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| Share Name | Share Symbol | Market | Type | Share ISIN | Share Description |
|---|---|---|---|---|---|
| Sse Plc | LSE:SSE | London | Ordinary Share | GB0007908733 | ORD 50P |
| Price Change | % Change | Share Price | Bid Price | Offer Price | High Price | Low Price | Open Price | Shares Traded | Last Trade | |
|---|---|---|---|---|---|---|---|---|---|---|
| 2.00 | 0.12% | 1,667.00 | 1,667.00 | 1,668.00 | 1,683.00 | 1,658.00 | 1,683.00 | 3,378,973 | 16:29:59 |
| Industry Sector | Turnover | Profit | EPS - Basic | PE Ratio | Market Cap |
|---|---|---|---|---|---|
| Electric Services | 12.49B | -60.6M | -0.0555 | -300.36 | 18.22B |
From Apr 2019 to Apr 2024
TIDMSSE
RNS Number : 2670P
SSE PLC
25 May 2018
SSE plc
Preliminary results for the year to 31 March 2018
25 May 2018
This report sets out the preliminary results for SSE plc for the year to 31 March 2018. It includes updates on operations and investments in its Wholesale, Networks and Retail (including Enterprise) businesses.
Overview of 2017/18
SSE's financial highlights for the year to 31 March 2018 are set out below and are in line with its Notification of Closed Period statement of 29 March 2018, with adjusted earnings per share ahead of expectations at the start of the financial year. Comparisons are with the previous financial year unless otherwise stated.
-- Recommended full-year dividend up 3.7% to 94.7p; -- Adjusted earnings per share down 3.6% to 121.1p; -- Adjusted operating profit down 2.4% to GBP1,828.7m#; -- Adjusted profit before tax down 6.0% to GBP1,453.2m; -- Net exceptional charges of GBP213.3m; -- Investment and capital expenditure down 12.9% to GBP1,503.0m; -- Adjusted net debt and hybrid capital up 8.7% to GBP9.2bn at 31 March 2018; -- Reported operating profit down 28.9 % to GBP1,379.2m; -- Reported profit before tax down 38.9% to GBP1,086.2m; and -- Reported earnings per share down 48.7% to 81.3p.
# Follows sale by SSE of 16.7% stake in SGN in October 2016.
Note: The definitions SSE uses for adjusted measures are consistently applied and are explained in the Alternative Performance Measures section of this document, before the Summary Financial Statements
Key developments in 2018/19
In its Notification of Close Period statement on 29 March, SSE said that the 2018/19 financial year is expected to be one of transition for the SSE group. Key developments are expected to include:
-- The planned transaction* relating to SSE's GB household energy supply and services business (now named SSE Energy Services), subject to approvals, which remains on track for completion in the last quarter of 2018 or the first quarter of 2019. SSE shareholders will retain their existing SSE shares and will also hold one share in the newly-listed business for every existing SSE share they hold at demerger record date; and from that point, SSE will no longer derive cash flow or earnings from supplying energy and services to households in GB.
-- The expected enactment later this year of the Domestic Gas and Electricity (Tariff Cap) Bill and subsequent introduction of a temporary cap on the price of standard variable and default electricity and gas tariffs. It is intended to be in place for the winter of 2018/19.
*See: Important note: planned SSE Energy Services transaction above
Outlook for 2018/19 to 2022/23
SSE's strategy is to create value for shareholders and society from developing, owning and operating energy and related infrastructure and services in a sustainable way, and at its core will be regulated energy networks and renewable energy.
The financial objective of this strategy is to remunerate shareholders' investment through the payment of dividends. SSE believes that its dividends should be sustainable, based on the quality and nature of its assets and operations, the earnings derived from them and the longer-term financial outlook.
In line with this, taking account of the impact of the expected key developments in 2018/19, and reflecting the underlying quality and value of its assets and earnings and the cash flows they deliver, SSE's plan for the dividend for the five years to 2023 is as follows:
-- For 2018/19, SSE is intending to recommend a full-year dividend of 97.5 pence per share, an increase of 3% on 2017/18, which is broadly in line with expectations for RPI inflation. This provides clarity in a year of transition and is not subject to the timing of either the SSE Energy Services transaction or the Domestic Gas and Electricity (Tariff Cap Bill).
-- For 2019/20, SSE is planning to set the first post-transaction dividend at 80.0 pence per share, which reflects the impact of the changes in the SSE group expected to take effect by then. This provides a sustainable basis for future dividend growth.
-- For 2020/21, 2021/22 and 2022/23 SSE is targeting annual increases in the full-year dividend that at least keep pace with RPI inflation. This reflects SSE's confidence in the quality and value of its assets and earnings and cash flows they deliver.
This plan for the dividend for the five years to March 2023, when the current electricity distribution Price Control comes to an end, supersedes SSE's previous reference to a dividend cover range and is a plan which:
-- Aims to provide shareholders with certainty in 2018/19, a year of transition for SSE;
-- Reflects the changes in the SSE group expected to take effect by the start of the 2019/20 financial year; and
-- Sets the dividend on a path for sustainable growth for the three years from 2020.
SSE intends to retain a Scrip dividend scheme but where take-up of the full-year dividend exceeds 20%, SSE now intends to buy back shares so the dilutive effect of the Scrip is limited.
In addition to the dividend plan above, subject to the necessary approvals being secured, the transaction relating to SSE Energy Services announced on 8 November means shareholders in SSE will receive one share in the planned new independent energy supply and services company for every one SSE share they hold at the demerger record date.
Continuing to invest in assets and infrastructure
Over the five years to March 2023, and based on existing plans, SSE expects its capital and investment expenditure to total around GBP6bn.
Around 70% of the total capex and investment forecast is expected to be related to regulated electricity networks and renewable sources of energy; it also includes GBP350m investment in a new highly efficient and flexible 840MW gas-fired power station at Keadby in Lincolnshire (Keadby '2').
In the first of the five years, 2018/19, capital and investment expenditure is forecast to be around GBP1.7bn. SSE currently expects its adjusted net debt and hybrid capital to peak at around GBP10bn and to fall back towards GBP9bn by 2023.
Contributing to the UK and Irish economies
SSE's wider economic contribution is substantially larger than the profit it makes. In addition to creating value for shareholders, SSE supports inclusive economic growth across the UK and Ireland by developing, owning and operating energy and related infrastructure and services in a sustainable way. Its contribution to UK Gross Domestic Product in 2017/18 totalled GBP8.6bn, taking the total for the last seven years to GBP65.2bn (in 2017/18 prices). In Ireland, it was EUR806m in 2017/18. These results are provided by PwC, which has undertaken SSE's economic contribution analysis for every financial year since 2011/12.
SSE has today published a summary of its sustainability impacts in 2017/18, in advance of the publication of its Sustainability Report 2018 on 15 June 2018.
Richard Gillingwater, Chairman of SSE, said:
"As expected, 2017/18 presented a number of complex challenges to manage, but SSE's operational performance was generally very robust and significant progress was achieved in key aspects of the company's capital investment programme. It is encouraging that the company's financial results are ahead of expectations at the start of the financial year.
"The challenges will continue in 2018/19, which is also expected to be a year of major transition for SSE. A strong operational and investment focus on meeting the current and future needs of energy customers is essential, as is preparing the businesses in the SSE group for the changes that lie ahead.
"SSE's strategic goal is to create value in a sustainable way, for shareholders and society. The changes we are making as we renew SSE are intended to have positive outcomes over the long term for customers, stakeholders and investors.
"For investors, by giving clarity on the dividend for the five years to March 2023, SSE is demonstrating that remunerating them for their investment is and will remain its first financial objective."
SSE's financial performance in 2017/18 at-a-glance
Hot Features
Premium
Mar 18 Mar 17 Mar 16
Adjusted operating profit GBPm GBPm GBPm
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Wholesale 652.4 514.6 442.5
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Networks 763.1 936.5 926.6
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Retail 402.8 422.3 455.2
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Corporate unallocated 10.4 0.6 0.1
======== ======== ========
Total adjusted operating profit 1,828.7 1,874.0 1,824.4
-------- -------- --------
Adjusted profit before tax 1,453.2 1,545.9 1,513.5
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Pence Pence Pence
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Adjusted earnings per share (EPS) 121.1 125.7 119.5
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Full-year dividend per share (DPS) 94.7 91.3 89.4
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GBPm GBPm GBPm
-------- -------- --------
Investment and capital expenditure (adjusted) 1,503.0 1,726.2 1,618.7
-------- -------- --------
Mar 18 Sept 17 Mar 17
-------- -------- --------
Adjusted net debt and hybrid capital 9,221.8 9,245.8 8,483.0
-------- -------- --------
Mar 18 Mar 17 Mar 16
======== ======== ========
Reported operating profit / (loss) GBPm GBPm GBPm
======== ======== ========
Wholesale 403.1 498.2 (481.3)
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Networks 669.6 848.8 833.2
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Retail 328.0 309.6 437.4
======== ======== ========
Corporate unallocated (21.5) 283.9 (3.9)
======== ======== ========
Total reported operating profit 1,379.2 1,940.5 785.4
-------- -------- --------
Reported profit before tax 1,086.2 1,776.6 593.3
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Pence Pence Pence
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Reported/basic earnings per share (EPS) 81.3 158.4 46.1
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Mar 18 Sept 17 Mar 17
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GBPm GBPm GBPm
-------- -------- --------
Unadjusted net debt 8,378.3 7,338.3 6,655.4
-------- -------- --------
Earning a profit from SSE's businesses
All three of SSE's reportable business areas contributed adjusted operating profit in 2017/18, as set out above and described below. Comparisons in these tables are with the previous two years, but it should be noted that movements may also reflect the cumulative impact of issues arising, or decisions taken, in earlier financial years. SSE's objective is not to maximise profit in any one year but to earn a sustainable level of profit over the medium-term.
The three business areas themselves are unchanged, but changes have been made to the presentation of results within the within the Wholesale business area, in support of additional transparency, and within the Retail business area, in anticipation of the planned SSE Energy Services transaction.
WHOLESALE
-- Generation: adjusted operating profit increased to GBP578.9m in 2017/18, from GBP510.9m in the previous year, reflecting increased output in both renewable and thermal generation. This was partly offset, as expected, by a lower achieved power price than the previous year and the end of the one-year contract under which Fiddler's Ferry power station provided Blackstart services to National Grid.
Within this segment Renewable Generation adjusted operating profit increased to GBP474.9m, up from GBP391.6m in the previous year.
-- Energy Portfolio Management: earned an adjusted operating profit of GBP46.0m in 2017/18, compared to an operating loss of GBP9.7m in 2016/17, due to an improved trading position.
-- Gas Production: adjusted operating profit increased to GBP34.0m in 2017/18, from GBP26.4m in the previous year, mainly due to a higher achieved price, partly offset by slightly lower production volumes.
-- Gas Storage: adjusted operating loss improved to GBP6.5m in 2017/18, from GBP13.0m in the previous year, due to an improved trading performance and year on year cost savings.
-- Reported Wholesale Operating Profit: decreased to GBP403.1m in 2017/18 compared to GBP498.2m the previous year. The increase, due to the factors outlined above was offset by the impact of exceptional items and re-measurements. This included an impairment of Gas Production assets of GBP104.7m, compared to GBP227.5m in prior year. In addition, there was an GBP89.1m loss on operating derivatives versus a GBP201.0m gain in the prior year. There was also a fair value uplift on deconsolidation of Clyde of GBP59.1m in prior year.
NETWORKS
Transmission: as expected, adjusted operating profit decreased to GBP195.6m in 2017/18, from GBP263.7m in the previous year. This was mainly due to the phasing of capital expenditure on significant projects and the resulting impact on regulatory revenue, along with the impact of the sharing of the previous year's total expenditure (totex) underspends with customers.
Distribution: as expected, adjusted operating profit decreased to GBP402.2m in 2017/18, from GBP433.4m in the previous year. While base revenue increased in line with the growing RAV (Regulatory Asset Value), this was offset by the expected net reduction in under-recoveries and losses incentive income, outlined in the table below.
This table also gives an indication of the expected impact of under- or over-recoveries in future years:
FY2016/17 FY2017/18 FY2018/19 FY2019/20
Under/over recovery + GBP38m +GBP5m - c.GBP10m - c. GBP14m
from 2 yr. previous under-recovered from under-recovered from over-recovered from over-recovered from
FY 2014/15 2015/16 2016/17 2017/18. A further
-GBP10m related to
2017/18 over recovery
will be absorbed in
2021/22
====================== ====================== ====================== ======================
DPCR Losses incentive +GBP35m +GBP15m - -
income
====================== ====================== ====================== ======================
There are several factors which contribute to RIIO Price Control earnings which can be found on the Ofgem website in the Transmission and Distribution Licence, Price Control Financial Handbook and Price Control Financial Model.
Gas Distribution: as expected, SSE's share of SGN's adjusted operating profit fell to GBP165.3m in 2017/18, from GBP239.4m in the previous year, mainly due to SSE's disposal of a partial equity stake (16.7%) in October 2016, but also due to the phasing of regulatory revenue and the sharing of out-performance with customers, as part of the RIIO Price Control. The impact on operating profit of the part disposal in the full financial year 2017/18 was GBP55m.
Reported Networks operating profit: decreased to GBP669.6m, from GBP848.8m, primarily for the reasons outlined above. In addition, SGN had an exceptional gain in 2016/17 of GBP19.5m due to the change in Corporation Tax rate.
RETAIL
SSE Energy Services - Energy supply (households in GB): adjusted operating profit was flat at GBP260.4m in 2017/18 compared to GBP260.8m in 2016/17. While electricity tariffs increased to recognise rising non-energy costs, overall profits were also impacted by customer account losses and the introduction of price caps for certain customer groups, offset by ongoing efficiency savings. The business also benefited, in the last quarter of the financial year, from higher customer energy consumption due to unseasonably cold weather.
SSE Energy Services - Energy-related services (households in GB): adjusted and reported operating profit increased to GBP18.3m in 2017/18, from GBP12.7m in 2016/17, reflecting increased profitability of SSE's home services and telco businesses, which was partially offset by a reduction in revenues from the heritage metering business.
Energy Supply (Business Energy): adjusted operating profit decreased to GBP64.2m in 2017/18, from GBP89.4m in 2016/17. While underlying profits remained similar, 2016/17 included a larger prior year reconciliation catch up.
Energy Supply (SSE Airtricity): adjusted operating profit decreased to GBP33.0m in 2017/18, from GBP42.7m in the previous year, due to a combination of increased competition and increased energy costs.
Enterprise: Adjusted operating profit increased to GBP26.9m in 2017/18, from GBP16.7m in the previous year, due to a combination of higher revenues and focused cost cutting.
Reported Retail operating profit: increased to GBP328.0m from GBP309.6m in prior year due to the reasons outlined above in addition to the impact of exceptional items and certain re-measurements. In the year, the Group has recorded exceptional impairments totalling GBP63.0m as a result of its decision to demerge its UK domestic gas and electricity supply business. In addition, there was an exceptional impairment of GBP11.8m in the Heat Networks business due to a re-evaluation of some of the contracts within the business. In the prior year impairments totalled GBP112.7m.
Consolidated Segmental Statement
In line with its licence condition, SSE will publish a Consolidated Segmental Statement(CSS) setting out the revenues, costs and profit or losses of businesses in its Wholesale and Retail segments in Great Britain for 2017/18. It is intended to publish the CSS in late June 2018.
The CSS will be fully reconciled to SSE's published financial statements and reviewed by SSE's auditors, KPMG. It is expected to show that SSE's operating profit margin from supplying electricity and gas to British households in 2017/18 was slightly lower than the previous year, at 6.8%.
Within this, SSE has previously highlighted an increasing divergence between gas and electricity margins due to increasing policy costs being levied predominantly on electricity. However, following the increase to electricity prices only in April 2017, margins are more balanced across fuels in 2017/18 than the previous year.
Corporate Unallocated: Adjusted operating profit increased to GBP10.4m in 2017/18 up from GBP0.6m the previous year, due to releases of provisions in the year. Reported operating profit decreased from a profit of GBP283.9m in the prior year, primarily due to the exceptional gain on sale of the Group's 16.66% stake in SGN, to a loss of GBP21.5m in the current year primarily due to central IT costs impaired as part of the review undertaken in preparation of the SSE Energy Services transaction.
Outlook for Wholesale, Networks and Retail in 2018/19
In 2018/19 Wholesale's adjusted operating profit will be affected by the cessation of 'in the money' power purchase agreements and by the fact renewable energy output is forward-hedged at a price lower than in 2017/18.
Total adjusted operating profit in the economically-regulated Networks segment is expected to increase by a mid-single digit percentage, mainly as a result of the phasing of income recovery in Electricity Transmission and a higher expected contribution from SGN.
Retail's adjusted operating profit attributable to SSE will be subject, amongst other things, to the progress and timing of the planned SSE Energy Services transaction and the timing and impact of the Domestic Gas and Electricity (Tariff Cap) Bill.
SSE's actual level of adjusted operating profit and profit before tax will also be determined by the range of factors set out in previous years that continue to apply in its market-based businesses, in which energy portfolio management is a major influence. These include:
-- the impact of wholesale prices for energy;
-- electricity market conditions, the ability of its thermal power stations to be available and to generate electricity efficiently;
-- the output of renewable energy from its hydro-electric stations and wind farms and the price achieved for the output;
-- the output from its gas production assets and the price achieved for the output; and -- the actual and underlying level of customers' energy consumption.
Investing to create long-term value
SSE's strategy is to create value for shareholders and society from developing, owning and operating energy and related infrastructure in a sustainable way. This includes capital and investment expenditure in assets and infrastructure that is needed by energy customers across the UK and Ireland and which also supports SSE's earnings and dividends.
In 2017/18, SSE's adjusted investment and capital expenditure totalled GBP1,503.0m. Economically regulated electricity networks accounted for 50.6% of this spend and renewable energy in support of government obligations and targets accounted for 20.1%. As a result of investment in 2017/18 and in previous years plus planned investment:
-- the RAV of SSE's networks, including its share of SGN, is currently GBP8.3bn and this is expected to grow to around GBP9bn by 2020 and to reach GBP10bn by 2023; and
-- the net capacity of SSE's energy from renewable sources, including pumped storage and biomass, is around 3.8GW and is expected to reach over 4.2GW by 2020, and to be capable of generating around 12TWh of electricity in a typical year. As an example, with an assumed power price of GBP45/MWh and a ROC price of GBP50/MWh, SSE estimates that this would deliver EBITDA of around GBP800m by 2020.
SSE's adjusted net debt and hybrid capital was GBP9.2bn at 31 March 2018, compared with GBP9.2bn at 30 September 2017 and GBP8.5bn at 31 March 2017. The overall level of net debt and hybrid capital largely reflects SSE's ongoing investment programme. The movement in net debt also reflects GBP371.6m of share buy-back completed in 2017/18 being the remainder of the GBP500m share buy-back programme announced in November 2016.
Further Information
Investor Timetable Annual Report 2018 on sse.com/investors 15 June 2018 Sustainability Report 2018 on sse.com/investors 15 June 2018 Shareholder Circular on sse.com/investors 27 June 2018 Q1 Trading Statement 19 July 2018 Annual General Meeting (Perth) 19 July 2018 General Meeting (Perth) re SSE Energy Services transaction 19 July 2018 Ex-dividend Date 26 July 2018 Record date 27 July 2018 Final date for receipt of Scrip Elections 23 August 2018 Final dividend payment date 21 September 2018 Notification of Close Period By 28 September 2018 Interim Results for the six months to 30 September 14 November 2018 Investors and Analysts ir@sse.com + 44 (0)345 0760 530 Media media@sse.com + 44 (0)345 0760 530
Webcast facility
SSE will present its 2017/18 Financial Results at 11am UK time, on Friday 25 May 2018. You can join the webcast by visiting www.sse.com and following the links on either the homepage or investor pages; or directly using https://edge.media-server.com/m6/p/kf279ded. This will also be available as teleconference, details below. Both facilities will be available to replay.
Confirmation: 5951898
Location Phone Type Phone Number
United Kingdom Toll-free/Freephone 0800 358 6377
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United Kingdom, Local Local +44 (0)330 336 9105
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United States, Los Angeles Local +1 323-794-2093
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United States/Canada Toll-free/Freephone 866-548-4713
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Online information
News releases and announcements are made available on SSE's website at www.sse.com. You can also follow the latest news from SSE at www.twitter.com/sse.
Disclaimer
This financial report contains forward-looking statements about financial and operational matters. Because they relate to future events and are subject to future circumstances, these forward-looking statements are subject to risks, uncertainties and other factors. As a result, actual financial results, operational performance and other future developments could differ materially from those envisaged by the forward-looking statements.
SSE plc gives no express or implied warranty as to the impartiality, accuracy, completeness or correctness of the information, opinions or statements expressed herein. Neither SSE plc nor its affiliates assume liability of any kind for any damage or loss arising from any use of this document or its contents.
This document does not constitute an offer or invitation to underwrite, subscribe for, or otherwise acquire or dispose of any SSE shares or other securities and the information contained herein cannot be relied upon as a guide to future performance.
Definitions
These financial results for the year to 31 March 2018 are reported under IFRS, as adopted by the EU.
In order to present the financial results and performance of the Group in a consistent and meaningful way, SSE applies a number of adjusted accounting measures throughout this financial report. These adjusted measures are used for internal management reporting purposes and are believed to present the underlying performance of the Group in the most useful manner for ordinary shareholders and other stakeholders.
The definitions SSE uses for adjusted measures are consistently applied and are explained in the Alternative Performance Measures section before the Summary Financial Statements.
In preparing this financial report SSE has been mindful of the commentary issued in May 2016 by the Financial Reporting Council on the European Securities and Markets Authority's Guidelines on Alternative Performance Measures. SSE will monitor developing practice in the use of Alternative Performance Measures and will continue to prioritise this, ensuring the financial information in its results statements is clear, consistent and relevant to the users of those statements.
This announcement is being disclosed in accordance with the Market Abuse Regulation (EU596/2014) and has been determined to contain inside information in line with the definition therein.
Important note: planned SSE Energy Services transaction
On 8 November 2017, the Board of Directors of SSE plc announced it had entered into an agreement with Innogy SE in respect of a proposed demerger of SSE's household energy and services business in Great Britain (now named SSE Energy Services) and immediate combination of that business with Innogy SE's subsidiary npower to form a new independent UK-based group - to be held by SSE shareholders (following the demerger) and (following the combination) with minority shareholding participation by Innogy SE (65.6% and 34.4% respectively). Following the combination, the new independent business will be separately listed on the London Stock Exchange. SSE shareholders will retain their existing SSE shares and will also hold one share in the newly-listed business for every existing SSE plc share they hold at the demerger record date.
In this financial report, this demerger of SSE Energy Services, combination with npower and listing on the London Stock Exchange is described as 'the planned SSE Energy Services transaction'. SSE shareholders are required to approve resolutions relating to the transaction at a General Meeting on 19 July 2018 and a Shareholder Circular in relation to this is being issued on 27 June 2018. The transaction is also subject to regulatory approval. On 8 May 2018, the Competition and Markets Authority referred the proposed combination of SSE Energy Services and npower for a so-called 'Phase 2' investigation, by a group of independent panel members. The deadline for the final report from that investigation is 22 October 2018.
Strategic Overview
The operating environment for energy companies in the UK and Ireland continues to present a number of complex challenges to manage. SSE's vision is to be a leading provider of energy and related services in a low carbon world and its approach to achieving this is to:
-- maintain a strong operational focus on meeting the needs of energy customers; -- deliver efficient investment in the energy assets needed now and in the future;
-- engage constructively and effectively with key stakeholders on all of the key issues affecting energy customers; and
-- embrace change and adapt to the emerging political, economic, social and technological requirements of energy customers and of society as a whole.
All of this means taking the necessary decisions to secure the right outcomes for customers, investors and other stakeholders.
For 2017/18 this approach enabled SSE to deliver financial results ahead of expectations at the start of the financial year, while preparing the businesses in the SSE group for important changes that lie ahead in 2018/19 and beyond.
In making those changes, SSE's strategy is to create value for shareholders and society from developing, operating and owning energy and related infrastructure and services in a sustainable way. The financial objective of this strategy is to remunerate shareholders' investment through the payment of dividends.
Putting safety first
The safety of the people who work on behalf of SSE is the company's first priority. SSE's Total Recordable Injury Rate for employees and employees of other companies working on SSE sites was 0.2 per 100,000 hours worked in a rolling 12-month period to 31 March 2018, compared with 0.22 over the same period to 31 March 2017.
In support of achieving its ultimate goal of injury-free working, SSE has adopted a new definition for its Safety value that is intended to emphasise that every employee working on its behalf has a licence to ensure safe working: If it's not safe, we don't do it. The adoption of this licence is being supported by an extensive and enduring commitment to employee engagement in all aspects of safety throughout the SSE group.
Creating value
SSE's strategic focus on creating value means focusing on earning returns for shareholders, sustaining skilled jobs and making a positive economic and social contribution to the countries in which SSE operates.
Earning returns for shareholders
The financial objective of this strategy is to remunerate shareholders' investment through the payment of dividends. This objective is being achieved. The recommended full-year dividend for 2017/18 is 94.7 pence per share, an increase of 3.7%. Looking ahead, SSE has a clearly-defined five-year plan for the dividend.
In order to give clarity in respect of what is expected to be a year of transition for SSE, the target full-year dividend for 2018/19 is 97.5 pence per share, a 3% increase based on forecasts for RPI inflation. For 2019/20, following the proposed SSE Energy Services transaction that was announced in November 2017 and the changes it will mean for the SSE group, SSE is targeting a full-year dividend of 80.0 pence per share. This reflects the quality and nature of SSE's assets and operations following the proposed SSE Energy Services transaction, the earnings derived from them and the longer-term financial outlook.
SSE is thereafter targeting annual increases in the dividend per share that at least match RPI inflation in each of the three years to 2022/23, when the current Electricity Distribution Price Control will come to an end.
Sustaining skilled jobs
The ability to earn returns for shareholders is dependent on the shared talent, skills and values of people throughout SSE; and SSE believes that supporting and creating high quality long-term jobs is central to its long-term success.
SSE has previously quantified the economic value of the people it employs; and intends to update this work in the course of 2018/19. In February 2018, the Good Economy, a social advisory firm focused on the role of business and finance in building a good economy, rated 150 of the FTSE350 companies on how well they deliver good jobs growth in Britain. SSE was placed in the number one spot.
The Good Economy believes that business must create quality, secure and fulfilling jobs; and in 2017/18 alone, SSE recruited more than 2,500 people and now has 1,100 employees in structured programmes designed for school leavers, apprentices, trainee engineers and graduates.
Making a positive contribution to society
In addition to making dividend payments, which directly or indirectly are subject to taxation, and which also contribute to the pension funds of people throughout the UK and Ireland, and creating sustainable jobs, SSE seeks to make a positive social and economic contribution.
In particular, SSE remains strongly committed to fairness and transparency in respect of taxation matters and remains the only FTSE 100 company to have secured the Fair Tax Mark, which requires companies to be transparent about their tax affairs in a way that goes well beyond the current requirements of UK company law.
SSE is also focused on its wider contribution to the economies - and therefore societies - of the UK and Ireland in 2017/18 this contribution has been estimated at GBP8.6bn and EUR806m respectively.
SSE believes that this economic contribution and commitment to transparency in tax demonstrates its commitment to a social contract with the societies of which it is part and from which it benefits from public service provision, skilled and committed employees and the right to pay dividends.
Taking the right decisions
SSE's ability to make a positive contribution to society and sustain skilled jobs and so earn returns for shareholders is dependent on its ability to adapt to the emerging political, economic, social and technological requirements of energy customers and of society as a whole. It is also dependent on SSE taking the necessary decisions to secure the right outcomes for energy customers, investors and other stakeholders.
The scale of change in the household energy supply and services market in Great Britain is especially notable, with a rapidly evolving competitive landscape and fast-changing expectations of customers, regulators and other stakeholders.
To respond to this evolving landscape and those fast-changing expectations, SSE concluded that the planned SSE Energy Services transaction announced in November 2017 has a strong strategic logic and the potential to drive significant benefits for the business and its customers.
In particular, SSE believes that creating an efficient new independent energy supply and services business in Great Britain and creating a new market model by combining the resources and experience of two established players with the focus and agility of an independent supplier will ultimately better serve customers, employees and other stakeholders. The necessary shareholder and regulatory approvals for this are being sought, with the aim of the new independent supplier taking its place in the market in the last quarter of 2018 or the first quarter of 2019.
Realising the opportunities
SSE believes there are significant opportunities for it to create value in a changing energy system, and needs to be focused on realising them in the coming years. The planned SSE Energy Services transaction should reinforce this focus. SSE's market focus is the UK and Ireland and it will remain so. Although it has no plans to do so at present, SSE is open to extending to other markets its core competencies in areas such as renewable energy.
Decarbonisation
The momentum behind decarbonisation is continuing to build, with cross-party support for clean growth and a robust institutional framework - illustrated by the work of the Committee on Climate Change and by the publication in October 2017 of the UK government's Clean Growth Strategy, which is designed to grow national income while cutting greenhouse gas emissions. Cost reductions in renewable energy technologies have also increased the prospects for meeting carbon targets and enhance the long-term growth prospects for this sector.
SSE believes this presents opportunities for it as the leading generator of renewable energy across the UK and Ireland; and has adopted a new ambition to reduce the carbon intensity of the electricity it generates by 50%, to below 150g/kWh, by 2030.
Electrification
The trend to electrification is clear and is being reinforced by the focus on air quality, as well as clean growth, illustrated by changes in the transport sector such as the UK government's decision to ban the sale of new diesel and petrol cars from 2040. Over the next few years, it is likely that the scope for electrification in transport and heat will increase significantly.
SSE believes this presents opportunities for it as an electricity generator and distributor and as a utilities services provider; and is already preparing for the expected increase in electric vehicles through developments in its Networks and Enterprise businesses in particular.
Infrastructure
The commitment to a major upgrade of infrastructure is at the heart of the UK's Industrial Strategy, illustrated by the fact that public infrastructure investment will have doubled in a decade by 2023. SSE believes that this will provide opportunities for it as a provider of local energy and utility solutions, telecoms and rail services.
The developments relating to infrastructure, electrification and decarbonisation are of huge significance and SSE's Networks, Enterprise and Wholesale businesses are focused on realising them.
Meeting the challenges of change
The opportunities presented by decarbonisation, electrification and infrastructure development are clearly very significant, but change on this scale brings new challenges as well.
For example, auctions to provide infrastructure and services are an established and growing part of the energy sector, with lower strike prices already a feature in the offshore wind sector. The scrutiny of the cost of energy to customers is extending further into Networks, with Ofgem's RIIO 2 Price Control process now under way. In addition, fundamental questions are being asked about the appropriateness of private provision of energy in the UK.
SSE assets, investment and earnings have focused increasingly on electricity networks and renewable energy in recent years. By having a greater focus on core competences of energy infrastructure and related services; by demonstrating its commitment to creating value for shareholders and for society; and by listening and responding to the concerns of all key stakeholders, SSE can deliver results that are fair to customers, investors and society as a whole.
As part of this, it has plans for capital and investment expenditure of around GBP6bn for the five years to March 2023, focused on regulated electricity networks and renewable energy.
In all of this, maintaining a values-based approach to business is key, exemplified by the SSE SET of Safety, Service, Efficiency, Sustainability, Excellence and Teamwork.
Focusing on the right priorities
As it meets the challenges of change, SSE focuses on realising the opportunities that lie ahead, takes the right decisions and works to create value. The way SSE does business will be guided by the SSE SET of values. Those values will also guide SSE as it focuses on six strategic priorities for 2018/19. While it is expected to be a year of major transition for the SSE group, the priorities are nevertheless clear:
-- safe, responsible and efficient operation of assets, including a high standard of service for customers;
-- efficient, responsible and successful investment in assets that customers need now in the future, including progress on the Beatrice offshore wind farm and the Caithness-Moray transmission link;
-- completion of the planned SSE Energy Services transaction to create an efficient new independent energy supplier that works for customers;
-- development of existing and new growth options, going with the grain of societal focus on decarbonisation, electrification and infrastructure;
-- further enhancement of SSE's core strengths and capabilities to be as well-placed as possible to analyse and respond to new opportunities to create value in a fast-changing sector; and
-- effective engagement with politicians, regulators and other stakeholders in the debates about the future of energy provision.
