Preliminary results for the year to 31 March 2016

RNS Number : 5345Y
SSE PLC
18 May 2016
 

SSE plc
Preliminary results for the year to 31 March 2016

18 May 2016

This report sets out the preliminary results for SSE plc for the year to 31 March 2016. It includes updates on operations and investments in its Wholesale, Networks and Retail (including Enterprise) businesses.

Overview

·      SSE has met its main financial objective of an annual increase in the full-year dividend that is at least equal to RPI inflation - recommended full-year dividend up 1.1% to 89.4p;

·      Adjusted earnings per share down 3.7% to 119.5p but ahead of target of at least 115p;

·      Dividend cover of 1.34 times, which is within the expected range of 1.2 times-1.4 times;

·      SSE is targeting a return to growth and adjusted earnings per share of at least 120p in 2016/17; and delivery of a full-year dividend that at least keeps pace with RPI inflation in 2016/17 and in the subsequent years;

·      Taking account of the general uncertainties in the operating environment, SSE expects its dividend cover could range from around 1.2 times to around 1.4 times over the three years to 2018/19, based on dividend increases that at least keep pace with RPI inflation;

·      Adjusted profit before tax fell by 3.3% to £1,513.5mand reported profit before tax fell by 19.3% to £593.3m;

·      All three reportable business segments contributed adjusted operating profit during 2015/16: Wholesale earned £442.5m, down 6.6%; Networks earned £926.6m, down 1.1% and Retail (including Enterprise) earned £455.2m, down 0.4%.  Overall, operating profit is as expected when SSE published its Notification of Close Period on 24 March 2016, although the mix of operating profit is slightly different;

·      SSE recorded net exceptional charges of £889.8m before tax which was predominately related to impairment of certain Wholesale assets.  Against this, SSE also recorded a gain on the disposal of an interest in its Clyde wind farm of £138.6m which was recorded directly in equity.

·      Capital and investment expenditure totalled £1.6bn and adjusted net debt and hybrid capital was £8.4bn at 31 March 2016, compared to £7.9bn at 30 September 2015.  While underlying cash flows remain strong, the increase in adjusted net debt follows the acquisition of, and resulting investment in, new gas production and infrastructure assets acquired in October 2015, and unfavourable movements in foreign exchange rates;

·      SSE's total investment and capital expenditure is expected to be around £1.75bn in 2016/17 and in the range of £5.5-£6bn across the four years to March 2020;

·      SSE continues to focus on operational efficiency and has also secured over £1bn from its asset disposal programme. With a small amount still to complete, this programme has already achieved its objectives and will support future operations and investment;

·      SSE considers disposal of up to one third of its 50% equity stake in SGN Limited, with any proceeds being used to return or create value for shareholders; and

·      SSE continues to engage constructively with policy-makers and regulators.  There is now increased clarity on aspects of the external operating environment with the conclusion of the CMA consideration of the RIIO ED1 framework, planned revisions to the UK Capacity Market and the Provisional Decision on Remedies from the CMA investigation into the supply and acquisition of energy.

SSE's financial performance in 2015/16 at-a-glance

 

Mar 16

Mar 15

Mar 14

Adjusted Operating Profit*

£m

£m

£m

Wholesale

442.5

473.8

634.6

Networks

926.6

936.8

920.3

Retail

455.2

456.8

327.1

Corporate Unallocated

0.1

14

(1.9)

Total adjusted operating profit

1,824.4

1,881.4

1,880.1

 

 

 

 

Adjusted profit before tax*

1,513.5

1,564.7

1,551.1

Reported/ unadjusted  profit before tax

593.3

735.2

592.5

 

 

 

 

 

Pence

Pence

Pence

Adjusted earnings per share (EPS)*

119.5

124.1

123.4

Full-year dividend per share(DPS)

89.4

88.4

86.7

 

Times

Times

Times

Dividend cover

1.34

1.40

1.42

 

 

 

 

 

£m

£m

£m

Investment and capital expenditure

1,618.7

1,475.3

1,582.5

Adjusted  net debt and hybrid capital

8,395.0

7,568.1

7,642.8

Business-by-business profitability and performance

Operating profit*, which is stated before the payment of interest and tax, for the year to 31 March 2016 is set out above. Comparisons are with the previous two financial 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.

Wholesale

·      Energy Portfolio Management and Electricity Generation: operating profit* increased slightly by 0.7% mainly due to a 11.5% increase in electricity output from renewable sources offset by low wholesale power prices;

·      Gas Production:  operating profit* fell by 94%, reflecting a lower average achieved price  for gas produced; and

·      Gas Storage:  operating profit* was broadly flat, but very low at £4.0m reflecting continuing challenging operating conditions.

Wholesale was impacted by significant impairment charges associated with certain assets reflecting the impact of prevailing commodity prices and regulatory and other economic factors.

Networks

·      Electricity Transmission: operating profit* rose 56.0% reflecting major investment in the asset base;

·      Electricity Distribution: operating profit* fell by 20.7% as expected, mainly due to the reduction in base revenues under the first year of the RIIO ED1 Price Control; and

·      Gas Distribution: SSE's share of SGN's operating profit* fell by 5.7% primarily due to the decrease in allowed revenue in 2015/16 compared to the prior year.

Retail

·      Energy Supply:  operating profit* increased by 8.2% reflecting growth from Business Energy, especially from the I&C sector, where customer propositions and service have been enhanced.  This was offset by a decline in operating profit in household energy caused by declining customer numbers and lower energy consumption.  Over the year SSE's annual pre-tax profit margin per dual fuel household customer in GB was around 6.2%;

·      Energy-related services:  operating profit* fell by 13.0%, as SSE continues to invest in building scale in these businesses; and

·      Enterprise: operating profit* fell by 41.9% - the previous financial year included the £15.3m profit from the disposal of SSE's gas pipeline business and there have been a number of revisions to the overall structure of the SSE Enterprise business.

Investment and Capital Expenditure

In the year to 31 March 2016 SSE's investment and capital expenditure totalled £1.62bn. Economically-regulated Networks and renewable energy mandated by government obligations and targets accounted for 70% of this spend. Investment and capital expenditure included:

·      progressing the Caithness-Moray electricity transmission link, the largest capital project ever undertaken by SSE, and investing in customer service and innovation in Electricity Distribution. This investment further increased the RAV in Electricity Transmission, and the total RAV of SSE's networks businesses is well placed to reach around £10bn by 2020; and

·      expanding SSE's renewables portfolio with 67 MW of new onshore wind commissioned and a further 548 MW in construction, including the Galway Wind Park, Ireland's largest wind farm. These developments in government-mandated renewables reinforce SSE's position as an industry leader and are expected to take SSE's total renewable energy capacity to just over 3.7GW net of the recent Clyde part disposal.

In addition to the investment and capital expenditure outlined above, SSE has also purchased a 20% interest in the four gas fields and surrounding exploration acreage approximately 125km north west of the Shetland Islands, collectively known as the Greater Laggan Area, along with a 20% interest in the new Shetland Gas Plant, from Total E&P UK Limited. These are long-term assets which complement SSE's existing gas production assets and their acquisition is part of SSE's well-established strategy to maintain a balanced range of businesses.

Investment and capital expenditure is expected to be in the range of £5.5 - 6bn across the four years to March 2020; in 2016/17 it is expected to be around £1.75bn and in 2017/18 it is currently expected to be around £1.65bn, although this is subject to change.  This means the capex is weighted more towards the first half of the four-year period than the second.  Around two thirds of this investment and capital expenditure is expected to be in electricity networks and renewables.

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 annual dividend increases that at least keep pace with RPI inflation.

SSE's economic contribution

SSE's contribution to UK Gross Domestic Product in 2015/16 totalled just under £8.9bn, taking the total for the last five years to over £45bn.  In Ireland, it was €805m in 2015/16.

Safety

Safety is the number one priority for SSE. The Total Recordable Injury Rate for employees and employees of other companies working on SSE sites was 0.23 per 100,000 hours worked in 2015/16, the same as in the previous year.

Financial outlook for SSE in 2016/17

SSE continues to fulfil its core purpose of providing the energy people need in a reliable and sustainable way with clearly-defined and long-term strategic and financial frameworks which are built around the efficient operation of, and disciplined investment in, a balanced range of businesses across the energy sector in Great Britain and Ireland;

SSE believes that the quality of its operations, assets and investment opportunities means it can continue to deliver a full-year dividend that at least keeps pace with RPI inflation in 2016/17 and in the subsequent years.

It uses adjusted earnings per share to monitor financial performance over the medium term because it defines the amount of profit after tax that has been earned for each Ordinary share.  Although the nature of energy provision means that its financial results in any single year are always subject to well-documented  uncertainties, SSE is aiming for a return to growth and adjusted earnings per share of at least 120p in 2016/17.

As a result of its investment over the last five years, the majority of SSE's asset base and operating profit now relates to economically-regulated Networks and government-mandated renewable sources of energy.  Over the three years to 2018/19, SSE expects its dividend cover could range from around 1.2 times to around 1.4 times, based on dividend increases that at least keep pace with RPI inflation.  SSE maintains a long term target for dividend cover of above 1.4 times and closer to 1.5 times, based on dividend increases which at least keep pace with RPI inflation.

 

Richard Gillingwater, Chairman, SSE, said:

"SSE continues to fulfil its core purpose of providing the energy people need in a reliable and sustainable way, and in the context of a number of significant challenges 2015/16 marked another year of solid operational and financial performance across the SSE group. SSE has a clearly defined and long-term strategic framework comprising operational efficiency, disciplined investment and maintaining a balanced range of energy businesses. This strategy puts the company in good stead for the future and SSE is well-placed to deliver for its customers and its investors alike in the years ahead, and to continue to meet its financial objective of annual dividend growth of at least RPI inflation."

 

Alistair Phillips-Davies, Chief Executive of SSE, said:

"It has been another year in which SSE has delivered what it said it would. Nevertheless, the operating environment presented a number of complex issues, including the impact of prevailing commodity prices and intense retail market competition.  At the same time, SSE has continued to demonstrate financial discipline and commitment to its long-term strategic framework. The fact that some of the mist is beginning to clear around the legislative, political and regulatory environment means there are grounds for some cautious optimism for the next couple of years.

"SSE continues to invest for the future and in the year ahead plans almost £1.75bn of investment into new energy infrastructure in the UK and Ireland and improvements in services for our customers.  SSE will continue to identify opportunities for growth, whilst maintaining its financial discipline, enabling it to deliver for customers, achieve its core purpose and meet its dividend commitments." 

Further Information

Investor Timetable

 

Annual report on sse.com/investors

AGM (Perth) and Q1 Trading Statement

Ex-dividend date

21 June 2016

21 July 2016

28 July 2016

Record Date

29 July 2016

Final date for receipt of Scrip Elections

26 August 2016

Payment Date

23 September 2016

Notification of Close Period

by 30 September 2016

Results for six months to 30 September 2016

9 November  2016

 

 

 

 

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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 ending 31 March 2016 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.

As a result, this report focuses on adjusted earnings per share, adjusted profit before tax and adjusted operating profit.

Therefore, unless explicitly stated otherwise, any reference to Operating Profit, Profit before Tax and Earnings Per Share in the pages up to the Preliminary Financial Information refers to SSE's adjusted measures.  This has also been indicated by the use of an *.

The definitions SSE uses can be explained as follows:

Adjusted Operating Profit * - describes operating profit before exceptional items and re-measurements arising from IAS 39 and after the removal of interest and taxation on profits from joint ventures and associates. Note that 'operating profit' is described as profit before interest and taxation.

Adjusted Profit before Tax* - describes profit before tax, before exceptional items and re-measurements arising from IAS 39, excluding interest costs on net pension scheme liabilities and after the removal of taxation on profits from joint ventures and associates.

Adjusted Earnings Per Share* - describes earnings per share based on adjusted profit after tax which excludes exceptional items and re-measurements arising from IAS 39, deferred tax and interest costs on net pension scheme liabilities.

Note 2 to the Preliminary Financial Statements explains more about the basis and rationale of these adjustments including SSE's definition of Exceptional Items and Certain Re-measurements.


 

Chief Executive's Statement

In 2015/16, SSE again delivered what it said it would.  Nevertheless, the operating environment presented a number of complex issues.  In this context SSE continues to operate within a clearly defined strategic framework built on efficient operations, disciplined investment and maintaining a balanced range of businesses across the energy sector - in production, storage, transmission, distribution, supply and related services. This positions the business well for future evolution and change in energy provision, whilst also enabling it to identify opportunities for growth which should arise as the overall operating environment continues to become clearer.

Maintaining a clearly-defined strategic framework

SSE's long-established core purpose is to provide the energy people need in a reliable and sustainable way.  It operates under a clearly-defined strategic framework consisting of:

·      Efficient and safe core operations to help meet customers' long-term energy needs and earn the profit that allows it to give a return to investors;

·      Disciplined investments that are governed, developed and executed efficiently and in line with SSE's commitment to strong financial management and the dividend;

·      The maintenance of a balanced business so that SSE has a broad platform from which to deliver long-term value and does not become over-exposed to any one part of the energy sector but can pursue opportunities and contain risk in each of them where appropriate.

The energy markets in GB and Ireland are undergoing technological, regulatory and demographic changes. SSE believes that its strategic framework continues to be the right one to give it both the foundations and the flexibility to navigate through a changing market and changing regulatory conditions. Its focus is to provide its customers and its shareholders with long-term value. The fundamental strength of the business is its focus on efficiency, strong financial management, and the maintenance of a balanced range of businesses in the energy sector. This provides substantial opportunities for long-term growth and its track record in, and ongoing commitment to, operational efficiency and financial management stands SSE in good stead for the future.

Operating within a clearly-defined financial framework

The financial objective of this strategic framework is to increase annually the dividend payable to shareholders by at least RPI inflation.  This is because shareholders have either invested directly in SSE or, as owners of the company, have enabled it to borrow money from debt investors to finance investment that will help to meet the needs of energy customers in the UK and Ireland over the long term. In the five years since 1 April 2011, this investment totalled almost £8 bn.

SSE's clearly-defined financial framework has three features:

·      Dividend: SSE's financial objective is to deliver annual increases in the dividend of at least RPI inflation. This means it is able to look beyond short-term value and profit maximisation in any one year and maintain a disciplined, responsible and long-term approach to the management of, and investment in, its business activities.

·      Dividend cover: SSE believes that its dividend per share should be covered by adjusted earnings per share* at a level that is sustainable over the medium term. It has updated its three-year view of the probable range of dividend cover, despite the general uncertainties that prevail in a sector like energy.   As a result of its investment over the last five years, the majority of SSE's asset base and operating profit now relates to economically-regulated Networks and government-mandated renewable sources of energy.  Over the three years to 2018/19, SSE expects its dividend cover could range from around 1.2 times to around 1.4 times, based on dividend increases that at least keep pace with RPI inflation.  SSE maintains a long term target for dividend cover of above 1.4 times and closer to 1.5 times, based on dividend increases which at least keep pace with RPI inflation. In making this assessment, SSE has considered its current and projected dividend resources in the period to March 2019, the principal risks facing the business and the control measures in place to mitigate those risks.

·      Balance sheet:  As a long-term business, SSE believes that it should maintain a strong balance sheet, illustrated by its commitment to the current criteria for a single A credit rating.  SSE believes that a strong balance sheet enables it to secure funding from debt investors at competitive and efficient rates and take decisions that are focused on the long term - all of which supports the delivery of annual increases in the dividend of at least RPI inflation and the maintenance of an appropriate level of dividend cover.

SSE believes that its prudent financial framework and associated disciplined approach to financial management continues to make it an attractive investment for shareholders interested in long-term value.

Earning profits in a responsible way

A company's values are the bedrock of how it operates and in the fulfilment of its strategy SSE's values are central. SSE provides people with vital services and therefore has embedded a responsible approach into its business operations. Some of the significant steps SSE has taken to achieve enhanced social, economic and environmental impacts include paying the Living Wage to all employees, including being the first corporate Living Wage employer in Ireland, and being accredited as the UK's largest Fair Tax Mark company to recognise its transparent tax disclosures. In summary, SSE seeks to maintain a responsible approach to business to help ensure it is able to fulfil its core purpose, execute its strategy and achieve its financial objectives over the long term.  Full details of how SSE seeks to earn a profit in a responsible way can be found at sse.com/being responsible.

Performance of the three business segments

There are three reportable segments that make up the SSE Group: Wholesale, Networks and Retail (including Enterprise). It is this balance of businesses across the energy sector that enables SSE to pursue opportunities and manage risks, as well as apply best practice across all of its businesses in critical areas such as safety, large capital projects, customer service and disciplined financial management.

Overall, operating profit* is as expected when SSE published its Notification of Close Period on 24 March 2016, although the mix of operating profit* is slightly different.

·      Wholesale SSE's Wholesale business includes Generation and EPM, Gas Storage and Gas Production.  In 2015/16 there was a slight rise in operating profit* in EPM and Generation, as a result of an 11.5% increase in output of electricity from renewable sources. However, overall Wholesale  operating profit* fell by 6.6% due to an 94% reduction in Gas Production profits, reflecting the very challenging market conditions, and a continuing low contribution from Gas Storage adjusted operating profit*. The operating environment for Gas Production, thermal generation plant and Gas Storage remains persistently challenging due primarily to the impact of commodity prices. However, changes planned by the UK Government to the functioning of the Capacity Market may improve the outlook for thermal generation plant.

·      Networks SSE wholly owns three electricity networks businesses and has a 50% share in the SGN gas distribution networks.  These well-managed, economically-regulated energy network companies provide a relatively stable revenue flow for SSE, and its future plans in both Transmission and Distribution allow opportunities for fair returns. In 2015/16 there was a 56% growth in Transmission operating profits*, due to the delivery of a major programme of capital investment. This was offset by the expected reduction in base revenues for Electricity Distribution under the first year of the RIIO ED1 Price Control which was the primary reason for the 20.7% reduction in its  operating profit*  and a 5.7% reduction in the profitability of SGN, in which SSE currently has a 50% equity share.

·      Retail (including Enterprise) SSE's Retail business supplies electricity and gas, and other energy-related services, to customers across the UK and Ireland. In 2015/16, Energy Supply operating profit* increased by 8.2% to £398.9m reflecting growth from business energy supply, especially from the I&C sector, in which the number of customer accounts increased.  This offset the decline in operating profit* in household energy caused by declining customer numbers and lower energy consumption.  Over the year, SSE's annual profit margin per dual fuel household in GB was around 6.2%.  There were lower profits in SSE's Enterprise business, as the previous financial year included the £15.3m profit from the disposal of SSE's gas pipeline business and there have been a number of revisions to the overall structure of SSE Enterprise.

Providing greater transparency in reporting

In March 2014 SSE announced that it would begin a process of business separation to provide greater transparency and clarity in its reporting. There is now a subsidiary company for energy portfolio management, SSE EPM Limited, which sits alongside the separately disclosed Energy Supply and Generation activities of the SSE Group.  Against this background, the presentation of the results for SSE's businesses in its Financial Statements continues to be kept under review.

This separation should increase transparency and accountability in the performance management and the regulatory and financial reporting of each business. Whilst there is a general drive within SSE to improve accountability of the individual business segments, each reportable business segment works within SSE's strategic framework and it is their combined performance that enables it to meet its financial objective.

Managing energy sector issues

In 2015/16 there were continued uncertainties in aspects of SSE's operating environment. After a period of regulatory and legislative uncertainty, however, a degree of clarity is emerging and during the course of the year there has been increasing visibility around the shape of the future policy and regulatory framework affecting energy markets in Great Britain. This provides grounds for some cautious optimism for the future.

The energy sector issues SSE continues to manage include:

·      A sustained fall in commodity prices. Commodity prices have an inherent and well-recognised influence on SSE's business.  However, the balance of the SSE group as a whole, as well as the long-term nature of its assets and investments, mean that it is well-placed to manage this risk. The fall in commodity prices over the 18 months to March 2016 has had implications across the SSE Group. In SSE's Retail business gas tariffs were reduced by 4.1% in April 2015 and 5.3% in March 2016 as savings from a sustained fall in the wholesale price of gas were passed through to customers. In electricity the situation is more complicated due to cumulative costs associated with the long-term upgrade of the country's electricity system that began a decade ago. In SSE's Wholesale business the reduction in wholesale prices led to lower earnings for SSE's Gas Production and electricity generation businesses which in turn contributed to the significant Wholesale business exceptional charges recorded in the year.

·      The design of the GB Capacity Market: Through the two Capacity Market Auctions since 2014 SSE has secured agreements to provide de-rated electricity generation capacity to help the UK Government, National Grid and Ofgem, to deliver their responsibilities for security of supply. For future auctions DECC consulted on a number of changes to the way the auction functions, with the intention of ensuring that National Grid has adequate electricity generation capacity to call upon. The planned rule changes should, over time, lead to an even more effective mechanism and the intention to introduce a supplementary capacity auction in 2016 for the delivery year 2017/2018 is welcome.

·      The evolution of the regulatory framework for energy Networks. During the course of the year there were notable developments in the regulatory framework for networks. The conclusion, in September 2015, of the CMA's consideration of the concurrent British Gas Trading (BGT) and Northern Powergrids (NPg) appeals on the RIIO-ED1 price control resulted in it being largely upheld. Whilst as a result of the findings of these appeals two of SSE's Networks (SHEPD and SEPD) saw their average annual revenue reduced by £2m, the CMA's conclusions further demonstrated that the RIIO-ED1 price control process represented value for money for customers, balancing improved network performance and customer service over the price control period with a fair return to investors. SSE welcomes Ofgem's recent decision that it would not conduct a mid-period review into SHE Transmission's RIIO T1 price control and remains committed to delivering against its outputs while ensuring value for money for the remainder of RIIO T1.  Separately, SSE continues to engage in the process for designing competitive tendering for onshore transmission assets, which is being developed by Ofgem and legislated for by the UK Government, and which may impact future transmission investment.

·      The publication by the Competition and Markets Authority of its Provisional Decision on Remedies:  The CMA's announcement of their Provisional Decision on Remedies in March 2016 marked the near-culmination of a two year investigation into the supply and acquisition of energy in GB. Importantly, the investigation progressively narrowed in focus with the main proposed remedies focussed towards engaging customers in the energy retail market.  SSE supports many of the remedies and a clear framework and market design is emerging, but there are unfortunate shortcomings in the CMA's figures around the degree of consumer 'detriment' and some of the remedies proposed require consideration as to their practical and cost-effective implementation.

In addition, within its Notification of Close Period Statement on 24 March 2016, SSE provided a view on the risks posed by the forthcoming referendum on the UK's continued membership of the European Union.

As energy is an issue of societal importance political, legislative and regulatory change will continue to be an inherent feature of SSE's operating environment and acknowledged as a principal risk. Legislative change to the functioning of the energy market is also occurring in the Irish market where SSE operates. SSE believes that it should continue to maintain a constructive approach to its engagement with all political parties, regulators and governments within the jurisdictions in which it operates.

Delivering the core purpose in 2016/17

SSE's strategic priorities for 2016/17 include:

·      The safe and efficient management of assets to provide the energy that customers rely on and support the profitability of the business;

·      The delivery of high quality customer service and propositions to meet the increasingly changing needs of customers of the Retail (including Enterprise) and Networks businesses;

·      The efficient and disciplined investment in new assets or the upgrading of existing assets to support and maintain the balance of the business;

·      Taking further steps to increase the agility and flexibility of the business segments within the SSE Group and to simplify further the business through continued focus on efficiency;

·      Constructive engagement with regulators and legislators as further clarity is forthcoming on the evolution of the market, the regulatory framework and the operating environment.

·      The delivery of a full-year dividend increase that at least keeps pace with RPI inflation.

Conclusion

SSE's three business segments - Wholesale, Networks and Retail (including Enterprise) - have one core purpose: to provide the energy people need in a reliable and sustainable way.  SSE believes that success in fulfilling this core purpose enables it to earn a profit which it can then put to good use for the benefit of customers, other stakeholders and investors.  This helps to ensure that SSE is in a good position to achieve its first financial objective for shareholders: annual increases in the dividend that at least keep pace with RPI inflation in 2016/17 and beyond.


