REG - SSE Plc - Half-year Report <Origin Href="QuoteRef">SSE.L</Origin> - Part 2
08/11/2017 07:15
- Part 2: For the preceding part double click ID:nRSH8580Va
that reported earnings per share decreased 43.9% to 29.8p.
Investment and capital expenditure
Central to SSE's strategic framework is efficient and disciplined investment in building a balanced range of economically
regulated, government-mandated and market-based energy assets that it also generally owns and operates. This means that
investment should be: in line with SSE's commitment to strong financial management; focused on securing returns that are
clearly greater than the cost of capital and which support adjusted earnings per share; and consistent with the maintenance
of a balanced range of assets within SSE's businesses.
Investing efficiently in energy assets that the UK and Ireland need in 2017/18
SSE invests in a balanced range of businesses and invests only in assets for which returns are, as stated above, expected
to be clearly greater than the cost of capital. All projects complement SSE's existing portfolio of assets and are governed
and executed in an efficient manner and in line with SSE's commitment to strong financial management.
In the six months to 30 September 2017, SSE's investment and capital expenditure totalled £779.5m. This included:
· A major investment programme in electricity networks with good progress being made on both the construction of the
Caithness-Moray electricity transmission link and the Stronelairg wind farm connection. These Transmission investments
continue alongside the upgrading of the electricity distribution network; which in the six months to September 2017
included spend in the Bicester, Iver-Yiewsley, Cowes-Wootton Common and Ironbridge areas. This strategic investment will
both meet the changing needs of customers and further increase the total Regulated Asset Value (RAV) of SSE's networks
businesses;
· Further investment in renewable energy in GB and Ireland with the delivery of 405MW of onshore windfarms including
Clyde Extension (173MW) and the Galway Wind Park (SSE share 120MW). A further 591MW of on and offshore wind farm capacity
is currently in construction, including the offshore Beatrice windfarm (SSE share 235 MW). This renewable generation
supports the delivery of government climate change targets and is being delivered through either the Renewables Obligation
or Contracts for Difference in GB and Northern Ireland or the Renewable Energy Feed in Tariff 2 in Ireland These capital
investment projects are expected to take SSE's total renewable energy capacity to 4.3GW (including pumped storage) by March
2020 (up from 3.7GW at September 2017); helping SSE to generate around 12TWh of electricity from renewable sources in a
typical year.*
*Assumes SSE's share of Clyde windfarm remains at 65%
In addition, SSE is fulfilling a regulatory obligation to install smart meters for its Energy Supply customers. At 30
September 2017, SSE had around 625,000 smart meters on supply in customers' homes. Post installation, SSE's meters will
transfer to a contracted Meter Asset Provider and SSE's investment and capital expenditure therefore excludes the capital
cost of installation and meter assets.
SSE is maintaining investment momentum with capital and investment expenditure of around £1.7bn still expected for 2017/18,
with similar levels currently expected for 2018/19, and around £6bn as a whole over the four years to 2020. Around £5bn of
that is already committed, predominantly in building, owning and operating economically regulated electricity networks and
government-mandated renewable energy projects. The revenue derived from those assets is generally index-linked.
SSE's principal joint ventures and associates
SSE's financial results include contributions from equity interests in joint ventures ("JVs") and associates. The details
of the most significant of these are included in the table below.
SSE principal JVs and associates Asset type SSE holding Accounting treatment in SSE's adjusted performance measures Shareholder loans as at 30 Sep 2017
Seabank Power 1,140MW CCGT 50% Equity accounted no loans outstanding
Marchwood Power 840MW CCGT 50% Equity accounted £85m
Clyde Windfarm 522MW onshore windfarm 65% Equity accounted £372m (inc. £85m held for sale)
Walney (UK) Offshore Windfarm 367MW offshore windfarm 25.1% Equity accounted no loans outstanding
Seagreen Phase 1 up to 1,050MW 50% Equity accounted £14m
Dogger Bank Up to 3,600MW 50% Equity accounted £43m
Scotia Gas Networks Gas Distribution Network 33.3% Equity accounted £178m
Ferrybridge MFE 68MW 50% Equity accounted £135m
Ferrybridge MFE2 70MW 50% Equity accounted £66m
Beatrice 588MW offshore windfarm 40% Equity accounted Project financed
Greater Gabbard, a 504MW offshore windfarm (SSE share 50%) is proportionally consolidated and is reported as a Joint
Operation with no loans outstanding.
Financial management and balance sheet
Keeping SSE well-financed
As a long-term business, SSE believes that it should maintain a strong balance sheet and has a long history of financial
strength and discipline illustrated by its commitment to robust ratios for retained cash flow and funds from
operations/debt. SSE believes that a strong balance sheet enables it to secure funding from debt investors at competitive
and efficient rates and take decisions that are focused on the long term. In August 2017, Moody's Investors Service
re-affirmed SSE's senior credit rating of A3, stable outlook. In the same month, Standard & Poor's affirmed SSE's A-rating
and moved to a stable outlook. While they are not fundamental to it, these ratings help illustrate the quality and
resilience of SSE.
