REG - SSE Plc - Half Yearly Report <Origin Href="QuoteRef">SSE.L</Origin> - Part 2
12/11/2014 08:01
- Part 2: For the preceding part double click ID:nRSL7750Wa
means of reducing its tax liability. SSE's tax policy is to operate within both the letter and spirit of the
law at all times.
In the three years to 31 March 2014, SSE's tax paid to government in the UK, including Corporation Tax, Employers' National
Insurance Contributions and Business Rates totalled £1.1bn. SSE pays taxes in the Republic of Ireland, in relation to its
operations there, and paid £35.5m during the same three years.
In October 2014, SSE became the first FTSE 100 company to be awarded the Fair Tax Mark. It was launched in February 2014
and is the world's first independent accreditation process for identifying companies making a genuine effort to be open and
transparent about their tax affairs. In complying with the Fair Tax Mark criteria SSE is providing information that moves
its disclosure well beyond the current requirements of UK company law to ensure that it provides all its stakeholders with
the information they need to properly appraise its tax affairs.
Setting out SSE's tax position
To assist the understanding of SSE's tax position, the adjusted current tax charge is presented as follows:
Sep 14 Sep 13 Sep 12
£m £m £m
Restated Restated
Adjusted current tax charge 55.6 58.2 64.0
Add/(less)
Share of JCE/Associate tax (22.1) 40.3 (2.0)
Deferred tax including share of JV and Associates 24.3 (27.2) 8.6
Tax on exceptional items/certain re-measurements (4.2) (118.3) (124.8)
Reported tax charge /(credit) 53.6 (47.0) (54.2)
For reasons already stated above, SSE's focus is on adjusted profit before tax* and in line with that the adjusted current
tax charge is the tax measure that best reflects underlying performance. The effective adjusted current tax rate, based on
adjusted profit before tax*, is 15.0%, compared with 16.4% in the same period last year, on the same basis.
Priorities and Outlook for 2014/15 and beyond
Setting the right long-term priorities to provide the energy people need
In support of its strategy, SSE has identified three long-term priorities across its balanced range of businesses which
reflect, and are consistent with, the key issues and trends in its Wholesale, Networks and Retail segments. The long-term
priorities are:
· sustainability and flexibility in Wholesale;
· efficiency and innovation in Networks; and
· excellence and trust in Retail.
In addition to the safe and efficient management of assets in operation or under maintenance or construction and the safe
and efficient delivery of services to Retail and Networks customers, SSE's priorities for 2014/15 are to:
· ensure planned steps to simplify and streamline its business are successfully delivered, with further opportunities
identified;
· adapt successfully to the progressive implementation of the UK government's Electricity Market Reform;
· ensure that the development and construction of new electricity generation assets makes good progress;
· secure an outcome from the ED1 electricity distribution Price Control review that is fair to customers and fair to
investors and prepare for its delivery;
· deliver in a timely manner the required investment in the transmission system in the north of Scotland;
· make a positive contribution to the CMA investigation of the energy market in Great Britain, with the objective of
achieving greater political and regulatory stability for the benefit of customers and investors alike; and
· ensure that the transformation of systems required under smart metering, and to provide digital services of a
standard customers will expect, makes good progress.
Conclusion
SSE's three business segments - Wholesale, Networks and Retail (including Enterprise) - have one core purpose: to provide
the energy people need in a reliable and sustainable way. SSE believes that success in fulfilling this core purpose
enables it to earn a profit which it can then put to good use for the benefit of customers, other stakeholders and
investors. This helps to ensure that is in a good position to achieve its first financial objective for shareholders:
annual increases in the dividend that at least keep pace with RPI inflation.
