra-segment revenue

Total revenue

External revenue

Intra-segment revenue

Total revenue

 

 

£m

 

£m

 

£m

 

£m

 

£m

 

£m

Networks




 

 

 

Electricity Distribution

316.9

113.3

430.2

330.6

131.8

462.4

Electricity Transmission

179.5

-

179.5

117.9

-

117.9

 

496.4

113.3

609.7

448.5

131.8

580.3

Retail

 

 

 

 

 

 

Energy Supply

3,125.9

46.2

3,172.1

3,167.5

9.3

3,176.8

Enterprise

205.4

72.3

277.7

190.0

72.5

262.5

Energy-related Services

58.7

54.3

113.0

57.6

54.0

111.6

 

3,390.0

172.8

3,562.8

3,415.1

135.8

3,550.9

Wholesale

 

 

 

 

 

 

   Energy Portfolio Management and Electricity Generation

9,892.3

1,476.4

11,368.7

8,498.0

1,526.9

10,024.9

Gas Storage

2.8

100.3

103.1

4.5

79.1

83.6

Gas Production

0.9

79.4

80.3

0.6

84.4

 

9,896.0

1,656.1

11,552.1

8,503.1

1,689.8

10,192.9

Corporate unallocated

49.1

112.0

161.1

47.2

85.3

132.5

Total

13,831.5

2,054.2

15,885.7

12,413.9

2,042.7

14,456.6

Revenue from the Group's investment in Scotia Gas Networks Limited, the Group's share being £262.7m (September 2014- £269.4m) is not recorded in the revenue line in the income statement.



 

5.     Segmental information (continued)

(a) Revenue by segment (continued)

 

Year ended 31 March 2015

 

External revenue

Intra-segment revenue

Total revenue

 

£m

£m

£m

Networks

 

 

 

 Electricity Distribution

735.6

288.0

1,023.6

 Electricity Transmission

246.7

0.2

246.9

 

982.3

288.2

1,270.5

Retail

 

 

 

 Energy Supply

7,961.2

30.3

7,991.5

 Enterprise

495.7

155.4

651.1

 Energy-related Services

112.6

97.3

209.9

 

8,569.5

283.0

8,852.5

Wholesale

 

 

 

 Energy Portfolio Management and Electricity Generation

22,023.7

4,015.4

26,039.1

 Gas Storage

9.7

211.8

221.5

 Gas Production

1.3

177.5

178.8

 

22,034.7

4,404.7

26,439.4

 Corporate unallocated

67.9

225.8

293.7

Total

31,654.4

5,201.7

36,856.1

 

 

(b)  Operating profit by segment

 

Six months ended 30 September 2015

 

Adjusted operating profit reported to the Board

Joint Venture/ Associate share of interest and tax (i)

Before exceptional items and certain re-measurements

Exceptional items and certain re-measurements

Total

 

£m

£m

£m

£m

£m

Networks

 

 

 

 

 

Electricity Distribution

178.6

-

178.6

-

178.6

Electricity Transmission

142.4

-

142.4

-

142.4

Gas Distribution

130.6

(72.5)

58.1

2.4

60.5

 

451.6

(72.5)

379.1

2.4

381.5

Retail

 

 

 

 

 

Energy Supply  

73.8

-

73.8

-

73.8

Enterprise

16.5

-

16.5

-

16.5

Energy-related Services

11.2

-

11.2

-

11.2

 

101.5

-

101.5

-

101.5

Wholesale

 

 

 

 

 

Energy Portfolio Management and Electricity Generation

141.8

(10.3)

131.5

(278.4)

(146.9)

Gas Storage

3.7

-

3.7

-

3.7

Gas Production

14.1

-

14.1

-

14.1

 

159.6

(10.3)

149.3

(278.4)

(129.1)

Corporate unallocated

(10.8)

-

(10.8)

-

(10.8)

Total

701.9

(82.8)

619.1

(276.0)

343.1

 



 

5.     Segmental information (continued)

(b)   Operating profit by segment (continued)

 

Six months ended 30 September 2014

 

Adjusted operating profit reported to the Board

Joint Venture/ Associate share of interest and tax (i)

Before exceptional items and certain re-measurements

Exceptional items and certain re-measurements

Total

 

 

 

 

 

 

 

£m

£m

£m

£m

£m

Networks

 

 

 

 

 

Electricity Distribution

215.7

-

215.7

-

215.7

Electricity Transmission

98.9

-

98.9

-

98.9

Gas Distribution

143.8

(81.0)

62.8

2.2

65.0

 

458.4

(81.0)

377.4

2.2

379.6

Retail

 

 

 

 

 

Energy Supply

(16.9)

-

(16.9)

-

(16.9)

Enterprise

42.9

-

42.9

-

42.9

Energy-related Services

11.3

-

11.3

-

11.3

 

37.3

-

37.3

-

37.3

Wholesale

 

 

 

 

 

Energy Portfolio Management and Electricity Generation

11.8

(9.7)

2.1

(10.5)

(8.4)

Gas Storage

1.6

-

1.6

-

1.6

Gas Production

13.3

-

13.3

-

13.3

 

26.7

(9.7)

17.0

(10.5)

6.5

   Corporate unallocated

7.4

-

7.4

-

7.4

Total

529.8

(90.7)

439.1

(8.3)

430.8

 

 

Year ended 31 March 2015

 

Adjusted operating profit reported to the Board

Joint Venture/ Associate share of interest and tax (i)

Before exceptional items and certain re-measurements

Exceptional items and certain re-measurements

Total

 

 

 

 

 

 

 

£m

£m

£m

£m

£m

Networks

 

 

 

 

 

Electricity Distribution

467.7

-

467.7

-

467.7

Electricity Transmission

184.1

-

184.1

-

184.1

Gas Distribution

285.0

(137.1)

147.9

5.3

153.2

 

936.8

(137.1)

799.7

5.3

805.0

Retail

 

 

 

 

 

Energy Supply

368.7

-

368.7

(34.2)

334.5

Enterprise

70.4

-

70.4

30.3

100.7

Energy-related Services

17.7

-

17.7

15.6

33.3

 

456.8

-

456.8

11.7

468.5

Wholesale

 

 

 

 

 

Energy Portfolio Management and Electricity Generation

433.3

(21.3)

412.0

(483.8)

(71.8)

Gas Storage

3.9

-

3.9

(163.9)

(160.0)

Gas Production

36.6

-

36.6

(106.0)

(69.4)

 

473.8

(21.3)

452.5

(753.7)

(301.2)

Corporate unallocated

14.0

-

14.0

(0.4)

13.6

Total

1,881.4

(158.4)

1,723.0

(737.1)

985.9

(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 and certain re-measurements (note 6). The share of Scotia Gas Networks Limited interest includes loan stock interest payable to the consortium shareholders. The Group has accounted for its 50% share of this, £13.2m (2014 - £16.7m, March 2015 - £33.3m), as finance income (note 7).