Issuing SSE's inaugural Green Bond
SSE has a long-standing commitment to maintaining financial discipline and diversity of funding sources and to moving
quickly to select financial options that are consistent with this, including issuing new bonds and loans. In line with
this, in September 2017, SSE successfully issued its inaugural Green Bond, an eight year E600m bond with a coupon of 0.875%
and an all in cost of 0.98%. The Bond was almost 3 times oversubscribed and had significant interest from Green only funds.
It also represents the lowest coupon ever achieved by SSE.
This issuance will help SSE to take a leading role in supporting the transition towards a low carbon future, through its
plans to continue to invest in renewable energy, and reaffirm its position as a leader in renewable sources of energy.
Focusing on effective financial management
In June 2017, SSE exercised the second, and last, one-year extension option on the £1.3bn revolving credit facility meaning
that this now matures in July 2022. The £200m bilateral facility has a similar extension option and this was exercised in
October 2017 meaning that it now matures in November 2022. The £200m EIB facility that was signed in March 2017 has a one
year availability period and it is intended to draw this facility in the second half of the year when it will become a 10
year term loan.
The proceeds from the £1.0bn of Hybrid debt issued in March 2017, at an all-in rate of 3.02% per annum, were used on 2
October 2017 to redeem the Hybrids issued in 2012, at an all-in rate of 5.6%, which had their first call date on that date.
This will result in annualised cash savings of around £26m from 2018/19. The combined hybrid coupon and hybrid interest
payments in 2017/18 are expected to be £128m, falling to around £77m in 2018/19 as the full benefit of the replacement
hybrid's lower coupon rate is realised. The new £1.0bn Hybrids have a fixed redemption date and are therefore debt
accounted and included within Loans and Other Borrowings, while the existing £2.2bn (£1.2bn following October 17
redemption) of Hybrids are perpetual instruments and are therefore accounted for as part of equity.
A table noting the expected amounts, timing and accounting treatment of coupon payments is shown below.
Hybrid coupon payments 16/17 17/18 18/19
HYa FYa HYa FYe HYe FYe
Total equity (cash) accounted £73.9m £119.3m £57.4m £98m £46m £46m
Total debt (accrual) accounted - £1.3m £15.3m £30m £15m £30m
Total hybrid coupon £73.9m £120.6m £72.4m £128m £61m £76m
SSE has confirmed that the criteria applied by the Rating Agencies, Moody's and Standard and Poor's, will result in broadly
the same value of hybrid equity treatment as that of previous years.
Maintaining a prudent treasury policy
SSE's treasury policy is designed to be prudent and flexible. In line with that, cash from operations is first used to
finance maintenance capital expenditure and then dividend payments, with further growth in capital expenditure and
investment generally financed by a combination of cash from operations, bank borrowings and bond issuance.
As a matter of policy, a minimum of 50% of SSE's debt is subject to fixed rates of interest. Within this policy framework,
SSE borrows as required on different interest bases, with financial instruments being used to achieve the desired out-turn
interest rate profile. At 30 September 2017, 92% of SSE's borrowings were at fixed rates.
Borrowings are mainly made in Sterling and Euros to reflect the underlying currency denomination of assets and cashflows
within SSE. All other foreign currency borrowings are swapped back into either Sterling or Euros. SSE has kept its
recently issued E600m Green Bond in Euros and has swapped E400m of the 2% June 2020 bond to Sterling increasing the all in
cost of that portion of the E600m bond to 2.99%. This allows SSE to maintain the correct overall level of Euro debt to
match SSE's Euro assets in the Republic of Ireland under a net investment hedge.
Transactional foreign exchange risk arises in respect of procurement contracts; fuel and carbon purchasing; commodity
hedging and energy portfolio management operations; and long-term service agreements for plant.
SSE's policy is to hedge any material transactional foreign exchange risks through the use of forward currency purchases
and/or financial instruments. Translational foreign exchange risk arises in respect of overseas investments, hedging in
respect of such exposures is determined as appropriate to the circumstances on a case-by-case basis. Overall, while SSE
has kept its treasury policy under review following the result of the EU Referendum, it has so far identified no need for
change.
Managing net debt and maintaining cash flow
SSE's adjusted net debt and hybrid capital was £9.2bn as at 30 September 2017, compared with £8.5bn at 31 March 2017 and
£9.0bn on 30 September 2016 and is forecast to be around £9.3bn at March 2018.
The overall level of net debt and hybrid capital reflects SSE's ongoing investment programme; however, it also includes an
accounting decrease of around £100m as a result of fair value adjustments. The fair value adjustment relates to
marked-to-market movements on cross currency swaps and floating rate swaps that are classed as fair value hedges under
IFRS. As a result of Sterling strength against the Dollar and higher interest rates during the six months to September 2017
these have become less 'in the money' to SSE therefore decreasing the net debt position. This accounting movement in debt
is offset by an equivalent movement in derivative financial liabilities held on SSE's balance sheet.
Adjusted net debt and hybrids at 30 September 2017 also includes £100m of the £500m proceeds identified for the share buy
back from the sale of a 16.7% stake in SGN. As at 1 November 2017, SSE had directed just over £400m towards the buy back,
including stamp duty and commission, re-purchasing around 27.4m shares. It still expects the process to be completed by
the end of December 2017.
Adjusted net debt excludes finance leases and includes outstanding liquid funds that relate to wholesale energy
transactions.