Remunerating shareholders' investment
These priorities support the fulfilment of SSE's first financial objective for 2018/19, which is delivery of a full-year dividend of 97.5 pence per share, and its commitment to creating value remunerating shareholders' investment through its clearly-defined five-year plan for the dividend.
The operating environment for energy companies is likely to remain complex and challenging, and a year of transition lies ahead, but SSE believes it has the strategic priorities, assets, opportunities and focus to create value for shareholders and society in the years ahead.
Alistair Phillips-Davies
Chief Executive
Group Financial Overview 2017/18
The following tables provide a summary of Group Financial Performance. The definitions SSE uses for adjusted measures are consistently applied and are explained in the Alternative Performance Measures section of this document, before the Summary Financial Statements.
Key Adjusted Financial Metrics Mar 18 Mar 17 Mar 16
GBPm GBPm GBPm
Adjusted Operating Profit 1,828.7 1,874.0 1,824.4
========= ======== ========
Adjusted Net Finance Costs (375.5) (328.1) (310.9)
========= ======== ========
Adjusted Profit before Tax 1,453.2 1,545.9 1,513.5
========= ======== ========
Adjusted Current Tax Charge (130.7) (157.7) (193.4)
========= ======== ========
Adjusted Profit after Tax 1,322.5 1,388.2 1,320.1
========= ======== ========
Less: hybrid equity coupon payments (98.5) (119.3) (124.6)
========= ======== ========
Adjusted Profit After Tax attributable to ordinary shareholders 1,224.0 1,268.9 1,195.5
========= ======== ========
Adjusted EPS - pence 121.1 125.7 119.5
========= ======== ========
Number of shares for basic/reported and adjusted EPS (million) 1,010.9 1,009.7 1,000.0
========= ======== ========
Shares in issue at 31 March (m) 1,023.0 1,015.6 1,007.6
========= ======== ========
Key Reported Financial Metrics Mar 18 Mar 17 Mar 16
GBPm GBPm GBPm
Reported Operating Profit 1,379.2 1,940.5 785.4
-------- -------- --------
Reported Net Finance Costs (293.0) (163.9) (192.1)
-------- -------- --------
Reported Profit before Tax 1,086.2 1,776.6 593.3
-------- -------- --------
Reported Tax Charge (166.1) (57.8) (8.1)
-------- -------- --------
Reported Profit after Tax 920.1 1,718.8 585.2
-------- -------- --------
Less: hybrid equity coupon payments (98.5) (119.3) (124.6)
-------- -------- --------
Reported Profit After Tax attributable to ordinary shareholders(1) 821.6 1,599.5 460.6
-------- -------- --------
Reported EPS- pence 81.3 158.4 46.1
-------- -------- --------
(1After distributions to hybrid capital holders)
Dividend per Share Mar 18 Mar 17 Mar 16
-------- -------- --------
Interim Dividend pence 28.4 27.4 26.9
-------- -------- --------
Final Dividend pence 66.3 63.9 62.5
-------- -------- --------
Full Year Dividend pence 94.7 91.3 89.4
-------- -------- --------
Increase % 3.7% 2.1% 1.1%
-------- -------- --------
Dividend Cover times / SSE's adjusted EPS 1.28 x 1.38 x 1.34 x
-------- -------- --------
Adjusted Operating Profit by Segment Mar 18 Mar 17 Mar 16
GBPm GBPm GBPm
Generation 578.9 510.9 465.5
======== ======== ========
EPM 46.0 (9.7) (29.2)
======== ======== ========
Gas Production 34.0 26.4 2.2
======== ======== ========
Gas Storage (6.5) (13.0) 4.0
======== ======== ========
Wholesale 652.4 514.6 442.5
======== ======== ========
Electricity Transmission 195.6 263.7 287.2
======== ======== ========
Electricity Distribution 402.2 433.4 370.7
======== ======== ========
SGN
(SSE's 50% share reducing to 33% from 26 Oct 2016) 165.3 239.4 268.7
======== ======== ========
Networks 763.1 936.5 926.6
======== ======== ========
SSE Energy Services - Energy Supply 260.4 260.8 247.9
======== ======== ========
SSE Energy Services - Energy related services 18.3 12.7 15.4
======== ======== ========
Total SSE Energy Services subject to de-merger 278.7 273.5 263.3
======== ======== ========
Business Energy 64.2 89.4 111.6
======== ======== ========
Airtricity 33.0 42.7 39.4
======== ======== ========
Enterprise 26.9 16.7 40.9
======== ======== ========
Total Retail remaining as part of SSE 124.1 148.8 191.9
======== ======== ========
Retail 402.8 422.3 455.2
======== ======== ========
Corporate Unallocated 10.4 0.6 0.1
======== ======== ========
Total Adjusted Operating Profit 1,828.7 1,874.0 1,824.4
======== ======== ========
Reported Operating Profit by Segment Mar 18 Mar 17 Mar 16
GBPm GBPm GBPm
Electricity Generation 523.4 544.8 (114.5)
======== ======== ========
EPM (43.1) 191.3 (60.3)
======== ======== ========
Gas Production (70.7) (201.1) (159.6)
======== ======== ========
Gas Storage (6.5) (36.8) (146.9)
======== ======== ========
Wholesale 403.1 498.2 (481.3)
======== ======== ========
Electricity Transmission 195.6 263.7 287.2
======== ======== ========
Electricity Distribution 402.2 433.4 370.7
======== ======== ========
SGN
(SSE's 50% share) reduced to 33% from 26 Oct 2016 71.8 151.7 175.3
======== ======== ========
Networks 669.6 848.8 833.2
======== ======== ========
SSE Energy Services- Energy Supply 203.5 171.7 247.9
======== ======== ========
SSE Energy Services - Energy related services 18.3 5.5 15.4
======== ======== ========
Total SSE Energy Services subject to de-merger 221.8 177.2 263.3
======== ======== ========
Business Energy 64.2 73.0 93.8
======== ======== ========
Airtricity 26.9 42.7 39.4
======== ======== ========
Enterprise 15.1 16.7 40.9
======== ======== ========
Total Retail remaining as part of SSE 106.2 132.4 174.1
======== ======== ========
Retail 328.0 309.6 437.4
======== ======== ========
Corporate Unallocated (21.5) 283.9 (3.9)
======== ======== ========
Total Reported Operating Profit 1,379.2 1,940.5 785.4
======== ======== ========
A reconciliation of adjusted operating profit by segment to reported operating profit by segment can be found in Note 6 (ii) to the Summary Financial Statements.
Tax Mar 18 Mar 17 Mar 16
GBPm GBPm GBPm
Adjusted current tax charge 130.7 157.7 193.4
======= ======= =======
Effective current tax rate based on adjusted profit before tax 9.0% 10.2% 12.8%
======= ======= =======
Total UK taxes paid including taxes on profits, property taxes, environmental taxes and
employment
taxes 484.1 385.0 453.9
======= ======= =======
Investment and Capex Summary (adjusted) Mar 18 Mar 18 Mar 17
Share % GBPm GBPm
======== ======== ========
Thermal Generation 5.9 89.0 108.6
======== ======== ========
Renewable Generation 20.1 301.7 366.4
======== ======== ========
Gas Storage 0.1 1.8 0.2
======== ======== ========
Gas Production 4.4 65.5 72.9
======== ======== ========
Total Wholesale 30.5 458.0 548.1
======== ======== ========
Electricity Transmission 28.9 434.2 505.0
======== ======== ========
Electricity Distribution 21.7 326.1 284.7
======== ======== ========
Total Networks 50.6 760.3 789.7
======== ======== ========
SSE Energy Services - Energy Supply 6.7 100.9 172.4
======== ======== ========
SSE Energy Services - Energy Related Services 0.7 9.9 11.6
======== ======== ========
Business Energy and Airtricity 0.1 1.5 0.3
======== ======== ========
Enterprise 4.1 61.9 58.7
======== ======== ========
Total Retail and Enterprise 11.6 174.2 243.0
======== ======== ========
Other 7.3 110.5 145.4
======== ======== ========
Total investment and capital expenditure (adjusted) 100% 1,503.0 1,726.2
======== ======== ========
Debt metrics Mar 18 Mar 17 Mar 16
GBPm GBPm GBPm
========== ========== ==========
Adjusted net debt and hybrids (GBPm) (9,221.8) (8,483.0) (8,395.0)
========== ========== ==========
Average debt maturity (years) 7.9 8.8 8.9
========== ========== ==========
Adjusted interest cover (excluding SGN) times 5.0 6.0 5.2
========== ========== ==========
Adjusted interest cover (including SGN) times 4.3 4.7 4.7
========== ========== ==========
Average interest rate for the period excluding JV/assoc. interest and all hybrid
coupon payments) 3.56% 3.66% 3.73%
========== ========== ==========
Average cost of debt at period end (including all hybrid coupon payments) 3.84% 4.10% 3.95%
========== ========== ==========
Net finance costs Reconciliation Mar 18 Mar 17 Mar 16
GBPm GBPm GBPm
======= ======= =======
Adjusted net finance costs 375.5 328.1 310.9
======= ======= =======
Add/(less):
======= ======= =======
Finance lease interest (30.8) (33.1) (34.7)
======= ======= =======
Notional interest arising on discounted provisions (16.3) (14.2) (15.7)
======= ======= =======
Hybrid equity coupon payment 98.5 119.3 124.6
======= ======= =======
Adjusted finance costs for interest cover calculation 426.9 400.1 385.1
======= ======= =======
SSE Principal Sources of debt funding Mar 18 Mar 17 Mar 16
Bonds 49% 41% 45%
======= ======= =======
Hybrid debt and equity securities 23% 33% 25%
======= ======= =======
European investment bank loans 13% 11% 8%
======= ======= =======
US private placement 10% 10% 5%
======= ======= =======
Index -linked debt, long term project finance and other loans 5% 5% 17%
======= ======= =======
% of total SSE borrowings secured at a fixed rate 90% 91% 87%
======= ======= =======
Rating Agency Rating Criteria Date of Issue
Moody's A3 Stable outlook Mid-teens% RCF/ Net Debt August 2017
================== ========================= ==============
Standard and Poor's A- Stable outlook 23% FFO/Net Debt August 2017
================== ========================= ==============
Contributing to employees' pension schemes - IAS 19 R Mar 18 Mar 17 Mar 16
GBPm GBPm GBPm
Net pension scheme asset/ (liabilities) recognised in the balance sheet before deferred
tax 334.5 70.5 (394.8)
Employer cash contributions Scottish Hydro Electric scheme 29.0 36.2 33.7
======= ======= ========
Deficit repair contribution included above 14.0 14.0 14.8
======= ======= ========
Employer cash contributions Southern Electric scheme 68.9 76.3 68.3
======= ======= ========
Deficit repair contribution included above 45.9 41.2 44.6
======= ======= ========
Additional information on employee pension schemes can be found in Note 15 to the Summary Financial Statements.
Group Financial Review 2017/18
This SSE group financial review covers SSE's financial performance and outlook, capital investment, balance sheet and tax payments.
Earnings, Dividends and Dividend Cover
Remunerating shareholders' investment through payment of dividends
The Board is recommending a final dividend of 66.3p per share, to which a Scrip alternative is offered, compared with 63.9p in the previous year, an increase of 3.8%. This will make a full-year dividend of 94.7p per share which is: an increase of 3.7 % compared with 2016/17, which is in line with RPI inflation; and covered 1.28 times by SSE's adjusted earnings per share.
Focusing on adjusted earnings per share
To monitor its financial performance over the medium term, SSE consistently reports on its adjusted earnings per share (EPS) measure. This measure is calculated by excluding the charge for deferred tax, interest costs on net pension liabilities, exceptional items and the impact of certain re-measurements.
SSE's adjusted EPS measure has been calculated consistently and provides an important and meaningful measure of underlying financial performance. In adjusting for exceptional items and certain re-measurements, adjusted EPS reflects SSE's internal performance management, avoids the volatility associated with mark-to-market IAS 39 re-measurements and means that items deemed to be exceptional due to their nature and scale do not distort the presentation of SSE's underlying results. For more detail on these and other adjusted items please refer to the Adjusted Performance Measures section of this report.
In 2017/18, SSE's adjusted earnings per share was 121.1 pence, which was 3.6% lower than in 2016/17 but nevertheless ahead of expectations at the start of the financial year. As expected, it reflected the impact on Networks of the phasing of returns in the Price Control mechanisms for Electricity Distribution and Transmission and the disposal by SSE in October 2016 of part of its stake in Scotia Gas Networks Limited (SGN). These reductions were partly offset by increased earnings from Renewable and Thermal Generation and a strong operational focus that helped ensure the overall adjusted earnings per share for 2017/18 was better than expected.
Delivering adjusted profit before tax in 2017/18
Adjusted profit before tax in 2017/18 fell by 6.0%, to GBP1,453.2m from GBP1,545.9m. SSE's Wholesale, Networks and Retail (including Enterprise) Business Areas were all profitable, with adjusted operating profit increasing in Wholesale, declining, as expected, in Networks, with a moderate fall also reported in the Retail division as a whole.
Summarising the impact of Movements on Derivatives
SSE enters into forward purchase contracts (for power, gas and other commodities) to meet the future demands of its three energy supply businesses and to optimise the value of its Generation and Gas Production assets. Some of these contracts are determined to be derivative financial instruments under IAS 39 and as such are required to be recorded at their fair value.
SSE shows the change in the fair value of these forward contracts separately as this mark-to-market movement is not relevant to the underlying performance of its operating segments. It will recognise the underlying value of these contracts as the relevant commodity is delivered, which will predominantly be within the subsequent 12 to 36 months. Conversely, commodity contracts that are not determined to be derivative financial instruments under IAS 39 are accounted for as 'own use' contracts, the cost of which is recognised on delivery of the underlying commodity.
The adverse movement on derivatives under IAS39 of GBP89.1m arose partly from a deterioration in the fair value of forward commodity purchase contracts and the unwinding of contracts in 2017/18. The fair value of such contracts is derived by comparing the contractual delivery price against the prevailing market forward price at the balance sheet date. The position at 31 March 2018, primarily relating to electricity and gas, was a liability of GBP252.4m, compared to a liability on similar contracts at 31 March 2017 of GBP163.3m.
In addition to the adverse movement on operating derivatives, there was an adverse movement on the fair valuation of interest and currency derivatives of GBP33.0m. This movement is due to the maturing of in-the-money cross-currency hybrid swaps which were redeemed in October 2017, offset by a reduction in out-of-the-money interest swaps due to the increase in swap rates. SSE also reports these fair value re-measurements separately as these do not represent underlying business performance during the financial year. The effect of the contracts will be recorded in adjusted profit measures when the transactions are settled.
Exceptional Items
In the year to 31 March 2018, SSE recognised a net exceptional charge of GBP213.3m before tax. The following table provides a summary of the key components making up the net charge position:
Total net exceptional charges by asset Property, Plant & Equipment Other Exceptional (charges)/credits Total
class
GBPm GBPm GBPm
============================ ==================================== ========
Gas Production (104.7) - (104.7)
============================ ==================================== ========
Retail technology developments (53.3) (9.7) (63.0)
============================ ==================================== ========
Other (20.9) (24.7) (45.6)
============================ ==================================== ========
Total exceptional (charge)/gain (178.9) (34.4) (213.3)
============================ ==================================== ========
By Segment
============================ ==================================== ========
Wholesale (120.3) 12.4 (107.9)
============================ ==================================== ========
Retail (58.6) (16.2) (74.8)
============================ ==================================== ========
Corporate - (30.6) (30.6)
============================ ==================================== ========
Total (178.9) (34.4) (213.3)
============================ ==================================== ========
For a full description of the net exceptional charge see note 7 of the financial statements.
The impairment charges recognised for Gas Production assets are mainly driven by the latest independent Reserves Report, which takes account of all technical and economic variables, and estimates a reduction in the Proven and Probable (2P) reserves in the Greater Laggan Area assets. In addition, an impairment charge has been recognised in relation to Bacton field assets, predominantly related to higher than previously assessed decommissioning costs.
The exceptional charges for Retail and other technology developments reflect impairments of capitalised costs following the decision to undertake the planned SSE Energy Services transaction. The impairment charges relate primarily to the development of certain IT assets to ensure that a new demerged Retail business would contain assets that would be utilised in its post demerger operations. This review resulted in impairments of GBP29.3m to system and software development assets related to SSE's previous Retail strategic investment in transformation and a further GBP33.7m of Retail related software developments and programmes within SSE's central service company and other subsidiaries that it was identified would no longer be utilised by the demerged or continuing energy supply businesses.
The other exceptional charges are primarily the impairment of SSE's investment in BIFAB Limited, following disposal of its interest in the company in March 2018, an impairment of SSE's 2.2MW Barkip anaerobic digestion plant to nil, following a review of the future economic contribution of the site, and other net items including the reversal of provisions and impairments previously recognised.
Reported Profit Before Tax and Earnings Per Share
Reported results for 2017/18 are significantly lower than those for 2016/17 due to the impact on reported profit before tax of the significant exceptional charges incurred in the year (see above) compared to lower asset write downs in 2016/17 offset by the gain on sale of a stake in SGN. This together with the relative movement in mark to market valuations on forward purchase contracts for commodities over both years (which at March 2018 remain 'out of the money') contributed to a net reported loss before tax of GBP332.1m in 2017/18 compared to a profit before tax on those items of GBP247.5m in 2016/17.
This movement is explained in more detail in the relevant sections throughout this report and is the main driver for:
-- Reported profit before tax decreasing to GBP1,086.2m in 2017/18, from GBP1,776.6m in 2016/17, due to the movement in non-recurring exceptional items; and
-- Reported earnings per share decreasing to 81.3p in 2017/18, from 158.4p in 2016/17, 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 developing and building a balanced range of economically-regulated and market-based energy assets that it generally owns and operates, but from which it also seeks to be agile in securing value. 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 2017/18
SSE invests only in assets for which returns are expected to be clearly greater than the cost of capital. All projects are intended to 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 2017/18, SSE's investment and capital expenditure totalled GBP1,503.0m. This included:
-- A major investment programme in electricity networks totalling GBP760.3m. This includes ongoing construction of the Caithness-Moray electricity transmission link and the connection of the Stronelairg wind farm. 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 totalling GBP301.7m: progress was made in increasing SSE's renewable energy portfolio, with the delivery during 2017/18 of onshore wind farm projects with a total capacity of 534MW. A further 463MW of on- and offshore wind farm capacity is currently in construction: Stronelairg onshore wind farm (228MW); and the project-financed Beatrice offshore wind farm (SSE share: 235MW). Both remain due for completion in calendar year 2019. This capacity for renewable energy supports the delivery of government targets relating to climate change and output from it qualifies for either the Renewables Obligation (RO), which also applies in Northern Ireland, Contracts for Difference (CfD) and Renewable Energy Feed in Tariff 2 in Ireland.
-- In addition, SSE is fulfilling a regulatory obligation to install smart meters for its Energy Supply customers. At 31 March 2018, SSE had installed over 850,000 smart meters on supply in customers' homes. Post installation, SSE's meters transfer to a contracted Meter Asset Provider and SSE's investment and capital expenditure excludes the capital cost of installation and meter assets.
SSE is continuing to undertake significant investment in assets, with capital and investment expenditure of around GBP1.7bn planned for 2018/19, around two thirds of which relates to developing and maintaining economically-regulated electricity networks and renewable energy projects. Much of the revenue derived from such assets is index-linked.
SSE's principal joint ventures and associates
SSE's financial results include contributions from equity interests in joint ventures ("JVs") and associates. The details of the most significant of these are included in the table below.
SSE principal JVs and Asset type SSE holding Accounting treatment in Shareholder loans as at
associates SSE's adjusted 31 Mar 2018
performance measures
Seabank Power 1,140MW CCGT 50% Equity accounted no loans outstanding
======================== ============ ======================== =========================
Marchwood Power 840MW CCGT 50% Equity accounted GBP80m
======================== ============ ======================== =========================
Clyde Windfarm 522MW onshore windfarm 65%* Equity accounted GBP357m (inc GBP82m held
for sale)*
======================== ============ ======================== =========================
Walney (UK) Offshore 367MW offshore windfarm 25.1% Equity accounted no loans outstanding
Windfarm
======================== ============ ======================== =========================
Seagreen Phase 1 up to 1,050MW 50% Equity accounted GBP14m
======================== ============ ======================== =========================
Dogger Bank Up to 3,600MW 50% Equity accounted GBP43m
======================== ============ ======================== =========================
Scotia Gas Networks Gas Distribution 33.3% Equity accounted GBP109m
Network
======================== ============ ======================== =========================
Ferrybridge MFE 68MW 50% Equity accounted GBP128m
======================== ============ ======================== =========================
Ferrybridge MFE2 70MW 50% Equity accounted GBP110m
======================== ============ ======================== =========================
Beatrice 588MW offshore windfarm 40% Equity accounted Project financed
======================== ============ ======================== =========================
Cloosh Valley 105MW onshore windfarm 50% Equity Accounted Project financed
part of Galway
======================== ============ ======================== =========================
Greater Gabbard, a 504MW offshore windfarm (SSE share 50%) is proportionally consolidated and is reported as a Joint Operation with no loans outstanding.
*SSE's share of Clyde windfarm is expected to reduce to 50.1% in May 2018.
Financial management and balance sheet
Maintaining a strong balance sheet
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 (RCF) to debt and funds from operations (FFO) to 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.
In August 2017, Moody's Investor Services reaffirmed SSE's senior credit rating of A3 with a stable outlook. In the same month, Standard & Poor's affirmed SSE's A- rating and moved it to a stable outlook. While they are not fundamental to it, these ratings help to illustrate the quality and resilience of the SSE group of businesses.
Managing adjusted net debt and hybrid capital
SSE's adjusted net debt and hybrid capital was GBP9.2bn at 31 March 2018, compared with GBP9.2bn at 30 September 2017 and GBP8.5bn at 31 March 2017. The overall level of net debt and hybrid capital largely reflects SSE's ongoing investment programme. The year on year movement also reflects share buy-backs totalling GBP371.6m which were completed in 2017/18. This being the remainder of the GBP500m share buy-back programme announced in November 2016.
Adjusted net debt excludes finance leases and includes outstanding liquid funds that relate to wholesale energy transactions. Adjusted net debt at 31 March 2018 also includes an accounting increase of GBP37.3m as a result of fair value adjustments.
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 in the Alternative Performance Measures section of this statement.
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. The hedges ensure that any movement in the fair value of net debt is offset by an equivalent movement in the derivative position.
The fair value decrease in net debt was driven by both Sterling and Euro strength against the US Dollar along with rising interest rates during the year to 31 March 2018. This benefit is offset by an equivalent decrease to the 'in the money' derivative position of SSE's fair value hedges.
Hybrid Bonds summary
Value GBPm Coupon Rate Accounting First Call Date
equivalent per annum Treatment
- parts are
issued in
EUR and $
Hybrid Bonds GBP1bn All in rate Equity accounted Redeemed Oct 2017
September 2012 5.625%
============= ============ ================= ==================
Hybrid Bonds GBP1.2bn All in rate Equity accounted September 2020
March 2015 4.01% & April 2021
============= ============ ================= ==================
Hybrid Bonds GBP1bn All in rate Debt accounted September 2022
March 2017 3.02%
============= ============ ================= ==================
Further details on each hybrid bond can be found in the note 14 to the Summary Financial Statements.
The proceeds from March 2017 GBP1.0bn Hybrid Bonds, all in rate 3.02%, were used on 2 October 2017 to redeem the Hybrid Bonds issued in 2012, at an all-in rate of 5.6%. The additional costs of carrying additional hybrids for six months is outweighed by the savings realised over the life of the new hybrid
In 2017/18, the combined coupon payments on the equity and debt accounted hybrid bonds was GBP128m, compared to GBP120m in 2016/17. This increase was mainly due to the temporary position in the first six months when SSE made coupon payments on three hybrid tranches, prior to redeeming the 2012 hybrid bonds in October 2017. Total hybrid payments are expected to fall to around GBP77m in 2018/19 as the full benefit of the replacement hybrid's lower coupon rate is realised.
A table noting the amounts, timing and accounting treatment of coupon payments is shown below.
Hybrid coupon payments 16/17 17/18 18/19
HYa FYa HYa FYa HYe FYe
======= ======== ======= ======== ======= =======
Total equity (cash) accounted GBP74m GBP119m GBP57m GBP99m GBP47m GBP47m
======= ======== ======= ======== ======= =======
Total debt (accrual) accounted - GBP1m GBP15m GBP30m GBP15m GBP30m
======= ======== ======= ======== ======= =======
Total hybrid coupon GBP74m GBP120m GBP72m GBP129m GBP62m GBP77m
======= ======== ======= ======== ======= =======
SSE's September 2012 and March 2015 Hybrid Bonds are perpetual instruments and are therefore accounted for as part of equity within the Financial Statements but, as in previous years, have been included within SSE's 'Adjusted net debt and hybrid capital' to aid comparability.
The new March 2017 Hybrid Bonds have a fixed redemption date and are therefore debt accounted and included within Loans and Other Borrowings.
The coupon payments relating to the September 2012 and March 2015 equity accounted hybrid bonds are presented as distributions to other equity holders and are reflected within adjusted earnings per share when paid. The coupon payments on the March 2017 debt accounted hybrid bonds are treated as finance costs under IFRS.
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.
Managing net finance costs
SSE's adjusted net finance costs, including interest on debt accounted hybrid bonds but not equity accounted hybrid bonds, were GBP375.5m in the year to 31 March 2018 compared to GBP328.1m in the previous year. This reflected the cost of the additional hybrid debt charges outlined above along with the increase resulting from higher overall debt levels, albeit SSE's average interest rate has decreased as a result of efficient treasury management.
Reported net finance costs were GBP293.0m, compared to GBP163.9m, reflecting the increase in debt and the impact of changes in the fair value of financing derivatives.
Summarising cash and cash equivalents
At 31 March 2018, SSE's adjusted net debt included cash and cash equivalents totalling GBP0.2bn, down from GBP1.4bn in March 2017 due to the redemption of GBP1.0bn Hybrids in October 2017 which were refinanced in March 2017. Medium term borrowings maturing in 2018/19 are estimated at around GBP0.6bn.
Focusing on effective financial management: Treasury facilities in 2017/18
During the year to March 2018, SSE:
-- exercised the second, and last, one-year extension option on its GBP1.3bn revolving credit facility and GBP200m bilateral facility, meaning these facilities now mature in July 2022 and November 2022 respectively;
-- drew down the GBP200m EIB facility in March 2018 which was signed in March 2017, as two GBP100m/10-year floating rate loans priced at 6-month LIBOR plus 64.4bps, alongside five- year forward starting swaps to swap the full GBP200m to a fixed rate of 2.16% for the last five years; and
-- rolled a maturing GBP108m term loan for a further two years at 6-month LIBOR plus 57.5bps.
Issuing SSE's inaugural Green Bond
In September 2017, SSE successfully issued its inaugural Green Bond, an eight year EUR600m bond with a coupon of 0.875% and an all-in cost of 0.98%. The Bond was almost three times oversubscribed and had significant interest from Green only funds whilst also representing the lowest coupon ever achieved by SSE.
This issuance will help SSE to take a leading role in supporting the transition towards a low carbon future, through its plans to continue to invest in renewable energy, and reaffirm its position as a leader in renewable sources of energy.
Refinancing over the medium term
SSE's next significant refinancing is outlined below:
-- in October 2018 it will redeem its GBP500m/5% coupon bond; -- in June 2020 it will redeem its EUR600m/2% coupon bond; and
-- September 2020 is the first call date for the GBP750m/3.875% coupon equity accounted Hybrid.
Maintaining a prudent treasury policy
SSE's treasury policy is designed to be prudent and flexible. In line with that, cash from operations is first used to finance regulatory and maintenance capital expenditure and then dividend payments, with capital and investment expenditure for growth 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 2018, 90% of SSE's borrowings were at fixed rates.
Borrowings are mainly in Sterling and Euros to reflect the underlying currency denomination of assets and cash flows within SSE. All other foreign currency borrowings are swapped back into either Sterling or Euros. SSE has kept the recent EUR600m Green Bond in Euros and has swapped EUR400m of the 2% June 2020 bond to Sterling, increasing the all-in cost of that portion of the 2020 bond to 2.99%. This allows SSE to maintain a level of Euro debt to match SSE's Euro assets in the Republic of Ireland under a net investment hedge.
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. 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 UK's EU Referendum in June 2016, it has so far identified no need for change.
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 2018 was 7.9 years, compared with 8.8 years at 31 March 2017.
SSE's debt structure remains strong, and on 31 March 2018 it had around GBP8.9bn of medium/long term borrowings in the form of issued bonds, European Investment Bank debt, hybrid securities and other loans.
Operating a Scrip Dividend Scheme
The Scrip Dividend Scheme, the renewal of which is being sought at the 2018 AGM, 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 2017 (relating to the final dividend for the year to 31 March 2017) resulted in a reduction in cash dividend funding of GBP324.5m, with 23.5 million new ordinary shares, fully paid, being issued; and
-- In February 2018 (relating to the interim dividend for 2017/18) resulted in a reduction in cash dividend funding of GBP7.1m, with 0.5m new ordinary shares, fully paid, being issued.
The average Scrip dividend take-up since 2010 is 24%. 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 GBP1,621 m and has resulted in the issue of 117.5 million Ordinary shares.
SSE believes the Scrip remains an important option for shareholders but SSE is entering a new phase in its development and is confident about the enduring strength of the business. As a result, SSE believes the Scrip's impact needs to be balanced. That means that if Scrip take-up of the full-year dividend exceeds 20%, SSE now intends to buy back shares so that its dilutive effect is not excessive. SSE believes this strikes the right balance in terms of giving shareholders choice, potentially securing cash dividend payment savings and managing the number of additional shares issued.
Tax
SSE is one of the UK's biggest taxpayers, and in the survey published in December 2017 was ranked 17th out of the 100 Group of Companies in 2017 in terms of taxes borne (those which represent a cost to the company and which are reflected in its financial results).
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.
In October 2017, SSE published Talking Tax 2017: Being transparent about tax. It did this because it believes building trust with stakeholders on issues relating to tax is important to the long-term sustainability of the business.
In the year to 31 March 2018, SSE paid GBP484.1m of taxes on profits, property taxes, environmental taxes, and employment taxes in the UK, compared with GBP385.0m in the previous year. The increase in total taxes paid in 2017/18 compared with the previous year was primarily due to:
-- A reduction in the level of asset impairments in 2017 and 2018 on which corporation tax relief was claimed. Asset impairments in 2016 were particularly high which, due to the timing of quarterly tax payments, meant corporation tax paid in the first half of the year to 31 March 2017 was relatively low. Corporation tax payments then returned to their normal levels for the rest of 2017 and 2018.
-- Increased amounts of business rates being payable on Network assets, partly due to the continued expansion of the electricity transmission and distribution network and increased rates.
-- Increased amounts of Climate Change Levy being payable due to the increased volume of gas used across SSE's fleet of electricity generating assets.
In 2017/18 SSE also paid EUR22.6m of taxes in Ireland, compared to EUR16.5m the previous year; being the only country outside the UK in which it has any trading operations.
As with other key financial indicators, 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 9.0%, as compared with 10.2% in 2016/17 on the same basis, the reduction being primarily due to the reduction in the headline rate of UK corporation tax from 20% to 19%.
As would be expected for a group of SSE's size, SSE 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 Priorities for 2018/19
SSE's financial priorities for 2018/19 include:
-- Delivering an increase in the full-year dividend to 97.5 pence per share;
-- 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 renewable sources of energy; and
-- Maintaining a strong balance sheet, with robust ratios for retained cash flow to debt and funds from operations to debt.
Group Strategy and Financial Outlook from 2018/19 onwards
SSE expects the planned SSE Energy Services transaction to be completed in the second half of financial year 2018/19 making this a year of transition for SSE.
