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.

 

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 200,000^th 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.