REG - SSE Plc - Half-year Report <Origin Href="QuoteRef">SSE.L</Origin> - Part 3
08/11/2017 07:14
- Part 3: For the preceding part double click ID:nRSH8580Vb
price control in April 2013, SSEN's capital investment in its transmission network has
totalled over £2bn, and continues to play a pivotal role in providing the key national infrastructure to facilitate the
UK's transition to a low carbon economy. With its committed pipeline of investment, SSEN expects to increase its RAV to
around £3.6bn by the end of the RIIO T1 price control in March 2021.
Excellent progress continues to be made with the delivery of SSEN's flagship Caithness-Moray transmission link, which
remains on schedule and within the allowed spend. With an agreed allowance of £1,118m (2013/14 prices), the project is the
largest single investment undertaken by any part of the SSE group to date.
The majority of key onshore enabling works related to the project have now been completed; including the successful
energisation of the Thurso South section in July 2017. The installation of the subsea cable is now well under way and is
on track to be completed during the first six months of 2018. The Caithness-Moray reinforcement remains on course to be
commissioned and energised by the end of 2018.
Reviewing transmission performance
SSEN has undertaken a review of its transmission business performance under the RIIO-ET1 transmission price control
settlement, in particular the expenditure and outputs in relation to the Strategic Wider Works mechanism. The review was
conducted in line with SSEN's responsibilities as a network owner to operate reasonably, prudently and efficiently.
As a result of this review, SSEN has identified £65.1m of forecast regulatory allowances which will either no longer be
required or claimed. This consists of £58.3m of allowances associated with the Caithness-Moray project, currently in
construction (mentioned above), and an additional £6.8m of expenditure to date related to landowner wayleave compensation
which will now not be recovered from customers.
SSEN has discussed its proposal with the regulator and expects Ofgem to consult on a resultant adjustment in its RIIO-ET1
TOTEX allowance through the Price Control financial model. This outcome, once implemented, is expected to reduce projected
revenues from SSEN's transmission business by £9.1m during FY2020/21. The adjustment will also mean that the RAV of SSEN's
transmission business will be £26m lower than previously projected levels.
The outcome of this proposed adjustment does not impact on the delivery of regulatory outputs for the Caithness-Moray
project and, providing SSEN delivers these outputs on time, an ex-post efficiency review is not expected. This is in line
with Ofgem's previously stated policy on the handling of Strategic Wider Works projects.
Enabling the transition to a low carbon economy
SSEN's strategic priority for the RIIO-T1 period has been enabling the transition to a low carbon economy through building
the transmission infrastructure necessary to connect and transport renewable energy in the north of Scotland.
Since the beginning of the current Price Control period in April 2013, the installed renewable electricity generation
capacity connected to SSEN's transmission network in the north of Scotland has grown significantly, from 3.3GW to over 5GW
today, contributing significantly to Government renewable and climate change targets as the UK continues to transition to a
low carbon economy.
Despite recent changes in the policy framework underpinning investment in low carbon electricity generation, in particular
the closure of the Renewables Obligation (RO) in March 2017, renewable electricity generation capacity supported by SSEN's
transmission network is forecast to grow to over 6GW by the end of the current Price Control period.
In the second half of 2017/18, the main generation assets due to connect to SSEN's transmission network are Stronelairg
wind farm (228MW); and Aberdeen Offshore Windfarm (92MW).
Fulfilling responsibilities for potential island links
SSEN remains fully committed to bringing forward proposals for new transmission links to the Scottish Islands, and in
October 2017, the UK Government, as part of its Clean Growth Strategy announcement, announced that it intends to include
island onshore wind in the next Contracts for Difference auction in Spring 2019.
SSEN welcomes this development for its island onshore wind customers and continues to engage with developers, Ofgem,
Government and other stakeholders to take forward proposals to provide transmission connections to the Scottish Island
groups in a timely manner, as soon as developer commitment and regulatory approval is confirmed.
Adapting to policy and regulatory change
SSEN continues to engage constructively with Ofgem in relation to the development of the regime for Extending Competition
in onshore Transmission (ECIT). Whilst it remains unclear when the legislation to take forward ECIT might be implemented,
in its recent consultation on the Needs Case for National Grid's Hinkley Seabank project, published on 30 August 2017,
Ofgem reaffirmed its commitment to introduce competition for the delivery of new, separable and high value transmission
assets.
The introduction of competition poses some potential risks to future growth and revenue, but also presents opportunities.
With a strong track record for connecting renewables on time and within budget, SSEN believes the experience it has gained
both in-house and with its supply, chain means that it is well placed to participate in competitive delivery arrangements
as the delivery partner of choice once the regime is implemented.