Completion of this transaction is subject to necessary shareholder and regulatory approvals; which SSE believes will be secured. In addition to providing benefits for energy customers and the energy market as a whole, its completion will:
-- give SSE a greater focus on the infrastructure and related services relied on by energy customers, which is more aligned to its core competencies; and
-- give investors greater visibility of assets and earnings in the future, the majority of which will come from regulated networks and renewables.
Strategy
Purpose, vision and strategy
The reshaped and renewed SSE will have a simple purpose: to responsibly provide energy and related services needed now and in the future. Its vision is to be a leading provider of energy and related services in a low carbon word; and its strategy is to create value for shareholders and society from developing, operating and owning energy and related infrastructure and services in a sustainable way.
-- Create value means focusing on earning returns for shareholders, sustaining skilled jobs and making a positive economic and social contribution to the countries in which SSE operates.
-- Developing, operating and owning means being efficient in developing, operating and owning infrastructure and services and being agile in creating and securing value from them.
-- Energy and related infrastructure and services means maintaining a range of complementary business activities with a depth of insight on a core sector and related infrastructure
-- Sustainable way means doing things responsibly
Dividends and earnings
Remunerating shareholders' investment through payment of dividends
The financial objective of this strategy is to remunerate shareholders' investment through the payment of dividends. SSE believes that its dividends should be sustainable, based on the quality and nature of its assets and operations, the earnings derived from them and the longer-term financial outlook.
In line with this, taking account of the impact of the expected key developments in 2018/19, and reflecting the underlying quality and value of its assets and earnings and the cash flows they deliver, SSE's plan for the dividend for the five years to 2023 is as follows:
-- For 2018/19, SSE is intending to recommend a full-year dividend of 97.5 pence per share, an increase of 3% on 2017/18, which is broadly in line with expectations for RPI inflation. This provides clarity in a year of transition. This provides clarity in a year of transition and is not subject to the timing of either the SSE Energy Services transaction or the Domestic Gas and Electricity (Tariff Cap Bill).
-- For 2019/20, SSE is planning to set the first post-transaction dividend at 80 pence per share, which reflects the impact of the changes in the SSE group expected to take effect by then. This provides a sustainable basis for future dividend growth.
-- For 2020/21, 2021/22 and 2022/23 SSE is targeting annual increases in the full-year dividend that at least keep pace with RPI inflation. This reflects SSE's confidence in the quality and value of its assets and earnings and cash flows they deliver.
This plan for the dividend for the five years to March 2023, when the current electricity distribution Price Control comes to an end, supersedes SSE's previous reference to a dividend cover range and is a plan which:
-- Aims to provide shareholders with certainty in 2018/19, a year of transition for SSE;
-- Reflects the changes in the SSE group expected to take effect by the start of the 2019/20 financial year; and
-- Sets the dividend on a path for sustainable growth for the three years from 2020.
In addition to the dividend plan above, subject to the necessary approvals being secured, the transaction relating to SSE Energy Services announced on 8 November means shareholders in SSE will receive one share in the planned new independent energy supply and services company for every one SSE share they hold at the relevant record date.
Focusing on adjusted earnings per share
To help assess its financial performance over the medium term, SSE will continue to report on its adjusted earnings per share (EPS) measure. This measure is calculated by excluding the charge for deferred tax, interest costs on net pension liabilities, exceptional items and the impact of certain re-measurements. It provides an important and meaningful measure of underlying financial performance.
Investment and capital expenditure
Investing efficiently in energy assets that the UK and Ireland need
SSE's strategy is to create value for shareholders and society from developing, operating and owning energy and related infrastructure and services in a sustainable way. Central to this is investing in assets for which returns are expected to be clearly greater than the cost of capital. New assets should complement SSE's existing portfolio of assets and their development and construction should be governed and executed in an efficient manner and in line with SSE's commitment to strong financial management.
SSE is currently expecting capital and investment expenditure to total around GBP6bn across the five years to March 2023. Economically-regulated electricity networks and government-supported renewable sources of energy are expected to account for around 70% of this. As is to be expected, the investment is weighted more towards the first half of the five-year period than the second; and includes around GBP1.7bn planned for 2018/19 and around GBP1.2bn currently planned for 2019/20.
Around 80% of the GBP6bn is committed. It includes around GBP2.8bn of investment in electricity networks investment, which should support further growth in the RAV to around GBP10bn in 2023. It also includes investment in electricity generation such as a new GBP350m highly efficient and flexible gas-fired power station at Keadby 2 in Lincolnshire, an additional multi-fuel plant and some potential investment in offshore wind farms.
Final investment decisions will be determined by the need to secure returns that are clearly greater than the cost of capital, enhance earnings and support the delivery of dividend commitments. Indeed, SSE believes that strict financial discipline is more important than ever as auctions become an increasing feature of energy networks infrastructure provision and SSE will result taking on in appropriate risks or accepting returns on investment that are financially unsustainable.
Supporting investment with effective financial management
SSE's continued investment in 2018/19 and 2019/20 means it currently expects its adjusted net debt and hybrid capital to peak at around GBP10bn. With its annual capital and investment expenditure likely to be at lower levels in the subsequent three years, SSE's cash flow based on its current plans should allow adjusted net debt and hybrid capital to fall back towards GBP9bn by 2023.
SSE's debt structure remains strong, with around GBP9.5bn of medium/long-term borrowings in the form of issued bonds, European Investment Bank debt and other loans. Of this, around GBP5.5bn of medium/long term borrowings are scheduled to mature in the period to March 2023. Medium/long-term borrowings are supported by around GBP0.3bn of cash and cash equivalents and cash held as collateral, resulting in adjusted net debt of GBP9.2bn at 31 March 2018.
This outlook is based on completing the planned SSE Energy Services transaction, the capital and investment expenditure plans described above, planned changes to the Scrip dividend scheme and delivering new dividend commitments. At the same time, opportunism and agility will continue to be important to SSE and if good opportunities to invest in, or acquire, new assets emerge that are consistent with SSE's approached to discipline in financial decision-making, levels of adjusted net debt and hybrid capital may increase; but this would be in direct support of adjusted earnings per share and the dividend.
Taskforce on Climate-related Financial Disclosures
In June 2017, the report of the Task Force on Climate-related Financial Disclosures (TCFD) was published, which included a series of recommendations for disclosing clear, comparable and consistent information about the risks and opportunities presented by climate change.
SSE endorses the recommendations and in November 2017 signed up to their implementation; and over the next three years, will report against them in relation to governance, strategy, risk and targets.
Strategy and Outlook - Conclusions and priorities
The first financial objective of the strategy of the re-shaped SSE, following the planned SSE Energy Services transaction is clear: it is to remunerate shareholders' investment through the payment of dividends. Over the period to 2023, SSE's strategic and financial priorities are:
-- Effective execution of SSE's agreed strategy, with its focus on regulated energy networks and renewable energy;
-- Delivery of SSE's five-year dividend plan;
-- Financial and operational discipline in relation to capital and investment expenditure currently expected to total around GBP6bn between 2018 and 2023;
-- Maintenance of strong financial management, including robust ratios for RCF and FFO/debt;
-- Progress towards SSE's long-term vision of being a leading energy provider in a low carbon world.
WHOLESALE
Wholesale Key Performance Indicators
Mar 18 Mar 17
Electricity Generation and Energy Portfolio Management (EPM)
=========== ===========
Generation adjusted operating profit - GBPm 578.9 510.9
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Generation reported operating profit - GBPm 523.4 544.8
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EPM adjusted operating profit/(loss) - GBPm 46.0 (9.7)
=========== ===========
EPM reported operating (loss)/profit - GBPm (43.1) 191.3
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EPM and Generation capital expenditure and investment - GBPm 390.7 475.0
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GENERATION CAPACITY - MW
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Gas- and oil-fired generation capacity (GB) - MW 4,013 4,013
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Gas- and oil-fired generation capacity (Ire) - MW 1,292 1,292
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Coal-fired generation capacity - MW 1,995 1,995
=========== ===========
Multi-fuel capacity - MW 34 34
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Total thermal generation capacity - MW 7,334 7,334
=========== ===========
Pumped storage capacity (GB) - MW 300 300
=========== ===========
Conventional hydro capacity (GB) - MW 1,150 1,150
=========== ===========
Onshore wind capacity (GB) - MW 1,260 900
=========== ===========
Onshore wind capacity (NI) - MW 141 122
=========== ===========
Onshore wind capacity (ROI) - MW 594 456
=========== ===========
Offshore wind capacity (GB) - MW 344 344
=========== ===========
Biomass capacity (GB) - MW 37 37
=========== ===========
Total renewable generation capacity (inc pumped storage) - MW 3,826 3,309
=========== ===========
Total electricity generation capacity (GB and Ire) - MW 11,160 10,643
=========== ===========
Renewable capacity qualifying for ROCs - MW c2,150 c1,850
=========== ===========
GENERATION OUTPUT - GWh
=========== ===========
Gas- and oil-fired (inc CHP) output (GB) - GWh 19,153 14,977
=========== ===========
Gas- and oil-fired output (Ire) - GWh 2,739 2,463
=========== ===========
Coal-fired (inc biomass co-firing) output - GWh 1,462 901
=========== ===========
Multi-fuel output - GWh 316 0
=========== ===========
Total thermal generation - GWh 23,670 18,341
=========== ===========
Pumped storage output - GWh 259 233
=========== ===========
Conventional hydro output - GWh 3,171 3,101
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Onshore wind output GB - GWh 2,774 1,895
=========== ===========
Onshore wind output NI - GWh 306 251
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Onshore wind output ROI - GWh 1,509 1,211
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Offshore wind output - GWh 1,319 1,172
=========== ===========
Biomass output GB - GWh 90 92
=========== ===========
Total renewable generation (inc pumped storage) - GWh 9,428 7,955
=========== ===========
Total Generation output all plant - GWh 33,098 26,296
=========== ===========
Note 1: Capacity is wholly-owned and share of joint ventures
Note 2: Output is electricity from power stations, including multifuel, in which SSE has an
ownership interest (output based on SSE's power purchase agreements (PPA)). SSE awarded Ferrybridge
Multifuel 1 PPA October 2017.
Note 3: Wind output excludes 406GWh of constrained off generation in 2017/18 and 309GWh in
2016/17
Note 4: Onshore wind capacity and output at March18 includes additions at Clyde (net 165MW)
Bhlaraidh (110 MW) Dunmaglass (94 MW), Galway (120MW), Slieve Divena (19MW) and Leanamore
(18MW) and the disposal of Port of Tilbury (- 9MW)
Note 5: An additional 78MW of Clyde onshore windfarm was sold May 2018
Note6: Slough Heat & Power Biomass Plant's financial results are reported within SSE Enterprise.
Capacity and output included above.
Mar 18 Mar 17
=========== ===========
GAS PRODUCTION
=========== ===========
Gas production adjusted operating profit - GBPm 34.0 26.4
=========== ===========
Gas production reported operating (loss) - GBPm (70.7) (201.1)
=========== ===========
Gas production- M therms 543 618
=========== ===========
Gas production- Mboe 9.05 10.21
=========== ===========
Liquids production - Mboe 0.74 1.05
=========== ===========
Gas production capital investment - GBPm 65.5 72.9
=========== ===========
Total net proven and probable reserves (2P) bn therms 1.9 2.5
=========== ===========
Total net proven and probable reserves (2P) Mboe 33.8 43
=========== ===========
GAS STORAGE
=========== ===========
Gas storage adjusted operating (loss) - GBPm (6.5) (13.0)
=========== ===========
Gas storage reported operating (loss) - GBPm (6.5) (36.8)
=========== ===========
Gas storage customer nominations met - % 100 100
=========== ===========
Gas storage capital investment - GBPm 1.8 0.2
=========== ===========
Financial performance in Wholesale
During the year to 31 March 2018 total adjusted operating profit in Wholesale was GBP652.4m compared to GBP514.6m in the previous year. The primary drivers relating to operating profit were as follows:
Generation: adjusted operating profit increased to GBP578.9m in 2017/18, from GBP510.9m in the previous year, reflecting increased output in both renewable and thermal generation. This was partly offset, as expected, by a lower achieved power price than in the previous year and the end of the one-year contract under which Fiddler's Ferry power station provided Blackstart services to National Grid.
Within this segment Renewable Generation adjusted operating profit increased to GBP473.8m, up from GBP391.6m in the previous year.
Energy Portfolio Management: earned an adjusted operating profit of GBP46.0m in 2017/18, compared to an operating loss of GBP9.7m in 2016/17, due to an improved trading position.
Gas Production: adjusted operating profit increased to GBP34.0m in 2017/18, from GBP26.4m in the previous year, mainly due to a higher achieved price, partly offset by slightly lower production volumes.
Gas Storage: adjusted operating loss improved to GBP6.5m in 2017/18, from GBP13.0m in the previous year, due to an improved trading performance and year on year cost savings.
Reported Wholesale Operating Profit: decreased to GBP403.1m in 2017/18, compared to GBP498.2m the previous year, due to the factors above, offset by the impact of exceptional items and re-measurements. In the year, there was an exceptional impairment of Gas Production assets of GBP104.7m, compared to GBP227.5m in the previous year. The result on operating derivatives was an GBP89.1m loss in 2017/18 versus a GBP201.0m gain in the prior year. There was also a fair value uplift on deconsolidation of Clyde wind farm of GBP59.1m in prior year.
Wholesale Financial Outlook for 2018/19
In 2018/19 Wholesale's adjusted operating profit will be affected by the cessation of 'in the money' power purchase agreements and by the fact renewable energy output is forward-hedged at a price lower than in 2017/18.
Overview
SSE's Wholesale segment consists of Electricity Generation, Gas Storage, Gas Production and Energy Portfolio Management. The businesses within Wholesale are well positioned to support the trends towards decarbonisation, electrification and infrastructure.
A diverse and complementary generation portfolio
SSE owns and operates a highly complementary portfolio of renewable and thermal generation assets. This is in line with its strategic interest to develop, own and operate renewable generation and supporting flexible generation.
Low carbon generation from SSE's onshore wind farm, offshore wind farm and hydro assets creates sustainable returns, with the majority rewarded through renewable support schemes. Renewable generation is influenced by weather conditions, but when renewable output is low, SSE's thermal assets are able to respond quickly, providing back up to renewables and delivering value from thermal flexibility.
The diversity of SSE's generation portfolio is fundamental to achieving the overall earnings in Electricity Generation. Moreover, maximising portfolio returns requires a deep operational understanding of all generation assets combined with extensive commercial experience to secure value in an increasingly volatile market.
Renewable Energy
Increasing output of renewable energy
Output of electricity from renewable sources, including pumped storage, increased in 2017/18, compared to the previous year (9.4TWh compared to 7.9TWh). The primary driver for this differential was an increase in onshore wind capacity, as new wind farms came online, along with improved wind conditions. Overall renewable energy capacity, including conventional hydro and pumped storage, increased, to 3,826MW as at 31 March 2018, from 3,309MW in the previous year. The further sale of a 78MW stake in Clyde wind farm in May 2018 means this stands at 3,748MW at 25 May 2018.
Enhancing management of hydro assets
Hydro is unique in SSE's portfolio, as it can be characterised as both renewable and flexible. Over the last financial year, SSE's hydro stations have delivered increased value from their flexibility, enabled by enhancements to SSE's commercial management of these assets.
In addition to 400MW of run-of-river hydro, SSE has 750MW of flexible hydro. Alongside SSE's 300MW of pumped storage, flexible hydro operates as 'Britain's biggest battery'. Increasing volumes of wind energy coming onto the UK system will create the need for more flexibility in the form of energy storage, and SSE's hydro assets are well placed to provide this in an optimal way.
Generating value from onshore wind
2018 marks ten years since SSE's acquisition of Airtricity, and over the past decade SSE has developed strengths in the efficient development, construction and operation of onshore wind. To date, SSE's focus has been on completing Renewable Obligation (RO) projects in the UK and REFIT projects in Ireland. Seven new onshore wind energy projects have been delivered in the last 16 months, and all have come in under budget. These include Bhlaraidh in Scotland (110 MW) and Leanamore (18MW) in Ireland, which were both delivered in the second half of 2017/18.
Following the sale of 78MW of capacity at Clyde, SSE's onshore wind farm capacity now stands at 1,917MW. Stronelairg (228MW), SSE's final wind farm to be constructed under the RO, is on track for completion in 2018. The project reached a significant milestone on 24 March 2018 when it achieved first export, rendering it eligible for RO accreditation.
SSE's onshore wind farm pipeline consists of around 800MW of potential new build projects and extensions, including the joint venture Viking Wind Farm (up to 457MW - SSE share 50%), located on Shetland, and Strathy South (up to 133MW). In February 2018, the UK Government received State Aid clearance from the European Commission to enable wind projects on the remote islands of Scotland to compete in the next Contracts for Difference auction alongside other less established technologies. Confirmation of the treatment of remote islands projects in the next allocation round is expected in the coming months.
At present, there is no indication of a further UK Contracts for Difference auction for onshore wind. In Ireland, SSE awaits the outcome of the Irish Government's consultation on the development and design of a new Renewable Electricity Support Scheme (RESS). In both jurisdictions, SSE continues to explore future development options for onshore wind and is well placed to take advantage of future opportunities as they emerge.
Continuing to invest in offshore wind
Part of the value of SSE's offshore wind farm assets is their geographic diversity around the UK, which provides a spread of wind capture opportunities. Existing offshore wind continues to hold possibilities of growth through more efficient operation, better targeting of operations and maintenance (O&M) investment or enhancements to revenue streams.
The joint venture operations of SSE's existing offshore assets have created strong commercial partnerships and resulted in shared industry learnings.
Offshore wind represents a huge opportunity for SSE to deliver its own decarbonisation ambitions and contribute to the achievement of the UK's and Ireland's carbon targets. For example, in the UK, to meet legally binding carbon targets, the Committee on Climate Change estimates an additional 80 to 100TWh of low carbon generation are needed by 2030. In October 2017, the UK Government announced that GBP557m will be available for future Contracts for Difference auctions for less established technologies, including offshore wind. The next auction is expected to take place in Spring 2019. The UK Government also intends to work with industry to develop an offshore wind Sector Deal, which could result in at least 10GW of new capacity in the 2020s.
SSE continues to develop its expertise in offshore wind, primarily through the Beatrice Offshore Windfarm joint venture (588MW - SSE share 40%), which is making excellent progress towards its construction milestones and which will contribute to earnings from mid-2019/20. SSE has interests in three further offshore wind prospects under development:
Dogger Bank (up to 3.6GW), a 50:50 joint venture formed with Statoil to develop three projects in the Dogger Bank zone - Creyke Beck A, Creyke Beck B and Teesside A. The projects are being progressed in readiness for potential participation in the next CfD auction.
Seagreen (Phase One up to 1,050MW), a 50:50 partnership with Fluor Limited, which in November 2017 was cleared of the legal challenge to its consent. Work is also under way to prepare Seagreen to potentially enter the next CfD auction.
Arklow Bank (520MW) in Ireland. SSE wholly owns this consented site and awaits the outcome of the Irish RESS to see whether offshore wind will be eligible for support.
The Crown Estate and the Crown Estate Scotland have signalled their intent to make new seabed rights available to offshore wind developers to ensure new projects can start to operate from the late 2020s. SSE is following this process closely to prepare for potential new offshore wind leasing in the form of extensions or new sites.
Thermal Generation
Complementing renewable energy
Efficient, reliable and flexible thermal back-up offers weather insurance for SSE's wind farm capacity and allows optimisation of the portfolio to a higher overall economic return. In addition to managing variability in renewable production and demand, SSE's thermal fleet provides an advantage within the wider electricity market by providing reliably capacity at scale in response to market changes, for example, unplanned nuclear outages.
SSE's CCGTs are among the most flexible on the GB electricity system and have increasingly created value from their intra-day flexibility.
Capacity market auction
In February 2018, the UK Government procured 5.8GW of de-rated capacity in the year-ahead capacity market auction for delivery in 2018/19. The auction cleared at a price of GBP6.00/kW (kilowatt). SSE successfully secured an agreement for its CCGT at Peterhead (1,044MW) worth GBP6.3 million. Below is a summary of the auction results for capacity which will be delivered in 2018/19 and results that were decided in 2017/18.
2018/19 Delivery Year Clearing price Successful SSE capacity Total SSE income
(GBP/kW) (MW) (GBP/year)
T-1 auction
(February 2018) 1,044 of gas-fired power generating plant
Total of 5.8GW procured 6.00 (Peterhead) 6.3 million
================ ================================================== =================
T-4 auction (December 2014) 19.40 849MW of hydro electric and pumped storage plant 85.5 million
Total of 49.26GW procured 2,266MW of gas-fired power generating plant;
1,294MW of coal-fired power generating plant
================ ================================================== =================
2021/22 Delivery Year Clearing price Successful SSE capacity Total SSE income
(GBP/kW) (MW) (GBP/year)
T-4 auction 806MW of hydro electric and pumped storage plant
(February 2018 3,371MW of gas-fired power generating plant
Total of 50.6GW procured 8.40 (including all existing CCGTs) 35.1 million
================ ==================================================== =================
The capacity market revenue will be received on a pro-rated basis throughout the delivery year, which runs October through September. To secure the revenue arising from the capacity market, providers of generating capacity must produce electricity when the system requires during the relevant delivery year; failure to do so will result in penalties being levied.
Looking to future requirements for electricity
Whilst recent capacity market auctions have not resulted in new-build CCGT, the mandated closure of coal-fired generation and continued uncertainty over nuclear life extensions and nuclear new build mean that new capacity will be required by the mid-2020s.
As a result, SSE, in partnership with Siemens, has decided to proceed with a unique commercial opportunity to introduce first-of-a-kind, high efficiency, gas-fired generation technology to the UK. Work will begin in Spring 2018 on an 840MW CCGT at Keadby 2. Siemens will provide its 9000H technology and will manage technical, construction risk until the plant is handed over to SSE as well as provide appropriate performance guarantees. SSE will invest around GBP350m in the development and construction of the project, with a substantial proportion of its financial exposure deferred until the plant is operational.
Once completed, the station will be the most efficient CCGT on the system, delivering large-scale capacity from the early 2020s onward. It will be able to provide the flexible generation needed to support the integration of large-scale renewables into the electricity grid.
SSE continues to believe the GB capacity market is the right mechanism to ensure the electricity system remains secure at the lowest cost to consumers. Alongside wholesale market and ancillary services revenues, capacity market payments remain an important aspect of the economics of Keadby 2, and SSE intends to participate in future auctions to secure a capacity market agreement.
Additionally, SSE continues to develop a CCGT project at Ferrybridge D with the view to progressing should market conditions warrant further investment in high efficiency gas-fired generation. There is also considerable value in the optionality of the existing sites at Ferrybridge and Fiddler's Ferry.
Securing capacity contracts in Ireland
In January 2018, the results of the first competitive capacity auction under Ireland's new Integrated Single Electricity Market (I-SEM) were published. All units at each of SSE's four thermal plant in Ireland (Great Island CCGT (464MW), Rhode (104MW), Tawnaghmore (104MW), and Tarbert (590MW)) secured I-SEM capacity contracts at the auction clearing price of EUR41.8/kW.
The new I-SEM capacity contracts will be from October 2018 until September 2019. Capacity market revenue will be received throughout the delivery year. Generators that fail to provide energy when called upon will be subject to financial penalties.
Gas Production
SSE has a diverse equity share in over 15 producing fields across 17 licences in three regions of the UK Continental Shelf: the Easington Catchment Area, the Bacton Area and Greater Laggan Area.
Total output in 2017/18 was 543 million therms (9.05 mmboe) of gas and 0.74 mmboe of liquids, compared with 618 million therms of gas (10.21 mmboe) and 1.05 mmboe of liquids for 2016/17. This decline in production was primarily due to the natural decline of the fields. Average daily gas and liquids production was around 1.6mth/day (gas equivalent) in 2017/18.
Gas Production currently produces enough gas to supply all of SSE's Business Energy customers as well as SSE Airtricity household customers in Ireland. This acts as a natural hedge to other parts of the SSE Group. For example, the availability of fixed price fuel within the Wholesale portfolio enables SSE to provide sales contracts to I&C customers which offer longer term price protection.
Successes over the last financial year included the early delivery of the Edradour and Glenlivet fields across the Greater Laggan Area, as well as achieving operational efficiency at the Shetland Gas Plant (SSE share - 20%) of 95.4%.
SSE does not expect to make further acquisitions; however, investments to enhance its existing assets may be undertaken. For example, further exploration and appraisal activities are planned for the West of Shetland region in financial year 2018/19.
Energy Portfolio Management (EPM)
Energy Portfolio Management provides a route-to-market and effective risk management for Wholesale and other 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.
As the electricity system changes to integrate intermittent, inflexible and distributed forms of generation alongside conventional plant, EPM's ability to realise the value of flexibility from SSE's thermal and hydro assets is increasingly important. Building on a foundation of strong asset optionality and wind forecasting capabilities, EPM's ability to take responsible trading decisions provides the opportunity to increase value derived from SSE's onshore and offshore wind portfolio.
Gas Storage
The economic conditions continued to be challenging for gas storage in 2017/18. Following the closure of Rough capacity, SSE now holds around 40% of the UK's conventional underground gas storage capacity, and the overall UK storage duration curve has shrunk to around 16 days. This loss of energy storage will be further exacerbated as coal-fired generation shuts over the next few years, taking with it the storage inherent in coal stocks.
Although the UK has access to diverse gas supply sources, such as interconnection and LNG, gas storage will play an important role in safeguarding the UK's gas and electricity security of supply. If the market or regulatory signals are present, SSE's gas storage assets are well-placed to provide this service to energy users.
Wholesale - Conclusion and Priorities
SSE's Wholesale directorate comprises a unique portfolio of complementary, high quality businesses with assets and expertise that cannot be replicated in the market. It is well placed to respond to the trends of decarbonisation, electrification and infrastructure development as outlined in Realising Opportunities section of the Strategic Overview.
The Wholesale businesses have a significant role to play in delivering SSE's ambition to be a leading provider of energy and related services in a low carbon world. Having already met its 2020 carbon target and helping the UK to meet its first two carbon budgets, SSE has a new ambition to further reduce the carbon intensity of the power it generates by 50%, to around 150gCO(2) eq/kWh, by 2030. SSE continues to believe that putting a meaningful price on carbon emissions is a critical part of UK and Irish energy policy and is one of the most important policy tools that governments have to help the continued cost-effective delivery of reliable and low carbon electricity.
Together, SSE's Wholesale businesses have delivered adjusted operating profit of GBP652.4m and present material opportunities for further growth. They support SSE's strategic goal of creating value for shareholders and society. Over the next financial year, Wholesale will continue to focus on the following priorities:
safe, responsible and efficient operation of all existing assets;
efficient, responsible and successful investment in assets that energy customers need now in the future; and
development of existing and new growth options in the UK and Ireland - with a focus on realising value from SSE's material offshore wind farm interests, maintaining options for onshore wind and CCGTs, beginning work to construct Keadby 2; and pursuing new multifuel capacity.
NETWORKS
Networks Key Performance Indicators
Mar 18 Mar 17
ELECTRICITY TRANSMISSION
======= =======
Transmission adjusted and reported operating profit - GBPm 195.6 263.7
======= =======
Regulated Asset Value (RAV) - GBPm 3,070 2,685
======= =======
Capital expenditure - GBPm 434.2 505.0
======= =======
ELECTRICITY DISTRIBUTION
======= =======
Electricity distribution adjusted and reported operating profit - GBPm 402.2 433.4
======= =======
Regulated Asset Value (RAV) - GBPm 3,406 3,246
======= =======
Capital expenditure - GBPm 326.1 284.7
======= =======
Electricity Distributed TWh 39.2 39.3
======= =======
Customer minutes lost (SHEPD) average per customer 55 60
======= =======
Customer minutes lost (SEPD) average per customer 48 43
======= =======
Customer interruptions (SHEPD) per 100 customers 57 68
======= =======
Customer interruptions (SEPD) per 100 customers 55 48
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SCOTIA GAS NETWORKS (SGN)
SSE's 50% share reducing to 33% from 26 Oct 2016
======= =======
SGN adjusted operating profit (SSE's share) - GBPm 165.3 239.4
======= =======
SGN reported operating profit (SSE's share) - GBPm 71.8 151.7
======= =======
Regulated Asset Value - GBPm 1,828 1,748
======= =======
Uncontrolled gas escapes attended within one hour % 98.2 98.7
======= =======
SGN gas mains replaced - km 1,000 989
======= =======
Owning, operating and investing in Networks
Energy networks continue to play a pivotal role in the transition to a low carbon economy, providing the critical national infrastructure required to support the ongoing shift to a decarbonised energy system and electrification of transport.
SSE is the only energy company in the UK to be involved in electricity transmission, electricity distribution and gas distribution. Its electricity networks businesses are collectively known as Scottish and Southern Electricity Networks (SSEN).
Company Network SSE Ownership Geography Covered
Scottish Hydro Electric Transmission Scottish Hydro Electric 100% North of Scotland
Plc Transmission (SHET)
==================================== ============== =========================
Scottish Hydro Electric Power Scottish Hydro Electric Power 100% North of Scotland
Distribution Plc Distribution (SHEPD)
==================================== ============== =========================
Southern Electric Power Distribution Southern Electric Power 100% Central Southern England
Plc Distribution (SEPD)
==================================== ============== =========================
Scotia Gas Networks Scotland Gas Networks 33% Scotland
------------------------------------ -------------- -------------------------
Southern Gas Networks Southern England
==================================== -------------- =========================
SSE's interests in economically-regulated energy networks support the maintenance of a balanced range of assets, operational efficiency and disciplined investment. SSE's capital expenditure and investment programme for its electricity networks in the five years to 2023 is forecast to be around GBP2.8bn. This will support future earnings and growth with the RAV (Regulatory Asset Value) on course to reach GBP10bn by 2023, across SSE's electricity and gas networks interests.
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.
These economically-regulated, lower-risk businesses provide relative predictability and stability for SSE and balance its activities in the market-based parts of the energy sector. They are core to SSE's strategy in the short, medium and long-term and contribute significantly to its commitment to the payment of dividends to shareholders.
Looking ahead to RIIO-2
On 7 March 2018, Ofgem published a consultation on the regulatory framework for the next Price Control periods, RIIO-2, which for SSE will run from April 2021 for its electricity transmission business and its share in SGN; and from April 2023 for its two electricity distribution businesses.
In its consultation, Ofgem has set out that it expects the range of available returns for network businesses to be lower for the next round of Price Controls, while maintaining high levels of innovation and reliability. It has also set out its strongly "minded to" position to revert to five-year price control periods and confirmed a stronger voice for customers and stakeholders in the development of Price Control business plans through the establishment of independent user groups and panels.
Despite its focus on lower returns, Ofgem has confirmed it is still expected that high performing companies will continue to be rewarded through outperformance of the incentive based regulatory framework.
SSE will continue to engage constructively with Ofgem and other stakeholders as the regulator further develops its proposals for RIIO-2, helping to ensure the evidence base is robust, the outcomes are clear and the views of customers, communities, stakeholders and investors are fully considered.
Engaging stakeholders in decision making
SSEN continues to place its customers and stakeholders at the forefront of its decision making and during 2017/18 it held three major stakeholder engagement events for each of its three licenced electricity networks. The events focused on SSEN's performance against its business plan and will lead to a number of changes to its practices and priorities during 2018/19 and beyond as a direct result of the feedback received.
SSEN's independent Stakeholder Advisory Panel is now firmly established and working alongside its Board, and continues to provide key external input to help scrutinise business performance in meeting SSEN's business plan commitments.
In January 2018, SSEN also established the industry's first Inclusive Service Panel, bringing together representatives with expertise ranging from mental and physical disability to religious diversity and equality. The Panel is already providing invaluable insight and making practical recommendations to help ensure SSEN delivers a truly inclusive service for all.
The commitment to place its stakeholders at the heart of its business will help ensure SSEN is well placed to adapt to the evolution of the regulatory framework, RIIO2, and to the enhanced and enduring role its customers and stakeholders will play in the development of its future business plans.
