SSE PLC Annual Financial Report (3704I)

TIDMSSE

RNS Number : 3704I

SSE PLC

16 June 2017

Annual Financial Report

Following the Preliminary Results announcement on 17 May 2017, SSE plc confirms that it has published its Annual Report and Accounts for the year ended 31 March 2017.

The Annual General Meeting (AGM) will be held at the Perth Concert Hall, Mill Street, Perth PH1 5HZ on Thursday, 20 July 2017 at 12 noon. The mailing to shareholders of the AGM documentation has commenced, and copies of the Annual Report and Accounts and the Notice of Annual General Meeting for 2017 are available to view on the Company's website: www.sse.com.

In accordance with Listing Rule 9.6.1, copies of the Annual Report and Accounts, Notice of Annual General Meeting, and Form of Proxy for 2017 have been submitted to the UK Listing Authority and will shortly be available for inspection from the National Storage Mechanism, which can be accessed at: www.hemscott.com/nsm.do

The information that follows in Sections 1 to 3 is extracted in unedited full text from the 2017 Annual Report and Accounts and is included in this announcement for the purpose of compliance with Disclosure Guidance and Transparency Rule 6.3.5. The information reproduced should be read in conjunction with the Preliminary Results announcement issued on 17 May 2017. Together these constitute the material required by Disclosure Guidance and Transparency Rule 6.3.5 to be communicated to the media in unedited full text through a Regulatory Information Service. This material is not a substitute for reading the full 2017 Annual Report and Accounts. Page numbers and cross-references in the extracted information attached refer to page numbers and cross-references in the 2017 Annual Report and Accounts.

Section 1 - Principal Risks and Uncertainties: The following information is extracted from pages 24 to 27 of the 2017 Annual Report and Accounts.

Risk Management Framework

Supporting the achievement of SSE's strategic objectives

The Group's objectives are set through the Strategic Framework. To support the achievement of these over the past 12 months the Board has sought to further mature and embed the Risk Management Framework (as detailed below) that has been developed over the past three years. For further information on how SSE manages risk, please see the supplementary Group Risk Report.

The Executive Committee and its subcommittees have responsibility for overseeing SSE's Principal Risks. During the third quarter of SSE's financial year, a self assessment is completed for each of SSE's Principal Risks by an assigned oversight committee. This assessment requires committee members to provide commentary on contextual changes in the risk and whether they consider it to have become more or less material during the course of the year. These individual responses are consolidated into a report, one for each Principal Risk. The end reports are then presented back to the committees, along with the results of provisional viability testing and analysis of relevant and current Management Information.

Following presentation of the assessment information, the committees discuss and reach a consensus regarding risk trend (more, less or equally material), overall effectiveness of the risk control and monitoring environment, and whether any additional actions are required to improve the control environment. The outputs from the committee assessments are then presented to the Executive Committee for full review, with any material changes resulting from this being proposed to the Board for approval.

Following the 2016/17 review process, the number of Principal Risks to the Group was increased from nine to ten with the pre-existing "Cyber and Networks Failure" risk being split into two separate risks - Cyber Security and Resilience and Energy Infrastructure Failure. In addition, the "Human and Relationship Capital" risk has been expanded and renamed, becoming People and Culture.

System of internal control

The diagram below [set out on page 24 and 25 of the 2017 Annual Report and Accounts] details SSE's wider System of Internal Control and how the Risk Management Framework is aligned with the other elements of it.

There are five related frameworks which, combined, comprise SSE's system of internal control.

The Corporate Governance Framework is designed to ensure focus on the key components of high quality and effective decision making - clarity, accountability, transparency and efficiency. For further details please see page 58 of the Directors' report.

The Strategic Framework comprises the Group's strategic objectives, financial objective and our responsibility framework. For further details please see page 12 to 23 of the Strategic Report. The strategic framework forms the basis for all activity within the Risk Management Framework.

The Risk Management Framework is underpinned by the fundamental principle that everyone at SSE is responsible for the management of risk. The Risk Management Framework supports each Division in managing its risks and helps to ensure that the

Board is able to meet its obligations.

