REG - SSE Plc - Preliminary results for the year to 31 March 2017 <Origin Href="QuoteRef">SSE.L</Origin> - Part 4
17/05/2017 07:06
- Part 4: For the preceding part double click ID:nRSQ3515Fc
contract with Marchwood Power Limited, which are not directly related to the external financing of the Group. The Group
excludes these liabilities from its adjusted net debt and hybrid capital measure to better reflect the Group's underlying
funding position with its primary sources of capital.
9 Non-recourse Clyde debt
At 31 March 2016, prior to the change in consolidation treatment for the venture, an adjustment was made to exclude
non-recourse debt associated with Clyde Windfarm (Scotland) Limited. Further explanation of the rationale is included in
Note 4.2(iii).
Adjustments to Capex Measure
10 Other expenditure
Other expenditure primarily represents subsequently derecognised development expenditure which is excluded to better
reflect the Group's ongoing capital position.
11 Customer funded additions. Customer funded additions represents additions to electricity and other networks funded by
customer contributions and accounted for under IFRIC 18. Given this is directly funded by customers, this has been
excluded to better reflect the Group's underlying investment position.
12 Allowances and certificates
Allowances and certificates consist of purchased carbon emissions allowances and generated or purchased renewable
obligations certificates (ROCs) and are not included in the Group's Capital Expenditure and Investment alternative
performance measure to better reflect the Group's investment in enduring operational assets.
13 Disposed additions
Disposed additions represents capital additions related to smart meter installations which were subsequently disposed to
the Meter Fit 2 Limited (see Note 10). This has been excluded to better reflect the Group's net capital investment.
14 Joint ventures and associates additions
Joint ventures and associates additions represent funding provided to joint venture arrangements in relation to capital
expenditure projects. This has been included to better reflect the Group's use of directly funded equity-accounted vehicles
to grow the Group's asset base. Project finance raised directly by the Group's joint ventures and associates is not
included in this adjustment.
The table below reconciles the adjusted performance measures to the reported measure of the Group.
March 2017 March 2016 March 2015
£m £m £m
Adjusted operating profit 1,874.0 1,824.4 1,881.4
Adjusted net finance costs (328.1) (310.9) (316.7)
Adjusted profit before tax (PBT) 1,545.9 1,513.5 1,564.7
Adjusted current tax charge (157.7) (193.4) (224.8)
Adjusted profit after tax (PAT) 1,388.2 1,320.1 1,339.9
Hybrid coupon paid (119.3) (124.6) (121.3)
Adjusted profit after tax attributable to ordinary shareholders for EPS 1,268.9 1,195.5 1,218.6
Number of shares for EPS 1,009.7 1,000.0 981.8
Adjusted Earnings per Share 125.7 119.5 124.1
Adjusted operating profit 1,874.0 1,824.4 1,881.4
Movement on operating and financing derivatives 203.1 (28.8) (61.1)
Exceptional items (8.2) (889.8) (674.6)
Share of joint ventures and associates interest and tax (128.4) (120.4) (159.8)
Reported Operating Profit 1,940.5 785.4 985.9
Adjusted Profit Before Tax PBT 1,545.9 1,513.5 1,564.7
Movement on operating and financing derivatives 255.7 (14.5) (105.3)
Exceptional items (8.2) (889.8) (674.6)
Interest on net pension assets/liabilities (3.1) (22.3) (14.0)