As noted above SSE's existing £2.2bn of hybrid bonds are accounted for as equity within the Financial Statements but, as in
previous years, have been included within SSE's 'Adjusted net debt and hybrid capital' to aid comparability. SSE's new
£1.0bn of hybrid debt issued during 2016/17 is treated as debt. A reconciliation of adjusted net debt and hybrid capital
to reported net debt is provided in the table headed Adjusted Net Debt and Hybrid Capital in the Alternative Performance
Measures section of this statement.
The level of reported net debt also reflects SSE's ongoing capital expenditure programme along with the impact of movements
in foreign exchange rates.
Ensuring a strong debt structure through medium- and long-term borrowings
SSE's objective is to maintain a reasonable range of debt maturities. Its average debt maturity, excluding hybrid
securities, at 30 September 2017 was 8.2 years, compared with 8.8 years at 30 September 2016.
SSE's debt structure remains strong, and on 30 September 2017, it had around £9.2bn of medium/long term borrowings in the
form of issued bonds, European Investment Bank debt, hybrid securities and other loans.
The balance of SSE's adjusted net debt is financed with short-term bank debt. At 30 September 2017, SSE's adjusted net
debt includes cash and cash equivalents totalling £1.2bn and around £1.1bn of medium-term borrowings maturing in the six
months to March 2018. This included £1.0bn of hybrid equity, which had a first call date on 2 October 2017 and was redeemed
using the proceeds of the most recent hybrid issuance.
Refinancing over the Mid Term
The Hybrid equity issued in March 2017 and the Green Bond issued in September 2017 mean that SSE has fully covered its
refinancing risk for the 2017/18 financial year, with the next significant refinancing now due in October 2018 when SSE
will redeem its £500m/5% coupon bond. Following on from that, the next significant refinancing does not occur until
2020/21 when SSE will redeem its E600m/2% coupon bond in June 2020. The next Hybrid equity first call date is in September
2020, in respect of the £750m/3.875% coupon equity accounted Hybrid.
Operating a Scrip Dividend Scheme
The Scrip Dividend Scheme, approved by SSE's shareholders most recently in 2015, gives shareholders the option to receive
new, fully paid ordinary shares in the Company in place of their cash dividend payments. It therefore reduces cash outflow
and so supports the balance sheet.
The scrip dividend take-up in August 2017 (relating to the final dividend for the year to 31 March 2017) was 50%, compared
to the average 25% over the last 8 years , resulting in a reduction in cash dividend funding of £324.5m, with 23.5 million
new ordinary shares, fully paid, being issued. SSE will continue to review its use of the scrip dividend as a useful
source of funding.
Managing net finance costs
SSE believes adjusted net finance costs provide the most useful measure of performance and a reconciliation of adjusted and
reported net finance costs is provided in the Adjusted Performance Measures section of this report. SSE's adjusted net
finance costs in six months to 30 September 2017 were £176.6m, compared to £161.4m in the same six months in 2016,
reflecting the fact that while SSE's average interest rate has decreased along with SSE's share of SGN interest costs, the
quantum of debt has increased. Reported net finance costs were £147.2m, compared to £120.6m, again reflecting the increase
in debt, at a lower average coupon.
The coupon payments relating to the existing £2.2bn hybrid equity are presented as distributions to other equity holders
and are reflected within adjusted earnings per share when paid. The coupon payments on the new £1.0bn hybrid debt issuance
are treated as finance costs under IFRS.
Tax
SSE considers being a responsible taxpayer a core element of being a responsible member of society. SSE seeks to pay the
right amount of tax on its profits, in the right place, at the right time, and continues to be the only FTSE 100 company to
have been awarded the Fair Tax Mark. While SSE has an obligation to its customers and shareholders to efficiently manage
its total tax liability, it does not seek to use the tax system in a way it does not consider it was meant to operate, or
use "tax havens" to reduce its tax liabilities.
SSE understands it also has an obligation to the society in which it operates, and from which it benefits - for example,
tax receipts are vital for the public services SSE relies upon. Therefore, SSE's tax policy is to operate within both the
letter and spirit of the law at all times.
For reasons already stated above, SSE's focus is on adjusted profit before tax, and in line with that, SSE believes that
the adjusted current tax charge on that profit is the tax measure that best reflects underlying performance. SSE's adjusted
current tax rate for 2017/18, based on adjusted profit before tax, is forecast to be 9.3%, as compared with 10.2% in
2016/17 on the same basis.
In October 2017, SSE published Talking Tax 2017, summarising its approach to tax matters (see sse.com).
Group Financial Overview - Conclusion and Priorities
SSE's financial priorities for 2017/18 as a whole include:
· Delivering an annual increase in the dividend that at least keep pace with RPI inflation;
· Maintaining dividend cover in a range from around 1.2 times to around 1.4 times, albeit towards the bottom end of
this range;
· Continuing a disciplined approach to investment in building, owning and operating a balanced range of energy related
assets and delivering assets within the established investment programme, especially in economically-regulated Networks and
government-mandated renewable sources of energy; and
· Maintaining a strong balance sheet, with robust ratios for retained cash flow and funds from operations/debt.