6.     Exceptional items and certain re-measurements

 

Year ended 31 March

2015

£m

 

Six months ended 30 September 2015

£m

Six months ended 30 September 2014

£m

 

Exceptional items (i)

 

 

(667.5)

Asset impairments and related charges

(25.3)

-

(56.0)

Provisions for restructuring and other liabilities

(16.2)

-

74.8

Net gains on disposal of businesses and other assets

39.3

-

(648.7)


(2.2)

-

(25.9)

Impairment of investments (share of result, net of tax)

-

-

(674.6)


(2.2)

-

 

Certain re-measurements (ii)

 

 

(67.8)

Movement on operating derivatives

(276.2)

(10.5)

(44.2)

Movement on financing derivatives

(11.3)

(9.7)

5.3

Share of movement on derivatives in jointly controlled entities (net of tax)

2.4

2.2

(106.7)


(285.1)

(18.0)

(781.3)

Exceptional items before taxation

(287.3)

(18.0)

 

Taxation

 

 

15.6

Effect of change in UK corporation tax rate on deferred tax assets and liabilities

-

-

145.6

Taxation on other exceptional items

8.3

-

161.2


 

-

39.2

Taxation on certain re-measurements

55.2

4.2

200.4

Taxation

63.5

4.2

(580.9)

Exceptional items after taxation

(223.8)

(13.8)

 


 

 

 

Exceptional items categorised as:

 

 

(478.8)

Property, plant and equipment impairments

-

-

(95.6)

Intangible asset and goodwill impairments

-

-

(25.9)

Joint venture and associate investment impairments

-

-

74.8

Net gains on disposal of businesses and assets

39.3

-

(149.1)

Other impairments, provisions and charges

(41.5)

-

(674.6)

Total before taxation

(2.2)

-

 

 

 

 

 

Exceptional items are disclosed across the following categories within the income statement

 

 

 

Cost of sale:

 

 

(313.5)

Exceptional charges relating to Ferrybridge and Fiddler's Ferry

(41.5)

-

(51.5)

Other impairments relating to Generation assets

-

-

(67.8)

Movement on operating derivatives (note 16)

(276.2)

(10.5)

(432.8)

 

(317.7)

(10.5)

 

Operating costs:

 

 

(358.5)

All other exceptional items

-

-

 

Operating income:

 

 

74.8

Net gains on disposals of businesses and other assets

39.3

-

 

Joint ventures and associates:

 

 

(25.9)

Impairment of investments

-

-

5.3

Share of movement on derivatives in jointly controlled entities (net of tax)

2.4

2.2

(20.6)

 

2.4

2.2

(737.1)

Operating loss

(276.0)

(8.3)

 

Finance costs

 

 

(44.2)

Movement on financing derivatives (note 16)

(11.3)

(9.7)

(781.3)

Loss before taxation

(287.3)

(18.0)

(i)     Exceptional items

Following the announcement on 20 May 2015 that coal-fired generation at Ferrybridge would cease at 31 March 2016, further exceptional charges of £41.5m have been recognised in relation to the impairment of inventory and the recognition of restructuring provisions. On 28 May 2015, the Group entered into an agreement to sell three onshore wind development sites to Blue Energy. An exceptional gain on disposal of £39.3m has been recognised. Further detail is included at Note 12.

In the previous financial year, the Group recognised exceptional asset impairment and related charges totalling £667.5m and provisions of £56.0m. These consisted of impairments and charges in relation to the Group's coal-fired plants at Ferrybridge and Fiddler's Ferry (£313.5), the Aldbrough gas storage facility (£163.9m), the North Sea gas production assets (£106.1m) and certain other assets.

In the prior year the Group benefited from the recognition of £74.8m of exceptional credits in relation to the disposal of the businesses and assets that were held for sale at 31 March 2014 before recognition of associated provisions. This included gains in relation to the seven streetlighting PFIs sold to Equitix and the Group's share of the dividend from the Environmental Energy Fund disposal of its stake in Anesco.



 

6.     Exceptional items and certain re-measurements  (continued)

(ii)    Certain re-measurements

Certain re-measurements arising from IAS 39 are disclosed separately to aid understanding of the underlying performance of the Group. This category includes the movement on derivatives (and hedged items) as described in note 16. Only certain of the Group's energy commodity contracts are deemed to constitute financial instruments under IAS 39. As a result, while the Group manages the commodity price risk associated with both financial and non-financial commodity contracts, it is only commodity contracts that are designated as financial instruments under IAS 39 that are accounted for on a fair value basis with changes in fair value reflected in the income statement (as part of 'certain re-measurements') or in equity. Conversely, commodity contracts that are not financial instruments under IAS 39 are accounted for as 'own use' contracts.