WHOLESALE
Wholesale Key Performance Indicators
Sep 14 Sep 13
Energy Portfolio Management (EPM) and Electricity Generation
EPM and Generation operating profit* - £m 11.8 86.2
EPM and Generation capital expenditure and investment - £m 200.8 363.1
EPM
Total wholesale electricity traded on N2EX Auction - GWh 41,299 47,582
Total wholesale electricity traded with small suppliers - GWh 336 436
GENERATION
Gas- and oil-fired generation capacity (GB and Ire) - MW 5,330 5,338
Coal-fired generation capacity (inc biomass co-firing) - MW 3,009 4,215
Renewable generation capacity GB and Ire (inc pump storage) - MW 3,394 3,237
Total electricity generation capacity (GB and Ire) - MW 11,733 12,790
Gas power station availability - % 95 92
Coal power station availability - % 81 89
Onshore wind farm availability % 98 97
Hydro storage at end September - % 43 44
Gas- and oil-fired (inc CHP) output (GB and Ire) - GWh 5,340 5,577
Coal-fired (inc biomass co-firing) output- GWh 2,591 6,832
Total output from thermal power stations (GB and Ire) - GWh 7,931 12,409
Conventional hydro output - GWh 1,210 1,070
Wind energy output (GB and Ire) - GWh 1,556 1,969
Dedicated biomass output - GWh 30 38
Total output of renewable energy (GB and Ire) - GWh 2,796 3,077
Total output from pumped storage - GWh 53 93
Total Generation output all plant - GWh 10,780 15,579
Note 1: Capacity is wholly-owned and share of joint venturesNote 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 735MW of mothballed plant at Keadby and 1,180MW at Peterhead (while TEC for these stations is zero and 400MW respectively from 1st April 14.).Note 4: Capacity excludes Ferrybridge units 1 and 2 (c. 980MW) and 2 units at Uskmouth (c.230MW) which ceased operations at the end of March
2014.
GAS PRODUCTION
Gas production operating profit* - £m 13.3 69.0
Gas production - m therms 200.8 206.8
Gas production capital investment - £m 6.2 15.7
GAS STORAGE
Gas storage operating profit* - £m 1.6 5.2
Gas storage customer nominations met - % 100 100
Gas storage capital investment - £m 1.4 1.8
Sustainably sourcing and producing energy
SSE's long-term priority for the Wholesale segment is sustainability and flexibility in energy production through a diverse
portfolio of assets and contracts that helps keep the lights on by being available to produce energy when it is required
and is flexible enough to respond to changes in demand when they occur.
SSE's Wholesale segment delivers this through the following business activities:
· Energy Portfolio Management (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;
and selling the power output from this plant in the wholesale market.
· Electricity Generation is responsible for the operation and management of SSE's generation assets, their maintenance
and ensuring these assets are available for use by EPM.
· Gas Production is responsible for the efficient delivery of gas from the physical gas fields that SSE has a shared
ownership in.
Separately, Gas Storage is responsible for the operation and management of SSE's gas storage facilities, their maintenance
and ensuring they are available for use by SSE and third parties.
EPM and Electricity Generation form a single profit centre with a focus on the efficient procurement (and, in the case of
renewable sources, capture) of energy and efficient operation of electricity generation plant. In doing so it ensures it
is consistent with all regulatory requirements, including the EU Regulation on Energy Market Integrity and Transparency
(REMIT).
Financial performance in Wholesale
During the six months to 30 September 2014 operating profit* in Wholesale was £26.7m. This comprised (comparisons with the
same period last year):
Wholesale Operating Profit* Sep 14 Sep 13
EPM and Electricity Generation* £m 11.8 86.2
Gas Production* £m 13.3 69.0
Gas Storage* £m 1.6 5.2
Total Wholesale Operating Profit 26.7 160.4
The principal issues relating to operating profit in SSE's Wholesale businesses are as follows:
· EPM and Electricity Generation - lower output from renewable energy as well as lower coal-fired power station output
and lower 'dark spreads' (the difference between the cost of coal and emissions allowances and the price received for
electricity generated) all contributed to the fall in operating profit;
· Gas Production - day ahead wholesale gas prices were around one third lower on average than for the same period last
year, resulting in the fall in operating profit; and
· Gas Storage - continued low gas price volatility has further reduced the spread between summer and winter gas prices
resulting in a lower Standard Bundled Unit price being achieved.
Protecting customers from wholesale energy price volatility
The wholesale price of energy can fluctuate significantly due to a number of factors including the economy, the weather,
customer demand, infrastructure availability, and world events. SSE's Wholesale business seeks to minimise the impact of
these variables by maintaining a diverse and well-balanced portfolio of contracts and assets, both long and short term. In
doing so, SSE has:
· greater ability to manage wholesale energy price volatility, thereby protecting customers from it and ensuring
greater retail price stability;
· lower risk from wholesale prices through reduced exposure to volatility in any single commodity; and
· more scope to deliver the investment needed in Generation and Gas Production because the risks associated with
large-scale and long-term investments are balanced by the demand from electricity and gas customers.
