REG - SSE Plc - Preliminary results for the year to 31 March 2017 <Origin Href="QuoteRef">SSE.L</Origin> - Part 2
17/05/2017 07:06
- Part 2: For the preceding part double click ID:nRSQ3515Fa
write downs in 2016/17. This together with the relative movement in mark to market valuations on forward purchase
contracts for commodities over both years (which at March 2017 were still 'out of the money') contributed to a net reported
gain before tax of £247.5m in 2016/17 compared to a loss before tax on those items of (£904.3m) in 2015/16.
This swing is explained in more detail in the relevant sections throughout this report and is the main driver for:
· Reported profit before tax increasing to £1,776.6m in 2016/17 compared to a £593.3m in 2015/16, due to the movement
in non-recurring exceptional items; and
· Reported earnings per share increasing to 158.4p in 2016/17 compared to 46.1p in 2015/16, again due to the movement
in non-recurring exceptional items.
Investment and Capital Expenditure
Central to SSE's strategic framework is efficient and disciplined investment in building a balanced range of
economically-regulated and market-based energy assets that it also generally owns and operates. This means that investment
should be in line with SSE's commitment to strong financial management and consistent with the maintenance of a balanced
range of assets within SSE's businesses.
Investing efficiently in energy assets that the UK and Ireland need in 2016/17
SSE invests in a balanced range of businesses and invests only in assets for which returns are expected to be clearly
greater than the cost of capital. All projects complement SSE's existing portfolio of assets and are governed and executed
in an efficient manner and in line with SSE's commitment to strong financial management.
During 2016/17, SSE's investment and capital expenditure totalled £1,726.2m. This included:
· A major investment programme in electricity networks: the switching on of the first section of an overhead link
between Knocknagael and Kintore represented a key milestone in the Caithness-Moray electricity transmission link project.
The project is the largest capital project ever undertaken by SSE and is on schedule for completion in 2018. This
investment, alongside continued upgrading of the electricity distribution network to meet the changing needs of customers,
will further increase the total Regulated Asset Value (RAV) of SSE's networks businesses;
· Further investment in renewable energy in GB and Ireland: progress was made to increase SSE's renewable energy
portfolio in GB with projects to be delivered through the Renewables Obligation (RO), which also applies in Northern
Ireland, Contracts for Difference (CfD) and Renewable Energy Feed in Tariff 2 in Ireland. Progress has been made at
projects including the Clyde Extension (173MW); Stronelairg (225MW); the Beatrice offshore wind farm (SSE share 235MW); and
Galway Wind Park (SSE share 120MW), which is the largest wind farm in Ireland. These projects, along with further onshore
wind projects in construction or pre-construction and the recently delivered Tievenameenta (34MW) wind farm, will add just
over 1GW to SSE's renewable energy portfolio, taking SSE's total renewable energy capacity 4.3GW including pumped storage;
In addition, SSE is fulfilling a regulatory obligation to install smart meters for its Energy Supply customers. At 31 March
2017 SSE had installed over 500,000 smart meters in customers' homes. Post installation, SSE's meters will transfer to a
contracted Meter Asset Provider, therefore SSE's investment and capital expenditure excludes the capital cost of
installation and meter assets. Subject to the delivery timetable of the critical central infrastructure, and other GB-wide
technical constraints affecting the progress of smart metering, SSE intends to ramp up its rollout significantly over
2017/18.
SSE is maintaining investment momentum, with capital and investment expenditure of around £1.7bn planned for
2017/18,similar levels currently expected for 2018/19 and around £6bn as a whole over the four years to 2020. Around £5bn
of that is already committed, predominantly in building, owning and operating economically-regulated electricity networks
and government-mandated renewable energy projects. The revenue derived from those assets is generally index-linked.
Simplifying and re-shaping the SSE group
As part of its long-standing strategic commitment to efficiency and disciplined investment, SSE is maintaining the
significant downward pressure on its operating costs that it started in 2014.
Also in 2014 SSE commenced what was called a value programme to dispose of assets which were not core to its future plans,
which resulted in a disproportionate burden, or which could release capital for future investment - all in the interests of
simplifying and re-shaping the SSE group. The sale in March 2017 of its equity holding in the last of 11 PFI
streetlighting contracts means the programme is now complete, and over the period between 2014 and 2017 SSE secured
disposal proceeds and debt reduction as a result of this value programme totalling over £1.1bn.
The sale in October 2016 of a 16.7% stake in SGN for £621m is in addition to the £1.1bn received as a result of the value
programme launched in 2014; but the SGN stake sale and the value programme both demonstrate that timely disposals to create
value for shareholders should always be an option for SSE where they help to simplify and streamline the SSE group.
