Publication of Annual Report and Accounts 2020

RNS Number : 5682S

SSE PLC

09 July 2020

 

SSE plc

Publication of Annual Report and Accounts 2020

9 July 2020

Following its Preliminary Full-Year Results announcement on 17 June 2020, SSE plc confirms that it has today published its Annual Report and Accounts for the year ended 31 March 2020, alongside its Sustainability Report 2020.

SSE's Annual General Meeting (AGM) will be held at Inveralmond House, 200 Dunkeld Road, Perth, PH1 3AQ on Wednesday 12 August 2020 at 11.00am. The mailing to shareholders of the AGM documentation has commenced, and copies of the Annual Report and Accounts and the Notice of Annual General Meeting for 2020 are available to view on the Company's website at: https://www.sse.com/investors/reports-and-results/

In light of the outbreak of the coronavirus (COVID-19) pandemic and associated social distancing measures, this year's AGM will be held with only the minimum number of shareholders present as required to form a quorum under the Company's Articles of Association, who will be officers or employees of the Company. The safety of shareholders, employees and the public is SSE's number one priority; for that reason , other shareholders will not be able to gain access to the AGM on the day.

SSE remains committed to open engagement with shareholders, however, and arrangements have been put in place to encourage continued shareholder participation, in the form of voting electronically or by proxy, and the submission of questions to be addressed by the Board in a pre-recorded session ahead of the meeting , to be published on the day . Full details are set out in SSE's Notice of Annual General Meeting 2020.

In accordance with Listing Rule 9.6.1, copies of the Annual Report and Accounts, Notice of Annual General Meeting, and Form of Proxy for 2020 have been submitted to the Financial Conduct Authority and will shortly be available for inspection via the National Storage Mechanism, which can be accessed at: https://data.fca.org.uk/#/nsm/nationalstoragemechanism

A condensed set of SSE plc's Group financial statements, and information on important events that have occurred during the year and their impact on the financial statements, were included in SSE's Preliminary Full-Year Results announcement issued on 17 June 2020. That information, together with the information set out in Sections 1 to 3 below, which is extracted from the 2020 Annual Report and Accounts, constitute the material required by Disclosure Guidance and Transparency Rule 6.3.5 to be communicated to the media in unedited full text through a Regulatory Information Service. This material is not a substitute for reading the full 2020 Annual Report and Accounts. Page numbers and cross-references in the extracted information refer to page numbers and cross-references in the 2020 Annual Report and Accounts .  

Section 1. Principal Risks and Uncertainties  

The following information is extracted from pages 28 to 36 of the 2020 Annual Report and Accounts.

MANAGING SSE'S PRINCIPAL RISKS

The successful delivery of SSE's strategic objectives depends on effective identification, understanding and mitigation of its Principal Risks. SSE has an established Risk Management Framework and wider system of internal control (as described on page 128 of the Directors' Report) to inform decision-making in support of creating value in a sustainable way.

In January 2020, SSE completed the disposal of its Energy Services business, thereby confirming its strategic focus on developing, building, operating and owning assets that support the transition to a net-zero economy and its ambition to be a leading energy company in a low-carbon world. This reshaping of SSE took place against a background developments in SSE's operating environment and of a number of key external factors which will set the operating context for SSE for years to come.

Key external factors

First, the UK's Brexit process gave rise to significant economic, regulatory and political developments and uncertainties, many of which are believed to be unprecedented and are expected to have long-lasting consequences.

Second, the concept of state control and ownership of infrastructure such as energy networks continued to feature in political and public debates and is likely to continue to do so for some time to come.

Third, the power cuts experienced in Great Britain on 9 August emphasised the extent to which society is dependent on a fully functioning electricity system and the extent to which stakeholders therefore expect the highest standards of delivery from infrastructure providers.

Fourth, the UK became the first major economy to pass a law to require it to bring all greenhouse gas emissions to net zero by 2050. This occurred amidst significantly enhanced stakeholder concern and activism in relation to climate change that is expected to increase further in the future.

Towards the end of 2019/20, the coronavirus outbreak reached the UK and Ireland, with immediate, and potentially long-term, human, social, economic and business effects that may shape the operating context for SSE for years to come and that require to be considered in any assessment of risk.

The reshaping of the SSE Group following the sale of the Energy Services business and along with the key factors described above formed the basis of the full review of SSE's Principal Risks that took place during the course of the financial year.

Board considerations

Effective identification, understanding and mitigation of Principal Risks underpins the Board's approach to setting strategic objectives for SSE and informing strategic decision making. The Board aims to consider all material influencing factors and key external trends in the energy market, including those relating to climate change, security of energy supply and technological developments and aims to do so in a way that reflects the expectations of SSE's key stakeholder groups. These material influencing factors also impact the nature and extent of risks the Board is willing to take in order to meet these objectives, and related mitigation strategies adopted by the Group. Material changes in the nature and potential impacts of SSE's Group Principal Risks are continuously assessed with appropriate mitigations implemented where necessary.

