REG - SSE Plc - Half Year Results <Origin Href="QuoteRef">SSE.L</Origin> - Part 2

SSEAnnouncement

09/11/2016 07:06

- Part 2: For the preceding part double click  ID:nRSI6798Oa 

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 - all of which supports the delivery of annual increases in the dividend of at least RPI inflation and the maintenance
of an appropriate level of dividend cover.  In October 2016, Moody's Investors Service affirmed SSE's senior credit rating
of A3, changed SSE's outlook from negative to stable and raised SSE's threshold for retained cash flow/debt ratio to 'mid
teens' (previously 13%). In the same month, Standard & Poor's affirmed SSE's A-rating and negative outlook, while also
raising SSE's threshold for funds from operations/debt ratio to 23% (previously 20-23%). 
 
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. 
 
Maintaining a prudent treasury policy following the EU referendum 
 
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 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 2016, 88.3% 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. 
 
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 therefore all its major project capex requirements are hedged, including the recently approved
Stronelairg.  Translational foreign exchange risk arises in respect of overseas investments, and hedging in respect of such
exposures is determined as appropriate to the circumstances on a case-by-case basis.  Overall, while SSE has reviewed its
treasury policy following the result of the EU Referendum, it has identified no need for change at this time. 
 
Managing net debt and maintaining cash flow 
 
SSE's adjusted net debt and hybrid capital was £9.0bn at 30 September 2016, compared with £8.40bn on 31 March in 2016 and
£7.94bn on 30 September 2015.  The level of net debt and hybrid capital reflects SSE's ongoing investment programme and in
the six months to 30 September 2016 includes an increase in net debt as a result of macro economic factors, in particular
exchange rates, which increased SSE debt during the period by around £271m.  Adjusted net debt and hybrid capital is
expected remain flat at around £9.0bn on 31 March 2017, dependant on factors ranging from working capital to the timing of
the use of the SGN proceeds. 
 
Adjusted net debt excludes finance leases and includes outstanding liquid funds that relate to wholesale energy
transactions.  Hybrid capital is accounted for as equity within the Financial Statements but has been included within SSE's
'Adjusted net debt and hybrid capital' to aid comparability.  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. 
 
Reported net debt has increased due to the Group'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 2016 was 8.8 years, compared with 8.9 years at 31 March 2016. 
 
SSE's debt structure remains strong, with around £6.5bn of medium/long term borrowings in the form of issued bonds,
European Investment Bank debt and other loans. 
 
The balance of SSE's adjusted net debt is financed with short-term bank debt.  SSE's adjusted net debt includes cash and
cash equivalents totalling £257.9m.  Around £1.1bn of medium-term borrowings will mature in the period to March 2018. 
 
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 2016 (relating to the final dividend for the year to 31 March 2016) resulted in a
reduction in cash dividend funding of £142.6m, with 9.4 million new ordinary shares, fully paid, being issued. 
 
This means that the cumulative cash dividend saving or additional equity capital resulting from the introduction of SSE's
Scrip Dividend Scheme in 2010 now stands at £1,194m and has resulted in the issue of 87.1 million Ordinary shares. 
 
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 table headed Net Finance Costs.  SSE's adjusted net finance costs in the 6
months to 30 September 2016 were £161.4m, compared to £153.1m for the same period in 2015; and reported net finance costs
were £120.6m, compared to £112.3m.   Reconciling items between adjusted and reported net finance costs in the six months to
30 September 2016 are similar to last year, with the increase in both adjusted and reported net finance costs attributable
to the higher level of debt. 
 
Coupon payments relating to hybrid capital are presented as distributions to other equity holders and are reflected within
adjusted earnings per share when paid. The schedule for SSE's hybrid bond interest payments has changed to reflect the most
recently issued hybrid bonds, with the result that payments are higher in the H1, but will be lower for 2016/17 as a whole.
 Hybrid coupon payments in the six months to 30 September 2016 were £73.9m (compared to £12.5m in the same period last
year) and in 2016/17 as a whole, are expected to be c.£120m (compared to £124.6m last year) 
 
Tax 
 
SSE believes it should pay its fair share of tax, and its policy is to operate within both the letter and the spirit of the
law at all times. Its primary objective from a tax perspective is to be compliant with all tax legislation requirements.
This includes making timely and accurate returns which reflect SSE's fiscal obligation to Government whilst, at the same
time, recognising all legislative concessions and reliefs. 
 
SSE strives to minimise its total tax liability within the framework of legislative reliefs but does not take an aggressive
stance in its interpretation of tax legislation. SSE does not use artificial tax avoidance schemes or tax havens to reduce
the Group's tax liabilities. 
 
Central to its Tax Policy is the maintenance and development of a strong working relationship with HMRC and other
treasuries based on trust and cooperation.  As a consequence, SSE strives to be regarded as a low risk and responsible
taxpayer.  In October it published Talking Tax 2016, summarising its approach to tax matters (see sse.com). 
 