Share of joint ventures and associates tax (13.7) 6.4 (35.6)
Reported profit before tax 1,776.6 593.3 735.2
Adjusted net finance costs 328.1 310.9 316.7
Movement on financing derivatives (52.6) (14.3) 44.2
Share of joint ventures and associates interest (114.7) (126.8) (124.2)
Interest on net pension assets/liabilities 3.1 22.3 14.0
Reported net finance costs 163.9 192.1 250.7
Adjusted current tax charge 157.7 193.4 224.8
Share of joint ventures and associates tax (13.7) 6.4 (35.6)
Deferred tax including share of joint ventures and associates 19.8 80.8 82.0
Tax on exceptional items and certain re-measurement (106.0) (272.5) (200.4)
Reported tax charge 57.8 8.1 70.8
Adjusted Net Debt and Hybrid Capital (8,483.0) (8,395.0) (7,568.1)
Hybrid Capital 2,209.7 2,209.7 3,371.1
Adjusted Net Debt (6,273.3) (6,185.3) (4,197.0)
Outstanding liquid funds (105.2) (121.8) (71.7)
Finance leases (276.9) (300.8) (319.7)
Non-recourse Clyde debt - (200.7) -
Unadjusted net debt (6,655.4) (6,808.6) (4,588.4)
Investment and Capital expenditure (adjusted) 1,726.2 1,618.7 1,475.3
Other expenditure 4.2 6.9 (24.5)
Customer funded additions 112.8 88.3 89.8
Allowances and certificates 633.5 580.4 441.8
Disposed additions 15.6 - -
Joint ventures and associates additions (105.0) (46.2) (85.6)
Additions to Intangible Assets and Property, Plant and Equipment 2,387.3 2,248.1 1,896.8
Additions to Intangible Assets 779.5 713.1 527.6
Additions to Property, Plant and Equipment 1,607.8 1,535.0 1,369.2
Additions to Intangible Assets and Property, Plant and Equipment 2,387.3 2,248.1 1,896.8
Summary Financial Statements
Consolidated Income Statement
for the year ended 31 March 2017
2017 2016
Beforeexceptionalitems andcertainre-measure ments Exceptional items andcertainre-measure-ments(note 6) Total Beforeexceptionalitems andcertainre-measure-ments Exceptional items andcertainre-measure-ments(note 6) Total
Note £m £m £m £m £m £m
Revenue 5 29,037.9 - 29,037.9 28,781.3 - 28,781.3
Cost of sales (25,794.5) 232.6 (25,561.9) (25,859.4) (644.5) (26,503.9)
Gross profit 3,243.4 232.6 3,476.0 2,921.9 (644.5) 2,277.4
Operating costs (1,707.3) (406.2) (2,113.5) (1,449.8) (334.0) (1,783.8)
Other operating income 24.2 366.4 390.6 29.4 57.6 87.0
Operating profit before joint ventures and associates 1,560.3 192.8 1,753.1 1,501.5 (920.9) 580.6
Joint ventures and associates:
Share of operating profit / (loss) 313.7 - 313.7 322.9 - 322.9
Share of interest (114.7) - (114.7) (126.8) - (126.8)
Share of movement on derivatives - 2.1 2.1 - 2.3 2.3
Share of tax (32.8) 19.1 (13.7) (39.9) 46.3 6.4
Share of profit on joint ventures and associates 166.2 21.2 187.4 156.2 48.6 204.8
Operating profit 5 1,726.5 214.0 1,940.5 1,657.7 (872.3) 785.4
Finance income 7 93.7 - 93.7 101.8 - 101.8
Finance costs 7 (310.2) 52.6 (257.6) (308.2) 14.3 (293.9)
Profit before taxation 1,510.0 266.6 1,776.6 1,451.3 (858.0) 593.3
Taxation 8 (163.8) 106.0 (57.8) (280.6) 272.5 (8.1)
Profit for the year 1,346.2 372.6 1,718.8 1,170.7 (585.5) 585.2
Attributable to:
Ordinary shareholders of the parent 1,226.9 372.6 1,599.5 1,046.1 (585.5) 460.6
Other equity holders 119.3 - 119.3 124.6 - 124.6
Earnings per share
Basic earnings per share (pence) 9 158.4 46.1
Diluted earnings per share (pence) 9 158.2 46.0
Dividends
Interim dividend paid per share (pence) 9 27.4 26.9
Proposed final dividend per share (pence) 9 63.9 62.5
91.3 89.4
The accompanying notes are an integral part of the financial information in this announcement.
