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Strategic Report
About SSE
Welcome to the SSE
Annual Report 2017
At SSE we provide the energy people need in a reliable and
sustainable way. We’re involved in producing, generating, distributing
and supplying electricity and gas, as well as other energy-related
services, across the UK and Ireland. This gives SSE the broadest
range of energy businesses of any company listed on the London
Stock Exchange.
Our performance in 2016/17 demonstrates the value of a business
built on core strengths and a commitment to providing long-term
value for our shareholders and meeting the needs of our customers.
This Report, addressed to SSE’s shareholders, details SSE’s
performance in 2016/17 and looks ahead to 2017/18 and beyond.
Strategic Report
About SSE
Our story
About our business
Chairman’s introduction
Our role in society
Executing our long-term strategy
Questions to the Chief Executive
Our strategy
Performance in 2016/17 and
future plans
Financial and non-financial
performance indicators
Reducing our carbon emissions
Our people and our values
Risk Management Framework
Working in partnership with
our stakeholders
Our financial and
business performance
Financial overview
The weather
Wholesale – producing energy
Networks – delivering energy
Retail – supplying energy
Enterprise – providing
energy services
2
4
6
8
10
12
14
16
18
20
24
28
30
39
40
44
48
52
Directors’ Report
Chairman’s introduction
Board of Directors
Leadership
Effectiveness
Accountability
Stakeholder engagement and
responsible stewardship
Remuneration
Other statutory information
Statement of Directors’
responsibilities
54
56
58
64
70
76
80
98
100
Financial Statements
Alternative Performance Measures 101
Consolidated income statement
106
Consolidated statement
of comprehensive income
Consolidated balance sheet
Consolidated statement
of changes in equity
107
108
109
Consolidated cash flow statement 110
Notes to the consolidated
financial statements
Accompanying information
Company balance sheet
Company statement
of changes in equity
Notes to the Company
financial statements
Independent Auditor’s Report
Shareholder information
111
159
187
188
189
199
IBC
CDP has again recognised SSE as a leader for
its actions and disclosure on climate change.
SSE was awarded a score of A- in recognition
of its significant reduction in carbon emissions
in 2015/16. This score is expected to be updated
in October 2017.
For the third year in a row SSE has been
awarded the Fair Tax Mark for its transparent
tax disclosures, it is the only FTSE-listed company
to have this accreditation.
SSE is an accredited Living Wage company and
extends this commitment to its supply chain.
Full year dividend per share
SSE believes its first responsibility is to give shareholders a return on their investment through the
payment of dividends, that are at least equal to RPI inflation. SSE has delivered a dividend increase
every year since 1999.
25.7
27.5
30.0
32.4
35.0
37.7
60.5
55.0
42.5
46.5
80.1
75.0
66.0
70.0
84.2
86.7
88.4
89.4
91.3
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
Adjusted profit before tax
Reported profit before tax
£1,545.9m
+2.1%
£1,776.6m
£593.3m in 2015/16
Total recordable injury
rate per 100,000 hours
worked
0.22
-4.4% compared
with 2015/16
Total carbon emissions
(carbon dioxide equivalent
– 000’s tonnes)
See page 18 for more
19,395
-14% compared
with 2015/16
Adjusted capital and
investment expenditure
£1,726.2m
+6.6%
Reported capital and
investment expenditure
£2,387.3m
£2,248.1m in 2015/16
Economic contribution
to the UK
£9.3bn
+5% compared
with 2015/16
Adjusted earnings per share
Reported earnings per share
125.7p
+5.2%
158.4p
46.1p in 2015/16
This symbol donates the use of an Alternative Performance Measure (APM).
Read more about Alternative Performance Measures on page 104.
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3.1. Strategic Report2. Strategic Report – About SSE
Our story
Building on a proud past; creating
a smarter, low-carbon future
Our heritage
Preserving our heritage
Pitlochry Dam Visitor Centre
At the heart of the post World War Two
hydro-electric revolution in the north of
Scotland was the Tummel-Garry project,
known as the Grand Scheme because of
the vast area of the project. While Perthshire
has abundant rainfall and many hills and
mountains, the scale of these mountains
was not comparable to the hydro schemes
that were developing in North America.
Therefore the Scottish schemes needed
to think more creatively and capture more
water from a wider area. Across the north
of Scotland 54 main hydro-electric power
stations were built, 30km of tunnel and a
construction workforce that reached 12,000
at its peak. This was a feat of incredible
vision, engineering and effort.
The social history that was created by
these hydro pioneers is something that
does not simply belong to SSE and there is
a responsibility to preserve and promote that
heritage for future generations. That’s why
in 2015 a final investment decision was taken
to invest £4m in a brand new visitor centre
in Pitlochry – the very heart of the Tummel-
Garry hydro scheme. It opened to the public
on 30 January 2017, is free entry and tells
the story of Scotland’s hydro heritage.
Furthermore, the visitor centre allows visitors
to learn more about the importance of
newer forms of renewable energy for
a low carbon future.
Taking inspiration
from a rich heritage
SSE’s roots are firmly planted in the
hydro-electric revolution that took place
in the north of Scotland shortly after the
Second World War. Bringing power to the
islands, glens and crofts of the north of
Scotland was transformative to life in the
north and established, at the time, a public
corporation whose aim was to harness
abundant natural resource for public benefit.
It was the privatised Scottish Hydro-electric
that merged with Southern Electric to create
Scottish and Southern Energy, now known
as SSE.
The two regions in the most extreme
north and south of the British Isles could
not have been more different geographically,
economically or socially. The electricity
network in the south of England had
expanded quickly: the challenge was to
provide electricity reliably to a booming
population. The relative strengths
complemented each other and provided
the basis from which SSE grew rapidly
through the 2000s.
1933
The National Grid started
operating across GB
1990
Central Electricity Board broken
into three parts and privatised
1991
Scottish electricity industry
privatised
1943
The Hydro Electric (Scotland)
Development Act
1956
Calder Hall, the world’s first
nuclear power station of industrial
scale opened in Cumbria
1989
The Electricity Act provided for
the privatisation of the electricity
industry
1986
The Gas Act provided for the
privatisation of the gas industry
1998
Scottish Hydro Electric and
Southern Electric merge
and become Scottish and
Southern Energy
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SSE plc Annual Report 2017
Working to deliver a clean, digital electric future
One hundred years ago, electricity
revolutionised the way in which people lived
their lives and today it is an essential service
that we take for granted. It powers the daily
commute, how we interact with friends and
family and as a sector electricity is central
to economic growth. This century, a new
electric revolution is under way, driven by
the imperative to cut carbon emissions, and
create an electricity system that is flexible,
dynamic and clean. SSE aims to take a leading
role, supporting the transition towards this
low carbon future.
Central to this are SSE’s plans to continue to
invest in renewable energy, and reaffirm its
position as a leader in renewable sources
of energy. SSE, alongside its joint venture
partners, is investing in the Beatrice offshore
wind farm, a £2.6bn, 588MW windfarm in
the Moray Firth.
The scale of the Beatrice wind farm is as awe
inspiring as the hydro schemes of the 1950s.
7MW turbines with individual blades almost
as long as a football pitch being constructed
in the deep, difficult waters of the Moray
Firth, providing enough electricity to power
450,000 homes.
A smarter future is also in prospect for homes
and businesses. The installation of smart
meters in homes and businesses throughout
the UK marks the beginning of a digitalised
industry. SSE is working hard to install smart
meters in its customer homes, with the
programme ramping up significantly in
2016/17 with a total of 500,000 smart
meters installed as of 31 March 2017.
The transport sector is also on the cusp
of transformation. Two hundred years
since the internal combustion engine was
invented, electric motors may provide a
clean alternative to the future of transport.
Providing transformative opportunities to
improve air quality reduce carbon emission
providing significant opportunity to electricity
companies ready to respond. Electricity
generators, suppliers and distribution
network companies must be ready to deal
with the challenges a mass take-up of electric
cars will have on the system. SSE’s Scottish
and Southern Electricity Networks has taken
a leading role in considering the impacts
and the ways to manage the system
more efficiently.
2008
Irish wind developer Airtricity
acquired, expanding SSE’s
capabilities in renewable energy
2008
UK’s Climate Change Act sets legal
target to reduce CO2 emissions by
80% on 1990 levels by 2050
2007
All Ireland single electricity
market created
2006
SSE’s Hadyard Hill wind farm
became first in the UK to generate
over 100MW of electricity
2013
Ofgem introduced the RIIO
(Revenue = Incentives + Innovation
+ Outputs) framework for energy
network regulation
2017
First 24-hour period since 1880s
that Britain did not use coal to
generate electricity
2020
SSE’s capital investment
programme from 2016 is expected
to result in renewable energy
capacity increasing to 4.3GW
and the Regulated Asset Value
of its Networks businesses
increasing to close to £9bn
3
1. Strategic Report2.3. Strategic Report – About SSE
About our business
A balanced range
of energy businesses
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3
Gas
Electricity
SSE provides the energy people need
in a reliable and sustainable way. It has
three principal business areas: Wholesale,
using turbines to convert energy from
gas, oil, coal, water and wind to generate
electricity; trading in wholesale energy
markets; and managing energy contracts.
Networks, transmitting and distributing
electricity and gas to homes and
workplaces. Retail, supplying electricity
and gas and related services to households
and organisations. Each business area
works within SSE’s strategic framework
and enables SSE to fulfil its financial
objective. It is the only company listed
on the London Stock Exchange with
such a balance of energy businesses.
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SSE plc Annual Report 2017
Wholesale
Sustainably sourcing and producing energy
SSE provides energy and related services for customers in wholesale
energy markets in Great Britain and the island of 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.
Read more information see pages 40 to 43.
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3
Gas production
Extracting natural gas from fields in the North Sea and west
of Shetland for use onshore.
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.
Gas storage
Using caverns to store large volumes of natural gas under ground
for use at a future date.
Market-based
5
6
7
8
4
Networks
9
Retail
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 the island of Ireland. It aims to
become a market-leading retailer by digitalising and diversifying
its business and consistently excelling in customer service. It also
incorporates SSE Enterprise, which brings together key SSE services
for industrial, commercial and public sector customers.
Read more information see pages 44 to 47.
Read more information see pages 48 to 51.
4
5
6
Gas distribution
Using pipes to distribute gas from the transmission network to homes,
work places and other premises.
Electricity transmission
Using higher voltage lines and cables to transmit electricity from
generating plant to the distribution network.
Electricity distribution
Using lower voltage lines and cables to distribute electricity to homes,
work places and other premises.
7
8
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Energy supply
Retailing gas and electricity to household, small business and
industrial and commercial customers.
Energy-related services
Providing energy-related products and services to households
and small businesses.
Enterprise
Bringing together key SSE services for industrial, commercial and
public sector customers.
Economically-regulated
Market-based
5
3.1. Strategic Report2. Strategic Report – About SSE
Chairman’s introduction
Providing the energy
people need
This Strategic Report sets out our performance over 2016/17,
and looks at our future strategic priorities.
6
SSE plc Annual Report 2017
I’m pleased to introduce this year’s Strategic
Report. Since becoming Chairman of SSE
in July 2015 I’ve had the privilege of seeing
first hand a business made up of talented
and committed people who are focused on
exceeding the expectations of customers;
building, owning and operating assets
that power our low-carbon energy future;
working constructively with stakeholders;
and making a positive contribution to the
communities and wider society it serves.
There is more detail about all of these areas
in this Strategic Report.
Energy underpins modern society: it’s at the
centre of economic growth and industrial
strategy, and it powers the daily commute
to work and how our customers engage
with friends and family. Yet the energy sector
never stands still and 2016/17 brought further
changes and challenges. In all of this SSE
is a business built for the long term. The
fundamentals of the business are strong and
our proposition to shareholders, to increase
annually the dividend payable to shareholders
by at least RPI inflation, remains firm.
A business investing, building
and operating long-term assets
SSE is a business that focuses on what it
does well. As well as efficiently operating
our assets that provide energy to the UK and
Ireland’s homes and businesses, in 2016/17 we
invested over £1.7bn as part of plans to invest
around £6bn in the four years to March 2020
of which around two thirds is investment
in regulated networks and government
mandate renewables. This investment adds
to the diversity of SSE’s operations and the
balance of our business. It also helps to
stimulate sustainable economic activity,
principally by supporting around 120,000
people’s employment. The sheer scale and
impact of the Caithness-Moray transmission
link and the engineering feats at the Beatrice
offshore wind farm, SSE’s two largest projects
to date, can not fail to leave a positive
impression. The projects are on track for
completion in 2018 and 2019 respectively.
Of course, SSE’s assets are not confined to
plant and machinery; SSE is a people business.
The stable, experienced and increasingly
diverse team are committed to adding to
the ‘human capital’ of the organisation. This
stretches from our engineering apprentices
helping to deliver an efficient distribution
network whatever the weather; those who
operate our diverse portfolio of power
stations; through to the teams dedicated to
making energy fair and simple for customers.
Our highly skilled teams cover the length
and breadth of the UK and Ireland and their
commitment to their roles has formed
the basis of SSE’s success to date, and will
drive it to succeed in the future.
A changing energy sector
Change is a theme running throughout
all aspects of SSE’s businesses. Some
political uncertainty is a fact of life for the
energy sector. It is again evident with the
UK’s decision to leave the European Union,
political parties in the UK considering
possible intervention in the Retail energy
market and the calls for a second Scottish
independence referendum. This is
something on which the Board is clearly
focused, not only to manage any risks from
politics and regulation but also to foster
constructive working relationships with
government and regulators, to best
represent customers’ interests and identify
opportunities that may emerge.
Politics is just one factor driving change.
Energy markets are now changing at a
rapid pace as competition changes market
dynamics and the costs of some low-carbon
technologies falls rapidly. This brings notable
changes to every part of SSE’s operations.
SSE has shown before it can respond and
adapt when market conditions change, from
becoming a leading investor in renewable
energy to spearheading calls for tax
transparency on the part of large business.
The Board held several discussions this year
to help the SSE team pursue emerging
opportunities, whilst mitigating risk.
Putting customers at the
heart of everything we do
Almost everything SSE does is paid for
by consumers. It must therefore put their
interests and needs at the heart of its
activities. We can’t control the underlying
cost of energy, particularly wholesale prices
or many of the costs associated with the
low-carbon transition, and it was with regret
that we announced an increase in our GB
domestic electricity tariffs, which took effect
at the end of April 2017, and increases for
customers in Northern Ireland also. While
we have been able to hold gas prices at their
current levels, and we protected customers
from an increase in energy costs during the
preceding winter, the fact is that the costs
of programmes to upgrade and decarbonise
our ageing energy infrastructure are
ultimately borne by the bill payer. At SSE,
we do everything we can to keep the impact
of that on customers to a minimum.
We are very aware that energy is an essential
service and energy suppliers have to treat
their customers fairly. We have taken action,
be it investment in smart metering or
outlining a proactive programme to engage
with our customers to ensure they are on
the right products for them. There is always
more to do, particularly as the regulatory
environment evolves, following the UK
General Election. The Board is committed
to fostering constructive relationships with
governments and regulators as they pursue
their priorities; and to ensuring that SSE is as
well-placed as possible to respond to the
challenges and opportunities that those
priorities represent.
Creating a culture for
long-term success
In July 2016, the Financial Reporting
Council (FRC) published a report on
the importance of corporate culture to
long-term business success. SSE’s Board
endorsed the FRC’s definition of culture
and the active management and oversight
of SSE’s culture has been a growing theme
for the Board throughout 2016/17.
There are, of course, distinctive responsibilities
between Board and Executive in relation to
corporate culture: it is the role of the Board to
agree a healthy culture and for ensuring there
is an appropriate framework of control with
regard to culture-related issues; and it is the
role of the Executive team to ensure that the
attitudes and behaviours demonstrated in
day-to-day operations are consistent with
an appropriate culture.
I have been pleased with early progress in a
more systematic and methodical approach
to defining, nurturing and monitoring SSE’s
internal culture. From a new code of ethics
for employees to the development of ethical
training packages, SSE made a good start in
2016/17 with much to do in the years to come.
Acting in the interests
of stakeholders
Over the last year, there has been significant
debate about the UK’s strategy for economic
growth. Creating an Industrial Strategy and
giving greater importance to the voice of the
stakeholder in business decision making are
increasingly coming into focus.
Stakeholder interests are explicitly outlined
in Section 172 of the Companies Act 2006,
as is the impact of a company’s operations
on the community and the environment.
SSE has always sought to live by the spirit
and the letter of Section 172 of the Act.
Fulfilling its duty to act in the interest of
all stakeholders should make a significant
contribution to a healthy organisational
culture. As well as our commitment to
reduce carbon emissions from our electricity
generation output, the achievement of
the Fair Tax Mark for the third year in a row,
supported by more accessible tax disclosure,
and SSE’s four year commitment to the
accredited Living Wage are symbols of
fairness that are valued by stakeholders,
customers and shareholders.
I have no doubt that continuous improvement
in openness and transparency at the same
time as recognising the strategic role of the
stakeholder voice will benefit SSE in the short,
medium and long term.
Achieving our first
financial objective
At SSE our financial objective is to
increase annually the dividend payable to
shareholders, by at least RPI inflation. SSE
has delivered a dividend increase every year
since 1999. I’m pleased that the Board is
recommending a final dividend that will take
the full-year dividend for 2016/17 to 91.3
pence per share.
In all, SSE provides the energy people need
in a reliable and sustainable way. We made
a £9.3bn contribution to the UK economy
this year and we know we have a unique role
in the energy sectors in the UK and Ireland
which comes with responsibilities and the
need to earn the right to make a sustainable
profit over the long term. There are complex
issues to manage and additional challenges
facing us in 2017/18 yet SSE has the strategy,
culture, and a team of talented people
required to succeed in 2017/18 and beyond.
The Strategic Report was approved by and
on behalf of the Board of Directors on
16 May 2017. This Strategic Report provides
you the shareholder with an update on our
approach and performance.
Richard Gillingwater CBE
Chairman
May 2017
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3.1. Strategic Report2. Strategic Report – About SSE
Our role in society
Providing the energy
people need to create
and share value
SSE does not operate in isolation; it has a deeply interconnected relationship with the society
it serves, operates within and is part of. SSE relies on society to be able to serve its customers in
a reliable and sustainable way, and in return puts back into society through paying tax, creating
sustainable employment and investing in national energy infrastructure. By creating and sharing
value with the communities in which it operates SSE fulfils its role as a responsible member
of society.
Supporting
and creating
sustainable
jobs
Investing in
infrastructure
Paying a fair
share of tax
Society
Providing
public
services
8
SSE plc Annual Report 2017
Giving the
right to pay
dividends
Lending
human
capital
Investing in
infrastructure
Supporting and creating
sustainable jobs
Paying a fair
share of tax
SSE helps maintain and invest in the energy
infrastructure society needs. In 2016/17
SSE invested around £1.7bn in energy assets
and services, part of the £9.3bn and €779m
contribution SSE made to UK and Irish
economies in the same year.
As a responsible member of society,
SSE believes in supporting and creating
high quality long-term jobs. In 2016/17
SSE employed 21,157 people directly
and supported a total of 108,440 jobs
across the UK and Ireland.
SSE believes it should contribute to the cost
of the services on which it depends. It does
this through the payment of tax. SSE seeks
to be transparent and open about its tax
disclosures. It has been an accredited Fair
Tax Mark company since 2014.
Capital investment 2016/17
Employees 2016/17
Total tax paid including on profits, property,
and employment and environmental taxes
£1.7bn
+6.6%
21,157
+0.2%
£385m
-15.2%
Society
Providing
public services
Lending
human capital
Giving the right
to pay dividends
The public services society provides
are crucial for SSE to function and thrive.
SSE relies on emergency services, public
infrastructure, health and education services
to fulfil its core purpose of providing energy
in a reliable and sustainable way.
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.
Energy was once owned and operated
by central government in the UK 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.
Contribution to the UK economy 2016/17
Investment in people development 2016/17
Full-year dividend price per share 2016/17
£9.3bn
+5%
£18.9m
+9.8%
91.3p
+2.1%
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3.1. Strategic Report2.
Strategic Report – Executing our long-term strategy
Questions to the Chief Executive
Managing change
for the long term
SSE Chief Executive Alistair Phillips-Davies answers questions
on SSE’s performance in 2016/17 and looks ahead to 2017/18
and beyond.
10 SSE plc Annual Report 2017
How would you describe SSE’s
performance in 2016/17?
The best word is robust. I’m pleased that
we met our financial objective and took
some major steps to prepare the business for
the future, whilst not losing sight of the need
to deliver the efficient and safe operations
that customers rely on. The operating context
continues to present challenges and it’s clear
that a combination of political uncertainty
and technology will change our energy
sector in the years ahead. That’s why SSE’s
focus is on what it does well: building, owning
and operating assets and providing energy
safely and efficiently for customers. We are
a business that is focused, adaptable and
resilient and this has formed the basis of
our solid performance and forms the
foundations for sustainable growth.
What aspect of SSE’s performance
in 2016/17 has disappointed you
the most and, what has pleased
you the most?
I’m pleased with the progress at our major
investments, notably the Caithness-Moray
transmission link and our portfolio of
renewable energy developments. We invested
around £1.7bn over the year, part of a £6bn
programme to 2016-20, in strategic assets
that will grow and diversify our business.
I’d also note the discipline we showed in
asset disposals and capital recycling. The
sale of a 16.7% stake in SGN, for a headline
consideration of £621m, confirmed our
ability to deliver value for shareholders by
reshaping SSE. But safety comes first at SSE.
In some ways, our performance may have
been better than in the previous year but this
was completely overshadowed by the death
last October of a contractor working on an
SSE project. The loss of life at work is why the
safety and wellbeing of our team must be the
top priority.
In a year in which SSE increased
its electricity tariffs in GB, and
energy affordability is the priority
for regulators and governments,
how is SSE factoring this into
decision making?
I’ve said before that everything that SSE
does is ultimately paid for by customers.
As a group of energy businesses we must
always remember how important it is that
people can afford to pay their bills. The energy
sector in general, and the cost of energy in
particular, will always be under political and
regulatory scrutiny. So we have to ensure
energy affordability is central to our decision
making in each business, and that’s why our
focus on controlling costs and operating
efficiently is so important. It’s also why we
engage constructively with governments and
regulators to ensure a balance in delivering
reliable and low carbon energy as cost-
effectively as we can for customers.
The energy market continues
to change at a rapid pace, and
innovation and competition
are driving this change. Is SSE’s
strategic framework still the
right one in this rapidly-
developing sector?
Sector changes mean that to succeed in
the future SSE will have to evolve and adapt,
as it has in the past. Our strategic framework
is consistent over the long term and allows
us to exploit opportunities, as well as mitigate
risk. It has also seen us undertake some
innovative projects, including our distribution
business trialling more active network
management on Orkney, to prepare it
for an increasingly distributed and flexible
energy system. Our Wholesale business
is involved in the testing of wind turbines
that are larger, more efficient and capable
of supporting offshore wind projects in
deeper waters, such as the Beatrice offshore
wind farm. Our strategic framework gives
us the foundations from which to innovate,
whilst providing great service to our
customers, and invest for the future.
How are SSE’s capital expenditure
and investment plans to 2020
progressing?
We’re pleased with our investment portfolio.
Central to our strategy is building, owning
and operating assets that bring scale, diversity
and balance to the business and any final
investment decisions for such assets are
determined by the need to secure returns
that are clearly greater than the cost of capital,
enhance earnings and support the delivery
of annual dividend increases that at least
keep pace with inflation. We invested around
£1.7bn in 2016/17. Over the four years 2016-20
we’re on course to invest around £6bn.
This strategic investment is largely in assets
that are either economically-regulated or
government mandated, such as renewables.
This will further transform the SSE Group and
support earnings and our commitment to
dividend growth.
Has the macro-economic and
regulatory risk to SSE escalated
due to Brexit and calls from the
Scottish Government for a second
independence referendum?
Politics, regulation and compliance is one
of SSE’s principal risks. Whilst these events
don’t present an immediate risk to how we
serve customers or our investment plans,
the level of risk could increase if political
uncertainty leads to a prolonged period of
legislative or regulatory volatility. Whenever
I speak to government I always advocate
for as much stability in the operating
environment as can be achieved. Our
balanced business model is designed,
amongst other things, to provide underlying
resilience when there is regulatory
uncertainty. I do think as well as risks there
will be opportunities emerging in this
changing environment and we need to
identify them.
What do you expect to be the
consequences for the energy
sector of the UK General Election?
Energy was a prominent issue when the
election was called. During it, SSE issued a
five-part ‘manifesto’ with a series of proposals
for building a productive and sustainable
UK economy and an energy sector that
works for customers. Our balanced business
model is designed to ensure SSE is resilient
to political changes – for example, operating
profit from GB household energy supply
comprised around 15% of overall operating
profits in 2016/17. We clearly recognise the
role of government and regulation in the
energy sector, but I’d caution that intervention
in a changing market requires a clear objective
with broad support and careful consultation
on the principles and the detail. This belief will
form the basis of our approach to working
with the UK government and members of
Parliament in the years ahead.
How has SSE invested in the people
and culture for future success?
This is a critical area for us. Our sector is
facing challenges in terms of its diversity,
age profile and skillset. We have to therefore
respond. I was pleased that we were the
first major UK company to measure the
economic value of the skills and capabilities
of the people we employ; and are updating
this. We did this principally to give us the
insights our team needs into how to manage
our most critical resource – the people who
work for SSE. We’ve put considerable
thought into our people and getting the
right culture at SSE. This is about attracting
talent, investing in a pipeline of apprentices
and young people, and building an inclusive
and diverse workforce who will achieve our
strategic aims.
Is the commitment to the dividend
sustainable in the years ahead?
Yes. Annual dividend increases, in line
with RPI inflation, remains our first financial
objective. Our strategic framework and
opportunities for growth mean we can
deliver a full-year dividend increase that
keeps pace with RPI in 2017/18 and in the
subsequent years.
What are your personal priorities
for 2017/18 and the period
to 2020?
We know that 2017/18 will present challenges
and changes. But that’s a fact of life in the
energy sector. Our focus will be on doing
what we do well and building on our core
strengths. Our long-term approach is to
maintain focus, be resilient and ensure we
can adapt to external change. So in the
coming years, we’ll focus on securing
maximum value from our portfolio of
Wholesale assets and investments, achieving
further efficiencies and customer service
improvements in our Networks businesses
and giving our Retail and Enterprise customers
the products and services they need. In all this
our commitment will be to provide long-term
value for customers and shareholders.
Alistair Phillips-Davies
Chief Executive
May 2017
Our strategic priorities to 2020
The safe and efficient operation
of assets and providing the
energy products and services
that customers rely on.
The disciplined investment in
new assets, or the upgrading
of existing assets, to support
and maintain the balance of
the business.
Constructive engagement
with regulators and legislators
to advocate for clarity and
stability, where possible, in the
regulatory framework for all
three business segments.
11
3.1. Strategic Report2. Strategic Report – Executing our long-term strategy
Our strategy
Creating value
for the long term
SSE’s strategy outlines not only what we do but how we do it. It outlines our strategic priorities,
our values and the financial objective that we work towards, to increase annually the dividend
payable to shareholders, in line with RPI inflation.
Strategy
SSE provides the energy people need in
a reliable and sustainable way. Its strategy
is to deliver the efficient operations of,
and disciplined investment in, a balanced
range of energy-related businesses, focusing
on the UK and Ireland.