Financial performance in Networks
As expected, total adjusted operating profit in Networks for FY2017/18 decreased to GBP763.1m, compared to GBP936.5m in the previous year, with the principal movements as follows:
Transmission: as expected, adjusted operating profit decreased to GBP195.6m in 2017/18, from GBP263.7m in the previous year. This was mainly due to the phasing of capital expenditure on significant projects and the resulting impact on regulatory revenue, along with the impact of the sharing of the previous year's total expenditure (totex) underspends with customers.
Distribution: as expected, adjusted operating profit decreased to GBP402.2m in 2017/18, from GBP433.4m in the previous year. While base revenue increased in line with the growing RAV (Regulatory Asset Value), this was offset by the expected net reduction in under-recoveries and losses incentive income, outlined in the table below.
This table also gives an indication of the expected impact of under- or over-recoveries in future years and also income from incentives:
FY2016/17 FY2017/18 FY2018/19 FY2019/20
Under/over + GBP38m +GBP5m - c.GBP10m - c. GBP14m
recovery from 2 under-recovered from under-recovered from over-recovered from over-recovered from
yr. previous FY 2014/15 2015/16 2016/17 2017/18. A further
-GBP10m related to
2017/18 over
recovery
will be absorbed in
2021/22
====================== =========================== ======================== ====================
DPCR Losses +GBP35m +GBP15m - -
incentive income
====================== =========================== ======================== ====================
Incentives Performance FY2017/18 (performance FY2018/19 (performance FY2019/20
earned in 2015/16) earned in 2016/17) (performance earned
in 2017/18)
=========================== ======================== ======================
Interruptions Incentive Scheme (IIS) GBP18.45m GBP13.9m GBP6.81m
=========================== ======================== ======================
Customer Satisfaction and Engagement
=========================== ======================== ======================
Customer Satisfaction Survey GBP1.70m GBP2.78m GBP2.73m
=========================== ======================== ======================
Stakeholder Engagement and Vulnerable GBP1.13m GBP0.82m GBP1.15m*
Customers*
=========================== ======================== ======================
Connections GBP2.33m GBP1.73m GBP1.77m
=========================== ======================== ======================
Total GBP23.61m GBP19.23m GBP12.46m
=========================== ======================== ======================
Numbers shown are in the price base of the year in which incentives are earned, and under
the price control are inflated to the price base of the year in which they are recovered.
A requirement for continual improvement is built into the incentives framework, this means
if performance measures do not demonstrate improvement year on year, incentive income falls.
*estimated outturn (actual not determined until later in 2018)
There are several factors which contribute to RIIO Price Control earnings which can be found on the Ofgem website in the Transmission and Distribution Licence, Price Control Financial Handbook and Price Control Financial Model.
Gas Distribution: as expected, SSE's share of SGN's adjusted operating profit fell to GBP165.3m in 2017/18, from GBP239.4m in the previous year, mainly due to SSE's disposal of a partial equity stake (16.7%) in October 2016, but also due to the phasing of regulatory revenue and the sharing of out-performance with customers, as part of the RIIO Price Control. The impact on operating profit of the part disposal in the full financial year 2017/18 was GBP55m.
Reported Networks operating profit: decreased to GBP669.6m, from GBP848.8m, primarily for the reasons outlined above. In addition, SGN had an exceptional gain in 2016/17 of GBP19.5m due to the change in Corporation Tax rate.
Networks Financial Outlook - 2018/19
Total adjusted operating profit in the economically-regulated Networks segment is expected to increase by a mid-single digit percentage, mainly as a result of the phasing of income recovery in Electricity Transmission and a higher expected contribution from SGN.
Electricity Transmission
SSEN, operating as Scottish Hydro Electric Transmission plc, is responsible for maintaining and investing in the electricity transmission network in the North of Scotland.
In addition to the base rate of return (WACC) on the RAV, we are able to earn incentives as part of the RIIO framework. In RIIO-T1 the financial incentives available are driven primarily by totex outperformance and the potential to deliver savings in capital investment to the benefit of customers. Given the significant capital investment programme that SSEN has undertaken, the outcome of efficiency savings will be dependent on the successful completion of multi-year large scale projects and the close out of RIIO-T1 after 2021. It is currently expected that SSEN will deliver totex savings over the course of RIIO-T1 of which, under the price control agreement, 50% will be retained by SSEN, supporting returns for RIIO-T1, with the remaining 50% returned to customers.
Operating a rapidly growing network
SSEN's first priority is to provide a safe and reliable supply of electricity to the communities it serves. SSEN has established a dedicated and experienced team within its transmission business to deliver operational excellence, including improved asset management and timely preparation for the introduction of new types of plant and technology.
During the current period of rapid growth in transmission development, including commissioning of substantial new assets and the connection of large volumes of renewable generation capacity, SSEN has maintained an impressive reliability of over 99.9% in 2017/18.
Connecting renewable electricity generation
SSEN's strategic priority for the RIIO-T1 period has been to enable the transition to a low carbon economy through building the transmission infrastructure necessary to connect and transport renewable energy.
Since the beginning of RIIO-T1, the installed renewable electricity generation capacity connected to SSEN's transmission network has grown significantly, from 3.7GW to over 5GW and is forecast to grow to over 6GW by the end of the current Price Control period. This successful and timely connection of renewable electricity generation is contributing significantly to Government renewable and climate change targets.
During 2017/18, generation assets connected to SSEN's transmission network included Stronelairg wind farm (228MW); and Aberdeen Offshore Windfarm (96MW), both of which were successfully connected during March 2018.
SSEN continues to work with its generation customers to provide timely and efficient connections to its network, including Dorenell wind farm (220MW) due to connect in 2018/19; Beatrice Offshore Wind Farm (588MW also due to connect in 2018/19; and Moray Offshore Renewable Limited (MORL) (504MW) due to connect in 2020/21.
Investing to provide the infrastructure to support a decarbonised energy system
Since the start of the RIIO-T1 Price Control, SSEN's capital investment in its transmission network has totalled over GBP2.3bn, with this investment playing a pivotal role in providing the key national infrastructure to facilitate the UK's transition to a low carbon economy and a largely decarbonised energy system.
SSEN continues to make progress with the delivery of its Caithness-Moray transmission link. With an agreed allowance of GBP1.1bn, the project is the largest single investment undertaken by any part of the SSE group to date. Construction progress on most aspects of the project continues to be excellent, although as with any project of this size and complexity there are challenges to overcome in terms of construction risk and quality assurance. SSEN continues to work very closely with its key contractors to make the necessary progress in the coming months so that the commissioning and energising of the reinforcement is successful and remains on track for delivery by the end of 2018.
Despite the changes affecting onshore wind policy, SHE Transmission still has a healthy pipeline of projects for the remaining three years of the current price control period. This comprises:
-- planned projects associated with on- and off-shore wind generation developments; and, -- projects to renew ageing infrastructure dating back to the 1950s and 1960s.
These projects represent a forecast pipeline of investment of around GBP900m in the next three years and mean the business is on track to increase the Transmission RAV to around GBP3.6bn by the end of the current Price Control period in 2021. This investment pipeline, plus a further GBP300m of Transmission capital and investment expenditure in the period to 2023, means the RAV is forecast to grow to GBP3.8bn by 2023. This total of GBP1.2bn of spend in the five years to 2023 is one component of SSE's Group capital and investment plans of GBP6bn over the five years to 2023.
In addition to its base case capital and investment plans of GBP1.2bn, SHE Transmission has visibility on a further GBP700m of contingent projects that are dependent on the progress of onshore wind developments against a continued uncertain policy regime. This means the timing and ultimate need for them is not yet clear. Several of these relate to potential onshore reinforcements in Argyll and Kintyre and across the Highlands. This list also includes projects which came forward in January 2018, when the System Operator, National Grid, published its Network Options Assessment (NOA) report, which gave SSEN the signal to proceed with plans to reinforce the existing North East and East Coast onshore transmission system.
Once complete, the reinforcements will provide additional network capacity to facilitate the planned connection of significant offshore wind generation across the north east of Scotland, the increase in transmission entry capacity (TEC) at Peterhead Power Station and the proposed NorthConnect interconnector to Norway.
Preparing to connect Scotland's island groups
The potential transmission links to the Scottish islands groups provide further potential for future growth.
Following confirmation that the UK Government intends to allow remote island onshore wind to complete in the next Contracts for Difference auction in spring 2019, SSEN continues to work with its generation customers and other stakeholders across the three island groups to take forward proposals to provide transmission connections to enable the connection of renewable electricity generation.
In March 2018, SSEN submitted to Ofgem a Needs Case for the Orkney transmission link. SSEN's proposed solution would deliver a phased approach to reinforcement, which will initially deliver a single 220MW subsea cable in October 2022, followed by a second cable of similar specification once further generation has committed and the economic case has been made for the further investment.
SSEN also intends to submit Needs Cases for both the Western Isles and Shetland during the second half of 2018 and will continue to engage positively and constructively with developers, Ofgem, Government and other stakeholders to take forward its proposals in a timely manner, as soon as developer commitment and all necessary regulatory and planning approvals are confirmed. Together, these three island links could provide an investment opportunity of GBP1.5bn.
Addressing competition in transmission
In January 2018 Ofgem published an update to its plans to introduce competition into onshore electricity transmission for new, separable and high value onshore transmission assets.
With a strong track record for connecting renewable energy developments on time and within budget, SSEN believes the experience it has gained both in-house and with its supply chain means that it is well placed to participate in competitive delivery arrangements.
SSEN remains supportive in principle of the introduction of competition, where it can be clearly demonstrated that it delivers benefits to energy customers and the wider economy as well as maintaining the efficient delivery of transmission infrastructure. It does, however, have a number of concerns about its implementation. In particular, SSEN believes Ofgem's proposals would effectively reopen the current Price Control without following due process; and they are not underpinned by legislation and they risk delays to the delivery of well-established and advanced projects.
For these reasons, SSEN believes competition should not be implemented before the beginning of the next Price Control in order that these material factors be adequately addressed in an open and transparent manner and SSEN will continue to engage constructively with Ofgem and other stakeholders as part of this process.
Planning for the RIIO-ET2 price control
Preparations are well under way to gather evidence to support the development of SSEN's next transmission business plan.
SSEN's main focus during 2017/18 has been on future energy scenarios across the north of Scotland, with extensive consultation and engagement with key stakeholders helping SSEN identify the likely network requirements for the next Price Control. This has ranged from future energy trends; the future outlook for electricity generation, including repowering of ageing onshore wind farms; as well as the likely speed and scale of the electrification and decarbonisation of heat and transport.
SSEN will undertake further engagement and consultation with key stakeholders in the year ahead, including its Stakeholder Advisory Panel and the soon to be established User Group and Industry Panels, which will form a key component of the RIIO2 framework. This research and engagement will help SSEN build a credible and evidence-based business plan for submission to Ofgem in 2019.
Electricity Distribution
SSEN, operating as Scottish Hydro Electric Power Distribution (SHEPD) and Southern Electric Power Distribution (SEPD) under licence, is responsible for maintaining the electricity distribution networks supplying over 3.7 million homes and businesses across central southern England and north of the central belt of Scotland.
Delivering for customers under the incentive based framework
SSEN is now three years into the RIIO-ED1 Price Control and continues to deliver significant changes to its operations, processes and standards to ensure the needs of its customers remain at the forefront of decision making.
SSEN's performance is assessed against the commitments made in its business plan and this drives the revenue which is earned. The key areas addressed are: network availability and reliability; social obligations; safety; environmental impact; connections; and customer satisfaction.
The outcomes of the incentive based framework within which SSEN operates are increasingly dependent on customer opinion and feedback, providing opportunities for additional earnings through a range of incentive schemes. The additional incentive based performance is measured against: The Interruption Incentive Scheme; Ofgem Customer Satisfaction Measures; Complaints Performance; Stakeholder Engagement and Customer Vulnerability; and Incentive in Connections Engagement. A requirement for continual improvement is built into the incentives framework, this means if performance measures do not demonstrate improvement year on year, incentive income falls.
By making a concerted effort to focus on its people and its processes, SSEN has made significant changes to ensure it is meeting its customers' needs and delivering against the measures as set by the RIIO-ED1 price control. This has ensured it is able to deliver outputs aligned to the expectations of its customers, stakeholders and the regulator while delivering a fair financial return to investors.
'Keeping the lights on' for customers
A fundamental responsibility of SSEN is to 'keep the lights on' for its customers. Through the RIIO-ED1 price control, SSEN is incentivised on its performance against the loss of electricity supply through the recording of Customer Interruptions (CI) and Customers Minutes Lost (CML), which include both planned and unplanned supply
interruptions. This is part of the Interruption Incentive Scheme (IIS).
After a good performance in 2016/17, SSEN experienced a fall in IIS incentive income from GBP13.9m to GBP6.8m in 2017/18. This was largely due to an unusual and sustained pattern of weather in the south of England leading to pockets of unplanned supply interruptions that did not qualify under Ofgem's 'exceptional event' definition.
In SSEN's central southern England network region, CI increased to 55 (48 in 2016/17) and the average CML increased to 48 (43 in 2016/17).
In SSEN's north of Scotland network region, CI decreased to 57 (68 in 2016/17) and the average CML decreased to 55 (60 in 2016/17).
SSEN's commitment to providing a safe and secure electricity supply and to minimise unplanned interruptions requires a continuous programme of investment in the network. This includes the refurbishment and reinforcements of assets; upgrades to automation which reduces the number of customers affected and the duration of faults; minimise the impact of tree related damage; as well as investments in new innovative technologies.
Providing leading customer service and engaging with stakeholders
Since beginning of the RIIO-ED1 price control, SSEN has implemented significant changes to its customer services operations to improve the journey for its customers and respond to the incentive based framework.
SSEN's continued focus on its customers and doing the right thing has resulted in a total incentive reward of GBP2.7m for 2017/18 against the Customer Satisfaction (or Broad) Measure Incentive which is slightly lower than in the previous year (GBP2.8m).
To benchmark its performance against leading customer service providers SSEN has become a member of the Institute of Customer Service and continues to look across a range of sectors to help it achieve its ambition to be recognised for providing leading customer service.
SSEN remains fully committed to supporting its customers who require extra help and ensuring suitable support is provided to its Priority Services Register (PSR) Customers during network outages. Supporting vulnerable customers is also a key component of the Stakeholder Engagement and Consumer Vulnerability (SECV) Incentive and contributes to 25% of the total award available. In respect of performance in FY17, SSEN was awarded GBP0.8m under the SECV incentive against a total available reward of GBP3.1m. The outcome of the SECV incentive for 2017/18 will not be known until the second half of 2018 but it is currently estimated to be GBP1.15m.
A key challenge continues to be identifying customers who are eligible for support through its PSR. SSEN continues to look at innovative ways of reaching these customers, from its vulnerability mapping tool, to working with external partners and trusted intermediaries building on existing partnerships and forging new relationships with a broad and diverse range of organisations, such as the London Sustainability Exchange and NHS Highland, helping broaden the reach of SSEN's support.
Continuing improvements in connections
Over recent years, SSEN has made significant changes and improvements to its connections process, informed by the needs and expectations of customers, which was reflected by an award of GBP1.8m under the Average Time to Connect Incentive for 2017/18 against a total reward available of GBP2.4m, up from GBP1.7m the previous year.
This commitment to place its connections customers at the heart of its processes was also reflected by SSEN avoiding a penalty for the second consecutive year under the penalty-only Incentive in Connections Engagement (ICE) for the 2016/17. The outcome of ICE for 2017/18 will not be known until the second half of 2018.
Targeting frontier incentive performance
Performance in relation to interruptions, customer service and connections, plus stakeholder engagement, are the subject of an incentives framework which rewards companies for good performance but also penalises them where performance does not meet required standards. In summary, this provides an opportunity for network operators to share in the rewards from delivering improvements for its customers. Improved performance against these metrics remains a key objective for SSEN.
Looking collectively at RIIO-ED1 incentive performance during 2017/18, SSEN earned GBP12.5m from a maximum available award of GBP43.1m. It also avoided penalty-only awards totalling GBP9.7m. Whilst this represents progress in incentive performance since the start of RIIO-ED1, significant headroom remains across each area.
SSEN is targeting operational improvements across its business to drive performance, including the increased use of automation, the monitoring of multiple interruptions and 'at risk' circuits, and a consistent approach for design and quotation in connections. A new Customer Relationship Management system will be introduced in 2019, which will provide a platform for effective management of customer-related issues.
SSEN is confident these incremental improvements in reliability, customer service and connections, plus stakeholder engagement, will move it closer to maximising its incentive income as it progresses through the RIIO-ED1 price control.
Delivering a major programme of capital investment
SSEN continues to undertake a major capital investment delivery programme across both its distribution licenced networks which will deliver significant improvements for its customers and provide the infrastructure required to support economic development, as well as contributing to sustained and fair returns and increased RAV.
In 2017/18 SSEN invested a total of GBP326.1m in its distribution networks, bringing the total invested in the first three years of the ED1 Price Control to GBP869.1m - which is part of a forecast investment of GBP2.4bn throughout the RIIO-ED1 period.
Good progress is being made to deliver SSEN's Bicester to East Claydon project which, at GBP24m, is the largest single project being delivered by SSEN under the RIIO-ED1 Price Control and is one of the largest electricity distribution investments ever undertaken in south east England.
In the north of Scotland, SSEN is taking forward a major rolling programme of investment to replace the existing subsea cables which have successfully and safely served the Scottish islands for many decades. With a forecast investment of GBP100m across ED1, subject to regulatory approval, the responsible and evidenced based approach SSEN has adopted to inform its subsea cable replacement programme will deliver RAV growth, whilst minimising the cost impact to its customers.
SSEN's disciplined and efficient approach, underpinning the delivery of its capital and strategic investment programme, will ensure it continues to deliver value for energy consumers and provide a fair return on investment for shareholders.
Leading on networks innovation
Innovation continues to play a key role in the development and improvement of the service provided to SSEN's customers and, at the same time, help inform the wider industry as it prepares for fundamental changes to the electricity system.
SSEN has a clear track record in progressing innovation through Ofgem funded structures, securing over GBP95m in regulatory funding for innovation projects since 2010. This record was strengthened in July 2017, when SSEN was awarded an additional GBP2m as a discretionary award from Ofgem for its Tier 1 innovation projects, the highest amount awarded to any Distribution Network Operator (DNO) group.
SSEN has also been successful in progressing new initiatives outside of funding mechanisms, where benefits to the efficiency of operations or delivery for customers are proven. This includes investment in aerial scanning of its overhead network using LiDAR technology, which is now 90% complete. This initiative, which will give measurements accurate to 2cm, will bring significant benefits in ensuring safety and asset compliance, efficient vegetation management and, ultimately, improved fault performance. SSEN is the first network operator to bring this technology into business- as-usual operation.
In 2017/18, many of SSEN's innovation projects, such as a trial of Constraint Managed Zones, were designed to inform the wider industry on the move to a new, smart, flexible system and the transition of DNOs to a new Distribution System Operator (DSO) role.
Supporting the transition to a smart, flexible electricity system
One of the biggest changes in the energy system is the flexibility revolution. Distributed generation, electric vehicles, demand-side response and energy storage are transforming the energy system and giving customers access to new products and services from a new range of providers.
DNOs will play a pivotal role in this revolution which will increase the investment needed across networks, creating new opportunities in managing this demand.
In November 2017, SSEN published its DSO strategy, Supporting a Smarter Electricity System, setting out the five key principles it believes should underpin the transition to a smart, flexible electricity system. These are: working for all customers; ensuring cost efficiency; market neutrality; removing barriers to local solutions; and adopting an approach of learning by doing.
SSEN continues to play a leading role in the influential Open Networks project, led by the Energy Networks Association, and will continue to engage with industry, policy-makers and the regulator in support of a phased approach to the DSO transition whereby impacts can be carefully reviewed and the best interests of customers maintained.
Preparing for the electrification of transport
A key aspect of the transition to a smart, flexible electricity system is the electrification and decarbonisation of transport. SSEN continues to respond to the growth in electric vehicles (EV) which is forecast to accelerate in the coming years in response to ambitious targets set by both the UK and Scottish Governments to phase out petrol and diesel vehicles by 2040 and 2032 respectively.
To prepare for the likely growth in uptake of EV and Low Emissions Vehicles, SSEN continues to support the industry in identifying the challenges and solution to ensure the transition is a smooth as possible. This includes a consultation SSEN published in March on 'Managed Electric Vehicle Charging', which seeks views on proposed solutions to help avoid potential overloads on local electricity networks caused by sharp increases in the use of electric vehicles.
The consultation forms part of SSEN's Smart EV project, undertaken alongside technology partners EA Technology and supported by GB distribution network operators. The project, funded by Ofgem's Network Innovation Allowance, sets out to review and research charging solutions that will allow the transition to electric vehicles to take place with minimum disruption to customers and avoiding unnecessary network reinforcement.
SGN
Covering Scotland and the south of England, SGN is the gas network company distributing natural and green gas to 5.9 million homes and businesses through a network of 74,000km of mains and services. Good progress is also being made building a third distribution network in the west of Northern Ireland comprising some 700km of new gas pipelines which will allow up to 40,000 customers to connect for the first time to mains natural gas. SGN now has 36 biomethane plants connected to its GB networks, supplying enough green gas for the needs of almost 180,000 homes. This is good progress to achieving its 2021 ambition of supplying 250,000 customers with green gas.
As the current RIIO- GD1 eight-year price control moves closer to its 2021 conclusion, SGN remains focused on the delivery of all its outputs under this RIIO framework as well as ensuring it maximises its regulatory incentives. In November 2017 SGN committed to Ofgem a voluntary contribution of GBP145m in price control allowance terms to customers, which was welcomed by Ofgem.
The primary focus of the SGN management team is to ensure all its operations are run safely for the public at large, its customers, contractors and employees. SGN continues to invest in both its network and people, while ensuring: it minimises its impact on the environment; engages with and communicates with its customers and stakeholders: and delivers new initiatives to help reduce fuel poverty and increase awareness of Carbon Monoxide dangers.
SGN had a good year in all its operations activities, including emergency repair and gas mains replacement. At the year-end, it exceeded its 97% emergency response target and dealt with a number of multiple 'no gas' incidents, many caused by broken water mains and third-party damage. SGN also achieved its gas mains replacement year-end targets in both networks with 269km achieved in Scotland and 731km in its southern network area.
Initiated in 2015, SGN's three-year customer experience transformation programme is continuing to deliver much improved customer experience, by leveraging digital technology and adding value by reducing cost to serve. Through the commitment and hard work of its operations and field teams, for the second year running SGN is the UK number one gas network for customer service. It is also the UK's number one gas network company for complaint handling, reducing customer complaints on average by 18% each year and overall by 66% since 2012/13.
Networks - Conclusion and Priorities
SSE's economically-regulated Networks businesses will continue to play a pivotal role in the transition to a low carbon economy, providing the critical national infrastructure required to support the ongoing shift to a decarbonised energy system and electrification of transport.
SSE's capex and investment programme for electricity networks in the five years to 2023 is forecast to be around GBP2.8bn, forming a significant part of the SSE group capital and investment expenditure plans of GBP6bn over the same period. This will support future earnings and growth with the RAV (Regulatory Asset Value) on course to reach GBP10bn by 2023, across SSE's electricity and gas networks interests, delivering value for money for customers and a fair return for investors. Additional contingent projects totalling GBP700m as well as potential island links with a total value of around GBP1.5bn provide further opportunities for growth in the 2020s.
SSE will work, in 2018/19 and beyond, to ensure it continues to meet the needs of its customers and stakeholders, and earn fair returns for shareholders through focusing on the current and future needs of customers, disciplined investment and innovation and excellence in delivery, creating a stable platform for future growth.
Networks priorities for 2018/19 and beyond
SSE's Networks businesses' priorities in 2018/19 and beyond are to:
-- operate safely and meet all compliance requirements while providing leading customer service, delivering required outputs and maintaining tight controls over expenditure;
-- maintain good progress in the safe delivery of new assets and opportunities for future growth;
-- progress innovations that will improve network reliability, efficiency and customer service and inform industry-wide improvements to support the transition to a smart, flexible energy system;
-- adapt and prepare for the evolution of the regulatory framework for future Price Control, RIIO-2, including maintaining effective stakeholder relationships.
RETAIL
Retail Key Performance Indicators
Mar 18 Mar 17
SSE Energy Services
============= =============
SSE Energy Services - Energy Supply
(households GB) adjusted operating profit
- GBPm 260.4 260.8
============= =============
SSE Energy Services - Energy Supply
(households GB) reported operating profit
- GBPm 203.5 171.7
============= =============
SSE Energy Services - Energy Related
Services (households GB) adjusted operating
profit - GBPm 18.3 12.7
============= =============
SSE Energy Services - Energy Related
Services (households GB) reported operating
profit - GBPm 18.3 5.5
============= =============
Total SSE Energy Services adjusted operating
profit 278.7 273.5
============= =============
Total SSE Energy Services reported operating
profit 221.8 177.2
============= =============
Retail Businesses remaining after the
proposed transaction
============= =============
Energy Supply - Business Energy adjusted
operating profit - GBPm 64.2 89.4
============= =============
Energy Supply -Business Energy reported
operating profit - GBPm 64.2 73.0
============= =============
Energy Supply - SSE Airtricity adjusted
operating profit - GBPm 33.0 42.7
============= =============
Energy Supply - SSE Airtricity reported
operating profit - GBPm 26.9 42.7
============= =============
Enterprise adjusted operating profit
- GBPm 26.9 16.7
============= =============
Enterprise reported operating profit
- GBPm 15.1 16.7
============= =============
Total Remaining within SSE adjusted
operating profit - GBPm 124.1 148.8
============= =============
Total Remaining within SSE reported
operating profit - GBPm 106.2 132.4
============= =============
Capital expenditure (SSE Energy Services)
- GBPm 110.8 184.0
============= =============
Capital expenditure (Business, Airtricity
& Enterprise) - GBPm 63.4 59.0
============= =============
Electricity customer accounts (GB domestic)
- m 3.82 4.06
============= =============
Gas customer accounts (GB domestic)
- m 2.53 2.70
============= =============
Energy Related Services (GB domestic)
- m 0.45 0.47
============= =============
Total SSE Energy Services customers
- m 6.80 7.23
============= =============
Energy customers' accounts (Business
Energy sites) - m 0.49 0.45
============= =============
All-Island energy market customers (Ire)
- m 0.74 0.79
============= =============
Total Retail Customer accounts 8.03 8.47
============= =============
Electricity supplied household average
(GB) - kWh 3,788 3,793
============= =============
Gas supplied household average (GB)
- th 454 440
============= =============
Household/small business aged debt (GB,
Ireland) - GBPm 85.8 80.2
============= =============
Bad debt expense (GB, Ireland) - GBPm 46.0 47.9
============= =============
Customer complaints to third parties
(GB)1 1,616 1,322
============= =============
(1 Ombudsman: Energy Services and Citizens
Advice)
============= =============
Smart Meters on supply Over 850,000 Over 500,000
============= =============
Providing energy and related services in Great Britain and Ireland
SSE is one of the largest energy suppliers operating in the competitive energy markets in Great Britain and Ireland. At 31 March 2018, it supplied electricity and gas to 7.58 million household and business accounts. It also provides other related products and services, including telephone, broadband and boiler care, to 0.45 million household customers.
The Retail business area includes those businesses which are subject to the planned SSE Energy Services transaction.
Financial performance in Retail
During the 12 months to 31 March 2018, total adjusted operating profit in Retail including Enterprise was GBP402.8m compared with GBP422.3m for 2016/17. The principal movements were as follows:
SSE Energy Services - Energy supply (households in GB): adjusted operating profit was flat at GBP260.4m in 2017/18 compared to GBP260.8m in 2016/17. While electricity tariffs increased to recognise rising non-energy costs, overall profits were also impacted by customer account losses and the introduction of price caps for certain customer groups, offset by ongoing efficiency savings. The business also benefited, in the last quarter of the financial year, from higher customer energy consumption due to unseasonably cold weather.
SSE Energy Services - Energy-related services (households in GB): adjusted operating profit increased to GBP18.3m in 2017/18, from GBP5.5m in 2016/17, reflecting increased profitability of SSE's home services and telco businesses, which was partially offset by a reduction in revenues from the heritage metering business.
Energy Supply (Business Energy): adjusted operating profit decreased to GBP64.2m in 2017/18, from GBP89.4m in 2016/17. While underlying profits remained similar, 2016/17 included a larger prior year reconciliation catch up.
Energy Supply (SSE Airtricity): adjusted operating profit decreased to GBP33.0m in 2017/18, from GBP42.7m in the previous year, due to a combination of increased competition and increased energy costs.
Enterprise: Adjusted operating profit increased to GBP26.9m in 2017/18, from GBP16.7m in the previous year, due to a combination of higher revenues and focused cost cutting.
Reported Retail operating profit: increased to GBP328.0m from GBP309.6m in prior year due to the reasons outlined above in addition to the impact of exceptional items and certain re-measurements. In the year, the Group has recorded exceptional impairments totalling GBP63.0 m as a result of its decision to demerge its UK domestic gas and electricity supply business. In addition, there was an exceptional impairment of GBP11.8m in the Heat Networks business due to a re-evaluation of some of the contracts within the business. In the prior year impairments totalled GBP112.7m.
Consolidated Segmental Statement
In line with its licence condition, SSE will publish in June 2018 a Consolidated Segmental Statement(CSS) setting out the revenues, costs and profit or losses of businesses in its Wholesale and Retail segments in Great Britain for 2017/18. The CSS will be fully reconciled to SSE's published financial statements and reviewed by SSE's auditors, KPMG. It is expected to show that SSE's operating profit margin from supplying electricity and gas to British households in 2017/18 was slightly down on the previous year, at 6.8%.
Within this, SSE has previously highlighted an increasing divergence between gas and electricity margins due to increasing policy costs being levied predominantly levied on electricity. However, following the increase to electricity prices only in April 2017, margins are more balanced across fuels in 2017/18 than the previous year.
Retail Financial Outlook for 2018/19
Retail's adjusted operating profit attributable to SSE will be subject, amongst other things, to the progress and timing of the planned transaction relating to SSE Energy Services and the timing and impact of the Domestic Gas and Electricity (Tariff Cap) Bill.
Adapting to a changing environment
Preparing SSE Energy Services for the future
In its full-year results statement for 2016/17, SSE stated that the rapidly evolving and increasingly competitive market for the supply of energy and related services presents a number of challenges for traditional energy supply business models and they must evolve and adapt in order to be sustainable in the medium to longer term. On 8 November 2017, SSE set out that following discussions with Innogy SE (Innogy), SSE had identified an opportunity - subject to the necessary regulatory and shareholder approvals - to combine its household energy and services business in GB with that of Innogy's subsidiary, npower, to create a new, independent company to be listed on the London Stock Exchange. Both SSE and Innogy believe the planned SSE Energy Services transaction has potential to drive real benefits for customers, employees, shareholders and the wider energy market by combining the expertise and resources of two established providers with the focus and agility of an independent supplier in what would be a unique model in the market. With its own dedicated Board and expert management team, the new company would be well positioned to respond to changing customer and stakeholder expectations by becoming more efficient, agile and innovative.
The planned SSE Energy Services transaction is subject to approval by the Competition and Markets Authority (CMA) and a merger notice was formally submitted to the CMA on 28 February 2018. Following an initial Phase One investigation, on 8 May 2018, the Competition and Markets Authority referred the planned transaction for a so-called 'Phase 2' investigation, by a group of independent panel members. The deadline for the final report from that investigation is 22 October 2018. The transaction is also subject to approval by SSE's shareholders and a shareholder circular will be published on 27 June 2018 in advance of a vote at a General Meeting to take place immediately after the SSE Annual General Meeting on 19 July 2018. As stated in November 2018, significant synergies are also anticipated, and further detail on these will be set out in the shareholder circular. Taking these timetables into account, the planned SSE Energy Services transaction remains on track for completion in the last quarter of the 2018 calendar year or first quarter of 2019.