Consolidated Statement of Comprehensive Income
For the year ended 31 March 2017
2017 2016
£m £m
Profit for the year 1,718.8 585.2
Other comprehensive income:
Items that will be reclassified subsequently to profit or loss:
Losses on revaluation of available for sale investments, net of taxation - (8.4)
Net gains on cash flow hedges 14.9 79.4
Transferred to assets and liabilities on cash flow hedges 10.6 4.7
Taxation on cashflow hedges (2.8) (15.1)
22.7 69.0
Share of other comprehensive (loss)/income of joint ventures and associates, net of taxation (6.0) 3.9
Exchange difference on translation of foreign operations 74.1 85.1
Loss on net investment hedge net of taxation (22.5) (33.4)
68.3 116.2
Items that will not be reclassified to profit or loss:
Actuarial gain on retirement benefit schemes, net of taxation 252.5 195.4
Share of other comprehensive (loss)/income of joint ventures and associates, net of taxation (56.4) 76.4
196.1 271.8
Other comprehensive gain, net of taxation 264.4 388.0
Total comprehensive income for the period 1,983.2 973.2
Attributable to:
Ordinary shareholders of the parent 1,863.9 848.6
Other equity holders 119.3 124.6
1,983.2 973.2
Consolidated Balance Sheet
as at 31 March 2017
2017 2016
Note £m £m
Assets
Property, plant and equipment 12,622.2 12,525.0
Goodwill and other intangible assets 760.4 859.4
Equity investments in associates and joint ventures 985.8 1,045.1
Loans to associates and joint ventures 788.4 591.6
Other investments 12.5 16.7
Deferred tax assets 322.3 512.0
Derivative financial assets 528.3 537.7
Retirement benefit assets 13 525.4 -
Non-current assets 16,545.3 16,087.5
Intangible assets 580.7 500.1
Inventories 269.1 215.4
Trade and other receivables 3,754.4 3,274.3
Cash and cash equivalents 1,427.0 360.2
Derivative financial assets 1,269.5 1,615.0
Current assets held for sale 10 70.4 134.2
Current assets 7,371.1 6,099.2
Total assets 23,916.4 22,186.7
Liabilities
Loans and other borrowings 11 142.4 923.3
Trade and other payables 4,923.5 4,184.4
Current tax liabilities 294.8 298.2
Provisions 39.7 94.0
Derivative financial liabilities 1,153.2 1,783.8
Liabilities held for sale 10 1.4 115.0
Current liabilities 6,555.0 7,398.7
Loans and other borrowings 11 7,940.0 6,245.5
Deferred tax liabilities 788.9 917.5
Trade and other payables 437.4 452.4
Provisions 764.5 703.3
Retirement benefit obligations 13 454.9 394.8
Derivative financial liabilities 703.2 857.5
Non-current liabilities 11,088.9 9,571.0
Total liabilities 17,643.9 16,969.7
Net assets 6,272.5 5,217.0
Equity
Share capital 12 507.8 503.8
Share premium 885.7 880.4
Capital redemption reserve 26.5 22.0
Hedge reserve 14.5 (2.2)
Translation reserve 33.8 (17.8)
Retained earnings 2,594.5 1,598.6
Equity attributable to ordinary shareholders of the parent 4,062.8 2,984.8
Hybrid equity 12 2,209.7 2,209.7
Total equity attributable to equity holders of the parent 6,272.5 5,194.5
Non-controlling interests - 22.5
Total equity 6,272.5 5,217.0
The accompanying notes are an integral part of the financial information in this announcement
Consolidated Statement of Changes in Equity
for the year ended 31 March 2017
Share capital Share premium Capital redemption reserve Hedge reserve Translation reserve Retained earnings Total attributable to ordinary shareholders Hybrid equity Totalequity attributable to equity holders of the parent Non-controlling interests Total equity
£m £m £m £m £m £m £m £m £m £m £m
At 1 April 2016 503.8 880.4 22.0 (2.2) (17.8) 1,598.6 2,984.8 2,209.7 5,194.5 22.5 5,217.0
Total comprehensive income for the year - - - 16.7 51.6 1,795.6 1,863.9 119.3 1,983.2 - 1,983.2
Dividends to shareholders - - - - - (906.6) (906.6) - (906.6) - (906.6)
Scrip dividend related share issue 7.9 (7.9) - - - 237.9 237.9 - 237.9 - 237.9
Distributions to Hybrid equity holders - - - - - - - (119.3) (119.3) - (119.3)
Issue of shares 0.6 13.2 - - - - 13.8 - 13.8 - 13.8
Share repurchase (4.5) - 4.5 - - (131.5) (131.5) - (131.5) - (131.5)
Credit in respect of employee share awards - - - - - 13.1 13.1 - 13.1 - 13.1