Financial management and balance sheet
Keeping SSE well-financed
As a long-term business, SSE believes that it should maintain a strong balance sheet, illustrated by its commitment to
robust ratios for retained cash flow and funds from operations/debt. SSE believes that a strong balance sheet enables it
to secure funding from debt investors at competitive and efficient rates and take decisions that are focused on the long
term - 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 of '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. In line with
this, in March 2017, it successfully issued £1.03bn of Hybrid debt. The dual tranche issue comprised £300m with a coupon of
3.625% and $900m with a coupon of 4.75%. The $900m tranche has been swapped back to both Euros and Sterling, bringing the
all-in rate down to 2.72% and resulting in an all-in funding cost for both tranches to SSE of 3.02% per annum. The intent
is to use the proceeds to replace SSE's hybrid issued in 2012 (at an all-in rate of 5.6%), which has an issuer first call
date on 1 October 2017. This will result in an annualised cash saving of around £26m from 2018/19. The combined hybrid
coupon and hybrid interest payments in 2017/18 are expected to be £128m falling to around £80m in 2018/19. The new
£1.03bn Hybrids have a fixed redemption date and are therefore debt accounted and included within Loans and Other
Borrowings while the existing £2.2bn of Hybrids are perpetual instruments and are therefore equity accounted.
SSE has confirmed that the criteria applied by the Rating Agencies, Moody's and Standard and Poor's, will result in broadly
the same value of hybrid equity treatment as that of previous years.
During the year the £300m Scottish Hydro Electric Transmission plc facility with the European Investment Bank was drawn
into a 10 year fixed rate term loan at a rate of 2.076% while a new £200m facility with the European Investment Bank was
secured. The new facility is split evenly between SSE plc and Scottish Hydro Electric Transmission plc and will be drawn
during 2017/18 at which point it will convert to 10 year term loans. The first of the one year extension options on the
£1.5bn of bank facilities was exercised in 2016 meaning these facilities now mature in 2021 while the second one year
option is likely to be exercised during 2017 which will take these maturities to 2022.
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 in capital expenditure and
investment generally financed by a combination of: cash from operations; bank borrowings and bond issuance.
As a matter of policy, a minimum of 50% of SSE's debt is subject to fixed rates of interest. Within this policy framework,
SSE borrows as required on different interest bases, with financial instruments being used to achieve the desired out-turn
interest rate profile. At 31 March 2017, 91% 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. This means that all its major project capex requirements are hedged, including the
Stronelairg wind farm that was approved in 2016. Translational foreign exchange risk arises in respect of overseas
investments, hedging in respect of such exposures is determined as appropriate to the circumstances on a case-by-case
basis. Overall, while SSE has kept its treasury policy under review following the result of the EU Referendum, it has so
far identified no need for change.
Managing net debt and maintaining cash flow
SSE's adjusted net debt and hybrid capital was £8.5bn at 31 March 2017, compared with £9.0bn at 30 September 2016 and
£8.4bn on 31 March 2016. The overall level of net debt and hybrid capital reflects SSE's ongoing investment programme
however it also includes an accounting increase of around £212m as a result of fair value adjustments. The fair value
adjustment relates to marked-to-market movements on cross currency swaps and floating rate swaps that are classed as fair
value hedges under IFRS and as a result of Sterling weakness and lower interest rates during 2016/17 these have become more
'in the money' to SSE therefore increasing the net debt position. This accounting movement in debt is offset by an
equivalent movement in derivative financial liabilities held on SSE's balance sheet.
Adjusted net debt and hybrids at 31 March 2017 also includes £369m of the £500m proceeds identified for the share buy back
from the sale of a 16.7% stake in SGN. Of this, £65m was deployed during the irrevocable, non-discretionary programme
that continued during the close period from 1 April 2017 which means as at 17 May 2017 SSE has directed £196m towards the
buy back, re-purchasing around 13.4m shares. It still expects the process to be completed by the end of December 2017.
Adjusted net debt and hybrids is forecast to be around £9.5bn at March 2018.
Adjusted net debt excludes finance leases and includes outstanding liquid funds that relate to wholesale energy
transactions.
As noted above SSE's existing £2.2bn of hybrid equity is accounted for as equity within the Financial Statements but, as in
previous years, has been included within SSE's 'Adjusted net debt and hybrid capital' to aid comparability. SSE's new
£1.03bn of hybrid debt issued during 2016/17 is treated as debt. A reconciliation of adjusted net debt and hybrid capital
to reported net debt is provided in the table headed Adjusted Net Debt and Hybrid Capital, due to the different accounting
treatments, only the £2.2bn of hybrid equity is part of that reconciliation.