The Assurance Framework. Group Audit, Group Compliance, Group SHE and LCP Services work together to provide an integrated programme of audit and assurance activity that is independent of the day to day operations of the Divisions and Corporate Functions.

The Standards and Quality Framework sets out the expected standards and guidelines to be followed in the delivery of the Group's core purpose - providing the energy people.

Risk Appetite Statement

No business is risk-free and indeed the achievement of SSE's strategic objectives necessarily involves taking risk. SSE will however only accept risk where it is appropriate, well understood, can be effectively managed and offers commensurate reward.

The markets in which SSE operates are inherently subject to a high degree of political, regulatory and legislative risk. Furthermore each of SSE's business divisions has differing levels of exposure to additional risks. For example, the Networks business is largely regulated and is characterised by stable, inflation linked cashflows whereas the Wholesale and Retail businesses are heavily exposed to energy market and commodity risk. Affordability and industry transformation also particularly affect the Retail business while Enterprise is exposed to the risks that come with growth in a highly competitive market place.

The key elements of SSE's strategic framework - including the diversity of energy businesses within the SSE Group described above, as well as its financial objective - are fully reflective of its risk appetite:

-- SSE seeks to avoid over-exposure to any single part of the energy sector and therefore maintains a balanced range of economically regulated and market based energy businesses;

-- production, storage, transmission, distribution, supply and related services provide a balanced portfolio of business activities whilst keeping the depth of focus on a single sector - energy; and

-- Great Britain and Ireland gives SSE a geographic markets focus and a clear understanding of the risks and opportunities in those markets.

In areas where SSE is exposed to risks for which it has little or no appetite, even though it has implemented high standards of control and mitigation, the nature of these risks mean that they cannot be eliminated completely. In determining its appetite for specific risks, the Board is guided by three key principles:

1. Risks should be consistent with SSE's strategy, financial objective and core values - safety is SSE's number one value and it has no appetite for risks brought on by unsafe actions;

2. Risks should only be accepted where appropriate reward is achievable on the basis of objective evidence; and

3. Risks should be actively controlled and monitored through the appropriate allocation of management and other resources.

The Board has overall responsibility for determining the nature and extent of the risk it is willing to take and for ensuring that risks are managed effectively across the Group.

Group Principal Risks

 
 Commodity Prices                       Cyber Security and Resilience 
  Oversight: Wholesale Risk              Oversight: Information 
  Committee                              Security and Privacy Committee 
  The risk associated with               The risk that key infrastructure, 
  the Group's exposure to                networks or core systems 
  fluctuations in both the               are compromised or are 
  physical volumes and price             otherwise rendered unavailable. 
  of key commodities, including          Key mitigations include 
  electricity, gas, CO2 permits,         significant longer term 
  oil and related foreign                Security Programme investment 
  exchange values. Key mitigations       and ensuring staff awareness 
  include the use of VaR                 of security issues and 
  monitoring measures and                their importance. 
  daily assessments of commodity         -- Highly interconnected 
  positions by a risk management         with SSE's other Principal 
  team which is independent              Risks. 
  of the trading teams. 
  -- Limited level of interconnection 
  with SSE's other Principal 
  Risks. 
-------------------------------------  ------------------------------------- 
 Development and Change                 Energy Affordability 
  Oversight: Executive Committee         Oversight: Retail Risk 
  The risk of failing to                 Committee 
  recognise and react appropriately      The risk that the combination 
  to competition, technological          of the cost of providing 
  advancements and changes               reliable and sustainable 
  in customer expectations               energy and the level of 
  within the energy industry.            customers' incomes means 
  Key mitigations include                that energy becomes unaffordable 
  the implementation of various          to a significant number 