Overseeing risk

The Group Executive Committee and its sub-committees have responsibility for overseeing SSE's Principal Risks. During the third quarter of SSE's financial year, an assessment of each Principal Risk is completed by the assigned oversight committee. This assessment requires committee members to provide commentary on contextual changes to the Risks and whether they consider them to have become more or less material during the year. Consideration is also given to potential emerging risks and whether or not any of those identified have the potential to become a Principal Risk to the business in the medium to long term.

These responses are then consolidated into reports, one for each Principal Risk, which are presented back to the committees along with the results of provisional viability testing and analysis of relevant, current management information and key information relating to Business Unit Principal Risks and Controls. These reports form the basis for the committees to discuss and confirm risk trend (more, less or equally material), overall effectiveness of the risk control and monitoring environment, and whether any additional control improvement actions are required. This is an inclusive and iterative process that results in considered and objective outputs and a robust assessment of Principal Risks.

The outputs from these committee assessments are then presented to the Group Executive Committee for full review, with any emerging risks or additional material changes resulting from this being proposed to the Board.

2019/20 review outcome

Following the 2019/20 annual review process, the number of Principal Risks to the Group has increased from 10 to 11 with the introduction of "Climate Change". Ensuring its strategy and goals are consistent with national and international efforts to tackle climate change has long been at the heart of SSE's approach to business, but in light of the UK's legislation on net-zero emissions in 2019, it was recognised that stakeholders would expect climate change to be explicitly recognised as a Principal Risk.

In addition, the pre-existing "Development and Change" risk has been redefined and renamed "Speed of Change" to ensure clarity relating to its focus. An emerging risk "Joint Venture and Partner Management" was also been identified. The importance of joint ventures and partner management is continuing to increase in SSE as its business units pursue their strategic and business objectives in association with other companies and organisations.

Important revisions have also been made to the descriptions of each of the other Principal Risks to take account of key developments and corresponding mitigations that were introduced during the year.

Group Principal Risks

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

The Board and Group Executive Committee look for as complete a perspective as possible when assessing the Principal Risks that face the Group. This graphic [set out on page 29 of the 2020 Annual Report and Accounts] illustrates SSE's 11 Group Principal Risks positioned on a relative basis against the output of the business as usual Principal Risk Self Assessment process (based on changes in the context and prevalence of each risk since June 2019) and the risk trend based on the additional Group Principal Risk Assessment process completed in May and taking into consideration the change in prevalence of each Group Principal Risk as a result of the coronavirus outbreak.

In addition, Principal Risks that were considered by their oversight committees to have increased in materiality during the last 3 months are shown in red, and those that have not changed significantly are shown in blue. No Principal Risk was deemed to have reduced in materiality.

Coronavirus

The outbreak of coronavirus in the UK and Ireland in March 2020 resulted in the Board undertaking an additional assessment of each of the Principal Risks. As with SSE's established process for the assessment of Principal Risks, this was an inclusive and iterative exercise delivering considered and objective outputs.

Completed by the members of the assigned oversight committees, this further assessment required consideration of contextual changes to the Risks based on information collected from SSE's Business Units and corporate functions, highlighting any additional areas of concern and re-assessing the risk trends resulting from the impacts of coronavirus (more, less or equally material).

The output from this additional assessment was then considered by the Group Risk Committee before being presented to the Board for review and approval. The overall conclusion of this assessment was that the human, social and economic impact of coronavirus has increased the prevalence of a number of the material influencing factors detailed against each of SSE's Group Principal Risks.

In turn, these material influencing factors may increase the likelihood of occurrence of the Risks and in some cases may increase the materiality of their impacts should they occur.

For example the dependence of critical national response activities on energy infrastructure has been highlighted during the pandemic, with SSE's overriding priority being on supporting the safe and reliable supply of electricity and essential energy services at local, regional and national level. At the same time, the social and economic impact of coronavirus has thrown into sharper relief the question of energy affordability - a matter that affects all parts of the energy sector, not just companies involved in direct supply to end customers.

Full details of the Group Principal Risks are detailed overleaf [ pages 31 to 36 of the 2020 Annual Report and Accounts].

Risk Appetite Statement

No business is risk free and indeed the achievement of SSE's strategic objectives necessarily involves taking risk. SSE will however only accept risk where it is consistent with its core purpose, strategy and values; is well understood; can be effectively managed; and offers commensurate reward.

The sectors in which SSE operates continue to be subject to a high degree of political, regulatory and legislative risk as well as risks arising from other developments and change including technology, the impact of competition, stakeholders' evolving expectations and climate change.

Furthermore, each of SSE's Business Units have differing levels of exposure to additional risks. For example, the Transmission and Distribution businesses are largely economically regulated and are characterised by relatively stable, inflation-linked cash flows while the SSE Renewables business benefits from cash flows linked to government-mandated renewables subsidies. Those business units that generate and trade energy are also exposed to significant medium- to long-term energy market and commodity risks in operational and investment decision making.

