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Providing the energy
people need
SSE plc Annual Report 2016
Section 1
Strategic Report
1 Overview
2 Chairman’s introduction
Our business
and performance
4 Our business explained
6 Chief Executive’s statement
8 Our Strategic Framework
10 Our performance
16 Risk management
Embedding
responsibility
20 Doing the right thing
22 Responsible member
of society
23 Responsible buyer
24 Responsible employer
28 Responsible operator
30 Stakeholders’ questions
to the Chief Executive
Financial overview
and performance
Section 2
Directors’ Report
Section 3
Financial Statements
66 Chairman’s introduction
120 Consolidated income
68 Board of Directors
70 Corporate governance
80
Nomination
Committee Report
84 Audit Committee Report
90
Safety, Health and
Environment Advisory
Committee (SHEAC) Report
92 Remuneration Report
104 Annual Remuneration
Report 2015/16
statement
121 Consolidated statement
of comprehensive income
122 Balance sheets
123 Statement of changes
in equity
125 Cash flow statements
126 Notes on the financial
statements
191 Accompanying information
205 Independent auditor’s report
32 Financial overview
114 Other statutory information
IBC Shareholder information
40 The weather
116 Statement of Directors’
42 Wholesale overview
50 Networks overview
56 Retail overview
(including Enterprise)
responsibilities in respect
of the Annual Report and
the financial statements
117 SSE’s financial
results explained
At SSE our purpose is to
provide the energy people
need in a reliable and
sustainable way.
We’re involved in producing, distributing and supplying electricity
and gas, as well as other energy-related services, to homes and
businesses in Great Britain and Ireland. SSE is the only company
listed on the London Stock Exchange with such a balance of
energy businesses.
We are committed to creating and sustaining long-term value
for our shareholders and our customers.
sse.com/investors
1. Strategic Report
2.
3.
A commitment to our shareholders
We believe that our first responsibility
to shareholders is to give them a
return on their investment through
the payment of dividends.
SSE has delivered a dividend increase
every year since 1999. Not only that,
but we rank well among continuing
FTSE 100 companies for Total
Shareholder Return over that period.
SSE’s financial objective is to increase
the dividend every year by at least
Retail Price Index (RPI) inflation.
For more on SSE’s dividend policy
see page 9
Strategic Report
Overview
Full-year dividend per share
89.4p
+1.1% compared with 2014/15
Adjusted profit before tax*
£1,513.5m
-3.3% compared with 2014/15
Adjusted earnings per share*
119.5p
-3.7% compared with 2014/15
*
See full explanation of adjusted profit before tax and adjusted earnings per share on pages 117 and 118.
SSE’s strategic framework for achieving its financial objective is to deliver:
Efficient operations
Efficient operations are how SSE serves its customers to fulfil its core purpose. At the heart
of SSE’s business are its core operations. In 2015/16 it produced 27,776GWh of electricity
output from thermal and renewable power stations; safely delivered electricity to 3.7 million
homes and businesses through its distribution networks; and, supplied electricity and gas
to over 8.2 million domestic and business customer accounts in GB and Ireland.
Disciplined investment
Central to SSE’s strategy is disciplined investment in a balanced range of businesses across
the energy sector. In 2015/16 SSE invested £1.62bn before proceeds from disposals. SSE’s
strategy avoids becoming over-exposed to any one part of the energy sector but pursues
investment opportunities where most appropriate.
A strategy to deliver
long-term success
SSE’s strategy is about how the
company manages all of the
issues that influence energy
provision; how it fulfils its core
purpose of providing the energy
people need; and how it achieves
its principal financial objective of
increasing annually the dividend
payable to shareholders by at
least RPI inflation.
For more on SSE’s strategic framework and how
it measures its performance see pages 8 to 15
Balanced businesses
SSE has reportable segments covering Wholesale, Networks and Retail businesses
(including Enterprise, which is a leading provider of integrated energy solutions
for the public and private sectors). This gives SSE balance and a diversity of business
activity across the energy sector.
1
Strategic Report
Chairman’s introduction
Working to fulfil SSE’s
core purpose
SSE’s core purpose is to provide the energy people need in a
reliable and sustainable way. In fulfilling this purpose, SSE requires
the support of shareholders, to whom this report is addressed.
It summarises SSE’s performance in 2015/16 and looks ahead
to 2016/17 and beyond.
Total recordable injury rate
per 100,000 hours worked
0.23
0.23
0.20
2014
2015
2016
Carbon emissions (Carbon dioxide equivalent
(Co2e) 000’s tonnes)
25,396
16,774
13,066
2014
2015
2016
SSE’s economic contribution
to UK GDP in 2015/16 – £bn
9.22
8.81
8.87
2014
2015
2016
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SSE plc Annual Report 2016
In my role as SSE’s Chairman I’ve had the
privilege of seeing many aspects of the
Company’s operations first hand. I’ve met line
engineers in Inverness, meter readers in Havant,
apprentices in Cardiff and front line customer
service teams in Dublin. I’ve also seen electricity
transmission lines replaced, visited hydro stations
and wind farms and seen innovation in action as
the Company moves to the digitalisation of its
customer service.
All of this has demonstrated to me the scale of
SSE’s operations and the responsibilities that
shareholders, customers and society have
entrusted in the Company to fulfil its core purpose.
It has also reinforced my view of the need for SSE
to maintain a clear strategic framework to stand it
in good stead for the long term.
Changing operating environment
This is especially critical as I complete my first
year as SSE’s Chairman amidst the backdrop of
an operating environment which has presented
a range of challenges, some more expected
than others.
The year saw the publication of the provisional
remedies from the Competition and Markets
Authority (CMA) into the supply and acquisition
of energy, sustained falls in commodity prices
affecting gas production, persistently challenging
market conditions for gas-fired power stations
and continued changes to the regulatory and
legislative frameworks that each of SSE’s
businesses operate within. Each of these subjects
is covered in detail in this Strategic Report.
Against this backdrop, the Board’s role is to
ensure that shareholder value is increased over
the medium and long term, and we place
customers at the heart of everything we do. We
understand that change is constant and is to be
expected as the societies SSE operates within seek
to provide secure, affordable and clean supplies of
energy for homes and businesses. Change of this
scale brings risks but also opportunities.
A strategy to create long-term value
SSE is well-positioned in this changing operating
environment. The company is built on strong
foundations and operates with a clear strategic
framework comprising a balanced range of
businesses in core markets, and a commitment
to efficient operations and disciplined
investment. As the broadest-based energy
company in the GB and Ireland markets this
strategic framework ensures that SSE has a range
of opportunities both to invest in new assets
and develop new customer propositions.
Critically, this strategy also enables SSE to deliver
its financial objective to provide shareholders with
annual increases in divided payments, of at least
RPI inflation. This is a long-standing financial
objective which recognises that shareholders
have either directly invested in SSE or, as owners
of the Company, have enabled it to borrow
1. Strategic Report
2.
3.
SSE is well-positioned
in this changing operating
environment. The Company
is built on strong foundations
and operates with a clear
strategic framework
comprising a balanced
range of businesses in core
markets, and a commitment
to efficient operations and
disciplined investment.
money from debt investors to finance investment
in the assets that help it to fulfil its core purpose.
SSE’s business has built a platform for dividend
growth. I am pleased therefore that the Board
is recommending a final dividend that will take
the full-year dividend for 2015/16 to 89.4 pence
per share.
A company built on values
and doing the right thing
In fulfilling its strategy SSE’s values are as
important as ever. A company’s values are the
bedrock of how it operates and the Board is
acutely aware of the scrutiny SSE is under and
the expectations that shareholders, customers
and employees, as well as wider society, place
upon it. For SSE companies don’t just need to
fulfil their core purpose or deliver their financial
objective; they must do so in a responsible
manner that provides the basis for continued
business success and this is the starting point
for any commercial decisions we take. This is
acknowledged throughout SSE and is integral
to the delivery of the financial objective,
the strategic framework and reinforces
the commitment to shareholder value.
Building a team for
future business success
SSE also values the people who work for it. They
are its greatest asset. Their human capital has
been borrowed from society and enables it to
operate and grow the business. The Company’s
ethos regarding its people is therefore very
deliberate; SSE seeks to create sustainable jobs
and invest in its employees. As well as a robust
and talented leadership team in my role as
Financial highlights
Chairman I am fortunate enough to meet
members of the SSE team across the UK and
Ireland. It is at times humbling and always
engaging to see the commitment to their
work, their customers and their colleagues.
Indeed, the decision to invite BBC television
cameras into SSE this year to film a documentary
of its operations conforms to the bold decision-
making and transparent approach to its affairs
which SSE always seeks to adopt.
Delivering for investors
and customers alike
In summary, 2015/16 was another solid year
of efficient performance and advancement.
From restoring customers’ power safely and
efficiently following the severe storms over
the winter, through to the investment in new
assets to balance the business, the completion
of Beauly-Denny one of the highest and longest
electricity transmission lines in the UK, and
leading the energy supply industry in customer
complaint handling, SSE has continued to deliver
for shareholders and customers alike.
The operating environment has at times
brought challenges and these will continue
for the foreseeable future as the impact of
the many external influences on SSE makes
itself felt. Nevertheless, SSE has the strategy,
values, robust management and a team of
talented people required to meet those
challenges, fulfil its core purpose and
deliver for shareholders and customers.
Richard Gillingwater CBE
Chairman
Dividend per share – pence
Adjusted earnings per share* – pence
119.5p -3.7%
Adjusted profit before tax* – £m
£1,513.5m -3.3%
86.7
88.4
89.4
123.4
124.1
119.5
1,551.1
1,564.7
1,513.5
2014
2015
2016
2014
2015
2016
2014
2015
2016
Wholesale operating profit – £m
£442.5m -6.6%
Networks operating profit – £m
£926.6m -1.1%
Retail operating profit – £m
£455.2m -0.4%
634.6
920.3
936.8
926.6
456.8
455.2
473.8
442.5
327.1
2014
2015
2016
2014
2015
2016
2014
2015
2016
3
Strategic Report – Our business and performance
Our business explained
Providing
the energy
people need
SSE’s core purpose is to provide the energy people
need in a reliable and sustainable way. It does this
through three principal business segments: Wholesale,
producing, generating and trading electricity and gas;
Networks, transmitting and distributing electricity
and gas; and Retail (including Enterprise), supplying
electricity and gas and related services to homes and
businesses. SSE is the only company listed on the
London Stock Exchange involved in such a broad
range of energy businesses.
1
3
2
Gas
Electricity
1.
Gas production
Extracting natural gas from
fields in the North Sea and west
of Shetland for use onshore.
2.
Energy portfolio
management and
electricity generation
Using turbines to convert energy
from gas, oil, coal, water and
wind to generate electricity and
managing energy contracts.
Wholesale
Market-based
4
SSE plc Annual Report 2016
4
3.
Gas storage
Using caverns to store large
volumes of natural gas under
ground for use at a future date.
4.
Gas distribution
Using pipes to distribute
gas from the transmission
network to homes, work
places and other premises.
Networks
Economically-regulated
1. Strategic Report
2.
3.
Wholesale 1-3
Networks 4-6
Retail 7-9
Sustainably sourcing
and producing energy
SSE provides energy and related services
for customers in wholesale energy markets
in Great Britain and Ireland. It delivers this
through Energy Portfolio Management
and Electricity Generation, Gas Production
and Gas Storage. Amongst other things,
it is a leading generator of electricity from
renewable sources across the UK and Ireland.
Safely delivering energy
to homes and businesses
SSE has an ownership interest in the energy
networks businesses in electricity transmission
in the north of Scotland, electricity distribution
in the north of Scotland and southern central
England and in gas distribution in Scotland
and southern England. These ‘regionally-
defined’ businesses are subject to economic
regulation by Ofgem.
Supplying energy and essential
services to customers
SSE supplies electricity, gas and related
services such as telecoms in markets in Great
Britain and Ireland. It is focused on attracting
and retaining customers through excellent
service and a brand people trust. It also
incorporates SSE Enterprise, which brings
together key SSE services for industrial,
commercial and public sector customers.
For more information see pages 42 to 49
For more information see pages 50 to 55
For more information see pages 56 to 65
6
7
5
8
9
5.
Electricity
transmission
Using higher voltage lines and
cables to transmit electricity
from generating plant to the
distribution network.
6.
Electricity
distribution
Using lower voltage lines and
cables to distribute electricity
to homes, work places and
other premises.
7.
Energy supply
Retailing gas and electricity
to household, small business
and industrial and
commercial customers.
8.
Energy-related
services
Providing energy-related
products and services
to households and
small businesses.
9.
Enterprise
Bringing together key
SSE services for industrial,
commercial and public
sector customers.
Networks
Economically-regulated
Retail
Market-based
5
Strategic Report – Our business and performance
Chief Executive’s statement
Delivering a long-term
strategic framework with
a clear financial objective
In 2015/16 SSE again delivered what it said it would in an operating
environment that presented a number of complex issues. SSE
continues to operate within a long-term strategic framework based
on efficient operations, disciplined investment and the maintenance
of a balanced range of energy businesses. This positions the
business well for future evolution and change in energy provision
while also enabling it to identify opportunities for growth as the
overall operating environment continues to become clearer.
Delivering the core
purpose in 2016/17
SSE’s strategic priorities for
2016/17 include:
- The safe and efficient
management of assets;
- The delivery of high quality
customer service and propositions
to meet the increasingly changing
needs of customers;
- The efficient and disciplined
investment in new assets or the
upgrading of existing assets;
- Taking further steps to increase the
agility, efficiency and flexibility of
the business segments;
- Constructive engagement with
regulators and legislators as the
operating environment evolves; and
- The delivery of a full-year dividend
increase that at least keeps pace
with RPI inflation.
6
SSE plc Annual Report 2016
Maintaining a clearly-defined
strategic framework
SSE’s 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; and
- 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.
The energy markets in GB and Ireland are
undergoing technological, regulatory and
demographic changes, yet SSE believes that its
strategic framework provides the foundations
and the flexibility to successfully navigate through
a changing market. Its focus is to provide
customers and 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.
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 £8bn.
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,
1. Strategic Report
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3.
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 support the delivery
of annual increases in the dividend of at least
RPI inflation and the maintenance of an
appropriate level of dividend cover.
Earning profits in a responsible way
SSE provides people with an essential service
and therefore has embedded a responsible
approach into its business operations, set out in
detail on pages 20 to 29 of this Report. SSE’s
responsible approach to its business conduct
helps to ensure it is able to fulfil its core purpose
over the long-term. 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.
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.
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 a 11.5% increase in output of electricity
from renewable sources. However, overall
operating profit fell by 6.6% due to a 94%
reduction in Gas Production profits, reflecting
the very challenging market conditions, and a
continuing low contribution from Gas Storage.
The operating environment for Gas Production,
thermal generation plant and Gas Storage
remains persistently challenging due primarily
to changes in commodity prices.
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 significant
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 and a slight reduction in the
profitability of SGN.
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 pipelines 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. 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 for 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
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 is acknowledged
as a principal risk. The energy sector issues SSE
continues to manage include:
- A sustained fall in commodity prices:
Commodity prices have an inherent influence
on SSE’s business. Whilst the fall in commodity
prices over the 18 months to March 2016 has
had implications across the SSE Group, the
balance of the business and the long-term
nature of its assets and investments, mean that
it is well-placed to manage this risk. 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. 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 asset
impairments taken 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. The UK Government is
planning changes to the way the auction
functions which should, over time, lead to
a more effective mechanism.
- 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, SSE
welcomes Ofgem’s recent decision that it
would not conduct a mid-period review into
SHE Transmissions’ RIIO T1 price control and
remains committed to delivering against its
outputs while ensuring value for money for
the remainder of RIIO T1.
- 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. The proposed remedies focus towards
engaging customers in the energy retail
market. SSE supports many of the remedies,
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.
Furthermore, SSE provided a view on the risks
posed by the forthcoming referendum on the
UK’s continued membership of the European
Union in its Notification of Close Period
Statement on 24 March 2016.
SSE believes that it has a duty to shareholders
and customers to maintain a constructive
approach to its engagement with political
parties, regulators and governments within
the jurisdictions in which it operates.
Alistair Phillips-Davies
Chief Executive
7
Strategic Report – Our business and performance
Our Strategic Framework
Creating
long-term value
SSE’s strategy is about how the company manages the external issues that influence
energy provision; how it fulfils its core purpose of providing the energy people need;
and how it achieves its principal financial objective of increasing annually the dividend
payable to shareholders by at least RPI inflation.
Strategy
Our core purpose is to provide
the energy people need in a reliable
and sustainable way.
SSE’s long-term strategy for achieving its financial objective is to
deliver the efficient operation of, and investment in, a balanced range
of economically-regulated and market-based businesses in energy
production, storage, transmission, distribution, supply and related
services with a geographic focus on the UK and Ireland.
See pages 10 and 11 for how we measure our strategic performance.
Finance
Our financial objective is to increase
annually the dividend payable to
shareholders by at least RPI inflation.
See pages 32 to 39 for more information.
Responsibility
SSE believes that to be successful over
the long term, companies must operate
responsibly. For this reason, SSE operates
under a set of core values known as the
SSE SET.
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SSE plc Annual Report 2016
1. Strategic Report
2.
3.
Efficient operations
Efficient operations are how SSE serves its
customers to fulfil its core purpose. At the heart
of SSE’s business are its core operations. In
2015/16 it produced 27,776GWh of generation
output from thermal and renewable power
stations; safely delivered electricity to 3.7
million homes and businesses through its
distribution networks; and supplied electricity,
gas and related services to over 8.5 million
customer accounts in GB and Ireland.
An operational focus for SSE means:
- a focus on the safety of its people;
- operating its assets safely and using
resources effectively, efficiently and
sustainably; and
- putting the current and future needs of
customers at the heart of everything it does.
Disciplined investment
Central to SSE’s strategy is disciplined
investment in a balanced range of businesses
across the energy sector. In 2015/16 SSE
invested £1.62bn before proceeds and
disposals. SSE’s strategy avoids becoming
over-exposed to any one part of the energy
sector but pursues investment opportunities
where most appropriate.
SSE’s investments are:
-
in line with its commitment to strong
financial management;
- complementary to its existing portfolio
of assets; and
Balanced businesses
SSE has reportable segments covering
Wholesale, Networks and Retail businesses
(including Enterprise, which provides
services for commercial and public sector
organisations). This gives SSE a diversity of
business activity across the energy sector.
SSE’s balance is maintained by:
- operating and investing in a balanced
range of energy assets and businesses;
- maintaining a range of opportunities to
develop new assets and customer
propositions; and
- developing a balanced range of future
- governed, developed and executed in an
investment options.
efficient and effective manner.
Dividend
SSE’s financial focus is not on maximising
short-term profits but on delivering an annual
dividend increase to shareholders, of at least
RPI inflation, as shareholders’ objective for
investing capital into companies is to secure
a return.
Dividend cover
Dividends are paid out of earnings and,
over the long term, earnings should increase
to support dividend growth. SSE maintains a
long-term target for dividend cover of above
1.4 times and closer to 1.5 times based on
dividend increases that at least keep pace with
RPI inflation.
Balance sheet
SSE believes it should maintain a strong
balance sheet, illustrated by its commitment
to the current criteria for a single A credit
rating. A strong balance sheet enables it to
borrow money from debt investors at
competitive rates and therefore take
long-term decisions.
Safety
All accidents are preventable, so we
do everything safely and responsibly
or not at all.
Sustainability
We are ethical, responsible and balanced,
helping to achieve environmental, social
and economic well-being for current and
future generations.
Excellence
We strive to get better, smarter and
more innovative and be the best in
everything we do.
Service
We put the current and future needs
of customers at the heart of everything
we do.
Efficiency
We keep things simple, do the work
that adds value and avoid wasting
money, materials, energy or time.
Teamwork
We support and value our colleagues
and enjoy working together as a team
in an open and honest way.
9
Strategic Report – Our business and performance
Our performance
Measuring the results
of SSE’s strategy
SSE’s strategic, financial
and responsibility
frameworks are mutually
dependent and reinforcing
and their results are
measured through a
series of key indicators.
Financial Framework Strategic Framework
Disciplined investment
Balanced businesses
Dividend per share – pence
Investment and capital
expenditure – £m
Investment and capital
expenditure composition
86.7
88.4
89.4
1,582.5
1,475.3
1,618.7
7.2%
13.4%
28%
51.4%
2014
2015
2016
2014
2015
2016
Networks
Retail (including Enterprise)
Wholesale
Other
Adjusted profit before tax* – £m
Net debt and hybrid capital – £m
Operating profit composition
25%
24%
51%
Networks
Wholesale
Retail (including Enterprise)
1,551.1
1,564.7
1,513.5
7,642.8
7,568.1
8,395.0
2014
2015
2016
2014
2015
2016
Adjusted earnings per share*
– pence
Networks Regulated Asset Value
(RAV) – £bn
123.4
124.1
119.5
6.82
7.35
7.96
2014
2015
2016
2014
2015
2016
Dividend cover – times
1.42
1.40
1.34
10 SSE plc Annual Report 2016
2014
2015
2016
Strategic Framework
1. Strategic Report
2.
3.
Wholesale
Networks
Retail
Operating profit – £m
Operating profit – £m
Operating profit – £m
Responsibility
Framework
Total recordable injury rate
per 100,000 hours worked
634.6
473.8
442.5
920.3
936.8
926.6
456.8
455.2
0.20
0.23
0.23
327.1
2014
2015
2016
2014
2015
2016
2014
2015
2016
2014
2015
2016
Renewable generation output
– TWh
Customer minutes lost (north)
Energy customer account
numbers – millions
9.0
8.5
9.7
77
69
55
9.10
8.58
8.21
UK employee productivity
(direct contribution to GDP per
capita) – £
139,900
129,700
115,700
2014
2015
2016
2014
2015
2016
2014
2015
2016
2014
2015
2016
Thermal generation output – Twh Customer minutes lost (south)
Energy customer complaints
to third parties
UK tax paid (profit, property,
environment and employment
taxes) – £m
26.7
67
57
1,528
1,416
1,208
506.2
453.9
431.6
18.9
18.1
41
2014
2015
2016
2014
2015
2016
2014
2015
2016
2014
2015
2016
Gas production output
– million therms
Electricity distribution estimated
incentives performance – £m
Aged debt – £m
Carbon emissions (Carbon dioxide
equivalent (Co2e) 000’s tonnes)
414.1
397.9
403.0
c23.0
117.8
106.2
103.2
25,396
2014
2015
2016
N/A
0
2014
2015
2016
2014
2015
2016
2014
2015
2016
c6.5
16,774
13,066
11
Strategic Report – Our business and performance
Our performance
Delivering against SSE’s
strategic framework
in 2015/16
Efficient operations
Leading the industry in energy
customer complaint handling
In its Retail business, SSE takes a rigorous and
proactive approach to customer complaint
handling. Figures published by the Energy
Ombudsman in February 2016 showed that only
four out of 100,000 customer complaints were
accepted for further investigation in the first three
quarters of the year, meaning 99.969% of
customer issues were resolved by SSE, in house,
ensuring that customer complaints are resolved
efficiently and satisfactorily.
Reducing the number and
duration of power cuts
The focus of the RIIO ED1 price control has
been delivering efficient operations and
the best possible experience for electricity
distribution customers. Over the year the
Distribution networks withstood severe
flooding and 12 Atlantic storms. Restoring
power safely and efficiently is the priority
and continued investment in automation,
network reinforcement and tree cutting saw
reductions in both Customer Interruptions and
Customer Minutes Lost in 2015/16 compared
with the previous year and to record low levels.
12 SSE plc Annual Report 2016
Maintaining a flexible range
of electricity generation assets
The focus on efficient operations in the
Wholesale business meant that after 50 proud
years of service the Ferrybridge coal-fired power
station ceased operations due to its worsening
economic outlook. Elsewhere, in November
2015 the 735MW Keadby gas-fired power station
came out of deep mothball to return to service
and make a contribution to the maintenance of
the UK electricity system. SSE continues to move
from a coal and gas weighted portfolio towards
one comprised largely of gas and renewables.
Disciplined investment
Balanced business
Working with businesses to
meet their energy needs
SSE Enterprise incorporates six of SSE’s
businesses: Contracting, Energy Solutions,
Rail, Slough Heat and Power, Telecoms and
Utilities. The utilities business has ambitious
plans to build on its current portfolio of district
heat networks and maintain its position as one
of the UK’s leading heat network providers.
This year SSE Enterprise Utilities delivered
a low-carbon, multi-utility solution at the
Adding to the value of
electricity networks
The replacement Beauly-Denny electricity
transmission line was energised in November
2015 providing the potential for new low-
carbon generation to connect to the grid,
as well as network resilience and secure supplies
to consumers. There will be further investment
in Transmission and the Caithness-Moray
transmission reinforcement will be SHE
Transmission’s flagship project and its largest
single capital investment to date. It is scheduled
to be operational by the end of 2018.
Continued investment in
renewable energy
SSE operates a renewable energy portfolio
comprising onshore wind, offshore wind and
conventional hydro. In 2015/16 SSE expanded
its renewables portfolio with 67MW of new
onshore wind commissioned and a further
548MW in construction, including the Galway
Wind Park, Ireland’s largest wind farm. SSE
also progressed the Beatrice Offshore Wind
Farm. The UK Government’s decision to close
the Renewables Obligation (RO) for new
onshore wind projects from March 2016 has
affected SSE’s onshore wind development
Riverlight regeneration development in
London, providing the installation and ongoing
ownership, operation and maintenance of the
water, heat, gas and electricity networks. At the
same time, SSE grew its market share in Business
Energy Supply during 2015/16 and it continues
to listen to its business customers, act on their
needs and create enduring partnerships.
Securing future gas supplies
at Greater Laggan
In line with its strategy for maintaining a
balanced range of energy businesses, in July
2015 SSE announced the acquisition from
Total UK Ltd of a 20% interest in four gas fields
collectively known as the Greater Laggan Area,
North West of the Shetland Islands, along with
a 20% interest in the new Shetland Gas Plant.
Gas production started in February 2016 from
pipeline. Two notable projects – Strathy North
(up to 133MW) and Stronelairg (up to 240MW) –
will not progress as planned as they did not
qualify for the government’s grace period
transition arrangements. SSE engaged
constructively with the UK Government during
the closure of the RO and sees continued
opportunities for renewables, chiefly though
potential expansion in its portfolio of offshore
wind assets.
the Laggan fields which could produce up
to 90,000 barrels of oil equivalent a day at
peak production. Despite the current impact
of lower gas prices, long-term nature of the
assets will help to secure energy for customers
and meet the needs of gas-fired power stations
contributing to security of electricity supply.
13
3. 2. 1. Strategic Report Strategic Report – Our business and performance
Our performance
Managing key issues
affecting energy provision
To meet its core purpose of providing the energy people need, SSE has to
manage key issues and changes in its operating environment in the GB and
Ireland energy sectors.
The energy market is constantly changing.
How markets look today differs from how
it looked 10 years ago; 10 years from now it will
look different again. There are several factors
causing this, the principal cause has been the
desire to decarbonise electricity generation,
whilst providing consumers with secure and
affordable energy.
In fulfilling its core purpose and delivering its
strategy SSE has to understand and manage
a range of issues in the energy sector that are
external to its business. It does this through its
risk management processes (see pages 16 to 19),
acting responsibility and engaging with external
stakeholders (see pages 20 to 38) and efficient
operations in each of its business segments
(see pages 42 to 65).
Some of the key issues affecting energy
provision and, therefore, SSE’s strategic focus on
operations and investments are set out below.
Consumption
The affordability of energy for households
and businesses depends on several factors:
their income, the efficiency with which they
are able to use energy and the price of the
energy itself.
Improving the efficiency with which energy is
used has been and remains a key objective of
policy-makers. In 2015/16 consumption of gas
– on a weather corrected basis – was 2.7%
down for SSE’s customers. At the same time,
due to falling wholesale gas prices the UK
Government calculates that average standard
gas bills for UK domestic consumers fell by
5.1% in 2015, compared to 2014. Against this
background, SSE implemented its third
successive price reduction for gas customers
on its standard tariff in 2016, three months
prior to the end of its 27-month price freeze.
-12%
Reduction in SSE’s gas prices for a typical
household customer compared to 2013.
Competition
SSE’s market-based Wholesale and Retail
(and Enterprise) businesses are subject to
significant competitive forces. For example,
the number of energy suppliers in the
GB Energy Supply market has increased
significantly in recent years and as the market
becomes more competitive and customers
switch, retaining and attracting customers
presents challenges. As a result, SSE’s Retail
business must continue to develop a range
of products, services and a consumer
brand, as well as continued industry leading
customer service, for all of its customers.
Separately, the UK government and regulator
are developing new ways of introducing
elements of competition into economically-
regulated Networks businesses.
Decarbonisation
The Paris climate conference in December
2015 saw 195 countries reaffirm the global
commitment to decarbonisation. Therefore,
SSE continues to operate in markets with an
overarching drive to decarbonise electricity
generation and reduce reliance on fossil fuels.
The UK Government has announced plans
to phase out coal-fired power stations in the
next decade and invest in cleaner sources of
energy production such as renewables, gas
and nuclear. For SSE this means continuing to
invest in lower-carbon sources of energy
such as gas and renewables, and the network
infrastructure to support cleaner forms
of energy.
476,528
The number of customers who switched
electricity supplier in the GB market in
March 2016, the highest recorded since
November 2013.
45.5%
In 2015 calendar year low carbon
electricity’s share of electricity generation
in the UK reached a record high (up around
8% on 2014), due to nuclear generation
and higher renewables generation
following increases in capacity.
14 SSE plc Annual Report 2016
1. Strategic Report
2.
3.
Innovation
The energy sector is undergoing constant
innovation and technological change
illustrated by the UK National Infrastructure
Commission’s Smart Power report, published
in March 2016. This change ranges from
regulatory incentives to innovate in the
energy networks to prepare for future
changes such as the greater deployment of
Electric Vehicles; the continued innovation
in the size and the scale of offshore wind
turbines; and, the deployment of smart
meters to every home and business in GB.
These innovations will transform the sector
and each of SSE’s businesses has to focus
on the benefits that such innovations can
bring to customers.
Integration
The energy markets in GB and Ireland are
increasingly integrated and impacted by
global developments. SSE’s markets are
integrated through the Internal Energy
Market, comprising EU Member States
and others, and capacity is increasingly
physically interconnected between the GB
and mainland Europe. At the same time, the
price of commodities such as oil, gas and
power are affected by global factors such
as geopolitical developments between oil
producing countries and macro-economic
issues. This integration will continue and SSE
has to understand and manage the impact
of these changes on its business operations
and consumers.
Regulation
SSE operates in countries with stable
regulatory regimes or where its operations
are politically mandated. The energy market
is subject to high levels of interest and
intervention from independent energy
regulators and governments at both national
and European levels. SSE works constructively
to engage in public policy debates and
represent the interests of its customers
and shareholders. Regulatory changes have
included the near conclusion of the
Competition and Markets Authority
investigation into the supply of energy and
the development of OFGEM’s regulatory
regime for electricity Transmission and
Distribution networks.
183,000
-37%
SSE had installed over 183,000 smart
meters by 31 March 2016. It has a
regulatory obligation to offer a
smart meter to every customer
by December 2020.
Reduction in average NBP Day Ahead gas
prices in March 2016 compared with
average during March 2015.
8 years
The duration of the Price Control
settlements for the five economically
regulated energy network companies that
SSE has an ownership interest in.
For more on energy affordability, development and change in the market and politics, regulation
and compliance see pages 16 to 17 on Group Principal Risks and their mitigation.
15
Strategic Report – Our business and performance
Risk management
Overview
Managing risk to deliver
long-term value
To help ensure that it is able to provide the energy people need and deliver
value over the long term, SSE has continued to develop its Risk Management
Framework, including its Principal Risks and its Risk Appetite Statement.
For further detail on how SSE manages risk please see the supplementary
Group Risk Report.
The component parts of the framework and
how it interacts with the wider system of internal
control are illustrated in the diagram below.
The Group Risk Management and Internal
Control Policy is set by the Board and outlines
the principles and responsibilities which
underpin SSE’s approach to managing risk.
The Board performs a review of the
effectiveness of the system of internal control
annually. This review is supported by a report
from the Director of Group Risk, Audit and
Insurance detailing the activity and operation
of the system during the year. For further detail
on the outcome of the review please see the
Directors’ Report on page 78.
A new Principal Risk Self Assessment process
was introduced during 2015/16. Executive level
Committees are now formally identified as
owners of each Principal Risk and are required
to assess these risks and their associated
controls annually.
Following review, the number of Principal Risks
to the Group has been reduced from 10 to 9 with
Funding Shortfall and Pensions Liabilities being
combined into a single risk – “Financial Liabilities”.
The full list of Principal Risks is on page 18.
The Board determines the nature and extent
of risk that the Group is willing to take in pursuit
of its strategy and this is detailed in the Risk
Appetite Statement.
In order to support its statement of longer
term viability as required by the updated UK
Corporate Governance Code, the Board has for
the first time performed a Viability Assessment.
This assessment is based on stress testing the
Group’s financial model using scenarios relating
to SSE’s Principal Risks. The resulting Viability
Statement can be found on page 17.
As part of the ongoing assessment of the Group’s
Principal Risks, Key Risk Indicators are reported
to the Board on a regular basis. These provide
high level insight into the key factors which are
likely to influence SSE’s exposure to those risks.
System of internal control
Corporate Governance
Framework
For more information see page 71
k
r
o
w
e
m
a
r
F
c
g
e
t
a
r
t
S
i
Board
Board Committees
Executive Committee
Executive Sub-
Committees
Divisions
Corporate Support
Corporate Support
Functions
16 SSE plc Annual Report 2016
Risk Management
Framework
Group Risk Management and
Internal Control Policy
Review of the Effectiveness of the
System of Internal Control
Principal Risk Self-Assessment
Risk Appetite Statement
Viability Assessment
Key Risk indicators
Divisional Risk Approach
Assurance Evaluation
Risk Blueprint
Assurance
Framework
External Audit
Internal Audit
Group Compliance
Business
Assurance
The Group Risk Management and Internal
Control Policy requires the Managing Director
of each Division to implement a Divisional Risk
Approach to support their business in identifying,
understanding and managing its key risks.
Each division carries out an annual Assurance
Evaluation with key Group policies, with the
output and any areas of required improvement
reported to the Chief Executive.
The Risk Blueprint provides guidance on best
practice in risk management and decision-
making and is designed to be used by people
at all levels across the organisation.
Risk Appetite Statement
No business is risk-free, and indeed the
achievement of SSE’s goals necessarily involves
taking risk. SSE will however only accept risk
where it is appropriate, well understood,
can be effectively managed and offers
commensurate reward.
Each of SSE’s business divisions has a distinctly
different risk profile. For example, the Networks
business is heavily regulated and is characterised
by stable, inflation linked cashflows whereas the
Wholesale business is heavily exposed to energy
market and commodity risk. Affordability,
transformation and political risk particularly affect
the Retail business, while Enterprise is exposed to
the risks that come with rapid growth in a highly
competitive market place.
The key elements of SSE’s strategy – including
the diversity of energy businesses within the SSE
Group described above, as well as its financial
framework – are fully reflective of its risk appetite:
- SSE seeks to avoid over-exposure to any
single part of the energy sector and therefore
maintains a balanced range of economically
regulated and market-based energy businesses;
- production, storage, transmission, distribution,
supply and related services provide a balanced
portfolio of business activities whilst keeping
the depth of focus on a single sector –
energy; and
- Great Britain and Ireland gives SSE a
geographic markets focus and a clear
understanding of the risks and opportunities
in those markets.
In areas where SSE is exposed to risks for which
it has little or no appetite for, even though it has
implemented high standards of control and
mitigation, the nature of these risks mean
that they cannot be eliminated completely.
In determining its appetite for specific risks,
the Board is guided by three key principles:
1. Risks should be consistent with SSE’s strategy,
financial objective and core values – safety is
SSE’s number one value and it has no appetite
for risks brought on by unsafe actions;
2. Risks should only be accepted where
appropriate reward is achievable on the
basis of objective evidence; and
The elements which comprise the Risk
Framework are aligned to different levels of the
Corporate Governance Framework as outlined
in the diagram. Outputs from the Strategic
Framework, particularly the Group’s objectives
and the SSESET of values, form the basis of all
activity within the Risk Management Framework.
This provides a focus for the management of
risk, defined as anything which can threaten
the achievement of objectives or compromise
SSE’s values. Together with the Group Policy
Framework, outputs from the Risk Framework
provide the foundation for the work of the
teams within the Assurance Framework in
providing objective assessments of the
control environment.
Policy
Framework
Group policies
Divisional Policies
and Procedures
1. Strategic Report
2.
3.
3. Risks should be actively controlled and
monitored through the appropriate allocation
of management and other resources.
The Board has overall responsibility for
determining the nature and extent of the risk
it is willing to take and for ensuring that risks
are managed effectively across the Group.
Viability Statement
As required within provision C.2.2 of the UK
Corporate Governance Code, the Board has
assessed the prospects of the Company over
the next 3 financial years to the period ending
March 2019. The Directors have determined
that as this time horizon aligns with the Group’s
current capital programme and is within the
strategy planning period, a greater degree of
confidence over the forecasting assumptions
modelled can be established.
In making this statement the Directors have
considered the resilience of the Group taking
into account its current position, its Risk Appetite,
the Principal Risks facing the Group and the
control measures in place to mitigate each of
them. In particular, the Directors recognise the
significance of SSE’s strong balance sheet and
committed lending facilities of £1.5bn which
could be drawn down in most circumstances.
The Group also has a number of highly attractive
and relatively liquid assets – including a regulated
asset base which benefits from a strong regulated
revenue stream as well as the operational wind
portfolio – which provide flexibility of options.
Stress tests incorporating severe but plausible
scenarios relating to the Principal Risks have been
assessed against the forecast cash flow of the
business. The scenarios selected were those that
most have the potential to affect SSE’s ability to
deliver its core purpose of providing the energy
people need in a reliable and sustainable way.
Upon the basis of the analysis undertaken, the
Directors have a reasonable expectation that
the Group will be able to continue to meet
its liabilities as they fall due in the period to
March 2019.
17
Strategic Report – Our business and performance
Risk management continued
Summary of Principal Risks
Group Principal Risks
The Board has a responsibility to identify key
risks which could threaten the Company’s
business model, future performance, solvency
or liquidity, and determine how these Principal
Risks will be managed or mitigated.
During 2015/16, SSE introduced a new Principal
Risk Self-Assessment process to support this
responsibility, assigning ownership of each
Principal Risk to the Executive Committee –
or where more appropriate to one of its formal
sub-committees. The owning Committee is
responsible for assessing any changes in the
risk and the effectiveness of the controls in
place, reporting on these to the Board.
Emerging risks are also considered as part of
this assessment to help identify new exposures
as early as possible. While a number of risk areas
were identified, after full consideration none of
these was felt material enough to meet the
required threshold to become a Group Principal
Risk. Key elements of some were however
incorporated into existing Principal Risks, with
the descriptions of these being amended
accordingly. For example, “Infrastructure Failure”
has been revised to “Cyber and Networks Failure”
to more explicitly highlight, in particular, the
increasing threat of cyber attack.
After review, the Board has determined that
the list below represents the current Principal
Risks to SSE. Combining ‘Pension Liabilities’
and ‘Funding Shortfall’ into ‘Financial Liabilities’,
reflecting similarities in their nature and impact,
has resulted in the list reducing from 10 risks in
2014/15 to 9 in 2015/16.
Further detail on each of the Principal Risks and
associated controls can be found in the
supplementary Group Risk Report.
The Group Principal Risks are presented here
in alphabetical order:
Commodity
prices
Risk Owner – Risk and Trading Committee (RTC)
The Group is exposed to fluctuations in the physical
volume and price of certain commodities, through (i)
its requirement to match volumes of purchased gas and
electricity with customer demand, and (ii) exposures arising
due to long-term investment in generation and Exploration
and Production (E&P) assets driven by the cost of fuel and
other commodities required for generation, and through
revenues realised from these assets.
Key Mitigations:
- SSE uses Value at Risk (VaR) measures to monitor and
control exposures to commodity price and volume.
Trading limits are set by the Board and managed through
the Risk and Trading Committee (RTC).
- Commodity positions are assessed on a daily basis by a
business risk management function that is independent
of the trading team.
Cyber and
networks
failure
Risk Owner – Executive Committee
SSE’s electricity networks are part of Great Britain’s critical
national infrastructure assets and as such are central to the
functioning of the economy. Additionally, SSE is reliant on a
number of key IT systems to support its ongoing operations.
A loss of these systems could be caused by malicious cyber
attack, software or hardware issues, inadequate investment
in maintenance or by poor operational performance.
Development
and change
Energy
affordability
Risk Owner – Executive Committee
SSE’s strategic focus is the efficient operation of, and
investment in, a balanced range of energy businesses to
support annual dividend growth. SSE strives to be a leading
provider of energy and related services within an industry
where innovation, de-carbonisation and competition are
leading to continual technological advancements and
changes in customer expectations and options. To continue
to achieve this, a number of strategic change programmes
are under way. It is vital that SSE successfully delivers these
to meet the current and future needs of customers in the
most efficient way possible.
Risk Owner – Risk and Trading Committee
SSE is involved in a broad range of energy businesses in
the UK and Ireland including the production, storage,
transmission, distribution and supply of electricity, gas and
related services. The decisions taken in operating these
contribute to the overall cost of energy to the consumer
which is in turn driven by a number of factors including
commodity costs, infrastructure costs and energy sector
overheads. Costs can also be impacted by public policies
aimed at supporting measures for the reduction of carbon
emissions, while increased energy efficiency can lead to
reduced consumption of energy.
18 SSE plc Annual Report 2016
Key Mitigations:
- The Information Security and Privacy Committee
(ISPC) meets quarterly and works to ensure that suitable
technical, process and people security controls are
implemented throughout the Group to protect information,
intellectual property and the systems these reside on.
- SSE is an active member of a number of security forums
including the Energy Emergencies Executive Committee
Cyber Security Sub Group (E3CC) and the Centre for the
Protection of National Infrastructure (CPNI).
Key Mitigations:
- Five year transformation road maps have been developed
by each division to ensure that SSE is investing in the
capabilities and solutions that deliver the greatest benefit.
- The Transformation Governance Framework provides
a consistent process and tool-set to manage change
within the organisation from first principles to benefit
realisation across the Group.
Key Mitigations:
- SSE actively encourages public policy makers to ensure
that non-commodity costs associated with energy
provision and which make up a significant part of the
average bill are allocated fairly.
- The SSE Board approves retail tariff structures
recommended by the RTC. In addition, it approves all
long-term generation investment decisions to ensure
that a diverse portfolio of assets is maintained, limiting
exposure to any one commodity.
1. Strategic Report
2.
3.
Financial
liabilities
Human and
relationship
capital
Major
projects
quality
Politics,
regulation
and
compliance
Risk Owner – Risk and Trading Committee
SSE ensures that it has funds available at all times to
meet its liabilities when these fall due, in both normal and
stressed conditions. Around £1.7bn of medium to long-term
borrowings will mature in the two years to March 2018.
SSE has obligations in respect of three defined benefit
pension Schemes (including SGN) and currently, in aggregate,
there is an actuarial deficit between the current value of the
projected liabilities of these Schemes and the value of the
assets that they hold.
Key Mitigations:
- The Group ensures that committed borrowings and
facilities are available at all times equal to at least 105%
of forecast borrowings over a rolling six month period.
- The Audit Committee formally reviews treasury exposures,
performance and the adequacy of committed borrowing
facilities twice a year.
- The defined benefit pension schemes each have
investment advisors in place who have helped develop
road-maps with the aim of the schemes becoming fully
funded (i.e. no longer reliant on SSE), within fifteen years.
Risk Owner – Executive Committee
SSE’s people are its most valuable asset and it is therefore
essential that the Group retains, attracts and develops
diverse talent and leadership to ensure the continued
success of the business.
SSE expects its people to comply with all legislation,
regulation and internal policies, including the SSESET of
values. The current pace of change, combined with the
inherent complexity of SSE’s activities, makes it increasingly
important that everyone at SSE strives for continuous
improvement and is able to readily question the status quo.
Key Mitigations:
- SSE looks to employ, train, develop and retain a diverse and
talented workforce and provide its people with the support
they need to deliver objectives in a responsible way.
- SSE’s business leaders are required to undertake regular
succession planning reviews. At a Group level, SSE
continues to develop its approach to the management of
talent, identifying the current depth across the organisation
and developing strategies to enhance it.
Risk Owner – Large Capital Projects Committee
SSE continues to deliver its capital investment programme
with a number of major construction and IT projects
nearing completion. Its single biggest construction
project, the Caithness-Moray high voltage transmission
link, is now underway.
Key Mitigations:
- The Large Capital Project Governance Framework
Manual ensures that all material capital investment
projects for the Group are governed, developed,
approved and executed in a consistent and
effective manner.
The operational assets from these projects have long
economic lives, typically between 15 and 30 years but
often greater, and it is therefore essential that these projects
are completed to the quality standards required.
- The Large Capital Projects Services function employs
quality and assurance teams to perform independent
project reviews.
Risk Owner – Executive Committee
The markets in which SSE operates are subject to a high
degree of regulatory and legislative intervention at both
domestic and EU level. Legal and compliance obligations
can change explicitly with the introduction of new or revised
legislation, or implicitly due to evolving interpretation and
legal precedent.
The potential impacts to the Group of the referendum in
June 2016 on the UK’s continued participation in the EU
have been considered against this risk.
Key Mitigations:
- SSE has dedicated Corporate Affairs, Regulation, Legal
and Compliance functions that provide advice and
guidance regarding the interpretation of political,
regulatory and legislative changes to its Divisions.
- The Governance and Disclosure Committee maintains
oversight of key legislative, regulatory and governance
issues. It meets quarterly and is responsible for ensuring
that SSE’s objectives are achieved lawfully, ethically and
with the appropriate corporate oversight.
Safety and the
environment
Risk Owner – Safety, Health and Environment Committee
Safety is SSE’s first core value. By the nature of its operations,
SSE faces a number of significant safety risks – in particular
relating to process safety. A major incident at one of SSE’s
hydro, gas storage or E&P assets could have a material
adverse impact on employees, contractors, members
of the public, the environment and property.
Key Mitigations:
- SSE has crisis management and business continuity plans
in place which are designed for the management of, and
recovery from, significant safety or environmental events.
- For offshore E & P assets where SSE is not the operator,
there are a number of assurance measures in place to
ensure that the proven and approved operator partners
maintain and adopt high standards for their safe
management and operation. This includes regular
engagement across all aspects of the operation,
with an emphasis on safety and technical assurance
audits and verification using both internal and third
party resources.
19
Strategic Report – Embedding responsibility
Doing the right thing
Embedding responsibility
into our business
In order to execute its strategy, meet its business objective and manage
risk over the long term, SSE needs to ensure it operates sustainably and
responsibly. As an energy provider and UK-listed company, SSE’s
environmental, social and economic impacts are significant and SSE
believes it should demonstrate a responsible approach by actively
managing those impacts in order to secure long-term commercial success.
Sustainability highlights
Cutting carbon intensity of electricity
SSE’s most material environmental impact is the emission of carbon dioxide from
the generation of electricity. In line with international and national agreements,
the progressive decarbonisation of SSE’s generation fleet is a long-term aspiration
with a medium term target of having the carbon intensity of its generation by 2020,
compared to 2006. In 2015/16 carbon intensity fell by nearly 16%.
2015/16 Carbon emissions – kg CO2e/MWh
397
474 in 2014/15
For more information see Responsible Operator pages 28 to 29
Understanding the value of people
Understanding the value of SSE’s people is a core component of SSE’s strategy to
develop its human capital. SSE’s employability programme ‘Barnardo’s Works’ has
been a key pipeline of untapped talent since 2008, delivering quantifiable value to
both SSE and the wider community. In 2015/16, SSE published research that
demonstrates this value.
Return on investment
£1:£7.67
For more information see Responsible Employer pages 24 to 26
Contributing to the UK and Irish economies
Demonstrating that SSE’s economic value goes further than financial results, SSE has
quantified, for the 5th year in a row, the economic contribution its activities make to
the UK and Irish Economies.
2015/16 UK Gross Value Added – £bn
2015/16 Ireland Gross Value Added – €m
£8.9bn
£8.8bn in 2014/15
For more information see the Sustainability Report on www.sse.com/beingresponsible
€805m
€966m in 2014/15
20 SSE plc Annual Report 2016
Earning the right to make a profit
The strategic underpinning for SSE’s sustainability
strategy is the understanding that SSE’s core
purpose, is an essential service that people
and businesses need and that has in the past
been provided by the public sector. Therefore
a multiplicity of stakeholders have an interest
in SSE’s activities and the impacts it makes.
In order to retain the right to be commercially
successful over the long term, SSE must be open
and accountable to its customers, employees,
shareholders – as well as the wider society in
which it operates.
Managing risk and building trust
An inadequate response to enhanced public
and stakeholder scrutiny can increase the
risk of change in the number or nature of
compliance requirements as consequence of
intensified political or regulatory intervention:
a principal risk for SSE. SSE’s response to this
challenge is to work to improve its external
impacts, by seeking to conduct its operations
and conduct it business in a way that enhances
value to wider society at the same time as
meeting its core financial objectives. In doing
so, it seeks to build trust with its customers and
stakeholders, which in turn, reduces the risk of
change resulting from increased political or
regulatory requirements.
Materiality
SSE’s most material sustainability issues are
those with greatest relevance that must be
addressed. The most significant impacts are
assessed against the changing business
environment, stakeholder feedback and
emerging trends. SSE most material issues
continue to be its contribution to energy
security, the decarbonisation of electricity
generation and working to provide more
affordable energy. Beyond these energy issues
SSE makes many other material impacts on the
economy, society and the environment. These
issues are reported in an integrated way in this
annual report and is supplemented in its sister
document, the Sustainability Report 2016.
Governance
Sustainability is integrated into the business
governance approach. The Board is responsible
for setting the strategy and sustainability policies.
The Executive Committee implements the
sustainability strategy and sub-committees assist in
the implementation of the sustainability initiatives.
Aiming to be open and accountable
This integrated annual report outlines the most
material social, economic and environmental
impacts SSE makes. In order to achieve improved
transparency of the challenge of making
balanced, sustainable decisions, key business
dilemmas are outlined in its sister document,
the Sustainability Report 2016, alongside
extensive additional disclosure of sustainability
impacts. Furthermore, SSE has sought external
assurance on its carbon and water data.
SSE’s ‘Responsible House’
The framework for SSE’s sustainable and
responsible approach to business is SSE’s
‘Responsible House’. The first obligation and
the foundation of the house is to ‘Do no harm’:
to keep people safe and prevent pollution. In
particular, in line with its safety core value, SSE
believes everything should be done safely, or
not at all. From this foundation, it is possible to
aim to make a positive contribution to society
and the environment.
through core relationships with employees,
suppliers and society as a whole.
Three ‘bricks’ outline the way in which the core
business activities across the SSE group add value
as service providers, operators of existing assets
and developers of new assets. Three more
‘bricks’ describe the way in which it adds value
SSE is a values driven organisation, and its
sustainability value has provided a guide for
business decisions since 2006. This value
support SSE’s business goals and enables it
to meet its core purpose: to provide energy
in a reliable and sustainable way.
A responsibility framework
SSE’s ‘Responsible House’ provides a framework from
which stakeholders can understand how its activities
and relationships add value.
Purpose
Core value
Providing energy
in a reliable and sustainable way
Our actions and decisions are ethical, responsible and balanced, helping to achieve
environmental, social and economic well being for current and future generations.
What we aim to do
Be responsible to fulfil our core purpose, be consistent with our
values and achieve our business goals.
How we do it
Responsible
Service Provider
Doing more to provide essential
services reliably and affordably.
Read the case studies on
pages 55 and 60
Responsible
Operator
Producing and delivering safe,
secure and sustainable energy
in the best way we can.
See pages 28 and 29
Responsible
Developer
Seeking to impact positively on
economies, communities and the
environment by investing in new
energy infrastructure.
Read the case studies on
pages 48 and 54
Responsible
Employer
Responsible
Society Member
Responsible
Buyer
Creating sustainable employment
and a great place to work.
See pages 24 to 26
Sharing value by contributing
to the societies in which
SSE operates.
Using the power of the supply
chain to bring about positive
social and environmental impacts.
See page 22
See page 23
Foundation
Do no harm
21
3. 2. 1. Strategic Report Strategic Report – Embedding responsibility
Responsible member of society
Sharing the value
that SSE creates
SSE’s purpose within the societies in which it provides the energy people
need is deeply interconnected. It contributes to society by fulfilling its core
purpose of providing reliable and sustainable energy but equally it relies
on society to enable it to do those things. SSE therefore seeks to be a
responsible member of society by respecting those connections and
seeking to share value with the societies in which it operates.
Providing public services
SSE depends on society to provide strong public
services to function and thrive. SSE relies on
emergency services, public roads and the public
health services to fulfil its core purpose of
providing energy in a reliable and sustainable way.
Lending human capital
SSE’s success depends on its employees and their
innate abilities and learned knowledge. It depends
on society to make the first investment in that
human capital, through education and training.
Giving right to pay dividends
Energy was once nationalised, and so SSE
depends on society for the right to pay dividends
to shareholders. To attract and support
investment in energy infrastructure, SSE has
paid increasing dividends each year since it
was formed in 1998.
Paying a fair share of tax
As part of society, SSE believes it should
contribute to the cost of the services on which
it depends. SSE has been an accredited Fair Tax
Mark company since 2014 and paid tax to
government totalling £453.9m in 2015/16.
Supporting and creating sustainable jobs
As part of society, SSE believes in supporting
and creating high quality, long-term jobs for
local people. In 2015/16, SSE employed 21,118
people directly and supported another 97,430
jobs across the UK and Ireland.
Investing in infrastructure
SSE helps maintain and grow the energy
infrastructure society needs. In 2015/16 SSE
invested £1.6m in energy assets and services,
part of the £8.9bn and €805m contribution SSE
made to UK and Irish economies in the same year.
Providing public services
Lending human capital
Giving right to pay
dividends
Providing the
energy people
need
Paying a fair share of tax
Supporting and creating
sustainable jobs
Investing in
infrastructure
22
SSE plc Annual Report 2016 Responsible buyer
Using SSE’s buying
power for good
SSE seeks to use the power of its supply chain to bring about positive social
and environment outcomes, and by doing so, aims to bring about long-term
sustainable business benefits that also contribute to the wider economy.
Encouraging responsible
business practice
SSE’s responsible procurement charter aims to
ensure all its suppliers act ethically, sustainably
and within the law by stating SSE’s expectations
on health and safety, bribery and corruption,
employment practices, conflicts of interest and
environmental impacts. By implementing this
charter across SSE’s 8,300+ suppliers
representing over £2.7bn of procurement
expenditure, progress has been made in 2015/16:
1. Managing contractor safety performance:
Major construction projects can pose
particular health and safety risks and during
2015/16 a concerted focus on safety practices
by SSE’s Transmission business and its
contractors led to an injury free year on the
major transmission projects in the north
of Scotland. SSE remains focused on its
enduring goal of zero incidents and continues
to work closely with its contractors to improve
performance across all of its business units.
2. Living wage: SSE continued to implement
the requirement for contracted employees
who work regularly on SSE’s sites to receive
at least the Living Wage. Every new service
and works contract awarded after 1 April 2014
has included this Living Wage requirement.
According to modelling undertaken by
KPMG on SSE’s behalf, as of 1 April 2016, it is
estimated that 50% of the relevant contracts
had implemented this requirement and over
400 people will have received a pay rise in
2015/16. 90% compliance is expected by
31 March 2017.
3. Modern slavery: SSE has taken the first steps
to ensure that modern slavery and human
trafficking is not present within SSE’s own
business and its supply chain. For the first
time, SSE has produced a Modern Slavery
Statement (available on sse.com) which sets
out its approach and the activities that will be
implemented to ensure SSE complies with the
Act. SSE has also set standards that it expects
its suppliers to adhere to in its responsible
procurement policy; introduced clauses in
its standard contract forms for new contracts
to ensure suppliers are able to demonstrate
compliance with the Act; and as part of a
community with other utilities introduced
questions in the standard prequalification
process to ensure suppliers are assessing
and managing the risk. The Modern Slavery
statement details the next steps SSE will be
taking in 2016/17 to comply with the Act.
Improving the transparency
of SSE’s supply chain practices
By understanding the environment and social
practices of its supply chain SSE aims to reduce
its non financial risks; build better relationships
with suppliers and create value across its
business. This approach is an increasing
component to SSE’s sustainability and the
delivery of its business strategy.
To support this objective SSE has developed
a responsibility dashboard that tracks and
benchmarks major suppliers’ performance on
several responsibility criteria including carbon
emissions, compliance, employment policies
and environmental impact. The aim of this
is for SSE to use this information to report on
sustainability practices in addition to other
financial and business data and improve the
transparency of non financial reporting in
the supply chain in the future.
Understanding the economic
impact of SSE’s supply chain
Recognising the significant economic contribution
SSE makes through its investments and operations,
SSE has sought to quantify and publish the
economic impact of specific investment
projects, alongside social and environmental
impacts. Working on the premise that the
process of quantification encourages greater
value of non financial impacts, in 2015/16,
SSE has undertaken economic assessment
of the following projects: Caithness-Moray
Transmission project; Clyde Extension Wind
Farm; and Wyndford District Heating.
1. Strategic Report
2.
3.
Creating an environment for
local supply chains to thrive
It is in SSE’s interests for healthy local supply
chains to be able to compete effectively within
the context of a diverse and vibrant wider
economy. SSE believes that a responsible
business should encourage in local supply chains
and businesses to ensure that communities and
local areas are sustainable for the future. To
support this SSE has targeted small to medium
sized enterprises, amongst other efforts through
its Open4Business portals in areas of significant
major project activity with £22.8m of contracts
or subcontracts awarded to local businesses, and
£19m awarded by our Tier 1 suppliers in 2015/16.
KPMG modelling found that as a result of
SSE’s Living Wage commitments for contracts,
over 400 people will have received a pay rise
in 2015/16.
23
Strategic Report – Embedding responsibility
Responsible employer
Building a team for future
business success
SSE’s ability to fulfil its core purpose and execute its strategy depends upon
the skills and talents of the people it employs. The strategic development
of human capital is therefore critical to SSE’s long-term success.
Performance summary
Total number of employees1
Retention rate2
Total recruitment3
Employee gender (female)
Average age
Employee engagement index4
Number
%
Number
%
Years
%
Total number of training interventions5
Number
Investment in pipelines6
UK Productivity (GVA per capita)7
Productivity compared to UK average8
£
£
n:n
2015/16
21,118
89
2,763
31
40
77
63,052
12.7m
2014/15
19,965
87
2,319
30
40
73
48,656
11m
129,670
139,870
2.4:1
2.6:1
Notes
1 Headcount at 31 March 2016, including employees within Windtowers Ltd.
2 Excludes end of fixed term contracts and internal transfers.
3 External recruitment only.
4 Externally facilitated company-wide employee engagement survey.
5
6 Total cost of apprentice, engineering graduate and Technical Skills Trainee programmes.
7 Based on SSE’s direct contribution to UK GDP and directly employed employees, analysis undertaken by PwC.
8 Based on output per capita data provided by the ONS.
Including targeting courses, workshops, seminars on e-learning packages.
24 SSE plc Annual Report 2016
Sustainable employment ethos
At the heart of SSE’s human capital strategy
is an ethos about the way in which the talents
and abilities of people flourish. Understanding
that the key driver of human capital comes from
investing in talent, SSE’s sustainable employment
ethos seeks to give a firm foundation from which
this valuable resource can be enhanced.
The core characteristics of a sustainable
employment approach:
-
In-house operational model preferring to
directly employ the people it needs;
- The avoidance of out-sourcing roles where
possible;
- The creation of sustainable employment
opportunities, growing talent and developing
skills from within; and
- Where workforce changes are necessary
in challenging business environment,
a preference against redundancy in
favour of redeployment or re-training
and a commitment to treating people
with dignity and respect.
Knowing that all its employees deserve at least
to earn a rate of pay that enables them to live a
decent life, SSE continues to be an accredited
Living Wage employer in the UK and in 2015/16
became one of the first Living Wage employers
in the Republic of Ireland.
SSE believes this approach gives a signal to
its employees that they are valued and that
worthwhile, rewarding careers can be built with
SSE. In return, SSE looks for its employees to be
engaged, motivated and flexible; delivering for
both customers and shareholders over the
long term.
Responding to strategic challenges
The energy industry faces two significant
employment challenges. The first is a skills
shortage. Around half of the energy industry’s
workforce is due to leave or retire by 2023,
so SSE must build new pipelines of talent. The
second challenge is a stark lack of diversity in the
sector: just 15% of the jobs are held by women
and only 4% are from Black, Asian and Minority
Ethnic communities.
Creating a workforce for the future
In 2014/15 SSE undertook an exercise to quantify
the economic value of the human capital it
employs. That exercise was instructive and
demonstrated that investing in growing talent
from within is one of the most powerful ways
to enhance this value.
Therefore SSE’s first response to the looming
skills shortage, in both the company itself and
the energy industry as a whole, has been to
create its own pipelines for growing new talent.
SSE offers a range of structured development
programmes designed for school leavers,
apprentices, trainee engineers and graduates,
1. Strategic Report
2.
3.
which introduce hundreds of young people
into SSE every year. SSE’s investment in three
of its main pipeline programmes – apprentices,
Technical Skills Trainees and engineering
graduates – grew by around 15% between
2014/15 and 2015/16, from £11m to £12.7m.
SSE also spent just under an additional £1m
delivering other pipeline programmes including
business graduates, IT graduates, customer
service apprenticeships and the Barnardo’s
Works programme. SSE is also investing in its
links and relationships with schools to create
awareness of the careers SSE can offer.
Building upon the human capital valuation
carried out in 2014/15, SSE used the methodology
again in 2015/16 to quantify the economic return
on investment for its youth employability
programme, Barnardo’s Works. Since 2008,
SSE has helped over 230 previously unemployed
young people join Barnardo’s Works and has
invested around £1m to ensure its continued
success after almost a decade. SSE’s assessment
outlines three ways this investment makes an
impact: on the individual, on the company and
on wider society. It was found that for every
£1 invested by SSE between 2012 and 2015,
the overall return was £7.67, demonstrating a
compelling business case for ongoing investment.
SSE has now used this methodology to measure
the value of three pipeline programmes, and
intends to continue using it to provide evidence
for particular human capital investment priorities.
Pipelines – 875 individuals on a pipeline
programme in 2015/16
241
24
8
31
51
90
430
Apprentices
Technical skills trainees
Business graduates
Engineering graduates
IT graduates
Barnardo’s Works participants
Customer service apprenticeships
Beyond the focus on pipelines of new talent, SSE
continues to invest in its people through talent
development, management training, technical
training, customer service development and the
delivery of specific issues-based knowledge and
skills through electronic learning techniques. This
development activity is predominately delivered
internally, ensuring the programmes are bespoke
and designed for SSE’s particular circumstances.
Internal training – 59,738 training
interventions delivered internally in 2015/16
8,519
8,903
4,332
37,984
Technical (representing a significant increase
in training for smart metering)
Customer service
Management
e-learning
The training and development delivered directly
by SSE is supplemented by the use of external
courses and training providers. In 2015/16 the
total number of training interventions (internal
and external) grew by almost 30% from the
previous year, from 48,656 to 63,052, and the
total expenditure was £17.2m. Having invested
significantly in the development of leadership
skills, SSE will focus in the future on providing the
right work experiences to further enhance the
skills of its current and future leaders.
Further to this training activity, 1,200 managers
and leaders in 2015/16 participated in leadership
development training which is designed to grow
the future leaders of the company from within.
SSE’s leadership blueprint defines the desirable
characteristics of successful leaders in SSE and
has been supported by extensive workshops and
seminars to embed positive leadership traits
throughout the organisation (see more on
page 70).
In addition, SSE regards creating opportunities for
people to develop their skills and experience by
being given opportunities to undertake different
roles across the SSE group as central to its overall
commitment to creating a high-performing and
engaged workforce for the future.
Investing in diversity
It is now well recognised that diverse and
inclusive organisations are more likely to be
effective, innovative and commercially successful.
It is therefore understood that SSE will be a more
productive and sustainable company if it
manages to attract and retain a workforce that
is clearly diverse and inclusive in every sense.
To respond to the challenge of increasing the
diversity of its workforce, SSE has begun by
targeting a series of actions around gender
diversity. Since 2014/15, the proportion of women
within SSE‘s workforce has risen very slightly from
30% to 31%. While still proportionally too low,
the number of women high earners (earning over
£40,000 a year) in SSE has increased, from 11%
in 2014/15 to 12% in 2015/16. Combined with the
gender pay differential data now being reported,
there is a greater imperative to take more action
to target female representation across the SSE
group. SSE recognises that tackling the barriers
that have prevented diversity must be a long run
commitment. Therefore SSE set a long-term
strategy in 2015/16 focussing on the principles
of “in, on and up”.
In: SSE aims to attract more women into the
energy industry. To do that, it is targeting more
young women into its pipeline programmes,
whilst rolling out training for hiring managers to
challenge unconscious bias. SSE understands
that barriers do not just start at the application
stage, so is working more closely with education
partners to inspire girls to pursue STEM (science,
technology, engineering and maths) subjects.
Women with STEM expertise are also being
encouraged to return back into the workplace
through ‘returnships’. SSE is working with Equate
Scotland, a gender equality organisation, and
the Prospect trade union to help professional
women back into work to help meet the existing
skills shortage.
On: To improve retention rates of women
in SSE, forums are being created to identify
and implement policy changes. Flexible
working continues to be a key contributor to
the attraction, retention and progression of
women in the workplace and so too does the
offering of support at key life stages. Over the
last year SSE has introduced parental mentoring
whereby everybody who is planning to take
maternity, paternity or adoption leave is offered
a mentor to support them before, during and
after the period of leave.
SSE’s policies support the employment, training,
promotion and career development of disabled
persons, as well as supporting employees who
become disabled during the course of their
employment. SSE makes reasonable adjustments
for disabled employees, including seeking
redeployment in the event that reasonable
adjustments are not possible.
Up: SSE is determined to increase the number
of women in the most senior positions within
the company and an initial target has been set
to more than double the proportion of women
earning over £40,000 to 25% by 2025. Following
the introduction of unconscious bias training
for senior leaders in 2015/16, a new programme
will be introduced in 2016/17 for the active
25
for their financial future and has proactively
enrolled new employees onto its pension
schemes since 2005. 97.5% of SSE’s employees
in 2015/16 chose to save for their future
through one of SSE’s pension schemes.
- Sharing success: SSE actively encourages
it employees to own shares in the company,
offering both an employee Share Incentive
Plan (SIP) and a Sharesave scheme, with
participation rates in 2015/16 at 64% and 41%
respectively. In 2015/16 SSE reduced the free
share element of the SIP in favour of a Free
Share allocation to establish a more equitable
offer that introduces all employees to the
long-term benefits of share ownership, 79%
of employees have taken up this offer so far.
- Employee benefits: A wider package
of lifestyle benefits focus on employee
well-being, including medical cover,
gym membership, the opportunity to buy
additional holiday leave and a free employee
assistance programme is available for
confidential personal advice and support.
Working with trade unions
SSE’s human rights policy specifically respects
the right of its employees to join a trade union.
SSE recognises four trade unions and has local
Joint Business Committees in place to ensure
that employees are engaged and consulted
within their own business areas. This structure
is supported by a company Joint Negotiating
and Consultative Committee (JNCC) to ensure
that company wide employee issues are
effectively managed. 75% of SSE’s employees
are covered by the negotiating arrangements
under the JNCC. SSE respects the significance
of employee representatives in enabling
employees to engage with business strategy
and their critical role in delivering its success.
Strategic Report – Embedding responsibility
Responsible employer continued
sponsorship of career progression for women
within SSE. A new resourcing approach for
all senior appointments will demand gender
diverse shortlists as well as gender balanced
decision making panels.
Finally, SSE’s sponsorship of the SSE Women’s
FA Cup and the sponsorship of the SSE Women’s
Golf Invitational, a golf and networking event,
have been deliberately designed to complement
SSE’s overall business strategy to be more
attractive to female employees.
Focusing on gender pay differentials
SSE welcomes the new requirement on
companies to publish gender pay statistics
in the UK and will meet this requirement in full
according to the guidelines set by government,
once they are finalised. In the meantime, SSE
seeks to become an early adopter of such
requirements and has calculated the gap
between men and women’s pay according
to the draft guidance.
As of 30 April 2016 (the proposed annual cut
date for calculating gender pay gaps), the overall
gender pay differential within SSE was:
Difference in mean pay between
male and female employees
Difference in median pay between
male and female employees
23.4%
19.4%
This gap is not dissimilar to UK national averages.
Early work by SSE that seeks to investigate this gap
sheds a lot more light on the factors influencing
the overall position. This process has been
instructive and is providing SSE with a rich seam
of evidence from which it can build its diversity
strategy further. More detail is disclosed in the
Sustainability Report 2016.
Reinforcing an ethical business culture
Human rights
In 2015/16, SSE established a new policy
on Human Rights. Based on the UN Global
Compact, the policy outlines the fundamental
principles that guide SSE’s employees,
recognising that in both its direct employment
and through its supply chain, human rights must
be actively respected and protected. The policy
also outlines SSE’s commitment to meeting the
provision of the UK’s Modern Slavery Act.
Code of ethical business conduct
SSE’s Code of business conduct provides the
basis from which employees are guided in terms
of the ethical business standards they are
expected to meet. SSE became a subscriber
to the Institute of Business Ethics in 2015/16 and,
as a result of their advice and feedback, is
undergoing a review of its existing Code with
plans to launch an improved Code in 2016/17.
26 SSE plc Annual Report 2016
A culture of Speaking up
In 2015/16 SSE enhanced its whistleblowing
procedures through the implementation of
an externally hosted ‘Speak Up’ phone line
and email service, so that employees can be
confident that there will be no recriminations
to the whistle-blower if wrongdoing is reported.
Engaging employees
The principal of mutual respect underpins one of
SSE’s core business values: teamwork. Alongside
the other five values in the SSESET, teamwork has
been an enduring value that guides employees in
their day-to-day working lives.
Teamwork: we support and value our
colleagues and enjoy working together
in an open and honest way
SSE continues to undertake a regular survey
of employee opinion, with the 2015/16 survey
achieving an 89% response rate. The benchmark
employee engagement index rose four points to
77%. The survey provides important evidence
from which SSE’s leadership is able to gauge the
depth of overall engagement, but importantly,
it highlights strengths and weaknesses on
particular priority areas.
Rewarding employee contribution
The ability to grow and develop a career is the
most important driver of employee retention,
and with this in mind SSE has expanded the
opportunity for employees to create their own
personal development plans, supported by line
managers with a growing set of online resources
to enable self-led learning.
SSE has a comprehensive approach to
performance management designed to enable
individuals to fulfil their potential at the same time
as contributing to SSE’s business goals. Alongside
assessing performance against agreed objectives,
the process assesses the extent to which each
individual, including the senior management
team, demonstrate their support for SSE’s core
values of Safety, Service, Efficiency, Sustainability,
Excellence and Teamwork.
A growing focus on employee wellbeing resulted
in a number of interventions designed to help
employees make positive healthy choices and
build mental health awareness. Training has been
provided to managers and supervisors in health
and wellbeing resilience and a focus on health
in operational areas ensures the ongoing
management of Hand Arm Vibration risks.
It is also understood that employee benefit
packages make an important contribution
to employee commitment and motivation.
SSE recognises that different employees have
different needs and therefore offers a variety
of further employee benefits:
- SSE pension schemes: SSE has taken
measures to help employees plan and save
1. Strategic Report
2.
3.
At the heart of SSE’s human capital
strategy is an ethos about the way
in which the talents and abilities of
people flourish.
Understanding that the key driver of
human capital comes from investing
in talent and creating sustainable
employment, in 2015/16 we invested
£13.7m in our pipeline programmes,
employing 875 apprentices, trainees
and graduates.
27
Strategic Report – Embedding responsibility
Responsible operator
Managing our
environmental impact
SSE understands that its principal environmental impact arises from carbon
emissions as a result of the production, distribution and use of energy. It recognises
that providing energy in a sustainable way means it has an important part to play
in helping to address the potential impact of climate change on the UK and Ireland,
the markets in which it operates.
Responding to the challenge
of climate change
To support the transition to a low carbon
electricity system SSE has: invested over
£291m in 2015/16 in renewable energy and has
the largest renewable energy capacity in the UK
and Ireland at 3,275MW; invested £832m in new
electricity network infrastructure that has
allowed the connection of new renewable
generation capacity in 2015/16; and brought
about a shift in SSE’s electricity generation mix
(increasing 12% between 2014/15 and 2015/16
for renewables whilst coal reduced by nearly
33% in the same period).
SSE continues to be committed to its core carbon
target of reducing the carbon intensity of its
electricity generation output by 50% by 2020,
using 2006 performance as its baseline.
SSE’s performance in managing climate
change impacts, led CDP to award SSE an
100% disclosure rating in 2015 and include it in
the global Climate Disclosure Leadership Index.
SSE was also awarded a ‘B’ performance rating
for its significant reduction in carbon emissions
in 2014/15.
CO2 emissions – tonnes (000’s)
Generation
Other Scope 1
Scope 1 Total
Distribution Network Losses
Other Scope 2
Scope 2 Total
Scope 3 WTT Fuel Purchased
Scope 3 Total
Total Emissions
Scope 2 emissions (net)
Net Emissions
Intensity Ratios
Emissions Relative to MW output
(kg CO2e per MWh)
1 April 2015 to 31 March 2016
1 April 2014 to 31 March 2015
CO2
10,889
45
10,935
1,079
60
1,138
888
906
12,980
(47)
12,932
CO2
12,903
70
12,973
1,178
66
1,244
2,407
2,426
16,643
(1,163)
15,480
CO2e
Total CO2
(A)
10,966
55
11,021
1,079
60
1,138
888
906
13,066
(47)
13,018
77
9
86
–
–
–
–
–
86
–
86
397
Total CO2
13,000
79
13,079
1,178
66
1,244
2,407
2,426
16,749
(1,163)
15,586
CO2e
97
9
106
–
–
–
–
–
106
–
106
474
Notes
1
The figure for generation emissions adjusts the figure from SSE-owned generation (in GB and Ireland) to include energy bought in under power purchase agreements.
The figure corresponds to the contracted position set out in the Annual Report.
Scope 1 comprises generation, operational vehicles, sulphur hexafluoride, fuel combustion, gas consumption in buildings.
Scope 2 comprises distribution losses, electricity consumption in buildings and substations.
2
3
4 Emissions intensity relative to MW is calculated against generation emissions only, rather than total emissions.
5 GHG emissions from SGN’s and SHETL’s activities are excluded (SGN reports these separately and SHETL is operated by National Grid Company).
(A) The figures have been assured to the ISAE3000 and ISAE3410 standards by PwC. PwC’s assurance statement and the criteria to which the carbon emissions are reported are detailed
at www.sse.com/beingresponsible/reportinganddata.
28 SSE plc Annual Report 2016
1. Strategic Report
2.
3.
- advocating market and regulatory
frameworks in the UK and Ireland that are
consistent with the Paris Agreement, thereby
creating the conditions where continued
investment in low carbon and renewable
energy is economically viable for SSE.
To continue to enable this transition, SSE
advocates in favour of tangible actions such
as tightening the EU ETS along with setting
a firm trajectory for the UK’s Carbon Price
Floor beyond 2020 will help to support carbon
abatement in line with a 2 degree (stretching
to 1.5 degree) temperature increase.
Climate adaptation
While SSE plays its part to mitigate climate
change, it must also adapt its business to the
impacts of rising global temperatures. SSE
has identified that the material risk of climate
adaptation are on SSE’s transmission and
distribution business where extreme weather
events pose risk to the resilience of the network.
As a result SSE has invested in maintenance and
emergency response solutions. This includes
new technology that identifies faults on lines;
tree cutting along networks; resilience funds for
local communities to support climate adaptation
initiatives; and emergency response procedures
to ensure the lights are kept on.
Using resources responsibly
Managing water use
In 2015/16, SSE judged that the significance of
responsible water use has reached a point where
enhanced transparency of water use is disclosed,
SSE has responded to this by seeking external
assurance of its water data and reporting to the
CDP Water programme in 2016.
to cool its generation plants;
SSE uses water for four main purposes:
-
- as process water for a variety of operations;
- as a source of energy in hydro generation
schemes; and
for amenities in offices and buildings.
-
Water abstraction, consumption and return
(millions m3)
2013/14
2014/15
2015/16
Total water abstracted 27,914 27,109 28,856
Total water consumed
16
19
8
Total water abstracted
& returned
27,898 27,089 28,848
In total, SSE’s operations abstracted 28.9 billion
m3 of water for 2015/16 (27.1 billion m3 for
2014/15). The vast majority was abstracted
by SSE’s hydro generation operations and is
therefore returned almost immediately to the
environment – only 8 million m3, of this water
was consumed in 2015/16 (19.4 million m3
for 2014/15)(A).
Air emissions from SSE’s thermal
generation plant
)
s
e
n
n
o
t
(
s
n
o
i
s
s
i
m
E
35,000
30,000
25,000
20,000
15,000
10,000
5,000
0
30,000
20,000
10,000
)
h
w
G
(
t
u
p
t
u
O
0
2013/14
2014/15
2015/16
Nitrogen oxide
Sulphur dioxide
Total thermal output
Managing air emissions
SSE is reducing air emissions as a result of the
change in its energy generation mix (reducing
coal), the increased use of renewable energy and
the use of operating practices and technologies
that reduce or remove air pollutants. In 2015/16
SSE’s thermal generation sites emitted 6,704
tonnes of sulphur dioxide and 10,685 tonnes
of oxides of nitrogen. This compares to 9,977
and 16,871 tonnes in 2014/15. Emissions will be
lowered further through continued investment
in improvements in combustion processes and
renewable energy.