Group Financial Overview - Conclusion and Priorities 
 
SSE's first financial objective is to deliver annual increases in the dividend that at least keep pace with RPI inflation. 
SSE believes that its strategic framework, opportunities for growth and effective financial management mean it can continue
to deliver this in 2016/17 and beyond.  Its financial priorities for 2016/17 as a whole include: 
 
·     Delivery of an annual increase in the dividend that at least keep pace with RPI inflation; 
 
·     A return to growth and adjusted earnings per share of at least 120p; 
 
·     Maintaining dividend cover in a range from around 1.2 times to around 1.4 times, and in each of the years to 2018/19
also, based on dividend increases that at least keep pace with RPI inflation; 
 
·     Continued disciplined investment in a balanced range of energy related assets and delivering the projects within the
established investment programme, especially in economically-regulated Networks and government-mandated renewables; 
 
·     Maintaining a strong balance sheet, with a commitment to robust ratios for retained cash flow and funds from
operations/debt; and 
 
·     Appropriate use of the SGN proceeds, a process which could continue until the end of 2017. 
 
WHOLESALE 
 
Wholesale Key Performance Indicators 
 
                                                                                                                                                                           Sep 16   Sep 15   
 Energy Portfolio Management (EPM) and Electricity Generation                                                                                                                                
 EPM and Generation adjusted operating profit - £m                                                                                                                         123.2    141.8    
 EPM and Generation reported operating profit/(loss) - £m                                                                                                                  268.7    (146.9)  
 EPM and Generation capital expenditure and investment - £m                                                                                                                188.3    214.3    
                                                                                                                                                                                             
 GENERATION                                                                                                                                                                                  
 Gas- and oil-fired generation capacity (GB) - MW                                                                                                                          4,013    3,961    
 Gas- and oil-fired generation capacity (Ire)  - MW                                                                                                                        1,292    1,292    
 Coal-fired generation capacity- MW                                                                                                                                        1,995    2,519    
 Waste to Energy capacity -  (MW)                                                                                                                                          34       34       
 Total thermal generation capacity - MW                                                                                                                                    7,334    7,806    
 Conventional hydro capacity (GB) - MW                                                                                                                                     1,150    1,150    
 Onshore wind  capacity (GB) - MW                                                                                                                                          900      1,008    
 Onshore wind capacity (NI) - MW                                                                                                                                           88       88       
 Onshore wind capacity (ROI) - MW                                                                                                                                          456      456      
 Offshore  wind capacity (GB) - MW                                                                                                                                         344      354      
 Dedicated biomass capacity (GB) - MW                                                                                                                                      37       37       
 Total renewable generation capacity - MW                                                                                                                                  2,975    3,093    
 Pumped storage capacity (GB) - MW                                                                                                                                         300      300      
 Total electricity generation capacity (GB and Ire) - MW                                                                                                                   10,609   11,199   
                                                                                                                                                                                             
 Renewable capacity qualifying for ROCs - MW                                                                                                                               c.1,750  c.1,900  
                                                                                                                                                                                             
 Gas- and oil-fired (inc. CHP) output (GB) - GWh                                                                                                                           6,639    3,634    
 Gas- and oil-fired output ( Ire) - GWh                                                                                                                                    1,428    1,015    
 Coal-fired (inc. biomass co-firing) output - GWh                                                                                                                          2        605      
 Total thermal generation - GWh                                                                                                                                            8,069    5,254    
 Conventional hydro output - GWh                                                                                                                                           1,234    1,590    
 Onshore wind output GB - GWh                                                                                                                                              708      1,011    
 Onshore wind output NI - GWh                                                                                                                                              87       94       
 Onshore wind output ROI - GWh                                                                                                                                             471      548      
 Offshore wind output - GWh                                                                                                                                                488      535      
 Biomass output GB - GWh                                                                                                                                                   38       27       
 Total renewable generation - GWh                                                                                                                                          3,026    3,805    
 Pumped storage output - GWh                                                                                                                                               123      105      
 Total Generation output  all plant - GWh                                                                                                                                  11,218   9,164    
 Note 1: Capacity is wholly-owned and share of joint ventures.Note 2: Output is electricity from power stations in which SSE has an ownership interest (output based on    
 SSE's contractual share).Note 3: Capacity includes 1,180MW at Peterhead (while TEC is 400MW)Note 4: Keadby TEC increased by 20MW to 755MW and Medway TEC increased by 35MW 
 to 735MW from 1 April 2016.Note 4: 2016 Capacity excludes Ferrybridge which ceased operation on 31 March 2016, a reduction of 524MW.Note 5: Wind output excludes 58GWh of 
 constrained off generation in HY2016/17 and 112GWh in HY2015/16Note 6: Onshore wind capacity and output at Sep 16 excludes 175MW related to the Clyde disposal in March 16 
  Note 7: Waste to Energy GWh not included above as contracted to third partyNote 8: Slough Heat & Power Biomass Plant's financial results are reported within SSE         
 Enterprise.  Capacity and output included above.                                                                                                                          
 
 
                                                                 Sep 16  Sep 15  
 GAS PRODUCTION                                                                  
 Gas production adjusted and reported operating profit - £m      2.1     14.1    
 Gas production- m therms                                        314.5   191.3   
 Gas production- mm boe                                          5.11    3.11    
 Liquids production - mm boe                                     0.47    0.03    
 Gas production capital investment - £m                          46.3    9.6     
                                                                                 
 GAS STORAGE                                                                     
 Gas storage adjusted and reported operating (loss)/profit - £m  (4.3)   3.7     
 Gas storage customer nominations met - %                        100     100     
 Gas storage capital investment - £m                             0.2     3.2     
 
 
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 flexible provision, storage and delivery of energy and related services for
customers in wholesale energy markets in Great Britain and Ireland. This is achieved through the maintenance of a diverse
portfolio of assets, contracts and innovative energy solutions; and the ability to respond quickly and effectively to
changing market conditions and opportunities. 
 
