REG - SSE Plc - Preliminary results for the year to 31 March 2016 <Origin Href="QuoteRef">SSE.L</Origin> - Part 2
18/05/2016 07:06
- Part 2: For the preceding part double click ID:nRSR5345Ya
disproportionate
burden, or which could release capital for future investment.
Agreements with total disposal proceeds and debt reduction of over £1bn have so far been secured or concluded to dispose
of assets such as an equity shares in the Clyde of onshore wind farm projects and other wind developments, SSE Pipelines
Ltd and equity in PFI street lighting contracts. A gain on sale of £138.6m resulting from the sale of the 49.9% equity
stake in Clyde windfarm (49.9% of 350MW) in the year is a clear example of the value created through this disposal
programme. With a small amount still to complete, this programme has already achieved its objectives and will support
future operations, investment and capital expenditure.
Financial management and balance sheet
Keeping SSE well-financed
SSE believes that maintaining a strong balance sheet, illustrated by its commitment to the current criteria for a single A
credit rating - such as a funds from operations/debt ratio of 20%-23% (Standard & Poor's) and a retained cash flow/debt
ratio of 13% (Moody's) - is a key financial principle. Standard & Poor's credit ratings service affirmed SSE's 'A-' long
term credit rating in February 2016 with a 'negative' outlook. This follows the decision by Moody's Investors Service, also
in February 2016, to affirm its 'A3' issuer rating for SSE, also with a 'negative' outlook.
SSE has a long-standing commitment to maintaining financial discipline and diversity of funding sources and to moving
quickly to select financial options that are consistent with this, including issuing new bonds and loans. In line with
this, in September 2015, it successfully issued an eight-year E700m euro bond, with a coupon of 1.75% and an all-in funding
cost, when converted back to sterling, of 3.19%. In addition, in March 2016, SSE completed a private placement with 19 UK
and US investors of £500m with a weighted average maturity of 9.6 years and an all-in funding cost of 3.1%.
During the year SSE extended, on cheaper terms, £1.5bn of bank facilities that were due to mature in 2018 to 2020 with two,
one year options that would take these facilities out to 2022. Under the Scottish Hydro Electric Transmission entity, it
also secured a further £300m facility with the European Investment Bank that will be drawn during 2016/17 at which point it
will convert to a 10 year term loan.
Maintaining a prudent treasury policy
SSE's treasury policy is designed to be prudent and flexible. In line with that, its operations and investments are
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 31 March 2016, 87.1% 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 trading operations; and long-term service agreements for plant.
SSE's policy is to hedge any material transactional foreign exchange risks through the use of forward currency purchases
and/or financial instruments. Translational foreign exchange risk arises in respect of overseas investments, and hedging
in respect of such exposures is determined as appropriate to the circumstances on a case-by-case basis.
Managing net debt and maintaining cash flow
SSE's adjusted net debt and hybrid capital was £8.40bn at 31 March 2016, compared with £7.57bn on the same date in 2015,
£7.64bn in 2014 and £7.35bn in 2013. The £827m increase in the year results from the West of Shetland acquisition
completed in October 2015 (£669m), a lower uptake of the Scrip Dividend, the impact of negative foreign exchange movements
on debt balances at the year end and higher net capex in the year (after disposals). These disposals in 2015/16 included
the sale of 49.9% of the equity in Clyde Windfarm (Scotland) Limited ('Clyde'). On 13 May 2016, SSE waived certain rights
in relation to the construction of the 172.8MW extension to Clyde that saw the entity fully consolidated in the Group's
balance sheet at March 2016. As a result, the arrangement is now deemed to be under joint control and consequently SSE has
excluded £200.7m of non-recourse finance due by Clyde to the venture partners from its adjusted net debt and hybrid capital
measure.
Fundamentally, the level of SSE's net debt reflects the quantum and phasing of capital expenditure and investment in
projects to maintain, upgrade, build and acquire new assets in the UK and Ireland that energy customers depend on and which
support annual increases in the dividend payable to shareholders.
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.
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 31 March 2016 was 8.9 years, compared with 9.9 years at 31 March 2015.
SSE's debt structure remains strong, with around £5.9bn of medium/long term borrowings in the form of issued bonds,
European Investment Bank debt and long-term project finance and other loans.
The balance of SSE's adjusted net debt is financed with short-term bank debt. SSE's adjusted net debt includes cash and
cash equivalents totalling £360.2m. Around £700m of medium-term borrowings will mature in 2016/17.