The level of reported net debt also reflects SSE's ongoing capital expenditure programme along with the impact of movements
in foreign exchange rates.
Ensuring a strong debt structure through medium- and long-term borrowings
SSE's objective is to maintain a reasonable range of debt maturities. Its average debt maturity, excluding hybrid
securities, at 31 March 2017 was 8.8 years, compared with 8.9 years at 31 March 2016.
SSE's debt structure remains strong, with around £8.7bn of medium/long term borrowings in the form of issued bonds,
European Investment Bank debt and other loans. This includes £1.03bn of hybrid equity with their first call date on 2
October 2017, which it is intended will be redeemed using the proceeds of the most recent hybrid issuance.
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 £1.4bn and around £1.2bn of medium-term borrowings which will mature in the period to March
2018, including the hybrid bonds mentioned above.
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; and
· In February 2017 (relating to the interim dividend for 2016/17) resulted in a reduction in cash dividend funding of
£95.3m, with 6.3m 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 £1,289m and has resulted in the issue of 93.4 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 2016/17
were £328.1m, compared to £310.9m in 2015/16 reflecting the increase in net debt in the year. Reported net finance costs
were £163.9m, compared to £192.1m. This reduction reflects a positive movement in finance derivatives of £52.6m in 2016/17
compared to £14.3m in 2015/16.
The coupon payments relating to the existing £2.2bn hybrid equity are presented as distributions to other equity holders
and are reflected within adjusted earnings per share when paid. In 2016/17 these totalled £119.3m, compared to £124.6m in
the previous year. The coupon payments on the new £1.03bn hybrid debt issuance are treated as finance costs under IFRS and
were £1.3m in 2016/17.
Tax
SSE is one of the UK's biggest taxpayers, and in the survey published in November 2016 was ranked 14th out of the 100 Group
of Companies in 2016 in terms of taxes paid. In the year to 31 March 2017, SSE paid £385.0m of taxes on profits, property
taxes, environmental taxes, and employment taxes in the UK, compared with £453.9m in the previous year. Total taxes paid in
2016/17 were lower than the previous year, primarily due to:
· reduced taxable profits from Gas Production as a result of lower gas prices and capital allowances from the
Greater Laggan acquisition in 2015/16;
· the reduction in the Petroleum Revenue Tax rate to 0% from 1 January 2016;
· a one-off Land & Buildings Transaction Tax liability in 2015/16 on the Greater Laggan acquisition; and
· lower Climate Change Levy liabilities through reduced coal consumption.
SSE also paid E16.5 million of taxes in the Republic of Ireland, being the only country outside of the UK in which it 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, SSE believes that
the adjusted current tax charge on that profit is the tax measure that best reflects underlying performance. SSE's adjusted
current tax rate, based on adjusted profit before tax, is 10.2%, as compared with 12.8% in 2015/16 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.
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 2017/18 and beyond. Its financial priorities for 2017/18 as a whole include:
· Delivering an annual increase in the dividend that at least keep pace with RPI inflation;
· Maintaining dividend cover in a range from around 1.2 times to around 1.4 times, albeit towards the bottom of it;
· Continuing a disciplined approach to investment in building, owning and operating a balanced range of energy related
assets and delivering assets within the established investment programme, especially in economically-regulated Networks and
government-mandated renewables;
· Maintaining a strong balance sheet, with robust ratios for retained cash flow and funds from operations/debt; and
· Completing deployment of the SGN stake sale proceeds by way of the on market share buy back, a process which could
continue until the end of 2017.