Until such time as approval is given and the transaction is completed, SSE Energy Services and npower remain entirely separate and compete with one another as normal. However, integration planning work is under way to make necessary plans and preparations for the new business, to the extent allowed within the letter and spirit of competition law. A number of key milestones have already been reached, including the appointment of Katie Bickerstaffe as Chief Executive Designate of the future combined business. Katie will take up her new appointment later this year and will lead the work to prepare for the formation and listing of the new company. Her role during that period will not include any involvement in the leadership or management of either existing organisation.
Facing up to the core challenges
Energy supply businesses in GB face a number of headwinds due to the rapidly evolving and increasingly competitive nature of the market. These headwinds can be characterised as four 'core' challenges to which SSE Energy Services must respond in order to stay relevant and sustainable:
Competition: the energy supply market continues to intensify with around 70 suppliers now competing to win and retain customers, the arrival of new entrants from start-ups to major multi-nationals such as Shell, Vattenfall and Engie, and record levels of customer switching, according to Energy UK data. As a result, despite ongoing efforts to attract and retain customers, in 2017/18 SSE GB domestic electricity and gas customer accounts numbers fell to 6.35m compared with 6.76m at 31 March 2017.
Operating costs: in this environment, ensuring controllable costs are as low as possible is key to staying competitive and offering customers value while delivering for shareholders; however, the cost of supplying energy is increasing and there is upward pressure from a number of areas principally the many and varied impacts of the smart meter roll-out, falling underlying energy consumption, regulatory intervention and lower customer numbers.
Regulatory intervention: there will always be intense political interest in the energy market and this has major implications for the regulatory environment in which SSE Energy Services operates. The Domestic Gas and Electricity (Tariff Cap) Bill 2017-19 is expected to receive royal assent in Summer 2018 and Ofgem is already consulting on how to implement this market-wide cap on standard household energy prices. Although SSE has warned against the unintended consequences of such a significant intervention in a rapidly evolving and highly competitive market, it is engaging constructively with Ofgem to help ensure the methodology used to set and update the cap is robust, fair and takes account of the real costs and risks of supplying energy to a large and diverse range of customers. At the same time, transformational regulatory projects are being undertaken in the form of the smart meter roll-out and the faster switching programme. As well as introducing an unprecedented amount of change, implementing these projects requires a significant commitment of resources.
Evolving customer expectations: the energy market does not exist in a vacuum and customers' expectations continue to increase, informed by their experiences of other companies and markets. Demand is growing for more tailored, personalised services underpinned by data (used responsibly), seamless customer experiences across channels and devices, and an enhanced ability to 'self-serve' via user-friendly, intuitive digital platforms. In the longer term, the development of disruptive technologies from smart meters to domestic micro-generation, storage and electric vehicles could change fundamentally the nature of the services customers require.
Setting and delivering on the right strategic priorities
In the longer term, SSE believes the planned SSE Energy Services transaction is the right strategic response to these issues, creating an independent business with singularity of focus and the ability to be more agile and responsive to changing market and customer dynamics.
However, this is subject to regulatory and shareholder approvals and in the interim SSE Energy Services remains focused on its own internal strategic priorities for addressing these challenges across both Energy Supply and Energy Related Services:
Attracting and retaining more customers: in a fiercely competitive market, winning and keeping customers is challenging and a key area of focus. In 2017/18, SSE Energy Services continued to leverage its investment in entertainment sponsorship to offer additional rewards to customers in order to engage and retain them and more than 2.5m people visited SSE-sponsored venues during this 12-month period alone. In exploring ways to engage customers in new ways, SSE is developing partnerships with leading retail brands such as WH Smith, nectar and Argos. It will also soon launch a 'renew 1-year fix' tariff through which it will automatically sign up customers whose fixed-term deal is ending to a new fixed-term tariff with no exit fees - giving them price protection and, critically, introducing a new prompt to engage with their tariff choices on renewal each year. These efforts are also supported by innovative new propositions such as offering low-cost unlimited broadband and the popular 'Boiler Rescue' offer of a free emergency boiler repair to any customer who then signs up to a new boiler care subscription. This makes SSE Energy Services the only energy provider offering to fix their customers' boiler for free, even if they don't have cover at the point of breakdown. This has contributed to strong performance in SSE's Energy-Related Services business and, having successfully completed its transition to a regulated insurance model in Home Services, SSE sees further opportunities for growth in this area, as well as improving energy customer retention through value-adding, bundled propositions.
Reducing our cost to serve: given the competitive environment, upward pressure on costs and the need to keep energy as affordable as possible for customers, efforts to drive efficiency improvements across SSE Energy Services are vitally important. Through further embedding 'lean' methodology and continuous improvement hubs, with more than 300 staff now trained as part of the 'lean academy', this programme continued to deliver cost efficiencies in 2017/18. Also in 2017/18, SSE Energy Services made further progress in its efforts to digitalise its front and back-office systems, rolling out further process automation to reduce administrative costs and helping more customers to self-serve online, as demonstrated by a 200% uplift in phone and broadband sign-ups online following improvements to the customer journey.
Delivering smart in a safe, cost-effective and customer-centric way: the smart meter roll-out represents an opportunity to transform the relationship between customers, their energy supplier and the energy they consume. SSE remains committed to delivering on its obligations under the roll-out in a way that is safe, minimises where possible costs to customers, and maximises the net benefits to customers by engaging them with their energy use. To that end, as of 31 March 2018, SSE had more than 850,000 smart meters on supply in customers' homes. Despite ongoing challenges associated with the availability of key enabling technology, generating demand from customers and timing the ramp-up of its workforce, SSE was pleased to deliver against its binding targets agreed with Ofgem for 2017 and is now preparing to make the transition to the enduring SMETS2 solution, once available. Given the degree of complexity and up-front investment costs involved, SSE has consistently argued that the roll-out and associated targets should be kept under review so that pragmatic, informed decisions can be made that lead to the highest possible net benefits to customers from the programme as a whole.
Building on SSE's customer-centric culture: throughout a year of change, SSE has continued to put customers at the heart of everything it does. Senior managers met regularly with customers in SSE's Customer Forums and the company has engaged with over 60,000 consumers through a programme of research which includes its 3,000-strong online Customer Connect community. SSE's focus on delivering excellent customer service has seen it sign up to the Energy Switch Guarantee and the Energy UK Billing Code and these commitments have helped maintain a strong performance in the Citizens Advice Energy Supplier rating, including SSE once again being identified as having the lowest levels of complaints to third parties amongst the major energy suppliers in Great Britain. SSE remains very mindful of its responsibilities in respect of supporting customers in vulnerable circumstances; to that end, it committed to attaining the British Standard for Inclusive Service Provision, which is widely regarded as the 'gold standard' in recognising and adapting service to customer vulnerability in all its forms. SSE achieved the Standard in March 2018, for the key areas of Complaints, Credit Management and Sales.
Delivering for business energy customers
Business Energy supplies energy to business and public sector customers throughout Great Britain, to a market which consumes a total of around 180TWh of electricity and 8 billion therms of gas annually.
Business Energy continued to perform robustly across all customer segments, this strong position is built on solid core competencies in meeting business customers' energy needs. Competencies such as excellent customer service and sales channels exist within Business Energy, whilst others are leveraged across the wider SSE Group, for example, the ability to develop products that navigate the increasing complexity of the GB energy market.
In 2018/19 the focus remains on growing Business Energy's core market segments, whilst broadening into related services such as energy optimisation and demand side response where there is an opportunity to use data and technology to improve outcomes for customers.
Supplying energy and essential services across Ireland
In Ireland's all-island energy market, SSE's retail arm SSE Airtricity is the second-largest provider of energy and related services across the Republic of Ireland (ROI) and Northern Ireland (NI), and the only retail energy brand operating in each of the competitive gas and electricity markets across the island.
At 31 March 2018, SSE Airtricity supplied electricity and natural gas to 0.74 million household and business customer accounts in ROI and NI, reflecting a fall in household customer numbers due to increased competitive pressures, particularly in electricity markets.
Focused cost-management alongside competitive product pricing ensured that SSE Airtricity continued to deliver value to existing and new home energy customers, while enabling further investment in digitised service offerings, including the introduction of a new video-chat customer channel. As a result, SSE Airtricity was named Best for Customer Service in February 2018 for the second year running by leading Irish internet comparison site Bonkers.ie.
In NI, SSE Airtricity increased household electricity prices by 7.5% from 1 October 2017 while in ROI electricity prices increased by 5.6% from 1 November 2017. These were the first such increases in both markets since 2013 and were as a result of increases in the cost of supply including wholesale and regulated networks costs. On 1 April 2018, SSE Airtricity increased its regulated natural gas prices in NI by 7.8% for home and small business customers. This increase was examined and approved by the NI Utility Regulator.
SSE Airtricity Business Energy increased customer load across the island by 12% in the 12 months to 31 March 2018, while the company's Eco team has facilitated energy efficiency initiatives that are saving businesses almost 110GWh of primary energy annually. For the second year running SSE Airtricity received the highest supplier satisfaction rating (81%) in the Irish SME electricity market, according to the latest Annual Survey published by the Commission for Regulation of Utilities.
In April 2018, SSE Airtricity announced a 40% acquisition of Activ8 Solar Energies, a leading supplier of Rooftop Solar systems to home and business customers, with an option to acquire a further 10 per cent after two years. The acquisition marks yet another step forward in the development of the company's commercial and domestic energy services solutions.
SSE's Energy Markets trading team in Ireland is at the final stages of preparation for the introduction of the Integrated Single Electricity Market (I-SEM) this year, under which new balancing obligations will be established.
Retail - Conclusion and Priorities
After a solid performance in the 12 months to 31 March 2018, 2018/19 promises to be another year of change and transition as SSE continues to adapt to the rapidly evolving competitive markets in which it operates. At the same time, it must retain a keen focus on its core operations and delivering on its strategic priorities to ensure it is well positioned for the future, regardless of the outcome from the proposed merger.
In Great Britain, SSE Energy Services remains focused on:
-- attracting and retaining more customers; -- reducing its operating costs; -- delivering smart in a safe, cost-effective and customer-centric way; and -- building on its customer-centric culture. -- In Ireland, SSE's key priorities are to: -- attract and retain energy supply customers in increasingly competitive markets; -- deliver customer value through cost-management and investment in digitised services; -- further expand its commercial and domestic Energy Services solutions; and
-- optimise its Energy Markets capabilities ahead of the introduction of the Integrated Single Electricity Market (I-SEM).
In Business Energy, SSE's priorities are to:
-- further strengthen SSE's strong position in meeting the core energy needs of business and public sector customers
-- leverage internal capabilities across the SSE Group to broaden the customer offering to include smarter products such as energy optimisation and demand side response.
Beyond these immediate priorities, work will continue to: complete the separation of SSE Energy Services within the SSE Group; engage with shareholders and the CMA to secure the necessary approvals; plan and prepare for integration; and complete the planned transaction. This, combined with a continued focus on delivering strong operational performance in the interim, will help position both the merged retail business and remaining SSE businesses for long-term success following the expected completion of the transaction, subject to approvals, in the last quarter of 2018 or first quarter of the 2019 calendar year.
ENTERPRISE
Enterprise Key Performance Indicators
Enterprise adjusted operating profit - GBPm 26.9 16.7
Enterprise reported operating profit - GBPm 15.1 16.7
=========== ===========
Capital expenditure - GBPm 61.9 58.7
=========== ===========
SSE Heat network customer accounts Over 9,400 Over 6,500
=========== ===========
Number of Enterprise Telecoms infrastructure projects connecting businesses 363 260
=========== ===========
Number of Bollore EV charge points installed to date in London by Enterprise Contracting 583 315
=========== ===========
Number of train stations maintained or improved by Enterprise Rail 1,002 517
=========== ===========
Financial performance in Enterprise
Enterprise: Adjusted operating profit increased to GBP26.9m in 2017/18, compared to GBP16.7m the previous year, due to a combination of higher revenues and focussed cost cutting.
Reported operating profit decreased to GBP15.1m in 2017/18 from GBP16.7m in 2016/17 due to the factors above, offset by an impairment of Heat Networks assets and a provision against future contracts following an operational review of that area of the business.
Looking ahead, Enterprise will continue to engage with its significant restructuring exercise - which is designed to drive out unnecessary cost and thereby ensure the business is best placed to seek out and win new growth opportunities. Safety remains a key priority for Enterprise, with an objective to reduce reported accidents - in line with the targets of SSE Group.
Playing to the core strengths of Enterprise
SSE Enterprise is a group of businesses that provides energy and telecoms services to industrial, commercial and public sector customers across the UK and Ireland. To fulfil that need the business has developed the capacity to build, own, operate and maintain assets. Its four business areas are: Contracting, Utilities, Telecoms and Rail.
There is a pipeline of significant opportunities which the four Enterprise business streams are well placed to tap into. These include bigger and better opportunities in mechanical and electrical, energy storage, distributed energy, electric vehicle infrastructure, fibre networks, 5G infrastructure, and rail power and communications infrastructure.
Moving forward, the role of Enterprise, within SSE Group, will be to consolidate and grow its existing market share as well as explore new opportunities in areas that are complementary to the Group's core energy portfolio. Enterprise is one of several adjacent businesses which can benefit directly and indirectly from the strength and depth of SSE Group's experience in core energy markets.
To ensure Enterprise is a growth driver for the SSE Group it aims to:
-- Focus on growth in its existing core markets;
-- Develop larger projects which give longer term visibility of earnings and build on the strengths of the company's diverse business areas and multi utility capabilities;
-- Develop further the capacity of the business to build, own, operate and maintain assets; and
-- Focus on providing innovative solutions to meet the changing needs of customers.
A dynamic player in an evolving energy environment
Developing strategic partnerships will continue to help Enterprise deliver value and support SSE Group to meet the changing needs of the energy and telecoms sector. For example, helping to deliver electric vehicle infrastructure in the UK represents an exciting opportunity for Enterprise to build on the success of its London project for electric buses at Waterloo bus depot. Likewise, the Utilities business will be aiming to play a bigger role in distributed energy and energy as a service.
In Rail, work awarded through the national Building and Civils Framework will transform the size of the business. In Contracting, there are opportunities arising from supporting the infrastructure growth agendas and further investments in High Voltage, and large scale projects across the UK. And finally, the Telecoms business has secured an important contract agreement with Three UK, which will see the two companies working together to support the mobile network's growth and expansion goals.
With national infrastructure investment set to increase, there are major opportunities within Enterprise's existing core markets. These include:
-- The move towards distributed energy and energy as a service;
-- The significant spend on rail infrastructure. For example, the combined value of the spend on such projects as HS2 and Network Rail's Control Period 6, is expected to be in excess of GBP100bn;
-- The emergence of the clean growth agenda and the increasing requirement for EV infrastructure for public and private vehicles;
-- The migration towards 5G and the fact that broadband is increasingly seen as a fifth utility; and
-- The development of the smart city agenda, which involves elements of multi utility, telecoms and contracting.
Performance summary of four business streams
Contracting
On the back of a substantial and successful efficiency programme, SSE Enterprise Contracting has made further progress in putting in place the building blocks for future growth. It retains a clear focus on mechanical and electrical as well as power activity as the foundations of its success. SSE Enterprise Contracting is also pursuing larger scale opportunities using a disciplined approach to pick the right segments and right customers to engage with.
Utilities
SSE Enterprise Utilities aims to be a leader both in its core utility infrastructure market and the fast-growing market for distributed energy networks. It is looking to increase the scale of the energy assets and networks it currently builds, owns, operates and maintains. The business is set to target the rapidly growing electric vehicle market, and is involved in the installation and power supply of EV infrastructure. In response to demand, it is seeking to deliver solutions to integrate energy generation, storage and utility infrastructure. On the back of strong growth by Slough Heat and Power in its private electricity network, the business is aiming to recreate this capability across the UK market.
Telecoms
SSE Enterprise Telecoms continues to accelerate new network development to help bring major UK data centres "on net" and expand its commercial footprint throughout the UK and especially on key strategic routes by unbundling more BT Exchanges. It is winning long term core network agreements with new clients in the banking, transportation and service provider markets. It is also supporting both broadband rollout and Mobile Network Operators with their 5G network preparation. In Ireland, SSE is a member of a consortium that has been participating in a competitive tender dialogue process with the Irish government to deliver Ireland's National Broadband Plan.
Rail
SSE Enterprise Rail continues to grow thanks to its reputation for delivering an outstanding quality of work - as evidenced by recent PRISM scores from Network Rail. SSE Enterprise Rail has a unique service offering because it can be a local service provider; whilst retaining the capability to bid for work on major infrastructure projects such as HS2, drawing on the experience of SSE Group. The award of a significant quantum of work via the national Building and Civils Framework shows that the business can become a 'supplier of choice' for Network Rail through its scale and quality capabilities.
Enterprise - Conclusion and Priorities
2017/18 represented a very positive year for the Enterprise business, thanks primarily to its focus on efficiency and delivering for customers in its core markets. That disciplined approach will continue into 2018/19, to ensure the Enterprise business is well placed to deliver further growth to SSE Group. Enterprise's key priorities are:
-- To continue to improve its safety performance in line with SSE Group objectives; -- To continue its relentless focus on consolidating and growing its presence in core markets; -- To ensure it is meeting the changing needs of its customers with innovative solutions; and -- To ensure that 2018/19 is another year of progress.
Alternative Performance Measures
When assessing, discussing and measuring the Group's financial performance, management refer to measures used for internal performance management. These measures are not defined or specified under International Financial Reporting Standards (IFRS) and as such are considered to be Alternative Performance Measures (APMs).
By their nature, APMs are not uniformly applied by all preparers including other participants in the Group's industry. Accordingly, APMs used by the Group may not be comparable to other companies within the Group's industry.
Purpose
APMs are used by management to aid comparison and assess historical performance against internal performance benchmarks and across reporting periods. These measures provide an ongoing and consistent basis to assess performance by excluding items that are materially non-recurring, uncontrollable or exceptional. These measures can be classified in terms of their key financial characteristics:
-- Profit measures allow management to assess and benchmark underlying business performance during the year. They are primarily used by operational management to measure operating profit contribution and are also used by the Board to assess performance against business plan.
-- Capital measures allow management to track and assess the progress of the Group's significant ongoing investment in capital assets and projects against their investment cases, including the expected timing of their operational deployment.
-- Debt measures allow management to record and monitor both operating cash generation and the Group's ongoing financing and liquidity position.
The following table explains the key APMs applied by the Group and referred to in these statements:
Closest Equivalent
Group APM Purpose IFRS measure Adjustments to reconcile to primary financial statements
Adjusted EBITDA Profit measure Operating Profit
(Earnings before * Movement on operating and financing derivatives
interest, tax, ('certain re-measurements')
depreciation and
amortisation)
* Exceptional items
* Share of joint ventures and associates interest and
tax
* Depreciation and amortisation before exceptional
charges
* Share of joint ventures and associates depreciation
and amortisation
* Release of deferred income
================ =================== ===========================================================
Adjusted Profit measure Operating Profit
Operating Profit * Movement on operating and financing derivatives
('certain re-measurements')
* Exceptional items
* Share of joint ventures and associates interest and
tax
================ =================== ===========================================================
Adjusted Profit Profit measure Profit before tax
Before Tax * Movement on operating and financing derivatives
('certain re-measurements')
* Exceptional items
* Interest on net pension assets/liabilities (IAS 19R)
* Share of joint ventures and associates tax
================ =================== ===========================================================
Adjusted net Profit measure Net finance costs
finance costs * Movement on financing derivatives
* Share of joint ventures and associates interest
* Interest on net pension assets/liabilities (IAS 19R)
---------------- ------------------- -----------------------------------------------------------
Adjusted Current Profit measure Tax charge
Tax Charge * Share of joint ventures and associates tax
* Deferred tax including share of joint ventures and
associates
* Tax on exceptional items and certain re-measurement
* Reclassification of tax liabilities
================ =================== ===========================================================
Adjusted earnings Profit measure Earnings per share
per share * Exceptional items
* Movements on Derivatives ('certain re-measurements')
* Interest on net pension assets/liabilities (IAS 19R)
* Deferred tax including share of joint ventures and
associates
================ =================== ===========================================================
Adjusted Net Debt Debt measure Unadjusted net
and Hybrid debt * Hybrid equity
Capital
* Outstanding liquid funds
* Finance leases
* Non-recourse Clyde debt
================ =================== ===========================================================
Investment and Capital measure Capital additions
Capital to Intangible * Other expenditure
expenditure Assets and
(adjusted) Property, Plant
and Equipment * Customer funded additions (IFRIC 18)
* Allowances and certificates
* Disposed additions
* Joint venture and associate additions
================ =================== ===========================================================
Rationale for adjustments
Adjustments to Profit Measure
1 Movement on operating and financing derivatives ('certain re-measurements')
This adjustment can be split between operating and financing derivatives.
Operating derivatives are where the Group enters into forward contracts to buy (or sell) electricity, gas and other commodities to meet the future demand requirements of its Energy Supply business or to optimise the value of its Wholesale assets. Certain of these contracts are determined to be derivative financial instruments under IAS 39 "Financial Instruments: Recognition and Measurement" and as such are required to be recorded at their fair value. Changes in the fair value of those commodity contracts designated as IAS 39 financial instruments are reflected in the income statement (as part of 'certain re-measurements'). The Group shows the change in the fair value of these forward contracts separately as this mark-to-market movement is not relevant to the underlying performance of its operating segments due to the volatility that can arise. The Group will recognise the underlying value of these contracts as the relevant commodity is delivered, which will predominately be within the subsequent 12 to 36 months. Conversely, commodity contracts that are not financial instruments under IAS 39 are accounted for as 'own use' contracts.
Financing derivatives include all fair value and cash flow interest rate hedges, non-hedge accounted (mark-to-market) interest rate derivatives, cash flow foreign exchange hedges and non-hedge accounted foreign exchange contracts entered into by the Group to manage its banking and liquidity requirements as well as risk management relating to interest rate and foreign exchange exposures. Changes in the fair value of those financing derivatives are reflected in the income statement (as part of 'certain re-measurements'). The Group shows the change in the fair value of these forward contracts separately as this mark-to-market movement is not relevant to the underlying performance of its operating segments.
The re-measurements arising from operating and financing derivatives, and the tax effects thereof, are disclosed separately to aid understanding of the underlying performance of the Group.
2 Exceptional Items
Exceptional charges or credits, and the tax effects thereof, are considered unusual by nature or scale and of such significance that separate disclosure is required for the underlying performance of the Group to be properly understood. Further explanation of the rationale for deciding whether an item is exceptional is included in Note 4.2.
3 Share of joint ventures and associates interest and tax
This adjustment can be split between the share of interest and the share of tax.
The Group is required to report profit before interest and tax ('operating profit') including its share of the profit after tax of its equity-accounted joint ventures and associates. However, for internal performance management purposes and for consistency of treatment, SSE reports its adjusted profit measures before its share of the interest and/or tax on joint ventures and associates.
4 Share of joint ventures and associates depreciation and amortisation
For management purposes, the Group considers EBITDA (earnings before interest, tax, depreciation and amortisation) based on a sum-of-the-parts derived metric which includes share of EBITDA from equity-accounted investments. While this is not equal to adjusted cash generated from operating activities, it is considered useful by management in assessing a proxy for such a measure given the complexity of the Group structure and range of investment structures utilised.
5 Interest on net pension assets/liabilities (IAS 19R "Employee Benefits")
The Group's interest charges relating to defined benefit pension schemes are derived from the net assets/liabilities of the schemes as valued under IAS 19R. This will mean that the charge recognised in any given year will be dependent on the impact of actuarial assumptions such as inflation and discount rates. To avoid income statement volatility derived from this basis of measurement and reflecting the non-cash nature of these charges, the Group excludes these from its adjusted profit measures.
6 Deferred tax
The Group adjusts for deferred tax when arriving at adjusted profit after tax, adjusted earnings per share and its adjusted effective rate of tax. Deferred tax arises as a result of differences in accounting and tax bases that give rise to potential future accounting credits or charges. As the Group remains committed to its ongoing capital programme, the liabilities associated are not expected to reverse and accordingly the Group excludes these from its adjusted profit measures. The current tax APM for 2018 has been presented net of a reclassification adjustment, from current to deferred tax, in respect of liabilities related to historic open tax positions.
Adjustments to Debt measure
7 Hybrid equity
SSE plc has a mixture of perpetual and long dated hybrid capital securities with the perpetual hybrids being treated as equity and the long-dated hybrids being treated as debt. The characteristics of the perpetual hybrid capital securities mean they qualify for recognition as equity rather than debt under IFRSs. Consequently, their coupon payments are presented within dividends rather than within finance costs. As a result, the coupon payments are not included in SSE's adjusted PBT measure. In order to present total funding provided from sources other than ordinary shareholders, SSE presents its adjusted net debt measure inclusive of hybrid capital to better reflect the Group's funding position.
8 Outstanding liquid funds
Outstanding liquid funds are SSE cash balances held by counterparties as collateral at the year end. SSE includes these as cash until they are utilised. The Group includes this adjustment in order to better reflect the immediate cash resources it has access to, which in turn better reflects the Group's funding position.
9 Finance leases
SSE's reported loans and borrowings include finance lease liabilities, most significantly in relation to its tolling 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.
10 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. Following the change in consolidation treatment, that non-recourse debt is not held on SSE's balance sheet and hence the adjustment is no longer required to the APM.
Adjustments to Capex Measure
11 Other expenditure
Other expenditure primarily represents subsequently derecognised development expenditure which is excluded to better reflect the Group's ongoing capital position.
12 Customer funded additions.
Customer funded additions represents additions to electricity and other networks funded by customer contributions and accounted for under IFRIC 18 'Transfers of Assets from Customers'. Given these additions are directly funded by customers, these have been excluded to better reflect the Group's underlying investment position.
13 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 APM to better reflect the Group's investment in enduring operational assets.
14 Disposed additions
Disposed additions represents capital additions related to the Group's MFE2 plant at Ferrybridge prior to disposal of 50% interest on 4 September 2017. Prior year disposed additions represent smart meter installations which were subsequently disposed to the Meter Fit 10 Limited in 2017 (see Note 12). This has been excluded to better reflect the Group's net capital investment.
15 Joint venture and associate additions
Joint ventures and associates additions represent funding provided as equity and loans to joint ventures and associates directly related to large 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 by the Group's joint ventures and associates for capital expenditure is not included in this adjustment.
The table below reconciles the adjusted performance measures to the reported measure of the Group.