Read more about our highlights in delivering our strategy this year
on pages 14 and 15.
Efficient operations
Efficient operations means putting safety first and putting
the current and future needs of customers at the heart of
everything SSE does. At the heart of SSE’s business are its
core operations. In 2016/17, total generation output was
26,296GWh; it safely delivered electricity to 3.7 million
homes and businesses through its distribution networks;
and supplied electricity, gas and related services to over
8 million customer accounts in the UK 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.
Finance
Our financial objective is to increase annually
the dividend payable to shareholders by at
least RPI inflation.
See pages 30 to 38 for more information.
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.
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.
Safety
All accidents are preventable,
so we do everything safely
and responsibly or not at all.
Service
We put the current and future
needs of customers at the
heart of everything we do.
12 SSE plc Annual Report 2017
Disciplined investment
Balanced businesses
Disciplined investment means identifying assets that
complement SSE’s business and securing returns which
are clearly greater than the cost of capital and enhance
Adjusted earnings per share.
Balanced businesses means operating and investing both in
economically-regulated and market-based energy-related
assets and businesses and avoiding over-exposure to any
one part of the energy sector.
In 2016/17 SSE invested around £1.7bn across the UK and
Ireland. SSE’s strategy seeks to avoid becoming over-exposed
to any one part of the energy sector but pursues investment
opportunities where most appropriate.
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 investments are:
– in line with its commitment to strong financial management;
– complementary to its existing portfolio of assets; and
– governed, developed and executed in an efficient and
effective manner.
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 investment options.
Dividend cover
Dividends are paid out of earnings and, over the long term,
earnings should increase to support dividend growth. Over
the three years to 2019/20, and subject to the ongoing factors
that influence earnings and material changes to sector
regulation, SSE is on course to achieve dividend cover within
a range of around 1.2 times to around 1.4 times.
Balance sheet
SSE believes it should maintain a strong balance sheet,
illustrated by its commitment to robust ratios for retained
cash flow and funds from operations/debt. A strong balance
sheet enables it to borrow money from debt investors at
competitive rates and therefore take long-term decisions.
Efficiency
We keep things simple,
do the work that adds value
and avoid wasting money,
materials, energy or time.
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.
Teamwork
We support and value
our colleagues and enjoy
working together as a team
in an open and honest way.
13
3.1. Strategic Report2. Strategic Report – Executing our long-term strategy
Performance in 2016/17 and future plans
Delivering our strategy
and looking ahead
2016/17 was another year of delivery against SSE’s strategic priorities. Looking ahead, 2017/18
and beyond will bring challenges, but also new opportunities which will support SSE’s focus
on delivering annual increases in the dividend that at least keep pace with inflation.
Efficient
operations
Performance highlights
Putting safety first and putting the
current and future needs of customers
at the heart of everything SSE does
Disciplined
investment
Identifying assets that complement
SSE’s business and securing returns
which are clearly greater than the
cost of capital and enhance Adjusted
earnings per share
Total recordable injury rate
0.22 per 100,000 hours worked,
an improvement on 2015/16
SSE broke company records with the
best ever complaints score of 20.5 per
100,000 customers from October to
December 2016 in the Citizens Advice
Supplier Performance Report
Performance highlights
Investment of £1.73bn took the
total since 2010 to almost £11bn,
significantly in renewables and
networks, including the £1.1bn
Caithness-Moray transmission link
SSEN’s investment in reinforcements,
upgrades to automation and tree
cutting will improve customer’s
experience of the electricity network
Balanced
businesses
Performance highlights
Operating and investing both in
economically-regulated and market-
based energy-related assets and
businesses and avoiding over-exposure
to any one part of the energy sector
14 SSE plc Annual Report 2017
Investing for the future at the
Ferrybridge Multifuel 2 project
which can generate 70MW,
powering 170,000 homes
Investment into our Business
Energy products continued
with the launch of a 100%
renewable energy proposition
for commercial customers
Outlook to 2020
– Continue an ‘if it’s not safe, we don’t do it’ culture
– Respond constructively to regulatory change in the Retail market
and advocate for changes that benefit customers
– Provide an excellent service to all customers who rely on their
energy networks
– Continue to build on SSE’s strong culture of customer service with
new products, services and efficiently delivering smart metering
– Retain and gain domestic and business energy customer accounts,
with a lower net loss than in recent years
Outlook to 2020
– Efficiently execute our £6bn investment programme 2016 – 2020, including
our two largest projects: the Caithness-Moray transmission link and the
Beatrice offshore wind farm, due for completion in 2018 and 2019 respectively
– Take the RAV of the networks business to almost £9bn through investment in
new assets and timely connections to our networks
– Continue progress with onshore wind projects in construction which are on
track to take our total renewable electricity capacity to 4.3GW
– Explore strategic generation development options in new gas, offshore wind
and multi-fuel to diversify and bring flexibility to our portfolio
– Further investment in digital customer service platforms to improve our
customer service
Outlook to 2020
– Maintain balance to sources of revenue and ensure balance in our
investment options
– Continue to operate a diverse and balanced portfolio of electricity generation
and gas production assets
– Diversify the Retail business by building a range of connected products and
services and expanding energy-related services
– Further growth in Business Energy based on meeting business customers’
core energy needs and enhancing our engagement with key customers
and partners
– Build on strong foundations and new leadership to grow the Enterprise
business to further balance SSE’s revenue and market exposure
15
A step change improvement in
customer contact and experience
in Distribution led to a 74% rise in
performance against the RIIO-ED1
customer satisfaction measure
Further investment in our
renewable energy portfolio,
including construction of Ireland’s
largest wind farm in Galway
SSE Retail expanded its customer
base in energy-related services
including boiler cover and home
broadband to 0.5m, from
0.4m previously
3.1. Strategic Report2. Strategic Report – Executing our long-term strategy
Financial and non-financial performance indicators
Measuring the results of SSE’s strategy
We assess our performance in delivering our financial objectives, executing our strategy and fulfilling our
core purpose in a reliable and sustainable way through a series of financial and non-financial indicators.
Financial
Dividend per share – pence
Dividend cover – times
Adjusted earnings per share
– pence
88.4
89.4
91.3
1.40
1.34
1.38
124.1
119.5
125.7
2015
2016
2017
2015
2016
2017
2015
2016
2017
SSE’s financial objective is to increase annually the
dividend payable to shareholders, by at least RPI inflation.
SSE believes that the dividend should be covered by
Adjusted earnings per share at a level that is sustainable
over time and it believes that sustainability is based on the
quality of the operations and assets from which earnings
are derived and the longer-term financial outlook.
Dividends are paid out of earnings and SSE’s Adjusted EPS
measure provides an important and meaningful measure
of financial performance. For more detail on Adjusted
items see Alternative Performance Measures on pages
101 to 104.
Strategic
Adjusted capital and investment
expenditure – £m
1,618.7
1,726.2
1,475.3
Networks Regulated Asset Value – £bn
7.35
7.96
7.68
Renewable energy generation capacity
– MW
3,394
3,275
3,309
2015
2016
2017
2015
2016
2017
2015
2016
2017
Central to SSE’s strategic framework is efficient and
disciplined investment in building a balanced range
of economically-regulated and market-based assets.
SSE’s economically-regulated energy networks businesses
provide index-linked RAV and relatively stable returns,
which brings opportunities for investment and balance
to SSE as a whole which underpins our financial objective
for dividend growth.
Renewable energy generation capacity in the UK and
Ireland is supported by government-mandated targets
and mechanisms. SSE’s Wholesale business seeks to
grow SSE’s renewables portfolio as the investments
provide balance and opportunities for investment in
strategic assets.
Responsibility
Total recordable injury rate per 100,000
hours worked
UK employee productivity (direct
contribution to GDP per capita) – £000
0.23
0.23
0.22
172.0
139.9
129.7
Carbon intensity of electricity generated
(Emissions Relative to MWh output
(kg CO2e per MWh))
474
397
304
2015
2016
2017
2015
2016
2017
2015
2016
2017
Safety is a core SSE value. We measure it by assessing
the Total Recordable Injury Rate for employees and
employees of other companies working on SSE sites
per 100,000 hours worked.
16 SSE plc Annual Report 2017
Combining SSE’s direct contribution to GDP and the size of
its workforce implies SSE’s average employee productivity
as shown above.
SSE aims to use resources responsibly and be transparent
in its reporting of this. SSE is committed to reducing the
carbon intensity of its overall electricity generation by
50% (compared to 2006) by 2020.
Financial
Strategic
Responsibility
Reported earnings per share – pence
Adjusted profit before tax – £m
Reported profit before tax – £m
158.4
1,564.7
1,513.5
1,545.9
1,776.6
55.3
46.1
735.2
593.3
2015
2016
2017
2015
2016
2017
2015
2016
2017
Reported results for 2016/17 were significantly higher
than those for 2015/16 due to the impact of significant
exceptional charges incurred in the previous year compared
to lower asset write downs and a gain on sale in 2016/17,
plus a movement in mark-to-market valuations on forward
purchase contracts for commodities over both years.
SSE’s objective is not to maximise profit in any one year but
to earn a sustainable level of profit over the medium term.
Reported results for 2016/17 were significantly higher
than those for 2015/16 due to the impact of significant
exceptional charges incurred in the previous year compared
to lower asset write downs and a gain on sale in 2016/17,
plus a movement in mark-to-market valuations on forward
purchase contracts for commodities over both years.
Adjusted capital and investment
expenditure composition
8%
14%
32%
Wholesale
Networks
Retail
Corporate
Adjusted operating profit composition
Adjusted operating profit composition
(five year average)
23%
27%
Wholesale
Networks
Retail
Corporate 0%
23%
28%
Wholesale
Networks
Retail
Corporate 0%
46%
50%
49%
Central to SSE’s strategy is disciplined investment
in a balanced range of energy business across the
energy sector.
To provide balance to the SSE group of businesses,
SSE seeks to earn a sustainable level of operating profit
from each of its three segments, covering economically-
regulated and market-based sectors. This prevents
it from becoming over exposed to any single part of
the energy sector.
Central to SSE’s strategy over the long term is a balanced
range of energy businesses. This balance seeks to avoid
exposure to one single part of the energy sector and derive
operating profits from economically-regulated activities
and market-based businesses.
UK tax paid (profit, property, environment
and employment taxes) – £m
All employees gender diversity
– male/female
506
454
385
68.6%
Female
Male
31.4%
For information on the performance
of SSE’s Wholesale, Networks, Retail
and Enterprise businesses in 2016/17,
see pages 40 to 53.
2015
2016
2017
As a responsibly-minded Company, SSE believes in being
transparent in its tax affairs and that this is important to
shareholders and other stakeholders.
SSE has been targeting a series of actions around gender
diversity and chose to be an early adopter of the draft
gender pay gap regulations, publishing its full disclosure
in 2015/16.
17
3.1. Strategic Report2.
Strategic Report – Executing our long-term strategy
Reducing our carbon emissions
Managing our
environmental impacts
Managing the issues of climate change, resource use and waste is
gaining significant interest from stakeholders interested in the impacts
of these issues on business performance and long term viability. SSE
has an important role to play in driving a low carbon transition as well
as improving its environmental performance and disclosure.
CO2 Emissions (000’s tonnes)
Generation 1
Other Scope 1
Scope 1 Total 2
Distribution Network Losses
Other Scope 2
Scope 2 Total 3
Scope 3 WTT Fuel Purchased
Scope 3 Gas Sold
Scope 3 Transmission
Other Scope 3
Scope 3 Total 4
Total Emissions 5
Scope 2 emissions (net)
Net Emissions
Intensity Ratios
Emissions relative to MWh
output (kg CO2e per MWh) 6
1 April 2016 to 31 March 2017
1 April 2015 to 31 March 2016
CO2
7,915
40
7,955
971
63
1,034
969
9,086
286
16
10,357
19,346
0
19,346
CO2e
Total CO2
CO2
CO2e
Total CO2
38
12
49
0
0
0
0
0
0
0
0
49
0
49
7,953
10,889
51
39
8,004(A) 10,928
971
63
1,079
60
1,034(A)
1,138
969
888
9,086
9,139
286
16
329
19
10,357(A) 10,375
19,395(A) 22,441
0
47
19,395
22,394
77
16
92
0
0
0
0
0
0
0
0
92
0
92
10,966
54
11,021(A)
1,079
60
1,138(A)
888
9,139
329
19
10,375(A)
22,534(A)
47
22,486
304
397
Notes
1
2
3
4
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.
Scope 1 comprises electricity generation, operational vehicles and fixed generation, sulphur hexafluoride emissions
and gas consumption in buildings.
Scope 2 comprises electricity distribution losses and electricity consumption in non-operational buildings and
substations – transmission and distribution.
Scope 3 comprises emissions that occur outside of the organisation in support of its activities. Scope 3 emissions
have been extended to include emissions from SHE Transmission losses and gas sold. As a result, scope 3 emissions
have been restated for the previous year.
5 GHG emissions from SGN’s activities are excluded (SGN reports these separately). GHG emissions from other Joint
Ventures are also excluded.
6 Emissions intensity relative to MWh is calculated against scope 1 emissions only, rather than total emissions.
(A) PwC has provided limited assurance against ISAE 3000 (Revised) and ISAE 3410 standards for selected key data in
2016/17. Where you see the (A) ‘Assurance symbol’ in this report, it indicates data has been subject to assurance. For
the limited assurance opinion and SSE’s reporting criteria, see www.sse.com/beingresponsible/reporting-and-policy/.
18 SSE plc Annual Report 2017
A sustainable climate
change strategy
SSE’s most material environmental impact
is the carbon it emits when generating
electricity. Its strategy is to transition to
a low carbon energy system by reducing
the carbon intensity of the electricity it
generates. To do this it is undertaking a
strategic shift away from carbon intensive
fossil fuel generation towards electricity
generation from more efficient thermal
generation and renewable sources. At its
core is a long-standing commitment to
reduce the carbon intensity of its electricity
generation by 50% by 2020, using 2006
performance as its baseline.
SSE’s performance in managing climate
change impacts led CDP to award SSE
an A- in 2016 and include it in the global
Climate Disclosure Leadership Index.
Risks and opportunities to SSE’s
business from climate change
Climate change, and the imperative to
decarbonise energy systems, creates both
risks and opportunities for SSE. In response to
a heightened awareness from investors and
other stakeholders, SSE has considered the
way in which climate change is best reflected
in its assessment of Group Principal Risks.
The framework for managing these risks
is outlined on pages 24 to 27. Furthermore,
SSE’s Sustainability Report 2017 and CDP
submission 2017 outline in more detail the
risks and opportunities associated with
climate change for the SSE Group.
Taking action on climate change
To bring about a change in carbon
performance, SSE has:
– invested significantly in renewable energy
(£3.2bn since 2010) and has
the largest renewable energy capacity
in the UK and Ireland at 3,309MW;
– switched from thermal (primarily coal)
to renewables generation with coal
output contributing 3.4% of output and
renewables contributing 30% of output in
2016/17 (22% and nearly 35% respectively
in 2015/16); and
Generation output (GWh) and carbon scope 1 emissions (000’s tonnes CO2e)
50,000
40,000
)
h
w
G
(
t
u
p
t
u
O
30,000
20,000
10,000
0
2011/12
2012/13
2013/14
2014/15
2015/16
2016/17
Gas output
Coal output
Renewables output
Scope 1: Carbon emissions
30,000
20,000
10,000
0
)
e
2
O
C
s
e
n
n
o
t
s
0
0
0
(
s
n
o
i
s
s
i
m
e
n
o
b
r
a
C
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.
Responding to other
environmental challenges:
using resources responsibly
Managing water use
SSE’s enhanced disclosure of water is detailed
in its Sustainability Report 2017. In 2016/17
SSE’s operations in GB abstracted a total of
22.7 billion m3 of water (28.9 billion m3 for
2015/16). The vast majority was abstracted
by SSE’s hydro generation operations and is
therefore returned almost immediately to the
environment – only 0.005 billion m3, of this
water was consumed in 2016/17 (0.008 billion
m3 for 2015/16). None of SSE’s operations
have an impact on ‘water stressed areas’.
Water abstraction, consumption and return
(billions m3)
Water consumption
2014/15
2015/16 2016/17
– enabled more renewable generation
to connect to the electricity network
by investing close to £1.9bn since the
Transmission price control period began
in 2013 in new electricity infrastructure
that has allowed the connection 500MW
of new renewable generation capacity
in 2016/17.
SSE’s carbon intensity falling by 23% between
2015/16 and 2016/17 to 304 kgCO2e/MWh.
While this means that SSE’s carbon intensity
target was met for the first time in 2016/17,
there is an ongoing imperative to bring
about a year-on-year contribution for
supporting the UK and Ireland transition
to a low carbon economy.
Total water
abstracted
Total water
consumed
Total water
abstracted
& returned
27.1
28.9
22.7
0.019 0.008 0.005
27.1
28.8
22.7
In addition, SSE has been advocating
for carbon pricing by engaging with
government officials, the Committee on
Climate Change and collaborated with
partners to publish an open letter in the
Financial Times in September 2016. The
decision by the UK Government to maintain
the Carbon Price Floor up to 2021 at the
current carbon price support level, as well
as the tightening of the EU ETS to close
the global emissions gap to keep global
temperature changes to well below 2°C of
pre-industrial levels, was welcomed by SSE.
Improving carbon
emissions performance
In 2016/17 SSE achieved a 14% reduction
in its total carbon emissions (scope 1, 2
and 3) from 2015/16. The main contributor
was the significant reduction in total scope 1
carbon emissions which fell by 27% between
2015/16 and 2016/17. The reduction in gross
scope 1 emissions was mainly a result of
significantly lower output from SSE’s coal-
fired generation plant from 6,141GWh to
901GWh between 2015/16 and 2016/17.
SSE’s renewable generation assets (including
hydro pumped storage) generated 7,955
GWh of electricity in 2016/17, 30% of SSE’s
entire generation output. This resulted in
SSE has enhanced and improved its disclosure
on reporting its scope 3 emissions. These
emissions now cover SHE Transmission losses
and gas sold to customers.
Resilience to different climate
change scenarios
SSE has been collaborating with
stakeholders to understand the impacts
of carbon reduction ambitions on the
resilience of its business. From the scenario
analysis it was found SSE’s balanced and
mixed assets in distribution, transmission
and generation were found to be vital to
the UK’s electricity system over the long
term. The important conclusion from the
review was that the long term viability of
SSE’s existing portfolio of assets is secure
in every scenario it assessed.
Climate adaptation
While SSE plays its part to mitigate climate
change, it must also adapt its business to
the impacts of rising global temperatures.
Extreme weather events are a material
climate adaptation risk that impacts the
resilience of SSE’s transmission and
distribution network. As a result SSE has
invested in maintenance and emergency
response solutions. This includes new
technology that identifies faults on lines;
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 2016/17 SSE’s
thermal generation sites in GB emitted 1,564
tonnes of sulphur dioxide and 5,555 tonnes
of oxides of nitrogen. This compares to 6,704
and 10,685 tonnes in 2015/16. Emissions
will be lowered further through continued
investment in improvements in combustion
processes and renewable energy.
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
2014/15
2015/16
2016/17
Nitrogen oxide
Sulphur dioxide
Total thermal output
30,000
20,000
10,000
)
h
w
G
(
t
u
p
t
u
O
0
19
3.1. Strategic Report2.
Strategic Report – Executing our long-term strategy
Our people and our values
Investing in a diverse team,
built on core values
SSE’s current and future success depends upon the talents, skills and
motivation of the people it employs. The strategic development of
human capital value is therefore critical to SSE’s long-term success.
Key workforce metrics
Total number of employees 1
Number
21,157
21,118
2016/17
2015/16
Retention rate 2
Total recruitment 3
Employee gender (female)
Average age
Employee engagement index 4
Learning and development expenditure
%
Number
%
Years
%
£m
86
3,227
31.4
40
n/a
18.9
89
2,763
30.9
40
77
17.2
Total number of training interventions 6
Number
103,688
63,052
Investment in pipelines 7
UK Productivity (GVA per capita) 8
Productivity compared to UK average 9
£m
£
n:n
Whistle-blowing cases raised 10
Number
9.4
12.7
172,000
129,670
3.1:1
88
2.4:1
41
Total headcount at 31 March 2017, including employees within Windtowers Ltd.
1
2 Excludes end of fixed term contracts and internal transfers.
3 External recruitment only.
4 Total expenditure in learning and development, internal and external, including talent pipelines.
5 Externally facilitated company-wide employee engagement survey, not available until July 2017.
6
7 The total cost of providing apprentice, graduate, technical skills and employability training programmes.
8 Based on SSE’s direct contribution to UK GDP and directly employed employees, analysis undertaken by PwC.
9 Ratio of SSE’s UK labour productivity to the UK’s national productivity (source: PwC).
10 Number of cases reported to SSE’s independent whistle-blow line.
Including targeting courses, workshops, seminars on e-learning packages.
Talent pipeline
1,277 trainees
Development training
103,688 interventions
Apprentices (436)
Technical skills
trainees (64)
Business graduates (25)
Engineering
graduates (26)
IT graduates (13)
Employability
programme participants
(Barnardo’s and Career
Ready) (31)
Customer service
apprenticeships (682)
Craft (3,969)
Development (7,712)
Legislation and
policy (1,421)
Safety rule
authorisations (2,284)
Safety, health and the
environment (4,997)
Sales and service
(74,051)
Misc (9,254)
20 SSE plc Annual Report 2017
Responding to strategic
challenges: skills shortages
and greater diversity
The strategic human capital challenges
SSE has articulated regularly in recent years
remain key. The strategy is to anticipate
the skills gaps that are looming in the early
2020s by attracting a wide and diverse
range of entry level talent into SSE’s pipeline
programmes. These pipelines include
employability programmes, apprenticeships,
higher level technical skills trainees and
engineering graduates.
The solution to the second strategic
challenge, a lack of diversity, is complementary
to the first. Because of the skills gap SSE has
a unique opportunity to become a more
inclusive employer, improve its attractiveness
to a diverse set of applicants and to build a
pipeline of new talent that more closely
reflects the communities SSE serves.
Creating a workforce for the future
SSE offers a range of structured programmes
designed for school leavers, apprentices,
trainee engineers and graduates. These
pipelines introduce hundreds of young
people into SSE every year and represent
the single most important way SSE builds
its future workforce.
While the financial investment in its
pipeline programmes in 2016/17 was
£9.4m, representing a fall in investment
since 2015/16, the number of individuals
participating increased to 1,277 from 859
in 2015/16. The increase is dominated
by a concerted effort to develop existing
employees working in customer service,
progressing from Level 2 to Level 3
qualifications, supporting SSE’s strategy
to continue to differentiate itself on the
basis of sector leading customer service.
Talent pipelines
There were 1,277 trainees on a pipeline
programme in 2016/17. See pie chart on
page 20.
Beyond this focus on pipelines of new
talent, SSE invests in its people through
talent development, management training,
technical training, customer service
development and the delivery of particular
issues based knowledge and skills through
electronic learning techniques. This
development activity is predominately
delivered internally, ensuring the skills
and knowledge learnt are bespoke and
designed for SSE’s particular circumstances.
Development training
103,688 training interventions were delivered
internally in 2016/17. See pie chart on page 20.
2016/17 saw a step change in the way
SSE delivers continuous learning and
development across its workforce. The
establishment of a new Learning
Management System has provided the
opportunity to deliver significantly more
training opportunities online. There has
been greater focus on training for
compliance, and significantly more
individual interventions supporting higher
quality customer service. The ability to track
and monitor employee participation and
the efficacy of training programmes has
also improved.
Furthermore, the momentum in delivering
SSE’s Smart Meter programme increased
significantly in 2016/17. The nature and
demand of the programme means there
is a shortage of smart meter operatives in
the labour market; therefore SSE is both
redeploying existing meter reading employees
and recruiting individuals with the aptitude
to be skilled smart meter operative installers
and putting them through a comprehensive
training and assessment programme. In
2016/17 583 smart meter operatives were
recruited to SSE’s Smart Meter programme.
Inclusion and diversity
SSE’s efforts to improve its inclusiveness
have prioritised gender representation in
the short term. Further disclosure relating
to other protected characteristic contained
within the Equalities Act, including disability,
can be found in the Sustainability Report 2017.
In relation to gender diversity, the proportion
of women within SSE has, once again, risen
marginally from 30.9% to 31.4%.
SSE chose to be an early adopter of the draft
gender pay gap regulations in 2015/16 and
published its full disclosure in its Sustainability
Report 2016. The full disclosure for 2016/17
is published, once again, in its Sustainability
Report available on see.com. This exercise
proved to be very instructive to SSE’s strategy
to improve inclusion and diversity and
supported the formation of its strategy
of ‘in, on and up’.
In: The first level of the inclusion and
diversity programme is to attract more
women applicants into SSE. Some progress
was made in 2016/17. The proportion of
women being recruited externally has risen
from 33% in 2014/15, to 37% in 2015/16 and
to 39% in 2016/17. It is worth noting that the
short term impact of attracting higher
proportions of entry level women, may
actually influence the gender pay gap in
a negative direction. Nevertheless, SSE
believes the longer term prize of an
organisation more reflective of the society
it serves is more important. Furthermore,
SSE understands that the barriers to a career
in the energy industry are deep and cultural,
therefore SSE has a role to encourage
non-traditional entrants into the industry
and has a partnership with Teach First to
influence the uptake of STEM subjects by
girls in schools in England and Wales.
On: Retaining women within the
organisation is particularly important
given the relative success, so far, of efforts
to attract more women entrants. There are
many initiatives targeting this group from
enhanced flexible working practices and
investment in connected working
technology to the development of STEM
and senior women networks. Most recently
maternity, adoption and paternity benefit
offerings have been significantly enhanced.
Whilst this includes a substantial increase
in the level of paid leave, it also sees the
introduction of a gradual phasing in the
return to work for maternity and adoption
leavers, with no reduction in salary. New
ways of flexible working are being piloted
for employees moving to SSE’s new
Forbury Place development in Reading,
with a view to this being rolled out across
the wider organisation.
Up: Creating the conditions whereby
more women are present in the highest
levels of the organisation is expected to
take time. A number of initiatives are in
place, in particular, the establishment of
a ‘Shadow Board’ of diverse emerging
talent for SSE’s Wholesale business has
proved to be an interesting pilot due to
be rolled out in new areas of the SSE group
in the year ahead. The first target set is a
simple one, where the proportion of women
earning over £40,000 will rise to 25% by
2025. In 2016/17 the proportion was 12.8%,
representing a rise of 8% since 2015/16.
Sustainable employment ethos
At the centre of SSE’s human capital strategy
is an ethos about the way in which the talents
and abilities of people flourish. 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 to its employees to be engaged,
motivated and committed, delivering for
both customers and shareholders over
the long term.
A focus on career progression
and recruiting senior positions
from within
A preference for direct
employment as opposed to
out-sourcing core work
A preference for direct
employment and a presumption
against offshoring work outside
of the UK and Republic of Ireland
Career progression
Through 2016/17, 3,826 employment
vacancies were filled across SSE. Of those
3,826 vacancies, 16% were filled from
internal applicants. However, at the most
senior levels, where talent and succession
is managed closely, 34 vacancies were
filled. Of those, nearly 60% were awarded
to internal applicants.