Energy Portfolio Management (EPM)
Managing an energy portfolio
In recent years, SSE has typically required around eight million therms of gas per day to supply its customers and to fuel
its power stations, and around 140GWh of electricity per day to supply all its customers. EPM has three primary routes to
procure competitively and sustainably the fuels and energy it needs to meet this demand:
· assets: including upstream gas exploration and production and thermal and renewable electricity generation;
· contracts: long-term gas producer contracts, power purchase agreements (with SSE-owned plant and third parties) and
solid fuel contracts; and
· trading: where energy contracts are transparently traded on international exchanges or through 'over the counter'
markets, with 100% of SSE's electricity supply and demand traded on the day-ahead auction market.
Managing risks associated with energy procurement across these three routes is a key challenge for EPM, as it is heavily
influenced by a multitude of national and international factors. By optimising energy procurement through a diverse
portfolio, SSE ensures that its customers are protected to an extent from the unavoidable volatility that exists in global
markets.
In early October 2014, in line with this wider strategy, SSE entered into a long-term gas supply contract with Norwegian
oil and gas provider Statoil. Starting on 1 October 2015, the six year deal secures the provision of 500,000 therms of gas
per day - approximately 6% of SSE's average daily gas demand - at prevailing market prices and conditions. The contract
provides SSE with a secure supply of gas, enabled by the physical links between Norwegian gas resources and the UK.
Managing changes in wholesale gas prices
Spot and day-ahead gas prices reduced through the end of the winter period and into the summer, with day-ahead prices
dropping to below 35p/therm in early July, their lowest level since September 2010. This reduction in prices was driven by
mild weather over the winter period and gas storage levels, which were at their highest level in five years going into
summer 2014. This was in contrast to the end of the winter period in 2013 when prices increased as a result of cold weather
and historically low gas storage levels.
Increasing wholesale market transparency
SSE has led the way in responding to stakeholders' desire for greater transparency and increased liquidity in the
short-term wholesale market for electricity. For three years it has consistently placed 100% of its electricity generation
and demand into NASDAQ OMX Group Inc. and Nord Pool Spot AS's N2EX daily auction. In taking this action SSE has helped to
deliver a new level of market transparency. High volumes of electricity are now traded on the N2EX platform, benefiting
'day ahead' and forward markets, and SSE also believes that liquidity is now sufficient for independent retailers and does
not represent any kind of barrier to market entry.
EPM priorities for the remainder of 2014/15 and beyond
EPM's priorities include:
· securing a stable and predictable supply of energy to meet SSE's customers' needs;
· driving business change to respond effectively to new UK, RoI and EU regulations;
· responding to market evolution and change;
· identifying and agreeing new long term energy supply contracts; and
· continuing to support improved market transparency and liquidity initiatives.
Generation - Great Britain and Ireland Overview
Managing Generation assets according to long-standing principles
SSE's primary objective for its Generation division is to maintain a diverse generation portfolio, including the largest
amount of renewable energy capacity in the UK and Ireland, that helps keep the lights on by being available, reliable and
flexible. This objective is underpinned by six principles that direct the operation of, and investment in, its Generation
portfolio:
· compliance: with all safety standards and environmental and regulatory requirements;
· diversity: to avoid over-dependency on particular fuels or technologies;
· capacity: to meet the electricity needs of domestic and small business customers;
· availability: to respond to customer demand and market conditions;
· flexibility: to ensure that changes in demand for electricity and the variability of generation from wind farms can
be addressed; and
· sustainability: to support progressive reduction in the CO2 intensity of electricity generated through the cost
efficient decarbonisation of its generation fleet.
SSE's generation assets are underpinned by a strong engineering focus on asset life and ongoing equipment monitoring to
maximise efficiency.
Maintaining a diverse Generation portfolio
In moving towards a lower carbon generation mix SSE will, by the end of the decade, transition its generation assets from a
portfolio weighted towards gas and coal, towards a portfolio more weighted towards gas and renewables. SSE's generation
portfolio at 30 September 2014 comprises:
Electricity generation capacity Sep 14 Sep 13
Gas -fired generation capacity (GB) - MW 4,262 4,270
Gas- and oil-fired generation capacity (Ire) - MW 1,068 1,068
Coal-fired generation capacity (GB) (inc biomass co-firing) - MW 3,009 4,215
Renewable generation capacity GB and Ire (inc pump storage) - MW 3,394 3,237
Total electricity generation capacity (GB and Ire) - MW 11,733 12,790
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