WHOLESALE
Wholesale Key Performance Indicators
Sep 17 Sep 16
Energy Portfolio Management (EPM) and Electricity Generation
EPM and Generation adjusted operating profit - £m 160.7 123.2
EPM and Generation reported operating profit/(loss) - £m 169.9 327.8
EPM and Generation capital expenditure and investment - £m 222.7 188.3
GENERATION CAPACITY - MW
Gas- and oil-fired generation capacity (GB) - MW 4,013 4,013
Gas- and oil-fired generation capacity (Ire) - MW 1,292 1,292
Coal-fired generation capacity- MW 1,995 1,995
Multi-fuel capacity - (MW) 34 34
Total thermal generation capacity - MW 7,334 7,334
Pumped storage capacity (GB) - MW 300 300
Conventional hydro capacity (GB) - MW 1,150 1,150
Onshore wind capacity (GB) - MW 1,150 900
Onshore wind capacity (NI) - MW 141 88
Onshore wind capacity (ROI) - MW 576 456
Offshore wind capacity (GB) - MW 344 344
Biomass capacity (GB) - MW 37 37
Total renewable generation capacity (inc. pumped storage) - MW 3,698 3,275
Total electricity generation capacity (GB and Ire) - MW 11,032 10,609
Renewable capacity qualifying for ROCs - MW c.2,000 c.1,750
GENERATION OUTPUT - GWh
Gas- and oil-fired (inc. CHP) output (GB) - GWh 9,187 6,639
Gas- and oil-fired output ( Ire) - GWh 1,402 1,428
Coal-fired (inc. biomass co-firing) output - GWh 71 2
Total thermal generation - GWh 10,660 8,069
Pumped storage output - GWh 132 123
Conventional hydro output - GWh 1,132 1,234
Onshore wind output GB - GWh 1,012 708
Onshore wind output NI - GWh 154 87
Onshore wind output ROI - GWh 589 471
Offshore wind output - GWh 437 488
Biomass output GB - GWh 40 38
Total renewable generation (inc. pumped storage) - GWh 3,496 3,149
Total Generation output all plant - GWh 14,156 11,218
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).Note3: Wind output excludes 137GWh of constrained off generation in HY2017/18 and 58GWh in HY2016/17.Note 4: Onshore wind capacity and output at
Sept 17 reflects 439MW of additional capacity which came on line during the year to 30 September 2017, net of the 5% Clyde disposal in August 17 and the Port of
Tilbury sale in June 17. See reconciliation tableNote 5: Waste to Energy GWh not included above as contracted to third partyNote 6: Slough Heat & Power Biomass Plant's
financial results are reported within SSE Enterprise. Capacity and output included above.
Sep 17 Sep 16
GAS PRODUCTION
Gas production adjusted operating profit - £m 4.5 2.1
Gas production reported operating profit/(loss) - £m 4.5 2.1
Gas production- M therms 254.9 314.5
Gas production- Mboe 4.21 5.11
Liquids production - Mboe 0.38 0.47
Gas production capital investment - £m 36.0 46.3
GAS STORAGE
Gas storage adjusted and reported operating profit/(loss) - £m (5.3) (4.3)
Gas storage reported operating profit/(loss) - £m (5.3) (4.3)
Gas storage customer nominations met - % 100 100
Gas storage capital investment - £m 0.5 0.2
Sustainably sourcing and producing energy
SSE's Wholesale segment consists of three business areas: Energy Portfolio Management (EPM) and Electricity Generation; Gas
Storage; and Gas Production. It makes a sustainable contribution to the fulfilment of SSE's core purpose and achievement of
its financial goals through excellence in the provision of energy, capacity, flexibility and related services for customers
in wholesale energy markets in Great Britain and Ireland.
The markets in which SSE's Wholesale businesses operate continue to be impacted by a number of key long-term trends and
developments, including an uncertain macroeconomic environment; shifts in commodity prices; government intervention;
regulatory change; and the ongoing transition to a low carbon economy. SSE's Wholesale business therefore has to
continually review its portfolio of assets, contracts and investment opportunities in the context of a changing market,
spreading risk in order to deliver returns in varied and challenging conditions.
SSE believes that putting a meaningful price on carbon emissions is a critical part of the UK's energy policy and is one of
the most important policy tools the government has to help industry continue to deliver reliable and lower carbon
electricity cost-effectively. The extension of the UK's Carbon Price Floor beyond April 2021 is dependent on government
decisions in the next Budget and has interactions with UK's future participation in the EU Emissions Trading Scheme.
Financial performance in Wholesale
During the six months to 30 September 2017, total adjusted operating profit in Wholesale was £159.9m compared to £121.0m in
the same period last year.
Adjusted operating profits and the principal movements in Wholesale's business segments during the six months to 30
September 2017 are as follows; comparisons are with the six months to 30 September 2016 unless otherwise stated:
Energy Portfolio Management and Electricity Generation: adjusted operating profit increased to £160.7m compared to
£123.2m. This reflects improved financial performance and higher output from both renewable and gas-fired generation,
partially offset by the end of the ancillary services contract for Fiddler's Ferry power station.
Gas Production: adjusted and reported operating profit increased to £4.5m, compared to £2.1m, mainly due to a higher
average achieved gas price which benefitted earnings in the six months to 30 September 2017, partly offset by lower
production volumes and the write-off of costs associated with an exploration well.
Gas Storage: an adjusted and reported operating loss of £5.3m was recorded, compared to an adjusted operating loss of
£4.3m, as challenging market conditions continue.