WHOLESALE
Wholesale Key Performance Indicators
Mar 17 Mar 16
Energy Portfolio Management (EPM) and Electricity Generation
EPM and Generation adjusted operating profit - £m 501.2 436.3
EPM and Generation reported operating profit/(loss) - £m 736.1 (174.8)
EPM and Generation capital expenditure and investment - £m 475.0 382.6
GENERATION CAPACITY - MW
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 1,995
Multi-fuel capacity - (MW) 34 34
Total thermal generation capacity - MW 7,334 7,282
Pumped storage capacity (GB) - MW 300 300
Conventional hydro capacity (GB) - MW 1,150 1,150
Onshore wind capacity (GB) - MW 900 900
Onshore wind capacity (NI) - MW 122 88
Onshore wind capacity (ROI) - MW 456 456
Offshore wind capacity (GB) - MW 344 344
Biomass capacity (GB) - MW 37 37
Total renewable generation capacity (inc. pumped storage) - MW 3,309 3,275
Total electricity generation capacity (GB and Ire) - MW 10,643 10,557
Renewable capacity qualifying for ROCs - MW c1,850 c1,800
GENERATION OUTPUT - GWh
Gas- and oil-fired (inc. CHP) output (GB) - GWh 14,977 10,160
Gas- and oil-fired output ( Ire) - GWh 2,463 1,780
Coal-fired (inc. biomass co-firing) output - GWh 901 6,141
Total thermal generation - GWh 18,341 18,081
Pumped storage output - GWh 233 252
Conventional hydro output - GWh 3,101 4,074
Onshore wind output GB - GWh 1,895 2,439
Onshore wind output NI - GWh 251 235
Onshore wind output ROI - GWh 1,211 1,308
Offshore wind output - GWh 1,172 1,312
Biomass output GB - GWh 92 75
Total renewable generation (inc. pumped storage) - GWh 7,955 9,695
Total Generation output all plant - GWh 26,296 27,776
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 is due to reduce to be zero from 1 April 2018)Note 4: Keadby TEC
increased by 20MW to 755MW and Medway TEC increased by 35MW to 735MW from 1 April 2016.Note 4: Wind output excludes 309GWh of constrained off generation in 2016/17 and
387GWh in 2015/16Note 5: Onshore wind capacity and output at March17 excludes 175MW related to the Clyde disposal in March 16 Note 6: Waste to Energy GWh not included
above as contracted to third partyNote 7: Slough Heat & Power Biomass Plant's financial results are reported within SSE Enterprise. Capacity and output included above.
Mar 17 Mar 16
GAS PRODUCTION
Gas production adjusted operating profit - £m 26.4 2.2
Gas production reported operating profit/(loss) - £m (201.1) (159.6)
Gas production- M therms 618 403
Gas production- Mboe 10.21 6.55
Liquids production - Mboe 1.05 0.13
Gas production capital investment - £m 72.9 56.1
Total net proven and probable reserves (2P) bn therms 2.5 3.6
Total net proven and probable reserves (2 P) Mboe 43 59
GAS STORAGE
Gas storage adjusted and reported operating (loss)/profit - £m (13.0) 4.0
Gas storage reported operating profit/(loss) - £m (36.8) (146.9)
Gas storage customer nominations met - % 100 100
Gas storage capital investment - £m - 0.2
Sustainably sourcing and producing energy
SSE's Wholesale segment consists of three business areas: Energy Portfolio Management (EPM) and Electricity Generation; Gas
Storage; and Gas Production. It makes a sustainable contribution to the fulfilment of SSE's core purpose and achievement of
its financial goals through excellence in the flexible provision, storage and delivery of energy and related services for
customers in wholesale energy markets in Great Britain and Ireland.
The markets in which SSE's Wholesale businesses operate continue to be impacted by a number of key long-term trends and
developments, including an uncertain macroeconomic environment; shifts in commodity prices; government intervention;
regulatory change; and the ongoing transition to a low carbon economy. SSE's Wholesale business therefore has to
continually review its portfolio of assets, contracts and investment opportunities in the context of a changing market,
spreading risk in order to deliver returns in varied and challenging conditions.
Financial performance in Wholesale
During the year to 31 March 2017 total adjusted operating profit in Wholesale was £514.6m compared to £442.5m in the
previous year. The primary drivers relating to operating profit are as follows:
· Energy Portfolio Management and Electricity Generation: adjusted operating profit increased to £501.2m in 2016/17
compared to £436.3m in 2015/16, despite lower renewable energy output, due to improved financial performance in thermal
generation and Energy Portfolio Management;
· Gas Production: adjusted operating profit increased to £26.4m in 2016/17, compared to £2.2m the previous year, due
to an increase in production as additional West of Shetland fields came on line and improved winter gas prices compared to
the previous year;
· Gas Storage: an adjusted operating loss of £13.0m was recorded in 2016/17, compared to an adjusted operating profit
of £4.0m the previous year, reflecting sustained challenging market conditions;
· Reported Wholesale Operating Profit: reported operating profit for the Wholesale segment was £498.2m compared to an
operating loss of (£481.3m) in 2015/16. This improvement was due to the recognition in the previous year of £868m of
exceptional charges relating to thermal generation plants, gas storage facilities and gas production fields. In 2016/17,
net exceptional charges were significantly lower and included a gain on revaluation of the SSE's Clyde wind farm following
part disposal. In addition, marked -to-market derivatives were significantly less 'out of the money' at March 2017 than at
March 2016.
Energy Portfolio Management (EPM)
The wholesale price of energy can fluctuate significantly due to a number of factors including the economy, the weather,
customer demand, infrastructure availability, and political and world events. EPM seeks to manage the impact of these
variables by maintaining a diverse and well-balanced portfolio of contracts, and trading positions. EPM provides a
route-to-market for SSE's Generation assets and helps Energy Supply manage its commodity risk. 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.