7.     Net finance costs

Year ended 31 March 2015

 

 

Six months ended 30 September 2015

Six months ended 30 September 2014

 

 

 

 

£m

 

£m

£m

 

Finance income:

 

 

1.1

Interest income from short term deposits

4.7

0.8

 

Other interest receivable:

 

 

33.3

Scotia Gas Networks loan stock

13.2

16.7

14.8

Other joint ventures and associates

1.0

7.0

46.7

Other receivable

28.7

25.2

94.8

 

42.9

48.9

95.9

Total finance income

47.6

49.7

 

 

 

 

 

Finance costs:

 

 

(23.9)

Bank loans and overdrafts

(12.8)

(10.7)

(262.5)

Other loans and charges

(133.6)

(138.4)

(25.1)

Interest on net pension scheme liabilities

(10.3)

(13.0)

(14.0)

Notional interest arising on provisions

(1.7)

(5.3)

(0.5)

Foreign exchange translation of monetary assets and liabilities

-

-

(34.2)

Finance lease charges

(16.2)

(17.1)

57.8

Less: interest capitalised

26.0

30.3

(302.4)

Finance costs excluding movement on financing derivatives and exceptional items

(148.6)

(154.2)

(44.2)

Movement on financing derivatives and exceptional items

(11.3)

(9.7)

(250.7)

Net finance costs

(112.3)

(114.2)

Adjusted net finance costs are arrived at after the following adjustments:

Year  ended 31 March 2015

 

Six months ended 30
September
2015

Six months ended 30
September

2014

 

 

 

 

£m

 

£m

£m

 

 

 

 

(250.7)

Net finance costs

(112.3)

(114.2)

 

(add)/less:

 

 

 

Share of interest from joint ventures and associates:

 

 

(33.3)

Scotia Gas Networks loan stock

(13.2)

(16.7)

(90.9)

Other jointly controlled entities and associates

(50.2)

(52.6)

(124.2)

 

(63.4)

(69.3)

25.1

Interest on net pension scheme liabilities

10.3

13.0

(11.1)

Share of interest on net pension liabilities in joint ventures

1.0

1.3

44.2

Movement on financing derivatives (note 16)

11.3

9.7

(316.7)

Adjusted net finance costs

(153.1)

(159.5)

 

 

 

 

14.0

Notional interest arising on discounted provisions

6.9

5.3

34.2

Finance lease charges

16.2

17.1

(121.3)

Hybrid coupon payment

(12.5)

(11.7) 

(389.8)

Adjusted net finance costs for interest cover calculations

(142.5)

(148.8)

8.     Taxation

The income tax expense reflects the anticipated effective rate of tax on profits before taxation for the Group for the year ending 31 March 2016, taking account of the movement in the deferred tax provision in the period so far as it relates to items recognised in the income statement. The reported tax rate on the profit before tax before exceptional items and certain re-measurements is 17.2% (2014 - 17.3%, March 2015 - 17.9%). The reported tax rate on the profit before tax after exceptional items, including the effect of changes in tax rate, and certain re-measurements was 11.1% (2014 - 16.9%, March 2015 - 9.6%).

The total adjusted effective rate of tax on profits before taxation excluding exceptional items, certain re-measurements, deferred tax associated with interest on net pension liabilities under IAS 19R and adjusted for tax on associates and jointly controlled entities for the period can be represented as follows:

Year ended 31 March 2015

 

Six months ended 30
September
2015

Six months ended 30
September
2014

 

Adjusted effective rate:

 

 

14.4%

Current tax

14.6%

15.0%

2.9%

Deferred tax

5.1%

6.4%

17.3%

 

19.7%

21.4%

9.     Dividends

Ordinary dividends

Year ended

31 March 2015 Total £m

Settled via scrip £m

Pence per ordinary share

 

Six months ended 30 September 2015

Total

£m

Settled

via scrip
£m

Pence per ordinary share

Six months ended 30 September 2014  Total     £m

Settled

via scrip £m

Pence per ordinary share

-

-

-

Final  - year ended 31 March 2015

613.5

159.5

61.8

-

-

-

262.5

81.6

26.6

Interim - year ended 31 March 2015

-

-

 

-

-

-

591.6

174.0

60.7

Final- year ended 31 March 2014

-

-

-

591.6

174.0

60.7

854.1

255.6

 

 

613.5

159.5

 

591.6

174.0

 

The final dividend of 61.8p per ordinary share declared in the financial year ended 31 March 2015 (2014 - 60.7p) was approved at the Annual General Meeting on 23 July 2015 and was paid to shareholders on 19 September 2015. 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.

An interim dividend of 26.9p per ordinary share (2014 - 26.6p) has been proposed and is due to be paid on 18 March 2016 to those shareholders on the SSE plc share register on 22 January 2016. The proposed interim dividend has not been included as a liability in these financial statements. A scrip dividend will be offered as an alternative.

10.   Earnings per share

Basic earnings per share

The calculation of basic earnings per share at 30 September 2015 is based on the net profit attributable to ordinary shareholders and the weighted average number of ordinary shares outstanding during the period ended 30 September 2015. All earnings are from continuing operations.

Adjusted earnings per share

Adjusted earnings per share has been calculated by excluding the charge for deferred tax, the interest on net pension liabilities under IAS 19R and the impact of exceptional items and certain re-measurements.

Year ended

 31 March 2015

 

Six months ended
30 September 2015

Six months ended 
30 September 2014

Earnings

£m

Earnings per share

pence

 

Earnings

£m

Earnings per share

pence

Earnings

£m

Earnings  per share

pence

 

 

 

 

 

 

 

 

 

 

 

 

 

 

543.1

55.3

Basic

192.7

19.4

251.3

25.8

580.9

59.2

Exceptional items and certain re-measurements (note 6)

223.8

22.5

13.8

1.4

1,124.0

114.5

Basic excluding exceptional items and certain re- measurements

416.5

41.9

265.1

27.2

 

 

Adjusted for:

 

 

 

 

25.1

2.5

Interest on net pension scheme liabilities (note 7)

10.3

1.0

13.0

1.3

(11.1)

(1.1)

   Share of interest on net pension liabilities in joint venture (note 7)

1.0

0.1

1.3

0.1

69.6

7.1

Deferred tax

29.6

3.0

13.4

1.4

11.0

1.1

Deferred tax from share of joint ventures

(1.3)

(0.1)

10.2

1.1

1,218.6

124.1

Adjusted

456.1

45.9

303.0

31.1

 

543.1

55.3

Basic

192.7

19.4

251.3

25.8

-

(0.1)

Dilutive effect of convertible debt and share options

-

(0.1)

-

(0.3)

543.1

55.2

Diluted

192.7

19.3

251.3

25.5

The weighted average number of shares used in each calculation is as follows:

Year ended 31 March 2015

Number of  shares

(millions)

 

Six months ended 30 September 2015

Number of shares (millions)

Six months ended 30 September 2014

Number of shares (millions)

 

 

 

 

981.8

For basic and adjusted earnings per share

993.8

975.7

2.1

Effect of exercise of share options

2.6

8.2

983.9

 

996.4

983.9

11.   Notes to the Consolidated Cash Flow Statement

(a)  Reconciliation of Group operating profit to cash generated from operations

Year ended

31 March 2015

 

Six months ended 30 September

2015

Six months ended 30 September

2014

 

 

 

 

£m

 

£m

£m

 

 

 

 

664.4

Profit for the period/year

205.2

263.0

 

Add back:

 

 

70.8

Taxation

25.6

53.6

250.7

Net finance costs

112.3

114.2

985.9

Operating profit

343.1

430.8

(163.6)

Less: share of profit of ventures and associates

(79.7)

(82.3)

822.3

Operating profit before joint ventures and associates

263.4

348.5

 

Add/(less):

 

 

67.8

Movement on operating derivatives

276.2

10.5

(77.5)

Pension service charges net of contributions paid

(26.3)

(38.9)

648.7

Exceptional charges

2.2

-

656.7

Depreciation of assets

323.6

308.2

3.4

Amortisation and impairment of intangible assets

1.5

3.4

1.4

Impairment of inventories

-

-

(16.9)

Release of deferred income

(8.9)

(8.4)

15.0

Charge in respect of employee share awards (before tax)

8.7

7.5

(40.2)

Profit on disposal of property, plant and equipment

(0.7)

(15.8)

-

Profit on disposal of held for sale assets

(39.3)

(15.3)

-

Loss on sale of other investments

-

0.2

2,080.7

Cash generated from operations before working capital movements

800.4

599.9

(b)  Reconciliation of net increase in cash and cash equivalents to movement in adjusted net debt and hybrid capital

Year ended

31 March 2015

 

Six months ended 30 September

2015

Six months ended 30 September

2014

 

 

 

 

£m

 

£m

£m

 

 

 

 

1,053.5

Increase/(Decrease) in cash and cash equivalents

166.3

(214.3)

 

(Add)/less:

 

 

(1,184.3)

Issue of hybrid capital

-

-

(151.1)

New borrowings

(565.0)

(104.1)

66.3

Repayment of borrowings

29.4

30.2

269.8

Other movement on borrowings

(41.0)

19.0

20.5

Increase in cash held as collateral

41.6

4.9

74.7

Movement in adjusted net debt and hybrid capital

(368.7)

(264.3)

Other movement on borrowings includes non-cash revaluation of fair value items, exchange movements and accretion of index-linked bonds and minimum payments under finance leases. Cash held as collateral refers to amounts deposited on commodity trading exchanges which are reported within trade and other receivables on the face of the balance sheet.

12.   Acquisitions, disposals and held for sale

Disposals

On 28 May 2015 the Group agreed to sell three onshore wind development sites (98MW) to Blue Energy. Total consideration for the sale of these assets was £52.4m of which £43.0m is deferred. An exceptional gain on sale has been recognised for these assets of £39.3m in the current period (note 6).

Held for sale assets

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 30 September 2015. This includes a number of the assets and businesses identified in 26 March 2014 announcement and referred to above. The assets have been stated at their fair value less costs to sell.

March

2015

 

 

Energy portfolio management

and electricity generation

September

2015

Enterprise

September

2015

Total September 2015

 

Total

September

2014

£m

 

 

£m

£m

£m

 

£m

54.2

 

Property plant and equipment

47.4

-

47.4

 

30.5

1.8

 

Biological assets

-

-

-

 

3.4

21.3

 

Other intangible

10.3

-

10.3

 

9.8

77.3

 

Non-current assets

57.7

-

57.7

 

43.7

 

 

 

 

 

 

 

 

-

 

Inventories

-

-

-

 

0.9

33.0

 

Trade and other receivables

1.8

38.2

40.0

 

309.1

33.0

 

Current assets

1.8

38.2

40.0

 

310.0

110.3

 

Total assets

59.5

38.2

97.7

 

353.7

 

 

 

 

 

 

 

 

(10.8)

 

Trade and other payables

-

-

-

 

(31.7)

-

 

Provisions

-

-

-

 

(1.4)

(10.8)

 

Current liabilities

-

-

-

 

(33.1)

 

 

 

 

 

 

 

 

(0.3)

 

Deferred tax liabilities

(0.3)

-

(0.3)

 

(0.5)

-

 

Provisions

-

-

-

 

-

(0.3)

 

Non-current liabilities

(0.3)

-

(0.3)

 

(0.5)

(11.1)

 

Total liabilities

(0.3)

-

(0.3)

 

(33.6)

 

 

 

 

 

 

 

99.2

 

Net assets

59.2

38.2

97.4

 

320.1

The assets and liabilities identified as held for sale at 30 September 2015 include a number of offshore and onshore developments and lighting service companies. Since the year ended 31 March 2015, onshore wind development assets with net assets of £13.1m have been sold for a gain on sale of £39.3m and biological assets of £1.8m are no longer recognised as held for sale. Assets recognised for the first time as held for sale at 30 September amount to £10.6m, these include certain lighting service businesses.

In the period since 30 September 2015, the Group has completed the disposal of a number of the assets held for sale. On 6 November 2015, the Group completed the sale, to Equitix MA Infrastructure Limited (Equitix), of the equity in its 100% held Dorset Streetlighting PFI special purpose entity (SPE). The entity was funded through a mix of senior debt and equity, and the removal of this project-related senior debt, along with the cash consideration of £7.0m, will have the immediate effect of reducing SSE's net debt by £27.6m.

In addition on 29 October 2015 the Group disposed of its 50% stake in the Galloper offshore windfarm project for net proceeds of £17.6m.