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 2015 (relating to the final dividend for the year to 31 March 2015) and in February
2016 (relating to the interim dividend for the year to 31 March 2016) resulted in a reduction in cash dividend funding of
£175.8m, with 11.8 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 now stands at £1,051m and has resulted in the issue of 77.7 million Ordinary shares. At the July
2015 AGM, shareholders voted by a 99.7% majority of votes cast, to agree an extension to the Scrip Dividend Scheme from
2015 to 2018.
Managing net finance costs
SSE believes adjusted net finance costs provide the most useful measure of performance and a reconciliation of adjusted to
reported net finance costs is provided in the table headed Net Finance Costs. SSE's adjusted net finance costs in the year
to 31 March 2016 were £310.9m, a reduction on £316.7m in the previous year reflecting the lower average interest rate in
the period.
Coupon payments relating to hybrid capital are presented as distributions to other equity holders and are reflected within
adjusted earnings per share* when paid.
Tax
SSE is one of the UK's biggest taxpayers, and in the survey published in November 2015 was ranked 13th out of the 100 Group
of Companies in 2015 in terms of taxes paid. In the year to 31 March 2016, SSE paid £453.9m of taxes on profits, property
taxes, environmental taxes, and employment taxes in the UK, compared with £506.2m in the previous year. Total taxes paid
in 2015/16 were lower than the previous year, primarily due to:
• reduced gas production profits as a result of lower gas prices;
• capital allowances resulting from the Greater Laggan acquisition in 2015/16;
• tax relief available on costs associated with closing thermal generation plant; and
• lower Climate Change Levy liabilities through reduced coal consumption.
SSE also paid E15.2 million of taxes in the Republic of Ireland, being the only country outside of the UK in which SSE has
any trading operations.
SSE considers being a responsible taxpayer a core element of being a responsible member of society. SSE seeks to pay the
right amount of tax on its profits, in the right place, at the right time, and continues to be the only FTSE 100 company to
have been awarded the Fair Tax Mark. While SSE has an obligation to its customers and shareholders to efficiently manage
its total tax liability, it does not seek to use the tax system in a way it does not consider it was meant to operate, or
use "tax havens" to reduce its tax liabilities. SSE understands it also has an obligation to the society in which it
operates, and from which it benefits - for example, tax receipts are vital for the public services SSE relies upon.
Therefore SSE's tax policy is to operate within both the letter and spirit of the law at all times.
For reasons already stated above, SSE's focus is on adjusted profit before tax*, and in line with that, the adjusted
current tax charge on that profit is the tax measure that best reflects underlying performance. SSE's adjusted current tax
rate, based on adjusted profit before tax*, is 12.8%, as compared with 14.4% in 2014/15 on the same basis.
As would be expected for a Company of SSE's size, the SSE group has a small number of tax enquiries ongoing with HMRC at
any one time. In addition, under Corporate Tax Self Assessment, SSE adopts a filing position on matters in its tax returns
that may be large or complex, with the position then being discussed with HMRC after the tax returns have been filed. SSE
engages proactively with HMRC on such matters, but where SSE considers there to be a risk that HMRC may disagree with its
view, and that additional tax may become payable as a result, a provision is made for the potential liability, which is
then released once the matter has been agreed with HMRC. SSE considers this to be in line with the overall prudent
approach to its tax responsibilities.
Reviewing the value of SSE's equity stake in SGN
SSE acquired a 50% equity stake in SGN Limited in 2005 for a total of £505m. In the time since then, SGN has become a
leading gas distribution business demonstrating efficiency and innovation that has benefited, and continues to benefit,
customers and has earned fair returns for investors. Its Regulated Asset Value reached just over £5bn at 31 March 2016.
Throughout this time, SSE has continued to invest in its wholly-owned electricity transmission and distribution businesses
and their Regulated Asset Value reached a total £5.4bn at 31 March 2016, with the principal growth arising as a result of
SSE's major investment in electricity transmission.
Against this background of a transformed portfolio of energy Networks businesses, SSE has decided to consider options to
crystallise some value for shareholders from its long-term investment in SGN and is considering the sale of up to one third
of its 50% equity stake in SGN Limited. In considering whether to take forward the disposal of part of its equity in SGN,
SSE will be very mindful of the need to ensure that SGN itself is in a good position build to on its track record of
success in the future.
Should a sale be completed, SSE would expect to use the proceeds to return value to its shareholders, or to invest to
create value for shareholders should there be the right opportunity, in a way that would be determined at the time.
Conclusion
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 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 in 2016/17;
· Maintaining dividend cover in a range from around 1.2 times to around 1.4 times over the three years to 2018/19
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 Networks and government-mandated renewables; and
· Maintaining a strong balance sheet, with a commitment to the current criteria for a single 'A' credit-rating.