Reported Wholesale operating profit: decreased from £325.6m (restated) to £169.1m as a result of operating derivative gains
of £162.1m in 2016/17 compared to £21.4m in 2017/18. The prior year operating profit also includes an accounting fair value
uplift of £59.1m in relation to the Clyde windfarm.
Energy Portfolio Management (EPM)
The wholesale price of energy can fluctuate significantly due to a number of factors including the economy, the weather,
customer demand, infrastructure availability, and political and world events. EPM seeks to manage the impact of these
variables by maintaining a diverse and well-balanced portfolio of contracts and trading positions. EPM provides a
route-to-market for SSE's Generation assets and helps Energy Supply manage its commodity risk.
EPM is responsible for ensuring SSE has the energy supplies it requires to meet the needs of customers; procuring the fuel
required by the generation plants that SSE owns or has a contractual interest in; selling the power output from this plant;
where appropriate, securing value and managing volatility in volume and price through the risk-managed trading of
energy-related commodities; and providing energy solutions and services to customers.
As the electricity system changes to integrate intermittent, inflexible and distributed forms of generation alongside
conventional plant, EPM's ability to realise the value of flexibility within SSE's portfolio is increasingly important.
Electricity Generation (Renewables)
Delivering renewable sources of energy
Output of electricity from renewable sources, including pumped storage increased in the first half of 2017/18, compared to
the same period in the previous year (3.5TWh compared to 3.1TWh). Onshore wind generation increased partly due to new
windfarms coming on line and partly due to wind speeds returning to average levels. Offshore wind was down slightly as
certain assets underwent maintenance over the summer period. Hydro generation was down due to lower storage levels at the
start of the year, although the flexibility in generation means that much of the hydro generation can be run to meet peak
demands and offer generation to the electricity balancing mechanism.
Overall net renewable energy capacity including conventional hydro and pumped storage, increased from 3,275MW to 3,698MW in
the 12 months to 30 September 2017. The progress of SSE's onshore and offshore wind farm developments in that time is
summarised below:
Windfarm Status Generation Type Location Policy Support Scheme Net capacity change (MW) As at SSE Renewable Capacity (MW)
SSE Total Renewable Capacity as at 30 September 2016 3,275
Tievenameenta Delivered onshore wind NI RO 34 Feb-2017 3,309
Port of Tilbury Disposal onshore wind GB RO -9 Jun-2017 3,300
Slieve Divena 2 Delivered onshore wind ROI REFIT 2 19 Jun-2017 3,319
Dunmaglass Delivered onshore wind GB RO 94 Aug-2017 3,413
Galway Delivered onshore wind ROI REFIT 2 120 Sep-17 3,533
Clyde extension*reflecting SSE's stake increasing from 50% to 70% Delivered onshore wind GB RO 191 (173 MW constructed + 18MW per JV agreement)* Sep-17 3,724
Clyde 5% Part disposal onshore wind GB RO -26 Sep-17 3,698
SSE Total Renewable Capacity as at 30 Sept 2017 3,698
Bhlaraidh Delivered onshore wind GB RO 110 Oct-2017 3,834
Leanamore In Construction onshore wind GB RO 18 Early 2018 3,852
Stronelairg In Construction onshore wind GB RO 228 2018 4,080
Beatrice In Construction offshore wind GB CfD 235 2019 4,315
SSEs expected Total Renewable Capacity by 2020*Assumes SSE's share of Clyde windfarm remains at 65% 4,315
Opportunities in onshore wind
SSE is continuing to advance its planning application for the Doraville development in Northern Ireland. In March 2017, it
confirmed a new design layout which includes a reduction in turbine numbers and a change in turbine specification to
optimise generation to 119MW.
Future development options for onshore wind projects are being explored in light of the UK's current policy and regulatory
framework. The Irish Government issued a consultation in September 2017 on the design of a new renewable electricity
support scheme.
In October 2017, the UK Government announced it intends to allow wind projects on the remote islands of Scotland to compete
in the next Contracts for Difference auction alongside other less established technologies, subject to State Aid clearance
from the European Commission. SSE, with its joint venture partner, Viking Energy Shetland LLP, who represent the interests
of the Shetland community in large scale wind farm development in Shetland, will look to progress their consented Viking
Wind Farm (up to 457MW - SSE share 50%).
Opportunities in offshore wind
SSE continues to focus its offshore work and resources on the Beatrice offshore wind farm (588MW - SSE share 40%) in the
outer Moray Firth (see table above). The £2.6bn project reached financial close in May 2016 and is progressing in
accordance with the terms of the investment contract awarded to it by the UK government in 2014. SSE's joint venture
partners on the project are Copenhagen Infrastructure Partners (CIP) (35%) and SDIC Power (25%). Both onshore and offshore
construction are now well under way and the project is expected to be fully operational in 2019, contributing around
1,000GWh annually (SSE's share).
SSE has an interest in two further offshore wind farm developments. The first is Dogger Bank (up to 3.6GW), a 50:50 joint
venture formed with Statoil, following the exit of innogy from the former Forewind consortium. Under the new partnership,
SSE and Statoil will work to progress three projects in the Dogger Bank zone: Creyke Beck A, Creyke Beck B and Teesside A.
This includes continuing to assess the outcome of the most recent auction for Contracts for Difference.