The key elements of SSE's strategic framework - including the focus on regulated electricity networks and renewable sources of energy, complemented by flexible thermal generation and business energy sales - and its financial objective in relation to dividend payments are fully reflective of its risk appetite.

Fundamentally:

• SSE is focused on creating value from the successful development, efficient operation and responsible ownership of energy infrastructure and businesses in a sustainable way. This provides a complementary portfolio of business activities whilst keeping the depth of focus on a single sector - energy;

• SSE has a clear understanding of the risks and opportunities in the Great Britain and Ireland energy markets and these markets therefore continue to provide the Group's geographic focus, with any expansion into other markets being subject to especially rigorous scrutiny.

Safety is SSE's first value and it has no appetite for risks brought on by unsafe actions, nor does it have any appetite for risks brought on by insecure actions including those relating to cyber security.

In areas where SSE is exposed to risks for which it has little or no appetite, even though it has implemented high standards of control and mitigation, the nature of these risks mean that they cannot be eliminated completely.

In determining its appetite for specific risks, the Board is guided by three key principles:

1. Risks should be consistent with SSE's strategy, values and financial objectives;

2. Risks should only be accepted where appropriate reward is achievable on the basis of objective evidence and in a manner that is consistent with SSE's purpose, strategy and values; and

3. Risks should be actively controlled and monitored through the appropriate allocation of management and other resources, underpinned by the maintenance of a healthy business culture.

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

Viability Statement

SSE aims to be a leading energy provider in a net-zero world. The pursuit of that vision is guided by a collective purpose, which is to provide energy needed today while building a better world of energy tomorrow. The primary duty of the SSE Board is to act in accordance with this purpose and to promote the long-term sustainable success of the Company.

SSE is a company undergoing rapid evolution. A keener focus has been placed on SSE's core, low-carbon businesses and greater visibility has been given to the assets that create sustainable value. This shift in focus and the commitment to greater visibility of assets and earnings are leading to significant change in the way SSE's businesses are structured and managed.

As required within Provision 41 of the UK Corporate Governance Code the Board has formally assessed the prospects of the Company over the next three financial years to the period ending March 2023. The Directors have determined that as this time horizon aligns with the Group's current capital programme and is within the strategy planning period, a greater degree of confidence over the forecasting assumptions modelled can be established.

In making this statement the Directors have considered the resilience of the Group taking into account its current position, the impacts of the coronavirus outbreak, the Principal Risks facing the Group and the control measures in place to mitigate each of them. In particular the Directors recognise the significance of the strong balance sheet, and total committed lending facilities of £1.5bn.

The Group is an owner and operator of critical national infrastructure and has a proven ability to maintain access to capital markets during stressed economic conditions, as demonstrated in April through the successful issuance of a €1.1bn 5- and 10-year dual tranche euro bond.

The Group has a number of highly attractive and relatively liquid assets - including a regulated asset base which benefits from a strong regulated revenue stream as well as the operational wind portfolio - which provide flexibility of options.

To help support this Statement, over the course of the year a suite of severe but plausible scenarios has been developed for each of SSE's Principal Risks. These scenarios are based on relevant real life events that have been observed either in the markets within which the Group operates or related markets globally. Examples include critical asset failure (for Energy Infrastructure Failure); changes to key government energy policies (for Politics, Regulation and Compliance); and the impact of the loss of key systems (for Cyber Security and Resilience).

Scenarios are stress tested against forecast available financial headroom which this year also considered sensitivities on future cashflow projections resulting from the coronavirus pandemic. Further details can be found in A6.3 (Accompanying Information to the Financial Statements).

In addition to considering these in isolation, the Directors also consider the cumulative impact of different combinations of scenarios, including those that individually have the highest impact.

Upon the basis of the analysis undertaken, and on the assumption that the fundamental regulatory and statutory framework of the markets in which the Group operates does not substantively change, the Directors have a reasonable expectation that the Group will be able to continue to meet its liabilities as they fall due in the period to March 2023.

GROUP PRINCIPAL RISKS

CLIMATE CHANGE

Oversight:

Group Executive Committee

What is the risk?

The risk that SSE's strategy, investments or operations are deemed to have an unacceptable future impact on the natural environment and on national and international targets to tackle climate change.

Material Influencing Factors:

• The impact of physical risks associated with climate change, such as severe adverse weather that causes damage or interrupts energy supply or generation.

• The speed of technological developments.

• Transitional risks relating to developments in political and regulatory requirements around the products and services that SSE provides.

Material Influencing Factors most impacted by coronavirus:

• Fast developing stakeholder needs and expectations in relation to efficient, innovative and flexible products and services.

• Ensuring the continuation of Large Capital Projects which are fundamental to Group net zero targets.

• Global and domestic policies.

• Political and regulatory engagement.

Strategic link:

Delivering in a sustainable way.

Key developments

• Following the UK Parliament's legislation requiring the UK to bring all greenhouse gas emissions to net zero by 2050, SSE refined its vision which is now to be a leading energy company in a net zero world.