Environmental management
SSE is subject to a number of environmental
regulations. To help focus on the management
of environmental risk, SSE has an internal
classification of environment related incidents,
that takes account of their scale, impact and are
aligned with criteria established by Regulators in
the UK and Ireland.
In 2015/16 there were no environmental
prosecutions issued against SSE.
SSE’s carbon performance
In 2015/16 SSE achieved a 22% reduction in its
total carbon emissions (scope 1, 2 and 3) from
2014/15. The main contributor was the significant
reduction in total scope 1 carbon emissions
which fell by around 16% between 2014/15
and 2015/16. The reduction in gross scope 1
emissions was largely a result of significantly
lower output from SSE’s coal-fired generation
plant from 9,143 GWh to 6,141 GWh between
2014/15 and 2015/16 a total reduction of 33%.
Also, for the second year running SSE’s
renewable generation capacity 3,275MW
exceeded its coal-fired generation capacity
1,995MW. SSE’s renewable generation assets
(including hydro pumped storage) generated
9,695 GWh of electricity in 2015/16, nearly 35%
of SSE’s entire generation output. This resulted
in SSE’s carbon intensity falling by 16% between
2014/15 and 2015/16 to 397 gCO2e/kWh – and
SSE is on track to achieve its 50% reduction in
carbon intensity target by 2020 based on
2006 levels.
Generation output (GWh) and carbon scope 1
emissions (000’s tonnes CO2e)
)
h
w
G
(
t
u
p
t
u
O
50,000
40,000
30,000
20,000
10,000
0
30,000
20,000
10,000
s
n
o
i
s
s
i
m
e
n
o
b
r
a
C
)
e
2
O
C
s
e
n
n
o
t
s
0
0
0
(
0
11/12
12/13
13/14
14/15
15/16
Gas output
Coal output
Renewables output
Scope 1: Carbon emissions
Supporting progressive
decarbonisation of energy
SSE supports the long-term objectives of the
Paris Agreement set out by the UN Framework
on Climate Change (UNFCC), to keep global
average temperature changes to well below
2 degrees and potentially below 1.5 degrees
of pre-industrial levels by 2100. To contribute
to these agreements, SSE is committed to:
- achieving its carbon intensity target by 2020
-
-
(50% reduction compared with 2006 emissions);
investing in low carbon energy networks
that help the UK power sector to reduce
carbon intensity to 100 g/kWh by 2030, as
set out by the UK government’s independent
climate change body, The Climate
Change Committee;
recognising the external cost of carbon
dioxide emissions to society and the
environment by internalising the cost
of carbon where practical in investment
appraisals; and
29
Strategic Report – Embedding responsibility
Stakeholders’ questions to the Chief Executive
Alistair Phillips-Davies
Working constructively
and collaboratively with
our stakeholders
SSE believes that its ability to manage risks, create value and fulfil
its core purpose depends on working constructively with the wide
range of organisations with an interest in energy provision in the
UK and Ireland. It seeks to engage constructively to understand
their points of view, factor them into decision-making where it can
and maintain a positive dialogue, even where views differ.
30 SSE plc Annual Report 2016
Institute of
Business Ethics
The Institute of Business Ethics was established
in 1986 to encourage high standards of business
behaviour based on ethical values.
Philippa Foster Back CBE, Director
Q: How is SSE ensuring that its values are
lived every day by all employees?
Alistair: The SSE SET of values has guided
actions and decisions in SSE since 2006.
For values to remain relevant they must be
constantly reinforced so a new Guide to
ethical business conduct will be launched
in 2016. It outlines the principles of ethical
business conduct that everyone in SSE is
expected to meet and explains what to do
if they spot something wrong. It is vital that
employees of SSE know, understand and
follow the rules that apply to the business,
but it is the combination of values and
rules that means we have the best chance
of doing the right thing throughout SSE.
Pensions and
Lifetime Savings
Association
PLSA is the national association helping pension
professionals run better pension schemes.
Luke Hildyard, Policy Lead: Stewardship
and Corporate Governance
Q: SSE seems to be trying to differentiate
by positioning itself as a responsible
and ethical business, through initiatives
such as the fair tax mark and detailed
reporting of your human capital. What
evidence has so far emerged of the
financial benefits of this approach?
Alistair: There is an expectation that
Companies go beyond compliance with the
rules. We believe that acting responsibly is
expected for a utility and we think it makes
business sense. In the case of human capital
we wanted to assess our people’s true value
as they are our biggest asset. We’ll see more
expectations on listed Companies on issues
such as people, pay, tax and political
advocacy and our response is to embed
responsible practices into our business. We
do this by signing up to industry standards,
for example our voluntary membership of
the UK Lobbying Register, and, where we
can, lead the industry, such as being the
only FTSE-listed company awarded the
Fair Tax Mark.
1. Strategic Report
2.
3.
Glasgow
City Council
Glasgow City Council provides
services to 600,000 customers
in Scotland’s largest city.
Kevin Rush, Head of Economic Development
National Skills
Academy for Power
Committee on
Fuel Poverty
The National Skills Academy for Power sits at
the heart of the Power Sector, driving excellence
in skills and bringing together employers, skills
organisations and stakeholders.
Nick Ellins, Chief Executive, National Skills
Academy for Power
The Committee on Fuel Poverty advises the UK
Government on the effectiveness of policies aimed
at reducing fuel poverty in England, and encourages
greater co-ordination across the organisations
working to reduce fuel poverty.
Tom Wright, Chairman
Q: Glasgow wants to see lower carbon
energy systems here in the city that
can deliver affordable warmth for our
residents and ensure security of supply
for our businesses. What can SSE do to
help deliver these objectives?
Alistair: The move to a more distributed
energy system is happening and SSE is part
of it. We’re working closely with Glasgow
– and other councils – to help them meet
their energy objectives. A great example is
our Enterprise businesses’ award winning
retrofit district heating scheme for 1,800
homes at the Wyndford Housing Estate.
It’s a project that provides secure lower
carbon energy, tackles fuel poverty and
improves residents’ comfort.
Q: How will SSE approach workforce
renewal across its UK operations,
and what do you see as the main
skills challenge?
Alistair: The retiral of a large proportion of
both SSE and the wider energy industry’s
workforce is, by far, the greatest skills
challenge facing SSE. A collective response
across industries is required but our first
response to this challenge is through
SSE’s own training pipelines, focussed
on apprentices, engineer training and
graduates. In 2015/16 875 individuals were
participating in one of these programmes
within SSE. At the same time as developing
these pipelines of fresh talent, SSE is
working to attract greater diversity of
successful applicants.
Q: What are SSE’s initiatives for tackling
fuel poverty and who does SSE work with
in implementing these?
Alistair: Tackling fuel poverty is a critical
challenge. SSE does its bit through both our
Distribution and Supply businesses which
have a range of initiatives. These include
improving the insulation of over 35,000
UK homes last year, maintaining a Priority
Service Register to provide bespoke support
to vulnerable customers during power cuts
and pioneering initiatives targeting those in
need, such as providing emergency credit
‘top-ups’ to SSE Paygo customers at a
Perthshire foodbank. There’s always more
to do and we work with a range of local and
national partners to support our customers.
Ibec
Ibec represents the interests
of business in Ireland.
Danny McCoy, CEO, Ibec
Q: Global leaders in the Irish services
sector have cited Ireland’s green energy
as an important element in the economic
recovery and informing investment
decisions. What recommendations would
you have for policy makers to maintain
these levels of investment?
Alistair: Since 2008 Ireland is a major part
of SSE’s growth strategy. We’ve invested
€2 billion into the Irish economy which
has helped to underpin Ireland’s green
credentials and induced further investment
across the economy. I try and stay out of
politics but as an investor I believe that
policymakers must do everything they
can to provide stability. Ultimately this
helps the confidence of investors and
enables cost-efficient delivery of low
carbon and secure energy.
Institution of
Civil Engineers
Carbon Disclosure
Project
The ICE supports civil engineers and technicians
by awarding professional qualifications, ensuring
they work to high standards, and helping them to
develop their careers.
Mac West, Chair of the Institution
of Civil Engineers Scotland
Q: 2016 is being predicted as a
breakthrough year for electricity
storage. What barriers remain to further
deployment and what can be done to
remove them?
Alistair: Storage offers a range of benefits
to the UK electricity system. The challenge
is that the market framework doesn’t
currently support investment and the
regulator is considering what changes may
be required to bring forward new storage
deployment. Each technology is different
and to get maximum benefits different
types of storage, at different scales, will be
required. I’m optimistic about the role of
storage in a more flexible system and the
benefits for the market and customers.
CDP is an independent not-for-profit organization
holding the largest database of primary corporate
climate change information in the world. CDP works
to transform the way the world does business to
prevent dangerous climate change and protect our
natural resources.
Daniel Turner, Head of Disclosure
Q: How is SSE responding to the far
reaching commitments made at the
historic COP 21 in Paris and what is the
potential for the UK energy industry to
switch to majority renewables and make
a significant impact in contributing to the
global needs for a low carbon future?
Alistair: SSE supports the agreements
reached in Paris. The outcomes are bold
and industry and governments now need to
collaborate to fulfill them. SSE continues to
reduce its carbon emissions. We invested
well over £1bn this year alone in low carbon
energy and infrastructure and for 2015/16
our total carbon emissions fell from 474 kg
CO2/MWh to 397 kg CO2e/MWh compared
to 2014/15. We’re committed to further
investment and our target to reduce by 50%
the carbon intensity of electricity generation
output by 2020, based on 2006 data.
31
Strategic Report – Financial overview and performance
Financial overview
Delivering for
investors and
customers alike
SSE is committed to delivering value for customers
and creating and sustaining long-term value for
shareholders. Its first financial objective is to deliver
annual dividend increases that at least keep pace with
inflation, while ensuring that the dividend is covered
by adjusted EPS at a level that is sustainable over time.
An increase in the dividend per share to 89.4p
demonstrates that in a challenging year SSE has
delivered to shareholders what it said it would.
32 SSE plc Annual Report 2016
Key questions to Gregor Alexander,
SSE Finance Director
How would you describe the performance
of SSE in 2015/16?
In challenging market conditions we have
delivered what we said we would and increased
the full year dividend by 1.1%. We have also
successfully taken forward our planned disposal
of over £1bn of non-core assets to support
future growth. Our performance has reaffirmed
that SSE is right to maintain its consistent and
long-term strategic framework against a volatile
operating environment.
Given the challenging operating environment,
how sure are you that SSE’s divided
commitment can be met in the future?
Annual increases in the dividend, so that it at least
keeps pace with RPI inflation, is SSE’s financial
objective and its strategic framework is built
towards achieving that aim. Despite the general
uncertainties in a sector like energy SSE is aiming
for a return to growth and adjusted earnings per
share* of at least 120 pence in 2016/17 and to
deliver a full-year dividend that at least keeps
pace with RPI inflation in 2016/17.
What factors will affect SSE’s financial
performance in the next three years?
Whilst the mist has cleared in some areas,
there remains regulatory uncertainties affecting
all three business segments. This, alongside
commodity prices and macro-economic risks
means there are plenty of challenges.
Nevertheless, as a result of our investment over
the last five years, the majority of our asset base
and profit now relates to economically-
regulated Networks and government-mandated
renewable sources of energy. Over the three
years to 2018/19 we expect dividend cover
could range from around 1.2 times to around
1.4 times, based on dividend increase that at
least keep pace with RPI inflation.
1. Strategic Report
2.
3.
Group Financial Overview
Key Financial Metrics
Adjusted Operating Profit*
Adjusted Net Finance Costs*
Adjusted Profit before Tax*
Adjusted Current Tax Charge*
Adjusted Profit after Tax*
Less: attributable to other equity holders
Adjusted Profit After Tax attributable
to ordinary shareholders*
Adjusted EPS* – pence
Reported Profit after Tax**
Basic EPS – pence
Number of shares for basic and adjusted EPS (million)
Shares in issue at 31 March (m)
** After distributions to hybrid capital holders.
Dividend Per Share
Interim Dividend pence
Final Dividend pence
Full Year Dividend pence
Increase %
Dividend Cover times/SSE’s adjusted EPS*
Adjusted Operating Profit* by Segment
EPM and Electricity Generation*
Gas Production*
Gas Storage*
Wholesale
Transmission*
Distribution*
SGN * (SSE’s share)
Networks
Energy Supply*
Energy related services*
Enterprise*
Retail
Corporate Unallocated*
Total Adjusted Operating Profit*
Tax
Adjusted current tax charge*
Add/(less)
Share of JV/Associates tax
Deferred tax including share of JV and Associates
Tax on exceptional items/certain re-measurements
Reported tax charge/(credit)
Effective current tax rate based on adjusted profit before tax*
Total UK taxes paid including taxes on profits, property taxes, environmental taxes, and employment taxes
March 16
£m
March 15
£m
March 14
£m
1,824.4
(310.9)
1,513.5
(193.4)
1,320.1
(124.6)
1,195.5
119.5
460.6
46.1
1,000.0
1,007.6
1,881.4
(316.7)
1,564.7
(224.8)
1,339.9
(121.3)
1,218.6
124.1
543.1
55.3
981.8
993.0
1,880.1
(329.0)
1,551.1
(236.7)
1,314.4
(122.9)
1,191.5
123.4
323.1
33.5
965.5
974.9
March 16
March 15
March 14
26.9
62.5
89.4
1.1%
1.34x
26.6
61.8
88.4
2.0%
1.40x
26.0
60.7
86.7
3.0%
1.42x
March 16
£m
March 15
£m
March 14
£m
436.3
2.2
4.0
442.5
287.2
370.7
268.7
926.6
398.9
15.4
40.9
455.2
0.1
433.3
36.6
3.9
473.8
184.1
467.7
285.0
936.8
368.7
17.7
70.4
456.8
14.0
496.1
130.2
8.3
634.6
136.7
507.0
276.6
920.3
246.2
24.1
56.8
327.1
(1.9)
1,824.4
1,881.4
1,880.1
March 16
£m
March 15
£m
March 14
£m
193.4
224.8
236.7
6.4
80.8
(272.5)
8.1
12.8%
453.9
(35.6)
82.0
(200.4)
70.8
14.4%
506.2
28.8
141.8
260.8
146.5
15.3%
431.6
33
Strategic Report – Financial overview and performance
Financial overview continued
Net finance costs
Adjusted net finance costs*
Add/(less):
Movement on financing derivatives (IAS 39)
Share of JV/Associates interest
Interest on net pension liabilities (IAS 19R)
Reported net finance costs
Adjusted net finance costs*
Add/(less):
Finance lease interest
Notional interest arising on discounted provisions
Hybrid coupon payment
Adjusted finance costs for interest cover calculation*
Profit before Tax
Adjusted Profit before Tax*
Movement on derivatives (IAS 39)
Exceptional items
Interest on net pension liabilities (IAS 19R)
Share of JV/Associates tax
Reported Profit before Tax
Investment and Capex summary
Thermal Generation
Renewable Generation
Gas Storage
Gas Production
Total Wholesale
Electricity Transmission
Electricity Distribution
Total Networks
Energy Supply and related services
Enterprise
Total Retail
Other
March 16
£m
March 15
£m
March 14
£m
310.9
316.7
329.0
(14.3)
(126.8)
22.3
192.1
44.2
(124.2)
14.0
250.7
64.2
(137.5)
28.2
283.9
310.9
316.7
329.0
(34.7)
(15.7)
124.6
385.1
(34.2)
(14.0)
121.3
389.8
(35.7)
(9.5)
122.9
406.7
March 16
£m
March 15
£m
March 14
£m
1,513.5
(14.5)
(889.8)
(22.3)
6.4
593.3
1,564.7
(105.3)
(674.6)
(14.0)
(35.6)
735.2
1,551.1
(212.0)
(747.2)
(28.2)
28.8
592.5
March 16
Share %
March 16
£m
March 15
£m
5.6
18.0
0.9
3.5
28.0
35.4
16.0
51.4
10.4
3.0
13.4
7.2
90.8
291.8
14.0
56.1
452.7
573.4
258.3
831.7
169.0
48.5
217.5
116.8
160.6
239.0
14.3
21.0
434.9
467.2
327.6
794.8
109.6
25.1
134.7
110.9
Total investment and capital expenditure
100.0
1,618.7
1,475.3
Disposal programme1
Headline proceeds of disposal
Less: Debt reduction
Less: Other costs and deferrals
Cash proceeds of disposal
1
In period since announcement on 26 March 2014.
34 SSE plc Annual Report 2016
March 16
£m
March 15
£m
Total
£m
542.2
(23.5)
(5.6)
513.1
467.5
(228.8)
(4.9)
233.8
1,009.7
(252.3)
(10.5)
746.9
Debt metrics
Adjusted net debt and hybrid capital* (£m)
Average debt maturity (years)
Adjusted interest cover1 *(excluding SGN) times
Adjusted interest cover1 *(including SGN) times
Average interest rate (excluding JV/assoc. interest and hybrid coupon)
Average interest rate1
1
Including hybrid coupon.
Adjusted Net Debt and hybrid capital*
Adjusted Net Debt and hybrid capital*
Less: hybrid capital
Adjusted Net Debt*
Less: Outstanding Liquid Funds
Add: Finance Leases
Less: Non-recourse Clyde debt
Unadjusted Net Debt
SSE Principal Sources of debt funding
Bonds
Hybrid capital securities
European investment bank loans
US private placement
Index – linked debt, long-term project finance and other loans
1. Strategic Report
2.
3.
March 16
£m
March 15
£m
March 14
£m
(8,395.0)
8.9
5.2
4.7
(7,568.1)
9.9
5.3
4.8
(7,642.8)
10.7
5.1
4.6
3.73%
3.95%
4.21%
4.55%
4.71%
4.92%
March 16
£m
March 15
£m
March 14
£m
(8,395.0)
2,209.7
(6,185.3)
(121.8)
(300.8)
(200.7)
(6,808.6)
(7,568.1)
3,371.1
(4,197.0)
(71.7)
(319.7)
–
(4,588.4)
(7,642.8)
2,186.8
(5,456.0)
(51.2)
(328.9)
–
(5,836.1)
March 16
March 15
March 14
45%
25%
8%
5%
17%
38%
37%
8%
5%
12%
43%
27%
7%
5%
18%
Rating Agency
Moody’s
Standard and Poor’s
Rating
A3 Negative outlook
A- Negative outlook
Current criteria
13% RCF/Net Debt
20-23% FFO/Net Debt
Date of issue
Feb 2016
Feb 2016
Contributing to employees’ pension schemes – IAS 19 R
Net pension scheme liabilities recognised in the balance sheet before deferred tax IAS 19R
Employer cash contributions Scottish Hydro Electric scheme
Deficit repair contribution included above
Employer cash contributions Southern Electric scheme
Deficit repair contribution included above
SGN contribution to SSE
SGN Net Debt (excluding shareholder loans)
SGN net finance costs included as part of SSE net Finance costs
SGN contribution to SSE’s adjusted profit before tax*
March 16
£m
March 15
£m
March 14
£m
394.8
33.7
14.8
68.3
44.6
664.6
57.6
29.5
92.0
58.5
637.7
50.4
29.5
82.3
56.7
March 16
£m
March 15
£m
March 14
£m
3,632
83.3
184.3
3,553
91.0
194.0
3,523
94.4
182.2
35
Strategic Report – Financial overview and performance
Financial overview continued
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
36
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; and
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
IAS 39 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:
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
SSE plc Annual Report 2016 Total net charges by asset class
Coal Generation
Gas Generation
Gas Production
Gas Storage
Other
Disposals
Total
By segment
Wholesale
Retail
Corporate
Total
1. Strategic Report
2.
3.
Property,
Plant &
Equipment
impairments
£m
Other
impairments,
charges and
(income)
£m
67.6
302.5
125.0
150.9
–
–
219.4
23.9
36.8
–
21.3
(57.6)
Total
£m
287.0
326.4
161.8
150.9
21.3
(57.6)
646.0
243.8
889.8
646.0
–
–
646.0
222.0
17.8
4.0
243.8
868.0
17.8
4.0
889.8
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.
37
Strategic Report – Financial overview and performance
Financial overview continued
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
38
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.
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
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.
-
-
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.
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.
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.
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.
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
SSE plc Annual Report 2016 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.
- Maintaining a strong balance sheet, with
a commitment to the current criteria for
a single ‘A’ credit-rating.
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.
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
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*.
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
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.
See pages 117 and 118 for more information.
39
Strategic Report – Financial overview and performance
The Weather
Assessing the impact
of the weather on SSE’s
businesses
The operational performance and financial results of SSE’s principal
businesses are each affected by the weather because of its impact
on production of energy from renewable sources (Wholesale); its
impact on electricity transmission and distribution lines (Networks);
and its impact on the amount of gas and electricity used by
customers (Retail).
Therefore, the weather has a direct impact
on SSE’s performance against its core
purpose of providing the energy people
need in a reliable and sustainable way.
The UK was hit by summer flooding and
12 Atlantic storms. The saturated ground
from the wet weather exacerbated the impact
of the storms on SSE’s networks which had
to prepare for and manage the impact of the
weather and focus on its number one priority:
restoring power for customers. The weather
caused significant damage to the Networks.
Yet Customer Minutes Lost per year – a key
performance indictor for the Networks
business – reduced by 16mins for SEPD
and 14mins for SHEPD, compared to the
previous year.
It is the role of SSE’s dedicated meteorologist
to monitor and understand the weather
patterns and conduct forecasts for temperature,
rainfall and wind. This allows SSE to:
- Predict how forecast temperatures may
affect customer’s demand for energy as
well as whether unexpected fluctuations
in daily temperatures require a response
from SSE’s generation assets;
- Forecast the temperature to inform how
SSE’s energy portfolio managers buy
power and gas in advance, thereby
improving SSE’s energy procurement;
- Establish short, medium and long-term
wind forecasts which influences the
electricity generation output from its
renewable generation assets;
- Monitor and prepare for how extreme
winds or excessive rainfall may affect SSE’s
transmission and distribution assets and
its efforts to keep the lights on reliably
and safely for customers; and
- Assess how rainfall patterns will impact
SSE’s hydro-electric generation output
and storage capabilities in the north and
the west of Scotland.
40 SSE plc Annual Report 2016
Weather in 2015/16
+7%
Above the 1981-2010
average rainfall
Rainfall
Directly affects hydroelectric
generation in the north and
west of Scotland.
A total of 1846.3mm of rain fell in the North of
Scotland during the year which is 107% of the
1981-2010 average*. There was record rainfall
in January and flooding across Perthshire and
other parts of the UK in July and August. As a
result, SSE’s hydro-electric assets saw their
output increase by 10.4% on the previous year.
+0.40C
Above the 1981-2010 average temperature
Temperature
Above or below average
temperatures can significantly
impact total demand for energy.
2015/16 was marginally cooler than 2014/15
and 0.4C warmer than the average over
1981-2010. Customer consumption volumes
were reduced. On a weather-corrected basis,
and acknowledging the impacts from
improvements in household energy
efficiency, consumption of gas fell by 2.7%
and electricity fell by 2.1% compared to the
previous year.
2.7%
Drop in gas
consumption
2.1%
Drop in electricity
consumption
+7%
Above the 1981-2010
average rainfall
+0.40C
Above the 1981-2010 average temperature
1. Strategic Report
2.
3.
Wind
Optimum speeds drive
generation but excess can limit
capacity and damage networks.
GB wind speeds in 2015/16 were very close
to the average over 2000 to 2010 and overall
the year was +0.4 knots windier than 2014/15.
This contributed to an increase of over 1GW
of renewable energy output from SSE’s
onshore and offshore wind farms than in
the previous year.
>1GW
Extra renewable generation
in 2015/16
+0.4 knots
Above the GB wind average in 2014/15
* The 30 year interval 1981 – 2010 is a common benchmark
based on the recommendations of the International
Meteorological Conference. A 30 year interval is sufficiently
long to filter out many of the short-term fluctuations and
anomalies, but sufficiently short so as to be used to reflect
longer term climatic trends.
41
Strategic Report – Financial overview and performance
SSE Wholesale
Wholesale
overview
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.
Wholesale operating profit*
– £m
Total generation capacity
– MW
Total generation output
– TWh
442.5
-6.6%
10,557
-10.0%
27.8
+0.7%
The businesses in SSE’s Wholesale
segment source, produce and store
energy through energy portfolio
management, electricity generation,
gas production and gas storage.
SSE’s generation capacity (including
its share of joint ventures) incorporates
5,330MW of gas-fired generation
3,394MW of renewable generation,
and 3,009MW of coal-fired generation.
SSE’s generation output covers the
amount of electricity generated by the
gas-fired, renewable and coal-fired
power stations in which SSE has an
ownership or contractual interest.
Renewable generation
capacity – MW
Renewable generation output
– TWh
Gas production (exc liquids)
– million therms
3,275
-3.5%
9.7
+12.0%
403
+1.3%
Renewable generation capacity covers
hydro electric schemes (conventional
and pumped storage), wind farms
(onshore and offshore) and dedicated
biomass plant.
Renewable generation output covers
conventional hydro electric schemes
and pumped storage on and offshore,
wind farms and dedicated biomass plant.
Output is affected by the amount of plant
in operation and by weather conditions.
Gas production is responsible for
the efficient delivery of gas from the
physical gas fields that SSE has a shared
ownership in.
42
SSE plc Annual Report 2016
43
3. 2. 1. Strategic Report Strategic Report – Financial overview and performance
Wholesale continued
Key questions
What were the key issues for Wholesale in 2015/16?
The year was particularly challenging for Wholesale as a result of sustained
weakening in commodity prices, and this can be seen in the impairments set
out in our financial statements. There was also quite a lot of policy change –
some parts welcome, some less so, which again emphasised the importance
of maintaining a balanced range of assets.
How does the Wholesale business help SSE fulfil
its strategy and financial objective?
The focus for the Wholesale business is ensuring efficient operation
of our assets, investment discipline, and managing our contracts and energy
portfolio management in a dynamic way that is capable of responding to
market, policy and regulatory signals. By identifying our competitive advantage
and discovering future value early we can strive to be the most efficient
company on cost in the sector.
What is the principal challenge your business faces
in the next three years?
Wholesale must continue to recognise and respond to commercial and
legislative sector changes, including technological developments. The
correct investment decisions will ensure that we have a diverse portfolio and
capabilities setting us apart from our competitors. Wholesale must maximise
the benefits from the changes that are known and be prepared to act quickly
upon those which are not.
What are your key priorities for 2016/17 and beyond?
In Wholesale, our key priorities are: 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.
Martin Pibworth
Managing Director, Wholesale
44
SSE plc Annual Report 2016
Sustainably sourcing
and producing energy
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
1. Strategic Report
2.
3.
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.
Wholesale key performance indicators
Energy Portfolio Management (EPM) and Electricity Generation
EPM and Generation operating profit* – £m
EPM and Generation capital expenditure and investment – £m
Generation
Gas- and oil-fired generation capacity (GB) – MW
Gas- and oil-fired generation capacity (Ire) – MW
Coal-fired generation capacity – MW
Waste to Energy capacity – MW
Total thermal generation capacity – MW
Pumped storage capacity (GB) – MW
Conventional hydro capacity (GB) – MW
Onshore wind capacity (GB) – MW
Onshore wind capacity (NI) – MW
Onshore wind capacity (ROI) – MW
Offshore wind capacity (GB) – MW
Dedicated biomass capacity (GB) – MW
Total renewable generation capacity – MW
Total electricity generation capacity (GB and Ire) – MW
Renewable capacity qualifying for ROCs – MW
Gas- and oil-fired (inc. CHP) output (GB) – GWh
Gas- and oil-fired output ( Ire) – GWh
Coal-fired (inc. biomass co-firing) output – GWh
Total thermal generation – GWh
Pumped storage output – GWh
Conventional hydro output – GWh
Onshore wind output GB – GWh
Onshore wind output NI – GWh
Onshore wind output ROI – GWh
Offshore wind output – GWh
Biomass output GB – GWh
Total renewable generation – GWh
Total Generation output all plant – GWh
March 16 March 15
436.3
382.6
433.3
399.6
3,961
1,292
1,995
34
4,262
1,068
3,009
0
7,282
8,339
300
1,150
900
88
456
344
37
300
1,150
1,008
88
456
355
38
3,275
3,394
10,557
11,733
c.1,800 c.1,900
10,160
1,780
6,141
9,537
251
9,143
18,081
18,931
252
4,074
2,439
235
1,308
1,312
75
190
3,726
2,219
212
1,055
1,191
63
9,695
8,656
27,776
27,587
Notes
1 Capacity is wholly-owned and share of joint ventures.
2 Output is electricity from power stations in which SSE has an ownership interest (output based on SSE’s
contractual share).
3 Capacity includes 1,180MW at Peterhead (while TEC is 400MW) and 464MW at Great Island (net increase 224MW)
operational from 17 April 2015.
4 2016 capacity excludes Ferrybridge which ceased operation on 31 March 2016.
5 Wind output excludes 387GWh of constrained off generation in 2015/16 and 268GWh in 2014/15.
6 Onshore wind capacity at March16 excludes 175MW related to the Clyde disposal in March 16 – onshore wind
output includes 100%.
7 Waste to Energy GWh not included above as contracted to third party.
8
Slough Heat & Power Biomass Plant’s financial results are reported within SSE Enterprise.
Gas Production
Gas Production operating profit* – £m
Gas Production – m therms
Gas Production – mn boe
Liquids Production – mn boe
Gas Production capital investment – £m
Total net proven plus probable (2P) Reserves estimate – bn therms
Total net proven plus probable (2P) Reserves estimate – mn boe
Gas Storage
Gas Storage operating profit* – £m
Gas Storage customer nominations met – %
Gas Storage capital investment – £m
2.2
403
6.55
0.13
56.1
3.62
58.8
4.0
100
14.0
36.6
398
6.47
0.08
21.0
1.73
28.2
3.9
100
14.3
45
Strategic Report – Financial overview and performance
Wholesale continued
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.
46 SSE plc Annual Report 2016
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
1. Strategic Report
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3.
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 1 April 2016; and
- 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.
-
-
47
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.
Strategic Report – Financial overview and performance
Wholesale continued
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.
Responsible Developer
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.
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’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.
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.
Responsibly developing
Ireland’s largest onshore
wind farm at Galway
Once operational in 2017, Galway Wind
Park (GWP) will be the largest onshore wind
farm in Ireland. It is estimated that the
169MW development will generate enough
electricity to power approximately 84,000
homes. The renewable energy produced
by GWP will help offset around 190,000
tonnes of CO2 emissions from fossil fuel
energy generation each year.
GWP is being delivered in two phases –
Phase 1 (64MW) is owned and financed by
SSE and Phase 2 (105MW) is a 50/50 joint
venture between SSE and Ireland’s state
forestry company, Coillte. With construction
of both phases now under way, the GWP
team is working hard to establish a range of
initiatives which optimise positive impacts
for the local economy and communities
from this €280m project investment.
The GWP team is committed to achieving
industry best practice in social acceptance
for the project. At the end of March 2016
SSE recorded that 62% of all employees,
over 100 people, working on-site lived
within 30km of GWP and over 50 local
businesses have also provided products
and services to facilitate the project.
48 SSE plc Annual Report 2016
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 31 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
1. Strategic Report
2.
3.
extension to maintenance works at the site kept
it unavailable, resulting in a drop from typical
high levels for the year overall; and
- 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
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.
49
Strategic Report – Financial overview and performance
SSE Networks
Networks
overview
Safely delivering
energy to homes
and businesses
SSE is the only energy company in the UK to be involved in electricity
transmission, electricity distribution and gas distribution. Its has an ownership
interest in five economically-regulated energy network companies consisting
of a 100% ownership of Scottish Hydro Electric Transmission (SHET), Scottish
Hydro Electric Power Distribution (SHEPD), Southern Electric Power Distribution
(SEPD) and a 50% stake in both Scotland Gas Networks and Southern Gas
Networks (SGN).
SSE’s interests in regulated energy networks supports the SSE Group to deliver
disciplined investment, balance and operational efficiency. The RAV of SSE’s five
existing Networks companies is well placed to reach around £10bn by 2020.
Networks operating
profit* – £m
Networks Regulated Asset
Value (RAV) (net) – £bn
Customer minutes
lost (north)
926.6
-1.1%
7.96
+8.3%
55
-20.3%
SSE is involved in: electricity
transmission; electricity distribution
and gas distribution (through Scotia
Gas Networks).
The RAV is the price paid for
economically-regulated energy networks
when they were privatised plus allowed
capital expenditure less depreciation. It is
indexed to the Retail Price Index.
Excluding exceptional events, customer
minutes lost is the average number of
minutes that customers are without
electricity supply in a year. SSE’s north of
Scotland network distributes electricity
to around 800,000 properties.
Customer minutes
lost (south)
41
-28.1%
Distribution networks capital
expenditure – £m
Transmission networks capital
expenditure – £m
258.3
-21.2%
573.4
+22.7%
Excluding exceptional events, customer
minutes lost is the average number of
minutes that customers are without
electricity supply in a year. SSE’s network
in central southern England distributes
electricity to around 2.9 million properties.
SSE owns and invests in two electricity
distribution networks companies:
Scottish Hydro Electric Power
Distribution and Southern Electric
Power Distribution.
SSE owns and invests in the transmission
network in the north of Scotland through
Scottish Hydro Electric Transmission.
50
SSE plc Annual Report 2016
51
3. 2. 1. Strategic Report Strategic Report – Financial overview and performance
Networks continued
Key questions
What were the key issues for Networks in 2015/16?
With 2015/16 being the first year of the ED1 price control, the key issue for our
Distribution businesses has been ensuring that we delivered on improved
customer service while driving efficiencies and incentives. For SHE Transmission
it has been the disciplined investment and timely completion of projects that
add to the Regulated Asset Value, most notably the completion of the Beauly-
Denny 400kV overhead line.
How does the Networks business help SSE fulfil
its strategy and financial objective?
SSE’s Networks businesses are at the core of the company’s strategy both in the
short and long-term as they contribute significantly to its ability to deliver annual
dividend increases. Over this financial year, SHE Transmission grew its RAV by
£555m to £2.2bn and the RAV is on target to be around £3bn by March 2018.
By effecting change to help drive improved customer service, efficiencies, and
through the greater use of innovation, SHEPD ad SEPD is earning an agreed,
steady return while creating direct benefits for customers.
What is the principal challenge your business faces
in the next three years?
The focus of the ED1 price control is on delivering outputs for customers.
Therefore, one of the key challenges for our Distribution businesses will be
providing year-on-year improvements in output delivery through increased
efficiencies, customer service and innovation, while delivering value for
money. The introduction of competition into onshore transmission changes
the regulatory framework for our Transmission business and we are engaging
constructively with Ofgem as it develops its plans.
What are your key priorities for 2016/17 and beyond?
In Networks, our key priorities include: operate safely and meet all compliance
requirements; provide an excellent service to all customers who rely on our
networks; 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; and progress
innovations that improve network reliability, efficiency and customer service.
52
SSE plc Annual Report 2016
Colin Nicol
Managing Director, Networks
Owning, operating and
investing in Networks
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.
1. Strategic Report
2.
3.
Networks key performance indicators
Electricity Transmission
Operating profit* – £m
Regulated Asset Value (RAV) – £m
Capital expenditure – £m
Connection offers provided in required period
Electricity Distribution
Operating profit* – £m
Regulated Asset Value (RAV) – £m
Capital expenditure – £m
Electricity Distributed – TWh
Customer minutes lost (SHEPD) – average per customer
Customer minutes lost (SEPD) – average per customer
Customer interruptions (SHEPD) – per 100 customers
Customer interruptions (SEPD) – per 100 customers
Estimated Incentives Performance – £m
Scotia Gas Networks
Operating profit* (SSE’s share) – £m
Regulated Asset Value (SSE’s share) – £m
Capital and replacement expenditure (SSE’s share) – £m
Uncontrolled gas escapes attended within one hour – %
SGN gas mains replaced – km
March 16 March 15
287.2
2,287
573.4
88
370.7
3,157
258.3
39.5
55
41
66
47
c23
268.7
2,513
162.8
98.5
960
184.1
1,732
467.2
97
467.7
3,159
327.6
39.6
69
57
70
60
c6.5
285.0
2,459
169.9
98.7
1,042
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
53
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.
Strategic Report – Financial overview and performance
Networks continued
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
Responsible Developer
Responsibly developing
SHE Transmission’s largest
capital project
As a responsible developer SHE Transmission
understands that the Caithness-Moray
transmission project is not only its largest
capital project to date, but also one of the
most important infrastructure investments
in Scotland in this decade.
It is the biggest fully Living Wage compliant
project in the UK and around £600m will
be contributed to the UK economy,
including approximately £250m of value
going directly to Scotland.
SSE has evaluated the economic impact of
the investment: in March 2016 the project
is employing 217 people who are local to
where the new infrastructure is being built;
a further £4.5m of value is also estimated
to have supported hotels, B&Bs and rental
properties used during the project; and,
by the end of the project, over 10,000 years
of employment will have been supported
across the UK, including close to 5,000
in Scotland.
54 SSE plc Annual Report 2016
1. Strategic Report
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electricity networks of the future.
- Following a number of trials SSEPD has
This has included:
- A consultation launched in 2015/16 to give
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
Responsible Service Provider
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.
Providing a reliable and
essential service for our
vulnerable customers
SSE Power Distribution (SSEPD) understands
the importance of maintaining an accurate
Priority Services Register so vulnerable
customers receive attention in the event of
power interruptions. SSEPD is required to
provide these services under its regulatory
duties. However, to develop and improve its
services further, SSE enlisted the help of the
British Standard for inclusive service
provision (BSi).
BSi is the gold standard for companies
seeking to respond to vulnerability. At its
heart is an understanding that vulnerability
is broadly defined and that a person’s status
can change. SSEPD made several
improvements to its practises, including
awareness training, developing internal
standards and amending customer
communications. Audits were carried out
by BSi and the accreditation was achieved
by November 2015.
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
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.
55
Strategic Report – Financial overview and performance
SSE Retail (including Enterprise)
Retail overview
Supplying energy
and essential
services to our
customers
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 8.21m
household and business accounts. It also provides other related products and
services including telephone, broadband and boiler care to 0.40m 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 commitment to efficient operations and industry-leading
customer service.
Retail operating profit*
– £m
SSE Enterprise profit
– £m
Energy customer accounts
– millions
455.2
-0.4%
40.9
-41.9%
8.21
-4.3%
SSE is involved in the supply of electricity,
gas and other energy related services
to household customers and, through
its Enterprise business, to industrial and
commercial customers.
Enterprise brings together key SSE
services for industrial, commercial
and public sector customers.
SSE supplies electricity and gas to
household and business customers in
the energy markets in Great Britain and
Ireland. It is the second largest supplier
in both markets.
Debt overdue by more than
six months – £m
Financial assistance for
vulnerable customers – £m
103.2
-2.8%
48.5
-5.5%
Meters read – millions
11.4
-12.3%
SSE aims to engage as early as possible
with customers who are struggling
with debt through agreeing payment
arrangements that lower balances from
the outset and helping to spread the cost
of energy over the year.
SSE provides assistance for customers
who struggle to pay for their basic
energy needs, including discounts
on energy bills.
SSE is involved in supplying, installing,
maintaining and reading meters in the
household, commercial, industrial and
generation sectors in Great Britain.
56
SSE plc Annual Report 2016
57
3. 2. 1. Strategic Report Strategic Report – Financial overview and performance
Retail (including Enterprise) continued
Key questions
What were the key issues for Retail in 2015/16?
We took important strides towards achieving our strategy: investing in our
digital platforms, continuing to build scale in our non-energy businesses,
ramping up our smart metering roll-out and driving operational efficiencies.
The operating environment has become clearer as the CMA inquiry draws to
a close. Unfortunately we’ve lost customers, but we’re taking steps to tackle
this by investing in even better customer service and new products.
How does the Retail business help SSE fulfil
its strategy and financial objective?
Retail is an important part of SSE’s balanced range of businesses. Ultimately,
all of SSE’s operations are funded by customers and it’s through our Retail
business that most customers interact with us; so it is about operating an
efficient business and giving customers value. By staying true to our values
of service and efficiency, we can keep our customers happy while also
making a fair profit.
What is the principal challenge your business faces
in the next three years?
The energy supply markets in Britain and Ireland are undergoing a
transformation. This creates challenges and opportunities for us. There are
substantial regulatory changes at the same time as considerable innovation
in new products, service offerings and technologies such as installing smart
meters in every home and business in GB which will help to meet changing
customer expectations and preferences but which will also be a complex
project to deliver.
What are your key priorities for 2016/17 and beyond?
In the Retail segment our key priorities are maintaining a clear focus on safe
and compliant operations in the interests of customers and employees;
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;
and delivering continuing investment and growth
in energy supply to commercial and public
sector organisations.
Will Morris
Managing Director, Retail
58 SSE plc Annual Report 2016
Supplying energy and essential
services across the Great Britain
and Ireland markets
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 averaged 4.1% 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 0.40 million from
0.35 million 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.
1. Strategic Report
2.
3.
Retail (including Enterprise) key performance indicators
March 16 March 15
Energy Supply
Operating Profit* – £m
398.9
Capital expenditure (Energy Supply and Energy Related Services) – £m 169.0
Electricity customer accounts (GB domestic) – m
4.16
Gas customer accounts (GB domestic) – m
2.79
Energy customers (GB business sites) – m
0.47
All-Island energy market customers (Ire) – m
0.79
Total energy customer accounts (GB, Ire) – m
8.21
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
Electricity supplied household average (GB) – kWh
Gas supplied household average (GB) – th
Household/small business aged debt (GB, Ire) – £m
Bad debt charge – £m
Customer complaints to third parties (GB)1
Energy related services
Operating profit* – £m
Home Services customer accounts (GB) – m
Meters read – m
Supply customers’ bills based on actual reading – %
Smart Meters installed
Enterprise
Operating profit* – £m
Capital expenditure – £m
SSE Contracting Order Book – £m
1 Ombudsman: Energy Services and Citizens Advice.
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.
368.7
109.6
4.37
2.96
0.45
0.80
8.58
3,842
438
106.2
65.3
1,528
3,763
426
103.2
44.0
1,416
15.4
0.40
11.4
95.1
over
180,000
17.7
0.35
13.0
96.2
over
40,000
40.9
48.5
133
70.4
25.1
133
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).
59
Strategic Report – Financial overview and performance
Retail (including Enterprise) continued
Responsible Service Provider
Putting the current
and future needs of
customers at the heart
of everything we do
Treating customers fairly is the guiding
principle of SSE’s Energy Supply business.
In fulfilling this principle SSE seeks to act as
a responsible service provider and put the
current and future needs of customers at
the heart of everything it does.
customers and stakeholders who told SSE
that: they want to find the information they
need quickly and easily; bills should be no
longer than two pages; and they don’t
want unnecessary or confusing
information to be included.
Having listened to customers’ views, and
research by uSwitch that found that six in
10 customers don’t understand their bills,
SSE undertook a year-long research
project aiming to simplifying energy bills
to make them less cluttered and confusing.
Much of the content on an energy bill is
prescribed by regulations, and whilst
well-meaning this can create confusion.
In February 2016, SSE published a new,
simplified bill (below). The new design is
the result of in-depth engagement with
The new design was devised in partnership
with Which?, Citizens Advice, uSwitch, the
Design Council, Age UK and the Money
Advice Service. Ofgem recognises there
needs to be reform in energy bills and
has begun consulting suppliers and
stakeholders. SSE continues to engage
constructively with the regulator on the
issue of simple bills.
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.
60 SSE plc Annual Report 2016
1. Strategic Report
2.
3.
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.
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.
While consumption can vary greatly year-on-
year based on temperatures, on a weather-
corrected basis SSE estimates that gas and
Further to its commitment in GB to use any
future unclaimed credit balances which cannot
be returned to customers to help give additional
support for vulnerable customers, SSE has also
now reallocated historic unclaimed credits to
the value of more than £28m.
Debt levels continue to reduce, partly reflecting
lower prices and falling consumption, but also
due to SSE’s efforts to engage constructively
and understandingly with customers in arrears
as early as possible, making sure support is
provided and payment plans are manageable.
Rolling out smart meters to customers
across Great Britain
SSE’s metering business is undergoing a
transformation through the smart meter roll-
out; however, it still undertakes meter reading
operations and meter operator work in all parts
of Great Britain. SSE believes in the potential for
the national roll-out of smart meters to transform
the relationship between customers, their energy
usage and their supplier in the coming years. It is
therefore committed to delivering its roll-out in
a way that is both cost-effective and customer-
centric, with the primary objective of maximising
the net benefits to customers.
SSE has been gradually ramping up its capacity
and delivery of smart meters with a view to
getting it right for customers first time to
maximise engagement. As of 31 March 2016, SSE
had installed more than 180,000 smart meters
and installed its 200,000th meter in April 2016.
2016/17 is a pivotal year for the smart programme,
with the central communications infrastructure
provided by the Data Communications Company
(DCC) due to be delivered to a revised timetable
which will see phased introduction in August
and October 2016. While there remain other
constraints to be addressed, getting the DCC up
and running is a critical first step towards enabling
suppliers to build up to mass deployment. Any
further delays to the DCC’s delivery timetable
must be reflected in the overall delivery timetable
to avoid any negative impacts for customers.
Doing more for business
energy customers
Business Energy performed strongly in 2015/16,
driven by growth in the Industrial and Commercial
(I&C) market and ongoing efforts to control
operating costs. SSE has continued to build
its offering in the commercial sector with the
launch of a new renewable energy proposition
‘SSE Green’, a new customer website and a
change in approach to service with a greater
focus on the needs of customers. This has
resulted in Business Energy’s service team
moving closer to its sales team, working with
the customer to define requirements at an
early stage and then providing ongoing
support on a continuous basis.
61
Strategic Report – Financial overview and performance
Retail (including Enterprise) continued
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
Responsible Service Provider
In 2015/16, SSE entered into an agreement
with The Football Association to become the
sponsor of The SSE Women’s FA Cup. The
2016 Final took place at Wembley Stadium,
and was attended by over 30,000 spectators.
It was also broadcast live on BBC Television.
Arsenal beat the holders Chelsea 1-0.
This sponsorship demonstrates two things
about SSE that it will aim to build on in
2016/17 and beyond.
The first is a commitment to associating
SSE’s Retail brand with positive
developments in areas such as women’s
sport, complementing its sponsorship of
leading entertainment venues The SSE
Hydro, The SSE Arena, Wembley, and The
SSE Arena, Belfast.
The second is a commitment to ensure that
SSE is a diverse and inclusive organisation
that more closely reflects the diversity of its
customers and, in line with that, puts
customers at the heart of everything it does.
As a result of its sponsorship, SSE won the
Empowering Women Through Sport Award
(supported by Women in Sport) at the UK
Sponsorship Awards 2016.
62 SSE plc Annual Report 2016
Enterprise
Key questions
What were the key issues for Enterprise in 2015/16?
This year has been about building on the progress made since Enterprise
was formed in 2014 and laying the foundations to support future growth.
Our particular focus has been on operational efficiency, identifying
new opportunities for growth such as our rail business and Energy
Performance Contracts frameworks, building enhanced sales capability
and a focus on delivering value for our customers.
How does the Enterprise business help SSE fulfil
its strategy and financial objective?
Enterprise is a multi-disciplined partner for businesses and public sector
organisations. We have a diverse range of businesses with a broad service
and product offering enabling us to identify opportunities for growth across
several markets.
What is the principal challenge your business faces
in the next three years?
The energy needs and expectations of businesses are becoming increasingly
sophisticated, with growing requirements for effective energy management
and robust energy and utility infrastructure. Responding to the changing nature
of how our customers want to do business is the principal challenge facing
Enterprise, but also presents significant opportunities which Enterprise is well
positioned to exploit.
What are your key priorities for 2016/17 and beyond?
In Enterprise, our key priorities are: continuing development of integrated
energy and utility solutions that meet the specific and evolving needs of
customers; and the continued organic growth of each of the businesses
within Enterprise.
1. Strategic Report
2.
3.
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.
Jim McPhillimy
Managing Director, Enterprise
63
Strategic Report – Financial overview and performance
Retail (including Enterprise) continued
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
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.
64 SSE plc Annual Report 2016
1. Strategic Report
2.
3.
Supporting responsible
transport delivery
In 2015/16 SSE significantly expanded its capability in the rail sector
with the creation of a dedicated new business.
SSE Enterprise Rail has been formed with the primary purpose of
‘Powering Britain’s Railways’ and signals the company’s increasing
focus in the rail sector, building on the extensive experience and
expertise and wide variety of rail industry clients SSE has built
up in rail over the last 15 years. As the rail industry continues
to modernise, delivering responsible, sustainable transport to
commuters across Great Britain, SSE Enterprise Rail aims to
become the rail industry’s power partner of choice, building
a sustainable infrastructure for the future.
65
Directors’ Report
Chairman’s introduction
to SSE corporate governance
The Board is committed
to ensuring that the high
standards of corporate
governance which are
embedded within the
organisation are maintained,
and are at the forefront of
all that we do.
Dear Shareholder,
I am pleased to introduce the Directors’ Report
which sets out the roles and responsibilities of
the Board and its Committees, along with an
explanation of the work that we have carried
out during the year.
Corporate governance
SSE recognises that a successful and sustainable
company is founded upon strong principles of
corporate governance. The Board is therefore
committed to ensuring that the high standards
of corporate governance which are embedded
within the organisation are maintained, and
are at the forefront of all that we do. It is these
standards in turn, that underpin SSE’s clear
strategic, financial and responsibility framework,
and enable decisions to be taken that create
value for future years.
The UK Corporate Governance Code
This is the first year that we report against the
2014 version of The UK Corporate Governance
Code (the Code), which is issued by the FRC and
is available on their website. The Code adopts
a ‘comply or explain’ model, which recognises
that there are situations where a period of
non-compliance may be appropriate, provided
good governance can be achieved by other means
and the reasons are explained to shareholders.
During the reporting period there have been
no material departures from the Code which
have been detrimental to the standards of
governance that we instil. However, between
the conclusion of the AGM on 23 July 2015 and
1 August 2015, a 9 day period of non-compliance
occurred in respect of Code provisions A.4.1,
C.3.1 and D.2.1. These departures, along with
the planned changes to Committee membership
to address the non-compliance, were disclosed
at the AGM in July 2015 and occurred when
succession plans were well advanced. No formal
Board or Committee activity was planned to
take place during this time, and a full explanation
of the steps taken is provided in the Nomination
Committee Report on page 82.
Our position in respect of Code provision C.3.7,
whereby the external audit contract should be
put out to tender at least every 10 years remains
unchanged. A detailed explanation of our
approach, along with the anticipated timeline for
the tender of the external audit contract is set
out in the Audit Committee Report on page 88.
66 SSE plc Annual Report 2016
Board changes
As was outlined in last year’s Report, a number of
planned membership changes have taken place
at Board level during the year. Following an orderly
hand-over, I became Chairman at the conclusion
of our AGM on 23 July 2015 when Lord Smith
of Kelvin stepped down from the role, and in
line with succession plans we have welcomed
two new non-Executive Directors to the Board.
Crawford Gillies and Helen Mahy joined us on
1 August 2015 and 1 March 2016 respectively,
with Crawford Gillies assuming the role of Senior
Independent Director on appointment. Further
details of both Crawford Gillies’ and Helen Mahy’s
Committee membership are provided on page
82 of the Nomination Committee Report, and
information in respect of the ongoing tailored
inductions which all new Directors receive can
be found on page 77.
Board diversity
The Davies Review published in 2011 set out the
recommendation that all FTSE 100 Board’s should
aim for 25% female representation by 2015. SSE
continues to be supportive of the approach set
out in the Davies Review, and recognises that
gender diversity plays a vital role in creating a
balanced and effective Board. With the release
of the five year summary of the Davies Review
in October 2015, we will continue to take account
of further developments in this area. I am delighted
to report that following the changes outlined
above, the SSE Board currently comprises 33%
female representation.
Balance and effectiveness is further achieved
through understanding the needs of the
organisation, identifying the skills required of the
Board and recruiting the best individuals for any
role. This recruitment follows a rigorous and
independent process, and full details of that
used by SSE can be found on pages 81 and 82.
The appointment of Crawford Gillies and Helen
Mahy in 2015/16 has indeed contributed to the
balance of the Board, as they bring a wealth of
knowledge and professional experience from
a broad range of work across different sectors,
and I am sure this will be of great value
going forward.
Board evaluation
The Board recognises the importance of the
evaluation process. In line with recommended
practice, we underwent an externally facilitated
evaluation in November 2015 having completed
an internal evaluation for the previous two years.
The findings will help shape the agenda and
activity of the Board going forward, and progress
against the objectives set will be assessed during
the planned internal evaluation later this year.
The process adopted along with the key findings
of the external evaluation are detailed on pages
76 and 77.
Risk
Risk management and reporting continues to
be an area of focus for both the Board and Audit
Committee, with SSE’s approach to managing
risk being defined by the Group Risk Management
and Internal Control Policy which is set by the
Board. In order to monitor the Risk Management
Framework, the Board conducts an annual review
of effectiveness which in 2015/16 resulted in a
reduction in the number of Principal Risks from
10 to 9. During the period a viability assessment
was also conducted to enable development
of the Group Viability Statement. Further
information on risk management and internal
control can be found in the: Strategic Report
(pages 16 to 19); Directors’ Report (pages 78 and
84 to 89); and in the supplementary Group Risk
Report which is published on the SSE website.
Corporate culture
At the heart of SSE’s culture is our strategic,
financial and responsibility framework, which
is outlined on pages 8 and 9 of the Strategic
Report. The framework is focussed on creating
long-term value, and is designed to support
responsible decision making to ensure SSE
continues to deliver for shareholders and
customers alike. Embedded within the
framework, and our culture in turn, is the SSE
SET of core values. These values underpin
everything that SSE does and focus on safety,
service, efficiency, sustainability, excellence and
teamwork. Whilst the Board play a vital role in
shaping culture and embedding these values,
it is the hard work and dedication of our 21,118
people who define them.
Richard Gillingwater CBE
Chairman
1.
2. Directors’ Report
3.
In this section
68 Board of Directors
70 Corporate Governance
70
Leadership
76
Effectiveness
78 Accountability
79
Relations with
shareholders
80 Nomination Committee Report
84 Audit Committee Report
90
Safety, Health and Environment
Advisory Committee (SHEAC)
Report
92 Remuneration Report
92 Chairman’s Statement
94 At a glance
96 Remuneration Policy
104
Remuneration Report
2015/16
114 Other Statutory Information
116
Statement of Directors’
Responsibilities
117 SSE’s financial results explained
67
Directors’ Report
Board of Directors
Career
Richard Gillingwater CBE
Chairman
Alistair Phillips-Davies
Chief Executive
Gregor Alexander
Finance Director
Richard’s career to date
includes varied experience with
a wide range of organisations.
For more than a decade he
worked in corporate finance
and investment banking, in due
course becoming Chairman of
European Investment Banking
at CSFB. He served as Chief
Executive of the Shareholder
Executive for a time and latterly
was Dean of Cass Business
School, London.
He also has extensive board
experience and served as the
Chairman of CDC Group and
a non-Executive Director of
P&O, Debenhams, Tomkins,
Qinetiq Group and Kidde.
In 2015 he resigned as Senior
Independent Director of Hiscox
Ltd and as a non-Executive
Director of Wm Morrison
Supermarkets plc in order to
ensure he has the appropriate
capacity to be Chairman
of SSE plc.
Alistair’s career to date
comprises a variety of roles.
He has over 19 years’ service
with the Group, having
joined Southern Electric plc
in 1997 and has the benefit
of experiencing much change
in the energy sector over
that period. Prior to 1997
he worked for HSBC and
National Westminster Bank
in corporate finance and
business development roles
in London and New York.
His career has provided him
with extensive experience
across the energy sector and
he has held leadership roles
in the Wholesale, Retail and
Enterprise areas as well as in
other commercial areas of SSE,
such as Corporate Finance. In
addition he has led many of
the Group’s most significant
transactions since the merger
in 1998 when SSE plc was
formed. Alistair also served
as Chairman of the Energy
Retail Association.
Gregor’s career to date has
spanned all areas of finance.
He has over 25 years’ service
with the Group, joining
Scottish Hydro-Electric plc in
1990 and has the benefit of
experiencing much change
in the energy sector over this
period. Prior to 1990, Gregor
worked for Arthur Andersen
where he trained and qualified
as a Chartered Accountant.
He was SSE’s Group Treasurer
and Tax Manager before being
appointed as Finance Director
in 2002. His role was expanded
in 2012 and he now has
responsibility for Finance,
Risk, Audit and Insurance,
Procurement and Logistics, IT,
Corporate Business Services
and Investor Relations. He
was instrumental in SSE’s
investment in SGN and is
currently Chairman of the SGN
Board. In addition he is the
sponsoring Board member for
SSE’s businesses in Ireland.
Crawford Gillies
Senior Independent
Director
Crawford has over three
decades of business and
management experience
in a variety of organisations.
Initially this was with Bain &
Company, a firm of international
management consultants,
where he was Managing
Director Europe from 2001
to 2005. While at Bain he
worked with major companies
in the UK, Continental Europe
and North America across
multiple sectors.
He has also held public
sector posts in both England
and Scotland. He was an
independent member of
the Department of Trade
& Industry and chaired its
Audit & Risk Committee.
Crawford brings a wealth
of experience including
extensive board experience,
making him an excellent
appointment as SSE’s Senior
Independent Director.
Skills and competencies
Date of appointment
Committee membership
Key current appointments
68 SSE plc Annual Report 2016
Richard has significant board
experience which he applies in
his leading of the SSE Board. He
has an excellent understanding
of the policy and regulatory
framework within which
SSE operates as well as
broad financial skills and
City experience.
Alistair is a Chartered Accountant
and this together with his
operational experience and
leadership skills means he brings
significant knowledge and
commerciality to the Board. His
experience in the energy sector
gives him a valuable insight into
the challenges the industry faces.
Gregor is a Chartered
Accountant and brings wide
ranging financial knowledge
to the Board. His detailed
understanding of the different
aspects of the SSE group and
their operating environment
is invaluable.
Crawford’s long and varied
career in business means he
brings broad commercial and
governance knowledge to
the Board including particular
expertise in matters of finance
and risk management.
Non-Executive Director
since May 2007.
Chairman since July 2015.
Appointed an Executive
Director in January 2002.
Appointed Chief Executive
in July 2013.
Appointed Finance Director
in October 2002.
Non-Executive Director
since 1 August 2015.
Chairman of the
Nomination Committee.
Member of the
Remuneration Committee.
Member of the Nomination
Committee.
Member of the
Nomination Committee.
Member of the Audit,
Nomination and
Remuneration Committees.
Chairman of Henderson
Group plc.
Senior Independent
Director of Helical Bar plc.
Director of Energy UK.
Member of the Accenture
Global Energy Board.
Vice President of Eurelectric.
Non-Executive Director
of Stagecoach Group plc.
Chairman of SGN Ltd.
Chairman of Control
Risks Group. Non-Executive
director of Barclays plc.
Senior Independent director
of Standard Life plc.
Member of Advisory Board
of School for CEO’s.
Richard Gillingwater CBE
Alistair Phillips-Davies
Chairman
Chief Executive
Gregor Alexander
Finance Director
Jeremy Beeton CB
Non-Executive Director
Katie Bickerstaffe
Non-Executive Director
Dame Susan Bruce DBE
Non-Executive Director
Peter Lynas
Non-Executive Director
Helen Mahy CBE
Non-Executive Director
Career
1.
2. Directors’ Report
3.
Jeremy’s career comprises
over 40 years of international
project management
experience over large,
multi-site projects. He has
worked with a wide range
of organisations including
governments, and both
private and public companies.
During his career, he held
various positions at Bechtel
Ltd., Haden Maclellan
Holdings PLC and Cleveland
Bridge Engineering UK Middle
East Ltd. In due course he
became Principal Vice
President of Bechtel Ltd,
where he had responsibility
for the management and
delivery of Bechtel’s civil
engineering projects in
infrastructure and aviation.
He was the Director General
of the UK Government
Olympic Executive, the
lead government body for
coordinating the 2012 London
Olympics and Paralympic
Games from 2007 to 2012.
Katie’s career to date has
included experience in a
variety of roles in customer-
facing retailers and fast-
changing markets.
Katie is a graduate of Unilever’s
management training scheme
and her earlier career included
roles at Dyson Ltd and
PepsiCo Inc.
She later became Managing
Director of Kwik Save Ltd
and Group Retail Director
and Group HR Director at
Somerfield plc.
From 2008 to 2012,
Katie further expanded
and consolidated her
varied business experience
while serving as Director
of Marketing, People and
Property (Dixons). In 2012
she was promoted to the
role of Chief Executive,
UK and Ireland Dixons
Carphone plc and also
joined the Group Board.
Sue has had an extensive
and varied career in local
government.
During this time, she held
a variety of roles including
Chief Executive at both East
Dunbartonshire Council
and Aberdeen City Council
before taking up the role
of Chief Executive at the
City of Edinburgh Council.
This provided her with
substantial experience in
leading sizeable organisations
with large numbers of
employees, significant assets
and an important place in
the communities they serve.
Through this part of her career,
she also gained experience
in financial management,
cost control, organisation
recovery and in a range
of large-scale projects.
After 40 years service
she retired from local
government in 2015.
Peter’s career to date means
he has over 30 years of
business experience spanning
all areas of finance as well as
plc board experience.
He joined GEC-Marconi in
1985 as a Financial Accountant
at the manufacturing operation
in Portsmouth. In 1998 he was
appointed Finance Director
of Marconi Electronic Systems
prior to the completion of
the British Aerospace/
Marconi merger.
He was a Board Director
of Marconi’s European joint
venture companies, Alenia
Marconi Systems and Matra
Marconi Space, and has been
Chairman of the trustee Board
of a major pension scheme.
He has been Group Finance
Director of BAE Systems Plc
since 2011.
Helen’s career to date
includes varied experience
as Company Secretary and
General Counsel as well as on
UK and international boards.
She was Group General
Counsel and Company
Secretary of Babcock
International Group PLC.
From 2003 to late 2012
she was Group Company
Secretary and General
Counsel of National Grid plc
where she gained valuable
energy sector experience as
well as experience in the areas
of risk and compliance.
She was previously a
non-Executive Director of
Aga Rangemaster Group plc
and of Stagecoach Group plc
and a former chair of the
GC100 Group.
These roles have also
provided Helen with extensive
commercial experience.
Executive for a time and latterly
National Westminster Bank
Richard’s career to date
includes varied experience with
a wide range of organisations.
For more than a decade he
worked in corporate finance
and investment banking, in due
course becoming Chairman of
European Investment Banking
at CSFB. He served as Chief
Executive of the Shareholder
was Dean of Cass Business
School, London.
He also has extensive board
experience and served as the
Chairman of CDC Group and
a non-Executive Director of
P&O, Debenhams, Tomkins,
Qinetiq Group and Kidde.
In 2015 he resigned as Senior
Independent Director of Hiscox
Ltd and as a non-Executive
Director of Wm Morrison
Supermarkets plc in order to
ensure he has the appropriate
capacity to be Chairman
of SSE plc.
Alistair’s career to date
comprises a variety of roles.
He has over 19 years’ service
with the Group, having
joined Southern Electric plc
in 1997 and has the benefit
of experiencing much change
in the energy sector over
that period. Prior to 1997
he worked for HSBC and
in corporate finance and
business development roles
in London and New York.
His career has provided him
with extensive experience
across the energy sector and
he has held leadership roles
in the Wholesale, Retail and
Enterprise areas as well as in
Gregor’s career to date has
spanned all areas of finance.
He has over 25 years’ service
with the Group, joining
Scottish Hydro-Electric plc in
1990 and has the benefit of
experiencing much change
in the energy sector over this
period. Prior to 1990, Gregor
worked for Arthur Andersen
where he trained and qualified
as a Chartered Accountant.
He was SSE’s Group Treasurer
and Tax Manager before being
appointed as Finance Director
in 2002. His role was expanded
in 2012 and he now has
responsibility for Finance,
Risk, Audit and Insurance,
Procurement and Logistics, IT,
other commercial areas of SSE,
Corporate Business Services
such as Corporate Finance. In
and Investor Relations. He
addition he has led many of
the Group’s most significant
was instrumental in SSE’s
investment in SGN and is
transactions since the merger
currently Chairman of the SGN
in 1998 when SSE plc was
formed. Alistair also served
as Chairman of the Energy
Retail Association.
Board. In addition he is the
sponsoring Board member for
SSE’s businesses in Ireland.
Crawford Gillies
Senior Independent
Director
Crawford has over three
decades of business and
management experience
in a variety of organisations.
Initially this was with Bain &
Company, a firm of international
management consultants,
where he was Managing
Director Europe from 2001
to 2005. While at Bain he
worked with major companies
in the UK, Continental Europe
and North America across
multiple sectors.
He has also held public
sector posts in both England
and Scotland. He was an
independent member of
the Department of Trade
& Industry and chaired its
Audit & Risk Committee.
Crawford brings a wealth
of experience including
extensive board experience,
making him an excellent
appointment as SSE’s Senior
Independent Director.
Skills and competencies
Date of appointment
Committee membership
Key current appointments
Richard has significant board
Alistair is a Chartered Accountant
Gregor is a Chartered
experience which he applies in
and this together with his
his leading of the SSE Board. He
operational experience and
Accountant and brings wide
ranging financial knowledge
has an excellent understanding
leadership skills means he brings
to the Board. His detailed
of the policy and regulatory
significant knowledge and
framework within which
SSE operates as well as
broad financial skills and
City experience.
commerciality to the Board. His
experience in the energy sector
gives him a valuable insight into
the challenges the industry faces.
understanding of the different
aspects of the SSE group and
their operating environment
is invaluable.
Crawford’s long and varied
career in business means he
brings broad commercial and
governance knowledge to
the Board including particular
expertise in matters of finance
and risk management.
Jeremy is a Civil Engineer and
brings extensive knowledge of
project management and related
topics including (amongst
others) safety, effective teams,
complex project structures and
contractual negotiations.
Katie brings an understanding
of customers’ needs gained
through her career in retail.
She combines this with her
experience in HR, marketing
and other business areas to
bring a wide-range of skills
applicable to SSE’s business.
Sue’s extensive career in the
public sector enhances the
diversity of the Board. Her
operational experience of leading
large organisations and projects
make Sue a source of knowledge
on these matters for the Board.
Peter is a Fellow of the
Chartered Association of
Certified Accountants and
brings up to date financial
knowledge and experience as
well as the general business
knowledge gained from being
an Executive Director on
another plc board.
Helen’s career, including
relevant sector experience,
puts her in the ideal position
to understand the legal,
compliance and governance
issues SSE faces. She also brings
a detailed knowledge of, and
interest in, the areas of inclusion
and diversity.
Non-Executive Director
since May 2007.
Appointed an Executive
Director in January 2002.
Appointed Finance Director
Non-Executive Director
in October 2002.
since 1 August 2015.
Non-Executive Director
since July 2011.
Non-Executive Director
since July 2011.
Non-Executive Director
since September 2013.
Non-Executive Director
since July 2014.
Non-Executive Director
since 1 March 2016.
Chairman since July 2015.
Appointed Chief Executive
in July 2013.
Chairman of the
Member of the Nomination
Member of the
Nomination Committee.
Committee.
Nomination Committee.
Member of the Audit,
Nomination and
Remuneration Committees.
Member of the
Remuneration Committee.
Chairman of Henderson
Director of Energy UK.
Group plc.
Senior Independent
Director of Helical Bar plc.
Member of the Accenture
Global Energy Board.
Vice President of Eurelectric.
Non-Executive Director
of Stagecoach Group plc.
Chairman of SGN Ltd.
Chairman of Control
Risks Group. Non-Executive
director of Barclays plc.
Senior Independent director
of Standard Life plc.
Member of Advisory Board
of School for CEO’s.
Chairman of the Safety,
Health and Environment
Advisory Committee.
Member of the Remuneration
and Nomination Committees.
Member of the Court
of Strathclyde University.
Member of the Advisory
Board of PwC.
Chairman of Merseylink Ltd.
Non-Executive Director
of WYG plc.
Non-Executive Director
of John Laing Group plc.
Chairman of the
Remuneration Committee
Member of the Nomination
Committee.
Member of the Audit,
Nomination and Safety,
Health and Environment
Advisory Committees.
Chairman of the
Audit Committee.
Member of the
Nomination Committee.
Member of the Audit,
Nomination and Safety,
Health and Environment
Advisory Committees.
Chief Executive, UK and Ireland
Dixons Carphone plc.
Chair of the Royal Scottish
National Orchestra.
Chair of Young Scot.
Deputy Chair of The
Scottish Council for
Development and Industry.
Visiting Professor, The
International Institute of Public
Policy, University of Strathclyde.
Group Finance Director
of BAE Systems plc.
Member of the BAE Systems Inc
Board in the US.
Chairman of The Renewables
Infrastructure Group.
Non-Executive Director
of Bonheur ASA.
Non-Executive Director
of SVG Capital plc.
69
Directors’ Report
Corporate governance
Leadership
Role of the Board
SSE’s core purpose is to provide the energy
people need in a reliable and sustainable
way. As explained in the Strategic Report, SSE
achieves this through the efficient operation
of, and investment in, a balanced range of
energy-related businesses within three principal
areas: Wholesale; Networks; and Retail (which
incorporates Enterprise). Through these operations
and investments, the Board is collectively
responsible to SSE’s shareholders for the long-
term success of the Group. The Board decide
the overall strategic direction, values and
governance of the Group, and provide the
entrepreneurial leadership within a framework
which enables risk to be assessed and managed.
Effective leadership is further defined within SSE
through the Leadership Blueprint, which is
detailed below.
Governance framework
The Board sets SSE’s corporate governance
framework which is detailed opposite, and
through continual review ensures that it remains
supportive of the individual needs of each
business area and the Group at large. The
governance framework recognises the highly
regulated environment within which SSE
operates, and facilitates effective decision-
making by taking into account the different
regimes that regulate the energy sector in
the UK and Ireland. Embedded within the
governance framework are sound systems
of internal control and risk management.
These are subject to regular review, and it is
the responsibility of the Board to confirm that
they remain robust and relevant to the risk
landscape within which SSE operates.
Decision-making and oversight
The individual and collective powers and
duties of the Directors are determined by a
combination of legislation and the Company’s
Articles of Association. In addition, a formal
schedule of matters is specifically reserved for
consideration by the Board. This schedule is
reviewed annually by the Board as part of SSE’s
Board Charter, and is published on the SSE
website along with the Articles of Association.
Oversight of matters which are delegated
by the Board is retained through a robust
reporting framework central to which are
effective relations with the Board Committees,
Chief Executive, Finance Director and the
SSE Executive Committee. Reports from
the Executive Directors and the Executive
Committee are provided to the Board at each
Board meeting, and minutes from all Board
Committee and Executive Committee meetings
are included within Board meeting packs.
Board Committees
As outlined in SSE’s corporate governance
framework, there are four standing committees
of the Board to which certain matters are
delegated. Delegation to specific committees
ensures that all areas receive adequate focus
and may include matters for approval or review.
The terms of reference of each Committee are
set by the Board, reviewed regularly and are
available in full on the SSE website. An overview
of the responsibilities of each Committee is
detailed opposite and further information can
be found in the relevant Committee reports that
follow. Committee membership is determined
by the Board, on the recommendation of the
Nomination Committee and in consultation
with the relevant Committee Chairman. Prior
to a recommendation being made, consideration
is given to the requisite role of the Committee
and the subject matter of their work, such that
membership complements any technical
expertise required. At meetings of the full Board,
the Committee Chairman is responsible for
communicating key matters requiring the
consideration of the Board.
SSE’s Leadership Blueprint
The Leadership Blueprint defines SSE’s
expectations of its leaders and the behaviours
that are deemed necessary to enable the Group
to succeed over the long term. The behaviours
it sets out are consistent with SSE’s core values
and are supportive of the corporate culture of
the Group. In line with SSE’s ‘Guide to ethical
business conduct for all SSE employees’, the
Leadership Blueprint is centred on ‘Does the
right things’.
The Leadership Blueprint permeates from
Board level and has been rolled out through
dedicated training and information sessions to
over 1,000 leaders and managers across the
Group. It provides a clear and consistent
framework for leadership in SSE and forms an
important aspect of the culture for leaders and
managers to embrace and promote within
their teams.
70 SSE plc Annual Report 2016
Builds a
proud team
Gets it done
brilliantly
Does the
right things
Reads the
energy
contest
Discovers
future
value
1.
2. Directors’ Report
3.
SSE’s corporate governance framework
Board of Directors
Responsible to shareholders for the long-term success of SSE and
for its overall strategic direction, values and governance.
Matters reserved exclusively for Board consideration include:
- Group strategy.
- Annual budget.
- Approval of interim and full year financial statements.
- Interim dividend payments and recommendation
of final dividend.
- Changes in capital structure of the Group.
- Board and Committee membership.
- Succession planning and people strategy.
- Major acquisitions, mergers, disposals and
capital expenditure.
- Significant changes in accounting policy and practice.
- The Group’s corporate governance, risk management
- Approval of key policies.
- Regulatory matters including price control reviews
and system of internal control.
proposed by Ofgem.
Nomination
Committee
Audit
Committee
Reviews and monitors
the leadership needs of
the Board and senior
management, and
supports SSE’s continued
ability to recruit the level
and quality of expertise
it needs to ensure long-
term success.
See pages 80 to 83.
n
o
i
t
a
g
e
l
e
D
Assists the Board
in discharging its
responsibilities in relation
to financial reporting,
internal audit, external
audit, internal control
and risk management.
See pages 84 to 89.
Safety, Health
and Environment
Advisory Committee
Advises the Board
on safety, health and
environment matters,
including setting targets
and overseeing strategy
implementation to
improve performance.
See pages 90 and 91.
Remuneration
Committee
Reviews and monitors
remuneration policy to
support the long-term
success of SSE and
approves the detailed
remuneration terms for
the Executive Directors
on behalf of the Board.
See pages 92 to 113.
k
c
a
b
t
r
o
p
e
R
Executive Committee
Responsible for implementing the strategy, values and governance set
by the Board, whilst leading the day to day running and operations of SSE.
Safety,
Health and
Environment
Committee
Risk and
Trading
Committee
Risk
Committee
Ireland
Large Capital
Projects
Committee
Capital
Allocation
Group
Governance
and Disclosure
Committee
Information
Security
and Privacy
Committee
71
Directors’ Report
Corporate governance continued
Leadership continued
Composition of the Board
The Board comprises the Chairman, the Senior
Independent Director, two Executive Directors
and five non-Executive Directors. Appointment
to these positions results from a combination
of comprehensive succession planning, and
formal and rigorous external searches. To ensure
effective leadership the size, composition and
performance of the Board and its Committees
is regularly reviewed.
In order to fulfil its role the Board must
collectively possess the correct mix of skills,
knowledge and expertise, which includes
amongst other matters an understanding of: the
energy sector; the competitive landscape; the
incumbent risks within the industry and those
specific to SSE’s businesses; the political and
regulatory framework in which SSE operates;
large capital projects; consumer markets;
and finance and audit. SSE recognises that
key to securing such a broad range of skills
and knowledge is diversity. Non-Executive
Directors are therefore recruited on merit from
a variety of backgrounds, in order to build the
desired skill set, and introduce difference of
approach and thought to the boardroom.
More information on the Board’s policy on
diversity and of the Board changes that occurred
during 2015/16 can be found in the Nomination
Committee report on pages 82 and 83. The
Directors’ biographies are set out in full on
pages 68 and 69.
Roles and responsibilities
An overview of the roles and responsibilities of
the Board members and Company Secretary
are outlined below. The roles of Chairman and
Chief Executive are separate and clearly defined.
The non-Executive Directors are appointed
for a fixed term of three years subject to annual
re-election by shareholders. This term can be
renewed by mutual agreement and the current
appointment letters for each of the non-
Executive Directors are available for inspection
on the SSE website.
The Board appoints one of the non-Executive
Directors to be the Senior Independent Director
(SID), who in addition to the responsibilities of
non-Executive Director has specific roles as
outlined below.
The Chairman meets the non-Executive
Directors without the Executive Directors
present throughout the year and in 2015/16 two
meetings were held. These meetings provide the
opportunity to discuss matters without executive
input and to raise any concerns as appropriate.
Roles and responsibilities
Chairman
Richard Gillingwater
Senior Independent Director
Crawford Gillies
Non-Executive Directors
Jeremy Beeton, Katie Bickerstaffe,
Sue Bruce, Peter Lynas and Helen Mahy
The role of the Chairman involves:
- leadership, operation and governance of
the Board;
- setting the agenda for Board meetings
ensuring that they operate effectively, and
provide appropriate opportunity for challenge
and debate to support sound decision-making;
- ensuring constructive relations exist between
the Executive and non-Executive Directors;
- identifying individual Director training needs
and overseeing the performance evaluation;
- meetings with shareholders, analysts and other
representatives of institutional investors; and
- meeting with managers and employees at
various locations throughout the Group.
The role of the Senior Independent
Director involves:
The role of the non-Executive
Directors involves:
- providing a sounding board for the Chairman;
- serving as an intermediary to other Directors
- scrutinising, measuring and reviewing the
performance of management;
when necessary; and
- constructively challenging and assisting in the
- being available to shareholders if they have
development of strategy;
any concerns which are unable to be resolved
through the normal channels of Chairman,
Chief Executive or Finance Director, or if
contact through these channels is deemed
inappropriate.
- reviewing the Group financial information,
ensuring systems of internal control and risk
management are appropriate and effective;
- reviewing the succession plans for the
Board; and
- serving on various Committees of the Board.