13.   Loans and other borrowings

March

2015

 

September

2015

September

2014

£m

 

£m

£m

 

Current

 

 

0.2

Bank Overdraft

-

0.1

712.4

Other short-term loans

712.6

835.2

20.2

Obligations under finance leases

21.7

17.5

732.8

 

734.3

852.8

 

Non current

 

 

5,068.4

Loans

5,644.8

5,185.5

299.5

Obligations under finance leases

286.8

301.9

5,367.9

 

5,931.6

5,487.4

 

 

 

 

6,100.7

Total loans and borrowings

6,665.9

6,340.2

(1,512.3)

Cash and cash equivalents

(1,678.4)

(244.4)

4,588.4

Unadjusted net debt

4,987.5

6,095.8

 

Add/(less):

 

 

3,371.1

Hybrid capital (note 14)

3,371.1

2,186.8

(319.7)

Obligations under finance leases

(308.5)

(319.4)

(71.7)

Cash held as collateral

(113.3)

(56.1)

7,568.1

Adjusted Net Debt and Hybrid Capital

7,936.8

7,907.1

On 8 September 2015, the Group issued a new 8 year €700m bond maturing 2023 with a coupon of 1.750% and after being swapped back to Sterling, total proceeds were £514.6m at an all-in funding cost of 3.193%. The remaining £50m of the £200m EIB bank facility arranged in August 2014 was drawn down in August 2015 as an 8 year fixed rate term loan at a rate of 2.545%. An existing £200m floating rate bank term loan which was due to mature in June 2015 was extended by a year and now matures in June 2016 while the £500m floating rate term loan that was extended by a year in September 2014 has now been extended for a further year in September 2015 and now matures in September 2016. In July 2015 the Group also extended the maturity of its £1.3bn revolving credit facility to July 2020 on improved terms.

Adjusted net debt and hybrid capital is stated after removing obligations on finance leases and cash held as collateral. Cash held as collateral refers to amounts deposited on commodity trading exchanges which are reported within Trade and other receivables on the face of the balance sheet.

In addition the Group has an established €1.5bn Euro commercial paper programme (paper can be issued in a range of currencies and swapped into Sterling). The Group has £1.5bn (September 2014 - £1.5bn) of committed credit facilities in place, maturing in April 2018 (£200m) and July 2020 (£1.3bn), which provide a back up to the commercial paper programme. At 30 September 2015, these facilities were undrawn.

14.   Hybrid Capital

March 2015

 

September 2015

September 2014

£m

Perpetual subordinated capital securities

£m

£m

744.5

GBP 750m 5.453% perpetual subordinated capital securities  (i)

744.5

744.5

416.9

EUR 500m 5.025% perpetual subordinated capital securities  (i)

416.9

416.9

427.2

USD 700m 5.625% perpetual subordinated capital securities  (ii)

427.2

427.2

598.2

EUR 750m 5.625% perpetual subordinated capital securities  (ii)

598.2

598.2

748.3

GBP 750m 3.875% perpetual subordinated capital securities (iii)

748.3

-

436.0

EUR 600m 2.375% perpetual subordinated capital securities (iii)

436.0

-

3,371.1

 

3,371.1

2,186.8

(i)     20 September 2010 £750m and €500m hybrid capital bonds

Each bond has no fixed redemption date but the Company may, at its sole discretion, redeem all, but not part, of these capital securities at their principal amount.

The 20 September 2010 issued capital may be redeemed fully (not in part) at their principal amounts on 1 October 2015 or 1 October 2020 or any subsequent coupon payment date.

On 1 October 2015 the company redeemed the £750m and €500m hybrid capital bonds issued on 20 September 2010, the redemption was funded by the proceeds of the £750m and €600m hybrid capital bonds issued on 10 March 2015.

(ii)    18 September 2012 €750m and US$700m Hybrid Capital Bonds

Each bond has no fixed redemption date but the Company may, at its sole discretion, redeem all, but not part, of these capital securities at their principal amount. The date for the discretionary redemption of the capital issued on 18 September 2012 is 1 October 2017 and every five years thereafter.

 

14.   Hybrid Capital (continued)

(ii)   18 September 2012 €750m and US$700m Hybrid Capital Bonds (continued)

For the €750m capital issued on 18 September 2012, coupon payments are expected to be made annually in arrears on 1 October in each year. For the US$700m capital issued on 18 September 2012, coupon payments are expected to be made bi-annually in arrears on 1 April and 1 October each year.

(iii)   10 March 2015 £750m and €600m hybrid capital bonds

On 10 March 2015, the Company issued £750m and €600m hybrid capital bonds with no fixed redemption date, but the Company may, at its sole discretion, redeem all, but not part, of the capital securities at their principal amount. The date for the first potential discretionary redemption of the £750m hybrid capital bond is 10 September 2020 and then these can occur every 5 years thereafter. The date for the first discretionary redemption of the €600m hybrid capital bond is 1 April 2021 and then these can occur every 5 years thereafter. The purpose of all three issues was to strengthen SSE's capital base and fund the Group's ongoing capital investment and acquisitions.

For the £750m capital issued the first coupon payment is expected to be made on 10 September 2016 and then annually in arrears thereafter, and for the €600m capital issued on 10 March 2015, the first coupon payment is expected to be made on 1 April 2016 and then annually in arrears thereafter.

(iv)   Coupon Payments

Coupon payments of £12.5m (2014 - £11.7m) in relation to the US$ capital issued on 18 September 2012 were paid on 1 April 2015. Coupon payments of £11.9m were made in relation to the same hybrid capital bond on 1 October 2014, and payments of £97.7m were made in relation to all other hybrid capital bonds on 1 October 2014.

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.   Share capital

 

Number

(millions)

£m

Allotted, called up and fully paid:

 

 

At 1 April 2015

993.0

496.5

Issue of shares

10.8

5.4

At 30 September 2015

1,003.8

501.9

 

 

 

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.

Shareholders were able to elect to receive ordinary shares in place of the final dividend for the year to 31 March 2015 of 61.8p (60.7p - September 2014 in relation to the final dividend for the year to 31 March 2014, 26.6p - March 2015, in relation to the interim dividend for the year to 31 March 2015) per ordinary share under the terms of the Company's scrip dividend scheme.  This resulted in the issue of 10,600,639 (September 2014 - 11,775,169, March 2015 - 5,348,770) new fully paid ordinary shares.