WHOLESALE
Wholesale Key Performance Indicators
March 16 March 15
Energy Portfolio Management (EPM) and Electricity Generation
EPM and Generation operating profit* - £m 436.3 433.3
EPM and Generation capital expenditure and investment - £m 382.6 399.6
GENERATION
Gas- and oil-fired generation capacity (GB) - MW 3,961 4,262
Gas- and oil-fired generation capacity (Ire) - MW 1,292 1,068
Coal-fired generation capacity- MW 1,995 3,009
Waste to Energy capacity - (MW) 34 0
Total thermal generation capacity - MW 7,282 8,339
Pumped storage capacity (GB) - MW 300 300
Conventional hydro capacity (GB) - MW 1,150 1,150
Onshore wind capacity (GB) - MW 900 1008
Onshore wind capacity (NI) - MW 88 88
Onshore wind capacity (ROI) - MW 456 456
Offshore wind capacity (GB) - MW 344 355
Dedicated biomass capacity (GB) - MW 37 38
Total renewable generation capacity - MW 3,275 3,394
Total electricity generation capacity (GB and Ire) - MW 10,557 11,733
Renewable capacity qualifying for ROCs - MW c.1,800 c.1,900
Gas- and oil-fired (inc. CHP) output (GB) - GWh 10,160 9,537
Gas- and oil-fired output ( Ire) - GWh 1,780 251
Coal-fired (inc. biomass co-firing) output - GWh 6,141 9,143
Total thermal generation - GWh 18,081 18,931
Pumped storage output - GWh 252 190
Conventional hydro output - GWh 4,074 3,726
Onshore wind output GB - GWh 2,439 2,219
Onshore wind output NI - GWh 235 212
Onshore wind output ROI - GWh 1,308 1,055
Offshore wind output - GWh 1,312 1,191
Biomass output GB - GWh 75 63
Total renewable generation - GWh 9,695 8,656
Total Generation output all plant - GWh 27,776 27,587
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) and 464MW at Great Island (net increase 224MW) operational from 17 April
2015.Note 4: 2016 Capacity excludes Ferrybridge which ceased operation on 31 March 2016.Note 5: Wind output excludes 387GWh of constrained off generation in 2015/16 and
268GWh in 2014/15Note 6:Onshore wind capacity at March16 excludes 175MW related to the Clyde disposal in March 16 - onshore wind output includes 100%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
March 16 March 15
GAS PRODUCTION
Gas production operating profit* - £m 2.2 36.6
Gas production- m therms 403 398
Gas production- mn boe 6.55 6.47
Liquids production - mn boe 0.13 0.08
Gas production capital investment - £m 56.1 21.0
Total net proven plus probable (2P) Reserves estimate - bn therms 3.62 1.73
Total net proven plus probable (2P) Reserves estimate - mn boe 58.8 28.2
GAS STORAGE
Gas storage operating profit* - £m 4.0 3.9
Gas storage customer nominations met - % 100 100
Gas storage capital investment - £m 14.0 14.3
Sustainably sourcing and producing energy
SSE's Wholesale segment consists of three business areas: Energy Portfolio Management 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 maintaining a diverse
portfolio of assets, contracts and innovative energy solutions; and the ability to respond quickly and effectively to
changing market conditions and opportunities.
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; increased government
intervention; 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.
In line with its commitment to transparency in performance management and reporting SSE has incorporated a new subsidiary
company to conduct its energy portfolio management activities, SSE EPM Limited. This company will produce separately
audited accounts and, sits alongside the separately disclosed Energy Supply and Generation activities of the SSE Group.
Against this background, 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 year to 31 March 2016 total operating profit in Wholesale was £442.5m. The primary drivers relating to operating
profit are as follows:
EPM and Electricity Generation - an 11.5% increase in output of electricity from renewable sources, primarily due to higher
average wind speeds and levels of rainfall compared to 2014/15, although this was largely offset by the impact of lower
commodity prices across both Generation and EPM.
Gas Production - a significantly lower average achieved price for the wholesale gas volumes produced.
Gas Storage - a challenging economic environment saw a small reduction in operating profit.
The Wholesale business also incurred £868m of net exceptional charges in the year with the significant reduction in
commodity prices and other economic factors impacting the carrying value of gas production, thermal generation and gas
storage assets; a breakdown of which is set out in the table of Wholesale key performance indicators.
Preparing Consolidated Segmental Statements
SSE is required by Ofgem to publish a Consolidated Segmental Statement (CSS) each year setting out the revenues, costs and
profits or losses of businesses in its Wholesale and Retail segments.