Chief Executive
Alistair Phillips-Davies
Finance Director
Gregor Alexander
Company Secretary
Sally Fairbairn
The Chief Executive is responsible for:
The Finance Director is responsible for:
- deputising for the Chief Executive;
- leading the finance management teams;
- leading and supporting the functions of:
Procurement and Logistics; Risk, Audit and
Insurance; Investor Relations and Company
Secretarial; Corporate and Business Services;
Assurance, Supply and Transformation; and
IT; and
The Company Secretary is responsible to the
Board for:
- compliance with Board procedures;
- advising and keeping the Board up to date
on all corporate governance developments;
- facilitating the Directors’ induction
programmes and assisting with professional
development;
- considering Board effectiveness in conjunction
- representing SSE externally to stakeholders,
with the Chairman; and
shareholders, customers, suppliers,
regulatory and government authorities and
the community.
- providing advice, services and support to all
Directors as and when required.
- delivering strategy as agreed by the Board;
- leading the Executive Committee which
oversee the operational and financial
performance of, and issues facing the Group;
- leading and supporting each of SSEs
businesses and the functions of HR, Strategy
and Development and Corporate Affairs; and
- representing SSE externally to stakeholders,
shareholders, customers, suppliers,
regulatory and government authorities and
the community.
72 SSE plc Annual Report 2016
1.
2. Directors’ Report
3.
Board meetings
The Board has six scheduled Board meetings
each year and attendance for 2015/16 is set
out in the table below. In the event of non-
attendance due to unforeseen circumstances
or prior commitments which could not be
rearranged, the Director will provide comments
and feedback to the Chairman or Company
Secretary, who then ensures that they are
raised at the meeting.
In addition to full Board meetings, a Board call
is held in the alternate months. This is used to
update the Board on business performance,
provide briefings on any current issues, and
may include matters for decision or approval.
Arrangements are also in place should a
Board decision be required to be taken
out with these times.
A business dinner with senior management and
external guests is held in the evening before
each Board meeting. Full Board meetings then
commence the following day and are arranged
to take place at different SSE locations. This
facilitates engagement across all areas of the
business and enhances the Board’s level of
understanding at an operational level. Members
of the Executive Committee are also regularly
invited to attend, with at least two members of
the Executive Committee or senior management
present on a rotating basis. The additional
attendees routinely provide updates from
within their business area, enabling in-depth
and constructive discussion at Board level and
supporting effective decision-making.
Board activity
The Board agenda setting process is built from
an annual Board Planner, which was reviewed
in 2015/16 by the Chairman and Company
Secretary. Significant focus was given to both
the matters to be considered, and the time
throughout the year at which they are brought,
to ensure that the Board continues to support
effective decision-making.
Signature practices at every Board meeting
include reports from: the CEO; the Finance
Director; and the Managing Directors from
the main businesses and support functions
in relation to safety, compliance, performance,
developments and key strategic initiatives.
Some of the specific matters considered by
the Board during the year in relation to SSE’s
strategic priorities of efficient operations,
disciplined investment and balanced
businesses are outlined on page 74.
The reporting year 2015/16 was another busy
period for the Board, in what has continued to
be particularly challenging market conditions.
Some difficult discussions took place during the
year, including those surrounding the Company’s
thermal generation assets – Ferrybridge and
Fiddler’s Ferry Power Stations. Further information
of the governance surrounding the decision-
making process can be found in the Fiddler’s
Ferry case study on page 75.
Future investment has also been an area
of focus, with the acquisition of a share
in the West of Shetland upstream gas assets,
and the continued progress with the Caithness-
Moray transmission line. The Board has
continued to oversee the Company’s approach
in respect of ‘Treating Customers Fairly’, and
throughout the year individual members of
the Board participated in a number of related
forums. In July 2015 the Board approved SSE’s
Treating Customers Fairly Statement which is
published on the SSE website.
A significant amount of time has also been spent
engaging with the business outside of the Board
meeting schedule, and further details of the
specific activities which have taken place are
detailed on page 74.
Board attendance
Members
Position
Richard Gillingwater
Chairman
Gregor Alexander
Executive Director
Jeremy Beeton
Independent NED
Katie Bickerstaffe
Independent NED
Sue Bruce
Independent NED
Crawford Gillies1
Senior Independent Director
Peter Lynas
Helen Mahy2
Independent NED
Independent NED
Alistair Phillips-Davies
Executive Director
Lord Smith of Kelvin3
Former Chairman
1 Crawford Gillies joined the Board on 1 August 2015.
2 Helen Mahy joined the Board on 1 March 2016.
3
Lord Smith of Kelvin retired from the Board on 23 July 2015.
On the
Board since
Attended/
scheduled
2007
2002
2011
2011
2013
2015
2014
2016
2002
2005
6/6
6/6
6/6
6/6
6/6
4/4
6/6
1/1
6/6
2/2
SSE Board Charter
During the year, the Board reviewed
and realigned a number of existing
governance policies and documents
with the approval of the SSE Board
Charter. The Board Charter supports
good standards of corporate
governance, through the collation
and regular review of a number of
key matters, including:
-
the division of responsibilities
between the Chairman and
Chief Executive;
the respective roles,
responsibilities and authorities
of the Board, its Committees
and management;
the Schedule of Reserved
Matters; and
-
-
- Board level policies and practices.
The SSE Board Charter is provided to
each of the Directors and is subject
to a comprehensive annual review,
with updates made during the year
as required.
Strategy session
The annual strategy session was
held in July 2015 and was attended
by all Board and Executive Committee
members. The session was facilitated
by the Director of Strategy and
Development and served as a platform
for iterative strategy development,
with specific initiatives and plans
for implementation being agreed.
The Board was provided with an
assessment of the Group’s current
strategic position in advance of
the session, which was reviewed
and debated in detail on the day.
Key conclusions and agreed actions
were then recorded and subsequently
finalised, following any investigation
as appropriate. As part of the session
the Board also received an update
on the CMA Energy Market
investigation by the Managing
Director, Corporate and Business
Services and Shareholder perspectives
by SSE’s Corporate Broker, Credit
Suisse International.
73
Directors’ Report
Corporate governance continued
Board activity in 2015/16
SSE is built on strong foundations and operates with a clear strategic framework comprising a balanced range of
businesses in core markets, and a commitment to efficient operations and disciplined investments. Some of the
matters considered by the Board in relation to these strategic priorities are set out below.
Area of focus
Matters considered by the Board included
Disciplined investment
Efficient operations
-
-
Investment and capital expenditure to deliver business growth resulting in progression of
the Caithness-Moray electricity transmission link and expanding SSE’s renewables portfolio.
Investing in becoming a market-leading retailer of energy and essential services by
digitalising, diversifying and excelling in customer service.
- The disposal strategy to deliver business simplification, create value and recycle capital,
including the disposal of SSE Pipelines, PFI street lighting contracts and an equity share
in Clyde wind farm.
- Managing energy sector issues including the CMA investigation, RIIO ED1 framework,
commodity prices and planned revisions to the UK Capacity Market.
Balanced businesses
- Ensuring SSE has a broad platform from which to deliver long-term value, with the purchase
of a 20% share in the four gas fields in the Greater Laggan Area and a 20% share in the
Shetland Gas Plant.
- Managing risk through owning a diverse range of assets and fuels from which to meet
the needs of customers, including the option to invest in a second multi-fuel facility
at Ferrybridge.
Board engagement in 2015/16
Members of the Board regularly visit locations across the Group to meet with management and gain a greater understanding of the
operations of SSE’s businesses. Following any such site visits, the Director will provide feedback at the next Board meeting.
Wholesale
During the year, a number
of the Directors took the
opportunity to visit some
of SSE’s gas generation assets
at Medway in the UK and Great
Island in Ireland. At each visit,
the Directors were given a tour
of the site and met with local
management to gain a better
understanding of the operational
challenges facing the plant.
Networks
Significant milestones were
reached during the year on a
number of large capital projects
within the Networks business,
including the completion of the
Beauly-Denny Transmission
Line and commencement of
the Caithness to Moray subsea
transmission link. The full Board
are due to visit sections of both
these assets in 2016/17.
Retail
During the year, members of
the Board attended a number
of sessions on the digitalisation
and strategic priorities of the
Retail business. Briefings from
senior management provided
the Board with a deeper level
of insight on digital customer
engagement, smart meters
and other growth opportunities.
Enterprise
A number of site visits
took place during the year,
to update members of the
Board on Enterprise business
initiatives, including the Energy
Company Obligation scheme
and Wyndford District heating
scheme. An engagement
session on ‘Smart Cities’ was
also arranged covering market,
technologies and solutions.
74 SSE plc Annual Report 2016
1.
2. Directors’ Report
3.
Governance case study
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 upon the profitability of all thermal
assets. This has affected SSE’s own portfolio as well as the wider market. This trend looks set to continue and it was
against this backdrop that the decisions outlined in the governance case study below were made.
January 2016
1
2
3
February 2016
4
5
March 2016
6
7
8
Background
The energy landscape:
- The UK Government announces it will
consult on proposals to end electricity
generation from coal-fired power
stations by 2025, with operations
substantially reduced from 2023.
- All units at Fiddler’s Ferry fail to secure a
capacity obligation agreement for delivery
in the 2019/20 Capacity Market auction,
in December 2015.
- There has been an observed change in
the generation mix, seeing coal stations
being displaced by cheaper lower carbon
alternatives. SSE has stated its intention to
progressively reduce the carbon intensity
of its electricity generation.
Fiddler’s Ferry:
- SSE employs 213 people at Fiddler’s
Ferry Power Station.
- From 1 April 2016 the station is due
to have Transmission Entry Capacity
(TEC) of 1,455MW (equivalent to three of
Fiddler’s Ferry’s Units), and a contract to
provide Supplemental Balancing Reserve
for winter 2016/17 is in place.
- Costs are not being covered by the
income the station receives from
generating electricity and providing
services to National Grid. The station
has been loss-making over the last
two financial years and cash outflow
is expected to exceed cash inflow in
all of the financial years through to
March 2020.
- The asset is aging and its high carbon
intensity poses disadvantages in relation
to cost and environmental impact.
Decision-making
1. Executive Committee
The Executive Committee considered SSE’s
position and options for the future operation
of its thermal generation assets, which
included Fiddler’s Ferry Power Station. The
Executive Committee recommended that
the issues identified, including the proposal
to consult with employees be presented to
the Board.
2. Board
The Board reviewed SSE’s position in respect
of its thermal generation assets, including
the projected future losses at Fiddler’s Ferry.
The Board considered the potential impact
of any proposal to end commercial
operations, recognising that work which
would continue to inform the decision-
making process was currently ongoing.
It was acknowledged, should an intention
to close Fiddler’s Ferry be announced,
an extensive stakeholder engagement
and employee consultation process would
commence. It was agreed that a dedicated
sub-Committee of the Board should be
formed in order to support the Executive
Committee and to facilitate the process
surrounding this important decision.
3 & 4. Sub-Committee of the Board
A dedicated sub-Committee of the Board
comprising both non-Executive and Executive
Directors met in January and February 2016
to assess the output of ongoing internal and
external engagement surrounding the future
of Fiddler’s Ferry. At the meeting in January,
the Directors agreed to defer any decision
for a further period to allow engagement
to continue. At the meeting in February, the
Directors reviewed the position and confirmed
that the major factors which had been
considered by the Board in January remained
unchanged, namely the energy landscape and
economic outlook for the plant. Under the
terms of the authority delegated by the Board,
the sub-Committee approved the decision of
the intention to close three of the four units at
Fiddler’s Ferry from 1 April 2016.
5. Announcement of intention to close
made to the market
An announcement was made on 3 February
2016. The full consultation process to enable
a final decision to be made was initiated.
6. Executive Committee
An update of developments potentially
impacting the intention to close Fiddler’s
Ferry decision was provided to the Executive
Committee. The Committee discussed the
option for Fiddler’s Ferry to participate in
an upcoming tender for the provision of
Ancillary Services to National Grid, with a
contract start date of 1 April 2016. A number
of potential outcomes were identified and
following comprehensive analysis it was
agreed that the Executive Committee would
recommend a bid, for consideration by
the Board.
7. Board
A comprehensive bid proposal was reviewed
by the Board. At this time the extensive
stakeholder consultation process remained
ongoing and the future operations of Fiddler’s
Ferry were still under review. The Board
subsequently agreed that a bid should be
submitted to National Grid’s tender process.
The Board also received an update following
the Government announcement that a
further Capacity Market auction for 2017/18
was under consultation.
8. Announcement of operations
continuing in 2016/17
Following a competitive procurement
process, one of the three available units
at Fiddler’s Ferry, secured a contract to
provide Ancillary Services to National
Grid. An announcement confirmed this
development, and detailed that commercial
operations would continue at the site for
2016/17, with all or part of Fiddler’s Ferry
being entered into any Capacity Market
auction in 2017/18.
75
Directors’ Report
Corporate governance continued
Executive Committee
Martin Pibworth
Managing Director,
Wholesale
Colin Nicol
Managing Director,
Networks
Will Morris
Managing Director,
Retail
Jim McPhillimy
Managing Director,
Enterprise
Sally Fairbairn
Company Secretary
and Director of
Investor Relations
The Executive Committee is responsible
for implementing policy and strategy as
agreed by the Board and for the operational
management of SSE’s businesses. The
membership of the Executive Committee
comprises: the two Executive Directors; and
the Managing Directors of Wholesale,
Networks, Retail and Enterprise – all of
whom are persons discharging managerial
responsibilities. The Company Secretary
is Secretary to the Executive Committee,
and the Managing Director, Corporate
Affairs, is invited to attend meetings.
The Executive Committee meets monthly
and follows a detailed plan of business
throughout the year, with meetings taking
place at different SSE sites in order to
increase visibility and staff engagement.
The Executive Committee carried out an
annual review of performance in September
2015, with the operation of the Committee
being confirmed as remaining effective.
Effectiveness
Evaluation of the Board,
Committees and Directors
The Board, its Committees and the individual
Directors participate in an annual evaluation
of performance.
Having undergone an internal review of
effectiveness in 2013/14 and 2014/15, the Board
underwent a comprehensive external evaluation
during the year, which followed a facilitated
self-assessment process as outlined opposite.
The review was conducted by Sean O’Hare of
Boardroom Dialogue Ltd. Neither Sean O’Hare
nor Boardroom Dialogue Ltd have any other
connection with the Company.
Overall the evaluation concluded that the Board
were committed and working effectively together
in their leadership role. Current membership was
deemed to possess diversity of skill, background
and gender, with open, engaged and respectful
relationships existing between the Board and
senior management. The strength of the
corporate culture which emanates from the
SSE SET of core values, was clearly visible,
and the process confirmed that the Board
and its Committees were functioning well.
The evaluation identified opportunities to
further enhance Board engagement, strengthen
exposure to complex and technical issues,
improve meeting administration and increase
consideration of succession planning. Details
of the objectives set are detailed opposite.
Progress has been achieved against all objectives
set in 2014/15, and will again be measured against
those currently set during the scheduled internal
evaluation in 2016/17.
During the year each Director participated in a
detailed review of individual performance which
was carried out by the Chairman. The process
for evaluating the Chairman was managed
by the Senior Independent Director, which
involved a separate meeting with the non-
Executive Directors and included feedback
from the Executive Directors and the
Company Secretary.
Independence
The Nomination Committee Report explains the
process carried out during the year to verify the
continuing independence of the non-Executive
Directors. The Board considers that the Chairman
was independent on appointment and that all
non-Executive Directors are independent in
line with the criteria as set out in the Code. The
continuing independent and objective judgement
of the non-Executive Directors was confirmed as
part of the annual Board evaluation process.
Directors’ conflicts of interest
During the year a review of the Directors’
interests and appointments was carried out
by the Company Secretary and a report was
provided to the Nomination Committee for
review and recommendation to the Board.
The Board then considered and authorised each
Director’s reported actual or potential conflicts
76 SSE plc Annual Report 2016
of interest at their meeting in January 2016.
Each Director abstained from approval of their
own position. The Board continues to monitor
and review actual and potential conflicts of
interest on an ongoing basis and Directors are
responsible for notifying the Company Secretary
if they become aware of an actual or potential
conflict situation or a change in circumstances
relating to an existing authorisation. Biographical
details for all the Directors, including details of
their external directorships are set out on pages
68 and 69.
Director induction
On joining the Board, all non-Executive Directors
receive an induction tailored to their individual
requirements. Crawford Gillies and Helen Mahy
completed a comprehensive programme on
appointment, which was facilitated by both
the Chairman and Company Secretary and
comprised the elements outlined in the table
opposite. During the induction programme
each Director also identified areas in which
they requested additional meetings or further
information. As a result Helen Mahy met with
Group Risk and Human Resources, and a
‘Digital Deep Dive’ was arranged for both
Helen Mahy and Crawford Gillies with the
Retail Leadership Team.
1.
2. Directors’ Report
3.
Board and Committee evaluation
Step 1
A meeting was held with Boardroom Dialogue
A meeting was held with Boardroom
Ltd, the Chairman and Company Secretary,
Dialogue Ltd, the Chairman and Company
at which the scope and format of the
evaluation process was decided.
Secretary, at which the scope and format
of the evaluation process was discussed.
A recommendation to proceed was
agreed by the Board.
Step 1
Boardroom Dialogue Ltd
Step 4
attended the Board meeting
in January and presented the
Boardroom Dialogue Ltd attended the
findings of the evaluation
Board meeting in January 2016 and
process. The recommendations
presented the findings of the evaluation
made were considered by the
Board and actions identified for
process. The recommendations made
the coming year.
were considered by the Board and
actions identified for the coming year.
S
t
e
p
4
Key findings and objectives for 2016/17
S
t
e
p
Step 2
Individual interviews were held by Boardroom
Individual interviews were held
Dialogue Ltd with each of the Directors, the
by Boardroom Dialogue Ltd with each of
Company Secretary, Deputy Company
Secretary and members of the
the Directors, the Company Secretary,
Executive Committee. A review of
Deputy Company Secretary and members
Board documentation including
of the Executive Committee. A review
meeting packs and agendas
from the past 12 months was
of Board documentation including
also conducted.
meeting packs and agendas from the
past 12 months was also conducted.
2
The findings of the evaluation
process were compiled and
reported to the Board via an
in-depth report.
Step 3
The findings of the evaluation
process were compiled and provided to
the Chairman and Company Secretary.
These were then communicated to
the Board via an in-depth report.
External
Evaluation
Process
p 3
S t e
External Evaluation Process
Enhancing Board engagement
Monitor the agenda setting process to ensure continued linkage
to strategy; review the allocation of time for site visits including the
process for reporting back to the Board; and consider increasing
Interview
the number of meetings of the non-Executive Directors in the
Board calendar.
and
Engaging in Board development
Review
Identify complex or technical business areas that would benefit
from teach-ins and consider increasing the number of one-to-one
meetings between the non-Executive Directors and members of
the senior management team.
Briefing
and
Scope
Improving meeting administration
Explore options for streamlining the format and volume of Board
and Committee meeting packs, with continued timely dissemination
of all documentation.
Result
Collation
Discussion
and
Objectives
Considering long-term succession planning
Continue to monitor and develop succession plans at Board level and
increase visibility of the talent pipeline below the Board and upper
level of senior management.
Step 1
Step 2
Step 3
Step 4
Non-Executive Director induction programme
Crawford Gillies and Helen Mahy
- Briefings on strategy, financial performance, the energy sector and priorities for long-term success from the Chief Executive;
- overview on finance and the control environment, internal and external audit, risk and compliance with the Finance Director;
- sessions with each of the Managing Directors of the key business areas (including members of their leadership teams) covering structure,
strategy and performance;
- comprehensive session with the Chairman on strategy and the operation of the Board and its Committees;
- a meeting with the Company Secretary and Director of Investor Relations to review the Group’s governance and policies, and investor
relations matters;
- overview of the political and external environment from the MD, Corporate Affairs;
- details of HR policies, overview of the Leadership Blueprint, and ongoing work from the Director of Human Resources;
- an update on regulatory and legislative matters including any significant issues facing the Group from the MD, Corporate and Business
Services and the Director of Legal Services; and
- meeting with the External Auditor.
77
Corporate governance continued
Effectiveness continued
Chairman engagement
As part of the transition from Deputy Chairman
to Chairman, Richard Gillingwater participated
in a number of engagement activities during
the year. These included individual meetings
with a number of shareholders covering a range
of topics including specific governance matters,
and stakeholder meetings such as consumer
forums attended by Ofgem and Which.
Training and development
Directors are encouraged to develop and refresh
their knowledge and skills on an ongoing basis
with developmental needs being reviewed as
part of the annual Board evaluation process,
and the necessary resources are made available
should any Director wish additional training.
The Company also operates performance
coaching for the Executive Directors and
for other members of senior management,
which is designed to develop and enhance
individual and Company performance.
In 2015/16 the non-Executive Directors
participated in various technical updates and
briefings, including one-to-one meetings
between individual directors and members
of senior management. Following any such
meetings the Director will provide feedback
to the next Board meeting.
Information and briefings
Keeping up to date with key business
developments is essential for Directors to
maintain and enhance their effectiveness, and the
details of Board Activity and Board Engagement
in 2015/16 provided on page 74 gives an insight
into some of the activity undertaken during the
year. The Board further receives regular updates
on the progress and performance of investments
including a detailed KPI report from senior
management, and Board dinners are often
accompanied by presentations on topics
such as: the competitive environment; or the
regulatory, political and economic landscape.
Site visits are arranged for the non-Executive
Directors during the year in order to allow a
greater understanding of the operation of SSE’s
businesses. During 2015/16 these included both
visits incorporated as part of on-site Board
meetings and those arranged independently of
the formal meeting schedule. Details of Board
engagement outside of the Boardroom are set
out on page 74.
Independent professional advice
There is an agreed procedure for Directors
to take independent professional advice if
necessary, at the Company’s expense. Any advice
obtained shall be made available to the other
members of the Board. This procedure was not
used during the year.
78
Accountability
Financial and business reporting
The Board recognises its responsibility for
preparing the Annual Report and Accounts and
to present a fair, balanced and understandable
assessment of the Group’s position and
prospects. This assessment also extends to
interim results statements and other price
sensitive public announcements, reports to
regulators and information to be presented by
statutory requirements.
The Directors’ statement set out on page 116
recognises and confirms these responsibilities,
and further details of the Fair, Balanced and
Understandable Assurance Framework used
by the Directors can be found on page 85. The
Strategic Report on pages 1 to 65 explains the
basis on which the Group generates or preserves
value over the longer term, and the strategy for
delivering its objectives. As such, the Annual
Report is intended to provide the information
necessary to enable an assessment of the
Company’s position and performance, business
model and strategy. The responsibilities of the
External Auditor, KPMG, in relation to financial
reporting are set out in the Auditors’ report on
pages 205 to 208.
Risk management and internal control
The Group Risk Management and Internal Control
Policy is underpinned by the principle that
everyone in SSE has a responsibility for the
management of risks. To ensure the Group’s
success, it is critical that material risks are
understood and effectively managed, and that
decisions are taken with full consideration of these.
The Board is responsible for ensuring that
SSE maintains an effective risk management
framework as part of a sound system of internal
control. The framework applies to all business
practices including the Group’s financial
reporting process (including the preparation of
consolidated financial statements) as described
on pages 84 to 89. While SSE commits to
ensuring that these systems remain robust and
effective, they are designed to manage rather
than eliminate risk and as such can only
therefore provide reasonable rather than
absolute assurance.
The Risk Management Framework has been
designed to:
- ensure that the Board meets its obligations
under the Code;
- encourage everyone in SSE to consider
and discuss risk in the course of decision
making; and
- align with SSE’s corporate governance
framework to ensure the most appropriate
levels of ownership and oversight.
Pages 16 to 19 of the Strategic Report sets out
SSE’s Principal Risks and the processes by which
they are managed. During the year the Board
has carried out a robust assessment of the
Principal Risks facing the Group, including those
that would threaten its business model, future
performance, solvency or liquidity. The diagram
on pages 16 and 17 of the Strategic Report
illustrates SSE’s wider system of internal control.
Board’s review of internal control
The Board and Audit Committee have
reviewed the effectiveness of the Group’s risk
management and system of internal control
in line with the requirements of the Code for
the period from 1 April 2015 to 17 May 2016
(being the last practical day prior to printing
of this Annual Report) and confirm that the
procedures and processes of the system of
internal control, which accord with the Code
and appropriate Disclosure and Transparency
Rules, have been in place during that period.
This review covered all material controls,
including financial, operational and compliance
controls and no significant failings or weaknesses
were identified. In 2015/16, Ofgem opened an
investigation into whether SSE infringed Chapter
II of the Competition Act 1998 and/or Article 102
Treaty on the Functioning of the European Union
in respect of the particular issue of provision of
Points of Connection services in the Southern
Electric Power Distribution area. The
investigation is ongoing.
Further details of the process undertaken
to review the system of internal control can
be found in the Audit Committee Report on
pages 84 to 89. The risk and internal control
procedures described in this report have not
been extended to cover the Group’s interests
in joint ventures. SSE does however have
representation on the Boards of its joint venture
companies. In respect of its most significant
undertaking, SGN, the Board receives regular
updates on risk management and internal
control activities and issues from its
representatives on the SGN Board, and
from the Chief Executive of SGN directly.
Going Concern
After making appropriate enquiries, the
Directors have a reasonable expectation that
the Company and the Group have adequate
resources to continue in operational existence
for the foreseeable future (12 months). The
financial statements are therefore prepared
on a Going Concern basis. Further details
of the Group’s liquidity position and Going
Concern review are provided in note 34 to
the financial statements.
Viability Statement
The Directors’ statement of longer term viability
can be found on page 17 of the Strategic Report.
SSE plc Annual Report 2016Directors’ Report
1.
2. Directors’ Report
3.
Relations with shareholders
Governance and Disclosure Committee
The Governance and Disclosure Committee is
a sub-Committee of the Executive Committee.
The Committee monitors governance
developments, advises on matters relating to
external affairs and assists in developing the
investor relations strategy. It is responsible for
overseeing the Company’s compliance with
regulatory and legal requirements including
those arising from SSE’s listing on the London
Stock Exchange, surrounding the release
and control of announcements and other
information of interest to shareholders and the
investment community. The Governance and
Disclosure Committee comprises: the Chief
Executive; the Finance Director; the Company
Secretary and Director of Investor Relations;
the Managing Director, Corporate Affairs; the
Managing Director, Corporate and Business
Services; the Director of Human Resources;
the Director of Risk, Audit and Insurance; and
the Director of Legal Services. The Deputy
Company Secretary is Secretary to the
Committee. The Committee meets as
required and had six meetings in the year.
Dialogue with investors
The Company continues to maintain an effective
dialogue with its shareholders which is primarily
delivered through a programme of meetings
and calls with shareholders and analysts led
by the Chief Executive and Finance Director.
The Investor Relations team, managed by the
Company Secretary and Director of Investor
Relations, administer the day to day operations
and engagement with institutional and retail
investors and market analysts. In the last financial
year, the Chief Executive and Finance Director
have hosted over 100 meetings or calls with
existing or potential investors and analysts and
presented at several investor conferences.
The Chairman, Senior Independent Director and
members of the Executive Committee are also
available to engage with shareholders and the
Chairman has attended several shareholder
meetings and conferences over the last year.
In preparation for his new role the Chairman
offered meetings to the top 10 shareholders
and met a number of them to discuss their
opinions on governance and the challenges
facing SSE. During the year the Chairman and
the Chair of the Remuneration Committee also
offered to engage with principal shareholders
and shareholder representative bodies to discuss
directors remuneration policy which led to a
number of calls and meetings.
Feedback from shareholder meetings is gathered
bi-annually through SSE’s Corporate Brokers and
is presented to the Board. Following changes
in 2015/16, SSE’s joint Corporate Broker’s are
currently Morgan Stanley & Co. International plc
and Credit Suisse International. Investor Relations
review analyst reports on a daily basis,
identifying relevant opinions and issues and
distributing them timeously to the Directors
and other members of the senior management
team, allowing them to form a view of the
priorities and concerns of SSE’s shareholders.
During the year, SSE also commissioned an
independent investor and analyst perception
study to further understand the views of
institutional investors and analysts.
Communication with shareholders
SSE’s website contains up-to-date information for
shareholders and other interested parties including
share price information, announcements and
news releases, investor and analyst presentations,
information on shareholder services and contact
details. The Company’s Annual Report and other
shareholder circulars are also published on the
SSE website.
Shareholders have a choice in how to receive their
company communications such as the Annual
Report. The Company encourages shareholders
to receive electronic communication, and
currently around 95% of shareholders receive
company communications such as the Annual
Report and Notice of Annual General Meeting
electronically. In order to make voting easier and
reduce SSE’s environmental impact, from the 2017
AGM paper proxy voting cards will only be sent to
shareholders who have requested to receive a
hard copy of the Annual Report. Shareholders
who receive paper notification that the Annual
Report is available online through the SSE website
will default to online voting in 2017. Shareholders
who wish to change their communication
preference can do so by contacting the
Company’s Share Registrar, Capita Asset Services,
whose contact details can be found on page 209.
Annual General Meeting
The AGM provides an opportunity for the Board
to meet with shareholders and present an update
on the performance, key developments and
strategy of the Company. Shareholders are
invited to ask questions at the AGM in order to
communicate their views. The Notice of Annual
General Meeting, which contains full explanations
of the business to be conducted at the AGM, is set
out in a separate shareholder circular. Voting is
conducted by means of an electronic handset
and in the event of a significant vote against
any resolution, appropriate steps will be taken
to understand and address any underlying
shareholder concerns. Details of the 2015
AGM and forthcoming AGM can be found
in the table below.
Communications with other stakeholders
The Executive Directors have a programme
of events to meet with a range of external
stakeholders representing the regulatory
and government authorities, public sector,
investment community, environmental affairs,
and consumer interests. The purpose of these
events is to discuss the Company’s position on
a range of business, policy and public interest
issues, to learn more about stakeholders’ views,
and to hear their suggestions and address any
areas of concern.
More generally, working with public policy
makers is a vital area for the Company, given the
high profile of energy and environment related
issues and SSE does this in several ways including
submission of consultation responses, meetings
and dialogue with different government and
non-government organisations, as well as active
participation in relevant trade associations and
other bodies.
In all of its engagement with stakeholders, SSE
seeks to adopt a straight forward and transparent
approach, seeking outcomes that bring lasting
benefits to customers and support the fair
remuneration of investment in the energy
industry in the UK and Ireland.
The AGM
Annual General Meeting
Overview
23 July 2015
Perth Concert Hall, Perth
21 July 2016
Perth Concert Hall, Perth
- Full Director attendance.
- Lord Smith of Kelvin stepped down from
the Board as Chairman.
- At least 94% of votes received for the
re-election of all other Directors.
- Highest votes in favour: 99.99% to receive
the report and accounts.
- Lowest votes in favour: 91.78% to approve
14 days’ notice of general meetings.
- 17 Ordinary Resolutions and 3 Special
Resolutions being proposed to
shareholders.
79
Directors’ Report
Nomination Committee Report
We continually monitor the
membership and composition of the
Board, its Committees, and the internal
talent pipeline, to ensure that they
support the long-term success of SSE.
Members and meetings
Members
Richard Gillingwater
(Committee Chairman)
Gregor Alexander
Jeremy Beeton
Katie Bickerstaffe
Sue Bruce
Crawford Gillies1
Peter Lynas
Helen Mahy2
Alistair Phillips-Davies
Lord Smith of Kelvin3
Independent non-
Executive Director
Member since
Attended/scheduled
n/a
No
Yes
Yes
Yes
Yes
Yes
Yes
No
No
September 2008
6/6
July 2014
July 2014
September 2011
July 2014
August 2015
July 2014
March 2016
July 2013
March 2004
6/6
6/6
6/6
6/6
2/2
6/6
n/a
6/6
4/4
1 Crawford Gillies joined the Nomination Committee on 1 August 2015.
2 Helen Mahy joined the Nomination Committee on 1 March 2016.
3
Lord Smith of Kelvin retired from the Nomination Committee on 23 July 2015
upon stepping down from the Board.
80 SSE plc Annual Report 2016
Dear Shareholder,
It has been a particularly busy year for the
Nomination Committee, with six meetings in
2015/16. During this period we have welcomed
two new non-Executive Directors to our Board
and I assumed the role of Company Chairman
when Lord Smith of Kelvin stood down at the
conclusion of our 2015 AGM.
It was outlined in last year’s report that
succession plans in respect of a new non-
Executive Director were already well advanced.
We announced in June 2015 the appointment of
Crawford Gillies as Senior Independent Director
with effect from 1 August 2015. It was
highlighted at the AGM in July that a timing
issue between the change in Chairman and
the appointment of Crawford Gillies would give
rise to a short period of non-compliance with
certain provisions of the Code. An explanation
of the steps taken to mitigate these areas of
non-compliance, such that our standards of
corporate governance remained unaffected,
can be found in the report that follows.
Upon welcoming Crawford Gillies to the
Board on 1 August 2015, he became a member
of the Nomination, Audit and Remuneration
Committees. Helen Mahy then joined us on
1 March 2016 as a non-Executive Director,
and became a member of the Nomination,
Audit, and Safety, Health and Environment
Advisory Committees.
I am delighted to welcome both Crawford and
Helen to SSE and following the changes outlined
above, the Board now comprises the Chairman,
Senior Independent Director, two Executive
Directors and five non-Executive Directors.
As a Committee we fully recognise the stability
that strong and balanced leadership affords. It is
therefore essential that we continually monitor
the membership and composition of the Board,
its Committees, and the internal talent pipeline,
to ensure that they support the long-term
success of SSE.
Richard Gillingwater CBE
Chairman of the Nomination Committee
1.
2. Directors’ Report
3.
Activities in 2015/16
The Nomination Committee had six meetings during the year and an overview of the work carried out during the period is set out in the
table below.
Action
Succession planning
Outcome
- Handover in Chairmanship upon stepping down of Lord Smith
- Richard Gillingwater assumed the role of Chairman from his position
of Kelvin.
as Deputy Chairman following a facilitated transition period.
- Conduct searches for two new non-Executive Directors, with
- Recommendations to appoint Crawford Gillies as Senior
one candidate to assume the role of Senior Independent Director.
- Monitor plans for succession and refreshment of the Board and
Independent Director and Helen Mahy as non-Executive Director.
- An ongoing review of the succession pipeline for Board and senior
senior management.
management positions.
Director independence and conflicts
- Review the independence of all non-Executive Directors.
- Review of declared and potential conflicts of interests of the
Directors.
Committee membership
- Confirmation that all non-Executive Directors remain independent
in line with the Code.
- Made recommendation to the Board for approval.
- Review Board Committee membership and consider the 9 day
- Recommended changes to the membership of the Board
period of non-compliance attributed to timing issues with changes
in Board membership.
Committees with the joining of two new non-Executive Directors.
Diversity
- Monitor the diversity of the Board and recruit in line with the
- Board appointments were made in consideration of the requisite
Board Diversity Policy.
skills and experience required and in line with Board Policy.
Role
The Nomination Committee reviews and
monitors the leadership needs of the Board
and senior management, and supports SSE’s
continued ability to recruit the level and quality
of expertise it needs to ensure long-term
success. The Nomination Committee’s remit,
which is set out in its terms of reference,
includes responsibility for:
-
reviewing the structure, size and composition
of the Board and its Committees and making
recommendations to the Board on any
desired changes;
reviewing the succession plans for the
Executive Directors and senior management;
-
-
-
reviewing potential conflicts of interest
of Directors; and
reviewing the external commitments of the
Directors and the time required to discharge
their responsibilities effectively.
Composition
The membership of the Nomination Committee
comprises the full Board. As such changes
to membership during the year reflect the
changes that were made to the Board. The table
opposite details the membership and meeting
attendance for the year. The Company Secretary
is Secretary to the Nomination Committee.
- making recommendations to the Board on
suitable candidates to fill vacancies for both
non-Executive and Executive Directors;
- ensuring that the procedure for appointing
new Directors is rigorous and transparent
and that appointments are made on merit
and against objective criteria, including
independence and diversity of candidates;
Succession planning
The Nomination Committee has responsibility
to confirm that arrangements are in place to
support any changes in Board membership,
and takes responsibility for the programme of
planned refreshment, ensuring that the balance
of skills, knowledge and experience is both
maintained and appropriate.
Before a Board appointment is made, the
Nomination Committee evaluates the skills,
knowledge and experience of the Board to
ensure that any new appointment complements
existing qualities, and further identifies any areas
in which representation is required. Candidates
are considered from a wide range of backgrounds
and appointments are made on merit, with due
regard being given to the benefits of diversity
on the Board, including gender. The Committee
also assesses the current time commitments of
candidates as appropriate.
The selection process uses the services of a
professional search firm specialising in Board-level
recruitment and generally involves interviews with
a number of candidates. In line with Board policy
the Company strives to engage only with search
firms that have signed up to the Voluntary Code
of Conduct for Executive Search Firms.
81
Nomination Committee Report continued
Succession planning continued
When the Nomination Committee deals with
any matter concerning the Chairmanship of the
Board, another non-Executive Director chosen
by the remaining members chairs the meeting.
Members of the Nomination Committee do
not take part in discussions when their own
performance or their continued appointment
is being considered.
In the course of its work the Nomination
Committee also reviews leadership and succession
at senior management level taking into account
the risks and opportunities facing the Company,
identifying required skills and expertise as
appropriate. The Company’s talent management
programme and Leadership Blueprint helps
provide a robust process for succession and
development, and career progression.
In 2015/16 the Chairman of the Board and
Nomination Committee attended and presented
at the SSE Leadership Conference, and participated
in a facilitated question and answer session
providing Board perspective on a range of matters.
The Conference is attended annually by a number
of senior managers and individuals who have been
identified for their development potential, and
therefore provides oversight of the depth of talent
within the Company and creates the opportunity
to engage with individuals from all levels.
Throughout the reporting year a number of
individuals were also invited to attend and
present at meetings of the Board and in
2015/16 this totalled 41 members of the senior
management team. Although this practice
primarily ensures that progress updates are
received directly from each business area,
it provides the Board with the opportunity to
meet the next tier of management.
Board succession in 2015/16
On 23 July 2015, Richard Gillingwater assumed
the role of Chairman, following on from his role
as Deputy Chairman, and as successor to Lord
Smith of Kelvin, who stepped down from the
Board after 10 years of tenure. The detailed
recruitment process for this appointment
was set out in last year’s Annual Report and in
preparation for the role Richard Gillingwater
reduced his number of external commitments
including his two major non-Executive roles at
Hiscox Ltd and Wm Morrisons Supermarkets plc.
At this time, significant progress had been made
in a focussed search for a new non-Executive
Director who could take on the role of Senior
Independent Director and it was subsequently
announced in June 2015 that Crawford Gillies
was to be appointed from 1 August 2015.
Following the successful appointment of
Crawford Gillies, the Nomination Committee
undertook a second recruitment process
during 2015/16 to identify a further new
non-Executive Director. This was an extension
of earlier work with the overall desire being
to further increase the resilience and diversity
of the Board and resulted in the appointment
of Helen Mahy from 1 March 2016.
The professional external search agency
Sam Allen Associates were involved in the
recruitment for both positions. Sam Allen
Associates are signed up to the Voluntary
Code of Conduct for Executive Search Firms,
and have no other connection to SSE. The process
conducted by Sam Allen Associates involved the
initial identification of suitable candidates, followed
by an extensive benchmarking process of persons
meeting the desired criteria as agreed in advance
by the Nomination Committee. A shortlist was
then prepared and meetings were held with a
number of Board members. Following deliberation
it was agreed that Crawford Gillies and Helen
Mahy’s candidacies were complementary to
the existing Board membership and that they
were the preferred individuals for the role.
A recommendation was therefore made to
the Board in respect of each appointment,
which was subsequently agreed.
Crawford Gillies and Helen Mahy are considered
highly valuable additions to the Board as
they bring a wealth of skills, and diversity of
professional background. Crawford Gillies
possesses extensive, in-depth business and plc
board experience, including expertise in matters
of finance and risk management, and Helen
Mahy has relevant sector experience from her
role at National Grid, a background in legal
counsel, and a detailed knowledge of, and an
interest in, the areas of inclusion and diversity.
Committee changes in 2015/16
Upon the announcement of Crawford Gillies’
appointment from 1 August 2015 and in
recognition of Richard Gillingwater
commencing as Chairman on 23 July 2015,
the Nomination Committee proposed a number
of changes to Board Committee membership in
2015. The changes allowed the level of expertise
and knowledge within each Committee to be
retained, whilst ensuring that there was a fair
division of responsibilities between the
non-Executive Directors. In summary the
changes were:
- on 23 July 2015, Richard Gillingwater
became Chairman of the Nomination
Committee, ceased to be a member of
the Audit Committee, and stood down as
Chairman of the Remuneration Committee
although continue as a member;
- on 23 July 2015, Katie Bickerstaffe became
Chair of the Remuneration Committee; and
- on 1 August 2015, Crawford Gillies became
a member of the Nomination, Audit and
Remuneration Committees.
82
The changes outlined above ensured that all
Committees would be compliant with the Code
from 1 August 2015, with a short 9 day period
of non-compliance occurring between 23 July
and 1 August attributed to the timing between
appointments. The relevant provisions of the
Code from which there was a departure were:
A.4.1 in relation to the requirement for a Senior
Independent Director; and C.3.1 and D.2.1
in relation to the number of independent
non-Executive Directors on the Audit and
Remuneration Committees respectively.
There was no formal Board or Committee
activity planned for during this period to
ensure that standards of governance would
remain unaffected, and it is confirmed that
this was indeed the position.
Upon appointment on 1 March 2016 Helen Mahy
joined the Nomination, Audit and Safety, Health
and Environment Advisory Committees.
Committee evaluation
Details of the external evaluation of the full Board
which was conducted during the period are
provided on pages 76 and 77 of the Corporate
Governance Report. The process included
a review of all Board Committees and it was
concluded that the relationship between the
Board and its Committees was functioning well,
with all Committees fully meeting their remit.
Independence
The continuing independence of the non-
Executive Directors was considered and
reviewed at the meeting of the Nomination
Committee in January 2016, with each member
abstaining from their own evaluation. Richard
Gillingwater was considered independent on
appointment as Chairman on 23 July 2015.
Diversity
The Nomination Committee reviews the diversity
within the organisation as a whole, including
that of senior management and the talent
management pipeline. In addition in 2015/16
regular updates have been provided to the Board
from Human Resources on matters including:
Human Capital; Diversity and Inclusion; and
Gender Pay. The Executive Committee further
receives quarterly updates on the work that is
being carried out in these areas. Further detail on
Group wide initiatives can be found on pages 24
to 27 in the Strategic Report.
SSE plc Annual Report 2016Directors’ Report 1.
2. Directors’ Report
3.
Board diversity
The recommendation of the Davies Review
which was first commissioned in 2010 was
that FTSE 100 companies should aim for a
minimum of 25% female representation on
Boards by 2015. The Company is committed to
the approach on diversity set out in the Davies
Report, and continues to monitor any future
recommendations in line with the five year
summary which was published in October 2015.
The female representation of the SSE Board is
currently above the original recommendation at
33% and an overview of the diversity represented
by the SSE Board is detailed in the diagram
opposite. The Nomination Committee will
further monitor and consider diversity for future
Board appointments whilst continuing to recruit
on merit. During the year the Nomination
Committee also reviewed the Board Diversity
Policy as outlined below.
Membership diversity
Board diversity, by gender
Female representation on the Board
33
66
Male
Female
33%
33%
22%
20%
25%
11%
2011
2012
2013
2014
2015
2016
Board diversity, by sector
Board diversity, by age (years)
1
2
4
2
46-50
51-55
56-60
61-65
Board Diversity Policy
The Nomination Committee
reviewed and the Board approved a
revised Board Diversity Policy during
the year. The purpose of the review
was to ensure that the Policy reflected
both existing practices and the
ongoing work of the Nomination
Committee and Board in this area,
including during the recruitment
of potential candidates for Board
positions. The Policy is designed to
encourage continued progress, as the
Board and Nomination Committee
recognise the benefits of diversity
in the creation of a resilient and
effective Board. Progress against
Policy objectives will continue to
be monitored and will be reported
in due course.
1
3
1
1
1
1
1
Utilities
Banking
Major projects
Risk and Consultancy
Retail
Public sector
Defence
Board diversity, by tenure (years)
0-3
3-6
6-9
9+
1
2
2
4
83
Directors’ Report
Audit Committee Report
The Audit Committee assists the
Board in discharging its responsibilities
in relation to financial reporting,
internal audit, external audit, internal
control and risk management.
Members and meetings
Members
Peter Lynas
Sue Bruce
Crawford Gillies1
Helen Mahy2
Richard Gillingwater3
Independent non-
Executive Director
Member since
Attended/scheduled
Yes
Yes
Yes
Yes
n/a
July 2014
July 2014
August 2015
March 2016
May 2007
4/4
4/4
3/3
n/a
1/1
1 Crawford Gillies became a member of the Audit Committee on 1 August 2015.
2 Helen Mahy became a member of the Audit Committee on 1 March 2016.
3 Richard Gillingwater ceased to be a member of the Audit Committee on 23 July 2015.
84 SSE plc Annual Report 2016
Dear Shareholder,
On behalf of the Audit Committee, I’m pleased
to present our report for 2015/16 which sets
out the role, composition and activities of the
Committee during the year.
Committee Changes
As part of the Board’s succession planning
strategy, the membership of the Audit
Committee was refreshed during the year.
Richard Gillingwater ceased to be a member
when he became Chairman of the Board on
23 July 2015. I was delighted to welcome two
new members to the Audit Committee with
the appointment of Crawford Gillies on 1 August
2015 and Helen Mahy on 1 March 2016. Through
an independent mindset and diversity of
professional background including experience
in finance, risk, governance, management and
the energy sector, each member is able to make
a valuable contribution to the deliberations of
the Audit Committee.
FRC Letter
As reported in the Audit Committee Report last
year, SSE received a letter from the FRC which
raised a number of queries from its review of
the 2014 Annual Report. Following engagement
with the FRC, we have provided additional
information and explanation in both the 2015
and 2016 Annual Reports. I am pleased to report
that the FRC have confirmed that all matters
raised have been adequately addressed, and we
remain committed to developing our approach
to reporting in the coming years.
External Auditor
KPMG were appointed as SSE’s External Auditor in
1999. The Audit Committee oversees the process
for monitoring the objectivity, independence,
effectiveness and ongoing relationship with the
External Auditor. Full details of how we have
approached this during 2015/16 are set out in
our report, which includes further details on our
Non-Audit Services Policy and a timeline for the
tender of the external audit contract to support
our explanation of non-compliance with section
C.3.7 of the Code.
Areas of focus
The report that follows explains the work of
the Audit Committee during the year which has
focused on five main areas: Financial Reporting
and Significant Financial Judgements; Internal
Audit; External Audit; Internal Control and Risk
Management; and Governance. Looking forward
to the next 12 months, we will continue to keep
our activities under review to ensure that the
work of the Audit Committee assists the Board
and supports the delivery of SSE’s strategy,
values and governance.
Peter Lynas
Chairman of the Audit Committee
1.
2. Directors’ Report
3.
Composition
Members of the Audit Committee are appointed
by the Board following recommendation by
the Nomination Committee. The current
membership of the Audit Committee is set out
in the table opposite.
The Board has confirmed that each member of
the Audit Committee is independent and that the
membership meets the requirements of the Code.
Peter Lynas is considered by the Board to have
recent and relevant financial experience as the
current Group Finance Director of BAE Systems
plc and a Fellow of the Chartered Association of
Certified Accountants. The Deputy Company
Secretary is secretary to the Audit Committee.
On joining the Audit Committee, new members
receive an induction tailored to their individual
requirements which provides an overview of the
business, its financial dynamics, principal risks
and their management, and includes a separate
meeting with the External Auditor. Tailored
induction programmes for Crawford Gillies
and Helen Mahy were delivered during the year.
Meetings and activities in 2015/16
The Audit Committee met four times during
the year, with each meeting scheduled at key
times in the Group’s financial reporting and
audit calendar. The Audit Committee has met
once since the end of the financial year. This was
the first scheduled Audit Committee meeting
following Helen Mahy’s appointment to the Board
on 1 March 2016, and all members attended.
Meetings of the Audit Committee are also
routinely attended by the: Company Chairman;
Chief Executive; Finance Director; Managing
Director, Finance; Group Financial Controller;
Director of Risk, Audit and Insurance; and the
External Auditor, KPMG LLP (KPMG). Throughout
the year, a number of other senior managers
were invited to attend certain meetings to provide
a deeper level of insight into particular items of
business. This gave the Audit Committee the
opportunity to meet management and discuss,
debate and challenge on a range of matters.
The Chairman of the Audit Committee meets
separately with the Finance Director, Director
of Risk, Audit and Insurance, other senior
management, and the External Auditor on a
regular basis to ensure the work of the Audit
Committee is focused on key and emerging
issues. The Audit Committee meets with the
External Auditor and management separately
at least once a year in order to get feedback on
the relationship and assess the effectiveness
of the external audit process.
Meetings of the Audit Committee take place in
advance of Board meetings. The Audit Committee
Chairman provides an update to the Board after
each meeting and minutes are provided to the
Board and External Auditor.
Role
The Audit Committee is authorised by the
Board to:
-
review the integrity of the interim and annual
financial statements;
review the appropriateness of accounting
policies and practices;
review the significant issues and judgements
considered in relation to the financial
statements, including how each was
addressed;
review the content of the Annual Report and
Accounts and advise the Board on whether,
taken as a whole, it is fair, balanced and
understandable;
review and monitor the effectiveness of the
Internal Audit function, including approval
of the audit plan;
review and monitor the objectivity and
independence of the External Auditor,
including the policy to govern the provision
of non-audit services;
review and monitor the effectiveness of the
external audit process and the ongoing
relationship with the External Auditor;
review and make recommendations to
the Board on: the tendering of the external
audit contract; and the appointment,
remuneration and terms of engagement
of the External Auditor;
review and monitor the effectiveness
of the risk management and internal
control framework;
review the framework and analysis to support
the long-term viability statement; and
-
-
-
-
-
-
-
-
-
- establish and oversee appropriate
whistleblowing and fraud prevention
arrangements.
Fair, Balanced and Understandable
Assurance Framework
The Audit Committee reviewed and the
Board approved the assurance framework
used to assist the Directors discharge
their requirement to state that the Annual
Report and Accounts are fair, balanced and
understandable. The main components
of the assurance framework which were
used to assist with the preparation of
2016 Annual Report and Accounts are
highlighted below:
- comprehensive guidance issued to
contributors, including the FRC Letter,
‘Summary of key developments for 2015
annual reports’, which was issued to Audit
Committee Chairmen in December 2015;
- a verification process dealing with the
factual content;
- comprehensive reviews undertaken
independently by the Company’s
Director of Compliance and Director
of Regulation to consider messaging
and balance;
- comprehensive reviews undertaken
by the Company’s brokers to ensure
consistency and balance;
reporting by the External Auditor of
any material inconsistencies; and
-
- comprehensive review by the Directors
and the senior management team.
The Audit Committee and Board received
confirmation from management that the
assurance framework described above had
been adhered to at its meeting in May 2016.
85
Directors’ Report
Audit Committee Report continued
Areas of focus in 2015/16
The key matters considered by the Audit
Committee during the year are explained in
detail below, and principally fell under the
following five main areas: Financial Reporting
and Significant Financial Judgements; Internal
Audit; External Audit; Internal Control and Risk
Management; and Governance.
Financial reporting and significant
financial judgements
Financial reporting
The Audit Committee assists the Board with
the effective discharge of its responsibilities for
financial reporting. During the year, the Audit
Committee reviewed:
-
the integrity of the interim and annual
financial statements and accompanying
reports to shareholders;
the appropriateness of the accounting
policies and practices used;
the clarity of the disclosures, in addition to
compliance with financial reporting standards
and governance reporting requirements;
-
-
-
-
the Group’s tax position, including ongoing
HMRC enquires, areas of potential tax
exposure and the Fair Tax Mark accreditation;
regular reports on the status of various
accounting projects including the transition
to FRS 101/102 for subsidiary companies;
- areas in which significant judgements had
been applied and other matters raised for
discussion by the External Auditor;
reports from the External Auditor on its
audit of the full year results and its review
of the half year results;
-
- matters which informed the Board’s
-
assessment that it was appropriate to prepare
the accounts on a going concern basis;
letters of representation issued by
management to the External Auditor for the
full year and half year results prior to them
being signed on behalf of the Board; and
- whether the Annual Report and Accounts
were fair, balanced and understandable
and provided the information necessary
for shareholders to assess the company’s
performance, business model and strategy.
In carrying out the review of these matters,
the Audit Committee received reports from
members of the Group Finance Team and
the External Auditor setting out their views
on the accounting treatments and judgements
included in the Financial Statements.
Significant Financial Judgements
In preparing the financial statements, there
are a number of areas requiring the exercise by
management of judgement or a high degree of
estimation. In the Audit Committee Report in
2015, accounting for legal and contractual
claims was included as a significant financial
judgement area. After discussion with
management and the External Auditor, the
significant areas of judgement reviewed and
considered by the Audit Committee in relation
to the 2016 Financial Statements, and how these
were addressed are set out in the table below:
Significant financial judgements
Significant financial judgements for the year ended 31 March 2016
How the Audit Committee addressed these significant financial judgements
Carrying value of certain non-current assets: The carrying
value of certain non-current assets in the Group – including power
generation plants and goodwill – needs to be assessed by reference
to the recoverable value (value-in-use or fair value less costs to sell)
of the asset or the associated CGU (cash generating unit). An annual
valuation/impairment exercise is carried out. The assumptions
applied in this exercise require judgements on the economic factors
associated with the assets under review (see notes 4 and 16 to the
Financial Statements).
The basis and outcome of this review is described in a paper
presented to the Audit Committee by management. The paper
includes a description of the assumptions applied in deriving the
recoverable values. The Audit Committee reviewed and challenged
the assumptions and projections presented in the management
paper and also considered the detailed reporting from, and findings
by, the External Auditor. Following this review, the Audit Committee
supported the recommendation to recognise exceptional charges
of £889.8m in relation to certain assets in the financial year.
Accounting for estimated revenue: Revenue from energy sales
in the Retail division includes an estimate of the value of electricity
or gas supplied to customers between the date of the last meter
reading and the financial year end. This is based on estimates and
assumptions in relation to the consumption and valuation of that
consumption (see notes 4 and 21 to the Financial Statements).
Valuation of receivables: The recoverability of the Group’s billed
energy receivables in the Retail division is a key judgement area
given the risk of customer insolvency or default. The level of the
Group’s aged debt is monitored with the Group’s allowances
for doubtful debt being based on assumptions derived from
experience and industry knowledge (see notes 4 and 34 to
the Financial Statements).
Accounting for Group pension obligations: The assumptions in
relation to the cost to the Group of providing future post-retirement
benefits are set after consultation with qualified actuaries and can
have a significantly material impact on the financial position of the
Group (see notes 4 and 32 to the Financial Statements).
The Audit Committee reviewed a paper prepared by management
which detailed the practical process issues and assumptions applied in
determining the basis of recognition of ‘unbilled’ debtors, with particular
reference to domestic electricity and gas. The Audit Committee also
considered detailed reporting from, and held discussions with, the
External Auditor on this key judgement. Following this review, the Audit
Committee supported this judgement.
The Audit Committee considered a paper which described the
assumptions impacting management judgements on doubtful
debt allowances and charges, and were updated on the activities
of the Group’s Debts Steering Group (whose members include the
Finance Director and other senior management) and the processes
for receivables collection and provisioning. The Audit Committee
also considered the results of the work of the External Auditor in
this area. Following this review, the Audit Committee supported
this judgement.
The costs, assets and liabilities of the Group’s defined benefit
retirement schemes are regularly reviewed. Advice is taken from
independent actuaries on the IAS 19R valuation of the schemes.
The Audit Committee were updated on the schemes’ valuation
from management and also considered the reporting of the
External Auditor particularly in relation to the schemes’ key
assumptions relative to market practice. Following this review,
the Audit Committee supported this judgement.
86 SSE plc Annual Report 2016
1.
2. Directors’ Report
3.
partner is in the second year of his term. The
current lead audit partner is based in London
and is supported by an audit team based in
Glasgow, Reading and Dublin.
Appointment of External Auditor
The Audit Committee is responsible for
reviewing and making recommendations to the
Board on the appointment, remuneration and
terms of engagement of the External Auditor.
In making such recommendations to the Board,
the Audit Committee considered the objectivity,
independence, effectiveness, and ongoing
relationship with the current External Auditor
as described below, in addition to the External
Auditor’s approach, scope, areas of focus, level
of materiality and remuneration for the audit of
the financial year ended 31 March 2016.
Objectivity and independence
of External Auditor
The Audit Committee is responsible for
reviewing and monitoring the objectivity and
independence of the External Auditor. The
External Auditor has provided specific assurance
to the Audit Committee on the arrangements
it has in place to maintain its objectivity and
independence, including confirmation of
compliance with APB Ethical Standards in
relation to the audit engagement. In addition,
the Audit Committee oversees a policy to
govern the non-audit services provided by
the External Auditor. Details of the policy and
fees paid to the External Auditor in 2015/16
are provided below. The Audit Committee also
considered reports from management which
did not raise any concerns in respect of the
External Auditors’ objectivity and independence.
After taking into account all the above matters,
the Audit Committee concluded that it is fully
satisfied with the objectivity and independence
of the External Auditor.
Effectiveness of External Auditor
and ongoing relationship
The Audit Committee is responsible for
reviewing and monitoring the effectiveness
of both the external audit process and the
ongoing relationship with the External Auditor.
During the year, the Audit Committee reviewed:
regular reports on progress against the
-
2015/16 External Audit Plan, significant
findings, the adequacy of management’s
response and the time taken to resolve;
the competence with which the External
Auditor handled and communicated the
key accounting and audit judgements;
-
Overview of Non-Audit
Services Policy
A comprehensive review of the Non-Audit
Services Policy was carried out in 2015/16
in anticipation of future changes which
are being introduced as part of EU Audit
Reform, where the cumulative limit of
non-audit services cannot exceed 70%
of the statutory audit fees. The policy
recognises that the external audit contract
will be subject to mandatory rotation from
time-to-time, and includes a safeguard to
ensure that potential audit firms are not
restricted in their ability to tender for the
external audit contract going forward.
For the purposes of approval, non-audit
services were divided into 3 categories:
- Audit-Related Services, where the
approval of the Finance Director
is needed;
- Permitted Non-Audit Services, where
approval can be obtained from the
Finance Director up to £150,000 and
the Audit Committee Chairman above
this amount; and
- Prohibited Non-Audit Services.
The Audit Committee reviews a report
at each meeting on the services being
provided by the External Auditor. Fees for
Audit and Audit-Related Services incurred
during the year amounted to £1.1m and
£0.6m for Permitted Non-Audit Services.
Significant categories of engagement for
Permitted Non-Audit Services awarded
during the year include £0.3m for advice
and data analysis services provided in
relation to the Connections business
within Networks and £0.2m for tax
advisory services. In line with the Non-
Audit Services Policy, in each case the
Audit Committee was satisfied that the
work was best handled by the External
Auditor because of their knowledge of the
Group and the skills and expertise brought
to the assignment. Details of the fees paid
to the External Auditor during the year are
made in note 6 to the Financial Statements.
Fees paid to External Auditor
Audit and for Audit-
Related Services
Permitted
Non-Audit
Services
£0.6m
£1.1m
87
Internal audit
The Director of Risk, Audit and Insurance has
management responsibility for the Internal Audit
function. In addition to the normal corporate
reporting structure, he is given the right of direct
access to the Audit Committee, Chief Executive,
and Company Chairman. The Internal Audit
function operates a risk-based methodology
to review internal control and risk management
processes and procedures. During the year,
the Audit Committee:
-
reviewed progress against the 2015/16
Internal Audit Plan, including significant
findings, the adequacy of management’s
response and the time taken to resolve;
received reports from Internal Audit on the
assessment of the risk management framework
and the internal control environment;
-
- considered the independence, authority and
responsibilities of the Internal Audit function
and approved an updated version of the
Internal Audit Charter;
- assessed the expertise and resources
available to the Internal Audit function; and
- approved the Internal Audit Plan for 2016/17
which comprises fixed and flexible elements
in order to provide capacity to respond to
changing business requirements and new
and emerging risks.
The Audit Committee is responsible for reviewing
and monitoring the effectiveness of the Internal
Audit function. During the year, the Audit
Committee considered:
-
the views of the Director of Risk, Audit and
Insurance on the effectiveness, resourcing
and areas for future development of the
Internal Audit function;
the output of a Quality and Standards
Assessment of the Internal Audit function
undertaken by KPMG; and
the results of a senior management survey
obtaining feedback on the value, business
acumen, trust and service provided by
Internal Audit.
-
-
After taking into account all of the above
matters, the Audit Committee concluded
that it is fully satisfied with the effectiveness
of the Internal Audit function, and supports
ongoing developments to further enhance
its effectiveness.
External audit
KPMG were appointed as the External Auditor
in 1999 through a competitive tender process
following the merger which formed SSE. At the
2015 AGM, shareholders re-appointed KPMG as
the External Auditor of the Company for the year
ended 31 March 2016, and authorised the Audit
Committee to fix their remuneration. KPMG
has acted as the External Auditor of the Group
throughout the year. The External Auditor is
required to rotate the lead audit partner every
five years. The Audit Committee monitors this
rotation, and confirms that the current lead audit
Directors’ Report
Audit Committee Report continued
-
-
the quality, stability and continuity provided
by the relationship with the current External
Auditor;
the changes to auditor tendering requirements
and the mandatory auditor rotation obligation,
and the impact both have on the timing of
a tender;
- management of the audit requirement
regarding the change in accounting
standards at subsidiary level; and
the lead time required to ensure potential
audit firms are not restricted in their ability to
tender for the external audit contract arising
from existing contracts for non-audit work.
-
After taking into account the matters outlined
above, in addition to the arrangements for
monitoring all aspects of the relationship with
the External Auditor, upon the recommendation
of the Audit Committee, the Board concluded
that it was in the best interests of the Company
not to tender the audit contract at this time.
The matters highlighted in this section constitute
the Company’s rationale and explanation for
non-compliance with section C.3.7 of the Code.
Tender timeline
The five year rotation of the current lead Audit
Partner will end on completion of the audit
for the financial year ending 31 March 2019.
As stated in the Audit Committee Report last
year, it is anticipated that a tender process
will take place in 2018, in accordance with
the timeline below which complies with the
transitional provisions set out in The Statutory
Audit Services for Large Companies Market
Investigation (Mandatory Use of Competitive
Tender Processes and Audit Committee
Responsibilities) Order 2014. There are no
contractual obligations with a third party
which restrict the choice of External Auditor,
and the future tender process will be based
on a clear selection and assessment criteria.
The Audit Committee will continue to keep
under review the timing of the tender for the
external audit contract. In light of the decision
to defer tendering, resolutions to re-appoint
KPMG as External Auditor of the Company
for the year ending 31 March 2017, and to
authorise the Audit Committee to fix their
remuneration, will be proposed to shareholders
at the AGM on 21 July 2016.
Internal control and
risk management
Whilst the Board is responsible for the
overall system of internal control and risk
management, reviewing and monitoring the
ongoing effectiveness of the system is covered
by a number of key committees and related
assurance activities across the Group. Full
details of the Group’s internal control and
risk management framework including an
overview of developments during the year
for the identification and management of
risk, and an explanation of the requirements
under the relevant FRC guidance, are set out
on pages 16 to 19 and 78.
External audit continued
-
the effectiveness of the overall external
audit process for 2015/16, including meeting
with the External Auditor and management
separately to identify any areas of concern;
the quality of the External Auditor’s
engagement with the Audit Committee;
the qualifications, expertise and resources
of the External Auditor;
the output from a questionnaire completed
by senior management seeking views on
KPMG’s capability and performance in
providing external audit services; and
the output from a FRC Audit Quality Review
of KPMG published in May 2015.
-
-
-
-
After taking into account all the above matters,
the Audit Committee concluded that it is fully
satisfied with the effectiveness of both the
external audit process and the ongoing
relationship with the External Auditor.
Tendering of External Audit
Whilst the Audit Committee has continued to
keep under review all aspects of the relationship
with the External Auditor, no formal tender of
the external audit contract has been carried out
since KPMG’s appointment in 1999. The Audit
Committee is fully aware of the audit tendering
recommendations set out in the Code and the
requirements of the CMA Audit Order, EU Audit
Regulation and EU Audit Directive. Before
making a recommendation to the Board on the
timing of the external audit contract tender,
the Audit Committee considered:
External Audit Tender Timeline
3 Lead Audit
Partner tenures
5 Year Term Of Current Audit Partner
New External Auditor
1999
2014
(1 April)
2015
(AGM 23 July)
2016
(AGM 21 July)
2018
2019
(31 March)
2019
(AGM)
2020
(31 March)
KPMG
appointed
as External
Auditor
KPMG
re-appointed
as External
Auditor
Approval
sought for the
re-appointment
of KPMG
Competitive
external audit
tender process
begins
Completion
of final audit
by KPMG
Approval
sought for the
appointment of
new External
Auditor
Completion of
first audit by
new External
Auditor
88 SSE plc Annual Report 2016
Governance
In addition to the matters described in this report
and to ensure good governance practice, the
Audit Committee considered the following
matters during the year.
Terms of Reference
The Audit Committee’s structure and operations,
including its delegated responsibilities and
authority, are governed by Terms of Reference
which are reviewed annually.
Annual plan of business
To support the Terms of Reference and ensure
the effective operation of the Audit Committee,
a detailed plan of business for each meeting
throughout the year is approved annually.
Briefings
The Audit Committee receives regular briefings
from management on matters such as governance
and regulatory developments, treasury, energy
trading and accounting policies and practices.
Review of disclosures
The Audit Committee considered and approved
content to be included in the Annual Report
concerning risk management, internal control
and the Audit Committee Report.
Disclosure of information to Auditors
The Audit Committee oversees the governance
arrangements to assist the Directors discharge
their responsibilities in relation to the disclosure
of information to the External Auditor and make
the statement as set out on page 114.
Evaluation
During the course of the year, regular challenge
and engagement with management, Internal
Audit and the External Auditor, together with
the timely circulation of reports and information,
has enabled the Audit Committee to discharge
its duties and responsibilities effectively. The
external Board evaluation process which was
carried out during the year confirmed that
the Audit Committee continued to operate
effectively. Details of the evaluation process
are set out on pages 76 and 77.
The Audit Committee plays an important role
in the internal control and risk management
framework, and during the year it reviewed
information drawn from a number of different
sources, including reports from:
- Treasury, setting out: strategy; market
developments; debt structure; maturity
profiles; funding plan; liquidity; going
concern; credit rating; foreign exchange;
and significant risks and controls;
Internal Audit on cyber security risks and
vulnerabilities, including the development
of the IT security programme;
-
- Energy Portfolio Management setting out:
strategy; market prices and analysis; financial
regulation developments; energy portfolio
and counterparty credit exposures; and
significant risks and controls;
- Group Risk on the framework for the
identification, evaluation and monitoring of
Principal Risks, including their assessment of
the risk management framework and internal
control environment;
- Group Risk on the framework and analysis
to support the long-term viability statement
made on page 17;
- Group Risk on the framework to provide
assurance to the Executive Committee and
Board that key policies which form part of
SSE’s System of Internal Control are being
properly implemented within each of the
Group’s Divisions;
- Group Compliance with an update on the
-
-
-
-
project to enhance the control environment in
relation to the various legislative and regulatory
obligations that govern SSE’s operations;
Internal Audit on the review of
whistleblowing arrangements, and the
implementation of an updated policy and
external reporting channel to support the
launch of the revised arrangements;
Internal Audit highlighting investigations into
allegations and incidents of fraud across
the Group, and the Company’s response;
Internal Audit on the work undertaken to
identify the top Group-level fraud risks, and
the development of a focused audit plan; and
the External Auditor, on its assessment
of significant risks and the internal control
environment in so far as is necessary to
form an opinion on the true and fair view
of the Financial Statements.
These reports provided the Audit Committee
with invaluable insights into the risks facing
the Group and the management of them,
and inform the Board in its review of the
effectiveness of the risk management and
internal control framework.
89
3. 1. 2. Directors’ Report Directors’ Report
Safety, Health and Environment Advisory
Committee (SHEAC) Report
The SHEAC advises the Board on
safety, health and environmental
matters including policy, targets
and strategy.
Members and meetings
Members
Jeremy Beeton
Sue Bruce
Helen Mahy1
Jim McPhillimy
Mark Patterson
Paul Smith
Independent
non-Executive
Director
Yes
Yes
Yes
No
No
No
Member since
July 2011
September 2013
March 2016
November 2008
January 2013
November 2008
Attended/
scheduled
3/3
3/3
1/1
3/3
3/3
3/3
90 SSE plc Annual Report 2016
Dear Shareholder,
On behalf of the Board, I am pleased to present
this report which explains the role, composition
and activities of the SHEAC during the year.
We operate in a hazardous industry with
inherent risks relating to safety, health and the
environment. I’m pleased to report that SSE’s
SHE performance in 2015/16 has continued
to be strong, but we always want to do better.
Our first priority in everything that we do is
to prevent harm to employees, contractors,
customers and the environment. Our seven
enduring goals which are set out in the report
that follows help focus attention on the unique
challenges facing each of the business areas.
It is through these goals and a culture where
colleagues look out for each other that we strive
to minimise risks to ourselves, those who work
for us, the public and our environment.
This year, the SHEAC visited SSE’s new gas
fired power station in Ireland which became
operational in 2015. It provided an excellent
opportunity to meet with employees and gain
a deeper understanding and appreciation of the
SHE related challenges affecting the Wholesale
business now and over the coming years.
The opportunity to spend time with employees
and hold a meeting on-site was very well
received by the SHEAC and will be repeated
in 2016/17.
Jeremy Beeton CB
Chairman of the SHEAC
Role
The role of the SHEAC is to advise the Board
on safety, health and environmental matters.
It provides a leadership forum for non-Executive
Directors to work with senior management and
shape policy, targets and strategy to improve
safety, health and environmental performance.
The SHEAC is responsible for:
- ensuring adherence to SSE’s safety,
health and environmental policies;
setting Group targets and strategy for
improved performance;
-
- monitoring Group performance against
these targets;
- enhancing the awareness and the
importance of safety, health and
environmental management and
ensuring consistent performance; and
- making recommendations to the Board
where action or improvement is needed.
Composition
Members of the SHEAC are appointed by
the Board following recommendation by the
Nomination Committee. The membership
of the SHEAC is set out in the table opposite.
1.
2. Directors’ Report
3.
Safety and the Seven Enduring Goals
SSE’s first priority in everything it does it to prevent harm to people or
places. In support of that, SSE’s first core value is Safety – we believe all
accidents are preventable, so we do everything safely and responsibly
or not at all. Due to the diversity of operations across SSE’s businesses,
the Safety value is supported by Seven Enduring Goals which provides
a framework for each business to focus attention on its unique safety,
health and environment challenges.
1 Safety
Family
2 Driving
3 Process
Safety
4 Contractor
Safety
Being our brother’s keeper with
everyone working to high standards.
Creating a company of lower
risk drivers.
Managing our assets well and
preventing major incidents.
Partnering with contractors to be
‘best in class’ on safety, keeping
them as safe as SSE colleagues.
5 Occupational
Health and Well-being
Protecting our team’s health
and promoting their wellbeing.
6 Environment
Protecting the environment and
operating in a sustainable way.
7 Crisis
Management
Staying well prepared and
responding brilliantly when
things go wrong.
91
Jeremy Beeton brings a depth of experience
from his background in engineering and major
construction projects. Sue Bruce provides
valuable insights from various senior roles in the
public sector. Helen Mahy joined the SHEAC on
1 March 2016 and brings a wealth of knowledge
from her career in the energy industry. Jim
McPhillimy, Mark Patterson and Paul Smith bring
substantial operational experience to the SHEAC
through their roles and responsibilities within SSE.
The Chief Executive regularly attends meetings
and during the year the Audit Committee
Chairman attended the meeting held at the
gas fired power station in Ireland. The Deputy
Company Secretary is Secretary to the SHEAC.
Meetings and activities in 2015/16
The SHEAC met three times during the year
and details of attendance are set out in the
table opposite. Meetings are routinely held on
the same day as Board meetings and the SHEAC
Chairman reports to the Board after each meeting.
The work of the SHEAC is underpinned by the
Safety Value and is designed around the Seven
Enduring Goals. At each meeting, the SHEAC
reviews: performance; incidents and trends;
emerging risks and priorities. Examples
of matters considered by the SHEAC during
the year include:
- Deep dives into the SHE risks facing each
of the main business areas.
- Project Drive which sets out a framework
to lower the risks relating to driving.
- Organisation redesign to enhance the
management of SHE matters throughout SSE.
- Emerging SHE risks arising from the next
stage of the capital investment programme
and the decommissioning of assets such as
the Ferrybridge coal fired power station.
In addition, an important aspect of the work
of the SHEAC is to gain a deep understanding
of the safety, health and environmental
challenges affecting SSE’s businesses. During
the year, members of the SHEAC visited various
operational sites throughout the UK and Ireland
and met front-line management teams. Members
of the SHEAC routinely provide feedback at the
annual SHE Conferences which are held at
locations across the Group.
Further information relating to safety, health and
environment performance during 2015/16 and
priorities for 2016/17 is contained on pages 1 to 65.
Total recordable injury rate per 100,000
hours worked
0.23
0.23
0.20
2014
2015
2016
Directors’ Report
Remuneration Report
Committee Chairman’s statement
The Remuneration Committee
believes it is very important that
overall remuneration is strongly
aligned to SSE’s purpose and strategy.
Members and meetings
Members
Katie Bickerstaffe
(Committee Chairman)
Jeremy Beeton
Crawford Gillies1
Richard Gillingwater CBE
Lord Smith of Kelvin2
Independent
non-Executive
Director
Yes
Yes
Yes
n/a
n/a
Member since
July 2011
July 2014
August 2015
June 2007
March 2005
Attended/
scheduled
4/4
4/4
3/3
4/4
1/1
1 Crawford Gillies joined the Board on 1 August 2015.
2
Lord Smith of Kelvin retired from the Board on 23 July 2015.
92 SSE plc Annual Report 2016
Dear Shareholder,
I am pleased to present the Remuneration
Committee’s Directors’ Remuneration Report
for the year to 31 March 2016.
The objective of this report is to set out in a clear
and transparent way how SSE pays its Executive
Directors; how this links to the Company’s
purpose and strategy; and how the Committee
works, mindful as it is of the expectations of
shareholders and other stakeholders.
Linking Executive Directors’
remuneration with SSE’s purpose
and strategy
The Committee believes it is very important
that our overall remuneration policy is strongly
aligned to SSE’s purpose and strategy; it aims
to ensure this through the following approach:
- Simplicity – Our Executive Directors’ pay is
made up of just four elements: base salary
and benefits; a pension; a performance-
based annual incentive scheme (cash and
shares); and a performance-based long-term
incentive scheme (shares).
- Balance – We assess performance through
a balanced range of measures to ensure we
cover all aspects of our Executive Directors’
performance. We also align Executive
Directors’ performance related salary increases
with those of the other employees of SSE.
- Customer focus – Reflecting our
commitment to customers, we include
customer service measures in both the
annual incentive and the long-term incentive
(the performance share plan (PSP)).
- Delivery – Dividends and Total Shareholder
Return (TSR) performance continue to
feature strongly in our incentive framework
to ensure Executive Directors’ interests are
aligned with those of our shareholders.
- Stewardship – Executive Directors are
expected to look to the long term and are
required to build and maintain a significant
personal shareholding in the business;
furthermore a two-year holding period extends
the overall time horizon of our PSP to five years.
In addition from 2016/17 onwards, we are
proposing to introduce ‘career deferral’ whereby
deferred shares are not released until 12 months
after the director leaves the company.
Through this approach, we believe that SSE’s
remuneration policy addresses potential areas
of concern for shareholders and reflects wider
stakeholder interests as well.
Changes to our Policy for 2016/17
As highlighted in last year’s Directors’
Remuneration Report, during 2015 we
undertook a wide ranging review of the
remuneration arrangements for our Executive
Directors to ensure these arrangements were
fair and reasonable, and also relevant and
aligned with our strategy. Following this review,
we are proposing to make a number of changes
to the structure of our remuneration package, in
line with the core principles previously set out:
1.
2. Directors’ Report
3.
-
-
‘Career deferral’ – the most significant change
we are proposing to the structure of our
Executive Directors’ remuneration package is
to introduce career deferral. This will extend the
time period that deferred shares, arising from
annual incentive awards, are held to until a year
after an Executive Director steps down from
their position. We believe this new innovative
arrangement aligns the Executive Directors’
interests to the long-term stewardship of
the Company, including importantly, the
sustainability of SSE post leaving.
Increase in percentage deferred – in
addition to extending the time period
deferred shares are required to be held,
we are proposing to increase the percentage
of the annual incentive that will be deferred
into shares from 25% to 33%.
- Pensionable salary cap – we are also
proposing to decrease the emphasis on
pension by capping future pensionable
salary increases at RPI + 1%.
These changes are in addition to other recent
structural changes including the introduction
of a two-year holding period for the PSP, post
vesting, and the increase in share ownership
guidelines to 200% of base pay.
As part of this wide ranging review, we also
looked at incentive opportunity levels taking
into consideration any retention risk and the
marketability of our Executive Directors, the
complexity and challenges of the Executive
Director role in the environment that SSE now
operates in, and giving appropriate consideration
to what we believe is a fair and reasonable
arrangement for the breadth and depth of
roles being undertaken.
Levels of variable pay were last reviewed over
eight years ago, when there were four Executive
Directors’ and have remained unchanged since.
In that time, the environment in which SSE
operates has become significantly more complex
and challenging, and the role of our Executive
Directors has changed as a result of this.