Operating a rapidly growing network
SSEN's first priority is to provide a safe and reliable supply of electricity to the communities its transmission network
serves. SSEN has established a dedicated and experienced team within its transmission business to deliver operational
excellence, including improved asset management and timely preparation for the introduction of new types of plant and
technology.
During the current period of rapid growth in transmission development, including commissioning of substantial new assets
and the connection of large volumes of renewable generation capacity, SSEN has maintained an impressive reliability of over
99.9%, with faults reducing by over a third on a five year average. In the first six months of 2017/18 there have been no
transmission faults affecting SSEN's demand customers, with SSEN currently on track to achieve 100% for the Energy Not
Supplied incentive.
As part of its increasing focus on operational excellence, SSEN is taking forward a number of refurbishment programmes to
renew its existing assets. This includes a refurbishment programme for the Fort Augustus - Fort William overhead line
which began in August 2017 and is expected to complete in summer 2020. The work will involve replacing the existing
conductors with new, innovative technology, which will be twice as strong as the existing conductors, 70% lighter and able
to carry twice the amount of power, improving efficiency and reliability for our customers as well as providing additional
capacity to support new forms of electricity generation.
Planning for the next Price Control
With the current price control now passed its mid-point, SSEN has started to gather evidence to support the development of
its next business plan for the price control period from April 2021 onwards.
As part of this process, SSEN is undertaking various reviews of its transmission area in the North of Scotland to
understand future energy scenarios and help deliver a resilient, pro-active, adaptable and efficient future network for its
customers.
Through this initial research and engagement with key stakeholders, SSEN has identified a divergence in the trend of energy
demand requirements for its industrial and commercial customers when compared to the GB average. This research has shown
that industrial and commercial electricity consumption has increased in SSEN's transmission area by over 13% in the last
decade, in contrast to a 7% decline seen across GB as a whole. Further work is required to fully understand the reasons
behind this and whether this is forecast to continue from April 2021 when next price control is scheduled to begin.
SSEN has also started to engage with its generation customers to understand potential onshore wind repowering scenarios as
existing onshore wind farms start to approach the end of their current renewable policy support mechanisms, predominately
the Renewables Obligation. This work and the energy trends research will inform a North of Scotland Future Energy
Scenarios paper due to be published for consultation later this year, helping build the evidence base to underpin SSEN's
next transmission business plan.
Throughout the second half of 2017/18, SSEN will undertake further engagement and consultation with a range of key external
stakeholders including its Stakeholder Advisory Panel: to help shape and influence its future business plan commitments; to
help understand and prepare for the specific requirements of its transmission network from April 2021 onwards; and to
ensure SSEN continues to delivers value for money services that consumers want and need.
Electricity Distribution
Scottish and Southern Electricity Networks (SSEN), operating as Scottish Hydro Electric Power Distribution (SHEPD) and
Southern Electric Power Distribution (SEPD) under licence, is responsible for maintaining the electricity distribution
networks supplying over 3.7 million homes and businesses across central southern England and north of the central belt of
Scotland, the Mull of Kintyre and the Scottish Islands.
Delivering for customers
Now in the third year of the RIIO-ED1 Price Control, SSEN's electricity distribution business continues to adapt to the
regulatory framework and has delivered significant changes to its operations, processes and standards to ensure the needs
of its customers remain at the forefront of decision making.
Under the RIIO ED1 price control, SSEN's performance is assessed against the commitments made in its business plan and this
drives the revenue which is earned. The key areas addressed by the business plan are network availability and reliability;
social obligations; safety; environmental impact; connections; and customer satisfaction. Each of these areas of focus has
the current and future needs of customers at its heart.
The outcomes of the incentive based framework within which SSEN operates are increasingly dependent on customer opinion and
feedback. Financial performance is reflected against: the Interruption Incentive Scheme; Ofgem Customer Satisfaction
Measures; Incentive in Connections Engagement; Complaints Performance and Stakeholder Engagement and Customer
Vulnerability.
By making a concerted effort to focus on its people and its processes, SSEN has made significant changes to ensure it is
meeting its customers' needs and delivering against the measures as set by the RIIO ED1 price control. This has ensured it
is able to deliver outputs aligned to the expectations of its customers, stakeholders and the regulator while delivering a
fair financial return to investors.
Keeping the lights on
As part of RIIO-ED1, SSEN is incentivised on its performance against the loss of electricity supply through the recording
of Customer Interruptions (CI) and Customers Minutes Lost (CML), which include both planned and unplanned supply
interruptions.
In the six months to 30 September 2017, Customer Interruptions decreased to 25 in Scotland (34 in HY16/17) and rose
slightly to 27 in England (26 in HY16/17) per 100 customers. Average Customer Minutes Lost decreased to 23 minutes in
Scotland (27 in HY16/17) and decreased to 22 minutes in England (23 in HY16/17).