· In line with that requirement, SSE expects to publish its CSS for 2015/16 in July 2016. The CSS for 2015/16, which
will be reconciled to SSE's published financial statements and reviewed by SSE's auditors KPMG , is expected to show that
within EPM and Electricity Generation, EPM and thermal generation reported operating losses and renewable generation
reported an operating profit.
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 world events. EPM seeks to manage the impact of these variables by
maintaining a diverse and well-balanced portfolio of contracts, and trading positions, both long and short term. 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 and Gas Production because the risks associated with
large-scale and long-term investments are contained by the balanced nature of SSE's energy businesses.
In recent years, SSE has typically required around 7 million therms of gas per day to supply its gas customers and to fuel
its power stations, and around 130GWh of electricity per day to supply all its electricity customers. There are three
primary routes to competitively and sustainably procure the fuels and energy it needs to meet this demand:
· assets: including thermal and renewable power generation; and upstream gas exploration and production;
· contracts: long-term gas producer contracts; power purchase agreements and solid fuel contracts; and
· trading: where energy contracts are transparently traded on international exchanges or through 'over the counter'
markets.
Managing risks associated with energy procurement across these three routes is a key requirement for EPM. In establishing
the separated legal entity to manage these risks and requirements on behalf of the Group's Energy Supply, Generation and
Gas Production businesses, SSE has enhanced the reporting transparency and accountability of this activity. By optimising
energy procurement through a diverse portfolio, SSE aims to shelter its portfolio from the inevitable volatility that
exists in global markets.
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 able to meet contractual obligations and developing future renewable
and thermal projects.
Managing and developing Generation assets to meet key priorities
The Generation division's principal objective is to safely, efficiently and reliably maintain and operate a diverse
generation portfolio, which includes substantial amounts of capacity for renewable energy, across the UK and Ireland. 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 being dependent on particular fuels or technologies;
· capacity: that is well-maintained to meet its requirements in the GB and Irish electricity systems;
· availability: to respond to system demand and market conditions;
· flexibility: to ensure that changes in demand for electricity and the impact of variability of generation from wind
farms can be managed; and
· sustainability: to support progressive reduction in the CO₂ intensity of electricity generated through the cost
efficient decarbonisation of its generation fleet. By moving towards a lower carbon generation mix, SSE is transitioning
its Generation assets from a portfolio weighted towards gas and coal, to one weighted towards gas and renewables.
Generation - Great Britain (renewables)
Operating SSE's renewable generation capacity
Output of electricity from renewable sources increased in 2015/16, compared to the previous year (9,695 GWh compared to
8,656 GWh) despite overall renewable operating capacity remaining largely unchanged (67MW commissioned in the year). The
primary driver for this differential was the weather: put simply there was more rainfall and windier conditions in 2015/16
across Great Britain than in 2014/15. Availability and performance of the renewable portfolio has also remained very high
throughout the period, allowing SSE's assets to operate in these favourable conditions.
Meanwhile, judgement on the Court of Session case of SSE Generation Ltd against Hochtief Solutions AG and Hochtief (UK)
Constructions Ltd in relation to the hydro-electric scheme at Glendoe 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.
The policy framework for renewable generation was subject to a number of interventions by the UK Government after it took
office in May 2015. These include:
· the early closure of the RO to new onshore wind;
· a delay until late 2016 of the second CfD auction for "less established" technologies, including offshore wind;
· the clear signal that CfDs in their current form are unlikely to be generally available to new onshore wind; and
· the removal of levy-exemption certificates (LECs) for renewable electricity.
For SSE's onshore wind portfolio, clarity regarding which projects remain eligible for RO support was provided through the
definition of 'grace periods'. Future development options for later onshore wind projects are being explored in light of
the policy changes referenced above.
SSE has three onshore wind projects under construction which will qualify for the GB RO:
· Dunmaglass (94MW) - scheduled for completion by the end of 2016/17.
· Clyde Extension (172.8MW) - expected to be fully operational in 2017.
· Bhlaraidh (108MW) - expected to be fully operational in 2017.
SSE also has onshore wind projects in development that will not qualify for the RO:
· Stronelairg (with consent) (up to 240MW) - SSE, alongside the Scottish Government, is appealing the judicial review
judgement which rejected the consent decision and will be heard in court in May 2016.
· Viking (with consent) (up to 457MW - SSE share 50%) - SSE, with its Joint Venture partner, has continued to develop
this project which requires State Aid clearance from the European Commission and confirmation it 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 now awaiting a consent decision from Scottish Ministers.