 

Group Financial Overview

Key Financial Metrics

Mar 16

£m

Mar 15

£m

Mar 14

£m

Adjusted Operating Profit*

1,824.4

1,881.4

1,880.1

Adjusted Net Finance Costs*

(310.9)

(316.7)

(329.0)

Adjusted Profit before Tax*

1,513.5

1,564.7

1,551.1

Adjusted Current Tax Charge*

(193.5)

(224.8)

(236.7)

Adjusted Profit after Tax*

1,320.0

1,339.9

1,314.4

Less: attributable to other equity holders

(124.6)

(121.3)

(122.9)

Adjusted Profit After Tax attributable to ordinary shareholders*

1,195.4

1,218.6

1,191.5

 

 

 

 

Adjusted EPS* - pence

119.5

124.1

123.4

 

 

 

 

Reported Profit after Tax**

460.6

543.1

323.1

Basic EPS - pence

46.1

55.3

33.5

 

 

 

 

Number of shares for basic and adjusted EPS (million)

1,000.0

981.8

965.5

Shares in issue at 31 March (m)

1,007.6

993.0

974.9

**After distributions to hybrid capital holders

 

Dividend Per Share

Mar 16

Mar 15

Mar 14

Interim Dividend pence

26.9

26.6

26.0

Final Dividend pence

62.5

61.8

60.7

Full Year Dividend pence

89.4

88.4

86.7

Increase %

1.1%

2.0%

3.0%

Dividend Cover times / SSE's adjusted EPS*

1.34x

1.40x

1.42x

 

Adjusted Operating Profit* by Segment

Mar 16

£m

Mar 15

£m

Mar 14

£m

EPM and Electricity Generation*

436.3

433.3

496.1

Gas Production*

2.2

36.6

130.2

Gas Storage*

4.0

3.9

8.3

Wholesale

442.5

473.8

634.6

Transmission *

287.2

184.1

136.7

Distribution *

370.7

467.7

507.0

SGN * (SSE's share)

268.7

285.0

276.6

Networks

926.6

936.8

920.3

Energy Supply*

398.9

368.7

246.2

Energy related services*

15.4

17.7

24.1

Enterprise*

40.9

70.4

56.8

Retail

455.2

456.8

327.1

Corporate Unallocated*

0.1

14.0

(1.9)

Total Adjusted Operating Profit*

1,824.4

1,881.4

1,880.1

 

 

Net finance costs

Mar 16

Mar 15

Mar 14

 

£m

£m

£m

Adjusted net finance costs*

310.9

316.7

329.0

add/(less):

 

 

 

Movement on financing derivatives (IAS 39)

(14.3)

44.2

64.2

Share of JV/Associates interest

(126.8)

(124.2)

(137.5)

Interest on net pension liabilities (IAS 19R)

22.3

14.0

28.2

Reported net finance costs

192.1

250.7

283.9

 

 

 

 

Adjusted net finance costs*

310.9

316.7

329.0

Add/(less):

 

 

 

Finance lease interest

(34.7)

(34.2)

(35.7)

Notional interest arising on discounted provisions

(15.7)

(14.0)

(9.5)

Hybrid coupon payment

124.6

121.3

122.9

Adjusted finance costs for interest cover calculation*

385.1

389.8

406.7

 

Profit before Tax

Mar 16

Mar 15

Mar 14

 

£m

£m

£m

Adjusted Profit before Tax*

1,513.5

1,564.7

1,551.1

Movement on derivatives (IAS 39)

(14.5)

(105.3)

(212.0)

Exceptional items

(889.8)

(674.6)

(747.2)

Interest on net pension liabilities (IAS19R)

(22.3)

(14.0)

(28.2)

Share of JV/ Associates tax

6.4

(35.6)

28.8

Reported Profit before Tax

593.3

735.2

592.5

 

Tax

Mar 16

£m

Mar 15

£m

Mar 14

£m

Adjusted current tax charge*

193.4

224.8

236.7

Add/(less)

 

 

 

Share of JV/Associates tax

6.4

(35.6)

28.8

Deferred tax including share of JV and Associates

80.8

82.0

141.8

Tax on exceptional items/certain re-measurements

(272.5)

(200.4)

260.8

Reported tax charge /(credit)

8.1

70.8

146.5

Effective current tax rate based on adjusted profit before tax

12.8%

14.4%

15.3%

Total UK taxes paid including taxes on profits, property taxes, environmental taxes, and employment taxes

453.9

506.2

431.6

 

Investment and Capex Summary

Mar 16

Mar 16

Mar 15

 

Share %

£m

£m

Thermal Generation

5.6

90.8

160.6

Renewable Generation

18.0

291.8

239.0

Gas Storage

0.9

14.0

14.3

Gas Production

3.5

56.1

21.0

Total Wholesale

28.0

452.7

434.9

Electricity Transmission

35.4

573.4

467.2

Electricity Distribution

16.0

258.3

327.6

Total Networks

51.4

831.7

794.8

Energy Supply and related services

10.4

169.0

109.6

Enterprise

3.0

48.5

25.1

Total Retail

13.4

217.5

134.7

Other

7.2

116.8

110.9

Total investment and capital expenditure

100.0%

1,618.7

1,475.3

 

Disposal programme 1

Mar 16

Mar 15

TOTAL

 

£m

£m

£m

Headline proceeds of disposal

542.2

467.5

1,009.7

Less: Debt reduction

(23.5)

(228.8)

(252.3)

Less: Other costs and deferrals

(5.6)

(4.9)

(10.5)

Cash proceeds of disposal

513.1

233.8

746.9

1 In period since announcement on 26 March 2014

 

Debt metrics

Mar 16

Mar15

Mar 14

 

£m

£m

£m

Adjusted net debt and hybrid capital* (£m)

(8,395.0)

(7,568.1)

(7,642.8)

Average debt maturity (years)

8.9

9.9

10.7

Adjusted interest cover1 *(excluding SGN) times

5.2

5.3

5.1

Adjusted interest cover1 *(including SGN) times

4.7

4.8

4.6

 

Average interest rate (excluding JV/assoc. interest and hybrid coupon)

3.73%

4.21%

4.71%

Average interest rate 1

3.95%

4.55%

4.92%

1 Including hybrid coupon

 

Adjusted Net Debt and Hybrid Capital*

Mar 16

Mar15

Mar 14

 

£m

£m

£m

Adjusted Net Debt and hybrid capital*

(8,395.0)

(7,568.1)

(7,642.8)

Less: hybrid capital

2,209.7

3,371.1

2,186.8

Adjusted Net Debt*

(6,185.3)

(4,197.0)

(5,456.0)

Less: Outstanding Liquid Funds

(121.8)

(71.7)

(51.2)

Add: Finance Leases

(300.8)

(319.7)

(328.9)

Less: Non-recourse Clyde debt

(200.7)

-

-

Unadjusted Net Debt

(6,808.6)

(4,588.4)

(5,836.1)

 

 

SSE Principal Sources of debt funding

Mar 16

Mar15

Mar 14

Bonds

45%

38%

43%

Hybrid capital securities

25%

37%

27%

European investment bank loans

8%

8%

7%

US private placement

5%

5%

5%

Index -linked debt, long term project finance and other loans

17%

12%

18%

 

Rating Agency

Rating

Current Criteria

Date of Issue

Moody's

A3 Negative outlook

13% RCF/Net Debt

Feb 2016

Standard and Poor's

A- Negative outlook

20-23% FFO/Net Debt

Feb 2016

 

Contributing to employees' pension schemes - IAS 19 R

Mar 16

£m

Mar15

£m

Mar 14

£m

Net pension scheme liabilities recognised in the balance sheet before deferred tax IAS19R

394.8

664.6

637.7m

Employer cash contributions Scottish Hydro Electric scheme

33.7

57.6

50.4

Deficit repair contribution included above

14.8

29.5

29.5

Employer cash contributions Southern Electric scheme

68.3

92.0

82.3

Deficit repair contribution included above

44.6

58.5

56.7

 

SGN contribution to SSE

Mar 16

Mar 15

Mar 14

 

£m

£m

£m

SGN Net Debt (excluding shareholder loans)

3,632

3,553

3,523

SGN net finance costs included as part of SSE net Finance costs

83.3

91.0

94.4

SGN contribution to SSE's adjusted profit before tax

184.3

194.0

182.2

Group Financial Review

This group financial review covers SSE's financial performance and outlook, capital investment, balance sheet and tax payments.

Earnings and Dividends

Working to deliver dividend increases that at least keep pace with inflation

SSE has met its financial objective for an annual increase in the full-year dividend that is at least equal to RPI inflation. The Board is recommending a final dividend of 62.5p per share, to which a Scrip alternative is offered, compared with 61.8p in the previous year, an increase of 1.1 %.  This will make a full-year dividend of 89.4p per share which is: an increase of 1.1 % compared with 2014/15, which is in line with RPI inflation; and covered 1.34 times by SSE's adjusted earnings per share.

SSE believes that its strategic framework and opportunities for growth mean it can continue to deliver a full-year dividend increase that at least keeps pace with RPI inflation in 2016/17 and in the subsequent years (measured against the average annual rate of RPI inflation across each of the 12 months to March).

Focusing on Adjusted Earnings Per Share*

To monitor its financial performance over the medium term, SSE focuses consistently 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.

Adjusted earnings per share* has the straightforward benefit of presenting the amount of profit after tax that has been earned for each Ordinary Share. 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.

In the year to 31 March 2016, SSE's adjusted earnings per share* was down 3.7% on the previous year to 119.5 pence but ahead of the target of at least 115 pence.  This resulted in dividend cover of 1.34 times which is within the expected range of 1.2 times to 1.4 times.

SSE continues to recognise that adjusted earnings per share* is subject to significant uncertainties in 2016/17 and the years immediately following.  The nature of energy provision means that financial results in any single year are always subject to well-documented uncertainties, meaning SSE generally seeks to provide a financial outlook later in the financial year.  Nevertheless, SSE is aiming for a return to growth and adjusted earnings per share of at least 120p in 2016/17.

Delivering adjusted profit before tax in 2015/16 and 2016/17

As expected, adjusted profit before tax* fell 3.3%, from £1,564.7m to £1,513.5m in 2015/16. SSE's Wholesale, Networks and Retail (including Enterprise) segments were all profitable.  Nevertheless, SSE's objective is not to maximise profit in any one year but to earn a sustainable level of profit over the medium term.

Over 2016/17 SSE's actual level of adjusted profit before tax will be determined largely by a range of factors that apply in its market-based businesses including:

·      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;

·      the actual and underlying level of customers' energy consumption.

Impact of movements on derivatives (IAS 39)

The Group enters into forward purchase contracts (for power, gas and other commodities) to meet the future demands of its Energy Supply business and to optimise the value of its Generation and other Wholesale 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. 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 predominantly be within the subsequent 12 to 18 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 £31.1m has arisen partly from a deterioration in the fair value of forward commodity purchase contracts.  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 2016, primarily electricity and gas, was a liability of £364.3m compared to a liability on similar contracts at 31 March 2015 of £333.2m.

Partly offsetting this is a net favourable movement on the fair valuation of interest and currency derivatives of £14.3m. This movement is primarily due to the weakening of Sterling against all major currencies during the year (impact of £20.0m) partly offset by interest rate swaps moving further out of the money by £5.7m due to fall in interest rates during the year. 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 2016, SSE recognised net exceptional charges of £889.8m before tax. The following table provides a summary of those net charges:

Total net charges by asset class

Property, Plant & Equipment impairments

Other impairments, charges and (income)

Total

 

£m

£m

£m

Coal Generation

67.6

219.4

287.0

Gas Generation

302.5

23.9

326.4

Gas Production

125.0

36.8

161.8

Gas Storage

150.9

-

150.9

Other

-

21.3

21.3

Disposals

-

(57.6)

(57.6)

Total

646.0

243.8

889.8

By Segment

 

 

 

Wholesale

646.0

222.0

868.0

Retail

-

17.8

17.8

Corporate

-

4.0

4.0

Total

646.0

243.8

889.8

The Coal Generation charges reflect the May 2015 announcement that Ferrybridge would cease commercial operations at March 2016 and also reflects increased economic and regulatory uncertainty at Fiddler's Ferry. The impairments of the Group's gas-fired power generation assets at Peterhead, Marchwood and Medway reflect ongoing low 'spark' spreads and uncertainty over the enduring ability of the plants to benefit from the UK Government's Capacity Market auctions. The charges recognised for Gas Production assets relate almost entirely to the decline in wholesale gas prices and includes an element (£121.2m) related to the Greater Laggan assets, while the prospects for Gas Storage remain extremely challenging. Finally, the Group recognised gains on disposal of wind development assets of £57.6m and also recorded a £138.6m gain on the part-disposal of its Clyde wind farm directly in equity. The Retail and Corporate charges are predominantly related to the cost of restructuring the business as well as costs associated with systems and non-core activities.

Investment and Capital Expenditure

Investing efficiently in energy assets that the UK and Ireland need in 2015/16

Central to SSE's strategic framework is efficient and disciplined investment in a balanced range of economically-regulated and market-based energy businesses. 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.

In March 2014, SSE said that it expected its investment and capital expenditure would total around £5.5bn (net of disposal proceeds received and balance sheet debt reduction), or £6.5bn gross, over the four years to 2017/18.  In 2015/16, SSE's investment totalled £1.62bn before proceeds and disposals across its businesses.  The Wholesale businesses accounted for around 30% of the total; the Networks businesses for around 50% and Retail, including Enterprise, plus Corporate for the remaining 20%.  Key strategic investments in 2015/16 included:

·      progressing the Caithness-Moray electricity transmission line, the largest capital project undertaken by SSE, and investing to improve service quality for customers in Electricity Distribution - this further increased the total RAV of SSE's existing Networks business, which is well placed to reach around £10bn by 2020; and

·      expanding SSE's renewables portfolio with 67 MW of new onshore wind commissioned and a further 548 MW in construction, including the Galway Wind Park, Ireland's largest wind farm. These developments in government-mandated renewables reinforce SSE's position as an industry leader and are expected to take SSE's total renewable energy capacity to over 3.7GW by 2019.  Including SSE 300MW Foyers pumped storage scheme, the total will be over 4GW.

In addition to the investment and capital expenditure outlined above, SSE has also purchased a 20% interest in the four gas fields and surrounding exploration acreage approximately 125km north west of the Shetland Islands, collectively known as the Greater Laggan Area, along with a 20% interest in the new Shetland Gas Plant, from Total E&P UK Limited. These long-term assets are a natural complement to SSE's existing gas production assets and provide further diversity to SSE's portfolio.

Allocating capital and investment expenditure in the period up to 2020

In March 2014 SSE set out its investment and capital expenditure programme for the four years to March 2018.  It is now half way through that period and is still expecting gross investment and capital expenditure to total £6.5bn, with around £1.75bn expected in 2016/17 and around £1.65bn expected in 2017/18, although this is subject to change.

Beyond that SSE has a wide range of options to support earnings and dividend growth post-2018 and now expects total investment and capital expenditure to be in the range of £5.5-£6bn in the four years to March 2020.  Around 50% of this is expected to be in economically-regulated Networks and around 20% in government-mandated renewables.  At all times SSE will continue to allocate capital in a way consistent with its focus on strong financial management, operational efficiency and maintaining a balanced range of businesses.

Disposing of over £1bn of non-core assets to support future investment

As part of its long-standing strategic commitment to efficiency and disciplined investment, in 2014 SSE commenced what was called a value programme to dispose of assets which are not core to its future plans, which result in a disproportionate burden, or which could release capital for future investment.

Agreements with  total disposal proceeds and debt reduction of over £1bn have so far been secured or concluded to dispose of assets such as an equity shares in the Clyde of onshore wind farm projects and other wind developments, SSE Pipelines Ltd and equity in PFI street lighting contracts.  A gain on sale of £138.6m resulting from the sale of the 49.9% equity stake in Clyde windfarm (49.9% of 350MW) in the year is a clear example of the value created through this disposal programme.  With a small amount still to complete, this programme has already achieved its objectives and will support future operations, investment and capital expenditure.

 

Financial management and balance sheet

Keeping SSE well-financed

SSE believes that maintaining a strong balance sheet, illustrated by its commitment to the current criteria for a single A credit rating - such as a funds from operations/debt ratio of 20%-23% (Standard & Poor's) and a retained cash flow/debt ratio of 13% (Moody's) - is a key financial principle.  Standard & Poor's credit ratings service affirmed SSE's 'A-' long term credit rating in February 2016 with a 'negative' outlook. This follows the decision by Moody's Investors Service, also in February 2016, to affirm its 'A3' issuer rating for SSE, also with a 'negative' outlook.

SSE has a long-standing commitment to maintaining financial discipline and diversity of funding sources and to moving quickly to select financial options that are consistent with this, including issuing new bonds and loans. In line with this, in September 2015, it successfully issued an eight-year €700m euro bond, with a coupon of 1.75% and an all-in funding cost, when converted back to sterling, of 3.19%.  In addition, in March 2016, SSE completed a private placement with 19 UK and US investors of £500m with a weighted average maturity of 9.6 years and an all-in funding cost of 3.1%.

During the year SSE extended, on cheaper terms, £1.5bn of bank facilities that were due to mature in 2018 to 2020 with two, one year options that would take these facilities out to 2022.  Under the Scottish Hydro Electric Transmission entity, it also secured a further £300m facility with the European Investment Bank that will be drawn during 2016/17 at which point it will convert to a 10 year term loan.

Maintaining a prudent treasury policy

SSE's treasury policy is designed to be prudent and flexible.  In line with that, its operations and investments are generally financed by a combination of: cash from operations; bank borrowings and bond issuance.

As a matter of policy, a minimum of 50% of SSE's debt is subject to fixed rates of interest.  Within this policy framework, SSE borrows as required on different interest bases, with financial instruments being used to achieve the desired out-turn interest rate profile.  At 31 March 2016, 87.1% of SSE's borrowings were at fixed rates.

Borrowings are mainly made in Sterling and Euros to reflect the underlying currency denomination of assets and cashflows within SSE.  All other foreign currency borrowings are swapped back into either Sterling or Euros.

Transactional foreign exchange risk arises in respect of: procurement contracts; fuel and carbon purchasing; commodity hedging and energy trading operations; and long-term service agreements for plant.

SSE's policy is to hedge any material transactional foreign exchange risks through the use of forward currency purchases and/or financial instruments.  Translational foreign exchange risk arises in respect of overseas investments, and hedging in respect of such exposures is determined as appropriate to the circumstances on a case-by-case basis.

Managing net debt and maintaining cash flow

SSE's adjusted net debt and hybrid capital was £8.40bn at 31 March 2016, compared with £7.57bn on the same date in 2015, £7.64bn in 2014 and £7.35bn in 2013.  The £827m increase in the year results from the West of Shetland acquisition completed in October 2015 (£669m), a lower uptake of  the Scrip Dividend, the impact of negative foreign exchange movements on debt balances at the year end and higher net capex in the year (after disposals).  These disposals in 2015/16 included the sale of 49.9% of the equity in Clyde Windfarm (Scotland) Limited ('Clyde'). On 13 May 2016, SSE waived certain rights in relation to the construction of the 172.8MW extension to Clyde that saw the entity fully consolidated in the Group's balance sheet at March 2016. As a result, the arrangement is now deemed to be under joint control and consequently SSE has excluded £200.7m of non-recourse finance due by Clyde to the venture partners from its adjusted net debt and hybrid capital measure.

Fundamentally, the level of SSE's net debt reflects the quantum and phasing of capital expenditure and investment in projects to maintain, upgrade, build and acquire new assets in the UK and Ireland that energy customers depend on and which support annual increases in the dividend payable to shareholders.

Adjusted net debt excludes finance leases and includes outstanding liquid funds that relate to wholesale energy transactions.  Hybrid capital is accounted for as equity within the Financial Statements but has been included within SSE's 'Adjusted net debt and hybrid capital' to aid comparability.

Ensuring a strong debt structure through medium- and long-term borrowings

SSE's objective is to maintain a reasonable range of debt maturities.  Its average debt maturity, excluding hybrid securities, at 31 March 2016 was 8.9 years, compared with 9.9 years at 31 March 2015.

SSE's debt structure remains strong, with around £5.9bn of medium/long term borrowings in the form of issued bonds, European Investment Bank debt and long-term project finance and other loans.

The balance of SSE's adjusted net debt is financed with short-term bank debt.  SSE's adjusted net debt includes cash and cash equivalents totalling £360.2m.  Around £700m of medium-term borrowings will mature in 2016/17.

Operating a Scrip Dividend Scheme

The Scrip Dividend Scheme, approved by SSE's shareholders most recently in 2015, gives shareholders the option to receive new fully paid Ordinary shares in the company in place of their cash dividend payments.  It therefore reduces cash outflow and so supports the balance sheet.

The Scrip dividend take-up in August 2015 (relating to the final dividend for the year to 31 March 2015) and in February 2016 (relating to the interim dividend for the year to 31 March 2016) resulted in a reduction in cash dividend funding of £175.8m, with 11.8 million new ordinary shares, fully paid, being issued.

This means that the cumulative cash dividend saving or additional equity capital resulting from the introduction of SSE's Scrip Dividend Scheme now stands at £1,051m and has resulted in the issue of 77.7 million Ordinary shares.  At the July 2015 AGM, shareholders voted by a 99.7% majority of votes cast, to agree an extension to the Scrip Dividend Scheme from 2015 to 2018.

Managing net finance costs

SSE believes adjusted net finance costs provide the most useful measure of performance and a reconciliation of adjusted to reported net finance costs is provided in the table headed Net Finance Costs.  SSE's adjusted net finance costs in the year to 31 March 2016 were £310.9m, a reduction on £316.7m in the previous year reflecting the lower average interest rate in the period.

Coupon payments relating to hybrid capital are presented as distributions to other equity holders and are reflected within adjusted earnings per share* when paid.

Tax

SSE is one of the UK's biggest taxpayers, and in the survey published in November 2015 was ranked 13th out of the 100 Group of Companies in 2015 in terms of taxes paid.  In the year to 31 March 2016, SSE paid £453.9m of taxes on profits, property taxes, environmental taxes, and employment taxes in the UK, compared with £506.2m in the previous year.  Total taxes paid in 2015/16 were lower than the previous year, primarily due to:

•              reduced gas production profits as a result of lower gas prices;

•              capital allowances resulting from the Greater Laggan acquisition in 2015/16;

•              tax relief available on costs associated with closing thermal generation plant; and

•              lower Climate Change Levy liabilities through reduced coal consumption.

SSE also paid €15.2 million of taxes in the Republic of Ireland, being the only country outside of the UK in which SSE has any trading operations.

SSE considers being a responsible taxpayer a core element of being a responsible member of society.  SSE seeks to pay the right amount of tax on its profits, in the right place, at the right time, and continues to be the only FTSE 100 company to have been awarded the Fair Tax Mark.  While SSE has an obligation to its customers and shareholders to efficiently manage its total tax liability, it does not seek to use the tax system in a way it does not consider it was meant to operate, or use "tax havens" to reduce its tax liabilities.  SSE understands it also has an obligation to the society in which it operates, and from which it benefits - for example, tax receipts are vital for the public services SSE relies upon.  Therefore SSE's tax policy is to operate within both the letter and spirit of the law at all times.

For reasons already stated above, SSE's focus is on adjusted profit before tax*, and in line with that, the adjusted current tax charge on that profit is the tax measure that best reflects underlying performance.  SSE's adjusted current tax rate, based on adjusted profit before tax*, is 12.8%, as compared with 14.4% in 2014/15 on the same basis.

As would be expected for a Company of SSE's size, the SSE group has a small number of tax enquiries ongoing with HMRC at any one time.  In addition, under Corporate Tax Self Assessment, SSE adopts a filing position on matters in its tax returns that may be large or complex, with the position then being discussed with HMRC after the tax returns have been filed.  SSE engages proactively with HMRC on such matters, but where SSE considers there to be a risk that HMRC may disagree with its view, and that additional tax may become payable as a result, a provision is made for the potential liability, which is then released once the matter has been agreed with HMRC.  SSE considers this to be in line with the overall prudent approach to its tax responsibilities.

Reviewing the value of SSE's equity stake in SGN

SSE acquired a 50% equity stake in SGN Limited in 2005 for a total of £505m.  In the time since then, SGN has become a leading gas distribution business demonstrating efficiency and innovation that has benefited, and continues to benefit, customers and has earned fair returns for investors.  Its Regulated Asset Value reached just over £5bn at 31 March 2016.

Throughout this time, SSE has continued to invest in its wholly-owned electricity transmission and distribution businesses and their Regulated Asset Value reached a total £5.4bn at 31 March 2016, with the principal growth arising as a result of SSE's major investment in electricity transmission.

Against this background of a transformed portfolio of energy Networks businesses, SSE has decided to consider options to crystallise some value for shareholders from its long-term investment in SGN and is considering the sale of up to one third of its 50% equity stake in SGN Limited.   In considering whether to take forward the disposal of part of its equity in SGN, SSE will be very mindful of the need to ensure that SGN itself is in a good position build to on its track record of success in the future.

Should a sale be completed, SSE would expect to use the proceeds to return value to its shareholders, or to invest to create value for shareholders should there be the right opportunity, in a way that would be determined at the time.

Conclusion

SSE's first financial objective is to deliver annual increases in the dividend that at least keep pace with RPI inflation.  SSE believes that its strategic framework, opportunities for growth and effective financial management mean it can continue to deliver this in 2016/17 and beyond.  Its financial priorities for 2016/17 include:

·      Delivery of an annual increase in the dividend that at least keep pace with RPI inflation;

·      A return to growth and adjusted earnings per share of at least 120p in 2016/17;

·      Maintaining dividend cover in a range from around 1.2 times to around 1.4 times over the three years to 2018/19 based on dividend increases that at least keep pace with RPI inflation;

·      Continued disciplined investment in a balanced range of energy related assets and delivering the projects within the established investment programme, especially in Networks and government-mandated renewables; and

·      Maintaining a strong balance sheet, with a commitment to the current criteria for a single 'A' credit-rating.