While the issue of fair and appropriate
arrangements was the principal consideration
for the Committee, in my role as chair, I believed
that it was important to have available relevant
reference points to further inform our thinking.
As such, current incentive arrangements were
reviewed against relevant external benchmarks
which highlighted that current incentive opportunity
levels are significantly below market levels.
Given the background and context described
above, the Committee feels that it is right to
increase the overall incentive opportunity to levels
which are more commensurate with the size and
complexity of the organisation, but which would
continue to position SSE conservatively against
a range of relevant benchmarks. The proposed
changes are as follows:
- Annual Incentive Plan opportunity for our
Chief Executive to increase from 100% to
150% of salary and from 100% to 130%
of salary for our Finance Director; and
- Performance Share Plan opportunity to
increase from 150% to 200% of salary for
our Chief Executive and 150% to 175% of
salary for our Finance Director.
We have historically set stretching targets for both
the annual incentive and PSP, as demonstrated by
our historically conservative payouts, and targets
will remain challenging and stretching going
forward. Following our shareholder consultation
exercise and against the context of increased
incentive levels, we decided to introduce more
stretching targets for the PSP. The Committee
confirmed that the current approach of using
a balanced range of performance measures
continues to be appropriate.
We believe that the balance of the proposed changes
to Executive Director packages, as well as other
recent structural changes such as the two year PSP
holding period, provides a conservative but more
competitive remuneration structure designed to
promote long-term stewardship and commitment.
We, as the Remuneration Committee of SSE, value
the views of our shareholders and as part of our
review we consulted with our largest shareholders,
as well as the Investment Association and
Institutional Shareholder Services on these
proposals at the beginning of 2016. We welcomed
and took on board the feedback from these
meetings and we hope that you will support
the proposals at our 2016 AGM, where a new
Remuneration Policy will be put to shareholder vote.
Performance related
pay out-turns in 2015/16
2015/16 was once again a challenging year for
the energy sector and for SSE. Managing the
balance between providing energy that is secure,
affordable and reliable, whilst meeting
regulatory and climate change obligations
continues to be a focal point. Similarly, doing
more for customers, providing excellent
customer service and building customers’ trust
is an ongoing priority. Despite the challenges,
SSE remains a resilient and diverse business,
with a strong commitment to operational
efficiency and delivering value for both
customers and investors. The Committee
believes that the Executive Directors have made
strong progress in leading the Company through
these challenges, whilst maintaining a balance
between meeting short-term goals and the
long-term success of the Company. In so doing,
they have demonstrated judgement, resilience,
and adherence to the Company’s core values.
- Base Salary: We reviewed salary levels for
Executive Directors looking at a number
of factors, including individual performance
and increases awarded to the wider SSE
employee population. The Executive
Directors will both receive a salary increase
of 2.4% effective from 1 April 2016, which is
in line with the average performance based
salary increases for other employees in SSE.
- Annual Incentive Plan (AIP): The out-turn
under the Annual Incentive Plan (AIP) was
determined against a set of financial, strategic
and personal targets set at the beginning of
the year. This resulted in an outcome of 54%
of the maximum opportunity. We have set
out details of SSE’s performance against the
AIP measures and targets on page 105.
- Performance Share Plan (PSP): For PSP
awards granted in 2013, which were due to
vest following the end of the 2015/16 financial
period, measurement of performance over
the three year period resulted in no pay-out,
reflecting that the targets were set in very
different market conditions.
Next steps
I hope that this Report fulfils its objective of
setting out in a clear and transparent way SSE’s
approach to Executive Directors’ remuneration
and the key decisions relating to it that were
taken in the year. I believe that a remuneration
policy based on simplicity, balance, customer
focus, delivery and stewardship is the right one
for a company which has the core purpose of
providing the energy people need in a reliable
and sustainable way.
At our AGM in 2015, we were pleased to receive
overwhelming support from shareholders for
our Remuneration Report, with 98% of votes
cast in favour. Listed companies are now
required to submit separate ordinary resolutions
for approval by shareholders and at our AGM in
2016, shareholders will have the opportunity to
vote on the following:
- The Directors’ Remuneration Report. This
is a required annual advisory vote relating to
Directors’ remuneration paid in the previous
financial year, and setting out how the
Directors’ Remuneration Policy will be
implemented in the forthcoming year.
- The Directors’ Remuneration Policy. This
was last reviewed in 2014 and although this
is only required every three years, the
Remuneration Committee has decided to
submit a new policy for approval this year
reflecting the proposed changes outlined above.
- A new Performance Share Plan. The
existing Performance Share Plan, was
approved by shareholders in 2006 and
expires in 2016. The new plan reflects the
proposed changes outlined.
I hope that our shareholder consultation exercise
and the context in this report will provide
shareholders with the information they need to
continue to support our remuneration resolutions.
As always, I would welcome any feedback or
comments on this Report. We will continue to
endeavour to report remuneration matters with
clarity and transparency and would welcome
any suggestions on how we can add to those
qualities in the future.
Katie Bickerstaffe
Chairman of the Remuneration Committee
93
Directors’ Report
Remuneration Report continued
At a Glance
SSE’s performance in 2015/16
Executive Directors’ remuneration is strongly linked to Company performance. The table below shows some of SSE’s financial and non-financial
highlights in 2015/16.
Earnings per share – 119.5p
* 124.1p in 2014/15
Adjusted profit before tax – £1,510m
* £1,564.7m in 2014/15
Investment and capital expenditure – £1,618.7m
* £1,475.3m in 2014/15
Contribution to UK economy – £8.9bn
* £8.8bn in 2014/15
Total Recordable Injury Rate – 0.23 per 100,000 hours worked
* 0.23 in 2014/15
Strong performance in the Citizens Advice Energy Supplier
Performance Report
Electricity distribution estimated incentive performance – c.£23m
* c.£6.5m in 2014/15
77% employee engagement index
* 4% increase on 2014/15
Remuneration Principles and Strategy
The Remuneration Committee believes it is important that overall remuneration policy is strongly aligned to the purpose and strategy through the
following approach:
Simplicity
Executive Directors’ pay
is made up of just
four elements – base
salary and benefits,
pension, an annual
incentive, and
a long-term incentive.
Customer focus
Customer service
measures are included
in both the annual
incentive and PSP.
Balance
A balanced range of
measures used to ensure
all aspects of Executive
Directors’ overall
performance
are covered.
Delivery
Dividends and Total
Shareholder Return
(TSR) measures align
Executive Directors’
interests with
shareholders.
Stewardship
Executive Directors
are expected to look
to the long term and
build and maintain
significant personal
shareholdings in the
business.
TSR
EPS/PBT
DPS
Cashflow
Customer
Teamwork
Personal
Providing the energy people need in a reliable and sustainable way
Financial objectives
Consistent strategy
Long-term values
P
P
P
P
P
P
P
P
P
P
Remuneration framework
In line with the principles above, Executive Directors’ remuneration is made up of just four elements as set out below. Variable Remuneration is subject
to performance and, in a number of aspects, continued service with SSE.
i
l
g
n
d
o
h
e
r
a
h
s
m
u
m
n
M
i
i
%
0
0
2
o
t
l
a
u
q
e
e
n
i
l
i
e
d
u
g
l
y
r
a
a
s
e
s
a
b
f
o
Fixed Remuneration
Variable Remuneration
Base Salary and Benefits
Short-term (annual)
Car, medical insurance and Share Incentive Plan.
Annual Incentive Plan (AIP) – 75% maximum cash and
25% deferred shares. Linked to individual and team
performance, financial and operational measures.
Pension
Final Salary.
Long-term (three years)
Performance Share Plan (PSP) – three years plus two year
holding period. Linked to relative TSR performance against
the FTSE100 and MSCI European Utilities, dividend growth,
adjusted annual EPS growth and customer satisfaction.
94 SSE plc Annual Report 2016
1.
2. Directors’ Report
3.
Executive Directors’ Remuneration 2015/16
The chart below shows the total remuneration received for 2015/16. For comparison, the chart also indicates minimum, on target and maximum
remuneration levels that could have been earned in the year.
Chief Executive – Alistair Phillips-Davies
Finance Director – Gregor Alexander
Maximum
Target (50%)
Actual 2015/16
Minimum
Maximum
Target (50%)
Actual 2015/16
Minimum
Total Fixed Remuneration
AIP (100%)
PSP (150%)
0
1,000
2,000
3,000
4,000
Thousands
0
1,000
2,000
3,000
4,000
Thousands
* Actual figures are based on the assumptions used for the single figure table on page 104.
Changes for 2016/17
As discussed in the Remuneration Committee Chairman’s letter on pages 92 to 93, during 2015 a review of the remuneration arrangements for Executive
Directors was undertaken to ensure their continued relevance and alignment with our strategy. Following this review a number of changes are proposed
which are in line with SSE’s core principles detailed above.
Pay element
Base Salary
Change
+ 2.4%
Rationale for change
Effective from 1 April 2016, both Directors will receive a salary increase of 2.4%. This is in line with
average performance-based salary increases for the wider SSE population.
Career Deferral
From three years post
award to one year
after the Executive
Director steps down
Extends the time period that deferred shares, arising from annual incentive awards, are held to
until a year after an Executive Director steps down from their position. This supports SSE’s Executive
Directors’ commitment to the long-term sustainability and stewardship of the Company – even
after leaving.
Deferral Percentage
Increase from
25% to 33%
This supports the commitment to the long-term sustainability and stewardship of SSE and further
aligns Executive Directors with the interests of shareholders.
Pensionable
Salary Increases
Capped at RPI +1%
Effective from 1 April 2017, this decreases the emphasis on pension in total reward.
Annual Incentive Plan
Opportunity
CEO: 100% to 150%
FD: 100% to 130%
Variable incentive levels were last reviewed over eight years ago and have remained unchanged
since. However over this time the scope and complexity of the roles have increased significantly.
Performance Share Plan
Opportunity
CEO: 150% to 200%
FD: 150% to 175%
Performance
Share Plan Targets
Maximum EPS growth
target increased from
RPI +8% to RPI +10%
Maximum DPS growth
target increased from
RPI +4% to RPI +5%
The environment in which SSE operates has become significantly more complex and challenging,
including significant additional devolution within the UK, and more complex and wide-ranging
regulation. As a result, the role of Executive Directors now includes engaging effectively with
policy-makers and regulators and a wide range of stakeholders, as well as balancing value to
customers and shareholders, while making the long-term investment decisions designed to sustain
dividends for shareholders over the longer term.
As part of the wide ranging review, the Committee looked at incentive levels taking into consideration
any retention risk, the complexity and challenges of the Executive Director role in the environment
that SSE operates, and the role of incentives in supporting our strategy. Against the background and
context above, the Committee felt that it was right to increase the overall incentive opportunity to
levels which are commensurate with the size and complexity of the organisation, but which would
still position SSE conservatively against a range of relevant benchmark reference points.
In the context of the increase to overall incentives, the Committee increased the maximum targets
for a number of PSP performance measures.
95
Directors’ Report
Remuneration Report continued
Policy
The following sets out SSE’s Directors’ Remuneration Policy (the “Policy”). The Policy is subject to a binding shareholder vote at SSE’s AGM on 21 July
2016 and, if approved, will apply from this date.
The key changes between this Policy and the policy which was approved by shareholders at SSE’s AGM on 17 July 2014 are as follows:
- A career deferral period is being introduced to the annual incentive plan, extending the time period that deferred shares are held to one year after
an Executive Director steps down from their position. This supports SSE’s commitment to long-term sustainability and stewardship of SSE.
- An increase to the proportion of award to be deferred is proposed in addition to the above. Previously, 25% of a Director’s annual incentive award
was deferred as shares for a period of three years. Under the new arrangements, 33% of the award will be deferred.
- A cap on pensionable salary is to be introduced effective from 1 April 2017. Future pensionable base pay increases will be capped at RPI +1%.
- Annual incentive and performance share plan opportunities are to increase for both Executive Directors. Variable incentive levels were last reviewed
over eight years ago and have remained unchanged since. However over this time the scope and complexity of the roles have increased significantly.
The new approach continues to position SSE conservatively against the market in line with SSE’s pay policy. The Chief Executive’s maximum AIP
opportunity will increase from 100% to 150%, and maximum PSP will increase from 150% to 200%. The Finance Director’s maximum AIP opportunity
will increase from 100% to 130% and maximum PSP will increase from 150% to 175%.
Remuneration Policy
Base Salary
Purpose
and link
to strategy
Operation
The base salary supports the retention and recruitment of Executive Directors of the calibre required to develop the Company’s
strategy, deliver efficient operations and investments, and engage effectively with the Company’s key stakeholders. It is intended
to reflect the role and its responsibilities, business and individual performance measured against SSE’s strategy and core purpose
of providing the energy people need in a reliable and sustainable way, and to have an awareness of competitive market pressures.
The Committee sets base salary taking into account:
-
-
-
-
the individual’s skills, experience and performance;
salary levels at other FTSE100 companies and other energy businesses;
remuneration of different groups of employees and wider internal pay arrangements; and
the overall policy objective to remain below market median on a total remuneration basis for the FTSE 20-50 excluding financial
services companies.
Base salary is normally reviewed annually with changes effective from 1 April. It may be reviewed more frequently or at different times
of the year if the Committee determines this is appropriate.
Maximum
opportunity
While there is no maximum salary level, salary increases will normally be in line with the typical level of increase awarded to other
employees in the Company. However, increases may be above this level in certain circumstances, including but not limited to:
- where a new Executive Director has been appointed to the Board at an initially lower base salary with the intention that larger salary
increases would be awarded for an initial period of time as the Executive Director gains experience;
- where there has been a significant increase in the scope and responsibility of an Executive Director’s role or where they have been
promoted; and
- where a larger increase is considered necessary to reflect significant changes in market practice.
Performance
measures
The overall performance of the Executive Directors in ensuring that SSE fulfils its core purpose of providing the energy people need
and, delivers its strategic focus on efficient operations and disciplined investment and achieves key financial objectives is considered
by the Remuneration Committee when setting and reviewing salaries annually.
96 SSE plc Annual Report 2016
1.
2. Directors’ Report
3.
Pension
Purpose
and link
to strategy
Pension planning is an important part of SSE’s remuneration strategy because it is consistent with the long-term goals and horizons
of the business.
The pension supports the Company’s ability to retain experienced Executive Directors and develop talent internally.
Operation
The current Executive Directors participate in either the Southern Electric Pension Scheme or the Scottish Hydro-Electric Pension Scheme.
These schemes are funded final salary (subject to the cap on future increases in pensionable pay described below) pension schemes. Where
an Executive Director is subject to the scheme-specific salary cap (which mirrors the provisions of the previous HMRC cap arrangements) the
Company provides top-up unfunded arrangements (“UURBS”) up to the maximum benefit outlined below.
The Committee may determine that alternative pension provisions will operate for new appointments to the Board, and would also
determine the value of such arrangements. When determining pension arrangements for new appointments the Committee will give
regard to cost, market practice and the pension arrangements received elsewhere in the Company.
Maximum
opportunity
For existing Executive Directors, the pension arrangements provide for a maximum pension of two-thirds of final salary, normally at
age 60. From 1 April 2017, future pensionable pay increases will be capped at RPI + 1% (regardless of the level of any actual increases
in salaries).
Performance
measures
Not applicable.
Benefits
Purpose
and link
to strategy
Operation
To provide a market-competitive level of benefits for Executive Directors.
Benefit policy is to provide an appropriate level of benefit taking into account market practice at similar sized companies and the
level of benefits provided for other employees in the Company.
Core benefits – Benefits currently include car allowance, private medical insurance and health screening.
All-employee share plans – Executive Directors are eligible to participate in the Company’s all-employee share plans on the same
terms as UK colleagues. The Company currently operates the Share Incentive Plan and the Sharesave Scheme.
Relocation policy – In the event that an Executive Director was required to re-locate to undertake their role, the Committee may
provide additional reasonable benefits (either on a one-off or on-going basis) to reflect the relevant circumstances.
The Committee may introduce or remove particular benefits if it is considered appropriate to do so.
When determining the level of benefits the Committee will consider the factors outlined in the ‘Operation’ section.
Maximum
opportunity
The cost will depend on the cost to the Company of providing individual items and the individual’s circumstances and therefore there
is no maximum benefit level.
Performance
measures
Not applicable.
97
Directors’ Report
Remuneration Report continued
Policy
Annual incentive plan (AIP)
Purpose
and link
to strategy
In line with the need to achieve a suitable balance of fixed and variable remuneration the purpose of the AIP is to reward Executive Directors’
performance during the year, based upon achievement of performance targets. The performance targets are linked to SSE’s strategy and
core purpose.
Compulsory deferral into Company shares provides alignment between Executive Directors’ interests and the long-term interests of
shareholders. With effect from the 2016/17 performance year, this alignment will be reinforced as the deferral will take the form of an award
of career shares, which are shares that cannot be disposed of until after the Executive Director has stepped down.
Operation
The Committee determines the level of incentive at its absolute discretion taking into account performance in each of the measures,
the underlying performance of the business and Executive Directors’ management of, and performance in, all of the business issues
that arise during the year.
Performance is typically assessed over a financial year.
For the 2015/16 performance year, the award will be delivered 75% in cash and 25% in deferred shares.
Deferred shares will normally vest three years from the award and will typically be subject to continued employment. Until vesting,
the awards may accrue additional dividend shares. Dividend equivalents may be determined by the Committee on a cumulative basis
and may assume reinvestment of dividends in the Company’s shares.
From the 2016/17 performance year, the award will normally be delivered:
- 67% in cash; and
- 33% in deferred shares, which will be granted as a career share award
The Committee may determine that a different balance of cash and deferred shares may be awarded.
For the 2016/17 annual incentive year and thereafter, deferred shares will be granted in the form of a career share award under the
Deferred Scheme. Career share awards will normally vest three years from the award date (unless the Committee determines an
alternative vesting period is appropriate) with accrual of dividends over that period as described above.
Following vesting, the after-tax number of shares under the career share award will be held in a nominee account until the first
anniversary of the cessation of the Executive Director’s employment with the Company (irrespective of the circumstances of such
cessation) or, if earlier, until death or the occurrence of a change of control of the Company. In the event that the Committee
implements the career deferral holding period in such a way that Executives do not have beneficial ownership of the shares,
dividends may accrue or be paid during the holding period following vesting.
Deferred shares granted under the Deferred Scheme in respect of the 2015/16 annual incentive year will not be subject to any
mandatory post-vesting holding period, except as otherwise required by the Company’s shareholding policy from time to time.
In certain circumstances as set out in the plan rules the Committee may at its discretion apply malus to outstanding awards under
the AIP or unvested career share awards prior to the relevant vesting or payment date, and/or claw back the cash or share portion
of awards under the AIP for up to three years after the cash payment date of the relevant award.
The Committee may adjust and amend the terms of the career share awards in accordance with the Deferred Scheme rules.
Maximum
opportunity
Maximum annual incentive opportunity is equal to 150% of base salary for the Chief Executive and 130% of base salary for the
Finance Director.
Performance
measures
The annual incentive is normally based on a mix of financial measures and measures related to the strategic performance of the business.
A minimum of 50% of the annual incentive will be based on financial performance.
The strategic performance of the business is generally determined with reference to its core purpose of providing the energy people
need in a reliable and sustainable way and therefore normally includes matters such as safety, customer service in the Retail and
Networks divisions and investment decision-making and execution, as well as the personal performance of the Executive Directors.
The Committee determines the exact metrics each year depending on the key strategic objectives for the forthcoming year and
ensures that they are appropriately stretching in the context of the business plan.
In determining the final out-turn the Committee considers Executive Directors’ management of, and performance in, all of the
business issues that arose during the year.
The Committee may review the detailed targets and weightings of measures year on year, as well as the appropriate threshold levels
of vesting and performance.
Around 50% of the incentive is paid if target levels of performance are delivered with the full incentive being paid for delivering
stretching levels of performance.
The part of the AIP that is deferred in the form of deferred shares or a career share award is not subject to any further performance conditions.
98 SSE plc Annual Report 2016
1.
2. Directors’ Report
3.
Performance share plan (PSP)
Purpose
and link
to strategy
Operation
The purpose of the PSP is to reward Executive Directors, over a three year performance period and a further two year holding period,
for their part in delivering the sustained success of SSE and to ensure that their interests are aligned with those of the shareholders who
invest in the Company.
Shares are awarded which normally vest based on performance over a period of three years. Awards granted to Executive Directors will be
subject to an additional two year post-vesting holding period during which time the Executive must retain the post-tax number of shares
vesting under the award.
The Committee shall determine the extent to which the performance conditions have been met. No shares shall vest unless the
Committee is satisfied with the underlying financial performance of the Company. Awards do not vest until after the end of the
performance period.
Until vesting, PSP awards may accrue additional dividend shares. Dividend equivalents may be determined by the Committee on
a cumulative basis and may assume reinvestment of dividends in the Company’s shares.
In certain circumstances set out in the PSP rules the Committee may at its discretion apply malus to outstanding awards prior to
vesting and/or claw back vested awards for up to three years after the vesting date of the relevant award.
The Committee may adjust and amend awards in accordance with the PSP rules.
Maximum
opportunity
The maximum value of award that can be granted under the PSP is equal to 200% of base salary for the Chief Executive and 175%
of base salary for the Finance Director.
Performance
measures
The Committee determines targets each year to ensure that they are stretching and represent value creation for shareholders while
remaining realistically achievable for management.
Awards vest based on relative total shareholder return, financial based measures and customer satisfaction.
At least 70% of the award will be based on financial and relative total shareholder return measures.
The Committee may review the detailed targets and weightings of measures year on year, as well as the appropriate threshold levels of vesting
and performance.
Share ownership policy
Purpose
and link
to strategy
Operation
A key element of Executive Director pay policy is to align the interests of Executive Directors with those of shareholders who invest
in the Company.
Shareholding is normally built up via shares vesting through the PSP, deferred shares from the AIP and all employee share schemes.
Vested career shares under the Deferred Scheme (which, except in certain circumstances, must be retained for one year post-
cessation of employment) may also count towards the Executive Director’s shareholding.
Maximum
opportunity
Executive Directors are expected to maintain a shareholding equivalent to two times base salary built up within a reasonable timescale.
Consent to sell shares is not normally given (unless in exceptional circumstances) until this level of shareholding is reached.
Performance
measures
Not applicable.
Chairman and non-Executive Director fees
Purpose
and link
to strategy
Operation
Fees are set at a level which provides reward for undertaking the role and are sufficient to attract and retain individuals with the calibre
and experience to contribute effectively at Board level.
The Committee is responsible for determining fees for the Chairman. The Board is responsible for determining fees for other non-
Executive Directors.
Fees are reviewed at appropriate intervals against companies of a similar size and complexity. Fees are set in a way that is consistent
with the wider remuneration policy.
The fee structure may be made up of:
- a basic Board fee or Chairman fee;
- an additional fee for any committee chairmanship or membership; and
- an additional fee for further responsibilities e.g. Senior Independent Director, or periods of increased activity.
99
Directors’ Report
Remuneration Report continued
Policy
Chairman and non-Executive Director fees continued
Operation
continued
Non-Executive Directors do not participate in the Annual Incentive Plan, Deferred Bonus Scheme or any of the share schemes,
or contribute to any group pension scheme.
Non-Executive Directors do not currently receive any benefits. Benefits may, however, be provided in the future for non-Executive
Directors if in the view of the Board this was considered appropriate and they may also be provided in the future for the Chairman if in
the view of the Committee this was considered appropriate.
Reasonable travelling and other expenses for costs incurred in the course of the non-Executive Directors undertaking their duties are
reimbursed (including any tax due on the expenses).
It is also expected that all non-Executive Directors should build up a minimum of 2,000 shares in the Company.
The aggregate level of non-Executive Director fees shall not exceed the maximum limit set out in the Articles of Association.
Maximum
opportunity
Performance
measures
While there are no direct performance measures relating to Chairman and non-Executive Director fees, the performance of the Board
is subject to annual evaluation, including individual evaluation.
Committee discretion
All incentive awards are subject to the terms of the relevant plan rules under which awards are made. The Committee may adjust or amend awards in
accordance with the provisions of the relevant plan rules. This includes, but is not limited to, the following discretions:
-
In the event of a variation of the Company’s share capital or reserves, or a demerger, special dividend, rights issue or other event, the number
of shares subject to an Award and/or any performance condition attached to Awards, may be adjusted.
- The Committee may adjust PSP performance conditions for subsisting awards as it considers appropriate to take account of any factors which are
-
relevant in the opinion of the Committee, for example to reflect modifications of accounting standards.
In the event of a voluntary winding-up of the Company, the Committee may allow some or all of the outstanding PSP awards to vest (and be deemed
exercised) on the date the resolution for the winding-up is passed.
The Committee may make minor changes to this Policy (for example for regulatory, exchange control, tax or administrative purposes or to take account
of a change in legislation or corporate governance requirements or guidance) without seeking shareholder approval for that amendment.
Legacy commitments
The Committee reserves the right to make any remuneration payments and payments for loss of office (including exercising any discretion available to it in
connection with such payments) notwithstanding that they are not in line with the Policy set out in this report where the terms of the payment were agreed
(i) before 17 July 2014 (the date the Company’s first shareholder approved directors’ remuneration policy came into effect) (ii) before this Policy came into
effect provided that the terms of the payment were consistent with the shareholder-approved directors’ remuneration policy in force at the time they were
agreed or, (iii) at a time when the relevant individual was not a director of the Company and, in the opinion of the Committee, the payment was not in
consideration for the individual becoming a director of the Company. As well as remuneration payments and payments for loss of office under the
Company’s Directors’ Remuneration Policy which was approved by shareholders on 17 July 2014, this includes commitments relating to the defined benefit
pension arrangements which were made before 27 June 2012. “Payments” includes the Committee sanctioning awards of variable remuneration and an
award over shares is “agreed” at the time the award is granted. Any payments made outside of the remuneration Policy pursuant to legacy commitments
will be disclosed in full in the relevant year’s Annual Report.
Directors’ service contracts and non-Executive Directors’ letters of appointment
Current Executive Directors have service contracts terminable by the Company immediately without notice upon breach by the individual or by the
Company giving to the individual 12 months’ notice or, at its discretion, payment in lieu of salary only during that notice. The payment in lieu of notice
may be made in staged payments, and may either reduce or cease completely where the departing Executive Director gains new employment. The
Executive Director may terminate his contract by giving the Company 12 months’ notice. Contracts for new Executive Directors will be limited to
12 months’ notice by both parties (or payment in lieu of notice in respect of the Company).
The non-Executive Directors have letters of appointment, and are appointed for fixed terms of three years, subject to retirement and re-appointment at AGMs.
Non-Executive Directors on termination are not entitled to any payment in lieu of notice or any compensation for loss of office.
The letters of appointment are available for shareholders to view on www.sse.com.
Loss of office policy
The Committee takes a number of factors into account when determining leaving arrangements for Executive Directors:
- The Committee must satisfy any contractual obligations provided they are consistent with the Policy or have been entered into on a date on or before
27 June 2012 in accordance with relevant legislation.
- The treatment of outstanding share awards is governed by the relevant share plan rules, as set out below.
- The Committee may determine that the Executive Director should receive outplacement support and legal advice at the expense of the Company
and any payments required by statute.
The Company may at its discretion terminate any Executive Director’s contract by providing notice or payment in lieu of notice (as set out above).
100 SSE plc Annual Report 2016
AIP
The Executive Director may, at the discretion of the Committee, remain eligible to receive an AIP award for the financial year in which they ceased
employment. Any such AIP award will be determined by the Committee taking into account time in employment and performance. If an AIP award
is received in such cases it will not be subject to deferral into deferred shares.
Deferred and career shares
If an Executive Director’s employment terminates in circumstances such as death, injury, disability, ill-health (as agreed by the Committee) or other
circumstances that the Committee deems appropriate, unvested deferred and career shares shall vest in full at the time of termination of employment.
If an Executive Director leaves the business in other circumstances their deferred shares and unvested career shares shall lapse. Vested career shares shall
not lapse.
Vested awards in the form of career shares shall, except in the case of death or change of control, be released one year after cessation of employment,
irrespective of the reason for such cessation.
Performance share plan
If an Executive Director’s employment terminates in circumstances such as death, injury, disability, ill-health (as agreed by the Committee) or other
circumstances that the Committee deems appropriate, PSP shares may continue to vest. The PSP shares will normally be reduced to reflect the time
elapsed in the three-year performance period when the Director’s employment ends and will normally remain subject to performance at the end
of the performance period.
The Committee may determine, in exceptional circumstances, that PSP shares may be released at the time of cessation of employment. In this
circumstance, it will determine the level of vesting taking into account the extent to which the performance conditions have been met at the time
(subject to modification if the Committee considers that the performance condition would be met to a greater or lesser extent at the end of the original
performance period) and the period the Executive Director has been in employment.
The Committee has the discretion to disapply time pro-rating or alter the time pro-rating fraction if it considers that the Executive Director’s contribution
to the business of the Company would not otherwise be properly recognised (for awards under the 2006 PSP, this discretion is limited to circumstances
where the Committee determines that PSP shares shall vest for reasons other than death, disability or ill health). In this circumstance, the vesting of PSP
shares would remain subject to performance until the end of the performance period.
If the Executive Director’s employment ends for any other reason, unvested PSP share awards will lapse. Vested PSP shares which are subject to a
mandatory holding period will not lapse as a result of cessation of employment for any reason.
Pension
Where an Executive retires through ill-health they are entitled to an unreduced pension based on service to expected retirement.
In the event of any reorganisation or redundancy, Executives who are aged 50 or more with at least five years of service will be provided with an
unreduced accrued pension. If an Executive has not reached age 50 at the time of this event their pension will be paid from age 50.
From age 55 Executives are entitled to leave the Company and receive a pension, reduced for early payment, unless the Company gives consent and
funds the pension being paid on an unreduced basis.
Dependent upon the circumstances surrounding the departure of the Executive Director and the financial health of the Company at the time, the
Committee’s policy is to give consideration to a cash commutation of the UURB pension at the time of leaving. Any cash commutation would limit SSE’s
liability, taking into account valuations provided by independent actuarial advisors, and would be undertaken on what was judged by the Committee to
be on a cost neutral basis to SSE.
The following is information relating to the pension of Gregor Alexander as a participant in the HMRC approved Scottish Hydro-Electric Pension Scheme
the terms of which also apply to the UURBS arrangement.
(i) Dependants’ pensions on death are half of members’ pension entitlements, together with a capital sum equal to four times pensionable pay.
On death in retirement, the Director’s spouse will receive a pension equal to half of that payable to the Director. In addition, on death within the first five
years of retirement, a lump sum is payable equal to the balance outstanding of the first five years’ pension payments.
(ii) Post retirement increases are expected to be in line with RPI.
The following is information relating to the pension of Alistair Phillips-Davies, as a participant in the HMRC approved Southern Electric Group of the
Electricity Supply Pension Scheme, the terms of which also apply to the UURBS arrangement.
(i) Dependants’ pensions on death are four-ninths of the member’s pensionable pay, together with a capital sum equal to four times pensionable pay.
If death occurs after attaining the age of 55 an additional lump sum between three to five times notional pension is payable dependent upon age and
length of service.
101
3. 1. 2. Directors’ Report Remuneration Report continued
Policy
Loss of office policy continued
(ii) On death in retirement, the Director’s spouse will receive a pension equal to two-thirds of that payable to the Director. In addition, on death within
the first five years of retirement, a lump sum is payable equal to the balance outstanding of the first five years’ pension payments.
(iii) Post retirement increases are expected to be in line with RPI (guaranteed up to the level of 5% per annum and discretionary above that level).
Other arrangements
If buyout awards are made on recruitment, the treatment on leaving would be determined at the time of the award.
For all-employee share plans, such as the Sharesave Scheme and the Share Incentive Plan, leavers will be treated in accordance with the HMRC
approved plan rules.
Change of control
On a change of control, Executive Directors’ awards will be treated in accordance with the rules of the applicable plan(s). In summary, in the event of
a change of control of the Company, performance in the PSP will be measured to that date subject to modification if the Committee considers that
the performance conditions would be met to a greater or lesser extent at the end of the original performance period. Awards will normally be scaled
down to reflect the period up to the change of control, but the Committee has discretion to dis-apply or alter the pro-rating fraction if it considers
that participants’ contribution to the creation of shareholder value during the performance period would not otherwise be properly recognised. Any
outstanding unvested deferred or career shares from the AIP will vest automatically, and any vested shares subject to a holding period will be released.
Recruitment policy
The Committee would generally seek to align the remuneration package offered with its remuneration policy outlined on page 96 and would be subject
to the variable pay limit outlined below.
Base salary would be set taking into account the individual’s skills and experience and performance, salary levels at other FTSE 100 companies and other
energy businesses, remuneration of different groups of employees, and the wider internal pay arrangements.
The Committee will determine appropriate pension provision for any new Executive Director. When determining pension arrangements for new
appointments the Committee will give regard to the cost of the arrangements, market practice and the pension arrangements which operate elsewhere
in the Company.
The Committee retains the flexibility to provide a higher variable remuneration opportunity for a new recruit. For example, where the value of pension
offered is lower than that offered to current Executive Directors, a higher level of incentive opportunity may be required to maintain broadly comparable
total remuneration positioning. More generally, it is considered appropriate for the Policy to provide some flexibility given the current conservative
positioning of SSE’s incentive arrangements. The over-riding objective in determining a total remuneration package for a new recruit would be to
make decisions which are in the best interests of the Company, its shareholders and other stakeholders.
In this context the on-going variable incentive maxima (currently, for the Chief Executive and Finance Director respectively, 150% and 130% annual
incentive and 200% and 175% PSP) may be increased. Were an increase to be made for a new recruit the Committee would consider very carefully
the appropriate level, taking into account the rationale and circumstances. The maximum annual incentive level would be 150% and the maximum
PSP would be 225%. (Note: These incentive maximums have not increased from the recruitment maximums approved by shareholders when the first
Policy was adopted on 17 July 2014.)
The Committee may make awards on appointing an Executive Director to ‘buy out’ remuneration arrangements forfeited on leaving a previous employer.
In doing so the Committee will take account of relevant factors including any performance conditions attached to these awards, the form in which they
were granted (e.g. cash or shares) and the time over which they would have vested. Generally buy-out awards will be made on a comparable basis to
those forfeited. To facilitate these awards, the Committee may make awards under Company incentive plans and other available structures.
The committee may make awards under Company incentive plans and under the Listing Rules exemption in LR9.4.2 which allows Companies to make
grants to a director to facilitate, in unusual circumstances, the recruitment or retention of that director. The use of the latter shall be limited to the
granting of buy-out awards or share awards within the limits described above.
Shareholders’ views
The Committee Chairman, on behalf of the Committee, consulted with SSE’s largest shareholders in developing the new Policy, as well as representatives
from the Investment Association and Institutional Shareholder Services. This included a number of meetings which allowed a discussion of the proposals
in the context of SSE’s business strategy and the environment in which it operates. The feedback received was extremely helpful in informing the
Committee’s decisions.
More generally, the Committee Chairman, on behalf of the Committee, periodically undertakes consultation with a number of institutional shareholders
regarding a broad range of remuneration issues. The Committee finds such consultation meetings a valuable opportunity to receive feedback on the
work of the Committee and the key issues that it is considering. The feedback received is extremely helpful in informing the Committee’s decisions.
In addition, the Committee also monitors the views of other stakeholders and broader developments in executive remuneration generally.
102
SSE plc Annual Report 2016Directors’ Report 1.
2. Directors’ Report
3.
Remuneration engagement across the Company
The Committee appreciates the importance of an appropriate relationship between the remuneration levels of the Executive Directors, senior executives,
managers and other employees within the Company although comparison metrics are not used. Remuneration at all levels in SSE is designed to support
its core remuneration principles, long-term business strategy and core purpose of providing the energy people need in a reliable and sustainable way. It is
also designed to be consistent with and support the Company’s core values of Safety, Service, Efficiency, Sustainability, Excellence and Teamwork. The
structure of reward necessarily differs based on scope and responsibility of role, level of seniority and location.
- The senior management population also participate in annual and long-term incentive arrangements. In line with Executive Directors’ arrangements,
incentives for senior management have an emphasis on share awards and the performance metrics support those used at Board level.
- All employees have the opportunity to be share owners through the Share Incentive Plan and the Sharesave Plan and those participating are able
to express their views in the same way as other shareholders.
- Pension planning is an important part of SSE’s reward strategy for all employees because it is consistent with the long-term goals and horizons of the
business, an approach it has been practising for a number of years. The terms of the funded final salary pension schemes apply equally to all members.
- As part of its Employee Engagement Survey the Company invites all employees to provide a view on the benefits and pay that it provides.
The Head of Reward also provides an annual update to all SSE-recognised trade unions, explaining the Company’s position on executive remuneration.
This covers many of the policy positions explained in this report. Feedback from this meeting is shared with the Remuneration Committee. The
Company will continue to liaise with employee representative bodies in the future and welcomes their views and opinions on remuneration issues.
Illustration of the Remuneration Policy for 2016/17
Chief Executive –
Allistair Phillips-Davies
Finance Director –
Gregor Alexander
5,000
4,000
3,000
2,000
1,000
)
0
0
0
£
(
n
o
i
t
a
r
e
n
u
m
e
R
l
a
t
o
T
0
31%
23%
45%
100%
40%
30%
29%
5,000
)
0
0
0
£
(
n
o
i
t
a
r
e
n
u
m
e
R
l
a
t
o
T
4,000
3,000
2,000
1,000
0
28%
21%
50%
100%
38%
28%
34%
PSP
AIP
Base salary, benefits, pension
Minimum
Target
Maximum
Minimum
Target
Maximum
The charts above are based on the current Executive Directors’ packages and show the amount of remuneration payable in three scenarios; 1) minimum
performance where only base salary, benefits and pension is payable, 2) target performance and 3) maximum performance.
Underlying assumptions
Minimum performance
In this scenario only the fixed pay elements are payable i.e. base salary, benefits and pension calculated as:
- Base salary effective from 1 April 2016.
- Benefits represent those shown on the single figure table on page 104.
- Pension is the value of accrual in a typical year (using the same valuation methodology as in the “single figure” table on
page 104.
CEO
FD
Base salary
£844,104
£652,424
Benefits
24,430
20,764
Pension
354,298
335,298
Total
1,222,832
1,008,486
Target performance
Maximum performance
This is what the Executive Director would receive in addition to the minimum performance element, if the Committee
agreed that target level performance had been achieved:
- AIP pays out 50% of maximum opportunity.
- PSP pays out 50% of maximum opportunity.
This is what the Executive Director would receive in addition to the minimum performance element, if the Committee
agreed that the maximum level performance had been achieved:
- AIP pays out 150% of base salary for the CEO and 130% for the FD.
- PSP pays out 200% of base salary for the CEO and 175% for the FD.
Notes
The AIP figures are the gross value of the awards before 33% is converted into deferred career shares.
The PSP awards are shown simply as the gross face value at the date of grant and do not include any assumptions for share price growth or dividend accrual.
103
Directors’ Report
Annual Remuneration Report 2015/16
The following sets out SSE’s Annual Remuneration Report. The report will be subject to an advisory vote at the 2016 AGM. The Annual Remuneration
Report is divided into three main sections as follows:
Single figure of remuneration and supporting information
Statement of implementation for 2016/17
Other remuneration disclosures
This section sets out details of Executive Directors’ pay for the financial year
along with supporting information on the elements of pay including details
of pay and performance under SSE’s incentive plans. (pages 104 to 107).
This section provides details of the implementation of the new policy for
2016/17 including the context for the change in policy. Details of malus and
clawback provisions are also provided in this section. (pages 107 to 109).
This section provides other remuneration disclosures including historical
CEO pay, comparison with all-employee pay, how Executive Director pay
compares to other financial dispersals, detailed share interests and share
award tables and information in relation to the advice provided to the
Committee. (pages 109 to 111).
Single figure of remuneration and supporting information
Single total figure of remuneration for each director for financial years ended 31 March 2015 and 2016 (audited)
Executive Directors
Alistair Phillips-Davies
Gregor Alexander
Non-Executive Directors
Thomas Thune Andersen1
Jeremy Beeton
Katie Bickerstaffe
Sue Bruce
Crawford Gillies2
Richard Gillingwater CBE3
Peter Lynas4
Helen Mahy5
Lady Rice6
Lord Smith of Kelvin7
Base salary/fees
£000s
Benefits8
£000s
AIP9
£000s
PSP10
£000s
Pension11
£000s
Total12
£000s
2016
2015
2016
2015
2016
2015
2016
2015
2016
2015
2016
2015
824
637
805
622
24
21
26
23
445
344
515
398
0
0
0
0
403
286
965 1,696
354 1,288
2,311
1,397
Total 2,984 3,708
20
66
59
59
83
55
21
370
71
69
60
47
275
75
5
117
20
66
59
59
83
55
21
370
71
69
60
47
275
75
5
117
Overall Total 3,703 4,441
Thomas Thune Andersen stepped down from the Board on 17 July 2014.
Notes
1
2 Crawford Gillies was appointed to the Board on 1 August 2015.
3 Richard Gillingwater CBE was appointed as Chairman on 23 July 2015.
4 Peter Lynas was appointed to the Board on 1 July 2014.
5 Helen Mahy was appointed to the Board on 1 March 2016.
Lady Rice stepped down from the Board on 17 July 2014.
6
Lord Smith stepped down as Chairman on 23 July 2015 but has been retained by SSE’s Executive Committee for a further year to provide advice and counsel on key business issues relating
7
to Scotland.
8 Benefits relate to company car, Share Incentive Plan company contributions and medical benefits.
9 The AIP figures above show the full value of the award before 25% was deferred in shares.
10 The PSP awards due to vest in 2015 and 2016 lapsed in full.
11 The pension value represents the cash value of pension accrued over 1 year x a multiple of 20 in line with statutory reporting requirements.
12 directors have not received any other items in the nature of remuneration other than as disclosed in the table.
Salary
The salaries shown in the table reflect a 2015/16 salary, effective from 1 April 2015 to 31 March 2016, of £824,320 for the Chief Executive and £637,133 for
the Finance Director.
104 SSE plc Annual Report 2016
1.
2. Directors’ Report
3.
2015/16 AIP
The AIP award is determined by performance against three financial metrics (Adjusted PBT, DPS Growth and Cash-flow) and three areas of non-financial
performance (Customer, Teamworking and Personal). The table below provides more information on the measures and the performance that was
ultimately delivered.
Measure
Performance context
Measure
Weighting
Threshold
Target
Maximum
Outcome
% Out-turn
Financial 50%
Adjusted PBT
DPS Growth
Cash-flow
30%
10%
10%
£1,487
£1,565m
13%
1.08%
13.5%
£1,643
3.08%
14%
£1,513.5
1.13%
13.3%
16.71%
51.25%
30%
Total
5%
5%
3%
13%
Customer 15%
Overall service performance for SSE’s Retail customers continues to be good, in line with it’s
commitment to the principle of treating customers fairly.
Teamworking 20%
SSE continues to be recognised by a variety of trusted third parties for the quality of its service,
including: the Ombudsman for Energy Services report in March 2016 that SSE received the
fewest complaints of all 10 suppliers covered; the Citizens Advice Energy Supplier Performance
Report, in which SSE continues to perform strongly; and in reports on the large energy suppliers
conducted by uSwitch, Which? and the Institute of Customer Service.
Service performance for SSE’s Networks customers has also been high, with a lower number
and duration of power cuts experienced by customers in 2015/16 resulting in the best-ever
performance for the business.
Teamwork measures performance against the ‘SSESET’ of core values. The Committee assesses
each area before reaching an overall conclusion on the performance out-turn.
- Safety – Performance was broadly in line with last year’s performance with a low Accident
Frequency Rate of 0.10 and Total Recordable Injury Rate of 0.23 . Overall this performance
reflects the fact that SSE is achieving a good level of safety performance when compared to
industry in general, and our sector in particular.
- Service – As indicated above, SSE continues to provide good performance in both Energy
Supply customer surveys and in the number and duration of power cuts experienced by
Networks customers.
- Efficiency – Significant value secured from a programme of asset disposals started in 2014,
with agreements to secure proceeds and debt reduction of over £1bn.
- Sustainability – During 2015/16, SSE made further significant progress towards its 2020 target
of reducing the carbon intensity of the electricity it generates by 50%. In addition, SSE
continued to facilitate the connection of renewable sources of electricity to the transmission
system, including the completion of the Beauly-Denny replacement line and a successful
start to the new Caithness-Moray link.
- Excellence – SSE was one of the first FTSE100 companies, and the first energy company,
to become an accredited Living Wage employer in 2013. Work began in 2015/16 to
demonstrate the progress in implementing the Living Wage to contracted employees,
with 50% of all relevant contracts requiring the Living Wage to be paid to contracted
employees working on site.
78%
12%
- Teamwork – The Great Place to Work survey produced a strong set of results indicating a high
level of employee engagement with SSE’s engagement index rising 4% on last year to 77%.
83%
17%
Personal 15%
During 2015/16, against a challenging business environment the Executive Directors delivered
strong performance against individual objectives by successfully delivering a high level of
customer performance, maintaining a clear focus on safety and operational performance,
effective communication channels with key stakeholders, reviewing the business strategy,
setting out plans for investment and growth, developing effective cost control and efficiency
programmes, delivering the disposal programme to maintain a strong balance sheet, and
ensuring that employees remained engaged and motivated to deliver for SSE.
80%
12%
54%
Executive Directors were eligible to receive an AIP of up to 100% of salary in respect of 2015/16. Based on performance against these targets, the Chief
Executive and the Finance Director received payment of 54% of maximum. One-quarter of the award will be payable in shares deferred for a further
three years. Malus and clawback provisions will apply to the 2015/16 AIP award.
105
Directors’ Report
Annual Remuneration Report 2015/16 continued
2013/16 PSP
The targets attached to the 2013 PSP awards are set out in the table below. Performance was measured over the three-year period to 31 March 2016.
Measure
Performance context
Relative TSR 50%
Financial 50%
Measure
Weighting
Threshold
Maximum
v FTSE100
v MSCI
EPS
DPS
25%
25%
25%
25%
Median
Median
rpi + 2%
rpi + 2%
Upper Quartile
Upper Quartile
rpi + 8%
rpi + 6%
Outcome
< median
< median
< Threshold
< Threshold
Total
0
0
0
0
0
Based on performance against these targets, the 2013 PSP award will lapse in full.
Benefits
Benefits are provided at an appropriate level taking into account market practice at similar sized companies and the level of benefits provided for other
employees in the Company.
Core benefits include car allowance, private medical insurance and health screening.
The Executive Directors participate in the Company’s all-employee share schemes on the same terms as other employees.
Pension
In common with all members of the pension schemes who joined at the same time as the Executive Directors, the following provisions relating to
leaving the Company apply: for retirement through ill-health an unreduced pension based on service to expected retirement is paid; in the event of
any reorganisation or redundancy an unreduced accrued pension is paid to a member who is aged 50 or above, with at least five years’ service or,
for a member who has not yet reached that age, it will be payable with effect from 50; and from the age of 55, a scheme member is entitled to leave
the Company and receive a pension, reduced for early payment, unless the Company gives consent and funds this pension being paid on an
unreduced basis.
The Executive Directors are members of either the Southern Electric Pension Scheme or the Scottish Hydro-Electric Pension Scheme and their plan
membership predates their Board appointments. These are both funded final salary pension schemes and the terms of these schemes apply equally
to all members. The Directors’ service contracts provide for a possible maximum pension of two thirds final salary from the age of 60. In relation to
Executive Directors who are subject to the scheme-specific salary cap (which mirrors the provisions of the previous HMRC cap arrangements) the
Company provides top-up (unfunded) arrangements which are designed to provide an equivalent pension on retirement from the age of 60 to that
which they would have earned if they had not been subject to the salary cap. There are no arrangements to compensate members for any change
in their personal tax liability.
Dependent on the circumstances surrounding the departure of the Executive Director and financial health of the Company at the time, the Committee’s
policy is to give consideration to a cash commutation of the unfunded unapproved retirement benefit (UURB) pension at the time of leaving. Any cash
commutation would limit SSE’s liability, taking into account valuations provided by independent actuarial advisors, and would be undertaken on what
was judged to be a cost neutral basis to SSE.
Directors’ pension information
Alistair Phillips-Davies
Gregor Alexander
Accrued pension as at
31 March 2016
£000s
Accrued pension as at
31 March 2015
£000s
354
335
329
316
106 SSE plc Annual Report 2016
1.
2. Directors’ Report
3.
Recovery provisions
The Committee believes that it is right that it should have the ability to recover pay in circumstances where that pay is later proved to have been unfairly
earned. The PSP and AIP have the following recovery provisions:
What is it?
Ability to reduce or cancel unvested deferred AIP and
PSP share awards
Ability to take back value delivered through the cash
element of the AIP or vested PSP awards
Malus
Clawback
Circumstances to which each
provision would apply
- Material misstatement or restatement of accounts
- Misconduct which results in a materially adverse
financial effect
- Serious reputational damage including material
environmental or safety issue, or material operational
or business failing
- Factual error in calculating payment/vesting
- Serious misconduct
- Material misstatement or restatement of accounts
- Serious misconduct
- Factual error in calculating payment/vesting
Plans impacted
AIP (deferred shares) and PSP
Cash AIP and PSP
Applicable time period
At any point between the grant date and vesting
date (a three-year period)
At any point:
- Up to three years post-payment of cash under the
AIP; and
- Up to three years post-vesting of PSP shares
When do new provisions apply
First applies to any deferred shares granted in 2016 and
to PSP awards granted in 2015
First applies to payments in respect of the 2015/16 AIP and
PSP awards granted in 2015
Personal shareholding policy
The level of SSE shares to be held by Executive Directors is 200% of base salary. Both current Executive Directors have shareholdings above this level.
Statement of implementation for 2016/17
This section provides an overview of how the Committee intends to operate the new Remuneration Policy for 2016/17, subject to shareholder approval
at the 2016 AGM.
2016/17 remuneration review and shareholder consultation
During 2015 the Committee undertook a review of the remuneration arrangements for Executive Directors to ensure their continued relevance and
alignment with SSE’s strategy. Following this review, a number of changes are proposed which are in line with SSE’s core principles of simplicity, balance,
customer focus, delivery and stewardship.
The Committee values the views of shareholders. The Committee Chairman, on the behalf of the Committee, consulted with SSE’s largest shareholders,
as well as the Investment Association and Institutional Shareholder Services, in developing these proposals. The feedback received was extremely
helpful in informing the Committee’s decisions.
Link with SSE’s strategy
SSE’s core purpose is to provide the energy people need in a reliable and sustainable way, whilst recognising the need to reward shareholders who have
either invested directly in SSE or, as owners of the Company, have enabled it to borrow money from debt investors to finance investments that will help
to meet customers’ energy needs over the long term.
To support this purpose incentives are aligned to a balanced range of performance measures, including measures related to the customer experience
and SSE’s culture and values, measures related to the return to shareholders on their investment (total shareholder return and dividends per share), and
measures related to the financial stability of SSE and the ability to make future investments (cashflow and profit).
SSE’s remuneration structure is also designed to support it’s strategy by retaining the services of the best leaders. This means ensuring pay is at a level
which is appropriate for the complexity and challenges of the role and takes into account the marketability of senior talent. In order to support SSE’s
strategy, pay levels are linked to stretching and relevant targets and include important safeguards such as malus and clawback.
SSE is a business which is investing for the long term. It is therefore important that the remuneration structure is aligned to the long-term sustainability
and stewardship of the company. The remuneration structure therefore includes significant shareholding requirements, holding periods and the new
‘career deferral’ which extends the time that deferred shares are held until a year after an Executive Director steps down from their position.
107
Directors’ Report
Annual Remuneration Report 2015/16 continued
Base Salary
The Committee reviewed salary levels for Executive Directors, taking into account a number of factors including individual performance
and the salary increases awarded to the wider SSE population. Effective from 1 April 2016, the two Executive Directors will receive a
salary increase of 2.4%, which is in line with the average performance-based salary increases for the wider SSE employee population.
This will move the Chief Executive’s salary to £844,104 and the Finance Director’s salary to £652,424.
Benefits
Pension
Incentive
plans –
performance
measures
There are no changes proposed to the benefits framework for 2016/17.
The emphasis on pension in total reward has been decreased by introducing a limit on pensionable earnings through a cap on
pensionable base pay growth of RPI + 1% from 1 April 2017.
The Committee considers that using a balanced range of performance measures is aligned to SSE’s objectives.
The performance measures and weightings for the Annual Incentive Plan and the Performance Share Plan will be the same as for
2015/16 as detailed below:
Annual Incentive Plan
Performance Share Plan
Performance measure
Weighting
Performance measure
Financial1
Customer
Team-working
Personal
50%
15%
20%
15%
Relative TSR1
EPS2
Growth in DPS versus RPI3
Customer service (Citizens Advice league table)
Weighting
40%
20%
20%
20%
1
Financial measures consist of Adjusted PBT (30%),
Growth in DPS (10%) and Cash-flow (10%).
1 Relative TSR is measured against two comparator groups, being the FTSE 100 and a group of European
Utilities, each weighted 20%. 25% vesting for median and 100% for upper quartile.
2 25% vesting for RPI, 80% vesting for RPI +5% and 100% vesting for RPI +10%.
3
50% vesting for growth of RPI and 100% vesting for RPI +5%.
The entry level vesting percentage for DPS growth reflects the higher degree of stretch of this target. Taking into account the
importance of dividend growth to shareholders, the Committee operates a principle of no vesting for below RPI growth. However,
it is recognised that sustained growth at RPI would be good performance in the context of SSE’s business environment and is
considered to be a stretching level of performance rather than a “threshold” level of performance. As last year, the entry level vesting
has therefore been set at 50% for achieving this stretch. In assessing performance against DPS the Committee must be satisfied that
a reasonable level of dividend cover has been maintained.
The customer service measure is based on an independent external customer measure (Citizen’s Advice League Table) and the
measure compares SSE’s performance with the other energy suppliers. The comparator group has been increased from the other
five large energy suppliers to the new wider comparator group of 18 energy suppliers. The entry level vesting is being reduced from
50% to 25%, with threshold vesting for 9th position (above median) and maximum vesting only for 1st position out of 18.
In the context of the increase to overall incentives the Committee increased the targets for a number of the PSP measures:
- Maximum EPS growth target increased from RPI +8% to RPI +10%
- Maximum DPS growth target increased from RPI +4% to RPI +5%
From the annual incentive awarded in respect of 2016/17 onwards, the deferral period will be extended from the current three years
to one year after an Executive Director steps down from their position. The deferred shares will continue to be subject to continued
employment for a period of three years, but will not be delivered until one year following the end of the Executive Director’s tenure.
This approach, which goes beyond current best practice for deferral arrangements seen in the wider market, supports Executive
Directors’ commitment to the long-term sustainability and stewardship of SSE, even after leaving.
The percentage of the annual incentive plan award that is deferred will be increased from 25% to 33%, further aligning Executive
Directors with the interests of shareholders and supports SSE’s commitment to long-term sustainability and stewardship.
Performance Share Plan awards will be subject to performance over three years and will have a two-year holding period following
the end of the performance period.
Annual
Incentive
Plan – Career
deferral and
deferral
percentage
Performance
Share Plan
– holding
period
108 SSE plc Annual Report 2016
1.
2. Directors’ Report
3.
Incentive
opportunity
Variable incentive levels were last reviewed over eight years ago and have remained unchanged since. In that time, the environment in
which SSE operates has become significantly more complex and challenging, including significant additional devolution within the UK,
and more complex and wide-ranging regulation. As a result, the role of Executive Directors now includes engaging effectively with
policy-makers and regulators and providing leadership within the sector, as well as balancing value to customers and shareholders,
while making the long-term investment decisions which will sustain dividends for shareholders over the longer term.
As part of the wide ranging review, the Committee looked at incentive levels taking into consideration any retention risk and the
marketability of the Executive Directors, the complexity and challenges of the Executive Director role in the environment that SSE
operates, and the role of incentives in supporting strategy. While these were the principal considerations, the Committee also had
available relevant benchmark reference points to inform the Committee’s thinking.
Against the background and context provided above, the Committee felt that it was right to increase the overall incentive opportunity
to levels which are commensurate with the size and complexity of the organisation, but which would still position SSE conservatively
against a range of relevant benchmark reference points. The proposed new incentive levels are set out below:
CEO
FD
2016/17 AIP maximum opportunity
2016/17 PSP maximum opportunity
150% of salary
(2015/16: 100%)
130% of salary
(2015/16: 100%)
200% of salary
(2015/16: 150%)
175% of salary
(2015/16: 150%)
Malus and
clawback
Both Annual Incentive and Performance Share Plan awards will be subject to malus and clawback provisions, as set out in the
‘Recovery Provisions’ section on page 107.
Shareholding
guidelines
200% of salary.
Non-Executive Director fees (audited)
The following table sets out the fee structure for non-Executive Directors, effective from 1 April 2016.
Chairman
Base fee
Additional Senior Independent Director fee
Additional fee for being Remuneration Committee Chairman
Additional fee for being Audit Committee Chairman
Additional fee for being SHEAC Chairman
Fee as at
1 April 2016
£368,600
£61,300
£11,300
£15,000
£16,000
£11,000
Non-Executive Director fees are due to be reviewed during 2016/17, and any changes will be disclosed in next year’s Directors’ Remuneration Report.
Other remuneration disclosures
Chief Executive’s historical remuneration 2010-16 (audited)
Directors
2016 (Alistair Phillips-Davies)
2015 (Alistair Phillips-Davies)
2014 (Alistair Phillips-Davies and Ian Marchant)
2013 (Ian Marchant)
2012 (Ian Marchant)
2011 (Ian Marchant)
2010 (Ian Marchant)
Single figure
of total
remuneration
£000s
Annual variable
element award
rates against
maximum
opportunity
%
Long-term
incentive vesting
rates against
maximum
opportunity
%
1,696
2,311
2,546
2,241
1,214
1,686
1,795
54
64
63
0
25
60
59
0
0
22
53
0
0
16
Note
The single figure of total remuneration has been valued using the same approach as used in the table on page 104.
For 2014 an aggregate number has been applied by combining pro-rated values for each CEO based upon their time in the role.
SSE TSR performance: 31 March 2009 to
31 March 2016
220
190
160
130
100
Mar 09
Mar 10
Mar 11
Mar 12 Mar 13 Mar 14 Mar 15 Mar 16
SSE
FTSE
Source: Datastream
The FTSE 100 index is used as a comparator to SSE as the Company has been a member of the FTSE 100 during the period of comparison.
109
Directors’ Report
Annual Remuneration Report 2015/16 continued
Chief Executive pay progression comparison (audited)
The table below shows the percentage change in the Chief Executive’s base salary, benefits and AIP between 2015 and 2016 compared with the
percentage change in the average of all employees:
Chief Executive
All Employees
% change in remuneration from 2014/15 to 2015/16
% change in base
salary
% change in
benefits
% change in
annual incentive
2.40%
3.17%
-4.54%
15.09%
-13.60%
-13.04%
Notes
The Chief Executive base salary is calculated on the same basis as the ‘single total figure of remuneration’ table on page 104.
The all-employee base salary change is based on comparing the change in the average basic salary increase at April 2015 and April 2016.
The Chief Executive change in benefits is calculated on the same basis as the single figure table on page 104.
The all-employee change in benefits is based on P11D data from 2015 and 2016. The 15.09% increase is largely due to the increase in the number of company cars which can be attributed to an
increase in employees who participate in a salary sacrifice car scheme, and also new entrants to the company car scheme following acquisition.
The Chief Executive annual incentive is calculated on the same basis as the single figure table on page 104.
The all-employee change in annual incentive reflects the average out-turn for all eligible employees in 2015 and 2016.
Relative importance of the spend on pay
How do the earnings of the Executive Directors compare with other financial dispersals? (audited)
Executive Directors’ earnings1
Dividends to shareholders2
Capital and investment expenditure
Total UK taxes paid (profits, property, environment and employment taxes)3
Staffing Costs4
Notes
1 Calculated on the same basis as the ‘single total figure of remuneration’ table on page 104.
2 There were no share buy-backs in 2014/15 or 2015/6.
3
4
Includes Corporation Tax, Employers’ National Insurance Contributions and Business Rates.
Staffing costs for all employees, as per note 8.1 of the accounts, excluding Executive Directors.
2015
£m
3.7
854.1
1,472.8
506.2
875.6
2016
£m
3.0
884.0
1,618.7
453.9
916.2
% change
in year
-23.99%
3.38%
9.01%
-11.52%
4.43%
The table above shows that for every £1 spent on Executive Directors’ earnings by SSE in 2015/16, £151 was paid in tax, £305 was spent on employee
costs, £295 was made in dividend payments to shareholders and £540 was spent on capital and investment expenditure.
CEO earnings1
1,696,000
Average employee earnings2
39,990
Pay ratio
42.1
The CEO’s earnings are calculated on the same basis as the single figure of remuneration table shown on page 104.
1
2 Average employee earnings are based on staffing costs calculated on the same basis as note 8.1 of the accounts, excluding
social security costs.
Executive Directors’ earnings compared
with dividend payments
180
160
140
120
100
80
2011
2012
2013
2014
2015
2016
Dividend payments to shareholders
Executive Directors’ earnings
110 SSE plc Annual Report 2016
1.
2. Directors’ Report
3.
Share interests and share awards
Directors’ share interests (audited)
Director
Gregor Alexander
Jeremy Beeton
Katie Bickerstaffe
Sue Bruce
Crawford Gillies
Richard Gillingwater
Peter Lynas
Helen Mahy
Alistair Phillips-Davies
Number of shares
Number of options
Interests in
shares,
awarded
without
performance
conditions at
31 March
2016
Interests in
shares,
awarded
subject to
performance
conditions at
31 March
2016
Interests in
share
options,
awarded
without
performance
conditions at
31 March
2016
Interests in
share
options,
awarded
subject to
performance
conditions at
31 March
2016
*Shareholding
requirement as a % of
salary (Actual/% met)
Share owned
outright at
31 March
2016
326% (200% – met)
267% (200% – met)
139,624
4,000
5,079
2,358
5,000
2,000
2,000
1,035
147,675
15,562
–
–
–
–
–
–
–
18,701
179,227
–
–
–
–
–
–
–
226,163
2,399
–
–
–
–
–
–
–
2,610
–
–
–
–
–
–
–
–
–
Former Directors/Non-Executive Directors
Lord Smith of Kelvin
Notes
* Shareholding requirement:
Executive Directors – 200% of salary.
Non-Executive Directors – minimum 2,000 shares.
Price used to calculate shareholding requirement as % of salary as at 31/03/16 – £14.92.
Shares
owned
outright at
31 March
2015
137,017
4,000
2,300
1,602
–
2,000
2,000
–
145,739
29,950
111
Directors’ Report
Annual Remuneration Report 2015/16 continued
Directors’ Long-term Incentive Plan interests (audited)
Gregor Alexander
Normal
exercise
period (or
vesting date)
No. of shares
under award
as at
1 April 2015
Date of
award
Option
exercise
price
Share plan
Additional
shares
awarded
during the
year
No. of shares
lapsed during
the year
No.of shares
realised
during the
year
No. of shares
under
award at
31 March
2016
DBP 20062 22/06/12
DBP 20062
13/06/13
DBP 20062 26/06/14
DBP 20062 25/06/15
22/06/15
13/06/16
26/06/17
25/06/18
22/06/12 May 2015
13/06/13 May 2016
20/12/13 May 2016
26/06/14 May 2017
25/06/15 June 2018
30/06/10 01/10/2015
– 31/03/16
02/07/14 01/10/2019
– 31/03/20
01/10/20
– 31/03/21
03/07/15
PSP1
PSP1
PSP1
PSP1
PSP1
Sharesave
Sharesave
Sharesave
2,9534
6,1303
59,065
2,953
3,440
5,992
59,065
54,604
5,367
60,408
58,8483
2835
283
871p
2,213
1,247p
1,288p
1866
3,440
5,992
6,130
54,604
5,367
60,408
58,848
2,213
186
Alistair Phillips-Davies
Normal
exercise
period (or
vesting date)
No. of shares
under award
as at
1 April 2015
Date of
award
Option
exercise
price
Share plan
Additional
shares
awarded
during the
year
No. of shares
lapsed during
the year
No.of shares
realised
during the
year
No. of shares
under
award at
31 March
2016
DBP 20062 22/06/12
DBP 20062
13/06/13
DBP 20062 26/06/14
DBP 20062 25/06/15
22/06/15
13/06/16
26/06/17
25/06/18
22/06/12 May 2015
13/06/13 May 2016
20/12/13 May 2016
26/06/14 May 2017
25/06/15 May 2018
PSP1
PSP1
PSP1
PSP1
PSP1
2,461
3,440
7,330
59,065
54,604
17,266
78,155
Sharesave
29/06/12
Sharesave
02/07/14
01/10/2017
– 31/03/18
01/10/2019
– 31/03/20
1,408
1,065p
1,202
1,247p
7,9313
59,065
76,1383
2,4614
3,440
7,330
7,931
54,604
17,266
78,155
76,138
1,408
1,202
Notes
Shares which are released under the DBP 2006 and PSP attract additional shares in respect of the notional reinvestment of dividends. In addition to the shares released under the DBP 2006, as
indicated in the table above, the following shares were realised arising from such notional reinvestment of dividends:
Gregor Alexander received 539 shares and Alistair Phillips-Davies received 448 shares.
The performance conditions applicable to awards under the PSP since 2007 are described on page 99. The 2013 awards due to vest in May 2016 will lapse in full.
1
2 25% of annual bonus payable to Executive Directors and Senior Managers is satisfied as a conditional award of shares under the DBP 2006. Vesting of shares is dependent on continued service over
a three year period. In view of the linkage to annual bonus, no further performance condition applies to the vesting of DBP 2006 awards.
3 The market value of a share on the date on which these awards were made was 1,612p.
4 The market value of a share on the date on which these awards were realised was 1,612p.
5 The market value of a share on the date on which these awards were exercised was 1,557p.
6 The market value of a share on the date on which these options were granted was 1,558p.
The closing market price of shares at 31 March 2016 was 1,492p and the range for the year was 1,321p to 1,696p. Awards granted during the year were
granted under the DBP 2006 and the PSP. The aggregate amount of gains made by the Directors on the exercise of share options and realisation of
awards during the year was £105,125.50 (2015 – £681,353.72).
112 SSE plc Annual Report 2016
1.
2. Directors’ Report
3.
DBS and PSP awards granted in 2015/16 (audited)
Scheme
Basis of award
granted
Shares
awarded
Face value
of award
Maximum
vesting
Percentage vesting for
threshold performance
Vesting period
Alistair Phillips-Davies
PSP
150% of salary
76,138 £1,236,480
100%
25% Performance measured over
3 years to 31 March 2018
DBS
25% of annual
incentive
7,931
£128,800
100% Deferred bonus, subject to
continued employment
Award will vest on third
anniversary of grant
Gregor Alexander
PSP
150% of salary
58,848
£955,700
100%
25% Performance measured over
3 years to 31 March 2018
DBS
25% of annual
incentive
6,130
£99,552
100% Deferred bonus, subject to
continued employment
Award will vest on third
anniversary of grant
Note
1 Based on a grant price of £16.24 on 25 June 2015.
External appointments (audited)
Executive Directors are able to accept a non-Executive appointment outside the Company with the consent of the Board, as such appointments can
enhance Directors’ experience and value to the Company. Any fees received are retained by the Director.
Gregor Alexander was a non-Executive Director with Stagecoach Group plc and received £58,508 in fees. Gregor Alexander is also Chairman of Scotia
Gas Networks and receives no additional fees for this.
Payments for loss of office and payments to past directors
There were no payments for loss of office during the year. Lord Smith of Kelvin stepped down from the Board on 23/07/2015 but has been retained by
SSE’s Executive Committee for a further year to provide advice and counsel on key business issues relating to Scotland.
Evaluation
The external Board evaluation process which was carried out during the year confirmed the Remuneration Committee continued to operate effectively.
Details of the evaluation process are set out on pages 76 and 77.
Advice to the Committee
The Chief Executive, the Director of Human Resources, and SSE’s Head of Reward, advised the Committee on certain remuneration matters for the
Executive Directors and senior executives although they were not present for any discussions on their own remuneration. The Director of Human
Resources and SSE’s Head of Reward advised on HR strategy and the application of HR policies across the wider organisation.
Deloitte LLP provided a range of information to the Committee which included market data drawn from published surveys, governance developments
and their application to the Company, advice on remuneration disclosures and regulations and comparator group pay.
Deloitte LLP received fees of £103,600 in relation to their work for the Committee, calculated on a time and materials basis. Deloitte LLP is one of the
founding members of, and adheres to, the Remuneration Consultants’ Group Code of Conduct. They were appointed by the Committee who reviews
their performance annually to determine that it is satisfied with the quality and relevance of advice being provided and that it was objective and
independent. Deloitte LLP also advised the Company on tax, provided corporate finance advisory services and audited the joint venture Scotia Gas
Networks Limited. Deloitte LLP and Deloitte MCS Limited together provided IT and business consulting services.
Up to 28 February 2016, Bank of America Merrill Lynch undertook analysis on comparator performance. They were appointed by the Committee for
these services. They did not receive any fees relating specifically to these services. From 1 March 2016, Morgan Stanley and Co International Plc provided
these services and are retained as SSE’s brokers.
Freshfields LLP also provided advice on legal matters, such as share plan rules, during the year.
Shareholder voting in 2015
On 23 July 2015, shareholders approved the Remuneration Policy and the Remuneration Report for the year ended 31 March 2015. Below are the results
of the resolutions:
Remuneration Report
This report was approved by the Board and signed on its behalf by:
Katie Bickerstaffe
Remuneration Committee Chairman
17 May 2016
Votes for
Votes against
Votes cast
Withheld
98.3%
1.7%
652,779,310
6,946,512
113
Directors’ Report
Other statutory information
Disclosures in Strategic Report
The Strategic Report is set out on pages 1 to 65.
The Board has taken advantage of Section 414C
(11) of the Companies Act 2006 to include
disclosures in the Strategic Report on:
- Employment of disabled people on pages 25.
- Employee involvement on pages 24 to 27.
- A summary of the principal risks facing the
Company on pages 16 to 19.
- An indication of likely future development
in the business of the Company see pages
1 to 65.
- Greenhouse gas emissions on pages 28 to 29.
Results and dividends
The Group profit attributable to Ordinary
Shareholders for the financial year amounted
to £460.6m. The Directors recommend a final
dividend of 62.5p per Ordinary Share which,
subject to approval at the 2016 AGM, will be
payable on 23 September 2016 to shareholders
on the Register of Members at close of business
on 22 July 2016. With the interim dividend of
26.9p per Ordinary Share paid on 18 March
2016, this makes a total dividend of 89.4p per
Ordinary Share.
Share capital
Details of the Company’s issued share capital
as at 31 March 2016, which includes options
granted under the Group’s employee share
option schemes, are set out in notes 29 and
33 to the Financial Statements.
Authority to purchase shares
The Company was authorised at the 2015 AGM
to purchase its own shares within certain limits.
During 2015/16, SSE did not purchase any shares
under this authority. The Directors will, however,
seek renewal of their authority to purchase in
the market the Company’s own shares at the
2016 AGM. Further details are provided in the
Notice of Annual General Meeting for 2016.
Accounting policies, financial
instruments and risk
Details of the Group’s accounting policies,
together with details of financial instruments and
risk, are provided in note 34 and Accompanying
Information, A1.
114 SSE plc Annual Report 2016
Substantial shareholdings
As at 17 May 2016 the Company has been notified under Rule 5 of the Disclosure and Transparency
Rules of the interests in its shares as shown in the table below:
Entity
Number of shares*
Percentage*
Nature of holding
The Capital Group Companies, Inc.
BlackRock, Inc.
UBS Investment Bank
Invesco Limited
* At date of disclosure by relevant entity.
150,532,674
61,237,317
52,003,155
45,775,918
14.96%
6.08%
5.17%
4.69%
Indirect
Indirect
Indirect
Indirect
Employees who participate in the Share Incentive
Plan whose shares remain in the schemes’ trusts
give directions to the trustees to vote on their
behalf by way of a Form of Direction.
The Company is not aware of any agreements
between shareholders that may result in
restrictions on the transfer of securities and/or
voting rights.
The rules governing the appointment and
replacement of Directors are set out in the
Company’s Articles of Association.
The Company’s Articles of Association may only
be amended by a special resolution at a general
meeting of shareholders.
The Company is not aware of any significant
agreements to which it is party that take effect,
alter or terminate upon a change of control of
the Company following a takeover.
Each of the Directors who held office at the
date of approval of this Directors’ Report
confirms that, so far as each Director is aware,
there is no relevant audit information of which
the Company’s Auditors are unaware and each
Director has taken all the steps that ought to have
been taken in his or her duty as a Director to make
himself or herself aware of any relevant audit
information and to establish that the Company’s
Auditors are aware of that information.
The Directors’ Report set out on pages 66 to 118
has been approved by the Board of Directors in
accordance with the Companies Act 2006.
Indemnification of Directors
and insurance
The Directors have the benefit of the indemnity
provision contained in the Company’s Articles
of Association. They also have been granted a
qualifying third party indemnity provision which
was in force throughout the financial year and
remains in force. The Company also purchased
and maintained throughout the financial year
Directors’ and Officers’ liability insurance in
respect of itself and for its Directors and Officers.
Research and development
SSE’s business are involved in a range of
innovative projects and programmes which are
designed to progressively transform the energy
system. A numbers of these projects and
programmes are referred to in the Strategic
Report in pages 1 to 65.
Political donations
No donations were made by the Group for
political purposes during the year.
Related party transactions
Related party transactions are set out in note 35
to the Financial Statements.
Post balance sheet events
Post balance sheet events are set out in note 37
to the Financial Statements.
Additional information
Where not provided elsewhere in the Directors’
Report, the following provides the information
required to be disclosed by Section 992 of the
Companies Act 2006.
Each Ordinary Share of the Company carries
one vote at general meetings of the Company.
There are no restrictions on the transfer of
Ordinary Shares in the capital of the Company
other than certain restrictions which may from
time-to-time be imposed by law (for example,
insider trading law). In accordance with the
Listing Rules of the Financial Conduct Authority,
certain employees are required to seek the
approval of the Company to deal in its shares.
1.
2. Directors’ Report
3.
Disclosures required under Listing Rule 9.8.4R
The Company is required to disclose certain information under Listing Rule 9.8.4R in the Directors’ Report or advise where such relevant information
is contained. The other information that may be relevant to the Directors’ Report can be found in the following sections of the 2016 Annual Report
and Accounts.
No.
Information required by LR9.8.4R
1
2
Capitalised interest
Statement of amount of interest capitalised by the Group during the financial year.
Long-term incentive schemes
Details of any long-term incentive schemes.
Relevant to
the Company √/X
Annual Report section
and page reference
√
√
139 to 140
92 to 113
By order of the Board
Sally Fairbairn
Company Secretary
17 May 2016
115
Directors’ Report
Statement of Directors’ responsibilities in respect of the
Annual Report and the financial statements
The directors are responsible for preparing the Annual Report and the group and parent company financial statements in accordance with applicable
law and regulations.
Company law requires the directors to prepare group and parent company financial statements for each financial year. Under that law they are required
to prepare the group financial statements in accordance with IFRSs as adopted by the EU and applicable law and have elected to prepare the parent
company financial statements on the same basis.
Under company law the directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state
of affairs of the group and parent company and of their profit or loss for that period. In preparing each of the group and parent company financial
statements, the directors are required to:
-
- make judgements and estimates that are reasonable and prudent;
-
- prepare the financial statements on the going concern basis unless it is inappropriate to presume that the group and the parent company will
state whether they have been prepared in accordance with IFRSs as adopted by the EU; and
select suitable accounting policies and then apply them consistently;
continue in business.
The directors are responsible for keeping adequate accounting records that are sufficient to show and explain the parent company’s transactions and
disclose with reasonable accuracy at any time the financial position of the parent company and enable them to ensure that its financial statements
comply with the Companies Act 2006. They have general responsibility for taking such steps as are reasonably open to them to safeguard the assets
of the group and to prevent and detect fraud and other irregularities.
Under applicable law and regulations, the directors are also responsible for preparing a Strategic Report, Directors’ Report, Directors’ Remuneration
Report and Corporate Governance Statement that complies with that law and those regulations.
The directors are responsible for the maintenance and integrity of the corporate and financial information included on the company’s website.
Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.
Responsibility statement of the directors in respect of the annual financial report
We confirm that to the best of our knowledge:
-
the financial statements, prepared in accordance with the applicable set of accounting standards, give a true and fair view of the assets, liabilities,
financial position and profit or loss of the company and the undertakings included in the consolidation taken as a whole; and
the strategic report includes a fair review of the development and performance of the business and the position of the issuer and the undertakings
included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face.
-
We consider the annual report and accounts, taken as a whole, is fair, balanced and understandable and provides the information necessary for
shareholders to assess the group’s position and performance, business model and strategy.
For and on behalf of the Board
Alistair Phillips-Davies
Chief Executive
17 May 2016
Gregor Alexander
Finance Director
116 SSE plc Annual Report 2016
SSE’s financial results explained
SSE’s results on an adjusted basis:
Adjusted operating profit
Adjusted net finance costs
Adjusted Profit before Tax (PBT)
Adjusted current tax charge
Adjusted Profit after Tax (PAT)
Hybrid coupon paid
Adjusted Profit after Tax for EPS
Weighted average number of shares for adjusted EPS
Adjusted Earnings Per Share (EPS) (pence)
1.
2. Directors’ Report
3.
March 2016
£m
March 2015
£m
March 2014
£m
1,824.4
(310.9)
1,513.5
(193.4)
1,320.1
(124.6)
1,195.5
1,000.0
119.5
1,881.4
(316.7)
1,564.7
(224.8)
1,339.9
(121.3)
1,218.6
981.8
124.1
1,880.1
(329.0)
1,551.1
(236.7)
1,314.4
(122.9)
1,191.5
965.5
123.4
Why do we have “adjusted” numbers for Profit Before Tax (PBT), Profit After Tax (PAT), Earnings Per
Share (EPS) and Net Debt and Hybrid Capital?