Out-sourcing
There is a clear preference to directly deliver
core work in house. On the occasions where
it is necessary to use external contractors to
support peak demand or transitional change,
SSE insists on a number of core standards in
relation to health and safety and conditions
of service. In 2016/17, SSE took the decision
to extend its Living Wage commitment in its
supply chain. Rather than simply ensuring
that regular contractors working on SSE’s
sites receive the real Living Wage, (as required
by the Living Wage Foundation) from 1 April
2017 every new contract will include a
requirement to ensure that everyone UK
based providing regular services to SSE’s
customers will receive the Living Wage.
21
3.1. Strategic Report2. Strategic Report – Executing our long-term strategy
Our people and our values continued
Redeployment
Change is an ongoing feature of the energy
market and SSE must be able to respond to
changing conditions and markets. To remain
competitive and efficient SSE has had to
review and either restructure or cease several
operations in 2016/17. In all instances, it has
sought to fully consult with those employees
impacted and to offer opportunities for
retraining and redeployment where possible.
One such example of this is the Retail
shops in the north of Scotland. To ensure
opportunities are available to employees
affected by change in the organisation, a
number of vacancies are advertised internally
only. In 2016/17, 306 vacancies were opened
to internal applicants only.
An engaged workforce
Teamwork is one of six enduring values that
guide employees in their day-to-day working
lives in SSE. It is underpinned by an ethic of
mutual respect and is defined as:
Teamwork: we support and value our
colleagues and enjoy working together
in an open and honest way.
SSE has undertaken an annual survey of
employee opinion for many years. A review
of the survey in 2016/17 considered feedback
and decided to adjust the frequency of the
survey to every two years to allow sufficient
time to understand, plan and report back on
progress with action plans to all employees.
The next survey is being run in the early
summer of 2017. The objective of the new
survey is to gather instructive data on SSE’s
business culture, as well as gather signals on
issues such as inclusiveness, engagement
and strategy.
Headline results from that survey will be
published on sse.com/beingresponsible
in the summer of 2017.
Rewarding employee contribution
Performance management is undertaken
comprehensively throughout SSE. Its
objective is to create a framework for
continuous feedback and improvement
in line with business goals. Above all, this
approach is designed to ensure the safe
operation of SSE’s businesses and the
reliable provision of service to customers.
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, Excellence, Sustainability, Efficiency
and Teamwork.
The opportunity to grow and develop a
career has the greatest impact on employee
22 SSE plc Annual Report 2017
commitment but it is also understood that
employee benefits make an important
contribution to both employee engagement
and the attractiveness of SSE as a place to
choose to work.
– Employee benefits: a significantly
enhanced package of employee benefits
was established in 2016/17. A more
flexible and family friendly package
includes significant improvement to
parental benefits, more flexibility for
unexpected situations and a new ‘gradual
return to work’ offer for returning
mothers. This package has been
deliberately designed to reflect modern
lives and support SSE’s efforts to become
a more inclusive and diverse organisation.
There has also been a strong focus
on delivering additional health related
benefits to support employee wellbeing.
– Sharing success: SSE actively encourages
it employees to own SSE shares, offering
both an employee Share Incentive Plan
(SIP) and a Sharesave scheme, with
participation rates at 73% and
41% respectively.
– SSE pension schemes: SSE has taken
measures to help employees plan and
save for their financial future and has
proactively enrolled new employees
onto its pension schemes since 2005.
97% of SSE’s employees in 2016/17 chose
to save for their future through one of
SSE’s pension schemes. Recent supplier
negotiations have improved the value
that employees get from these schemes,
with affinity benefits and reduced
management charges.
Fairness at work
SSE’s Human Rights policy specifically
respects the right of its employees to join a
trade union. SSE recognises four trade unions
and a Joint Negotiating and Consultative
Committee (JNCC) continue to provide the
structure by which industrial relations are
conducted. 66% of SSE’s employees are
covered by the negotiating arrangements
under the JNCC.
SSE has a range of employment policies
in place to ensure that all people, including
those with disabilities, are dealt with fairly
during the recruitment process, and that
all people have access to training and
development opportunities with SSE.
Believing that 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 pays its employees in Ireland the
Irish Living Wage.
Reinforcing an ethical
business culture
Code of ethical business conduct
In 2016/17 SSE published a new code:
Doing the right thing: A guide to ethical
business conduct for SSE employees.
The new code is a development from the
previous version as it more explicitly outlines
the steps employees should take to ensure
that their day-to-day actions and decisions
are consistent both with SSE’s values and
rules. SSE engaged proactively with the
Institute of Business Ethics to ensure the
new code reflected best practice. The
implementation of the code is ongoing,
with regular issue driven awareness
raising campaigns alongside the delivery
of a range of training packages.
Creating a culture of speaking up
Building on the establishment of a new
whistleblowing policy in 2015/16, SSE
worked throughout 2016/17 to actively
promote the Speak Up policy, alongside
awareness raising of Doing the right thing:
A guide to ethical business conduct for
SSE employees. As a result, the number
of whistle-blowing reports has more than
doubled between 2015/16 and 2016/17
from 41 to 88. This increase is welcome as it
confirms that the efforts to promote Speak
Up are having an impact. Analysis is being
undertaken to carefully track trends and an
aftercare process is being introduced to get
feedback on the experience from those
reporting issues through this approach.
Human rights
SSE’s Human Rights Policy outlines the
fundamental principles that guide SSE,
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 and SSE’s second Modern Slavery
Statement is published on sse.com.
More information: SSE is committed
to the ongoing development of
workforce metrics and works with
a number of stakeholders to provide
more data that supports its human
capital strategy. More information
and disclosure can be found in SSE’s
Sustainability Report 2017.
Creating a workforce
for the future
SSE offers a range of structured programmes designed for
school leavers, apprentices, trainee engineers and graduates.
These pipelines introduce hundreds of young people into
SSE every year and represent the single most important way
SSE builds its future workforce.
In 2016/17 the number of individuals participating in SSE’s
talent pipelines was 1,277.
23
1. Strategic Report2.3. Strategic Report – Executing our long-term strategy
Risk Management Framework
Supporting the achievement
of SSE’s strategic objectives
The Group’s objectives are set through the Strategic Framework. To support the achievement
of these over the past 12 months the Board has sought to further mature and embed the Risk
Management Framework (as detailed below) that has been developed over the past three years.
For further information on how SSE manages risk, please see the supplementary Group Risk Report.
The Executive Committee and its sub-
committees have responsibility for overseeing
SSE’s Principal Risks. During the third quarter
of SSE’s financial year, a self assessment is
completed for each of SSE’s Principal Risks
by an assigned oversight committee. This
assessment requires committee members
to provide commentary on contextual
changes in the risk and whether they consider
it to have become more or less material
during the course of the year. These individual
responses are consolidated into a report, one
for each Principal Risk. The end reports are
then presented back to the committees, along
with the results of provisional viability testing
and analysis of relevant and current
Management Information.
Following presentation of the assessment
information, the committees discuss and
reach a consensus regarding risk trend
(more, less or equally material), overall
effectiveness of the risk control and
monitoring environment, and whether any
additional actions are required to improve the
control environment. The outputs from the
committee assessments are then presented
to the Executive Committee for full review,
with any material changes resulting from this
being proposed to the Board for approval.
Following the 2016/17 review process,
the number of Principal Risks to the
Group was increased from nine to ten
with the pre-existing “Cyber and Networks
Failure” risk being split into two separate
risks – Cyber Security and Resilience and
Energy Infrastructure Failure. In addition,
the “Human and Relationship Capital”
risk has been expanded and renamed,
becoming People and Culture.
The diagram below details SSE’s wider
System of Internal Control and how the
Risk Management Framework is aligned
with the other elements of it.
System of internal control
Corporate Governance
Framework
Strategic
Framework
Risk Management
Framework
Assurance
Framework
Standards and Quality
Framework
Board
Board Committees
Executive Committee
Executive Sub-Committees
Divisions
Corporate
Support Functions
24 SSE plc Annual Report 2017
Strategic
Objectives
Financial
Objective
Responsibility
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
External Audit
Internal Audit
Group Policies
Group Compliance
Group SHE
Large Capital Projects Services
Governance
Manuals
Business
Assurance
Divisional Procedures,
Processes and Systems
Risk Appetite Statement
No business is risk-free and indeed the
achievement of SSE’s strategic objectives
necessarily involves taking risk. SSE will
however only accept risk where it is
appropriate, well understood, can
be effectively managed and offers
commensurate reward.
The markets in which SSE operates are
inherently subject to a high degree of
political, regulatory and legislative risk.
Furthermore each of SSE’s business divisions
has differing levels of exposure to additional
risks. For example, the Networks business
is largely regulated and is characterised by
stable, inflation linked cashflows whereas
the Wholesale and Retail businesses are
heavily exposed to energy market and
commodity risk. Affordability and industry
transformation also particularly affect the
Retail business while Enterprise is exposed
to the risks that come with growth in a
highly competitive market place.
The key elements of SSE’s strategic
framework – including the diversity of
energy businesses within the SSE Group
described above, as well as its financial
objective – 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, 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
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.
Corporate Governance
Framework
Strategic
Framework
Risk Management
Framework
Assurance
Framework
Standards and Quality
Framework
Board
Board Committees
Executive Committee
Executive Sub-Committees
Divisions
Corporate
Support Functions
Strategic
Objectives
Financial
Objective
Responsibility
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
External Audit
Internal Audit
Group Policies
Group Compliance
Group SHE
Large Capital Projects Services
Governance
Manuals
Business
Assurance
Divisional Procedures,
Processes and Systems
There are five related frameworks which, combined,
comprise SSE’s system of internal control.
The Corporate Governance Framework is
designed to ensure focus on the key components
of high quality and effective decision making –
clarity, accountability, transparency and efficiency.
For further details please see page 58 of the
Directors’ report.
The Strategic Framework comprises the Group’s
strategic objectives, financial objective and our
responsibility framework. For further details please
see page 12 to 23 of the Strategic Report. The
strategic framework forms the basis for all activity
within the Risk Management Framework.
The Risk Management Framework is underpinned
by the fundamental principle that everyone at SSE
is responsible for the management of risk. The Risk
Management Framework supports each Division
in managing its risks and helps to ensure that the
Board is able to meet its obligations.
The Assurance Framework. Group Audit, Group
Compliance, Group SHE and LCP Services work
together to provide an integrated programme of
audit and assurance activity that is independent of
the day to day operations of the Divisions and
Corporate Functions.
The Standards and Quality Framework sets
out the expected standards and guidelines to
be followed in the delivery of the Group’s core
purpose – providing the energy people need in
a reliable and sustainable way.
25
3.1. Strategic Report2. Strategic Report – Executing our long-term strategy
Risk Management Framework continued
Group Principal Risks
Commodity Prices
Oversight: Wholesale Risk Committee
The risk associated with the Group’s exposure to fluctuations in
both the physical volumes and price of key commodities, including
electricity, gas, CO2 permits, oil and related foreign exchange values.
Key mitigations include the use of VaR monitoring measures and
daily assessments of commodity positions by a risk management
team which is independent of the trading teams.
• Limited level of interconnection with SSE’s other Principal Risks.
Cyber Security and Resilience
Oversight: Information Security and Privacy Committee
The risk that key infrastructure, networks or core systems are
compromised or are otherwise rendered unavailable. Key
mitigations include significant longer term Security Programme
investment and ensuring staff awareness of security issues and
their importance.
• Highly interconnected with SSE’s other Principal Risks.
Development and Change
Oversight: Executive Committee
The risk of failing to recognise and react appropriately to
competition, technological advancements and changes in customer
expectations within the energy industry. Key mitigations include the
implementation of various strategic change programmes which
are governed by SSE’s Transformation and Large Capital Projects
and Governance Frameworks.
• Moderately interconnected with SSE’s other Principal Risks.
Energy Infrastructure Failure
Oversight: Executive Committee
The risk of national energy infrastructure failure, whether in respect
of assets owned by SSE or those owned by others which SSE relies
on, that prevents the Group from meeting its obligations. Key
mitigations include wide-ranging asset management strategies,
and membership and participation in national security forums such
as the Centre for the Protection of National Infrastructure (CPNI).
• Moderately interconnected with SSE’s other Principal Risks.
Major Projects Quality
Oversight: Group Large Capital Projects Committee
The risk that major assets that SSE builds do not meet the quality
standards required to support economic lives of typically 15 to 30
years. Key mitigations include the Large Capital Project Governance
Framework which ensures that all material capital investment
projects across the Group are governed, developed, approved
and executed in a consistent and effective manner.
• Moderately interconnected with SSE’s other Principal Risks.
Politics, Regulation and Compliance
Oversight: Group Governance, Culture and Controls Committee
The risk from changes in obligations arising from operating
in markets which are subject to a high degree of regulatory, legislative
and political intervention and uncertainty. Key mitigations include
the maintenance of dedicated Corporate Affairs, Regulation, Legal
and Compliance functions that provide advice and guidance
regarding the interpretation of political, regulatory and legislative
changes to SSE’s operating divisions.
• Highly interconnected with SSE’s other Principal Risks.
26 SSE plc Annual Report 2017
Energy Affordability
Oversight: Retail Risk Committee
The risk that the combination of the cost of providing reliable and
sustainable energy and the level of customers’ incomes means
that energy becomes unaffordable to a significant number of SSE’s
customers. This risk is directly connected to political interventions
and commodity price exposure. Key mitigations include
maintenance of a diverse generation fleet limiting exposure to a single
commodity, as well as public policy lobbying to try to ensure the fair
allocation of non-commodity costs related to energy provision.
• Limited level of interconnection with SSE’s other Principal Risks.
Financial Liabilities
Oversight: Tax and Treasury Committee
The risk that funding is not available to meet SSE’s financial liabilities,
including those to its defined benefit pension schemes, as these fall
due under both normal and stressed conditions without incurring
unacceptable costs or risking damage to its reputation. Key mitigations
include the mandatory maintenance of minimum borrowings and
committed facilities to support forecast debt requirements, plus the
ongoing de-risking of SSE’s defined benefit pension schemes.
• Limited level of interconnection with SSE’s other Principal Risks.
People and Culture
Oversight: Group Governance, Culture and Controls Committee
The risk that SSE is unable to attract, develop and retain an
appropriately skilled, diverse and responsible workforce and
leadership team, and maintain a healthy business culture which
encourages and supports ethical behaviours and decision-making.
Key mitigations include clear expectations relating to conduct and
accountability, the SSE SET of values, well developed succession
and diversity plans, and comprehensive training and learning
management across the organisation.
• Highly interconnected with SSE’s other Principal Risks.
Safety and the Environment
Oversight: Group Safety, Health and Environment Committee
The risk of harm to people, property or the environment from SSE’s
operations. Key mitigations include crisis management and business
continuity plans that are in place and regularly tested, which are
designed for the management of, and recovery from, significant
safety and environmental events.
• Moderately interconnected with SSE’s other Principal Risks.
Group Principal Risks
High
s
n
o
i
t
c
e
n
n
o
c
r
e
t
n
I
People and
culture
Politics,
regulation and
compliance
Cyber security
and resilience
Development
and change
Safety and the
environment*
Energy
infrastructure
failure
Major projects
quality
Energy
affordability**
Financial
liabilities
Commodity
prices
Low
Less
Potential impact on Group Viability
More
*
**
Safety is SSE’s most important value, and management of this risk remains SSE’s highest priority.
It should be noted that Energy Affordability is particularly closely linked to – and therefore impacted by –
Politics, Regulation and Compliance and Commodity Prices.
SSE operates in fast moving markets that
are subject to a high degree of political,
regulatory and legislative intervention.
It is therefore essential that SSE’s Risk
Management Framework is dynamic and
flexible, allowing decision makers to focus
on material risk information that may have
an impact, whether positive or negative,
on core objectives.
The Board and Executive Committee
look to assess the Principal Risks that
face the Group from a number of different
perspectives, including both individually
and collectively. This graphic illustrates
SSE’s ten Group Principal Risks positioned
on a relative basis against two important
metrics – interconnectivity (a highly
interconnected risk has more ways to
manifest than a less interconnected risk),
and potential impact on Group viability
based on selected critical risk scenarios
developed in conjunction with
business experts.
In addition, the Principal Risks that were
considered by their oversight Committees
to have increased in materiality during the
year are shown in red, with those whose
materiality has not significantly changed
are shown in blue. No Principal Risk was
deemed to have decreased in materiality.
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 31 March 2020. The Directors have
determined that as this time horizon aligns
with the Group’s current capital programme
and is within the strategy planning period,
a greater degree of confidence over the
forecasting assumptions modelled can
be established.
In making this statement the Directors
have considered the resilience of the
Group taking into account its current
position, the 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.
This was demonstrated in the successful
sale during the 16/17 financial year of a
16.7% share of Scotia Gas Networks Ltd.
To help support this Statement, over the
course of the year a suite of severe but
plausible scenarios has been developed for
each of SSE’s Principal Risks. These scenarios
are based on relevant real life events that have
been observed either in the markets within
which the Group operates or related markets
globally. Examples include persistently low
commodity prices (for “Commodity Prices”);
changes to key government energy policies
(for “Politics, Regulation & Compliance”);
and, a major incident that results in the loss
of a significant volume of customer data (for
“Cyber Security and Resilience”).
A formal assessment is carried out to stress
test the scenarios that most have the potential
to adversely affect SSE’s ability to deliver its
core purpose of “providing the energy people
need in a reliable and sustainable way” against
forecast available financial headroom.
In addition to considering these in isolation,
the Directors also consider the cumulative
impact of different combinations of scenarios,
including those that individually have the
highest impact and those that are most
heavily interconnected with SSE’s other
Principal Risks.
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 31 March 2020.
Long Term Climate
Change Risk Exposure
In response to the 2015 Paris Agreement
on Climate Change, and out with the scope
of the Viability Assessment, a number of
scenarios have been assessed to consider
SSE’s long-term resilience to carbon reductions
that would be required to prevent global
average temperatures rising by 1.5 °C or
2 °C. Further detail is disclosed in SSE’s
Sustainability Report.
27
3.1. Strategic Report2. Strategic Report – Executing our long-term strategy
Working in partnership with our stakeholders
Collaborating to achieve sustainable
outcomes for customers
SSE’s success depends on its ability to engage and work constructively with a range of key
stakeholders, to improve the outcomes it can achieve for customers, shareholders and society
as a whole. For SSE, stakeholders are people, groups and organisations who have an interest
in SSE and the energy sector as a whole.
SSE and its stakeholders have a common
agenda in ensuring the energy sectors in the
UK and Ireland are delivering for customers;
are reliable and sustainable; and are dealing
responsibly with economic, social and
environmental issues.
Customers: Customers are at the heart of
everything SSE does. In addition to engaging
with customers through the day-to-day
provision of services, ongoing research and
surveys and customer forum and
consultation events, SSE engages with five
other key stakeholder groups:
SSE’s principal stakeholders
– Government and regulators: SSE
recognises the central role of governments
and regulators in the energy sector, and its
Political Engagement Policy can be viewed
at sse.com.
– Non-governmental organisations (NGOs):
NGOs focus on social, environmental and
other energy- and business-related issues
which affect energy customers, bringing
a specialist, distinctive and influential view
to those issues. SSE actively seeks their
insight and advice through meetings,
consultation and other programmes.
Society
- g o v e r n mental organisations
n
o
N
L i s t ening to
t h e views of
s p e c i a list bodies
Energy
Customers
d
e
R
m
e
s
o
p
c
r
e
a
c
t
t
i
i
c
n
g
p
r
t
h
e
o
c
e
s
s
G
o
v
e
r
n
m
e
n
t
a
n
d
r
e
g
u
l
a
t
o
r
s
g to
G issues
din
n
o
p
s
e
R
S
E
y
e
k
U
p
o
s
i
n
Providing the energy
people need
g p e ople to
r f o r c usto mers
a r e h olders
h
g i n
E n g a
e
i v
d e l
a n d s
w
g b
e
r for good
uying
ers
old
h
e
r
a
h
S
S
u
p
p
li
e
r
s a
n
d c
ontractors
E m p l o y e es
28 SSE plc Annual Report 2017
– Suppliers and contractors: Working with
suppliers and contractors can reduce the
costs of, and enhance positive economic,
social and environmental outcomes from,
energy provision. SSE has a structured
approach to engaging with its most
strategic supply chain partners, with a
new framework of category management
to ensure a more coherent approach
to procurement.
– Employees: SSE depends on employees to
deal with customers and other stakeholders
on a day-to-day basis and to respond first
hand the issues that customers face and
contribute to how those issues are resolved.
SSE’s objective is to create a framework for
continuous engagement, feedback and
improvement for employees (see Our
people and our values on pages 20 to 23).
– Shareholders: Shareholders own the
Company and have a wider concern
to ensure SSE is a responsible company
that considers shareholders’ concerns
its decision-making, especially on
environmental, social and governance
matters. SSE has a structured investor
relations programme, covering financial,
operational and environmental, social
and governance issues.
All of this means that in making operational,
investment and strategic decisions, SSE
depends on the knowledge and insight
which stakeholders can bring to support
robust business decisions that are in the
long-term interests of customers and
investors alike.
This, in turn, means that SSE is better able
to fulfil its core purpose of providing the
energy people need in a reliable and
sustainable way; and it means that SSE acts
as a responsibly-minded business in pursuit
of its financial and other business objectives.
For these reasons, SSE will continue to
engage and work constructively with a
range of key stakeholders in 2017/18
and beyond.
Putting stakeholders at the
heart of Networks decision-making
At a time in which the energy networks
must be more responsive to stakeholder
and customer needs, in March 2016 Scottish
and Southern Electricity Networks has
established an independent Stakeholder
Advisory Panel. With membership from
charities and external industry bodies,
it works alongside the Board for SSE’s
Networks business to help scrutinise
key areas of business performance, the
commitments made under the RIIO-T1
and RIIO-ED1 price controls and future
plans. The Panel consists of a Chair and six
members, recruited to reflect a broad range
of external interests, skills, knowledge and
experiences. Through its work, the panel
brings stakeholder insight and challenge
to SSEN’s decision-making and long-term
direction at the highest level, helping to
drive improvement in key processes and
outcomes for customers.
A Sustainability Impact Report found that
Galway Wind Park (a joint venture between
SSE and Coillte) will add €88.7m to Irish GDP
and grant over €150,000 to local community
groups during construction.
In September 2016, SSE’s three electricity networks businesses adopted a common trading name
as Scottish and Southern Electricity Networks (SSEN). This, alongside the Advisory Panel, responds
to the RIIO price controls which incentivises all network operators to engage effectively with their
customers and stakeholders.
Working with communities and assessing our impacts
when developing and constructing onshore wind farms
Developing and upgrading the energy
infrastructure in the UK and Ireland is
an essential part of providing the energy
people need. As a responsible developer
and operator SSE therefore strives to
develop projects responsibly, listening to
stakeholders and responding in a balanced
way. This is particularly the case for SSE’s
onshore wind farm developments, as SSE
knows that developers must try to minimise
the upheaval and associated impacts to
local residents. That’s why engagement
is a major part of SSE’s development
plans and why SSE has always sought to
engage constructively and openly with
the communities living and working in the
vicinity of a project. Its focus is always
to understand, and where possible act
upon, any issues or concerns raised by the
community in order to refine and improve
plans and SSE works hard to ensure there is
extensive two-way communication between
its project liaison team with those living near
a project. It also produces several reports
to quantify the material economic, social
and environmental impacts of its projects.
In 2016/17 SSE produced a sustainability
impact report for the Galway Wind Park,
which found that Ireland’s largest onshore
wind development would add €88.7m
to Irish GDP and support 1,657 years of
Irish employment.
Engaging customers to ensure Retail services
and products meet their expectations
meter rollout. The Forum members and
chairs meet regularly with senior managers
in the Retail business and, from time to time,
with members of the SSE plc Board.
Launched in 2012 SSE’s Retail business has
four independent Customer Forums that
provide honest feedback on the company’s
products and services, thereby enabling the
business to factor their views into decisions.
The Forums are made up of customers and
are based in Newcastle, Perth, Cardiff and
Havant. Each is chaired by a representative
of a leading consumer group, for example
Citizen’s Advice. There were 13 meetings
in total in 2016/17 and the topics discussed
included how to simplify the presentation
of new products, how to improve our
telephone customer service and what
customer’s think of aspects of the smart
SSE’s Retail business has taken the guidance
and advice from its Customer Forums since
2012. This helps it develop products and
services to meet customer’s needs.
29
3.1. Strategic Report2. Strategic Report – Our financial and business performance
Financial overview
SSE is committed to creating and sustaining long-term
value. Its first financial objective is to deliver annual dividend
increases that at least keep pace with inflation, whilst ensuring
that the dividend is covered by Adjusted EPS at a level that
is sustainable over time. A 2.1% increase in the dividend per
share to 91.3p demonstrates that despite an increasingly
competitive and changing operating environment SSE
is focused on responsibly delivering what it says it will
for shareholders and this year was no exception.
30 SSE plc Annual Report 2017
Key questions to Gregor Alexander,
SSE Finance Director
Given the challenges in the operating
environment, how committed are you
to future dividend increases, in line
with RPI?
We’re fully committed to meeting our long-
standing financial objective of annual dividend
increases, at least in line with RPI. The business
is geared toward this. Our strategic framework,
options for growth, relentless focus on efficiency
and index-linked revenues in Wholesale and
Networks position us well to deliver our financial
objective in 2017/18 and beyond.
What is the outlook for capital
and investment expenditure?
Disciplined investment in building, owning and
operating assets is core to our strategy and since
2010 we’ve invested almost £11bn. We are now
into a programme to invest around £6bn in the
years 2016 to 2020. All investments are intended
to complement our asset base and provide balance
to the Group. That’s why economically-regulated
networks and government mandated renewables,
whose revenues are generally index-linked, make
up around two-thirds of this investment
programme. Going forward our investments will
only proceed if they create long-term value with
returns greater than the cost of capital, meaningfully
contribute to earnings and provide balance to SSE.
Financial discipline has always been
important for SSE, how confident are
you that this will be maintained?
Financial discipline, securing a diversity of funding
sources and maintaining a strong balance sheet
are fundamental to how we run our business. Our
credit rating illustrates this, and we are committed to
maintaining robust ratios for both retained cash flow
and funds from operation to debt. This, alongside a
strong balance sheet, gives SSE the capacity to invest
to create long-term value. Financial discipline,
therefore, will always be part of our plans.
How consistent is SSE’s financial focus
with its agenda on sustainability?
Totally. In addition to being committed to the
transparency demanded in tax by the Fair Tax Mark,
we are also involved in Accounting for Sustainability.
It is aiming to make sure that financial and
accounting systems better reflect wider
environmental and social factors and help support
better business decision-making. As a long-term
business in a key sector, this is highly relevant for SSE.
Group financial overview
The following tables provide a summary of Group financial performance. The definitions SSE uses for Adjusted measures are consistently
applied and are explained in the Alternative Performance Measures section of this document, before the Financial Statements.