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 in the context of a changing market. 
 
SSE remains committed to enhancing the transparency in the financial reporting and performance management of its operating
segments.  Accordingly, the presentation of the results for SSE's Wholesale businesses in its Financial Statements
continues to be kept under review. 
 
Financial performance in Wholesale 
 
During the six months to 30 September 2016 total adjusted operating profit in Wholesale was £121.0m compared to £159.6m in
the same period last year. The primary drivers relating to operating profit are as follows: 
 
·     Energy Portfolio Management and Electricity Generation: adjusted operating profit decreased by £18.6m, to £123.2m
mainly due to a 20.5% decrease in electricity output from renewable sources, partly offset by an improvement in the
economics of SSE's thermal generation portfolio.  For the year as a whole, SSE is still expecting to report an increase in
EPM and Electricity generation operating profit; and while SSE's diverse portfolio of assets and contracts provides
mitigation, the volatile conditions we have seen in recent weeks in the GB power market could have wide-ranging impacts. 
 
Reported operating profit shows an increase from a loss of (£146.9)m to a profit of £268.7m, in the main due to the
relative positive performance of its marked-to-market operating derivatives between the periods. 
 
·     Gas Production:   operating profit (adjusted and reported) decreased by £12m to £2.1m, reflecting lower gas prices,
with some improvement in profitability expected in the second half of the year due to a higher winter gas price. 
 
·     Gas Storage:  made an adjusted operating loss (adjusted and reported) of (£4.3m), compared to a profit of £3.7m for
the same period last year, reflecting the continued challenges in operating conditions. 
 
Energy Portfolio Management (EPM) 
 
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. 
 
Maintaining a diverse portfolio of energy assets and contracts 
 
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. In doing so, SSE has: 
 
·     greater ability to manage the impact from wholesale energy price volatility; and 
 
·     more scope to deliver the investment needed in Generation in particular because the risks associated with large-scale
and long-term investments are contained by the balanced nature of SSE's energy businesses. 
 
Generation - Overview 
 
Electricity Generation is responsible for the operation, management and maintenance of SSE's generation assets; and for
ensuring these assets are available when required; and for developing future renewable and thermal generation projects. 
 
The Generation division's principal objective is to safely, efficiently and reliably maintain and operate a diverse
generation portfolio, which includes a significant amount of renewable energy capacity, across the UK and Ireland. 
 
Generation - Great Britain (renewables) 
 
Operating SSE's renewable generation capacity 
 
Output of electricity from renewable sources decreased in the first half of 2016/17, compared to the same period in 2015/16
(3,026GWh compared to 3,805GWh). The primary driver for this differential was the weather; put simply there was lower
rainfall and less windy conditions in the first half of 2016/17 across Great Britain than in the same period last year.
Overall renewable capacity also reduced slightly, from 3,093MW to 2,975MW, following the sale of 49.9% of Clyde wind farm
in March 2016.  Availability of the renewable portfolio remained high throughout the period. 
 
SSE's second largest conventional hydro electric scheme is Glendoe, and judgement on the Court of Session case of SSE
Generation Ltd against Hochtief Solutions AG and Hochtief (UK) Constructions Ltd in relation to the scheme is expected to
be handed down in the second half of this financial year. 
 
Developing renewable energy schemes onshore 
 
SSE continues to operate under the policy support regime for renewable generation capacity in GB, currently delivered
through the Renewables Obligation (RO) (which also applies in Northern Ireland); and the Contracts for Difference (CfD)
mechanism. 
 
SSE has three onshore wind projects under construction which will qualify for the GB RO: 
 
·     Dunmaglass (94MW) - the project is now exporting electricity and is scheduled for completion in the Spring of 2017. 
 
·     Clyde Extension (173MW) - turbine erection is now under way and the project is expected to be fully operational in
2017. 
 
·     Bhlaraidh (108MW) - turbine erection is now under way and the project is expected to be fully operational in 2017. 
 
SSE also has one onshore wind project in pre-construction which it expects to qualify for the GB RO: 
 
·     Stronelairg (225MW) - The Judicial Review appeal was upheld by the Court of Session in July 2016.  Although this is a
challenging project, SSE intends to proceed with the construction of the project and expects to secure accreditation under
the Renewables Obligation. 
 
SSE also has onshore wind farm projects in development which, if developed, will not qualify for the RO: 
 
·     Viking (with consent) (up to 457MW - SSE share 50%) - SSE, with its Joint Venture partner, has continued to develop
this project. In order to progress further it requires State Aid clearance from the European Commission and confirmation
that Remote Islands Wind projects will be eligible to participate in forthcoming CfD auctions. 
 