Key developments associated with coronavirus:

• Continued focus on SSE's business model and strategy to create value for shareholders and society through developing, operating and owning principally electricity assets and businesses in a sustainable way will ensure that SSE is best placed to play its part in long-term economic recovery. There has been widespread recognition that the transition to net zero and the opportunities that arise from it will play an important role in the recovery phase from the coronavirus crisis.

Key mitigations:

• Policy Link: SSE Climate Change Policy.

• SSE provides transparent disclosures to allow its stakeholders to properly assess its performance in managing climate related issues including a commitment to meet the TCFD recommendations in full by March 2021.

• The Group Executive Committee is responsible for implementing the Group strategy set by the Board and driving climate-related performance programmes across the organisation. The Chief Sustainability Officer is responsible for advising the Board, Group Executive Committee and businesses on climate-related matters and provides support in the implementation of relevant initiatives across the Group.

• In March 2019, SSE's Remuneration Committee took the decision that from 2019/20 onwards 20% of the total Annual Incentive Plan (AIP) for Executive Directors would be determined by the progress made in meeting SSE's four 2030 Goals which are focussed on addressing the challenge of climate change.

COMMODITY PRICES

Oversight:

Group Risk Committee

What is the risk?

The risk associated with the Group's exposure to fluctuations in both the physical volumes and price of key commodities, including electricity, gas, CO₂ permits, oil and related foreign exchange values.

Material Influencing Factors:

• Weather associated seasonal fluctuations in demand, supply and generation capabilities - which may not be in line with historical trends, which in turn, may or may not be associated with climate change - both in GB and globally. Further detail is available on page 37 of the Strategic Report.

• Generation technology advancements.

• Global and domestic political change.

• European generation outputs and availability.

• International and national agreements on climate change.

• International flows of fuel.

Material Influencing Factors most impacted by coronavirus:

• Fluctuations in foreign exchange values.

• Fluctuations in the global supply and demand of fuel.

• Global economic growth.

• Geopolitical events.

Strategic link:

Focusing on the electricity core.

Key developments:

• Managing the impacts of geopolitical events including those relating to Brexit.

Key developments associated with coronavirus:

• Managing the impacts of significant reduction in energy demand.

• Managing the impacts of significant fluctuations in commodity prices and foreign exchange values.

Key mitigations:

• Policy Link: An asset-by-asset approach to hedging strategy that ensures trading positions cannot have a material impact on SSE Group earnings. This was fully implemented in April 2020. Full details of SSE's hedging approach can be read on sse.com.

• The Energy Markets Risk Committee monitors the effectiveness of Group hedging arrangements.

• SSE uses VaR and PaR measures to monitor and control exposures. Trading limits are reviewed regularly by the Energy Markets Risk Committee, with consideration given to changes in the material influencing factors noted above, before being approved by the Board.

• SSE's Energy Economics team provides commodity price forecasts which are used to inform decisions on trading strategy and asset investment.

• SSE utilises hedging instruments to minimise exposure to fluctuations in foreign exchange markets, details of which are available in the Financial Statements section of the Annual Report and Account.

CYBER SECURITY AND RESILIENCE

Oversight:

Information, Security and Privacy Committee

What is the risk?

The risk that key infrastructure, networks or core systems are compromised or are otherwise rendered unavailable.

Material Influencing Factors:

• Software or hardware issues, including telecoms network and connectivity and power supplies.

• Ineffective operational performance, for example, breach of information security rules or poor management of resilience expertise.

• Employee and contractor understanding and awareness of information security requirements.

Material Influencing Factors most impacted by coronavirus:

• Geopolitical events including impacts relating to Brexit.

• Malicious cyber attack.

Strategic link:

Focusing on the electricity core.

Key developments:

• Work to ensure the successful technological separation of systems associated with the sale of SSE Energy Services to Ovo, in a secure manner without interruption to services.

Key developments associated with coronavirus:

• Ensuring the continued security and resilience of Critical National Infrastructure given the heightened risk of malicious cyber attack.

Key mitigations:

• Policy Link: SSE Cyber Security Policy and SSE Data and Information Policy.

• Key technology and infrastructure risks are incorporated into the design of systems and are regularly appraised with risk mitigation plans recommended.

• SSE conducts regular internal and third party testing of the security of its information and operational technology networks and systems.

• Further strengthening and embedding of the cyber risks and controls framework to continue to identify threats and reduce exposures through, for example, improved use of data analytics and further migration from unsupported systems.

• Significant longer term Security Programme investment and planning which seeks to strengthen the resilience of the systems on which SSE relies.

• IT Service Assurance works with individual business units to form and agree appropriate service level agreements for business critical IT services.

• Business continuity plans are in place and regularly tested and reviewed.

ENERGY AFFORDABILITY

Oversight:

Group Executive Committee

What is the risk?

The risk that energy customers' ability to meet the costs of providing energy, or their ability to access energy services is limited, giving rise to negative political or regulatory intervention that has an impact on SSE's core regulated Networks and Renewables businesses.