WHOLESALE

Wholesale Key Performance Indicators

 

March 16

March 15

Energy Portfolio Management (EPM) and Electricity Generation

 

 

EPM and Generation operating profit* - £m

436.3

433.3

EPM and Generation capital expenditure and investment - £m

382.6

399.6

 

 

 

GENERATION

 

 

Gas- and oil-fired generation capacity (GB) - MW

3,961

4,262

Gas- and oil-fired generation capacity (Ire)  - MW

1,292

1,068

Coal-fired generation capacity- MW

1,995

3,009

Waste to Energy capacity -  (MW)

34

0

Total thermal generation capacity - MW

7,282

8,339

Pumped storage capacity (GB) - MW

300

300

Conventional hydro capacity (GB) - MW

1,150

1,150

Onshore wind  capacity (GB) - MW

900

1008

Onshore wind capacity (NI) - MW

88

88

Onshore wind capacity (ROI) - MW

456

456

Offshore  wind capacity (GB) - MW

344

355

Dedicated biomass capacity (GB) - MW

37

38

Total renewable generation capacity - MW

3,275

3,394

Total electricity generation capacity (GB and Ire) - MW

10,557

11,733

 

 

 

Renewable capacity qualifying for ROCs - MW

c.1,800

c.1,900

 

 

 

Gas- and oil-fired (inc. CHP) output (GB) - GWh

10,160

9,537

Gas- and oil-fired output ( Ire) - GWh

1,780

251

Coal-fired (inc. biomass co-firing) output - GWh

6,141

9,143

Total thermal generation - GWh

18,081

18,931

Pumped storage output - GWh

252

190

Conventional hydro output - GWh

4,074

3,726

Onshore wind output GB - GWh

2,439

2,219

Onshore wind output NI - GWh

235

212

Onshore wind output ROI - GWh

1,308

1,055

Offshore wind output - GWh

1,312

1,191

Biomass output GB - GWh

75

63

Total renewable generation - GWh

9,695

8,656

Total Generation output  all plant - GWh

27,776

27,587

Note 1: Capacity is wholly-owned and share of joint ventures.

Note 2: Output is electricity from power stations in which SSE has an ownership interest (output based on SSE's contractual share).

Note 3: Capacity includes 1,180MW at Peterhead (while TEC is 400MW) and 464MW at Great Island (net increase 224MW) operational from 17 April 2015.

Note 4: 2016 Capacity excludes Ferrybridge which ceased operation on 31 March 2016.

Note 5: Wind output excludes 387GWh of constrained off generation in 2015/16 and 268GWh in 2014/15

Note 6:Onshore wind capacity at March16 excludes 175MW related to the Clyde disposal in March 16 -  onshore wind output includes 100%

Note 7: Waste to Energy GWh not included above as contracted to third party

Note 8: Slough Heat & Power Biomass Plant's financial results are reported within SSE Enterprise

 

 

March 16

March 15

GAS PRODUCTION

 

 

Gas production operating profit* - £m

2.2

36.6

Gas production- m therms

403

398

Gas production- mn boe

6.55

6.47

Liquids production - mn boe

0.13

0.08

Gas production capital investment - £m

56.1

21.0

Total net proven plus probable (2P) Reserves estimate - bn therms

3.62

1.73

Total net proven plus probable (2P) Reserves estimate - mn boe

58.8

28.2

 

 

 

GAS STORAGE

 

 

Gas storage operating profit* - £m

4.0

3.9

Gas storage customer nominations met - %

100

100

Gas storage capital investment - £m

14.0

14.3

Sustainably sourcing and producing energy

SSE's Wholesale segment consists of three business areas: Energy Portfolio Management and Electricity Generation; Gas Storage; and Gas Production. It makes a sustainable contribution to the fulfilment of SSE's core purpose and achievement of its financial goals, through excellence in the flexible provision, storage and delivery of energy and related services for customers in wholesale energy markets in Great Britain and Ireland. This is achieved through maintaining a diverse portfolio of assets, contracts and innovative energy solutions; and the ability to respond quickly and effectively to changing market conditions and opportunities.

The markets in which SSE's Wholesale businesses operate continue to be impacted by a number of key long-term trends and developments, including an uncertain macroeconomic environment; shifts in commodity prices; increased government intervention; and the ongoing transition to a low carbon economy. SSE's Wholesale business therefore has to continually review its portfolio in the context of a changing market.

In line with its commitment to transparency in performance management and reporting SSE has incorporated a new subsidiary company to conduct its energy portfolio management activities, SSE EPM Limited. This company will produce separately audited accounts and, sits alongside the separately disclosed Energy Supply and Generation activities of the SSE Group.  Against this background, the presentation of the results for SSE's Wholesale businesses in its Financial Statements continues to be kept under review.

Financial performance in Wholesale

During the year to 31 March 2016 total operating profit in Wholesale was £442.5m. The primary drivers relating to operating profit are as follows:

EPM and Electricity Generation - an 11.5% increase in output of electricity from renewable sources, primarily due to higher average wind speeds and levels of rainfall compared to 2014/15,  although this was largely offset by the impact of lower commodity prices across both Generation and EPM.

Gas Production - a significantly lower average achieved price for the wholesale gas volumes produced.

Gas Storage - a challenging economic environment saw a small reduction in operating profit.

The Wholesale business also incurred £868m of net exceptional charges in the year with the significant reduction in commodity prices and other economic factors impacting the carrying value of gas production, thermal generation and gas storage assets; a breakdown of which is set out in the table of Wholesale key performance indicators.

Preparing Consolidated Segmental Statements

SSE is required by Ofgem to publish a Consolidated Segmental Statement (CSS) each year setting out the revenues, costs and profits or losses of businesses in its Wholesale and Retail segments.

·      In line with that requirement, SSE expects to publish its CSS for 2015/16 in July 2016. The CSS for 2015/16, which will be reconciled to SSE's published financial statements and reviewed by SSE's auditors KPMG , is expected to show that within EPM and Electricity Generation, EPM and thermal generation reported operating losses and renewable generation reported an operating profit.

Energy Portfolio Management (EPM)

EPM is responsible for ensuring SSE has the energy supplies it requires to meet the needs of customers; procuring the fuel required by the generation plants that SSE owns or has a contractual interest in; selling the power output from this plant; where appropriate, securing value and managing volatility in volume and price through the risk-managed trading of energy-related commodities; and providing energy solutions and services to customers.

Maintaining a diverse portfolio of energy assets and contracts

The wholesale price of energy can fluctuate significantly due to a number of factors including the economy, the weather, customer demand, infrastructure availability, and world events. EPM seeks to manage the impact of these variables by maintaining a diverse and well-balanced portfolio of contracts, and trading positions, both long and short term.  EPM provides a route-to-market for SSE's Generation assets and helps Energy Supply manage its commodity risk.  In doing so, SSE has:

·      greater ability to manage the impact from wholesale energy price volatility; and

·      more scope to deliver the investment needed in Generation and Gas Production because the risks associated with large-scale and long-term investments are contained by the balanced nature of SSE's energy businesses.

In recent years, SSE has typically required around 7 million therms of gas per day to supply its gas customers and to fuel its power stations, and around 130GWh of electricity per day to supply all its electricity customers. There are three primary routes to competitively and sustainably procure the fuels and energy it needs to meet this demand:

·      assets: including thermal and renewable power generation; and upstream gas exploration and production;

·      contracts: long-term gas producer contracts; power purchase agreements and solid fuel contracts; and

·      trading: where energy contracts are transparently traded on international exchanges or through 'over the counter' markets.

Managing risks associated with energy procurement across these three routes is a key requirement for EPM. In establishing the separated legal entity to manage these risks and requirements on behalf of the Group's Energy Supply, Generation and Gas Production businesses, SSE has enhanced the reporting transparency and accountability of this activity. By optimising energy procurement through a diverse portfolio, SSE aims to shelter its portfolio from the inevitable volatility that exists in global markets.

Generation - Overview

Electricity Generation is responsible for the operation, management and maintenance of SSE's generation assets and for ensuring these assets are available when required and able to meet contractual obligations and developing future renewable and thermal projects.

Managing and developing Generation assets to meet key priorities

The Generation division's principal objective is to safely, efficiently and reliably maintain and operate a diverse generation portfolio, which includes substantial amounts of capacity for renewable energy, across the UK and Ireland. This objective is underpinned by six principles that direct the operation of, and investment in, its Generation portfolio:

·      compliance: with all safety standards and environmental and regulatory requirements;            

·      diversity: to avoid being dependent on particular fuels or technologies;

·      capacity: that is well-maintained to meet its requirements in the GB and Irish electricity systems;

·      availability: to respond to system demand and market conditions;

·      flexibility: to ensure that changes in demand for electricity and the impact of variability of generation from wind farms can be managed; and

·      sustainability: to support progressive reduction in the CO₂ intensity of electricity generated through the cost efficient decarbonisation of its generation fleet. By moving towards a lower carbon generation mix, SSE is transitioning its Generation assets from a portfolio weighted towards gas and coal, to one weighted towards gas and renewables.

Generation - Great Britain (renewables)

Operating SSE's renewable generation capacity

Output of electricity from renewable sources increased in 2015/16, compared to the previous year (9,695 GWh compared to 8,656 GWh) despite overall renewable operating capacity remaining largely unchanged (67MW commissioned in the year). The primary driver for this differential was the weather: put simply there was more rainfall and windier conditions in 2015/16 across Great Britain than in 2014/15. Availability and performance of the renewable portfolio has also remained very high throughout the period, allowing SSE's assets to operate in these favourable conditions.

Meanwhile, judgement on the Court of Session case of SSE Generation Ltd against Hochtief Solutions AG and Hochtief (UK) Constructions Ltd in relation to the hydro-electric scheme at Glendoe is expected to be handed down in the second half of this financial year.

Developing renewable energy schemes onshore

SSE continues to operate under the policy support regime for renewable generation capacity in GB, currently delivered through the Renewables Obligation (RO) (which also applies in Northern Ireland); and the Contracts for Difference (CfD) mechanism.

The policy framework for renewable generation was subject to a number of interventions by the UK Government after it took office in May 2015. These include:

·      the early closure of the RO to new onshore wind;

·      a delay until late 2016 of the second CfD auction for "less established" technologies, including offshore wind;

·      the clear signal that CfDs in their current form are unlikely to be generally available to new onshore wind; and

·      the removal of levy-exemption certificates (LECs) for renewable electricity.

For SSE's onshore wind portfolio, clarity regarding which projects remain eligible for RO support was provided through the definition of 'grace periods'. Future development options for later onshore wind projects are being explored in light of the policy changes referenced above.

SSE has three onshore wind projects under construction which will qualify for the GB RO:

·      Dunmaglass (94MW) - scheduled for completion by the end of 2016/17.

·      Clyde Extension (172.8MW) - expected to be fully operational in 2017.

·      Bhlaraidh (108MW) - expected to be fully operational in 2017.

SSE also has onshore wind projects in development that will not qualify for the RO:

·      Stronelairg (with consent) (up to 240MW) - SSE, alongside the Scottish Government, is appealing the judicial review judgement which rejected the consent decision and will be heard in court in May 2016.

·      Viking (with consent) (up to 457MW - SSE share 50%) - SSE, with its Joint Venture partner, has continued to develop this project which requires State Aid clearance from the European Commission and confirmation it will be eligible to participate in forthcoming CfD auctions.

·      Strathy South (in planning) (up to 133MW) - Objections were examined fully at a Public Local Inquiry in 2015 and it is now awaiting a consent decision from Scottish Ministers.

·      Gordonbush Extension (in planning) (up to 32MW) - Highland Council did not object to the application at a planning committee meeting in February 2016 and it is now awaiting a consent decision from Scottish Ministers.

Offshore wind projects in development

In the last 12 months SSE's offshore efforts and resources have been focused on the Beatrice project (588MW - SSE share 40%) planned for the outer Moray Firth. The project is progressing in accordance with the terms of the Investment Contract awarded by the UK government in 2014. The project is expected to reach financial close in May 2016. SSE's Joint Venture partners on the project are Copenhagen Infrastructure Partners (CIP) who increased their interest from 25% to 35% in February 2016 and Repsol who currently have a 25% stake.  Beatrice will be project financed with non-recourse debt.

Subject to financial close, onshore construction activities will begin in 2016 with offshore construction planned for 2017. The project is expected to be fully operational by 2019. The Beatrice wind farm is expected to deliver around £700m into the UK economy via supply chain opportunities alone.

In addition to Beatrice, SSE has an interest in two further offshore wind farm developments: Seagreen (up to 3,500MW - a 50:50 partnership with Fluor Limited); and Forewind (up to 4,800MW - a four-way partnership with RWE Innogy, Statoil and Statkraft). The first phase of Seagreen (up to 1,050MW) is consented although this decision is subject to a judicial review in the Court of Session heard in 2015. Forewind has consent for four separate 1,200MW projects in the Dogger Bank Zone and the four Joint Venture partner organisations will agree the best route forward for each.

In October 2015 SSE announced that it had agreed exit terms from the Galloper project (340MW, 50:50 partnership with RWE Innogy), following RWE Innogy's announcement that it had reached financial close on the project.

The UK Government confirmed in the Budget 2016 that it intends to auction £730m of CfD contracts in this parliament for offshore wind and other less established technologies connecting in 2021-26. The first auction is expected to be later this year with £290m available. This announcement provides welcome clarity about the future for offshore wind.

Optimising the renewable development portfolio

In order to support future investment in a balanced range of energy assets SSE has, as first outlined in March 2014 recycled capital by delivering a programme of selective disposals of non-core assets and operational and in-development onshore wind projects. In March 2016 agreements were signed for the sale of 49.9% of the operational 349.6MW Clyde Wind Farm located in South Lanarkshire to Greencoat UK Wind Plc (UKW) and GMPF & LPFA Infrastructure LLP (GLIL) for a headline consideration of £355 million resulting in a gain of £138.6m.  As part of its key accounting judgements, SSE concluded that at 31 March 2016 Clyde remained under its control due to certain contractual arrangements relating to the construction of the extension project. As such, this gain was recognised directly in equity. In May 2016, these arrangements were changed and consequently SSE's interest in Clyde will be that of a joint venture going forward. When the 172.8MW extension to Clyde is commissioned the equity stake jointly owned by UKW and GLIL will be diluted to 30% with SSE retaining 70% and providing long term management services for the day to day operations of all 522.4MW.

Generation - Great Britain (thermal)

Market developments with an impact on SSE

In 2015/16 the UK Government announced a number of policies and regulatory changes affecting SSE's thermal generation portfolio. These included:

·      revisions to the future functioning of the GB Capacity Market (see below);

·      an announcement of the intent to close coal-fired power stations by 2025, and facilitate the development of new gas-fired power stations; and

·      an announcement that it will continue to cap Carbon Price Support rates at £18/t CO2 for 2019-20 and 2020-21 (in real terms adjusted for RPI). The Government also indicated that the future of the Carbon Price Floor beyond 2021 will be announced in its Autumn Statement later this year.

Ofgem has consistently maintained that during the period to 2018/19 it expects electricity generation capacity margins will be lower than they were in recent years due to weak market economics and the closure of older plant.  The UK Government, together with National Grid (as the System Operator) and Ofgem, has decided to address this issue in two ways:

·      in the longer term, through the implementation of the Capacity Market. SSE supports the UK Government's plans to incrementally improve the Capacity Market, including the planned supplementary capacity auction for winter 2017/2018; and

·      in the intervening period, through the Supplemental Balancing Reserve (SBR) which will close after winter 2016/17.

The design and operation of both the Capacity Market and SBR mechanisms is set by the UK's Department of Energy and Climate Change (DECC) and National Grid. They determine how much capacity is required to ensure security of supply under each mechanism. Once this volume has been determined they procure the necessary capacity through a competitive auction/tender process.

SSE will play its part by ensuring all plant eligible to participate in both the SBR and the Capacity Market will be made available when required. It will also continue to work openly and constructively with all stakeholders on the issue of security of supply.

Operating SSE's thermal power stations

Market conditions for thermal generation continued to be challenging during 2015/16. The continued expansion of sources of renewable electricity and reducing customer demand has impacted the profitability of all thermal assets. In addition, the 18 months to March 2016 saw a significant weakening of the market prices for oil and gas. Together with the closure of older coal-fired power stations this has led to an increase in gas-fired generation output relative to coal. This has been reflected in SSE's own portfolio as well as the wider market. This trend looks set to continue and it is therefore anticipated that gas-fired power stations will play an increasingly important role in GB electricity generation in the coming years.  Despite the strategic improvement, market conditions remain challenging for gas- fired electricity generation as reflected by the plant impairments of £326.4m recognised in the year.

In December 2015 the second Capacity Market auction was held in GB. A total of 3.2GW (de-rated) of SSE's 6.1GW (de-rated) pre-qualified capacity was successful in the auction, and will receive a total payment of £57m on the basis it delivers this capacity in 2019/20. The balance of the pre-qualified capacity remains eligible to participate in the 'T-1' 2019/20 capacity auction.  In the summer of 2016 SSE plans to pre-qualify capacity for the next 'T-4' auction scheduled for December 2016, as well as for the additional planned auction that will procure capacity for 2017/18.

Maintaining and operating a portfolio of gas-fired power stations

SSE has an ownership interest in five gas-fired power stations that participate in the GB electricity market:

·      Medway (700MW wholly owned) has continued to perform well in response to market requirements and contractual obligations, and it has taken on a capacity obligation for 2018/19 and 2019/20;

·      Keadby (735MW wholly owned) returned to service in November 2015 following its removal from the market in March 2013. Keadby also has capacity obligations for 2018/19 and 2019/20;

·      Peterhead (1,180MW wholly owned) 400MW of Peterhead's capacity returned to service in November 2015 following the completion of major upgrade work to improve the flexibility and efficiency of the station. It has also secured SBR contracts to provide support services to National Grid over the winters 2015/16 and 2016/17 and a voltage control contract for one year commencing 1st April 2016;

·      Seabank (1,164MW) and Marchwood (840MW) SSE has a 50% stake in each of these gas-fired power stations, which have both taken on capacity obligations for 2018/19 and 2019/20.

In 2015/16, the UK Government also decided that the capital budget for a Carbon Capture and Storage (CCS) competition would no longer be available and that the competition would not proceed on the planned basis.  SSE had been working with Shell on a CCS project at its Peterhead power station.  In response, SSE acknowledged that being in government involves taking difficult decisions, but also stated that the decision represented a significant missed opportunity for the UK.

Taking key decisions on the future of coal-fired power stations

SSE acquired two wholly-owned coal-fired power stations in 2004: Ferrybridge (Yorkshire; now closed) and Fiddler's Ferry (Cheshire, 1,995MW).

In March 2016 SSE ceased coal-fired electricity generation at Ferrybridge in line with the announcement of plans to do so in May 2015. SSE acknowledges the immense contribution of all who have worked at Ferrybridge during its proud 50 years of service. The site has now entered a period of decommissioning.

The future commercial operation at three of the four units at Fiddler's Ferry (1,455MW) was the subject of a consultation with employees and other stakeholders, announced by SSE in February 2016. In March 2016 Fiddler's Ferry successfully secured a contract to provide ancillary services to National Grid. The one-year contract, which started on 1 April 2016, covers one of the three available units at the site. It was secured following a competitive procurement process.

Following its success in securing this contract and in view of the UK Government's planned reforms to the Capacity Market, SSE also:

·      confirmed that one unit at the station will provide Supplementary Balancing Reserve (SBR) services to National Grid for the winter of 2016/17. TEC (Transmission Entry Capacity) is therefore not required for this unit's capacity;

·      retained TEC for the station of 1,455MW, equivalent to the capacity of three units, for 2016/17; decided to enter all or part of Fiddler's Ferry capacity into any 2017/18 Capacity Market auction; and

·      recognised exceptional charges of £287.0m in relation to coal generation activities.

Developing new gas-fired generation options

SSE supports recent proposals by the UK Government to encourage investment in new gas-fired generation. SSE will continue and retain and develop options for new stations at Keadby 2 in Lincolnshire and Seabank 3 near Bristol, but will do so in a way that is fully consistent with its commitment to disciplined financial decision-making.

Investing for the future through 'multi-fuel'

SSE's generation strategy is built upon managing risk through owning a diverse range of assets and fuels from which to meet the needs of customers. Multi fuel remains an important part of that strategy.

In July 2015 Multifuel Energy Ltd (MEL) (the SSE and Wheelabrator Technologies Inc. 50:50 joint venture) fully commissioned a £300m (68MW) multi-fuel generation facility adjacent to SSE's existing Ferrybridge coal power station, known as Ferrybridge Multifuel 1 (FM1). The station has taken on a capacity obligation for 2018/19 and 2019/20. Whilst SSE reports its 34MW share of capacity, it excludes generation output at Ferrybridge multi-fuel as this is contracted to a third party. In its first full financial year of operation to March 2016 the station processed 413,000 tonnes of fuel in commercial operation and exported 385GWh of electricity, with the station running at near baseload.

In October 2015, planning consent for a second multi-fuel facility at the Ferrybridge site, Ferrybridge Multifuel 2 (FM2) was granted , and a final investment decision on it is expected to be taken later in 2016.

Generation - Ireland

Producing electricity for Ireland's Single Electricity Market

SSE is the third largest electricity generator by capacity in the all-island Single Electricity Market (SEM). It owns and operates 1,836MW of generation capacity of which 544MW is from renewable sources. This makes SSE the largest single generator of wind power in the SEM. The company also trades across the interconnectors between Ireland and GB.

SSE's new 464MW Great Island CCGT unit (grid connection capacity set at 431MW) commenced commercial operation in April 2015. Coinciding with the retirement of the old 240MW heavy fuel oil unit at the same site, the transition to gas has improved the carbon intensity of SSE's fleet and significantly decarbonises energy generation in the all-island market.

Delivering and developing new capacity for electricity generation

SSE continues to invest in renewable electricity generation in Ireland.  Over the two years to March 2018, SSE will add 174MW of new Irish wind power generation capacity to its existing fleet.

In the Republic of Ireland, construction of the two-phase 174MW (SSE share 120MW) Galway Wind Park project is ongoing. Phase 1 of the project (66MW), which entered construction in February 2015, is owned and financed by SSE. Phase 2 (108MW) is a 50/50 joint venture between SSE and Coillte. Galway Wind Park is expected to be commissioned in 2017, qualifying the wind farm for the REFIT II support scheme.

In Northern Ireland, SSE is currently constructing the 35MW Tievenameenta Wind Farm in Co. Tyrone. In the same county construction is due to commence shortly on the 19MW Slieve Divena II Wind Farm. Both projects are expected to be fully operational in 2017 and meet the criteria for Northern Ireland's RO grace period.

SSE also has plans for a wind farm development at Doraville (up to 115MW), a planning application for which is currently before Northern Ireland's Department of the Environment. This project will not qualify for the RO.

Engaging in the ISEM reform process

Reform of Ireland and Northern Ireland's SEM market to comply with the EU Electricity Target Model continues, with regulators in each jurisdiction progressing the Integrated SEM (I-SEM) project. SSE remains fully involved in all stages of the ongoing design and implementation process for the new market which is due for introduction by the end of 2017.

Gas Production

Gas Production is responsible for the efficient delivery of gas from the offshore gas fields in which SSE has a shared ownership.

Producing from UK Continental Shelf assets

Total output in the year to 31 March 2016 was 403 million therms (6.55mn boe) of gas and 0.13mn boe of liquids, compared with 398 million therms of gas (6.47mn boe) and 0.08mn boe in the previous year. This slight rise in production in 2015/16 was due to the start up of the Laggan field in February 2016 although there was a natural decline in output from existing fields. The Greater Laggan Area acquisition is expected to mean SSE's average annual volumes of gas and liquids produced will be at a higher level than those it reported in previous years with a forecast average production of around 500million therms (8.1mn boe) of gas and 0.85mn boe of liquids per year in the five years to March 2021.

The decrease in operating profit, £2.2m compared to £36.6m, from Gas Production during the period was mainly as a result of the significantly lower average achieved price for wholesale gas volumes produced. The sustained decline in gas price was a significant contributor to the £161.8m of exceptional charges recognised in the year, which includes £121.2m related to Greater Laggan Area.

Delivering new opportunities in Gas Production

SSE had regularly set out its intention to seek new opportunities to increase its asset base to help meet gas demand requirements, with the UK and north-west Europe the focus for this activity due to the relatively stable tax and fiscal regime and proximity to SSE's domestic energy supply markets.

In line with this long-term strategy SSE announced in July 2015, that it had entered into an agreement with Total E&P UK Limited to acquire: a 20% interest in the four gas fields and surrounding exploration acreage approximately 125km north west of the Shetland Islands, collectively known as the Greater Laggan Area; and a 20% interest in the new Shetland Gas Plant. The acquisition was completed in October 2015. Total E&P UK Limited is the operator of, and owns a 60% stake in these assets. The remaining 20% is owned by DONG Energy.

The transaction completed with cash consideration of £669m (which reflects the value of the assets including associated UK capital allowances). SSE's share of forecast capex in the period to March 2019 is expected to be c. £190m to complete the entire development of the four primary fields (Laggan, Tormore, Edradour and Glenlivet) as well as the Shetland Gas Plant, of which £43m was spent to 31 March 2016.

The new Shetland Gas Plant is located close to Sullom Voe and will process and export produced gas and condensate from developments in the west of Shetland for onward delivery to the St Fergus Gas Terminal for gas; and via the Sullom Voe Oil Terminal for liquids. This makes it one of the most important infrastructure developments in the UK. Production started in February 2016 and it is expected to process and export gas and condensate for producers West of Shetland well into the 2030s.

Gas production started in February 2016 from the Laggan fields which have the ability to produce up to 90,000 boe a day at peak production (SSE share 20%) and will help to secure energy for SSE's customers and help meet the needs of SSE's gas-fired power stations contributing to security of electricity supply. The nearby Tormore, Edradour and Glenlivet fields are expected to start production towards the end of 2016, 2017 and 2018 respectively and should keep production at peak rates through to 2020.

In addition to helping meet SSE's gas demand requirements, the acquisition is expected to create value over the long term, despite the current impact of lower gas prices, and represents SSE's focus on maintaining a balanced range of energy businesses across its portfolio.