The second development is Seagreen (Phase One up to 1050MW), a 50:50 partnership with Fluor Limited. Seagreen's consent was
subject to a judicial review in the Court of Session which found in favour of the petitioner, RSPB, in July 2016. This
decision was appealed in February 2017 by Scottish Ministers. In May 2017, the Inner House of the Court of Session
overturned the ruling and reinstated the consents. The RSPB subsequently applied directly to the UK Supreme Court for leave
to appeal against the Inner House's decision. SSE awaits the Supreme Court's decision.
In October 2017, the UK Government announced that £557m will be available for future Contracts for Difference auctions for
less established technologies, including offshore wind. The next auction will take place in Spring 2019.
Hydro
SSE's hydro portfolio continued to perform well in the half year, contributing flexible output to the UK electricity system
via the wholesale and balancing markets as well as providing ancillary services. Pumped hydro and conventional hydro can
function in effect as large-scale batteries, storing excess electricity until it is required to meet demand. In
particular, the hydro stations at Sloy, Errochty, Glendoe and Fasnakyle, which have a combined capacity of over 400MW, can
contribute a fast and flexible response to the electricity system.
Electricity Generation (Thermal)
Providing reliable capacity
The UK Government, together with Ofgem and National Grid (as the System Operator), introduced the Capacity Market in 2014
to encourage new investment and to ensure the UK has enough electricity generation capacity to meet peak demand.
In January 2017, the UK Government procured 54.4GW in a supplementary auction for delivery in 2017/18. SSE pre-qualified
5,898MW of capacity, and, of this, 4,451MW successfully secured agreements worth £31m.
SSE has also previously secured capacity market agreements worth:
· £85m for delivery in 2018/19;
· £57m for delivery in 2019/20; and
· £73m for delivery in 2020/21.
Capacity market income is received monthly with contract years running from October to September. To secure the revenue
arising from the Capacity Market, capacity providers must produce electricity or reduce demand when the system requires it;
failure to do so will result in penalties being levied.
In July 2017, the UK Government announced it would procure 50.1GW in the T-4 auction for delivery in 2021/22. The T-1
auction for delivery in 2018/19 will procure 6GW. SSE has submitted pre-qualification applications for both upcoming
auctions planned to start on 6 February 2018 and 30 Jan 2018, respectively.
Managing developments regarding thermal power stations
SSE's thermal assets produced over 10TWh in the half year to 30 September 2017, compared to 8TWh in the same period last
year, the majority of which came from gas-fired generation.
SSE has an ownership interest in five gas-fired power stations that participate in the GB electricity market:
· Medway (735MW wholly owned) has capacity obligations from 2017 through to 2021.
· Keadby (755MW wholly owned) has capacity obligations from 2017 through to 2021.
· Peterhead (1,180MW wholly owned) has no capacity obligations to date.
· Seabank (1,164MW) and Marchwood (840MW) SSE has a 50% stake in each of these gas-fired power stations, which have
both taken on capacity obligations from 2017 through to 2021.
A sixth gas-fired power station, Great Island (464MW), participates in the Single Electricity Market in Ireland.
SSE supports the UK Government policy to encourage investment in new gas-fired generation. It will continue to take a
disciplined approach to developing options for new stations, including the Keadby 2 CCGT in Lincolnshire.
SSE announced in February 2017 that it was undertaking a review of future options for Peterhead Power Station in
Aberdeenshire. The station's location means it has been required to pay significantly higher Transmission Entry Capacity
(TEC) costs than other power stations on the electricity system. In September 2017, Ofgem approved SSE's CUSC
modification proposal, CMP 268, which is due to become effective from 1st April 2018 and which should result in lower TEC
costs for the station. If CMP 268 is in practice adopted, SSE intends to continue to operate Peterhead Power Station at
1,180MW after 1 April 2018.
SSE operates one wholly owned coal-fired power station, at Fiddler's Ferry (Cheshire, 1,995MW), which has capacity
obligations for three of its four units from 2017 through to 2019. Preparation for the safe demolition of Ferrybridge 'C'
is under way.
Investing for the future through 'multifuel'
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 energy customers. Multifuel is an important part of that strategy.
Multifuel Energy Ltd (MEL) (the SSE and Wheelabrator Technologies Inc. 50:50 joint venture) operates a 68MW multifuel
generation facility known as Ferrybridge Multifuel 1 (FM1) in Knottingley, West Yorkshire. FM1 has now processed over 1.3
million tonnes of fuel and the station has taken on capacity obligations from 2017 through to 2021.
Construction is well under way at SSE's Ferrybridge Multifuel 2 (FM2) project after the final investment decision was taken
in June 2016. The project is being built next to the FM1 facility. The completed plant will be able to generate around 70MW
of electricity and is expected to be in operation from 2019. In September 2017, SSE completed the disposal of 50% of the
share capital of the company to Wheelabrator Technologies of the initial multi fuel facility.
Gas Production
Producing from UK Continental Shelf assets
SSE's gas production portfolio comprises stakes in mature assets in Easington and Bacton Catchment Areas in the Southern
North Sea as well as equity in new fields in the Greater Laggan Area which are located to the West of Shetland. Total
output in the six months to 30 September 2017 was 254.9million therms (4.21 mmboe) of gas and 0.38 mmboe of liquids,
compared with 314.5 million therms of gas (5.11 mmboe) and 0.47 mmboe of liquids for the same period in 2016. This decline
in production was primarily due to the natural decline of the fields and the summer maintenance programme.