The Company issued 0.2m shares (2014 - 0.1m, March 2015 - 1.0m) during the period under the savings-related share option schemes, and discretionary share option schemes for a consideration of £1.1m (2014 - £1.1m, March 2015 - £10.3m).

During the period, on behalf of the Company, the employee share trust purchased 0.4 million shares (2014 - 0.3 million, March 2015 - 0.6 million) for a consideration of £7.4m (2014 - £4.3m, March 2015 - £9.0m) to be held in trust for the benefit of employee share schemes.

16.   Capital and Financial Risk Management

Capital management

The Board's policy is to maintain a strong balance sheet and credit rating so as to support investor, counterparty and market confidence 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 30 September 2015, the Group's long term credit rating was A- stable outlook for Standard & Poor's, which was subsequently revised to A- negative outlook on 15 October 2015.  As at 30 September 2015, the Group's long term credit rating was A3 negative outlook for Moody's. Further detail of the capital management objectives, policies and procedures are included in the 'Financial management and balance sheet' section of the Strategy and Finance section of this report.

 

16.   Capital and Financial Risk Management (continued)

Capital management (continued)

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.

From time to time the Group has the option to purchase its own shares on the market; the timing of these purchases depends on market prices and economic conditions. The use of share buy-backs is the Group's benchmark for investment decisions and can be utilised at times when management believe the Group's shares are undervalued. No share buy-back was made during the period.

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 addition the Group has issued hybrid capital securities which bring together features of both debt and equity, are perpetual and subordinate to all senior creditors. The Group has £1.5bn of committed bank facilities which relate to the Groups revolving credit and bilateral facilities that can be accessed at short notice for use in managing the Group's short term funding requirements, however, these committed facilities remain undrawn for the majority of the time.

The 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 this capital management approach during the period.

Financial risk management

The Board has overall responsibility for the establishment and oversight of the Group's risk management framework. The Risk and Trading Committee, which reports to the Executive Committee, comprises the two Executive Directors and senior managers from the Energy Portfolio Management, Retail, Corporate and Finance functions. Its specific remit is 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 and treasury operations. The specific financial risks which involve the use of financial instruments are the Group's commodity, currency, credit, liquidity and interest rate risks.

Exposure to the commodity, currency and interest rate risks referred to arise in the normal course of the Group's business and the Group enters into derivative financial instruments to manage 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 remain as stated in the Group's financial statements at March 2015.

In the six months to 30 September 2015, the Group continued to be exposed to difficult economic conditions. In reference to credit risk, the impairment provision for credit losses remained at the same level as March 2015. The Group has continued to commit significant internal resource to managing credit risk in the period.

The Group's policy in relation to liquidity risk continues to be to ensure, in so far as possible, that it will always have sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to its reputation. Further detail is noted under 'capital management' above.

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:

Year ended 31 March 2015

£m

 

Six months ended 30 September 2015

£m

Six months ended 30 September 2014

£m

 

Operating derivatives

 

 

(1,073.5)

Total result on operating derivatives (i)

(1,253.7)

(683.9)

1,005.7

Less: amounts settled (ii)

977.5

673.4

(67.8)

Movement in unrealised derivatives

(276.2)

(10.5)

 

 

 

 

 

Financing derivatives (and hedged items)

 

 

(395.5)

Total result on financing derivatives (i)

(97.6)

(187.2)

351.3

Less: amounts settled (ii)

86.3

177.5

(44.2)

Movement in unrealised derivatives

(11.3)

(9.7)

(112.0)

Total

(287.5)

(20.2)

(i) Total result on derivatives (and hedged items) 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 period represent the result on derivatives transacted which have matured or been delivered and have been included within the total result on derivatives. 

16.   Capital and Financial Risk Management (continued)

Financial risk management (continued)

The fair values of the primary financial assets and liabilities of the Group together with their carrying values are as follows:

March 2015

 

September 2015

September 2014

Carrying Value

£m

Fair Value

£m

 

Carrying Value

£m

Fair Value

£m

Carrying

Value

£m

Fair

Value

£m

 

 

Financial Assets

 

 

 

 

 

 

Current

 

 

 

 

2,977.5

2,977.5

Trade receivables

2,265.7

2,265.7

2,106.7

2,106.7

25.2

25.2

Other receivables

69.9

69.9

29.2

29.2

71.7

71.7

Cash collateral

113.3

113.3

56.1

56.1

1,512.3

1,512.3

Cash and cash equivalents

1,678.4

1,678.4

244.4

244.4

1,999.9

1,999.9

Derivative financial assets

2,051.8

2,051.8

1,189.9

1,189.9

6,586.6

6,586.6

 

6,179.1

6,179.1

3,626.3

3,626.3

 

 

Non-current

 

 

 

 

11.2

11.2

Unquoted equity investments

11.2

11.2

14.5

14.5

559.4

559.4

Loans to joint ventures and associates

586.9

586.9

529.4

529.4

566.8

566.8

Derivative financial assets

582.0

582.0

302.3

302.3

1,137.4

1,137.4

 

1,180.1

1,180.1

846.2

846.2

7,724.0

7,724.0

 

7,359.2

7,359.2

4,472.5

4,472.5

 

 

Financial Liabilities

 

 

 

 

 

 

Current

 

 

 

 

(2,707.7)

(2,707.7)

Trade payables

(2,767.5)

(2,767.5)

(2,789.8)

(2,789.8)

(712.6)

(714.3)

Bank loans and overdrafts

(712.6)

(714.2)

(835.3)

(836.9)

(20.2)

(20.2)

Finance lease liabilities

(21.7)

(21.7)

(17.5)

(17.5)

(2,297.3)

(2,297.3)

Derivative financial liabilities

(2,496.3)

(2,496.3)

(1,405.9)

(1,405.9)

(5,737.8)

(5,739.5)

 

(5,998.1)

(5,999.7)

(5,048.5)

(5,050.1)

 

 

Non-current

 

 

 

 

(5,068.4)

(6,213.4)

Loans and borrowings

(5,644.8)

(6,510.7)

(5,185.5)

(5,920.4)

(299.5)

(299.5)