SSE's UK Continental Shelf upstream portfolio is predominantly gas weighted with only associated liquids and as per the independent Reserves Audit, at 31st March 2016, SSE's total economically recoverable net proven plus probable (2P) reserves, taking into account all technical and economic variables was estimated to be 3.6 billion therms (58.8 mn boe) in all of the fields in which SSE has an ownership interest.

Gas Storage

Gas Storage is responsible for the operation and maintenance of SSE's gas storage facilities, and for ensuring they are available for use by its customers.

Delivering gas storage services from Hornsea and Aldbrough

The economic environment for gas storage facilities continued to be extremely challenging during 2015/16 - as illustrated the £150.9m of exceptional charges recognised in the year. As previously announced, SSE took the difficult decision at the end of 2014/15 to mothball its older withdrawal plant at the Hornsea (Atwick) facility, which it completed  for the start of the 2015/16 storage year.

Both of SSE's storage sites have continued to operate to meet the needs of their customers through 2015/16, albeit with some revision to Hornsea service provision during the last quarter:

·      Hornsea (Atwick) again met 100% of customer nominations with the site 52% available through the year except in instances of planned maintenance. The site was 97% available in the six months to 30 September 2015. During the second half of the year, however, a significant extension to maintenance works at the site kept it unavailable , resulting in a drop from typical high levels for the year overall;

·      Aldbrough met 100% of customer nominations and was 82% available through the year except in instances of planned maintenance. The two caverns removed from service earlier in the year have remained out of service, with forward options regarding these caverns under review.

Alongside the requirement to continue to ensure the highest standards of asset management are maintained, SSE continues to review its gas storage business on an ongoing basis. Its overall aim is to continue to provide valuable flexibility and hedging services to its customers and hence the wider UK gas market, while managing its profitability and being as well positioned as possible to take advantage of future market developments.

Wholesale - Conclusion and Priorities

Creating sustainable, long-term value from wholesale markets for investors and customers is the strategic objective of SSE's Wholesale businesses. This should be delivered through the responsible production, storage and delivery of energy and related services; a focus on meeting the needs of its customers; ongoing rigour in optimising its portfolio of existing assets and those in development, mean that SSE's activities across its Wholesale businesses continue to support SSE's core purpose and the first financial objective of annual growth in the dividend payable to shareholders.

Wholesale - priorities in 2016/17 and beyond include:

·      Ensuring the safe, reliable and efficient operation of all wholly-owned assets and those in which SSE has an ownership interest ;

·      Securing a stable and predictable supply of energy to meet SSE's needs;

·      Delivering SSE's investments in renewable energy and other electricity generation plant;

·      Driving business change to respond effectively to market change and regulatory developments in GB, NI, RoI and EU regulations; and

·      Securing value, where appropriate, through the risk-managed trading of energy-related commodities.

NETWORKS

Networks Key Performance Indicators

 

Mar 16

Mar 15

 

 

 

ELECTRICITY TRANSMISSION

 

 

Operating profit* - £m

287.2

184.1

Regulated Asset Value (RAV) - £m

2,287

1,732

Capital expenditure - £m

573.4

467.2

Connection offers provided in required period

88

97

 

 

 

ELECTRICITY DISTRIBUTION

 

 

Operating profit* - £m

370.7

467.7

Regulated Asset Value (RAV) - £m

3,157

3,159

Capital expenditure - £m

258.3

327.6

Electricity Distributed TWh

39.5

39.6

Customer minutes lost (SHEPD) average per customer

55

69

Customer minutes lost (SEPD) average per customer

41

57

Customer interruptions (SHEPD) per 100 customers

66

70

Customer interruptions (SEPD) per 100 customers

47

60

Estimated Incentives Performance  £m

c23

c6.5

 

 

 

SCOTIA GAS NETWORKS

 

 

Operating profit* (SSE's share) - £m

268.7

285.0

Regulated Asset Value (SSE's share) - £m

2,513

2,459

Capital and replacement expenditure (SSE's share)- £m

162.8

169.9

Uncontrolled gas escapes attended within one hour %

98.5

98.7

SGN gas mains replaced - km

960

1,042

 

 

 

Owning, operating and investing in Networks

SSE is the only energy company in the UK to be involved in electricity transmission, electricity distribution and gas distribution. Its five economically-regulated energy network companies consist of a 100% ownership of Scottish Hydro Electric Transmission (SHET), Scottish Hydro Electric Power Distribution (SHEPD) and Southern Electric Power Distribution (SEPD) and a 50% stake in both Scotland Gas Networks and Southern Gas Networks (SGN).

SSE's interests in economically-regulated energy networks supports the delivery of disciplined investment, a balanced range of assets and operational efficiency.  The RAV of SSE's five existing Networks companies is well placed to reach around £10bn by 2020.

Through Price Controls, Ofgem sets the index-linked revenue the network companies can earn through charges levied on users to cover costs and earn a return on regulated assets.  While the RIIO Price Control mechanism is complex, these economically-regulated, lower-risk businesses provide relative predictability and stability for SSE and balance its activities in the competitive Wholesale and Retail markets.  They are core to SSE's strategy in the short, medium and long-term and contribute significantly to its ability to deliver annual dividend increases.

Under the RIIO price controls all network operators are incentivised to become more responsive to the needs of their customers and stakeholders and to engage effectively with them to help inform how they plan and run their businesses.  SSE's Network businesses recognise that this requirement is key to ensuring it is accountable and responsive to the communities it serves.

In the second half of 2016/17, SSE's three electricity networks businesses will become collectively known as Scottish and Southern Electricity Networks following a rebranding process designed to improve customers' awareness of, and stakeholders' engagement with, the businesses.

Financial performance in Networks

During the year to 31 March 2016, total operating profit in Networks was £926.6m with the principal movements in operating profit as follows:

Transmission - The 56% increase in SHE Transmission's operating profit reflects the ongoing delivery of a major programme of capital investment including the first full year of construction of the Caithness-Moray transmission link.  Operating profit is likely to decline in this new financial year due to phasing of capex and revenue as well as rates rebates and depreciation associated with the growing asset base.  Since the current RIIO T1 Price Control started in April 2013, SHE Transmission's capital investment has totalled £1.39bn.

Distribution - The 20.7% decrease in electricity distribution operating profit is primarily due to the expected reduction in base revenues under the first year of the RIIO ED1 price control. The profiling of the price control settlement resulted in a significant income reduction in 2015/16. This was set out in Ofgem's Final Determination in November 2014.

SGN - SSE's share of SGN's operating profit fell by 5.7% primarily due to a decrease in Allowed Revenue in 2015/16 compared to the prior year. The drop was mainly linked to the regulatory mechanism for sharing the benefit of previously earned outperformance with customers in RIIO GD1, for which there is a two year lag.

Impact of revenue recovery

If in any year, regulated network companies' revenue is greater (over recovery) or lower (under recovery) than is allowed under the relevant Price Control, the difference is carried forward and the subsequent prices the companies may charge are adjusted.  This particularly impacts Electricity Distribution and during 2014/15 there was an under recovery of approximately £38m in this business.  Under the regulatory framework the £38m under recovery in 2014/15 was reflected in customer charges published in December 2015 for 2016/17. The under recovery in 2015/16 was significantly lower, at approximately £5m.  There were no material under or over recovery positions in Transmission or Gas Distribution reflecting a more capacity based revenue recovery mechanism.

Electricity Transmission

Scottish Hydro Electric Transmission Plc (SHE Transmission) is responsible for maintaining and investing in the electricity transmission network in the north of Scotland.

Completing projects which add to the RAV

During 2015/16 SHE Transmission completed a number of upgrades and reinforcements to its transmission network in the north of Scotland. The projects, which were all completed on time and within their Ofgem allowances (nominal prices), are:

·      the £94m reconductoring of the Beauly-Blackhillock-Kintore overhead line;

·      the £68m substation and overhead line works on the Beauly-Mossford project; and

·      the £210m subsea upgrade and associated onshore infrastructure on the Kintyre-Hunterston projects.

The replacement Beauly-Denny 400kV overhead line was energised in November 2015 and provides additional flexibility and electricity network resilience. As well as connecting new electricity generation to the transmission network one of the additional benefits of the new overhead line was realised during the big storms of the winter - storms Frank, Gertrude and Henry - when there was no loss of supply to generation customers. The replacement of its section of the Beauly-Denny line has required a total investment to date by SHE Transmission of around £650m and it is continuing discussions with Ofgem regarding recovery of efficiently incurred costs additional to the original allowance of the project. Total costs are now not expected to exceed £670m.

SHE Transmission's investment in these and other projects demonstrates its commitment towards supporting the transition to lower carbon forms of electricity generation. In delivering these essential infrastructure projects SHE Transmission has built on its continuing expertise in delivering increased capacity for electricity generation.

The investment that SHE Transmission has made in its network has helped connect over 2GW of additional capacity and as a result has made its network more secure and resilient.  With the current pipeline of development SHE Transmission is expected to increase its RAV from £2.3bn as at March 2016 to around £3bn by March 2018.

Delivering the Caithness-Moray project

With an agreed investment of £1,118m (2013/14 prices), the Caithness-Moray transmission reinforcement is SHE Transmission's flagship project and its largest single capital investment to date. The project, which will enable the connection of up to 1,200MW of additional generation capacity in the north of Scotland and the Northern Isles is progressing well and is scheduled to be operational by the end of 2018.  For example, both land and subsea cable manufacture are continuing ahead of programme, with land cable production completed and delivered to site for both Caithness and Moray. The subsea cable manufacture is on course for completion by the end of 2016.  Subsea activities will commence in the first quarter of 2017.  First revenues were received in 2015/16 under the Strategic Wider Works mechanism.

Fulfilling responsibilities for potential island links

Developers of generation capacity on the Scottish Islands continue to await clarity from the UK Government on whether EU State Aid clearance is obtained and their projects are eligible for Contracts for Difference (CfD) in forthcoming auctions. Whilst this uncertainty remains, developers are unable to commit to final funding decisions on their projects. While it continues to engage with stakeholders, SHE Transmission is not therefore in a position to submit 'Needs Cases' to Ofgem for the island links to the Western Isles and Shetland.  SHE Transmission continues to engage with Ofgem and developers and will submit Needs Cases for the island links later this year, if circumstances allow.

Adapting to policy and regulatory change

Following the publication in March 2015 of the final conclusions of its Integrated Transmission Planning and Regulation (ITPR) project, Ofgem has continued the development of the regime for extending the use of competition in onshore transmission.

While ITPR poses some potential risks, the extension of competition into onshore transmission also presents opportunities for SHE Transmission. The experience it has built up both in-house and with its supply chain means that SHE Transmission is well placed for competitive delivery when it is implemented.

Through continued engagement with Ofgem and DECC SHE Transmission aims to ensure that its development portfolio, and specifically some of its more advanced projects, can be delivered as far as possible under the existing regulatory framework. It is also contributing to discussions on future arrangements that will deliver the transmission infrastructure required in a way that supports the UK Government's policy objectives, delivers value for end consumers and achieves a fair and reasonable return to investors.

Ofgem announced on 12 May 2016 that it would not conduct a mid-period review into SHE Transmission's RIIO T1 price control. SHE Transmission remains committed to delivering against its outputs while ensuring value for money for the remainder of RIIO T1.

Working with stakeholders

SHE Transmission is also engaging with stakeholders through its Visual Impact of Scottish Transmission Assets (VISTA) project which is seeking views on how to mitigate the impacts of transmission infrastructure in National Parks and National Scenic Areas. The views of stakeholders are central to understanding the impact of existing infrastructure and investigating potential options for mitigation.

Electricity Distribution

Scottish and Southern Energy Power Distribution (SSEPD) 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.

Putting customers first

During 2015/16, its first year under the incentives-based RIIO ED1 price control, SSEPD has made significant steps in driving real change in its operations, processes and standards. The introduction of a change programme is ensuring that the business is able to meet the demands of the eight year price control.  Its new sustainable business model,  built on a combination of customer service and innovation, will bring benefits to customers while ensuring  financial targets are achieved and a fair  return is delivered to investors.

The focus of the new price control is the delivery of efficient operations and the best possible experience for customers; and the business has prioritised its efforts on the incentives built into RIIO ED1 that are designed to encourage improvements in customer service.

 The most financially significant of these are the two measures of loss of electricity supply: Customer Interruptions and Customer Minutes Lost (CIs and CMLs).  In the first year of the new price control SSEPD's adoption of the 'restore first, repair second' method was a driver in bringing down its CIs and CMLs. The continued investment in automation, network reinforcement and tree cutting also delivered improvements to help secure financial incentives. SSEPD's adoption of a regionalised model across its distribution areas has assigned responsibility and decision making to local teams which has helped to improve the response to power supply disruption during extreme weather events.

SSEPD's commitment to minimising the occurrence and duration of customer interruptions saw the Customer Minutes Lost reduce to 55minutes (SHEPD) and 41minutes (SEPD) per customer and for Customer Interruptions to reduce to 66 per 100 customers (SHEPD) and 47 per 100 customers (SEPD).  This is the best-ever performance for SSE's Networks business.

The first awards from SSEPD's £1.3m Resilient Communities Fund, which was established to support local communities in their preparation and response to emergencies, were made in 2015/16. The second round of nominations for funding has opened. The fund was established using money remaining from an amount agreed with Ofgem following weather-related electricity supply disruption over the Christmas period in 2013/14.

During the winter of 2015/16 SSEPD delivered its largest ever customer communications campaign, including advertising on TV, radio and digital outputs. The campaign raised awareness of its contact details in response to storms and to promote the services it provides for customers, including those who may need extra help during a power cut that are registered on its Priority Service Register.

Keeping costs down

The main focus for SSEPD during RIIO ED1 is to deliver the outputs outlined in its business plan in an efficient and sustainable manner. In order to meet these challenges the business is transforming continually to ensure that its processes, procedures and supply chain are efficient.

Improving through innovation

Innovation is a key priority at SSEPD and its projects will play a crucial role in balancing the country's future energy needs, while helping to keep the cost of energy down. SSEPD has a pipeline of innovations, at various stages of development, and is on target to achieve cost savings over the period of the price control while creating direct benefits for customers.

The innovation projects are funded through Ofgem's incentive schemes, which are designed to help Britain's electricity networks achieve energy efficiencies and become smarter. Projects have included:

·      SSEPD's My Electric Avenue monitored what impact people charging their electric vehicles could have on the electricity network and tested real solutions to allow more to connect with minimal disruption. The trial will help all Distribution Network Operators (DNOs) to safeguard, maintain and develop smarter networks to cope with the increase in electric vehicle usage in the future. This project is now informing work on developing a standard solution for smart charging where networks are heavily loaded, working closely with the other DNOs.

·      The findings from the Thames Valley Vision project on energy characterisation and forecasting could revolutionise the way that DNOs manage and effectively maintain the electricity networks of the future.

·      Following a number of trials SSEPD has created the first "Constraint Managed Zones (CMZs)" on its network. The CMZs ensure that security of supply is met for sections of the network through the use of load variation techniques, such as Demand Side Response, Energy Storage and stand-by generators. The first deployment is deferring £9m of capital cost beyond RIIO ED1.

SSEPD actively shares the learning from these projects within the Networks business and with other networks operators in the UK and across Europe, helping to promote best practice and bring new techniques and technologies into 'business as usual' operation across Britain's electricity network.

Co-operating with an investigation

On 20 January 2015, SSE plc was notified that the Gas and Electricity Markets Authority opened an investigation into whether SSE plc had infringed Chapter II of the Competition Act 1998 and/or Article 102 Treaty on the Functioning of the European Union in respect of the provision of points of connection services in the Southern Electric Power Distribution area.  The investigation is ongoing.

Engaging stakeholders in decision making

A key feature of SSEPD's first year in the price control is making sure its stakeholders have a say in its business decisions. This influence allows them to hold the DNOs to account and it has been vital to maintaining SSEPD's reputation. This has included:

·      A consultation launched in 2015/16 to give stakeholders the opportunity to nominate the undergrounding of 90km of overhead lines in Areas of Outstanding Natural Beauty, National Parks and National Scenic Areas in the north of Scotland and central southern England.

·      SHEPD working with Comhairle nan Eilean Siar and other stakeholders to explore the available options around current network restrictions in the Western Isles. A steering group has been formed and it is investigating possible solutions that may accommodate the connection of additional renewable energy generation.

Stakeholder engagement will continue to play a vital role at SSEPD and is a requirement for further regulated incentives during the price control.

SGN

SGN manages the network that distributes natural and green gas to 5.9 million homes and businesses across Scotland and the south of England.  In line with its equity holding, SSE receives 50% of the distributable earnings from SGN Ltd while, through a managed service agreement, continues to provide some back-office support.

 Working with the Gas Distribution Price Control

SGN is focused on ensuring all its outputs under Ofgem's RIIO framework are met, incentives are maximised and innovation is delivered effectively while running an efficient, safe and reliable network.

SGN's investment programme is a key element of this and, within overall total cost allowances of over £4.6bn (at 2012/13 prices), Ofgem has allowed around £2.8bn over the current eight year price control running to 2021 to cover new capital investment and to manage the risks relating to SGN's existing assets. This investment enables SGN to:

·      deliver a safe and reliable network for customers;

·      minimise its impact on the environment and communicate its work to stakeholders; and

·      deliver new customer-driven initiatives to help reduce fuel poverty and increase awareness of Carbon Monoxide dangers.

In terms of operational performance and safety, 98.5% of uncontrolled gas escapes reported by the public were attended within one hour of notification, exceeding Ofgem's 97% standard.

Networks - Conclusion and Priorities

SSE's economically-regulated Networks businesses are key to the provision of energy in the north of Scotland and central southern England.  SSE aims to put the current and future needs of customers at the heart of these businesses and, in doing so, earn a return that is value for money for customers and fair to investors.  This will be its aim in 2016/17 and beyond.

Networks priorities for 2016/17 and beyond

·      operate safely and meet all compliance requirements;

·      provide an excellent service to all customers who rely on its network;

·      deliver required outputs while maintaining tight controls over expenditure;

·      deliver every customer connection to quoted cost, time and budget;

·      develop and maintain effective stakeholder relationships;

·      progress innovations that improve network reliability, efficiency and customer service.

RETAIL (including Enterprise)

Retail (including Enterprise) Key Performance Indicators

 

Mar 16

Mar 15

 

 

 

Energy Supply

 

 

Operating Profit * - £m

398.9

368.7

Capital expenditure (Energy Supply and Energy Related Services) - £m

169.0

109.6

Electricity customer accounts (GB domestic) - m

4.16

4.37

Gas customer accounts (GB domestic) - m

2.79

2.96

Energy customers (GB business sites) - m

0.47

0.45

All-Island energy market customers (Ire) - m

0.79

0.80

Total energy customer accounts (GB, Ire) - m

8.21

8.58

 

 

 

Electricity supplied household average (GB) - kWh

3,763

3,842

Gas supplied household average (GB) - th

426

438

Household/small business aged debt (GB, Ire) - £m

103.2

106.2

Bad debt charge - £m

44.0

65.3

Customer complaints to third parties (GB)1

1,416

1,528

1 Ombudsman: Energy Services and Citizens Advice

 

 

 

 

 

Energy related services

 

 

Operating profit*- £m

15.4

17.7

Home Services customer accounts (GB) - m

0.40

0.35

Meters read - m

11.4

13.0

Supply customers' bills based on actual reading %

95.1

96.2

Smart Meters installed

over 180,000

over 40,000

 

 

 

Enterprise

 

 

Operating profit* - £m

40.9

70.4

Capital expenditure - £m

48.5

25.1

SSE Contracting Order Book - £m

133

133

Supplying energy and essential services across the Great Britain and Ireland markets

SSE is one of the largest energy suppliers in the competitive markets in Great Britain and Ireland. At 31 March 2016 it supplied electricity and gas to 8.21million household and business accounts. It also provides other related products and services including telephone, broadband and boiler care to 0.40 million household and business customers. The Retail segment includes the Enterprise business which provides energy services to meet the needs of businesses and public sector organisations in a reliable and sustainable way. Taken together these businesses provide balance to the SSE Group and demonstrate SSE's commitment to efficient operations and industry-leading customer service.

SSE is focused on addressing the decline in customer numbers it has experienced in recent years. In the context of the rapidly evolving competitive environment in which its Retail business operates, SSE has embarked on a transition from commodity provider towards its vision of becoming a market-leading retailer of energy and essential services, by digitalising and diversifying its business, and consistently excelling in customer service.

Financial performance in Retail and Enterprise

In 2015/16, SSE's profit margin (operating profit as a percentage of revenue) in Energy Supply was 5.2% (before tax) compared with 4.6% in 2014/15 and 2.9% in 2013/14. Energy supply profit margin has averaged4.1% over the past five years.

During the year to 31 March 2016, total operating profit in Retail was £455.2m with the principal movements in operating profit as follows:

Energy Supply - The overall increase in operating profit was driven primarily by strong performance in Business Energy, in particular due to increasing market share in the industrial and commercial (I&C) sector. This more than offset a reduction in operating profit in domestic energy as a result of customer losses and lower consumption.  This is in line with the expectations set out by SSE at its interim results that operating profit in domestic energy supply would fall in 2015/16 relative to 2014/15.

Energy Related Services - Operating profit fell as SSE continues to invest in building scale in these businesses, making a number of operational improvements to support its plans for future growth in non-energy as part of its diversification strategy.  In line with that strategy, overall customer numbers in Energy-Related Services, which includes broadband and fixed-line telephone, gas boiler and electrical maintenance, repair and installation, increased to 0.40million from 0.35million in the year to 31 March 2016.

Enterprise - The reduction in operating profit mainly reflects strategic business disposals that took place in the previous year (including the £15.3m profit from the disposal of SSE's gas pipeline business), alongside numerous revisions to the overall structure of the SSE Enterprise business.

Preparing Consolidated Segmental Statements

SSE is required by Ofgem to publish a Consolidated Segmental Statement (CSS) each year setting out the revenues, costs and profits or losses of businesses in its Wholesale and Retail segments.

In line with that requirement, SSE expects to publish its CSS for 2015/16 in July 2016. The CSS for 2015/16, which will be reconciled to SSE's published financial statements and reviewed by SSE's auditors KPMG.  It is expected to show that SSE's profit margin (before tax) from supplying electricity and gas to households in Great Britain was relatively flat at 6.2%, compared with 6% in 2014/15. SSE's CSS is also expected to highlight the increasing divergence between electricity and gas margins, primarily due to cumulative costs associated with the long-term upgrade of the country's electricity system that began around a decade ago and which is continuing in the interests of ensuring that customers benefit from a secure and lower-carbon energy system. These costs are levied more heavily against electricity.

Responding to the Competition and Markets Authority inquiry

On 10 March 2016 the Competition and Markets Authority (CMA) published its Provisional Decision on Remedies (PDR) summary, setting out for consultation its final proposed remedies as it approaches the conclusion of its two-year energy market investigation. As outlined in SSE's published response, the PDR largely reflects the position that GB energy markets are generally competitive and well-functioning, and, in particular:

·      that the key elements of the wholesale markets are working well and highly competitive;

·      the significant number of positive features that the CMA has identified in the domestic supply markets, including that over 30 suppliers compete vigorously on price, tariff and product innovation; and

·      that market developments, and particularly smart meters, will have (and are already having) a materially positive impact on the energy sector.

However, SSE does not recognise either the CMA's assessment of profitability in the sector and associated customer detriment or the overall picture of the GB energy supply market implied by the PDR findings. SSE remains concerned that, despite some of the in-depth analysis undertaken, the PDRs still display a considerable lack of appreciation for the dynamic and evolving nature of this market.

Nevertheless, SSE supports many of the remedies proposed by the CMA, including the withdrawal of the simpler choices component of the Retail Market Review (RMR) rules; improving the framework for effective competition through a clear path towards mandatory half-hourly settlement; and improving industry governance, among others. However, SSE has concerns that prepayment meters (PPMs) are a poor proxy for vulnerable customers and the PPM price cap stands out as a potentially flawed remedy which may have a detrimental impact on competition and endanger the efficacy of the rest of the package.

While SSE strongly supports efforts to maximise customer engagement, it also has concerns over the proposed database for "disengaged" customers.

SSE will continue to work constructively with the CMA and other appropriate stakeholders to reach a practical delivery of this substantial package, whilst recognising it is already a busy period of change in the industry, particularly against the backdrop of the smart meter roll-out.

Energy Supply and Energy Related Services

Treating customers fairly

Underpinning SSE's approach to the provision of both energy and energy-related services is the principle of treating customers fairly. This is central to the decisions SSE takes both at Executive Committee and Board level, as documented in its annual Treating Customers Fairly Statement, published in August each year. This means actively addressing any issues that arise relating to the quality of the service provided, as well as looking for ways to improve service quality in the future.

As a result of its approach to customers, SSE continues to be recognised by a variety of trusted third parties for the quality of its service:

·      The Ombudsman for Energy Services reported in March that SSE received the fewest complaints of all ten suppliers covered, including the largest independent suppliers, with 3.09 complaints per 100,000 customers.

·      SSE continues to perform strongly in the Citizens Advice Energy Supplier Performance Report, with a score 44 times better than the worst performing supplier and seven times better than the other major suppliers' average score. SSE remained top for the period June-September 2015, a position held for five years, before slipping fractionally to second place for Q4 2015. SSE is working hard to improve on this and is confident that it will remain an industry leader.