Material Influencing Factors:

• Technology changes and innovations.

• Supply chain cost management.

• Public policies, including those aimed at reducing carbon emissions and energy consumption.

• Accessibility to energy and related services for all.

• Required investment in the upgrading of the UK's energy infrastructure to achieve net zero.

Material Influencing Factors most impacted by coronavirus:

• Macro-economic impacts on household and business incomes.

• Fluctuations in the cost of fuels.

• Supplier and customer failures and related bad debt.

• Political interventions, such as renationalisation of any part of the UK's energy infrastructure.

Strategic link:

Delivering in a sustainable way.

Key developments:

• In the second half of 2019/20, SSEN published three strategies to help coordinate its work in a fast changing energy sector and deliver the best outcome for customers. Full details of these strategies can be found in the Sustainability Report.

Key developments associated with coronavirus:

• In line with the commitments of the C-19 Business Pledge SSE has accelerated the availability of up to 10% of its annual community funds in direct response to the challenges posed by coronavirus.

Key mitigations:

• Policy Link: SSE Sustainability Policy.

• In February 2019, SSEN attained the British Standard for inclusive service provision (BS 18477) for the fourth year in a row. This recognition, from business standards company BSI, is achieved through rigorous assessments to ensure SSEN's policies, procedures and services are accessible and fair to all customers.

• SSE Airtricity continues to focus on helping customers reduce their carbon output and to save on energy costs. Through partnerships with local authorities, the Sustainable Energy Authority Of Ireland (SEAI) and others, SSE Airtricity Energy Services has been delivering large-scale energy efficiency retrofit projects for homes across Ireland.

• SSE continues to advocate its belief that modernisation of the energy market is best delivered by a cost-effective privatised system that is properly regulated.

ENERGY INFRASTRUCTURE FAILURE

Oversight:

Group Executive Committee

What is the risk?

The risk of national energy infrastructure failure, whether in respect of assets owned by SSE or those owned by others which SSE relies on, that prevents the Group from meeting its obligations.

Material Influencing Factors:

• Severe adverse weather that causes damage or interrupts energy supply or generation.

• Government policy regarding the operation of the energy network which relates to security of supply.

• Transition to a low carbon energy network.

• Failures in any aspect of the GB national critical infrastructure.

• Continuing access to the European energy markets and continued inclusion of Northern Ireland in the all-island Single Electricity Market.

Material Influencing Factors most impacted by coronavirus:

• Appropriate asset management and necessary upgrading works of both generation and network assets.

• Malicious attack on the GB energy infrastructure.

• Energy network balancing mechanisms.

• Continued availability of competent staff.

• Continued availability of key systems.

Strategic link:

Developing, operating, owning.

Key developments:

• Continued progress in developing and building electricity network flexibility and infrastructure to help accommodate 10 million electric vehicles in GB by 2030.

Key developments associated with coronavirus:

• The successful implementation of comprehensive crisis management and business continuity plans designed to protect and ensure the ongoing security of energy supplies.

• SSE's electricity networks business is using its well established Priority Services Register to provide additional support to vulnerable customers, working closely with local agencies to ensure those who are vulnerable can be reached as quickly as possible in the event of an electricity network fault.

Key mitigations:

• Policy Link: Business Unit Asset Management Policies.

• SSE's dedicated Engineering Centre of Excellence reviews and develops plans to ensure the ongoing integrity of its generation assets is maintained.

• Crisis management and business continuity plans are in place across the Group. These are tested regularly and are designed for the management of, and recovery from, significant energy infrastructure failure events. Where there are material changes in infrastructure (or the management of it) additional plans are developed.

• SSE continues to be an active participant in national security forums such as the Centre for the Protection of National Infrastructure (CPNI).

FINANCIAL LIABILITIES

Oversight:

Group Risk Committee

What is the risk?

The risk that funding is not available to meet SSE's financial liabilities, including those relating to its defined benefit pension schemes, as these fall due under both normal and stressed conditions without incurring unacceptable costs or risking damage to its reputation.

Material Influencing Factors:

• Ongoing commitment to an Investment Grade credit rating.

Material Influencing Factors most impacted by coronavirus:

• Global macro-economic changes and subsequent volatility in foreign exchange markets.

• Fluctuations in interest rates and inflation which influence borrowing costs.

• Defined benefit pension scheme investment and performance.

• The impact of fluctuations in gilt yields on the value of defined benefits pension scheme liabilities.

Strategic link:

Creating value for shareholders and society.

Key developments:

• In September 2019, SSE issued a 16-year £350m Green Bond - its third Green Bond in three years - making SSE the largest issuer of Green Bonds in the UK Corporate sector.

Key developments associated with coronavirus:

• In April 2020, the Group successfully issued a €1.1bn 5- and 10-year dual tranche euro bond, ensuring continued affordable funding for the Group.

Key mitigations:

• Policy Link: SSE Financial Management Policy.

• Committed borrowings and facilities are available at all times equal to at least 105% of forecast borrowings over a rolling 6 month period.