March 2018 March 2017 March 2016
GBPm GBPm GBPm
Adjusted operating profit 1,828.7 1,874.0 1,824.4
Adjusted net finance costs (375.5) (328.1) (310.9)
------------------------------------------------------------------------- ----------- ----------- -----------
Adjusted profit before tax (PBT) 1,453.2 1,545.9 1,513.5
Adjusted current tax charge (130.7) (157.7) (193.4)
Adjusted profit after tax (PAT) 1,322.5 1,388.2 1,320.1
------------------------------------------------------------------------- ----------- ----------- -----------
Hybrid coupon paid (98.5) (119.3) (124.6)
------------------------------------------------------------------------- ----------- ----------- -----------
Adjusted profit after tax attributable to ordinary shareholders for EPS 1,224.0 1,268.9 1,195.5
Number of shares for EPS 1,010.9 1,009.7 1,000.0
Adjusted Earnings per Share 121.1 125.7 119.5
------------------------------------------------------------------------- ----------- ----------- -----------
Adjusted EBITDA 2,721.1 2,723.2 2,592.6
Depreciation and amortisation before exceptional charges (796.9) (751.4) (679.1)
Release of deferred income 20.6 18.0 17.9
Share of JV and associate depreciation and amortisation (116.1) (115.8) (107.0)
Adjusted operating profit 1,828.7 1,874.0 1,824.4
------------------------------------------------------------------------- ----------- ----------- -----------
Adjusted operating profit 1,828.7 1,874.0 1,824.4
Movement on operating and financing derivatives (85.8) 203.1 (28.8)
Exceptional items (213.3) (8.2) (889.8)
Share of joint ventures and associates interest and tax (150.4) (128.4) (120.4)
Reported Operating Profit 1,379.2 1,940.5 785.4
------------------------------------------------------------------------- ----------- ----------- -----------
Adjusted Profit Before Tax PBT 1,453.2 1,545.9 1,513.5
Movement on operating and financing derivatives (118.8) 255.7 (14.5)
Exceptional items (213.3) (8.2) (889.8)
Interest on net pension assets/(liabilities) 2.9 (3.1) (22.3)
Share of joint ventures and associates tax (37.8) (13.7) 6.4
Reported profit before tax 1,086.2 1,776.6 593.3
------------------------------------------------------------------------- ----------- ----------- -----------
Adjusted net finance costs 375.5 328.1 310.9
Movement on financing derivatives 33.0 (52.6) (14.3)
Share of joint ventures and associates interest (112.6) (114.7) (126.8)
Interest on net pension (assets)/liabilities (2.9) 3.1 22.3
------------------------------------------------------------------------- ----------- ----------- -----------
Reported net finance costs 293.0 163.9 192.1
------------------------------------------------------------------------- ----------- -----------
Adjusted current tax charge 130.7 157.7 193.4
Share of joint ventures and associates tax (37.8) (13.7) 6.4
Deferred tax including share of joint ventures and associates 288.0 19.8 80.8
Reclassification of tax liabilities (101.3) - -
Tax on exceptional items and certain re-measurement (113.5) (106.0) (272.5)
Reported tax charge 166.1 57.8 8.1
------------------------------------------------------------------------- ----------- ----------- -----------
Adjusted Net Debt and Hybrid Capital (9,221.8) (8,483.0) (8,395.0)
Hybrid Capital 1,169.7 2,209.7 2,209.7
------------------------------------------------------------------------- ----------- ----------- -----------
Adjusted Net Debt (8,052.1) (6,273.3) (6,185.3)
Outstanding liquid funds (75.1) (105.2) (121.8)
Finance leases (251.1) (276.9) (300.8)
Non-recourse Clyde debt - - (200.7)
Unadjusted net debt (8,378.3) (6,655.4) (6,808.6)
------------------------------------------------------------------------- ----------- ----------- -----------
Investment and Capital expenditure (adjusted) 1,503.0 1,726.2 1,618.7
Other expenditure - 4.2 6.9
Customer funded additions 82.0 112.8 88.3
Allowances and certificates 712.9 633.5 580.4
Disposed additions 60.6 15.6 -
Joint ventures and associates additions (110.3) (105.0) (46.2)
------------------------------------------------------------------------- ----------- ----------- -----------
Additions to Intangible Assets and Property, Plant and Equipment 2,248.2 2,387.3 2,248.1
------------------------------------------------------------------------- ----------- ----------- -----------
Additions to Intangible Assets 794.0 779.5 713.1
Additions to Property, Plant and Equipment 1,454.2 1,607.8 1,535.0
------------------------------------------------------------------------- ----------- ----------- -----------
Additions to Intangible Assets and Property, Plant and Equipment 2,248.2 2,387.3 2,248.1
------------------------------------------------------------------------- ----------- ----------- -----------
Summary Financial Statements
Consolidated Income Statement
for the year ended 31 March 2018
2018 2017
Before
exceptional Exceptional Before Exceptional
items and items and exceptional items and
certain certain items and certain
re-measure re-measure-ments certain re-measure-ments
ments (note 7) Total re-measure-ments (note 7) Total
Note GBPm GBPm GBPm GBPm GBPm GBPm
Revenue 6 31,226.4 - 31,226.4 29,037.9 - 29,037.9
Cost of sales (27,954.3) (89.1) (28,043.4) (25,794.5) 232.6 (25,561.9)
Gross profit 3,272.1 (89.1) 3,183.0 3,243.4 232.6 3,476.0
Operating costs (1,774.7) (213.3) (1,988.0) (1,707.3) (406.2) (2,113.5)
Other operating
income 38.0 - 38.0 24.2 366.4 390.6
Operating profit
before joint
ventures and
associates 1,535.4 (302.4) 1,233.0 1,560.3 192.8 1,753.1
------------------- ---- ------------- ---------------- ---------- ---------------- ---------------- ----------
Joint ventures and
associates:
Share of operating
profit 293.3 - 293.3 313.7 - 313.7
Share of interest (112.6) - (112.6) (114.7) - (114.7)
Share of movement
on derivatives - 3.3 3.3 - 2.1 2.1
Share of tax (37.2) (0.6) (37.8) (32.8) 19.1 (13.7)
-------------
Share of profit on
joint ventures and
associates 143.5 2.7 146.2 166.2 21.2 187.4
------------- ---------------- ----------
Operating profit 6 1,678.9 (299.7) 1,379.2 1,726.5 214.0 1,940.5
Finance income 8 102.1 - 102.1 93.7 - 93.7
Finance costs 8 (362.1) (33.0) (395.1) (310.2) 52.6 (257.6)
Profit before
taxation 1,418.9 (332.7) 1,086.2 1,510.0 266.6 1,776.6
Taxation 9 (279.6) 113.5 (166.1) (163.8) 106.0 (57.8)
------------- ---------------- ---------- ---------------- ---------------- ----------
Profit for the year 1,139.3 (219.2) 920.1 1,346.2 372.6 1,718.8
------------- ---------------- ---------- ---------------- ---------------- ----------
Attributable to:
Ordinary
shareholders of
the parent 1,040.8 (219.2) 821.6 1,226.9 372.6 1,599.5
Other equity
holders 98.5 - 98.5 119.3 - 119.3
Earnings per share
Basic earnings per
share (pence) 11 81.3 158.4
Diluted earnings
per share (pence) 11 81.2 158.2
Dividends
Interim dividend
paid per share
(pence) 10 28.4 27.4
Proposed final
dividend per share
(pence) 10 66.3 63.9
---------- ----------
94.7 91.3
---------- ----------
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 2018
2018 2017
GBPm GBPm
Profit for the year 920.1 1,718.8
Other comprehensive income:
Items that will be reclassified subsequently to profit or loss:
Net (losses)/gains on cash flow hedges (29.5) 14.9
Transferred to assets and liabilities on cash flow hedges 1.4 10.6
Taxation on cashflow hedges 5.0 (2.8)
----------------------------------------------------------------------------------------------- ------- -------
(23.1) 22.7
Reversal of unrealised losses following disposal of investments recognised in income statement 14.4 -
Share of other comprehensive loss of joint ventures and associates, net of taxation (6.9) (6.0)
Exchange difference on translation of foreign operations 27.8 74.1
Loss on net investment hedge net of taxation (18.3) (22.5)
------- -------
(6.1) 68.3
Items that will not be reclassified to profit or loss:
Actuarial gain on retirement benefit schemes, net of taxation 178.6 252.5
Share of other comprehensive income/(loss) of joint ventures and associates, net of taxation 47.3 (56.4)
------- -------
225.9 196.1
Other comprehensive gain, net of taxation 219.8 264.4
Total comprehensive income for the period 1,139.9 1,983.2
Attributable to:
Ordinary shareholders of the parent 1,041.4 1,863.9
Other equity holders 98.5 119.3
1,139.9 1,983.2
------- -------
Consolidated Balance Sheet
as at 31 March 2018
2018 2017
Note GBPm GBPm
Assets
Property, plant and equipment 13,121.7 12,622.2
Goodwill and other intangible assets 707.7 760.4
Equity investments in associates and joint ventures 977.0 985.8
Loans to associates and joint ventures 781.0 788.4
Other investments 4.8 12.5
Deferred tax assets 294.7 322.3
Derivative financial assets 336.4 528.3
Retirement benefit assets 15 572.1 525.4
-------- --------
Non-current assets 16,795.4 16,545.3
--------
Intangible assets 712.5 580.7
Inventories 225.9 269.1
Trade and other receivables 4,071.7 3,754.4
Cash and cash equivalents 232.2 1,427.0
Derivative financial assets 1,060.1 1,269.5
Current assets held for sale 12 117.2 70.4
Current assets 6,419.6 7,371.1
-------- --------
Total assets 23,215.0 23,916.4
-------- --------
Liabilities
Loans and other borrowings 13 650.3 142.4
Trade and other payables 4,977.6 4,923.5
Current tax liabilities 117.9 294.8
Provisions 20.6 39.7
Derivative financial liabilities 1,253.1 1,153.2
Liabilities held for sale 12 - 1.4
-------- --------
Current liabilities 7,019.5 6,555.0
-------- --------
Loans and other borrowings 13 7,960.2 7,940.0
Deferred tax liabilities 1,002.8 788.9
Trade and other payables 385.3 437.4
Provisions 812.5 764.5
Retirement benefit obligations 15 237.6 454.9
Derivative financial liabilities 566.9 703.2
-------- --------
Non-current liabilities 10,965.3 11,088.9
-------- --------
Total liabilities 17,984.8 17,643.9
-------- --------
Net assets 5,230.2 6,272.5
-------- --------
Equity
Share capital 14 511.5 507.8
Share premium 890.3 885.7
Capital redemption reserve 34.8 26.5
Hedge reserve (15.5) 14.5
Translation reserve 43.3 33.8
Retained earnings 2,596.1 2,594.5
Equity attributable to ordinary shareholders of the parent 4,060.5 4,062.8
Hybrid equity 14 1,169.7 2,209.7
-------- --------
Total equity 5,230.2 6,272.5
-------- --------
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 2018
Total
equity
Total attributable
Capital attributable to equity
Share Share redemption Hedge Translation Retained to ordinary Hybrid holders of
capital premium reserve reserve reserve earnings shareholders equity the parent
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
At 1 April
2017 507.8 885.7 26.5 14.5 33.8 2,594.5 4,062.8 2,209.7 6,272.5
Total
comprehensive
income for
the year - - - (30.0) 9.5 1,061.9 1,041.4 98.5 1,139.9
Dividends to
shareholders - - - - - (926.1) (926.1) - (926.1)
Scrip dividend
related share
issue 12.0 (12.0) - - - 331.6 331.6 - 331.6
Distributions
to Hybrid
equity
holders - - - - - - - (98.5) (98.5)
Redemption of
hybrid - - - - (92.4) (92.4) (1,040.0) (1,132.4)
Issue of
shares - 16.6 - - - - 16.6 - 16.6
Share
repurchase (8.3) - 8.3 - - (371.6) (371.6) - (371.6)
Credit in
respect of
employee
share awards - - - - - 18.0 18.0 - 18.0
Investment in
own shares - - - - - (19.8) (19.8) - (19.8)
At 31 March
2018 511.5 890.3 34.8 (15.5) 43.3 2,596.1 4,060.5 1,169.7 5,230.2
-------- -------- ---------- -------- ----------- -------- ------------ --------- ------------
Statement of Total equity
changes in Total attributable
equity Capital attributable to equity
Share Share redemption Hedge Translation Retained to ordinary Hybrid holders of Non-controlling Total
capital premium reserve reserve reserve earnings shareholders equity the parent interests equity
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
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 - - - - - - - - - (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
------- ------- ---------- ------- ----------- -------- ------------ ------- ------------ --------------- -------
Consolidated Cash Flow Statement
for the year ended 31 March 2018
2018 2017
Note GBPm GBPm
Operating profit 6 1,379.2 1,940.5
Less share of profit of joint ventures and associates (146.2) (187.4)
--------- ---------
Operating profit before jointly controlled entities and associates 1,233.0 1,753.1
Pension service charges less contributions paid (39.5) (48.0)
Movement on operating derivatives 89.1 (201.0)
Depreciation, amortisation, write downs and impairments 1,036.8 1,135.0
Charge in respect of employee share awards (before tax) 21.7 16.2
Profit on disposal of assets and businesses (34.9) (391.0)
Release of provisions (20.5) (17.6)
Release of deferred income (20.6) (18.0)
--------- ---------
Cash generated from operations before working capital movements 2,265.1 2,228.7
Decrease in inventories 43.2 8.6
Increase in receivables (313.1) (541.9)
(Decrease)/increase in payables (i) (97.8) 644.0
Decrease in provisions (7.9) (53.8)
--------- ---------
Cash generated from operations 1,889.5 2,285.6
Dividends received from investments 171.9 123.4
Interest paid (201.8) (178.5)
Taxes paid (132.2) (98.5)
--------- ---------
Net cash from operating activities 1,727.4 2,132.0
--------- ---------
Purchase of property, plant and equipment (1,486.6) (1,621.1)
Purchase of other intangible assets (i) (71.7) (146.3)
Deferred income received 12.2 36.9
Proceeds from disposals 12 151.5 739.3
Loans and equity provided to joint ventures and associates (140.4) (105.0)
Purchase of businesses and subsidiaries - (15.8)
Loans and equity repaid by joint ventures 128.0 73.4
Increase in other investments - (0.2)
--------- ---------
Net cash from investing activities (1,407.0) (1,038.8)
--------- ---------
Proceeds from issue of share capital 16.6 13.8
Dividends paid to company's equity holders 10 (594.5) (668.7)
Redemption of Hybrid equity (1,132.4) -
Hybrid equity dividend payments 14 (98.5) (119.3)
Employee share awards share purchase (19.8) (12.6)
New borrowings 859.0 1,842.5
Repayment of borrowings (175.4) (961.2)
Settlement of cashflow hedges 1.4 10.6
Repurchase of own shares 14 (371.6) (131.5)
--------- ---------
Net cash from financing activities (1,515.2) (26.4)
--------- ---------
Net (decrease)/increase in cash and cash equivalents (1,194.8) 1,066.8
--------- ---------
Cash and cash equivalents at the start of year 1,427.0 360.2
Net (decrease)/increase in cash and cash equivalents (1,194.8) 1,066.8
--------- ---------
Cash and cash equivalents at the end of year 232.2 1,427.0
--------- ---------
(i)Re-presented to reclassify the purchase of carbon allowances and certificates from investing to operating activities.
The accompanying notes are an integral part of these financial statements.
Notes to the Preliminary Statement
for the year ended 31 March 2018
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 2018 or 2017, but is derived from those accounts. Consolidated financial statements for the year ended 31 March 2017 were delivered to the Registrar of Companies, and those for the year ended 31 March 2018 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 24 May 2018.
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 2018. These consolidated summary 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 2018 unless expressly stated otherwise.
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', 'adjusted EBITDA' and 'adjusted net debt and hybrid equity' are not defined under IFRS and are explained in more detail in note 4.
2.3 Changes to presentation
During the year, the Group reviewed the presentation of its operating segments following the announcement of its intention to dispose of its GB domestic energy supply and energy related service activities through a demerger with npower. The change to operating segments is a result of changes to management structure and internal reporting to the Board following the announcement. Further information on the change to presentation of the operating segments is provided in note 6.
3. New accounting policies and reporting changes
The basis of consolidation and principal accounting policies applied in the preparation of these financial statements are set out below and will be included within A1 Accompanying Information to the Group's consolidated Financial Statements.
All issued standards, amendments and interpretations of adopted IFRS, mandatory for the year ended 31 March 2018 and not early adopted, have been applied by the Group in the current year and have not had a material impact on the financial statements.
A number of standards have been issued but not yet adopted by the Group within these financial statements, because application is not yet mandatory or because adoption by the EU remains outstanding at this point in time:
3.1 IFRS 9 'Financial instruments' which has been endorsed by the European Union (EU) and will be effective from 1 January 2018 (and thus 1 April 2018 for the Group);
This standard replaces IAS 39 'Financial Instruments: Recognition and Measurement' and sets out the requirements for recognising and measuring financial assets, financial liabilities and some contracts to buy or sell non-financial items. The impact of adopting this standard can be summarised with reference to the three project phases:
(i) Classification and measurement
The standard adopts a principles based approach to classify financial assets on the basis of the business model within which they are held and their contractual cash flow characteristics. Following this approach, financial assets will be classified as measured at amortised cost, fair value through profit and loss or fair value through other comprehensive income. For financial liabilities, the classification and measurement requirements under IAS 39 have been carried forward essentially unchanged, with the majority of financial liabilities being classified as measured at amortised cost.
Whilst financial assets and liabilities will be classified into the categories required by IFRS 9, there is not expected to be any resulting measurement impact. The Group will continue to measure equity instruments at fair value through other comprehensive income, as an election on an instrument-by-instrument basis on initial recognition.
Notes to the Preliminary Statement
for the year ended 31 March 2018
3. New accounting policies and reporting changes (continued) (ii) Impairment
The standard includes the requirement that impairment models also consider the expected credit losses on an entity's financial assets held at amortised cost and commitments to extend credit. As a result of this forward looking model - which removes the requirement for a "trigger event" to have occurred - earlier recognition of credit losses may occur.
The Group has reviewed existing impairment models - principally counterparty specific provision models applied to Wholesale Trade Receivables and provision matrix models applied to Retail Trade Receivables - including the credit risk management processes which will be described in A6.1 Accompanying Information to the Group's consolidated Financial Statements. Given the short term nature of the majority of affected financial assets, and the Group's focus on mitigating significant credit risk through regular monitoring and securitisation, the inclusion of forward looking information within these models is expected to reduce Group Reported Profit by less than 1%.
(iii) Hedge accounting
The standard does not materially change the amounts recognised in relation to existing hedging arrangements but does simplify the requirements for measuring hedge effectiveness, and thus the eligibility conditions for hedge accounting. The new hedge accounting model is intended to enable companies to reflect better their risk management activities in the financial statements.
The Group's review of the IFRS 9 hedge accounting model concluded that whilst adoption would not change the treatment of existing hedging arrangements, the changes made would not result in any additional hedge designations either. As such, the existing hedge accounting model under IAS 39 appropriately reflects our risk management activities in the financial statements. Therefore, as permitted by IFRS 9, the Group has elected to continue to apply the hedge accounting requirements of IAS 39. This policy choice will be periodically reviewed to consider any changes in our risk management activities.
Upon adoption of IFRS 9, the Group intends to apply the exemption from the requirement to restate comparative information about classification and measurement, including impairment. The opening retained earnings will be adjusted for any difference between financial instrument carrying amounts before and after adoption of IFRS 9, which is expected to be less than 1% of Group Reported Profit.
3.2 IFRS 15 'Revenue from contracts with customers' which has been endorsed by the EU and will be effective from 1 January 2018 (and thus 1 April 2018 to the Group);
This standard replaces IAS 11 'Construction contracts', IAS 18 'Revenue', IFRIC 18 'Transfers of Assets from Customers' and a number of other revenue related interpretations previously adopted by the Group. The core principle of IFRS 15 is that an entity recognises revenue that reflects the expected consideration for goods or services provided to a customer under contract, over the performance obligations they are being provided. The standard has introduced a five-step model as the framework for applying that core principle.
The Group's assessment of changes to the current revenue recognition policy, which will be described in A1.2 Accompanying Information to the Group's consolidated Financial Statements, can be summarised for each Business Area as follows:
Networks
Revenue relating to distribution connections will be recognised "over time" with reference to the ongoing obligation to provide connection access to the distribution network, rather than at the point of time the connection was completed under IFRIC 18. This will reduce revenue and operating profit from this revenue stream.
Retail
The clarifications on assessing principal versus agent relationships will result in revenue and costs relating to third party intermediary companies (used by Business customers to support and advise them in changing supplier), as well as customer support schemes (such as the Warm Home Discount), being offset within the Income Statement, rather than recognised gross as currently applied. This will reduce revenue but have no impact on operating profit.
A review of the "percentage of completion" methodology currently applied by the Enterprise Segment concluded that certain process changes are required, specifically to ensure contract costs are expensed as they occur (thereby removing Work in Progress from the Balance Sheet) and calculating revenue recognised on a "costs incurred" input basis (rather than the margin mark-up basis currently applied). This may either increase or reduce revenue and operating profit from this segment, depending on the underlying contractual terms.
For certain equipment provided to customers on inception of a contract - for example, internet routers delivered to a customer on inception of a broadband contract - IFRS 15 requires recognition of revenue when the equipment is delivered rather than over the contract period as currently applied. This will increase revenue and operating profit from this revenue stream.
Notes to the Preliminary Statement
for the year ended 31 March 2018
3. New accounting policies and reporting changes (continued)
Wholesale
The majority of revenue within this business area relates to sales through optimisation trades in physical and financial energy and commodity contracts ("commodity trades") within the scope of IFRS 9 "Financial Instruments" and therefore outwith the scope of IFRS 15. No changes to revenue recognition under IFRS 15 have been noted in this area.
Adoption
Applying the IFRS 15 revenue recognition policy changes noted above to the Group for the year ended 31 March 2018 - either separately or in combination - would have resulted in a less than 1% change in Group Revenue, less than 1% change in Group Reported Profit and less than 1% change in Group Net Assets. Adoption of IFRS 15 will not affect the cashflows generated by the Group. The full impact of adopting IFRS 15 on the Group's consolidated Financial Statements for the year ended 31 March 2019 will depend on the contractual arrangements entered into by the Group during the forthcoming financial year, however, it is the Group's expectation that the impact will be broadly equivalent.
The Group will apply the "Modified Retrospective" approach, with the cumulative effect of initially applying IFRS 15 recognised at the date of initial application as allowed by the standard. The Group has also elected to take advantage of the practical expedient whereby contracts that have been completed under the current accounting policies at the beginning of the earliest period are not restated.
Whilst not within the scope of IFRS 15 and with no changes to revenue recognition under IFRS 15 being identified for revenue in the Energy Portfolio Management (EPM) business, the Group has noted that presentation of sales and purchases of commodity optimisation trades on a gross or net basis varies across its industry peer group. Therefore, in connection with the future adoption of IFRS 15, the Group will undertake a review in the forthcoming financial year of whether a gross or net presentation of commodity trades, provides a more relevant reflection of their underlying economic reality of the activities in the EPM business to users of the financial statements. Therefore, the Group currently presents sales and purchases on a gross basis, a net presentation could have reduced revenue and cost of sales for the year ended 31 March 2018 by up to GBP22bn with no impact on reported profit, net assets or cashflows.
3.3 IFRS 16 'Leases' which has been endorsed by the EU and will be effective from 1 January 2019 (and thus 1 April 2019 to the Group).
This standard replaces IAS 17 'Leases' and sets out the principles for the recognition, measurement, presentation and disclosure of leases. The principal change from the previous standard is the introduction of a single lessee accounting model which requires a lessee to recognise assets and liabilities for all leases with a term of more than 12 months, unless the underlying asset is of low value.
The Group commenced its project on adoption of this standard during the year, with current activity still focussed on data collection and analysis of contracts for lease features. The Group continues to anticipate that the impact from adopting the standard can be summarised in two areas:
(i) Identification of a lease
The standard introduces a distinction between a lease and a service contract on the basis of whether a customer is able to control an identifiable asset. The Group anticipates some existing operating and finance leases may fail to meet this definition, and therefore would be treated as service contracts. Likewise, some existing service contracts may now meet this definition, and therefore would be treated as leases. However, the Group does not believe this will have a material impact on the Group's results, given the low number of affected contracts identified to date.
(ii) Recognition of right-of-use assets and lease liabilities for existing operating leases
The standard removes the previous distinction between operating leases and finance leases and requires that, where a lease is identified in a contract, a right-of-use asset and lease liability are recognised. The Group anticipates that adoption is likely to result in the majority of arrangements currently accounted for as operating leases (GBP174.6m of operating lease commitments at 31 March 2018) being recognised on the Consolidated Balance Sheet as right-of-use assets and lease liabilities.
The project will be completed during the forthcoming financial year and, given the number of leases in place, the data capture requirements and the variety of transition approaches available on adoption, the full implementation effect of the standard will only be determined once the project has completed.
However, the Group has concluded that the arrangements for Smart Meter contracts - as described in Accounting Judgement Note 5.2(iv) - do not contain a lease under IFRS 16, given the Suppliers' inability to direct the use of the asset.
Notes to the Preliminary Statement
for the year ended 31 March 2018
4. Adjusted accounting measures 4.1 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 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 also uses adjusted earnings before interest, taxation, depreciation and amortisation ('adjusted EBITDA') as an alternative operating performance measure which acts as a management proxy for cash generated from operating activities. This does not take into account the rights and obligations that SSE has in relation its equity-accounted joint ventures and associates. This measure excludes exceptional items and certain re-measurements (see below), the net interest costs associated with defined benefit schemes, depreciation and amortisation from equity-accounted joint ventures and associates and interest and taxation on profits from equity-accounted joint ventures and associates.
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 and other taxation exceptional items. Deferred taxation is excluded from the Group's adjusted EPS because of the Group's significant ongoing capital investment programme, which means that the deferred tax is unlikely to reverse. 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. 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.
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 direct 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, or other capital invested in joint ventures or associates. 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 57 to 63 before the Summary Financial Statements.
Notes to the Preliminary Statement
for the year ended 31 March 2018
4.2 Exceptional items and certain re-measurements
Exceptional items are those charges or credits that are considered unusual by nature and/or 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 and reorganisation costs, significant gains or losses on disposal and provisions in relation to contractual settlements associated with significant disputes and claims. The Directors consider that any individual gain or loss on disposal of greater than GBP30.0m 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. Impairments of intangible development projects as part of the normal course of business are not considered exceptional.
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. 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.
4.3 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.
5. 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.
5.1 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 2018 are intangible development assets and specific property, plant and equipment assets related to gas production, thermal power generation and hydro 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. At 31 March 2018, the Group has assessed that its Gas Production assets, Glendoe hydro-electric generation plant and its Great Island CCGT plant displayed indicators of impairment and were accordingly tested for impairment.
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.
Notes to the Preliminary Statement
for the year ended 31 March 2018
5. Accounting judgements and estimation uncertainty (continued) 5.1 Significant Financial Judgements - Estimation Uncertainties (continued) (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 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 (disclosed as accrued income). Given the non-routine process, number of differing inputs and the extent of management judgement as noted below, the unbilled revenue estimate is considered a significant estimate made by management in preparing the financial statements.
Unbilled revenue is calculated by applying the tariffs applicable to customers to the calculated estimated 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 corroboration process requires the comparison of calculated unbilled volumes to a 'benchmark' measure of unbilled volumes (in GWh and millions of therms) which is derived from historical weather-adjusted consumption patterns and aggregated, independently validated but unreconciled, metering data that is used in industry reconciliation processes for total consumption by supplier. This comparison of the estimated supplied quantity of electricity or gas that is deemed to have been delivered to customers against 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 estimation 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, judgements applied for domestic and business electricity, the Group's confidence in the quality of grid supply point metering and national settlements data it uses as part of its estimation process has improved which has enabled an additional revenue amount of c. GBP42m (2017 - GBP60m) to be recognised in the year. The unbilled gas revenue estimation process has required the Group to take account of industry estimated supplied quantities of gas consumed have historically been higher than actual metered supply. To address this, the Group has applied a further judgement, being a percentage reduction to unbilled consumption volume, to the measurement of its unbilled revenue in the financial statements. While it is expected that this judgement will become less critical as the industry transitions to smart meter technology, the percentage reduction applied has been increased in the year following the entering into operation of the new national settlements system, Nexus, and data issues associated with that; the impact of this change in estimation is c. GBP12m reduction in revenue. The sensitivity associated with this judgement factor will be disclosed at Note 18 of the Group's consolidated financial statements.
(iii) Retirement benefit obligations - Estimation Uncertainty
The assumptions in relation to the cost of providing post-retirement benefits during the period are based on the Group's best estimates and are set after consultation with qualified actuaries. While these assumptions are believed to be appropriate, a change in these assumptions would impact the level of the retirement benefit obligation recorded and the cost to the Group of administering the schemes.
Changes from prior year
In addition to the three significant financial judgements noted above, the Group disclosed the valuation of trade receivables as a significant financial judgement at 31 March 2017. The Group has assessed that the judgements applied in arriving at the provisions for bad and doubtful debt do not have a material impact on these financial statements at 31 March 2018.
Notes to the Preliminary Statement
for the year ended 31 March 2018
5. Accounting judgements and estimation uncertainty (continued) 5.2 Other key accounting judgements (i) Accounting for Capacity Market payments - Accounting Judgement
The Group's UK Supply businesses are required to make payments to an independent Settlement Body to ensure sufficient reliable electricity capacity is available throughout the year. This charge is based on the Supplier's forecast energy demands between November and February, and is charged over the course of the delivery year.
In accordance with IFRIC 21 "Levies", a liability for the full year charge is recognised progressively between November and February. The Group has assessed that this represents a regulatory operating cost to the business for its operations throughout the year and therefore recognises the cost over the course of the year. Any difference between the liability and charge is recognised as a settlement prepaid asset.
(ii) Accounting for costs of the smart meter infrastructure programme - Accounting Judgement
Through its participation in the UK smart metering programme, the Group is required to make payments to the Data Communications Company ("DCC") as it develops infrastructure to support the UK smart meter roll-out. The Group has assessed that the DCC costs incurred are capital in nature as they will provide future economic benefit and the Group has the power to control certain assets through the terms of the Smart Meter Code. These assets relate to the centralised infrastructure costs of the UK's smart meter programme. At 31 March 2018 the costs capitalised to date total GBP86.6m (2017: GBP54.4m). SSE is aware that other market participants have elected to expense these costs as incurred, however, given that it has been assessed that control exists over these assets, they have been capitalised.
(iii) Presentation of SSE's household energy and services business in Great Britain - Accounting Judgement
On 8 November 2017 the Group announced that it had entered into an agreement with innogy SE ("innogy") in respect of a proposed demerger of SSE's household energy and services business in Great Britain and combination with innogy's subsidiary, npower Group plc, to form a new independent UK incorporated company. At 31 March 2018 it has been assessed that the business activity subject to the demerger does not meet the criteria to be disclosed as held for sale, because the transaction is subject to a UK Competition and Markets Authority investigation and the approval of SSE's shareholders, neither of which have been completed at 31 March 2018. It has been assessed that because these approvals have not been granted it is not reasonably certain that the business activity will be disposed of in the next 12 months. SSE therefore continues to present its household energy and services businesses as continuing operations within the Retail operating segment.
(iv) Lease classification for Smart Meter contracts - Accounting Judgement
Following the disposal of smart meter assets to Meter Fit 10 Limited in the prior period (see Note 12), the Group entered into an agreement for the provision of meter asset provider (MAP) services with that company. During the prior year, the Group also entered into a framework agreement with a joint venture company, Maple Topco Limited, to provide MAP services for further tranches of smart meter deployment.
The Group has assessed that both arrangements, in common with all similar arrangements, do not contain leases of the smart meters owned by the MAP due to other parties taking a significant amount of the output from the meters and due to the Group being unable to control either the operation or the physical access to the meters. The IFRS 16 "Leases" implementation project has concluded that this assessment will not change upon adoption of that standard (see Note 3.3).
Changes from prior year
At 31 March 2017 the Group also disclosed business combinations and acquisitions; treatment of disputes and claims; consolidation of interest in investments and trading arrangements; and pension scheme surplus restrictions as accounting judgements. Following a review of transactions during the year, it has been assessed that the judgements applied no longer have a significant impact on the presentation of these financial statements. Further information of the non-significant judgements applied can be found in the relevant notes to the financial statements.
5.3 Other areas of estimation uncertainty (i) Tax provisioning
The Group has a number of open tax issues with the tax authorities in the UK and Republic of Ireland, the two jurisdictions in which the Group operates. Where management makes a judgement that an outflow of funds is probable, and a reliable estimate of the dispute can be made, provision is made for the best estimate of the most likely liability.
In estimating any such liability, the Group applies a risk-based approach, taking into account the specific circumstances of each dispute based on management's interpretation of tax law and supported, where appropriate, by discussion and analysis by external tax advisors. These estimates are inherently judgemental and could change substantially over time as each dispute progresses and new facts emerge. Provisions are reviewed on an ongoing basis, however the resolution of tax issues can take a considerable period of time to conclude and it is possible that amounts ultimately paid will be different from the amounts provided. Provisions for uncertain tax positions are included in current tax liabilities, and total GBP66.1m at 31 March 2018 (2017 GBP131.6m). The Group estimates that a reasonably possible range of settlement outcomes for the uncertain tax positions could be in the range from nil to the full value of the provision
Notes to the Preliminary Statement
for the year ended 31 March 2018
5 Accounting judgements and estimation uncertainty (continued) 5.3 Other areas of estimation uncertainty (continued)
IFRIC 23 "Uncertainty over Income Tax Treatments", issued by the IASB with an effective date for the Group of 1 April 2019 but yet to be endorsed by the EU, clarifies the application of IAS 12 "Income Taxes" regarding recognition and measurement when there is uncertainty over the income tax treatment. Analysis of the potential impact from adopting this interpretation is ongoing, however adoption may result in changes to the judgements or estimates made for tax provisions.
(ii) Decommissioning costs
The estimated cost of decommissioning at the end of the useful lives of certain property, plant and equipment assets is reviewed periodically and has been reassessed in the year to 31 March 2018. Decommissioning costs in relation to gas exploration and production assets are periodically agreed with the field operators and reflect the latest expected economic production lives of the fields. Provision is made for the estimated discounted cost of decommissioning at the balance sheet date. The dates for settlement of future decommissioning costs are uncertain, particularly for gas exploration and production assets where reassessment of gas and liquids reserves can lengthen or shorten the field life as well as the upward and downward movement in commodity prices and operating costs, but are currently expected to be incurred beginning in 2019 and increasing into the subsequent decade and out to 2040.
Further detail on the assumptions made and movement in decommissioning costs during the year will be disclosed at Note 20 of the Group's consolidated financial statements.
(iii) Gas and liquids reserves
The volume and production profile of proven and probable (2P) gas and liquids reserves is an estimate that affects the unit of production depreciation of producing gas and liquids property, plant and equipment. This is also a significant input estimate to the associated impairment and decommissioning calculations. The estimation of gas and liquid reserves is subject to change between reporting periods, following the review and updating of inputs such as regional activity, geological data, reservoir performance data, well drilling activity, commodity prices and production costs. Proven and probable (2P) reserves, and other reserve classifications out-with 2P, can both increase and decrease following assessment of the inputs.
The estimates of gas and liquid reserves are formally reviewed on an annual basis using an independent reservoir auditor, and the impact of a change in estimated proven and probable reserves is dealt with prospectively by depreciating the remaining book value of producing assets over the expected future production. If proven and probable reserves estimates are revised downwards, earnings could be affected by an immediate write-down (impairment) of the asset's book value or a higher future depreciation expense.
Notes to the Preliminary Statement
for the year ended 31 March 2018
6. Segmental information
The Group's operating segments are those used internally by the Board to run the business and make strategic decisions. On 8 November 2017, SSE announced its intention to dispose of its GB domestic supply and energy related services business in a demerger with npower. Following this announcement the presentation of financial information to the Board changed, resulting in a change of the operating segments with the activities subject to the demerger being presented as SSE Energy Services. During the review of operating segments triggered by the Retail transaction, it was also assessed that the Energy Portfolio Management activity should also be presented as a standalone segment to reflect its contribution to the Group.
The types of products and services from which each reportable segment derives its revenues are:
Business Area Reported Segments Description
Networks Electricity Distribution The economically regulated lower voltage distribution
of electricity to customer premises
in the North of Scotland and the South of England
---------------------------------------------- ------------------------------------------------------
Electricity Transmission The economically regulated high voltage transmission
of electricity from generating plant
to the distribution network in the North of Scotland
============================================== ======================================================
Gas Distribution SSE's share of Scotia Gas Networks, which operates
two economically regulated gas distribution
networks in Scotland and the South of England
============================================== ======================================================
Retail SSE Energy Services - Supply The supply of electricity and gas to residential
customers in GB
---------------------------------------------- ------------------------------------------------------
SSE Energy Services - Energy Related Services The provision of energy related goods and services to
residential customers in GB including
meter reading and installation, boiler maintenance
and installation and domestic telecoms
and broadband services.
---------------------------------------------- ------------------------------------------------------
Business Energy The supply of electricity and gas to business
customers in GB
---------------------------------------------- ------------------------------------------------------
Airtricity The supply of electricity, gas and energy related
services to residential and business customers
in the Republic of Ireland and Northern Ireland.
---------------------------------------------- ------------------------------------------------------
Enterprise The integrated provision of services in competitive
markets for industrial and commercial
customers including electrical contracting, private
energy networks, lighting services and
telecoms capacity and bandwidth.