Key Adjusted financial metrics
Adjusted operating profit
Adjusted net finance costs
Adjusted profit before tax
Adjusted current tax charge
Adjusted profit after tax
Less: hybrid equity coupon payments
Adjusted profit after tax attributable to ordinary shareholders
Adjusted EPS – pence
Number of shares for basic and Adjusted EPS – million
Shares in issue at 31 March – million
Key Reported financial metrics
Reported operating profit
Reported net finance costs
Reported profit before tax
Reported tax charge
Reported profit after tax
Less: hybrid equity coupon payments
Reported profit after tax attributable to ordinary shareholders 1
Reported EPS – pence
1 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
Electricity Transmission
Electricity Distribution
SGN (SSE’s 50% share reducing to 33% from 26 Oct 2016)
Networks
Energy Supply
Energy-related Services
Enterprise
Retail
Corporate unallocated
Total Adjusted operating profit
March 17
£m
March 16
£m
March 15
£m
1,874.0
(328.1)
1,545.9
(157.7)
1,388.2
(119.3)
1,268.9
125.7
1,009.7
1,015.6
1,824.4
(310.9)
1,513.5
(193.4)
1,320.1
(124.6)
1,195.5
119.5
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
981.8
993.0
March 17
£m
March 16
£m
March 15
£m
1,940.5
(163.9)
1,776.6
(57.8)
1,718.8
(119.3)
1,599.5
158.4
785.4
(192.1)
593.3
(8.1)
585.2
(124.6)
460.6
46.1
985.9
(250.7)
735.2
(70.8)
664.4
(121.3)
543.1
55.3
March 17
March 16
March 15
27.4
63.9
91.3
2.1%
1.38x
26.9
62.5
89.4
1.1%
1.34x
26.6
61.8
88.4
2.0%
1.40x
March 17
£m
March 16
£m
March 15
£m
501.2
26.4
(13.0)
514.6
263.7
433.4
239.4
936.5
389.5
16.1
16.7
422.3
0.6
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
1,874.0
1,824.4
1,881.4
31
3.1. Strategic Report2.
Strategic Report – Our financial and business performance
Financial overview continued
Reported operating profit by segment
EPM and Electricity Generation
Gas Production
Gas Storage
Wholesale
Electricity Transmission
Electricity Distribution
SGN (SSE’s 50% share) reduced to 33% from 26 Oct 2016
Networks
Energy Supply
Energy-related Services
Enterprise
Retail
Corporate unallocated
Total Reported operating profit
March 17
£m
March 16
£m
March 15
£m
736.1
(201.1)
(36.8)
498.2
263.7
433.4
151.7
848.8
313.2
(20.3)
16.7
309.6
283.9
(174.8)
(159.6)
(146.9)
(481.3)
287.2
370.7
175.3
833.2
398.9
(2.4)
40.9
437.4
(3.9)
(71.8)
(69.4)
(160.0)
(301.2)
184.1
467.7
153.2
805.0
334.5
33.3
100.7
468.5
13.6
1,940.5
785.4
985.9
A reconciliation of Adjusted operating profit by segment to Reported operating profit by segment can be found in Note 5 (ii) to the accounts.
Operating profit reconciliation
Adjusted operating profit
Movement on derivatives
Exceptional items
Share of JVs and Associate interest and tax
Reported operating profit
Profit before tax reconciliation
Adjusted profit before tax
Movement on derivatives (IAS 39)
Exceptional items
Interest on net pension liabilities (IAS 19R)
Share of JVs and Associates tax
Reported profit before tax
Tax
Adjusted current tax charge
Add/(Less):
Share of JVs and Associates tax
Deferred tax including share of JV and Associates
Tax on exceptional items and certain re-measurements
Reported tax charge
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
32 SSE plc Annual Report 2017
March 17
£m
March 16
£m
March 15
£m
1,874.0
203.1
(8.2)
(128.4)
1,940.5
1,824.4
(28.8)
(889.8)
(120.4)
785.4
1,881.4
(61.1)
(674.6)
(159.8)
985.9
March 17
£m
March 16
£m
March 15
£m
1,545.9
255.7
(8.2)
(3.1)
(13.7)
1,776.6
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
March 17
£m
March 16
£m
March 15
£m
157.7
193.4
224.8
(13.7)
19.8
(106.0)
57.8
6.4
80.8
(272.5)
8.1
(35.6)
82.0
(200.4)
70.8
10.2%
12.8%
14.4%
385.0
453.9
506.2
Investment and capex summary (Adjusted)
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
Total investment and capital expenditure (Adjusted)
Debt metrics
Adjusted net debt and hybrids
Average debt maturity – years
Adjusted interest cover (excluding SGN) – times
Adjusted interest cover (including SGN) – times
Average interest rate for the period (excluding JV/assoc. interest and all hybrid coupon payments) – %
Average cost of debt at period end (including all hybrid coupon payments) – %
Adjusted net debt and hybrids reconciliation
Adjusted net debt and hybrids
Less: hybrid equity
Adjusted net debt and hybrid debt
Less: outstanding liquid funds
Add: finance leases
Less: non-recourse Clyde debt
Unadjusted net debt and hybrid debt
Net finance costs reconciliation
Adjusted net finance costs
Add/(Less):
Movement on financing derivatives (IAS 39)
Share of JV and Associates interest
Interest on pension asset/(liabilities) (IAS 19R)
Reported net finance costs
Adjusted net finance costs
Add/(Less):
Finance lease interest
Notional interest arising on discounted provisions
Hybrid equity coupon payment
Adjusted finance costs for interest cover calculation
March 17
Share %
March 17
£m
March 16
£m
6.3
21.2
–
4.2
31.7
29.3
16.5
45.8
10.7
3.4
14.1
8.4
100
108.6
366.4
0.2
72.9
548.1
505.0
284.7
789.7
184.3
58.7
243.0
145.4
90.8
291.8
14.0
56.1
452.7
573.4
258.3
831.7
169.0
48.5
217.5
116.8
1,726.2
1,618.7
March 17
£m
March 16
£m
March 15
£m
(8,483.0)
8.8
6.0
4.7
3.66%
4.10%
(8,395.0)
8.9
5.2
4.7
3.73%
3.95%
(7,568.1)
9.9
5.3
4.8
4.21%
4.55%
March 17
£m
March 16
£m
March 15
£m
(8,483.0)
2,209.7
(6,273.3)
(105.2)
(276.9)
–
(6,655.4)
(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)
March 17
£m
March 16
£m
March 15
£m
328.1
310.9
316.7
(52.6)
(114.7)
3.1
163.9
(14.3)
(126.8)
22.3
192.1
44.2
(124.2)
14.0
250.7
328.1
310.9
316.7
(33.1)
(14.2)
119.3
400.1
(34.7)
(15.7)
124.6
385.1
(34.2)
(14.0)
121.3
389.8
33
3.1. Strategic Report2.
Strategic Report – Our financial and business performance
Financial overview continued
SSE principal sources of debt funding
Bonds
Hybrid debt and equity securities
European investment bank loans
US private placement
Index-linked debt, long term project finance and other loans
% of total SSE borrowings secured at a fixed rate
Rating agency
March 17
%
March 16
%
March 15
%
41
33
11
10
5
91
45
25
8
5
17
87
38
37
8
5
12
83
Moody’s
Standard and Poor’s
A3 Stable outlook
A- Negative outlook
Mid teens% RCF/net debt
23% FFO/net debt
Rating
Criteria
Date of issue
3 October 2016
26 October 2016
Contributing to employees’ pension schemes – IAS 19R
Net pension scheme asset/(liabilities) recognised in the balance sheet before deferred tax
Employer cash contributions Scottish Hydro Electric scheme
Deficit repair contribution included above
Employer cash contributions Southern Electric scheme
Deficit repair contribution included above
Additional information on employee pension schemes can be found in Note 23 to the accounts.
March 17
£m
March 16
£m
March 15
£m
70.5
36.2
14.0
76.3
41.2
(394.8)
33.7
14.8
68.3
44.6
(664.6)
57.6
29.5
92.0
58.5
Group financial review
This Group financial review covers SSE’s
financial performance and outlook, capital
investment, balance sheet and tax payments.
Earnings, dividends
and dividend cover
Focusing on delivering dividend
increases that at least keep pace
with inflation
The Board is recommending a final
dividend of 63.9p per share, to which a
Scrip alternative is offered, compared with
62.5p in the previous year, an increase of
2.2%. This will make a full-year dividend of
91.3p per share which is: an increase of 2.1%
compared with 2015/16, which is in line with
RPI inflation; and covered 1.38 times by SSE’s
Adjusted earnings per share.
SSE believes that its strategic framework,
opportunities for growth and the extent
to which its revenues in Wholesale and
Networks are index-linked mean it can
deliver a full-year dividend increase that at
least keeps pace with RPI inflation in 2017/18
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 and dividend cover
To monitor its financial performance over
the medium term, SSE consistently reports
on its Adjusted earnings per share (EPS)
measure. This measure is calculated by
excluding the charge for deferred tax,
interest costs on net pension liabilities,
exceptional items and the impact of
certain re-measurements.
SSE’s Adjusted EPS measure has been
calculated consistently and provides
an important and meaningful measure
of underlying financial performance.
In adjusting for exceptional items and
certain re-measurements, Adjusted
EPS reflects SSE’s internal performance
management, avoids the volatility
associated with mark-to-market IAS 39
re-measurements and means that items
deemed to be exceptional due to their
nature and scale do not distort the
presentation of SSE’s underlying results.
For more detail on these and other
Adjusted items please refer to the
Alternative Performance Measures
section of this report.
In 2016/17, SSE’s Adjusted earnings per
share increased by 5.2%, to 125.7 pence,
which was ahead of the target of at least 120
pence. Reported EPS was 158.4p, compared
to 46.1p in the previous year. The extent
of this increase is predominantly explained
by the impact on Reported earnings of the
significant exceptional charges incurred in
the previous year and the relative movement
in mark to market valuations on derivative
contracts over both years.
As stated in its Notification of Close Period
Statement on 30 March 2017, SSE is working
to keep dividend cover within the expected
range of around 1.2 to around 1.4 times in
2017/18, although it is likely to be towards
the bottom of it, which also means Adjusted
earnings per share is likely to be lower than
it was in 2016/17.
SSE believes that its dividend should be
covered by Adjusted earnings per share
at a level that is sustainable over time; and
it believes that sustainability is based on
the quality of the operations and assets
from which earnings are derived and the
longer-term financial outlook.
34 SSE plc Annual Report 2017
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, and largely
index-linked, Networks and government-
mandated renewable sources of energy.
Subject to the range of factors that apply
in its market-based businesses (see below),
and to material political or regulatory change,
SSE is working towards achievement of
dividend cover a within a range of around
1.2 times to around 1.4 times over the
three years to 2019/20, based on dividend
increases that at least keep pace with RPI
inflation, and to be towards the bottom
of that range in 2017/18.
Delivering Adjusted profit before
tax in 2016/17 and 2017/18
Adjusted profit before tax increased by
2.1%, from £1,513.5m to £1,545.9m during
2016/17. SSE’s Wholesale, Networks and
Retail (including Enterprise) segments were
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 2017/18, SSE’s actual level of Adjusted
profit before tax will be determined largely
by the range of factors set out in previous
years that continue to apply in its market-
based businesses, in which energy portfolio
management is a major influence, 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.
Summarising the impact
of movements on derivatives
SSE enters into forward purchase contracts
(for power, gas and other commodities)
to meet the future demands of its 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. SSE shows the change
in the fair value of these forward contracts
separately as this mark-to-market movement
is not relevant to the underlying performance
of its operating segments. It will recognise
the underlying value of these contracts as
the relevant commodity is delivered, which
will predominantly be within the subsequent
12 to 36 months. Conversely, commodity
contracts that are not determined to be
derivative financial instruments under IAS 39
are accounted for as ‘own use’ contracts,
the cost of which is recognised on delivery
of the underlying commodity.
The favourable movement on derivatives
under IAS 39 of £201.0m arose partly from
an improvement in the fair value of forward
commodity purchase contracts and the
unwinding of contracts in 2016/17. 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 2017, primarily electricity and gas,
was a liability of £163.3m compared to a
liability on similar contracts at 31 March
2016 of £364.3m.
Complementing this was a positive
movement on the fair valuation of interest
and currency derivatives of £52.6m. This
movement is primarily due to the impact
of the aftermath of the EU referendum on
cross currency swaps and forward currency
contracts. 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 2017, SSE recognised
a net exceptional charge of £8.2m before
tax. The following table provides a summary
of the key components making up the net
charge position:
For a full description of the net exceptional
charge see Note 6 of the financial statements.
The Clyde fair value uplift of £59.1m relates
to the deconsolidation, in May 2016, following
a change to the shareholders’ agreement,
of SSE’s investment in Clyde Windfarm
(Scotland) Limited (‘Clyde’). It is therefore
now an equity-accounted joint venture.
This change in accounting treatment required
the investment to be fair valued and the
revaluation to be recorded in the income
statement. This has been recorded as an
exceptional credit due to both its quantum
and the non-recurring nature of the item.
The thermal generation credit reflects a
reversal of previously impaired coal inventory,
resulting from the unexpected improvement
in winter 2016/17 ‘dark spreads’, partially
offset by impairments at SSE’s oil burning
stations at Rhode and Tawnaghmor in the
Republic of Ireland due to their age and
future competitive prospects.
The impairment charges recognised for Gas
Production assets are mainly driven by the
latest independent Reserves Report, which
takes account of all technical and economic
variables, and estimates a significant reduction
in the Proven and Probable (2P) reserves in
the Greater Laggan Area assets that is only
partially offset by an increase in those of SSE’s
mature asset base in the Southern North Sea.
In addition, an impairment charge has been
recognised in relation to Bacton field assets,
predominantly related to higher than
previously assessed decommissioning costs.
The Gas Storage asset impairment relates to
higher anticipated decommissioning costs.
Total net charges
By asset class
SGN gain on sale
Clyde fair value uplift
Thermal Generation
Gas Production
Gas Storage
Retail and technology development
Other
Property,
plant &
equipment
£m
Gains/
(losses) on
disposals
£m
–
–
31.6
(227.5)
(23.8)
(120.3)
(34.6)
307.3
59.1
–
–
–
–
–
Total exceptional (charge)/gain
(374.6)
366.4
Total
£m
307.3
59.1
31.6
(227.5)
23.8
120.3
34.6
(8.2)
By segment
Wholesale
Retail
Corporate
Total
(237.9)
(112.7)
(24.0)
59.1
–
307.3
(374.6)
366.4
(178.8)
(112.7)
283.3
(8.2)
35
3.1. Strategic Report2. Strategic Report – Our financial and business performance
Financial overview continued
The exceptional charges for Retail and
other technology developments reflect
impairments of capitalised costs following
the decision taken to cease development
of a replacement customer service and
billing system and related technology
development projects.
line with SSE’s commitment to strong
financial management.
During 2016/17, SSE’s investment and
capital expenditure totalled £1,726.2m.
This included:
– a major investment programme in
The Other exceptional charges are primarily
the impairment of goodwill associated with
the purchase of the Energy Solutions Group
and offsetting changes in provisions relating
to disputes and claims.
Reported profit before tax
and earnings per share
Reported results for 2016/17 are significantly
higher than those for 2015/16 due to the
impact on Reported profit before tax of the
significant exceptional charges incurred in
2015/16. These related mainly to the write
down of wholesale generation, gas storage
and production assets in 2015/16 compared
to the gain on sale of a stake in SGN plus
lower asset write downs in 2016/17. This
together with the relative movement in mark
to market valuations on forward purchase
contracts for commodities over both years
(which at March 2017 were still ‘out of the
money’) contributed to a net Reported gain
before tax of £247.5m in 2016/17 compared
to a loss before tax on those items of
(£904.3m) in 2015/16.
This swing is explained in more detail in the
relevant sections throughout this report and
is the main driver for:
– Reported profit before tax increasing
to £1,776.6m in 2016/17 compared to
£593.3m in 2015/16, due to the movement
in non-recurring exceptional items; and
– Reported earnings per share increasing
to 158.4p in 2016/17 compared to 46.1p
in 2015/16, again due to the movement
in non-recurring exceptional items.
Investment and capital expenditure
Central to SSE’s strategic framework is
efficient and disciplined investment in
building a balanced range of economically-
regulated and market-based energy assets
that it also generally owns and operates.
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.
electricity networks: the switching on
of the first section of an overhead link
between Knocknagael and Kintore
represented a key milestone in the
Caithness-Moray electricity transmission
link project. The project is the largest
capital project ever undertaken by SSE
and is on schedule for completion in 2018.
This investment, alongside continued
upgrading of the electricity distribution
network to meet the changing needs of
customers, will further increase the total
Regulated Asset Value (RAV) of SSE’s
networks businesses; and
– further investment in renewable energy
in GB and Ireland: progress was made to
increase SSE’s renewable energy portfolio
in GB with projects to be delivered through
the Renewables Obligation (RO), which
also applies in Northern Ireland, Contracts
for Difference (CfD) and Renewable Energy
Feed in Tariff 2 in Ireland. Progress has
been made at projects including the Clyde
Extension (173MW); Stronelairg (225MW);
the Beatrice offshore wind farm (SSE share
235MW); and Galway Wind Park (SSE share
120MW), which is the largest wind farm in
Ireland. These projects, along with further
onshore wind projects in construction
or pre-construction and the recently
delivered Tievenameenta (34MW) wind
farm, will add just over 1GW to SSE’s
renewable energy portfolio, taking SSE’s
total renewable energy capacity 4.3GW
including pumped storage.
In addition, SSE is fulfilling a regulatory
obligation to install smart meters for its
Energy Supply customers. At 31 March 2017
SSE had installed over 500,000 smart meters
in customers’ homes. Post installation, SSE’s
meters will transfer to a contracted Meter
Asset Provider, therefore SSE’s investment
and capital expenditure excludes the capital
cost of installation and meter assets. Subject
to the delivery timetable of the critical
central infrastructure, and other GB-wide
technical constraints affecting the progress
of smart metering, SSE intends to ramp up
its rollout significantly over 2017/18.
Investing efficiently in energy assets
that the UK and Ireland need in 2016/17
SSE invests in a balanced range of businesses
and invests only in assets for which returns
are expected to be clearly greater than the
cost of capital. All projects complement SSE’s
existing portfolio of assets and are governed
and executed in an efficient manner and in
SSE is maintaining investment momentum,
with capital and investment expenditure of
around £1.7bn planned for 2017/18, similar
levels currently expected for 2018/19 and
around £6bn as a whole over the four years
to 2020. Around £5bn of that is already
committed, predominantly in building,
owning and operating economically-
36 SSE plc Annual Report 2017
regulated electricity networks and
government-mandated renewable energy
projects. The revenue derived from those
assets is generally index-linked.
Simplifying and re-shaping
the SSE group
As part of its long-standing strategic
commitment to efficiency and disciplined
investment, SSE is maintaining the significant
downward pressure on its operating costs
that it started in 2014.
Also in 2014 SSE commenced what was
called a value programme to dispose of
assets which were not core to its future
plans, which resulted in a disproportionate
burden, or which could release capital for
future investment – all in the interests of
simplifying and re-shaping the SSE group.
The sale in March 2017 of its equity holding
in the last of 11 PFI streetlighting contracts
means the programme is now complete,
and over the period between 2014 and
2017 SSE secured disposal proceeds and
debt reduction as a result of this value
programme totalling over £1.1bn.
The sale in October 2016 of a 16.7% stake
in SGN for £621m is in addition to the £1.1bn
received as a result of the value programme
launched in 2014; but the SGN stake sale
and the value programme both demonstrate
that timely disposals to create value for
shareholders should always be an option
for SSE where they help to simplify and
streamline the SSE group.
Financial management
and balance sheet
Keeping SSE well-financed
As a long-term business, SSE believes that
it should maintain a strong balance sheet,
illustrated by its commitment to robust
ratios for retained cash flow and funds from
operations/debt. SSE believes that a strong
balance sheet enables it to secure funding
from debt investors at competitive and
efficient rates and take decisions that are
focused on the long term – all of which
supports the delivery of annual increases
in the dividend of at least RPI inflation and
the maintenance of an appropriate level of
dividend cover. In October 2016, Moody’s
Investors Service affirmed SSE’s senior credit
rating of A3, changed SSE’s outlook from
negative to stable and raised SSE’s threshold
for retained cash flow/debt ratio of ‘mid
teens’ (previously 13%). In the same month,
Standard & Poor’s affirmed SSE’s A-rating
and negative outlook, while also raising SSE’s
threshold for funds from operations/debt
ratio to 23% (previously 20-23%).
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 March 2017, it
successfully issued £1.03bn of hybrid debt.
The dual tranche issue comprised £300m
with a coupon of 3.625% and $900m with
a coupon of 4.75%. The $900m tranche
has been swapped back to both Euros
and Sterling, bringing the all-in rate down
to 2.72% and resulting in an all-in funding
cost for both tranches to SSE of 3.02% per
annum. The intent is to use the proceeds
to replace SSE’s hybrid issued in 2012 (at an
all-in rate of 5.6%), which has an issuer first
call date on 1 October 2017. This will result
in an annualised cash saving of around
£26m from 2018/19. The combined hybrid
coupon and hybrid interest payments in
2017/18 are expected to be £128m falling
to around £80m in 2018/19. The new
£1.03bn hybrids have a fixed redemption
date and are therefore debt accounted and
included within Loans and Other Borrowings
while the existing £2.2bn of hybrids are
perpetual instruments and are therefore
equity accounted.
SSE has confirmed that the criteria applied by
the rating agencies, Moody’s, and Standard
and Poor’s, will result in broadly the same
value of hybrid equity treatment as that of
previous years.
During the year the £300m Scottish Hydro
Electric Transmission plc facility with the
European Investment Bank was drawn into
a 10 year fixed rate term loan at a rate of
2.076% while a new £200m facility with the
European Investment Bank was secured. The
new facility is split evenly between SSE plc
and Scottish Hydro Electric Transmission plc
and will be drawn during 2017/18 at which
point it will convert to 10 year term loans.
The first of the one year extension options
on the £1.5bn of bank facilities was exercised
in 2016 meaning these facilities now mature
in 2021 while the second one year option is
likely to be exercised during 2017 which will
take these maturities to 2022.
Maintaining a prudent treasury policy
following the EU referendum
SSE’s treasury policy is designed to be
prudent and flexible. In line with that, cash
from operations is first used to finance
maintenance capital expenditure and then
dividend payments, with further growth
in capital expenditure and investment
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 2017, 91% 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 portfolio management operations;
and long-term service agreements for plant.
SSE’s policy is to hedge any material
transactional foreign exchange risks through
the use of forward currency purchases and/
or financial instruments. This means that all
its major project capex requirements are
hedged, including the Stronelairg wind farm
that was approved in 2016. Translational
foreign exchange risk arises in respect of
overseas investments, hedging in respect of
such exposures is determined as appropriate
to the circumstances on a case-by-case
basis. Overall, while SSE has kept its treasury
policy under review following the result of
the EU Referendum, it has so far identified
no need for change.
Managing net debt and
maintaining cash flow
SSE’s Adjusted net debt and hybrid capital
was £8.5bn at 31 March 2017, compared with
£9.0bn at 30 September 2016 and £8.4bn on
31 March 2016. The overall level of net debt
and hybrid capital reflects SSE’s ongoing
investment programme however it also
includes an accounting increase of around
£212m as a result of fair value adjustments.
The fair value adjustment relates to marked-
to-market movements on cross currency
swaps and floating rate swaps that are classed
as fair value hedges under IFRS and as a result
of Sterling weakness and lower interest rates
during 2016/17 these have become more ’in
the money’ to SSE therefore increasing the
net debt position. This accounting movement
in debt is offset by an equivalent movement
in derivative financial liabilities held on SSE’s
balance sheet.
Adjusted net debt and hybrids at 31 March
2017 also includes £369m of the £500m
proceeds identified for the share buy back
from the sale of a 16.7% stake in SGN. Of this,
£65m was deployed during the irrevocable,
non-discretionary programme that
continued during the close period from
1 April 2017 which means as at 17 May 2017
SSE has directed £196m towards the buy
back, re-purchasing around 13.4m shares.
It still expects the process to be completed
by the end of December 2017. Adjusted net
debt and hybrids is forecast to be around
£9.5bn at March 2018.
Adjusted net debt excludes finance leases
and includes outstanding liquid funds that
relate to wholesale energy transactions.
As noted above SSE’s existing £2.2bn of
hybrid equity is accounted for as equity
within the Financial Statements but, as in
previous years, has been included within
SSE’s ‘Adjusted net debt and hybrid capital’
to aid comparability. SSE’s new £1.03bn of
hybrid debt issued during 2016/17 is treated
as debt. A reconciliation of Adjusted net debt
and hybrid capital to Reported net debt is
provided in the table headed Adjusted net
debt and hybrid capital, due to the different
accounting treatments, only the £2.2bn of
hybrid equity is part of that reconciliation.
The level of Reported net debt also reflects
SSE’s ongoing capital expenditure programme
along with the impact of movements in
foreign exchange rates.
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 2017 was 8.8 years, compared
with 8.9 years at 31 March 2016.
SSE’s debt structure remains strong,
with around £8.7bn of medium/long
term borrowings in the form of issued
bonds, European Investment Bank debt and
other loans. This includes £1.03bn of hybrid
equity with their first call date on 2 October
2017, which it is intended will be redeemed
using the proceeds of the most recent
hybrid issuance.
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 £1.4bn and around
£1.2bn of medium-term borrowings which
will mature in the period to March 2018,
including the hybrid bonds mentioned above.
37
3.1. Strategic Report2. Group financial overview –
conclusion and priorities
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
2017/18 and beyond. Its financial priorities
for 2017/18 as a whole include:
– delivering an annual increase in the
dividend that at least keep pace with
RPI inflation;
– maintaining dividend cover in a range
from around 1.2 times to around 1.4
times, albeit towards the bottom of it;
– continuing a disciplined approach to
investment in building, owning and
operating a balanced range of energy
related assets and delivering assets within
the established investment programme,
especially in economically-regulated
Networks and government-
mandated renewables;
– maintaining a strong balance sheet,
with robust ratios for retained cash flow
and funds from operations/debt; and
– completing deployment of the SGN stake
sale proceeds by way of the on market
share buy back, a process which could
continue until the end of 2017.
Strategic Report – Our financial and business performance
Financial overview continued
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 2016 (relating to the final
dividend for the year to 31 March 2016)
resulted in a reduction in cash dividend
funding of £142.6m, with 9.4 million
new ordinary shares, fully paid, being
issued; and
– in February 2017 (relating to the
interim dividend for 2016/17) resulted
in a reduction in cash dividend funding
of £95.3m, with 6.3m 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 in 2010 now stands
at £1,289m and has resulted in the issue of
93.4 million Ordinary shares.
Managing net finance costs
SSE believes Adjusted net finance costs
provide the most useful measure of
performance and a reconciliation of
Adjusted and Reported net finance costs
is provided in the table headed Net Finance
Costs. SSE’s Adjusted net finance costs
in 2016/17 were £328.1m, compared to
£310.9m in 2015/16 reflecting the increase
in net debt in the year. Reported net finance
costs were £163.9m, compared to £192.1m.
This reduction reflects a positive movement
in finance derivatives of £52.6m in 2016/17
compared to £14.3m in 2015/16.
The coupon payments relating to the
existing £2.2bn hybrid equity are presented
as distributions to other equity holders and
are reflected within Adjusted earnings per
share when paid. In 2016/17 these totalled
£119.3m, compared to £124.6m in the
previous year. The coupon payments on
the new £1.03bn hybrid debt issuance are
treated as finance costs under IFRS and
were £1.3m in 2016/17.