SSE’s financial statements are prepared in accordance with International Financial Reporting Standards as adopted by the EU (IFRSs). SSE applies the use
of a number of adjusted accounting measures throughout the Annual Report and Financial Statements in order to present the underlying performance
of the Group to the users of the statements in a consistent and meaningful manner. Further detail on the basis of presentation is included in note 3 to the
Financial Statements.
The adjustments made by SSE can be explained as follows:
1 Exceptional Items
Exceptional charges or credits are considered unusual by nature or scale and of such significance that separate disclosure is required for the underlying
performance of the Group to be properly understood.
2 Movements on derivatives (‘certain re-measurements’)
The Group enters into forward contracts to buy (or sell) electricity, gas and other commodities to meet the future demand requirements of its Energy
Supply business or to optimise the value of its Wholesale assets. Certain of these contracts are determined to be derivative financial instruments under
IAS 39 and as such are required to be recorded at their fair value. Changes in the fair value of those commodity contracts designated as IAS 39 financial
instruments are reflected in the income statement (as part of ‘certain re-measurements’).The Group shows the change in the fair value of these forward
contracts separately as this mark-to-market movement is not relevant to the underlying performance of its operating segments. The Group will recognise
the underlying value of these contracts as the relevant commodity is delivered, which will predominately be within the subsequent 12 to 18 months.
Conversely, commodity contracts that are not financial instruments under IAS 39 are accounted for as ‘own use’ contracts. The re-measurements arising
from IAS 39 are disclosed separately to aid understanding of the underlying performance of the Group. This category also includes income statement
movement on financing derivatives such as interest rate swaps and forward currency contracts.
3 Interest on net pension liabilities – IAS 19R
The Group’s interest charges relating to defined benefit pension schemes are derived from the net liabilities of the schemes as valued under IAS 19R.
This will mean that the charge recognised in any given year will be dependent on the impact of actuarial assumptions such as inflation and discount
rates. To avoid income statement volatility derived from this basis of measurement and reflecting the non-cash nature of these charges, the Group
excludes these from its adjusted profit measures.
4 Tax and interest on JVs and Associates
The Group is required to report profit before interest and tax (‘operating profit’) including its share of the profit after tax of its equity-accounted joint
ventures and associates. However, for internal performance management purposes and for consistency of treatment, SSE reports its adjusted operating
profit before its share of the interest and tax on joint ventures and associates.
5 Deferred tax
In line with its long standing approach, SSE adjusts for deferred tax when arriving at adjusted profit after tax and its adjusted effective rate of tax.
6 Hybrid capital securities
The characteristics of hybrid capital securities mean they qualify for recognition as equity rather than debt under IFRSs. Consequently, their coupon
payments are presented within dividends rather than within interest. The coupon payments are due to other equity holders and consequently are not
included in SSE’s EPS measures. SSE also presents its adjusted net debt measure inclusive of hybrid capital together as one balance.
7 Finance lease
SSE’s loans and borrowings includes finance lease liabilities primarily in relation to its tolling contract with Marchwood Power Limited. The Group
excludes these liabilities from its adjusted net debt and hybrid capital measure to better reflect the Group’s funding position.
8 Outstanding liquid funds and other short-term loans
Outstanding liquid funds are SSE cash balances held by counterparties as collateral at the year end. SSE includes these as cash until they are utilised.
Loans with a maturity of less than three months are also included in this adjustment.
117
Directors’ Report
SSE’s financial results explained continued
The table below reconciles the Operating Profit, PBT, Net Debt, Tax and Net Interest reported under IFRS with the SSE Adjusted numbers.
Reference
March 2016
£m
March 2015
£m
March 2014
£m
1,824.4
(28.8)
(889.8)
(120.4)
785.4
1,513.5
(14.5)
(889.8)
(22.3)
6.4
593.3
(8,395.0)
2,209.7
(6,185.3)
(121.8)
(300.8)
(200.7)
1,881.4
(61.1)
(674.6)
(159.8)
985.9
1,564.7
(105.3)
(674.6)
(14.0)
(35.6)
735.2
(7,568.1)
3,371.1
(4,197.0)
(71.7)
(319.7)
–
(6,808.6)
(4,588.4)
193.4
(272.5)
6.4
80.8
8.1
310.9
(14.3)
(126.8)
22.3
192.1
224.8
(200.4)
(35.6)
82.0
70.8
316.7
44.2
(124.2)
14.0
250.7
1,880.1
(147.8)
(747.2)
(108.7)
876.4
1,551.1
(212.0)
(747.2)
(28.2)
28.8
592.5
(7,642.8)
2,186.8
(5,456.0)
(51.2)
(328.9)
–
(5,836.1)
236.7
(260.8)
28.8
141.8
146.5
329.0
64.2
(137.5)
28.2
283.9
1
2
3
4
1 and 2
4
5
1
4
3
Operating profit
Adjusted operating profit
Movement on derivatives
Exceptional items
Share of JVs and Associate interest and tax
Reported operating profit
PBT
Adjusted Profit Before Tax (PBT)
Movement on operating and financing derivatives
Exceptional items
Interest on net pension liabilities
Share of JVs and Associates tax
Reported Profit before Tax
Adjusted net debt and hybrid capital
Adjusted net debt and hybrid capital
Less: Hybrid capital
Adjusted net debt
Less: Outstanding liquid funds
Add: Finance leases
Balances due to partners in Clyde Windfarm (Scotland)
Unadjusted net debt
Tax
Adjusted current tax charge
Tax on exception items/movements on derivatives
Share of JVs and Associate tax
Deferred tax including share of JVs and Associates
Reported tax charge
Interest
Adjusted net finance costs
Movement on financing derivatives
Share of JVs and Associate interest
Interest on net pension liabilities
Reported net finance costs
118
SSE plc Annual Report 2016
1.
2.
3. Financial Statements
Contents
120
Consolidated income statement
121
Consolidated statement
of comprehensive income
122 Balance sheets
123
Statement of changes
in equity
125 Cash flow statements
126
Notes on the financial statements
191 Accompanying information
205
Independent auditor’s report
IBC Shareholder information
119
Financial Statements
Consolidated income statement
for the year ended 31 March 2016
Revenue
Cost of sales
Gross profit
Operating costs
Other operating income
Operating profit before joint ventures
and associates
Joint ventures and associates:
Share of operating profit
Share of interest
Share of movement on derivatives
Share of tax
Share of profit on joint ventures
and associates
Operating profit
Finance income
Finance costs
Profit before taxation
Taxation
Profit for the year
Attributable to:
Ordinary shareholders of the parent
Other equity holders
Basic earnings per share (pence)
Diluted earnings per share (pence)
2016
2015
Before
exceptional items
and certain
re-measurements
£m
Exceptional items
and certain
re-measurements
(note 7)
£m
28,781.3
(25,859.4)
2,921.9
(1,449.8)
29.4
–
(644.5)
(644.5)
(334.0)
57.6
Note
5
6
6
Before
exceptional items
and certain
re-measurements
£m
Exceptional items
and certain
re-measurements
(note 7)
£m
31,654.4
(28,801.3)
2,853.1
(1,361.5)
47.2
–
(432.8)
(432.8)
(358.5)
74.8
Total
£m
28,781.3
(26,503.9)
2,277.4
(1,783.8)
87.0
Total
£m
31,654.4
(29,234.1)
2,420.3
(1,720.0)
122.0
1,501.5
(920.9)
580.6
1,538.8
(716.5)
822.3
322.9
(126.8)
–
(39.9)
156.2
1,657.7
101.8
(308.2)
1,451.3
(280.6)
1,170.7
–
–
2.3
46.3
48.6
(872.3)
–
14.3
(858.0)
272.5
(585.5)
1,046.1
124.6
(585.5)
–
17
6
9
9
10
12
12
12
342.6
(124.2)
–
(34.2)
184.2
1,723.0
95.9
(302.4)
1,516.5
(271.2)
1,245.3
(25.9)
–
6.7
(1.4)
(20.6)
(737.1)
–
(44.2)
(781.3)
200.4
(580.9)
1,124.0
121.3
(580.9)
–
322.9
(126.8)
2.3
6.4
204.8
785.4
101.8
(293.9)
593.3
(8.1)
585.2
460.6
124.6
46.1
46.0
316.7
(124.2)
6.7
(35.6)
163.6
985.9
95.9
(346.6)
735.2
(70.8)
664.4
543.1
121.3
55.3
55.2
The accompanying notes are an integral part of these financial statements.
120 SSE plc Annual Report 2016
Consolidated statement of comprehensive income
for the year ended 31 March 2016
Profit for the year
Other comprehensive income:
Items that will not be reclassified to profit or loss:
Actuarial gain/(loss) on retirement benefit schemes
Taxation on actuarial (gains)/losses on defined benefit pension schemes
Share of joint ventures actuarial gains/(losses) on retirement benefit schemes
Share of joint ventures taxation of actuarial (gains)/losses on retirement benefit schemes
Items that will be reclassified subsequently to profit or loss:
Gains/(losses) on effective portion of cash flow hedges
Transferred to assets and liabilities on cash flow hedges
Taxation on cashflow hedges
Share of joint ventures/associates gains/(losses) on effective portion of cash flow hedges
Share of joint ventures/associates taxation on cashflow hedges
Losses on revaluation of available for sale investments, net of taxation (note 17)
Exchange difference on translation of foreign operations
(Losses)/gains on net investment hedge
Taxation on net investment hedge
Other comprehensive gain/(loss), net of taxation
Total comprehensive income for the period
Attributable to:
Ordinary shareholders of the parent
Other equity holders
1.
2.
3. Financial Statements
2016
£m
585.2
254.3
(58.9)
195.4
94.8
(18.4)
76.4
79.4
4.7
(15.1)
69.0
4.7
(0.8)
3.9
(8.4)
85.1
(40.7)
7.3
51.7
2015
£m
664.4
(79.3)
16.3
(63.0)
(2.1)
0.2
(1.9)
(41.9)
(4.5)
8.8
(37.6)
(9.4)
1.9
(7.5)
(3.2)
(119.7)
61.7
(13.0)
(71.0)
388.0
(184.2)
973.2
480.2
848.6
124.6
973.2
358.9
121.3
480.2
121
Financial Statements
Balance sheets
as at 31 March 2016
Assets
Property, plant and equipment
Intangible assets:
Goodwill
Other intangible assets
Equity investments in joint ventures and associates
Loans to joint ventures and associates
Other investments
Investments in subsidiaries
Trade and other receivables
Deferred tax assets
Derivative financial assets
Retirement benefit assets
Non-current assets
Other intangible assets
Inventories
Trade and other receivables
Cash and cash equivalents
Derivative financial assets
Current assets held for sale
Current assets
Total assets
Liabilities
Loans and other borrowings
Trade and other payables
Current tax liabilities
Provisions
Derivative financial liabilities
Liabilities held for sale
Current liabilities
Loans and other borrowings
Deferred tax liabilities
Trade and other payables
Provisions
Retirement benefit obligations
Derivative financial liabilities
Non-current liabilities
Total liabilities
Net assets
Equity
Share capital
Share premium
Capital redemption reserve
Hedge reserve
Translation reserve
Retained earnings
Equity attributable to ordinary share holders of the parent
Hybrid capital
Total equity attributable to equity holders of the parent
Non-controlling interests
Total equity
Note
Consolidated
2016
£m
2015
£m
15
14
14
17
17
17
18
21
27
34
32
14
20
21
22
34
19
26
23
24
28
34
19
26
27
23
28
32
34
29
31
Company
2016
£m
–
–
–
190.0
538.9
6.8
2,728.8
4,958.9
56.4
175.6
10.0
8,665.4
–
–
4,828.9
155.9
81.3
–
5,066.1
2015
£m
–
–
–
190.0
544.4
15.2
2,051.2
4,505.9
87.9
141.8
–
7,536.4
–
–
3,944.2
1,321.1
46.7
–
5,312.0
12,525.0
11,303.9
609.9
249.5
1,045.1
591.6
16.7
–
–
512.0
537.7
–
598.0
170.4
875.2
559.4
26.4
–
–
270.2
566.8
–
16,087.5
14,370.3
500.1
215.4
3,274.3
360.2
1,615.0
134.2
6,099.2
433.5
342.3
4,527.0
1,512.3
1,999.9
110.3
8,925.3
22,186.7
23,295.6
13,731.5
12,848.4
923.3
4,184.4
298.2
94.0
1,783.8
115.0
7,398.7
6,245.5
917.5
452.4
703.3
394.8
857.5
9,571.0
16,969.7
5,217.0
503.8
880.4
22.0
(2.2)
(17.8)
1,598.6
2,984.8
2,209.7
5,194.5
22.5
5,217.0
732.8
5,277.1
308.4
99.5
2,297.3
11.1
8,726.2
5,367.9
716.0
424.6
382.4
664.6
933.4
8,488.9
17,215.1
6,080.5
496.5
862.7
22.0
(72.1)
(69.5)
1,469.8
2,709.4
3,371.1
6,080.5
–
6,080.5
898.8
3,385.8
21.9
–
39.1
–
4,345.6
4,494.4
–
–
–
–
360.4
4,854.8
9,200.4
4,531.1
503.8
880.4
22.0
14.2
–
901.0
2,321.4
2,209.7
4,531.1
–
4,531.1
700.0
2,715.0
44.2
–
101.1
–
3,560.3
3,719.0
–
–
–
131.1
373.9
4,224.0
7,784.3
5,064.1
496.5
862.7
22.0
(12.8)
–
324.6
1,693.0
3,371.1
5,064.1
–
5,064.1
These financial statements were approved by the Board of Directors on 17 May 2016 and signed on their behalf by
Gregor Alexander
Finance Director
Richard Gillingwater
Chairman
122 SSE plc Annual Report 2016
SSE plc Registered No: SC117119
1.
2.
3. Financial Statements
Statement of changes in equity
for the year ended 31 March 2016
Consolidated statement of changes in equity
Share
capital
£m
Share
premium
account
£m
Capital
redemption
reserve
£m
Hedge
reserve
£m
Translation
reserve
£m
Retained
earnings
£m
Total
attributable
to ordinary
shareholders
£m
Total equity
attributable
to equity
holders of
the parent
£m
Hybrid
capital
£m
Non-
controlling
interests
£m
Total
equity
£m
At 1 April 2015
496.5
862.7
22.0
(72.1)
(69.5) 1,469.8
2,709.4
3,371.1
6,080.5
– 6,080.5
Profit for the year
Other comprehensive income
Share of joint ventures and associates
other comprehensive gain
Total comprehensive income
for the year
Dividends to shareholders
Scrip dividend related share issue
Distributions to hybrid capital holders
Issue of shares
Redemption of hybrid capital
Credit in respect of employee share awards
Investment in own shares
Disposal of non-controlling interest in
Clyde Windfarm
Non controlling interest (i)
–
–
–
–
–
5.9
–
1.4
–
–
–
–
–
–
–
–
–
–
(5.9)
–
23.6
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
At 31 March 2016
503.8
880.4
22.0
–
69.0
3.9
–
51.7
460.6
187.0
460.6
307.7
124.6
–
585.2
307.7
–
76.4
80.3
–
80.3
72.9
51.7
724.0
848.6
124.6
973.2
(884.0)
175.8
–
–
(8.5)
13.5
(11.1)
(884.0)
175.8
–
25.0
(8.5)
13.5
(11.1)
–
–
(124.6)
–
(1,161.4)
–
–
(884.0)
175.8
(124.6)
25.0
(1,169.9)
13.5
(11.1)
–
–
–
–
–
–
–
–
(3.0)
(2.2)
–
–
–
–
–
–
–
–
–
138.6
(19.5)
138.6
(22.5)
–
–
138.6
(22.5)
–
22.5
138.6
–
(17.8) 1,598.6
2,984.8 2,209.7
5,194.5
22.5 5,217.0
–
–
–
–
585.2
307.7
80.3
973.2
–
(884.0)
–
175.8
–
(124.6)
–
25.0
– (1,169.9)
–
13.5
–
(11.1)
(i) This represents the non-controlling interest in Clyde Windfarm (Scotland) Limited, see note 4.2 (iv).
Consolidated statement of changes in equity
Share
capital
£m
Share
premium
account
£m
Capital
redemption
reserve
£m
Hedge
reserve
£m
Translation
reserve
£m
Retained
earnings
£m
Total
attributable
to ordinary
shareholders
£m
Hybrid
capital
£m
Total equity
attributable
to equity
holders of
the parent
£m
Non-
controlling
interests
£m
Total
equity
£m
At 1 April 2014
487.4
861.5
22.0
(27.0)
1.5
1,587.3
2,932.7 2,186.8
5,119.5
– 5,119.5
Profit for the year
Other comprehensive income
Share of joint ventures and associates
other comprehensive (loss)
Total comprehensive income
for the year
Dividends to shareholders
Scrip dividend related share issue
Distributions to hybrid capital holders
Issue of shares
Issue of hybrid capital
Credit in respect of employee share awards
Investment in own shares
–
–
–
–
–
8.6
–
0.5
–
–
–
–
–
–
–
–
(8.6)
–
9.8
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(37.6)
–
(71.0)
543.1
(66.2)
543.1
(174.8)
121.3
–
664.4
(174.8)
(7.5)
–
(1.9)
(9.4)
–
(9.4)
(45.1)
(71.0)
475.0
358.9
121.3
480.2
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(854.1)
255.6
–
–
–
15.0
(9.0)
(854.1)
255.6
–
10.3
–
–
(121.3)
–
– 1,184.3
–
–
15.0
(9.0)
(854.1)
255.6
(121.3)
10.3
1,184.3
15.0
(9.0)
–
–
–
–
664.4
(174.8)
(9.4)
480.2
–
(854.1)
255.6
(121.3)
–
–
10.3
– 1,184.3
15.0
–
(9.0)
–
At 31 March 2015
496.5
862.7
22.0
(72.1)
(69.5) 1,469.8
2,709.4
3,371.1
6,080.5
– 6,080.5
123
Financial Statements
Statement of changes in equity continued
for the year ended 31 March 2016
Company statement of changes in equity
At 1 April 2015
496.5
862.7
22.0
(12.8)
324.6
1,693.0 3,371.1 5,064.1
Share
capital
£m
Share
premium
account
£m
Capital
redemption
reserve
£m
Hedge
reserve
£m
Retained
earnings
£m
Total
attributable
to ordinary
shareholders
£m
Hybrid
capital
£m
Total
£m
Profit for the year
Other comprehensive income
Total comprehensive income for the year
Dividends to shareholders
Scrip dividend related share issue
Distributions to hybrid capital holders
Issue of shares
Redemption of hybrid capital
Increase in investment in subsidiaries
Investment in own shares
At 31 March 2016
Company statement of changes in equity
–
–
–
–
5.9
–
1.4
–
–
–
–
–
–
–
(5.9)
–
23.6
–
–
–
–
–
–
–
–
–
–
–
–
–
– 1,182.2
108.5
27.0
1,182.2
135.5
124.6 1,306.8
135.5
–
27.0 1,290.7
1,317.7
124.6 1,442.3
–
–
–
–
–
–
–
(884.0)
175.8
–
–
(8.5)
13.5
(11.1)
(884.0)
175.8
–
25.0
(8.5)
13.5
(11.1)
–
–
(124.6)
–
(1,161.4)
–
–
(884.0)
175.8
(124.6)
25.0
(1,169.9)
13.5
(11.1)
503.8
880.4
22.0
14.2
901.0
2,321.4 2,209.7 4,531.1
Share
capital
£m
Share
premium
account
£m
Capital
redemption
reserve
£m
Hedge
reserve
£m
Retained
earnings
£m
Total
attributable
to ordinary
shareholders
£m
Hybrid
capital
£m
Total
£m
At 1 April 2014
487.4
861.5
22.0
(1.3)
412.9
1,782.5 2,186.8 3,969.3
–
–
–
–
8.6
–
0.5
–
–
–
–
–
–
–
(8.6)
–
9.8
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(11.5)
476.4
27.8
(11.5)
504.2
476.4
16.3
492.7
121.3
–
121.3
597.7
16.3
614.0
–
–
–
–
–
–
–
(854.1)
255.6
–
–
–
15.0
(9.0)
(854.1)
255.6
–
10.3
–
–
(121.3)
–
– 1,184.3
–
–
15.0
(9.0)
(854.1)
255.6
(121.3)
10.3
1,184.3
15.0
(9.0)
496.5
862.7
22.0
(12.8)
324.6
1,693.0 3,371.1 5,064.1
Profit for the year
Other comprehensive (loss)/income
Total comprehensive income for the year
Dividends to shareholders
Scrip dividend related share issue
Distributions to hybrid capital holders
Issue of shares
Issue of hybrid capital
Increase in investment in subsidiaries
Investment in own shares
At 31 March 2015
124 SSE plc Annual Report 2016
Cash flow statements
for the year ended 31 March 2016
Cash generated from operations before working capital movements
Decrease/(Increase) in inventories
Decrease/(Increase) in receivables
(Decrease)/Increase in payables
Decrease in provisions
Cash generated from/(absorbed by) operations
Dividends received from joint ventures and associates
Dividends received from subsidiaries
Interest received
Interest paid
Income taxes paid
Payment for consortium relief
Net cash from operating activities
Cash flows from Investing activities
Purchase of property, plant and equipment
Purchase of other intangible assets
Deferred income received
Proceeds from disposals
Loans to joint ventures and associates
Purchase of businesses and subsidiaries
Loans and equity repaid by joint ventures
Investment in subsidiaries, associates and joint ventures
Increase in other investments
Net cash from investing activities
Cash flows from financing activities
Proceeds from issue of share capital
Dividends paid to company’s equity holders
(Redemption)/Issue of hybrid capital
Hybrid capital dividend payments
Employee share awards share purchase
New borrowings
Repayment of borrowings
Net cash from financing activities
1.
2.
3. Financial Statements
Note
13
17
19
17
17
17
Consolidated
Company
2016
£m
2,112.1
44.0
1,098.5
(879.5)
(55.7)
2,319.4
130.9
–
101.8
(254.1)
(125.5)
(13.6)
2015
£m
2,080.7
(8.5)
(243.1)
394.0
(66.2)
2,156.9
110.1
–
95.9
(227.8)
(164.8)
(12.0)
2,158.9
1,958.3
(1,495.4)
(444.8)
16.1
312.4
(50.5)
(669.0)
18.3
(9.8)
(0.2)
(2,322.9)
25.0
(708.2)
(1,161.4)
(124.6)
(11.1)
1,070.1
(77.7)
(987.9)
(1,345.3)
(241.8)
2.9
233.8
(33.9)
(66.0)
15.0
(20.0)
(0.1)
(1,455.4)
10.3
(598.5)
1,184.3
(121.3)
(9.0)
151.1
(66.3)
550.6
2016
£m
3.7
–
(458.1)
(39.4)
–
(493.8)
97.0
1,042.3
356.2
(184.1)
(148.5)
–
669.1
–
–
–
12.5
(30.6)
–
13.4
(711.0)
–
(715.7)
25.0
(708.2)
(1,161.4)
(124.6)
(11.1)
861.7
–
(1,118.6)
2015
£m
(5.3)
–
339.0
(499.9)
–
(166.2)
91.8
493.5
508.5
(137.7)
(177.7)
–
612.2
–
–
–
117.1
(34.2)
–
8.8
–
–
91.7
10.3
(598.5)
1,184.3
(121.3)
(9.0)
–
(61.3)
404.5
Net (decrease)/increase in cash and cash equivalents
(1,151.9)
1,053.5
(1,165.2)
1,108.4
Cash and cash equivalents at the start of year
Net (decrease)/increase in cash and cash equivalents
Cash and cash equivalents at the end of year
22
22
1,512.1
(1,151.9)
360.2
458.6
1,053.5
1,512.1
1,321.1
(1,165.2)
155.9
212.7
1,108.4
1,321.1
The accompanying notes are an integral part of these financial statements.
125
Financial Statements
Notes on the financial statements
for the year ended 31 March 2016
1. General Information and Basis of preparation
1.1 General information
SSE plc (the Company) is a company domiciled in Scotland. The address of the registered office is given on the back cover. The Group’s operations
and its principal activities are set out earlier in this Report at pages 1 to 65. The consolidated financial statements for the year ended 31 March 2016
comprise those of the Company and its subsidiaries (together referred to as the Group). The Company financial statements present information about
the Company as a separate entity and not about the Group. Under section 408 of the Companies Act 2006 the Company is exempt from the
requirement to present its own income statement and related notes.
1.2 Basis of preparation
Statement of compliance
The financial statements were authorised for issue by the directors on 17 May 2016. The financial statements have been prepared in accordance with
International Financial Reporting Standards (‘IFRSs’) and its interpretations as issued by the International Accounting Standards Board (‘IASB’) and
adopted by the European Union (‘adopted IFRS’).
Going concern
The Directors consider that the Group has adequate resources to continue in operational existence for the foreseeable future. The financial statements
are therefore prepared on a going concern basis. Further details of the Group’s liquidity position and going concern review are provided in note 34 of the
Financial Statements on page 175.
Basis of measurement
The financial statements of the Group and the Company are prepared on the historical cost basis except for derivative financial instruments, available-
for-sale financial assets and assets of the Group pension schemes which are stated at their fair value, and liabilities of the Group pension schemes which
are measured using the projected unit credit method. The directors believe the financial statements present a true and fair view. The financial statements
of the Group and Company are presented in pounds sterling. Operations and transactions conducted in currencies other than pounds sterling are
included in the consolidated financial statements in accordance with the Group’s foreign currencies accounting policy.
Use of estimates and judgements
The preparation of financial statements conforming with adopted IFRS requires the use of certain accounting estimates. It also requires management to
exercise judgement in the process of applying the accounting policies. The areas involving a higher level of judgement or estimation are summarised at
page 127 and 129.
2. Summary of significant new accounting policies and reporting changes
The basis of consolidation and principal accounting policies applied in the preparation of these financial statements are set out below and in the
Accompanying Information section (A1) on pages 191 to 204.
No new accounting standards have been adopted by the Group that have a material impact on the financial statements in the current year. The
following issued standards have not yet been adopted by the Group:
i)
IFRS 15 ‘Revenue from contracts with customers’ is effective on 1 January 2018 (and thus to the Group from 1 April 2018), subject to European Union
(EU) endorsement;
ii) IFRS 16 ‘Leases’ is effective on 1 January 2019 (1 April 2019 to the Group), subject to EU endorsement;
iii) IFRS 9: ‘Financial instruments’ which will be effective on 1 January 2018 (1 April 2018 to the Group), subject to EU endorsement.
The Group has commenced initial assessment of the impact of these standards on the consolidated financial statements. However, at this stage, it is not
yet practicable to quantify the impact these standards will have. The assessment of IFRS 15 will consider matters such as bundled goods and services,
the allocation of transaction price to performance obligations, treatment of customer acquisition costs and contracts with variable consideration. The
assessment of IFRS 16 will require, with certain exceptions, obligations associated with contracts currently designated as operating leases to be
recognised on balance sheet as lease liabilities. The definition of a lease has also been modified which may impact which contracts the Group accounts
for as leases.
In addition to these, there are a number of other amendments and annual improvement project recommendations that are not yet effective but which
have been endorsed by the EU. These are not anticipated to have a material impact on the Group’s consolidated financial statements. The amendments
to IFRS 11 ‘Accounting for acquisitions of interests in joint operations’ which were effective on 1 January 2016 clarifies that the acquisition of an interest in
a joint operation will be accounted for in accordance with IFRS 3 Business Combinations. This is not expected to represent a change in Group
accounting policy.
126 SSE plc Annual Report 2016
1.
2.
3. Financial Statements
3. Basis of presentation
The Group applies the use of adjusted accounting measures throughout the Annual Report and Financial Statements. These measures enable the
Directors to present the underlying performance of the Group and its segments to the users of the statements in a consistent and meaningful manner.
The adjustments applied and certain terms such as ‘adjusted operating profit’. ‘adjusted EPS’ and ‘adjusted net debt and hybrid capital’ are not defined
under IFRS and are explained in more detail below.
(i) Adjusted measures
The Directors assess the performance of the Group and its reportable segments based on ‘adjusted measures’. These measures are used for internal
performance management and are believed to be appropriate for explaining underlying performance to users of the accounts. These measures are also
deemed the most useful for the ordinary shareholders of the Company and for other stakeholders.
The performance of the reportable segments is reported based on adjusted profit before interest and tax (‘adjusted operating profit’). This is reconciled
to reported profit before interest and tax by adding back exceptional items and certain re-measurements (see note 3(ii) below) and after the removal of
interest and taxation on profits from equity-accounted joint ventures and associates.
The performance of the Group is reported based on adjusted profit before tax which excludes exceptional items and certain re-measurements (see
below), the net interest costs associated with defined benefit schemes and taxation on profits from equity-accounted joint ventures and associates.
The interest costs removed are non-cash and are subject to variation based on additional valuations of scheme liabilities.
The Group’s key performance measure is adjusted earnings per share (EPS), which is based on basic earnings per share before exceptional items and
certain re-measurements (see note 3(ii) below), the net interest costs associated with defined benefit schemes and after the removal of deferred taxation.
Adjusted profit after tax is presented on a basis consistent with adjusted EPS except for the exclusion of payments to holders of hybrid equity.
The financial statements also include an ‘adjusted net debt and hybrid capital’ measure. This presents financing information on the basis used for internal
liquidity risk management. This measure excludes obligations due under finance leases, non-recourse debt associated with Clyde Windfarm (Scotland)
Limited (see note 4.2(iv)) and includes cash held as collateral on commodity trading exchanges and other short-term loans. The measure represents the
capital owed to investors, lenders and equity holders other than the ordinary shareholders. As with ‘adjusted earnings per share’, this measure is considered
to be of particular relevance to the ordinary shareholders of the Group as well as other stakeholders and interested parties.
Reconciliations from reported measures to adjusted measures along with further description of the rationale for those adjustments are included in the
“SSE’s financial results explained” section at pages 117 and 118.
(ii) Exceptional items and certain re-measurements
Exceptional items are those charges or credits that are considered unusual by nature and scale and of such significance that separate disclosure is required
for the financial statements to be properly understood. The trigger points for exceptional items will tend to be non-recurring although exceptional charges
may impact the same asset class or segment over time. Market conditions that have deteriorated significantly over time will only be captured to the extent
observable at the balance sheet date. Examples of items that may be considered exceptional include material asset or business impairment charges, business
restructuring costs, significant gains or losses on disposal and contractual settlements following significant disputes and claims. The Directors consider that
any gain or loss on disposal of greater than £30.0m would be disclosed as being exceptional by nature of its scale. Other gains or losses on disposal below
this level may be considered to be exceptional by reference to specific circumstances which will be explained on a case-by-case basis.
Certain re-measurements are re-measurements arising on certain commodity, interest rate and currency contracts which are accounted for as held for
trading or as fair value hedges in accordance with the Group’s policy for such financial instruments. This excludes commodity contracts not treated as
financial instruments under IAS 39 where held for the Group’s own use requirements which are not recorded until the underlying commodity is delivered.
(iii) Other additional disclosures
As permitted by IAS 1 ‘Presentation of financial statements’, the Group’s income statement discloses additional information in respect of joint ventures
and associates, exceptional items and certain re-measurements to aid understanding of the Group’s financial performance and to present results clearly
and consistently.
4. Critical accounting judgements and key sources of estimation uncertainty
In the process of applying the Group’s accounting policies, management necessarily makes judgements and estimates that have a significant effect
on the amounts recognised in the financial statements. Changes in the assumptions underlying the estimates could result in a significant impact to the
financial statements. The Group’s key accounting judgement and estimation areas are noted with the most Significant Financial Judgement areas as
specifically discussed by the Audit Committee being highlighted separately.
4.1 Significant Financial Judgements – Estimation Uncertainties
The preparation of these Financial Statements has specifically considered the following Significant Financial Judgements which are all areas of
estimation uncertainty.
127
Financial Statements
Notes on the financial statements continued
for the year ended 31 March 2016
4. Critical accounting judgements and key sources of estimation uncertainty continued
(i) Impairment testing and valuation of certain Non-Current Assets – Estimation Uncertainty
The Group reviews the carrying amounts of its goodwill, other intangible assets and specific property, plant and equipment assets and to determine
whether any impairment of the carrying value of those assets requires to be recorded. Detail on the accounting policies applied is included in the
Accompanying Information section at pages 191 to 204. In conducting its reviews, the Group makes judgements and estimates in considering the
recoverable amount of the respective assets or cash-generating units (CGUs). The specific assets under review in the year ended 31 March 2016 are
goodwill, thermal power generation assets, wind farm CGUs, gas storage assets and exploration and production (E&P) assets. Changes to the estimates
and assumptions on factors such as regulation and legislation changes, power, gas, carbon and other commodity prices, volatility of gas prices, plant
running regimes and load factors, expected 2P reserves, discount rates and other inputs could impact the assessed recoverable value of assets and
CGUs and consequently impact the Group’s income statement and balance sheet. Further detail of the basis and assumptions used in the impairment
review conducted for the financial year, and the resulting impairment charges, is included at note 16.
(ii) Revenue recognition – estimated energy consumption – Estimation Uncertainty
Revenue from Retail energy supply activities includes an estimate of the value of electricity or gas supplied to customers between the date of the last
meter reading and the year end. This estimation will comprise of values for billed revenue in relation to consumption from unread meters based on
estimated consumption taking account of various factors including usage patterns and weather trends (disclosed as trade receivables) and for unbilled
revenue (disclosed as accrued income). The volume of unbilled electricity or gas is calculated by assessing a number of factors such as externally
notified aggregated volumes supplied to customers, amounts billed to customers and other adjustments. Unbilled income is calculated by applying the
tariffs relevant to the customer type to the calculated volume of electricity or gas. This estimation methodology is subject to an internal corroboration
process that provides support for the judgements made by management. This process requires the comparison of calculated unbilled volumes to a
benchmark measure of unbilled volumes which is derived using independently verified data and by assessing historical weather-adjusted consumption
patterns and actual meter data that is used in industry reconciliation processes for total consumption by supplier. This aspect of the corroboration
process, which requires a comparison of the estimated supplied quantity of electricity and gas that is deemed to have been delivered to customers
and the aggregate supplied quantity of electricity or gas applicable to the Group’s customers that is measured by industry system operators, is a key
judgement. The assessment of electricity unbilled revenue is further influenced by the impact on national settlements data or feed-in-tariff supported
volumes and spill from solar PV generation. The experience of the Group is that the industry estimated supplied quantities in gas have historically
been higher than actual metered supply. To take account of this, the Group applies a further judgement, being a percentage reduction to unbilled
consumption volume, to the measurement of its unbilled revenue in the financial statements. It is expected that this judgement will become less critical
as the industry transitions to smart meter technology. The sensitivity associated with this judgement factor is disclosed at note 21 on page 158.
(iii) Valuation of trade receivables – Estimation Uncertainty
The basis of determining the provisions for bad and doubtful debts is explained at note 34 in the section on credit risk and aged debt. While the
provisions are considered to be appropriate, changes in estimation basis or in economic conditions could lead to a change in the level of provisions
recorded and consequently on the charge or credit to the income statement.
(iv) Retirement benefits – Estimation Uncertainty
The assumptions in relation to the cost of providing post-retirement benefits during the period are based on the Group’s best estimates and are set after
consultation with qualified actuaries. While these assumptions are believed to be appropriate, a change in these assumptions would impact the level
of the retirement benefit obligation recorded and the cost to the Group of administering the schemes. The value of scheme assets are impacted by the
asset ceiling test which (a) restricts the surplus that can be recognised to assets that can be recovered fully through refunds and (b) may increase the
value of scheme liabilities where there are minimum funding liabilities in relation to agreed contributions. Further detail on the estimation basis is
contained in note 32.
4.2 Other key accounting judgements
Other key accounting judgements applied in the preparation of these Financial Statements include the following:
(i) Business Combinations and acquisitions – Accounting Judgement
Business combinations and acquisitions require a fair value exercise to be undertaken to allocate the purchase price to the fair value of the identifiable
assets acquired and the liabilities assumed. The determination of the fair value of the assets and liabilities is based, to a certain extent, on management’s
judgement. The amount of goodwill initially recognised as a result of a business combination is dependent on the allocation of this purchase price to the
identifiable assets and liabilities with any unallocated portion being recorded as goodwill. Business combinations are disclosed in note 19.
(ii) Energy Company Obligation (ECO) costs – Accounting Judgement
The Energy Company Obligation (‘ECO’) legislation, in force since 1 January 2013, requires qualifying energy suppliers to meet defined targets by
providing measures to improve the energy efficiency of and level of carbon emissions from UK domestic households. The targets for the Group’s Energy
Supply business are set based on historic customer information with delivery of the measures being required by 31 March 2017. The Group believes it is
not technically obligated to provide those measures until the end of the delivery period. As a consequence and applying applicable accounting
standards, the costs of ECO are recorded when measures are delivered or other qualifying expenditure has been incurred.
(iii) Treatment of disputes and claims – Accounting Judgement
The Group is exposed to the risk of litigation, regulatory judgements and contractual disputes through the course of its normal operations. The Group
considers each instance separately in accordance with legal advice and will provide or disclose information as deemed appropriate. Changes in the
assumptions around the likelihood of an outflow of economic resources or the estimation of any obligation would change the values recognised in
the financial statements.
128 SSE plc Annual Report 2016
1.
2.
3. Financial Statements
4. Critical accounting judgements and key sources of estimation uncertainty continued
(iv) Consolidation of interest in Clyde Windfarm (Scotland) Limited – Accounting Judgement
On 18 March 2016, the Group completed the sale of 49.9% of the equity in Clyde Windfarm (Scotland) Limited (‘Clyde’). Details of this transaction are
included at note 19. The Group is providing project and contract management services for and 100% of the funding for the construction of the 172.8MW
extension of the wind farm. As part of this arrangement, the Group has retained a casting vote over the engineering, procurement and construction of
the extension and certain rights over the construction of the extension. Under IFRS 10 Consolidated Financial Statements, the extension is considered to
be a ‘relevant activity’ which significantly affects the future returns from Clyde and the rights retained by the Group have been concluded to confer
power to control the relevant activities of Clyde to the Group. As a consequence, this entity has been fully consolidated into the Group’s financial
statements. This means that the gain on the transaction has been recorded in equity and the co-venturers’ ownership share is represented as a non-
controlling interest. On 13 May 2016, the Group agreed to waive those contractual rights which gave rise to the judgement that power to control the
relevant activities existed over Clyde. All other contractual arrangements remain in place. As a consequence, the Group will prospectively account for it’s
interest in Clyde as that of an investment in an equity-accounted joint venture. One of the impacts of that change to consolidation basis will be to
remove the equivalent to the £200.7m of non-recourse borrowings held by Clyde from the Group’s consolidated balance sheet. In addition, the Group’s
interest in the entity is expected to remain that of an equity-accounted joint venture following completion of the extension construction project. Given
this change in circumstance and on the basis the £200.7m debt item is non-recourse to the Group, this item has been excluded from the Group’s
‘adjusted net debt and hybrid capital’ measure.
4.3 Other areas of estimation uncertainty
(i) Provisions and contingencies
The assessments undertaken in recognising provisions and contingencies have been made in accordance with IAS 37. Provisions are calculated based
on estimations. The evaluation of the likelihood of the contingent events has required best judgement by management regarding the probability of
exposure to potential loss. Should circumstances change following unforeseeable developments, this likelihood could alter.
(ii) Decommissioning costs
The estimated cost of decommissioning at the end of the useful lives of certain property, plant and equipment assets is reviewed periodically and has
been reassessed in the year to 31 March 2016. Decommissioning costs in relation to gas exploration and production assets are based on expected lives
of the fields and costs of decommissioning. Provision is made for the estimated discounted cost of decommissioning at the balance sheet date. The
dates for settlement of future decommissioning costs are uncertain and are currently expected to be incurred predominantly between 2017 and 2040.
(iii) Gas and liquids reserves
The volume of proven and probable (2P) gas and liquids reserves is an estimate that affects the unit of production depreciation of producing gas and
liquids property, plant and equipment. This is also a significant input estimate to the associated impairment and decommissioning calculations. The
impact of a change in estimated proven and probable reserves is dealt with prospectively by depreciating the remaining book value of producing assets
over the expected future production. If proven and probable reserves estimates are revised downwards, earnings could be affected by higher
depreciation expense or an immediate write-down (impairment) of the asset’s book value.
5. Segmental information
The Group’s operating segments are those used internally by the Board to run the business and make strategic decisions. The Group’s main businesses
and operating segments are the Networks business comprising Electricity Distribution, Electricity Transmission and Gas Distribution; the Retail business
comprising Energy Supply, Enterprise and Energy-related Services, and; Wholesale comprising Energy Portfolio Management and Electricity Generation,
Gas Storage and Gas Production.
In March 2014, the Group announced its intention to reorganise its activities so that there are separately auditable legal entities responsible for its Energy
Supply, Energy Portfolio Management (EPM) and Electricity Generation activities. This change was made to enhance the transparency of the
measurement and reporting of the performance of these activities. There is now a subsidiary company, SSE EPM Limited, which is responsible for
managing the Group’s commodity requirements.
The establishment of this company does not change the Group’s basis of inter-segmental pricing or its basis of reporting operational performance to
the Board. The methodology in place promotes market reflectivity and closely aligns with the operational decision-making in the respective businesses.
EPM and Electricity Generation continue to be reported to the Board as a single reportable operating segment.
129
Financial Statements
Notes on the financial statements continued
for the year ended 31 March 2016
5. Segmental information continued
The types of products and services from which each reportable segment derives its revenues are:
Business area
Reported segments
Description
Networks
Electricity Distribution
The economically regulated lower voltage distribution of electricity to customer premises in the
North of Scotland and the South of England.
Electricity Transmission
The economically regulated high voltage transmission of electricity from generating plant to the
distribution network in the North of Scotland.
Gas Distribution
SSE’s share of Scotia Gas Networks, which operates two economically regulated gas distribution
networks in Scotland and the South of England.
Retail
Energy Supply
The supply of electricity and gas to residential and business customers in the UK and Ireland.
Enterprise
The integrated provision of services in competitive markets for industrial and commercial customers
including electrical contracting, private energy networks, lighting services and telecoms capacity
and bandwidth.
Energy-related Services
The provision of energy-related goods and services to customers in the UK including meter
reading and installation, boiler maintenance and installation and domestic telecoms and
broadband services.
Wholesale
Energy Portfolio
Management and
Electricity Generation
Gas Storage
Gas Production
The generation of power from renewable and thermal plant in the UK, Ireland and Europe and the
procurement and optimisation of SSE’s power and gas and other commodity requirements.
The operation of gas storage facilities in the UK.
The production and processing of gas and other hydrocarbon products from North Sea fields.
As referred to in note 3, the internal measure of profit used by the Board is ‘adjusted profit before interest and tax’ or ‘adjusted operating profit’ which is
arrived at before exceptional items, and certain re-measurement, the net interest costs associated with defined benefit pension schemes and after the
removal of taxation and interest on profits from joint ventures and associates.
Analysis of revenue, operating profit, assets and other items by segment is provided below. All revenue and profit before taxation arise from operations
within Great Britain and Ireland.
5.1 Segmental information disclosure
(i) Revenue by segment
Networks
Electricity Distribution
Electricity Transmission
Retail
Energy Supply
Enterprise
Energy-related Services
Wholesale
Energy Portfolio Management and Electricity Generation
Gas Storage
Gas Production
Corporate unallocated
Total
External
revenue
2016
£m
Intra-segment
revenue (i)
2016
£m
689.0
367.9
1,056.9
7,548.3
455.1
118.2
8,121.6
19,525.3
5.7
2.2
19,533.2
69.6
243.6
–
243.6
83.2
96.6
112.9
292.7
3,780.6
214.3
144.9
4,139.8
258.9
Total
revenue
2016
£m
932.6
367.9
1,300.5
7,631.5
551.7
231.1
8,414.3
23,305.9
220.0
147.1
23,673.0
328.5
External
revenue
2015
£m
Intra-segment
revenue (i)
2015
£m
735.6
246.7
982.3
7,961.2
495.7
112.6
8,569.5
22,023.7
9.7
1.3
22,034.7
67.9
288.0
0.2
288.2
30.3
155.4
97.3
283.0
4,015.4
211.8
177.5
4,404.7
225.8
5,201.7
Total
revenue
2015
£m
1,023.6
246.9
1,270.5
7,991.5
651.1
209.9
8,852.5
26,039.1
221.5
178.8
26,439.4
293.7
36,856.1
28,781.3
4,935.0
33,716.3
31,654.4
(i) Significant intra-segment revenue is derived from use of system income received by the Electricity Distribution business from Energy Supply; Energy Supply provides internal heat and light power
supplies to other Group companies; Enterprise provides electrical contracting services and telecoms infrastructure charges to other Group companies; Energy-related Services provides metering
and other services to other Group companies; Energy Portfolio Management and Electricity Generation provides power, gas and other commodities to the Energy Supply segment; Gas Storage
provide the use of Gas Storage facilities to Energy Portfolio Management; Gas Production sells gas from producing North Sea fields to the Electricity Generation and Energy Portfolio Management
segments. Corporate unallocated provides corporate and infrastructure services to the operating businesses. All are provided at arm’s length.
130 SSE plc Annual Report 2016
1.
2.
3. Financial Statements
5. Segmental information continued
Revenue within Energy Portfolio Management and Electricity Generation includes revenues from generation plant output and the gross value of all
wholesale commodity sales including settled physical and financial trades. These are entered into to optimise the performance of the generation plants
and to manage the Group’s commodity risk exposure. Purchase trades are included in cost of sales.
Revenue from the Group’s investment in Scotia Gas Networks SSE share being £549.8m; (2015– £659.2m) is not recorded in the revenue line in the
income statement.
Revenue by geographical location is as follows:
UK
Ireland
(ii) Operating profit/(loss) by segment
Networks
Electricity Distribution
Electricity Transmission
Gas Distribution
Retail
Energy Supply
Enterprise
Energy-related Services
Wholesale
Energy Portfolio Management and Electricity Generation
Gas Storage
Gas Production
Corporate unallocated
Total
2016
£m
2015
£m
28,035.4
745.9
28,781.3
30,923.3
731.1
31,654.4
2016
Adjusted
operating profit
reported to the
Board
£m
JV/Associate
share of interest
and tax (i)
£m
Before
exceptional
items and certain
re-measurements
£m
Exceptional
items and
certain
re-measurements
£m
370.7
287.2
268.7
926.6
398.9
40.9
15.4
455.2
436.3
4.0
2.2
442.5
0.1
–
–
(142.0)
(142.0)
–
–
–
–
(24.7)
–
–
(24.7)
–
370.7
287.2
126.7
784.6
398.9
40.9
15.4
455.2
411.6
4.0
2.2
417.8
0.1
1,824.4
(166.7)
1,657.7
–
–
48.6
48.6
–
–
(17.8)
(17.8)
(586.4)
(150.9)
(161.8)
(899.1)
(4.0)
(872.3)
Total
£m
370.7
287.2
175.3
833.2
398.9
40.9
(2.4)
437.4
(174.8)
(146.9)
(159.6)
(481.3)
(3.9)
785.4
131
Financial Statements
Notes on the financial statements continued
for the year ended 31 March 2016
5. Segmental information continued
Networks
Electricity Distribution
Electricity Transmission
Gas Distribution
Retail
Energy Supply
Enterprise
Energy-related Services
Wholesale
Energy Portfolio Management and Electricity Generation
Gas Storage
Gas Production
Corporate unallocated
Total
2015
Adjusted
operating profit
reported to the
Board
£m
JV/Associate
share of interest
and tax (i)
£m
Before
exceptional items
and certain
re-measurements
£m
Exceptional
items and
certain
re-measurements
£m
467.7
184.1
285.0
936.8
368.7
70.4
17.7
456.8
433.3
3.9
36.6
473.8
14.0
–
–
(137.1)
(137.1)
–
–
–
–
(21.3)
–
–
(21.3)
–
467.7
184.1
147.9
799.7
368.7
70.4
17.7
456.8
412.0
3.9
36.6
452.5
14.0
1,881.4
(158.4)
1,723.0
–
–
5.3
5.3
(34.2)
30.3
15.6
11.7
(483.8)
(163.9)
(106.0)
(753.7)
(0.4)
(737.1)
Total
£m
467.7
184.1
153.2
805.0
334.5
100.7
33.3
468.5
(71.8)
(160.0)
(69.4)
(301.2)
13.6
985.9
(i) The adjusted operating profit of the Group is reported after removal of the Group’s share of interest, fair value movements on financing derivatives and tax from joint ventures and associates and
after adjusting for exceptional items (see note 7). The share of Scotia Gas Networks Limited interest includes loan stock interest payable to the consortium shareholders (included in Gas
Distribution). The Group has accounted for its 50% share of this, £24.3m (2015 – £33.3m), as finance income (note 9).
The Group’s share of operating profit from joint ventures and associates has been recognised in the Energy Portfolio Management and Electricity
Generation segment other than that for Scotia Gas Networks Limited, which is recorded in Gas Distribution, and PriDE (South East Regional Prime),
which is recognised in Enterprise (£0.4m before tax; 2015 – £0.7m before tax).
(iii) Capital Expenditure by segment
Networks
Electricity Distribution
Electricity Transmission
Retail
Energy Supply
Enterprise
Energy-related Services
Wholesale
Energy Portfolio Management and Electricity Generation
Gas Storage
Gas Production
Corporate unallocated
Total
(Decrease)/increase in prepayments related to capital expenditure
Decrease/(increase) in trade payables related to capital expenditure
Less: Other non-cash additions
Net cash outflow
132 SSE plc Annual Report 2016
Capital additions
to intangible
assets
2016
£m
Capital additions
to property, plant
and equipment
2016
£m
Capital additions
to intangible
assets
2015
£m
Capital additions
to property, plant
and equipment
2015
£m
–
–
–
71.1
–
25.4
96.5
615.7
0.1
–
615.8
0.8
713.1
–
–
(268.3)
444.8
346.6
573.4
920.0
49.7
47.6
28.3
125.6
311.9
13.9
56.1
381.9
107.5
1,535.0
(37.8)
(1.8)
–
1,495.4
–
–
–
16.9
–
27.5
44.4
483.0
0.2
–
483.2
–
527.6
–
–
(285.8)
241.8
417.4
467.2
884.6
23.7
19.6
20.6
63.9
291.2
14.3
21.0
326.5
94.2
1,369.2
28.4
(52.3)
–
1,345.3
1.
2.
3. Financial Statements
5. Segmental information continued
Capital additions do not include assets acquired in acquisitions or assets acquired under finance leases. Capital additions to Intangible Assets includes
the cash purchase of emissions allowances and certificates (2016 – £312.1m; 2015 – £156.0m). Other non-cash additions comprise self-generated
renewable obligation certificates.
No segmental analysis of assets requires to be disclosed as this information is not presented to the Board.
(iv) Items included in operating profit/(loss) by segment
Networks
Electricity Distribution
Electricity Transmission (i)
Retail
Energy Supply
Enterprise
Energy-related Services
Wholesale
Energy Portfolio Management and Electricity
Generation
Gas Storage
Gas Production
Corporate unallocated
Total
Depreciation/impairment on property,
plant and equipment
Amortisation/impairment
of intangible assets
Before
exceptional
charges
2016
£m
Impairment
charges
2016
£m
237.9
43.7
281.6
31.4
26.0
10.6
68.0
206.9
5.8
69.7
282.4
44.8
676.8
–
–
–
–
–
–
370.1
150.9
131.7
652.7
–
652.7
Total
2016
£m
237.9
43.7
281.6
31.4
26.0
10.6
68.0
577.0
156.7
201.4
935.1
44.8
1,329.5
Before
exceptional
charges
2016
£m
Impairment
charges
2016
£m
–
–
–
1.5
–
–
1.5
–
–
–
–
0.8
2.3
–
–
–
–
–
11.2
11.2
2.2
–
27.2
29.4
–
40.6
Total
2016
£m
–
–
–
1.5
–
11.2
13.7
2.2
–
27.2
29.4
0.8
42.9
(i) The depreciation policy (and related revenue recognition policy) for depreciation of capital additions to the Group’s electricity transmission network arising from connections has been reassessed
and is now consistent with the Group’s depreciation policy for other transmission additions. The impact of this change to policy is a decrease in current year depreciation of c. £14.0m, with an
equal and opposite decrease in revenue recognised.
Networks
Electricity Distribution
Electricity Transmission
Retail
Energy Supply
Enterprise
Energy-related Services
Wholesale
Energy Portfolio Management and Electricity
Generation
Gas Storage
Gas Production
Corporate unallocated
Total
Depreciation/impairment on property,
plant and equipment
Amortisation/impairment
of intangible assets
Before
exceptional
charges
2015
£m
Impairment
charges
2015
£m
236.2
46.9
283.1
28.4
21.3
7.3
57.0
211.8
11.7
55.9
279.4
37.2
656.7
–
–
–
9.2
7.7
–
16.9
237.6
162.4
61.9
461.9
–
478.8
Total
2015
£m
236.2
46.9
283.1
37.6
29.0
7.3
73.9
449.4
174.1
117.8
741.3
37.2
1,135.5
Before
exceptional
charges
2015
£m
Impairment
charges
2015
£m
–
–
–
1.0
–
–
1.0
2.4
–
–
2.4
3.4
–
–
–
–
–
–
–
51.5
–
44.1
95.6
–
95.6
Total
2015
£m
–
–
–
1.0
–
–
1.0
53.9
–
44.1
98.0
99.0
The Group’s share of Scotia Gas Networks Limited depreciation (2016 – £81.7m; 2015 – £78.0m) and amortisation (2016 – £4.8m; 2015 – £4.8m) is not
included within operating costs.
133
Financial Statements
Notes on the financial statements continued
for the year ended 31 March 2016
6. Other operating income and cost
Total group costs before exceptional items and certain re-measurements can be analysed thus:
Cost of sales
Distribution costs
Administration costs
Operating costs
Total costs
Group operating profit is stated after charging (or crediting) the following items:
Depreciation of property, plant and equipment (note 15)
Exceptional charges (note 7)
Research costs
Operating lease rentals (note 36)
Release of deferred income in relation to capital grants and historic customer contributions
(Gain) on disposal (i)
Amortisation of other intangible assets (note 14) (i)
(i) Does not include exceptional impairment charges.
Auditor’s remuneration
Audit of these financial statements
Amounts receivable by the Company’s auditor and its associates in respect of:
Audit of financial statements of subsidiaries of the Company
Audit-related assurance services
Taxation compliance and advisory services
Other services fees
Total remuneration paid to Auditor
2016
£m
2015
£m
25,859.4
28,801.3
544.4
905.4
1,449.8
516.8
844.7
1,361.5
27,309.2
30,162.8
2016
£m
676.8
843.1
5.6
166.1
(17.9)
(30.2)
2.3
2016
£m
0.3
0.7
0.1
0.2
0.4
1.4
1.7
2015
£m
656.7
648.7
8.3
163.2
(16.7)
(58.8)
3.4
2015
£m
0.3
0.7
0.1
0.1
0.1
1.0
1.3
Assurance and tax service fees incurred in the year were £0.4m (2015 – £0.1m). Audit – related assurance services include fees incurred in relation to
regulatory accounts and returns required by Ofgem. Other service fees include fees for advice on regulatory matters (£0.3m), studies on the impact
of industry compliance issues and accounting advisory services. A description of the work of the Audit Committee is set out on pages 84 to 89 and
includes an explanation of how auditor objectivity and independence is safeguarded when non-audit services are provided by the auditors.
Amounts paid to the Company’s auditor in respect of services to the Company other than the audit of the Company’s financial statements have not
been disclosed as the information is required instead to be disclosed on a consolidated basis.
134 SSE plc Annual Report 2016
7. Exceptional items and certain re-measurements
Exceptional items
Asset impairments and related charges
Provisions for restructuring and other liabilities (note 28)
Net gains on disposals of businesses and other assets
Impairment of Investments in joint ventures and associates (share of result)
Share of effect of change in UK corporation tax on deferred tax liabilities and assets of associate and
joint venture investments
Total exceptional items
Certain re-measurements
Movement on operating derivatives (note 34)
Movement on financing derivatives (note 34)
Share of movement on derivatives in jointly controlled entities (net of tax)
Total certain re-measurements
Exceptional items and certain re-measurements before taxation
Taxation
Effect of change in UK corporation tax rate on deferred tax liabilities and assets
Taxation on other exceptional items
Taxation on certain re-measurements
Taxation
Exceptional items before certain re-measurements and after taxation
Exceptional items are disclosed across the following categories within the income statement:
Cost of sales:
Coal-fired Generation related provisions and charges
Gas-fired Generation related charges
Movement on operating derivatives (note 34)
Operating costs:
Gas Production (E&P) related charges
Gas Storage related charges
Gas-fired Generation related charges
Other exceptional provisions and charges
Operating income:
Net gains on disposals of businesses and other assets
Joint ventures and associates:
Impairment of investments
Share of movement on derivatives in jointly controlled entities (net of tax)
Operating loss
Finance costs
Movement on financing derivatives (note 34)
Loss before taxation
1.
2.
3. Financial Statements
2016
£m
(892.5)
(54.9)
(947.4)
57.6
(889.8)
–
(889.8)
46.7
(843.1)
(31.1)
14.3
1.9
(14.9)
(858.0)
41.5
227.6
269.1
3.4
272.5
(585.5)
2016
£m
(287.0)
(326.4)
(31.1)
(644.5)
(161.8)
(150.9)
–
(21.3)
(334.0)
2015
£m
(667.5)
(56.0)
(723.5)
74.8
(648.7)
(25.9)
(674.6)
–
(674.6)
(67.8)
(44.2)
5.3
(106.7)
(781.3)
15.6
145.6
161.2
39.2
200.4
(580.9)
2015
£m
(313.5)
(51.5)
(67.8)
(432.8)
(106.1)
(163.9)
(24.9)
(63.6)
(358.5)
57.6
74.8
–
48.6
48.6
(872.3)
14.3
(858.0)
(25.9)
5.3
(20.6)
(737.1)
(44.2)
(781.3)
135
Financial Statements
Notes on the financial statements continued
for the year ended 31 March 2016
7. Exceptional items and certain re-measurements continued
7.1 Exceptional items
In the year to 31 March 2016, the Group recognised net exceptional charges of £889.8m. This consisted of asset impairment and related charges
totalling £892.5m, exceptional provisions of £54.9m and net exceptional gains on disposal of £57.6m. The £138.6m gain on the part disposal of Clyde
Windfarm (Scotland) Limited has been recognised directly in equity and therefore does not form part of the Income Statement and therefore total
exceptional gains on disposal were £196.2m. Detail on the accounting judgements applied in relation to this transaction and the transaction itself are
included at note 4.2(iv) and note 19.3.
The exceptional charges recognised can be summarised as follows:
Coal Generation (i)
Gas Generation (ii)
Gas Production (iii)
Gas Storage (iv)
Other (v)
Property, plant
and equipment
(note 15)
£m
Goodwill and
other intangibles
(note 14)
£m
Inventories
(note 20)
£m
67.6
302.5
125.0
150.9
–
646.0
–
2.2
27.2
–
11.2
40.6
87.9
3.7
–
–
91.6
Other
charges
£m
83.2
18.0
9.6
–
3.5
114.3
Total
impairment
related
£m
238.7
326.4
161.8
150.9
14.7
892.5
Provisions
(note 28)
£m
48.3
–
–
–
6.6
54.9
Total
charges
£m
287.0
326.4
161.8
150.9
21.3
947.4
(i) Coal-fired Generation. On 20 May 2015, the Group announced that operations at Ferrybridge would cease at 31 March 2016 and consequently
exceptional charges including the recognition of restructuring provisions, impairment of inventory and other costs have been recognised (£72.0m).
On 30 March 2016, the Group announced that following a consultation process and success in securing a contract to provide ancillary services to
National Grid for one year from 1 April 2016, operations at Fiddler’s Ferry would continue and that SSE would enter ‘all or part of’ the capacity at
Fiddler’s Ferry into any 2017/18 Capacity Market auction. Nonetheless, the challenging economic and regulatory conditions facing coal-fired
generation in the UK means that the long-term future of Fiddler’s Ferry remains uncertain. In addition, SSE’s longer-term strategic involvement in
coal-fired generation and coal procurement is now under review. As a result, further exceptional charges have been recognised including impairment
of the value of plant (£67.6m) and inventory (£47.9m) at Fiddler’s Ferry and accelerated decommissioning costs recorded directly as a charge to the
income statement and, included in other charges, irrecoverable current assets and financial losses relating to cessation of coal hedging activities
(totalling £99.5m). Following these charges, the residual value of the Group’s coal generation plants is nil.
(ii) Gas-fired Generation. Following the failure of Peterhead Power Station to win a capacity contract under the Capacity Market Auction for 2019/20
and the announcement, on 25 November, that the UK Government was withdrawing funding support for the proposed carbon capture and storage
project at Peterhead Power Station, exceptional charges of £129.3m have been recognised in relation to the assets at the site. The economic
conditions for the Group’s other main Gas-fired Generation plants in Great Britain (Medway, Keadby and Marchwood) remain challenging. While the
Group’s long term view remains that the impact of regulatory changes will create a favourable economic environment for gas-fired generation, there
has as yet been no observable recovery in ‘spark spread’ margins at these plants and there remains uncertainty in relation to the enduring ability of
the plants to benefit from the UK Government’s Capacity Market process. As a result, further impairment charges have been recognised of £197.1m,
principally in respect of Marchwood and Medway plant and certain contractual prepayments. Following these charges, the residual value of the
Group’s GB gas generation plants under review is £226.2m.
(iii) Gas Production. Impairment of the Group’s Gas Exploration and Production assets in the North Sea has been recognised predominately due to
declining wholesale gas prices. The exceptional charges recognised include an element (£121.2m) related to the impairment of Greater Laggan field
assets acquired at 28 October 2015 which reflects the impact of the decline in expected long term gas prices between the acquisition date and the
financial year end. The other impairments relate to the impact of the fall in wholesale gas prices on the Group’s other E&P assets at Sean, Lomond,
Bacton and ECA (£40.6m). Following these charges, the residual value of the Group’s gas production assets is £888.0m.
(iv) Gas Storage. Current and forecast demand for gas storage in Great Britain continues to be impacted by reduced short term price volatility and
seasonal spreads in the wholesale gas market. These factors have had different but significant impacts on the Group’s facilities at Hornsea (Atwick)
and Aldbrough. As a result, exceptional charges of £150.9m have been recognised across both assets. Following these charges, the residual value
of the Group’s gas storage facilities is £21.2m.
(v) Other charges. Other exceptional charges have been recognised in relation to impairment of system development projects, restructuring charges
and exit costs associated with the strategic exit from certain non-core activities.
Further detail on the basis of impairment review across all asset categories is included in note 16 to these financial statements.
The Group recognised £57.6m of exceptional net credits arising from disposals. On 28 May 2015, the Group recognised an exceptional gain on disposal
of £39.3m in relation to the sale of three onshore wind development sites to Blue Energy. In addition, the Group also recognised a gain on its disposal
of its interest in the Galloper offshore wind development of £18.3m. The latter disposal gain is considered to be exceptional due to the Group having
previously impaired its investment in Galloper as part of its decision to scale back its commitment to offshore wind development. Further detail is
included at note 19.
136 SSE plc Annual Report 2016
1.
2.
3. Financial Statements
7. Exceptional items and certain re-measurements continued
In the previous financial year, the Group recognised exceptional charges arising from and related to asset impairments amounting to £667.5m and
provisions of £56.0m. The exceptional charges recognised can be summarised as follows:
Coal Generation
Gas Generation
Gas Production
Gas Storage
Other
Property, plant
and equipment
(note 15)
£m
Goodwill and
other intangibles
(note 14)
£m
Inventories
(note 20)
£m
222.7
14.9
61.9
162.4
16.9
478.8
–
51.5
44.1
–
–
95.6
41.0
–
–
–
–
41.0
Other
charges
£m
45.8
–
0.1
–
6.2
52.1
Total
impairment
related
£m
309.5
66.4
106.1
162.4
23.1
667.5
Provisions
(note 28)
£m
4.0
10.0
–
1.5
40.5
56.0
Total
charges
£m
313.5
76.4
106.1
163.9
63.6
723.5
The impairments of Coal generation plants followed the 31 July 2014 fire at Ferrybridge and the inability of both units at Ferrybridge and one unit at
Fiddler’s Ferry to secure agreements to provide capacity under the auction process run by DECC in December 2014. The impairments of Gas generation
plants predominately related to development sites at Abernedd and Seabank. The impairments of Gas Production assets related to the impact of
declining wholesale prices on the Group’s Sean, ECA and Lomond fields. The charges associated with Gas Storage followed the strategic review of the
Group’s operations in that segment the results of which were announced on 26 March 2015. The other charges mainly relate to asset impairments, other
charges in non-core businesses and provisions for certain disputes and claims. The exceptional disposal gains recorded related to the sale of seven
street lighting PFI companies to Equitix (£38.0m), the Group’s share of the dividend from Environmental Energy Fund’s disposal of its stake in Anesco
(£19.6m) and the gain on disposal of non-core retail assets (£17.2m).
As supplemental detail, the following table represents the exceptional charges recognised in the financial year to 31 March 2014 presented in
similar format:
Property, plant
and equipment
£m
Goodwill and
other intangibles
£m
Restructuring
Non-core
Wind
Coal Generation
Gas Storage
Other
35.2
17.0
191.6
111.4
17.5
372.7
2.0
75.9
–
26.3
18.7
122.9
146.3
Other
charges
£m
36.0
47.6
47.0
–
15.7
Total
impairment
related
£m
73.2
140.5
238.6
137.7
51.9
641.9
Provisions
£m
58.9
–
–
–
46.4
105.3
Total
charges
£m
132.1
140.5
238.6
137.7
98.3
747.2
The restructuring-related charges followed the announcement, on 28 March 2014, that the Group was intending to dispose of a number of non-core
assets and businesses, embark upon a programme of voluntary early release for around 500 employees and scale back its commitment in relation
to offshore wind developments. The impairments of the coal plants followed a period of relatively favourable operating conditions for Fiddler’s Ferry
and Ferrybridge but were necessary in context of the increasing impact on profitability of the Carbon Price Support (CPS) mechanism and uncertainty
around future political and regulatory support for coal generation. The impairment of Gas Storage was due to the impact of market and global factors
such as North American fracking and availability of LNG on the business. The 2014 financial statements noted that “there remains inherent imprecision
in the valuation processes for these long-term infrastructure assets which is dependent on macro-economic factors. Management believe a balanced
position has been taken regarding these factors”. The other charges relate to impairments of certain Retail developments and provisions for certain
disputes and claims.
7.2 Certain re-measurements
The Group enters into forward commodity purchase (and sales) contracts to meet the future demand requirements of its Energy Supply business and to
optimise the value of its Generation and other Wholesale assets. Certain of these contracts are determined to be derivative financial instruments under
IAS 39 and as such are required to be recorded at their fair value. Changes in the fair value of those commodity contracts designated as IAS 39 financial
instruments are reflected in the income statement (as part of ‘certain re-measurements’).The Group shows the change in the fair value of these forward
contracts separately as this mark-to-market movement is not relevant to the underlying performance of its operating segments. The Group will
recognise the underlying value of these contracts as the relevant commodity is delivered, which will predominately be within the subsequent 12 to 18
months. Conversely, commodity contracts that are not financial instruments under IAS 39 are accounted for as ‘own use’ contracts. The re-
measurements arising from IAS 39 are disclosed separately to aid understanding of the underlying performance of the Group. This category also
includes the income statement movement on financing derivatives (and hedged items) as described in note 34.
7.3 Change in UK corporation tax rates
Finance (No.2) Act 2015 which received royal assent on 18 November 2015 enacted a Corporation tax rate of 19% (currently 20%) from 1 April 2017,
and a rate of 18% from 1 April 2020. As these changes have been substantively enacted they have the effect of reducing the group’s deferred tax
liabilities by £27.6m including the impact of changes recognised in the statement of other comprehensive income. A further change to reduce the rate
of Corporation Tax to 17% from 1 April 2020 was announced in Finance (No.2) Bill 2016, however as this change has not been substantively enacted at
the balance sheet date it’s effect, estimated to be £21.0m, has not been brought into account in calculating the group’s deferred tax liabilities.
137
Financial Statements
Notes on the financial statements continued
for the year ended 31 March 2016
7. Exceptional items and certain re-measurements continued
7.3 Change in UK corporation tax rates continued
A resolution was passed under the Provisional Collection of Taxes Act 1968 on 22 March 2016 which reduced the rate of Petroleum Revenue Tax (PRT) to
0% (from 35%) with effect from 1 January 2016. As this change has been substantively enacted at the balance sheet date it has the effect of reducing the
group’s deferred tax liabilities by £2.8m. Finance (No.2) Bill 2016 announced a reduction in the rate of Supplementary Charge on ring-fenced profits to
0% (previously 20%) with effect from 1 January 2016. As this change has not been enacted at the balance sheet date it has not been brought into account
in calculating the group’s deferred tax liabilities. It is expected to reduce the group’s deferred tax liabilities by £9.0m.
Taxation
The Group has separately recognised the tax effect of the exceptional items and certain re-measurements summarised above.
8. Directors and employees
8.1 Staff costs
Staff costs:
Wages and salaries
Social security costs
Share-based remuneration (note 33)
Pension costs (note 32)
Less: capitalised as property, plant and equipment
8.2 Employee numbers
Numbers employed at 31 March
Consolidated
2016
£m
710.3
70.0
13.5
122.4
916.2
(144.5)
771.7
2015
£m
675.0
65.8
15.0
119.8
875.6
(130.7)
744.9
Consolidated
Company
2016
Number
21,118
2015
Number
19,965
2016
Number
2
2015
Number
2
The average number of people employed by the Group (including Executive Directors) during the year was:
Consolidated
Company
Networks
Electricity Distribution
Electricity Transmission
Retail
Energy Supply
Enterprise
Energy-related Services
Wholesale
Energy Portfolio Management and Electricity Generation
Gas Storage
Gas Production
Corporate unallocated
Total
2016
Number
2,480
487
2,967
5,774
4,698
2,963
13,435
1,796
89
–
1,885
2,268
2015
Number
2,303
422
2,725
5,769
4,842
2,782
13,393
1,682
97
–
1,779
2,118
20,555
20,015
2016
Number
2015
Number
–
–
–
–
–
–
–
–
–
–
2
2
–
–
–
–
–
–
–
–
–
–
2
2
The costs associated with the employees of the Company, who are the Executive Directors of the Group, are borne by Group companies. No amounts
are charged to the Company.
8.3 Directors’ remuneration and interests
Information concerning Directors’ remuneration, shareholdings, options, long-term incentive schemes and pensions is shown in the Remuneration
Report on pages 92 to 113. No Director had, during or at the end of the year, any material interest in any other contract of significance in relation to the
Group’s business.
138 SSE plc Annual Report 2016
1.
2.
3. Financial Statements
9. Finance income and costs
Recognised in income statement
2016
2015
Finance income:
Interest income from short term deposits
Foreign exchange translation of monetary assets
and liabilities
Other interest receivable:
Scotia Gas Networks loan stock
Other joint ventures and associates (i)
Other receivable (i)
Total finance income
Finance costs:
Bank loans and overdrafts
Other loans and charges
Interest on pension scheme liabilities
Notional interest arising on discounted provisions
Foreign exchange translation of monetary assets
and liabilities
Finance lease charges
Less: interest capitalised (ii)
Total finance costs
Changes in fair value of financing derivative assets or
liabilities at fair value through profit or loss
Net finance costs
Presented as:
Finance income
Finance costs
Net finance costs
Before
exceptional items
and certain
re-measurements
£m
Exceptional items
and certain
re-measurements
£m
4.7
9.0
24.3
18.8
45.0
88.1
101.8
(27.9)
(257.1)
(20.4)
(15.7)
–
(34.7)
47.6
(308.2)
–
(206.4)
101.8
(308.2)
(206.4)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
14.3
14.3
–
14.3
14.3
Before
exceptional items
and certain
re-measurements
£m
Exceptional items
and certain
re-measurements
£m
Total
£m
4.7
9.0
24.3
18.8
45.0
88.1
101.8
(27.9)
(257.1)
(20.4)
(15.7)
–
(34.7)
47.6
1.1
–
33.3
14.8
46.7
94.8
95.9
(23.9)
(262.5)
(25.1)
(14.0)
(0.5)
(34.2)
57.8
(308.2)
(302.4)
14.3
(192.1)
101.8
(293.9)
(192.1)
–
(206.5)
95.9
(302.4)
(206.5)
Total
£m
1.1
–
33.3
14.8
46.7
94.8
95.9
(23.9)
(262.5)
(25.1)
(14.0)
(0.5)
(34.2)
57.8
(302.4)
(44.2)
(250.7)
95.9
(346.6)
(250.7)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(44.2)
(44.2)
–
(44.2)
(44.2)
(i) Within the preliminary statement for 31 March 2016, other joint ventures and associates was stated as £0.9m and other receivable £62.9m, these have been changed to the balances above
since publication.
(ii) The capitalisation rate applied in determining the amount of borrowing costs to capitalise in the period was 4.24% (2015 – 4.49%).
Adjusted net finance costs are arrived at after the following adjustments:
Net finance costs
(add)/less:
Share of interest from joint ventures and associates:
Scotia Gas Networks loan stock
Other joint ventures and associates
Interest on pension scheme liabilities
Share of interest on net pension liabilities in joint ventures
Movement on financing derivatives (note 34)
Adjusted net finance costs
Notional interest arising on discounted provisions
Finance lease charges
Hybrid coupon payment (note 31)
Adjusted net finance costs for interest cover calculations
2016
£m
2015
£m
(192.1)
(250.7)
(24.3)
(102.5)
(126.8)
20.4
1.9
(14.3)
(310.9)
15.7
34.7
(124.6)
(385.1)
(33.3)
(90.9)
(124.2)
25.1
(11.1)
44.2
(316.7)
14.0
34.2
(121.3)
(389.8)
The interest on net pension liabilities for the year ended 31 March 2016 of £20.4m (2015 – £25.1m) represents the respective charges under IAS 19R.
139
Financial Statements
Notes on the financial statements continued
for the year ended 31 March 2016
9. Finance income and costs continued
Recognised in other comprehensive income
Profit/(loss) on effective portion of cash flow hedges (i)
Share of joint venture/associate gain/(loss) on effective portion of cash flow hedges (i)
(i) Before deduction of tax.
10. Taxation
Analysis of charge recognised in the income statement:
2016
£m
79.4
4.7
84.1
2015
£m
(41.9)
(9.4)
(51.3)
Current tax
UK corporation tax
Adjustments in respect of previous years
Total current tax
Deferred tax
Current year
Effect of change in tax rate
Adjustments in respect of previous years
Total deferred tax
Before
exceptional items
and certain
re-measurements
£m
Exceptional items
and certain
re-measurements
£m
180.5
(21.2)
159.3
74.9
–
46.4
121.3
(44.2)
–
(44.2)
(186.8)
(41.5)
–
(228.3)
Before
exceptional items
and certain
re-measurements
£m
Exceptional items
and certain
re-measurements
£m
231.4
(29.8)
201.6
52.7
–
16.9
69.6
(25.1)
–
(25.1)
(159.7)
(15.6)
–
(175.3)
2016
£m
136.3
(21.2)
115.1
(111.9)
(41.5)
46.4
(107.0)
2015
£m
206.3
(29.8)
176.5
(107.0)
(15.6)
16.9
(105.7)
Total taxation charge
280.6
(272.5)
8.1
271.2
(200.4)
70.8
In October 2014, SSE became the first FTSE 100 group to be accredited with the Fair Tax Mark. As a consequence, these financial statements include a
number of areas of enhanced disclosure which have been provided in order to develop stakeholder understanding of the tax the Group pays. The table
on the next page reconciles the tax which would be expected to be paid on SSE’s reported profit before tax to the reported current tax charge and the
reported total taxation charge along with additional commentary on the main reconciling items provided beneath the table:
140 SSE plc Annual Report 2016
10. Taxation continued
Group profit before tax
Less: share of results of associates and jointly controlled entities
Profit before tax
Tax on profit on ordinary activities at standard UK corporation tax rate of 20% (2015 –
21%)
Tax effect of:
Capital allowances (in excess of)/less than depreciation
Increase in restructuring and settlement provisions
Non-taxable gain on sale of shares
Fair value movements on derivatives
Pension movements
Relief for capitalised interest and revenue costs
Hybrid capital coupon payments
Corporation tax relief on PRT paid
Expenses not deductible for tax purposes
Impact of higher current tax rates on E&P profits
Impact of foreign tax rates
E&P tax losses carried forward
Employee share schemes
Adjustments to tax charge in respect of previous years
Reported current tax charge and effective rate
Depreciation in excess of capital allowances
Increase in restructuring and settlement provisions
Fair value movements on derivatives
Pension movements
Relief for capitalised interest and revenue costs
Impact of higher deferred tax rates on E&P profits
Impact of foreign tax rates
Adjustments to tax charge in respect of previous years
Change in rate of UK corporation tax
Arising due to business combination
E&P tax losses carried forward
Employee share schemes
Other items
Reported deferred tax credit and effective rate
Group tax charge and effective rate
1.
2.