In the Greater Laggan Area, gas production started in 2016 from the Laggan and Tormore fields with production rates peaking
at up to 90,000 boe a day. The nearby Edradour and Glenlivet fields started production ahead of schedule in August 2017,
albeit the Glenlivet field is still commissioning and is expected to reach full production before the calendar year end.
The production for full year 2017/18 is expected to be weighted to the second half, with the delivery of certain projects
and the full commissioning of the Glenlivet field scheduled for completion before the calendar year end.
As previously reported in SSE's Full Year Results 2016/17, as at 31 March 2017, the economically recoverable, Proven plus
Probable (2P) Reserves in SSE's gas production portfolio of assets were assessed as being 2.5bn therms. This technical
review is carried out annually by SSE's independent reserves auditors with movements in the technical assessment of 2P
reserves a well-known occurrence in the Gas Production business and further reassessments are expected in relation to these
relatively new fields.
These are important long term gas production assets which are expected to make a key contribution to EBITDA. SSE's annual
volumes of gas and liquids produced are expected to average around 500million therms (8.1mmboe) of gas per year in the
three years to March 2020. Thereafter, on current reserve estimates, production is forecast to decline to minimal levels by
2025.
Gas Storage
Both of SSE's storage sites have continued to operate to meet the needs of their customers in the first half of 2017/18,
following the return to service of the Atwick (Hornsea) site earlier in the year:
Alongside the under-pinning requirement to ensure the highest standards of safety and asset management are maintained, SSE
continues to respond to the difficult trading conditions with its overall aim to provide valuable flexibility and hedging
services to its customers and hence the wider UK gas market, while managing its cost base and being well positioned to take
advantage of future market developments.
Responding to market conditions for Gas Storage
The economic environment for gas storage in the UK continued to be extremely challenging in the first half of 2017/18.
SSE's response to these conditions has combined strict financial discipline regarding managing expenditure with innovative
development of new products to meet the evolving needs of customers.
SSE remains committed to working with UK government departments and the Regulator to ensure that the critical role of UK
storage in relation to security of supply and stability of gas price is maintained, despite the current threats to the
viability of the already low storage levels operating in the UK when compared to Europe, particularly with the recent
closure of UK gas storage assets.
Wholesale - Conclusion and Priorities
In addition to their first priority of safety, SSE's Wholesale businesses aim to create sustainable long-term value through
the responsible production, storage and provision of energy and related services for energy customers; ongoing rigour in
optimising its portfolio of existing assets and contracts; and developing new options for building, owning and operating
assets and delivering those in construction.
Wholesale priorities for 2017/18 and beyond
SSE's Wholesale businesses' priorities in 2017/18 and beyond are to:
· maintain and operate efficiently and reliably its generation portfolio across the UK and Ireland;
· deliver new assets in construction and develop new opportunities to build, own and operate assets in the future;
· secure a stable and predictable supply of energy to meet SSE's requirements;
· secure value, where appropriate, through the risk-managed trading of energy-related commodities;
· ensure efficient delivery of gas from the offshore gas fields in which SSE has a shared ownership; and
· safely, efficiently and reliably operate and maintain SSE's gas storage facilities, and ensure they are available for
use by its customers.
NETWORKS
Networks Key Performance Indicators
Sep 17 Sep 16
ELECTRICITY TRANSMISSION
Transmission adjusted and reported operating profit - £m 97.9 135.6
Regulated Asset Value (RAV) - £m 2,907 2,522
Capital expenditure - £m 231.4 269.3
ELECTRICITY DISTRIBUTION
Electricity distribution adjusted and reported operating profit - £m 176.0 181.0
Regulated Asset Value (RAV) - £m 3,355 3,209
Capital expenditure - £m 138.0 111.6
Electricity Distributed TWh 17.7 18.1
Customer minutes lost (SHEPD) average per customer 23 27
Customer minutes lost (SEPD) average per customer 22 23
Customer interruptions (SHEPD) per 100 customers 25 34
Customer interruptions (SEPD) per 100 customers 27 26
SCOTIA GAS NETWORKS
SGN adjusted operating profit (SSE's share) - £m 81.2 139.3
SGN reported operating profit (SSE's share) - £m 35.2 93.1
Regulated Asset Value - £m (SSE's share) - £m 1,790 2,555
Uncontrolled gas escapes attended within one hour % 98.6 98.7
SGN gas mains replaced - km 420 457
Owning, operating and investing in Networks
SSE is the only energy company in the UK to be involved in electricity transmission, electricity distribution and gas
distribution. Its five economically-regulated energy network companies consist of a 100% ownership of Scottish Hydro
Electric Transmission (SHE Transmission), Scottish Hydro Electric Power Distribution (SHEPD) and Southern Electric Power
Distribution (SEPD) and a 33.3% stake in both Scotland Gas Networks and Southern Gas Networks (SGN). Its electricity
networks businesses are collectively known as Scottish and Southern Electricity Networks (SSEN).