·     Strathy South (in planning) (up to 133MW) - Objections were examined fully at a Public Local Inquiry in 2015 and it
is awaiting a consent decision from Scottish Ministers. 
 
·     Gordonbush Extension (in planning) (up to 32MW) - Highland Council did not object to the planning application and it
is awaiting a consent decision from Scottish Ministers. 
 
Future development options for later onshore wind projects are being explored in light of recent changes to the UK's policy
and regulatory framework. 
 
Offshore wind projects in development 
 
SSE's offshore work and resources are focused on the Beatrice offshore wind farm (588MW - SSE share 40%) in the outer Moray
Firth. 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%). 
 
The wind farm is being developed with a tier 1 supply chain comprising Subsea 7, Siemens Wind and a consortium of Nexans
and Siemens Transmission and Distribution Ltd. Onshore construction is under way, offshore construction is planned to
commence in 2017, and the project is expected to be fully operational in 2019. 
 
In addition to Beatrice, SSE has an interest in two further offshore wind farm developments: Seagreen (up to 3,500MW - a
50:50 partnership with Fluor Limited); and Forewind (up to 4,800MW - a four-way partnership with RWE Innogy, Statoil and
Statkraft). The first phase of Seagreen (up to 1,050MW) was subject to a judicial review in the Court of Session which
found in favour of the petitioner, RSPB, in July2016. The Seagreen partners will work with the Scottish Government to
progress an appeal of this judgement. Forewind has consent for four separate 1,200MW projects in the Dogger Bank Zone, and
the four Joint Venture partner organisations will agree the best route forward for each. 
 
Future development opportunities 
 
SSE will continue to focus on opportunities for the development, construction and commissioning of onshore and offshore
wind farm capacity in the UK and Ireland, consistent with its commitment to efficiency in investment decision-making.
Looking further ahead, it is seeking to build opportunities to add to its portfolio of wind farms in these two countries. 
 
SSE will, however, always consider opportunities to extend, in a careful and measured way, its established interests in,
knowledge of and skills related to onshore wind energy. With this in mind, other jurisdictions may be considered if they
play to SSE's strengths, add to its balanced range of energy businesses and can deliver long-term growth for shareholders. 
 
Generation - Great Britain (thermal) 
 
Market developments with an impact on SSE 
 
In line with its responsibilities for security of supply, National Grid published its Winter Outlook Report in October 2016
and stated that it expects there to be sufficient generation and interconnector imports to meet demand throughout winter
2016/17.  It also stated that it is confident it has the right tools in place to help it balance the system. 
 
Equally, Ofgem has consistently maintained that during the period to 2018/19 it expects electricity generation capacity
margins to be lower than they have been historically due to weak market economics and the closure of older plant. 
 
The UK Government, together with Ofgem and National Grid (as the System Operator), has decided to address the issue of
capacity margins in two ways: 
 
·     in the longer term, through the implementation of the Capacity Market. SSE supports the UK Government's plans,
announced earlier this year, to incrementally strengthen the Capacity Market, including the supplementary capacity auction
planned for winter 2017/2018; and 
 
·     in the intervening period, through the Supplemental Balancing Reserve (SBR) which will close after winter 2016/17. 
 
The design and operation of both the Capacity Market and SBR mechanisms is set by the UK's Department of Business, Energy
and Industrial Strategy (DBEIS) and National Grid. They determine how much capacity is required to ensure security of
supply under each mechanism. Once this volume has been determined they procure the necessary capacity through a competitive
auction/tender process. 
 
In October 2016 the UK Government revised the previously published parameters for the next round of Capacity Market
auctions to: 
 
·     53.6GW in the supplementary auction for delivery in 2017/18; and 
 
·     51.7GW in the auction for delivery in 2020/21 (with an additional 600MW in the associated year-ahead auction).  In
line with the Government's announced intention to procure more capacity, this target is higher than for last year's
equivalent auction. 
 
SSE has prequalified 5,898MW and 7,025MW respectively of its generation portfolio for the upcoming auctions. This includes
all of its thermal power stations. 
 
Making the case for the Carbon Price Floor 
 
SSE believes that putting a price on carbon emissions, through the UK's Carbon Price Floor, 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 Carbon Price Floor arrangements are in place until April 2021.
SSE has publicly supported the extension of the Carbon Price Floor beyond that. 
 
Operating SSE's thermal power stations 
 
SSE's power generation assets operate in complex markets. They derive revenue from a number of sources, including a variety
of contracts, and operate in the context of wider energy portfolio management decisions. Amongst other things, this means
changes in 'spark' or 'dark spreads' may not always be reflected in the financial performance of generation plant.  In
addition, and as in any other market, the revenue they are able to earn is influenced by the extent and timing of the
demand for their core product of electricity, the output of electricity from a range of sources, including renewables, and
the position of other market participants and the operation of their plant. 
 
Market conditions for thermal generation continued to be challenging during the first six months of 2016/17. The continued
expansion of renewable sources of renewable and reducing customer demand has impacted the profitability of all thermal
assets. The closure of older coal-fired power stations and movements in commodity prices has led to an increase in
gas-fired generation output relative to coal and to the same period in 2015/16. This has been reflected in SSE's own
portfolio as well as the wider market. This trend looks set to continue and it is therefore anticipated that gas-fired
power stations will play an increasingly important role in the GB electricity system in the coming years. 
 