• SSE seeks to maintain a diverse and innovative portfolio of debt to avoid over-reliance on any one market. This allows it to build relationships with, and create competition between, debt providers.

• Each of SSE's defined benefit pension schemes has a Board of Trustees which acts independently of the Group.

LARGE CAPITAL PROJECTS QUALITY

Oversight:

Group Large Capital Projects Committee

What is the risk?

The risk that major assets that SSE builds do not meet the quality standards required to support economic lives of typically 15 to 30 years.

Material Influencing Factors:

• Appropriate contractual arrangements.

• New or unproven technology.

• Appropriate and effective budget management.

• All aspects of supply chain management, including those relating to human rights, modern slavery and labour standards, as well as the potential impacts of Brexit.

Material Influencing Factors most impacted by coronavirus:

• Availability of competent contractors.

Strategic link:

Developing, operating, owning.

Key developments:

• In September 2019 SSE Renewables was awarded Contracts for Difference (CfDs) for 2.2GW of new offshore wind farm projects. This was the largest volume of low carbon contracts secured in this allocation round by any developer and the largest ever secured by SSE. This award will materially assist in meeting the Group's business goal of trebling renewable output by 2030.

Key developments associated with coronavirus:

• Maintaining momentum across Large Capital Projects currently in the development phase is essential to ensure successful delivery of the Group's net-zero ambitions.

Key mitigations:

• Policy Link: SSE's Large Capital Projects Governance Framework manual ensures that all major capital investment projects for the Group are governed, developed, approved and executed in a consistent and effective manner, with full consideration of best practice project delivery. The manual provides common standards across the Group and incorporates continuous improvement practices.

• The Large Capital Project Services function employs dedicated quality and assurance teams who perform in-depth quality reviews.

• In major projects, SSE generally manages insurance placement by organising owner controlled insurance. This strategy allows it to have greater control and flexibility over the provisions in place. SSE also sees the insurance market as an important source of information on the reliability of technology and uses this to inform the design process of major projects.

PEOPLE AND CULTURE

Oversight:

Group Risk Committee (2019/20) Group Executive Committee (2020/21)

What is the risk?

The risk that SSE is unable to attract, develop and retain an appropriately skilled, diverse and responsible workforce and leadership team, and maintain a healthy business culture which encourages and supports ethical behaviours and decision-making.

Material Influencing Factors:

• Rewarding employee contributions through fair pay and benefits.

• Recognition of the value and benefit of having an inclusive and diverse workforce.

• A responsible employer ethos (see the Sustainability Report for further detail).

• Clearly defined roles, responsibilities and accountabilities for all employees.

• Availability of career development opportunities and appropriate succession planning that recognises potential future skills shortages.

• Clear personal objectives and communication of the SSE SET of values.

• A focus on ethical business conduct and creating a culture in which employees feel confident to speak up when they suspect wrongdoing.

Material Influencing Factors most impacted by coronavirus:

• The health and wellbeing of all employees (see the Sustainability Report for further detail).

• Clear and well structured employee communications.

Strategic link:

Delivering in a sustainable way

Key developments:

• SSE continues to promote fair tax and a living wage as the core of its ability to share economic value with society. As such, during 2019/20 SSE achieved ongoing accreditation of both the Fair Tax Mark and the Living Wage, supporting both campaigns to attract more companies to become accredited. Furthermore SSE continued its support of the new Living Hours initiative.

Key developments associated with coronavirus:

• SSE has carefully tracked the direct impact of the virus on its workforce as well as taking actions to help protect and support them. It has introduced measures and provided guidance on a wide range of issues that impact its employees during this period. This includes protective measures for those critical workers that can't work from home, redeploying those that cannot carry out their jobs at this time to other areas of the business, helping those with caring responsibilities and allowing time off work to support both local and national volunteering efforts.

Key mitigations:

• Policy Link: SSE Employment Policy and SSE Whistleblowing Policy.

• SSE has a detailed inclusion and diversity policy and plan, progress against which is reviewed and monitored by SSE's Group Executive Committee on a monthly basis.

• There are a wide range of tools and services available to all employees to support mental health and wellbeing, including those provided as part of the Employee Assistance Programme. Full details are available in the Sustainability Report.

• "Doing the Right Thing, a guide to ethical business conduct", explicitly outlines the steps employees should take to ensure their day-to-day actions and decisions are consistent both with SSE's values and ethical business principles. SSE employees can report incidents of wrongdoing through both internal and external mechanisms. SSE uses an independent "Speak Up" phone line and email service, hosted externally by SafeCall, through which incidents can be reported.

• The Audit Committee reviews all key accounting judgements made as part of the preparation of the Annual Report and Accounts.

• SSE's business leaders are required to undertake regular succession planning reviews. At a Group level, SSE continues to develop its approach to the management of talent.

POLITICS, REGULATION AND COMPLIANCE

Oversight:

Group Risk Committee

What is the risk?