SSE's interests in economically-regulated energy networks support the maintenance of a balanced range of assets,
operational efficiency and disciplined investment. The RAV (Regulatory Asset Value) of SSE's five existing Networks
companies is now on course to reach close to £9bn by 2020.
Through Price Controls, Ofgem sets the framework through which network companies can earn index-linked revenue through
charges levied on users to cover costs and earn a return on regulated assets. While the RIIO Price Control framework is
complex, it provides for revenue to be strongly linked to the delivery of customer-focused commitments, against which
performance is measured and can be rewarded or penalised.
These economically-regulated, lower-risk businesses provide relative predictability and stability for SSE and balance its
activities in the market-based parts of the energy sector. While the overall shape of the networks continues to evolve - as
the recent expansion of electricity transmission, the transition to a Distribution System Operator (DSO) and the sale of
part of a stake in SGN demonstrate - they are core to SSE's strategy in the short, medium and long-term and contribute
significantly to its commitment to the payment of dividends to shareholders.
Responding to Ofgem's open letter on RIIO-2
In July 2017, Ofgem published an open letter on the regulatory framework for the next Price Control periods, which for SSE
will run from April 2021 for its electricity transmission and gas distribution businesses; and from April 2023 for its two
electricity distribution businesses.
The current RIIO framework is designed to ensure that the revenue that network owners can earn is closely linked to
performance and is realising significant and material benefits to GB energy customers and stakeholders, from increasing
levels of network reliability and service, to the transformational role networks are playing in the transition to a low
carbon economy.
The RIIO framework provides a powerful incentive mechanism to encourage efficiency measures, whereby high performing
companies are permitted to earn returns greater than the cost of capital, providing a fair return on investment for
shareholders who have provided the necessary funding to allow network companies to invest in the key national
infrastructure and to support the transition to a low carbon economy. The current eight-year price control period provides
stability for long term planning, supply chain development and investment in communities, which is crucial given the long
term nature of network investment planning.
The RIIO framework and regulatory process has a strong track record of setting price controls that deliver for customers
and stakeholders alike. SSEN does not believe the current regulatory framework requires material change and is broadly
supportive of the RIIO model and the incentives based regulation that measures performance in respect of the outputs
delivered for customers.
Putting stakeholders at the heart of decision making
SSEN continues to place its customers and stakeholders at the forefront of its decision making. Its independent
Stakeholder Advisory Panel is now firmly established and working alongside its Board, providing key external input to help
scrutinise business performance and effectiveness in meeting SSEN's commitments under the RIIO-T1 and RIIO-ED1 Price
Controls. The Panel consists of a Chair and six members, recruited to reflect a broad range of external interests, skills,
knowledge and experience.
Financial performance in Networks
As previously highlighted, SSE anticipates that its Networks' operating profit in 2017/18, including SGN, will be around
£150m lower than in 2016/17, on an absolute basis. This reflects the impact of the SGN partial equity disposal and phasing
of returns in the Price Control mechanisms in Transmission and Distribution resulting in expected full year reductions in
operating profit of around £70m for SGN; £60m for Transmission; and £20m for Distribution. During the six months to 30
September 2017, total adjusted operating profit in Networks was £355.1m, compared to £455.9m in the same period last year.
Adjusted operating profits and the principal movements in Networks business segments during the six months to 30 September
2017 are as follows (comparisons are with the six months to 30 September 2016 unless otherwise stated):
Electricity Transmission: as expected, adjusted and reported operating profit decreased to £97.9m from £135.6m, mainly due
to the phasing of capital expenditure on significant projects and the resulting impact on regulatory revenue as well as the
impact of the sharing of previous years' total expenditure (totex) underspends with customers.
Electricity Distribution: adjusted and reported operating profit was slightly down at £176.0m compared to £181.0m,
reflecting the fact that while revenues have increased in line with the growing RAV, these have been partially offset in
the current year by the expected net reduction in other factors which contribute to the overall Price Control calculation,
including those in the table below:
FY2016/17 FY2017/18 FY2018/19
Under/over recovery from 2 yr. previous FY + £38m under-recovered from 2014/15 +£5m under-recovered from 2015/16 - c.£10m over-recovered from 2016/17
DPCR Losses incentive income +£35m +£15m -
There are several factors which contribute to RIIO Price Control earnings which can be found on the Ofgem website in the
Transmission and Distribution Licence, Price Control Financial Handbook and Price Control Financial Model.
Gas Distribution: SSE's share of SGN's adjusted operating profit fell to £81.2m from £139.3m mainly due to SSE's partial
equity disposal (16.7%) in October 2016, as well as the phasing of regulatory revenue and the sharing of out-performance
with customers, which is part of the RIIO Price Control. The impact on operating profit of the part disposal in the full
financial year 2017/18 is estimated at £55m and is almost fully reflected in the six months to 30 September 2017, given the
timing of the disposal.
Reported Networks operating profit: decreased to £309.1m compared to £409.7m primarily for the reasons given above. In
addition, SGN had an exceptional gain in prior year of £23.0m due to the change in corporation tax rate.
Electricity Transmission
Scottish and Southern Electricity Networks (SSEN), operating as Scottish Hydro Electric Transmission plc under licence, is
responsible for maintaining and investing in the electricity transmission network in the North of Scotland.
Maintaining a track record of delivering a major programme of investment
Since the start of the RIIO T1
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