SSEN's continued adoption of the 'restore first, repair second' method has helped deliver another strong performance for
its customers and continues to outperform the pre-determined targets set by Ofgem.
SSEN's commitment to providing a safe and secure electricity supply and to minimise unplanned interruptions requires a
continuous programme of investment in the network. In the six months to 30 September 2017, SSEN's programme of network
investment included reinforcements, upgrades to automation and tree cutting, as well as investments in new innovative
technologies.
Investing in innovation to improve network reliability
In July 2017, SSEN was awarded £2m as a discretionary award from Ofgem for its Tier 1 innovation projects. The award, the
highest amount awarded to any Distribution Network Operator (DNO) group, was based on the performance of SSEN's portfolio
of innovation projects under Low Carbon Networks (LCN) funding between 2010 and 2015.
SSEN continues to invest in innovative technologies to help improve the service to its customers and also improve
operational efficiency. This includes an initial investment of £255,000 in new power cut detection technology, which will
help engineers locate the source of underground cable faults much quicker, minimising the duration of power cuts and in
some cases even stopping them happening altogether.
TOUCAN - Thermal imaging Of Underground Cable Networks - is a new hand-held technology which during initial trials has
shown signs of significant benefits, allowing operatives to quickly locate and identify faults with precision, eliminating
ambiguity of location and minimising potential disruption to SSEN's customers and the electricity network.
Innovation continues to play a key role in the development and improvement of the service provided to SSEN's customers, at
the same time improving operational efficiency and delivering shareholder value by improving SSEN performance against its
reliability incentives.
Protecting vulnerable customers
SSEN remains fully committed to protecting its vulnerable customers and ensuring suitable support is provided to its
Priority Services Register (PSR) Customers during network outages.
One of its greatest challenges is identifying those customers who are eligible for its PSR and SSEN continues to look at
innovative ways of reaching these customers, from its vulnerability mapping portal, which provides detailed demographic
information about its communities, which SSEN is now using to directly target eligible groups of customers across its
regions, to partnerships with third party organisations, such as its link up with Home Energy Scotland, to help identify
SSEN's hard to reach vulnerable customers.
Throughout the second half of 2017/18, SSEN will maintain a clear focus on identifying and supporting its vulnerable
customers, particularly as the winter season approaches and potential impact on electricity supplies of seasonal stormy
weather.
Responding to Ofgem's proposed ICE penalty
In August, Ofgem published a consultation setting out proposed financial penalties, as part of the Incentive on Connection
Engagement, across all electricity DNOs for failing to meet minimum expectations when dealing with customers who request
new electricity connections. Following the subsequent consultation on the proposed penalties and the robust set of evidence
provided in SSEN's consultation response, Ofgem announced in October that it no longer intended to impose a penalty on
SSEN. Over recent years, SSEN has made significant changes and improvements to its connections process, informed by the
needs and expectations of customers, and remains fully committed to further improve its connections service based on the
needs and expectations of customers.
Setting out a customer focused DSO strategy
SSEN has published its DSO strategy, Supporting a Smarter Electricity System, alongside this statement, setting out the
five key principles it believes should underpin the transition to a smart, flexible electricity system: working for all
customers, ensuring cost efficiency, market neutrality, removing barriers to local solutions and adopting an approach of
learning by doing.
SSEN will continue to engage with industry, policy-makers and the regulator in support of a phased approach to the DSO
transition whereby impacts can be carefully reviewed and the best interests of customers maintained.
A proposed new energy solution for Shetland
The Shetland Islands are not currently connected to the GB Main Island Transmission System and all Shetland's energy needs
are met from a range of generation sources located on the islands, underpinned by the existing Lerwick Power Station. As
Lerwick Power Station is reaching the end of its operational life, SSEN was instructed by Ofgem to conduct a competitive
tender to find an economic and efficient solution to meet the future electricity demand requirements of Shetland's homes
and businesses.
Based on the bids received, a joint venture project from National Grid Shetland Link Interconnector Holdings Ltd and
partner Aggreko UK Ltd was recommended to Ofgem in May 2017 and SSEN now awaits the outcome of Ofgem's subsequent
consultation.
SGN
Scotia Gas Networks (SGN) manages the gas networks distributing natural and green gas to 5.9 million homes and businesses
across Scotland, the south of England and now Northern Ireland. In-line with its equity holding, SSE is entitled to receive
33.3% of SGN's distributed earnings.