  strategic change programmes            of SSE's customers. This 
  which are governed by SSE's            risk is directly connected 
  Transformation and Large               to political interventions 
  Capital Projects and Governance        and commodity price exposure. 
  Frameworks.                            Key mitigations include 
  -- Moderately interconnected           maintenance of a diverse 
  with SSE's other Principal             generation fleet limiting 
  Risks.                                 exposure to a single commodity, 
                                         as well as public policy 
                                         lobbying to try to ensure 
                                         the fair allocation of 
                                         non-commodity costs related 
                                         to energy provision. 
                                         -- Limited level of interconnection 
                                         with SSE's other Principal 
                                         Risks. 
-------------------------------------  ------------------------------------- 
 Energy Infrastructure Failure          Financial Liabilities 
  Oversight: Executive Committee         Oversight: Tax and Treasury 
  The risk of national energy            Committee 
  infrastructure failure,                The risk that funding is 
  whether in respect of assets           not available to meet SSE's 
  owned by SSE or those owned            financial liabilities, 
  by others which SSE relies             including those to its 
  on, that prevents the Group            defined benefit pension 
  from meeting its obligations.          schemes, as these fall 
  Key                                    due under both normal and 
  mitigations include wide-ranging       stressed conditions without 
  asset management strategies,           incurring unacceptable 
  and membership and participation       costs or risking damage 
  in national security forums            to its reputation. Key 
  such as the Centre for                 mitigations include the 
  the Protection of National             mandatory maintenance of 
  Infrastructure (CPNI).                 minimum borrowings and 
  -- Moderately interconnected           committed facilities to 
  with SSE's other Principal             support forecast debt requirements, 
  Risks.                                 plus the ongoing de-risking 
                                         of SSE's defined benefit 
                                         pension schemes. 
                                         -- Limited level of interconnection 
                                         with SSE's other Principal 
                                         Risks. 
-------------------------------------  ------------------------------------- 
 Major Projects Quality                 People and Culture 
  Oversight: Group Large                 Oversight: Group Governance, 
  Capital Projects Committee             Culture and Controls Committee 
  The risk that major assets             The risk that SSE is unable 
  that SSE builds do not                 to attract, develop and 
  meet the quality standards             retain an appropriately 
  required to support economic           skilled, diverse and responsible 
  lives of typically 15 to               workforce and leadership 
  30 years. Key mitigations              team, and maintain a healthy 
  include the Large Capital              business culture which 
  Project Governance Framework           encourages and supports 
  which ensures that all                 ethical behaviours and 
  material capital investment            decision-making. Key mitigations 
  projects across the Group              include clear expectations 
  are governed, developed,               relating to conduct and 
  approved and executed in               accountability, the SSE 
  a consistent and effective             SET of values, well developed 
  manner.                                succession and diversity 
  -- Moderately interconnected           plans, and comprehensive 
  with SSE's other Principal             training and learning management 
  Risks.                                 across the organisation. 
                                         -- Highly interconnected 
                                         with SSE's other Principal 
                                         Risks. 
-------------------------------------  ------------------------------------- 
 Politics, Regulation and               Safety and the Environment 
  Compliance                             Oversight: Group Safety, 
  Oversight: Group Governance,           Health and Environment 
  Culture and Controls Committee         Committee 
  The risk from changes in               The risk of harm to people, 
  obligations arising from               property or the environment 
  operating in markets which             from SSE's operations. 
  are subject to a high degree           Key mitigations include 
  of regulatory, legislative             crisis management and business 
  and political intervention             continuity plans that are 
  and uncertainty. Key mitigations       in place and regularly 
  include the maintenance                tested, which are designed 
  of dedicated Corporate                 for the management of, 
  Affairs, Regulation, Legal             and recovery from, significant 
  and Compliance functions               safety and environmental 
  that provide advice and                events. 
  guidance regarding the                 -- Moderately interconnected 
  interpretation of political,           with SSE's other Principal 
  regulatory and legislative             Risks. 
  changes to SSE's operating 
  divisions. 
  -- Highly interconnected 
  with SSE's other Principal 
  Risks. 
-------------------------------------  ------------------------------------- 
 

SSE operates in fast moving markets that are subject to a high degree of political, regulatory and legislative intervention. It is therefore essential that SSE's Risk Management Framework is dynamic and flexible, allowing decision makers to focus on material risk information that may have an impact, whether positive or negative, on core objectives.