Investment in own shares - - - - - (12.6) (12.6) - (12.6) - (12.6)
Non-controlling interest (i) - - - - - - - - - (22.5) (22.5)
At 31 March 2017 507.8 885.7 26.5 14.5 33.8 2,594.5 4,062.8 2,209.7 6,272.5 - 6,272.5
Statement of changes in equity Share capital Share premium Capital redemption reserve Hedge reserve Translation reserve Retained earnings Total attributable to ordinary shareholders Hybrid equity Total equity attributable to equity holders of the parent Non-controlling interests Total equity
£m £m £m £m £m £m £m £m £m £m £m
At 1 April 2015 496.5 862.7 22.0 (72.1) (69.5) 1,469.8 2,709.4 3,371.1 6,080.5 - 6,080.5
Total comprehensive income for the year - - - 72.9 51.7 724.0 848.6 124.6 973.2 - 973.2
Dividends to shareholders - - - - - (884.0) (884.0) - (884.0) - (884.0)
Scrip dividend related share issue 5.9 (5.9) - - - 175.8 175.8 - 175.8 - 175.8
Distributions to Hybrid equity holders - - - - - - - (124.6) (124.6) - (124.6)
Issue of shares 1.4 23.6 - - - - 25.0 - 25.0 - 25.0
Redemption of Hybrid equity - - - - - (8.5) (8.5) (1,161.4) (1,169.9) - (1,169.9)
Credit in respect of employee share awards - - - - - 13.5 13.5 - 13.5 - 13.5
Investment in own shares - - - - - (11.1) (11.1) - (11.1) - (11.1)
Disposal of non-controlling interest in Clyde Windfarm - - - - - 138.6 138.6 - 138.6 - 138.6
Non controlling interest (i) - - - (3.0) - (19.5) (22.5) - (22.5) 22.5 -
At 31 March 2016 503.8 880.4 22.0 (2.2) (17.8) 1,598.6 2,984.8 2,209.7 5,194.5 22.5 5,217.0
(i) This represents the recognition and de-recognition of the non-controlling interest in Clyde Windfarm (Scotland) Limited, the Group's share in which is now accounted as a joint venture (see Note 4.2(iii)).
Consolidated Cash Flow Statement
for the year ended 31 March 2017
2017 2016
Note £m £m
Operating profit 5 1,940.5 785.4
Less share of profit of joint ventures and associates (187.4) (204.8)
Operating profit before jointly controlled entities and associates 1,753.1 580.6
Pension service charges less contributions paid (48.0) (35.9)
Movement on operating derivatives (201.0) 31.1
Depreciation, amortisation and impairments 1,135.0 1,633.1
Charge in respect of employee share awards (before tax) 16.2 16.5
Profit on disposal of assets and businesses (391.0) (87.6)
Release of provisions (17.6) (7.8)
Release of deferred income (18.0) (17.9)
Cash generated from operations before working capital movements 2,228.7 2,112.1
Decrease in inventories 8.6 44.0
(Increase)/decrease in receivables (541.9) 1,098.5
Increase/(decrease) in payables 1,093.1 (879.5)
Decrease in provisions (53.8) (55.7)
Cash generated from operations 2,734.7 2,319.4
Dividends received from investments 123.4 130.9
Interest paid (178.5) (152.3)
Taxes paid (98.5) (139.1)
Net cash from operating activities 2,581.1 2,158.9
Purchase of property, plant and equipment (1,621.1) (1,495.4)
Purchase of other intangible assets (595.4) (444.8)
Deferred income received 36.9 16.1
Proceeds from disposals 10 739.3 312.4
Loans and equity provided to joint ventures and associates (105.0) (60.3)
Purchase of businesses and subsidiaries (15.8) (669.0)
Loans and equity repaid by joint ventures 73.4 18.3
Increase in other investments (0.2) (0.2)
Net cash from investing activities (1,487.9) (2,322.9)
Proceeds from issue of share capital 13.8 25.0
Dividends paid to company's equity holders 9 (668.7) (708.2)
Redemption of Hybrid equity - (1,161.4)
Hybrid equity dividend payments 12 (119.3) (124.6)
Employee share awards share purchase (12.6) (11.1)
New borrowings 1,842.5 1,070.1
Repayment of borrowings (950.6) (77.7)
Repurchase of own shares 12 (131.5) -
Net cash from financing activities (26.4) (987.9)
Net increase/(decrease) in cash and cash equivalents 1,066.8 (1,151.9)
Cash and cash equivalents at the start of year 360.2 1,512.1
Net increase/(decrease) in cash and cash equivalents 1,066.8 (1,151.9)
Cash and cash equivalents at the end of year 1,427.0 360.2
The accompanying notes are an integral part of these financial statements.