By leading the way on innovation and putting its customers at the heart of its operations, SGN looks to meet customer
expectations by exceeding its commitments under the RIIO Price Control. This is done while ensuring it runs a safe,
efficient and reliable gas network. SGN has marked the mid-point of the current eight-year price control with a strong
performance providing value for shareholders and customers through the regulatory sharing mechanism. SGN's investment
programme is a key element of this and, within overall total cost allowances for the regulatory period of over £4.6bn
(2012/13 prices), Ofgem has allowed around £2.8bn to cover new capital investment and to manage the risks relating to SGN's
existing assets.
For the start of this financial year SGN continues to deliver a high standard of customer service with its Scotland gas
network currently number one out of eight for customer satisfaction and its southern network ranked fourth, achieving
scores in excess of nine out of ten for the first time. In terms of operational performance and safety, 98.6% of
uncontrolled gas escapes reported by the public were attended within one hour of notification, exceeding Ofgem's 97%
standard.
Networks - Conclusion and Priorities
In addition to their first priority of safety, SSE's economically regulated Networks businesses play a crucial role in the
provision of energy in Scotland and southern England, delivering value for money for customers and a fair return for
investors. SSE will work, in 2017/18 and beyond, to ensure it continues to meet the needs of customers and earn returns for
shareholders through focusing on the current and future needs of customers, disciplined investment and innovation and
excellence in delivery, creating a stable platform for future growth.
Networks priorities for 2017/18 and beyond
SSE's Networks businesses' priorities in 2017/18 and beyond are to:
· operate safely and meet all compliance requirements;
· provide an excellent service to all customers who rely on their networks and related services;
· deliver required outputs while maintaining tight controls over expenditure;
· maintain good progress in the safe delivery of new assets and enhancing DSO capability;
· progress innovations that will improve network reliability, efficiency and customer service and inform industry-wide
improvements; and
· develop and maintain effective stakeholder relationships and conduct constructive engagement with regulators and
legislators, advocating clarity and stability in the regulatory framework.
RETAIL (including Enterprise)
Retail (including Enterprise) Key Performance Indicators
Sep 17 Sep 16
Energy Supply
Energy Supply adjusted and reported operating profit - £m 46.7 47.1
Capital expenditure (Energy Supply and Energy Related Services) - £m 69.8 86.8
Electricity customer accounts (GB domestic) - m 3.90 4.11
Gas customer accounts (GB domestic) - m 2.58 2.76
Energy customers (GB business sites) - m 0.47 0.47
All-Island energy market customers (Ire) - m 0.77 0.79
Total energy customer accounts (GB, Ire) - m 7.72 8.13
Electricity supplied household average (GB) - kWh 1,542 1,544
Gas supplied household average (GB) - th 105 111
Household/small business aged debt (GB, Ireland) - £m 108.6 120.3
Bad debt expense (GB, Ireland) - £m 24.1 27.0
Customer complaints to third parties (GB)1 847 703
1 Ombudsman: Energy Services and Citizens Advice
Energy Related Services
Energy Related Services adjusted and reported operating profit- £m 11.4 8.6
Energy Related Services customer accounts (GB) - m 0.46 0.44
Smart Meters on supply around 625,000 over 310,000
Enterprise
Enterprise adjusted and reported operating profit - £m 12.2 4.8
Capital expenditure - £m 26.5 23.1
SSE Heat network customer accounts Over 7,500 Over 6,000
SSE Water network customer accounts Over 15,000 Over 12,500
SSE out of are electricity networks 428 401
Supplying energy and essential services across Great Britain and Ireland
SSE is one of the largest energy suppliers operating in the competitive energy markets in Great Britain and Ireland. At 30
September 2017, it supplied electricity and gas to 7.72 million household and business accounts. It also provides other
related products and services through its SSE Energy Related Services division including telephone, broadband and boiler
care to 0.46 million household and business customers.
SSE Business Energy (included above) provides energy to businesses, the public sector and other organisations; and the SSE
Enterprise business, which provides energy-related and telecoms services to meet the needs of businesses and public sector
organisations. Taken together, these B2B businesses contribute balance to the SSE Group and demonstrate SSE's commitment to
efficient operations and industry leading customer service.
In the six months since 31 March 2017, SSE Retail has undergone a change in leadership with the departure of Will Morris,
SSE's Managing Director of Retail, who left SSE after five years to pursue new opportunities. While the longer-term Retail
leadership structure is reviewed, the responsibilities of Managing Director have been shared between two new co-Heads, who
step into expanded roles: Stephen Forbes, who has been appointed Chief Commercial Officer, and Tony Keeling, who had been
appointed Chief Operating Officer.
Financial performance in Retail
During the six months to 30 September 2017, total adjusted operating profit across the Retail and Enterprise division was
£70.3m compared to £60.5m in the same period last year.