Maintaining and operating a portfolio of gas-fired power stations 
 
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 for 2018/19 and 2019/20. 
 
·     Keadby (755MW wholly owned) has capacity obligations for 2018/19 and 2019/20. 
 
·     Peterhead (1,180MW wholly owned) Up to 400MW can operate in the market. It has a Supplemental Balancing Reserve (SBR)
contract to provide support services to National Grid for this winter and a one year voltage control contract until the end
of March 2017. 
 
·     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 for 2018/19 and 2019/20. 
 
Maintaining and operating coal-fired power stations 
 
SSE operates one wholly-owned coal-fired power station, at Fiddler's Ferry (Cheshire, 1,995MW). In March 2016 Fiddler's
Ferry successfully secured a contract to provide ancillary services to National Grid. The one-year contract, which ends on
1 April 2017, covers one of the three available units at the site. It was secured following SSE's response to an invitation
to tender issued by National Grid.  In addition, one unit at the station will provide SBR services to National Grid for the
winter of 2016/17. 
 
Developing new gas-fired generation options 
 
SSE supports recent plans from the UK Government to encourage investment in new gas-fired generation. SSE will continue to
develop options for new stations, including Keadby 2 in Lincolnshire, which has prequalified for the December 2016 Capacity
Market auction.  Abernedd, in Port Talbot, was not prequalified but SSE submitted an application to BEIS in August 2016 to
vary the planning consent to allow an OCGT station of up to 299MW. 
 
SSE's Wholesale business intends to responded to the formal invitation to tender for providing a new energy solution for
Shetland. 
 
Investing for the future through 'multi-fuel' 
 
SSE's generation strategy is built upon managing risk through owning a diverse range of assets and fuels from which to meet
the needs of customers. 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 multi-fuel
generation facility known as Ferrybridge Multifuel 1 (FM1) in Knottingley, West Yorkshire. The station has taken on
capacity obligations for 2018/19 and 2019/20 and has pre-qualified for the 2017/18 and 2020/21 Capacity Market auctions. 
 
Construction has commenced 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, enough to power around 170,000 homes. It has prequalified for the 2020/21 Capacity Market auction. 
 
Generation - Ireland 
 
Producing electricity for Ireland's Single Electricity Market (SEM) 
 
SSE is the third largest electricity generator by capacity in the all-island Single Electricity Market (SEM). It owns and
operates 1,836MW of generation capacity, of which 544MW is from renewable sources.  This makes SSE the largest wind energy
generator in the SEM. The company also trades across the interconnectors between Ireland and GB. 
 
In the six months to 30 September 2016, SSE's 464MW Great Island CCGT unit (grid connection capacity set at 431MW) exported
1.4TWh of electricity, up 41% on the same period in 2015. The improved generation performance was due to increased power
demand and prevailing market conditions, including the improved position of gas plant relative to other generation types. 
 
On 30 September 2016 Ireland's national grid operator EirGrid announced that the 500MW East West  Interconnector (EWIC)
between Ireland and GB had gone out of commission due to a fault that occurred during annual maintenance.  EirGrid
estimates a return to service by the end of February 2017. 
 
Delivering and developing new capacity for electricity generation 
 
Construction of the two-phase 174MW (SSE share 120MW) Galway Wind Park project is ongoing and it is due to be commissioned
by the end of 2017. The project will qualify for REFIT II support.  In Northern Ireland, construction of both the
Tievenameenta (35MW) and Slieve Divena II (18MW) onshore wind farms is progressing well. Both projects will be operational
in 2017, meeting the criteria for Northern Ireland's RO grace period. 
 
SSE continues to advance its planned Doraville wind farm development (up to 115MW), a planning application for which is
currently before Northern Ireland's Department for Infrastructure. This project, if developed, will not qualify for the
RO. 
 
Engaging in the I-SEM reform process 
 
Reform of the SEM to comply with the EU Electricity Target Model continues, with regulators in Ireland and Northern Ireland
progressing the Integrated SEM (I-SEM) project due for introduction by the end of 2017. In July, regulators said they
considered it very unlikely that the UK decision to leave the EU would have any significant impact on I-SEM programme
delivery. In addition, the UK Prime Minster has advised the Northern Ireland First Minister that resolving the SEM will be
a priority for the UK Government.  For its part SSE continues to be fully involved in all stages of the ongoing new market
design and implementation process. 
 
Gas Production 
 
Gas Production is responsible for the efficient delivery of gas from the offshore gas fields in which SSE has a shared
ownership. 
 
Producing from UK Continental Shelf assets 
 
Total output in the six months to 30 September 2016 was 314.5 million therms (5.11 mmboe) of gas and 0.47mmboe of liquids,
compared with 191.3 million therms of gas (3.11 mmboe) and 0.03 mmboe in the same period last year. This rise in production
was due to the start up of the Laggan field in February 2016, although there has also been a natural decline in output from
existing fields. The Greater Laggan Area acquisition is expected to mean SSE's average annual volumes of gas and liquids
produced will be at a higher level than those it reported in previous years, with a forecast average production of around
500million therms (8.1mmboe) of gas and 0.85mmboe of liquids per year in the five years to March 2021. 
 