·      SSE was also ranked best for customer service among the largest six energy suppliers by uSwitch, the best performing major energy supplier in the Which? customer service survey of the top 100 consumer brands, and number one energy supplier in the annual UK National Consumer Satisfaction Index (NICIS-UK).

Supplying energy to customers across Great Britain and Ireland

SSE appreciates that customers rely on its core products of electricity and gas to power and heat their homes in order to live safely and comfortably, and is therefore committed to keeping energy prices as low as possible. On 29 March 2016, SSE implemented its third price cut in Great Britain during the period of its unique two and a half year price freeze, reducing gas prices by a further 5.3%. SSE's household energy customers have not seen a price increase since November 2013 and SSE's new gas prices are now 12% lower for a typical household customer than they were in 2013. While electricity wholesale prices have also fallen, this has been offset by non-energy costs and in particular the cumulative impact of programmes to upgrade the country's energy infrastructure, which are levied predominantly against electricity.

In the year to 31 March 2016, SSE's energy customer accounts in Great Britain and Ireland fell from 8.58 million to 8.21 million. SSE is focused on addressing the decline in customer numbers it has experienced in recent years and is aiming to reduce significantly the rate of customer losses during the coming year. The market for energy supply in GB in particular continues to be intensely competitive, with political, regulatory and market factors all contributing to the rapid growth of new market entrants, of which 11 have come to market in the past year alone. Customers are also highly engaged: in March 2016 alone, over 475,000 customers switched supplier, with 43% switching to a smaller provider, according to Energy UK data. Increasingly, customers are switching via internet comparison sites (ICSs), which now account for around 50% of switches compared to 25% seven years ago, and are driven almost exclusively by price. Similar forces are at work in the competitive markets in Ireland.

Having made significant improvements in the past 12 months in order to compete more effectively in this environment, SSE will continue to offer market-leading deals to new and existing customers in 2016/17. However, it is, fundamentally, a business focused on the long-term and its strategy therefore centres around providing customers with additional value in order to create stronger, deeper and more sustainable customer relationships based on high-quality customer service, provision of a range of different, competitively priced products in the home and a programme of rewards. To support this strategy, SSE is also focused on building a strong brand that customers want to engage with and on delivering operational efficiencies that enable it to do more for less.

Investing in becoming a market-leading retailer of energy and essential services

SSE firmly believes that its strategy of becoming a market-leading retailer of energy and essential services, by digitalising and diversifying its business, and consistently leading in customer service, is the right response to an increasingly competitive market, and one which will enable it to leverage its strong competencies in customer service and efficient operations.

It now has a number of key initiatives under way, including:

·      a significant upgrade of its customer-facing digital channels and websites to simplify and improve customer service while also minimising its cost to serve;

·      diversifying though the national expansion of its Home Services business, which provides boiler and electrical services to customers;

·      offering market-leading deals in the broadband and fixed-line telephony market in order to build scale in this business and further diversify SSE's customer base, seeking to offer additional products and value to existing energy customers;

·      introducing additional resources, training and telephony services to its call centres to deliver on its ambition to build differentiation through service; and

·      optimising the smart meter roll-out and developing new in-home customer experiences linked to smart data to drive digital customer engagement and achieve its service ambition.

At the same time SSE continues to invest in its brand to ensure it not only appeals to customers but is able to offer additional value and rewards linked to its sponsorship of sports, such as the SSE Women's FA Cup, and leading entertainment venues The SSE Hydro, The SSE Arena, Wembley, and The SSE Arena, Belfast.

This investment is underpinned by SSE's ongoing efforts to streamline its operations and generate process efficiencies.

Meeting customers' need for energy

Following a colder first six months of the year relative to 2014/15, winter temperatures were again near or above average, impacting consumption volumes in the second half of the year. The average UK temperature for the 12 months to 31 March 2016 was 0.4 degrees Celsius warmer than the 30-year (1981-2010) average, though it was 0.3 degrees Celsius colder than in 2014/15.

While consumption can vary greatly year-on-year based on temperatures, on a weather-corrected basis SSE estimates that gas and electricity consumption by household customers in the 12 months to 31 March 2016 fell by 3.1% and 1.8% respectively. As well as reflecting underlying changes in SSE's customer base, this can be attributed to the ongoing impact of structural, technological and behavioural energy efficiency improvements. SSE estimates that, at today's prices, a typical customer bill is now approximately 12% lower than in 2011 as a result of reduced energy consumption, largely due to energy efficiency improvements.

SSE continues to play its role in the delivery of important energy efficiency improvements to customers' homes under the Energy Company Obligation (ECO). SSE is on course to meet its ECO targets to 31 March 2017 and, since the scheme was launched in 2013, SSE has:

·      promoted the installation of 282,000 energy efficiency measures including loft, cavity and solid wall insulation and boiler replacements;

·      helped improve the efficiency of over 242,000 homes across Great Britain; and

·      provided over £1,000m of notional lifetime bill savings for customers.

Helping vulnerable customers

Energy is an essential service; SSE therefore takes its responsibility to vulnerable customers very seriously and helps them manage their energy costs in a number of ways.

The Warm Home Discount (WHD) scheme enables pensioners and vulnerable customers to receive help with their fuel bills in the form of a yearly £140 rebate.  As part of the WHD Scheme, SSE's Priority Assistance Fund provides additional support to low income and vulnerable customers, including debt relief, free energy efficiency advice, and help with bespoke payment arrangements.  In the year to 31 March 2016 around 325,000 customers received assistance from SSE worth over £48.5 million through these initiatives and partnership projects with National Energy Action (NEA), Citizens Advice and the Home Heat Helpline.

SSE also operates a free Careline priority service, dedicated to helping customers who are elderly, disabled or have special medical needs.  It takes a proactive approach to monitoring the top-up behaviour of its prepayment customers to minimise the risk of 'self-disconnection'.  In line with its licence condition, between the start of December and the end of February (or longer if the weather is unseasonably cold), SSE has a no-disconnection policy covering all household customers.

Further to its commitment to use any future unclaimed credit balances which cannot be returned to customers to help give additional support for vulnerable customers, SSE has also now reallocated historic unclaimed credits to the value of more than £28m.

Debt levels continue to reduce, partly reflecting lower prices and falling consumption, but also due to SSE's efforts to engage constructively and understandingly with customers in arrears as early as possible, making sure support is provided and payment plans are manageable.

Rolling out smart meters to customers across Great Britain

SSE's metering business is undergoing a transformation through the smart meter roll-out; however, it still undertakes meter reading operations and meter operator work in all parts of Great Britain. SSE believes in the potential for the national roll-out of smart meters to transform the relationship between customers, their energy usage and their supplier in the coming years. It is therefore committed to delivering its roll-out in a way that is both cost-effective and customer-centric, with the primary objective of maximising the net benefits to customers.

SSE has been gradually ramping up its capacity and delivery of smart meters with a view to getting it right for customers first time to maximise engagement. As of 31 March 2016, SSE had installed more than 180,000 smart meters and installed its 200,000th meter in April 2016.  2016/17 is a pivotal year for the smart programme, with the central communications infrastructure provided by the Data Communications Company (DCC) due to be delivered to a revised timetable which will see  phased introduction in August and October 2016. While there remain other constraints to be addressed, getting the DCC up and running is a critical first step towards enabling suppliers to build up to mass deployment. Any further delays to the DCC's delivery timetable must be reflected in the overall delivery timetable to avoid any negative impacts for customers.

Doing more for business energy customers

Business Energy performed strongly in 2015/16, driven by growth in the Industrial and Commercial (I&C) market and ongoing efforts to control operating costs. SSE has continued to build its offering in the commercial sector with the launch of a new renewable energy proposition 'SSE Green', a new customer website and a change in approach to service with a greater focus on the needs of customers.  This has resulted in Business Energy's service team moving closer to its sales team, working with the customer to define requirements at an early stage and then providing ongoing support on a continuous basis.

For Business Energy's micro business customers, SSE has continued its emphasis on Treating Customers Fairly by relaunching its TCF statement and establishing a Performance team to focus on operational excellence by driving continuous improvement.  Third Party Intermediaries (TPIs) remain an important channel for Business Energy growth and SSE continues to provide ongoing support to its TPIs by providing access to its industry experts via sales channels, engagement sessions and regular industry updates.

Key to the continued success of Business Energy is a willingness to listen to customers, review processes and act on what customers are saying.  At the same time, SSE remains focused on giving business customers direct access to people who will support and work in partnership with them throughout the lifetime of their contract.

Supplying energy and energy-related services to customers in Ireland

SSE Airtricity is the second-largest energy provider in Ireland and the only energy supply brand to operate in all of the competitive gas and electricity markets across the island.  At 31 March 2016, SSE Airtricity supplied electricity and gas to 0.79 million household and business customer accounts in the Republic of Ireland (ROI) and Northern Ireland (NI), representing a 20% share of the total combined gas and electricity markets in which it operates.

Market conditions remain highly competitive, particularly in Northern Ireland where the regulated electricity market has seen the emergence of new domestic entrants in the last 12 months.  In light of competitive pressures, SSE Airtricity continues to invest in its brand and in June 2015 announced a ten-year naming rights deal for The SSE Arena, Belfast, adding to SSE's existing portfolio of UK-wide entertainment venues. SSE Airtricity's Energy Services business continues to expand in both the ROI and NI markets. As a 'digital-first' supplier, around 70% of all SSE Airtricity customer interactions are performed via the company's online, digital and mobile service platforms.

SSE Airtricity reduced its household electricity prices in Republic of Ireland by 2% from 11 January 2016, following an earlier 2% cut to electricity along with a 4% cut to gas prices in April 2015. In Northern Ireland, the company reduced its electricity prices by 8% in April 2015 and by a further 1.3% from 11 January 2016.

In Northern Ireland's Greater Belfast natural gas supply network, where SSE Airtricity is the regulated supplier with a 73% market share, the company reduced its gas prices by 10% from 1 October 2015. This followed an earlier 7.8% cut in its regulated prices in April 2015. The setting of SSE Airtricity's regulated natural gas prices, including any changes to those prices, follows a Price Control review conducted every six months by the Northern Ireland Utility Regulator.

Enterprise

Business Structure

SSE Enterprise incorporates six of SSE's businesses: Contracting, Energy Solutions, Rail, Slough Heat and Power, Telecoms and Utilities, supported by centralised sales and project delivery teams.  As a multi-disciplined engineering services partner for businesses, building a sustainable infrastructure for the future, SSE Enterprise provides energy services to meet the needs of businesses and public sector organisations in a reliable and sustainable way.

With a significant self-delivery capability, SSE Enterprise:

·      designs, builds, maintains and operates complex mechanical and electrical engineering infrastructure;

·      provides sector-leading energy management and data analytic services to help businesses optimise their energy performance, helping to reduce costs and emissions;

·      provides industry-leading telecoms connectivity and data centre services, meeting the connectivity and communication needs of businesses with bespoke solutions; and

·      designs builds, maintains and operates electricity, gas, water, heat and cooling networks for commercial and residential developments.

SSE Enterprise was formed in 2014 under the leadership of Managing Director Jim McPhillimy, who is also a member of SSE's Executive Committee and a PDMR.  Having successfully brought together the SSE Enterprise group of businesses and enhanced their overall capability, Jim will step down from the role and retire from SSE at the end of the year.  A successor will be appointed in the next few months.

Setting the right priorities for SSE Enterprise

The energy needs and expectations of private sector companies and public sector organisations are becoming increasingly sophisticated, with growing requirements for effective energy management and robust energy and utility infrastructure.  In addition, those customers are increasingly seeking integrated and bespoke solutions to meet their energy and utility needs.

Laying the foundations for future growth

Since the start of 2015/16, SSE Enterprise has continued to make progress in laying the foundations to deliver future growth.

·      SSE Enterprise Telecoms has continued to grow its network, unbundling a further 33 BT exchanges, increasing telecoms coverage by an additional 50,000 postcodes nationwide; further expanding its network in London; and connecting a further four data centres, bringing the total number of connected data centres to 72. SSE Enterprise Telecoms sales grew 30% year on year, with a number of notable new clients including NATS, Mitsubishi UFJ Financial Group Inc. (MUFG) and Imperial College.

·      SSE Enterprise Contracting and SSE Enterprise Energy Solutions have both undergone organisational restructures, with enhanced sales organisations focused on operational efficiency and delivering value for customers. SSE Enterprise Contracting has been selected by Bluepoint London, a subsidiary of the French group Bolloré, to be the installer of up to 6,000 Electric Vehicle Charging Points across London.

·      SSE Enterprise Utilities has created a dedicated heat team with ambitious plans to significantly build on its current portfolio of district heat networks and maintain its position as one of the UK's leading heat network providers. In 2015/16 SSE Enterprise Utilities delivered a low-carbon, multi-utility solution at the Riverlight development in London, providing the installation and ongoing ownership, operation and maintenance of the water, heat, gas and electricity networks.

·      A dedicated rail business, SSE Enterprise Rail, has been created with the primary purpose of 'Powering Britain's Railways', building on the extensive engineering experience and expertise SSE has built up in rail over the last 15 years.  Since its formation, SSE Enterprise Rail has significantly expanded its capabilities in the rail sector, increasing its product portfolio of Railway Industry Supplier Qualification Scheme (RISQS) codes; the industry recognised qualification for the supply of products and services to the rail industry, from 32 to over 200.

·      Slough Heat and Power has transferred from SSE's Generation division to SSE Enterprise, recognising the opportunity to broaden the offering of services that SSE Enterprise provides to Slough Heat and Power's existing and prospective customers.

·      A new Energy Performance team has been created, responsible for securing, structuring and delivering Energy Performance Contracts (EPCs).

Retail (including Enterprise) - Conclusion and Priorities

SSE's Energy Supply, Energy-Related Services and Enterprise businesses operate in competitive markets and are each focused on the changing energy needs of household, commercial and public sector customers.  This means maintaining a clear focus on delivering the propositions and services that customers need.  Put simply, the core requirement of these businesses is to put the current and future needs of customers at the heart of everything they do.

Key priorities for 2016/17 and beyond

·      moving towards a stabilisation of customer numbers through enhanced sales and retention activities, as well as through realising SSE's customer service ambition;

·      accelerating diversification through the national expansion of Home Services and continued growth in broadband and telephone;

·      taking the smart opportunity by optimising deployment of smart meters and developing compelling smart-enabled customer propositions;

·      continuing to improve the customer experience and deliver operational efficiencies by further digitalising the business;

·      delivering continuing investment and growth in energy supply to commercial and public sector organisations; and

·      continuing development of integrated energy and utility solutions that meet the specific and evolving needs of customers, in addition to the continued organic growth of each of the businesses within Enterprise.

 

Summary Financial Statements

Consolidated Income Statement

for the year ended 31 March 2016

 

 

2016

 

2015

 

 

 

Before

exceptional

items and

certain

re-measure-ments

 

Exceptional items and

certain

re-measure-ments

(note 6)

Total

 

 

Before

exceptional

items and

certain

re-measure-ments

 

Exceptional items and

certain

re-measure-ments

(note 6)

Total

 

Note

£m

£m

£m

 

£m

£m

£m

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

5

28,781.3

-

28,781.3

 

31,654.4

-

31,654.4

Cost of sales

 

(25,859.4)

(644.5)

(26,503.9)

 

(28,801.3)

(432.8)

(29,234.1)

Gross profit

 

2,921.9

(644.5)

2,277.4

 

2,853.1

(432.8)

2,420.3

Operating costs

 

(1,449.8)

(334.0)

(1,783.8)

 

(1,361.5)

(358.5)

(1,720.0)

Other operating income

 

29.4

57.6

87.0

 

47.2

74.8

122.0

Operating profit before joint ventures and associates

 

1,501.5

(920.9)

580.6

 

1,538.8

(716.5)

822.3

Joint ventures and associates:

 

 

 

 

 

 

 

 

Share of operating profit / (loss)

 

322.9

-

322.9

 

342.6

(25.9)

316.7

Share of interest

 

(126.8)

-

(126.8)

 

(124.2)

-

(124.2)

Share of movement on derivatives

 

-

2.3

2.3

 

-

6.7

6.7

Share of tax

 

(39.9)

46.3

6.4

 

(34.2)

(1.4)

(35.6)

Share of profit on joint ventures and associates

 

156.2

48.6

204.8

 

184.2

(20.6)

163.6

Operating profit

5

1,657.7

(872.3)

785.4

 

1,723.0

(737.1)

985.9

Finance income

7

101.8

-

101.8

 

95.9

-

95.9

Finance costs

7

(308.2)

14.3

(293.9)

 

(302.4)

(44.2)

(346.6)

Profit before taxation

 

1,451.3

(858.0)

593.3

 

1,516.5

(781.3)

735.2

Taxation

8

(280.6)

272.5

(8.1)

 

(271.2)

200.4

(70.8)

Profit for the year

 

1,170.7

(585.5)

585.2

 

1,245.3

(580.9)

664.4

 

 

 

 

 

 

 

 

 

Attributable to:

 

 

 

 

 

 

 

 

Ordinary shareholders of the parent

 

1,046.1

(585.5)

460.6

 

1,124.0

(580.9)

543.1

Other equity holders

 

124.6

-

124.6

 

121.3

-

121.3

 

 

 

 

 

 

 

 

 

Basic earnings per share (pence)

10

 

 

46.1

 

 

 

55.3

Diluted earnings per share (pence)

10

 

 

46.0

 

 

 

55.2

 

 

 

 

 

 

 

 

 

Interim dividend paid per share (pence)

9

 

 

26.9

 

 

 

26.6

Proposed final dividend per share (pence)                                                                                                                                                       

9

 

 

 

62.5

 

 

 

61.8

 

 

 

 

89.4

 

 

 

88.4

 

The accompanying notes are an integral part of the financial information in this announcement.


Consolidated Statement of Comprehensive Income

For the year ended 31 March 2016

 

 

2016

2015

 

£m

£m

 

 

 

Profit for the year

585.2

664.4

 

 

 

Other comprehensive income:

 

 

Items that will not be reclassified to profit or loss:

 

 

Actuarial gains/(losses) on retirement benefit schemes

254.3

(79.3)

Taxation on actuarial (gains)/losses on defined benefit pension schemes

(58.9)

16.3

 

195.4

(63.0)

 

 

 

Share of joint ventures actuarial gains/(losses )on retirement benefit schemes

94.8

(2.1)

Share of joint ventures taxation of actuarial gains/(losses) on retirement benefit schemes

(18.4)

0.2

 

76.4

(1.9)

Items that will be reclassified subsequently to profit or loss:

 

 

Gains/(losses) on effective portion of cash flow hedges

79.4

(41.9)

Transferred to assets and liabilities on cash flow hedges

4.7

(4.5)

Taxation on cashflow hedges

(15.1)

8.8

 

69.0

(37.6)

 

 

 

Share of joint ventures/associates gain/(loss) on effective portion of cash flow hedges

4.7

(9.4)

Share of joint ventures/associates taxation on cash flow hedges

(0.8)

1.9

 

3.9

(7.5)

 

 

 

Losses on revaluation of available for sale investments, net of taxation

(8.4)

(3.2)

 

 

 

Exchange difference on translation of foreign operations

85.1

(119.7)

(Losses)/gains on net investment hedge

(40.7)

61.7

Taxation on net investment hedge

7.3

(13.0)

 

51.7

(71.0)

 

 

 

Other comprehensive gain/(loss), net of taxation

388.0

(184.2)

 

 

 

Total comprehensive income for the period

973.2

480.2

 

 

 

Attributable to:

 

 

Ordinary shareholders of the parent

848.6

358.9

Other equity holders

124.6

121.3

 

973.2

480.2

 


Consolidated Balance Sheet

as at 31 March 2016

 

 

 

2016

 

2015

 

 

 

Note

£m

£m

Assets

 

 

 

 

  Property, plant and equipment

 

 

12,525.0

11,303.9

  Intangible assets:

 

 

 

 

    Goodwill

 

 

609.9

598.0

    Other intangible assets

 

 

249.5

170.4

  Equity investments in associates and joint ventures

 

 

1,045.1

875.2

  Loans to associates and joint ventures

 

 

591.6

559.4

  Other investments

 

 

16.7

26.4

  Deferred tax assets

 

 

512.0

270.2

  Derivative financial assets

 

 

537.7

566.8

  Non-current assets

 

 

16,087.5

14,370.3

 

 

 

 

 

  Other intangible assets

 

 

500.1

433.5

  Inventories

 

 

215.4

342.3

  Trade and other receivables

 

 

3,274.3

4,527.0

  Cash and cash equivalents

 

13

360.2

1,512.3

  Derivative financial assets

 

 

1,615.0

1,999.9

  Current assets held for sale

 

12

134.2

110.3

  Current assets

 

 

6,099.2

8,925.3

  Total assets

 

 

22,186.7

23,295.6

 

 

 

 

 

  Liabilities

 

 

 

 

  Loans and other borrowings

 

13

923.3

732.8

  Trade and other payables

 

 

4,184.4

5,277.1

  Current tax liabilities

 

 

298.2

308.4

  Provisions

 

 

94.0

99.5

  Derivative financial liabilities

 

 

1,783.8

2,297.3

  Liabilities held for sale

 

12

115.0

11.1

  Current liabilities

 

 

7,398.7

8,726.2

 

 

 

 

 

  Loans and other borrowings

 

13

6,245.5

5,367.9

  Deferred tax liabilities

 

 

917.5

716.0

  Trade and other payables

 

 

452.4

424.6

  Provisions

 

 

703.3

382.4

  Retirement benefit obligations

 

17

394.8

664.6

  Derivative financial liabilities

 

 

857.5

933.4

  Non-current liabilities

 

 

9,571.0

8,488.9

  Total liabilities

 

 

16,969.7

17,215.1

  Net assets

 

 

5,217.0

6,080.5

 

 

 

 

 

  Equity:

 

 

 

 

  Share capital

 

15

503.8

496.5

  Share premium

 

 

880.4

862.7

  Capital redemption reserve

 

 

22.0

22.0

  Hedge reserve

 

 

(2.2)

(72.1)

  Translation reserve

 

 

(17.8)

(69.5)

  Retained earnings

 

 

1,598.6

1,469.8

  Equity attributable to ordinary shareholders of the parent

 

 

2,984.8

2,709.4

  Hybrid capital

 

14

2,209.7

3,371.1

  Total equity attributable to equity holders of the parent

 

 

5,194.5

6,080.5

  Non-controlling interests

 

 

22.5

-

  Total equity

 

 

5,217.0

6,080.5

 

 

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 2016

 

 

Share capital

Share premium account

Capital redemption reserve

Hedge reserve

Translation reserve

Retained earnings

Total attributable to ordinary shareholders

Hybrid Capital

Total equity attributable to equity holders of the parent

Non-controlling  interests

Total  equity

 

£m

£m

£m

£m

£m

£m

£m

£m

£m

£m

£m

At 1 April 2015

496.5

862.7

22.0

(72.1)

(69.5)

1,469.8

2,709.4

3,371.1

6,080.5

-

6,080.5

 

 

 

 

 

 

 

 

 

 

 

 

Profit for the year

-

-

-

-

-

460.6

460.6

124.6

585.2

-

585.2

Other comprehensive income

-

-

-

69.0

51.7

187.0

307.7

-

307.7

-

307.7

Share of joint ventures and associates other comprehensive gain

-

-

-

3.9

-

76.4

80.3

-

80.3

-

80.3

Total comprehensive income for the year

-

-

-

72.9

51.7

724.0

848.6

124.6

973.2

-

973.2

 

 

 

 

 

 

 

 

 

 

 

 

Dividends to shareholders

-

-

-

-

-

(884.0)

(884.0)

-

(884.0)

-

(884.0)

Scrip dividend related share issue

5.9

(5.9)

-

-

-

175.8

175.8

-

175.8

-

175.8

Distributions to hybrid capital holders

-

-

-

-

-

-

-

(124.6)

(124.6)

-

(124.6)

Issue of shares

1.4

23.6

-

-

-

-

25.0

-

25.0

-

25.0

Redemption  of hybrid capital

-

-

-

-

-

(8.5)

(8.5)

(1,161.4)

(1,169.9)

-

(1,169.9)

Credit in respect of employee share awards

-

-

-

-

-

13.5

13.5

-

13.5

-

13.5

Investment in own shares

-

-

-

-

-

(11.1)

(11.1)

-

(11.1)

-

(11.1)

Disposal of non-controlling interest

-

-

-

-

-

138.6

138.6

 

138.6

-

138.6

Non controlling  interest (i)

-

-

-

(3.0)

-

(19.5)

(22.5)

-

(22.5)

22.5

-

At 31 March 2016

503.8

880.4

22.0

(2.2)

(17.8)

1,598.6

2,984.8

2,209.7

5,194.5

22.5

5,217.0

 

(i) This represents the non controlling interest in Clyde Windfarm (Scotland) Limited

 

 


 

Consolidated Statement of Changes in Equity

for the year ended 31 March 2016

 

Share capital

Share premium account

Capital redemption reserve

Hedge reserve

Translation reserve

Retained earnings

Total attributable to ordinary shareholders

Hybrid Capital

Total equity attributable to equity holders of the parent

Non-controlling  interests

Total  equity

 

£m

£m

£m

£m

£m

£m

£m

£m

£m

£m

£m

At 1 April 2014

487.4

861.5

22.0

(27.0)

1.5

1,587.3

2,932.7

2,186.8

5,119.5

-

5,119.5

 

 

 

 

 

 

 

 

 

 

 

 