Adjusted operating profits and the principal movements in Retail'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 Supply: adjusted and reported operating profit across Energy Supply as a whole remained broadly flat at £46.7m
compared to £47.1m. Within this, GB household energy supply was again loss making in the first half, in line with demand
seasonality. Results were impacted by reduced customer numbers and the Pre-Payment Meter (PPM) price cap, offset by a
continued focus on efficiency and costs.
Energy related services: adjusted and reported operating profit showed an encouraging start to the financial year,
increasing to £11.4m, compared to £8.6m, as the customer facing telecoms business sees the benefits of previous customer
acquisitions, alongside efficiency improvements.
Enterprise: also showed improved performance with adjusted and reported operating profit increasing to £12.2m from £4.8m,
mainly due to improved business performance and a reduced cost base providing a more effective platform for growth.
Reported Retail operating profit: was the same as adjusted operating profit in the six months to 30 September for both
2017 and 2016.
Adapting to a changing market
As a provider of an essential service, SSE's operations in the GB energy supply market are subject to considerable, and
legitimate, political interest.
Standard Variable Tariffs (SVTs)
Following the publication of the CMA Final Report in June 2016, there has been political debate about the future role of
SVTs in the market and the differential to the cheapest deals suppliers offer. As of 30 September, the annual differential
between SSE's SVT and cheapest Fixed tariff was £57, based on Ofgem's average consumption estimates.
Having listened carefully to the public and political debate around the role of SVTs in the GB energy market, SSE is
committed to building on the significant progress that has been made to date in engaging customers and supporting them to
make active, informed decisions around their energy tariff and supplier. , Enabled by the recent rule changes announced by
Ofgem, from the early part of next financial year SSE will no longer automatically roll customers onto the SVT once they
have come to the end of their fixed term contracts. Instead, SSE intends to move customers onto an equivalent or cheaper
fixed term tariff, which would fix prices for 12 months with no exit fees. As is customary now, each year SSE will
proactively communicate with all customers coming to the end of their fixed term tariffs to prompt them to consider which
energy tariff is most suitable for their needs. This decision will effectively introduce an annual engagement prompt for
these customers. We anticipate these changes, along with continued efforts to engage customers with proactive
communications, will accelerate the reduction in the number of SSE customers on SVTs.
Regulatory and political intervention on tariffs
In October 2017, the UK Government published a draft Bill that, if enacted, would mandate Ofgem to cap prices for GB
customers on SVTs . This policy intervention is currently undergoing pre-legislative scrutiny and the stated intention is
that a price cap would come into force in January 2019. As of 30 September 2017, of its 6.5 million GB domestic customer
accounts, SSE has 2.7 million electricity accounts on SVTs and 1.8 million gas accounts on SVTs which could be impacted by
the Government's proposed broader cap.
Furthermore, Ofgem is consulting on its proposals to extend the existing Pre-Payment ,Meter safeguard tariff to customers
in receipt of the Warm Home Discount (WHD). As final WHD customer numbers are only known at the end of each scheme year, it
is difficult to forecast how many customers could be impacted by this. However, in the year to March 2017, SSE had 0.3m
customers who were in receipt of the Warm Home Discount, around 70% of which were on the SVT and not supplied through a
Pre-Payment Meter.
How these issues develop is currently unclear. As ever, SSE's approach will be to engage constructively with the UK
Government, Ofgem and other stakeholders as these regulatory and public policy changes are progressed. Through its
engagement, SSE will seek to emphasise that competition not price caps best serves customers' long term interests. SSE also
remains committed to identifying solutions that contribute towards positive, sustainable outcomes for customers and, in
particular, vulnerable consumers.
SSE will also highlight the importance of ensuring any whole of market price caps are set using a methodology that
accurately reflects the cost of supplying energy. It would not be appropriate to simply extent the current Pre-Payment
Meter safeguard tariff methodology to a wider group of customers. SSE continues to believe that any price cap must
time-limited and applicable to all suppliers operating in the GB market to avoid unintended consequences for customers and
competition.
Progress in Energy Supply
Owing to ongoing competitive pressures, in the six months to September 2017, SSE's energy customer accounts in Great
Britain and Ireland fell from 8.00 million to 7.72million. SSE Retail has a long-standing strategy to respond to increased
competition in the market by investing in retention, taking additional steps to engage and reward its customers, aiming for
high levels of customer service, delivering efficiencies, and redoubling efforts to digitalise and diversify the business.
This approach will enable the development of stronger, more enduring customer relationships based on engagement, service
and value.