Delivering security in Gas Production 
 
SSE has a 20% interest in the four gas fields and surrounding exploration acreage approximately 125km north west of the
Shetland Islands, collectively known as the Greater Laggan Area; and a 20% interest in the new Shetland Gas Plant. Total
E&P UK Limited is the operator of, and owns a 60% stake in, these assets. The remaining 20% is owned by DONG Energy. 
 
Gas production started in February 2016 from the Laggan field and in August 2016 from the Tormore field which have reached
peak production of up to 90,000 boe a day.  This will help to secure energy for SSE's customers and help meet the needs of
SSE's gas-fired power stations, contributing to security of electricity supply. The nearby Edradour and Glenlivet fields
are expected to start production in 2017 and 2018 respectively and should keep production at peak rates through to 2020. 
 
The new Shetland Gas Plant is located close to Sullom Voe and processes and exports produced gas and condensate from
developments in the west of Shetland for onward delivery to the St Fergus Gas Terminal for gas; and via the Sullom Voe Oil
Terminal for liquids. This makes it one of the most important infrastructure developments in the UK. Production also
started in February 2016 and it is expected to process and export gas and condensate for producers West of Shetland well
into the 2030s. 
 
Overall, in addition to helping meet SSE's gas demand requirements, the acquisition is expected to create value over the
long term, despite the current impact of lower gas prices, and represents SSE's focus on maintaining a balanced range of
energy businesses across its portfolio. 
 
SSE's UK Continental Shelf upstream portfolio is predominantly gas weighted with only associated liquids and as per the
independent Reserves Audit, at 31 March 2016, SSE's total economically recoverable net proven plus probable (2P) reserves,
taking into account all technical and economic variables, was estimated to be 3.6 billion therms (58.8 mmboe) in all of the
fields in which SSE has an ownership interest. 
 
Gas Storage 
 
Gas storage is responsible for the safe, efficient and reliable operation and maintenance of SSE's gas storage facilities,
and for ensuring they are available for use by its customers. 
 
Both of SSE's storage sites have continued to operate to meet the needs of their customers through the first half of
2016/17, with the Hornsea (Atwick) site returning to service following its extended outage commenced in 2015/16: 
 
·     Hornsea (Atwick) again met 100% of customer nominations with the site 47% available through the period except in
instances of planned maintenance. The site was 76% available in the last three months to 30 September 2016, following the
return to service of the site earlier in the year, delivering over 90% availability by the end of the period; 
 
·     Aldbrough met 100% of customer nominations and was 98% available through the six months to September 2016 except in
instances of planned maintenance. 
 
Alongside the requirement to continue to ensure the highest standards of 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 profitability and being well positioned to take
advantage of future market developments. 
 
Responding to market conditions for Gas Storage 
 
The economic environment for gas storage continued to be extremely challenging in the first six months of 2016/17. The
value of traditional gas storage services has experienced further decline, although this has been partially off-set by a
series of new, innovative services which SSE has introduced during the period. 
 
Given the scale of the economic challenge, a further business review of the Hornsea (Atwick) site has recently been
concluded. As a result SSE has decided to mothball two of its nine Atwick caverns (representing c. 20% of storage capacity)
through long term suspension, rather than progress the investment required to return these to commercial service. This
follows the decision at the end of 2014/15 to mothball the older withdrawal plant at Atwick. 
 
This latest decision reflects the inevitable outcome of the current market conditions which exist in spite of the
relatively low levels of gas storage capacity currently available to the UK market. 
 
The economic challenges facing UK onshore gas storage operators have been further exacerbated by the recent announcement of
the proposed business rates listing for the period 2017 to 2022 and the consultation process on the associated transitional
arrangements. The latter has particularly significant consequences as it all but removes any early relief from the recent
doubling of business rates across the industry. 
 
Wholesale - Conclusion and Priorities 
 
Creating sustainable, long-term value from wholesale markets for investors and customers is the strategic objective of
SSE's Wholesale businesses. This should be delivered through the responsible production, storage and delivery of energy and
related services; a focus on meeting the needs of its customers; ongoing rigour in optimising its portfolio of existing
assets and those in development, meaning that SSE's activities across its Wholesale businesses continue to support SSE's
core purpose and the first financial objective of annual growth in the dividend payable to shareholders. 
 
Wholesale priorities in 2016/17 and beyond include: 
 
·     Ensuring the safe, reliable and efficient operation of all wholly-owned assets and those in which SSE has an
ownership interest; 
 
·     Securing a stable and predictable supply of energy to meet SSE's needs; 
 
·     Delivering SSE's investments in renewable energy and other electricity generation plant; 
 
·     Driving business change to respond effectively to market change and regulatory developments in GB, NI, RoI and EU
regulations; and 
 
·     Securing value, where appropriate, through the risk-managed trading of energy-related commodities. 
 