· Gordonbush Extension (in planning) (up to 32MW) - Highland Council did not object to the application at a planning
committee meeting in February 2016 and it is now awaiting a consent decision from Scottish Ministers.
Offshore wind projects in development
In the last 12 months SSE's offshore efforts and resources have been focused on the Beatrice project (588MW - SSE share
40%) planned for the outer Moray Firth. The project is progressing in accordance with the terms of the Investment Contract
awarded by the UK government in 2014. The project is expected to reach financial close in May 2016. SSE's Joint Venture
partners on the project are Copenhagen Infrastructure Partners (CIP) who increased their interest from 25% to 35% in
February 2016 and Repsol who currently have a 25% stake. Beatrice will be project financed with non-recourse debt.
Subject to financial close, onshore construction activities will begin in 2016 with offshore construction planned for 2017.
The project is expected to be fully operational by 2019. The Beatrice wind farm is expected to deliver around £700m into
the UK economy via supply chain opportunities alone.
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) is consented although this decision is subject to a judicial review
in the Court of Session heard in 2015. 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.
In October 2015 SSE announced that it had agreed exit terms from the Galloper project (340MW, 50:50 partnership with RWE
Innogy), following RWE Innogy's announcement that it had reached financial close on the project.
The UK Government confirmed in the Budget 2016 that it intends to auction £730m of CfD contracts in this parliament for
offshore wind and other less established technologies connecting in 2021-26. The first auction is expected to be later this
year with £290m available. This announcement provides welcome clarity about the future for offshore wind.
Optimising the renewable development portfolio
In order to support future investment in a balanced range of energy assets SSE has, as first outlined in March 2014
recycled capital by delivering a programme of selective disposals of non-core assets and operational and in-development
onshore wind projects. In March 2016 agreements were signed for the sale of 49.9% of the operational 349.6MW Clyde Wind
Farm located in South Lanarkshire to Greencoat UK Wind Plc (UKW) and GMPF & LPFA Infrastructure LLP (GLIL) for a headline
consideration of £355 million resulting in a gain of £138.6m. As part of its key accounting judgements, SSE concluded that
at 31 March 2016 Clyde remained under its control due to certain contractual arrangements relating to the construction of
the extension project. As such, this gain was recognised directly in equity. In May 2016, these arrangements were changed
and consequently SSE's interest in Clyde will be that of a joint venture going forward. When the 172.8MW extension to Clyde
is commissioned the equity stake jointly owned by UKW and GLIL will be diluted to 30% with SSE retaining 70% and providing
long term management services for the day to day operations of all 522.4MW.
Generation - Great Britain (thermal)
Market developments with an impact on SSE
In 2015/16 the UK Government announced a number of policies and regulatory changes affecting SSE's thermal generation
portfolio. These included:
· revisions to the future functioning of the GB Capacity Market (see below);
· an announcement of the intent to close coal-fired power stations by 2025, and facilitate the development of new
gas-fired power stations; and
· an announcement that it will continue to cap Carbon Price Support rates at £18/t CO2 for 2019-20 and 2020-21 (in
real terms adjusted for RPI). The Government also indicated that the future of the Carbon Price Floor beyond 2021 will be
announced in its Autumn Statement later this year.
Ofgem has consistently maintained that during the period to 2018/19 it expects electricity generation capacity margins will
be lower than they were in recent years due to weak market economics and the closure of older plant. The UK Government,
together with National Grid (as the System Operator) and Ofgem, has decided to address this issue in two ways:
· in the longer term, through the implementation of the Capacity Market. SSE supports the UK Government's plans to
incrementally improve the Capacity Market, including the planned supplementary capacity auction 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 Energy and Climate
Change (DECC) and National Grid. They determine how much capacity is required to ensure security of supply under each
mechanism. Once this volume has been determined they procure the necessary capacity through a competitive auction/tender
process.
SSE will play its part by ensuring all plant eligible to participate in both the SBR and the Capacity Market will be made
available when required. It will also continue to work openly and constructively with all stakeholders on the issue of
security of supply.
Operating SSE's thermal power stations
Market conditions for thermal generation continued to be challenging during 2015/16. The continued expansion of sources of
renewable electricity and reducing customer demand has impacted the profitability of all thermal assets. In addition, the
18 months to March 2016 saw a significant weakening of the market prices for oil and gas. Together with the closure of
older coal-fired power stations this has led to an increase in gas-fired generation output relative to coal. 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 GB electricity generation in the
coming years. Despite the strategic improvement, market conditions remain challenging for gas- fired electricity
generation as reflected by the plant impairments of £326.4m recognised in the year.