The risk from changes in obligations arising from operating in markets which are subject to a high degree of regulatory, legislative and political intervention and uncertainty.

Material Influencing Factors:

• Changes to regulatory frameworks.

• International and national agreements such as the 2015 Paris Agreement on Climate Change and The Climate Change Act 2008.

Material Influencing Factors most impacted by coronavirus:

• Government intervention into the structure of the energy sector including renationalisation of any aspect of the UK's energy infrastructure.

• Constitutional uncertainty relating to Brexit.

• Changes in financial, employment, safety and consumer legislation and regulation and the impact of these changes on business as usual activities.

Strategic link:

Focusing on the electricity core.

Key developments:

• Following the UK Parliament's legislation requiring the UK to bring all greenhouse gas emissions to net zero by 2050, SSE refined its vision which is now to be a leading energy company in a net-zero world.

Key developments associated with coronavirus:

• Managing the implementation of all Government guidance relating to social distancing while maintaining critical energy supplies across GB.

Key mitigations:

• Policy Link: SSE Political and Regulatory Engagement Policy.

• The Group has dedicated Corporate Affairs, Regulation, Legal and Compliance departments that provide advice, guidance and assurance to each business area regarding the interpretation of political, regulatory and legislative change. These teams take the lead in engagement with regulators, politicians, officials, and other such stakeholders.

• SSE has a clear Political Engagement Statement that sets out principles for any employees who make representations to institutions of governments or to legislatures on the Company's behalf.

• The Group has a dedicated project team to manage all aspects of the regulatory and legislative change impacts of Brexit.

• There is regular engagement with the Board and Group Executive Committee on political and regulatory developments which may impact SSE's operations or strategy.

SAFETY AND THE ENVIRONMENT

Oversight:

Group Safety, Health and Environment Committee

What is the risk?

The risk of harm to people, property or the environment from SSE's operations.

Material Influencing Factors:

• Clear and appropriately communicated safety processes.

• Regular and documented training.

• Adverse weather.

• Challenging geographic locations.

• Appropriate task and asset risk assessment.

Material Influencing Factors most impacted by coronavirus:

• Safety culture - "if it's not safe, we don't do it".

• Clear, effective and regular communications of all relevant safety updates.

• Competent employees and contractors.

Strategic link:

Delivering in a sustainable way.

Key developments:

• The key deliverables of SSE's 50by20 safety campaign were successfully met earlier than expected. Despite the positive progress and improvement in safety performance, work will continue to further embed the strong safety culture across the Group.

Key developments associated with coronavirus:

• In order to protect those supplying a critical service and to reflect government guidance, measures are in place to protect key personnel on SSE sites where work must continue to support the supply of electricity, while non-critical work has been suspended to enable as many employees as possible to remain in their homes.

• As part of SSE's response to coronavirus an additional preparedness test of all relevant crisis management and business continuity plans was carried out in February tailoring these to the specific circumstances of the pandemic. Plans were then implemented in stages beginning from the end of February and, as a result, SSE has managed to continue to fulfil its current priority of supporting the safe and reliable supply of electricity at local, regional and national level.

Key mitigations:

• Policy Link: SSE Safety and Health Policy and SSE Environment Policy.

• Safety is the Group's number one value with Board oversight being provided by the Safety Health and Environment Advisory Committee.

• Crisis management and business continuity plans are in place across the Group. These are tested regularly and are designed for the management of, and recovery from, significant safety and environmental events.

• Each business carries out regular SHE assurance reviews of the risks faced, the controls in place and the monitoring that is undertaken.

• SSE's dedicated Engineering Centre of reviews and develops plans to ensure that the integrity of its generation assets is maintained.

• Full environmental impact assessments are carried out for all major projects, to ensure adverse environmental impacts are well understood and minimised.

SPEED OF CHANGE

Oversight :

Group Executive Committee

What is the risk?

The risk that SSE is unable to keep pace with the speed of change affecting the sector and markets in which it operates and so fails to meet the evolving expectations of its stakeholders or achieve its strategic objectives.

Material Influencing Factors:

• Fast developing customer needs in relation to efficient, innovative and flexible products and services.

• Technological developments and innovation.

• Climate change and the necessity to generate the energy required by a modern society in a responsible and sustainable way, which includes ensuring that value is shared with those impacted by SSE's operations.

• Longer term capital investment plans and budgets.

Material Influencing Factors most impacted by coronavirus:

• The size, scale and number of change programmes under way, including those relating to regulatory or legislative requirements.

• Geopolitical events.

• Governance and decision-making within the Group.

Strategic link:

Creating value for shareholders and society.

Key developments:

• On 1 April 2019, a revised Group operating model was implemented to support SSE's agreed low-carbon strategy, the focus of which was the creation of distinct business units and the restructuring of the sub-committees which report to the Group Executive Committee. This redefined management structure supports the empowerment of business units by ensuring SSE's strengths are used to deliver sustainable outcomes for its key stakeholders through optimising its core and complementary business mix (see page 90 of the Directors report).