Profit for the year

-

-

-

-

-

543.1

543.1

121.3

664.4

-

664.4

Other comprehensive income

-

-

-

(37.6)

(71.0)

(66.2)

(174.8)

-

(174.8)

-

(174.8)

Share of joint ventures and associates other comprehensive (loss)

-

-

-

(7.5)

-

(1.9)

 

(9.4)

-

(9.4)

-

(9.4)

Total comprehensive income for the year

-

-

-

(45.1)

(71.0)

475.0

358.9

121.3

480.2

-

480.2

 

 

 

 

 

 

 

 

 

 

 

 

Dividends to shareholders

-

-

-

-

-

(854.1)

(854.1)

-

(854.1)

-

(854.1)

Scrip dividend related share issue

8.6

(8.6)

-

-

-

255.6

255.6

-

255.6

 

255.6

Distributions to hybrid capital holders

-

-

-

-

-

-

-

(121.3)

(121.3)

-

(121.3)

Issue of shares

0.5

9.8

-

-

-

-

10.3

-

10.3

-

10.3

Redemption of hybrid capital

-

-

-

-

-

-

-

1,184.3

1,184.3

-

1,184.3

Credit in respect of employee share awards

-

-

-

-

-

15.0

15.0

-

15.0

-

15.0

Investment in own shares

-

-

-

-

-

(9.0)

(9.0)

-

(9.0)

-

(9.0)

At 31 March 2015

496.5

862.7

22.0

(72.1)

(69.5)

1,469.8

2,709.4

3,371.1

6,080.5

-

6,080.5

 


 

Consolidated Cash Flow Statement

for the year ended 31 March 2016

 

 

 

2016

 

2015

 

 

Note

£m

£m

 

 

 

 

Cash generated from operations before working capital movements

11

2,112.1

2,080.7

Decrease/(increase) in inventories

 

44.0

(8.5)

Decrease/(increase) in receivables

 

1,098.5

(243.1)

(Decrease)/increase in payables

 

(879.5)

394.0

(Decrease) in provisions

 

(55.7)

(66.2)

Cash generated from operations

 

2,319.4

2,156.9

 

 

 

 

Dividends received from joint ventures and associates

 

130.9

110.1

Interest received

 

101.8

95.9

Interest paid

 

(254.1)

(227.8)

Income taxes paid

 

(125.5)

(164.8)

Payment for consortium relief

 

(13.6)

(12.0)

Net cash from operating activities

 

2,158.9

1,958.3

 

 

 

 

Cash flows from Investing activities

 

 

 

Purchase of property, plant and equipment

 

(1,495.4)

(1,345.3)

Purchase of other intangible assets

 

(444.8)

(241.8)

Deferred income received

 

16.1

2.9

Proceeds from disposals

12

312.4

233.8

Loans to joint ventures and associates

 

(50.5)

(33.9)

Purchase of businesses

12

(669.0)

(66.0)

Loans and equity repaid by joint ventures

 

18.3

15.0

Investment in joint ventures and associates

 

(9.8)

(20.0)

Increase in other investments

 

(0.2)

(0.1)

Net cash from investing activities

 

(2,322.9)

(1,455.4)

 

 

 

 

Cash flows from financing activities

 

 

 

Proceeds from issue of share capital

 

25.0

10.3

Dividends paid to company's equity holders

9

(708.2)

(598.5)

(Redemption)/issue of hybrid capital

14

(1,161.4)

1,184.3

Hybrid capital dividend payments

14

(124.6)

(121.3)

Employee share awards share purchase

 

(11.1)

(9.0)

New borrowings

 

1,070.1

151.1

Repayment of borrowings

 

(77.7)

(66.3)

Net cash from financing activities

 

(987.9)

550.6

 

 

 

 

Net (decrease)/increase in cash and cash equivalents

 

(1,151.9)

1,053.5

 

 

 

 

Cash and cash equivalents at the start of year

 

1,512.1

458.6

Net (decrease)/increase in cash and cash equivalents

 

(1,151.9)

1,053.5

Cash and cash equivalents at the end of year

 

360.2

1,512.1

 

 

 

 

Cash and cash equivalents in balance sheet

13

360.2

1,512.3

Bank overdrafts (i)

 

-

(0.2)

Cash and cash equivalents as above

 

360.2

1,512.1

 

(i) Bank overdrafts are reported on the balance sheet as part of current loans and borrowings. For cash flow purposes, these have been included as cash and cash equivalents.

 

Notes to the Preliminary Statement

for the year ended 31 March 2016

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 2016 or 2015, but is derived from those accounts.  Consolidated financial statements for the year ended 31 March 2015 were delivered to the Registrar of Companies, and those for the year ended 31 March 2016 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 in respect of the accounts for 2016.  This preliminary announcement was authorised by the Board on 17 May 2016.

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 2016.  These consolidated financial statements were prepared under the historical cost convention, excepting certain assets and liabilities stated at fair value and in accordance with International Financial Reporting Standards and their interpretations, as adopted by the European Union (adopted IFRS).  This consolidated financial information has been prepared on the basis of accounting policies consistent with those applied in the consolidated financial statements for the year ended 31 March 2015. 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'  and 'adjusted net debt and hybrid capital' are not defined under IFRS and are explained in more detail below.

(i)      Adjusted measures

The Directors assess the performance of the Group and its reportable segments based on 'adjusted measures'.  These measures are used for internal performance management and are believed to be appropriate for explaining underlying performance to users of the accounts. These measures are also deemed the most useful for the ordinary shareholders of the Company and for other stakeholders.

The performance of the reportable segments is reported based on adjusted profit before interest and tax ('adjusted operating profit'). This is reconciled to reported profit before interest and tax by adding back exceptional items and certain re-measurements (see Note 2.2(ii) below) and after the removal of interest and taxation on profits from equity-accounted joint ventures and associates.

The performance of the Group is reported based on adjusted profit before tax which excludes exceptional items and certain re-measurements (see below), the net interest costs associated with defined benefit schemes and taxation on profits from equity-accounted joint ventures and associates. The interest costs removed are non-cash and are subject to variation based on actuarial valuations of scheme liabilities.

The Group's key performance measure is adjusted earnings per share (EPS), which is based on basic earnings per share before exceptional items and certain re-measurements (see below), the net interest costs associated with defined benefit schemes and after the removal of deferred taxation. Adjusted profit after tax is presented on a basis consistent with adjusted EPS except for the exclusion of payments to holders of hybrid equity.

The financial statements also include an 'adjusted net debt and hybrid capital' measure. This presents financing information on the basis used for internal liquidity risk management. This measure excludes obligations due under finance leases, non-recourse debt associated with Clyde Windfarm (Scotland) Limited (see Note 4.2(iv)) and includes cash held as collateral on commodity trading exchanges. The measure represents the capital owed to investors, lenders and equity holders other than the ordinary shareholders. As with 'adjusted earnings per share', this measure is considered to be of particular relevance to the ordinary shareholders of the Group as well as other stakeholders and interested parties.


 

Notes to the Preliminary Statement

for the year ended 31 March 2016

2.   Basis of preparation and presentation (continued)

2.2 Basis of presentation (continued)

(ii)     Exceptional items and certain re-measurements

Exceptional items are those charges or credits that are considered unusual by nature and scale and of such significance that separate disclosure is required for the financial statements to be properly understood. The trigger points for exceptional items will be tend to be non-recurring although exceptional charges may impact the same asset class or segment over time. Market conditions that have deteriorated significantly over time will only be captured to the extent observable at the balance sheet date. Examples of items that may be considered exceptional include material asset or business impairment charges, business restructuring costs, significant gains or losses on disposal of assets and businesses and contractual settlements following significant disputes and claims. The Directors consider that any gain or loss on disposal of greater than £30.0m would be disclosed as being exceptional by nature of its scale. Other gains or losses on disposal below this level may be considered to be exceptional by reference to specific circumstances which will be explained on a case-by-case basis.

Certain re-measurements are re-measurements arising on certain commodity, interest rate and currency contracts which are accounted for as held for trading or as fair value hedges in accordance with the Group's policy for such financial instruments. 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.

(iii)    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.

3.      Summary of significant new accounting policies and reporting changes

No new accounting standards have been adopted by the Group that have a material impact on the financial statements in the current year. The following issued standards have not yet been adopted by the Group:

i) IFRS 15 'Revenue from contracts with customers' is effective on 1 January 2018 (and thus to the Group from 1 April 2018), subject to European Union (EU) endorsement;

ii) IFRS 16 'Leases' is effective on 1 January 2019 (1 April 2019 to the Group), subject to EU endorsement;

iii) IFRS 9 'Financial instruments' which will be effective on 1 January 2018 (1 April 2018 to the Group), subject to EU endorsement.

The Group has commenced initial assessment of the impact of these standards on the consolidated financial statements. However, at this stage, it is not yet practicable to quantify the impact these standards will have. The assessment of IFRS 15 will consider matters such as bundled goods and services, the allocation of transaction price to performance obligations, treatment of customer acquisition costs and contracts with variable consideration. The assessment of IFRS 16 will require, with certain exceptions, obligations associated with contracts currently designated as operating leases to be recognised on balance sheet as lease liabilities. The definition of a lease has also been modified which may impact which contracts the Group accounts for as leases.

In addition to these, there are a number of other amendments and annual improvement project recommendations that are not yet effective but which have been endorsed by the EU. These are not anticipated to have a material impact on the Group's consolidated financial statements.  The amendments to IFRS 11 'Accounting for acquisitions of interests in joint operations' which were effective on 1 January 2016 clarifies that the acquisition of an interest in a joint operation will be accounted for in accordance with IFRS 3 Business Combinations. This is not expected to represent a change in Group accounting policy.

4.      Critical accounting judgements and key sources of estimation uncertainty

In the process of applying the Group's accounting policies, management necessarily makes judgements and estimates that have a significant effect on the amounts recognised in the financial statements. Changes in the assumptions underlying the estimates could result in a significant impact to the financial statements. The Group's key accounting judgement and estimation areas are noted with the most Significant Financial Judgement areas as specifically discussed by the Audit Committee being highlighted separately.

4.1    Significant Financial Judgements - Estimation Uncertainties

The preparation of these Financial Statements has specifically considered the following Significant Financial Judgements all of which are areas of estimation uncertainty.


 

Notes to the Preliminary Statement

for the year ended 31 March 2016

4    Critical accounting judgements and key sources of estimation uncertainty (continued)

4.1 Significant Financial Judgements - Estimation Uncertainties (continued)

(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. In conducting its reviews, the Group makes judgements and estimates in considering the recoverable amount of the respective assets or cash-generating units (CGUs). The specific assets under review in the year ended 31 March 2016 are goodwill, thermal power generation assets, wind farm CGUs, gas storage assets and exploration and production (E&P) assets. 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 2P reserves, discount rates and other inputs could impact the assessed recoverable value of assets and CGUs and consequently impact the Group's income statement and balance sheet.

(ii)     Revenue recognition - estimated energy consumption  - Estimation Uncertainty

Revenue from Retail energy supply activities includes an estimate of the value of electricity or gas supplied to customers between the date of the last meter reading and the year end. This estimation will comprise of values for 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 for unbilled revenue (disclosed as accrued income). The volume of unbilled electricity or gas is calculated by assessing a number of factors such as externally notified aggregated volumes supplied to customers, amounts billed to customers and other adjustments. Unbilled income is calculated by applying the tariffs relevant to the customer type to the calculated volume of electricity or gas. This estimation methodology is subject to an internal corroboration process that provides support for the judgements made by management. This process requires the comparison of calculated unbilled volumes to a benchmark measure of unbilled volumes which is derived using independently verified data and by assessing historical weather-adjusted consumption patterns and actual meter data that is used in industry reconciliation processes for total consumption by supplier. This aspect of the corroboration process, which requires a comparison of the estimated supplied quantity of electricity or gas that is deemed to have been delivered to customers and the aggregate supplied quantity of electricity or gas applicable to the Group's customers that is measured by industry system operators, is a key judgement. The assessment of electricity unbilled revenue is further influenced by the impact on national settlements data or feed-in-tariff supported volumes and spill from solar PV generation. The experience of the Group is that the industry estimated supplied quantities in gas have historically been higher than actual metered supply. To take account of this, the Group applies a further judgement, being a percentage reduction to unbilled consumption volume, to the measurement of its unbilled revenue in the financial statements. It is expected that this judgement will become less critical as the industry transitions to smart meter technology.

(iii)    Valuation of trade receivables - Estimation Uncertainty

The basis of determining the provisions for bad and doubtful debts is explained at Note 16 of the financial statements in the section on credit risk and aged debt. While the provisions are considered to be appropriate, changes in estimation basis or in economic conditions could lead to a change in the level of provisions recorded and consequently on the charge or credit to the income statement.

(iv)    Retirement benefits - 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.  The value of scheme assets are impacted by the asset ceiling test which (a) restricts the surplus that can be recognised to assets that can be recovered fully through refunds and (b) may increase the value of scheme liabilities where there are minimum funding liabilities in relation to agreed contributions. Further detail on the estimation basis is contained in Note 32 of the financial statements.

4.2    Other key accounting judgements

Other key accounting judgements applied in the preparation of these Financial Statements include the following:

(i)      Business Combinations and acquisitions - Accounting Judgement

Business combinations and acquisitions require a fair value exercise to be undertaken to allocate the purchase price to the fair value of the identifiable assets acquired and the liabilities assumed.  The determination of the fair value of the assets and liabilities is based, to a certain extent, on management's judgement.  The amount of goodwill initially recognised as a result of a business combination is dependent on the allocation of this purchase price to the identifiable assets and liabilities with any unallocated portion being recorded as goodwill. Business combinations are disclosed in Note 12.


 

Notes to the Preliminary Statement

for the year ended 31 March 2016

4    Critical accounting judgements and key sources of estimation uncertainty (continued)

4.2 Other key accounting judgements (continued)

(ii)     Energy Company Obligation (ECO) costs - Accounting Judgement

The Energy Company Obligation ('ECO') legislation, in force since 1 January 2013, requires qualifying energy suppliers to meet defined targets by providing measures to improve the energy efficiency of and level of carbon emissions from UK domestic households. The targets for the Group's Energy Supply business are set based on historic customer information with delivery of the measures being required by 31 March 2017. The Group believes it is not technically obligated to provide those measures until the end of the delivery period. As a consequence and applying applicable accounting standards, the costs of ECO are recorded when measures are delivered or other qualifying expenditure has been incurred.

(iii)    Treatment of disputes and claims - Accounting Judgement

The Group is exposed to the risk of litigation, regulatory judgements and contractual disputes through the course of its normal operations. The Group considers each instance separately in accordance with legal advice and will provide or disclose information as deemed appropriate. Changes in the assumptions around the likelihood of an outflow of economic resources or the estimation of any obligation would change the values recognised in the financial statements.

(iv)    Consolidation of interest in Clyde Windfarm (Scotland) Limited- Accounting Judgement

On 18 March 2016, the Group completed the sale of 49.9% of the equity in Clyde Windfarm (Scotland) Limited ('Clyde'). Details of this transaction are included at Note 12. The Group is providing project and contract management services for and 100% of the funding for the construction of the 172.8MW extension of the wind farm. As part of this arrangement, the Group has retained a casting vote over the engineering, procurement and construction of the extension and certain rights over the construction of the extension. Under IFRS 10 Consolidated Financial Statements, the extension is considered to be a 'relevant activity' which  significantly affects the future returns from Clyde and the rights retained by the Group have been concluded to confer power to control the relevant activities of Clyde to the Group. As a consequence, this entity has been fully consolidated into the Group's financial statements. This means that the gain on the transaction has been recorded in equity and the co-venturers' ownership share is represented as a non-controlling interest. On 13 May 2016, the Group agreed to waive those contractual rights which gave rise to the judgement that power to control the relevant activities existed over Clyde. All other contractual arrangements remain in place. As a consequence, the Group will prospectively account for its interest in Clyde as that of an investment in an equity-accounted joint venture. One of the impacts of that change to the consolidation basis will be to remove the equivalent to the £200.7m of non-recourse borrowings held by Clyde from the Group's consolidated balance sheet. In addition, the Group's interest in the entity is expected to remain that of an equity-accounted joint venture following completion of the extension construction project. Given this change in circumstance and on the basis the £200.7m debt item is non-recourse to the Group, this item has been excluded from the Group's 'adjusted net debt and hybrid capital' measure.

4.3    Other areas of estimation uncertainty

(i)      Provisions and contingencies

The assessments undertaken in recognising provisions and contingencies have been made in accordance with IAS 37. Provisions are calculated based on estimations. The evaluation of the likelihood of the contingent events has required best judgement by management regarding the probability of exposure to potential loss. Should circumstances change following unforeseeable developments, this likelihood could alter.

(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 2016.  Decommissioning costs in relation to gas exploration and production assets are based on expected lives of the fields and costs of decommissioning. 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 and are currently expected to be incurred predominantly between 2017 and 2040.

(iii)    Gas and liquids reserves

The volume 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 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 higher depreciation expense or an immediate write-down (impairment) of the asset's book value.


 

Notes to the Preliminary Statement

for the year ended 31 March 2016

5.      Segmental information

The Group's operating segments are those used internally by the Board to run the business and make strategic decisions. The Group's main businesses and operating segments are the Networks business, compromising Electricity Distribution, Electricity Transmission and Gas Distribution; the Retail business, compromising Energy Supply, Enterprise and Energy-related Services; and Wholesale, comprising Energy Portfolio Management and Electricity Generation, Gas Storage and Gas Production.

In March 2014, the Group announced its intention to reorganise its activities so that there are separately auditable legal entities responsible for its Energy Supply, Energy Portfolio Management (EPM) and Electricity Generation activities. This change was made to enhance the transparency of the measurement and reporting of the performance of these activities. There is now a subsidiary company, SSE EPM Limited, which is responsible for managing the Group's commodity requirements.

The establishment of this company does not change the Group's basis of inter-segmental pricing or its basis of reporting operational performance to the Board. The methodology in place promotes market reflectivity and closely aligns with the operational decision-making in the respective businesses. EPM and Electricity Generation continue to be reported to the Board as a single reportable operating segment.

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

Energy Supply

The supply of electricity and gas to residential and business customers in the UK and 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

Energy-related Services

The provision of energy-related goods and services to customers in the UK including meter reading and installation, boiler maintenance and installation and domestic telecoms and broadband services

Wholesale

Energy Portfolio Management and Electricity Generation

The generation of power from renewable and thermal plant in the UK and Ireland and 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, operating profit, assets and other items by segment is provided below. All revenue and profit before taxation arise from operations within the United Kingdom and Ireland.


 

Notes to the Preliminary Statement

for the year ended 31 March 2016

5    Segmental information (continued)

5.1    Revenue by segment

 

External revenue

Intra-segment revenue
(i)

Total revenue

 

External revenue

Intra-segment revenue,

restated (i)

Total revenue,

restated

 

2016

£m

2016

£m

2016

£m

 

2015

£m

2015

£m

2015

£m

Networks

 

 

 

 

 

 

 

Electricity Distribution

689.0

243.6

932.6

 

735.6

288.0

1,023.6

Electricity Transmission

367.9

-

367.9

 

246.7

0.2

246.9

 

1,056.9

243.6

1,300.5

 

982.3

288.2

1,270.5

Retail

 

 

 

 

 

 

 

Energy Supply

7,548.3

83.2

7,631.5

 

7,961.2

30.3

7,991.5

Enterprise

455.1

96.6

551.7

 

495.7

155.4

651.1

Energy-related Services

118.2

112.9

231.1

 

112.6

97.3

209.9

 

8,121.6

292.7

8,414.3

 

8,569.5

283.0

8,852.5

Wholesale

 

 

 

 

 

 

 

Energy Portfolio Management and Electricity Generation

19,525.3

3,780.6

23,305.9

 

22,023.7

4,015.4

26,039.1

Gas Storage

5.7

214.3

220.0

 

9.7

211.8

221.5

Gas Production

2.2

144.9

147.1

 

1.3

177.5

178.8

 

19,533.2

4,139.8

23,673.0

 

22,034.7

4,404.7

26,439.4

Corporate unallocated

69.6

258.9

328.5

 

67.9

225.8

293.7

Total

28,781.3

4,935.0

33,716.3

 

31,654.4

5,201.7

36,856.1

(i)          Significant intra-segment revenue is derived from use of system income received by the Electricity Distribution business from Energy Supply; Energy Supply provides internal heat and light power supplies to other Group companies; Enterprise provides electrical contracting services and telecoms infrastructure charges to other Group companies; Energy-related Services provides metering and other services to other Group companies; Energy Portfolio Management and Electricity Generation provides power, gas and other commodities to the Energy Supply segment; Gas Storage provides the use of Gas Storage facilities to Energy Portfolio Management; Gas Production sells gas from producing North Sea fields to the Electricity Generation and Energy Portfolio Management segment. Corporate unallocated provides corporate and infrastructure services to the operating businesses.  All are provided at arm's length basis.

Revenue within Energy Portfolio Management and Electricity Generation includes revenues from generation plant output and the gross value of all wholesale commodity sales including settled physical and financial trades. These are entered into to optimise the performance of the generation plants and to manage the Group's commodity risk exposure. Purchase trades are included in cost of sales.

Revenue from the Group's investment in Scotia Gas Networks SSE share being £549.9m (2015 - £659.2m) is not recorded in the revenue line in the income statement.

Revenue by geographical location is as follows:

 

2016

2015

 

£m

£m

 

 

 

UK

28,035.4

30,923.3

Ireland

745.9

731.1

 

28,781.3

31,654.4

 


 

Notes to the Preliminary Statement

for the year ended 31 March 2016

5.   Segmental information (continued)

5.2    Operating profit/(loss) by segment

 

2016

 

Adjusted operating profit reported to the Board

JV / Associate share of interest and tax (ii)

Before exceptional items and certain re-measurements

Exceptional items and

certain re-measurements

Total

 

£m

£m

£m

£m

£m

Networks

 

 

 

 

 

Electricity Distribution

370.7

-

370.7

-

370.7

Electricity Transmission

287.2

-

287.2

-

287.2

Gas Distribution

268.7

(142.0)

126.7

48.6

 

926.6

(142.0)

784.6

48.6

833.2

Retail

 

 

 

 

 

Energy Supply

398.9

-

398.9

-

398.9

Enterprise

40.9

-

40.9

-

40.9

Energy-related Services

15.4

-

15.4

(17.8)

(2.4)

 

455.2

-

455.2

(17.8)

437.4

Wholesale

 

 

 

 

 

Energy Portfolio Management  and Electricity Generation

436.3

(24.7)

411.6

(586.4)

(174.8)

Gas Storage

4.0

-

4.0

(150.9)

(146.9)

Gas Production

2.2

-

2.2

(161.8)

(159.6)

 

442.5

(24.7)

417.8

(899.1)

(481.3)

Corporate unallocated

0.1

-

0.1

(4.0)

(3.9)

Total

1,824.4

(166.7)

1,657.7

(872.3)

785.4

 

 

2015

 

 

Adjusted operating profit reported to the Board

JV / Associate share of interest and tax (ii)

Before exceptional items and certain re-measurements

Exceptional items and certain re-measurements

Total

 

£m

£m

£m

£m

£m

Networks

 

 

 

 

 

Electricity Distribution

467.7

-

467.7

-

467.7

Electricity Transmission

184.1

-

184.1

-

184.1

Gas Distribution

285.0

(137.1)

147.9

5.3

 

936.8

(137.1)

799.7

5.3

805.0

Retail

 

 

 

 

 

Energy Supply

368.7

-

368.7

(34.2)

334.5

Enterprise

70.4

-

70.4

30.3

100.7

Energy-related Services

17.7

-

17.7

15.6

33.3

 

456.8

-

456.8

11.7

468.5

Wholesale

 

 

 

 

 

Energy Portfolio Management  and Electricity Generation

433.3

(21.3)

412.0

(483.8)

(71.8)

Gas Storage

3.9

-

3.9

(163.9)

(160.0)

Gas Production

36.6

-

36.6

(106.0)

(69.4)

 

473.8

(21.3)

452.5

(753.7)

(301.2)

Corporate unallocated

14.0

-

14.0

(0.4)

13.6

Total

1,881.4

(158.4)

1,723.0

(737.1)

985.9

(ii)        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 6). 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 50% share of this, £24.3m (2015 - £33.3m), as finance income (Note 7).

The Group's share of operating profit from joint ventures and associates has been recognised in the Energy Portfolio Management and Electricity Generation segment other than that for Scotia Gas Networks Limited, which is recorded in Gas Distribution, and PriDE (South East Regional Prime), which is recognised in Enterprise (£0.4m before tax; 2015 - £0.7m before tax).