In December 2015 the second Capacity Market auction was held in GB. A total of 3.2GW (de-rated) of SSE's 6.1GW (de-rated)
pre-qualified capacity was successful in the auction, and will receive a total payment of £57m on the basis it delivers
this capacity in 2019/20. The balance of the pre-qualified capacity remains eligible to participate in the 'T-1' 2019/20
capacity auction. In the summer of 2016 SSE plans to pre-qualify capacity for the next 'T-4' auction scheduled for
December 2016, as well as for the additional planned auction that will procure capacity for 2017/18.
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 (700MW wholly owned) has continued to perform well in response to market requirements and contractual
obligations, and it has taken on a capacity obligation for 2018/19 and 2019/20;
· Keadby (735MW wholly owned) returned to service in November 2015 following its removal from the market in March
2013. Keadby also has capacity obligations for 2018/19 and 2019/20;
· Peterhead (1,180MW wholly owned) 400MW of Peterhead's capacity returned to service in November 2015 following the
completion of major upgrade work to improve the flexibility and efficiency of the station. It has also secured SBR
contracts to provide support services to National Grid over the winters 2015/16 and 2016/17 and a voltage control contract
for one year commencing 1st April 2016;
· 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.
In 2015/16, the UK Government also decided that the capital budget for a Carbon Capture and Storage (CCS) competition would
no longer be available and that the competition would not proceed on the planned basis. SSE had been working with Shell on
a CCS project at its Peterhead power station. In response, SSE acknowledged that being in government involves taking
difficult decisions, but also stated that the decision represented a significant missed opportunity for the UK.
Taking key decisions on the future of coal-fired power stations
SSE acquired two wholly-owned coal-fired power stations in 2004: Ferrybridge (Yorkshire; now closed) and Fiddler's Ferry
(Cheshire, 1,995MW).
In March 2016 SSE ceased coal-fired electricity generation at Ferrybridge in line with the announcement of plans to do so
in May 2015. SSE acknowledges the immense contribution of all who have worked at Ferrybridge during its proud 50 years of
service. The site has now entered a period of decommissioning.
The future commercial operation at three of the four units at Fiddler's Ferry (1,455MW) was the subject of a consultation
with employees and other stakeholders, announced by SSE in February 2016. In March 2016 Fiddler's Ferry successfully
secured a contract to provide ancillary services to National Grid. The one-year contract, which started on 1 April 2016,
covers one of the three available units at the site. It was secured following a competitive procurement process.
Following its success in securing this contract and in view of the UK Government's planned reforms to the Capacity Market,
SSE also:
· confirmed that one unit at the station will provide Supplementary Balancing Reserve (SBR) services to National Grid
for the winter of 2016/17. TEC (Transmission Entry Capacity) is therefore not required for this unit's capacity;
· retained TEC for the station of 1,455MW, equivalent to the capacity of three units, for 2016/17; decided to enter
all or part of Fiddler's Ferry capacity into any 2017/18 Capacity Market auction; and
· recognised exceptional charges of £287.0m in relation to coal generation activities.
Developing new gas-fired generation options
SSE supports recent proposals by the UK Government to encourage investment in new gas-fired generation. SSE will continue
and retain and develop options for new stations at Keadby 2 in Lincolnshire and Seabank 3 near Bristol, but will do so in a
way that is fully consistent with its commitment to disciplined financial decision-making.
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. Multi fuel remains an important part of that strategy.
In July 2015 Multifuel Energy Ltd (MEL) (the SSE and Wheelabrator Technologies Inc. 50:50 joint venture) fully commissioned
a £300m (68MW) multi-fuel generation facility adjacent to SSE's existing Ferrybridge coal power station, known as
Ferrybridge Multifuel 1 (FM1). The station has taken on a capacity obligation for 2018/19 and 2019/20. Whilst SSE reports
its 34MW share of capacity, it excludes generation output at Ferrybridge multi-fuel as this is contracted to a third party.
In its first full financial year of operation to March 2016 the station processed 413,000 tonnes of fuel in commercial
operation and exported 385GWh of electricity, with the station running at near baseload.
In October 2015, planning consent for a second multi-fuel facility at the Ferrybridge site, Ferrybridge Multifuel 2 (FM2)
was granted , and a final investment decision on it is expected to be taken later in 2016.
Generation - Ireland
Producing electricity for Ireland's Single Electricity Market
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 single
generator of wind power in the SEM. The company also trades across the interconnectors between Ireland and GB.