3. Financial Statements
2016
£m
593.3
(204.8)
388.5
77.7
(24.9)
9.2
(11.5)
3.4
(3.1)
(20.3)
(24.8)
(3.2)
14.4
12.8
(3.0)
111.9
(2.3)
(21.2)
115.1
35.3
(9.2)
(3.4)
3.1
20.3
(32.6)
(1.7)
46.4
(41.5)
(14.1)
(111.9)
2.3
–
(107.0)
8.1
2016
%
20.0
(6.4)
2.4
(3.0)
0.9
(0.8)
(5.2)
(6.4)
(0.8)
3.7
3.3
(0.8)
28.8
(0.6)
(5.5)
29.6
9.1
(2.4)
(0.9)
0.8
5.2
(8.4)
(0.4)
11.9
(10.7)
(3.5)
(28.8)
0.6
–
(27.5)
2.1
2015
%
2015
£m
735.2
(163.6)
571.6
120.0
21.0
86.0
2.6
(13.8)
23.6
(11.0)
(22.3)
(25.5)
(4.5)
7.7
42.1
1.4
–
–
(29.8)
176.5
(68.5)
(2.6)
(23.6)
11.0
22.3
(34.8)
(4.2)
6.5
(15.6)
–
–
–
3.8
(105.7)
70.8
15.1
0.5
(2.4)
4.1
(1.9)
(3.9)
(4.5)
(0.8)
1.3
7.4
0.2
–
–
(5.2)
30.9
(12.0)
(0.5)
(4.1)
1.9
3.9
(6.1)
(0.7)
1.1
(2.7)
–
–
–
0.6
(18.6)
12.3
The majority of the Group’s profits are earned in the UK, with the standard rate of UK corporation tax being 20% for the year to 31 March 2016
(2015 –21%). The Group’s Gas Production business is taxed at a UK corporation tax rate of 30% plus a supplementary charge of 29% (combined 62%).
In addition, profits from the Sean gas field were subject to petroleum revenue tax (“PRT”) at 50% until 1 January 2016 which is deductible against
corporation tax, giving an overall effective rate for the field of 75%. Profits earned by the Group in the Republic of Ireland are taxable at either 12.5%
or 25%, depending upon the nature of the income.
Capital allowances are tax reliefs provided in law for the expenditure the Group makes on property, plant and equipment. The rates are determined by
Parliament annually, and spread the tax relief due over a number of years. This contrasts with the accounting treatment for such spending, where the
expenditure on property, plant and equipment is treated as an asset with the cost being depreciated over the useful life of the asset, or impaired if the
value of such assets is considered to have reduced materially. Adjustments to the deferred tax charge in respect of previous years includes an uplift in
the provision required in relation to the acquired Sean gas field.
The different accounting treatment of property, plant and equipment for tax and accounting purposes means that the taxable income of the Group is
not the same as the profit reported in the financial statements. During both the year to 31 March 2016 and the previous year, the substantial impairments
undertaken in relation to certain of the Group’s property, plant and equipment, which are explained at note 7 meant that the charge to profit for the year
significantly exceeded the amount of capital allowances due to the Group.
Short term temporary differences arise on items such as provisions for restructuring costs and onerous contracts, and retirement benefit obligations,
because the treatment of such items is different for tax and accounting purposes. These differences usually reverse in the year following that in which
they arise, as is reflected in the deferred tax charge in these financial statements. Where interest charges or other costs are capitalised in the accounts,
tax relief is either given as the charges are incurred or when the costs are taken to the income statement.
141
Financial Statements
Notes on the financial statements continued
for the year ended 31 March 2016
10. Taxation continued
As explained at Accompanying Information A1.11 and at note 34 to the accounts, the Group measures its operating and financing derivatives at fair value
under IAS 39. Due to the financial statements of its subsidiaries being prepared under UK GAAP and following the application of the UK tax “disregard
regulations”, the re-measurement movements have no current tax effect impacting only the deferred tax position.
Some expenses incurred by the Group, while entirely appropriate, are not allowed as an offset against taxable income when calculating the company’s
tax liability for the same accounting period. Examples of such disallowable expenditure include legal expenses on investment transactions, and
investment impairments.
As detailed at note 31 and explained in the Accompanying Information A1.11 (ix), the Group has issued hybrid capital securities which are treated as a
component of equity. While the coupon payments relating to these securities are treated as distributions to the holders of the equity instruments, tax
relief is allowed on the amount paid in the year. These tax credits are linked to the past transactions or events that support the coupon payments and
consequently the tax credits are reported in the income statement.
Reconciliation of tax charge to adjusted underlying current tax
As noted at note 3 to the accounts, the Group’s results are reported on an ‘adjusted’ basis in order to allow focus on underlying business performance.
The following table explains the adjustments that are made in order to arrive at adjusted profit before tax. This is the measure utilised in calculation of the
Group’s ‘adjusted effective rate of tax’.
Profit before tax
Add/(less):
Exceptional items and certain re-measurements
Share of tax from jointly controlled entities and associates before exceptional items and certain re-measurements
Interest on pension scheme liabilities
Share of interest on net pension liabilities in jointly controlled entities and associates
2016
£m
593.3
858.0
39.9
20.4
1.9
2015
£m
735.2
781.3
34.2
25.1
(11.1)
Adjusted profit before tax
1,513.5
1,564.7
The ‘adjusted current tax charge’ and the ‘adjusted effective rate of tax’, which are presented in order to best represent underlying performance by
making similar adjustments to the ‘adjusted profit before tax’ measure, are arrived at after the following adjustments:
Group tax charge and effective rate
Add: reported deferred tax credit and effective rate
Reported current tax charge and effective rate
Effect of adjusting items (see below)
Reported current tax charge on adjusted basis
add:
Share of current tax from joint ventures and associates
Current tax on exceptional items
Adjusted current tax charge and effective rate
2016
£m
8.1
107.0
115.1
–
115.1
34.1
44.2
193.4
The adjusted current tax charge can therefore be reconciled to the adjusted profit before tax as follows:
Adjusted profit before tax
Tax on profit on ordinary activities at standard UK corporation tax rate
Tax effect of:
Capital allowances in excess of depreciation
Non taxable gain on sale of shares
Increase in restructuring and settlement provisions
Pension movements
Relief for capitalised interest and revenue costs
Hybrid capital coupon payments
Corporation tax relief on PRT paid
Expenses not deductible for tax purposes
Losses carried forward, and (relief) for brought forward losses
Impact of higher current tax rates on oil and gas profits
Impact of foreign tax rates
Adjustments to tax charge in respect of previous years
Adjusted current tax charge and effective rate
142 SSE plc Annual Report 2016
2016
£m
1,513.5
302.7
(170.7)
1.9
2.9
(7.9)
(9.3)
(24.8)
(3.2)
4.5
108.8
12.8
(3.1)
(21.2)
193.4
2016
%
2.1
27.5
29.6
(22.0)
7.6
2.3
2.9
12.8
2016
%
20.0
(11.3)
0.1
0.2
(0.5)
(0.6)
(1.6)
(0.2)
0.3
7.2
0.8
(0.2)
(1.4)
12.8
2015
£m
70.8
105.7
176.5
–
176.5
23.2
25.1
224.8
2015
£m
1,564.7
328.6
(42.1)
(6.3)
3.9
(13.9)
(15.2)
(25.4)
(4.4)
10.1
(23.6)
42.1
1.4
(30.4)
224.8
2015
%
12.3
18.5
30.8
(19.5)
11.3
1.5
1.6
14.4
2015
%
21.0
(2.7)
(0.4)
0.2
(0.9)
(1.0)
(1.6)
(0.3)
0.7
(1.5)
2.7
0.1
(1.9)
14.4
1.
2.
3. Financial Statements
10. Taxation continued
The above reconciling adjustments differ from those analysed in the Group tax charge reconciliation above because they include SSE’s share of associates
and joint ventures, and are based on adjusted profit before tax.
Tax charge/(credit) recognised in other comprehensive income/(loss):
Relating to:
Pension scheme actuarial movements
Cash flow and net investment hedge movements
All tax recognised through other comprehensive income is deferred tax.
11. Dividends
Ordinary dividends
2016
£m
(58.9)
(7.8)
(66.7)
2015
£m
16.3
(4.2)
12.1
Interim – year ended 31 March 2016
Final – year ended 31 March 2015
Interim – year ended 31 March 2015
Final – year ended 31 March 2014
Year ended
31 March 2016
total
£m
Settled via
scrip
£m
Pence per
ordinary share
Year ended
31 March 2015
total
£m
Settled via
scrip
£m
Pence per
ordinary share
270.5
613.5
–
–
884.0
16.3
159.5
–
–
175.8
26.9
61.8
–
–
–
–
262.6
591.5
854.1
–
–
81.6
174.0
255.6
–
–
26.6
60.7
The final dividend of 61.8p per ordinary share declared in the financial year ended 31 March 2015 (2014– 60.7p) was approved at the Annual General
Meeting on 23 July 2015 and was paid to shareholders on 19 September 2015. Shareholders were able to elect to receive ordinary shares credited as
fully paid instead of the cash dividend under the terms of the Company’s scrip dividend scheme.
An interim dividend of 26.9p per ordinary share (2015 – 26.6p) was declared and paid on 18 March 2016 to those shareholders on the SSE plc share
register on 22 January 2016. Shareholders were able to elect to receive ordinary shares credited as fully paid instead of the interim cash dividend under
the terms of the Company’s scrip dividend scheme.
The proposed final dividend of 62.5p per ordinary share (which equates to a dividend of £629.8m based on the number of issued ordinary shares at
31 March 2016 is subject to approval by shareholders at the Annual General Meeting and has not been included as a liability in these financial statements.
12. Earnings per share
Basic earnings per share
The calculation of basic earnings per ordinary share at 31 March 2016 is based on the net profit attributable to Ordinary shareholders and a weighted
average number of ordinary shares outstanding during the year ended 31 March 2016. All earnings are from continuing operations.
Adjusted earnings per share
Adjusted earnings per share has been calculated by excluding the charge for deferred tax, interest on net pension liabilities under IAS 19R and the impact
of exceptional items and certain re-measurements (note 7).
Year ended
31 March 2016
earnings
£m
Year ended
31 March 2016
earnings per share
pence
Year ended
31 March 2015
earnings
£m
Year ended
31 March 2015
earnings per share
pence
Basic
Exceptional items and certain re-measurements (note 7)
Basic excluding exceptional items and certain re-measurements
Adjusted for:
Interest on net pension scheme liabilities (note 9)
Share of interest on net pension scheme liabilities in joint venture (note 9)
Deferred tax
Deferred tax from share of joint ventures and associates
Adjusted
Basic
Dilutive effect of outstanding share options
Diluted
460.6
585.5
1,046.1
20.4
1.9
121.3
5.8
1,195.5
460.6
–
460.6
46.1
58.5
104.6
2.0
0.2
12.1
0.6
119.5
46.1
(0.1)
46.0
543.1
580.9
1,124.0
25.1
(11.1)
69.6
11.0
1,218.6
543.1
–
543.1
55.3
59.2
114.5
2.5
(1.1)
7.1
1.1
124.1
55.3
(0.1)
55.2
143
Financial Statements
Notes on the financial statements continued
for the year ended 31 March 2016
12. Earnings per share continued
The weighted average number of shares used in each calculation is as follows:
For basic and adjusted earnings per share
Effect of exercise of share options
For diluted earnings per share
13. Notes to the Group Cash Flow Statement
13.1 Reconciliation of operating profit to cash generated from operations
31 March 2016
number of shares
(millions)
31 March 2015
number of shares
(millions)
1,000.0
1.2
1,001.2
981.8
2.1
983.9
Profit for the year
Add back: taxation
Add back: net finance costs
Operating profit
Less share of profit of joint ventures and associates
Operating profit before jointly controlled entities and associates
Movement on operating derivatives
Pension service charges less contributions paid
Exceptional charges
Depreciation of assets
Amortisation and impairment of intangible assets
Other fixed asset impairments
Impairment of inventories
Release of provisions
Release of deferred income
Charge in respect of employee share awards (before tax)
(Profit)/loss on disposal of assets and businesses – non exceptional
Income from investment in subsidiaries, jointly ventures and associates
Cash generated from/(absorbed by) operations before working capital
movements
Note
10
9
Consolidated
Company
2016
£m
585.2
8.1
192.1
785.4
(204.8)
580.6
31.1
(35.9)
889.8
676.8
2.3
6.7
–
(7.8)
(17.9)
16.5
(30.1)
–
2015
£m
664.4
70.8
250.7
985.9
(163.6)
822.3
67.8
(77.5)
648.7
656.7
3.4
–
1.4
–
(16.9)
15.0
(40.2)
–
2016
£m
1,306.8
22.0
(187.2)
1,141.6
–
1,141.6
–
(3.0)
56.4
–
–
–
–
–
–
–
–
(1,191.3)
2015
£m
597.7
51.9
(333.0)
316.6
–
316.6
–
(23.7)
931.4
–
–
–
–
–
–
–
4.2
(1,233.8)
2,112.1
2,080.7
3.7
(5.3)
13.2 Reconciliation of net increase in cash and cash equivalents to movement in adjusted net debt and hybrid capital
(Decrease)/increase in cash and cash equivalents
Add/(less):
Redemption/(issue) of hybrid capital
New borrowings
Repayment of borrowings
Non-cash movement on borrowings
Increase in cash held as collateral and other short-term loans
Balances due to partners in Clyde Windfarm (Scotland) Limited
Movement in adjusted net debt and hybrid capital
Note
21
Consolidated
2016
£m
2015
£m
(1,151.9)
1,053.5
1,161.4
(1,070.1)
77.7
(94.8)
50.1
200.7
(826.9)
(1,184.3)
(151.1)
66.3
269.8
20.5
–
74.7
Cash held as collateral refers to amounts deposited on commodity trading exchanges and loans provided with a less than three month maturity which
are reported within trade and other receivables on the face of the balance sheet.
144 SSE plc Annual Report 2016
1.
2.
3. Financial Statements
Goodwill
£m
Allowances and
certificates
£m
Development
assets
£m
Other
intangibles
£m
14. Goodwill and other intangible assets
Cost:
At 31 March 2014
Additions
Acquired through business combination
Transfer to Property Plant and Equipment (note 15)
Disposals/utilised
Transfers to/from Joint Ventures (note 17)
Transfer to held for sale (note 19)
Exchange adjustments
At 31 March 2015
Additions
Acquired through business combination (note 19)
Transfer to Property Plant and Equipment (note 15)
Disposals/utilised
Transfers to held for sale (note 19)
Exchange adjustments
At 31 March 2016
Aggregate amortisation and impairment:
At 31 March 2014
Charge for the year
Exceptional impairment (note 7)
At 31 March 2015
Charge for the year
Exceptional impairment (note 7)
At 31 March 2016
Carrying amount:
At 31 March 2016
At 1 April 2015
At 1 April 2014
726.0
–
80.0
–
–
–
–
(19.0)
787.0
–
–
–
–
–
11.9
798.9
(140.9)
–
(48.1)
(189.0)
–
–
661.2
441.8
–
–
(441.7)
–
–
(0.3)
661.0
580.4
–
–
(514.7)
–
0.9
727.6
(227.5)
–
–
(227.5)
–
–
(189.0)
(227.5)
609.9
598.0
585.1
500.1
433.5
433.7
396.0
75.2
–
(109.6)
(12.1)
(10.7)
(19.5)
(0.6)
318.7
62.3
73.2
(45.5)
(2.1)
(27.9)
1.6
139.0
10.6
–
(15.7)
–
–
–
(0.5)
133.4
70.4
–
(10.5)
–
–
0.5
Total
£m
1,922.2
527.6
80.0
(125.3)
(453.8)
(10.7)
(19.5)
(20.4)
1,900.1
713.1
73.2
(56.0)
(516.8)
(27.9)
14.9
380.3
193.8
2,100.6
(133.8)
–
(47.5)
(181.3)
–
(29.4)
(210.7)
169.6
137.4
262.2
(97.0)
(3.4)
–
(100.4)
(2.3)
(11.2)
(113.9)
79.9
33.0
42.0
(599.2)
(3.4)
(95.6)
(698.2)
(2.3)
(40.6)
(741.1)
1,359.5
1,201.9
1,323.0
145
Financial Statements
Notes on the financial statements continued
for the year ended 31 March 2016
14. Goodwill and other intangible assets continued
The Company does not hold intangible assets.
Intangible assets have been analysed as current and non-current as follows:
Current
Non-current:
Goodwill
Other
2016
£m
500.1
609.9
249.5
1,359.5
2015
£m
433.5
598.0
170.4
1,201.9
(i) Goodwill
At inception, Goodwill arising from business combinations is allocated to cash-generating units (CGUs) for impairment testing purposes. Certain
goodwill valuations have changed in the current year following retranslation. Commentary on the impairment testing of the related CGUs with the
exception of two historic balances totalling £18.5m (see note below) is included at note 16.
A summary of the goodwill allocated to CGUs and the Group’s operating segments is presented below:
Cash-generating unit
Ireland wind farms
GB wind farms
GB Energy Supply
Enterprise (i)
Ireland Supply (ii)
Operating Segment
Energy Portfolio Management and Electricity Generation
Energy Portfolio Management and Electricity Generation
Energy Supply
Enterprise
Energy Supply
2016
£m
124.5
199.9
187.0
90.3
8.2
609.9
2015
£m
112.6
199.9
187.0
90.3
8.2
598.0
(i) Enterprise includes goodwill balances arising from historic acquisitions of Telecoms and Contracting businesses of £10.3m and £80.0m in relation to the acquisition of Energy Solutions Group
(ESG) in the year to 31 March 2015. The amount of goodwill associated with the historic businesses is not significant in context of the aggregate carrying value of the business units or the aggregate
value of goodwill held by the Group. No impairment has been recognised during the year on this balance.
(ii) The value associated with the Ireland supply goodwill represents deferred tax recognised on the difference between the fair value attributed to the Northern Ireland –based Phoenix Energy
business acquired in 2012 and the book value of those assets. No impairment has been recognised during the year on this balance.
(ii) Allowances and Certificates
Allowances and Certificates consist of purchased carbon emissions allowances and generated or purchased renewable obligations certificates (ROCs).
These allowances and certificates will be utilised in settlement of environmental obligations incurred by the Group’s Energy Supply and Generation
businesses.
(iii) Development assets
Development costs relate to the design, construction and testing of thermal and renewable generation sites and devices, including wind farms,
which the Group believes will generate probable future economic benefits. Costs capitalised as development intangibles include options over land
rights, planning application costs, environmental impact studies and other costs incurred in bringing wind farm and other generation and network
development projects to the consented stage. These may be costs incurred directly or at a cost as part of the fair value attribution on acquisition.
Development assets also include the Group’s exploration and evaluation expenditure in relation to North Sea gas production wells.
At the point the development reaches the consent stage and is approved for construction, the carrying value is transferred to Property, Plant and
Equipment (note 15). At the point a project is no longer expected to reach the consented stage, the carrying amount of the project is impaired.
Exceptional impairment charges of £29.4m (2015 – £47.5m) were recognised in the financial year in relation to the impairment of E&P ‘prospect’
developments due to the impact decline in wholesale gas prices on the Gas Production segment (£27.2m) and CCS development asset-related
impairment charges recognised as part of the overall exceptional impairment of Peterhead power station (£2.2m). The exceptional charges of £47.5m
in the previous year were recognised in relation to the impairment of the Abernedd thermal power generation development and other assets. Disposals
with a book value of £2.1m (2015 – £12.1m) were made in the year which contributed a £nil (2015 – £1.5m) gain on sale. Further detail on the Group’s
disposal programme is included at note 19.3.
(iv) Other intangible assets
Included within other intangible assets are brands, customer lists, contracts, application software license fees, software development work, software
upgrades and purchased PC software packages. Amortisation is over the shorter of the contract term or five years with the exception of certain
application software assets, which are amortised over 10 years. Exceptional impairment charges of £11.2m (2015 – nil) were recognised in relation
to software developments in Energy-related Services, a business with an adjusted operating profit of £15.2m.
146 SSE plc Annual Report 2016
1.
2.
3. Financial Statements
Network
assets
£m
8,119.7
82.8
–
Metering assets
and other
equipment
£m
Assets under
construction
£m
633.7
0.3
–
840.1
1,275.5
–
Total
£m
18,417.7
1,369.2
31.2
–
–
120.8
125.3
827.6
99.3
(1,129.9)
–
–
–
–
–
–
(5.2)
728.1
1.0
–
–
1.3
104.9
(4.1)
4.3
835.5
407.3
46.6
16.9
–
–
470.8
60.1
–
(2.1)
5.1
–
–
(44.3)
1,062.2
1,451.4
–
–
42.5
(1,375.8)
(3.0)
39.7
(54.2)
(9.5)
(210.8)
19,668.9
1,535.0
695.8
175.0
56.0
–
(36.6)
125.5
1,217.0
22,219.6
–
–
–
–
–
–
–
64.4
–
–
64.4
7,332.5
656.7
478.8
(7.3)
(95.7)
8,365.0
676.8
652.7
(28.7)
28.8
9,694.6
61.4
8.8
14.9
(7.3)
–
77.8
7.5
–
(3.2)
(0.9)
81.2
3,341.2
297.4
–
–
–
3,638.6
299.1
–
–
–
3,937.7
533.9
192.9
187.2
200.1
5,994.6
5,391.5
4,778.5
301.6
257.3
226.4
1,152.6
12,525.0
1062.2
840.1
11,303.9
11,085.2
15. Property, plant and equipment
Consolidated
Cost
At 31 March 2014
Additions
Increase in decommissioning asset (i)
Transfer from Intangible Assets
(note 14)
Transfer from Assets Under
Construction
Transfer to Assets Held for Sale
(note 19)
Disposals (iii)
Exchange rate adjustments
Power
generation
assets (i)
£m
Gas Storage and
Production
assets (ii)
£m
Land and
buildings
£m
7,593.9
9.0
–
4.5
169.2
(54.2)
–
(161.3)
968.8
1.6
31.2
–
20.8
–
–
–
261.5
–
–
–
13.0
–
(9.5)
–
At 31 March 2015
7,561.1
1,022.4
265.0
9,030.1
Additions
Acquisitions (note 19)
Increase in decommissioning asset (i)
Transfer from Intangible Assets
(note 14)
Transfer from Assets Under
Construction
Disposals (iii)
Exchange rate adjustments
1.4
–
161.0
–
386.8
(24.5)
80.1
–
695.8
14.0
12.2
51.0
–
(0.6)
–
–
–
–
12.1
(5.0)
2.0
81.2
–
–
–
821.0
–
–
At 31 March 2016
8,165.9
1,794.8
274.1
9,932.3
Depreciation
At 31 March 2014
Charge for the year
Impairment charges (notes 7, 16) (v)
Disposals (iii)
Exchange rate adjustments
At 31 March 2015
Charge for the year
Impairment charges (notes 7, 16) (v)
Disposals (iii)
Exchange rate adjustments
At 31 March 2016
Net book value
At 31 March 2016
At 31 March 2015
At 1 April 2014
3,197.4
236.3
222.7
–
(91.5)
3,564.9
234.5
312.5
(23.4)
24.6
4,113.1
4,052.8
3,996.2
4,396.5
325.2
67.6
224.3
–
(4.2)
612.9
75.6
275.8
–
–
964.3
830.5
409.5
643.6
(i) Power generation assets comprise thermal and renewable generating plant, related buildings, plant and machinery and include all hydro power generation and wind farm assets. The net book
value of power generation assets includes decommissioning costs with a net book value of £161.0m (2015 – £16.8m) which includes an increase following a comprehensive review of all portfolio
decommissioning liabilities (see note 28).
(ii) Gas storage and production assets include decommissioning costs with a net book value of £205.3m (2015 – £98.4m) which includes an increase of £100.0m arising from the acquisiton of the
Greater Laggan assets (note 19), and an uplift in the other assets to reflect the fair value of the decommissioning provision of £23.6m.
(iii) Assets disposed includes operating wind farms and property. Details of disposals related to assets held for sale at 31 March 2015 are provided in note 19.3.
(iv) Represents the carrying value of development assets transferred from intangible assets (note 14) which have reached the consent stage and have been approved for construction.
(v)
Impairment charges relate to exceptional impairments of £646.0m and non-exceptional impairments of £6.7m (these relate to gas storage and production assets). (2015 – exceptional impairments
of £478.8m, non-exceptional impairments £nil).
147
Financial Statements
Notes on the financial statements continued
for the year ended 31 March 2016
15. Property, plant and equipment continued
The Company does not hold any property, plant or equipment.
Included within property, plant and equipment are the following assets held under finance leases:
Cost
At 1 April 2014
Additions
At 1 April 2015
Additions
At 31 March 2016
Depreciation
At 31 March 2014
Charge for the year
At 31 March 2015
Charge for the year
Impairment (note 7)
At 31 March 2016
Net book value
At 31 March 2016
At 31 March 2015
At 1 April 2014
Power
Generation
assets
£m
Network
assets
£m
Metering assets
and other
equipment
£m
401.7
–
401.7
–
401.7
85.3
20.1
105.4
20.1
124.3
249.8
151.9
296.3
316.4
5.0
12.6
17.6
–
17.6
5.0
–
5.0
2.5
–
7.5
10.1
12.6
–
7.0
–
7.0
–
7.0
7.0
–
7.0
–
–
7.0
–
–
–
Total
£m
413.7
12.6
426.3
–
426.3
97.3
20.1
117.4
22.6
124.3
264.3
162.0
308.9
316.4
16. Impairment testing
The Group reviews the carrying amounts of its PP&E, goodwill and other intangible assets and its interests in joint ventures and associates annually, or
more frequently if events or changes in circumstances indicate that the recoverable amounts may be lower than their carrying amounts or where other
indicators of impairment are deemed to have arisen. Further detail of the Group’s accounting policies and methodologies for impairment testing are
described at Accompanying Information sections 1.6(i) and 1.7.
16.1 Goodwill impairment reviews – CGUs testing
The recoverable amounts of the GB Energy Supply and Enterprise Energy Services Group CGUs are determined by reference to value-in-use (VIU)
calculations. The VIU calculations use, as a starting point, pre-tax cash flow projections based on the Group’s five year Corporate Model as approved by
the Board. The Group’s Corporate Model is based both on past experience and reflects the Group’s forward view of markets, prices, risks and its strategic
objectives. Commodity prices used are based on observable market data and, where this is not available, on internal estimates.
The recoverable amount of the wind farm CGUs is based on the fair value less costs to sell (FVLCS) methodology. The basis applied has been deemed
appropriate as it is consistent with the way in which the economic values of the CGUs are assessed by management and how they would be by other
market participants. The method applied is to determine fair value by assessing the discounted pre-tax cash flows expected to be earned by the
individual wind farm projects within the respective CGUs. The two identified CGUs (Ireland wind farms and UK wind farms) share many of the same
risk factors and are accordingly discounted using the same discount rates.
16.2 PP&E, other intangibles and investment impairment reviews – asset testing
The recoverable amounts of the Group’s PP&E, other intangible assets and interests in joint ventures and associates are determined by reference to
value-in-use (VIU) calculations with the exception of the Group’s Gas Production assets, which are based on the FVLCS methodology. Both calculations
use, as their starting point, pre-tax cash flow projections based on the Group’s five year Corporate Model as approved by the Board. The Group’s
Corporate Model is based on past experience and reflects the Group’s forward view of markets, prices, risks and its strategic objectives. Commodity
prices used are based on observable market data and, where this is not available, on internal estimates.
148 SSE plc Annual Report 2016
1.
2.
3. Financial Statements
16. Impairment testing continued
16.3 Impairment reviews
The key operating and valuation assumptions, specific considerations and outcome of tests for all impairment reviews are noted in the following table.
Management have determined the pre-tax cash flows of each asset or CGU based on projected performance and its expectations of market changes or
developments. The discount rates used are pre-tax real and reflect specific risks attributable to the relevant operating segments. The discount rates used
have been benchmarked against externally published rates used by comparable quoted companies operating in the respective market sectors. The
discount rates applied in both 2016 and 2015 remain consistent across all CGUs, except where noted, reflecting the group’s view of cost of capital and
risk. The recoverable amounts derived from the VIU or FVLCS calculations are compared to the carrying amount of each asset or CGU to determine
whether an impairment charge requires to be recognised. The reviews carried out for the 2016 accounts were carried out in the fourth quarter of the
year, which is consistent with previous reviews. Note that the actual outcomes may differ from the assumptions included in the assessments at the
balance sheet date.
All assets and CGUs under review are in the Wholesale business with the exception of the impairment review of the goodwill associated with the Energy
Services Group (ESG) which is a business in Enterprise and the goodwill held in relation to the GB Energy Supply business.
Assets/CGUs
Wind farm
goodwill CGUs
(GB and Ireland)
Cash flow period
assumption
Period to end
of life of
portfolio
assets
Operating and other valuation assumptions
Commentary and impairment conclusions
The recoverable amount of both the GB and Ireland
wind farm CGUs continues to exceed the carrying
values of the CGU based on the impairment test.
While cash flow projections are subject to inherent
uncertainty, reasonably possible changes in the key
assumptions applied in assessing the fair values less
cost to sell would not cause a change to the
conclusion reached.
This view is supported by the Group’s recent
experience of disposal of wind assets in both GB
and Ireland.
Wind farm projects have an average estimated useful life
of between 20 and 25 years. The FVLCS valuation is
projected by discounting the pre-tax cash flows expected
to be generated by the specific wind farm assets included
in both CGUs across the remaining useful lives of those
assets. This includes over 40 operating assets in both
Ireland and Great Britain.
Cash inflows for both CGUs are based on the expected
average annual generation GWh output based on
technical assessment and past experience and are valued
based on forward power price. Those prices are based
either on observable market information during that
period, which is deemed to be 3 years, or on internal
estimations beyond the observable market period (Level 3
basis as defined by IFRS 14 Fair Value Measurement). The
projections are also based on assumptions of the UK and
Irish government’s continuing support for existing
qualifying wind assets through ROCs or REFIT. Cash
outflows are based on planned and expected
maintenance profiles and other capital or replacement
costs. The cash flow projections have been discounted
applying a pre-tax discount rates of between 7.5% and
9.5% based on technology and market, which is consistent
with the previous year.
The Ireland and GB wind CGUs include wind farms in
operation and both CGUs include projects in the
construction phase. No values associated with cash flows
from assets in development are included in the goodwill
impairment review.
149
Financial Statements
Notes on the financial statements continued
for the year ended 31 March 2016
16. Impairment testing continued
Assets/CGUs
Cash flow period
assumption
GB Energy Supply 5 years
Operating and other valuation assumptions
Commentary and impairment conclusions
Goodwill is carried in relation to the acquisition of the
SWALEC supply business and is attributed to the Group’s
GB retail electricity and gas supply business CGU.
The recoverable amount of the GB Energy Supply CGU
significantly exceeded the carrying values of goodwill
and other non-current assets at the time of the
impairment test.
The main assumptions in the VIU assessment for the
impairment test are derived from the Group’s 5 year
Corporate Model and is principally based on the net
margins achieved from current and new customers based
on current experience. The derivation of the net margins
applied include assumptions for power and gas prices,
credit losses, acquisition and retention costs, sales and
marketing costs, government schemes such as ECO and
other impacts of competition and regulation. The
projected cash flows derived are discounted by applying a
pre-tax discount rate of 7.3%, which is consistent with the
previous year.
The specific impairment reviews of thermal power
generation plant and other assets at Fiddler’s Ferry,
Keadby, Medway, Peterhead and Marchwood as well as
the residual assets at Ferrybridge have been conducted
applying consistent methodology as with prior years.
The VIU assessment for each plant is based on projected
‘spark’ or ‘dark’ spread margins arising from profiled power
generation or from capacity market contracts and
ancillary services. The cost projections are based on
assumptions on employee costs, operational
maintenance costs, capital expenditure, rates, insurance
and other operational overheads.
Cash flows have been discounted based on a discount
rate of 7.3% which is consistent with previous reviews.
The VIU of the Group’s gas storage facilities at Aldbrough
and Atwick (Hornsea) was assessed based on internal
estimations of demand for the facilities in the 5 year
Corporate Model period. Cash flow projections were
subject to a discount rate of 10.0% which is consistent
with previous years. Estimations for demand growth in the
business beyond the 5 year model period were modest.
Due to lack of seasonal and short term price volatility in
the wholesale gas market and based on continuing low
level of contribution from the segment as whole.
While cash flow projections are subject to inherent
uncertainty, reasonably possible changes in the key
assumptions applied in assessing the value-in-use
would not cause a change to the conclusion reached.
Due to the changes in circumstances explained in
more detail at note 7, material exceptional impairment
charges have been recognised across these assets
including £370.1m of PP&E and £2.2m of intangible
development costs (2015 – £360.3m and £41.4m,
respectively). The prior year charges included the
Group’s Abernedd gas-fired development asset. Details
on residual values are provided at note 7.
Adverse changes to the key assumptions applied may
imply further impairment. For example, withdrawal of
capacity mechanism support for certain plants would
have a significant negative impact.
Exceptional charges of £150.9m (all impairment of
PP&E assets) were recognised in the current year
(2015 – £162.4m).
Due to the significant difficulties encountered by the
business, no reasonably probable changes in the short
to medium term prospects for the assets are
anticipated that would change the conclusion
reached. Details on residual values are provided at
note 7.
Thermal
Generation
Period to end
of life of
specific assets
Gas Storage
Period to end
of life of
specific assets
150 SSE plc Annual Report 2016
1.
2.
3. Financial Statements
16. Impairment testing continued
Assets/CGUs
Gas Production
Cash flow period
assumption
Period to end
of life of
field assets
Enterprise Energy
Solutions
5 years
Operating and other valuation assumptions
Commentary and impairment conclusions
The FVLCS of the Gas Production assets is based on the
projected gas or distillate production profiles up to the
date of the expected cessation of production for SSE’s
interests in the Greater Laggan, Sean, ECA, Lomond and
Bacton fields set against the expected selling price of the
hydrocarbons produced and the impact of tax allowances.
Management believes the expected cash flows derived
from this assessment is the appropriate based for
impairment testing for both goodwill and the underlying
value of field assets. Other variables taken into
consideration in this assessment include the recoverability
of hydrocarbons, production costs and infrastructure cost
and capital expenditure requirements.
The key inputs to the assessment are the long-term price
assumptions, production volumes and the discount rate.
The discount rate applied to the projected cash flows was
derived from a post-tax real discount rate of 8%.
The Group recognised goodwill of £70.0m on acquisition
of the Energy Solutions Group in 2015. The business
designs, installs and optimises building management
technologies which deliver efficient operating
environments for its customers. The VIU of the business
CGU has been based on a 10% post-tax discount rate and
includes growth assumptions of 2% per annum.
The result of the review are combined exceptional
impairment charges of £161.8m (2015 – £106.1m)
which is predominately associated with Greater Laggan
(£121.1m) and driven by the decline in wholesale gas
prices observed in the period. This includes £125.0m
PP&E (related to production assets) and £27.2m
Intangibles (relating to development prospects).
A 10% reduction to gas prices would have the impact
of a further £60.0m impairment charge across the
Group’s asset portfolio. Details on residual values
are provided at note 7.
No impairment has been deemed necessary in relation
to this balance. While cash flow projections are subject
to inherent uncertainty, reasonably possible changes
in the key assumptions applied in assessing the VIU
would not cause a change to the conclusion reached.
17. Investments
17.1 Associates and joint ventures
Share of net assets/cost
At 31 March 2014
Additions
Repayment of shareholder loans
Dividends received
Share of profit/(loss) after tax (i)
Share of other reserves adjustments
Disposal of equity (note 19)
Transfer to/(from) Intangible Assets
(note 14)
Exchange rate adjustments
At 31 March 2015
Additions
Repayment of shareholder loans
Dividends received
Share of profit/(loss) after tax
Share of other reserves adjustments
Disposal of equity (note 19)
Transfer
Exchange Rate adjustments
At 31 March 2016
Equity
Other JCEs and
associates
£m
Equity total
£m
427.5
20.0
–
(35.1)
10.3
–
(2.9)
(8.2)
(4.5)
407.1
9.8
–
(50.9)
29.5
1.3
(1.1)
1.5
5.5
826.7
20.0
–
(110.1)
163.6
(9.4)
(2.9)
(8.2)
(4.5)
875.2
9.8
–
(130.9)
204.8
80.3
(1.1)
1.5
5.5
Loans
Other JCEs and
associates
£m
Loans total
£m
Total
£m
254.7
33.9
(15.0)
–
–
–
–
18.9
–
292.5
50.5
(18.3)
–
–
–
–
–
–
521.6
33.9
(15.0)
–
–
–
–
18.9
–
559.4
50.5
(18.3)
–
–
–
–
–
–
1,348.3
53.9
(15.0)
(110.1)
163.6
(9.4)
(2.9)
10.7
(4.5)
1,434.6
60.3
(18.3)
(130.9)
204.8
80.3
(1.1)
1.5
5.5
SGN
£m
266.9
–
–
–
–
–
–
–
–
266.9
–
–
–
–
–
–
–
–
402.7
1,045.1
266.9
324.7
591.6
1,636.7
SGN
£m
399.2
–
–
(75.0)
153.3
(9.4)
–
–
–
468.1
–
–
(80.0)
175.3
79.0
–
–
–
642.4
(i)
Including exceptional impairment charges of nil (2014 – £25.9) (note 7).
151
Financial Statements
Notes on the financial statements continued
for the year ended 31 March 2016
17. Investments continued
Under IFRS 12 Disclosure of Interests in Other Entities, the Group has evaluated the key joint ventures and associates it holds with the purpose
of disclosing any which are materially significant in order to identify the impact it has on its’ financial position, performance and cash flows, whilst
identifying the nature of the risks associated with these interests. A full listing of the Group’s incorporated joint ventures, joint operations, associates
and investments in included at Accompanying Information.
Company
Share of net assets/cost
At 31 March 2014
Increase in shareholder loans
Repayment of shareholder loans
Transfer of loan to subsidiary
At 31 March 2015
Increase in shareholder loans
Repayment of shareholder loans
Transfer of loans to subsidiary
At 31 March 2016
Equity
Other JCEs and
associates
£m
Equity total
£m
–
–
–
–
–
–
–
–
–
190.0
–
–
–
190.0
–
–
–
190.0
SGN
£m
190.0
–
–
–
190.0
–
–
–
190.0
Loans
Other JCEs and
associates
£m
Loans total
£m
229.4
34.2
(8.8)
22.7
277.5
30.6
(13.4)
(22.7)
272.0
496.3
34.2
(8.8)
22.7
544.4
30.6
(13.4)
(22.7)
538.9
SGN
£m
266.9
–
–
–
266.9
–
–
–
266.9
Total
£m
686.3
34.2
(8.8)
22.7
734.4
30.6
(13.4)
(22.7)
728.9
17.2 Joint operations
Listed are the incorporated joint operations that have a material impact on the financial position and financial results of the Group.
Company
Greater Gabbard Offshore Winds Limited
Offshore Windfarm UK
Ordinary
50
50
31 March
Principal activity
Country of
incorporation
Class of shares held
Proportion of
shares held (%) Group Interest (%)
Year end
The Group’s interest in Greater Gabbard Offshore Winds Limited is that of a joint operation designed to provide output to the parties sharing control. The
liabilities of the arrangement are principally met by the parties through the contracts for the output of the wind farm.
The Group also has an unincorporated arrangement with Statoil under which it controls and accounts for its 66.7% share of the Aldbrough gas
storage facility and in respect of its North Sea Gas Production assets at Greater Laggan, Sean, ECA, Bacton and Lomond, all of which are owned by SSE
E&P UK Limited.
17.3 Principal joint ventures and associates
The Directors have assessed that the investments in the following equity accounted joint ventures and associates are sufficiently material impact to
warrant additional disclosure on an individual basis. Details of on the financial position and financial results of the Group:
Company
Principal activity
Country of
incorporation
Class of
shares held
Proportion of
shares held
(%)
Group
Interest
(%)
Year end
Consolidation
basis
Scotia Gas Networks Limited
Seabank Power Limited
Marchwood Power Limited
Multifuel Energy Limited
Walney (UK) Offshore Windfarms
UK
Gas Distribution
UK
Gas Power Generation
Gas Power Generation
UK
Multi Fuel Power Generation UK
Ordinary
Ordinary
Ordinary
Ordinary
50
50
50
50
31 March
50
50 31 December
50 31 December
31 March
50
Limited
Offshore Windfarm
UK
Ordinary
25.1
25.1
31 December
Equity
Equity
Equity
Equity
Equity
These investments are held by subsidiaries of the Company with the exception of the investment in Scotia Gas Networks Limited, which is held by
the Company.
152 SSE plc Annual Report 2016
1.
2.
3. Financial Statements
17. Investments continued
Summary information for material joint ventures from unaudited financial statements is as follows:
Revenue
Depreciation and amortisation
Other operating costs
Operating profit
Interest expense
Profit before tax
Corporation tax
Profit after tax
Total comprehensive income
SSE share of profit (based on % equity)
Non-current assets
Current assets
Current liabilities
Non-current liabilities
Net assets
SGN
Seabank Power Limited
Marchwood Power Limited
Multifuel Energy Limited
2016
£m
2015
£m
1,099.7
1,318.4
(161.5)
(400.9)
537.3
(215.1)
322.2
31.1
353.3
372.2
176.7
(164.3)
(601.2)
552.9
(212.9)
340.0
(71.0)
269.0
274.6
134.5
6,756.8
396.4
(357.9)
(5,528.3)
5,979.5
1,946.7
(1,859.1)
(5,140.9)
1,267.0
926.2
2016
£m
127.5
(15.8)
(50.2)
61.5
(0.5)
61.0
(10.2)
50.8
50.8
25.4
147.2
88.6
(20.2)
(38.9)
176.7
2015
£m
125.6
(15.5)
(54.6)
55.5
(2.2)
53.3
(12.3)
41.0
41.0
20.5
162.9
53.2
(11.1)
(33.4)
171.6
2016
£m
56.5
(0.1)
(40.1)
16.3
(11.5)
4.8
(2.3)
2.5
2.5
1.3
2015
£m
70.5
–
(22.8)
47.7
(13.4)
34.3
(7.9)
26.4
26.4
13.2
2016
£m
39.8
(10.6)
(10.5)
18.7
(15.7)
3.0
(0.6)
2.4
2.4
1.2
2015
£m
–
–
–
–
–
–
–
–
–
–
306.3
48.0
(45.2)
(199.3)
109.8
314.7
55.7
(35.8)
(204.1)
130.5
294.9
22.4
(11.8)
(303.1)
2.4
292.4
2.5
(24.8)
(266.1)
4.0
Reconciliation of the above amounts to the investment recognised in the Consolidated Statement of Financial Position.
Group equity interest
Net assets
Group’s share of ownership interest
Other adjustments
Carrying value of group’s equity interest
50%
1,267.0
633.5
8.9
642.4
50%
926.2
463.1
5.0
468.1
50%
176.7
88.4
–
88.4
50%
171.6
85.8
(4.9)
80.9
50%
109.8
54.9
–
54.9
50%
130.5
65.2
3.1
68.3
50%
2.4
1.2
–
1.2
50%
4.0
2.0
0.4
2.4
Summary information for material associate from unaudited financial statements is as follows:
Revenue
Profit after tax
Total comprehensive income
Non-current assets
Current assets
Current liabilities
Net assets
Group Interest
Net assets
Group’s ownership interest
Other adjustments
Carrying value of Group’s interest
Walney (UK) Offshore Winds Limited
2016
£m
124.3
19.5
19.5
882.9
19.9
(78.1)
824.7
25.1%
824.7
207.0
–
207.0
2015
£m
120.3
18.2
18.2
1,017.1
40.2
(80.4)
976.9
25.1%
976.9
245.2
9.0
254.2
In total details of equity relating to £993.9m (2015 – £869.5m) held in material joint ventures and associates was disclosed in relation to the group which
equates to 95% (2015: 99%) of all equity held. Equity in non material joint ventures not disclosed amounted to £51.2m (2015 – £5.7m).
In addition, at 31 March 2016, the Group was owed the following loans from its principal joint ventures: Scotia Gas Networks Limited £266.9m (2015
– £266.9m), Multifuel Energy Limited £151.9m (2015 – £119.8m), Marchwood Power Limited £100.0m (2015 – £107.2m) and Seabank Power Limited
£0.9m (2015 – £6.4m). This represents 88% (2015 – 89%) of the loans provided to equity-accounted joint ventures and associates.
153
Financial Statements
Notes on the financial statements continued
for the year ended 31 March 2016
17. Investments continued
17.4 Other investments
Consolidated
At 31 March 2014
Additions in the year
Disposals in the year (i)
Revaluation through other comprehensive income/(loss)
At 31 March 2015
Additions in the year
Disposals in the year (ii)
Revaluation through other comprehensive income/(loss)
At 31 March 2016
Faroe
Petroleum
£m
18.0
–
(2.8)
–
15.2
–
–
(8.4)
6.8
Other
£m
24.3
0.1
(10.0)
(3.2)
11.2
0.2
(1.5)
–
9.9
Total
£m
42.3
0.1
(12.8)
(3.2)
26.4
0.2
(1.3)
(8.4)
16.7
(i) There were no disposals in the current year. Greencoat Capital and shares in Faroe Petroleum were disposed on in the previous year for a combined cash consideration of £12.7m. (Further detail on
the Group’s disposal programme is included at note 19).
In the current year the investment in Sigma was reclassified from other investments to associates £1.5m.
(ii)
Company
At 31 March 2014
Disposals
At 31 March 2015
Revaluation through other comprehensive income/(loss)
At 31 March 2016
18. Subsidiary undertakings
Details of the Group’s subsidiary undertakings are disclosed in the Accompanying Information section (A2) on page 203.
Investment in subsidiaries
Company
At 31 March 2015
Increase in existing investments (i)
Exceptional impairment (ii)
At 31 March 2016
Faroe
Petroleum
£m
18.0
(2.8)
15.2
(8.4)
6.8
Total
£m
2,051.2
727.5
(49.9)
2,728.8
(i) The increase in existing investments held by the Company relates to a capital infusion into SSE Energy Supply Limited ahead of the transfer of assets and business to the newly incorporated SSE
EPM Limited company, the capitialisation of loan stocks held by the Company in Scottish and Southern Energy Power Distribution Limited and the equity shares in the Company awarded to the
employees of the subsidiaries of the Group under the Group’s share schemes, which are recognised as an increase in the cost of investment in those subsidiaries as directed by IFRIC 11 (2016 –
£13.5m, 2015 – £15.0m).
(ii) Following impairments of gas storage and gas production assets recognised by the Group (note 7), the Company recognised an exceptional impairment in relation to its investments in the
companies in which these assets are held.
Service concession arrangements
Details of the Group’s service concession arrangements are disclosed in the Accompanying Information note (A2) on page 203.
154 SSE plc Annual Report 2016
1.
2.
3. Financial Statements
19. Acquisitions, disposals and held-for-sale assets
19.1 Acquisitions
On 28 October 2015, the Group through its wholly owned subsidiary, SSE E&P UK Limited, acquired a 20% interest in the four gas fields and surrounding
exploration acreage approximately 125km north west of the Shetland Islands, collectively known as the Greater Laggan Area, along with a 20% interest in
the Shetland Gas Terminal, from Total E&P UK Limited. The cash consideration paid for the business of £669.0m included the Group’s share of post
1 January 2015 capital expenditure on the Shetland Gas Terminal along with other completion adjustments. Those items were the differences from the
consideration of £565.0m which was announced on 29 July 2015.
Assets acquired
Property, plant and equipment
Intangible development assets
Decommissioning provisions
Net assets
Total
£m
695.8
73.2
(100.0)
669.0
Production commenced from the Laggan-Tormore project on the UK Atlantic Frontier on 7 February 2016. In the financial year, 21m therms of gas were
extracted, 38.1k barrels of oil and 1.8k tonnes of natural gas liquids contributing £7.0m to revenue with a loss after tax of £1.8m during the period to
31 March 2016.
19.2 Held-for-sale assets and liabilities
During the year, the Group substantially completed the programme of non-core asset and business disposals that it had announced on 26 March 2014
along with a number of other separately identified assets. As the programme comes to an end, some assets and liabilities remain classified as held-for-
sale on the balance sheet at 31 March 2016. The aggregated pre-tax profit contribution of the held for sale assets and businesses in the year to 31 March
2016 was £nil (2015: £1.8m).
The assets and liabilities classified as held-for-sale, and the comparative balances at 31 March 2016, are as follows:
Property plant and equipment
Forestry assets
Other intangible
Non-current assets
Inventories
Trade and other receivables
Non trade debtors
Current assets
Total assets
Trade and other payables
Provisions
Current liabilities
Loans and borrowings
Deferred tax liabilities
Non-current liabilities
Total liabilities
Net assets
Retail
£m
–
–
27.9
27.9
–
–
–
–
27.9
–
–
–
–
–
–
–
Enterprise
£m
–
–
–
–
–
106.3
–
106.3
106.3
(11.2)
(5.9)
(17.1)
(97.9)
–
(97.9)
Total
2016
£m
–
–
27.9
27.9
–
106.3
–
106.3
134.2
(11.2)
(5.9)
(17.1)
(97.9)
–
(97.9)
(115.0)
(115.0)
2015
£m
54.2
1.8
21.3
77.3
–
33.0
–
33.0
110.3
(10.8)
–
(10.8)
–
(0.3)
(0.3)
(11.1)
27.9
(8.7)
(19.2)
99.2
155
Financial Statements
Notes on the financial statements continued
for the year ended 31 March 2016
19. Acquisitions, disposals and held-for-sale assets continued
19.3 Disposals
i) Significant disposals
On 29 October 2015, the Group agreed to sell its shareholding in Galloper Wind Farm Limited to its co-venturer RWE Innogy for cash consideration
of £18.3m. The rationale for the disposal was explained in the Group’s statement on offshore wind investment on 26 March 2014.
The gain on the disposal of £18.3m was recorded as an exceptional item (note 7).
On 28 May 2015, the Group also agreed to sell three onshore wind development sites (Cour, Blackcraig, Whiteside Hill, 98MW) to Blue Energy. Total
consideration of these assets was £52.4m. Consequently, an exceptional gain on disposal of £39.3m was recorded (note 7).
Both disposals were of businesses classified as Held-for-sale at 31 March 2015.
On 18 March 2016, the Group sold a 49.9% stake in its wholly owned operational 349.6MW Clyde Wind Farm located in South Lanarkshire to Greencoat
UK Wind Plc (“UKW”) and GMPF & LPFA Infrastructure LLP (“GLIL”) for a cash consideration of £399.2 million after costs. The stake held by the co-investors
has been deemed to be that of a non-controlling interest in an entity under the Group’s control. This key accounting judgement is explained at note 4.2.
The consequence of this is that the gain recorded on disposal of £138.6m was recognised directly in equity instead of in the income statement and the
non-recourse to SSE loans in the entity require to be recorded on the Group balance sheet.
The assets included in the Clyde Windfarm (Scotland) Limited transaction were not previously held-for-sale.
156 SSE plc Annual Report 2016
1.
2.
3. Financial Statements
19. Acquisitions, disposals and held-for-sale assets continued
ii) Disposals
The following table summarises all businesses and assets disposed of during the financial year, including those not previously ‘held for sale’ and
including other assets and investments disposed of as part of the normal course of business and which are noted in the relevant respective notes to the
financial statements.
Net assets disposed:
Property, plant and equipment
Intangible and biological assets
Investments – joint venture and other
Trade and other receivables
Trade and other payables
Loans and borrowings
Net assets
Proceeds of disposal:
Consideration including debt reduction
Deferred consideration
Debt reduction
Non-recourse loan
Costs of disposal
Provisions
Net proceeds (i)
2016
Held for sale at
March 2015
£m
Not held for sale
at March 2015
£m
37.5
11.7
–
1.4
52.3
(23.5)
79.4
160.5
–
(23.5)
–
–
–
137.0
6.8
–
–
–
–
–
6.8
381.7
–
–
(200.7)
(5.6)
–
175.4
2015
Held for sale at
March 2014
£m
Not held for sale at
March 2014
£m
72.2
2.5
0.3
348.7
(94.3)
(230.2)
99.2
399.6
1.1
(228.8)
–
(3.6)
(12.5)
155.8
2.2
12.1
15.7
1.7
–
–
31.7
67.9
11.0
–
–
(1.3)
11.0
88.6
Total
£m
44.3
11.7
–
1.4
52.3
(23.5)
86.2
542.2
–
(23.5)
(200.7)
(5.6)
–
312.4
Total
£m
74.4
14.6
16.0
350.4
(94.3)
(230.2)
130.9
467.5
12.1
(228.8)
–
(4.9)
(1.5)
244.4
Gain on disposal after provisions
57.6
168.6
226.2
56.6
56.9
113.5
Presentation:
Equity
Income statement credit
Net proceeds of disposal (i)
Deferred consideration
Provisions
Proceeds of disposal per cash flow statement
Cash from Clyde transaction recorded as New Borrowings
Total cash proceeds
–
57.6
138.6
30.0
138.6
87.6
2016
£m
312.4
–
–
312.4
200.7
513.1
–
56.6
–
56.9
–
113.5
2015
£m
244.4
(12.1)
1.5
233.8
–
233.8
The debt reduction items, £23.5m (2015 – £228.8m), are associated with the disposal of the street-lighting PFI companies.
19.4 Acquisitions and disposals in the previous year
(i) Acquisitions in the previous year
On 31 July 2014, the Group through it’s wholly owned subsidiary, SSE Contracting Group Limited, acquired 100% of the share capital of the Energy
Solutions Group Limited (‘ESG’). The consideration for the business was £71.9m and resulted in the recognition of goodwill including related deferred
tax of £80m.
(ii) Disposals in the previous year
On 11 November 2014, the Group completed the disposal of seven street lighting Private Finance Initiative (‘PFI’) vehicles to Equitix Infrastructure 3 Limited
(“Equitix”) for cash consideration of £95.2m, which reduced the Group’s debt by £324.0m (being cash of £95.2m and debt reduction of £228.8m). The
Group recorded a gross gain on disposal of £50.5m in relation to this transaction before recognition of associated contractual provisions of £12.5m.
On 26 November 2014, CBPE Capital acquired the shareholdings of Anesco Limited including 100% from the Environmental Energy Fund in which the
Group holds a 49% stake. Accordingly, on completion a payment of £22.2m cash dividend in relation to the Group’s share of the investment by the fund
was received, the Group recognised a gain on disposal of £19.6m.
During the year, the group disposed of a number of other businesses for the combined cash consideration of £116.4m, and deferred consideration
of £12.1m recognising a gain on disposal of £40.6m
157
Financial Statements
Notes on the financial statements continued
for the year ended 31 March 2016
20. Inventories
Fuel and consumables
Work in progress
Goods for resale
Less: provisions held
Consolidated
2016
£m
216.1
27.6
1.6
(29.9)
215.4
2015
£m
338.0
36.9
2.2
(34.8)
342.3
The Group has recognised £325.7m within cost of sales in the year (2015 – £502.7m) and has also recognised £84.0m (2015 – £59.2m) relating to
stock write-downs and increases in provisions held, £91.6m of these costs have been recognised as exceptional items. The Company does not hold
any inventories.
21. Trade and other receivables
Current assets
Retail trade receivables
Wholesale trade receivables
Other trade receivables
Trade receivables
Amounts owed by subsidiary undertakings
Other receivables
Cash held as collateral and other short-term loans
Prepayments and accrued income:
Unbilled energy income
Other prepayments and accrued income
Non-current assets
Amounts owed by subsidiary undertakings
Consolidated
2016
£m
2015
£m
Company
2016
£m
2015
£m
–
–
–
–
3,944.2
–
–
–
–
589.5
1,304.2
73.1
1,966.8
–
240.1
121.8
901.1
44.5
3,274.3
765.0
2,127.7
84.8
2,977.5
–
184.0
71.7
1,127.4
166.4
4,527.0
–
–
–
–
4,828.9
–
–
–
–
4,828.9
3,944.2
–
–
3,274.3
4,527.0
4,958.9
9,787.8
4,505.9
8,450.1
Prepayments and accrued income includes ‘unbilled’ energy income which represents an estimate of the value of electricity or gas supplied to
customers between the date of the last meter reading and the year end. The Group also applies a percentage reduction to consumption estimates to
take account of inaccuracies in the industry settlement process which have historically allocated more volume to the Group than has been recovered
through subsequent billings. A 1% change in this percentage adjustment would increase or decrease the accrued income recognised by £16.0m in the
current year (2015 – £17.1m).
Other receivables includes financial assets totalling £23.7m (2015 – £25.2m). Cash held as collateral and other short term loans relates to amounts
deposited on commodity trading exchanges of £78.3m (2015 – £71.7m) and other short term loans of £43.5m (2015 – £nil).
Trade receivables and other financial assets are part of the Group’s financial exposure to credit risk as explained in note 34.
158 SSE plc Annual Report 2016
1.
2.
3. Financial Statements
22. Cash and cash equivalents
Bank balances
Call deposits
Cash and cash equivalents
Consolidated
Company
2016
£m
360.2
–
360.2
2015
£m
1,507.3
5.0
1,512.3
2016
£m
155.9
–
155.9
2015
£m
1,321.1
–
1,321.1
Cash and cash equivalents (which are presented as a single class of assets in the face of the balance sheet) comprise cash at bank and short term highly
liquid investments with a maturity of six months or less.
Cash and cash equivalents (from above)
Bank overdraft (note 26)
Cash and cash equivalents in the statement of cash flows
23. Trade and other payables
Current liabilities
Amounts due to subsidiary undertakings
Trade payables
Other creditors
Accruals and deferred income (i)
Non-current liabilities
Accruals and deferred income (ii)
Consolidated
Company
2016
£m
360.2
–
360.2
2015
£m
1,512.3
(0.2)
1,512.1
2016
£m
155.9
–
155.9
2015
£m
1,321.1
–
1,321.1
Consolidated
2016
£m
2015
£m
Company
2016
£m
2015
£m
–
1,868.3
1,001.0
1,315.1
4,184.4
452.4
4,636.8
–
2,707.7
1,239.6
1,329.8
5,277.1
424.6
5,701.7
3,385.8
–
–
–
3,385.8
2,715.0
–
–
–
2,715.0
–
–
3,385.8
2,715.0
(i) Current accruals and deferred income includes customer contributions of £16.3m (2015 – £16.1m) and government grants of £0.9m (2015 – £1.3m).
(ii) Non-current accruals and deferred income includes customer contributions of £175.1m (2015 – £177.5m) and government grants of £3.1m (2015 – £2.9m).
24. Current tax liabilities
Corporation tax
Consolidated
Company
2016
£m
298.2
2015
£m
308.4
2016
£m
21.9
2015
£m
44.2
159
Financial Statements
Notes on the financial statements continued
for the year ended 31 March 2016
25. Construction contracts
Contracts in progress at balance sheet date:
Amounts due from contract customers included in trade and other receivables (note 21)
Amounts due to contract customers included in trade and other payables (note 23)
Contract costs incurred plus recognised profits less recognised losses to date
Less: Progress billings
2016
£m
42.4
(18.9)
165.1
(161.7)
3.4
2015
£m
31.0
(25.1)
171.9
(164.4)
7.5
In the year to 31 March 2016, contract revenue of £353.9m (2015 – £486.9m) was recognised.
At 31 March 2016, retentions held by customers for contract work amounted to £1.3m (2015 – £0.9m). Advances received from customers for contract
work amounted to £2.1m (2015 – £1.9m).
The Company does not hold any construction contracts.
26. Loans and other borrowings
Current
Bank overdraft
Other short-term loans
Obligations under finance leases
Non current
Loans
Obligations under finance leases
Total loans and borrowings
Cash and cash equivalents (note 22)
Unadjusted Net Debt
Add/(less):
Hybrid capital (note 31)
Obligations under finance leases
Cash held as collateral and other short term loans (note 21)
Balances due to partners in Clyde Windfarm (Scotland) Limited (note 4.2(iv))
Adjusted Net Debt and Hybrid Capital
Consolidated
2016
£m
–
898.8
898.8
24.5
923.3
2016
£m
5,969.2
276.3
6,245.5
7,168.8
(360.2)
6,808.6
2,209.7
(300.8)
(121.8)
(200.7)
8,395.0
2015
£m
0.2
712.4
712.6
20.2
732.8
2015
£m
5,068.4
299.5
5,367.9
6,100.7
(1,512.3)
4,588.4
3,371.1
(319.7)
(71.7)
–
7,568.1
Company
2016
£m
–
898.8
898.8
–
898.8
2016
£m
4,494.4
–
4,494.4
5,393.2
(155.9)
5,237.3
2,209.7
–
–
–
7,447.0
2015
£m
–
700.0
700.0
–
700.0
2015
£m
3,719.0
–
3,719.0
4,419.0
(1,321.1)
3,097.9
3,371.1
–
–
–
6,469.0
26.1 Borrowing facilities
The Group has an established €1.5bn Euro commercial paper programme (paper can be issued in a range of currencies and swapped into sterling) and
as at 31 March 2016 £198.8m commercial paper was outstanding (2015 – nil). During the year the Group extended its existing £1.5bn of facilities on
reduced pricing with the facilities now maturing in August 2020 (£1.3bn) and November 2020 (£0.2bn). These facilities continue to provide back up to
the commercial paper programme and at 31 March 2016 they were undrawn. The Group has a further £300m facility available with the European
Investment Bank which will be fully drawn in May 2016 when it will become a 10 year term loan.
160 SSE plc Annual Report 2016
2016
Carrying
amount
£m
–
198.8
700.0
898.8
632.6
498.6
12.7
66.9
471.3
1.
2.
3. Financial Statements
26. Loans and other borrowings continued
Analysis of borrowings
Loans and borrowings
Consolidated
Company
2016
Weighted
average
interest rate
(V)
2016
Face value
£m
2016
Fair value
£m
2016
Carrying
amount
£m
2016
Weighted
average
interest
rate (v)
2016
Face value
£m
2016
Fair value
£m
Current
Bank Overdrafts (i)
Commercial paper and cash advances
Bank Loans – non amortising
Total current
Non-Current
Bank loans – non amortising (iii)
5.00% Eurobond repayable 1 October 2018
US Private Placement 16 April 2017
US Private Placement 16 April 2019
2.00% 600m Eurobond repayable 17 June 2020
Between two and five years
Bank loans – non-amortising (iii)
Non-recourse funding (ii)
US Private Placement 16 April 2022
US Private Placement 16 April 2024
8.375% Eurobond repayable on 20 November 2028
5.50% Eurobond repayable on 19 June 2032
4.625% Eurobond repayable on 20 February 2037
6.25% Eurobond repayable on 27 August 2038
4.454% Index linked loan repayable on 27 February 2044
1.429% Index linked bond repayable on 20 October 2056
4.25% Eurobond repayable 14 September 2021
2.375% €500m Eurobond repayable 10 February 2022
5.875% Eurobond repayable 22 September 2022
1.75% €700m Eurobond repayable 8 September 2023
–
0.9%
1.0%
2.1%
5.0%
3.2%
3.7%
2.0%
2.2%
5.8%
4.3%
4.4%
8.4%
5.5%
4.6%
6.3%
4.5%
1.9%
4.3%
2.4%
5.9%
1.8%
–
198.8
700.0
898.8
632.6
500.0
12.8
67.0
474.4
–
199.0
701.6
900.6
683.4
542.2
14.2
75.7
498.8
–
198.8
700.0
898.8
632.6
498.6
12.7
66.9
471.3
0.9%
1.0%
2.1%
5.0%
3.2%
3.7%
2.0%
–
198.8
700.0
898.8
632.6
500.0
12.8
67.0
474.4
–
199.0
701.6
900.6
683.4
542.2
14.2
75.7
498.8
1,686.8
1,814.3
1,682.1
1,686.8
1,814.3
1,682.1
350.0
200.7
162.7
204.1
500.0
350.0
325.0
350.0
121.3
130.4
300.0
415.0
300.0
514.6
364.5
200.7
187.8
235.8
752.2
441.2
372.9
465.1
201.5
181.0
331.7
446.9
361.3
533.0
350.0
200.7
162.3
203.6
494.7
350.2
323.8
346.4
119.7
130.4
297.9
414.4
298.2
513.0
–
–
4.3%
4.4%
8.4%
–
–
6.3%
–
–
4.3%
2.4%
5.9%
1.8%
–
–
162.7
204.1
500.0
–
–
350.0
–
–
300.0
415.0
300.0
514.6
–
–
187.8
235.8
752.2
–
–
465.1
–
–
331.7
446.9
361.3
533.0
–
–
162.3
203.6
494.7
–
–
346.4
–
–
297.9
414.4
298.2
513.0
Over five years
4,223.8
5,075.6
4,205.3
2,746.4
3,313.8
2,730.5
Fair value adjustment (iv) (note 34)
–
–
81.8
–
–
81.8
Total non-Current
Total
5,910.6
6,889.9
5,969.2
4,433.2
5,128.1
4,494.4
6,809.4
7,790.5
6,868.0
5,332.1
6,028.7
5,393.2
161
Financial Statements
Notes on the financial statements continued
for the year ended 31 March 2016
26. Loans and other borrowings continued
Loans and Borrowings
Current
Bank Overdrafts (i)
Bank Loans – non amortising
Non-recourse funding (ii)
Total current
Non-Current
Bank loans – non amortising (iii)
5.00% Eurobond repayable 1 October 2018
Non – recourse funding
US Private Placement 16 April 2017
US Private Placement 16 April 2019
Between two and five years
Bank loans – non-amortising (iii)
Non-recourse funding (ii)
US Private Placement 16 April 2022
US Private Placement 16 April 2024
8.375% Eurobond repayable on 20 November 2028
5.50% Eurobond repayable on 19 June 2032
4.625% Eurobond repayable on 20 February 2037
6.25% Eurobond repayable on 27 August 2038
4.454% Index linked loan repayable on 27 February 2044
1.429% Index linked bond repayable on 20 October 2056
2.00% €600m Eurobond repayable 17 June 2020
4.25% Eurobond repayable 14 September 2021
2.375% €500m Eurobond Repayable 10 February 2022
5.875% Eurobond Repayable 22 September 2022
2015
Weighted
average
interest
rate (v)
0.50%
1.00%
5.85%
3.52%
5.00%
6.03%
3.17%
3.66%
1.95%
5.83%
4.31%
4.44%
8.38%
5.50%
4.63%
6.25%
4.45%
1.84%
2.00%
4.25%
2.38%
5.88%
Consolidated
Company
2015
Face value
£m
2015
Fair value
£m
2015
Carrying
amount
£m
2015
Weighted
average
interest
rate (v)
2015
Face value
£m
2015
Fair value
£m
2015
Carrying
amount
£m
0.2
700.0
12.4
712.6
126.6
500.0
48.9
12.8
67.0
755.3
700.0
78.7
162.7
204.1
500.0
350.0
325.0
350.0
119.0
129.0
433.8
300.0
415.0
300.0
0.2
701.7
12.4
714.3
177.1
558.6
48.9
13.9
73.9
872.4
719.2
78.7
182.2
229.7
790.2
459.7
389.3
500.8
197.9
170.9
460.0
334.9
457.2
370.3
0.2
700.0
12.4
712.6
126.6
498.1
48.9
12.7
66.8
753.1
700.0
78.7
162.2
203.5
494.3
350.2
323.9
346.2
118.6
129.1
429.8
297.4
414.4
297.9
1.00%
700.0
701.7
700.0
700.0
701.7
700.0
3.52%
5.00%
–
3.17%
3.66%
1.82%
–
4.31%
4.44%
8.38%
–
–
6.25%
–
–
2.00%
4.25%
2.38%
5.88%
126.6
500.0
–
12.8
67.0
706.4
400.0
–
162.7
204.1
500.0
–
–
350.0
–
–
433.8
300.0
415.0
300.0
177.1
558.6
–
13.9
73.9
823.5
409.7
–
182.2
229.7
790.2
–
–
500.8
–
–
460.0
334.9
457.2
370.3
126.6
498.1
–
12.7
66.8
704.2
400.0
–
162.2
203.5
494.3
–
–
346.2
–
–
429.8
297.4
414.4
297.9
Over five years
4,367.3
5,341.0
4,346.2
3,065.6
3,735.0
3,045.7
Fair value adjustment (iv) (note 34)
–
–
(30.9)
–
–
(30.9)
Total non-Current
Total
5,122.6
6,213.4
5,068.4
3,772.0
4,558.5
3,719.0
5,835.2
6,927.7
5,781.0
4,472.0
5,260.2
4,419.0
(i) Bank overdrafts are repayable on demand.
(II) Non-recourse funding in relation to Clyde Windfarm (Scotland) Limited of £200.7m has been recognised following the Group’s part-disposal of its equity investment in that Company as explained
at note 19.3. As explained in note 4.2(iv), the Group has subsequently waived its rights that gave rise to the treatment of its investment that as that in a controlled entity. Accordingly, this item has
been excluded from the Group’s Adjusted Net Debt and Hybrid Capital measure. In addition to this balance, the Group has non-recourse borrowings in the Tay Valley Lighting companies that
formed under 50:50 partnership with Royal Bank Leasing Limited to provide street-lighting services and which the Group is deemed to control. As the Group is in the process of arranging disposal
of its interest in these special purpose entities, those balances are shown as current liabilities held for sale.
(III) Balances include commercial paper, term loans and EIB debt and is a mixture of fixed and floating rate debt.
(IV) The fair value adjustment relates to the change in the carrying amount of the borrowings as a result of fair value hedges that are in place. The movement in the fair value adjustment is recognised in
the income statement with a corresponding movement on the hedging instrument also being recognised in the income statement.
(V) The weighted average interest rates for the Group (including the effect of interest rate swaps) for the year ended 31 March 2016 was 3.73% (2015 – 4.21%).
162 SSE plc Annual Report 2016
26. Loans and other borrowings continued
(i) Finance lease liabilities
Future finance lease commitments are as follows:
Amounts payable:
Within one year
Between one and five years
After five years
Less: future finance charge
Present value of lease obligations
1.
2.
3. Financial Statements
Minimum
lease payments
Present Value of minimum
lease payments
2016
£m
53.9
215.2
225.8
494.9
(194.1)
300.8
2015
£m
52.9
217.3
278.1
548.3
(228.6)
319.7
2016
£m
24.5
110.9
165.4
300.8
2015
£m
19.9
104.0
195.8
319.7
The Group has a power purchase agreement with a related party, Marchwood Power Limited, which is categorised as a finance lease. The lease is for use
of Marchwood Power’s main asset, an 840MW Gas powered CCGT Electricity Generating Plant. The term of the lease is 15 years with the Group having
the option for a further 5 years extension at the end of this period. £19.0m (2015 – £21.8m) of contingent rents paid under the lease were included within
cost of sales for the period. Contingent rent consists of £/MWh charges for availability of the plant for energy production and a £/MWh charge for actual
‘nominated’ energy produced.
Of the remaining finance leases held by the group, the average remaining term of the telecom leases is 6 years. No arrangements have been entered
into for contingent rental payments for these leases.
The fair value of the Group’s lease obligations approximates their carrying amount. The Group’s obligations under finance leases are secured by the
lessors’ rights over the leased assets. The Company does not have any obligations under finance leases.
27. Deferred taxation
The following are the deferred tax liabilities and assets recognised by the Group and movements thereon during the current and prior reporting periods:
Consolidated
At 31 March 2014
Acquisitions
(Credit)/charge to Income Statement
(Credit)/charge to equity
At 31 March 2015
Charge/(credit) to Income Statement
Charge/(credit) to equity
At 31 March 2016
Company
At 31 March 2014
(Credit)/charge to Income Statement
(Credit)/charge to equity
At 31 March 2015
Charge/(credit) to Income Statement
Charge/(credit) to equity
At 31 March 2016
(i)
Includes deferred tax on fair value items recognised in business combinations.
Accelerated
capital
allowances
£m
Fair value gains/
(losses) on
derivatives
£m
Retirement
benefit
obligations
£m
689.3
–
(71.2)
–
618.1
201.4
–
819.5
(117.5)
–
(22.4)
(8.8)
(148.7)
4.0
15.1
(129.6)
(127.5)
–
11.0
(16.3)
(132.8)
2.9
58.9
(71.0)
Fair value gains/
(losses) on
derivatives
£m
Retirement benefit
obligations
£m
Share based
payments
£m
(37.3)
(8.1)
(1.8)
(47.2)
5.1
5.0
(37.1)
(36.5)
3.6
6.8
(26.1)
(0.4)
28.3
1.8
0.8
–
–
0.8
–
–
0.8
Other (i)
£m
105.9
13.4
(23.1)
13.0
109.2
(315.3)
(7.3)
(213.4)
Other
£m
(27.5)
12.1
–
(15.4)
(6.5)
–
(21.9)
Total
£m
550.2
13.4
(105.7)
(12.1)
445.8
(107.0)
66.7
405.5
Total
£m
(100.5)
7.6
5.0
(87.9)
(1.8)
33.3
(56.4)
163
Financial Statements
Notes on the financial statements continued
for the year ended 31 March 2016
27. Deferred taxation continued
Certain deferred tax assets and liabilities have been offset, including the asset balances analysed in the tables above. The following is an analysis of the
deferred tax balances (after offset) for financial reporting purposes:
Deferred tax liabilities
Deferred tax assets
Net deferred tax liabilities/(assets)
Consolidated
Company
2016
£m
917.5
(512.0)
405.5
2015
£m
716.0
(270.2)
445.8
2016
£m
–
(56.4)
(56.4)
2015
£m
–
(87.9)
(87.9)
The deferred tax assets disclosed include the deferred tax relating to the Group’s pension scheme liabilities.
Temporary differences arising in connection with interests in associates and joint ventures are recorded as part of the Group’s share of investment in
those entities. The aggregate amount of these is a charge, excluding exceptional items and re-measurement, of £405.0m (2015 – £12.4m charge).
A deferred tax asset has not been recognised on £21.1m of trading losses (2015 – £22.7m) due to uncertainty around the availability of future profits in
the companies concerned.
28. Provisions
Consolidated
At 1 April 2015
Charged in the year
Increase in decommissioning provision (i)
Acquired
Unwind of discount
Released during the year
Disposed during the year
Utilised during the year
At 31 March 2016
At 31 March 2016
Non-current
Current
At 31 March 2015
Non-current
Current
Decommissioning (i)
£m
Contracting
Provisions (ii)
£m
Restructuring (iii)
£m
Other (iv)
£m
317.9
–
206.5
100.0
15.7
–
–
(2.9)
637.2
637.2
–
637.2
317.9
–
317.9
45.8
5.5
–
–
–
(4.4)
–
(22.4)
24.5
17.1
7.4
24.5
21.3
24.5
45.8
19.5
23.4
–
–
–
–
–
(7.0)
35.9
–
35.9
35.9
–
19.5
19.5
98.7
38.3
–
–
–
(3.4)
(0.8)
(33.1)
99.7
49.0
50.7
99.7
43.2
55.5
98.7
Total
£m
481.9
67.2
206.5
100.0
15.7
(7.8)
(0.8)
(65.4)
797.3
703.3
94.0
797.3
382.4
99.5
481.9
(i) Provision has been made for the estimated net present cost of decommissioning the Group’s Gas Production assets, Thermal and Renewable power generation as sets and Gas Storage facilities.
Estimates are based on forecasted clean-up costs at the time of decommissioning discounted for the time value of money of costs. During the year the group acquired a 20% stake in four gas fields
(known collectively as Greater Laggan). An increase of £206.5m was recognised in the year following a comprehensive review of the estimated timing and quantum of costs associated with the
Group’s portfolio in context of the continuing uncertainty over the viability and economic life of certain assets. Of this increase, £31.5m relating to the Group’s Ferrybridge and Fiddler’s Ferry assets
as recognised as an exceptional charge in the year (note 7).
(ii) The Group holds provisions in relation to certain long-term construction contracts. This includes the Group’s retained sub-contracts with the various street-lighting PFI companies subject to
disposal during the current and prior year. Following the disposal programme, the Group has utilised a significant amount of these provisions in the year to 31 March 2016.
(iii) Restructuring provisions includes exceptional charges related to the closure of Ferrybridge and the Group’s retail shops (note 7).
(iv) Other provisions relate to costs associated with licence condition breaches, insurance claims, contractual disputes and the employer financed retirement benefit provision for certain directors and
former directors and employees, which is valued in accordance with IAS 19. The Company does not hold provisions.
164 SSE plc Annual Report 2016
29. Share capital
Allotted, called up and fully paid:
At 1 April 2015
Issue of shares (i)
At 31 March 2016
1.
2.
3. Financial Statements
Number
(millions)
993.0
14.6
1,007.6
£m
496.5
7.3
503.8
The Company has one class of ordinary share which carries no right to fixed income. The holders of ordinary shares are entitled to receive dividends as
declared and are entitled to one vote per share at meetings of the Company.
(i) Shareholders were able to elect to receive ordinary shares in place of the final dividend of 61.8p per ordinary share (in relation to year ended 31 March 2015) and the interim dividend of 26.9p
(in relation to the current year) under the terms of the Company’s scrip dividend scheme. This resulted in the issue of 10,600,639 and 1,172,973 new fully paid ordinary shares respectively
(2015: 11,775,169 and 5,348,770). In addition, the Company issued 2.8m (2015 – 1.0m) shares during the year under the savings-related share option schemes for a consideration of £25.0m
(2015 – £10.3m).
During the year, on behalf of the Company, the employee share trust purchased 0.8m shares for a total consideration of £11.1m (2015 – 0.6m shares,
consideration of £9.0m). At 31 March 2016, the trust held 3.0m shares (2015 – 3.1m) which had a market value of £45.5m (2015 – £47.5m).
30. Reserves
The movement in reserves is reported in the Statement of Changes in Equity which is included as part of the primary statements (pages 123 and 124).
The capital redemption reserve comprises the value of shares redeemed or purchased by the company from distributable profits.
The hedge reserve comprises the effective portion of the cumulative net change in the fair value of cash flow hedge derivative instruments related to
hedged transactions that have not yet occurred.
The translation reserve comprises exchange translation differences on foreign currency net investments offset by exchange translation differences on
borrowings and derivatives classified as net investment hedges under IAS 39.
The profit for the year attributable to ordinary shareholders dealt with in the financial statements of the Company was £1,182.2m (2015 – £476.4m). As
allowed by section 408 of the Companies Act 2006, the Company has not presented its own income statement.