During the six months to 30 September 2017, SSE has continued its efforts to deliver sustainable reductions in operating
costs through digitalisation and, specifically, back office process automation. This has already proved effective in
reducing the manual handling by customer service agents of routine data processing, for example, with the associated
reduction in cost and risk from this activity. Having successfully proved the case, SSE will now accelerate its use of back
office automation, while also moving towards deployment of AI-enabled webchat facilities at the front end to provide
quicker resolution of simpler customer service issues and free up its dedicated customer service team to focus on resolving
more complex customer problems.
Moving towards a smarter market
The energy sector in Great Britain is undergoing a radical transformation, in particular through the digitalisation of the
underlying infrastructure through the smart meter programme. SSE views the smart meter rollout as a unique opportunity to
transform the relationship between customers, their energy supplier and the energy they use. SSE's focus remains on
delivering its obligations in a way that is cost effective and customer centric, to maximise the net benefits for
customers.
SSE has continued to make good progress, increasing the recruitment of installers in order to continue to support the
transition to mass smart meter deployment. As of 30 September 2017, SSE had around 625,000 smart meters on supply and, to
date, customer feedback on their experience of the installation has been positive. A multi-channel communication strategy
has been put in place to help drive customer demand while an online smart meter booking system has been established to make
it easier for customers to book appointments. In accordance with the UK Government's proposal to end SMETS1 delivery from
July 2018, SSE is also preparing to transition from SMETS1 to SMETS2 meters.
The programme is now reaching a critical juncture. Delays to the delivery of the enabling central infrastructure, including
the Data Communications Company (DCC), have compressed the timetable for delivery and impacted the industry's ability to
make progress. In parallel, media attention around the costs and safety of the programme has negatively impacted customer
sentiment towards smart meters and the ability of suppliers to generate demand. As with any infrastructure programme with
dependencies and of this complexity and scale, there continue to be challenges associated with SSE's obligations under the
smart meter rollout but SSE is working hard to mitigate any risks to delivery. As the roll-out progresses, SSE continues to
build an evidence base to support its concerns and encourage pragmatic and flexible decision-making around the programme.
Helping vulnerable customers
SSE recognises the impact higher energy costs can have on customers, particularly the most vulnerable. With that in mind,
alongside its electricity price rise in March 2017, SSE introduced a new £5m Customer Support Fund, intended to provide
additional assistance for customers who need it most, particularly those who rely on electricity to heat their homes. In
the six months from March 2017, SSE has distributed £767,000 of this fund to help over 1,000 customers, all of whom are on
a low income with children, or of pensionable age. With the onset of winter, energy costs can be felt most acutely and so
SSE will distribute the remaining £4.23m to vulnerable customers who are struggling with debt.
In addition, SSE helps vulnerable customers manage their energy costs in a number of ways:
· Through the Warm Home Discount scheme - as of 30 September 2017, SSE had allocated over 214,000 rebates at £140 each
and by the end of the scheme year on 31 March 2018, SSE expects to spend over £46m, helping over 290,000 customers.
· In the Benefit Entitlement Scheme (BEC) Year 6 ending early May 17; SSE's customer service advisers proactively
identified and referred over 4,000 customers for benefit entitlement checks, with more than 2,300 customers successfully
completing the check, resulting in an average increase in income of more than £2,700 a year per customer. Good progress has
been made delivering this year's scheme and to date SSE's customer service advisers have proactively identified and
referred over 700 customers for a Benefit Entitlement Check.
· 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.
and Power continues to be focused on the growth of its electrical private
network.
Telecoms
SSE Enterprise Telecoms continues to accelerate new network development to help bring major UK data centres "on net" and
expand its commercial footprint throughout the UK, especially on key strategic routes. It is winning long term core network
agreements with new clients in the banking, transportation and service provider markets. In Ireland, SSE is part of a
consortium which has submitted a 'Detailed Solution' as part of a competitive bid process for the National Broadband Plan,
being carried out by the Irish State. The company has similar ambitions to develop its proposition for rural broadband
rollout in Scotland.
Rail
SSE Enterprise Rail continues its healthy growth trajectory in terms of size of business. The business has ambitions to
become a 'supplier of choice' for Network Rail in the delivery of multidisciplinary rail projects, and it is well placed to
win bids in major projects such as HS2. It is also increasing its focus on potential asset ownership in the energy and
communications space.
Retail (including Enterprise) - Conclusion and Priorities
In addition to their first priority of safety, SSE's Energy Supply, Energy-Related Services and Enterprise businesses
continue to operate in challenging competitive markets and are each focused on adapting to meet the changing energy needs
of household, commercial and public sector customers. This means maintaining a clear focus on delivering the propositions
and services that customers need, while actively managing key risks and leveraging SSE's core strengths.