SSE's new 464MW Great Island CCGT unit (grid connection capacity set at 431MW) commenced commercial operation in April
2015. Coinciding with the retirement of the old 240MW heavy fuel oil unit at the same site, the transition to gas has
improved the carbon intensity of SSE's fleet and significantly decarbonises energy generation in the all-island market.
Delivering and developing new capacity for electricity generation
SSE continues to invest in renewable electricity generation in Ireland. Over the two years to March 2018, SSE will add
174MW of new Irish wind power generation capacity to its existing fleet.
In the Republic of Ireland, construction of the two-phase 174MW (SSE share 120MW) Galway Wind Park project is ongoing.
Phase 1 of the project (66MW), which entered construction in February 2015, is owned and financed by SSE. Phase 2 (108MW)
is a 50/50 joint venture between SSE and Coillte. Galway Wind Park is expected to be commissioned in 2017, qualifying the
wind farm for the REFIT II support scheme.
In Northern Ireland, SSE is currently constructing the 35MW Tievenameenta Wind Farm in Co. Tyrone. In the same county
construction is due to commence shortly on the 19MW Slieve Divena II Wind Farm. Both projects are expected to be fully
operational in 2017 and meet the criteria for Northern Ireland's RO grace period.
SSE also has plans for a wind farm development at Doraville (up to 115MW), a planning application for which is currently
before Northern Ireland's Department of the Environment. This project will not qualify for the RO.
Engaging in the ISEM reform process
Reform of Ireland and Northern Ireland's SEM market to comply with the EU Electricity Target Model continues, with
regulators in each jurisdiction progressing the Integrated SEM (I-SEM) project. SSE remains fully involved in all stages of
the ongoing design and implementation process for the new market which is due for introduction by the end of 2017.
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 year to 31 March 2016 was 403 million therms (6.55mn boe) of gas and 0.13mn boe of liquids, compared
with 398 million therms of gas (6.47mn boe) and 0.08mn boe in the previous year. This slight rise in production in 2015/16
was due to the start up of the Laggan field in February 2016 although there was 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 (8.1mn boe) of gas and 0.85mn boe of liquids per year in the five years to March 2021.
The decrease in operating profit, £2.2m compared to £36.6m, from Gas Production during the period was mainly as a result of
the significantly lower average achieved price for wholesale gas volumes produced. The sustained decline in gas price was a
significant contributor to the £161.8m of exceptional charges recognised in the year, which includes £121.2m related to
Greater Laggan Area.
Delivering new opportunities in Gas Production
SSE had regularly set out its intention to seek new opportunities to increase its asset base to help meet gas demand
requirements, with the UK and north-west Europe the focus for this activity due to the relatively stable tax and fiscal
regime and proximity to SSE's domestic energy supply markets.
In line with this long-term strategy SSE announced in July 2015, that it had entered into an agreement with Total E&P UK
Limited to acquire: a 20% interest in the four gas fields and surrounding exploration acreage approximately 125km north
west of the Shetland Islands, collectively known as the Greater Laggan Area; and a 20% interest in the new Shetland Gas
Plant. The acquisition was completed in October 2015. Total E&P UK Limited is the operator of, and owns a 60% stake in
these assets. The remaining 20% is owned by DONG Energy.
The transaction completed with cash consideration of £669m (which reflects the value of the assets including associated UK
capital allowances). SSE's share of forecast capex in the period to March 2019 is expected to be c. £190m to complete the
entire development of the four primary fields (Laggan, Tormore, Edradour and Glenlivet) as well as the Shetland Gas Plant,
of which £43m was spent to 31 March 2016.
The new Shetland Gas Plant is located close to Sullom Voe and will process and export produced gas and condensate from
developments in the west of Shetland for onward delivery to the St Fergus Gas Terminal for gas; and via the Sullom Voe Oil
Terminal for liquids. This makes it one of the most important infrastructure developments in the UK. Production started in
February 2016 and it is expected to process and export gas and condensate for producers West of Shetland well into the
2030s.
Gas production started in February 2016 from the Laggan fields which have the ability to produce up to 90,000 boe a day at
peak production (SSE share 20%) and 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 Tormore, Edradour and Glenlivet fields
are expected to start production towards the end of 2016, 2017 and 2018 respectively and should keep production at peak
rates through to 2020.
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 31st 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 mn boe) in
all of the fields in which SSE has an ownership interest.
Gas Storage
Gas Storage is responsible for the operation and maintenance of SSE's gas storage facilities, and for ensuring they are
available for use by its customers.