31. Hybrid capital
GBP 750m 5.453% perpetual subordinated capital securities (i)
EUR 500m 5.025% perpetual subordinated capital securities (i)
USD 700m 5.625% perpetual subordinated capital securities (ii)
EUR 750m 5.625% perpetual subordinated capital securities (ii)
GBP 750m 3.875% perpetual subordinated capital securities (iii)
EUR 600m 2.375% perpetual subordinated capital securities (iii)
2016
£m
–
–
427.2
598.2
748.3
436.0
2015
£m
744.5
416.9
427.2
598.2
748.3
436.0
2,209.7
3,371.1
(i) 20 September 2010 £750m and €500m hybrid capital bonds
On 1 October 2015 the company redeemed the £750m and €500m hybrid capital bonds issued on 20 September 2010, the redemption was funded by
the proceeds of the £750m and €600m hybrid capital bonds issued on 10 March 2015.
(ii) 18 September 2012 €750m and US$700m Hybrid Capital Bonds
Each bond has no fixed redemption date but the Company may, at its sole discretion, redeem all, but not part, of these capital securities at their principal
amount. The date for the discretionary redemption of the capital issued on 18 September 2012 is 1 October 2017 and every five years thereafter.
For the €750m capital issued on 18 September 2012, coupon payments are expected to be made annually in arrears on 1 October in each year. For the
US$700m capital issued on 18 September 2012, coupon payments are expected to be made bi-annually in arrears on 1 April and 1 October each year.
165
Financial Statements
Notes on the financial statements continued
for the year ended 31 March 2016
31. Hybrid capital continued
(iii) 10 March 2015 £750m and €600m Hybrid Capital Bonds
On 10 March 2015, the Company issued £750m and €600m hybrid capital bonds with no fixed redemption date, but the Company may, at its sole
discretion, redeem all, but not part, of the capital securities at their principal amount. The date for the first potential discretionary redemption of the
£750m hybrid capital bond is 10 September 2020 and then these can occur every 5 years thereafter. The date for the first discretionary redemption
of the €600m hybrid capital bond is 1 April 2021 and then these can occur every 5 years thereafter. The purpose of the outstanding issues was to
strengthen SSE’s capital base and fund the Group’s ongoing capital investment and acquisitions.
For the £750m capital issued on 10 March 2015 the first coupon payment is expected to be made on 10 September 2016 and then annually in arrears
thereafter, and for the €600m capital issued on 10 March 2015, the first coupon payment is expected to be made on 1 April 2016 and then annually in
arrears thereafter.
(iv) Coupon Payments
Coupon payments of £12.5m (2015 – £11.8m) in relation to the US$ capital issued on 18 September 2012 were paid on 1 April 2015. Coupon payments
of £12.4m (2015 – £12.4m) were made in relation to the same hybrid capital bond on 1 October 2015, and payments of £99.7m were made in relation
to all other hybrid capital bonds on 1 October 2015 with the exception of the two new hybrid capital bonds (€600m and £750m) that were issued on
10 March 2015 whose first coupon payments will fall on 1 April 2016 and 10 September 2016 respectively.
The Company has the option to defer coupon payments on the bonds on any relevant payment date, as long as a dividend on the ordinary shares has
not been declared. Deferred coupons shall be satisfied only in the following circumstances, all of which occur at the sole option of the Company:
redemption; or
-
- dividend payment on ordinary shares.
Interest will accrue on any deferred coupon.
32. Retirement benefit obligations
Defined benefit schemes
The Group has two funded final salary pension schemes which provide defined benefits based on final pensionable pay. The schemes are subject to
independent valuations at least every three years. The future benefit obligations are valued by actuarial methods on the basis of an appropriate
assessment of the relevant parameters. The Company operates one of these schemes, being the Scottish Hydro-Electric scheme.
The Group also has an Employer Financed Retirement Benefit scheme and a Group Personal Pension Plan. The Group Personal Pension Plan operates
on a Money purchase basis and has been arranged with Friends Provident. The Group matches employee contributions up to a specified limit, in most
circumstances this is set at 6%. The Group may also provide additional contributions of 3% after five years and a further 3% after ten years continuous
Group service.
Pension summary:
Scottish Hydro Electric (Company)
Southern Electric
Scheme type
Defined benefit
Defined benefit
IFRIC 14 movement
Net actuarial (loss)/gain and movement in IFRIC 14 liability
Net actuarial (loss)/gain recognised in
respect of the pension asset in the
Statement of Comprehensive Income
Net pension (liability)
2016
£m
191.3
112.5
303.8
(49.5)
254.3
2015
£m
31.3
(113.8)
(82.5)
3.2
(79.3)
2016
£m
272.7
(404.8)
(132.1)
(262.7)
(394.8)
2015
£m
75.4
(533.5)
(458.1)
(206.5)
(664.6)
The Scottish Hydro Electric Pension Scheme net asset of £10.0m (2015 – £131.1m liability) is presented after an IFRIC 14 minimum funding requirement
of £262.7m (2015 – £206.5).
The individual pension scheme details based on the latest formal actuarial valuations are as follows:
Latest formal actuarial valuation
Valuation carried out by
Value of assets based on valuation
Value of liabilities based on valuation
Valuation method adopted
Average salary increase
Average pension increase
Value of fund assets/accrued benefits
166 SSE plc Annual Report 2016
Scottish Hydro Electric
31 March 2015
Hymans Robertson
£1,916.0m
£1,964.7m
Projected Unit
Inflation curve plus 1.0% pa
RPI
97.5%
Southern Electric
31 March 2013
Aon Hewitt
£1,560.6m
£2,109.1m
Projected Unit
RPI
RPI
74.1%
1.
2.
3. Financial Statements
32. Retirement benefit obligations continued
32.1 Pension scheme assumptions
Both schemes have been updated to 31 March 2016 by qualified independent actuaries. The valuations have been prepared for the purposes of meeting
the requirements of IAS 19. The major assumptions used by the actuaries in both schemes were:
Rate of increase in pensionable salaries
Rate of increase in pension payments
Discount rate
Inflation rate
At 31 March
2016
At 31 March
2015
4.1%
3.1%
3.6%
3.1%
4.2%
3.2%
3.3%
3.2%
The assumptions relating to longevity underlying the pension liabilities at 31 March 2016 are based on standard actuarial mortality tables, and include an
allowance for future improvements in longevity. The assumptions, equivalent to future longevity for members in normal health at age 65, are as follows:
Currently aged 65
Currently aged 45
At 31 March
2016
Male
At 31 March
2016
Female
At 31 March
2015
Male
At 31 March
2015
Female
26
29
26
29
26
29
26
28
The impact on the schemes liabilities of changing certain of the major assumptions is as follows:
Discount rate
Longevity
At 31 March 2016
At 31 March 2015
Increase/
decrease in
assumption
0.1%
1 year
Effect on
scheme
liabilities
+/-1.8%
+/-3.1%
Increase/
decrease in
assumption
0.1%
1 year
Effect on
scheme
liabilities
+/- 1.8%
+/- 3.0%
These assumptions are considered to have the most significant impact on the scheme valuations.
32.2 Valuation of combined pension schemes
Consolidated
Company
Long-term rate
of return
expected at
31 March 2016
%
Value at
31 March 2016
£m
Long-term rate
of return
expected at
31 March 2015
%
Value at
31 March 2015
£m
Long-term rate
of return
expected at
31 March 2016
%
Value at
31 March 2016
£m
Long-term rate
of return
expected at
31 March 2015
%
Value at
31 March 2015
£m
Equities
Government bonds
Corporate bonds
Other investments
Total fair value of plan
assets
Present value of
defined benefit
obligation
Pension (liability)/asset
(pre IFRIC 14)
IFRIC 14 liability (i)
(Deficit)/surplus in
the scheme
Deferred tax thereon
Net pension (liability)/
asset
5.5
1.2
3.0
1.7
1,049.6
1,001.7
1,069.7
581.9
3,702.9
5.6
2.6
3.3
4.1
1,060.1
1,049.6
1,061.3
580.0
3,751.0
5.6
1.2
3.0
3.8
(3,835.0)
(4,209.1)
(132.1)
(262.7)
(394.8)
71.0
(323.8)
(458.1)
(206.5)
(664.6)
132.8
(531.8)
5.6
2.6
3.3
3.6
509.2
784.1
488.9
98.7
1,880.9
(1,608.2)
272.7
(262.7)
10.0
(1.8)
8.2
(i) The IFRIC 14 liability represents the deficit repair obligations required to ensure a minimum funding level together with a restriction on the surplus that can be recognised.
500.8
805.7
483.9
123.2
1,913.6
(1,838.2)
75.4
(206.5)
(131.1)
26.2
(104.9)
167
Financial Statements
Notes on the financial statements continued
for the year ended 31 March 2016
32. Retirement benefit obligations continued
32.3 Movements in the defined benefit asset obligations and assets during the year:
Group
at 1 April
3,751.0
(4,209.1)
(458.1)
3,257.3
(3,693.9)
2016
2015
Assets
£m
Obligations (i)
£m
Total
£m
Assets
£m
Obligations (i)
£m
Included in Income Statement
Current service cost
Past service cost
Interest income/(cost)
Included in Other Comprehensive Income
Actuarial (loss)/gain arising from:
Demographic assumptions
Financial assumptions
Experience assumptions
Return on plan assets excluding interest income
Other
Contributions paid by the employer
Scheme participants contributions
Benefits Paid
–
–
121.2
121.2
–
–
–
(123.1)
(123.1)
102.0
0.3
(148.5)
(46.2)
(61.8)
(4.3)
(134.9)
(201.0)
48.0
277.4
101.5
–
426.9
–
(0.3)
148.5
148.2
(61.8)
(4.3)
(13.7)
(79.8)
48.0
277.4
101.5
(123.1)
303.8
102.0
–
–
102.0
–
–
139.9
139.9
–
–
–
362.5
362.5
149.6
0.3
(158.6)
(8.7)
(55.4)
(16.7)
(156.4)
(228.5)
–
(515.4)
70.4
–
(445.0)
–
(0.3)
158.6
158.3
Total
£m
(436.6)
(55.4)
(16.7)
(16.5)
(88.6)
–
(515.4)
70.4
362.5
(82.5)
149.6
–
–
149.6
Balance at 31 March
3,702.9
(3,835.0)
(132.1)
3,751.0
(4,209.1)
(458.1)
(i) The retirement benefit obligations are stated before IFRIC 14 liabilities.
Company
at 1 April
Included in Income Statement
Current service cost
Past service cost
Interest income/(cost)
Included in Other Comprehensive Income
Actuarial (loss)/gain arising from:
Demographic assumptions
Financial assumptions
Experience assumptions
Return on plan assets excluding interest income
Other
Contributions paid by the employer
Scheme participants contributions
Benefits Paid
2016
Assets
£m
Obligations (i)
£m
1,913.6
(1,838.2)
–
–
61.8
61.8
–
–
–
(67.9)
(67.9)
33.7
–
(60.3)
(26.6)
(30.7)
–
(58.8)
(89.5)
56.3
129.0
73.9
–
259.2
–
–
60.3
60.3
Total
£m
75.4
(30.7)
–
3.0
(27.7)
56.3
129.0
73.9
(67.9)
191.3
33.7
–
–
33.7
2015
Assets
£m
Obligations (i)
£m
1,620.5
(1,602.1)
–
–
69.6
69.6
–
–
–
226.7
226.7
57.6
–
(60.8)
(3.2)
(27.0)
(6.9)
(67.6)
(101.5)
–
(244.8)
49.4
–
(195.4)
–
–
60.8
60.8
Balance at 31 March
1,880.9
(1,608.2)
272.7
1,913.6
(1,838.2)
Total
£m
18.4
(27.0)
(6.9)
2.0
(31.9)
–
(244.8)
49.4
226.7
31.3
57.6
–
–
57.6
75.4
(i) The retirement benefit obligations are stated before IFRIC 14 liabilities.
168 SSE plc Annual Report 2016
32. Retirement benefit obligations continued
32.4 Pension Scheme contributions and costs
Charges/(credits) recognised:
Current service cost (charged to operating profit)
Charged/(credited) to finance costs:
Interest from pension scheme assets
Interest on pension scheme liabilities
IFRIC 14 impact on net interest
The return on Pension Scheme assets is as follows:
(Loss)/return on Pension Scheme assets
1.
2.
3. Financial Statements
Consolidated
Company
2016
£m
66.1
66.1
(121.2)
134.9
6.7
20.4
2015
£m
72.1
72.1
(139.9)
156.4
8.6
25.1
2016
£m
29.9
29.9
(61.8)
58.8
6.7
3.7
2015
£m
31.9
31.9
(69.6)
67.6
8.6
6.6
Consolidated
Company
2016
£m
(6.1)
2015
£m
502.4
2016
£m
(1.9)
2015
£m
296.3
Defined contribution scheme
The total contribution paid by the Group to defined contribution pension schemes was £56.3m (2015 – £47.7m).
Employer financed retirement benefit (EFRB) pension costs
The decrease in the year in relation EFRB was £nil (2015 – £4.2m increase). This is included in other provisions (note 28).
Staff costs analysis
The pension costs in note 8 can be analysed thus;
Service costs
Defined contribution scheme payments
2016
£m
66.1
56.3
122.4
2015
£m
72.1
47.7
119.8
32.5 Pension Scheme Assessment
Risks to which the Pension Schemes exposes the Group and Company
The nature of the Group’s (and the Company’s) defined benefit pension schemes expose the Group and Company to the risk of paying unanticipated
additional contributions to the Scheme in times of adverse experience. The most financially significant risks are likely to be:
Asset volatility
The liabilities are calculated using a discount rate set with reference to corporate bond yields; if assets under perform this yield, this will create a deficit.
Changes in bond yields
A decrease in corporate bond yields will increase the value placed on the schemes’ liabilities for accounting purposes, although this will be partially
offset by and increase in the value of the Scheme’s bond holdings.
Inflation risk
The majority of the benefit obligations are linked to inflation, and higher inflation will lead to higher liabilities. The majority of assets are either unaffected
by or loosely correlated with inflation, meaning that an increase in inflation will also increase the deficit.
Life expectancy
The majority of the schemes’ obligations are to provide benefits for the life of the members, so an increase in the life expectancy will result in an
increase in the liabilities. The sensitivity analysis disclosed is intended to provide an indication of the impact on the value of the schemes’ liabilities of the
risks highlighted.
Policy for recognising gains and losses
The Group and Company recognise actuarial gains and losses immediately in the Statement of Other Comprehensive Income following the re-
measurement of the net defined benefit liabilities of the schemes.
169
Financial Statements
Notes on the financial statements continued
for the year ended 31 March 2016
32. Retirement benefit obligations continued
Methods and assumptions used in preparing the sensitivity analyses
The sensitivities disclosed are calculated using approximate methods taking into account the duration of the schemes’ liabilities. While these have been
calculated consistently with the previous financial year, the method applied may change over time with financial conditions and assumptions.
De-risking
The trustees have taken a number of steps to control the level of investment risk within the schemes over the last 12 months including reducing the
schemes’ exposures to higher risk assets and increasing the level of protection against adverse movements in interest rates and inflation. The trustees
of both schemes continue to review the risk exposures in light of the longer term objectives of the respective schemes.
Asset-liability matching strategies used by the Scheme or the Company
An asset-liability matching strategy has been adopted for a proportion of the schemes’ assets, which is designed to provide partial protection against
adverse movements in interest rates and inflation. The trustees of the respective schemes review the scheme’s asset allocation on an ongoing basis in
light of changes in the funding position and market opportunities.
Expected contributions over the next accounting period
The group and company expects to contribute approximately £34.0m to the Scottish Hydro Electric Scheme, and £78.0m to the Southern Electric
Scheme in the period ending 31 March 2017, these contributions include deficit repair contributions of £23.5m to the Southern Electric Scheme.
Maturity profile of the defined benefit obligation
The weighted average duration of the defined benefit obligation is 21 years (2015 – 22 years) for the Scottish Hydro Pension Scheme and 17 years
(2015 – 17 years) for the Southern Electric Pension Scheme.
33. Employee share-based payments
33.1 Share Schemes Summary
The Group operates a number of share schemes for the benefit of its employees. Details of these schemes, all of which are equity-settled, are as follows:
(i) Savings-related share option schemes (‘Sharesave’)
This scheme gives employees the option to purchase shares in the Company at a discounted market price, subject to the employees remaining in
employment for the term of the agreement. Employees may opt to save between £5 and £500 per month for a period of 3 and/or 5 years. At the end
of these periods employees have six months to exercise their options by using the cash saved (including any bonus equivalent to interest). If the option
is not exercised, the funds may be withdrawn by the employee and the option expires.
(ii) Share Incentive Plan (SIP)
This scheme allows employees the opportunity to purchase shares in the Company on a monthly basis. Employees may nominate an amount between
£10 and £150 to be deducted from their gross salary. This is then used to purchase shares (‘Partnership’ shares) in the market each month. These shares
are held in trust and become free of liability to income tax and national insurance on their fifth anniversary. These shares may be withdrawn at any point
during the 5 years, but tax and national insurance would become payable on any shares withdrawn.
From 1 September 2015, in addition to the shares purchased on behalf of the employee, the Company will also match the purchase up to a maximum
of 3 shares (‘Matching’ shares) per month. These shares are also held in trust and become free of liability to income tax and national insurance on their
fifth anniversary. If an employee leaves during the first three years, or removes his/her ‘partnership’ shares, these ‘matching’ shares are forfeited. Before
1 September 2015, the Company matched shares purchased up to a maximum of 6 shares per month on the same basis as above.
In addition to the above, an annual free share allocation directly linked to Company performance was introduced in 2015, to ensure all employees
benefit from SSE’s financial growth. The allocation of free shares is subject to SSE reporting dividend growth of at least RPI for the reporting year and the
first allocation will be made to eligible employees in June 2016.
(iii) Deferred Annual Incentive Scheme
This scheme applies to senior managers and Executive Directors. Under this scheme, 25% of all eligible employees’ annual bonus is deferred into shares
which only vest after three years, subject to continued service. The number of shares awarded is determined by dividing the relevant pre-tax bonus
amount by the share price shortly after the announcement of the results for the financial year to which the bonus relates.
170 SSE plc Annual Report 2016
1.
2.
3. Financial Statements
33. Employee share-based payments continued
(iv) Performance Share Plan
This scheme applies to executive directors and senior executives. Shares granted under this arrangement vest subject to the attainment of performance
conditions over the relevant three year performance period as set out below:
Award made
Maximum value of award as a % of base salary
02 June 2012
150
02 June 2013
150
02 June 2014
150
26 June 2015
150
Performance conditions
Total shareholder return (i)
Earnings per share (ii)
Dividend per share growth (iii)
Quality of Service (iv)
Full vesting
25% vesting
Full vesting
25% vesting
Full vesting
50% vesting
Full vesting
50% vesting
≥ 75th percentile
median
RPI + 8%
RPI + 2%
RPI + 6%
RPI + 2%
–
–
≥ 75th percentile
median
RPI + 8%
RPI + 2%
RPI + 6%
RPI + 2%
–
–
≥ 75th percentile
≥ 50th percentile
RPI + 8%
RPI
RPI + 4%
RPI
First place
Second place
≥ 75th percentile
≥ 50th percentile
RPI + 8%
RPI
RPI + 4%
RPI
First place
Second place
These awards will vest after three years to the extent that the relevant performance conditions are met.
(i) Total Shareholder Return (TSR) target relative to other FTSE100 companies and MSCI Europe Utilities (a dedicated peer group of UK and other European utilities) Index. Pro rata vesting will take
place between the 50th and 75th percentile, with no vesting if the minimum target is not met.
(ii) Under the EPS performance condition, pro rata vesting between the lower and upper level above RPI, with no vesting if the minimum EPS growth target is not achieved and full vesting if RPI +8% is achieved.
(iii) Under the Dividend per share growth performance condition, pro rata vesting between RPI and 4% above RPI, with no vesting if the minimum dividend per share growth target is not achieved.
(iv) The Quality of Service condition relates to the Company’s Complaints Ranking. Full vesting will be awarded for first place in the league table, 50% vesting for second place with no vesting for
below second place.
(iv) Long-term Incentive Plan (LTIP)
This scheme applies to the former Management Board and certain members of the Executive Committee. Shares granted under this arrangement vest
subject to the attainment of performance conditions over the relevant performance period. The relevant performance period for this LTIP award is
1 April 2011 to 31 March 2016. The performance conditions are as set out below:
Performance conditions
Dividend per share growth (DPS)
2012 and 2013
2014 to 2016
Full vesting (maximum)
40% vesting (threshold)
Full vesting (maximum)
40% vesting (threshold)
RPI + 5%
RPI +2%
RPI +3%
RPI
Where DPS growth is between threshold and maximum above RPI, vesting will be calculated on a straight-line basis. Where DPS growth is less than RPI
no vesting will occur.
33.2 Income Statement charge for all share schemes
A charge of £13.5m (2015 – £15.0m) was recognised in the Income Statement in relation to these schemes, £0.3m (2015 – £1.0m) of this was in relation
to the Directors of the Company. A credit of £13.5m (2015 – £15.0m) was recognised in the statement of changes in Equity in respect of these awards.
171
Financial Statements
Notes on the financial statements continued
for the year ended 31 March 2016
33. Employee share-based payments continued
33.3 Share Schemes Details
Details used in the calculation of the costs of these schemes are as follows:
(i) Savings-related share option scheme (Sharesave)
The movement in savings related share option schemes in the year were as follows:
Consolidated
As at 31 March 2016
Award Date
30 June 2009
30 June 2010
29 June 2011
29 June 2011
29 June 2012
29 June 2012
05 July 2013
05 July 2013
02 July 2014
02 July 2014
03 July 2015
03 July 2015
As at 31 March 2015
Award Date
17 July 2008
30 June 2009
30 June 2010
30 June 2010
29 June 2011
29 June 2011
29 June 2012
29 June 2012
05 July 2013
05 July 2013
02 July 2014
02 July 2014
Option Price
(pence)
Outstanding at
start of year
Granted
Exercised
Lapsed
Outstanding at
end of year
Date from which
exercisable
1,042
871
1,105
1,105
1,065
1,065
1,197
1,197
1,247
1,247
1,288
1,288
10,907
2,319,463
10,132
543,177
433,648
489,407
622,418
414,522
1,357,193
1,204,234
–
–
–
–
–
–
–
–
–
–
288
1,202
1,619,999
1,392,805
(4,024)
(2,273,852)
(3,995)
(15,746)
(414,451)
(5,180)
(13,119)
(2,538)
(14,177)
(1,861)
(433)
(71)
(6,883)
(15,679)
(6,137)
(16,577)
(8,406)
(21,551)
(47,907)
(29,278)
(154,855)
(74,502)
(129,988)
(68,657)
–
29,932
–
510,854
10,791
462,676
561,392
382,706
1,188,449
1,129,073
1,489,578
1,324,077
1 October 2014
1 October 2015
1 October 2014
1 October 2016
1 October 2015
1 October 2017
1 October 2016
1 October 2018
1 October 2017
1 October 2019
1 October 2018
1 October 2020
7,405,101
3,014,294
(2,749,447)
(580,420)
7,089,528
Option Price
(pence)
Outstanding at
start of year
Granted
Exercised
Lapsed
Outstanding at
end of year
Date from which
exercisable
1,274
1,042
871
871
1,105
1,105
1,065
1,065
1,197
1,197
1,247
1,247
15,782
468,608
15,279
2,555,941
306,731
600,292
504,339
532,144
710,247
471,613
–
–
–
–
–
–
–
–
–
–
–
–
1,447,558
1,256,980
(3,190)
(453,330)
(6,662)
(167,744)
(290,920)
(22,328)
(29,068)
(9,290)
(13,054)
(6,263)
(5,046)
(1,731)
(12,592)
(4,371)
(8,617)
(68,734)
(5,679)
(34,787)
(41,623)
(33,697)
(74,525)
(50,828)
(85,319)
(51,015)
–
10,907
–
2,319,463
10,132
543,177
433,648
489,157
622,668
414,522
1,357,193
1,204,234
1 October 2013
1 October 2014
1 October 2013
1 October 2015
1 October 2014
1 October 2016
1 October 2015
1 October 2017
1 October 2016
1 October 2018
1 October 2017
1 October 2019
6,180,976
2,704,538
(1,008,626)
(471,787)
7,405,101
Expiry date (i)
31 March 2015
31 March 2016
31 March 2015
31 March 2017
31 March 2016
31 March 2018
31 March 2017
31 March 2019
31 March 2018
31 March 2020
31 March 2019
31 March 2021
Expiry date (i)
31 March 2014
31 March 2015
31 March 2014
31 March 2016
31 March 2015
31 March 2017
31 March 2016
31 March 2018
31 March 2017
31 March 2019
31 March 2018
31 March 2020
As share options are exercised continuously throughout the period from 1 October to 31 March, the weighted average share price during this period
of 1,463p (2015 – 1,564p) is considered representative of the weighted average share price at the date of exercise. The weighted average share price
of forfeitures is simply the option price to which the forfeit relates.
172 SSE plc Annual Report 2016
1.
2.
3. Financial Statements
33. Employee share-based payments continued
Company
As at 31 March 2016
Award Date
30 June 2010
30 June 2012
30 June 2014
30 June 2015
As at 31 March 2015
Award Date
30 June 2009
30 June 2010
30 June 2012
30 June 2014
Option Price
(pence)
Outstanding at
start of year
Granted
Exercised
Outstanding at
end of year
Date from which
exercisable
871
1,065
1,247
1,288
283
1,408
3,415
–
5,106
–
–
–
186
186
(283)
–
–
–
(283)
1 October 2015
1 October 2017
1 October 2019
1 October 2020
–
1,408
3,415
186
5,009
Expiry date (i)
31 March 2016
31 March 2018
31 March 2020
31 March 2021
Option Price
(pence)
Outstanding at
start of year
Granted
Exercised
Outstanding at
end of year
Date from which
exercisable
1,042
871
1,065
1,247
1,253
283
1,408
–
2,944
–
–
–
3,415
3,415
(1,253)
–
–
–
(1,253)
1 October 2014
1 October 2015
1 October 2017
1 October 2019
–
283
1,408
3,415
5,106
Expiry date (i)
31 March 2015
31 March 2016
31 March 2018
31 March 2020
No options were forfeited in the year.
(i) Options may remain exercisable beyond the published expiry date due to individuals taking advantage of the right to a payment holiday during the term of the scheme.
The fair value of these share options at the measurement date, calculated using the Black-Scholes model, and the assumptions made in that model are
as follows:
July 2009
July 2010
July 2011
July 2012
July 2013
July 2014
July 2015
3 Year
5 Year
3 Year
5 year
3 year
5 Year
3 year
5 Year
3 year
5 year
3 year
5 year
3 year
5 year
Fair value of
option
Expected
volatility
Risk free rate
Expected
dividends
Term of the
option
Underlying price
at grant date
Strike price
244p
269p
231p
246p
171p
163p
182p
159p
194p
168p
146p
163p
133p
113p
35%
2.7%
35%
2.9%
19%
1.4%
19%
2.2%
18%
1.2%
18%
2.1%
18%
0.4%
18%
0.9%
15%
0.7%
15%
1.4%
15%
1.2%
15%
1.7%
14%
0.9%
14%
1.4%
4.1%
4.2%
1.7%
2.2%
6.1%
6.1%
5.9%
5.8%
5.9%
5.9%
5.9%
5.8%
6.0%
5.9%
3 yrs
5 yrs
3 yrs
5 yrs
3 yrs
5 yrs
3 yrs
5 yrs
3 yrs
5 yrs
3 yrs
5 yrs
3 yrs
5 yrs
1,139p
1,042p
1,139p
1,042p
1,089p
871p
1,089p
871p
1,393p
1,105p
1,393p
1,105p
1,391p
1,065p
1,391p
1,065p
1,579p
1,197p
1,579p
1,197p
1,595p
1,247p
1,595p
1,247p
1,558p
1,288p
1,558p
1,288p
Expected price volatility was determined by calculating the historical volatility of the Group’s share price over the previous 12 months.
(ii) Share Incentive Plan
Matching Shares
Outstanding at start of year
Granted during the year
Forfeited during the year
Exercised during the year
Transfer to pool during the year
Outstanding at end of year
Exercisable at end of year
Consolidated
Company
2016
2015
2016
2015
Shares
2,290,105
567,776
(117,193)
(123,293)
(315,343)
2,302,052
712,506
Weighted
average price
(pence)
1,386
1,515
1,515
1,381
1,160
1,467
1,360
Shares
2,288,129
696,371
(123,650)
(272,940)
(297,805)
2,290,105
680,599
Weighted
average price
(pence)
1,297
1,556
1,449
1,316
1,137
1,386
1,241
Weighted
average price
(pence)
1,381
1,517
–
–
1,159
1,449
1,356
Shares
708
108
–
–
(144)
672
276
Weighted
average price
(pence)
1,195
1,556
–
–
1,136
1,381
1,234
Shares
708
144
–
–
(144)
708
276
When shares have been held for 5 years they are transferred to a pooled share account. At this point the holder has an unconditional right to the share.
173
Financial Statements
Notes on the financial statements continued
for the year ended 31 March 2016
33. Employee share-based payments continued
The fair value of shares in the share incentive plan is not subject to valuation using the Black-Scholes model. However, the fair value of shares granted in
the year is equal to the weighted average price and is based on the price paid for the shares at the grant date as shares are acquired out of the market as
at that date to satisfy awards made under the scheme.
(iii) Deferred Annual Incentive Scheme
Free Shares
Consolidated
Company
2016
2015
2016
2015
Shares
372,812
149,691
(3,203)
(116,724)
402,576
–
Weighted
average price
(pence)
1,486
1,624
1,353
1,418
1,561
–
Shares
330,546
166,283
(3,780)
(120,237)
372,812
5,395
Weighted
average price
(pence)
1,409
1,545
1,502
1,343
1,486
1,322
Shares
25,616
14,061
–
(5,414)
34,263
–
Weighted
average price
(pence)
1,456
1,624
–
1,383
1,567
–
Shares
32,748
13,322
–
(20,454)
25,616
–
Weighted
average price
(pence)
1,381
1,545
–
1,342
1,456
–
Outstanding at start of year
Granted during the year
Forfeited during the year
Exercised during the year
Outstanding at end of year
Exercisable at end of year
The fair value of the annual incentive scheme shares is not subject to valuation using the Black-Scholes model. However, the fair value of shares granted
in the year is equal to the weighted average price and is based on the price paid for the shares at the grant date as shares are acquired out of the market
as at that date to satisfy awards made under the scheme.
(iv) Performance Share Plan
Outstanding at start of year
Granted during the year
Forfeited during the year
Exercised during the year
Outstanding at end of year
Consolidated
Company
2016
2015
2016
2015
Shares
1,684,901
647,858
(460,006)
(53,707)
1,819,046
Weighted
average price
(pence)
1,477
1,624
1,388
1,383
1,559
Shares
1,615,415
660,618
(471,039)
(120,093)
Weighted
average price
(pence)
1,408
1,545
1,350
1,342
Shares
388,534
134,986
(118,130)
–
Weighted
average price
(pence)
1,479
1,624
1,383
–
Shares
538,068
138,563
–
(288,097)
1,684,901
1,477
405,390
1,555
388,534
Weighted
average price
(pence)
1,347
1,545
–
1,342
1,479
Of the outstanding options at the end of the year, none were exercisable.
The fair value of the performance share plan shares is not subject to valuation using the Black-Scholes model. The fair value of shares granted in the year
is equal to the closing market price on the date of grant.
(v) Long-term Incentive Plan
Outstanding at start of year
Forfeit during year
Outstanding at end of year
No award was granted during the year.
2016
2015
Weighted
average price
(pence)
Weighted
average price
(pence)
Shares
1,352
–
246,867
(42,846)
1,352
204,021
1,350
1,342
1,352
Shares
204,021
–
204,021
Of the outstanding options at the end of the year, all will be exercisable. The company has no employees in the LTIP.
The fair value of the long-term incentive plan shares is not subject to valuation using the Black-Scholes model. The fair value of shares granted in the
year is equal to closing market price on the date of grant.
174 SSE plc Annual Report 2016
1.
2.
3. Financial Statements
34. Capital and financial risk management
Capital management
The Board’s policy is to maintain a strong balance sheet and credit rating so as to support investor, counterparty and market confidence and to underpin
future development of the business. The Group’s credit ratings are also important in maintaining an efficient cost of capital and in determining collateral
requirements throughout the Group. As at 31 March 2016, the Group’s long-term credit rating was A- negative outlook for Standard & Poor’s and A3
negative outlook for Moody’s. Further detail of the capital management objectives, policies and procedures are included in the ‘Financial management
and balance sheet’ section of the Financial Overview on pages 37 to 38 of this report.
The maintenance of a medium-term corporate model is a key control in monitoring the development of the Group’s capital structure, and allows for
detailed scenarios and sensitivity testing. Key ratios drawn from this analysis underpin regular updates to the Board and include the ratios used by the
rating agencies in assessing the Group’s credit ratings.
The Group has the option to purchase its own shares from the market; the timing of these purchases depends on market prices and economic
conditions. The use of share buy-backs is the Group’s benchmark for investment decisions and is utilised at times when management believe the
Group’s shares are undervalued. No share buy-back was made during the year.
The Group’s debt requirements are principally met through issuing bonds denominated in Sterling and Euros as well as private placements and medium
term bank loans including those with the European Investment Bank. In addition the Group has issued hybrid capital securities which bring together
features of both debt and equity, are perpetual and subordinate to all senior creditors. The Group has £1.5bn of committed bank facilities which relate to
the Group’s revolving credit and bilateral facilities that can be accessed at short notice for use in managing the Group’s short term funding requirements
however these committed facilities remain undrawn for the majority of the time.
The Group capital comprises:
Total borrowings (excluding finance leases)
Less: Cash and cash equivalents
Net debt (excluding hybrid capital)
Hybrid capital
Cash held as collateral and other short-term loans
Balances due to partners in Clyde Windfarm (Scotland) Limited
Adjusted Net Debt and Hybrid Capital
Equity attributable to shareholders of the parent
Total capital excluding finance leases
2016
£m
6,868.0
(360.2)
6,507.8
2,209.7
(121.8)
(200.7)
8,395.0
2,984.8
2015
£m
5,781.0
(1,512.3)
4,268.7
3,371.1
(71.7)
–
7,568.1
2,709.4
11,379.8
10,277.5
Under the terms of its major borrowing facilities, the Group is required to comply with the following financial covenant:
-
Interest Cover Ratio: The Company shall procure that the ratio of Operating Profit to Net Interest Payable for any relevant period is not less than 2.5 to 1.
The following definitions apply in the calculation of these financial covenants:
-
“Operating Profit” means, in relation to a relevant period, the profit on ordinary activities before taxation (after adding back Net Interest Payable) of
the Group for that relevant period but after adjusting this amount to exclude any exceptional profits (or losses) and, for the avoidance of doubt, before
taking account of any extraordinary profits (or losses) and excluding the effect of IAS 39.
“Net Interest Payable” means, in respect of any relevant period, interest payable during that relevant period less interest receivable during that
relevant period.
-
In summary, the Group’s intent is to balance returns to shareholders between current returns through dividends and long-term capital investment for
growth. In doing so, the Group will maintain its capital discipline and will continue to operate within the current economic environment prudently. There
were no changes to the Group’s capital management approach during the year.
Financial risk management
This note presents information about the fair value of the Group’s financial instruments, the Group’s exposure to the risks associated with those
instruments, the Group’s objectives, policies and processes for measuring and managing risk, and the Group’s management of capital. Further
qualitative disclosures are included throughout these consolidated financial statements.
The Group has exposure to the following risks from its use of financial instruments:
- Credit risk.
- Liquidity risk.
- Commodity risk.
- Currency risk.
-
Interest rate risk.
The Board has overall responsibility for the establishment and oversight of the Group’s risk management framework. The Risk and Trading Committee,
which reports to the Executive Committee, comprises the two Executive Directors and senior managers from the Energy Portfolio Management,
Generation, Retail, Corporate and Finance functions. Its specific remit is to support the Group’s risk management responsibilities by reviewing the
175
Financial Statements
Notes on the financial statements continued
for the year ended 31 March 2016
34. Capital and financial risk management continued
strategic, market, credit operational and liquidity risks and exposures that arise from the Group’s energy portfolio management, generation, energy
supply and treasury operations. The membership and deliberations of the Risk and Trading Committee are designed to ensure strict business separation
requirements are maintained.
The Group’s policies for risk management are established to identify the risks faced by the Group, to set appropriate risk limits and controls, and to monitor
risks and adherence to limits. These policies, and the systems used to monitor activities, are reviewed regularly by the Risk and Trading Committee.
Exposure to the commodity, currency and interest rate risks noted arise in the normal course of the Group’s business and derivative financial instruments
are entered into to hedge exposure to these risks. The objectives and policies for holding or issuing financial instruments and similar contracts, and the
strategies for achieving those objectives that have been followed during the year are explained below.
The Company is required to disclose information on its financial instruments and has adopted policies identical to that of the Group, where applicable.
Separate disclosure is provided where necessary.
Before detailing the relevant qualitative and quantitative disclosures in relation to the potential risks faced by the Group, details on the different
categories of financial instrument and the carrying and fair values of each of those categories is provided below.
34.1 Categories of financial instruments and fair values of those assets and liabilities
The fair values of the primary financial assets and liabilities of the Group together with their carrying values are as follows:
Financial Assets
Current
Trade receivables
Other receivables
Cash collateral and other short-term loans
Cash and cash equivalents
Derivative financial assets
Non-current
Unquoted equity investments
Loans to associates and jointly controlled entities
Derivative financial assets
Financial Liabilities
Current
2016
Amortised
cost or
other (i)
£m
2016
Classified as
trading (ii)
£m
2016
Total
carrying
value
£m
2015
Amortised
cost or
other (i)
£m
2015
Classified as
trading (ii)
£m
2015
Total
carrying
value
£m
2016
Fair value
£m
1,966.8
23.7
121.8
360.2
–
–
–
–
–
1,615.0
1,966.8
23.7
121.8
360.2
1,615.0
1,966.8
23.7
121.8
360.2
1,615.0
2,977.5
25.2
71.7
1,512.3
–
–
–
–
–
1,999.9
2,977.5
25.2
71.7
1,512.3
1,999.9
2015
Fair value
£m
2,977.5
25.2
71.7
1,512.3
1,999.9
2,472.5
1,615.0
4,087.5
4,087.5
4,586.7
1,999.9
6,586.6
6,586.6
9.9
591.6
–
601.5
–
–
537.7
537.7
9.9
591.6
537.7
9.9
591.6
537.7
1,139.2
1,139.2
11.2
559.4
–
570.6
–
–
566.8
566.8
11.2
559.4
566.8
11.2
559.4
566.8
1,137.4
1,137.4
3,074.0
2,152.7
5,226.7
5,226.7
5,157.3
2,566.7
7,724.0
7,724.0
Trade payables
Bank loans, commercial paper and overdrafts
Finance lease liabilities
Derivative financial liabilities
(1,868.3)
(898.8)
(24.5)
–
–
–
–
(1,783.8)
(1,868.3)
(898.8)
(24.5)
(1,783.8)
(1,868.3)
(900.6)
(24.5)
(1,783.8)
(2,707.7)
(712.6)
(20.2)
–
–
–
–
(2,297.3)
(2,707.7)
(712.6)
(20.2)
(2,297.3)
(2,707.7)
(714.3)
(20.2)
(2,297.3)
(2,791.6)
(1,783.8)
(4,575.4)
(4,577.2)
(3,440.5)
(2,297.3)
(5,737.8)
(5,739.5)
Non-current
Loans and Borrowings (iii)
Finance lease liabilities
Derivative financial liabilities
(5,887.4)
(276.3)
–
(81.8)
–
(857.5)
(5,969.2)
(276.3)
(857.5)
(6,889.9)
(276.3)
(857.5)
(5,099.3)
(299.5)
–
30.9
–
(933.4)
(5,068.4)
(299.5)
(933.4)
(6,213.4)
(299.5)
(933.4)
(6,163.7)
(939.3)
(7,103.0)
(8,023.7)
(5,398.8)
(902.5)
(6,301.3)
(7,446.3)
(8,955.3)
(2,723.1)
(11,678.4)
(12,600.9)
(8,839.3)
(3,199.8)
(12,039.1)
(13,185.8)
Net financial liabilities
(5,881.3)
(570.4)
(6,451.7)
(7,374.2)
(3,682.0)
(633.1)
(4,315.1)
(5,461.8)
(i) Recorded at amortised cost or loans and receivables.
(ii)
(iii) Includes non-recourse borrowings.
IAS 39 financial instruments.
176 SSE plc Annual Report 2016
1.
2.
3. Financial Statements
34. Capital and financial risk management continued
34.2 Risks from use of financial instruments
The fair values of the primary financial assets and liabilities of the Company together with their carrying values are as follows:
Financial Assets
Current
Cash and cash equivalents
Amounts owed by subsidiary undertakings
Derivative financial assets
Non-current
Amounts owed by subsidiary undertakings
Loans to associates and jointly controlled entities
Derivative financial assets
Financial Liabilities
Current
2016
Amortised
cost or
other (i)
£m
2016
Classified as
trading (ii)
£m
2016
Total
Carrying
value
£m
2015
Amortised
cost or
other (i)
£m
2015
Classified as
trading (ii)
£m
2015
Total
Carrying
value
£m
2016
Fair value
£m
2015
Fair value
£m
155.9
4,828.9
–
4,984.8
4,958.9
602.3
–
5,561.2
–
–
81.3
81.3
–
–
175.6
175.6
155.9
4,828.9
81.3
155.9
4,828.9
81.3
1,321.1
3,944.2
–
5,066.1
5,066.1
5,256.3
4,958.9
602.3
175.6
4,958.9
602.3
175.6
4,505.9
544.4
–
5,736.8
5,736.8
5,050.3
–
–
46.7
46.7
–
–
141.8
141.8
1,321.1
3,944.2
46.7
1,321.1
3,944.2
46.7
5,312.0
5,312.0
4,505.9
544.4
141.8
4,505.9
544.4
141.8
5,192.1
5,192.1
10,546.0
256.9
10,802.9
10,802.9
10,315.6
188.5
10,504.1
10,504.1
Bank loans, commercial paper and overdrafts
Amounts owed to subsidiary undertakings
Derivative financial liabilities
(898.8)
(3,385.8)
–
–
–
(39.1)
(898.8)
(3,385.8)
(39.1)
(900.6)
(3,385.8)
(39.1)
(700.0)
(2,715.0)
–
–
–
(101.1)
(700.0)
(2,715.0)
(101.1)
(701.7)
(2,715.0)
(101.1)
(4,284.6)
(39.1)
(4,323.7)
(4,325.5)
(3,415.0)
(101.1)
(3,516.1)
(3,517.8)
Non-current
Loans and borrowings
Derivative financial liabilities
(4,412.6)
–
(81.8)
(360.4)
(4,494.4)
(360.4)
(5,128.1)
(360.4)
(3,749.9)
–
30.9
(373.9)
(3,719.0)
(373.9)
(4,558.5)
(373.9)
(4,412.6)
(442.2)
(4,854.8)
(5,488.5)
(3,749.9)
(343.0)
(4,092.9)
(4,932.4)
(8,697.2)
(481.3)
(9,178.5)
(9,814.0)
(7,164.9)
(444.1)
(7,609.0)
(8,450.2)
Net financial assets/(liabilities)
1,848.8
(224.4)
1,624.4
988.9
3,150.7
(255.6)
2,895.1
2,053.9
(i) Recorded at amortised cost, available for sale, or loans and receivables.
(ii)
IAS 39 financial instruments.
Basis of determining fair value
Certain assets and liabilities designated and carried at amortised cost are loans and receivables. For certain current assets and liabilities their carrying
value is equivalent to fair value due to short term maturity.
Assets and liabilities designated at fair value and the fair value of other financial assets and liabilities have been determined by reference to closing rate
market values. This basis has been used in valuing interest rate instruments, foreign currency hedge contracts and foreign currency denominated
long-term fixed rate debt. Commodity contracts fair values are based on published price quotations.
The fair values are stated at a specific date and may be different from the amounts which will actually be paid or received on settlement of the
instruments. The fair value of items such as property, plant and equipment, internally generated brands or the Group’s customer base are not included
as these are not financial instruments.
(i) Credit risk
Credit risk is the risk of financial loss to the Group if a customer or counterparty fails to meet its contractual obligations.
Credit risk arising from the Group’s normal commercial operations is controlled by individual business units operating in accordance with Group policies
and procedures. Generally, for significant contracts, individual business units enter into contracts or agreements with counterparties having investment
grade credit ratings only, or where suitable collateral or other security has been provided. Counterparty credit validation is undertaken prior to
contractual commitment.
177
Financial Statements
Notes on the financial statements continued
for the year ended 31 March 2016
34. Capital and financial risk management continued
Credit risk management for the Group’s Networks businesses is performed in accordance with industry standards as set out by the Regulator and is financially
controlled by the individual business units. The Group’s greatest credit risks lie with the operations of the Energy Supply business, the Wholesale procurement
activities conducted by Energy Portfolio Management (’EPM’) under a trust arrangement and the activities carried out by the Group’s Treasury function. In all cases,
specific credit risk controls that match the risk profile of those activities are applied. Exposure to credit risk in the retail supply of electricity and gas to end user
customers arises from the potential of a customer defaulting on their invoiced payables. The financial strength and creditworthiness of business customers is
assessed prior to commencing, and for the duration of, their contract of supply. Domestic customers’ creditworthiness is reviewed from a variety of internal and
external information.
Exposure to credit risk in the procurement of wholesale energy and fuel is managed by reference to agreed transaction credit limits which are
determined by whether the counterparty:
- holds an investment grade credit rating; or
- can be assessed as adequately creditworthy in accordance with internal credit rules using information from other external credit agencies; or
- can provide a guarantee from an investment grade rated entity or post suitable collateral or provide other acceptable assurances in accordance with
group procedures where they have failed to meet the above conditions; or
- can be allocated a non-standard credit limit approved by the Risk and Trading Committee within its authorised limits as delegated by the
Group Board.
Credit support clauses or side agreements are typically included or entered into to protect the Group against counterparty failure or non-delivery. As
part of its normal activities, EPM transacts significant volumes of commodity derivative products through cleared exchanges to mitigate credit risk. Such
exchanges are subject to strict regulation by the UK Financial Conduct Authority (FCA) and participants in these exchanges are obliged to meet rigorous
capital adequacy requirements.
Individual counterparty credit exposures are monitored by category of credit risk and are subject to approved limits. At 31 March 2016, EPM had pledged
£211.4m (2015 – £235.8m) of cash collateral and letters of credit and had received £44.5m (2015 – £41.8m) of cash collateral and letters of credit
principally to reduce exposures on credit risk.
Bank credit exposures, which are monitored and reported on daily, are calculated on a mark-to-market basis and adjusted for future volatility and
probability of default. Any issues relating to these credit exposures are presented for discussion and review by the Risk and Trading Committee.
Cash and cash equivalents comprise cash in hand and deposits which are readily convertible to cash. These are subject to insignificant risk of change in
value or credit risk.
Derivative financial instruments are entered into to cover the Group’s market risks – commodity risk, interest rate risk, currency risk – and are
consequently covered elsewhere in this note.
Trade receivables represent the most significant exposure to credit risk and are stated after an allowance for impairment.
Concentrations of risk
Trade receivables recorded by reported segment held at the 31 March were:
Networks
Electricity Distribution
Electricity Transmission
Retail
Energy Supply
Enterprise
Energy Related Services
Wholesale
Energy Portfolio Management and Electricity Generation
Gas Storage
Gas Production
Corporate Unallocated
Total
178 SSE plc Annual Report 2016
2016
£m
72.2
0.9
73.1
524.2
53.9
11.4
589.5
1,291.5
1.1
1.4
1,294.0
10.2
1,966.8
2015
£m
69.4
15.4
84.8
595.8
145.9
23.3
765.0
2,114.0
1.5
0.5
2,116.0
11.7
2,977.5
1.
2.
3. Financial Statements
34. Capital and financial risk management continued
The Retail segment accounts for 30.0% (2015 – 25.7%) of the Group’s trade receivables. Trade receivables associated with the Group’s 8.2 million
electricity and gas customers are recorded in this segment. The Group also has significant receivables associated with its Wholesale activities which are
generally settled within two to four weeks from invoicing. The Group’s exposure to credit risk is therefore subject to diversification with no exposure to
individual retail customers totalling >10% of trade receivables. The biggest customer balance, due from a wholesale customer (also a wholesale supplier),
is 8% (2015 – 11%) of the total trade receivables.
The ageing of trade receivables at the reporting date was:
Not past due
Past due but not individually impaired:
0 – 30 days
31 – 90 days
Over 90 days
Less: allowance for impairment
Net Trade receivables
2016
£m
2015
£m
1,690.2
2,720.0
156.3
59.2
208.6
2,114.3
(147.5)
1,966.8
157.0
52.7
202.1
3,131.8
(154.3)
2,977.5
The Group has past due debt which has not had an impairment allowance set aside to cover potential credit losses. The Group has certain procedures to
pursue customers in significant arrears and believes its impairment policy in relation to such balances is appropriate. Those debts which are neither past
due nor impaired are considered to be good and are expected to be recoverable.
The Group has other receivables which are financial assets totalling £23.7m (2015 – £25.2m). The Company does not have trade receivables.
The movement in the allowance for impairment of trade receivables was:
Balance at 1 April
Increase in allowance for impairment
Impairment losses recognised
Balance at 31 March
2016
£m
154.3
54.3
(61.1)
147.5
2015
£m
164.4
56.2
(66.3)
154.3
At the end of each reporting period a review of the provision for bad and doubtful debts is performed. It is an assessment of the potential amount of
trade receivables which will not be paid by customers after the balance sheet date. This amount is calculated by reference to the age, status and risk
of each class of receivable.
(ii) Liquidity risk and going concern
Liquidity risk, the risk that the Group will have insufficient funds to meet its liabilities, is managed by the Group’s Treasury function. The Group can be
exposed to significant movements in its liquidity position due to changes in commodity prices, working capital requirements, the impact of the seasonal
nature of the business and phasing of its capital investment and recycling programmes.
Treasury is responsible for managing the banking and liquidity requirements of the Group, risk management relating to interest rate and foreign
exchange exposures, and for managing the credit risk relating to the banking counterparties with which it transacts. Short term liquidity is reviewed daily
by Treasury, while the longer term liquidity position is reviewed on a regular basis by the Board. The department’s operations are governed by policies
determined by the Board and any breaches of these policies are reported to the Risk and Trading Committee and Audit Committee.
In relation to the Group’s liquidity risk, the Group’s policy is to ensure, as far as possible, that it will always have sufficient liquidity to meet its liabilities
when due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the Group’s reputation.
During the year, the Group’s approach to managing liquidity was to seek to ensure that the Group had available committed borrowings and facilities
equal to at least 105% of forecast borrowings over a rolling 6 month period.
The Group uses cash flow forecasts to monitor its ongoing borrowing requirements. Typically, the Group will fund any short term borrowing positions
by issuing commercial paper or borrowing from uncommitted bank lines and will invest in money market funds when it has a cash surplus. Details of the
group’s borrowings are disclosed at note 26. In addition to the borrowing facilities listed at note 26, the Group has £150m of uncommitted bank lines
and a £15m overdraft facility.
179
Financial Statements
Notes on the financial statements continued
for the year ended 31 March 2016
34. Capital and financial risk management continued
Over the course of the financial year to 31 March 2017, the Group has £700m of term loans reaching maturity. Of these loans, £200m matures in June
2016 and £500m matures in September 2016. This refinancing requirement has been covered with the issuance of a new £501m US Private Placement
and a new £300m European Investment Bank facility, both were signed ahead of the year end 31 March 2016. The proceeds of the US Private Placement
will be received in 3 tranches £35m on 28 April 2016, £64m on 6 June 2016 and £402m on 6 September 2016, the average maturity is 9.6 years, with
maturities between April 2023 and September 2027. An utilisation request has been submitted and accepted by the European Investment Bank to draw
the £300m facility in full on 20 May 2016 as a 10 year fixed rate term loan. It is the view of the Directors that the Group’s 105% funding policy will be met
out its forecast borrowing requirement to September 2017.
Given the committed bank facilities of £1.5bn maintained by the Group and the current capital market conditions, the Directors have concluded that the
Group has sufficient headroom to continue as a going concern. In coming to this conclusion, the Directors have also taken into account the successful
issuance of £4.5bn of medium to long-term debt and hybrid capital since February 2012, and the Group’s credit rating. The statement of going concern
is included in the Directors’ Corporate Governance report on page 70.
Treasury also manage the Group’s interaction with its relationship banks (defined as those banks that support the company’s financing activities through
their ongoing participation in the committed lending facilities that are maintained by the Group). These are each allocated financial limits, subject to the
maintenance of a minimum credit rating of investment grade or better allocated by a recognised major ratings group. In respect of short-term cash
management, counterparties are subject to review and approval according to defined criteria.
As at 31 March 2016, the value of outstanding cash collateral in respect of mark-to-market related margin calls on exchange traded positions was
£78.3m (2015 – £71.7m).
The contractual cash flows shown in the following tables are the contractual undiscounted cashflows under the relevant financial instruments. Where
the contractual cashflows are variable based on a price, foreign exchange rate or index in the future, the contractual cashflows in the following tables
have been determined with reference to the relevant price, foreign exchange rate, interest rate or index as at the balance sheet date. In determining the
interest element of contractual cashflows in cases where the Group has a choice as to the length of interest calculation periods and the interest rate
that applies varies with the period selected, the contractual cashflows have been calculated assuming the Group selects the shortest available interest
calculation periods. Where the holder of an instrument has a choice of when to redeem, the amounts in the following tables are on the assumption the
holder redeems at the earliest opportunity.
180 SSE plc Annual Report 2016
1.
2.
3. Financial Statements
34. Capital and financial risk management continued
The numbers in the following tables have been included in the Group’s cashflow forecasts for the purposes of considering Liquidity Risk as noted above.
The following are the undiscounted contractual maturities of financial liabilities, including interest and excluding the impact of netting agreements:
Liquidity Risk
Financial Liabilities
Loans and Borrowings
Bank overdrafts
Commercial paper and
2016
Carrying
Value
£m
2016
Contractual
Cash Flows
£m
2016
0-12 months
£m
2016
1-2 years
£m
2016
2-5 years
£m
2016
> 5 years
£m
2015
Carrying
Value
£m
2015
Contractual
Cash Flows
£m
2015
0-12
months
£m
2015
1-2 years
£m
2015
2-5 years
£m
2015 > 5
years
£m
–
–
–
–
–
–
0.2
(0.2)
(0.2)
–
–
–
cash advances
198.8
Loans – floating
1,256.0
Loans – fixed
991.8
Unsecured bonds – fixed 4,138.9
Non-recourse funding
200.7
Fair value adjustment
81.8
Finance lease obligations
6,868.0
300.8
(198.8)
(1,292.1)
(1,352.0)
(6,521.2)
(487.4)
–
(9,851.5)
(494.9)
(198.8)
(710.2)
(38.2)
(183.6)
(22.8)
–
–
(113.2)
(50.7)
–
–
(151.1)
(317.6)
(870.9)
(392.2)
(183.6) (1,000.8) (5,153.2)
(375.2)
(67.0)
(22.4)
–
–
–
(1,153.6)
(53.9)
(369.9) (1,777.6) (6,550.4)
(225.8)
(160.0)
(55.2)
–
1,150.0
822.0
3,699.7
140.0
(30.9)
5,781.0
319.7
–
(1,187.5)
(1,047.0)
(6,379.8)
(140.1)
–
(8,754.6)
(548.3)
–
(708.5)
(31.5)
(179.2)
(12.5)
–
(931.9)
(52.9)
–
(5.6)
(31.5)
(179.3)
(12.6)
–
–
(16.8)
(293.9)
–
(456.6)
(690.1)
(1,013.9) (5,007.4)
(78.7)
–
(36.3)
–
(229.0) (1,360.9) (6,232.8)
(278.1)
(164.1)
(53.2)
Derivative Financial
Liabilities
Operating derivatives
designated at fair value
Interest rate swaps used
for hedging
Interest rate swaps
7,168.8 (10,346.4)
(1,207.5)
(425.1) (1,937.6) (6,776.2)
6,100.7
(9,302.9)
(984.8)
(282.2)
(1,525.0)
(6,510.9)
2,218.3
5,667.0
4,645.5
951.4
70.1
–
2,688.3
12,245.3
9,037.1
2,659.1
543.8
5.3
58.4
(58.4)
(19.7)
(19.7)
(16.6)
(2.4)
105.9
(105.9)
(22.3)
(22.3)
(46.2)
(15.1)
designated at fair value
357.1
(357.1)
(20.1)
(19.9)
(54.7)
(262.4)
367.4
(367.4)
(68.5)
(18.1)
(51.3)
(229.5)
Forward exchange
contracts held for
hedging
Forward exchange
contracts designated at
fair value
Other financial liabilities
Trade payables
7.4
(180.3)
(89.9)
(90.1)
(0.3)
0.1
(0.1)
(0.1)
–
–
–
–
62.0
(558.0)
(279.8)
(174.6)
(103.6)
7.1
(64.5)
(64.5)
–
–
–
–
2,641.3
5,071.1
4,515.7
821.7
(1.5)
(264.8)
3,230.7
11,149.5 8,602.0 2,444.1
342.7
(239.3)
1,868.3
(1,868.3)
(1,868.3)
1,868.3
(1,868.3)
(1,868.3)
–
–
–
–
–
–
2,707.7
(2,707.7)
(2,707.7)
2,707.7
(2,707.7)
(2,707.7)
–
–
–
–
–
–
Total
11,678.4
(7,143.6)
1,439.9
396.6 (1,939.1) (7,041.0)
12,039.1
(861.1) 4,909.5
2,161.9 (1,182.3) (6,750.2)
Derivative Financial Assets
Financing derivatives
Operating derivatives
(298.7)
(512.7)
(519.6)
(69.2)
37.6
38.5
(211.7)
(61.4)
(110.7)
1.4
14.7
33.2
designated at fair value
(1,854.0)
(5,146.1)
(4,082.9)
(950.6)
(112.6)
–
(2,355.0)
(9,522.0)
(7,310.3)
(1,967.5)
(244.2)
–
(2,152.7)
(5,658.8)
(4,602.5) (1,019.8)
(75.0)
38.5
(2,566.7)
(9,583.4)
(7,421.0)
(1,966.1)
(229.5)
33.2
Net total (i)
9,525.7 (12,802.4)
(3,162.6)
(623.2)(2,014.1) (7,002.5) 9,472.4
(10,444.5)
(2,511.5)
195.8 (1,411.8)
(6,717.0)
(i) The Group believes the liquidity risk associated with out-of-the-money operating derivative contracts needs to be considered in conjunction with the profile of payments or receipts arising from
derivative financial assets. It should be noted that cash flows associated with future energy sales and commodity contracts which are not IAS 39 financial instruments are not included in this
analysis, which is prepared in accordance with IFRS 7.
181
Financial Statements
Notes on the financial statements continued
for the year ended 31 March 2016
34. Capital and financial risk management continued
The Company has the following liquidity maturity profile:
Liquidity Risk
Financial Liabilities
Loans and Borrowings
Commercial paper and
cash advances
Loans – floating
Loans – fixed
Unsecured bonds – fixed
Fair value adjustment
Derivative Financial
Liabilities
Interest rate swaps used for
hedging
Interest rate swaps
2016
Carrying
Value
£m
2016
Contractual
Cash Flows
£m
2016
0-12
months
£m
2016
1-2 years
£m
2016
2-5 years
£m
2016
> 5 years
£m
2015
Carrying
Value
£m
2015
Contractual
Cash Flows
£m
2015
0-12
months
£m
2015
1-2 years
£m
2015
2-5 years
£m
2015
> 5 years
£m
198.8
1,106.0
672.1
3,334.5
81.8
5,393.2
(198.8)
(1,130.4)
(835.3)
(4,855.0)
–
(198.8)
(708.1)
(27.2)
(147.5)
–
–
(111.1)
(39.6)
(147.5)
–
–
–
–
(311.2)
(359.4)
(409.1)
(892.4) (3,667.6)
–
–
–
1,000.0
672.0
2,778.3
(30.9)
–
(1,024.4)
(862.5)
(4,361.2)
–
–
(706.5)
(27.2)
(137.7)
–
–
(3.6)
(27.2)
(137.7)
–
–
(10.7)
(281.0)
(888.0)
–
–
(303.6)
(527.1)
(3,197.8)
–
(7,019.5) (1,081.6)
(298.2) (1,563.0) (4,076.7)
4,419.4
(6,248.1)
(871.4)
(168.5)
(1,179.7) (4,028.5)
58.4
(58.4)
(19.7)
(19.7)
(16.6)
(2.4)
105.9
(105.9)
(22.3)
(22.3)
(46.2)
(15.1)
designated at fair value
341.1
(341.1)
(19.3)
(19.2)
(52.5)
(250.1)
352.7
(352.7)
(67.9)
(17.4)
(49.4)
(218.0)
Forward exchange
contracts held for
hedging
Other financial liabilities
Amounts due to subsidiary
–
–
–
–
–
–
399.5
(399.5)
(39.0)
(38.9)
(69.1)
(252.5)
16.4
475.0
(138.1)
(71.4)
(66.7)
–
–
(596.7)
(161.6)
(106.4)
(95.6)
(233.1)
undertakings
3,385.8
(3,385.8) (3,385.8)
3,385.8
(3,385.8) (3,385.8)
–
–
–
–
–
–
2,715.0
(2,715.0)
(2,715.0)
2,715.0
(2,715.0)
(2,715.0)
–
–
–
–
–
–
Total
9,178.5
(10,804.8) (4,506.4)
(337.1) (1,632.1) (4,329.2)
7,609.4
(9,559.8) (3,748.0)
(274.9)
(1,275.3)
(4,261.6)
Derivative Financial Assets
Financing derivatives
(256.9)
(206.4)
(315.1)
(8.6)
78.8
38.5
(188.5)
(187.1)
(45.2)
(46.7)
(53.8)
(41.4)
Net total
8,921.6
(11,011.2) (4,821.5)
(345.7) (1,553.3) (4,290.7)
7,420.9
(9,746.9) (3,793.2)
(321.6)
(1,329.1) (4,303.0)
(iii) Commodity risk
The Group’s Energy Portfolio Management (‘EPM’) business manages the Group’s exposure to energy commodity price movements and requirement
for the delivery of its physical commodity needs as part of its normal course of business. The risk management activity carried out by EPM arises from
the Group’s requirement to source gas, electricity or other commodities such as renewable obligation certificates for Energy Supply, and to procure fuel
and other commodities and provide a route-to-market for Electricity Generation.
The Group’s strategy is to manage all exposures to commodity risk through volumetric limits and to measure the exposure by use of Value at Risk (VaR)
models. The exposure is subject to financial limits established by the Board and managed by reference to guidance agreed by the Risk and Trading
Committee. Exposures are reported to the Committee on a monthly basis and to the Board when certain trigger levels are exceeded. Within this
approach, only certain of the Group’s energy commodity contracts are deemed to constitute financial instruments under IAS 39. As a result, while
the Group manages the commodity price risk associated with both financial and non-financial commodity contracts, it is only the fair value of IAS 39
financial instruments which represents the exposure of the Group’s commodity price risk under IFRS 7. This is a consequence of the Group’s accounting
policy which stipulates that commodity contracts which are designated as financial instruments under IAS 39 should be accounted for on a fair value
basis with changes in fair value reflected in profit or equity. Conversely, commodity contracts that are not designated as financial instruments under IAS
39 will be accounted for as ‘own use’ contracts. As fair value changes in own use contracts are not reflected through profit or equity, these do not
represent the IFRS 7 commodity price risk. Therefore, as the overall Group VaRs associated with commodity risk will be monitored for internal risk
management purposes and is outside the scope of IAS 39.
In EPM, the economic volatility that the Group is exposed to related to this risk is managed through a selection of longer and shorter term contracts for
commodities such as gas, electricity, coal and carbon allowances, the arm’s length arrangements with the Group’s gas production business and through
flexibility from the Group’s fleet of generation assets including assets such as pumped storage generating plant, flexible hydro generating plant, standby
oil plant and contracts with the gas storage business.
182 SSE plc Annual Report 2016
1.
2.
3. Financial Statements
34. Capital and financial risk management continued
Short-term exposures will arise from the requirement to match volumes of procured gas and electricity with demand for gas and electricity by Energy
Supply customers. In addition, exposures can arise from matching fuel and other commodity procurement with demand for these commodities arising
from the Group’s Generation assets. Both can vary from expectations and result in a requirement to close the contracted positions at unfavourable
prices. Longer-term exposures are managed by EPM through longer term contracts (including forwards, futures contracts and other financial
instruments). These, in turn, are used to reduce short-term market exposures.
As noted, certain commodity contracts are entered into primarily for own use purposes to supply to customers or to provide fuel to power stations.
However, as noted, a number of these contracts do not qualify for own use treatment under IAS 39 and are subject to fair value measurement through
the income statement. In addition to this, the Group enters into certain contracts to manage commodity price and volume risk. These are also subject to
fair value measurement through the income statement. Finally, other physical contracts can be treated as the hedging instrument in documented cash
flow hedging relationships where the hedged item is the forecast future purchase requirement to meet production or customer demand. The
accounting policies associated with such items are explained in the Accompanying information section A1.
The consequential commodity risk which derives from these activities is quantified by the use of a Value at Risk (VaR) model which considers exposures
in all commodities and provides an estimate of the potential change to the Group’s forecast profits over a given period and to a given confidence level.
The calculated financial risk is controlled through the imposition of a number of risk limits approved by the Board and monitored and managed by the
Risk and Trading Committee. The Group’s exposure to Commodity risk is subsequently reported to and monitored by the Risk and Trading Committee
and to the Executive Committee by exception.
The Group’s exposure to commodity price risk according to IFRS 7 is measured by reference to the Group’s IAS 39 commodity contracts. IFRS 7 requires
disclosure of a sensitivity analysis for market risks that is intended to illustrate the sensitivity of the Group’s financial position and performance to changes
in market variables impacting upon the fair value or cash flows associated with the Group’s financial instruments.
Therefore, the sensitivity analysis provided discloses the effect on profit or loss and equity at the balance sheet date assuming that a reasonably possible
change in the relevant commodity price had occurred, and been applied to the risk exposures in existence at that date. The reasonably possible changes
in commodity prices used in the sensitivity analysis were determined based on calculated or implied volatilities where available, or historical data.
The sensitivity analysis has been calculated on the basis that the proportion of commodity contracts that are IAS 39 financial instruments remains
consistent with those at that point. Excluded from this analysis are all commodity contracts that are not financial instruments under IAS 39.
Commodity prices
UK gas (p/therm)
UK power (£/MWh)
UK coal (US$/tonne)
UK emissions (€/tonne)
UK oil (US$/bbl)
2016
2015
Reasonably
possible increase/
decrease in
variable
Base Price (i)
Reasonably
possible increase/
decrease in
variable
Base Price (i)
33
33
42
5
49
+/- 4
+/- 5
+/- 4
+/- 1
+/- 7
48
46
60
7
67
+/- 7
+/- 7
+/- 4
+/- 2
+/- 7
(i) The base price represents the average forward market price over the duration of the active market curve used to calculate the sensitivity analysis.
The impacts of reasonably possible changes in commodity prices on profit after taxation based on the rationale described are as follows:
Incremental profit/(loss)
Commodity prices combined – increase
Commodity prices combined – decrease
2016
Impact on profit
and equity
(£m)
2015
Impact on
equity
(£m)
77.6
(77.6)
360.1
(360.1)
The sensitivity analysis provided is hypothetical and is based on the Group’s commodity contracts under IAS 39. This is analysis only and should be used
with caution as the impacts disclosed are not necessarily indicative of the actual impacts that would be experienced. It should also be noted that these
sensitivities impacts provided are indicative only and are based on calculations which do not consider all interrelationships, consequences and effects of
such a change in those prices.
183
Financial Statements
Notes on the financial statements continued
for the year ended 31 March 2016
34. Capital and financial risk management continued
(iv) Currency risk
The Group publishes its consolidated financial statements in Sterling but also conducts business in foreign currencies. As a result, it is subject to foreign
currency exchange risk arising from exchange rate movements which will be reflected in the Group’s transaction costs or in the underlying foreign
currency assets of its foreign operations.
The Group’s policy is to use forward contracts, swaps and options to manage its exposures to foreign exchange risk. All such exposures are transactional
in nature, and relate primarily to procurement contracts, commodity purchasing and related freight requirements, commodity hedging, long-term plant
servicing and maintenance agreements, and the purchase and sale of carbon emission certificates. The policy is to seek to hedge 100% of its currency
requirements arising under all committed contracts excepting commodity hedge transactions, the requirements for which are significantly less
predictable. The policy for these latter transactions is to assess the Group’s requirements on a rolling basis and to enter into cover contracts as appropriate.
The Group has foreign subsidiary operations with significant Euro-denominated net assets. The Group’s policy is to hedge its net investment in its
foreign operations by ensuring the net assets whose functional currency cash flows are denominated in Euros are matched by borrowings in Euros.
For the acquired net assets whose functional cash flows are in Sterling, the Group will ensure Sterling denominated borrowings are in place to minimise
currency risk.
Significant exposures are reported to, and discussed by, the Risk and Trading Committee on an ongoing basis and additionally form part of the bi-annual
Treasury report to the Audit Committee.
At the balance sheet date, the total nominal value of outstanding forward foreign exchange contracts that the Group has committed to is:
Forward foreign exchange contracts
The Group’s exposure to foreign currency risk was as follows:
2016
¥
m
DKK
m
SEK
m
€
m
$
m
NOK
m
CHF
m
¥
m
DKK
m
SEK
m
2016
£m
2015
£m
2,783.8
1,735.4
2015
€
m
$
m
NOK
m
CHF
m
15,000.0
–
– 2,063.3
850.0
–
– 15,000.0
–
– 1,102.4
700.0
–
–
Gross exposure
15,000.0
982.1 1,105.9 2,517.2 1,227.5
–
982.1 1,105.9
453.9
377.5
23.9
23.9
34.6
–
– 2,081.8
515.7
474.2
349.2
34.6 15,000.0
– 2,081.8
1,618.1
1,174.2
349.2
34.6
34.6
Forward
exchange/swap
contracts
Net exposure
(in currency)
Net exposure
(in £m)
15,000.0
982.1 1,105.9 2,029.1 1,239.0
23.9
34.6 15,000.0
– 2,081.8
992.0 1,066.4
349.2
34.6
–
–
–
–
–
–
488.1
(11.5)
386.0
(8.0)
–
–
–
–
–
–
–
–
–
–
626.1
107.8
452.5
72.6
–
–
–
–
This represents the net exposure to foreign currencies, reported in pounds Sterling, and arising from all Group activities. All sensitivity analysis has been
prepared on the basis of the relative proportions of instruments in foreign currencies being consistent as at the balance sheet date. This includes only
monetary assets and liabilities denominated in a currency other than Sterling and excludes the translation of the net assets of foreign operations but not
the corresponding impact of the net investment hedge.
The sensitivity analysis is indicative only and it should be noted that the Group’s exposure to such market rate changes is continually changing. The
calculations are based on linear extrapolations of rate changes which may not reflect the actual result which would impact upon the Group.
184 SSE plc Annual Report 2016
Loans and
borrowings
Purchase and
commodity
contract
commitments
1.
2.
3. Financial Statements
34. Capital and financial risk management continued
A 10% change in foreign currency exchange rates would have had the following impact on profit after taxation, based on the assumptions presented above:
US Dollars
Euro
DKK
¥
SEK
NOK
CHF
Equity
Income Statement
At 31 March
2016
£m
At 31 March
2015
£m
At 31 March
2016
£m
At 31 March
2015
£m
–
43.2
–
–
–
–
–
43.2
–
38.5
–
–
–
–
–
38.5
0.7
(8.1)
–
–
–
–
–
(7.4)
(6.5)
1.7
–
–
–
–
–
(4.8)
The impact of a decrease in rates would be an identical reduction in the annual charge.
(v) Interest rate risk
Interest rate risk derives from the Group’s exposure to changes in the value of an asset or liability or future cash flows through changes in interest rates.
The Group’s policy is to manage this risk by stipulating that a minimum of 50% of Group borrowings be subject to fixed rates of interest, either directly
through the debt instruments themselves or through the use of derivative financial instruments. The floating rate borrowings are provided by banks
including the European Investment Bank (EIB). Such instruments include interest rate swaps and options, forward rate agreements and, in the case of
debt raised in currencies other than Sterling, cross currency swaps. These practices serve to reduce the volatility of the Group’s financial performance.
Although interest rate derivatives are primarily used to hedge risk relating to current borrowings, under certain circumstances they may also be used to
hedge future borrowings. Any such pre-hedging is unwound at the time of pricing the underlying debt, either through cash settlement on a net present
value basis or by transacting offsetting trades. The floating rate borrowings mainly comprise cash advances from the European Investment Bank (EIB).
The impact of a change in interest rates is dependent on the specific details of the financial asset or liability in question. Changes in fixed rate financial
assets and liabilities, which account for the majority of cash, loans and borrowings, are not measured at fair value through the income statement. In
addition to this, changes to fixed-to-floating hedging instruments which are recorded under cash flow hedge accounting also do not impact the income
statement. Changes in variable rate instruments and hedging instruments and hedged items recorded under fair value hedge accounting are recorded
through the income statement. The exposure measured is therefore based on variable rate debt and instruments.
The net exposure to interest rates at the balance sheet date can be summarised thus:
Interest bearing/earning assets and liabilities:
– fixed
– floating
Represented by:
Cash and cash equivalents
Derivative financial liabilities
Loans and borrowings
Finance lease obligations
2016
Carrying
amount
£m
(5,613.9)
(1,372.1)
(6,986.0)
360.2
(177.4)
(6,868.0)
(300.8)
(6,986.0)
2015
Carrying
amount
£m
(4,983.4)
79.3
(4,904.1)
1,512.3
(284.8)
(5,811.9)
(319.7)
(4,904.1)
Following from this, the table below represents the expected impact of a change of 100 basis points in short term interest rates at the reporting date in
relation to equity and income statement. The analysis assumes that all other variables, in particular foreign currency rates, remain constant. An increase
in exchange rates would be a change to either the income statement or equity. The assessment is based on a revision of the fair value assumptions
included in the calculated exposures in the previous table.
All sensitivity analysis has been prepared on the basis of the proportion of fixed to floating instruments being consistent as at the balance sheet date and
is stated after the effect of taxation.
185
Financial Statements
Notes on the financial statements continued
for the year ended 31 March 2016
34. Capital and financial risk management continued
The sensitivity analysis is indicative only and it should be noted that the Group’s exposure to such market rate changes is continually changing. The
calculations are based on linear extrapolations of rate changes which may not reflect the actual result which would impact upon the Group.
Income statement
2016
£m
14.3
14.3
2015
£m
12.3
12.3
The impact of a decrease in rates would be an identical reduction in the annual charge. There is no impact on equity as the analysis relates to the
Group’s net exposure at the balance sheet date. Contracts qualifying for hedge accounting are, by definition, part of the group’s covered position.
(vi) Primary statement disclosures
For financial reporting purposes, the Group has classified derivative financial instruments into two categories, operating derivatives and financing
derivatives. Operating derivatives include all qualifying commodity contracts including those for electricity, gas, oil, coal and carbon. Financing
derivatives include all fair value and cash flow interest rate hedges, non-hedge accounted (mark-to-market) interest rate derivatives, cash flow foreign
exchange hedges and non-hedge accounted foreign exchange contracts. Non-hedge accounted contracts are treated as held for trading.
The net movement reflected in the income statement can be summarised thus:
Operating Derivatives
Total result on operating derivatives (i)
Less: Amounts settled (ii)
Movement in unrealised derivatives
Financing Derivatives (and hedged items)
Total result on financing derivatives (i)
Less: Amounts settled (ii)
Movement in unrealised derivatives
Net income statement impact
2016
£m
2015
£m
(1,375.4)
1,344.3
(31.1)
(1,073.5)
1,005.7
(67.8)
(214.9)
229.2
14.3
(395.5)
351.3
(44.2)
(16.8)
(112.0)
(i) Total result on derivatives in the income statement represents the total amounts (charged) or credited to the income statement in respect of operating and financial derivatives.
(ii) Amounts settled in the year represent the result on derivatives transacted which have matured or been delivered and have been included within the total result on derivatives.
The derivative financial assets and (liabilities) are represented as follows:
2016
£m
2015
£m
537.7
1,615.0
2,152.7
(857.5)
(1,783.8)
(2,641.3)
(488.6)
566.8
1,999.9
2,566.7
(933.4)
(2,297.3)
(3,230.7)
(664.0)
Derivative Financial Assets
Non-current
Current
Derivative Liabilities
Non-current
Current
Total derivative liabilities
Net (liability)
186 SSE plc Annual Report 2016
1.
2.
3. Financial Statements
34. Capital and financial risk management continued
Fair Value Hierarchy
The following table provides an analysis of financial instruments that are measured subsequent to initial recognition at fair value, grouped into Levels 1 to
3 based on the degree to which the fair value is observable.
- Level 1 fair value measurements are those derived from unadjusted quoted market prices for identical assets or liabilities.
- Level 2 fair value measurements are those derived from inputs other than quoted prices included within level 1 that are observable for the asset or
liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices).
- Level 3 fair value measurements are those derived from valuation techniques that include inputs for the asset or liability that are not based on
observable market data.