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.
Energy Generation (Renewables)
Summarising performance in 2016/17
Output of electricity from renewable sources, including pumped storage decreased in 2016/17, compared to the previous year
(8.0TWh compared to 9.7TWh). The primary driver for this differential was the weather; put simply there was lower rainfall
and less windy conditions in 2016/17 than in the previous year. Overall renewable energy capacity including, conventional
hydro and pumped storage, increased, from 3,275MW to 3,309MW with the delivery of the 34MW Tievenameenta onshore wind farm
in Northern Ireland which entered commercial operation in February 2017. Availability of the renewable energy portfolio to
generate electricity remained high throughout the period.
Onshore Wind
SSE continues to operate under the policy support regime for renewable generation capacity in the UK, currently delivered
through the Renewables Obligation (RO) (which also applies in Northern Ireland); and the Contracts for Difference (CfD)
mechanism. In Ireland support is provided via REFIT 2.
SSE has four onshore wind projects under construction which will qualify for the GB or NI RO:
· Dunmaglass (94MW) - the project is now in the final stages of construction and is scheduled for completion by summer
2017.
· Clyde Extension (173MW) - turbine erection is advanced and the project is expected to be fully operational by autumn
2017.
· Bhlaraidh (108MW) - turbine erection is advanced and the project is expected to be fully operational in late 2017.
· Slieve Divena 2 (19MW) - construction of this project in Co. Tyrone is progressing well and is expected to be fully
operational in summer 2017.
SSE expects a fifth onshore wind project under construction to qualify for the GB RO:
· Stronelairg (225MW) - The Judicial Review appeal was upheld by the Court of Session in July 2016. Full construction
in now under way and is expected to be completed in 2018.
SSE has two onshore wind projects under construction which will qualify for ROI REFIT 2 support:
· Galway Wind Park (SSE Share 120MW) - construction of this two-phase project totalling 174MW, making it Ireland's
largest onshore wind farm, is due to be completed by autumn 2017.
· Leanamore (18MW) - a new addition is in Co. Kerry where construction is under way and is expected to be completed by
the end of 2017.
Future development options for onshore wind projects are being explored in light of the UK's current policy and regulatory
framework.
SSE is continuing to advance its planning application for the Doraville development in Northern Ireland. In March 2017, it
confirmed a new design layout which includes a reduction in turbine numbers and a change in turbine specification to
optimise generation to 119MW.
Offshore Wind
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%). Both onshore and offshore construction are now under way and the
project is expected to be fully operational in 2019.
SSE has an interest in two further offshore wind farm developments: Seagreen (Phase one up to 1050MW, a 50:50 partnership
with Fluor Limited); and Forewind (up to 4,800MW). Seagreen was subject to a judicial review in the Court of Session which
found in favour of the petitioner, RSPB, in July 2016. This decision was appealed in February 2017. On 16 May 2017, the
Court of Session ruled in favour of developers and the Scottish government. Forewind has consent for four separate 1,200MW
projects in the Dogger Bank Zone. In March 2017 SSE and Statoil agreed to acquire Statkraft's stake in the consortium,
taking their share to 37.5% each with Innogy holding the other 25%. The three Joint Venture partner organisations will
agree the best route forward for the projects.
Energy Generation (Thermal)
Protecting capacity margins
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), addressed this issue through the
implementation of the Capacity Market. SSE supports the Capacity Market as the best way to deliver security of supply at
the lowest cost to consumers. It also supports the UK Government's recent changes which have strengthened the Capacity
Market by creating a more level playing field between participants.
In December 2016 the UK Government procured a revised figure of 52.4GW in the auction for delivery in 2020/21. SSE
pre-qualified 7,033MW of capacity and of this 3,239MW successfully secured agreements worth £72.9m.
In January 2017 the UK Government procured 54.4GW in a supplementary auction for delivery in 2017/18. SSE pre-qualified
5,898MW of capacity and of this 4,451MW successfully secured agreements worth £30.9m.
To secure the revenue arising from the Capacity Market, providers of generating capacity must produce electricity when the
system requires it; failure to do so will result in penalties being levied.
Managing developments regarding thermal 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 from 2017 through to 2021.
· Keadby (755MW wholly owned) has capacity obligations from 2017 through to 2021.
· Peterhead (1,180MW wholly owned) Up to 400MW can operate in the market, currently has a voltage control contract
with National Grid until 30 September 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 from 2017 through to 2021.