---------------------------------------------- ------------------------------------------------------
Wholesale Electricity Generation The generation of power from renewable and thermal
plant in the UK and Ireland.
---------------------------------------------- ------------------------------------------------------
Energy Portfolio Management (EPM) The optimisation of SSE's power and gas and other
commodity requirements.
---------------------------------------------- ------------------------------------------------------
Gas Storage The operation of gas storage facilities in the UK.
---------------------------------------------- ------------------------------------------------------
Gas Production The production and processing of gas and oil from
North Sea fields.
---------------------------------------------- ------------------------------------------------------
The internal measure of profit used by the Board is 'adjusted profit before interest and tax' or 'adjusted operating profit' which is arrived at before exceptional items, the impact of financial instruments measured under IAS 39, the net interest costs associated with defined benefit pension schemes and after the removal of taxation and interest on profits from joint ventures and associates.
Analysis of revenue and operating profit by segment is provided below. All revenue and profit before taxation arise from operations within the UK and Ireland.
Notes to the Preliminary Statement
for the year ended 31 March 2018
6 Segmental information (continued)
(i) Revenue by segment
Intra-
External Intra-segment External segment
revenue revenue Total revenue revenue revenue Total revenue
2018 2018 2018 2017 2017 2017
GBPm GBPm GBPm GBPm GBPm GBPm
Networks
Electricity
Distribution 777.0 252.4 1,029.4 814.8 259.7 1,074.5
Electricity
Transmission 325.7 0.2 325.9 358.2 0.2 358.4
1,102.7 252.6 1,355.3 1,173.0 259.9 1,432.9
--------------- --------------- -------------- --------------- --------------- --------------
Retail
SSE Energy
Services -
Energy Supply 3,840.5 10.1 3,850.6 3,796.6 - 3,796.6
SSE Energy
Services -
Energy Related
Services 135.5 168.5 304.0 130.7 151.0 281.7
Business Energy 2,517.3 22.1 2,539.4 2,579.6 19.2 2,598.8
Airtricity 917.6 119.1 1,036.7 865.5 82.9 948.4
Enterprise 431.1 104.0 535.1 371.6 99.5 471.1
--------------- --------------- -------------- --------------- --------------- --------------
7,842.0 423.8 8,265.8 7,744.0 352.6 8,096.6
--------------- --------------- -------------- --------------- --------------- --------------
Wholesale
Electricity
Generation 498.6 1,919.1 2,417.7 477.0 1,731.8 2,208.8
EPM 21,710.1 3,670.0 25,380.1 19,532.5 3,738.0 23,270.5
Gas Storage 11.1 306.5 317.6 13.5 280.4 293.9
Gas Production 30.3 221.7 252.0 35.5 235.4 270.9
--------------- --------------- -------------- --------------- --------------- --------------
22,250.1 6,117.3 28,367.4 20,058.5 5,985.6 26,044.1
--------------- --------------- -------------- --------------- --------------- --------------
Corporate
unallocated 31.6 316.9 348.5 62.4 273.9 336.3
--------------- --------------- -------------- --------------- --------------- --------------
Total 31,226.4 7,110.6 38,337.0 29,037.9 6,872.0 35,909.9
--------------- --------------- -------------- --------------- --------------- --------------
Revenue within Energy Portfolio Management ('EPM') represents the gross value of all wholesale commodity sales including settled physical and financial trades entered into to optimise the performance of the generation plants and to manage the Group's commodity risk exposure. The gross value of purchase trades are included in cost of sales. In connection with the future adoption of IFRS 15 "Revenue from contracts with customers", as highlighted in Note 3.2, the Group will undertake a review in the financial year ended 31 March 2019 of whether a gross or net presentation of commodity trades provides a more relevant reflection of their underlying economic reality to users of the financial statements. Whilst the Group currently presents sales and purchases on a gross basis, a net presentation could have reduced revenue and cost of sales for the year ended 31 March 2018 by up to GBP22bn with no impact on reported profit, net assets or cashflows.
Revenue from the Group's investment in Scotia Gas Networks Limited SSE share being GBP391.5m (2017: GBP486.7m) is not recorded in the revenue line in the income statement.
Revenue by geographical location is as follows:
2018 2017
GBPm GBPm
UK 30,407.6 28,291.3
Ireland 818.8 746.6
--------- ---------
31,226.4 29,037.9
--------- ---------
Notes to the Preliminary Statement
for the year ended 31 March 2018
6 Segmental information (continued)
(ii) Operating profit/(loss) by segment
2018
Exceptional items
Adjusted operating JV/ Associate share Before exceptional and
profit reported to of interest and tax items and certain certain
the Board (i) re-measurements re-measurements Total
GBPm GBPm GBPm GBPm GBPm
Networks
Electricity
Distribution 402.2 - 402.2 - 402.2
Electricity
Transmission 195.6 - 195.6 - 195.6
Gas Distribution 165.3 (96.2) 69.1 2.7 71.8
-------------------- -------------------- ------------------- -------------------- --------
763.1 (96.2) 666.9 2.7 669.6
Retail
SSE Energy Services
- Energy Supply 260.4 - 260.4 (56.9) 203.5
SSE Energy Services
- Energy-related
Services 18.3 - 18.3 - 18.3
Business Energy 64.2 - 64.2 - 64.2
Airtricity 33.0 - 33.0 (6.1) 26.9
Enterprise 26.9 - 26.9 (11.8) 15.1
-------------------- -------------------- ------------------- -------------------- --------
402.8 - 402.8 (74.8) 328.0
Wholesale
Electricity
Generation 578.9 (52.3) 526.6 (3.2) 523.4
EPM 46.0 - 46.0 (89.1) (43.1)
Gas Storage (6.5) - (6.5) - (6.5)
Gas Production 34.0 - 34.0 (104.7) (70.7)
-------------------- -------------------- ------------------- -------------------- --------
652.4 (52.3) 600.1 (197.0) 403.1
Corporate
unallocated 10.4 (1.3) 9.1 (30.6) (21.5)
-------------------- -------------------- ------------------- -------------------- --------
Total 1,828.7 (149.8) 1,678.9 (299.7) 1,379.2
-------------------- -------------------- ------------------- -------------------- --------
Notes to the Preliminary Statement
for the year ended 31 March 2018
6 Segmental information (continued)
(ii) Operating profit/(loss) by segment (continued)
2017
Exceptional items
Adjusted operating JV/ Associate share Before exceptional and
profit reported to of interest and tax items and certain certain
the Board (i) re-measurements re-measurements Total
GBPm GBPm GBPm GBPm GBPm
Networks
Electricity
Distribution 433.4 - 433.4 - 433.4
Electricity
Transmission 263.7 - 263.7 - 263.7
Gas Distribution 239.4 (108.9) 130.5 21.2 151.7
-------------------- -------------------- ------------------- -------------------- --------
936.5 (108.9) 827.6 21.2 848.8
Retail
SSE Energy Services
- Energy Supply 260.8 - 260.8 (89.1) 171.7
SSE Energy Services
- Energy-related
Services 12.7 - 12.7 (7.2) 5.5
Business Energy 89.4 - 89.4 (16.4) 73.0
Airtricity 42.7 - 42.7 - 42.7
Enterprise 16.7 - 16.7 - 16.7
-------------------- -------------------- ------------------- -------------------- --------
422.3 - 422.3 (112.7) 309.6
Wholesale
Electricity
Generation 510.9 (38.6) 472.3 72.5 544.8
EPM (9.7) - (9.7) 201.0 191.3
Gas Storage (13.0) - (13.0) (23.8) (36.8)
Gas Production 26.4 - 26.4 (227.5) (201.1)
-------------------- -------------------- ------------------- -------------------- --------
514.6 (38.6) 476.0 22.2 498.2
Corporate
unallocated 0.6 - 0.6 283.3 283.9
-------------------- -------------------- ------------------- -------------------- --------
Total 1,874.0 (147.5) 1,726.5 214.0 1,940.5
-------------------- -------------------- ------------------- -------------------- --------
i) The adjusted operating profit of the Group is reported after removal of the Group's share of interest, fair value movements on financing derivatives and tax from joint ventures and associates and after adjusting for exceptional items (see Note 7). The share of Scotia Gas Networks Limited interest includes loan stock interest payable to the consortium shareholders (included in Gas Distribution). The Group has accounted for its 33% share of this, GBP15.2m (2017 - GBP12.7m), as finance income (Note 8).
Notes to the Preliminary Statement
for the year ended 31 March 2018
6 Segmental information (continued)
(iii) Earnings before interest, taxation, depreciation and amortisation ('EBITDA')
2018
Adjusted
operating profit JV/ Associate
reported to the Depreciation/Impairment/ share of
Board amortisation before depreciation and Release of
(Note 6 (ii)) exceptional charges amortisation Deferred income Adjusted EBITDA
GBPm GBPm GBPm GBPm GBPm
Networks
Electricity
Distribution 402.2 248.7 - (13.4) 637.5
Electricity
Transmission 195.6 63.1 - (2.6) 256.1
Gas Distribution 165.3 - 55.8 - 221.1
763.1 311.8 55.8 (16.0) 1,114.7
Retail
SSE Energy
Services -
Energy Supply 260.4 37.8 - - 298.2
SSE Energy
Services -
Energy-related
Services 18.3 14.2 - - 32.5
Business Energy 64.2 0.3 - - 64.5
Airtricity 33.0 7.8 - - 40.8
Enterprise 26.9 31.4 - (1.5) 56.8
---------------- ------------------------ ---------------- ----------------- ---------------
402.8 91.5 - (1.5) 492.8
Wholesale
Electricity
Generation 578.9 219.7 59.6 (2.5) 855.7
EPM 46.0 - - - 46.0
Gas Storage (6.5) 0.9 - - (5.6)
Gas Production 34.0 119.0 - - 153.0
---------------- ------------------------ ---------------- ----------------- ---------------
652.4 339.6 59.6 (2.5) 1,049.1
Corporate
unallocated 10.4 54.0 0.7 (0.6) 64.5
Total 1,828.7 796.9 116.1 (20.6) 2,721.1
---------------- ------------------------ ---------------- ----------------- ---------------
The Electricity Generation adjusted EBITDA measure of GBP855.7m (2017 - GBP749.3m) can be attributed to Renewable (GBP692.2m, 2017 - GBP580.3m) and Thermal/Other (GBP163.5m, 2017 - GBP169.0m) sources.
(iii) Earnings before interest, taxation, depreciation and amortisation ('EBITDA') (continued)
2017
Depreciation/
Adjusted operating Impairment / JV/ Associate
profit reported to amortisation share of
the Board before exceptional depreciation and Release of deferred
(Note 6 (ii) charges amortisation income Adjusted EBITDA
GBPm GBPm GBPm GBPm GBPm
Networks
Electricity
Distribution 433.4 250.6 - (13.4) 670.6
Electricity
Transmission 263.7 52.5 - (2.6) 313.6
Gas Distribution 239.4 - 70.9 - 310.3
936.5 303.1 70.9 (16.0) 1,294.5
Retail
SSE Energy Services
- Energy Supply 260.8 8.2 - - 269.0
SSE Energy Services
- Energy-related
Services 12.7 12.0 - - 24.7
Business Energy 89.4 0.3 - - 89.7
Airtricity 42.7 6.3 - - 49.0
Enterprise 16.7 45.1 - (1.5) 60.3
------------------ ------------------ ------------------ ------------------- ---------------
422.3 71.9 - (1.5) 492.7
Wholesale
Electricity
Generation 510.9 193.9 44.9 (0.4) 749.3
EPM (9.7) - - - (9.7)
Gas Storage (13.0) 0.9 - - (12.1)
Gas Production 26.4 144.2 - - 170.6
------------------ ------------------ ------------------ ------------------- ---------------
514.6 339.0 44.9 (0.4) 898.1
Corporate
unallocated 0.6 37.4 - (0.1) 37.9
Total 1,874.0 751.4 115.8 (18.0) 2,723.2
------------------ ------------------ ------------------ ------------------- ---------------
Notes to the Preliminary Statement
for the year ended 31 March 2018
7. Exceptional items and certain re-measurements
2018 2017
GBPm GBPm
Exceptional items
Asset impairments and related charges and credits (205.3) (376.4)
Provisions for restructuring and other liabilities (8.0) 1.8
-------- --------
(213.3) (374.6)
Net gains on disposals of businesses and other assets
- 307.3
Fair value uplift on loss of control of Clyde - 59.1
(213.3) (8.2)
Share of effect of change in UK corporation tax on deferred tax liabilities and assets of
associate and joint venture investments - 19.5
--------
Total exceptional items (213.3) 11.3
-------- --------
Certain re-measurements
Movement on operating derivatives (note 16) (89.1) 201.0
Movement on financing derivatives (note 16) (33.0) 52.6
Share of movement on derivatives in jointly controlled entities (net of tax) 2.7 1.7
-------- --------
Total certain re-measurements (119.4) 255.3
-------- --------
Exceptional items and certain re-measurements before taxation (332.7) 266.6
-------- --------
Taxation
Effect of change in UK corporation tax rate on deferred tax liabilities and assets - 35.4
Taxation on other exceptional items 105.6 118.7
-------- --------
105.6 154.1
Taxation on certain re-measurements 7.9 (48.1)
-------- --------
Taxation 113.5 106.0
-------- --------
Exceptional items after certain re-measurements after taxation (219.2) 372.6
-------- --------
Exceptional items are disclosed across the following categories within the income statement:
2018 2017
GBPm GBPm
Cost of sales:
Thermal Generation related charges - 31.6
Movement on operating derivatives (note 16) (89.1) 201.0
-------- --------
(89.1) 232.6
Operating costs:
Gas Production related charges (104.7) (227.5)
Gas Storage related charges - (23.8)
Retail and technology development related charges (62.5) (120.3)
Other exceptional provisions and charges (46.1) (34.6)
-------- --------
(213.3) (406.2)
Operating income:
Net gains on disposals of businesses and other assets - 307.3
Fair value uplift on loss of control of Clyde - 59.1
-------- --------
- 366.4
Joint ventures and associates:
Effect of change in UK corporation tax rate on deferred tax liabilities and assets - 19.5
Share of movement on derivatives in jointly controlled entities (net of tax) 2.7 1.7
-------- --------
2.7 21.2
Operating profit/(loss) (299.7) 214.0
-------- --------
Finance costs
Movement on financing derivatives (note 16) (33.0) 52.6
-------- --------
Profit/(loss) before taxation (332.7) 266.6
-------- --------
Notes to the Preliminary Statement
for the year ended 31 March 2018
Exceptional items and certain re-measurements (continued)
7.1 Exceptional items
In the year to 31 March 2018, the Group recognised a net exceptional charge of GBP213.3m. This consisted of asset and investment impairment charges totalling GBP208.1m and net exceptional charges for provisions of GBP5.2m.
The net exceptional charges excluding gains on disposal recognised can be summarised as follows:
Goodwill
Property, & Other
Plant & Equipment Intangibles Other charges Total charges
GBPm GBPm GBPm GBPm
Gas Production (i) 104.7 - - 104.7
Retail and technology
development (ii) 53.3 9.7 - 63.0
Other (iii) 20.9 (4.4) 29.1 45.6
------------------- ------------- -------------- --------------
178.9 5.3 29.1 213.3
------------------- ------------- -------------- --------------
(i) Gas Production
In the year, the Group recognised net impairment charges of GBP104.7m related to its North Sea Gas Production assets following an increase in projected costs at certain fields and revised assessments of hydrocarbon reserves. The impairment charges were recognised on the Greater Laggan fields (GBP104.2m) and Bacton fields (GBP19.3m) due to lower than previously forecast independently assessed proved and probable (2P) hydrocarbon reserves and, at Greater Laggan, increased projected costs to extract those reserves as a result of enhanced clarity over the interconnectivity of the field resources. These charges were offset by a GBP18.8m reversal of previous exceptional impairments on the ECA field following an increase to estimated hydrocarbon reserves. Following these charges and credit, the residual value in the Group's gas production assets is GBP517.8m.
(ii) Retail and other technology developments
The Group has undertaken an internal restructuring exercise following the announcement on 8 November 2017 that SSE plans to demerge its UK domestic supply business in a transaction with npower. That restructuring, which was concluded on 1 April 2018, resulted in the transfer of assets and contracts between wholly owned subsidiaries of the Group, and necessitated a detailed impairment review. This impairment review was performed to ensure that a new demerged Retail business would contain assets that would be utilised in its post-demerger operations. This review resulted in GBP29.3m of software development costs impairment charges, related to the Group's previous Retail strategic investment in transformation and a further GBP33.7m of charges in relation to Retail related software developments and programmes within the Group's central service company and other subsidiaries that it was identified would no longer be utilised by the demerged or continuing energy supply businesses.
(iii) Other
In the year, SSE disposed of its 1.8% shareholding in Faroe Petroleum Limited for cash consideration of GBP4.0m, crystallising GBP7.2m of losses on disposal and disposed of its 15% shareholding in BIFAB Ltd for consideration of GBP1. The sale of shareholding in Burntisland Fabrication Limited ('BIFAB') resulted in an exceptional charge of GBP16.5m, including GBP10.0m of losses previously recognised in the statement of other comprehensive income. These losses represent costs of exit from non-controlling financial interests in investments totalling GBP23.7m. These investments are not-related to SSE's core operating activities and are considered exceptional in nature.
The Group also recognised an impairment charge of GBP15.6m on its Barkip anaerobic digestion plant following experience of operational issues and assessment of future economic prospects. The plant represented an investment in emergent and economically unproven technology and its impairment is considered exceptional due to the nature of that historic investment.
The Group recognised combined charges of GBP11.8m in its Enterprise Utilities business following detailed review and assessment of the assets and contracts in its Heat Network portfolio. These charges are considered exceptional as part of the restructure and realignment of that business under new management. As part of its preparation for the proposed demerger, the Group has also incurred GBP11.8m of transaction-related costs in the year to 31 March 2018.
Offsetting these exceptional charges, the Group recognised a reversal in impairment in its Doggerbank offshore windfarm prospect of GBP7.9m following a renewed commitment to the project by the joint venture partners. The Group also released GBP9.3m of provisions related to historic regulatory investigations and legal disputes following satisfaction of remedies and reassessment of liability in relation to the Glendoe dispute. These reversal credits are related to provisions and impairments previously disclosed as exceptional.
Notes to the Preliminary Statement
for the year ended 31 March 2018
7 Exceptional items and certain re-measurements (continued) 7.1 Exceptional Items (continued)
31 March 2017
In the previous financial year, the Group recognised a net exceptional charge of GBP8.2m. This consisted of asset impairment and related charges totalling GBP374.6m, net exceptional credits for provisions of GBP1.8m, net exceptional gains on disposal of GBP307.3m and net fair value uplift following loss of control of GBP59.1m. The GBP307.3m gain was related to the part disposal of the Group's stake in Scotia Gas Networks.
The exceptional charges recognised can be summarised as follows:
Property, Plant & Goodwill & Other Other
Equipment Intangibles Inventories charges/(credits) Total charges
GBPm GBPm GBPm GBPm GBPm
Gas Production 244.3 (20.0) - 3.2 227.5
Retail & technology
developments 42.2 78.1 - - 120.3
Gas Storage 23.8 - - - 23.8
Thermal Generation 30.7 - (62.3) - (31.6)
Other 12.0 36.4 - (13.8) 34.6
-------------------- -------------------- ------------ --------------------- --------------
353.0 94.5 (62.3) (10.6) 374.6
-------------------- -------------------- ------------ --------------------- --------------
In the previous year, the Group recorded significant impairment charges associated with its North Sea Gas Production assets, in particular at Greater Laggan, in relation to a reduction in the independently assessed quantity of available proved and probable (2P) hydrocarbon resources. This reserves re-assessment considered the reserves recognisable under likely production and took into account reserve shrinkage and contingent resource increases. In 2016/17, the Group also decided to cease the development of its replacement customer service and billing system and incurred an exceptional charge of GBP83.1m as a consequence, which was augmented by the discontinuation of related technology development projects totalling GBP37.2m. In addition, revised estimated decommissioning costs associated with the Aldbrough and Atwick Gas Storage sites led to an impairment of GBP23.8m in relation to Gas Storage. In thermal generation, the Group reassessed the value-in-use of its portfolio in Ireland and concluded that the Group's oil burning stations at Rhode and Tawnaghmor were impaired due to their age and future competitive prospects by GBP30.7m. Against this, the Group reversed previous stock impairments at Fiddler's Ferry following the success in securing a one year contract to provide ancillary capacity services.
31 March 2016
The exceptional charges recognised are summarised as follows:
Property, Goodwill & Total
Plant & Other Impairment
Equipment Intangibles Inventories Other charges related Provisions Total charges
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Coal
Generation 67.6 - 87.9 83.2 238.7 48.3 287.0
Gas
Generation 302.5 2.2 3.7 18.0 326.4 - 326.4
Gas
Production 125.0 27.2 - 9.6 161.8 - 161.8
Gas Storage 150.9 - - - 150.9 - 150.9
Other - 11.2 - 3.5 14.7 6.6 21.3
------------- ------------- ------------ -------------- ------------- ----------- --------------
646.0 40.6 91.6 114.3 892.5 54.9 947.4
------------- ------------- ------------ -------------- ------------- ----------- --------------
In 2015/16, the Group announced the closure of Ferrybridge and highlighted significant uncertainty in relation to ongoing operations at Fiddlers Ferry. These consequently gave rise to impairment and other charges totalling GBP287.0m. The subsequent 2016/17 operational performance at Fiddler's Ferry outturn was more positive than previously anticipated and gave rise to certain impairment reversals. The Group's gas-fired generation plants at Peterhead, Medway and Marchwood were impaired in 2015/16 due to difficult economic conditions and factors such as the withdrawal of support for the proposed carbon capture and storage project at Peterhead. More broadly, no observable recovery in "spark spread" margins were forecast. In total, impairment and other charges of GBP326.4m were recognised in relation to gas generation. No further deterioration in the values of GB gas plants was observed in the financial year to 31 March 2017. In 2015/16, impairment charges totalling GBP161.8m were recognised in relation to the Group's Gas Exploration and Production assets in the North Sea, predominately due to declining wholesale gas prices. The exceptional charges recognised included an element (GBP121.2m) relating to the impairment of Greater Laggan field assets acquired at 28 October 2016 which reflected the impact of the decline in expected long term gas prices between the acquisition date and the financial year end. The group's gas storage assets at Hornsea (Atwick) and Aldbrough saw reduced short term price volatility and seasonal spreads in the wholesale gas market, which created exceptional charges relating to plant value.
Notes to the Preliminary Statement
for the year ended 31 March 2018
Exceptional items and certain re-measurements (continued)
7.2 Certain re-measurements
The Group enters into forward commodity purchase (and sales) contracts to meet the future demand requirements of its Energy Supply business and to optimise the value of its Generation and other Wholesale assets. Certain of these contracts are determined to be derivative financial instruments under IAS 39 and as such are required to be recorded at their fair value. Changes in the fair value of those commodity contracts designated as IAS 39 financial instruments are reflected in the income statement (as part of 'certain re-measurements'). The Group shows the change in the fair value of these forward contracts separately as this mark-to-market movement is not relevant to the underlying performance of its operating segments. The Group will recognise the underlying value of these contracts as the relevant commodity is delivered, which will predominately be within the subsequent 12 to 18 months. Conversely, commodity contracts that are not financial instruments under IAS 39 are accounted for as 'own use' contracts. The re-measurements arising from IAS 39 are disclosed separately to aid understanding of the underlying performance of the Group. This category also includes the income statement movement on financing derivatives (and hedged items) as described in note 16.
7.3 Change in UK corporation tax rates
Finance (No.2) Act 2015 which received royal assent on 18 November 2015 enacted a corporation tax rate of 19% from 1 April 2017, and a rate of 18% from 1 April 2020. A further change to reduce the rate of corporation tax to 17% from 1 April 2020 was announced in Finance Act 2016, as this change was enacted on 15 September 2016 it had the effect of reducing the Group's deferred tax liabilities by GBP34.6m in the year ended 31 March 2017, including the impact of changes recognised in the statement of other comprehensive income. In the year to 31 March 2018, the rate change enacted on 15 September 2016 which is effective from 1 April 2020, has the effect of increasing the group's deferred tax liabilities by GBP12.8m. This impact results from items arising in the year to 31 March 2018, which were therefore not rebased to 17% at the previous balance sheet date.
The Group has separately recognised the tax effect of the exceptional items and certain re-measurements summarised above.
Notes to the Preliminary Statement
for the year ended 31 March 2018
8. Finance income and costs
2018 2017
Before Exceptional Exceptional items Before Exceptional Exceptional items
items and certain and certain items and certain and certain
re-measurements re-measurements Total re-measurements re-measurements Total
GBPm GBPm GBPm GBPm GBPm GBPm
Finance income:
Interest income
from short term
deposits 5.2 - 5.2 1.8 - 1.8
Foreign exchange
translation - - - 20.5 - 20.5
Interest on pension
scheme assets (I) 2.7 - 2.7 - - -
------------------ ------------------ ------- ------------------ ------------------- -------
Other interest
receivable:
Scotia Gas Networks
loan stock 15.2 - 15.2 12.7 - 12.7
Other joint
ventures and
associates 38.2 - 38.2 33.2 - 33.2
Other receivable 40.8 - 40.8 25.5 - 25.5
------------------- ------------------ ------------------ ------- ------------------ ------------------- -------
94.2 - 94.2 71.4 - 71.4
------------------ ------------------ ------- ------------------ ------------------- -------
Total finance
income 102.1 - 102.1 93.7 - 93.7
------------------ ------------------ ------- ------------------ ------------------- -------
Finance costs:
Bank loans and
overdrafts (26.5) - (26.5) (28.9) - (28.9)
Other loans and
charges (324.2) - (324.2) (275.4) - (275.4)
Interest on pension
scheme liabilities
(I) - - - (4.0) - (4.0)
Notional interest
arising on
discounted
provisions (16.3) - (16.3) (14.2) - (14.2)
Foreign exchange
translation (6.5) - (6.5)
Finance lease
charges (30.8) - (30.8) (33.1) - (33.1)
Less: interest
capitalised (II) 42.2 - 42.2 45.4 - 45.4
Total finance costs (362.1) - (362.1) (310.2) - (310.2)
------------------ ------------------ ------- ------------------ ------------------- -------
Changes in fair
value of financing
derivatives at
fair value through
profit or loss - (33.0) (33.0) - 52.6 52.6
Net finance costs (260.0) (33.0) (293.0) (216.5) 52.6 (163.9)
------------------ ------------------ ------- ------------------ ------------------- -------
Presented as:
Finance income 102.1 - 102.1 93.7 - 93.7
Finance costs (362.1) (33.0) (395.1) (310.2) 52.6 (257.6)
Net finance costs (260.0) (33.0) (293.0) (216.5) 52.6 (163.9)
------------------ ------------------ ------- ------------------ ------------------- -------
i) The interest on net pension assets/(liabilities) for the year ended 31 March 2018 of GBP2.7m credit (2017- GBP4.0m charge) represents the respective credits/(charges) under IAS 19R.
ii) The capitalisation rate applied in determining the amount of borrowing costs to capitalise in the period was 4.01% (2017 - 4.23%).
Adjusted net finance costs are arrived at after the following adjustments: 2018 2017
GBPm GBPm
Net finance costs (293.0) (163.9)
(add)/less:
Share of interest from joint ventures and associates:
Scotia Gas Networks loan stock (15.2) (12.7)
Other joint ventures and associates (97.4) (102.0)
-------- --------
(112.6) (114.7)
Interest on pension scheme liabilities (2.7) 4.0
Share of interest on net pension liabilities in joint ventures (0.2) (0.9)
Movement on financing derivatives (Note 16) 33.0 (52.6)
-------- --------
Adjusted net finance costs (375.5) (328.1)
Notional interest arising on discounted provisions 16.3 14.2
Finance lease charges 30.8 33.1
Hybrid coupon payment (Note 14) (98.5) (119.3)
-------- --------
Adjusted net finance costs for interest cover calculations (426.9) (400.1)
-------- --------
Notes to the Preliminary Statement
for the year ended 31 March 2018
9. Taxation
Analysis of charge recognised in the income statement
Before Before
Exceptional items Exceptional items Exceptional items Exceptional items
and certain and certain and certain and certain
re-measure-ments re-measure-ments 2018 re-measure-ments re-measure-ments 2017
GBPm GBPm GBPm GBPm GBPm GBPm
Current tax
UK corporation tax 162.7 (9.2) 153.5 188.0 (1.5) 186.5
Adjustments in
respect of
previous years (40.8) (29.1) (69.9) (61.1) (9.0) (70.1)
Reassessment of
capital
allowances for
previous years
(a) (101.3) - (101.3) - - -
Carry back of E&P
losses (24.0) - (24.0) - - -
------------------ ------------------ -------- ------------------ ------------------ -------
Total current tax (3.4) (38.3) (41.7) 126.9 (10.5) 116.4
------------------ ------------------ -------- ------------------ ------------------ -------
Deferred tax
Current year 103.3 (75.2) 28.1 11.8 (60.1) (48.3)
Effect of change
in tax rate 12.8 - 12.8 - (35.4) (35.4)
Losses carried
forward
recognised - - - 86.4 - 86.4
Reassessment of
capital
allowances for
previous years
(I) 101.3 - 101.3 - - -
Adjustments in
respect of
previous years 65.6 - 65.6 (61.3) - (61.3)
------------------ ------------------ -------- ------------------ ------------------ -------
Total deferred tax 283.0 (75.2) 207.8 36.9 (95.5) (58.6)
------------------ ------------------ -------- ------------------ ------------------ -------
Total taxation
charge 279.6 (113.5) 166.1 163.8 (106.0) 57.8
------------------ ------------------ -------- ------------------ ------------------ -------
I) Reclassification of historic tax liabilities from current to deferred tax following a review of the position taken in the Group's tax accrual calculations for earlier open years.
Adjusted current tax charge
The adjusted current tax charge is arrived at after the following adjustments:
2018 2018 2017 2017
GBPm % GBPm %
Group tax charge and effective rate 166.1 11.4 57.8 3.6
Add: reported deferred tax credit and effective rate (207.8) (14.3) 58.6 3.7
-------- ------- ------ -----
Current tax charge and effective rate (41.7) (2.9) 116.4 7.3
Effect of adjusting items (see below) - - - 0.2
-------- ------- ------ -----
Current tax charge and effective rate on adjusted basis (41.7) (2.9) 116.4 7.5
add:
Share of current tax from joint ventures and associates 32.9 2.3 30.8 2.0
Effect of reclassification 101.3 7.0 - -
Less:
Current tax on exceptional items 38.2 2.6 10.5 0.7
-------- ------- ------ -----
Adjusted current tax charge and effective rate 130.7 9.0 157.7 10.2
-------- ------- ------ -----
The adjusted effective rate is based on adjusted profit before tax being:
2018 2017
GBPm
Profit before tax 1,086.2 1,776.6
Add/(less):
Exceptional items and certain re-measurements 332.7 (266.6)
Share of tax from joint ventures/associates before exceptional items and certain re-measurements 37.2 32.8
Interest on pension scheme liabilities (2.7) 4.0
Share of interest on net pension liabilities in jointly controlled entities and associates (0.2) (0.9)
-------- --------
Adjusted profit before tax 1,453.2 1,545.9
-------- --------
Notes to the Preliminary Statement
for the year ended 31 March 2018
10. Dividends
10.1 Ordinary dividends
Year ended 31 Year ended 31
March 2018 Settled via Pence per March 2017 Settled via Pence per
Total scrip ordinary share Total scrip ordinary share
GBPm GBPm GBPm GBPm
Interim - year
ended 31 March
2018 287.8 7.1 28.4 - - -
Final - year
ended 31 March
2017 638.3 324.5 63.9 - - -
Interim - year
ended 31 March
2017 - - - 277.1 95.3 27.4
Final - year
ended 31 March
2016 - - - 629.5 142.6 62.5
926.1 331.6 906.6 237.9
--------------- --------------- --------------- ---------------
The final dividend of 63.9p per ordinary share declared in respect of the financial year ended 31 March 2017 (2016: 62.5p) was approved at the Annual General Meeting on 20 July 2017 and was paid to shareholders on 22 September 2017. Shareholders were able to elect to receive ordinary shares credited as fully paid instead of the cash dividend under the terms of the Company's scrip dividend scheme.