Notes to the Preliminary Statement
for the year ended 31 March 2017
1. Financial Information
The financial information set out in this announcement does not constitute the Group's consolidated financial statement for
the years ended 31 March 2017 or 2016, but is derived from those accounts. Consolidated financial statements for the year
ended 31 March 2016 were delivered to the Registrar of Companies, and those for the year ended 31 March 2017 will be
delivered in due course. The auditors have reported on those accounts and their reports were (i) unqualified; (ii) did not
include a reference to any matters to which the auditors drew attention by way of emphasis without qualifying their report;
and (iii) did not contain a statement under section 498 (2) or (3) of the Companies Act 2006. This preliminary
announcement was authorised by the Board on 16 May 2017.
2. Basis of preparation and presentation
2.1 Basis of preparation
The financial information set out in this announcement has been extracted from the consolidated financial statements of SSE
plc for the year ended 31 March 2017. These consolidated financial statements were prepared under the historical cost
convention, excepting certain assets and liabilities stated at fair value and in accordance with International Financial
Reporting Standards and their interpretations, as adopted by the European Union (adopted IFRS). This consolidated
financial information has been prepared on the basis of accounting policies consistent with those applied in the
consolidated financial statements for the year ended 31 March 2016 unless expressly stated otherwise. All issued standards,
amendments and interpretations of adopted IFRS that require to be adopted for the first time in these financial statements
have been applied by the Group in the current year and have not had a material impact on the financial statements. The
Directors consider that the Group has adequate resources to continue in operational existence for the foreseeable future.
The financial information has therefore been prepared on a going concern basis. The financial statements are presented in
Pounds Sterling.
2.2 Basis of presentation
The Group applies the use of adjusted accounting measures throughout these statements. These measures enable the Directors
to present the underlying performance of the Group and its segments to the users of the statements in a consistent and
meaningful manner. The adjustments applied and certain terms such as 'adjusted operating profit', 'adjusted EPS',
'investment and capital expenditure' and 'adjusted net debt and hybrid equity' are not defined under IFRS and are explained
in more detail below.
3. Adjusted accounting measures
3.1 Adjusted measures
The Directors assess the performance of the Group and its reportable segments based on 'adjusted measures'. These measures
are used for internal performance management and are believed to be appropriate for explaining underlying performance to
users of the accounts. These measures are also deemed the most useful for the ordinary shareholders of the Company and for
other stakeholders.
The performance of the reportable segments is reported based on adjusted profit before interest and tax ('adjusted
operating profit'). This is reconciled to reported profit before interest and tax by adding back exceptional items and
certain re-measurements (see Note 3.2 below) and after the removal of interest and taxation on profits from
equity-accounted joint ventures and associates.
The performance of the Group is reported based on adjusted profit before tax which excludes exceptional items and certain
re-measurements (see below), the net interest costs associated with defined benefit schemes and taxation on profits from
equity-accounted joint ventures and associates. The interest costs removed are non-cash and are subject to variation based
on actuarial valuations of scheme liabilities.