Finance lease liabilities

(286.8)

(286.8)

(301.9)

(301.9)

(933.4)

(933.4)

Derivative financial liabilities

(1,067.7)

(1,067.7)

(641.2)

(641.2)

(6,301.3)

(7,446.3)

 

(6,999.3)

(7,865.2)

(6,128.6)

(6,863.5)

(12,039.1)

(13,185.8)

 

(12,997.4)

(13,864.9)

(11,177.1)

(11,913.6)

 

 

 

 

 

 

 

(4,315.1)

(5,461.8)

Net financial liabilities

(5,638.2)

(6,505.7)

(6,704.6)

(7,441.1)

Fair Value Hierarchy

 

September 2015

September 2014

 

Level 1

Level 2

Level 3

Total

Level 1

Level 2

Level 3

Total

 

£m

£m

£m

£m

£m

£m

£m

£m

Financial Assets

 

 

 

 

 

 

 

 

Energy derivatives

1,174.8

1,296.1

-

2,470.9

157.0

1,271.1

-

1,428.1

Interest rate derivatives

-

142.5

-

142.5

-

60.2

-

60.2

Foreign exchange derivatives

-

20.5

-

20.5

-

3.9

-

3.9

Equity investments

-

26.4

-

26.4

-

29.7

-

29.7

Loans and borrowings

-

-

-

-

-

39.3

-

39.3

 

 

 

 

 

 

 

 

 

 

1,174.8

1,485.5

-

2,660.3

157.0

1,404.2

-

1,561.2

Financial Liabilities

 

 

 

 

 

 

 

 

Energy derivatives

(1,248.4)

(1,832.0)

-

(3,080.4)

(118.2)

(1,585.7)

-

(1,703.9)

Interest rate derivatives

-

(442.1)

-

(442.1)

-

(312.5)

-

(312.5)

Foreign exchange derivatives

-

(41.5)

-

(41.5)

-

(30.7)

-

(30.7)

Loans and borrowings

-

(30.2)

-

(30.2)

-

-

-

-

 

 

 

 

 

 

 

 

 

 

(1,248.4)

(2,345.8)

-

(3,594.2)

(118.2)

(1,928.9)

-

(2,047.1)

There were no significant transfers out of level 1 into level 2 and out of level 2 into level 1 during the 6 months ended 30 September 2015.

16.   Capital and Financial Risk Management (continued)

Financial risk management (continued)

Fair Value Hierarchy (continued)

 

March 2015

 

Level 1

Level 2

Level 3

Total

 

£m

£m

£m

£m

Financial Assets

 

 

 

 

Energy derivatives

1,093.3

1,261.7

-

2,355.0

Interest rate derivatives

-

188.5

-

188.5

Foreign exchange derivatives

-

23.2

-

23.2

Equity Investments

-

26.4

-

26.4

 

1,093.3

1,499.8

-

2,593.1

Financial Liabilities

 

 

 

 

Energy derivatives

(1,044.5)

(1,643.8)

-

(2,688.3)

Interest rate derivatives

-

(473.3)

-

(473.3)

Foreign exchange derivatives

-

(69.1)

-

(69.1)

Loans and borrowings

-

(30.9)

-

(30.9)

 

(1,044.5)

(2,217.1)

-

(3,261.6)

 

 

 

 

 

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 2015.

17.   Retirement Benefit Obligations

Defined Benefit Schemes

The Group has two funded final salary pension schemes which provide defined benefits based on final pensionable pay. The schemes are subject to independent valuations at least every three years, the Scottish Hydro Electric Scheme's valuation was completed on 30 September 2015.  The Group also has an Employer Financed Retirement Benefit scheme and a Group Personal Pension Plan, details of which were provided in the Group's Financial Statements to 31 March 2015.

Summary of Defined Benefit Pension Schemes:

Movement recognised in the SoCI

Pension (liability)/

asset

 

Movement recognised in respect of the pension liability in the SoCI

Pension (liability)/asset

March

2015

March

2015

 

September

2015

September

2014

September

2015

September

2014

£m

£m

 

£m

£m

£m

£m

31.3

75.4

Scottish Hydro Electric Pension Scheme

176.7

18.5

262.2

49.8

(113.8)

(533.5)

Southern Electric Pension Scheme

134.1

(29.6)

(390.1)

(467.3)

(82.5)

(458.1)

 

310.8

(11.1)

(127.9)

(417.5)

3.2

(206.5)

IFRIC 14 (i)

(50.5)

(21.5)

(260.4)

(226.9)

(79.3)

(664.6)

Net actuarial (loss)/gain and combined liability

260.3

(32.6)

(388.3)

(644.4)

The net pension liability of £388.3m (2014 - £644.4m, March 2015 - £664.6m) reported at 30 September 2015 includes a liability of £260.4m (2014 - £226.9m, March 2015 - £206.5m) calculated under IFRIC 14, which reflects the value of contributions payable under a schedule of contributions agreed by the Group and the Scottish Hydro Electric Pension scheme Trustees (minimum funding requirement) with a restriction on the surplus that can be recognised.

The major assumptions used by the actuaries in both schemes were:

31 March 2015

 

September

2015

September

2014

 

 

 

 

 

4.2%

Rate of increase in pensionable salaries

4.2%

4.4%

 

3.2%

Rate of increase in pension payments

3.2%

3.4%

 

3.3%

Discount rate

3.8%

4.0%

 

3.2%

Inflation rate

3.2%

3.4%

 

18.   Capital Commitments

 March

 2015

£m

 

September

2015

£m

September

2014

£m

1,059.5

Capital Expenditure

Contracted for but not provided

1,138.2

1,109.3

19.   Related Party Transactions

The following trading transactions took place during the period 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 joint control or significant influence over.