SSE supports the UK Government policy to encourage investment in new gas-fired generation. It will continue to take a
disciplined approach to developing options for new stations, including Keadby 2 in Lincolnshire and Abernedd in Port
Talbot. SSE submitted an application to BEIS in August 2016 to vary the Abernedd planning consent to allow an OCGT station
of up to 299MW.
SSE announced in February 2017 that it was undertaking a review of future options for Peterhead Power Station in
Aberdeenshire. The station's location means it is required to pay significantly higher Transmission Entry Capacity (TEC)
costs than other power stations on the electricity system. This puts it at a disadvantage in the Capacity Market auction
and it has failed to secure a contract in any of the auctions to date. TEC has been reduced to zero from 1 April 2018 as a
risk mitigation measure to avoid a substantial cancellation charge which would have applied if TEC had been cancelled later
in the year. Should the review and engagement with stakeholders conclude that the station has an enduring future SSE will
reapply for TEC and, subject to receiving a satisfactory offer from National Grid, reinstate it. SSE is considering all
possible options for the site during the review, which is expected to be concluded in the coming months.
SSE operates one wholly-owned coal-fired power station, at Fiddler's Ferry (Cheshire, 1,995MW). The station provided
ancillary services to National Grid in a one-year contract secured by tender which ended on 1 April 2017. Fiddler's Ferry
has capacity obligations for three of the four units from 2017 through to 2019.
In the 12 months to 31 March 2017, SSE's 464MW Great Island CCGT station in Ireland (grid connection capacity set at 431MW)
exported 2.4TWh of electricity, up 40% on the previous year. 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.
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 multifuel
generation facility known as Ferrybridge Multifuel 1 (FM1) in Knottingley, West Yorkshire. FM1 has now processed over 1
million tonnes of fuel and the station has taken on capacity obligations from 2017 through to 2021.
Construction is well under way at SSE's Ferrybridge Multifuel 2 (FM2) project after the Final Investment Decision was taken
in June 2016. The project is being built next to the FM1 facility. The completed plant will be able to generate around 70MW
of electricity, enough to power around 170,000 homes, and is expected to be in operation from 2019. SSE currently owns
100% of Ferrybridge MFE 2 Limited but has a contractual agreement, subject to various contingent matters, to dispose of 50%
of the share capital of the company to the joint venture partner of the initial multi fuel facility. This transaction is
anticipated to take place within the next year.
Gas Production
Developments in 2016/17
SSE's gas production portfolio comprises stakes in mature assets in Easington and Bacton Catchment Areas in the Southern
North Sea as well as equity in new fields in the Greater Laggan Area which are located to the West of Shetland. Total
output in 2016/17 was 618 million therms (10.2 mmboe) of gas and 1.0 mmboe of liquids, compared with 403 million therms of
gas (6.6 mmboe) and 0.1 mmboe of liquids in 2015/16. This significant rise in production was primarily due to the ramp up
of output from the newly commissioned fields in the Greater Laggan Area partially offset by the natural decline in output
from the more mature fields in Easington and Bacton Areas.
In the Greater Laggan Area, gas production started in 2016 from the Laggan and Tormore fields with production rates peaking
at up to 90,000 boe a day. The nearby Edradour and Glenlivet fields are both expected to start production by the end of
2017 helping to maintain production at peak rates during 2018.
Following a technical review of SSE's gas asset portfolio conducted by SSE's independent reserves auditors, the
economically recoverable, Proven plus Probable (2P) Reserves in SSE's gas production portfolio of assets were assessed as
being 2.5bn therms at 31 March 2017 compared to 3.6bn therms at 31 March 2016. As well as the production in the year,
this movement in estimated reserves reflects a significant reduction in the estimated 2P reserves in the Greater Laggan
Area assets that is only partially offset by an increase in those of SSE's mature asset base in the Southern North Sea.
The reduction in the estimated Greater Laggan Area 2P reserves resulted in an exceptional impairment of £180.5m at the year
end. While this is clearly disappointing, movement in the technical assessment of 2P reserves is a well-known occurrence
in the Gas Production business. Therefore, further reassessments will be expected in relation to these relatively new
fields. For the Greater Laggan Area fields, the movement in the reserves position reflects current best, but early stage,
understanding of the fields, where it now appears there is greater compartmentalisation of gas than expected, which it is
assessed, will require some further capital investment to extract. Consequently, this also means that the level of
Contingent Reserves (2C) has increased compared to March 2016.
Despite reduced estimated 2P reserves, these gas production assets are still an important long term asset and are expected
to make an important contribution to EBITDA with SSE's average annual volumes of gas and liquids produced expected to
average around 500million therms (8.1mmboe) of gas per year in the three years to March 2020. Thereafter, on current
reserve estimates, production is expected to decline to minimal levels by 2025.