The Group's key performance measure is adjusted earnings per share (EPS), which is based on basic earnings per share before
exceptional items and certain re-measurements (see below), the net interest costs associated with defined benefit schemes
and after the removal of deferred taxation. Adjusted profit after tax is presented on a basis consistent with adjusted EPS
except for the exclusion of payments to holders of hybrid equity.
The financial statements also include an 'adjusted net debt and hybrid equity' measure. This presents financing information
on the basis used for internal liquidity risk management. This measure excludes obligations due under finance leases and
includes cash held as collateral on commodity trading exchanges and other short term loans. At 31 March 2016, prior to the
change in consolidation treatment for the venture, this measure excluded non-recourse debt associated with Clyde Windfarm
(Scotland) Limited (see Note 4.2(iii)). The measure represents the capital owed to investors, lenders and equity holders
other than the ordinary shareholders. As with 'adjusted earnings per share', this measure is considered to be of particular
relevance to the ordinary shareholders of the Group as well as other stakeholders and interested parties.
Notes to the Preliminary Statement
for the year ended 31 March 2017
3 Adjusted accounting measures (continued)
3.1 Adjusted measures (continued)
Finally, the financial statements include an 'investment and capital expenditure' measure. This metric represents the
capital invested by the Group in projects that are anticipated to provide a return on investment over future years and is
consistent with internally applied metrics. This therefore includes capital additions to Property, Plant and Equipment and
Intangible Assets and also the Group's funding of joint venture and associates capital projects. The Group has considered
it appropriate to report these values both internally and externally in this manner due to its use of equity-accounted
investment vehicles to grow the Group's asset base, where the Group is providing the source of funding to the vehicle
through either loans or equity. The Group does not include project-funded ventures in this metric. In addition, the Group
excludes from this metric additions to its Property, Plant and Equipment funded by Customer Contributions and additions to
Intangible Assets associated with Allowances and Certificates. As with 'adjusted earnings per share', this measure is
considered to be of particular relevance to the ordinary shareholders of the Group as well as other stakeholders and
interested parties.
Reconciliations from reported measures to adjusted measures along with further description of the rationale for those
adjustments are included in the Alternative Performance Measures section at pages 48 to 53 before the Summary Financial
Statements.
3.2 Exceptional items and certain re-measurements
Exceptional items are those charges or credits that are considered unusual by nature and scale and of such significance
that separate disclosure is required for the financial statements to be properly understood. The trigger points for
exceptional items will tend to be non-recurring although exceptional charges may impact the same asset class or segment
over time. Market conditions that have deteriorated significantly over time will only be captured to the extent observable
at the balance sheet date. Examples of items that may be considered exceptional include material asset or business
impairment charges, business restructuring costs, significant gains or losses on disposal and contractual settlements
following significant disputes and claims. The Directors consider that any individual gain or loss on disposal of greater
than £30.0m would be disclosed as being exceptional by nature of its scale. Other gains or losses on disposal below this
level may be considered to be exceptional by reference to specific circumstances which will be explained on a case-by-case
basis.
Certain re-measurements are re-measurements arising on certain commodity, interest rate and currency contracts which are
accounted for as held for trading or as fair value hedges in accordance with the Group's policy for such financial
instruments. The amounts shown in the before exceptionals and certain re-measurements results for these contracts is the
amount settled in the year as disclosed in note 14. This excludes commodity contracts not treated as financial instruments
under IAS 39 where held for the Group's own use requirements which are not recorded until the underlying commodity is
delivered.
3.3 Other additional disclosures
As permitted by IAS 1 'Presentation of financial statements', the Group's income statement discloses additional
information in respect of joint ventures and associates, exceptional items and certain re-measurements to aid understanding
of the Group's financial performance and to present results clearly and consistently.
4. Accounting judgements and estimation uncertainty
In the process of applying the Group's accounting policies, management necessarily makes judgements and estimates that have
a significant effect on the amounts recognised in the financial statements. Changes in the assumptions underlying the
estimates could result in a significant impact to the financial statements. The Group's key accounting judgement and
estimation areas are noted with the most Significant Financial Judgement areas as specifically discussed by the Audit
Committee being highlighted separately.