 

Sale of goods and services

Purchase of goods and services

Amounts owed from

Amounts owed to

Sale of goods and services

Purchase of goods and services

Amounts owed from

Amounts owed to

 

Sep 2015

Sep 2015

Sep 2015

Sep 2015

Sep 2014

Sep 2014

Sep 2014

Sep 2014

Equity accounted joint ventures:

 

 

 

 

£m

£m

£m

£m

Scotia Gas Networks Ltd

25.8

(78.4)

14.8

-

24.3

(84.9)

12.1

0.3

Seabank Power Ltd

7.2

(60.0)

1.9

12.6

3.1

(60.3)

0.5

14.9

Marchwood Power Ltd

8.1

(56.2)

2.5

6.7

10.3

(57.4)

0.6

14.3

Other Joint Ventures

4.4

-

3.8

-

12.7

-

5.7

4.0

 

 

 

 

 

 

 

 

 

Associates

0.3

(23.8)

2.0

-

0.4

(18.7)

7.6

3.7

The Group's gas supply activity incurs gas distribution charges from Scotia Gas Networks while the Group also provides services to Scotia Gas Networks in the form of a management service agreement for corporate services and stock procurement services. 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. 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.

20.   Seasonality of operations

Certain activities of the Group are affected by weather and temperature conditions and seasonal market price fluctuations.  As a result of this, the amounts reported for the interim period may not be indicative of the amounts that will be reported for the full year due to seasonal fluctuations in customer demand for gas, electricity and services, the impact of weather on demand, renewable generation output and commodity prices, market changes in commodity prices and changes in retail tariffs. In Networks, the volumes of electricity and gas distributed or transmitted across network assets are dependent on levels of customer demand which are generally higher in winter months. In Retail, notable seasonal effects include the impact on customer demand of warmer temperatures in the first half of the financial year. In Wholesale, there is the impact of lower customer demand on commodity prices, the weather impact on renewable generation such as hydro and wind and other seasonal effects. The impact of temperature on customer demand for gas is more volatile than the equivalent demand for electricity.

21.   Post Balance Sheet Events

SSE plc, through it's wholly-owned subsidiary SSE E&P UK Limited, completed the acquisition of a 20% interest in the four gas fields and surrounding exploration acreage approximately 125km north west of the Shetland Islands, collectively known as the Greater Laggan Area, along with a 20% interest in the new Shetland Gas Plant for initial cash consideration of £666m, which will be subject to further completion adjustments on delivery of first gas, from Total E&P UK Limited on the 28 October 2015. This acquisition will be reflected in the year ended 31 March 2016 financial statements.

On 1 October 2015 the Company redeemed the £750m and €500m hybrid capital bonds issued on 20 September 2010, the redemption was funded by the proceeds of the £750m and €600m hybrid capital bonds issued on 10 March 2015. The effect of this redemption will be shown in the year ended 31 March 2016 financial statements.

The 2015 Budget on 8 July 2015 announced that the UK corporation tax rate will reduce from 20% to 19% in 2017 and then to 18% in 2020. A reduction in the rate from 20% to 19% (effective from 1 April 2017), and the reduction 19% to 18% (effective 11 April 2020) were substantively enacted on 26 October 2015. Substantive enactment took place after the period end 30 September 2015 and will be adopted during the remaining period to 31 March 2016. The financial effect of the rate change has the effect of reducing current deferred tax liabilities by £52.8m.

 


We confirm that to the best of our knowledge:

i) the condensed set of financial statements has been prepared in accordance with IAS 34 Interim Financial Reporting as adopted by the EU;

ii) the interim management report includes a fair review of the information required by:

(a) DTR 4.2.7R of the Disclosure and Transparency Rules, being an indication of important events that have occurred during the first six months of the financial year and their impact on the condensed set of financial statements; and a description of the principal risks and uncertainties for the remaining six months of the year; and

(b) DTR 4.2.8R of the Disclosure and Transparency Rules, being related party transactions that have taken place in the first six months of the current financial year that have materially affected the financial position or performance of the entity during that period; and any changes in the related party transactions described in the last annual report that could do so.

For and on behalf of the Board

 

 

 

 

Alistair Phillips-Davies                                              Gregor Alexander

Chief Executive                                                             Finance Director

 

 

London

10 November 2015

 


Introduction

We have been engaged by the company to review the condensed set of financial statements in the half-yearly financial report for the six months ended 30 September 2015 which comprises Consolidated and Condensed Income Statement, the Consolidated and Condensed Statement of Comprehensive Income, the Consolidated and Condensed Balance Sheet, the Consolidated and Condensed Statement of Changes in Equity, the Consolidated and Condensed Cash Flow Statement and the related explanatory notes.  We have read the other information contained in the half-yearly financial report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the condensed set of financial statements.

This report is made solely to the company in accordance with the terms of our engagement to assist the company in meeting the requirements of the Disclosure and Transparency Rules ("the DTR") of the UK's Financial Conduct Authority ("the UK FCA").  Our review has been undertaken so that we might state to the company those matters we are required to state to it in this report and for no other purpose.  To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company for our review work, for this report, or for the conclusions we have reached. 

Directors' responsibilities

The half-yearly financial report is the responsibility of, and has been approved by, the directors.  The directors are responsible for preparing the half-yearly financial report in accordance with the DTR of the UK FCA. 

As disclosed in note 1, the annual financial statements of the group are prepared in accordance with IFRSs as adopted by the EU.  The condensed set of financial statements included in this half-yearly financial report has been prepared in accordance with IAS 34 Interim Financial Reporting as adopted by the EU. 

Our responsibility

Our responsibility is to express to the company a conclusion on the condensed set of financial statements in the half-yearly financial report based on our review. 

Scope of review

We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410 Review of Interim Financial Information Performed by the Independent Auditor of the Entity issued by the Auditing Practices Board for use in the UK.  A review of interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures.  A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK and Ireland) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit.  Accordingly, we do not express an audit opinion. 

Conclusion

Based on our review, nothing has come to our attention that causes us to believe that the condensed set of financial statements in the half-yearly financial report for the six months ended 30 September 2015 is not prepared, in all material respects, in accordance with IAS 34 as adopted by the EU and the DTR of the UK FCA. 

 

 

 

William Meredith
for and on behalf of KPMG LLP
Chartered Accountants
191 West George Street
Glasgow
G2 2LJ

10 November 2015


This information is provided by RNS
The company news service from the London Stock Exchange
 
END
 
 
IR BBLLFEFFZFBB

Companies

SSE (SSE)
UK 100