Tax
SSE is one of the UK’s biggest taxpayers,
and in the survey published in November
2016 was ranked 14th out of the 100 Group
of Companies in 2016 in terms of taxes
paid. In the year to 31 March 2017, SSE paid
£385.0m of taxes on profits, property taxes,
environmental taxes, and employment taxes
in the UK, compared with £453.9m in the
previous year. Total taxes paid in 2016/17 were
lower than the previous year, primarily due to:
38 SSE plc Annual Report 2017
– reduced taxable profits from Gas
Production as a result of lower gas
prices and capital allowances from the
Greater Laggan acquisition in 2015/16;
– the reduction in the Petroleum Revenue
Tax rate to 0% from 1 January 2016;
– a one-off Land & Buildings Transaction
Tax liability in 2015/16 on the Greater
Laggan acquisition; and
– lower Climate Change Levy liabilities
through reduced coal consumption.
SSE also paid €16.5 million of taxes in the
Republic of Ireland, being the only country
outside of the UK in which it 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, SSE believes that the Adjusted
current tax charge on that profit is the tax
measure that best reflects underlying
performance. SSE’s Adjusted current tax rate,
based on Adjusted profit before tax, is 10.2%,
as compared with 12.8% in 2015/16 on the
same basis.
As would be expected for a Company of
SSE’s size, the SSE group has a small number
of tax enquiries ongoing with HMRC at any
one time. In addition, under Corporate Tax
Self Assessment, SSE adopts a filing position
on matters in its tax returns that may be large
or complex, with the position then being
discussed with HMRC after the tax returns
have been filed. SSE engages proactively
with HMRC on such matters, but where SSE
considers there to be a risk that HMRC may
disagree with its view, and that additional tax
may become payable as a result, a provision
is made for the potential liability, which is
then released once the matter has been
agreed with HMRC. SSE considers this to
be in line with the overall prudent approach
to its tax responsibilities.
+0.7°C
temperatures were above the 1981-2010
mean temperature for the UK
The weather
Managing the impact
of the weather on SSE
The operational performance of SSE’s businesses is affected by the
weather. It impacts the production of renewable energy (Wholesale),
the operation of the transmission and distribution lines (Networks)
and the amount of gas and electricity used by consumers (Retail).
Whilst the weather is not a principal risk
to SSE in itself, it is of course an important
contributor to business performance that
is strongly interconnected to identified
Principal Risks such as Energy Affordability
and Commodity Prices. Given its impacts,
SSE closely monitors short and long term
weather conditions so that it is able to
manage and respond to conditions in
an appropriate manner for the benefit
of customers and to support the fulfilment
of its business objectives. This includes:
– predicting how forecast temperatures
may affect customers’ demand for gas
and electricity, and whether daily
fluctuations in temperature require a
response form SSE’s generation assets;
– forecasting the temperature to inform
how SSE’s energy portfolio managers
buy power and gas in advance, thereby
improving SSE’s procurement;
– determining short-, medium- and
long-term wind forecasts and the
electricity generation output from
renewable generation assets;
– assessing how rainfall patterns could
impact SSE’s hydro-electric generation
output and storage capabilities; and
– preparing for how extreme weather,
such as high winds or excess rainfall,
could impact the resilience of the
transmission and distribution assets
that SSE’s customers rely on.
-13%
reduction in average rainfall in the
North of Scotland, compared to the
1981-2010 average
-0.3m/s
wind speeds in 2016/17 were below
the long-term average
Overall 2016/17 was warmer than the
previous year, however winds speeds and
rainfall in the North of Scotland were below
long-term averages. This has implications
for customer demand, renewable energy
output and hydro-electric output.
Rainfall
Wind
Temperature
Rainfall directly affects
hydroelectric generation in the
north and west of Scotland.
Wind speeds drive renewable
generation but excess can limit
capacity and damage networks.
A total of 1503.4mm of rain fell in the North
of Scotland during the year which is 87%
of the 1981-2010 average. Over the period
October to March rainfall was below average
in North of Scotland for 5 of the 6 months.
As a result, SSE’s hydro-electric assets
saw their output decrease to 3,101GWh
compared to 4,074GWh in the previous year.
While GB wind speeds in 2015/16 were
very close to the long-term average (over
1981-2010), they were 0.3m/s below the
average in 2016/17. Wind speeds were down
compared with the previous year due to
a change in the positions of the high and
low weather pressure systems. These less
windy conditions resulted in a decrease in
output of electricity from SSE’s wind farms.
Temperatures can significantly
impact total demand for energy.
2016/17 was warmer than the previous year
with average temperatures 0.7°C above the
1981-2010 average. The mean temperature
in the UK over the year was 9.5°C, which is
higher than the 9.2°C in the previous year.
Whilst overall it was warmer there were
several months in which the temperature
was significantly colder. This impacts the
trends in household energy demand.
39
3.1. Strategic Report2. 618m therms
Total output in
2016/17 from SSE’s
gas production assets.
588MW
The Beatrice offshore
wind farm on the outer
Moray Firth is expected
to be fully operational in
2019. SSE’s share is 40%.
Strategic Report – Our financial and business performance
Wholesale – producing energy
SSE’s Wholesale segment consists of three business areas: Energy Portfolio
Management (EPM) and Electricity Generation; Gas Storage; and Gas
Production. It operates a balanced portfolio of assets, contracts and
investment opportunities.
Wholesale Adjusted operating
profit – £m
Adjusted capital expenditure
and investment – £m
514.6 +16.3%
548.1
+21%
The businesses in SSE’s Wholesale segment source,
produce and store energy through energy portfolio
management, electricity generation, gas production
and gas storage.
Capital expenditure and investment for this business
is in strategic assets that enhance, diversify and balance
the portfolio.
Renewable generation capacity – MW
Total generation capacity – MW
3,309
+1.0%
Renewable generation capacity covers hydro electric
schemes (conventional and pumped storage), wind farms
(onshore and offshore) and dedicated biomass plant.
10,643 +0.8%
SSE’s generation capacity (including its share of joint
ventures) incorporates 5,305MW of gas and oil-fired
generation, 3,309MW of renewable generation
(including pumped-storage), 34MW of multi-fuel
and 1,995MW of coal-fired generation.
Renewable generation output – GWh
Total generation output – GWh
7,995
-17.9%
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.
26,296 -5.3%
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.
The Wholesale business aims to secure maximum value through the flexible provision,
storage and delivery of energy for customers in wholesale markets in Great Britain and
Ireland. We manage risks, notably volatile commodity prices, by ensuring a balance
and diversity in our business. It’s this diversity that positions us well. We are focussed
on efficiently and safely operating our assets in an increasingly complex market as well
as exploiting new opportunities by maintaining our investment momentum.
Martin Pibworth
Managing Director, Wholesale
40 SSE plc Annual Report 2017
41
1. Strategic Report2.3. Strategic Report – Our financial and business performance
Wholesale – producing energy continued
Wholesale key performance indicators
Energy Portfolio Management (EPM) and Electricity Generation
EPM and Generation Adjusted operating profit
EPM and Generation Reported operating profit/(loss) – £m
EPM and Generation Adjusted capital expenditure
– £m
and investment
– £m
March 17
March 16
501.2
736.1
436.3
(174.8)
475.0
382.6
Generation capacity – MW
Gas- and oil-fired generation capacity (GB) – MW
Gas- and oil-fired generation capacity (Ire) – MW
Coal-fired generation capacity – MW
Multi-fuel 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
Biomass capacity (GB) – MW
4,013
1,292
1,995
34
7,334
300
1,150
900
122
456
344
37
Total renewable generation capacity (inc. pumped storage) – MW
3,309
3,961
1,292
1,995
34
7,282
300
1,150
900
88
456
344
37
3,275
Total electricity generation capacity (GB and Ire) – MW
Renewable capacity qualifying for ROCs – MW
10,643
10,557
c1,850
c1,800
Generation output – GWh
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 (inc. pumped storage) – GWh
14,977
2,463
901
18,341
233
3,101
1,895
251
1,211
1,172
92
7,955
10,160
1,780
6,141
18,081
252
4,074
2,439
235
1,308
1,312
75
9,695
Total Generation output all plant – GWh
26,296
27,776
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 is due to reduce to be zero from 1 April 2018).
4 Keadby TEC increased by 20MW to 755MW and Medway TEC increased by 35MW to 735MW from 1 April 2016.
Wind output excludes 309GWh of constrained off generation in 2016/17 and 387GWh in 2015/16.
5 Onshore wind capacity and output at March 2017 excludes 175MW related to the Clyde disposal in March 2016.
6 Waste to Energy GWh not included above as contracted to third party.
7
Slough Heat & Power Biomass Plant’s financial results are reported within SSE Enterprise. Capacity and output
included above.
– £m
Gas Production
Gas Production Adjusted operating profit
Gas Production Reported operating profit/(loss) – £m
Gas Production – M therms
Gas Production – Mboe
Liquids Production – Mboe
Gas Production capital investment – £m
Total net proven and probable reserves (2P) – bn therms
Total net proven and probable reserves (2P) – Mboe
Gas Storage
Gas Storage Adjusted operating (loss)/profit
Gas Storage Reported operating profit/(loss) – £m
Gas Storage customer nominations met – %
Gas Storage capital investment – £m
– £m
42 SSE plc Annual Report 2017
26.4
(201.1)
618
10.21
1.05
72.9
2.5
43
(13.0)
(36.8)
100
0.2
2.2
(159.6)
403
6.55
0.13
56.1
3.6
59
4.0
(146.9)
100
14.0
Building new renewable
energy assets
SSE’s total wind capacity in operation is
1.8GW which, alongside our extensive
hydro assets, makes us one of the largest
generators of renewable energy in the
UK. We’ve outlined further investment
plans and expect to add over 500MW
of onshore wind in 2017/18 with
the 225MW Stronelairg wind farm
to follow in addition to that. We will also
continue to make significant progress
with the Beatrice offshore wind farm, in
which SSE has a 40% stake and a capacity
share of 235MW. Beyond this we have
the capability and track record to take
advantage of emerging opportunities
including interests in two further offshore
wind joint ventures.
Key questions and answers
about SSE’s Wholesale business
What is the role of the Wholesale
business within SSE’s strategic
framework?
Wholesale makes a significant contribution
to overall Group operating profit. It is a
business which is impacted by many
different changing external factors, from
commodity prices, exchange rates, the shift
to a low-carbon economy to regulatory and
political change. The business has a diverse
asset portfolio and investment opportunities.
This means that whilst overall there was
lower output from renewable sources of
energy in 2016/17, due to the weather,
and gas storage remains a very challenged
business, there was improved financial
performance from thermal generation
and Energy Portfolio Management. There
is also a significant investment programme
continuing in a range of technologies
including offshore wind, onshore wind
and multi-fuel.
The energy market is changing –
has the Wholesale businesses
strategy adapted?
Yes. Change is a fact of life for this business
and we must embrace it. One of the starkest
changes is how lower carbon forms of
generation are displacing coal and the scale
of the cost reductions in some low carbon
technologies is notable. As a business we
continue to adapt, review and shape our
portfolio of assets, contractual positions
and investments in the context of an
uncertain market. In doing so diversity
and flexibility is important, particularly
given the volatility in the electricity market.
This business works to ensure it has the
options it needs to adapt to changing
market conditions and to act as
opportunities emerge. In offshore wind
or new gas-fired generation investment,
for example, SSE has good options for the
future. We also have a portfolio of gas
production assets including the Greater
Laggan area assets acquired in 2015,
which now produce significant volumes
and contribute to the profitability of the
business and will do so for years to come.
Renewable energy has been
core to SSE’s investment pipeline,
but with no available subsidy
for new onshore wind in the UK
what is the outlook for your
generation capital expenditure?
Looking ahead we retain a number of
options in on- and offshore wind. The
Beatrice offshore wind project, which
we own 40% of, is one of the largest
infrastructure projects ever seen in Scotland.
While it remains a complex project to deliver,
it is on course to be operational in 2019.
Alongside this we have interests in offshore
wind projects at Dogger Bank and Seagreen
which we are hopeful can progress towards
bidding for support contracts. In onshore
wind we have sites in construction, including
Stronelairg wind farm in Scotland. The future
regulatory and policy framework is
developing and we will continue to adapt to
it, however, we think renewables in the UK
has a bright future and, as the sector grows,
it brings major industrial and supply chain
benefits too. In short, we have plenty of
options for the future but, as always with
capital investment decisions, will apply our
disciplined approach.
The decline in coal-fired generation
is a major trend across the sector,
so what are the implications for
your portfolio of assets and
investments?
SSE operates a balanced portfolio of energy
generation assets. This includes the coal-fired
power station at Fiddler’s Ferry in Cheshire,
hydro, on and offshore wind, and gas
generation as well as multi-fuel. Coal output
has significantly declined but the UK
Government’s commitment to phasing out
coal by 2025 means it still has a role to play.
Operating the electricity system is an
immensely complex task, and over the next
few years there will still be points at which
coal-fired power stations will be needed to
keep it stable and secure for the customers
who depend on it.
The acquisition of gas production
assets in the Greater Laggan area
completed in 2015 and has already
been subject to impairment
charges. Is SSE still positive about
these assets?
Yes. There has been a significant rise in
SSE’s gas production this year primarily due
to the ramp up of output from the newly
commissioned fields in the Greater Laggan
Area (GLA), partially offset by the natural
decline in output from the more mature fields
in SSE’s gas production portfolio. GLA started
in 2016 with production rates peaking at up
to 90,000 boe a day. Assets of this type are
subject to assessments at least annually by
independent reserves auditors who found
that the GLA’s Proven plus Probable (2P)
reserves are estimated to have reduced,
resulting in an exceptional impairment of
£180.5m at the 2016/17 year end. While this
is clearly disappointing, movement in the
technical assessment of 2P reserves is a
well-known occurrence, particularly for new
fields. This decrease reflects current best, but
early stage, understanding of the fields, it now
appears there is greater compartmentalisation
of gas than expected, which could require
some further capital investment to extract.
Consequently, this also means the level of
Contingent Reserves (2C) has increased.
Overall, these gas production assets are
long-term assets and are expected to make
an important contribution to EBITDA with
SSE’s average annual volumes of gas and
liquids produced expected to average around
500 million therms of gas per year in the
three years to March 2020.
What are the Wholesale businesses
principal strategic priorities for the
year ahead?
Our priorities are to operate our assets
safely, reliably and efficiently; deliver new
assets in construction, as well as develop
new opportunities to build, own and
operate assets in the future; ensure efficient
delivery of gas from the offshore fields in
which SSE has a shared ownership; and
secure value, where appropriate, through
the risk-managed trading of energy-
related commodities.
For the full analysis of SSE’s Wholesale
business in 2016/17, see the Full-Year Results
Statement (2016/17) available on sse.com.
43
3.1. Strategic Report2. Strategic Report – Our financial and business performance
Networks – delivering energy
SSE is the only energy company in the UK to be involved in electricity
transmission, electricity distribution and gas distribution. Its five economically-
regulated energy network companies consist of a 100% ownership of Scottish
Hydro Electric Transmission (SHE Transmission), Scottish Hydro Electric Power
Distribution (SHEPD) and Southern Electric Power Distribution (SEPD) and, since
26 October 2016, a 33.3% stake in both Scotland Gas Networks and Southern
Gas Networks (SGN).
Networks Adjusted operating profit
– £m
Total Networks RAV – £bn
936.5
+1.1%
7.68
-3.5%
Adjusted operating profit for this business covers
activity across all the electricity and gas networks
SSE has interests in.
SSE is on target to take this Regulated Asset Value of its
networks business to almost £9bn by 2020.
Adjusted Electricity Distribution
networks capital expenditure – £m
Transmission networks capital expenditure
– £m
284.7 +10.2%
505.0
-11.9%
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 two electricity distribution
networks companies: Scottish Hydro Electric Power
Distribution and Southern Electric Power Distribution.
Electricity Distribution operating profit
– £m
433.4 +16.9%
Scottish and Southern Electricity Networks (SSEN),
operating as Scottish Hydro Electric Power Distribution
(SHEPD) and Southern Electric Power Distribution (SEPD)
under licence, is responsible for maintaining the electricity
distribution networks supplying over 3.7 million homes
and businesses across central southern England and north
of the central belt of Scotland, the Mull of Kintyre and the
Scottish islands.
Transmission operating profit – £m
263.7
-8.2%
Scottish and Southern Electricity Networks (SSEN),
operating as Scottish Hydro Electric Transmission plc under
licence, is responsible for maintaining and investing in the
electricity transmission network in the north of Scotland.
Networks bring balance to SSE and the relative stability of the returns underpins the
Group’s financial performance. Through investment in modern energy networks and
targeted performance against the incentive-based regulatory framework, we provide
a safe, reliable and efficient service that our customers can rely on. We’ll continue
to adapt to a changing role for network operators, increasing our RAV through
investment delivered in the most disciplined way possible.
Colin Nicol
Managing Director, Networks
44 SSE plc Annual Report 2017
£1,118m
The agreed allowance, in
2013/14 prices, for SSEN’s
flagship Caithness-Moray
transmission link. The
largest single investment
undertaken by the SSE
group to date.
3.7m
homes and businesses
Scottish and Southern
Electricity Networks
is responsible for
maintaining the electricity
distribution networks
supplying homes and
businesses across central
southern England and
north of the central belt
in Scotland.
45
1. Strategic Report2.3. Strategic Report – Our financial and business performance
Networks – delivering energy continued
Networks key performance indicators
Electricity Transmission
Transmission operating profit – £m
Regulated Asset Value (RAV) – £m
Capital expenditure – £m
Electricity Distribution
Electricity Distribution operating profit – £m
Regulated Asset Value (RAV) – £m
Adjusted capital expenditure
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
– £m
Scotia Gas Networks
SSE’s 50% share reducing to 33% from 26 Oct 2016
SGN Adjusted operating profit (SSE’s share)
SGN Reported operating profit (SSE’s share) – £m
Regulated Asset Value – £m
Uncontrolled gas escapes attended within one hour – %
SGN gas mains replaced – km
– £m
46 SSE plc Annual Report 2017
March 17
March 16
263.7
2,685
505.0
433.4
3,246
284.7
39.3
60
43
68
48
239.4
151.7
1,748
98.7
457
287.2
2,287
573.4
370.7
3,157
258.3
39.5
55
41
66
47
268.7
175.3
2,513
98.5
960
A Distribution business
looking to the future
Our Distribution business is focused
on the future. The role of the network
is changing and will be more active
and flexible in a decarbonised energy
system. In preparing for this change we
have to ensure customer’s interests are
considered and the network remains
reliable and cost-effective. We’ve been
involved in some pioneering innovation
projects, working with Ofgem and
industry partners. For example, the My
Electric Avenue project considered how
to prepare the network for the possible
increase in electric vehicles. The findings
are shared across the sector to ensure a
cost-effective transition if homes and
businesses want to install charging
points. For more visit
http://myelectricavenue.info
Key questions and answers
about SSE’s Networks business
How would describe 2016/17
for SSE’s Networks business?
It was a year of important progress at
Scottish and Southern Electricity Networks
(SSEN). We have moved forward in areas
such as innovation, investment and customer
service, as well as continuing to provide a
safe and reliable electricity supply to homes
and businesses across our networks. We are
also undertaking a business-wide change
programme to improve the efficiency and
capability of our business and set ourselves
up well for a successful future. Networks
remains central to the fulfilment of SSE’s
strategy and underpins SSE’s commitment
to annual dividend growth through stable
returns and index-linked RAV, which bring
balance and investment options to SSE.
Excellence in customer and
stakeholder engagement is an
increasingly important component
of the RIIO regulatory framework,
so, is SSEN expanding its
capabilities in this area?
Yes. SSEN is a customer-focused business.
We transmit and distribute electricity to over
3.7 million customers and have to be focused
on their needs first and foremost. Ofgem
also recognise this and the RIIO framework
was created to make sure the needs of the
customer is considered and our financial
incentives or penalties are judged against that.
This includes power restoration times, the
support for vulnerable customers, efficient
connection management and stakeholder
involvement in decision making. We’ve
significantly invested in this area to ensure we
continue to deliver to meet the needs of our
customers. In September we rebranded our
business to Scottish and Southern Electricity
Networks so the business more accurately
reflects what we do and where we do it. We
have launched several initiatives that have
increased our stakeholders’ voice in our
business decisions, including stakeholder
feedback on the visual impact of our
transmission assets in Scotland, which
presents an opportunity to look again at the
visual impact of our existing infrastructure in
Scotland’s National Parks and National Scenic
Areas; similar to a scheme for our distribution
networks which invites stakeholders to
nominate areas for undergrounding of 90km
of distribution power lines in National Parks,
Areas of Natural Beauty and National Scenic
Areas; and the launch of our independent
Stakeholder Advisory Panel.
How is SSEN preparing for
a changing energy market?
There is no doubt that technology
improvements, decarbonisation of
electricity generation and increasing
levels of demand-side response and
energy storage will further transform the
way network operators do business, with
distribution companies in particular required
to adapt to a new active and flexible
distribution system operator role. From
SSEN’s perspective, we are well positioned
to maximise opportunities from this change,
having led the way in innovations such as
Active Network Management on Orkney,
considering the impact of electric vehicles
through our Electric Avenue initiative
and the six-year long Thames Valley
Vision project. We’ll continue to engage
constructively with policy-makers, the
regulator and industry to ensure that
a phased transition to a flexible role is
delivered in the best interests of customers.
How is the Caithness-Moray
transmission link, SSE’s largest ever
construction project, progressing
and what’s next for capital
expenditure in Transmission?
Good progress has been made. The sheer
scale of the project is remarkable and with
the manufacture of the subsea cable now
complete, we expect its installation on the
Moray Firth seabed later this year. Progress
remains on track with completion expected
by the end of 2018. We’ve developed
significant construction capabilities and see
major opportunities from the low-carbon
transition. Our capabilities and opportunities
arising mean we expect the RAV of this
business to reach around £3bn by 2018.
We are now four years into
the Transmission Price Control,
so is SSE’s Networks business
now thinking about the future?
Absolutely. The mid-point of Transmission’s
price control means that thoughts now
turn to the arrangements after 2021. We’re
starting to consider our business plan and
how we can meet the needs of customers
in the north of Scotland in the next decade.
We’ll be working with stakeholders to help
shape our thinking and ensure that our plan
is as robust and customer focused as possible.
What is SSEN’s principal priority
for the year ahead?
SSEN’s core priority is always to provide a
safe and reliable supply of electricity to the
communities we serve from the Scottish
islands to the Isle of Wight. We never lose
sight of our role to provide a reliable energy
network those homes and businesses can rely
on. Our investment plans will also continue
and our committed plans mean that the total
RAV of SSE’s network businesses is well placed
to reach almost £9bn by 2020.
Has demand for renewable energy
connections in Scotland continued
and what is the outlook?
In advance of the closure of the Renewables
Obligations Scheme, there has been an
increased demand for SSEN to provide
connections to its transmission network
for renewable energy developers. In fact it’s
been a record year. Including that connected
at distribution level, SSEN connected over
500MW of renewable electricity to its
networks in 2016/17, the highest combined
capacity to connect to the north of Scotland
network in a single year since electricity
privatisation. This continues the rapid
growth of renewable energy in the north
of Scotland, and low-carbon sources now
make up 4.5GW of generation capacity in
our licence area. Alongside this increase in
connections SSEN was able to maintain
99.9% network reliability, giving customers a
reliable and safe supply of electricity. Going
forward we expect a significant number of
new renewable energy projects to connect
to the transmission network throughout the
remainder of the transmission price control
to March 2021, subject to developers
reaching financial close.
For the full analysis of SSE’s Networks
business in 2016/17, see the Full-Year Results
Statement (2016/17) available on sse.com.
47
3.1. Strategic Report2. Strategic Report – Our financial and business performance
Retail – supplying energy
SSE is one of the largest energy suppliers in the competitive markets in
Great Britain and Ireland. It also provides other related products and services,
including telephone, broadband and boiler care, to homes and businesses.
Retail Adjusted operating profit* – £m
Retail Reported operating profit – £m
422.3
-7.2%
309.6
-29.2%
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.
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.
500,000
smart meters installed
SSE’s is focused on
delivering its obligation to
install smart meters in a
way that is cost-effective
and customer-centric, to
maximise the net benefits
for customers.
Energy customer accounts – m
SSE Enterprise operating profit – £m
8.0
-2.6%
16.7
-59.2%
SSE supplies electricity and gas to household and business
customers in the energy markets in the UK and Ireland. It is
the second largest supplier in both markets.
Enterprise brings together key SSE services for industrial,
commercial and public sector customers.
0.47m
Home Services customer
accounts (GB)
All-Island energy market customers (Ire) – m
Energy-related Services Adjusted
operating profit – £m
0.79
0.0%
16.1
+4.5%
SSE Airtricity is the second largest provider of energy
and related services in Ireland (ROI) and Northern Ireland
(NI), and the only energy retailer to operate in all of the
competitive gas and electricity markets across the island.
Energy-related services covers boiler cover, electrical
wiring, broadband and telephone.
The Retail business operates in an intensely competitive market, and one that is
subject to regulatory obligations and political interest. This is a challenging context,
yet our focus is delivering for our customers and ensuring they are at the heart of
everything we do. This means offering the products, services and value that they
are seeking, diversifying our business to provide balance and at all times focusing
on what we do well: supplying energy efficiently and providing customers with
excellent customer service.
Will Morris
Managing Director, Retail
48 SSE plc Annual Report 2017
49
1. Strategic Report2.3. Strategic Report – Our financial and business performance
Retail – supplying energy continued
Retail (including Enterprise) key performance indicators
– £m
Energy Supply
Energy Supply Adjusted operating profit
Energy Supply Reported operating profit – £m
Adjusted capital expenditure (Energy Supply and Energy-related Services)
Electricity customer accounts (GB domestic) – m
Gas customer accounts (GB domestic) – m
Energy customers (GB business sites) – m
All-Island energy market customers (Ire) – m
Total energy customer accounts (GB, Ire) – m
– £m
Electricity supplied household average (GB) – kWh
Gas supplied household average (GB) – th
Household/small business aged debt (GB, Ireland) – £m
Bad debt expense (GB, Ireland) – £m
Customer complaints to third parties (GB) 1
1 Ombudsman: Energy Services and Citizens Advice.
Energy-related Services
Energy-related Services Adjusted operating profit
Energy-related Services Reported operating profit – £m
Home Services customer accounts (GB) – m
Supply customers’ bills based on actual reading – %
Smart meters installed
– £m
Enterprise
Enterprise operating profit – £m
Capital expenditure – £m
SSE Heat network customer accounts
50 SSE plc Annual Report 2017
March 17
March 16
389.5
313.2
184.3
4.06
2.70
0.45
0.79
8.00
3,793
440
80.2
47.9
1,322
398.9
398.9
169.0
4.16
2.79
0.47
0.79
8.21
3,763
426
103.2
44.0
1,416
15.4
(2.4)
0.40
95.1
Over 500,000 Over 180,000
16.1
(20.3)
0.47
95.5
16.7
58.7
Over 6,500
40.9
48.5
Over 5,000
A smarter energy future
for our customers
SSE has continued to make significant
progress in fulfilling its regulatory
obligation to offer every customer
a smart meter. We’ve installed over
500,000 smart meters and, subject
to the delivery timetable for the critical
infrastructure, will ramp up our roll-out
further still in 2017/18. Our focus will as
always be on doing so in a cost-effective
way that maximises the net benefits
for customers. Alongside investments
in our digital, customer-facing services,
in time smart meters can lead the way
to a smarter energy market in which
customers can better engage with their
usage and products. This transformation
presents both risks and opportunities for
established businesses like ours and we
are focused on ensuring we not only
deliver on our obligations but emerge
well-placed to succeed in the smart-
enabled market of the future.