Key priorities for 2017/18 and beyond
SSE's Retail priorities in 2017/18 and beyond are to:
· actively manage the implementation of proposed intervention in the GB energy supply market, in particular, by
responding positively to the views of political, regulatory and consumer stakeholders;
· retain and gain domestic and business customer accounts, minimising losses where possible;
· continue to build on SSE's strong culture of customer service in both GB and Ireland with new products and services;
· continue to make progress in delivering smart meters to customers and ensure readiness to transition from SMETS1 to
SMETS2;
· continue to deliver operational efficiencies by further digitalising the business and moving towards an operating
model capable of meeting the future needs of customers; and
· re-focus the Enterprise business so it has the strongest possible foundations for future growth.
Condensed Interim Statements
Alternative Performance Measures
When assessing, discussing and measuring the Group's financial performance, management refer to measures used for internal
performance management. These measures are not defined or specified under International Financial Reporting Standards
(IFRS) and as such are considered to be Alternative Performance Measures ("APMs").
By their nature, APMs are not uniformly applied by all preparers including other participants in the Group's industry.
Accordingly, APMs used by the Group may not be comparable to other companies within the Group's industry.
Purpose
APMs are used by management to aid comparison and assess historical performance against internal performance benchmarks and
across reporting periods. There has been no change to the adjustments applied by management in calculating the alternative
performance measures. These measures provide an ongoing and consistent basis to assess performance by excluding items that
are materially non-recurring, uncontrollable or exceptional. These measures can be classified in terms of their key
financial characteristics:
· Profit measures allow management to assess and benchmark underlying business performance during the year. They are
primarily used by operational management to measure operating profit contribution and are also used by the Board to assess
performance against business plan.
· Capital measures allow management to track and assess the progress of the Group's significant ongoing investment in
capital assets and projects against their investment cases, including the expected timing of their operational deployment.
· Debt measures allow management to record and monitor both operating cash generation and the Group's ongoing
financing and liquidity position.
The following table explains the key APMs applied by the Group and referred to in these statements:
Group APM Purpose Closest Equivalent IFRS measure Adjustments to reconcile to primary financial statements
Adjusted operating profit Profit measure Operating profit · Movement on operating and financing derivatives ('certain re-measurements')· Exceptional items· Share of joint ventures and associates interest and tax
Adjusted profit before tax Profit measure Profit before tax · Movement on operating and financing derivatives ('certain re-measurements')· Exceptional items· Interest on net pension assets/liabilities (IAS 19R)· Share of joint ventures and associates tax
Adjusted net finance costs Profit measure Net finance costs · Movement on financing derivatives· Share of joint ventures and associates interest· Interest on net pension assets/liabilities (IAS 19R)
Adjusted current tax charge Profit measure Tax charge · Share of joint ventures and associates tax· Deferred tax including share of joint ventures and associates· Tax on exceptional items and certain re-measurement
Adjusted earnings per share Profit measure Earnings per share · Exceptional items· Movements on Derivatives ('certain re-measurements')· Interest on net pension assets/liabilities (IAS 19R)· Deferred tax including share of joint ventures and associates
Adjusted net debt and hybrid capital Debt measure Unadjusted net debt · Hybrid capital· Outstanding liquid funds · Finance leases
Investment and capital expenditure (adjusted) Capital measure Capital additions to Intangible Assets and Property, Plant and Equipment · Other expenditure· Customer funded additions (IFRIC 18)· Allowances and certificates· Disposed additions· Joint ventures and associates additions
Rationale for adjustments
Adjustments to Profit Measure
1 Movement on operating and financing derivatives ('certain re-measurements')
This adjustment can be designated between operating and financing derivatives.
Operating derivatives are contracts where the Group enters into forward commitments or options to buy or sell electricity,
gas and other commodities to meet the future demand requirements of its Energy Supply business or to optimise the value of
its Wholesale assets. Certain of these contracts are determined to be derivative financial instruments under IAS 39 and as
such are required to be recorded at their fair value. Changes in the fair value of those commodity contracts designated as
IAS 39 financial instruments are reflected in the income statement (as part of 'certain re-measurements'). The Group shows
the change in the fair value of these forward contracts separately as this mark-to-market movement is not relevant to the
underlying performance of its operating segments due to the volatility that can arise on revaluation. The Group will
recognise the underlying value of these contracts as the relevant commodity is delivered, which will predominantly be
within the subsequent 12 to 36 months. Conversely, commodity contracts that are not financial instruments under IAS 39 are
accounted for as 'own use' contracts and are consequently not recorded until the commodity is delivered and the contract is
settled.
Financing derivatives include all fair value and cash flow interest rate hedges, non-hedge accounted (mark-to-market)
interest rate derivatives, cash flow foreign exchange hedges and non-hedge accounted foreign exchange contracts entered
into by the Group to manage its banking and liquidity requirements as well as risk management relating to interest rate and
foreign exchange exposures. Changes in the fair value of those financing derivatives are reflected in the income statement
(as part of 'certain re-measurements'). The Group shows the change in the fair value of these forward contracts separately
as this mark-to-market movement is not relevant to the underlying performance of its operating segments.