NETWORKS 
 
Networks Key Performance Indicators 
 
                                                                       Sep 16  Sep 15  
                                                                                       
 ELECTRICITY TRANSMISSION                                                              
 Transmission adjusted and reported operating profit - £m              135.6   142.4   
 Regulated Asset Value (RAV) - £m                                      2,522   2,009   
 Capital expenditure - £m                                              269.3   289.3   
                                                                                       
 ELECTRICITY DISTRIBUTION                                                              
 Electricity distribution adjusted and reported operating profit - £m  181.0   178.6   
 Regulated Asset Value (RAV) - £m                                      3,209   3,133   
 Capital expenditure - £m                                              111.6   113.2   
 Electricity Distributed TWh                                           18.1    18.3    
 Customer minutes lost (SHEPD) average per customer                    27      24      
 Customer minutes lost (SEPD) average per customer                     23      21      
 Customer interruptions (SHEPD) per 100 customers                      34      31      
 Customer interruptions (SEPD) per 100 customers                       26      24      
                                                                                       
 SCOTIA GAS NETWORKS                                                                   
 SGN adjusted operating profit (SSE's share) - £m                      139.3   130.6   
 SGN  reported operating profit (SSE's share) £(m)                     93.1    60.5    
 Regulated Asset Value (SSE's share) - £m based on 50% shareholding    2,555   2,477   
 Capital and replacement expenditure (SSE's share)- £m                 84.5    79.9    
 Uncontrolled gas escapes attended within one hour %                   98.7    98.6    
 SGN gas mains replaced - km                                           457     484     
 
 
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, since 26 October 2016, a 33.3% stake in both Scotland Gas Networks and Southern Gas Networks
(SGN). 
 
SSE's interests in economically-regulated energy networks support the delivery of a balanced range of assets, operational
efficiency disciplined investment. The RAV of SSE's five existing Networks companies is now on course to reach close to
£9bn by 2020, net of the recent disposal of a 16.7% stake in SGN (this is consistent with the forecast of £10bn RAV by 2020
in place prior to the disposal). 
 
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 mechanism 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 competitive Wholesale and Retail markets. While the overall shape of the networks may evolve, as the
recent expansion of electricity transmission and sale of part of a stake in SGN show, they remain core to SSE's strategy in
the short, medium and long-term and contribute significantly to its ability to deliver annual dividend increases. 
 
Adopting a clear and distinctive identity through Scottish and Southern Electricity Networks 
 
In September 2016, SSE's three electricity networks businesses adopted a common trading name as Scottish and Southern
Electricity Networks (SSEN).  This new name and an accompanying rebranding process were developed following extensive
engagement with customers, employees and other stakeholders. 
 
This change responds to the operating environment under the RIIO price controls which incentivises all network operators to
engage effectively with their customers and stakeholders in developing and implementing their business plans.  SSEN
believes that adopting a clearer, simpler and more distinctive identity will help to deliver improved accountability to the
communities it serves, supporting its performance against key incentives. 
 
Putting stakeholders at the heart of decision-making 
 
Scottish and Southern Electricity Networks is also establishing a Stakeholder Advisory Panel to work alongside its Board to
help scrutinise business performance and effectiveness in meeting its commitments under the RIIO-T1 and RIIO-ED1 price
controls. The Panel will consist of a Chair and up to eight people, who are being recruited to reflect a broad range of
external interests, skills, knowledge and experience.   Through its work, the panel will bring stakeholder insight and
challenge to SSEN's decision-making at the highest level, helping to drive improvement in key processes and outcomes for
customers. 
 
Financial performance in Networks 
 
During the 6 months to 30 September 2016, total adjusted operating profit in Networks was £455.9m, compared to £451.6m in
the same period last year, with the principal movements as follows: 
 
·     Electricity Transmission: in line with expectations for 2016/17 outlined in SSE's FY2015/16 Financial Results,
adjusted and reported operating profit decreased by £6.8m to £135.6m reflecting the phasing of capital expenditure and
revenue associated with the growing asset base; 
 
·     Electricity Distribution: adjusted and reported operating profit rose very slightly, by £2.4m to £181.0m, with the
full benefit of previous under-recoveries of revenue still expected to be reflected in the second half of the year; and 
 
·     Gas Distribution: SSE's share of SGN's adjusted operating profit rose by £8.7m to £139.3m, reflecting the profiling
of revenue and continued good performance of the business.  Reported operating profit has increased by £32.6m to £93.1m due
to the impact of the change in Corporation Tax rate, as well as the underlying improvement in performance. 
 
Electricity Transmission 
 
Scottish and Southern Electricity Networks, operating under licence as Scottish Hydro Electric Transmission plc, is
responsible for maintaining and investing in the electricity transmission network in the north of Scotland. 
 
Delivering a major programme of investment 
 
Since the start of the RIIO T1 price control in 2013, Scottish and Southern Electricity Networks' capital investment in its
transmission network has totalled £1.66bn.  With its committed pipeline of investment, it expects to increase its RAV from
£2.3bn as at September 2016 to around £3bn by March 2018. 
 
Good progress continues to be made with the delivery of SSEN's flagship Caithness-Moray transmission link which, with an
agreed value of £1,118m (2013/14 prices), is its largest single investment to date.  In September 2016, the first part of
the new Blackhillock substation, near Keith, was energised on schedule.  Manufacture of the subsea cable has now been
completed and a specialised cable-laying vessel is due to install this on the Moray Firth seabed during 2017.  The
Caithness-Moray reinforcement as a whole remains on course to be commissioned by the end of 2018. 
 