4.1 Significant Financial Judgements - Estimation Uncertainties
The preparation of the Group's Financial Statements has specifically considered the following Significant Financial
Judgements all of which are areas of estimation uncertainty.
(i) Impairment testing and valuation of certain Non-Current Assets - Estimation Uncertainty
The Group reviews the carrying amounts of its goodwill, other intangible assets and specific property, plant and equipment
assets to determine whether any impairment of the carrying value of those assets requires to be recorded. The specific
assets under review in the year ended 31 March 2017 are goodwill, intangible development assets and specific property,
plant and equipment assets related to gas production, retail and technology development, gas storage, thermal power
generation and wind power generation. In conducting its reviews, the Group makes judgements and estimates in considering
both the level of cash generating unit (CGU) at which common assets such as goodwill are assessed against, as well as the
estimates and assumptions behind the calculation of recoverable amount of the respective assets or CGUs.
During the year, the Group performed a review of its CGUs based on the Group operating structure and economic
characteristics of similar assets. The review resulted in two CGUs - GB Wind and Ireland Wind - being combined into a Wind
Generation CGU. The other CGUs were unchanged following this review.
Notes to the Preliminary Statement
for the year ended 31 March 2017
4 Accounting judgements and estimation uncertainty (continued)
4.1 Significant Financial Judgements - Estimation Uncertainties (continued)
Changes to the estimates and assumptions on factors such as regulation and legislation changes, power, gas, carbon and
other commodity prices, volatility of gas prices, plant running regimes and load factors, expected proven and probable
reserves, discount rates and other inputs could impact the assessed recoverable value of assets and CGUs and consequently
impact the Group's income statement and balance sheet.
(ii) Revenue recognition - estimated energy consumption - Estimation Uncertainty
Revenue from Retail energy supply activities includes an estimate of the value of electricity or gas supplied to customers
between the date of the last meter reading and the year end. This estimation will comprise of values for i) billed revenue
in relation to consumption from unread meters based on estimated consumption taking account of various factors including
usage patterns and weather trends (disclosed as trade receivables) and ii) unbilled revenue (disclosed as accrued income).
The volume of unbilled electricity or gas is calculated by assessing a number of factors such as externally notified
aggregated volumes supplied to customers from national settlements bodies, amounts billed to customers and other
adjustments.
Unbilled revenue is therefore calculated by applying the tariffs associated with estimated customers to the calculated
volume of electricity or gas consumed. This estimation methodology is subject to an internal corroboration process that
provides support for the judgements made by management. This process requires the comparison of calculated unbilled volumes
to a 'benchmark' measure of unbilled volumes which is derived using independently verified data and by assessing historical
weather-adjusted consumption patterns and actual meter data that is used in industry reconciliation processes for total
consumption by supplier. This aspect of the corroboration process, which requires a comparison of the estimated supplied
quantity of electricity or gas that is deemed to have been delivered to customers and the aggregate supplied quantity of
electricity or gas applicable to the Group's customers that is measured by industry system operators, is a key judgement.
The assessment of electricity unbilled revenue is further influenced by the impact on estimated electricity or gas supplied
of national settlements data or, for electricity only, feed-in-tariff supported volumes and spill from solar PV
generation.
The Group's policy is to recognise unbilled revenue only where the economic benefits are expected to flow to the Group. As
a result, the judgements applied, and the assumptions underpinning the judgements, are considered to be appropriate. Change
in these assumptions would have an impact on the amount of revenue recognised in any given period. In the year, in relation
to electricity, the Group has been able to resolve a number of long-standing issues relating to the quality of grid supply
point metering and national settlements data. As a result, while significant estimation uncertainty remains, the aggregate
level of non-half-hourly and half-hourly volume associated with such factors has reduced in the year. This improvement in
confidence in estimation has enabled an additional revenue amount of c. £60m (1.1% of unbilled energy income) to be
recognised in the year. In relation to unbilled gas revenue estimation, the experience of the Group is that the industry
estimated supplied quantities of gas consumed have historically been higher than actual metered supply. To take account of
this, the Group has applied a further
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