Gas Storage
Both of SSE's storage sites have continued to operate to meet the needs of their customers through 2016/17, following the
return to service of the Hornsea (Atwick) site earlier in the year:
· Hornsea (Atwick) met 100% of customer nominations with the site 86% available through the second half of the year,
except in instances of planned maintenance.
· Aldbrough met 100% of customer nominations and delivered a record 98% availability, except in instances of planned
maintenance, throughout the year.
Alongside the under-pinning requirements to ensure the highest standards of safety and asset management are maintained, SSE
continues to respond to the difficult trading conditions with its overall aim to provide valuable flexibility and hedging
services to its customers and hence the wider UK gas market, while managing its 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 in the UK continued to be extremely challenging in 2016/17. SSE's response to
these conditions has combined strict financial discipline regarding managing expenditure with innovative development of new
products to meet the evolving needs of customers.
The decision to mothball two of the Atwick caverns, along with a continued focus on reducing operating costs reflects the
first element of this response with good progress being made on the cavern mothballing project since its announcement. The
commercialisation of further new products during the year, along with the sale of 100% of the Hornsea (Atwick) site
capacity through the recent auction, reflects the second element of SSE's response.
SSE remains committed to working with UK government departments to ensure the critical role of UK storage in relation to
security of supply and stability of gas price is maintained despite the current threats to the viability of the already low
storage levels operating in the UK when compared to Europe.
Wholesale - Conclusion and Priorities
In addition to their first priority of safety, SSE's Wholesale businesses aim to create sustainable long-term value through
the responsible production, storage and provision of energy and related services for energy customers; ongoing rigour in
optimising its portfolio of existing assets and contracts; and developing new options for building, owning and operating
assets and delivering those in construction.
Wholesale priorities for 2017/18 and beyond
SSE's Wholesale businesses' priorities in 2017/18 and beyond are to:
· maintain and operate efficiently and reliably its generation portfolio across the UK and Ireland;
· deliver new assets in construction and develop new opportunities to build, own and operate assets in the future;
· secure a stable and predictable supply of energy to meet SSE's requirements;
· secure value, where appropriate, through the risk-managed trading of energy-related commodities.
· ensure efficient delivery of gas from the offshore gas fields in which SSE has a shared ownership.
· safely, efficiently and reliably operate and maintain SSE's gas storage facilities, and ensure they are available
for use by its customers.
NETWORKS
Networks Key Performance Indicators
Mar 17 Mar 16
ELECTRICITY TRANSMISSION
Transmission adjusted and reported operating profit - £m 263.7 287.2
Regulated Asset Value (RAV) - £m 2,685 2,287
Capital expenditure - £m 505.0 573.4
ELECTRICITY DISTRIBUTION
Electricity distribution adjusted and reported operating profit - £m 433.4 370.7
Regulated Asset Value (RAV) - £m 3,246 3,157
Capital expenditure - £m 284.7 258.3
Electricity Distributed TWh 39.3 39.5
Customer minutes lost (SHEPD) average per customer 60 55
Customer minutes lost (SEPD) average per customer 43 41
Customer interruptions (SHEPD) per 100 customers 68 66
Customer interruptions (SEPD) per 100 customers 48 47
SCOTIA GAS NETWORKS
SSE's 50% share reducing to 33% from 26 Oct 2016
SGN adjusted operating profit (SSE's share) - £m 239.4 268.7
SGN reported operating profit (SSE's share) - £m 151.7 175.3
Regulated Asset Value - £m 1,748 2,513
Uncontrolled gas escapes attended within one hour % 98.7 98.5
SGN gas mains replaced - km 457 960
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 maintenance of a balanced range of assets,
operational efficiency and disciplined investment. The RAV (Regulatory Asset Value) of SSE's five existing Networks
companies is now on course to reach close to £9bn by 2020, which is net of the disposal of a 16.7% stake in SGN in October
2016. (This remains consistent with the forecast of £10bn RAV by 2020 which was in place prior to the SGN 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 framework is
complex, it provides for revenue to be strongly linked to the delivery of customer-focused commitments, against which
performance is measured and can be rewarded or penalised.
These economically-regulated, lower-risk businesses provide relative predictability and stability for SSE and balance its
activities in the 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 are core to SSE's strategy in
the short, medium and long-term and contribute significantly to its ability to deliver annual dividend increases that at
least keep pace with RPI inflation.