Notes to the Preliminary Statement

for the year ended 31 March 2016

6.      Exceptional items and certain re-measurements

 

2016

£m

2015

£m

Exceptional items

 

 

Asset impairments and related charges

(892.5)

(667.5)

Provisions for restructuring and other liabilities

(54.9)

(56.0)

 

(947.4)

(723.5)

Net gains on disposals of businesses and other assets

57.6

74.8

 

(889.8)

(648.7)

Impairment of investments in joint ventures and associates (share of result)

-

(25.9)

 

(889.8)

(674.6)

Share of effect of change in UK corporation tax on deferred tax liabilities and assets of associate and joint venture investments

46.7

-

Total exceptional items

(843.1)

(674.6)

 

 

 

Certain re-measurements

 

 

Movement on operating derivatives (note 16)

(31.1)

(67.8)

Movement on financing derivatives (note 16)

14.3

(44.2)

Share of movement on derivatives in jointly controlled entities (net of tax)

1.9

5.3

Total certain re-measurements

(14.9)

(106.7)

 

 

 

Exceptional items and certain re-measurements before taxation

(858.0)

(781.3)

 

 

 

Taxation

 

 

Effect of change in UK corporation tax rate on deferred tax liabilities and assets

41.5

15.6

Taxation on other exceptional items

227.6

145.6

 

269.1

161.2

Taxation on certain re-measurements

3.4

39.2

Taxation

272.5

200.4

 

 

 

Exceptional items after certain re-measurements after taxation

(585.5)

(580.9)

 

Exceptional items are disclosed across the following categories  within the income statement:

 

 

 

2016

£m

2015

£m

Cost of sales:

 

 

Coal-fired Generation related  provisions and charges

(287.0)

(313.5)

Gas-fired Generation related charges

(326.4)

(51.5)

Movement on operating derivatives (note 16)

(31.1)

(67.8)

 

(644.5)

(432.8)

Operating costs:

 

 

Gas Production (E&P) related charges

(161.8)

(106.1)

Gas Storage related charges

(150.9)

(163.9)

Gas-fired Generation related charges

-

(24.9)

Other exceptional  provisions and charges

(21.3)

(63.6)

 

(334.0)

(358.5)

Operating income:

 

 

Net gains on disposals of businesses and other assets

57.6

74.8

 

 

 

Joint  ventures and associates:

 

 

Impairment of investments

-

(25.9)

Effect of change in UK corporation tax on deferred tax liabilities and assets

46.7

-

Movement on derivatives (net of tax)

1.9

5.3

 

48.6

(20.6)

 

 

 

Operating loss

(872.3)

(737.1)

 

 

 

Finance costs

 

 

Movement on financing derivatives (note 16)

14.3

(44.2)

Loss before taxation

(858.0)

(781.3)

Notes to the Preliminary Statement

for the year ended 31 March 2016

6    Exceptional items and certain re-measurements (continued)

In the year to 31 March 2016, the Group recognised net exceptional charges of £889.8m. This consisted of asset impairment and related charges totalling £892.5m, exceptional provisions of £54.9m and net exceptional gains on disposal of £57.6m. The £138.6m gain on the part disposal of Clyde Windfarm (Scotland) Limited has been recognised directly in equity and therefore does not form part of the Income Statement and therefore total gains on disposal were £196.2m.

 

Property, Plant & Equipment

£m

Goodwill & Other Intangibles

£m

Inventories

 

 

£m

Other charges

 

£m

Total

Impairment

related

£m

Provisions

 

 

£m

Total charges

 

£m

Coal Generation (i)

67.6

-

87.9

83.2

238.7

48.3

287.0

Gas Generation (ii)

302.5

2.2

3.7

18.0

326.4

-

326.4

Gas Production (iii)

125.0

27.2

-

9.6

161.8

-

161.8

Gas Storage (iv)

150.9

-

-

-

150.9

-

150.9

Other (v)

-

11.2

-

3.5

14.7

6.6

21.3

 

646.0

40.6

91.6

114.3

892.5

54.9

947.4

 

(i) Coal-fired Generation. On 20 May 2015, the Group announced that operations at Ferrybridge would cease at 31 March 2016 and consequently exceptional charges including the recognition of restructuring provisions, impairment of inventory and other costs have been recognised (£72.0m). On 30 March 2016, the Group announced that following a consultation process and success in securing a contract to provide ancillary services to National Grid for one year from 1 April 2016, operations at Fiddler's Ferry would continue and that SSE would enter 'all or part of' the capacity at Fiddler's Ferry into any 2017/18 Capacity Market auction. Nonetheless, the challenging economic and regulatory conditions facing coal-fired generation in the UK means that the long-term future of Fiddler's Ferry remains uncertain. In addition, SSE's longer-term strategic involvement in coal-fired generation and coal procurement is now under review. As a result, further exceptional charges have been recognised including impairment of the value of plant (£67.6m) and inventory (£47.9m) at Fiddler's Ferry and accelerated decommissioning costs recorded directly as a charge to the income statement and, included in other charges, irrecoverable current assets and financial losses relating to cessation of coal hedging activities (totalling £99.5m). Following these charges, the residual value of the Group's coal generation plants is nil.

(ii) Gas-fired Generation. Following the failure of Peterhead Power Station to win a capacity contract under the Capacity Market Auction for 2019/20 and the announcement, on 25 November, that the UK Government was withdrawing funding support for the proposed carbon capture and storage project at Peterhead Power Station, exceptional charges of £129.3m have been recognised in relation to the assets at the site. The economic conditions for the Group's other main Gas-fired Generation plants in Great Britain (Medway, Keadby and Marchwood) remain challenging. While the Group's long term view remains that the impact of regulatory changes will create a favourable economic environment for gas-fired generation, there has as yet been no observable recovery in 'spark spread' margins at these plants and there remains uncertainty in relation to the enduring ability of the plants to benefit from the UK Government's Capacity Market process. As a result, further impairment charges have been recognised of £197.1m, principally in respect of Marchwood and Medway plant and certain contractual prepayments. Following these charges, the residual value of the Group's GB gas generation plants under review is £226.2m

(iii) Gas Production. Impairment of the Group's Gas Exploration and Production assets in the North Sea has been recognised predominately due to declining wholesale gas prices. The exceptional charges recognised include an element (£121.2m) related to the impairment of Greater Laggan field assets acquired at 28 October 2015 which reflects the impact of the decline in expected long term gas prices between the acquisition date and the financial year end. The other impairments related to the impact of the fall in wholesale gas prices on the Group's other E&P assets at Sean, Lomond, Bacton and ECA (£40.6m). Following these charges, the residual value of the Group's gas production assets is £888.0m

(iv) Gas Storage. Current and forecast demand for gas storage in Great Britain continues to be impacted by reduced short term price volatility and seasonal spreads in the wholesale gas market. These factors have had different but significant impacts on the Group's facilities at Hornsea (Atwick) and Aldbrough. As a result, exceptional charges of £150.9m have been recognised across both assets.   Following these charges, the residual value of the Group's gas storage facilities is £21.2m.

(v) Other charges. Other exceptional charges have been recognised in relation to impairment of system development projects, restructuring charges and exit costs associated with the strategic exit from certain non-core activities.

The Group recognised £57.6m of exceptional net credits arising from disposals. On 28 May 2015, the Group recognised an exceptional gain on disposal of £39.3m in relation to the sale of three onshore wind development sites to Blue Energy. In addition, the Group also recognised a gain on its disposal of its interest in the Galloper offshore wind development of £18.3m. The latter disposal gain is considered to be exceptional due to the Group having previously impaired its investment in Galloper as part of its decision to scale back its commitment to offshore wind development. Further detail is included at Note 12.

In the previous financial year, the Group recognised exceptional charges arising from and related to asset impairments amounting to £667.5m and provisions of £56.0m. The exceptional charges recognised can be summarised as follows:

Notes to the Preliminary Statement

for the year ended 31 March 2016

6. Exceptional items and certain re-measurements (continued)

6.1 Exceptional items (continued)

In the previous financial year, the Group recognised exceptional charges arising from and related to asset impairments amounting to £667.5m and provisions of £56.0m. The exceptional charges recognised can be summarised as follows:

 

Property, Plant & Equipment  £m

Goodwill & Other Intangibles

£m

Inventories

 

 

£m

Other charges

 

£m

Total

Impairment related

£m

Provisions

 

 

£m

Total charges

 

£m

Coal Generation

222.7

-

41.0

45.8

309.5

4.0

313.5

Gas Generation

14.9

51.5

-

-

66.4

10.0

76.4

Gas Production

61.9

44.1

-

0.1

106.1

-

106.1

Gas Storage

162.4

-

-

-

162.4

1.5

163.9

Other

16.9

-

-

6.2

23.1

40.5

63.6

 

478.8

95.6

41.0

52.1

667.5

56.0

723.5

The impairments of Coal generation plants followed the 31 July 2014 fire at Ferrybridge and the inability of both units at Ferrybridge and one unit at Fiddler's Ferry to secure agreements to provide capacity under the auction process run by DECC in December 2014. The impairments of Gas generation plants predominately related to development sites at Abernedd and Seabank. The impairments of Gas Production assets related to the impact of declining wholesale prices on the Group's Sean, ECA and Lomond fields. The charges associated with Gas Storage followed the strategic review of the Group's operations in that segment the results of which were announced on 26 March 2015. The other charges mainly relate to asset impairments, other charges in non-core businesses and provisions for certain disputes and claims. The exceptional disposal gains recorded related to the sale of seven street lighting PFI companies to Equitix (£38.0m), the Group's share of the dividend from the Environmental Energy Fund's disposal of its stake in Anesco (£19.6m) and the gain on disposal of non-core retail assets (£17.2m).

As supplemental detail, the following table represents the exceptional charges recognised in the financial year to 31 March 2014 presented in similar format:

 

Property, Plant & Equipment  £m

Goodwill & Other Intangibles

£m

Other

charges

 

£m

Total

Impairment

related

£m

Provisions

 

 

£m

Total charges

 

 

£m

Restructuring

 

 

 

 

 

 

  Non-core

35.2

2.0

36.0

73.2

58.9

132.1

  Wind

17.0

75.9

47.6

140.5

-

140.5

Coal Generation

191.6

-

47.0

238.6

-

238.6

Gas Storage

111.4

26.3

-

137.7

-

137.7

Other

17.5

18.7

15.7

51.9

46.4

98.3

 

372.7

122.9

146.3

641.9

105.3

747.2

The restructuring-related charges followed the announcement, on 28 March 2014, that the Group was intending to dispose of a number of non-core assets and businesses, embark upon a programme of voluntary early release for around 500 employees and scale back its commitment in relation to offshore wind developments. The impairments of the coal plants followed a period of relatively favourable operating conditions for Fiddler's Ferry and Ferrybridge but were necessary in context of the increasing impact on profitability of the Carbon Price Support (CPS) mechanism and uncertainty around future political and regulatory support for coal generation. The impairment of Gas Storage was due to the impact of market and global factors such as North American fracking and availability of LNG on the business. The 2014 financial statements noted that "there remains inherent imprecision in the valuation processes for these long-term infrastructure assets which is dependent on macro-economic factors. Management believe a balanced position has been taken regarding these factors". The other charges relate to impairments of certain Retail developments and provisions for certain disputes and claims.


Notes to the Preliminary Statement

for the year ended 31 March 2016

6    Exceptional items and certain re-measurements(continued)

6.1    Certain re-measurements

The Group enters into forward commodity purchase contracts to meet the future demands 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 income statement movement on financing derivatives (and hedged items) as described in Note 16.

6.2    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% (currently 20%) from 1 April 2017, and a rate of 18% from 1 April 2020. As these changes have been substantively enacted they have the effect of reducing the Group's deferred tax liabilities by £27.6m including the impact of changes recognised in the statement of other comprehensive income. A further change to reduce the rate of Corporation Tax to 17% from 1 April 2020 was announced in Finance (No.2) Bill 2016, however as this change has not been substantively enacted at the balance sheet date its effect, estimated to be £21.0m, has not been brought into account in calculating the Group's deferred tax liabilities.

A resolution was passed under the Provisional Collection of Taxes Act 1968 on 22 March 2016 which reduced the rate of Petroleum Revenue Tax (PRT) to 0% (from 35%) with effect from 1 January 2016. As this change has been substantively enacted at the balance sheet date it has the effect of reducing the Group's deferred tax liabilities by £2.8m. Finance (No.2) Bill 2016 announced a reduction in the rate of Supplementary Charge on ring-fenced profits to 0% (previously 20%) with effect from 1 January 2016. As this change has not been enacted at the balance sheet date it has not been brought into account in calculating the Group's deferred tax liabilities. It is expected to reduce the Group's deferred tax liabilities by £9.0m.

Taxation

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 2016

7.      Finance income and costs

 

2016

2015

 

Before Exceptional items and certain re-measurements

£m

Exceptional items and certain re-measurements

£m

Total

£m

Before Exceptional items and certain re-measurements

£m

Exceptional items and certain re-measurements

£m

Total

£m

Finance income:

 

 

 

 

 

 

Interest income from short term deposits

4.7

-

4.7

1.1

-

1.1

Foreign exchange translation of monetary assets and liabilities

9.0

-

9.0

-

-

-

Other interest receivable:

 

 

 

 

 

 

Scotia Gas Networks loan stock

24.3

-

24.3

33.3

-

33.3

Other joint ventures and associates

0.9

-

0.9

14.8

-

14.8

Other receivable

62.9

-

62.9

46.7

-

46.7

 

88.1

-

88.1

94.8

-

94.8

Total finance income

101.8

-

101.8

95.9

-

95.9

 

 

 

 

 

 

 

Finance costs:

 

 

 

 

 

 

Bank loans and overdrafts

(27.9)

-

(27.9)

(23.9)

-

(23.9)

Other loans and charges

(257.1)

-

(257.1)

(262.5)

-

(262.5)

Interest on pension scheme liabilities

(20.4)

-

(20.4)

(25.1)

-

(25.1)

Notional interest arising on discounted provisions

(15.7)

-

(15.7)

(14.0)

-

(14.0)

Foreign exchange translation of monetary assets and liabilities

-

-

-

(0.5)

-

(0.5)

Finance lease charges

(34.7)

-

(34.7)

(34.2)

-

(34.2)

Less: interest capitalised

47.6

-

47.6

57.8

-

57.8

Total finance costs

(308.2)

-

(308.2)

(302.4)

-

(302.4)

Changes in fair value of financing derivative assets or liabilities at fair value through profit or loss

-

14.3

14.3

-

(44.2)

(44.2)

Net finance costs

(206.4)

14.3

(192.1)

(206.5)

(44.2)

(250.7)

Presented as:

 

 

 

 

 

 

Finance income

101.8

-

101.8

95.9

-

95.9

Finance costs

(308.2)

14.3

(293.9)

(302.4)

(44.2)

(346.6)

Net finance costs

(206.4)

14.3

(192.1)

(206.5)

(44.2)

(250.7)

               

The capitalisation rate applied in determining the amount of borrowing costs to capitalise in the period was 4.24% (2015 - 4.49%).

 

Adjusted net finance costs are arrived at after the following adjustments:

 

 

 

2016

£m

2015

£m

Net finance costs

(192.1)

(250.7)

(add)/less:

 

 

Share of interest from joint ventures and associates:

 

 

Scotia Gas Networks loan stock

(24.3)

(33.3)

Other joint ventures and associates

(102.5)

(90.9)

 

(126.8)

(124.2)

Interest on pension scheme liabilities

20.4

25.1

Share of interest on net pension liabilities in joint  ventures

1.9

(11.1)

Movement on financing derivatives (Note 16)

(14.3)

44.2

Adjusted net finance costs

(310.9)

(316.7)

 

 

 

Notional interest arising on discounted provisions

15.7

14.0

Finance lease charges

34.7

34.2

Hybrid coupon payment (Note 14)

(124.6)

(121.3)

Adjusted net finance costs for interest cover calculations

(385.1)

(389.8)


Notes to the Preliminary Statement

for the year ended 31 March 2016

8.      Taxation

 

Analysis of charge recognised in the income statement:

 

Before Exceptional items and certain re-measure-ments

 

Exceptional items and certain re-measure-ments

 

 

 

 

 

2016

Before Exceptional items and certain re-measure-ments

 

Exceptional items and certain re-measure-ments

 

 

 

 

 

2015

 

 

 

 

 

 

 

 

£m

£m

£m

£m

£m

£m

Current tax

 

 

 

 

 

 

UK corporation tax

180.5

(44.2)

136.3

231.4

(25.1)

206.3

Adjustments in respect of previous years

(21.2)

-

(21.2)

(29.8)

-

(29.8)

Total current tax

159.3

(44.2)

115.1

201.6

(25.1)

176.5

Deferred tax

 

 

 

 

 

 

Current year

74.9

(186.8)

(111.9)

52.7

(159.7)

(107.0)

Effect of change in tax rate

-

(41.5)

(41.5)

-

(15.6)

(15.6)

Adjustments in respect of previous years

46.4

-

46.4

16.9

-

16.9

Total deferred tax

121.3

(228.3)

(107.0)

69.6

(175.3)

(105.7)

 

 

 

 

 

 

 

Total taxation charge

280.6

(272.5)

8.1

271.2

(200.4)

70.8


 

Notes to the Preliminary Statement

for the year ended 31 March 2016

8.  Taxation (continued)

In October 2014, SSE became the first FTSE 100 listed group to be accredited with the Fair Tax Mark. As a consequence, the Group's financial statements include a number of areas of enhanced disclosure which have been provided in order to develop stakeholder understanding of the tax the Group pays.  The table below reconciles the tax which would be expected to be paid on SSE's reported profit before tax to the reported current tax charge and the reported total taxation charge:

 

2016

2016

2015

2015

 

 

 

 

 

 

£m

%

£m

%

Group profit before tax

593.3

 

735.2

 

Less: share of results of associates and jointly controlled entities

(204.8)

 

(163.6)

 

Profit before tax

388.5

 

571.6

 

Tax on profit on ordinary activities at standard UK corporation tax rate of 20% (2014 - 21%)

77.7

20.0

120.0

21.0

Tax effect of:

 

 

 

 

Capital allowances (in excess of)/less than depreciation

(24.9)

(6.4)

86.0

15.1

Increase in restructuring and settlement provisions

9.2

2.4

2.6

0.5

Non-taxable gain on sale of shares

(11.5)

(3.0)

(13.8)

(2.4)

Fair value movements on derivatives

3.4

0.9

23.6

4.1

Pension movements

(3.1)

(0.8)

(11.0)

(1.9)

Relief for capitalised interest and revenue costs

(20.3)

(5.2)

(22.3)

(3.9)

Hybrid capital coupon payments

(24.8)

(6.4)

(25.5)

(4.5)

Corporation tax relief on PRT paid

(3.2)

(0.8)

(4.5)

(0.8)

Expenses not deductible for tax purposes

14.4

3.7

7.7

1.3

Impact of higher current tax rates on E&P profits

12.8

3.3

42.1

7.4

Impact of foreign tax rates

(3.0)

(0.8)

1.4

0.2

E&P tax losses carried forward

111.9

28.8

-

-

Employee share awards

(2.3)

(0.6)

-

-

Adjustments to tax charge in respect of previous years

(21.2)

(5.5)

(29.8)

(5.2)

Reported current tax charge and effective rate

115.1

29.6

176.5

30.9

Depreciation less than/in excess of capital allowances

35.3

9.1

(68.5)

(12.0)

Increase in restructuring and settlement provisions

(9.2)

(2.4)

(2.6)

(0.5)

Fair value movements on derivatives

(3.4)

(0.9)

(23.6)

(4.1)

Pension movements

3.1

0.8

11.0

1.9

Relief for capitalised interest and revenue costs

20.3

5.2

22.3

3.9

Impact of higher deferred tax rates on E&P profits

(32.6)

(8.4)

(34.8)

(6.1)

Impact of foreign tax rates

(1.7)

(0.4)

(4.2)

(0.7)

Adjustments to tax charge in respect of previous years

46.4

11.9

6.5

1.1

Change in rate of UK corporation tax

(41.5)

(10.7)

(15.6)

(2.7)

Arising due to business combination

(14.1)

(3.5)

-

-

E&P tax losses carried forward

(111.9)

(28.8)

-

-

Employee share schemes

2.3

0.6

-

-

Other items

-

-

3.8

0.6

Reported deferred tax credit and effective rate

(107.0)

(27.5)

(105.7)

(18.6)

Group tax charge and effective rate

8.1

2.1

70.8

12.3

 

The adjusted current tax charge is arrived at after the following adjustments:

 

2016

£m

2016

%

2015

£m

2015

%

Group tax charge and effective rate

8.1

2.1

70.8

12.3

Less: reported deferred tax credit and effective rate

107.0

27.5

105.7

18.6

Current tax charge and effective rate

115.1

29.6

176.5

30.9

Effect of adjusting items (see below)

-

(22.0)

-

(19.6)

Current tax charge and effective rate on adjusted basis

115.1

7.6

176.5

11.3

add/(less):

 

 

 

 

Share of current tax from joint ventures and associates

34.1

2.3

23.2

1.5

Current tax on exceptional items

44.2

2.9

25.1

1.6

Adjusted current tax charge and effective rate

193.4

12.8

224.8

14.4

 

 

 

 

Notes to the Preliminary Statement

for the year ended 31 March 2016

8    Taxation (continued)

The adjusted effective rate is based on adjusted profit before tax being:

 

2016

 

 

2015

 

 

£m

Profit before tax

593.3

735.2

Add/(less):

 

 

Exceptional items and certain re-measurements

858.0

781.3

Share of tax from joint  ventures/associates before exceptional items and certain re-measurements

39.9

34.2

Interest on pension scheme liabilities

20.4

25.1

Share of interest on net pension liabilities in jointly controlled entities and associates

1.9

(11.1)

Adjusted profit before tax

1,513.5

1,564.7

 

The adjusted current tax charge can therefore be reconciled to the adjusted profit before tax as follows:

 

 

2016

£m

2016

%

2015

£m

2015

%

Adjusted profit before tax

1,513.5

 

1,564.7

 

 

 

 

 

 

Tax on profit on ordinary activities at standard UK corporation tax rate

302.7

20.0

328.6

21.0

Tax effect of:

 

 

 

 

Capital allowances in excess of depreciation

(170.7)

(11.3)

(42.1)

(2.7)

Non taxable gain on sale of shares

1.9

0.1

(6.3)

(0.4)

Increase in restructuring and settlement provisions

2.9

0.2

3.9

0.2

Pension movements

(7.9)

(0.5)

(13.9)

(0.9)

Relief for capitalised interest and revenue costs

(9.3)

(0.6)

(15.2)

(1.0)

Hybrid capital coupon payments

(24.8)

(1.6)

(25.4)

(1.6)

Corporation tax relief on PRT paid

(3.2)

(0.2)

(4.4)

(0.3)

Expenses not deductible for tax purposes

4.5

0.3

10.1

0.7

Relief for brought forward losses

108.8

7.2

(23.6)

(1.5)

Impact of higher current tax rates on oil and gas profits

12.8

0.8

42.1

2.7

Impact of foreign tax rates

(3.1)

(0.2)

1.4

0.1

Adjustments to tax charge in respect of previous years

(21.2)

(1.4)

(30.4)

(1.9)

Adjusted current tax charge and effective rate

193.4

12.8

224.8

14.4

 


 

Notes to the Preliminary Statement

for the year ended 31 March 2016

 

9.      Dividends

Ordinary dividends

 

Year ended 31 March 2016 Total

Settled via scrip

Pence per ordinary share

Year ended 31 March 2015 Total

Settled via scrip

Pence per ordinary share

 

£m

£m

 

£m

£m

 

 

 

 

 

 

 

 

Interim - year ended 31 March 2016

270.5

16.3

26.9

-

-

-

Final - year ended 31 March 2015

613.5

159.5

61.8

-

-

-

Interim - year ended 31 March 2015

-

-

-

262.6

81.6

26.6

Final - year ended 31 March 2014

-

-

-

591.5

174.0

60.7

 

884.0

175.8

 

854.1

255.6

 

The final dividend of 61.8p per ordinary share declared in the financial year ended 31 March 2015 (2014- 60.7p) was approved at the Annual General Meeting on 23 July 2015 and was paid to shareholders on 19 September 2015. 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 26.9p per ordinary share (2015 - 26.6p) was declared and paid on 18 March 2016 to those shareholders on the SSE plc share register on 22 January 2016. 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 62.5p per ordinary share (which equates to a dividend of £629.8m) based on the number of issued ordinary shares at 31 March 2016 is subject to approval by shareholders at the Annual General Meeting and has not been included as a liability in these financial statements.

10.    Earnings per Share

Basic earnings per share

The calculation of basic earnings per ordinary share at 31 March 2016 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 2016. All earnings are from continuing operations.

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 6).