Key developments associated with coronavirus:

• Following the implementation of social distancing measures in response to the coronavirus outbreak, around two thirds of SSE's workforce began working from home on a full-time basis. SSE's ability to quickly and successfully enable this significant change in working arrangements for the majority of its employees was a result of the major financial investment and the wider efforts over previous years to provide modern, flexible working for its employees.

Key mitigations:

• Policy Link: SSE Operating Model Policy.

• The Board sets the risk appetite of the Group and approves and regularly reviews the Group's commercial strategy, business development initiatives and long-term options ensuring alignment of risk appetite and strategic objectives.

• SSE's revised Group operating model has been designed to ensure dynamic and efficient decision making, empowered and accountable delivery of business unit strategies and to fulfil SSE's purpose to provide energy needed today while building a better world of energy for tomorrow.

• The Group Executive Committee is responsible for ensuring that divisional strategies are consistent and compatible with the overarching Group strategy and its vision to be a leading energy provider in a low carbon world.

EMERGING RISK - JOINT VENTURE AND PARTNER MANAGEMENT

An essential tenet of SSE's Risk Management process is the consideration of potential emerging risks and whether or not any of those identified has the potential to become a Group Principal Risk in the medium to long term. As such, following the 2019/20 review process an emerging risk "Joint Venture and Partner Management" was identified and will continue to be monitored over the course of the year.

Monitored by:

Group Executive Committee

What is the emerging risk?

The reshaped SSE Group features an increasing number of significant Joint Ventures (operated and non-operated). SSE must ensure that joint venture structures, governance and operations are robust and consistent with its goals as a company so that SSE's investments continue to be protected and managed well.

Policy Link: SSE Joint Venture Management Policy.

Section 2. Directors' Responsibility Statement

The following information is extracted from page 161 of the 2020 Annual Report and Accounts.

STATEMENT OF DIRECTORS' RESPONSIBILITIES IN RESPECT OF THE ANNUAL REPORT AND THE FINANCIAL STATEMENTS

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

Company law requires the Directors to prepare Group and parent Company financial statements for each financial year. Under that law they are required to prepare the Group financial statements in accordance with International Financial Reporting Standards as adopted by the European Union (IFRSs as adopted by the EU) and applicable United Kingdom law and have elected to prepare the parent Company financial statements under Financial Reporting Standard 101, Reduced Disclosure Framework.

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

• select suitable accounting policies and then apply them consistently;

• make judgements and estimates that are reasonable, relevant and reliable;

• state whether they have been prepared in accordance with IFRSs as adopted by the EU;

• assess the Group and parent Company's ability to continue as a going concern, disclosing, as applicable, matters related to going concern; and

• use the going concern basis of accounting unless they either intend to liquidate the Group or the parent Company or to cease operations, or have no realistic alternative but to do so.

The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the parent Company's transactions and disclose with reasonable accuracy at any time the financial position of the parent Company and enable them to ensure that its financial statements comply with the Companies Act 2006. They are responsible for such internal control as they determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error, and have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Group and to prevent and detect fraud and other irregularities.

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

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

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

We confirm that to the best of our knowledge:

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

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

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

Alistair Phillips-Davies   Gregor Alexander

Chief Executive  Finance Director

16 June 2020

Section 3. Related Party Transactions

The following information is extracted from Accompanying Information A5. on page 260 of the 2020 Annual Report and Accounts. A condensed version of this extract was published as Note 18 in the Preliminary Results Statement for the year ended 31 March 2020.

A5. Related party transactions

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

Trading transactions

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

	2020 Sale of goods and services £m	2020 Purchase of goods and services £m	2020 Amounts owed from £m	2020 Amounts owed to £m	2019 Sale of goods and services £m	2019 Purchase of goods and services £m	2019 Amounts owed from £m	2019 Amounts owed to £m
Joint ventures:
Seabank Power Ltd	44.3	(66.1)	0.1	(5.8)	45.9	(60.5)	0.1	(10.2)
Marchwood Power Ltd	13.6	(96.2)	0.2	(6.8)	15.4	(116.2)	0.4	(14.6)
Scotia Gas Networks Ltd	39.5	(113.7)	0.1	(15.0)	46.2	(140.3)	11.8	(1.2)
Clyde Windfarm (Scotland) Ltd	4.2	(118.0)	1.3	(41.3)	3.5	(150.3)	3.7	(41.3)
Beatrice Offshore Windfarm Ltd	7.1	(40.8)	1.9	(3.3)	-	-	-	-
Stronelairg Windfarm Ltd	2.2	(55.4)	0.4	(16.3)	-	-	-	-
Dunmaglass Windfarm Ltd	0.9	(24.5)	-	(6.7)	-	-	-	-
SSE Telecommunications Ltd	14.4	(59.5)	11.8	(11.6)	-	-	-	-
Other joint ventures	45.3	(205.5)	12.8	(60.5)	-	-	-	-
Associates	-	(36.7)	-	-	-	(35.4)	-	-

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

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

ENDS

 

END

 

 

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