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 has established an independent 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 consists of a Chair and six members, recruited to reflect a broad range of external interests,
skills, knowledge and experience. Through its work, the Panel brings 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 year to 31 March 2017, total adjusted operating profit in Networks was £936.5m, compared to £926.6m in the
previous year, with the principal movements as follows:
Electricity Transmission: as expected, adjusted operating profit decreased to £263.7m in 2016/17, from £287.2m in 2015/16,
reflecting the phasing of capital expenditure and revenue associated with the growing asset base;
Electricity Distribution: adjusted operating profit rose to £433.4m in 2016/17, from £370.7m in 2015/16, reflecting
additional income as a result of the £38m under recovery of revenue from 2014/15, as outlined in customer charges published
in December 2015 for 2016/17. In 2016/17, around £35m of DPCR losses incentive income was also received, with a final
instalment of £15m due in 2017/18;
Gas Distribution: SSE's share of SGN's adjusted operating profit fell to £239.4m in 2016/17, from £268.7m the previous
year, mainly due to SSE's partial equity disposal in October 2016 and partly to the phasing of regulatory revenue and the
obligation to share outperformance with customers, which is part of the RIIO Price Control. The impact on operating profit
of the part disposal is estimated as being £37m; and
Reported Networks Operating Profit: reported operating profit for Electricity Transmission and Distribution is the same as
adjusted operating profit. SSE's share of SGN's reported operating profit fell to £151.7m, compared to £175.3m. This is
in line with the movement in adjusted operating profit and in addition reflects the change in SSE's share of SGN's interest
and tax.
The £307.3m gain on sale of the SGN stake is reflected in Corporate Unallocated reported operating profit.
Financial Outlook - 2017/18
As previously highlighted in its Notification of Close Period in March 2017, in 2017/18 SSE currently anticipates that its
Networks' operating profit, including SGN, will be around £100m lower than in 2016/17, on a like-for-like basis (£150m on
an absolute basis) as a result of the following:
· base revenue in Electricity Transmission is expected to decrease by around £40m compared with 2016/17 mainly due to
the phasing of capital expenditure on significant projects and the resulting impact on regulatory revenue. Base revenue is
then expected to return to 2016/17 levels for the subsequent three years, although depreciation charges are also expected
to increase as a result of continued investment;
· Electricity Distribution revenue in 2016/17 included an additional £38m that was 'under-recovered' from 2014/15. The
under recovery from 2015/16, recoverable in 2017/18 was significantly lower, at approximately £5m. As mentioned above,
around £35m of DPCR losses incentive income was also received in 2016/17, with a final instalment of £15m due in 2017/18;
and
· changes in the Gas Distribution revenue earned by SGN are likely to have the effect of reducing its operating profit
contribution to SSE by around £20m, after taking account of SSE's sale of a 16.7% stake in the business.
The Electricity Distribution revenue position for 2016/17 is being finalised and is expected to be an over-recovery of
around £10m and will be reflected in lower revenue in 2018/19.
Electricity Transmission
Scottish and Southern Electricity Networks (SSEN), operating as Scottish Hydro Electric Transmission plc under licence, is
responsible for maintaining and investing in the electricity transmission network in the north of Scotland.
Maintaining a track record of delivering a major programme of investment
Since the start of the RIIO T1 price control in 2013, SSEN's capital investment in its transmission network has totalled
close to £1.9bn, playing a pivotal role in providing the supporting infrastructure to facilitate the UK's transition to a
low carbon economy. With its committed pipeline of investment, it expects to increase its RAV from £2.69bn as at March 2017
to over £3bn by March 2018.
Good progress continues to be made with the delivery of SSEN's flagship Caithness-Moray transmission link, which remains on
schedule to be delivered on time and within allowed spend. With an agreed allowance of £1,118m (2013/14 prices), the
project is the largest single investment undertaken by the SSE group to date.
A number of key onshore enabling works related to the project were completed in 2016/17, including the first part of the
new Blackhillock Substation, which was successfully energised in September 2016; and the first element of the northern part
of the project, which was successfully energised at Dounreay Substation in March 2017.
The manufacture of the subsea cable is now complete and work to clear the seabed of rocks and boulders was successfully
completed in March 2017. Work has begun to create a trench on the Moray Firth seabed in advance of the subsea cable
installation, which is due to be installed by a specialised cable-laying vessel during 2017. The Caithness-Moray
reinforcement remains on course to be commissioned by the end of 2018.
Recovering the costs of Beauly-Denny
Following the successful energisation of the 220km Beauly-Denny overhead line replacement in November 2015, SSEN engaged
with Ofgem regarding the recovery of efficiently incurred costs. In January 2017, Ofgem determined that the full £58.8m
(2009/10 prices) of additional costs were efficient and will allow £27.8m to be included as an Asset Value Adjustment
Event, with the additional revenue stream starting in 2017/18. The remaining £31m will be
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