Delivering gas storage services from Hornsea and Aldbrough
The economic environment for gas storage facilities continued to be extremely challenging during 2015/16 - as illustrated
the £150.9m of exceptional charges recognised in the year. As previously announced, SSE took the difficult decision at the
end of 2014/15 to mothball its older withdrawal plant at the Hornsea (Atwick) facility, which it completed for the start
of the 2015/16 storage year.
Both of SSE's storage sites have continued to operate to meet the needs of their customers through 2015/16, albeit with
some revision to Hornsea service provision during the last quarter:
· Hornsea (Atwick) again met 100% of customer nominations with the site 52% available through the year except in
instances of planned maintenance. The site was 97% available in the six months to 30 September 2015. During the second half
of the year, however, a significant extension to maintenance works at the site kept it unavailable , resulting in a drop
from typical high levels for the year overall;
· Aldbrough met 100% of customer nominations and was 82% available through the year except in instances of planned
maintenance. The two caverns removed from service earlier in the year have remained out of service, with forward options
regarding these caverns under review.
Alongside the requirement to continue to ensure the highest standards of asset management are maintained, SSE continues to
review its gas storage business on an ongoing basis. Its overall aim is to continue to provide valuable flexibility and
hedging services to its customers and hence the wider UK gas market, while managing its profitability and being as well
positioned as possible to take advantage of future market developments.
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, mean 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
Mar 16 Mar 15
ELECTRICITY TRANSMISSION
Operating profit* - £m 287.2 184.1
Regulated Asset Value (RAV) - £m 2,287 1,732
Capital expenditure - £m 573.4 467.2
Connection offers provided in required period 88 97
ELECTRICITY DISTRIBUTION
Operating profit* - £m 370.7 467.7
Regulated Asset Value (RAV) - £m 3,157 3,159
Capital expenditure - £m 258.3 327.6
Electricity Distributed TWh 39.5 39.6
Customer minutes lost (SHEPD) average per customer 55 69
Customer minutes lost (SEPD) average per customer 41 57
Customer interruptions (SHEPD) per 100 customers 66 70
Customer interruptions (SEPD) per 100 customers 47 60
Estimated Incentives Performance £m c23 c6.5
SCOTIA GAS NETWORKS
Operating profit* (SSE's share) - £m 268.7 285.0
Regulated Asset Value (SSE's share) - £m 2,513 2,459
Capital and replacement expenditure (SSE's share)- £m 162.8 169.9
Uncontrolled gas escapes attended within one hour % 98.5 98.7
SGN gas mains replaced - km 960 1,042
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 (SHET), Scottish Hydro Electric Power Distribution (SHEPD) and Southern Electric Power Distribution
(SEPD) and a 50% stake in both Scotland Gas Networks and Southern Gas Networks (SGN).
SSE's interests in economically-regulated energy networks supports the delivery of disciplined investment, a balanced range
of assets and operational efficiency. The RAV of SSE's five existing Networks companies is well placed to reach around
£10bn by 2020.
Through Price Controls, Ofgem sets the index-linked revenue the network companies can earn through charges levied on users
to cover costs and earn a return on regulated assets. While the RIIO Price Control mechanism is complex, these
economically-regulated, lower-risk businesses provide relative predictability and stability for SSE and balance its
activities in the competitive Wholesale and Retail markets. They are core to SSE's strategy in the short, medium and
long-term and contribute significantly to its ability to deliver annual dividend increases.
Under the RIIO price controls all network operators are incentivised to become more responsive to the needs of their
customers and stakeholders and to engage effectively with them to help inform how they plan and run their businesses.
SSE's Network businesses recognise that this requirement is key to ensuring it is accountable and responsive to the
communities it serves.
In the second half of 2016/17, SSE's three electricity networks businesses will become collectively known as Scottish and
Southern Electricity Networks following a rebranding process designed to improve customers' awareness of, and stakeholders'
engagement with, the businesses.
Financial performance in Networks
During the year to 31 March 2016, total operating profit in Networks was £926.6m with the principal movements in operating
profit as follows:
Transmission - The 56% increase in SHE Transmission's operating profit reflects the ongoing delivery of a major programme
of capital investment including the first full year of construction of the Caithness-Moray transmission link. Operating
profit is likely to decline in this new financial year due to phasing of capex and revenue as well as rates rebates and
depreciation associated with the growing asset base. Since the current RIIO T1 Price Control started in April 2013, SHE
Transmission's capital investment has totalled £1.39bn.
Distribution - The 20.7% decrease in electricity distribution operating profit is primarily due to the expected reduction
in base revenues under the first year of the RIIO ED1 price control. The profiling of the
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