Key questions and answers
about SSE’s Retail business
drive further engagement and reduce costs.
We are digitalising our business to meet
the changing expectations that people
have about how they want to engage with
products such as energy and essential
services. Importantly we also have to get
the basics right, listening to, and engaging
with, our customers; so providing excellent
customer service is critical. Our track record
in this, notably complaint handling, remains
strong and we want to maintain our
leadership position in this area.
What are the growth areas
for SSE’s Retail business?
We see two prominent areas for growth.
Firstly, we want to expand our I&C customer
base and build upon the progress we’ve
made in recent years. Secondly, our business
is increasingly focused on diversifying into
new markets; that’s why we’re particularly
pleased that our Home Services business
now has a national presence, and we’ve
now grown to nearly 500k non-energy
customers across broadband, telephone
and home services. We are targeting further
growth in this area as we continue with our
strategy of becoming more than a retailer
of gas and electricity.
The price of energy has again
risen up the political agenda,
with potential government
interventions, how is the business
managing this risk?
Energy is an essential service and customers,
and the affordability of energy, are at the
heart of every decision we make. We regret
having to take the difficult decision to
increase electricity tariffs, but without this
increase SSE would have been supplying
electricity at a financial loss. At the same
time, we also have outlined major plans
to engage customers with the products,
services and rewards we offer, we continue
to take costs out of the business and we
work closely with the regulator and our
stakeholders on issues affecting customers.
Governments should be mindful of the
progress the market has made in any
interventions they make.
What does SSE’s Retail business
do to help vulnerable customers?
As an essential service provider, looking after
our vulnerable customers is central to how
we operate. That’s why we became the first
energy supplier in Great Britain to commit
publically to achieving the British Standard
for Inclusive Service Provision. This
represents the gold standard in recognising
and catering for vulnerability. In addition to
this, we have a wide range of practical
services to help people who are struggling
with their energy bills. The key point for any
customer who is vulnerable at any time is:
if you have any worries or concerns about
paying for your energy, get in touch with us.
There are many ways in which we can help.
One of the initiatives we are particularly
proud of is our advisers referring customers
for Benefit Entitlements Checks. The
outcome of these checks can transform
people’s lives for the better.
What are Retail’s principal strategic
priorities for the year ahead?
We are focused on doing the right things
to give customers what they are looking for
in terms of products, service and value. The
net loss of customer accounts in 2016/17
was lower than in previous years, and our
service, programmes of engagement,
products and investment in digitalising front-
end, customer-facing systems will continue.
We also need to fulfil our existing regulatory
obligations and work with the regulator on
the CMA remedies and other reforms from
government to ensure the competitive
market works in a way that benefits all
customers and, critically, make sure we
are well positioned to compete successfully
for customers in the future market.
For the full analysis of SSE’s Retail business
in 2016/17, see the Full-Year Results
Statement (2016/17) available on sse.com.
How would you describe the
performance of the Retail business
in 2016/17?
We have to acknowledge that operating
profit fell and that we experienced a decline
in household energy customer numbers.
We are, however, pleased with the positive
aspects of performance this year. We
have continued to expand our customer
propositions, whilst maintaining our good
record in customer service. The net loss
of customer accounts was the lowest
we’ve seen for a number of years and we
showed we can compete successfully for
new customers, while also working hard to
retain customers in greater numbers. Good
progress is being made in our investments
in digital, customer-facing systems and in
diversifying our products and services.
We took the difficult decision to increase
standard electricity prices for household
customers in GB from April 2017, although
were able to hold gas prices. The business
faces two prevailing headwinds: regulatory
and political scrutiny of energy costs, to
which we need to respond as constructively
as we can, and the increasingly
competitive market.
Customer account numbers have
fallen, so how are you responding
to that?
The energy retail market is the most
competitive it has ever been and this year
switching levels were at their highest rate
since Energy UK began its records. There are
over 50 suppliers and a range of products
and services are available to customers.
We don’t have a specific target for customer
numbers – the market is too complex and
fast moving to allow for that. Nevertheless,
winning and retaining customers in a fiercely
competitive market is central to this business.
That’s why our focus is on ensuring we are
doing the right things to treat customers
fairly and to give them what they are looking
for in products, service and value.
Consumer habits and expectations
are changing and competition is
fierce. How is the Retail business
adapting to this?
It’s true that the market is changing. Smart
metering, faster switching and the increasing
connectivity of customers’ homes will have
a transformative effect. This also presents us
with an opportunity to enhance service levels,
51
3.1. Strategic Report2. Strategic Report – Our financial and business performance
Enterprise – providing energy services
1. Strategic Report
2.
3.
I joined SSE as Managing Director of this business in January 2017. Already I can
see that we’re in a key phase of our development as part of the SSE Group. There
are significant opportunities for us in telecoms, rail, utilities and contracting and the
team I lead is working extremely hard to capitalise on these. I believe 2017/18 will be
a pivotal year to position us as an effective engine of growth in new competitive
markets for SSE.
Neil Kirkby
Managing Director, Enterprise
What’s the role of the Enterprise
business within SSE?
As a group of businesses we provide
energy and related services to meet
the needs of industrial, commercial and
public sector customers across the UK.
Our businesses comprise Telecoms, Utilities,
Rail and Contracting. This gives us diversity
in competitive markets and a broad client
base with a collective focus on delivering
efficient, reliable and bespoke solutions to
meet individual client needs.
considerable focus on adopting the best
structure to win and deliver work. Therefore
I have created a leadership team focused on
leaner operations and strategic development
and a business transformation programme is
underway. Embedding a culture of efficiency
will be essential for critical growth in the
longer term. We also need to optimise our
customer relationship management and
deliver a first class service whilst targeting
markets where we see opportunities
for growth.
You joined in January 2017,
what are your initial plans
for the business?
I joined SSE with a clear remit to develop
the business to be as efficient as possible
and to identify and exploit opportunities for
growth. We need to evolve the Enterprise
proposition to deliver larger scale projects
complementing business as usual and
ensuring a positive contribution to the SSE
Group. To achieve this there needs to be
What does the future look like
for the Enterprise business?
It promises to be an exciting time for this
business. While the financial performance in
the last year reflects the challenging markets
SSE Enterprise operates in, the business has
established strong foundations. There are
some compelling new opportunities in the
pipeline for each of the Enterprise businesses
and we are well-placed to tap into key
long-term economic, infrastructure and
technological trends. Advances such as the
electrification of transport, the move towards
distributed generation and the roll out of 5G
technology, as well as high speed rail, are all
crucial development areas as we look to
the future.
How will innovation play into the
SSE Enterprise growth story?
The most successful players in our markets
are those who are thinking differently in
the way that they operate as a business,
how they deliver their services, and how
they attract new customers. We have set
a significant challenge for Enterprise in
terms of improving efficiency and winning
new business this year. In order to deliver,
we must start to change the way we do
things. We have a superb talent base here
in Enterprise and I hope that by putting
innovation at our core, we will create a
leaner, more efficient, and forward looking
Enterprise capable of delivering real value
back to the wider SSE Group.
Innovative District Heating to improve
Glasgow’s housing stock
SSE Heat Networks is a division of SSE Enterprise, specialising in the design, construction,
maintenance and operation of heat infrastructure for homes and businesses. Cube Housing
Association partnered with SSE Heat Networks to install the new district heating system at
the Wyndford estate in Glasgow with the aim to improve comfort levels and the energy
efficiency of almost 1,800 homes; mainly social housing with a small number of privately
owned houses. The system uses hot water to heat multiple homes from a central boiler
rather than each individual home producing its own heating requirements. It is greener,
producing considerably less carbon emissions than more conventional forms of heat, and it
is also a more energy efficient way to keep homes warm. This ground-breaking project has
significantly improved quality of life for residents at the estate and has been recommended
by the Scottish Government as the preferred method for improving the quality of energy
provision for high-rise social housing in a sustainable and environmentally friendly way.
52 SSE plc Annual Report 2017
Directors’ Report
Chairman’s introduction
Board of Directors
Leadership
Effectiveness
Nomination Committee Report
Accountability
Audit Committee Report
Stakeholder engagement and
responsible stewardship
Safety, Health and Environment
Advisory Committee Report
Remuneration
Other statutory information
54
56
58
64
67
70
70
76
78
80
98
Statement of Directors’ responsibilities
100
53
3.2. Directors’ Report1. Chairman’s introduction
The Board is committed
to ensuring good
corporate governance
and effective Board
practice in support of
SSE’s sustainable success
over the long term
54 SSE plc Annual Report 2017
54 SSE plc Annual Report 2017
The UK Corporate
Governance Code
Through the Listing Rules, the UK
Corporate Governance Code (the ‘Code’)
underpins the overarching corporate
governance framework for premium
listed companies within the UK.
It contains principles and provisions
which set out standards of good practice
in relation to Board leadership,
effectiveness, accountability, relations
with stakeholders and remuneration
and this Directors’ Report is
structured accordingly.
The Code is published by the FRC and is
available to view on their website.
Each year, through this Directors' Report,
we describe how we have applied the
Main Principles of the Code and in line
with its ‘comply or explain’ model detail
any departures from its specific
provisions. A departure is only ever made
when it is deemed appropriate to do so,
and good governance can be achieved
by other means.
For 2016/17 we are again reporting
against the 2014 version of the Code and
confirm compliance with its provisions
with the exception of C.3.7 – that the
external audit contract be put out to
tender at least every ten years. This
remains unchanged from last year and
a full explanation of our reasons for
non-compliance, including details of the
timeline to address the position are set
out in the Audit Committee Report on
page 74.
Directors’ Report – Corporate governance Dear Shareholder,
As outlined in my earlier letter on pages
6 and 7 and as evidenced throughout the
Strategic Report, the Board have considered
a wide range of matters throughout 2016/17.
These have covered current investments in
capital projects, to support the maintenance
of a balanced portfolio of assets, through to
reviewing the risks associated with operating
such a diverse range of businesses. We have
also considered our people and stakeholders,
which has been both explicit – through
a review of cultural matters, talent and
succession plans; and implicit – when
assessing the impact of all our decisions
on our customers, society at large and in
delivering value for our shareholders. All
of these deliberations have been against a
backdrop of change, as we acknowledge
the existence of some political uncertainty,
the move towards a low-carbon future and
the impact of changing energy markets on
our businesses and customers. In line with
our stewardship position, we continually
monitor and reflect upon all of these
external developments when discharging
our role as a Board.
Corporate governance
The Directors’ Report which follows explains
the different elements of our Corporate
Governance Framework, which has been
designed to ensure that as a Board we fulfil
our responsibilities effectively and create
value for the longer term. This is achieved
by ensuring that we have appropriate
oversight of all matters affecting the Group
and that all risks and opportunities are
identified and considered by the correct
individuals, for example by one of our
supporting Committees, the Executive
Committee or management teams below.
The dedicated work of the Board
Committees is set out in each of
their respective reports which follow.
The relationships between the Board and
its sub-Committees, and the Executive
team and the business, are central to the
Group’s effective operation, and we
continually nurture these relationships to
ensure that all of our decisions are informed
and transparent. I believe this is an area in
which we have seen continued development
throughout the year, as demonstrated
through inviting members of senior
management to attend and present at Board
meetings, and through specific engagements
such as site visits, technical teach-ins and the
strategy development process.
Risk
Over the last year, focus has again been
given to the iterative development of SSE’s
Risk Management Framework, and the wider
review of the Group’s system of internal
Board members and meetings
Member
Position
Richard Gillingwater
Chairman
Gregor Alexander
Finance Director
Jeremy Beeton
Independent non-Executive Director
Katie Bickerstaffe
Independent non-Executive Director
Sue Bruce
Independent non-Executive Director
Crawford Gillies
Senior Independent Director (SID)
Peter Lynas
Helen Mahy
Independent non-Executive Director
Independent non-Executive Director
Alistair Phillips-Davies Chief Executive
Member
since
Attended/
scheduled
2007
2002
2011
2011
2013
2015
2014
2016
2002
7/7
7/7
7/7
7/7
7/7
7/7
7/7
7/7
7/7
control. Further information on our work
and responsibilities in these areas can be
found on pages 24 to 27 in the Strategic
Report and within our section on
accountability on pages 70 to 75,
which includes a description of the
work of the Audit Committee.
Talent and succession
As outlined in the Nomination Committee
Report there have been no changes to the
Board this year, as we have continued to
benefit from our experienced and diverse
membership. Increased focus has however
been provided to reviewing the internal
talent pipeline, including the work which
is being carried out to support inclusion
and diversity throughout the Group. During
the year I had the opportunity to attend a
number of employee events, including one
which was held at our new visitor centre in
Pitlochry, and these allowed me to meet and
understand the issues which are important
to our workforce. We have a highly skilled
and committed group of people who
underpin the operations and future success
of the Group and as a Board we have a
responsibility to ensure the appropriate
opportunities, development and support
are available to them.
Stakeholder engagement
Energy is an essential requirement of
everyday life and SSE’s role in its generation,
transmission, distribution, and supply means
that as a Company, we must interact with,
and acknowledge the potential impact of our
operations upon a wide range of stakeholders.
In our duty as a responsible Company each
matter considered by the Board therefore
has to be in the context of relevant economic,
social and environmental factors, and in order
for the Board to understand what these are,
constructive engagement is required. The
ways in which this is achieved is explained
on pages 76 and 77 and includes the use of
dedicated advisory panels and customer
forums and also meetings with shareholders
and the relevant regulatory bodies.
Corporate culture
Corporate culture within SSE is an area which
has received our specific focus this year,
although the behavioural aspects and impacts
of agenda items have long been an integral
part of the Board’s discussion. Our work in this
area has included the launch of a new guide
to ethical business conduct for SSE
employees, as well as updating the Matters
Reserved for the Board and the terms of
reference of the Board’s Committees, to
explicitly consider the impact of decisions
on culture and to reinforce our ultimate
responsibility to set the tone for the Group.
We have agreed that our initial work in this
area has formed a platform for further
initiatives in 2017/18, with culture being an
area which we will continue to monitor and
assess, in recognition of its fundamental role
in the successful and responsible delivery
of our strategic priorities, our values and our
financial objectives.
I hope you find the report that follows
an interesting explanation of our work
throughout the year and supportive of
our continued commitment to deliver
transparent and sustainable value to
our shareholders.
Richard Gillingwater CBE
Chairman
16 May 2017
55
3.2. Directors’ Report1. Board of Directors
Career, skills and
competencies
Richard Gillingwater CBE
Chairman
Alistair Phillips-Davies
Chief Executive
Gregor Alexander
Finance Director
Richard has varied
experience with a wide
range of organisations
giving him an excellent
understanding of the policy
and regulatory framework
within which SSE operates,
as well as broad financial
skills and City experience.
For over 20 years he worked
in corporate finance and
investment banking, latterly
as Chairman of European
Investment Banking at
CSFB. He served as
Chief Executive of the
Shareholder Executive and
was Dean of Cass Business
School, London. He has
extensive board experience
and was previously Senior
Independent Director of
Hiscox Ltd and a non-
Executive Director of Wm
Morrison Supermarkets plc.
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.
Alistair has 20 years’ service
with the Group, where he
has held leadership roles in
the Wholesale, Retail and
Enterprise areas, as well
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. Prior to
1997 he worked for HSBC
and National Westminster
Bank in corporate finance
and business development
roles in London and
New York.
Gregor is a Chartered
Accountant and has over
25 years’ service with the
Group, joining Scottish
Hydro-Electric plc in
1990. He therefore has
the benefit of experiencing
much change in the energy
sector and his detailed
understanding of the
different aspects of the SSE
Group and its operating
environment is invaluable.
He was SSE’s Group
Treasurer and Tax Manager
before being appointed as
Finance Director in 2002.
The responsibilities of this
role were first expanded
in 2010. He has been
instrumental in many of
SSE’s major investments
including SSE’s investment in
SGN. Prior to 1990, Gregor
worked for Arthur Andersen.
Crawford Gillies
Senior Independent
Director
Crawford’s varied
career means he brings
extensive commercial
and governance knowledge
to the Board including
particular expertise in
matters of finance and risk
management. Crawford
has over three decades
of business experience
in a variety of organisations
and extensive public
company board experience,
making him an excellent
appointment as Senior
Independent Director.
Crawford’s business
experience includes working
with major companies in
the UK, Europe and North
America across multiple
sectors. He has also held
public sector posts in the
UK, including Chairman
of Scottish Enterprise for
7 years until 2015.
Date of appointment
Non-Executive Director
since May 2007.
Chairman since July 2015.
Executive Director since
January 2002 and Chief
Executive from July 2013.
Finance Director since
October 2002.
Non-Executive Director
since August 2015.
Committee membership
Key current appointments
Nomination Committee
Audit Committee
Safety, Health
and Environment
Advisory Committee
Remuneration Committee
Committee Chair
Katie Bickerstaffe
N/A
N/A
Chairman of Henderson
Group plc.
Member of the Accenture
Global Energy Board.
Non-Executive Director of
Stagecoach Group plc.
Non-Executive Director
of Barclays plc.
Senior Independent
Director of Helical Bar plc.
Vice President of
Eurelectric.
Chairman of Scotia Gas
Networks Ltd.
Pro-Chancellor of Open
University.
Non-Executive Director
of The Edrington Group
Limited.
Crawford Gillies
Jeremy Beeton
Alistair Phillips-Davies
Dame Sue Bruce
56 SSE plc Annual Report 2017
56 SSE plc Annual Report 2017
Directors’ Report – Corporate governance
Jeremy Beeton CB
Non-Executive Director
Katie Bickerstaffe
Non-Executive Director
Dame Sue Bruce DBE
Non-Executive Director
Peter Lynas
Non-Executive Director
Helen Mahy CBE
Non-Executive Director
Jeremy is a Civil Engineer
and brings extensive
knowledge of project
management and
related areas including
safety, complex project
structures and contractual
negotiations. Jeremy’s
career comprises over 40
years in managing large,
multi-site projects. He has
worked with a wide range
of organisations including
governments, and both
private and public
companies. Jeremy held
various positions at Bechtel
Ltd., Haden Maclellan
Holdings PLC and Cleveland
Bridge Engineering UK
Middle East Ltd. He was
the Director General of
the UK Government
Olympic Executive
from 2007 to 2012.
Katie has experience in a
variety of roles in different
customer-facing retailers
and fast-changing markets
and has an invaluable
understanding of customers’
needs. This combined
with her experience in
HR, marketing and other
business areas gives her a
wide-range of skills relevant
to SSE’s business. From 2008
to 2012, Katie 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’s extensive career in
the public sector enhances
the diversity of the Board;
she held a variety of roles
in local government in
a career which spanned
40 years. Her operational
experience of leading
organisations, with large
numbers of employees,
significant assets,
construction projects and
an important place in the
community they serve,
make her an excellent
source of knowledge on
these matters for the Board.
She was 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.
Peter has over 30 years
of business experience
spanning all areas of
finance. He is a Fellow of
the Chartered Association
of Certified Accountants
and brings up to date
financial knowledge and
experience to the Board
as well as general business
knowledge and board
experience. In 1998 he
was appointed Finance
Director of Marconi
Electronic Systems prior to
the completion of the British
Aerospace/Marconi merger
and also 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, including
relevant sector experience,
puts her in the ideal position
to understand the legal, risk,
compliance, commercial
and governance issues SSE
faces. She has significant
public company board
experience in a number
of sectors in the UK and
abroad and brings a detailed
knowledge of, and interest
in, the areas of inclusion
and diversity. She was
Company Secretary and
General Counsel for both
Babcock International
Group PLC and more
recently National Grid plc.
Helen was also a non-
executive Director of
Stagecoach Group plc.
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 March 2016.
Chairman of Merseylink Ltd.
Senior Independent
Director of WYG plc.
Non-Executive Director
of John Laing Group plc.
Non-Executive Director of
OPG Power Ventures plc.
Chief Executive, UK and
Ireland Dixons Carphone
plc.
Chair of the Royal Scottish
National Orchestra.
Group Finance Director
of BAE Systems plc.
Chair of Young Scot.
Electoral Commissioner,
The Electoral Commission.
Member of the BAE
Systems Inc Board in
the US.
Gregor Alexander
Peter Lynas
Richard Gillingwater
Chairman of The
Renewables Infrastructure
Group Limited.
Non-Executive Director
of Bonheur ASA.
Non-Executive Director
of MedicX Fund Limited.
SVG Capital plc (until
approximately 2017).
Helen Mahy
5757
3.2. Directors’ Report1.3.2. Directors’ Report1.
Leadership
SSE’s Corporate
Governance Framework
The Board, Executive Committee and their
respective sub-Committees, together with
the relationships between them, make up
SSE’s Corporate Governance Framework
which is outlined in the diagram below. The
Corporate Governance Framework is set by
the Board and has been carefully designed
to ensure that decision-making within SSE is
transparent, well-informed and involves the
people with the correct skills and experience.
Central to this is a close working relationship
between the Board and the senior
management team, and a mutual respect
for the knowledge held at each level. In
recognition of the current pace of change
within the energy sector, the Corporate
Governance Framework is subject to
periodic review to ensure that all matters
relevant to the Group’s operations are able
to be identified and receive adequate focus.
Board role and relationships
SSE has a responsibility to meet its objectives
and operate sustainably for the benefit of
all of its stakeholders, which includes
upholding the commitments it has made
to its shareholders and customers through
its financial objective and core purpose. It is
the role of the Board to ensure that these are
achieved, and this is supported primarily
through setting the Group’s longer term
strategy, and providing the leadership and
support necessary to ensure that it can be
delivered responsibly within accepted levels
of risk. Implementation and delivery of this
strategy is managed through the careful
delegation of authority in line with the
Corporate Governance Framework, with
oversight being retained through regular
reporting, which includes an ongoing
dialogue between the Board, the Executive
Committee, their respective sub-Committees
and other key individuals within the business.
The individual and collective powers and
duties of the Board of Directors in managing
the Company are ultimately determined
by a combination of legislation and the
Company’s Articles of Association. As
outlined above, in order to discharge its
duties effectively the Board has the ability
to delegate this authority further, which may
include to any of its sub-Committees or the
Executive Committee. There are however
limits to this delegation as determined by
a formal Schedule of Matters Reserved for
the Board.
SSE’s Corporate Governance Framework
Board of Directors
Responsible to shareholders for the effective leadership and long-term success
of SSE, including its overall strategic direction, values and governance.
y
t
i
r
o
h
t
u
a
f
o
n
o
i
t
a
g
e
l
e
D
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.
– Significant changes in accounting policy and practice.
– The Group’s corporate governance, risk management
and system of internal control.
– Changes in capital structure of the Group.
– Board and Committee membership.
– Succession planning and people strategy.
– Major acquisitions, mergers, disposals and
capital expenditure.
– Approval of key policies.
– Significant legal and regulatory matters.
Nomination
Committee
Audit
Committee
Safety, Health
and Environment
Advisory
Committee
Remuneration
Committee
See pages 67 to 69.
See pages 70 to 75.
See pages 78 and 79.
See pages 80 to 97.
Group 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.
Wholesale
Management
Committee
Networks¹
Management
Committee
Retail
Management
Committee
Enterprise
Management
Committee
Group Capital
Allocation
Committee
Group Large
Capital
Projects
Committee
Group Safety,
Health and
Environment
Committee
Group
Governance
Culture and
Controls
Committee
1
The Networks Management Committee has dual reporting lines and also reports into the SSEPD Board, which has oversight of the Networks business.
58 SSE plc Annual Report 2017
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t
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a
s
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t
a
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Directors’ Report – Corporate governance
These reserved matters generally involve
decisions surrounding the governance, major
policies, structure, direction and values of the
Group. Both the Schedule of Matters Reserved
for the Board and Articles of Association are
available to view on the SSE website.
The four Committees of the Board support
it in its role by providing detailed focus to their
specific areas. This support can involve
assessing new developments or technical
matters, and may be followed by a
recommendation to the Board or taking
a decision within the relevant delegated levels
of authority. The remit and authority of each
Committee is determined by its terms of
reference; these are set by the Board, reviewed
regularly and available in full on the SSE
website. Further information on the work of
each Committee can be found in the 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 role and subject
matter of the Committee’s work, such that
membership complements any technical
expertise required. At meetings of the Board,
the Committee Chairman is responsible for
providing an update on key matters requiring
Board consideration.
The Executive Committee
The membership of the Executive Committee
comprises: the two Executive Directors; and
the Managing Directors of Wholesale,
Networks, and Retail – 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 is collectively responsible for
implementing Group strategy through the
operational management of each of SSE’s
businesses, and meets monthly in line with
an agreed meeting calendar. During 2016/17
the Executive Committee reviewed and
refreshed its reporting sub-Committee
structure to further support effective and
efficient decision-making.
Board composition, individual
roles and responsibilities
The composition of the Board has remained
unchanged during the reporting year and is set
out in the table on page 55. Each appointment
to the Board is made on the recommendation
of the Nomination Committee, and is the
result of a combination of comprehensive
succession planning and formal and rigorous
Board composition and roles
Position
Individuals
Role and responsibilities
Chairman 1,2
Richard Gillingwater
r
i
a
h
C
t
n
e
d
n
e
p
e
d
n
I
e
v
i
t
u
c
e
x
E
Senior
Independent
Director 1,3
Non-
Executive
Directors 1
Crawford Gillies
Jeremy Beeton
Katie Bickerstaffe
Sue Bruce
Peter Lynas
Helen Mahy
Chief
Executive 2
Alistair Phillips-
Davies
Finance
Director
Gregor Alexander
– 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.
– providing a sounding board for the Chairman;
– serving as an intermediary to other Directors when necessary; and
– being available to shareholders if they have 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.
– scrutinising, measuring and reviewing the performance of management;
– constructively challenging and assisting in the development of strategy;
– providing support to the Executive Committee surrounding the implementation of strategy;
– reviewing 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.
– 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 SSE’s 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.
– 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
– representing SSE externally to stakeholders, shareholders, customers, suppliers, regulatory and
government authorities and the community.
Sally Fairbairn
y Company
Secretary
r
a
t
e
r
c
e
S
– compliance with Board procedures;
– advising and keeping the Board up to date on corporate governance developments;
– facilitating the Directors’ induction programmes and assisting with professional development;
– considering Board effectiveness in conjunction with the Chairman; and
– providing advice, services and support to all Directors as and when required.
1
The Chairman, Senior Independent Director and 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 letters of appointment are available for inspection on the SSE website.
2 The roles of Chairman and Chief Executive are separate and clearly defined. These are set out in writing and were reviewed during the year with the approval of the Board Charter.
3 The Board appoints one of the non-Executive Directors to be the Senior Independent Director, who in addition to the responsibilities of non-Executive Director has specific roles
as outlined above.
59
3.2. Directors’ Report1. Leadership continued
external searches. Further information on
the work of the Nomination Committee,
including in relation to succession planning
can be found in its report on pages 67 to 69.