The Board and Executive Committee look to assess the Principal Risks that face the Group from a number of different perspectives, including both individually and collectively. This graphic [set out on page 27 of the 2017 Annual Report and Accounts] illustrates SSE's ten Group Principal Risks positioned on a relative basis against two important metrics - interconnectivity (a highly interconnected risk has more ways to manifest than a less interconnected risk), and potential impact on Group viability based on selected critical risk scenarios developed in conjunction with business experts.

In addition, the Principal Risks that were considered by their oversight Committees to have increased in materiality during the year are shown in red, with those whose materiality has not significantly changed are shown in blue. No Principal Risk was deemed to have decreased in materiality.

Viability Statement

As required within provision C.2.2 of the UK Corporate Governance Code, the Board has assessed the prospects of the Company over the next 3 financial years to the period ending 31 March 2020. The Directors have determined that as this time horizon aligns with the Group's current capital programme and is within the strategy planning period, a greater degree of confidence over the forecasting assumptions modelled can be established.

In making this statement the Directors have considered the resilience of the Group taking into account its current position, the Principal Risks facing the Group and the control measures in place to mitigate each of them. In particular the Directors recognise the significance of SSE's strong balance sheet, and committed lending facilities of GBP1.5bn which could be drawn down in most circumstances.

The Group also has a number of highly attractive and relatively liquid assets - including a regulated asset base which benefits from a strong regulated revenue stream as well as the operational wind portfolio - which provide flexibility of options. This was demonstrated in the successful sale during the 16/17 financial year of a 16.7% share of Scotia Gas Networks Ltd.

To help support this Statement, over the course of the year a suite of severe but plausible scenarios has been developed for each of SSE's Principal Risks. These scenarios are based on relevant real life events that have been observed either in the markets within which the Group operates or related markets globally. Examples include persistently low commodity prices (for "Commodity Prices"); changes to key government energy policies (for "Politics, Regulation & Compliance"); and, a major incident that results in the loss of a significant volume of customer data (for "Cyber Security and Resilience").

A formal assessment is carried out to stress test the scenarios that most have the potential to adversely affect SSE's ability to deliver its core purpose of "providing the energy people need in a reliable and sustainable way" against forecast available financial headroom.

In addition to considering these in isolation, the Directors also consider the cumulative impact of different combinations of scenarios, including those that individually have the highest impact and those that are most heavily interconnected with SSE's other Principal Risks.

Upon the basis of the analysis undertaken, the Directors have a reasonable expectation that the Group will be able to continue to meet its liabilities as they fall due in the period to 31 March 2020.

Long Term Climate Change Risk Exposure

In response to the 2015 Paris Agreement on Climate Change, and out with the scope of the Viability Assessment, a number of scenarios have been assessed to consider SSE's long-term resilience to carbon reductions that would be required to prevent global average temperatures rising by 1.5 degC or 2 degC. Further detail is disclosed in SSE's Sustainability Report.

Section 2 - Directors' Responsibility Statement: The following information is extracted from page 100 of the 2017 Annual Report and Accounts

Statement of Directors' responsibilities in respect of the Annual Report and the Financial Statements

The Directors are responsible for preparing the Annual Report and the group and parent company financial statements in accordance with applicable law and regulations.

Company law requires the Directors to prepare group and parent company financial statements for each financial year. Under that law they are required to prepare the group financial statements in accordance with IFRSs as adopted by the EU and applicable law and have elected to prepare the parent company financial statements in accordance with UK Accounting Standards, including FRS 101 Reduced Disclosure Framework.

Under company law the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the group and parent company and of their profit or loss for that period. In preparing each of the group and parent company financial statements, the directors are required to:

   --     select suitable accounting policies and then apply them consistently; 
   --     make judgements and estimates that are reasonable and prudent; 

-- for the group financial statements, state whether they have been prepared in accordance with IFRSs as adopted by the EU;

-- for the parent company financial statements, state whether applicable UK Accounting Standards have been followed, subject to any material departures disclosed and explained in the parent company financial statements; and

-- prepare the financial statements on the going concern basis unless it is inappropriate to presume that the group and the parent company will continue in business.