 

Year ended 31 March 2016

Year ended 31 March 2016

Year ended 31 March 2015

Year ended 31 March 2015

 

Earnings

£m

Earnings per share

pence

Earnings

£m

Earnings per share

pence

 

 

 

 

 

Basic

460.6

46.1

543.1

55.3

Exceptional items and certain re-measurements (Note 6)

585.5

58.5

580.9

59.2

Basic excluding exceptional items and certain re-measurements

1,046.1

104.6

1,124.0

114.5

Adjusted for:

 

 

 

 

Interest on net pension scheme liabilities (Note 7)

20.4

2.0

25.1

2.5

Share of interest on net pension scheme liabilities in joint venture    (Note 7)

1.9

0.2

(11.1)

(1.1)

Deferred tax (Note 8)

121.3

12.1

69.6

7.1

Deferred tax from share of joint ventures and associates

5.8

0.6

11.0

1.1

Adjusted

1,195.5

119.5

1,218.6

124.1

 

Basic

460.6

46.1

543.1

55.3

Dilutive effect of outstanding share options

-

(0.1)

-

(0.1)

Diluted

460.6

46.0

543.1

55.2

 

 

 

 

 

 


 

Notes to the Preliminary Statement

for the year ended 31 March 2016

10. Earnings per Share (continued)

The weighted average number of shares used in each calculation is as follows:

 

31 March 2016

Number of  shares

(millions)

 

31 March 2015

Number of  shares

(millions)

 

 

 

 

For basic and adjusted earnings per share

1,000.0

 

981.8

Effect of exercise of share options

1.2

 

2.1

For diluted earnings per share

1,001.2

 

983.9

11.    Notes to the Consolidated Cash Flow Statement

11.1  Reconciliation of Group operating profit to cash generated from operations

 

 

 

 

2016

 

 

2015

 

Note

£m

£m

 

 

 

 

Profit for the year

 

585.2

664.4

Add back: taxation

8

8.1

70.8

Add back: net finance costs

7

192.1

250.7

Operating profit

 

785.4

985.9

Less share of profit of joint ventures and associates

 

(204.8)

(163.6)

Operating profit before joint ventures and associates

 

580.6

822.3

Movement on operating derivatives

 

31.1

67.8

Pension service charges less contributions paid

 

(35.9)

(77.5)

Exceptional charges

 

889.8

648.7

Depreciation of assets

 

676.8

656.7

Amortisation and impairment of intangible assets

 

2.3

3.4

Fixed asset impairments

 

6.7

-

Impairment of inventories

 

-

1.4

Release of provisions

 

(7.8)

-

Release of deferred income

 

(17.9)

(16.9)

Charge in respect of employee share awards

 

16.5

15.0

Profit on disposal of assets and businesses - non exceptional

 

(30.1)

(40.2)

Cash generated from operations before working capital movements

 

2,112.1

2,080.7

 

 

 

 

 

11.2  Reconciliation of net increase in cash and cash equivalents to movement in adjusted net debt and hybrid capital

 

 

2016

2015

 

 

£m

£m

(Decrease)/Increase in cash and cash equivalents

 

(1,151.9)

1,053.5

Add/(less):

 

 

 

Issue of hybrid capital

 

1,161.4

(1,184.3)

New borrowings

 

(1,070.1)

(151.1)

Repayment of borrowings

 

77.7

66.3

Non-cash movement on borrowings

 

(94.8)

269.8

Increase in cash held as collateral and other short term loans

 

50.1

20.5

Balances due to partners in Clyde Windfarm (Scotland) Limited

 

200.7

-

Movement in adjusted net debt and hybrid capital

 

(826.9)

74.7

 

Cash held as collateral refers to amounts deposited on commodity trading exchanges which are reported within Trade and other receivables on the face of the balance sheet.

 


 

Notes to the Preliminary Statement

for the year ended 31 March 2016

12.    Acquisitions, disposals and held-for-sale assets

12.1  Acquisitions

On 28 October 2015, the Group through its wholly owned subsidiary, SSE E&P UK Limited, acquired a 20% interest in the four gas fields and surrounding exploration acreage approximately 125km north west of the Shetland Islands, collectively known as the Greater Laggan Area, along with a 20% interest in the Shetland Gas Terminal, from Total E&P UK Limited. The cash consideration paid for the business was £669.0m included the Group's share of post 1 January 2015 capital expenditure on the Shetland Gas Terminal along with other completion adjustments. Those items were the differences from the consideration of £565.0m which was announced on 29 July 2015.

 

Total

 

£m

Assets acquired

 

Property, Plant and Equipment

695.8

Development and other intangible assets

73.2

Decommissioning provisions

(100.0)

Net assets

669.0

 

Production commenced from the Laggan-Tormore project on the UK Atlantic Frontier on the 8th February, 2016. In the financial year, 21m therms of gas were extracted, 38.1k barrels of oil and 1.8k tonnes of natural gas liquids contributing £7.0m to revenue with a loss after tax of £1.8m during the period to 31 March 2016.

12.2  Held-for-sale assets and liabilities

During the year, the Group substantially completed the programme of non-core asset and business disposals that it had announced on 26 March 2014 along with a number of other separately identified assets.  As the programme comes to an end some assets and liabilities remain classified as held-for-sale on the balance sheet at 31 March 2016. The aggregated pre-tax profit contribution of the held for sale assets and businesses in the year to 31 March 2016 was £nil (2015: £1.8m).

The assets and liabilities classified as held for sale, and the comparative balances at 31 March 2016, are as follows:

 

 

Retail

 

Enterprise

Total

 

2016

2015

 

£m

£m

£m

£m

Property Plant and Equipment

-

-

-

54.2

Forestry Assets

-

-

-

1.8

Other intangible

27.9

-

27.9

21.3

Non-current assets

27.9

-

27.9

77.3

 

 

 

 

 

Trade and other receivables

-

106.3

106.3

33.0

Current assets

-

106.3

106.3

33.0

Total assets

27.9

106.3

134.2

110.3

 

 

 

 

 

Trade and other payables

-

(11.2)

(11.2)

(10.8)

Loans and borrowings

-

(5.9)

(5.9)

-

Current liabilities

-

(17.1)

(17.1)

(10.8)

 

 

 

 

 

Loans and borrowings

-

(97.9)

(97.9)

-

Deferred tax liabilities

-

-

-

(0.3)

Non-current liabilities

-

(97.9)

(97.9)

(0.3)

Total liabilities

-

(115.0)

(115.0)

(11.1)

 

 

 

 

 

Net assets

27.9

(8.7)

19.2

99.2

 


Notes to the Preliminary Statement

for the year ended 31 March 2016

12. Acquisitions, disposals and held-for-sale assets (continued)

12.3  Disposals

(i)      Significant disposals

On 29 October 2015, the Group agreed to sell its shareholding in Galloper Offshore Windfarm Limited to its co-venturer RWE Innogy for cash consideration of £18.3m. The rationale for the disposal was explained in the Group's statement on offshore wind investment on 26 March 2014. The gain on the disposal of £18.3m was recorded as an exceptional item (Note 6). On 28 May 2015, the Group also agreed to sell three onshore wind development sites (Cour, Blackcraig and Whiteside Hill) to Blue Energy. Total consideration of these assets was £52.4m. Consequently, an exceptional gain on disposal of £39.3m was recorded (Note 6). Both disposals were of businesses classified as Held-for-sale at 31 March 2015.

On 18 March 2016, the Group sold a 49.9% stake in its wholly owned operational 349.6MW Clyde Wind Farm located in South Lanarkshire to Greencoat UK Wind Plc ("UKW") and GMPF & LPFA Infrastructure LLP ("GLIL") for total cash consideration of £339.2 million. The stake held by the co-investors has been deemed to be that of a non-controlling interest in an entity under the Group's control. This key accounting judgement is explained at note 4.2 iv. The consequence of this is that the gain recorded on the part disposal of £138.6m was recognised directly in equity instead of in the income statement and the non-recourse to SSE loans held by the Clyde entity (£200.7m) require to be recorded on the Group balance sheet. The assets included in the Clyde Windfarm (Scotland) Limited transaction were not previously held-for-sale.

(ii)     Total Disposals

The following table summarises all businesses and assets disposed of during the financial year including the significant disposals referred to above. The table differentiates the disposals of previously 'held for sale' assets and businesses from other disposals which include other assets and investments disposed of as part of the normal course of business.

 

2016

2015

 

Held for Sale at March 2015

Not Held for Sale at March 2015

Total

 

Held for sale at March 2014

Not Held for Sale at

March 2014

 

 

Total

 

£m

£m

£m

£m

£m

£m

Net assets disposed:

 

 

 

 

 

 

Property, plant and equipment

37.5

6.8

44.3

72.2

2.2

74.4

Intangible and biological assets

11.7

-

11.7

2.5

12.1

14.6

Investments - joint venture and other

-

-

-

0.3

15.7

16.0

Trade and other receivables

1.4

-

1.4

348.7

1.7

350.4

Trade and other payables

28.8

-

28.8

(94.3)

-

(94.3)

Loans and borrowings

-

-

-

(230.2)

-

(230.2)

Net assets

79.4

6.8

86.2

99.2

31.7

130.9

 

 

 

 

 

 

 

Proceeds of disposal:

 

 

 

 

 

 

Consideration including debt reduction

160.5

381.7

542.2

399.6

67.9

467.5

Deferred consideration

-

-

-

1.1

11.0

12.1

Debt reduction

(23.5)

-

(23.5)

(228.8)

-

(228.8)

Non-recourse loans

-

(200.7)

(200.7)

-

-

-

Costs of disposal

-

(5.6)

(5.6)

(3.6)

(1.3)

(4.9)

Provisions

-

-

-

(12.5)

11.0

(1.5)

Net proceeds (i)

137.0

175.4

312.4

155.8

88.6

244.4

 

 

-

 

 

 

Gain on disposal after provisions

57.6

226.2

56.6

56.9

113.5

 

 

 

 

 

 

 

Presentation:

 

 

 

 

 

 

Equity

-

138.6

138.6

-

-

-

Income statement credit

57.6

87.6

56.6

56.9

113.5

 

 

2016

£m

 

2015

£m

Net proceeds of disposal (i)

312.4

 

244.4

Deferred consideration

-

 

(12.1)

Provisions

-

 

1.5

Proceeds of disposal per cash flow statement

312.4

 

233.8

Cash from Clyde transaction recorded as New Borrowings

200.7

 

-

Total cash proceeds

513.1

 

233.8

The debt reduction items, £23.5m (2015 -£228.8m), are associated with the disposal of the street-lighting PFI companies.

Notes to the Preliminary Statement

for the year ended 31 March 2016

13.    Loans and other borrowings

 

2016

£m

2015

£m

Current

 

 

Bank overdraft

-

0.2

Other short-term loans

898.8

712.4

 

898.8

712.6

Obligations under finance leases

24.5

20.2

 

923.3

732.8

 

Non current

 

 

Loans

5,969.2

5,068.4

Obligations under finance leases

276.3

299.5

 

6,245.5

5,367.9

 

Total loans and borrowings

7,168.8

6,100.7

Add:

 

 

Cash and cash equivalents

(360.2)

(1,512.3)

Unadjusted Net Debt

6,808.6

4,588.4

Add/(less):

 

 

Hybrid capital (Note 14)

2,209.7

3,371.1

Obligations under finance leases

(300.8)

(319.7)

Cash held as collateral and other short term loans

(121.8)

(71.7)

Balances due to non-controlling interest partners in Clyde Windfarm (Scotland) Limited

(200.7)

-

Adjusted Net Debt and Hybrid Capital

8,395.0

7,568.1

 

Borrowing facilities

The Group has an established €1.5bn Euro commercial paper programme (paper can be issued in a range of currencies and swapped into sterling) and as at 31 March 2016 £198.8m commercial paper was outstanding (2015 - nil). During the year the Group extended its existing £1.5bn of facilities on reduced pricing with the facilities now maturing in August 2020 (£1.3bn) and November 2020 (£0.2bn). These facilities continue to provide back up to the commercial paper programme and at 31 March 2016 they were undrawn. The Group has a further £300m facility available with the European Investment Bank which will be fully drawn in May 2016 when it will become a 10 year term loan.

14.    Hybrid Capital

 

2016

2015

 

£m

£m

GBP 750m 5.453% perpetual subordinated capital securities

-

744.5

EUR 500m 5.025% perpetual subordinated capital securities

-

416.9

USD 700m 5.625% perpetual subordinated capital securities

427.2

427.2

EUR 750m 5.625% perpetual subordinated capital securities

598.2

598.2

GBP 750m 3.875% perpetual subordinated capital securities

748.3

748.3

EUR 600m 2.375% perpetual subordinated capital securities

436.0

436.0

 

2,209.7

3,371.1

14.1  20 September 2010 £750m and €500m hybrid capital bonds

On 1 October 2015 the company redeemed the £750m and €500m hybrid capital bonds issued on 20 September 2010, the redemption was funded by the proceeds of the £750m and €600m hybrid capital bonds issued on 10 March 2015.

14.2  18 September 2012 €750m and US$700m Hybrid Capital Bonds

Each bond has no fixed redemption date but the Company may, at its sole discretion, redeem all, but not part, of these capital securities at their principal amount. The date for the discretionary redemption of the capital issued on 18 September 2012 is 1 October 2017 and every five years thereafter.

For the €750m capital issued on 18 September 2012, coupon payments are expected to be made annually in arrears on 1 October in each year. For the US$700m capital issued on 18 September 2012, coupon payments are expected to be made bi-annually in arrears on 1 April and 1 October each year.

Notes to the Preliminary Statement

14.3  10 March 2015 £750m and €600m Hybrid Capital Bonds

On 10 March 2015, the Company issued £750m and €600m hybrid capital bonds with 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 £750m hybrid capital bond is 10 September 2020 and then these can occur every 5 years thereafter. The date for the first discretionary redemption of the €600m hybrid capital bond is 1 April 2021 and then these can occur every 5 years thereafter. The purpose of the outstanding issues was to strengthen SSE's capital base and fund the Group's ongoing capital investment and acquisitions.

14.4  10 March 2015 £750m and €600m Hybrid Capital Bonds (continued)

For the £750m capital issued on 10 March 2015 the first coupon payment is expected to be made on 10 September 2016 and then annually in arrears thereafter, and for the €600m capital issued on 10 March 2015, the first coupon payment is expected to be made on 1 April 2016 and then annually in arrears thereafter.

14.5  Coupon Payments

Coupon payments of £12.5m (2015 - £11.8m) in relation to the US$ capital issued on 18 September 2012 were paid on 1 April 2015. Coupon payments of £12.4m (2015 -  £12.4m) were made in relation to the same hybrid capital bond on 1 October 2015, and payments of £99.7m were made in relation to all other hybrid capital bonds on 1 October 2015.

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.    Share capital

 

Number

(millions)

 

£m

Allotted, called up and fully paid:

 

 

At 31 March 2015

993.0

496.5

Issue of shares (i)

14.6

7.3

At 31 March 2016

1,007.6

503.8

 

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 61.8p per ordinary share (in relation to year ended 31 March 2015) and the interim dividend of 26.9p (in relation to the current year) under the terms of the Company's scrip dividend scheme. This resulted in the issue of 10,600,639 and 1,172,973 new fully paid ordinary shares respectively (2015: 11,775,169 and 5,348,770). In addition, the Company issued 2.8m (2015 - 1.0m) shares during the year under the savings-related share option schemes for a consideration of £25.0m (2015 - £10.3m)

During the year, on behalf of the Company, the employee share trust purchased 0.8m shares for a total consideration of £11.1m (2015 - 0.6m shares, consideration of £9.0m). At 31 March 2016, the trust held 3.0m shares (2015 - 3.1m) which had a market value of £45.5m (2015 - £47.5m).

16.    Capital and Financial Risk Management

16.1  Capital management

The Board's policy is to maintain a strong balance sheet and credit rating so as to support investor, counterparty and market confidence 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 2016, the Group's long term credit rating was A- negative outlook for Standard & Poor's and A3 negative 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.

The Group has the option to purchase its own shares from the market; the timing of these purchases depends on market prices and economic conditions. The use of share buy-backs is the Group's benchmark for investment decisions and is utilised at times when management believe the Group's shares are undervalued. No share buy-back was made during the year.


 

Notes to the Preliminary Statement

16  Capital and Financial Risk Management (continued)

16.1  Capital management (continued)

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 addition the Group has issued hybrid capital securities which bring together features of both debt and equity, are perpetual and subordinate to all senior creditors. The Group has £1.5bn of committed bank facilities which relate to the Group's revolving credit and bilateral facilities that 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's capital comprises:

 

 

2016

£m

 

2015

£m

Total borrowings (excluding finance leases)

6,868.0

5,781.0

Less : Cash and cash equivalents

(360.2)

(1,512.3)

Net debt (excluding hybrid capital)

6,507.8

4,268.7

Hybrid capital

2,209.7

3,371.1

Cash held as collateral and other short term loans

(121.8)

(71.7)

Balances due to non-controlling interest partners in Clyde Windfarm (Scotland) Ltd

(200.7)

-

Adjusted Net Debt and Hybrid Capital

8,395.0

7,568.1

Equity attributable to shareholders of the parent

2,984.8

2,709.4

Total capital

11,379.8

10,277.5

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.

16.2  Financial risk management

The Board has overall responsibility for the establishment and oversight of the Group's risk management framework. The Risk and Trading Committee, which reports to the Executive Committee, comprises the two Executive Directors and senior managers from the Energy Portfolio Management, Retail, Corporate and Finance functions. Its specific remit is 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, retail and treasury operations. This committee is discussed further in the Corporate Governance section of the Annual Report.

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 and Trading Committee.

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.

The Company is required to disclose information on its financial instruments and has adopted policies identical to that of the Group, where applicable. Separate disclosure is provided where necessary.

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.


 

Notes to the Preliminary Statement

for the year ended 31 March 2016

16. Capital and Financial Risk Management (continued)

16.2  Financial risk management (continued)

The net movement reflected in the interim income statement can be summarised thus:

 

2016

£m

2015

£m

Operating derivatives

 

 

Total result on operating derivatives (i)

(1,375.4)

(1,073.5)

Less: amounts settled (ii)

1,344.3

1,005.7

Movement in unrealised derivatives

(31.1)

(67.8)

 

 

 

Financing derivatives (and hedged items)

 

 

Total result on financing derivatives (i)

(214.9)

(395.5)

Less: amounts settled (ii)

229.2

351.3

Movement in unrealised derivatives

14.3

(44.2)

Net income statement impact

(16.8)

(112.0)

(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. 

 

The fair values of the primary financial assets and liabilities of the Group, together with their carrying values, are as follows:

 

 

 

2016

 

2016

 

2015

 

2015

 

 

Carrying

Value

£m

Fair

Value

£m

Carrying

Value

£m

Fair

Value

£m

Financial Assets

 

 

 

 

 

Current

 

 

 

 

 

Trade receivables

 

1,966.8

1,966.8

2,977.5

2,977.5

Other receivables

 

23.7

23.7

25.2

25.2

Cash held as collateral and other short term loans

13

121.8

121.8

71.7

71.7

Cash and cash equivalents

13

360.2

360.2

1,512.3

1,512.3

Derivative financial assets

 

1,615.0

1,615.0

1,999.9

1,999.9

 

 

4,087.5

4,087.5

6,586.6

6,586.6

Non-current

 

 

 

 

 

Unquoted equity investments

 

9.9

9.9

11.2

11.2

Loans to associates and jointly controlled entities

 

591.6

591.6

559.4

559.4

Derivative financial assets

 

537.7

537.7

566.8

566.8

 

 

1,139.2

1,139.2

1,137.4

1,137.4

 

 

5,226.7

5,226.7

7,724.0

7,724.0

Financial Liabilities

 

 

 

 

 

Current

 

 

 

 

 

Trade payables

 

(1,868.3)

(1,868.3)

(2,707.7)

(2,707.7)

Bank loans and overdrafts

13

(898.8)

(900.6)

(712.6)

(714.3)

Finance lease liabilities

13

(24.5)

(24.5)

(20.2)

(20.2)

Derivative financial liabilities

 

(1,783.8)

(1,783.8)

(2,297.3)

(2,297.3)

 

 

(4,575.4)

(4,577.2)

(5,737.8)

(5,739.5)

Non-current

 

 

 

 

 

Loans and Borrowings

13

(5,969.2)

(6,889.9)

(5,068.4)

(6,213.4)

Finance lease liabilities

13

(276.3)

(276.3)

(299.5)

(299.5)

Derivative financial liabilities

 

(857.5)

(857.5)

(933.4)

(933.4)

 

 

(7,103.0)

(8,023.7)

(6,301.3)

(7,446.3)

 

 

(11,678.4)

(12,600.9)

(12,039.1)

(13,185.8)

 

 

 

 

 

 

Net financial liabilities

 

(6,451.7)

(7,374.2)

(4,315.1)

(5,461.8)

 


 

Notes to the Preliminary Statement

for the year ended 31 March 2016

16. Capital and Financial Risk Management (continued)

16.2  Financial risk management (continued)

(i)      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.

 

Fair Value Hierarchy

 

 

Level 1

Level 2

Level 3

Total

Financial Assets

 

£m

£m

£m

£m

 

 

 

 

 

 

Energy derivatives

 

378.7

1,475.3

-

1,854.0

Interest rate derivatives

 

-

238.1

-

238.1

Foreign exchange derivatives

 

-

60.6

-

60.6

Equity investments

 

-

25.1

-

25.1

 

 

378.7

1,799.1

-

2,177.8

 

 

 

 

 

 

Financial Liabilities

 

 

 

 

 

Energy derivatives

 

(436.7)

(1,781.6)

-

(2,218.3)

Interest rate derivatives

 

-

(415.5)

-

(415.5)

Foreign exchange derivatives

 

-

(7.5)

-

(7.5)

Loans and Borrowings

 

-

81.8

-

81.8

 

 

(436.7)

(2,122.8)

-

(2,559.5)

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 2016.

17.    Retirement Benefit Obligations

 

Valuation of combined Pension Schemes

 

 

Long- term rate of return expected at 31 March 2016

Value

at 31 March 2016

Long- term rate of return expected at 31 March 2015

Value

at 31 March 2015

 

%

£m

%

£m

 

 

 

 

 

Equities

5.5

1,049.6

5.6

1,060.1

Government bonds

1.2

1,001.7

2.6

1,049.6

Corporate bonds

3.0

1,069.7

3.3

1,061.3

Other investments

1.7

581.9

4.1

580.0

Total fair value of plan assets

 

3,702.9

 

3,751.0

Present value of defined benefit obligation

 

(3,835.0)

 

(4,209.1)

Pension liability before IFRIC 14

 

(132.1)

 

(458.1)

IFRIC 14 liability (i)

 

(262.7)

 

(206.5)

Deficit in the schemes

 

(394.8)

 

(664.6)

Deferred tax thereon

 

71.0

 

132.8

Net pension liability

 

(323.8)

 

(531.8)

 

(i)  The IFRIC 14 liability represents the deficit repair obligations required to ensure a minimum funding level together with a restriction on the surplus that can be recognised.

 


 

Notes to the Preliminary Statement

for the year ended 31 March 2016

 

17  Retirement Benefit Obligations(continued)

 

Movements in the defined benefit asset obligations and assets during the year:

 

2016

2015

 

Assets

£m

Obligations

£m

Total

£m

Assets

£m

Obligations

£m

Total

£m

 

 

 

 

 

 

 

at 1 April

3,751.0

(4,209.1)

(458.1)

3,257.3

(3,693.9)

(436.6)

 

 

 

 

 

 

 

Included in Income Statement

 

 

 

 

 

 

Current service cost

-

(61.8)

(61.8)

-

(55.4)

(55.4)

Past service cost

-

(4.3)

(4.3)

-

(16.7)

(16.7)

Interest income/(cost)

121.2

(134.9)

(13.7)

139.9

(156.4)

(16.5)

 

121.2

(201.0)

(79.8)

139.9

(228.5)

(88.6)

Included in Other Comprehensive Income

 

 

 

 

 

 

Actuarial (loss)/gain arising from:

 

 

 

 

 

 

Demographic assumptions

-

48.0

48.0

-

-

-

Financial assumptions

-

277.4

277.4

-

(515.4)

(515.4)

Experience assumptions

-

101.5

101.5

-

70.4

70.4

Return on plan assets excluding interest income

(123.1)

-

(123.1)

362.5

-

362.5

 

(123.1)

426.9

303.8

362.5

(445.0)

(82.5)

Other

 

 

 

 

 

 

Contributions paid by the employer

102.0

-

102.0

149.6

-

149.6

Scheme participants contributions

0.3

(0.3)

-

0.3

(0.3)

-

Benefits paid

(148.5)

148.5

-

(158.6)

158.6

-

 

(46.2)

148.2

102.0

(8.7)

158.3

149.6

 

 

 

 

 

 

 

Balance at 31 March

3,702.9

(3,835.0)

(132.1)

3,751.0

(4,209.1)

(458.1)

 

Charges / (credits) recognised:

 

 

 

 

2016

 

 

2015

 

£m

 

 

£m

Current service cost (charged to operating profit)

66.1

 

 

72.1

 

66.1

 

 

72.1

(Credited)/charged to finance costs:

 

 

 

 

Interest on pension scheme assets

(121.2)

 

 

(139.9)

Interest on pension scheme liabilities

134.9

 

 

156.4

IFRIC 14 impact on net interest

6.7

 

 

8.6

 

20.4

 

 

25.1

           

 

18.    Capital commitments

 

2016

 

2015

 

£m

 

£m

Capital expenditure:

 

 

 

Contracted for but not provided

898.4

 

1,059.5

 

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 2016

19.    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.

 

2016

2016

2016

2016

2015

2015

2015

2015

 

Sale of goods and services

Purchase of goods and services

Amounts owed from

Amounts owed to

Sale of goods and services

Purchase of goods and services

Amounts owed from

Amounts owed to

Joint ventures:

£m

£m

£m

£m

£m

£m

£m

£m

Seabank Power Ltd

13.7

(125.8)

-

18.2

20.1

(115.5)

1.8

11.1

Marchwood Power Ltd

12.7

(108.7)

0.1

15.5

28.7

(114.4)

3.4

12.7

Scotia Gas Networks Ltd

46.3

(155.8)

15.9

0.9

49.0

(166.4)

7.7

0.3

Other Joint Ventures

8.1

(1.2)

8.4

-

27.6

(6.0)

3.0

-

 

 

 

 

 

 

 

 

 

Associates

0.5

(59.7)

2.4

3.9

0.8

(41.9)

1.9

2.5

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.

20.    Post Balance Sheet Events

On 13 May 2016, the Group agreed to waive certain contractual rights that gave rise to the accounting judgement that the Group had power to control the "relevant activities" of Clyde Windfarm (Scotland) Limited ('Clyde'). As a consequence, the Group will prospectively account for its interest in Clyde as that of an investment in an equity-accounted joint venture.


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