The individual Directors possess a broad
range of skills and insight having been
recruited from backgrounds which are
diverse in terms of career and experience.
Collectively they provide SSE with leadership
which is balanced, focussed and supports
the creation of value for the Group. In
addition to knowledge of business matters,
each Director through their individual
experience is able to apply independent
thought and judgement to decisions
surrounding SSE’s range of operations and
investments within the energy sector.
Further information on the background,
competencies, current tenure, Committee
membership and other appointments of
each Director can be found in the individual
Biographies on pages 56 and 57.
To ensure the Board functions effectively
and in the best interests of the Group, the
Chairman, Senior Independent Director,
non-Executive Directors and Executive
Directors all have individual responsibilities
as determined by their role. An overview
of each role and details of the individuals
assuming each position in 2016/17 is
provided on page 59.
Signature practices timeline
Board relationships
The Board as a whole have a collegiate
working relationship founded on trust and
a mutual duty to promote the long-term
success of the Group. In order to effectively
discharge their roles, the Chairman and Chief
Executive maintain a regular dialogue out with
the Boardroom, which recognises and
respects the division of responsibilities
between their positions. In addition, the
non-Executive Directors are provided with
direct channels of communication to any of
the senior management teams across SSE.
This allows them to ask questions, request
information and further their understanding
of specific areas as required. By fostering
strong relationships between the Board and
management, the non-Executive Directors
can respectfully challenge, support and
guide executive decision-making on behalf
of the Group.
As part of the ongoing process to preserve
the integrity of the Board-level relationships,
the Chairman meets the non-Executive
Directors individually throughout the year
and also collectively as a group without the
Executive Directors present – in 2016/17 two
meetings were held. The purpose of these
meetings is to provide the opportunity to
discuss matters without executive input and
to raise any concerns as required.
Board meetings and activity
In line with the scheduled meeting calendar,
the Board met seven times in 2016/17 with
full Director attendance at each meeting as
detailed on page 55. In addition, a Board
update call is held in most alternate months
to ensure that the Directors remain fully
informed of any business developments and
can consider any new issues or opportunities
as they arise. Arrangements are also in place
should a Board decision be required to be
taken out with the scheduled meetings
and calls.
Scheduled meetings of the Board adopt a
number of signature practices as outlined
in the timeline below, and begin with the
setting of the annual Board Planner prior
to the reporting year. The process which
follows ensures that significant focus is
given to each of the strategic priorities which
have been agreed when setting the Group’s
Strategic Framework. As outlined on pages 12
and 13 of the Strategic Report these are: the
operation of a balanced range of businesses
in core markets; a commitment to efficient
operations; and disciplined investment. A
number of matters considered by the Board
during 2016/17, including in relation to these
priorities are set out in the table opposite.
Start of reporting year
Before the meeting
Annual Board
Planner
The Annual Board
Planner is set in support
of SSE’s strategic priorities
and reporting timeline,
and ensures that flexibility
is retained. Amongst
other matters, each of
the Group’s business
areas is subject to a
deep dive throughout
the calendar year.
Meeting locations
The SSE site at which
each Board meeting is
to take place is agreed
and colleague
engagement at both
senior management
and operational level
is arranged.
Agenda
The final form agenda is
agreed by the Chairman,
Chief Executive and
Company Secretary
in alignment with the
Group’s reporting
timeline and in
consideration of: the
status of ongoing
projects; new investment
opportunities; any risks
and challenges which
have been identified;
external developments
relevant to the Group;
and stakeholder
considerations.
Meeting pack
The meeting pack is
issued to all Directors
and uploaded onto an
electronic Board portal
in advance to allow
sufficient time to review
the matters which are
to be discussed.
60 SSE plc Annual Report 2017
Evening before
the meeting
Board dinner
A business dinner at
which a range of topics
are presented, such
as: financial markets;
regulatory matters; and
the political landscape,
is held in advance of
each full Board meeting.
These may be attended
by external guests and
key stakeholders.
Board Committees
One or more of the
Board Committees may
arrange to meet in the
day or evening before
a full Board meeting.
Any matters requiring
Board consideration are
then raised during the
report back from the
Committee Chair the
following day.
Board meeting
Post meeting
Standing items
Each Board meeting
opens by reflecting upon
safety performance, and
the Directors provide
feedback on any site
visits which have been
conducted. Standing
updates include reports
from the: Chief Executive;
Finance Director;
Managing Directors
of each business and
key support functions.
Business attendees
One member of the
Executive Committee
is invited to attend each
meeting of the Board
in full. In addition, during
2016/17, 42 individuals
from within the business
presented to the Board.
Employee engagement
The Board meet with
individuals within the
business at the respective
meeting sites.
Feedback
Any comments on
the administrative or
operational aspects of
the meeting, and any
further information
requested by the Board
are provided as
appropriate.
Minutes and actions
Minutes and matters
arising from the meeting
are produced and
circulated to the
Directors for review
and feedback.
Directors’ Report – Corporate governance Board activity
Business areas
Group
Compliance and
Governance
Aspects of compliance were considered in relation
to all business areas. For example:
– the results of internal compliance audits;
– various network regulation and compliance
Board agenda items in the year included:
– a review of Committee membership;
– the review and approval of the Board Charter;
– an update on the government’s Governance
matters including price control reporting, and
the commitments made following Ofgem’s
investigation into SSE’s Connections business; and
– compliance with the CMA’s final recommendations
Green Paper;
– approval of SSE’s Group Policies;
– a review of internal control and risk management; and
– updates on the development of a new Group-wide
following their competition enquiry into GB
energy markets.
database documenting relevant legislative
and regulatory obligations.
Safety, Health
and Environment
(SHE)
As noted in the signature practices above, SHE performance is a standing item at the start of each Board meeting,
and feedback from the Safety, Health, and Environment Advisory Committee is also routinely provided. In addition,
specific updates were considered by the Board during the year surrounding: case details of the more serious safety
incidents which had been reported which included one contractor fatality in 2016/17; SSE initiatives to improve SHE
performance including internal SHE communications; and ongoing SHE enforcement actions.
Technology
A number of business specific technology developments
were considered by the Board during the year.
– For Wholesale, these focussed on technology
The Board received general updates on:
– the SSE IT security programme; and
– investment in technology to enable
advances impacting new generation opportunities.
mobile working.
Stakeholders
Culture
Commercial
– For Networks, updates were provided on how
the business aims to use technology to improve
compliance, efficiency and accuracy of data.
– For Retail, these included: decisions on system
development; connected homes; and investments in
digital, as well as updates on the smart meter roll out.
The Board considered the range of stakeholders relevant
to each business when taking a number of key decisions.
– In Wholesale, investment decisions in new projects
such as the Beatrice offshore wind farm, considered
the impact on employees, the environment and the
wider supply chain.
– In Networks, the best interests of customers and
Ofgem’s principles and objectives were considered
when reviewing performance.
– In Retail, customers were the focus when
considering: the domestic electricity tariff change;
reviewing performance against SSE’s treating
customers fairly objectives; and reviewing
sales-related standards and practices.
At a Group level, the Board routinely received
shareholder feedback and considered all stakeholders
when approving key external reports and statements,
including the Annual Report.
The Board was also updated on SSE’s engagement with
other stakeholders for example: the Rating Agencies;
Ofgem; and political representatives.
As noted on page 62 this was considered explicitly by the Board during the year. However, implicitly, culture
is also a key element within other areas of Board work, which over the period has included: changes in senior
management; feedback from the Nomination Committee on inclusion and diversity, and leadership, development
and succession; the SSE Group Policy environment; SSE’s guide to ethical business conduct; and the focus on
efficiency and effectiveness through improved organisation design and governance.
Commercial opportunities, decisions and developments
in each business were considered by the Board during the year.
These included investment decisions on:
– Beatrice offshore windfarm;
– Ferrybridge Multifuel 2;
– Stronelairg onshore windfarm;
– SSE’s bids into the GB Capacity auctions; and
– ceasing development of a replacement customer
service system.
At a Group level, Board activity included:
– the decision to sell part of SSE’s equity stake in SGN
including the proposal to return £500m in proceeds
to shareholders by way of a share buyback; and
– a review of efficiency and effectiveness of SSE’s
business operations.
Finance
Financial performance is a standing item on the Board agenda throughout the year. In addition, the following items
were considered in the period: approval of the interim and full year financial statements and the Annual Report;
approval of the distributable reserves in respect of the interim dividend; approval of the 2017/18 budget; an update on
SSE’s pension position; SSE’s funding position and approval of the issuance in March 2017, of new hybrid securities.
61
3.2. Directors’ Report1. Leadership continued
Strategy session
In June 2016 the Director of Strategy
Development and Head of Strategic Projects
facilitated a comprehensive strategy session
spanning two days, which was attended by
the Board and all members of the Executive
Committee. The purpose of the session was
to enable the Board to refine the focus of
the Group’s ongoing strategic development,
by using the conclusions which had been
drawn from the 2015 strategy session
as a platform for review. In conducting
its assessment the Board considered: the
Executive Committee’s view of the Group’s
strategic position; the planned focus of
any growth in the year ahead; and the
continued validity of any underlying strategic
assumptions. Following an in depth debate
and discussion of each of these areas, the
Board agreed any changes and actions that
were required in relation to the Group’s
existing strategic priorities, to ensure that the
overall Group and business level strategies
would continue to support the delivery of
SSE’s core purpose and financial objective.
Corporate culture in SSE
In support of the iterative strategy
development process, areas for further Board
consideration throughout the year were
identified and an annual strategy session for
2017 was again agreed to assess progress.
Culture
Following the release of the FRC’s report
‘Corporate Culture and the Role of Boards’,
the Board took the opportunity during the
reporting year to specifically consider the
existing culture within SSE and identify the
different culture related activities which help
to define it. The Board believes that a healthy
business culture is one which is inclusive and
diverse and which encourages employees to
make a positive difference for customers and
SSE’s other stakeholders. The Board
recognise their responsibility to lead by
example and also ensure that there is an
appropriate framework of control for
culture-related issues. One of the foundations
for this is the SSE SET of values, which was
adopted by the Board more than 10 years ago
and following periodic review, is considered
to remain an appropriate driver and
commitment to doing the right thing.
The SSE SET of values binds attitudes and
behaviours and underpins the Employee
Rules and the guide to ethical business
conduct for SSE employees which must be
adhered to. As a platform for ongoing work
in this area, the Board endorsed the below
depiction of culture recognising that in
addition to documented practice, culture
is embedded in, and is central to, every aspect
of operational performance and decision
making within the Group. The Board agreed
that whilst many of the existing key
performance indicators provide insight in
respect of existing values, attitudes and
behaviours, future work and assessments
based on objective evidence should be
carried out with structured and targeted
plans to address any shortcomings. A number
of actions which centre on reinforcing and
reviewing existing culture related activities
and initiatives were agreed by the Board,
and will be monitored throughout the
course of 2017/18.
Giving shareholders a return on their
investment through paying dividends
Meeting the current and future
needs of customers
Promoting success of the company
in line with Section 172 of the
Companies Act 2006
Earning returns greater
than the cost of capital
A combination of values,
attitudes and behaviours
Safety, Service, Efficiency,
Sustainability, Excellence, Teamwork
‘Doing the right thing’ A guide
to ethical business conduct
Proper and professional
performance of duties
Lead by example and take
a responsible approach
62 SSE plc Annual Report 2017
Directors’ Report – Corporate governance Governance case study
Decision to sell a 16.7% equity stake in Scotia Gas Networks Limited (SGN)
SSE’s acquisition of a 50% share in SGN in 2005 took the total net Regulated Asset Value (RAV) of its economically-regulated
businesses to just over £4bn. By 2015, that had increased to almost £7.5bn, with much of that increase attributable to Electricity
Transmission, in which a major – and continuing – programme of investment started in 2009, transforming its scale and scope.
Against this background of a transformed portfolio of economically-regulated networks businesses, in May 2016, SSE announced
its intention to consider options to crystallise some value for shareholders from its long term investment in SGN. This case study
sets out the related governance and process.
September 2015
The Board supported the potential sale of a stake in SGN and authorised initial discussions with SSE’s
Joint Venture partners. It was acknowledged that while Networks remain core to SSE’s strategy of
maintaining a balanced range of businesses, disposal of a stake would potentially provide an opportunity
to demonstrate value creation and refresh and re-balance SGN’s ownership facilitating more development
opportunities.
Consideration was also given to:
– the possible uses of proceeds, including the potential for a share buy back programme and for
investment in value creating projects; and
– the potentially positive impact of such a sale on SGN’s strategic opportunities.
February 2016
The Board delegated authority to the Executive team to progress options to sell a stake in SGN at or above
an agreed premium to RAV.
May 2016
The sales process, was outlined to and agreed by the Board. The following narrative was included in the
2015/16 Preliminary Results Statement.
June 2016
July 2016
‘SSE considers disposal of up to one third of its 50% equity stake in Scotia Gas Networks Limited, with any
proceeds being used to return or create value for shareholders. 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’.
Shareholder feedback, post results, was presented to the Board confirming that, SSE considering to sell
a stake in SGN was generally well received, as was the intention to return value to shareholders.
The 2016 AGM Notice of Meeting included the following wording within the explanatory notes for
proposed Resolution 18, Authority to purchase own shares:
This resolution renews the authority that was given at last year’s AGM, authorising the Company to
purchase its own ordinary shares in the market. In its preliminary financial results statement published on
18 May 2016 SSE stated it has decided to consider the disposal of up to one third of its 50% equity stake in
SGN Limited, with any proceeds being used to return capital to, or create value for, shareholders. Should
such a disposal take place in the year ended 31 March 2017 one option to return capital to shareholders
would be to use this authority, if approved, to purchase SSE’s own shares. Such purchases will only be
made if the Directors believe that to do so would result in an increase in the Group’s earnings per share
and would be in the best interests of shareholders generally. In this particular instance this method of
returning capital to shareholders could have the advantage of offsetting the EPS reduction resulting
from the potential disposal and reducing the total dividend outflow in future years.
This Resolution was approved by shareholders at the AGM with 99.04% of votes cast in favour.
September 2016
The Board were provided with an update on the SGN sale process and confirmed delegated authorities
for the potential transaction.
October 2016
The agreement to dispose of a 16.7% stake in SGN to wholly owned subsidiaries of the Abu Dhabi
Investment Authority (ADIA) was announced on 17 October 2016, with a headline consideration of £621m.
The sale was completed on 26 October 2016.
November 2016
The Board approved delegated authority to the Finance Director to return around £500m of the proceeds
to shareholders by way of an on-market share buy-back, expected to complete by December 2017.
The Board approved that the remaining £100m be directed to support the investment in the Stronelairg
onshore windfarm development. The Board noted that both uses of proceeds would mitigate the impact
of the sale on SSE’s Earnings per Share.
The Board approved the announcement of the intended use of proceeds in the Interim Results Statement.
63
3.2. Directors’ Report1. Effectiveness
Board evaluation
In 2015/16 the effectiveness of the Board
was assessed through a formal and rigorous
external evaluation process, the results of
which were used to develop actions and
agree areas for improvement in 2016/17. For
this reporting year an internal evaluation was
conducted, and was specifically designed
to allow any progress made throughout the
year to be measured. As well as confirming
the areas in which the Board has performed
well, or in which improvements have been
made, the evaluation identified areas of
focus for 2017/18. An overview of the
evaluation process is set out below and
details of the findings are detailed opposite.
During the year each Director also 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.
Details of the individual Committee
evaluations which were conducted can be
found in their respective reports that follow.
Director independence
and conflicts
The continuing independence of each
non-Executive Director is considered
through: the annual Board evaluation
process, which includes the individual
Directors’ evaluation; and the Nomination
Committee’s review of the Directors’
conflicts of interest. The Board recognises
the circumstances as set out in the Code
which could compromise the independence
of the non-Executive Directors and takes
these, amongst others matters, into account
when forming their view.
Each Director has a duty to disclose any
actual or potential conflict of interest to
the Board should it arise, which the Board
must then review and approve if appropriate
to do so. A Director always abstains from
authorising his or her own position. The
Company Secretary records any notifications
made, along with the Board’s response in
the Conflicts of Interest Register, which
is reviewed annually by the Nomination
Committee. This annual review is accompanied
by an assessment of the other appointments
held by each non-Executive Director.
Following their review, the Nomination
Committee provide a recommendation to
the Board as to any action that is required
and a view as to the continuing independence
of each non-Executive Director.
The Board confirmed all of the non-Executive
Directors remain independent, and note that
in line with the recommendations surrounding
tenure, no non-Executive Director has served
on the Board for more than nine years from
the date of their first election. The Board also
consider that the Chairman was independent
on appointment.
Knowledge
Throughout the reporting year the Directors
develop and refresh their knowledge
through various training sessions and
a number of internally and externally
facilitated engagements, with individual
development needs being reviewed as part
of the annual Board evaluation process.
Directors are encouraged to request
additional information and support at
any time as required, with the necessary
resources being made available to them.
There is an agreed procedure for the
Directors to take independent professional
advice at the Company’s expense should it
be required, with any advice being obtained
made available to the other members of the
Board. This procedure was not used during
the year.
As part of their development in 2016/17,
all Board members took the opportunity
to participate in site visits and spend time
with teams at different locations across each
of SSE’s business areas. These visits were
either organised in response to an identified
training requirement, or due to having been
an area of particular interest to the individual
Director. Whilst these engagements are
primarily to facilitate learning, they also
provide the Board with visibility of talent at
different levels and insight into the culture
within the business. Following any such site
visits, feedback is always provided at the next
Board meeting.
Additional knowledge is also gained through
the provision of teach-ins, and updates
and briefings which cover areas relevant
to the Group. These can involve deep dives
into technical business areas, presentations
on macro-economic, political and
regulatory developments, and training
in corporate matters.
Board and Committee evaluation process
Step 1
A meeting was held with Boardroom Dialogue
Review, plan and design
Ltd, the Chairman and Company Secretary,
at which the scope and format of the
The Chairman and Company Secretary
evaluation process was decided.
reviewed the actions which had been
agreed following the external evaluation
in 2015/16, in consideration of which,
a comprehensive questionnaire
was designed.
Step 1
Step 4
Boardroom Dialogue Ltd
attended the Board meeting
Report and agree
in January and presented the
The Chairman and Company
findings of the evaluation
process. The recommendations
Secretary prepared a report on the
made were considered by the
findings, which was presented to the
Board and actions identified for
the coming year.
Board along with a number of proposed
actions for consideration and approval
as appropriate.
S
t
e
p
4
64 SSE plc Annual Report 2017
External Evaluation Process
S
t
e
p
Step 2
Issue questionnaire
The questionnaire was issued to
each of the Directors for
comment and feedback.
Individual interviews were held by Boardroom
Dialogue Ltd with each of the Directors, the
Company Secretary, Deputy Company
Secretary and members of the
Executive Committee. A review of
Board documentation including
meeting packs and agendas
from the past 12 months was
also conducted.
2
Evaluation
Process
The findings of the evaluation
process were compiled and
reported to the Board via an
in-depth report.
Step 3
Compile and analyse
The individual responses were
compiled by the Company Secretary
and an in-depth analysis of the
comments provided was carried out.
p 3
S t e
Briefing
and
Scope
Interview
and
Review
Result
Collation
Discussion
and
Objectives
Step 1
Step 2
Step 3
Step 4
Directors’ Report – Corporate governance
Board evaluation findings
Actions for 2016/17
Progress made
Actions for 2017/18
Enhancing Board engagement
Monitor the agenda setting process to
ensure continued linkage to strategy.
A dedicated annual strategy session was
again held, which received positive feedback
surrounding year on year improvement.
The time allocated to strategic discussions
throughout the year has also increased.
Continue to assess the opportunities
to enhance strategic discussion and
debate throughout the year.
Review the allocation of time for site
visits including the process for reporting
back to the Board.
The number of site visits has increased
during the year, and each meeting of the
Board now includes ‘site visit feedback’
as a standing item.
Identify any areas of the business which
have not yet been visited by the Board and
consider increasing the number of visits
centred on safety.
Consider increasing the number
of meetings of the non-Executive
Directors in the Board calendar.
In addition to the normal diarised non-
Executive meetings, the non-Executive
Directors met over dinner as part of the
strategy session.
Continue to build both dedicated
non-Executive and Board engagement
time into the formal meeting calendar.
Engaging in Board development
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.
Improving meeting administration
Explore options for streamlining the
format and volume of Board and
Committee meeting packs, with
continued timely dissemination
of all documentation.
Considering long-term succession
planning
This was progressed during the year through
non-Executive Director teach-ins covering:
Energy Portfolio Management; aspects of
Financial Reporting; investing in digital in
Retail; and IT security.
Opportunities for further Board
development, both SSE specific and
more generally, will be monitored and
progressed as appropriate in 2017/18.
Technical presentations in relation to
financial reporting were also provided
to the Audit Committee.
The content and format of the agenda and
Board meeting packs was refreshed during
the year, with key matters and supplementary
information being clearly identifiable.
Meeting administration will be continually
monitored but no specific actions have
been identified in this area for 2017/18.
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.
Improvements were made in respect of
succession planning and talent development
and the Nomination Committee considered
these in detail throughout the year, reporting
back to the Board.
Receive feedback on planned engagement
between the Nomination Committee and
HR and consider ways in which the visibility
of the talent pipeline can be increased.
Continue to challenge and strengthen the
work on inclusion and diversity.
New actions for 2017/18
Focussing on corporate culture
Corporate culture is implicit in all areas
identified above and runs through all of
the Board’s work and considerations.
Following specific questioning and feedback
through the Board evaluation process, the
Board agreed that work in the area of culture
should be explicitly supported through the
reporting and monitoring of a number of
existing and new initiatives including
supporting data.
65
3.2. Directors’ Report1. Effectiveness continued
Examples of some of the different
development opportunities in which
the Directors participated throughout the
year, including details of specific site visits,
teach-ins and updates and briefings are
outlined below.
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.
Director induction
On joining the Board, all non-Executive
Directors receive an induction tailored to their
individual requirements. The comprehensive
programme is facilitated by the Chairman
and Company Secretary and involves
briefings and meetings with key individuals
from each business area and supporting
Group functions. During the induction
programme each Director is invited to
identify areas in which they would like
additional meetings or further information.
Director knowledge and Board engagement
Site visits
To gain a better understanding of: operational matters; safety considerations; and key performance drivers.
Wholesale
Site visits included:
– the coal fired power station
Networks
Site visits included:
– the Beauly-Denny
Fiddlers Ferry;
– the gas fired power stations
Medway and Peterhead; and
– the onshore windfarm sites
Clyde and Griffin.
and Caithness Moray
Transmission projects;
– the Networks Control
Room in Perth; and
– operational depots in
Inverness and Portsmouth.
Retail
Site visits included:
– a number of SSE’s call
centres; and
– customer services
sessions in Perth.
Enterprise
Site visits included:
– an on site meeting with
one of SSE’s contracting
teams in Inverness.
Teach-ins and one to one meetings with management
To provide a better understanding of: technical matters; areas specific to the relevant Board Committees; and key business initiatives.
Engagements included:
– an Energy Portfolio Management training session covering commodity markets and energy trading;
– a review of the developments in SSE’s digital customer service offering;
– an insight meeting with the Business Energy team on location;
– sessions with Finance and Internal Audit covering broader Audit Committee matters; and
– meetings with HR to review the ongoing inclusion and diversity work.
Updates and briefings
To provide a better understanding of: external developments relevant to the Group; and specialist corporate areas.
Engagements included:
– an overview of the political, regulatory and legal landscape following the EU referendum from members of SSE’s legal panel;
– a review of recent corporate developments from legal and financial advisors;
– an update on the views of the investment community from SSE’s brokers; and
– a briefing on changing trends and developments from within the energy sector from SSE’s strategy team.
66 SSE plc Annual Report 2017
Directors’ Report – Corporate governance Nomination Committee Report
Members and meetings
Member
Richard Gillingwater
Gregor Alexander 1
Jeremy Beeton
Katie Bickerstaffe
Sue Bruce
Crawford Gillies
Peter Lynas
Helen Mahy
Position
Chairman
Executive Director
Non-Executive Director 2
Non-Executive Director 2
Non-Executive Director 2
SID
Non-Executive Director 2
Non-Executive Director 2
Alistair Phillips-Davies 1
Executive Director
Member
since
Attended/
scheduled
2008
2014
2014
2011
2014
2015
2014
2016
2013
4/4
2/2
4/4
4/4
4/4
4/4
4/4
4/4
2/2
The two Executive Directors ceased their membership of the Nomination Committee during the year.
1
2 All non-Executive Directors are considered to be Independent by the Board.
Dear Shareholder,
It has been another busy year for the
Nomination Committee, with four meetings
during the reporting period. These meetings
covered a number of matters, ranging
from Board membership to Group wide
people initiatives, which I believe to be
both supportive and representative of the
broad scope and forward looking nature
of our work.
In 2016/17 we again reviewed the
composition of the Board and its
Committees. Following our most recent
appointments of Helen Mahy and Crawford
Gillies – both of whom have now completed
their first full year as non-Executive Directors
– we have benefited from an overall increase
in the diversity of skills and experience at
Board level. As such, no changes to Board
membership have been made this year.
At sub-Committee level, the membership
of the Safety, Health, and Environment
Advisory Committee has been refreshed
following changes in the SSE senior
management team, and the membership
of the Nomination Committee has also
been updated. This was following discussion
with significant US shareholders, and in
recognition of the more stringent New
York Stock Exchange corporate
governance standards surrounding fully
independent membership.
Specific Nomination Committee focus has
been provided to a number of other key areas
including: succession; talent development;
and the inclusion and diversity of both the
SSE leadership team and the Group at large,
all of which are highlighted in the report
that follows. We also took the opportunity
throughout the year to consider and refresh
our terms of reference in recognition of the
pace of external change in the areas relevant
to our work.
Throughout 2017/18 we will again monitor
the membership and composition of the
Board and its Committees, and challenge
the senior management team to develop
the internal talent pipeline, so that together
they continue to support and promote the
success of SSE in the longer term.
Richard Gillingwater CBE
Chairman of the Nomination Committee
16 May 2017
67
3.2. Directors’ Report1. Effectiveness continued
Role and responsibilities
The Nomination Committee is responsible
for reviewing and identifying the leadership
needs of the Board, its Committees and
SSE’s senior management in order to support
the long-term success of the Group. The
specific remit of the Committee is set out in
its terms of reference, which were refreshed
during the reporting year, and details of the
Committee’s key considerations, principles
and objectives which inform its work can be
found in the diagram opposite.
Nomination Committee
activities in 2016/17
The Nomination Committee had four
meetings during the year and an overview
of the work carried out during the reporting
period is set out in the table below.
Nomination Committee responsibility
i o n s ,
t
a
r
e
si d
n
o
C
External
commitments
of Directors
p rinciples and objectiv
e
s
SSE’s culture
and values
Group strategy
Responsibility:
to review the structure,
size and composition of
the Board and senior
management.
Potential
conflicts of
interest of
Directors
Diversity
including
gender and
ethnicity
Balance
of skills,
knowledge
and
experience
Progressive
and well
managed
change
Rigorous
and
transparent
appointment
process
Oversight of
the executive
talent pipeline
Nomination Committee activity
Area of focus
Actions
Succession planning and talent development
– Monitor plans for succession
and refreshment of the Board
and senior management.