The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the parent company's transactions and disclose with reasonable accuracy at any time the financial position of the parent company and enable them to ensure that its financial statements comply with the Companies Act 2006. They have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the group and to prevent and detect fraud and other irregularities.

Under applicable law and regulations, the directors are also responsible for preparing a Strategic Report, Directors' Report, Directors' Remuneration Report and Corporate Governance Statement that complies with that law and those regulations.

The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the company's website. Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

Responsibility statement of the directors in respect of the annual financial report

We confirm that to the best of our knowledge:

-- the financial statements, prepared in accordance with the applicable set of accounting standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the company and the undertakings included in the consolidation taken as a whole; and

-- the strategic report includes a fair review of the development and performance of the business and the position of the issuer and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face.

We consider the annual report and accounts, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the group's position and performance, business model and strategy.

   Alistair Phillips-Davies                                  Gregor Alexander 
   Chief Executive                                                                Finance Director 

16 May 2017

Section 3 - Related Party Transactions: The following information is extracted from Accompanying Information A.5 on page 176 of the 2017 Annual Report and Accounts. A condensed version of this extract was published as Note 16 in the Preliminary Results Statement for the year ended 31 March 2017.

A5. Related party transactions

The immediate parent and ultimate controlling party of the Group is SSE plc (incorporated in Scotland). Balances and transactions between the Company and its subsidiaries, which are related parties of the Company, have been eliminated on consolidation and are not disclosed in this note. Details of transactions between the Group and other related parties are disclosed below.

Trading transactions

The following transactions took place during the year between the Group and entities which are related to the Group but which are not members of the Group. Related parties are defined as those in which the Group has control, joint control or significant influence over.

 
                                     2017                                        2016 
                  ------------------------------------------  ------------------------------------------ 
                        Sale    Purchase                            Sale    Purchase 
                          of          of                              of          of 
                       goods       goods   Amounts   Amounts       goods       goods   Amounts   Amounts 
                         and         and      owed      owed         and         and      owed      owed 
                    services    services      from        to    services    services      from        to 
 Joint ventures         GBPm        GBPm      GBPm      GBPm        GBPm        GBPm      GBPm      GBPm 
----------------  ----------  ----------  --------  --------  ----------  ----------  --------  -------- 
 Seabank Power 
  Ltd                   11.0     (134.0)       0.1      17.0        13.7     (125.8)         -      18.2 
 Marchwood 
  Power Ltd             16.8     (144.5)       0.5      12.6        12.7     (108.7)       0.1      15.5 
 Scotia Gas 
  Networks Ltd          45.5     (158.0)       0.9       0.9        46.3     (155.8)      15.9       0.9 
 Clyde Windfarm 
  (Scotland) 
  Ltd                    5.7       (0.1)         -      11.1           -           -         -         - 
 Other Joint 
  Ventures              10.4           -       2.3         -         8.1       (1.2)       8.4         - 
 Associates              1.4      (53.4)       3.6       3.9         0.5      (59.7)       2.4       3.9 
----------------  ----------  ----------  --------  --------  ----------  ----------  --------  -------- 
 

The transactions with Seabank Power Limited and Marchwood Power Limited relate to the contracts for the provision of energy or the tolling of energy under power purchase arrangements. Scotia Gas Networks Limited has operated the gas distribution networks in Scotland and the South of England from 1 June 2005. The Group's gas supply activity incurs gas distribution charges while the Group also provides services to Scotia Gas Networks in the form of a management service agreement for corporate services, stock procurement services and the provision of the capital expenditure on the development of front office management information systems.

The amounts outstanding are trading balances, are unsecured and will be settled in cash. No guarantees have been given or received. No provisions have been made for doubtful debts in respect of the amounts owed by related parties. Aggregate capital loans to joint ventures and associates are shown in Note 16.

This information is provided by RNS

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June 16, 2017 10:44 ET (14:44 GMT)