Financial assets
Energy derivatives
Interest rate derivatives
Foreign exchange derivatives
Equity Investments
Financial liabilities
Energy derivatives
Interest rate derivatives
Foreign exchange derivatives
Loans and borrowings
Level 1
£m
378.7
–
–
–
378.7
(436.7)
–
–
–
(436.7)
Level 2
£m
1,475.3
238.1
60.6
25.1
1,799.1
(1,781.6)
(415.5)
(7.5)
81.8
(2,122.8)
Level 3
£m
Total
£m
–
–
–
–
–
–
–
–
–
–
1,854.0
238.1
60.6
25.1
2,177.8
(2,218.3)
(415.5)
(7.5)
81.8
(2,559.5)
There were no significant transfers out of level 1 into level 2 and out of level 2 into level 1 during the year ended 31 March 2016.
(vii) Cash flow hedges
The Group designates contracts which qualify as hedges for accounting purposes either as cash flow hedges or fair value hedges. Cash flow hedges are
contracts entered into to hedge a forecast transaction or cash flow risk generally arising from a change in interest rates or foreign currency exchange
rates and which meet the effectiveness criteria prescribed by IAS 39. The Group’s accounting policy on cash flow hedges is explained in the
Accompanying Information section A1.
The following table indicates the contractual maturities of the expected transactions and the qualifying cash flow hedges associated:
Cash flow hedges
Interest rate swaps:
Assets
Liabilities
Forward exchange contracts:
Assets
Liabilities
2016
Carrying
amount
2016
Expected
cash
flows
2016
0-12
months
2016
1-2 years
2016
2-5 years
2016
> 5 years
2015
Carrying
amount
2015
Expected
cash flows
2015
0-12
months
2015
1-2 years
2015
2-5 years
2015
> 5 years
0.4
(0.1)
0.3
0.4
(0.1)
0.3
–
–
–
0.1
–
0.1
0.1
–
0.1
36.5
(7.4)
(631.9)
(180.3)
(460.5)
(89.9)
(130.3)
(90.1)
(41.2)
(0.3)
29.1
(812.2)
(550.4)
(220.4)
(41.5)
0.2
(0.1)
0.1
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
12.0
(62.0)
(139.6)
(558.0)
(47.2)
(279.8)
(45.2)
(174.6)
(39.0)
(103.6)
(50.0)
(697.6)
(327.0)
(219.8)
(142.6)
(8.2)
–
(8.2)
(viii) Net investment hedge
The Group’s net investment hedge consists of debt issued in the same currency (€) as the net investment in foreign subsidiaries with € denominated
functional currencies being the Airtricity Supply business and the thermal plants and wind farms in Ireland. The hedge compares the element of the
net assets whose functional cash flows are denominated in € to the matching portion of the € borrowings held by the Group. This therefore provides
protection against movements in foreign exchange rates.
Gains and losses in the hedge are recognised in equity and will be transferred to the income statement on disposal of the foreign operation (2016
– £33.4m loss, 2015 – £48.7m gain). Gains and losses on the ineffective portion of the hedge are recognised immediately in the income statement
(2016 – £nil, 2015 – £nil).
187
Financial Statements
Notes on the financial statements continued
for the year ended 31 March 2016
35. Related party transactions
The immediate parent and ultimate controlling party of the Group is SSE plc (incorporated in Scotland). Balances and transactions between the
Company and its subsidiaries, which are related parties of the Company, have been eliminated on consolidation and are not disclosed in this note.
Details of transactions between the Group and other related parties are disclosed below.
Trading transactions
The following transactions took place during the year between the Group and entities which are related to the Group but which are not members of the
Group. Related parties are defined as those in which the Group has control, joint control or significant influence over.
2016
Sale of goods
and services
£m
2016
Purchase of
goods
and services
£m
2016
Amounts
owed from
£m
2016
Amounts
owed to
£m
2015
Sale of goods
and services
£m
Joint ventures:
Seabank Power Ltd
Marchwood Power Ltd
Scotia Gas Networks
Ltd
Other Joint Ventures
Associates
13.7
12.7
46.3
8.1
0.5
(125.8)
(108.7)
(155.8)
(1.2)
(59.7)
–
0.1
15.9
8.4
2.4
18.2
15.5
0.9
–
3.9
20.1
28.7
49.0
27.6
0.8
2015
Purchase of
goods
and services
£m
(115.5)
(114.4)
(166.4)
(6.0)
(41.9)
2015
Amounts
owed from
£m
2015
Amounts
owed to
£m
1.8
3.4
7.7
3.0
1.9
11.1
12.7
0.3
–
2.5
The transactions with Seabank Power Limited and Marchwood Power Limited relate to the contracts for the provision of energy or the tolling of energy
under power purchase arrangements. Scotia Gas Networks Limited has operated the gas distribution networks in Scotland and the South of England
from 1 June 2005. The Group’s gas supply activity incurs gas distribution charges while the Group also provides services to Scotia Gas Networks in the
form of a management service agreement for corporate services, stock procurement services and the provision of the capital expenditure on the
development of front office management information systems.
The amounts outstanding are trading balances, are unsecured and will be settled in cash. No guarantees have been given or received. No provisions
have been made for doubtful debts in respect of the amounts owed by related parties. Aggregate capital loans to joint ventures and associates are
shown in note 17.
Remuneration of key management personnel
The remuneration of the key management personnel of the Group (excluding amounts equivalent to pension value increases as set out in the
Remuneration Report), is set out below in aggregate.
Short-term employment benefits
Executive Directors
Other Executive Committee members
2016
£m
2.2
2.4
4.6
2015
£m
2.8
2.5
5.3
Key management personnel are responsible for planning, directing and controlling the operations of the Group. These activities were conducted by the
Executive Committee, comprising the two Executive Directors and the Managing Directors of the Networks, Retail, Wholesale and Enterprise businesses.
In addition, the key management personnel receive share based remuneration, details of which are found at note 33. Further information about the
remuneration of individual directors is provided in the audited part of the Remuneration Report. The Executive Directors are employed by the Company.
Information regarding transactions with post-retirement benefit plans is included in note 32.
188 SSE plc Annual Report 2016
1.
2.
3. Financial Statements
36. Commitments and contingencies
36.1 Capital commitments
Capital expenditure:
Contracted for but not provided
2016
£m
2015
£m
898.4
1,059.5
Contracted for but not provided capital commitments includes the fixed contracted costs of the Group’s major capital projects. In practice contractual
variations may arise on the final settlement of these contractual costs.
36.2 Operating lease commitments
(i) Leases as lessee:
Amount included in the income statement relating to the current year leasing arrangements
Minimum lease payments – power purchase agreement
Other lease payments
2016
£m
93.1
73.0
166.1
2015
£m
92.3
70.9
163.2
At the balance sheet date, the Group had outstanding commitments for future minimum lease payments under non-cancellable operating leases, which
fall due as follows:
Power purchase agreements
Within one year
In second to fifth years inclusive
Other leases
Within one year
In second to fifth years inclusive
After five years
Total
Within one year
In second to fifth years inclusive
After five years
2016
£m
78.6
86.8
165.4
76.9
134.9
244.5
456.3
155.5
221.7
244.5
621.7
2015
£m
89.4
164.3
253.7
60.4
116.8
259.3
436.5
149.9
281.1
259.3
690.3
The average power purchase agreement lease term is 4 years (2015 – 4 years).
Certain obligations under power purchase agreements with various power generating companies are not deemed to qualify as finance leases as the
lease term is not judged to be substantially all of the economic life of the power station and the present value of the minimum lease payments at the
inception of the agreements did not amount to substantially all of the fair value of the power stations at that time. The Company has no operating lease
commitments as a lessee.
(ii) Leases as lessor:
The Group and Company have no operating lease commitments as a lessor.
189
Financial Statements
Notes on the financial statements continued
for the year ended 31 March 2016
36. Commitments and contingencies continued
36.3 Guarantees, indemnities and other contingent liabilities
SSE plc has provided guarantees on behalf of subsidiary, joint venture and associated undertakings as follows:
Bank borrowing
Performance of contracts
Purchase of gas
Subsidiaries have provided guarantees on behalf of the Company as follows:
Bank borrowing
2016
£m
352.2
1,357.6
10.0
2015
£m
302.0
1,401.8
10.0
2016
£m
2015
£m
1,971.1
1,885.7
In the year to 31 March 2016, the Group had drawn down £105m from its Bank of America Merrill Lynch International Ltd facility. SSE Energy Supply Ltd
and SSE Generation Ltd have entered into a guarantee with Bank of America Merrill Lynch International Ltd in relation to the bank facility to guarantee
the obligations of SSE Plc. In relation to bank borrowings the guarantee amounts outlined above include accrued interest.
Unlimited guarantees have been provided on behalf of subsidiary undertakings in relation to eight contracts in respect of performance of work and
any liabilities arising. SSE Services Plc, a wholly owned subsidiary of the Company, has provided a guarantee to Group Trustee Independent Trustees in
respect of Southern Electric Group of the Electricity Supply Pension Scheme in respect of funding required by the Scheme. SSE Contracting Limited, a
wholly owned subsidiary of the Company, has provided a guarantee to Tay Valley Lighting (Leeds) Ltd, Tay Valley Lighting (Newcastle & North Tyneside)
Ltd and Tay Valley Lighting (Stoke on Trent) Ltd. SSE E&P (UK) Limited, a wholly owned subsidiary of the Company, has provided a guarantee to Hess
Limited in respect of decommissioning liabilities. SSE E&P (UK) Limited has also provided a guarantee to Britoil Limited and Arco British Limited in respect
of the acquisition of the Sean Field. SSE E&P (UK) Limited has also provided a guarantee to Perenco UK Limited in respect of a Sale and Purchase Agreement
for the Minerva, Apollo and Mercury Fields. SSE Stock Limited, a wholly owned subsidiary of the Company, has provided a guarantee to ABB Limited in
connection with the use of HVDC Replica Control Panels for Caithness-Moray Project.
Where the Company enters into financial guarantee contracts to guarantee indebtedness of the other companies within its group, the Company
considers these to be insurance arrangements, and accounts for them as such. In this respect, the Company treats the guarantee contract as a
contingent liability until such time as it becomes probable that the Company will be required to make payment under the guarantee.
37. Post Balance Sheet Events
On 13 May 2016, the Group agreed to waive certain contractual rights that gave rise to the accounting judgement that the Group had power to control
the “relevant activities” of Clyde Windfarm (Scotland) Limited (‘Clyde’). As a consequence, the Group will prospectively account for its interest in Clyde as
that of an investment in an equity-accounted joint venture.
190 SSE plc Annual Report 2016
Accompanying information
1.
2.
3. Financial Statements
This section explains the significant accounting policies applied in the preparation of the consolidated financial statements and provides details of the
Group’s principal subsidiaries, joint ventures and subsidiaries.
A1. Basis of consolidation and significant accounting policies
A1.1 Basis of consolidation
The financial statements consolidate the financial statements of the Company and its subsidiaries together with the Group’s share of the results and net
assets of its jointly controlled entities and associates.
Subsidiaries
Subsidiaries (including special purpose entities) are those entities controlled by the Group or the Company. Control exists when the Group has the
power, directly or indirectly, to govern the financial and operating policies of an entity in order to obtain benefits from its activities. In assessing control,
potential voting rights that are currently exercisable or convertible are taken into account. The financial statements of subsidiaries acquired are
consolidated in the financial statements of the Group from the date that control commences until the date control ceases. Transactions with non-
controlling interests that relate to their ownership interests and do not result in a loss of control are accounted for as equity transactions. All business
combinations are accounted for by applying the acquisition method of accounting as defined by IFRS 3 Business Combinations.
The special purpose entities referred to relate to entities in which the Group has a 50% shareholding but whose activities the Group is deemed to control
under IFRS 10 Consolidated Financial Statements
In the Company, investments in subsidiaries are carried at cost less any impairment charges.
Interests in joint arrangements and associates
Joint arrangements, as defined by IFRS 11, are those arrangements that convey to the parties ‘joint control’. Joint control exists when decisions about
the ‘relevant activities’, being the financial, operational or strategic policies of the arrangement, are made with the unanimous consent of the parties to
the arrangement. The Group’s investments in joint arrangements are classified as either joint operations or joint ventures depending on the investor’s
contractual rights and obligations. Associates are those investments over which the Group has significant influence but neither control or joint control.
These are normally where the Group holds between 20% and 50% of the voting rights. The Group’s joint ventures and associates are accounted for
using the equity method and are disclosed at note 17 to the Financial Statements.
Under the equity method of accounting, the joint venture and associate investments are carried at cost plus the Group’s share of post-acquisition results,
less any impairment in value. The Group recognises its share of the results of these equity-accounted operations after tax and interest in the income
statement. Where necessary to ensure consistency, the accounting policies of the associate or joint venture have been adjusted to align to the
accounting policies of the Group.
The Group’s interests in its joint operations are accounted for by recognising its share of the assets, liabilities, revenue and expenses of the operation. In
these arrangements, the Group’s share of the revenue will be eliminated as these relate to its purchased share of the output from the arrangement.
Details are included at note 17.
Transactions eliminated on consolidation
Intra-Group balances and any unrealised gains and losses or income and expenses arising from Intra-Group transactions, are eliminated in preparing the
consolidated financial statements. Unrealised gains and losses arising from transactions with associates and jointly controlled entities are eliminated to
the extent of the Group’s interest in the entity.
A1.2 Accounting policies
Revenue recognition: energy, services and goods relating to the sale of energy
Revenue is recognised to the extent that it is probable that economic benefits will flow to the Group and that the revenue can be reliably measured.
Revenue comprises sales of energy, use of system income, gas production revenue, gas storage facility revenue, the value of contracted services and
facilities provided and goods sold during the year in the normal course of business.
Revenue on energy sales comprises sales to retail end-user customers including an estimate of the value of electricity and gas supplied to customers
between the date of the last meter reading and the year end. Revenue on energy sales also includes monies received from the electricity and gas
balancing markets in the UK and other wholesale market energy sales. Unread energy sales are estimated using historical consumption patterns taking
account of industry volume reconciliation processes.
Revenue from sales and optimisation trades in physical and financial energy and commodity contracts is recognised gross in the income statement.
Revenue associated with business interruption insurance claims is recognised as revenue in the income statement only when it is virtually certain that
the claim will be successful.
Revenue from use of energy systems includes an estimation of the volume of electricity distributed or transmitted by customers based on independently
procured electricity settlement systems data. Annual revenue is dependent on being approved by the industry regulator, Ofgem. Certain circumstances
may result in the regulatory ‘allowed’ income being over- or under-recovered in the financial year. Any over- or under-recovery is included in the
calculation of the following year’s regulatory use of system revenue within agreed parameters. No adjustment is made for over- or under-recoveries in
the year that they arise.
191
Financial Statements
Accompanying information continued
A1. Basis of consolidation and significant accounting policies continued
Revenue from the production of natural gas, crude oil and condensates is recognised when title passes to the customer. The Group has an interest with
other producers in jointly ventures and associates for the production of such products.
Revenue under these arrangements is recognised based on the entitlement method in reference to the Group’s interest and the relevant production
sharing terms. Where there are differences between the Group’s share of production and the volume sold, an overlift or underlift is recorded (see below).
Where the Group has an ongoing obligation to provide services, revenues are recognised as the service is performed and amounts billed in advance are
treated as deferred income and excluded from current revenue. For network connections activity from 1 November 2009, the revenue recognition rules
of IFRIC 18 have been applied, whereby income is recognised over the course of completion of the associated capital works unless there is a future
service obligation, in which case revenue is recognised over the service period. Revenue from fixed-fee service contracts is recognised over the life of
the contract, in relation to the benefit received by the customer.
Gas storage facilities revenues are recognised evenly over the contract period, whilst revenues for the injection and withdrawal of gas are recognised at
the point of gas flowing into or out of the storage facilities.
Sales of goods are recognised when goods are delivered and title has passed, along with the risks and rewards of ownership.
Overlift and underlift
In relation to the Group’s gas production activities, it is often not practical for each participant to receive or sell its precise share of the overall production
from a jointly controlled operation under the contractual offtake arrangements in any given period. These short-term imbalances between cumulative
production entitlement and cumulative sales are referred to as overlift and underlift. An overlift payable, or underlift receivable, is recognised at the
balance sheet date and measured at market value, with movements in the period recognised within cost of sales.
Exploration, evaluation and production assets
The Group uses the successful efforts method of accounting for exploration and evaluation expenditure associated with exploration wells or ‘prospects’.
This expenditure will be capitalised initially within intangible assets and will include licence acquisition costs associated with the prospects. If the
prospects are subsequently determined to be successful on completion of the evaluation period, the relevant expenditure will be transferred to property,
plant and equipment and depreciated on a unit of production basis. If the prospects are subsequently determined to be unsuccessful on completion of
the evaluation period, the intangible asset will be expensed in the period in which that determination is made.
All field development costs, including rights and concessions related to production activities, are capitalised as property, plant and equipment.
Capitalised costs relate to the acquisition and installation of production assets and facilities and includes specialist engineering, drilling and technical
services costs. These property, plant and equipment assets are depreciated from the commencement of production in the fields concerned, using the
unit of production method, based on the proven and probable reserves of those fields. Changes in these estimates are dealt with prospectively.
The carrying value of exploration prospects is regularly compared on an individual field basis with the expected discounted future net revenues
associated with the remaining commercial reserves. An impairment loss will be recognised where it is considered that recorded amounts are unlikely
to be fully recovered from the net present value of future net revenues. All exploration and production assets are reviewed annually for indicators
of impairment.
Government grants
A government grant is recognised in the balance sheet initially as deferred income when there is reasonable assurance that it will be received and that
the Group will comply with the conditions attaching to it. Grants that compensate the Group for expenses incurred are recognised in the income
statement on a systematic basis in the same years in which the expenses are incurred. Grants that compensate the Group for the cost of an asset are
recognised in the income statement on a systematic basis over the useful life of the asset to match the depreciation charge.
Leases
The determination of whether an arrangement contains a lease is dependent on whether the arrangement relates to use and control of a specific asset.
Leases are classified as finance leases if the arrangement transfers substantially all the risks and rewards of ownership to the lessee. All other leases are
categorised as operating leases.
(i) Operating lease obligations
Payments made under operating leases are recognised in the income statement on a straight-line basis over the term of the lease. Lease incentives
received are recognised in the income statement as an integral part of the total lease expense.
(ii) Finance lease obligations
Assets held under finance leases are capitalised and held as part of property, plant and equipment. The accounting policy for such arrangements is
described on page 194.
192 SSE plc Annual Report 2016
1.
2.
3. Financial Statements
A1. Basis of consolidation and significant accounting policies continued
A1.3 Foreign currencies
The consolidated financial statements are presented in pounds sterling, which is the functional currency of the Company and the Group’s
presentational currency. Each entity in the Group determines its own functional currency and items included in the financial statements of each entity
are measured accordingly.
Transactions in foreign currencies are recorded at the rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign
currencies are translated at the rate of exchange ruling at the balance sheet date. Any gain or loss arising on the restatement of such items is taken to
the income statement with the exception of exchange gains or losses on foreign currency borrowings that provide a hedge against a net investment
in a foreign entity or exchange gains or losses incurred as part of a qualifying cash flow hedge. Exchange gains or losses on net investment hedges are
taken against the consolidated translation reserve, a separate component of equity, to the extent the hedge is effective. Non-monetary assets that are
measured in terms of historical cost in a foreign currency are translated at the historic rate at the date of transaction.
For the purpose of presenting the consolidated financial statements, the assets and liabilities of the Group’s foreign operations are translated into
pounds sterling at the balance sheet closing rate. The results of these operations are translated at the average rate in the relevant period. Exchange
differences on retranslation of the opening net assets and the results are transferred to the translation reserve and are reported in the statement of
recognised income and expense. Exchange differences on foreign currency borrowings, foreign exchange contracts or foreign currency swaps used
as part of a hedge against net investment in a foreign entity are transferred to the translation reserve.
Finance income and costs
Finance income comprises interest receivable on funds invested in short term deposits and the Group’s interests in jointly controlled entities and
associates and from interest rate derivative receipts. Finance costs comprise interest payable on borrowings and finance leases, the release of
discounting on provisions, interest on net pension scheme liabilities, interest rate derivative payments and accretion of the debt component on the
convertible loan less capitalised interest.
Interest on the funding attributable to major capital projects is capitalised during the years of construction and depreciated as part of the total cost over
the useful life of the asset.
Interest income and costs are recognised in the income statement as they accrue, on an effective interest method. The issue costs and interest payable
on bonds and all other interest payable and receivable is reflected in the income statement on the same basis.
Taxation
Taxation on the profit for the year comprises current and deferred tax. Taxation is recognised in the income statement unless it relates to items
recognised directly in equity, in which case it is recognised in other comprehensive income.
Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at the balance sheet date,
and any adjustment to tax payable in respect of previous years.
Deferred tax is calculated using the balance sheet liability method, providing for temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for taxation purposes. The following temporary differences are not provided for:
goodwill not deductible for tax purposes, the initial recognition of assets or liabilities other than in business combinations that affect neither accounting
nor taxable profit, and differences relating to investments in subsidiaries to the extent that they will probably not reverse in the foreseeable future. The
amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amount of assets and liabilities, using tax
rates enacted or substantively enacted at the balance sheet date.
Deferred tax assets and liabilities are offset where there is a legally enforceable right of offset within the same tax authority and where the Company
intends to either settle them on a net basis, or to realise the asset and settle the liability simultaneously. A deferred tax asset is recognised only to the
extent that it is probable that future taxable profits will be available against which the asset can be utilised. Deferred tax assets are reduced to the extent
that it is no longer probable that the related tax benefit will be realised.
Dividends
Dividend income is recognised on the date the Group’s right to receive payments is established. Dividend liabilities are recognised on the date the
Group’s obligation to pay dividends is established.
A1.4 Property, plant and equipment
(i) Owned assets
Items of property, plant and equipment are stated at cost less accumulated depreciation and impairments. The cost of self-constructed assets includes
the cost of materials, direct labour and other directly attributable costs. All items of property, plant and equipment are accounted for under the cost
model within IAS 16. The purchase price of an asset will include the fair value of the consideration paid to acquire the asset. Where an item of property,
plant and equipment comprises major components having different useful lives, the components are accounted for as separate items of property, plant
and equipment, and depreciated accordingly. An item of property, plant and equipment is derecognised on disposal or when no future economic
benefits are expected to arise from the continued use of the asset.
193
Financial Statements
Accompanying information continued
A1. Basis of consolidation and significant accounting policies continued
(ii) Leased assets
Leases where the Group assumes substantially all the risks and rewards of ownership are classified as finance leases.
Assets held under finance leases are recognised as part of the property, plant and equipment of the Group at the fair value or, if lower, at the present
value of the minimum lease payments, each determined at the inception of the lease. The corresponding liability is included in the balance sheet as a
finance lease obligation. Lease payments are apportioned between finance charges and reduction of lease obligation so as to achieve a constant rate of
interest on the remaining balance of the liability. Finance charges are charged directly against income, unless they are directly attributable to qualifying
assets, in which case they are capitalised in accordance with the Group’s general policy on borrowing costs.
Benefits received and receivable as an incentive to enter into an operating lease are also allocated on a straight line basis over the lease term.
(iii) Hydro civil assets
The Group is obliged under the Reservoirs Act 1975 to maintain its hydro infrastructure network, including its dams, tunnels and other hydro civil
engineering structures (hydro civil assets). All items of property, plant and equipment within hydro civil assets, with the exception of land, are subject
to depreciation.
In accordance with the transition provisions of IFRS 1, the Group identified the carrying value of these assets at privatisation and has treated this value as
deemed cost. Following this assessment, the assets, and all subsequent enhancement and replacement expenditure, has been subject to depreciation
over a useful economic life of 100 years. All subsequent maintenance expenditure is chargeable directly to the income statement.
(iv) Depreciation
Depreciation is charged to the income statement to write off cost, less residual values, on a straight line basis over their estimated useful lives with the
exception of Gas and Oil Production Assets which are depreciated on the Units of Production basis. Heritable and freehold land is not depreciated.
Depreciation policy, useful lives and residual values are reviewed at least annually, for all asset classes to ensure that the current method is the most
appropriate. Depreciation commences following the asset commissioning period and when the asset is available for commercial operation. The
estimated useful lives for assets depreciated on a straight line basis are as follows:
Hydro civil assets
Thermal and hydro power stations including electrical and mechanical assets
Operating wind farms
Overhead lines, underground cables and other network assets
Gas storage facilities
Other transmission and distribution buildings, plant and equipment
Office buildings
Shop & office refurbishment, fixtures, IT assets, vehicles and mobile plant
E+P infrastructure assets
Years
100
20 to 60
20 to 25
40 to 80
25 to 50
10 to 45
30 to 40
3 to 10
20 to 25
Assets held under finance leases are depreciated over their expected useful lives on the same basis as owned assets or, where shorter, over the term
of the relevant lease.
(v) Subsequent expenditure
It is the Group policy to capitalise qualifying replacement expenditure and depreciate it over the expected useful life of the replaced asset. Replaced
assets are derecognised at this point and the costs recorded as costs of disposal. Where an item of property, plant and equipment is replaced and it is
not practicable to determine the carrying amount of the replaced part, the cost of the replacement adjusted for inflation will be used as an
approximation of the cost of the replaced part at the time it was acquired or constructed.
Expenditure incurred to replace a component of an item of property, plant and equipment that is accounted for separately is capitalised. Other
subsequent expenditure is capitalised only when it increases the future economic benefits of the item of property, plant and equipment to which
it relates.
(vi) Derecognition
An item of property, plant or equipment is derecognised upon disposal or when no future economic benefits are expected to arise from the continued
use of the asset. Gains and losses on disposals are determined by comparing the proceeds received with the carrying amount of the asset and are
included in the income statement. Any gain or loss on derecognition of the asset is included in the income statement in the period of derecognition.
A1.5 Business combinations
The acquisition of subsidiaries is accounted for under the acquisition method as defined by IFRS 3. The acquired business is measured at the date
of acquisition as the aggregate of consideration transferred for the fair value of assets, liabilities and contingent liabilities. The excess of the cost
of acquisition over the fair value of the acquired business is represented as goodwill. Contingent consideration will be classified as a liability and is
subsequently re-measured through the income statement. No such contingent consideration is recorded on the balance sheets in these statemennts.
Pre-existing relationships are recognised and, together with all acquisition-related costs, are expensed. Acquisitions costs are expensed as incurred.
194 SSE plc Annual Report 2016
1.
2.
3. Financial Statements
A1. Basis of consolidation and significant accounting policies continued
A1.6 Intangible assets
(i) Goodwill and impairment testing
Goodwill arising on a business combination represents the excess of the cost of acquisition over the Group’s interest in the fair value of the identifiable
assets, liabilities and contingent liabilities of a subsidiary, associate or joint venture at the date of acquisition. Following initial recognition, goodwill is
measured at cost less any accumulated impairment losses. Goodwill is reviewed for impairment at least on an annual basis.
For the purpose of impairment testing, goodwill is allocated on initial recognition to those cash-generating units (CGUs) expected to benefit from the
combination’s synergies. The cash-generating units used for goodwill impairment testing purposes will represent how goodwill was attributed but may
not represent reportable business segments.
Goodwill may also arise upon investments in joint ventures and associates. Such goodwill is recorded within the carrying amount of the Group’s
investment and any impairment loss is included within the share of result from joint ventures and associates. On disposal or closure of a previously
acquired investment or business, any attributed goodwill will be included in determining the profit or loss on disposal.
(ii) Research and development
Expenditure on research activities is charged to the income statement as incurred. Expenditure on development activities, whereby research findings are
applied to a plan or design for the production of new or substantially improved products or processes, is capitalised if the product or process is
considered to be technically and commercially feasible and the Group intends to complete the intangible asset for use or for sale.
(iii) Allowances and emissions
The European Emissions trading scheme (EU ETS) has been in operation since 1 January 2005. The IASB withdrew IFRIC 3 Emission Rights in June 2005
and it has not been replaced with definitive guidance or interpretation for CO2 (“carbon”) emissions trading. Carbon allowances purchased are recorded
at cost within intangible assets. A liability is recognised based on the level of emissions recorded. Up to the level of allowances held, the liability is
measured at the cost of purchase. When the carbon emission liability exceeds the carbon allowances held, the net liability is measured at market value
selling price. Movements in the market value of the liability are recognised in operating profit. Forward carbon contracts are measured at fair value with
gains or losses arising on re-measurement being recognised in the income statement.
The carbon allowance intangible asset is surrendered at the end of the compliance period to the extent requested reflecting the consumption of the
economic benefit and is recorded as being utilised. As a result, no amortisation is booked but an impairment charge may be recognised should the
carrying value of allowances exceed market or fair value.
Under the Renewable Obligations Certificates (ROCs) scheme, certificates obtained from own generation are awarded by a third party, Ofgem.
Self-generated certificates are recorded at market value and purchased certificates are recognised at cost, both within intangible assets. The liability
under the renewables obligation is recognised based on electricity supplied to customers, the percentages set by Ofgem and the prevailing market
price. The intangible asset is surrendered at the end of the compliance period reflecting the consumption of economic benefit. As a result no
amortisation is recorded during the period.
(iv) Development assets
Costs capitalised as development intangibles represent the costs incurred in bringing individual projects to the consented stage. These include wind
farm developments, thermal generation and gas storage projects, prospective gas production assets and other developments relating to proven
technologies. Costs associated with reaching the consent stage include options over land rights, planning application costs and environmental impact
studies. These may be costs incurred directly or part of the fair value exercise on acquisition of a controlling interest in a project. The asset is subject to
impairment testing on an annual basis until this time. At the point that the project reaches the consent stage and is approved by the Board, the carrying
value of the project is transferred to property, plant and equipment as assets under construction. Once in operation, depreciation will be charged over
the expected useful life of the asset. The asset is derecognised on disposal, or when no future economic benefits are expected from their use.
(v) Other intangible assets
Other intangible assets that have been acquired by the Group including brands are stated at cost less accumulated amortisation and impairment losses.
Software licenses are stated at cost less accumulated amortisation. Expenditure on internally generated brands is expensed as incurred. Amortisation is
charged to the income statement on a straight-line basis over the estimated useful life of these other intangible assets. The amortisation periods utilised
are as follows:
Brand values
Developed software assets and application software licences
Customer lists
Contracts
The useful lives of all the intangible assets are reviewed annually and amended, as required, on a prospective basis.
Years
10
5-10
5
Shorter of contract term or 5
195
Financial Statements
Accompanying information continued
A1. Basis of consolidation and significant accounting policies continued
A1.7 Impairment review
The carrying amounts of the Group’s PP&E and other intangible assets and the Group’s investments in joint ventures and associates, are reviewed for
impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. For PP&E assets that have
previously been identified as exhibiting indications of impairment, the review of impairment will be performed annually until there is sufficient evidence
to confirm that any potential impairment loss has been appropriately recognised. For goodwill and other intangible assets with an indefinite life or which
are not ready for use, the test for impairment is carried out annually. In addition, financial assets measured at amortised cost are also reviewed for
impairment annually.
For assets subject to impairment testing, the asset’s carrying value is compared to the asset’s (or cash-generating unit (CGU)’s, in the case of goodwill),
recoverable amount. The recoverable amount is determined to be the higher of the fair value less costs to sell (FVLCS) and the value-in-use (VIU) of the
asset or CGU. For financial assets measured at amortised cost the impairment is measured as the difference between the asset’s carrying amount and
the present value of estimated future cash flows discounted at the financial asset’s original effective interest rate.
If the carrying amount of the asset or CGU exceeds its recoverable amount, an impairment charge will be recognised immediately in the income
statement and, in relation to the impairment of goodwill, will not be subsequently reversed.
Value in use (VIU) calculations require the estimation of future cash flows to be derived from the respective assets (or CGUs) and the selection of an
appropriate discount rate in order to calculate their present value. The fair value less costs to sell methodology used for wind farms CGUs also requires
the discounting of cash flows from the projects within the respective CGUs. The VIU methodology is deemed to be the most appropriate for reviews
of PP&E asset and the Group’s identified goodwill-related CGUs. This methodology is based on the post-tax cash flows arising from the assets or
underlying assets, for CGUs) and is consistent with the approach taken by management to evaluate the economic value of the assets or CGUs. The
estimation of the timing and value of underlying projected cash flows and the selection of appropriate discount rates involves management judgement.
For goodwill, the impairment charge will initially be adjusted against the goodwill allocated to the cash-generating unit. Thereafter, the remaining assets
of the cash-generating unit will be written-down proportionately.
The estimation of the timing and value of underlying projected cash flows and the selection of appropriate discount rates involves management
judgement. In the example of PP&E assets subject to impairment review, the VIU method will be applied to ascertain the extent of any potential
impairment charge. Subsequent changes to these estimates or judgements may impact the carrying value of the assets. Impairments of PP&E assets
will only reversed only if there has been a significant increase in the recoverable amount associated with the asset.
Gas production and development assets are assessed under the fair value less costs method for the respective CGUs. This is deemed more appropriate
as it is based on post-tax cash flows arising from each field within the respective CGUs, which is consistent with the approach taken by management in
determining the economic value of the underlying assets. This is determined by discounting the post-tax cash flows expected to be generated by the
CGU, net of associated selling costs, and takes into account assumptions market participants would use in estimating fair value.
A1.8 Inventories and work in progress
Inventories are valued at the lower of cost (on a first-in, first-out basis) and net realisable value. Net realisable value is the estimated selling price in the
ordinary course of business, less the estimated costs of completion and selling expenses. The cost of fuel stocks is based on the weighted average
principle. The valuation of work in progress is based on the cost of labour, the cost of contractors, the cost of materials plus other directly
attributable costs.
A1.9 Recognition of revenue and profit on construction contracts
Where the outcome of a construction contract can be estimated reliably, revenue and costs are recognised by reference to the stage of completion
of the contract activity at the balance sheet date. This is normally measured as the proportion of cost incurred on work performed to date compared
to the estimated total contract cost, except where this would not be representative of the stage of completion. Variations in contract work, claims and
incentive payments are included to the extent that they have been agreed with the customer. When it becomes probable that total contract costs will
exceed total contract revenue, the expected loss is recognised as an expense immediately in the income statement.
A1.10 Employee benefit obligations
(i) Defined benefit pension schemes
The Group operates two defined benefit pension schemes, one of which is operated by the Company. Pension scheme assets are measured using bid
market values. Pension scheme liabilities are measured using the projected unit credit actuarial method and are discounted at the current rate of return
on a high quality corporate bond of equivalent term and currency to the liability.
Any increase in the present value of liabilities within the Group’s defined benefit pension schemes expected to arise from employee service in the year is
charged as service costs to operating profit.
Net interest costs are based on net schemes’ liabilities adjusted for minimum funding requirement and pension surplus restrictions under IFRIC 14.
Actuarial gains and losses are recognised in full in the consolidated statement of comprehensive income. Pension scheme surpluses, to the extent that
they are considered recoverable, or deficits are recognised in full and presented on the face of the balance sheet.
196 SSE plc Annual Report 2016
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2.
3. Financial Statements
A1. Basis of consolidation and significant accounting policies continued
(ii) Defined contribution pension schemes
The Group also operates a number of defined contribution pension schemes. The assets of the schemes are held separately from those of the Group in
independently administered funds. The amounts charged represent the contributions payable to the schemes in the year and are charged directly to the
income statement.
(iii) Equity and equity-related compensation benefits
The Group operates a number of employee share schemes as described in the Remuneration Report and note 31. These schemes enable Group
employees to acquire shares of the Company.
The exercise prices of the sharesave scheme are set at a discount to market price at the date of the grant. The fair value of the sharesave scheme option
granted is measured at the grant date by use of a Black-Scholes model. The fair value of the options granted is recognised as an expense on a straight-
line basis over the period that the scheme vests. Estimates are updated for non-market conditions at each balance sheet date with any adjustment in
respect of the current and prior years being recognised in the income statement. The costs associated with the other main employee schemes are
recognised over the period to which they relate. The charge related to the equity shares in the Company awarded under the share schemes is treated
as an increase in the cost of investment held by the Company in the subsidiary companies of the Group.
A1.11 Financial instruments
The Group uses a range of financial instruments to hedge exposures to financial risks, such as interest rate, foreign exchange and energy price
fluctuations in its normal course of business and in accordance with the Group’s risk management policies. The Group’s risk management policies are
further explained in note 34.
(i) Interest rate and foreign exchange derivatives
Financial derivative instruments are used by the Group to hedge interest rate and currency exposures. All such derivatives are recognised at fair value
and are re-measured to fair value each reporting period. Certain derivative financial instruments are designated as being held for hedging purposes. The
designation of the hedge relationship is established at the inception of the hedge and procedures are applied to ensure the derivative is highly effective
in achieving its objective and that the effectiveness of the hedge can be reliably measured. The treatment of gains and losses on re-measurement is
dependent on the classification of the hedge and whether the hedge relationship is designated as either a ‘fair value’ or ‘cash flow’ hedge. Derivatives
that are not designated as hedges are treated as if held for trading, with all fair value movements being recorded through the income statement.
A derivative classified as a ‘fair value’ hedge recognises gains and losses from re-measurement immediately in the income statement. Loans and
borrowings are measured at cost except where they form the underlying transaction in an effective fair value hedge relationship. In such cases, the
carrying value of the loan or borrowing is adjusted to reflect fair value movements with the gain or loss being reported in the income statement.
A derivative classified as a ‘cash flow’ hedge recognises the portion of gains or losses on the derivative which are deemed to be effective directly in
equity in the hedge reserve. Any ineffective portion of the gains or losses is recognised in the consolidated income statement. When hedged cash flows
result in the recognition of a non-financial asset or liability, the associated gains or losses previously recognised in equity are included in the initial
measurement of the asset or liability. For all other cash flow hedges, the gains or losses that are recognised in equity are transferred to the income
statement in the same period in which the hedged cash flows affect the income statement.
Hedge accounting is discontinued when the hedging instrument expires or is sold, terminated or exercised, or no longer qualifies for hedge accounting.
At the point of discontinuation, any cumulative gain or loss on the hedging instrument recognised in equity remains in equity until the forecast
transaction affects profit or loss. On settlement, the cumulative gain or loss recognised in equity is recognised in the income statement.
(ii) Commodity derivatives
Within its regular course of business, the Group routinely enters into sale and purchase derivative contracts for commodities such as electricity, gas,
coal, carbon allowances and oil. Where the contract was entered into and continues to be held for the purpose of receipt or delivery in accordance
with the Group’s expected sale, purchase or usage requirements, the contracts are designated as ‘own use’ contracts and are measured at cost. These
contracts are not within the scope of IAS 39.
Derivative commodity contracts which are not designated as own use contracts are accounted for as trading derivatives and are recognised in the
balance sheet at fair value. Where a hedge accounting relationship is designated and is proven to be effective, the changes in fair value will be
recognised in accordance with the rules noted in part (i) to this note. There are currently no designated hedge relationships in relation to
commodity contracts.
Other commodity contracts, where own use is not established and a hedge accounting relationship is not designated, are measured at fair value with
gains and losses on re-measurement being recognised in the income statement in cost of sales.
(iii) Embedded derivatives
Derivatives embedded in other financial instruments or other host contracts are treated as separate derivatives where the characteristics of the
derivatives are not closely related to those of the host contracts.
197
Financial Statements
Accompanying information continued
A1. Basis of consolidation and significant accounting policies continued
(iv) Net investment hedges
Hedges of net investments in foreign operations are accounted in a manner similar to effective cash flow hedges. Any gain or loss on the effective
portion of the hedge is recognised in equity, in the translation reserve, and any gain or loss on the ineffective portion of the hedge is recognised in the
income statement. On disposal of the foreign operation, the cumulative value of any gains or losses recognised directly in equity is transferred to the
income statement.
(v) Cash and cash equivalents
Cash and cash equivalents comprise cash balances and call deposits. Bank overdrafts that are repayable on demand and form an integral part of the
Group’s cash management are included as a component of cash and cash equivalents for the purpose of the statement of cash flows.
(vi) Trade receivables
Trade receivables do not carry any interest and are measured at cost less an appropriate allowance for irrecoverable receivables.
(vii) Interest-bearing loans and borrowings
All such loans and borrowings are initially recognised at fair value including transaction costs and are subsequently measured at amortised cost, except
where the loan or borrowing is the hedged item in an effective fair value hedge relationship.
(viii) Share capital
Ordinary shares are accounted for as equity. Incremental costs directly attributable to the issue of new shares are shown in equity as a deduction from
the proceeds received.
(ix) Hybrid capital
Hybrid capital comprises issued bonds that qualify for recognition as equity. Accordingly, any coupon payments are accounted for as dividends and are
recognised directly in equity at the time the payment obligation arises. This is because the coupon payments are discretionary and relate to equity.
Coupon payments consequently do not have any impact on the income statement. Coupon payments are recognised in the cash flow statement in the
same way as dividends to ordinary shareholders. Tax credits in relation to the coupon payments are linked to the past transactions or events that support
the coupon payments and consequently the tax credits are reported in the income statement.
A1.12 Provisions
A provision is recognised in the balance sheet when the Group has a present legal or constructive obligation as a result of a past event, and it is probable
that an outflow of economic benefits will be required to settle the obligation. If the effect is material, provisions are determined by discounting the
expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and, where appropriate, the risks
specific to the liability.
A1.13 Decommissioning costs
The estimated cost of decommissioning at the end of the useful lives of certain assets is reviewed periodically. Provision is made for the net present
value of the estimated cost of decommissioning gas production facilities at the end of the producing lives of fields, and gas storage facilities, offshore
wind farms and power stations at the end of the useful life of the facilities. The estimates are based on technology and prices at the balance sheet date.
A corresponding decommissioning asset is recognised and is included within property, plant and equipment when the provision gives access to future
economic benefits. Changes in these provisions are recognised prospectively. The unwinding of the discount on the provision is included in finance
costs and the depreciation for the asset is straight-line over the expected useful life of the asset or, for gas production facilities, is amortised on the unit
of production method.
A1.14 Held for sale assets and liabilities
Non-current assets are classified as held for sale if their recoverable value is likely to be recovered via a sale opposed to continued use by the group. In
order to be classified as non-current assets held for sale, assets must meet all of the following conditions; sale highly probable, available for immediate
sale, being actively marketed and the sale is likely to occur within one year.
Non-current assets determined as held for sale are measured at the lower of carrying value and fair value less costs to sell, no depreciation is charged in
respect of these assets after classification.
198 SSE plc Annual Report 2016
A2. Related undertakings
A2.1.1. Subsidiary undertakings
Details of the subsidiary undertakings are as follows:
Company
Abernedd Power Company Limited
Airtricity Developments (Scotland) Limited
Airtricity Europe Windfarm Holdings Limited
Airtricity UK Windfarm Holdings Limited
Airtricity Windfarm Finance Limited
Arklow Offshore Phase II Company Limited
Ashdown Control Services Limited
AtlasConnect Limited
Beatrice Offshore Windfarm Holdco Limited
Bindoo Windfarm (ROI) Limited
Brickmount Limited
Building Automation Solutions Limited
CHP Supply Limited
Comhlacht Gaoithe Teoranta
Coomacheo Wind Farm Limited
Coomatallin Windfarm (ROI) Limited
Curragh Mountain Windfarm Limited
Dedondo Limited
Doggerbank Project 1A SSER Limited
Doggerbank Project 1B SSER Limited
Doggerbank Project 2A SSER Limited
Doggerbank Project 2B SSER Limited
Doggerbank Project 3A SSER Limited
Doggerbank Project 3B SSER Limited
Doggerbank Project 4A SSER Limited
Doggerbank Project 4B SSER Limited
Doggerbank Project 5A SSER Limited
Doggerbank Project 5B SSER Limited
Doggerbank Project 6A SSER Limited
Doggerbank Project 6B SSER Limited
Dorset Lighting Limited
Dromada Windfarm (ROI) Limited
Ealing Lighting Limited
ESG (international) Limited
Evolve Energy Limited
Fibre Fuel Limited
Fibre Power (Slough) Limited
Ganderoy Limited
Gartnaneane Limited
Griffin Wind Farm (Holdings) Limited
Griffin Wind Farm Limited
HE Trustees Limited
Invercassley Windfarm (Scotland) Limited
Islay Offshore Winds Limited
Islington Lighting Limited
Keadby Developments Limited
Keadby Generation Limited
Keadby Wind Farm Limited
Limerick West Windfarm Limited
March Winds Limited
Marsh Systems Limited
Medway Power Limited
Meentycat Limited
Milane Holdings Limited
Mullananalt Wind Farm (ROI) Limited
Neos Networks Limited
Nobbs & Jones Limited
Platin Power Limited
Country of Incorporation
England and Wales
Scotland
Ireland
Northern Ireland
Ireland
Ireland
England and Wales
Scotland
Scotland
Ireland
Ireland
England and Wales
Ireland
Ireland
Ireland
Ireland
Ireland
Ireland
England and Wales
England and Wales
England and Wales
England and Wales
England and Wales
England and Wales
England and Wales
England and Wales
England and Wales
England and Wales
England and Wales
England and Wales
England and Wales
Ireland
England and Wales
England and Wales
England and Wales
England and Wales
England and Wales
Ireland
Ireland
Scotland
Scotland
Scotland
Scotland
Scotland
England and Wales
England and Wales
England and Wales
England and Wales
Ireland
Ireland
England and Wales
England and Wales
Ireland
Ireland
Ireland
England and Wales
England and Wales
Ireland
1.
2.
3. Financial Statements
Registered Address
(Key)
2016
Holding %
2015
Holding % Principal Activity
B
A
S
P
S
S
Q
A
A
S
S
Q
S
S
S
S
S
S
B
B
B
B
B
B
B
B
B
B
B
B
B
S
B
Q
Q
B
B
S
S
A
A
A
A
A
B
M
M
B
S
S
Q
B
S
S
S
B
Q
S
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0 Dormant
100.0 Dormant
100.0 Holding Company
100.0 Holding Company
100.0 Holding Company
100.0 Dormant
100.0 Dormant
100.0 Dormant
100.0 Holding Company
100.0 Power Generation
100.0 Power Generation
100.0 Dormant
100.0 Dormant
100.0 Renewable Development
100.0 Power Generation
100.0 Power Generation
100.0 Power Generation
100.0 Power Generation
100.0 Holding Company
100.0 Holding Company
100.0 Holding Company
100.0 Holding Company
100.0 Holding Company
100.0 Holding Company
100.0 Holding Company
100.0 Holding Company
100.0 Holding Company
100.0 Holding Company
100.0 Holding Company
100.0 Holding Company
100.0 Dormant
100.0 Power Generation
100.0 Dormant
100.0 Dormant
100.0 Dormant
100.0 Dormant
100.0 Dormant
100.0 Dormant
100.0 Dormant
100.0 Holding Company
100.0 Power Generation
100.0 Dormant
100.0 Renewable Development
100.0 Renewable Development
100.0 Dormant
100.0 Dormant
100.0 Power Generation
100.0 Power Generation
100.0 Power Generation
100.0 Power Generation
100.0 Dormant
100.0 Power Generation
100.0 Power Generation
100.0 Holding Company
100.0 Power Generation
100.0 Telecommunications
100.0 Dormant
100.0 Dormant
199
Financial Statements
Accompanying information continued
A2. Related undertakings continued
Company
Country of Incorporation
Registered Address
(Key)
2016
Holding %
2015
Holding % Principal Activity
England and Wales
Northern Ireland
Ireland
Power from Waste Limited
Renewable Energy Partners Limited
Richfield Windfarm (ROI) Limited
Scottish and Southern Energy Power Distribution Limited Scotland
Scotland
Scottish Hydro Electric Power Distribution plc
Scotland
Scottish Hydro Electric Transmission plc
England and Wales
SEC Highway Lighting Dorset Limited
Northern Ireland
Slieve Divena Wind Farm No 2 Limited
England and Wales
Slough Domestic Electricity Limited
England and Wales
Slough Electricity Contracts Limited
England and Wales
Slough Energy Supplies Limited
England and Wales
Slough Heat & Power Limited
England and Wales
Slough Utility Services Limited
England and Wales
South Wales Electricity Limited
England and Wales
Southern Electric Gas Limited
England and Wales
Southern Electric Group Trustee Limited
England and Wales
Southern Electric Power Distribution plc
England and Wales
Southern Electric Quest Trustee Limited
Ireland
SSE (Ireland) Limited
Ireland
SSE Airtricity Limited
Northern Ireland
SSE Airtricity Energy Services (NI) Limited
Ireland
SSE Airtricity Energy Services Limited
Northern Ireland
SSE Airtricity Energy Supply (NI) Limited
Northern Ireland
SSE Airtricity Gas (NI) Limited
Ireland
SSE Airtricity Gas Limited
Northern Ireland
SSE Airtricity Gas Supply (NI) Limited
Ireland
SSE Airtricity Utility Solutions Limited
England and Wales
SSE Asia Limited
Scotland
SSE Beatrice Offshore Windfarm Holdings Limited
Scotland
SSE Calliachar Limited
Scotland
SSE CCS Limited
England and Wales
SSE Contracting Group Limited
England and Wales
SSE Contracting Limited
Scotland
SSE Cosec Limited
Scotland
SSE E&P UK Limited
Scotland
SSE Energy Solutions Limited
England and Wales
SSE Energy Supply Limited
England and Wales
SSE Enterprise Limited
England and Wales
SSE EPM Limited
England and Wales
SSE Galloper Offshore Windfarm Holdings Limited
Ireland
SSE Generation Ireland Limited
England and Wales
SSE Generation Limited
Scotland
SSE Green Deal Limited
Scotland
SSE Green Deal Provider Limited
Scotland
SSE Heat Networks Limited
Scotland
SSE Home Services Limited
England and Wales
SSE Hornsea Limited
England and Wales
SSE Insource Energy Limited
Isle of Man
SSE Insurance Limited
Scotland
SSE Islay Offshore Windfarm Holdings Limited
England and Wales
SSE Medway Operations Limited
Scotland
SSE Metering Limited
Scotland
SSE Micro Renewables Limited
England and Wales
SSE Mineral Solutions Limited
England and Wales
SSE Nuclear Limited
Scotland
SSE OWS Glasgow Limited
England and Wales
SSE Production Services Limited
Ireland
SSE Renewables (Ireland) Limited
Northern Ireland
SSE Renewables Developments (UK) Limited
Ireland
SSE Renewables Generation Ireland Limited
200 SSE plc Annual Report 2016
B
P
S
A
A
A
B
P
B
B
B
B
B
B
B
B
B
B
S
S
P
S
P
P
S
P
S
B
A
A
A
B
B
A
A
A
B
B
B
B
S
B
A
A
A
A
B
B
X
A
B
A
A
B
B
A
B
S
P
S
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0 Dormant
100.0 Renewable Development
100.0 Power Generation
100.0 Holding Company
100.0 Power Distribution
100.0 Power Transmission
100.0 Dormant
100.0 Renewable Development
100.0 Power Generation
100.0 Electricity Contracting
100.0 Dormant
100.0 Power Generation
100.0 Dormant
100.0 Dormant
100.0 Energy Supply
100.0 Dormant
100.0 Power Distribution
100.0 Dormant
100.0 Dormant
100.0 Energy Supply
100.0 Energy Supply
100.0 Energy Supply
100.0 Energy Supply
100.0 Energy Supply
100.0 Energy Supply
100.0 Energy Supply
100.0 Utility Contracting
100.0 Dormant
100.0 Holding Company
100.0 Power Generation
100.0 Dormant
100.0 Holding Company
100.0 Contracting
100.0 Dormant
100.0 Gas Production
100.0 Energy Related Services
100.0 Energy Supply
100.0 Dormant
100.0 Energy Trading
100.0 Holding Company
100.0 Power Generation
100.0 Power Generation
100.0 Dormant
100.0 Dormant
100.0 Utility Services
100.0 Energy Related Services
100.0 Gas Storage
100.0 Dormant
100.0 Insurance
100.0 Holding Company
100.0 Holding Company
100.0 Energy Supply
100.0 Energy Related Services
100.0 Dormant
100.0 Dormant
100.0 Property Holding
100.0 Dormant
100.0 Holding Company
100.0 Renewable Development
100.0 Power Generation
1.
2.
3. Financial Statements
A2. Related undertakings continued
Company
Country of Incorporation
Registered Address
(Key)
2016
Holding %
2015
Holding % Principal Activity
Ireland
Netherlands
Northern Ireland
Germany
Ireland
Scotland
Ireland
SSE Renewables Holdings (Europe) Limited
SSE Renewables Holdings (Netherlands) B.V.
SSE Renewables Holdings (UK) Limited
SSE Renewables Holdings Germany GmbH
SSE Renewables Holdings Limited
SSE Renewables Limited
SSE Renewables Off Shore Limited
SSE Renewables Offshore Windfarm Holdings Limited Scotland
SSE Renewables Onshore Windfarm Holdings Limited Northern Ireland
Northern Ireland
SSE Renewables UK Limited
England and Wales
SSE Renewables Walney (UK) Limited
Scotland
SSE Retail Limited
England and Wales
SSE Retail Telecoms Limited
England and Wales
SSE Rogerstone Limited
England and Wales
SSE Seabank Investments Limited
England and Wales
SSE Seabank Land Investments Limited
Ireland
SSE Secretaries Ireland Limited
England and Wales
SSE Services plc
Scotland
SSE Stock Limited
Scotland
SSE Telecommunications Limited
Scotland
SSE Toddleburn Limited
England and Wales
SSE Trading Limited
England and Wales
SSE Trustees Limited
England and Wales
SSE Uskmouth Acquisition Company Limited
England and Wales
SSE Utility Services Ltd
England and Wales
SSE Utility Solutions Limited
Scotland
SSE Venture Capital Limited
England and Wales
SSE Viking Limited
England and Wales
SSE Water Limited
England and Wales
SSEPG (Operations) Limited
Ireland
Sure Partners Limited
England and Wales
SWALEC Gas Limited
England and Wales
TESGL Limited
England and Wales
The Energy Solutions Group Bidco Limited
England and Wales
The Energy Solutions Group Midco Limited
England and Wales
The Energy Solutions Group Topco Limited
Ireland
Tournafulla Windfarm (ROI) Limited
S
Z
P
AA
S
A
S
A
P
P
B
A
B
B
B
B
S
B
A
A
A
B
B
B
B
B
A
B
B
B
S
B
Q
Q
Q
Q
S
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0 Holding Company
100.0 Dormant
100.0 Holding Company
100.0 Dormant
100.0 Holding Company
100.0 Holding Company
100.0 Holding Company
100.0 Holding Company
100.0 Holding Company
100.0 Holding Company
100.0 Holding Company
100.0 Energy Related Services
100.0 Dormant
100.0 Dormant
100.0 Dormant
100.0 Dormant
100.0 Corporate Services
100.0 Corporate Services
100.0 Stock Holding
100.0 Telecommunications
100.0 Power Generation
100.0 Energy Trading
100.0 Dormant
100.0 Dormant
100.0 Dormant
100.0 Utility Services
100.0 Investment Holding
100.0 Renewable Development
100.0 Water Network
100.0 Dormant
100.0 Dormant
100.0 Dormant
100.0 Dormant
100.0 Utility Services
100.0 Dormant
100.0 Holding Company
100.0 Power Generation
A2.1.2. Partnerships
Company
The Glasa LLP
Viking Energy (Scottish Partnership)
Viking Energy Wind Farm LLP
Country of Incorporation
Registered Address
(Key)
2016
Holding (%)
2015
Holding (%) Principal Activity
Scotland
Scotland
Scotland
A
V
V
90.0
50.0
50.0
90.0 Renewable Development
50.0 Renewable Development
50.0 Renewable Development
201
Financial Statements
Accompanying information continued
A2. Related undertakings continued
A2.1.3 Joint arrangements (incorporated)
Company
Country of Incorporation
Registered Address
(Key)
2016
Holding (%)
2015
Holding (%) Principal Activity
3SE (Barnsley, Doncaster & Rotherham) Holdings
England and Wales
Limited
3SE (Barnsley, Doncaster & Rotherham) Limited
Aquamarine Power Limited
Baglan Pipeline Limited
Beatrice Offshore Windfarm Limited
Brims Tidal Array Limited
Brough Head Wave Farm Limited
Cloosh Valley Wind Farm Designated Activity Company Ireland
Ireland
Cloosh Valley Wind Farm Holdings Designated Activity
England and Wales
Scotland
England and Wales
Scotland
Scotland
Scotland
Company
Clyde Windfarm (Scotland) Limited
Derwent Cogeneration Limited
Doggerbank Project 1 Bizco Limited
Doggerbank Project 2 Bizco Limited
Doggerbank Project 3 Bizco Limited
Doggerbank Project 4 Bizco Limited
Everwind Limited
Ferrybridge MFE Limited
Ferrybridge MFE2 Limited
Forewind Limited
Greater Gabbard Offshore Winds Limited
Green Energy Company Limited
Green Way Energy Limited
Kerry Power Limited
Marchwood Power Limited
Midas Energy Limited
Multifuel Energy Limited
PriDE (Serp) Ltd
Scotland
England and Wales
England and Wales
England and Wales
England and Wales
England and Wales
Ireland
England and Wales
England and Wales
England and Wales
England and Wales
Ireland
Ireland
Ireland
England and Wales
Ireland
Scotland
England and Wales
Scotia Gas Networks plc
Seabank Power Limited
Seagreen Wind Energy Limited
Tay Valley Lighting (Leeds) Limited
Tay Valley Lighting (Newcastle and North Tyneside)
England and Wales
England and Wales
England and Wales
England and Wales
England and Wales
Limited
Tay Valley Lighting (Stoke on Trent) Limited
Walney (UK) Offshore Windfarms Limited
England and Wales
England and Wales
J
J
I
C
A
G
K
F
F
A
B
B
B
B
B
L
B
B
B
B
N
N
O
R
O
A
H
U
T
B
W
W
W
Y
25.0
25.0
30.4
50.0
40.0
50.0
50.0
50.0
50.0
50.1
49.5
25.0
25.0
25.0
25.0
49.0
50.0
50.0
25.0
50.0
47.5
50.0
49.0
50.0
49.0
50.0
50.0
50.0
50.0
50.0
50.0
50.0
50.0
25.1
25.0 Holding Company
25.0 Waste Management
30.4 Renewable Development
50.0 Dormant
50.0 Renewable Development
50.0 Dormant
50.0 Dormant
50.0 Renewable Development
50.0 Renewable Development
100.0 Power Generation
49.5 Dormant
25.0 Holding Company
25.0 Holding Company
25.0 Holding Company
25.0 Holding Company
49.0 Dormant
50.0 Power Generation
50.0 Dormant
25.0 Dormant
50.0 Power Generation
47.5 Dormant
50.0 Dormant
49.0 Dormant
50.0 Power Generation
49.0 Power Generation
50.0 Power Generation
50.0 Estate Maintenance
and improvement
50.0 Gas Distribution
50.0 Power Generation
50.0 Renewable Development
50.0 Streetlighting
50.0 Streetlighting
50.0 Streetlighting
25.1 Power Generation
A2.1.4 Associates
Company
Shetland Land Lease Limited
St Clements Services Limited
Country of Incorporation
England and Wales
England and Wales
Registered Address
(Key)
2016
Holding (%)
2015
Holding (%)
Principal Activity
D
E
20.0
25.0
20.0 Development Company
25.0 Utilities Software
202 SSE plc Annual Report 2016
1.
2.
3. Financial Statements
A2. Related undertakings continued
A.2.1.5 Registered address key
Registered Address
Inveralmond House, 200 Dunkeld Road, Perth PH1 3AQ
55 Vastern Road, Reading, Berkshire RG1 8BU
16 Axis Way, Mallard Way, Swansea Vale, Swansea, Wales
18th Floor, 10 Upper Bank Street, Canary Wharf, London, E14 5BF, United Kingdom
4 – 6 Church Walk, Daventry, NN11 4BL, United Kingdom
6th Floor, South Bank House, Barrow Street, Dublin 4
c/o Maclay Murray & Spens LLP, 1 George Square, Glasgow G2 1AL
Capital Tower, 91 Waterloo Road, London, SE1 8RT
City Point, 65 Haymarket Terrace, Edinburgh, EH12 5HD, United Kingdom
Dunedin House Auckland Park, Mount Farm, Milton Keynes, Buckinghamshire, MK1 1BU, United Kingdom
Elder House, 24 Elder Street, Edinburgh, EH1 3DX
Gorthleahy, Macroom, County Cork
Keadby Power Station, PO Box 89, Keadby, Scunthorpe, North Lincs DN17 3AZ
Lissarda Business Park, Lissarda, Co Cork, Ireland
Lissarda Industrial Park, Lissarda, Macroom, County Cork
Millenium House, 17-25 Great Victoria Street, Belfast, BT2 7AQ
Ocean Court, Caspain Road, Atlantic Street, Altrincham, WA14 5HH
Oceanic Way, Marchwood Industrial Park, Marchwood, Southampton SO40 4BD
Red Oak South, South County Business Park, Leopardstown, Dublin 18
Severn Road, Hallen, Bristol, BS2 0ZW
St Lawrence House, Station Approach, Horley, Surrey RH6 9HJ
The Gutters' Hut, North Ness Business Park, Lerwick, Shetland ZE1 0LZ
The Quadrangle, The Promenade, Cheltenham, Gloucestershire GL50 1PX
Tower House, Loch Promenade, Douglas, Isle of Man
Watson Farley and Williams LLP, 15 Appold Street, London, EC2A 2HB, United Kingdom
WEENA 390, 3012 NJ Rotterdam, Netherlands
Büro München, Elektrastrasse 6, 81925, München, Germany
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AA
A2.2 Service concession arrangements
In 50:50 partnership with Royal Bank Leasing Limited, the Group established three companies to provide street lighting services to councils under the
Private Finance Initiative (PFI). These services are thereafter sub-contracted to SSE Contracting Limited, a wholly owned subsidiary of the Group. The
companies established are as follows:
Company
Tay Valley Lighting (Stoke on Trent) Limited
Tay Valley Lighting (Newcastle and North Tyneside) Limited
Tay Valley Lighting (Leeds) Limited
Council
Stoke-on-Trent
Newcastle and North Tyneside
Leeds City Council
Under IFRS 10, despite being 50% owned, these companies are categorised as subsidiaries and deemed to be controlled by the Group due to the
Group being assessed as bearing the majority of the risks and rewards associated with the companies. The debt associated with these companies
is non-recourse to the Group. The arrangements for all three companies are materially similar.
In addition to these, the Group owned 100% of the share capital of a number of entities which perform similar services under eight PFI contracts.
In November 2015, the Group completed the disposal of Dorset Lighting Limited (see note 19).
(i) Characteristics of the arrangements
Description
The contracts are and were 25 year arrangements to replace ageing street-lighting stock and to subsequently maintain the new assets throughout each
Councils’ areas.
Significant terms
The cash flows under the PFI arrangements come from the unitary charge for these services paid by the Councils. The unitary charge can only be
adjusted if performance under the contract falls below the required standards. Any significant change to the services proposed by either party is subject
to a formal change procedure and agreement to such a change is required by the other party.
203
Financial Statements
Accompanying information continued
A2. Related undertakings continued
Nature and extent of rights and obligations
The assets are part of the public highway and ownership of the assets remains with the Councils. The contract holding companies are licensed
to replace and maintain the assets for the period of the contract. This obligation was (and is) passed down to SSE Contracting Limited or to other
companies within the SSE Contracting group of companies through the operating sub-contract. Any failure to provide the services to the required
standards will result in financial penalties which are taken from the unitary charge.
The companies have 25 year contracts with no extension options. Termination during this period can be initiated through a number of routes including
service provider default, force majeure or the event of a risk becoming uninsurable, authority default, voluntary authority termination, or termination for
a prohibited act or breach of refinancing provisions. In all cases, a formula exists for calculating compensation payments to the service provider.
Throughout the contract period there are a number of circumstances under which the companies could potentially be required to provide
additional services:
A2.3 Changes in the law
If circumstances arise where by a change in legislation would mean a change in the way the services are to be provided the companies would be liable
for part of the cost of this change. This liability is capped.
A3. Final survey
The Councils have the ability to deduct a percentage of the unitary charge in the last two years if an independent survey indicates the assets are unlikely
to have a 5-year residual life.
204 SSE plc Annual Report 2016
Independent Auditor’s Report
1.
2.
3. Financial Statements
Opinions and conclusions arising from our audit
1. Our opinion on the financial statements is unmodified
We have audited the financial statements of SSE plc for the year ended 31 March 2016 set out on pages 120 to 204. In our opinion:
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the financial statements give a true and fair view of the state of the group’s and of the parent company’s affairs as at 31 March 2016 and of the group’s
profit for the year then ended;
the group financial statements have been properly prepared in accordance with International Financial Reporting Standards as adopted by the
European Union (IFRSs as adopted by the EU);
the parent company financial statements have been properly prepared in accordance with IFRSs as adopted by the EU and as applied in accordance
with the provisions of the Companies Act 2006; and
the financial statements have been prepared in accordance with the requirements of the Companies Act 2006 and, as regards the group financial
statements, Article 4 of the IAS Regulation.
2. Overview
A summary of our approach
Audit coverage: 98% of pbt
- Our audit covered 98 % of the Group’s total profit before tax (pbt) and was completed at Perth,
Reading and in Dublin
- Overall group materiality: £75m which represents 5% of profit before tax before exceptional items
and certain remeasurements
Materiality: 5% pbt (normalised)
- Accounting for impairment, unbilled income, debtor recoverability and pensions are the areas
of most significant audit effort
- The decline in commodity prices in the year has resulted in an increased risk of impairment
of assets, in particular, thermal generation, gas production and gas storage assets.
- We no longer assess litigation and claims as a significant area of audit effort.
Significant areas: carrying value
of assets, unbilled income, debtor
recoverability and pensions
3. Our assessment of risks of material misstatement
In arriving at our audit opinion above on the financial statements the risks of material misstatement that had the greatest effect on our audit, in
decreasing order of audit significance, were as follows:
Event driven risks
The risk
Our response
Risk vs 2015
Carrying value of certain non-current assets (fixed and intangible) and inventories which aggregate to £13.6 bn (2015 : £12.1 bn)
Refer to page 84 (Audit Committee statement), notes 4.1 and A1.7 (accounting policy) and notes 7 and 14 and 15 (financial disclosures) p
The decline in commodity prices in the year has resulted in an
increased risk of impairment of certain non-current assets, in
particular, thermal generation, gas production and gas storage
assets. This includes fixed assets and intangible assets (goodwill
and development assets).
The estimated recoverable amount is subjective due to the
inherent uncertainty involved in forecasting and discounting future
cash flows with many of the key underlying assumptions being
impacted by political and economic factors in the UK and globally.
Assets are reviewed, either on a stand-alone basis or as part of
a wider cash-generating unit (“CGU”), for impairment using the
higher of the value in use or fair value less costs to sell model.
The outcome of these impairment reviews could vary significantly
if different assumptions were applied in the model.
In this area our procedures included: challenging the group’s
calculation of value in use or fair value less costs to sell, as
appropriate, and the calculation of impairment charges during the
year. This included challenging key assumptions such as earnings
and cashflow forecasts included in the impairment review for each
CGU or asset tested on a stand-alone basis, and discount rate
assumptions used by the directors. We compared the Group’s key
assumptions noted opposite, where possible, to externally derived
data to historical analyses or to our expectations based on our
industry knowledge. For example we compared the discount rate
to those applied by companies operating in a similar environment
to the group and we compared earnings forecasts with budgets
used within the business for other purposes in assessing whether
the Group’s assessment was reasonable.
We also assessed whether the group’s disclosures about the
sensitivity of the outcome of the impairment assessment to
changes in key assumptions reflected the risks inherent in the
valuation of goodwill.
205
Financial Statements
Independent Auditor’s Report continued
Opinions and conclusions arising from our audit continued
3. Our assessment of risks of material misstatement continued
Annually recurring risks
The risk
Our response
Accounting for estimated revenue of £0.9 billion (2015 : £1.1 billion) included within total external group Energy Supply
revenues of £7.5 billion (2015 : £8.0 billion))
Refer to page 92 (Audit Committee statement), notes 4.1 and A1.2(accounting policy) and note 21 (financial disclosures)
Risk vs 2015
tu
Certain of the Group’s energy sales revenues are based on estimates
of the values of electricity and gas supplied to customers between
the date of the last meter reading and the year end (“estimated
revenues”) where no bill has been issued at the year end date.
The method of estimating such revenues is complex and
judgemental and requires estimates and assumptions to:
1 estimate the volumes of energy consumed by customers. The
group’s estimated accrual for revenue at the year end is based
on the closing unbilled volume reflected within the financial
statements in the prior year, with adjustments made for gas or
electricity sold to customers (as identified from the industry
wide settlements system), gas or electricity billed to customers
(as identified from the group’s billing system) and various other
adjustments; and
2 assess the value to be ascribed to that revenue given the range
of tariffs. The group applies a price per unit (which is dependent
on a number of factors including location of customers and
type of billing arrangement) to the estimate of volume of energy
to be accrued at year end to arrive at the total estimated value of
energy sales between the date of the last meter reading and the
year end.
For estimated revenue our procedures included performing various
analytical procedures using actual data to allow us to set expectations
as to the likely level of estimated revenue and comparing this with the
group’s estimate, obtaining explanations for significant differences.
We also challenged the group’s assumptions relating to volume and
price used in determining the level of estimated revenue, as follows:
Volume
We agreed the core volume data underlying the calculation of the
estimated volumes into purchases, sales and other systems having
performed sample testing of the key controls on these systems.
We compared the estimated volume determined by the Group
with benchmarks that the Group had also calculated using internal
and external information and analysed and sought explanations for
variances from that benchmark.
Price
We challenged the assumptions of price per unit by comparing the
price applied with historical and current trends and data. Further,
we assessed the overall consistency of the assumptions and of the
inputs to the calculation of estimated value of revenue.
We also considered the adequacy of the group’s disclosures
in this area.
Recoverability of retail receivables of £0.6 billion (2015 : £0.8 billion) and unbilled income (balances noted above)
Refer to page 84 (Audit Committee statement), notes 4.1 and A1.2 (accounting policy) and notes 21 and 34 (financial disclosures)
tu
The group’s billed energy revenues result in significant receivables
with customers and, the risk of customer default remains high,
resulting in significant judgement being applied in the group’s
assessment of the recoverability of these receivables.
Our procedures included: testing the group’s controls over the
receivables collection processes; considering the receipt of cash
after the year-end; and testing the adequacy of the group’s
provisions against trade receivables by assessing the relevant
assumptions, taking account of our own knowledge of recent
collections experience in this industry and also historical data from
the group’s previous collections experience. We also considered
the adequacy of the group’s disclosures in this area.
Valuation of the group’s pension obligations (the group reflects a net defined benefit pension liability of £0.4 billion
(2015 : £0.7 billion))
Refer to page 84 (Audit Committee statement), notes 4.1 and A1.10 (accounting policy) and note 32 (financial disclosures)
tu
The valuation of the group’s pension obligations requires significant
judgment and estimation to be applied across numerous
assumptions.
The matter is considered to be a significant risk as small changes in
the assumptions can have a material financial impact on the results
and financial position of the Group given the size of the deficit.
In this area our procedures included challenging the key assumptions
supporting the Group’s retirement benefit obligations valuation, with
input from our own actuarial specialists. This included a comparison
of the discount and inflation rates and other assumptions used
against benchmarks developed by our internal actuaries and
similar assumptions used by other groups with defined benefit
pension schemes.
Further, we considered the adequacy of the group’s disclosures
in the area of pension obligations.
In our audit report for the year ended 31 March 2015 we included accounting for litigation and claims as one of the risks of material misstatement that
had the greatest effect on our audit. We continue to perform audit procedures over this area. However, there is a trend of reducing exposure in this area
and our audit strategy, allocation of resources and effort reflects that; as a result, we have not assessed this as one of the risks that had the greatest effect
on our audit and, therefore, this risk is not separately identified in our report this year.
206 SSE plc Annual Report 2016
1.
2.
3. Financial Statements
Opinions and conclusions arising from our audit continued
4. Our application of materiality and an overview of the scope of our audit
In establishing the overall audit strategy, and performing the audit, materiality for the Group financial statements as a whole was set at £75 million
(2015: £110 million), determined with reference to a benchmark of group profit before taxation, normalised to exclude exceptional items and certain
remeasurements (mainly movements on derivatives) as disclosed on the face of the income statement, of which it represents 5.2%, reflecting industry
consensus levels (2015: 7.3%). We consider profit before tax, exceptional items and certain remeasurements to be the most appropriate benchmark as
it excludes the non-recurring distorting impact of exceptional items and certain remeasurements and is a more stable year on year profit measure.
We reported to the Audit Committee any corrected or uncorrected identified misstatements exceeding £3 million (2015: £5 million) in addition to other
identified misstatements that warranted reporting on qualitative grounds.
£75m: group
materiality
£10m - £25m:
component
materiality range
£1,451m
£75m
Group Materiality
PBT before exceptional items
and certain remeasurements
Of the group’s 224 reporting components, audits for group reporting purposes were performed at 127 components in the UK and Ireland and desktop
procedures performed in relation to 7 components. These audits covered 99% of Group revenue, 98% of Group profit before tax; and 98% of Group total
assets. For the remaining components, we performed analysis at an aggregated group level to re-examine our assessment that there were no significant
risks of material misstatement within these.
The Group team instructed component auditors as to the significant areas to be covered, including the relevant risks detailed above and the information
to be reported back. The Group team approved the component materialities, which ranged from £10 million to £25 million, having regard to the mix of
size and risk profile of the Group across the components. The work on 10 of the components was performed by component auditors and the rest by the
Group team. The Group team issued reporting instructions to the auditor of SGN, the group’s most significant joint venture as to the significant areas to
be covered during their audit.
The Group team visited the component location in Reading as part of the assessment of the audit risk and strategy. Telephone calls were also held with
the partners of the component auditors and with the partner of Deloitte in respect of the audit of SGN and the majority of the others that were not
physically visited. On these calls, the findings reported to the Group team were discussed in more detail, and any further work required by the Group
team was then performed by the component auditor and Deloitte as relevant.
Scoping of our audit
Analytical procedures
Scoped out of our audit
Audits for group reporting purposes
Revenue
Profit
before tax
Net assets
–
1%
99%
1%
1%
98%
–
2%
98%
5. Our opinion on other matters prescribed by the Companies Act 2006 is unmodified
In our opinion:
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the part of the Directors’ Remuneration Report to be audited has been properly prepared in accordance with the Companies Act 2006; and
the information given in the Strategic Report and the Directors’ Report for the financial year for which the financial statements are prepared is
consistent with the financial statements.
207
Financial Statements
Independent Auditor’s Report continued
Opinions and conclusions arising from our audit continued
6. We have nothing to report on the disclosures of principal risks
Based on the knowledge we acquired during our audit, we have nothing material to add or draw attention to in relation to:
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the directors’ statement of Risk Management on pages 16 to 19, concerning the principal risks, their management, and, based on that, the directors’
assessment and expectations of the group’s continuing in operation over the three years to March 2019; or
the disclosures in note 34 of the financial statements concerning the use of the going concern basis of accounting.
7. We have nothing to report in respect of the matters on which we are required to report by exception
Under ISAs (UK and Ireland) we are required to report to you if, based on the knowledge we acquired during our audit, we have identified other
information in the annual report that contains a material inconsistency with either that knowledge or the financial statements, a material misstatement
of fact, or that is otherwise misleading.
In particular, we are required to report to you if:
- we have identified material inconsistencies between the knowledge we acquired during our audit and the directors’ statement that they consider
that the annual report and financial statements taken as a whole is fair, balanced and understandable and provides the information necessary for
shareholders to assess the group’s position and performance, business model and strategy; or
the Audit Committee Report does not appropriately address matters communicated by us to the audit committee.
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Under the Companies Act 2006 we are required to report to you if, in our opinion:
- adequate accounting records have not been kept by the parent company, or returns adequate for our audit have not been received from branches
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not visited by us; or
the parent company financial statements and the part of the Directors’ Remuneration Report to be audited are not in agreement with the accounting
records and returns; or
- certain disclosures of directors’ remuneration specified by law are not made; or
- we have not received all the information and explanations we require for our audit.
Under the Listing Rules we are required to review:
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the directors’ statements, set out on pages 78 and 18, in relation to going concern and longer-term viability; and
the part of the Corporate Governance Statement on pages 70 to 79 relating to the company’s compliance with the eleven provisions of the 2014 UK
Corporate Governance Code specified for our review.
We have nothing to report in respect of the above responsibilities.
Scope and responsibilities
As explained more fully in the Directors’ Responsibilities Statement set out on page 116, the directors are responsible for the preparation of the financial
statements and for being satisfied that they give a true and fair view. A description of the scope of an audit of financial statements is provided on the
Financial Reporting Council’s website at www.frc.org.uk/auditscopeukprivate. This report is made solely to the company’s members as a body and is
subject to important explanations and disclaimers regarding our responsibilities, published on our website at www.kpmg.com/uk/auditscopeukco2014a,
which are incorporated into this report as if set out in full and should be read to provide an understanding of the purpose of this report, the work we
have undertaken and the basis of our opinions.
William Meredith (Senior Statutory Auditor)
for and on behalf of KPMG LLP, Statutory Auditor
Chartered Accountants
191 West George Street, Glasgow, G2 2LJ
17 May 2016
208 SSE plc Annual Report 2016
Shareholder information
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Shareholder enquiries
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The Registry
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Website
The Company’s website, www.sse.com, contains a wide range of
information including a dedicated Investors section where you can
find further information about shareholder services including:
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- dividend history and trading graphs;
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-
- downloadable shareholder forms.
the Scrip Dividend Scheme;
telephone and internet share dealing; and
share price information;
Financial calendar 2016
Annual Report on sse.com/investors
AGM (Perth) and Trading Statement
Ex-dividend date for final dividend
Record date for final dividend
Final date for Scrip elections
Payment date
21 June 2016
21 July 2016
28 July 2016
29 July 2016
26 August 2016
23 September 2016
Results for six months to 30 September
9 November 2016
Digital news
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to keep shareholders, investors, journalists, employees and other
interested parties up-to-date with news from the Company.
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