The re-measurements arising from operating and financing derivatives, and the tax effects thereof, are disclosed separately
to aid understanding of the underlying performance of the Group.
2 Exceptional Items
Exceptional charges or credits, and the tax effects thereof, are considered unusual by nature or scale and of such
significance that separate disclosure is required for the underlying performance of the Group to be properly understood.
Further explanation for the classification of an item as exceptional is included in Note 2 (iii).
3 Share of joint ventures and associates interest and tax
This adjustment can be split between the Group's share of interest and the Group's share of tax arising from its
investments in equity accounted joint ventures and associates.
The Group is required to report profit before interest and tax ('operating profit') including its share of the profit after
tax of its equity accounted joint ventures and associates. However, for internal performance management purposes and for
consistency of treatment, SSE reports its adjusted profit measures before its share of the interest and/or tax on joint
ventures and associates.
4 Interest on net pension assets/liabilities (IAS 19R)
The Group's interest charges relating to defined benefit pension schemes are derived from the net assets/liabilities of the
schemes as valued under IAS 19R. This will mean that the charge recognised in any given year will be dependent on the
impact of actuarial assumptions such as inflation and discount rates. To avoid income statement volatility derived from
this basis of measurement and reflecting the non-cash nature of these charges, the Group excludes these from its adjusted
profit measures.
5 Deferred tax
The Group adjusts for deferred tax when arriving at adjusted profit after tax and its adjusted effective rate of tax. Given
deferred tax arises as a result of potential future tax credits or charges, and is therefore unrelated to the current
period tax charge or payments made, the Group excludes these from its adjusted profit measures.
Adjustments to Debt measure
6 Hybrid capital
The characteristics of certain hybrid capital securities mean they qualify for recognition as equity rather than debt under
IFRS. Consequently, their coupon payments are presented within dividends rather than within finance costs. As a result, the
coupon payments are not included in SSE's adjusted profit before tax measure. In order to present total funding provided
from sources other than ordinary shareholders, SSE presents its adjusted net debt measure inclusive of hybrid capital to
better reflect the Group's funding position.
7 Outstanding liquid funds
Outstanding liquid funds are SSE cash balances held by counterparties as collateral at the year end. SSE includes these as
cash until they are utilised. Loans with a maturity of less than three months are also included in this adjustment. The
Group includes this adjustment in order to better reflect the immediate cash resources to which it has access, which in
turn better reflects the Group's funding position.
8 Finance leases
SSE's reported loans and borrowings include finance lease liabilities, most significantly in relation to its tolling
contract with Marchwood Power Limited, which are not directly related to the external financing of the Group. The Group
excludes these liabilities from its adjusted net debt and hybrid capital measure to better reflect the Group's underlying
funding position with its primary sources of capital.
Adjustments to Capex Measure
9 Other expenditure
Other expenditure primarily represents subsequently derecognised development expenditure which is excluded to better
reflect the Group's ongoing capital position.
10 Customer funded additions
Customer funded additions represents additions to electricity and other networks funded by customer contributions and
accounted for under IFRIC 18. Given this is directly funded by customers, this has been excluded to better reflect the
Group's underlying investment position.
11 Allowances and certificates
Allowances and certificates consist of purchased carbon emissions allowances and generated or purchased renewable
obligations certificates (ROCs) and are not included in the Group's Capital Expenditure and Investment alternative
performance measure to better reflect the Group's investment in enduring operational assets.
12 Additions subsequently disposed
Additions subsequently disposed in the current period represent capital additions related to Ferrybridge MFE2 Limited which
were subsequently disposed to Wheelabrator Technologies Inc. (see Note 11). In the year ended 31 March 2017 the Group had
invested in capital additions related to smart meter installations which were subsequently disposed to Meter Fit 2
Limited.
13 Joint ventures and associates additions
Joint ventures and associates additions represent funding provided to joint venture arrangements in relation to capital
expenditure projects. This has been included to better reflect the Group's use of directly funded equity accounted vehicles
to grow the Group's asset base. Project finance raised by the Group's joint ventures and associates is not included in this
adjustment.
The table below reconciles the adjusted performance measures to the reported measure of the Group.
March 2017 September 2017 September 2016(i) September 2015
£m £m £m £m
1,874.0 Adjusted operating profit 586.2 637.2 701.9
(328.1) Adjusted net finance costs (176.6) (161.4) (153.1)
1,545.9 Adjusted profit before tax (PBT) 409.6 475.8 548.8
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