Following successful energisation of the 220km Beauly-Denny overhead line replacement, SSEN has been engaging with Ofgem
regarding recovery of efficiently incurred costs. 
 
Connecting new sources of generation 
 
SSEN's delivery of these projects and other strategic investment in its transmission network has played an essential part
in facilitating the rapid growth of low carbon electricity generation within its licence area.  In the past decade it has
enabled the connection of over 2GW of additional installed capacity, bringing the total connected generation capacity to
4,258MW. 
 
As well as delivering major projects to reinforce the core network, it is responsible for providing transmission
connections to generators' major onshore sites at 132 kilovolts and above.  In the six months to September 2016, it has
connected an additional 231MW of installed capacity.  Further connection projects currently in construction will connect a
further 473MW. 
 
During the first half of the year, 25 new or modified connection offers were provided within the required period. 
 
Fulfilling responsibilities for potential island links 
 
Scottish and Southern Electricity Networks is committed to bringing forward its advanced proposals for new transmission
links to the Scottish Islands if they are required.  The development of these links remains subject to the ability of
island generators to commit to their projects, which is widely recognised to be dependent on confirmation by the UK
Government of their eligibility to participate in a future Contracts for Difference (CfD) auction and EU State Aid
clearance for this policy support.  SSEN continues to engage with affected stakeholders in order to progress the
development of the links in anticipation of developer commitment.  It is in a position to submit 'Needs Cases' to Ofgem for
the Western Isles and Shetland in 2017 if the circumstances allow. 
 
Operating a rapidly growing network 
 
The main purpose of Scottish and Southern Electricity Networks' significant investment in its network under its RIIO-T1
business plan is to facilitate the transmission of rapidly growing volumes of renewable energy safely and securely to
customers.  It is recognised that the efficient and flexible operation of its expanded network will play a crucial role in
its success in the remainder of the current price control and beyond. 
 
SSEN has therefore 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 this period of rapid change, including commissioning of substantial new assets and connection of large
volumes of renewable generation capacity, SSEN has provided a highly reliable network.  This is recognised through the
Energy Not Supplied incentive under which SSEN can be rewarded or penalised for network performance.  Full incentive was
achieved in 2015/16 and this performance has been sustained during the current year. 
 
Innovating to sustain operational success 
 
To support the successful integration of new High Voltage Direct Current (HVDC) infrastructure on its own network and
elsewhere in Great Britain, Scottish and Southern Electricity Networks is leading the development of the National HVDC
Centre in Cumbernauld via Ofgem's Electricity Network Innovation Competition.  The centre will allow engineers to replicate
the complexities of the future transmission system in real time, using powerful computer simulators.  This initiative will
support early development of efficient operational strategies and enable potential risks to be identified and addressed. 
Construction of the centre began in August 2016 and is due for completion during 2017. 
 
Adapting to policy and regulatory change 
 
Scottish and Southern Electricity Networks continues to engage constructively with Ofgem and the Department for Business,
Energy and Industrial Strategy (BEIS) in relation to the development of the regime for Extending Competition in onshore
Transmission (ECIT). 
 
The delivery of competition poses some potential risks to future growth and revenue, but also opportunities.  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 once the regime is implemented.  Through its engagement, SSEN aims to ensure that its
most advanced development projects can be delivered in a timely way under the existing framework.   In the longer term, it
is working to ensure that future arrangements developed under the ECIT project will deliver the transmission infrastructure
required in a way that supports the UK Government's policy objectives, delivers value for end consumers and achieves a fair
and reasonable return to investors. 
 
Working with stakeholders 
 
Under the RIIO-T1 price control, transmission owners such as Scottish and Southern Electricity Networks are encouraged to
be more responsive to changing stakeholder needs, with financial incentives based on performance in this area. The views of
stakeholders have played a key part in SSEN's success in electricity transmission under the current price control period
and will remain central to its future business plans. 
 
Stakeholders have played a major part in the development of SSEN's Visual Impact of Scottish Transmission Assets (VISTA)
policy, which seeks to mitigate the impacts of existing transmission infrastructure in National Parks and National Scenic
Areas.  In August, SSEN received Ofgem approval for its proposed approach and expects to make its first funding application
under the policy in 2017. 
 
SSEN has also responded to stakeholders' interest in its supply chain and the economic and social contribution that its
investments make.  Modelling of its £1.1bn Caithness-Moray investment has shown that around £640m of expenditure has been,
or will be, made with UK-based suppliers or contractors.  Through continuing work with its supply chain and with
stakeholders, SSEN is committed to using the outputs of this modelling to maximise the direct benefits that its activities
can bring to local economies. 
 
Electricity Distribution 
 
Scottish and Southern Electricity Networks is responsible for maintaining the electricity distribution networks that supply
over 3.7million homes and businesses, operating under licence as Scottish Hydro Electric Power Distribution (SHEPD) in the
north of Scotland and as Southern Electric Power Distribution (SEPD) in central southern England. 
 
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 

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