An interim dividend of 28.4p per ordinary share (2017: 27.4p) was declared and paid on 16 March 2018 to those shareholders on the SSE plc share register on 19 January 2018. Shareholders were able to elect to receive ordinary shares credited as fully paid instead of the interim cash dividend under the terms of the Company's scrip dividend scheme.
The proposed final dividend of 66.3p per ordinary share based on the number of issued ordinary shares at 31 March 2018 is subject to approval by shareholders at the Annual General Meeting and has not been included as a liability in these financial statements. Based on shares in issue at 31 March 2018, this would equate to a final dividend of GBP678.3m.
11. Earnings per Share
11.1 Basic earnings per share
The calculation of basic earnings per ordinary share at 31 March 2018 is based on the net profit attributable to ordinary shareholders and a weighted average number of ordinary shares outstanding during the year ended 31 March 2018. All earnings are from continuing operations.
11.2 Adjusted earnings per share
Adjusted earnings per share has been calculated by excluding the charge for deferred tax, interest on net pension liabilities under IAS 19R and the impact of exceptional items and certain re-measurements (Note 7).
Year ended 31 March Year ended 31 March Year ended 31 March Year ended 31 March
2018 2018 2017 2017
Earnings Earnings per share Earnings Earnings per share
GBPm pence GBPm pence
Basic 821.6 81.3 1,599.5 158.4
Exceptional items and
certain
re-measurements (Note
7) 219.2 21.7 (372.6) (36.9)
---------------------- ---------------------- ---------------------- ----------------------
Reclassification of
capital allowances
from prior years (101.3) (10.0) - -
---------------------- ---------------------- ---------------------- ----------------------
Basic excluding
exceptional items and
certain
re-measurements 939.5 93.0 1,226.9 121.5
Adjusted for:
Interest on net
pension scheme
liabilities (2.7) (0.3) 4.0 0.4
Share of interest on
net pension scheme
liabilities in joint
venture (0.2) - (0.9) (0.1)
Deferred tax (Note 8) 283.0 28.0 36.9 3.7
Deferred tax from
share of joint
ventures and
associates 4.4 0.4 2.0 0.2
Adjusted 1,224.0 121.1 1,268.9 125.7
---------------------- ---------------------- ---------------------- ----------------------
Basic 821.6 81.3 1,599.5 158.4
Dilutive effect of outstanding share options - (0.1) - (0.2)
----- ----- ------- -----
Diluted 821.6 81.2 1,599.5 158.2
Notes to the Preliminary Statement
for the year ended 31 March 2018
11.2 Earnings per share (continued)
Adjusted earnings per share (continued)
The weighted average number of shares used in each calculation is as follows:
31 March 2018 31 March 2017
Number of shares Number of shares
(millions) (millions)
For basic and adjusted earnings per share 1,010.9 1,009.7
Effect of exercise of share options 0.8 1.4
----------------- -----------------
For diluted earnings per share 1,011.7 1,011.1
----------------- -----------------
11.3 Dividend cover
The Group's adjusted dividend cover metric is calculated by comparing adjusted earnings per share to the projected dividend per share payable to ordinary shareholders.
2018 2018 2018 2017 2017 2017
Earnings per Dividend per Dividend Cover Earnings per Dividend per Dividend cover
share share share share
(pence) (pence) (times) (pence) (pence) (times)
Reported 81.3 94.7 0.86 158.4 91.3 1.74
Adjusted 121.1 94.7 1.28 125.7 91.3 1.38
---------------- ----------------- --------------- ----------------- ----------------- ---------------
12. Acquisitions, disposals and held-for-sale assets
12.1 Acquisitions
There have been no significant acquisitions in the year.
12.2 Disposals
Significant disposals
Clyde windfarm - On 28 August 2017 the Clyde Extension windfarm, comprising 54 turbines generating an additional 172.8MW, reached its Commercial Operation Date. In March 2016, SSE announced the initial sale of 49.9% of Clyde Windfarm (Scotland) Limited ("Clyde") equating to 349.6MW of the existing operational wind farm. It was agreed between the partners that when Commercial Operation began, the equity stake in Clyde jointly owned by Greencoat UK Wind Plc (UKW) and GLIL Infrastructure LLP ("GLIL") would be diluted from 49.9% to 30%, with the Group retaining 70%. Due to the contractual agreement between the parties, the Group assessed that dilution did not give rise to a change in control, therefore Clyde remains an equity accounted joint venture.
On 4 September 2017, the Group completed the disposal of a further 5.0% equity stake in Clyde to the existing joint venture partners for consideration of GBP67.8m, recognising a gain on sale of GBP24.0m. At 31 March 2018, the Group's shareholding in Clyde was therefore 65% with UKW and GLIL jointly owning 35%. In the period prior to disposal, the 5% equity stake in the windfarm contributed GBP0.2m to profit before tax of the Group.
As part of that disposal agreement, UKW and GLIL also have the option to buy a further 14.9% of Clyde, equating to 77.8MW, for a cash consideration of GBP202.2 million, before costs. This option can be exercised between 1 April 2018 and 30 June 2018 and would result in SSE's equity share in Clyde reducing to 50.1% with UKW and GLIL owning the remaining 49.9%. As a result, 14.9% of the Group's investment in Clyde has been presented as held for sale at 31 March 2018.
On 8(th) of May 2018, subsequent to the financial year end, UKW and GLIL announced that they will exercise their option to purchase 14.9% of on the 30(th) of May 2018 for consideration of GBP202.0m. Following the sale of this stake, the Group will retain 50.1% in the equity accounted joint venture. The gain on sale will be calculated following completion of the sale.
Ferrybridge MFE2 - On 7 September 2017, the Group disposed of a 50% equity stake in its subsidiary Ferrybridge MFE2 Limited to Wheelabrator Technologies Inc. for consideration of GBP62.5m, recognising nil gain/(loss) on disposal of the subsidiary. The Group disposed of a subsidiary on the date it lost control and acquired a joint venture which it then recognised at fair value under the principles of both IFRS 3 'Business Combinations' and IFRS 11 'Joint Arrangements'. A gain of GBP6.7m was recognised on acquisition of the joint venture following the fair value assessment. The Group's 50% interest in Ferrybridge MFE2 was classified as held for sale at 31 March 2017.
Notes to the Preliminary Statement
for the year ended 31 March 2018
12.2 Acquisitions, disposals and held-for-sale assets (continued)
12.3 Disposal reconciliation
The following table summarises all businesses and assets disposed of during the financial year, including those not previously 'held for sale' and including other assets and investments disposed of as part of the normal course of business and which are noted in the relevant respective notes to the financial statements.
2018 2018 2017
Held for sale at March 2017 Not Held for Sale at March 2017 Total Total
Net assets disposed: GBPm GBPm GBPm GBPm
Property, plant and equipment 63.6 21.8 85.4 15.5
Intangible and biological assets - 3.2 3.2 43.5
Investments and loans - joint
ventures - 34.7 34.7 326.9
Trade and other receivables - - - 105.8
Trade and other payables - - - (7.3)
Provisions - - - 16.2
Loans and borrowings - - - (90.4)
Net assets 63.6 59.7 123.3 410.2
----------------------------
Proceeds of disposal:
Consideration 66.6 84.9 151.5 886.0
Fair value uplift 6.7 - 6.7 -
Debt reduction - - - (129.4)
Costs of disposal - - - (11.7)
Provisions - - - (2.8)
Net proceeds 73.3 84.9 158.2 742.1
----------------------------
Gain on disposal after provisions 9.7 25.2 34.9 331.9
---------------------------- -------------------------------- ------ --------
Presentation:
Income statement exceptional credit - - - 307.3
Income statement non exceptional
credit 9.7 25.2 34.9 24.6
---------------------------- -------------------------------- ------ --------
2018 2017
GBPm GBPm
Net proceeds of disposal 158.2 742.1
Fair value uplift (6.7) -
Provisions - (2.8)
------ ------
Total cash proceeds 151.5 739.3
The debt reduction items in 2017 of GBP129.4m are associated with the disposal of PFI Lighting Services companies.
Notes to the Preliminary Statement
for the year ended 31 March 2018
12 Acquisitions, disposals and held-for-sale assets (continued)
12.4 Held-for-sale assets and liabilities
A number of assets and liabilities associated with activities are deemed available for immediate sale and have been separately presented on the face of the balance sheet at 31 March 2017. The assets have been stated at their fair value less costs to sell.
The assets and liabilities classified as held for sale, and the comparative balances at 31 March 2017, are as follows:
2018 2017
GBPm GBPm
Property plant and equipment - 63.6
Equity investments in joint ventures and associates 35.3 -
Loans to joint ventures and associates 81.9 -
Derivative financial assets - 2.7
Non-current assets 117.2 66.3
----- -----
Derivative financial assets - 4.1
Current assets - 4.1
----- -----
Total assets 117.2 70.4
----- -----
Deferred tax liabilities - (1.4)
Non-current liabilities - (1.4)
----- -----
Total liabilities - (1.4)
----- -----
Net assets 117.2 69.0
----- -----
The assets and liabilities classified as held for sale at 31 March 2018 are the Group's 14.9% equity interest in Clyde Windfarm (Scotland) Limited (see 'Significant Disposals'). The joint venture partners Greencoat UK Wind Plc and GLIL Infrastructure LLP have a non-transferrable option to purchase a further 14.9% equity stake in the joint venture for consideration of GBP202.2m between 1 April 2018 and 30 June 2018.
The aggregated pre-tax profit contribution of the held for sale assets and businesses in the year to 31 March 2018 was GBP6.6m (2017: nil).
GBP14.3m of operating wind farm assets were held for sale at 31 March 2017. The other held for sale items in prior year related to 50% of the assets and liabilities of Ferrybridge MFE 2 Limited which was disposed on 7 September 2017 (Note 12.2).
12.5 Acquisitions and disposals in the previous year
(i) Acquisitions in the previous year
The Group increased its share in the Dogger Bank Offshore Wind development on 24 March 2017 following the acquisition of an additional 12.5% stake from former consortium partner Statkraft for consideration of GBP15.8m. This takes SSE's share of the project to 37.5%. Following this the Group reversed a previous impairment of GBP10.7m in respect of the project within other intangible assets. The Dogger Bank offshore wind development comprises four projects which are located in the North Sea off the east coast of England and has a potential generating capacity of up to 4,800MW. Due to the development being assessed as being a joint operation, the purchase price has been wholly allocated against intangible development assets.
Notes to the Preliminary Statement
for the year ended 31 March 2018
12 Acquisitions, disposals and held-for-sale assets (continued) (ii) Disposals in the previous year
On 26 October 2016, the Group completed the disposal of a 16.7% equity stake in Scotia Gas Networks (SGN) to wholly owned subsidiaries of the Abu Dhabi Investment Authority (ADIA). After transaction costs and adjustments, cash consideration received was GBP615.1m and an exceptional gain on sale of GBP307.3m was recognised on disposal. Following the divestment, the Group will retain a 33.3% equity stake in SGN. These assets were not held for sale at 31 March 2016. The disposed 16.7% stake of SGN sold contributed GBP34.2m to the Group's reported profits in the prior financial year.
On 21 January 2016, the company sold a 10% share in Beatrice Offshore Windfarm Limited to CI Beatrice I Limited and CI Beatrice II Limited split equally between the two entities for total consideration of GBP31.7m of which GBP21.2m was deferred. The deferred element of the consideration was contingent on certain events occurring after the balance sheet date. Following confirmation of those events, in May 2016, the Group received net cash proceeds of GBP31.7m which also included an element of deferred consideration associated with a prior divestment (GBP10.5m). The Group consequently recognised a GBP20.3m gain on disposal in the current year. This was deemed not to be exceptional due to the value being below the Group's stated criteria for such items (see Note 4.2).
Other disposals included disposed of GBP43.5m of smart meter assets to Meter Fit 10 Limited for cash consideration equal to book value resulting in nil gain/(loss) on disposal and the disposal of its stake in three Lighting Services PFI joint ventures DIF Infra 4 UK Limited for net consideration of GBP40.4m, resulting in a gain on sale of GBP2.2m.
13. Sources of finance
13.1 Capital management
The Board's policy is to maintain a strong balance sheet and credit rating to support investor, counterparty and market confidence in the Group and to underpin future development of the business. The Group's credit ratings are also important in maintaining an efficient cost of capital and in determining collateral requirements throughout the Group. As at 31 March 2018, the Group's long term credit rating was A- stable outlook for Standard & Poor's and A3 stable outlook for Moody's.
The maintenance of a medium-term corporate model is a key control in monitoring the development of the Group's capital structure and allows for detailed scenarios and sensitivity testing. Key ratios drawn from this analysis underpin regular updates to the Board and include the ratios used by the rating agencies in assessing the Group's credit ratings.
During the year, the Group completed its discretionary share buyback programme announced on 11 November 2016 to reduce the share capital of the Company. In total 34.8m shares were purchased for consideration of GBP499.7m (excluding stamp duty and commission), of which 9.2m (GBP125.0m) were retained as treasury shares to settle some of the Group's obligations under the Sharesave scheme in the UK and 25.6m shares were cancelled.
The Group's debt requirements are principally met through issuing bonds denominated in Sterling and Euros as well as private placements and medium term bank loans including those with the European Investment Bank. In the financial year, SSE successfully issued its inaugural Green Bond, an eight year EUR600m bond with a coupon of 0.875% and an all-in cost of 0.98%, which represented the lowest coupon ever achieved by SSE. In March 2018, SSE drew the GBP200m EIB facility, signed in March 2017, as two GBP100m, 10 year floating rate loans and rolled the maturing GBP105m term loan for a further two years. SSE also exercised the second, and last, one year extension option on its GBP1.3bn revolving credit facility and GBP200m bilateral facility meaning these facilities now mature in July 2022 and November 2022 respectively. The GBP1.5bn of committed bank facilities can be accessed at short notice for use in managing the Group's short term funding requirements, however these committed facilities remain undrawn for the majority of the time.
The Group capital comprises:
2018 2017
GBPm GBPm
Total borrowings (excluding finance leases) 8,359.4 7,805.5
Less: Cash and cash equivalents (232.2) (1,427.0)
--------- ----------
Net debt (excluding hybrid equity) 8,127.2 6,378.5
Hybrid equity 1,169.7 2,209.7
Cash held as collateral and other short term loans (75.1) (105.2)
Adjusted Net Debt and Hybrid Equity #APM 9,221.8 8,483.0
Equity attributable to shareholders of the parent 4,060.5 4,062.8
--------- ----------
Total capital excluding finance leases 13,282.3 12,545.8
--------- ----------
In summary, the Group's intent is to balance returns to shareholders between current returns through dividends and long-term capital investment for growth. In doing so, the Group will maintain its capital discipline and will continue to operate within the current economic environment prudently. There were no changes to the Group's capital management approach during the year.
Notes to the Preliminary Statement
for the year ended 31 March 2018
13. Sources of finance (continued)
13.2 Loans and borrowings
2018 2017
GBPm GBPm
Current
Other short-term loans 626.3 118.8
Obligations under finance leases 24.0 23.6
------
650.3 142.4
------ ------
Non current
Loans 7,733.1 7,686.7
Obligations under finance leases 227.1 253.3
7,960.2 7,940.0
-------- --------
Total loans and borrowings 8,610.5 8,082.4
Add:
Cash and cash equivalents (232.2) (1,427.0)
-------- ----------
Unadjusted Net Debt 8,378.3 6,655.4
Add/(less):
Hybrid equity (Note 14) 1,169.7 2,209.7
Obligations under finance leases (251.1) (276.9)
Cash held as collateral and other short term loans (75.1) (105.2)
Adjusted Net Debt and Hybrid Capital 9,221.8 8,483.0
-------- ----------
Cash and cash equivalents (which are presented as a single class of assets on the face of the balance sheet) comprise cash at bank and short term highly liquid investments with a maturity of six months or less. The cash and cash equivalents are lower year on year due to the repayment of GBP1.0bn Hybrids maturing in October 17, which were refinanced in March 17.
Borrowing facilities
The Group has an established EUR1.5bn Euro commercial paper programme (paper can be issued in a range of currencies and swapped into sterling) and as at 31 March 2018 no commercial paper was outstanding (2017: GBPnil). During the year, the Group extended its existing GBP1.5bn revolving credit and bilateral facilities by invoking the second of the two, one year extension options with the facilities now maturing in July 2022 (GBP1.3bn) and November 2022 (GBP0.2bn). These facilities continue to provide back up to the commercial paper programme and, as at 31 March 2018, they were undrawn.
Hybrid Debt
On 16 March 2017, the Group issued GBP1.0bn of new hybrid debt securities. The securities have an issuer first call date on 16 September 2022 and are able to be redeemed at the Group's discretion. This dual tranche issue comprises GBP300m 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. This compares favourably to the all-in funding cost of 4.02% achieved on SSE's most recent Hybrid equity securities issued in 2015. The proceeds were used to repay SSE's hybrid issued in 2012 (at an all-in rate of 5.6%) on 1 October 2017. Due to the hybrid instruments issued in March 2017 having a fixed redemption date, they have been accounted for as a debt item and are included within Loans and Other Borrowings. This is in contrast to the previous Hybrid instruments which have no fixed redemption date and are accounted for as Equity, see Note 14.
Notes to the Preliminary Statement
for the year ended 31 March 2018
14. Equity
14.1 Share capital
Number
(millions) GBPm
Allotted, called up and fully paid:
At 31 March 2017 1,015.6 507.8
Issue of shares (i) 24.1 12.0
Shares repurchased (ii) (16.7) (8.3)
------------ ------
At 31 March 2018 1,023.0 511.5
------------ ------
The Company has one class of ordinary share which carries no right to fixed income. The holders of ordinary shares are entitled to receive dividends as declared and are entitled to one vote per share at meetings of the Company.
i. Shareholders were able to elect to receive ordinary shares in place of the final dividend of 63.9p per ordinary share (in relation to year ended 31 March 2017) and the interim dividend of 28.4p (in relation to the current year under the terms of the Company's scrip dividend scheme. This resulted in the issue of 23,497,675 and 546,613 new fully paid ordinary shares respectively (2017: 9,395,092 and 6,324,986). In addition, the Company issued 1.4m (2017- 1.2m) shares during the year under the savings-related share option schemes (of which 1.3m were settled by shares held in Treasury) for a consideration of GBP16.6m (2017: GBP13.8m)
ii. Under the share buyback programme announced on 11 November 2016, 16.7m shares were repurchased and cancelled in the year to 31 March 2018 for a total consideration of GBP245.5m (2017: 8.9m shares repurchased and cancelled for a total consideration of GBP131.5m). The nominal value of share capital repurchased and cancelled is transferred out of share capital and into the capital redemption reserve.
As part of the same share buyback programme the Group has purchased 9.2m shares (2017: nil) for total consideration of GBP126.1m (including stamp duty and commission) in the year to 31 March 2018 to be retained as treasury shares. These shares will be held by the Group and used to award shares to employees under the Sharesave scheme in the UK.
In total, since the announcement of the share buyback scheme on 11 November 2016, the Group has purchased 34.8m shares for consideration of GBP503.1m (inclusive of stamp duty and commission).
During the year, on behalf of the Company, the employee share trust purchased 1.4m shares for a total consideration of GBP19.8m (2017: 0.8m shares, consideration of GBP12.6m). At 31 March 2018, the trust held 3.3m shares (2017: 2.9m) which had a market value of GBP41.8m (2017: GBP42.5m).
14.1 Hybrid Equity
2018 2017
GBPm GBPm
USD 700m 5.625% perpetual subordinated capital securities - 427.2
EUR 750m 5.625% perpetual subordinated capital securities - 598.2
GBP 750m 3.875% perpetual subordinated capital securities 748.3 748.3
EUR 600m 2.375% perpetual subordinated capital securities 421.4 436.0
-------- --------
1,169.7 2,209.7
-------- --------
(i) 18 September 2012 EUR750m and US$700m Hybrid Equity Bonds
On 2 October 2017, the Group redeemed all of the capital securities at their principal amount. The securities were redeemed in their functional currency with the additional net Sterling cost of redemption of GBP92.4m being recognised in retained earnings. The funding has been replaced by a debt accounted GBP1.0bn instrument issued on 16 March 2017.
Each bond had no fixed redemption date but the Company was able, at its sole discretion, redeem all, but not part, of these capital securities at their principal amount. The first date for discretionary redemption of the capital issued on 18 September 2012 was 1 October 2017.
(ii) 10 March 2015 GBP750m and EUR600m Hybrid Equity Bonds
The March 2015 hybrid equity bonds have no fixed redemption date, but the Company may, at its sole discretion, redeem all, but not part, of the capital securities at their principal amount. The date for the first potential discretionary redemption of the GBP750m hybrid equity bond is 10 September 2020 and then every 5 years thereafter. The date for the first discretionary redemption of the EUR600m hybrid equity bond is 1 April 2021 and then every 5 years thereafter.
For the GBP750m capital issued coupon payments are made annually on 10 September and for the EUR600m capital issued coupon payments are made annually on 1 April.
Notes to the Preliminary Statement
for the year ended 31 March 2018
14 Equity (continued) (iii) Coupon Payments
In relation to the $700m hybrid equity bond coupon payments were made on 1 April 2017 and 2 October 2017 totalling GBP21.2m (2017: GBP23.3m). In relation to the EUR750m hybrid equity bond a coupon payment of GBP30.6m (2017: GBP33.6m) was made on 2 October 2017.
In relation to the EUR600m hybrid equity bond a coupon payment of GBP17.6m (2017: GBP18.6m) was made on 1 April 2017 and for the GBP750m hybrid equity bond a coupon payment of GBP29.1m (2017: GBP43.8m) was made on 10 September 2017.
The coupon payments in the year to 31 March 2018 consequently totalled GBP98.5m (2017: GBP119.3m).
The Company has the option to defer coupon payments on the bonds on any relevant payment date, as long as a dividend on the ordinary shares has not been declared. Deferred coupons shall be satisfied only in the following circumstances, all of which occur at the sole option of the Company:
-- redemption; or
-- dividend payment on ordinary shares.
Interest will accrue on any deferred coupon.
15. Retirement Benefit Obligations
15.1 Valuation of combined Pension Schemes
Value Value
Quoted Unquoted at 31 March 2018 Quoted Unquoted at 31 March 2017
GBPm GBPm GBPm GBPm GBPm GBPm
Equities 891.5 - 891.5 1,203.9 - 1,203.9
Government bonds 1,222.7 - 1,222.7 1,079.9 - 1,079.9
Corporate bonds 1,285.0 - 1,285.0 1,288.6 - 1,288.6
Insurance contracts - 210.8 210.8 - 221.3 221.3
Other investments 587.3 - 587.3 591.9 - 591.9
-------- -----------------
Total fair value of plan assets 4,197.3 4,385.6
Present value of defined benefit
obligation (3,862.8) (4,315.1)
----------------- -----------------
Surplus in the schemes 334.5 70.5
Deferred tax thereon (i) (159.8) (106.6)
----------------- -----------------
Net pension asset/(liability) (ii) 174.7 (36.1)
----------------- -----------------
(i) Deferred tax rate of 35% applied to pension surpluses, whilst 17% applied to pension deficits.
(ii)The two pensions schemes of the group, Scottish Hydro Electric pension scheme and the Southern Electric pension scheme are in individual in net asset and liability positions respectively, and as such these positions have been presented separately on the balance sheet, see below
Balance Sheet presentation
2018 Balance sheet presentation 2017
GBPm GBPm
Retirement benefit asset 572.1 525.4
Retirement benefit liability (237.6) (454.9)
-------------------------- -------------------------------
Net pension asset/(liability) 334.5 70.5
-------------------------- -------------------------------
Notes to the Preliminary Statement
for the year ended 31 March 2018
15 Retirement Benefit Obligations (continued)
Movements in the defined benefit asset obligations and assets during the year:
2018 2017
Assets Obligations (i) Total Assets Obligations (i) Total
GBPm GBPm GBPm GBPm GBPm GBPm
at 1 April 4,385.6 (4,315.1) 70.5 3,702.9 (3,835.0) (132.1)
Included in Income Statement
Current service cost - (55.2) (55.2) - (50.9) (50.9)
Past service cost - (3.2) (3.2) - (13.6) (13.6)
Interest income/(cost) 112.3 (109.6) 2.7 130.9 (134.9) (4.0)
112.3 (168.0) (55.7) 130.9 (199.4) (68.5)
Included in Other Comprehensive Income
Actuarial (loss)/gain arising from:
Demographic assumptions - 118.0 118.0 - 259.6 259.6
Financial assumptions - 66.4 66.4 - (807.9) (807.9)
Experience assumptions - (2.6) (2.6) - 31.4 31.4
Return on plan assets excluding interest income 40.0 - 40.0 675.5 - 675.5
40.0 181.8 221.8 675.5 (516.9) 158.6
Other
Contributions paid by the employer 97.9 - 97.9 112.5 - 112.5
Scheme participants' contributions 0.2 (0.2) - 0.2 (0.2) -
Benefits paid (438.7) 438.7 - (236.4) 236.4 -
(340.6) 438.5 97.9 (123.7) 236.2 112.5
Balance at 31 March 4,197.3 (3,862.8) 334.5 4,385.6 (4,315.1) 70.5
I) The retirement benefit obligations are stated before IFRIC 14 liabilities.
Charges / (credits) recognised:
2018 2017
GBPm GBPm
Current service cost (charged to operating profit) 58.4 64.5
58.4 64.5
(Credited)/charged to finance costs:
Interest on pension scheme assets (112.3) (130.9)
Interest on pension scheme liabilities 109.6 134.9
(2.7) 4.0
Notes to the Preliminary Statement
for the year ended 31 March 2018
16. Financial risk management
16.1 Financial risk management
The Board has overall responsibility for the establishment and oversight of the Group's risk management framework. The Risk Committees in the Wholesale and Retail divisions, both of which report directly to the Executive Committee to support the Group's risk management responsibilities by reviewing the strategic, market, credit operational and liquidity risks and exposures that arise from the Group's energy portfolio management, generation, energy supply and treasury operations. The Risk Committees of Wholesale and Retail are designed to ensure strict business separation requirements are maintained.
The Group's policies for risk management are established to identify the risks faced by the Group, to set appropriate risk limits and controls, and to monitor risks and adherence to limits. These policies, and the systems used to monitor activities, are reviewed regularly by the Risk Committees in Wholesale and Retail.
Exposure to the commodity, currency and interest rate risks noted arise in the normal course of the Group's business and derivative financial instruments are entered into to hedge exposure to these risks. The objectives and policies for holding or issuing financial instruments and similar contracts, and the strategies for achieving those objectives that have been followed during the year are explained below.
For financial reporting purposes, the Group has classified derivative financial instruments into two categories, operating derivatives and financing derivatives. Operating derivatives relate to qualifying commodity contracts which includes certain contracts for electricity, gas, oil, coal and carbon. Financing derivatives include all fair value and cash flow interest rate hedges, non-hedge accounted (mark-to-market) interest rate derivatives, cash flow foreign exchange hedges and non-hedge accounted foreign exchange contracts. Non-hedge accounted contracts are treated as held for trading.
The net movement reflected in the interim income statement can be summarised thus:
2018 2017
GBPm GBPm
Operating derivatives
Total result on operating derivatives (i) (445.9) (438.6)
Less: amounts settled (ii) 356.8 639.6
Movement in unrealised derivatives (89.1) 201.0
Financing derivatives (and hedged items)
Total result on financing derivatives (i) (95.6) (136.3)
Less: amounts settled (ii) 62.6 188.9
Movement in unrealised derivatives (33.0) 52.6
Net income statement impact (122.1) 253.6
(i) Total result on derivatives in the income statement represents the total amounts (charged) or credited to the income statement in respect of operating and financial derivatives.
(ii) Amounts settled in the year represent the result on derivatives transacted which have matured or been delivered and have been included within the total result on derivatives.
Notes to the Preliminary Statement
for the year ended 31 March 2018
16 Financial risk management (continued)
16.2 Fair Value Hierarchy
The following table provides an analysis of financial instruments that are measured subsequent to initial recognition at fair value, grouped into Levels 1 to 3 based on the degree to which the fair value is observable.
-- Level 1 fair value measurements are those derived from unadjusted quoted market prices for identical assets or liabilities.
-- Level 2 fair value measurements are those derived from inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices)
-- Level 3 fair value measurements are those derived from valuation techniques that include inputs for the asset or liability that are not based on observable market data.
Level 1 Level 2 Level 3 Total
Financial Assets GBPm GBPm GBPm GBPm
Energy derivatives 246.3 839.4 - 1,085.7
Interest rate derivatives - 301.9 - 301.9
Foreign exchange derivatives - 8.9 - 8.9
246.3 1,150.2 - 1,396.5
---------- ----------
Financial Liabilities
Energy derivatives (249.7) (1,088.4) - (1,338.1)
Interest rate derivatives - (480.0) - (480.0)
Foreign exchange derivatives - (1.9) - (1.9)
Loans and borrowings - (37.3) - (37.3)
---------- ----------
(249.7) (1,607.6) - (1,857.3)
---------- ----------
There were no significant transfers out of level 1 into level 2 and out of level 2 into level 1 during the year ended 31 March 2018.
17. Capital commitments
2018 2017
GBPm GBPm
Capital expenditure:
Contracted for but not provided 527.3 949.0
Contracted for, but not provided capital commitments, include the fixed contracted costs of the Group's major capital projects. In practice, contractual variations may arise on the final settlement of these contractual costs.
Notes to the Preliminary Statement
for the year ended 31 March 2018
18. Related party 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.
2018 2018 2018 2018 2017 2017 2017 2017
Sale of Purchase
goods of Sale of Purchase of
and goods and Amounts owed Amounts owed goods and goods Amounts Amounts
services services from to services and services owed from owed to
Joint
ventures: GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Seabank
Power Ltd 14.4 (155.0) 0.1 16.2 11.0 (134.0) 0.1 17.0
Marchwood
Power Ltd 8.5 (132.3) 0.2 10.6 16.8 (144.5) 0.5 12.6
Scotia Gas
Networks
Ltd 41.4 (144.8) 0.6 14.2 45.5 (158.0) 0.9 0.9
Clyde
Windfarm
(Scotland)
Ltd 4.8 (129.3) 6.5 37.7 5.7 (0.1) - 11.1
Other Joint
Ventures 23.3 (186.2) 17.1 52.3 10.4 - 2.3 -
Associates - (34.7) 4.5 - 1.4 (53.4) 3.6 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.
19. Post balance sheet events
19.1 Disposal of 14.9% equity stake in Clyde Windfarm (Scotland) Limited
On the 8(th) of May 2018, the Group's joint venture partners Greencoat UK Wind Plc ("UKW") and GLIL Infrastructure LLP ("GLIL") announced they would exercise their option to purchase a 14.9% equity stake in Clyde (Windfarm) Scotland Limited for consideration of GBP202.0m on the 30(th) of May 2018. Following the sale of this stake, the Group will retain 50.1% in the equity accounted joint venture. The gain on sale will be calculated following completion of the sale.
19.2 Ruling on the Group's claim for damages following a tunnel collapse on the Glendoe hydro power station
On the 10(th) of April 2018, a ruling was passed in the Court of Session in Edinburgh to award SSE damages of GBP108.6m plus interest in its case against the main building contractor of the Glendoe hydro power station, following the collapse of a tunnel in 2009. As this award remains subject to appeal by the contractor, receipt of the award is not yet virtually certain and these financial statements have not been adjusted to recognise receipt of the award. However, SSE considers that receipt of the award is highly likely and has considered the award of damages when testing the power station for impairment on 31 March 2018.
This information is provided by RNS, the news service of the London Stock Exchange. RNS is approved by the Financial Conduct Authority to act as a Primary Information Provider in the United Kingdom. Terms and conditions relating to the use and distribution of this information may apply. For further information, please contact rns@lseg.com or visit www.rns.com.
END
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