– Focus was given to the ongoing assessment of the succession pipeline for Board
and senior management positions, including a review of potential successors’
readiness and plans identified for their development.
– Reviewed senior appointments, both internal and external hires.
– Continued to monitor the acceleration of SSE’s female leadership pipeline.
– Out with the meetings a number of Committee members spent time with senior
leaders throughout SSE, providing an opportunity to observe the succession pipeline
in action. This included attending the SSE Leadership Conference and a senior
Wholesale team event.
– Updates were received on the HR team’s initiatives on inclusion and diversity. These
comprise measures to build a diverse and long-term pipeline of talented individuals
from a wide range of backgrounds, and initiatives to improve: social inclusion; female
representation; and ethnic representation.
– The Committee discussed the findings of a number of externally developed reports
including: the Hampton-Alexander Review; the Parker Report: the ethnic diversity of
UK boards; and various Government papers.
– Confirmed that all non-Executive Directors remain independent in line with the Code.
Inclusion and diversity
– Support inclusion and diversity
throughout SSE.
Director independence and conflicts
– Review the independence of all
non-Executive Directors.
– Review of declared and potential
– Made a recommendation to the Board for approval.
conflicts of interests of the Directors.
Committee and Board membership
– Review the Board and Board
Committee membership.
68 SSE plc Annual Report 2017
– Recommended changes to the membership of the Safety, Health, Environment,
Advisory Committee and the Nomination Committee.
– Recommended re-appointment of Sue Bruce as a non-Executive Director for a
further three years from 1 September 2016, and confirmed continuing membership
of the Audit Committee and the Safety, Health, Environment, Advisory Committees.
Directors’ Report – Corporate governance Performance
The performance of the Nomination
Committee was assessed as part of the
internal evaluation process, in which the
Board and its Committees participated
during the year. The evaluation was
conducted using a tailored questionnaire
and the responses highlighted positive
developments for the year under review.
It was noted in particular, that the visibility
of SSE’s talent pipeline and succession
planning had improved, and that this should
continue in 2017/18 with specific focus on
diversity, talent development and the wider
scope of the HR function.
Diversity
As well as maintaining an overview of
Group initiatives to improve diversity, the
Committee has a responsibility to consider
diversity in its broader sense when reflecting
upon the correct composition of the Board
and its Committees. In doing so, the
Committee considers the recommendations
and findings of external reviews which have
been undertaken in areas relevant to their
work. The SSE Board Diversity Policy also
continues to support the Committee in this
area, by setting out SSE’s approach to Board
diversity, and the principles which should be
applied when recruiting new individuals and
considering if any changes are required. The
Policy also ensures that recommendations
surrounding appointment continue to be
made on merit.
In 2016/17 the diversity of Board and senior
leadership positions within FTSE companies
continued to receive significant focus, and
the Committee have discussed and will
continue to monitor the implementation of
any initiatives as appropriate to support any
recommendations made.
In respect of gender diversity at Board level,
the Board and Committee were supportive
of the original work of the Davies Review,
and recognise the current recommendations
of the Hampton-Alexander Review for a
minimum 33% women’s representation
on FTSE 350 Boards by 2020. Female
membership of the Board is currently
in line with this at 33%.
A number of measures of the current diversity
of the Board are highlighted opposite and
further detail on the gender mix of SSE’s
employees is provided on pages 20 to 22
of this Strategic Report.
Composition
The membership of the Nomination
Committee comprises the five non-
Executive Directors and the Chairman
of the Board, who is also Chairman of the
Committee. The Company Secretary is
Secretary to the Nomination Committee.
The membership of the Nomination
Committee has always recognised and
been compliant with provision B.2.1. of the
Code, whereby a majority of the members
should be independent non-Executive
Directors. During the year and following
discussion with significant US shareholders,
the membership was updated to reflect
the New York Stock Exchange listing and
corporate governance standards, which
require Committee membership to be
fully independent. As a result the Executive
Directors, Alistair Phillips-Davies and Gregor
Alexander, stepped down from their
positions on the Nomination Committee.
Succession planning
During the reporting year, the Nomination
Committee continued to discharge its
responsibility for ensuring that the balance
of skills, knowledge and experience on
both the Board and its Committees remains
appropriate, such that they are able to carry
out their roles effectively. In reviewing the
composition of the Board and its
Committees, the Nomination Committee
has due regard for succession planning
and the options for future membership
refreshment should it be required.
Following the appointment of Crawford
Gillies and Helen Mahy in the previous
financial year, the Nomination Committee
was satisfied that no further changes to
Board membership were required in 2016/17.
Before a Board appointment is made,
the Nomination Committee applies the
considerations, principles and objectives
outlined in the diagram on page 68, and
in addition, when appointing a new non-
Executive Director, engages the services
of a professional search firm specialising
in Board-level recruitment. The process
generally involves interviews with a number
of candidates and in line with Board policy
SSE strives to engage only with firms that
have signed up to the Voluntary Code of
Conduct for Executive Search Firms.
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 continued
appointment is being considered.
Board diversity
Gender of Board
Male (6)
Female (3)
Board – Years of service
0-3 years (2)
3-6 years (4)
>9 years (3)
Board – Age
41 to 50 years (2)
51 to 60 years (5)
61 to 65 years (2)
Board – Experience 1
Banking, corporate
finance (4)
Large capital
projects (3)
Retail businesses (3)
Regulation &
energy utilities (4)
Governance & risk (4)
Leadership of large
organisations (3)
Public sector (3)
1 Number of members with relevant experience
in this area.
69
3.2. Directors’ Report1. Accountability
Audit Committee Report
Members and meetings
Member
Peter Lynas 1
Sue Bruce
Crawford Gillies
Helen Mahy 2
Position
Non-Executive Director
Non-Executive Director
Non-Executive Director
Non-Executive Director
Member
since
Attended/
scheduled
2014
2014
2015
2016
4/4
4/4
4/4
4/4
The Board has confirmed that each member of the Audit Committee is independent and that membership meets the
requirements of the Code in terms of recent and relevant financial experience and competence relevant to the sector
in which the company operates.
1 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.
2 Energy sector experience through previous role as Company Secretary and General Counsel of National Grid plc.
70 SSE plc Annual Report 2017
70 SSE plc Annual Report 2017
Dear Shareholder,
On behalf of the Audit Committee, I am
pleased to present the Audit Committee’s
Report for the year ended 31 March 2017.
Over the following pages we provide insight
into the workings and activity of the Audit
Committee throughout the reporting year,
in support of our role, which is to assist the
Board discharge it’s responsibilities in relation
to: the integrity of Financial Reporting; the
relationship with the External Auditor; the
effectiveness of the Internal Audit function;
and the effectiveness of the System of Internal
Control and Risk Management Framework.
The Audit Committee held four meetings
in 2016/17 in line with the financial and
audit calendars. Amongst a range of
matters, the Audit Committee conducted
a comprehensive review of the system
of internal control and risk management
framework, including the related assurance
processes. We agreed to recommend to the
Board that the number of Principal Risks be
increased from nine to ten, following the split
of the ‘Cyber and Networks Failure’ into two
separate risks. The ‘Human and Relationship
Capital’ risk was also expanded and renamed
to ‘People and Culture’. We were pleased
with the positive progress which has been
made in this area, and further details of these
changes are set out on pages 24 to 27.
Over the next 12 months the Audit
Committee will continue to focus on
the audit, assurance and risk processes
to enhance the overall effectiveness of
the System of Internal Control.
Peter Lynas
Chairman of the Audit Committee
16 May 2017
Directors’ Report – Corporate governance Role
The key matters considered by the Audit
Committee during the year are explained
in the report that follows, and principally
fell under the following areas.
Financial reporting
– 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; and
– 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.
Internal Audit
– review and monitor the effectiveness
of the Internal Audit function, including
approval of the audit plan.
External Audit
– 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; and
– 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.
Risk management and internal control
– 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.
which was carried out during the year
confirmed that the Audit Committee
continued to operate effectively.
Meetings and activities in 2016/17
Meetings of the Audit Committee are
scheduled at key times in the Group’s
financial reporting and audit calendar, and
take place in advance of Board meetings.
The matters considered at each meeting are
guided by an annual plan of business which
is designed to ensure the Audit Committee
discharges its responsibilities in accordance
with its terms of reference which were
updated during the year.
The Audit Committee met four times during
the year, and has met once since the end
of the financial year. Meetings of the Audit
Committee are also routinely attended by
the: Company Chairman; Finance Director;
Director of Risk, Audit and Insurance; the
External Auditor; and the Deputy Company
Secretary who is secretary to the Audit
Committee. Throughout the year, a number
of other senior finance and business
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 to ensure the work of the Audit
Committee is focused on key and emerging
issues. 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 internal
Board and Committee evaluation process
Financial reporting and significant
financial judgements
Financial reporting
The Annual Report and Accounts seek to
provide the information necessary to enable
an assessment of the Company’s position
and performance, business model and
strategy. The Directors’ statement set out
on page 100 recognises and confirms the
Board’s responsibility for preparing the
Annual Report and Accounts and to
present a fair, balanced and understandable
assessment of the Group’s position
and prospects.
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, including Alternative
Performance Measures;
– the Group’s tax position, including
ongoing HMRC enquiries, and areas
of potential tax exposure;
– regular reports on the status of various
accounting projects including: the
transition to FRS 101 for subsidiary
companies; IFRS15 – Revenue from
Contracts with Customers; and IFRS9 –
Financial Instruments;
– areas in which significant judgements
had been applied and other matters
raised for discussion by the
External Auditor;
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 components of the
assurance framework which were used to assist with the preparation of 2017 Annual Report and Accounts included:
– comprehensive guidance issued to contributors, including the FRC Letter, ‘Summary of key developments for 2016
annual reports’, which was issued to Audit Committee Chairman and Finance Director in October 2016;
– a verification process dealing with the factual content;
– comprehensive reviews undertaken independently by senior management in Legal and 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 had been adhered
to for the preparation of the 2017 Annual Report.
71
3.2. Directors’ Report1. Accountability continued
– 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;
– the content of the Annual Report
and Accounts and advised the Board
on whether they were fair, balanced
and understandable and provide the
information necessary for shareholders
to assess the company’s performance,
business model and strategy; and
– the governance arrangements to
assist the Directors discharge their
responsibilities in relation to: the
disclosure of information to the External
Auditor; and the fair, balanced and
understandable assurance framework.
Significant financial judgements
In carrying out the review of these matters,
the Audit Committee received reports from
management 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. After discussion with
management and the External Auditor, the
significant areas of judgement reviewed
and considered by the Audit Committee
in relation to the 2017 Financial Statements,
and how these were addressed are set out
in the table below.
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 1 to the Financial
Statements. The Directors’ statement of
longer term viability can be found on page 27.
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 has 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 2016/17
Internal Audit Plan, including significant
findings, the adequacy of management’s
response and overdue actions;
– received reports on the assessment of
the system of internal control, including
risk management;
Significant financial judgements for the year ended 31 March 2017
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 – are 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. Further details are provided in Notes 4.1 (i) and Note 15
to the Financial Statements.
Accounting for estimated revenue: Revenue from energy sales
in the Retail division include estimates of the value of electricity
and gas supplied to customers between the date of the last
meter reading and the financial year end. These are based on
estimates and assumptions in relation to the consumption and
valuation of that consumption. Further details are provided in
Notes 4.1 (ii) and Note 18 to the Financial Statements.
The basis and outcome of this review is presented to the Audit
Committee by management, and includes a description of the
assumptions applied in deriving the recoverable values. The
Audit Committee reviewed and challenged the assumptions
and projections and also considered the findings of the External
Auditor. Following this review, the Audit Committee supported
the recommendation to recognise exceptional charges of
£374.6m in relation to certain assets in the financial year.
The Audit Committee reviewed 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 the findings of
the External Auditor. Following this review, the Audit Committee
supported this judgement.
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 allowances for doubtful
debt being based on assumptions derived from experience and
industry knowledge. Further details are provided in Notes 4.1 (iii)
to the Financial Statements.
The Audit Committee considered the assumptions impacting
doubtful debt allowances and charges, and were updated on the
activities of the Retail Debts Committee (whose members include
the Finance Director) and the processes for receivables collection
and provisioning. The Audit Committee also considered the
findings of the External Auditor in this area. Following this review,
the Audit Committee supported this judgement.
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 significant material impact on the
financial position of the Group. Further details are provided
in Notes 4.1 (iv) and Note 23 to the Financial Statements.
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
and also considered the findings of the External Auditor
particularly in relation to the scheme’s key assumptions relative
to market practice. Following this review, the Audit Committee
supported this judgement.
72 SSE plc Annual Report 2017
Directors’ Report – Corporate governance – considered the independence, authority
and responsibilities of the Internal Audit
function and approved an updated
version of the Internal Audit Charter;
After taking into account all of the above
matters, the Audit Committee concluded
that it is satisfied with the effectiveness of
the Internal Audit function.
– assessed the expertise and level of
resources available to the Internal
Audit function; and
– approved the Internal Audit Plan for
2017/18 which comprises both fixed
and flexible elements in order to provide
capacity to respond to any changing
business requirements.
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 level of resourcing
and areas for future development of the
Internal Audit function;
– progress on delivery of the audit plan,
together with post-audit management
feedback;
– progress of the actions identified in the
Quality and Standards Assessment of
the Internal Audit function undertaken
by KPMG in 2015;
– the output of a senior management
survey obtaining feedback on the overall
value and quality of the service provided
by Internal Audit; and
– the views of the External Auditor on the
effectiveness of the Internal Audit function.
External Audit
KPMG were appointed as the External
Auditor in 1999 through a competitive
tender process following the merger which
formed SSE. At the 2016 AGM, shareholders
re-appointed KPMG as the External Auditor
of the Company for the year ended 31 March
2017, 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 the
current lead Audit Partner – Bill Meredith –
is in the third year of his term.
Objectivity and independence
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 FRC
Auditing and Ethical Standards in relation
to the audit engagement. The Audit
Committee also considered reports from
management which did not raise any
concerns in respect of the External Auditors’
objectivity and independence. 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
2016/17 are provided below. After taking
into account all the above matters, the Audit
Committee concluded that it is satisfied with
the objectivity and independence of the
External Auditor.
Effectiveness and ongoing relationship
During the year, the Audit Committee reviewed:
– the approach, scope, areas of focus, level
of materiality and remuneration for the
audit of the financial year ended
31 March 2017;
– regular reports on progress against the
2016/17 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;
– the effectiveness of the overall external
audit process for 2016/17, including
meeting with the External Auditor and
management separately to get feedback
on the relationship and assess the
effectiveness of the external
audit process;
– the quality of the External Auditor’s
engagement with the Audit Committee;
– the qualifications, expertise and
resources of the External Auditor;
Non-Audit Services Policy
The Non-Audit Services Policy applicable during the financial year recognises that the external audit contract will be subject to
mandatory rotation from time-to-time, and provides 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 are 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 £1.2m and £0.7m for Permitted Non-Audit Services. Details of the
fees paid to the External Auditor during the year are made in Note 6 to the Financial
Statements. Significant categories of engagement for Permitted Non-Audit Services
awarded during the year include £0.5m for transaction support in relation to the part
disposal of SGN, £0.1m for review of various regulatory returns and information
requests arising in the Networks business and £0.1m for tax advisory and compliance
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.
Fees paid to External Auditor
£0.7m
£1.2m
During the year, the Non-Audit Services Policy was reviewed and updated (with
effect from 1 April 2017) to ensure compliance with the changes introduced as part
of EU Audit Reform.
Audit and Audit Related Services
Permitted Non-Audit Services
73
3.2. Directors’ Report1. Accountability continued
– the output from a questionnaire
– the lead time required to ensure
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 2016.
After taking into account all the above
matters, the Audit Committee concluded
that it is satisfied with the effectiveness
of both the external audit process and
the ongoing relationship with the
External Auditor.
Tendering of External Audit contract
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. Before making a
recommendation to the Board on the
timing of the external audit contract
tender, the Audit Committee considered:
– the quality, stability and continuity
provided by the relationship with the
current External Auditor;
– the audit tendering recommendations
set out in the Code and the requirements
of the CMA Audit Order, EU Audit
Regulation and EU Audit Directive;
– management of the audit requirement
regarding the change in accounting
standards at subsidiary level; and
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
to tender the audit contract in line with
the timeline set out below. The matters
highlighted in this section constitute the
Company’s rationale and explanation for
non-compliance with provision C.3.7 of the
Code. Resolutions to re-appoint KPMG as
External Auditor of the Company for the year
ending 31 March 2018, and to authorise the
Audit Committee to fix their remuneration,
will be proposed to shareholders at the AGM
on 20 July 2017.
Internal control and
risk management
The Board is responsible for the effectiveness
of the Group’s system of internal control,
including risk management and risk appetite.
The Group’s system of internal control is
detailed on pages 24 and 25. The Group’s
risk management framework is designed to
manage rather than eliminate the risk of
failure to achieve business objectives, and
can only provide reasonable and not
absolute assurance against material
misstatement or loss. During the year the
Board has carried out a robust assessment
of the Principal Risks facing the Group (as
set out on pages 24 to 27), being those that
could threaten its business model, future
performance, solvency or liquidity. The
Directors’ statement of longer term viability
can be found on page 27.
The Group has in place extensive internal
controls to help mitigate the material risks
which the business faces and management
is responsible for establishing and
maintaining these controls, including those
in relation to the financial reporting process.
This year, the Group implemented an
integrated assurance mapping and planning
process to ensure coordination of assurance
activities across the Group.
The Board has delegated responsibility for
reviewing the effectiveness of SSE’s system
of internal control to the Audit Committee.
This covers all material controls including
financial, operational and compliance
controls. During the year, the Audit
Committee reviewed information drawn
from a number of 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;
External Audit tender timeline
3 Lead Audit
Partner tenures
5 Year term of current Audit Partner
New External Auditor
1999
2014
(1 April)
2016
(AGM 21 July)
2017
(AGM 20 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
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. A tender process will take place in 2018, in accordance with the timeline above which complies with the 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.
74 SSE plc Annual Report 2017
Directors’ Report – Corporate governance Review of system of internal control
The Board and Audit Committee have
reviewed the effectiveness of the Group’s
system of internal control, including risk
management, in accordance with the
requirements of the FRC Guidance on
Risk Management, Internal Control and
related Financial and Business Reporting.
The Board confirms that no significant
failings or weaknesses were identified during
the year and up to the date of this Annual
Report. Where areas for improvement were
identified, processes are in place to ensure
that the necessary action is taken and that
progress is monitored.
– 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 assessment
of the risk management framework and
internal control environment;
– Group Risk on the framework and
analysis to support the long-term
viability statement;
– Group Compliance updates on the
development and implementation of
a comprehensive obligations matrix,
documenting legislative and regulatory
obligations that govern SSE’s operations;
– Company Secretarial on governance
developments relating to the work of
the Audit Committee;
– Internal Audit on the work undertaken
to identify Group-level fraud risks, and
the development of a focused fraud risk
audit plan;
– Internal Audit and Human Resources
on the review and effectiveness of
whistleblowing arrangements;
– Internal Audit highlighting investigations
into allegations and incidents of fraud
across the Group;
– 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; and
– Group Risk on the information to provide
assurance to the Audit Committee and
Board on the key areas which form the
system of internal control, together with
a view from the Finance Director on the
overall effectiveness of the system of
internal control.
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 Group’s system of
internal control, including risk management.
75
3.2. Directors’ Report1. Stakeholder engagement and responsible stewardship
The Board and SSE’s stakeholders
In order to agree the strategic priorities
for the Group, and apply judgement and
challenge to the ways in which these should
be delivered, the Board must understand
the concerns and needs of both SSE’s
shareholders and its wider stakeholders.
This is supportive of the Board’s duty to
promote the success of the company as set
out in Section 172 of the Companies Act
2006, and is achieved in part through a
number of engagement activities. These
engagement activities include: regular
ongoing dialogue with stakeholder groups;
promoting the creation of, and attending,
dedicated forums, focus groups and
advisory panels; and the considerations and
work of the Safety, Health, and Environment
Advisory Committee. Further information
on the role and activities of SSE in relation
to the above is detailed on pages 28 and 29
of the Strategic Report and within SSE’s
Sustainability Report which can be found
on the SSE website.
Shareholder dialogue
The Board is committed to maintaining
constructive dialogue with shareholders –
its ultimate owners – to enable
communication of the Group’s objectives,
strategy and performance, and to develop
an understanding of shareholder views.
The Board recognise that in their investment
decisions, many shareholders consider
a range of environmental, social and
governance matters and the Board seeks
to understand what these are, such that they
can be considered and applied as appropriate
in their decision making. This constructive
shareholder dialogue is achieved through
a structured investor relations programme
comprising meetings and bi-annual
roadshows, as well as ad hoc conferences,
discussions and correspondence on a
reactive basis. Details of some of these
investor relations activities and the related
resources are set out in the table below.
Shareholder engagement
Website and
shareholder
communications
SSE’s website is an
important source
of information for
shareholders,
which includes:
– share price
information;
– Stock Exchange
announcements;
– investor
presentations;
– shareholder
services; and
– useful contact
details.
Shareholder circulars,
including the Annual
Report and Accounts,
and Notice of Annual
General Meeting, are
sent to all shareholders
at the requisite time.
These are provided
in electronic form by
default, however, any
shareholder wishing
to receive hard copies
can contact Capita
Asset Services, SSE’s
Share Registrar.
Roadshows,
shareholder meetings
and feedback
The Executive Directors
aim to meet or have
calls with SSE’s top 30
shareholders twice
annually, as well as
attend a number of
investor conferences
where they typically
meet with groups of
investors. The Chairman
and Senior Independent
Director also attend a
selection of investor
meetings.
The Board receives
updates on SSE’s
shareholder
engagement and
analyst commentary
at each Board meeting,
and is provided with
independent investor
feedback collated by
SSE’s Brokers twice
a year. This follows
investor roadshows
which take place in
November and May.
During this reporting
year, the Board also
heard directly from
one of SSE’s largest
shareholders as part of
a pre-Board briefing.
76 SSE plc Annual Report 2017
Consultation and
engagement
Results and routine
announcements
Annual General
Meeting
In 2016 the Chairman
and the Chair of
the Remuneration
Committee held
meetings and calls
to consult with large
shareholders on
remuneration matters.
The same is being
offered in 2017.
Senior management
and the investor
relations team engage
throughout the year
with a range of investors
and analysts, which this
year included presenting
at a Local Authority
Pensions Fund Forum
Conference.
Following publication of
interim and preliminary
results, in November
and May respectively,
presentations are held in
London and attended by
SSE’s large shareholders
and energy utility
analysts. The results
presentation is also
available online and by
dial-in, both real-time
and after the event. The
Chairman and Executive
Directors attend and
present results.
Other routine
announcements
designed to ensure
ongoing engagement
with investors include:
– the Q1 Trading
update;
– the Q3 Trading
update; and
– pre-close
announcements
in September
and March.
AGM 21 July 2016
– Full director
attendance.
– 3 Special resolutions
passed.
– 17 Ordinary
resolutions passed.
AGM 20 July 2017
– Full Director
attendance planned.
– 3 Special resolutions
proposed.
– 15 Ordinary
resolutions
proposed.
At the 2016 AGM
attendees included
a number of
shareholders as well
as representatives of
shareholder bodies,
such as the Aiming for
A investor coalition and
the Local Authority
Pension Fund Forum.
The AGM includes
time for the Chairman
and Board to answer
questions from
attendees.
Directors’ Report – Corporate governance Stakeholder engagement and Board oversight
The Board recognises and embraces its
responsibility to take account of the
interests of stakeholders – people,
groups and organisations who have an
interest in SSE and the energy sector as a
whole – in the course of its deliberations
and decision making. The diagram below
sets out the different elements of direct
Board level engagement, and includes
details of the feedback it receives from
a range of well established stakeholder
engagement activities which take place
within each of SSE’s business areas.
Taken together, these help to provide
insight surrounding the way in which
business is being conducted and to
ensure that it is both responsible
and sustainable.
Society
In line with their role to promote SSE’s responsibility within
society, during 2016/17, the Board approved 24 Group Policies
and the revised guide to ethical business conduct for SSE
employees, which had received input during development
from the Institute of Business Ethics. The Group Policies and
the Guide cover the different cornerstones of SSE’s interactions
and impacts upon its stakeholders, including amongst others,
the areas of: Climate Change; Safety, Health and the
Environment; Sustainability and Corporate Responsibility;
Inclusion and Diversity; and the SSE Group Taxation policy.
Society
- g o v e r n mental organisations
n
o
N
L i s t ening to
t h e views of
s p e c i a list bodies
Energy
Customers
d
e
R
m
e
s
o
p
c
r
e
a
c
t
t
i
i
c
n
g
p
r
t
h
e
o
c
e
s
s
G
o
v
e
r
n
m
e
n
t
a
n
d
r
e
g
u
l
a
t
o
r
s
g to
G issues
din
n
o
p
s
e
R
S
E
y
e
k
U
p
o
s
i
n
Providing the energy
people need
g p e ople to
r f o r c usto mers
a r e h olders
h
g i n
E n g a
e
i v
d e l
a n d s
w
g b
e
r for good
uying
ers
old
h
e
r
a
h
S
S
u
p
p
li
e
r
s a
n
d c
ontractors
E m p l o y e es
Suppliers and contractors
In 2016/17, the Safety, Health,
and Environment Advisory
Committee provided
additional focus to the area
of sub-contractor safety, and
the Board approved the
updated SSE Modern Slavery
Statement and a revised
Procurement policy.
Customers
The Chairman and the Chief Executive meet
annually with the Chairs of a number of
Customer Forums, and receive feedback and
insight surrounding the areas which have been
highlighted as important by SSE’s retail energy
customers. The Board also provided oversight and
support surrounding SSE’s treating customers fairly
commitments for 2016/17, which were developed
in consideration of this feedback, and in recognition
of SSE’s customer needs.
Government and regulators
The Board met directly with the energy
regulator, Ofgem, during the reporting
year, and welcomed the opportunity
to engage and allow better common
understanding of priorities and areas
of concern.
The Board also welcomes engagement
from policy makers and the opportunity
to oversee SSE’s responses to
consultations. These can relate
specifically to SSE’s different business
areas, as well as general governance
and business developments, for
example, in 2016/17 Board members
fed views into the All Party Corporate
Governance Group report, ‘The Board’s
Role in Determining Culture’.
Employees
A key aspect of Board member’s site
visits, attendance at teach-ins, and
one-to-one meetings and briefings,
is the opportunity that they provide for
engagement with SSE employees. In
addition the non-Executive Directors
attended the SSE employee safety
conferences and a number of
employee leadership events. The
Chairman also chaired an event which
captured views on SSE’s corporate
culture from a cross-section
of employees.
In addition to the ongoing employee
engagement, in 2017/18, the Chairman
and the Chair of the Remuneration
Committee intend to meet directly with
employee representatives, which will
provide the opportunity for further
understanding of the matters relevant
to SSE’s workforce.
77
3.2. Directors’ Report1.
Stakeholder engagement and responsible stewardship continued
Safety, Health and Environment Advisory
Committee Report
Members and meetings
Member
Position
Jeremy Beeton
Non-Executive Director ¹
Sue Bruce
Helen Mahy
Colin Nicol 2
Jim Smith 2
Non-Executive Director ¹
Non-Executive Director ¹
Senior Executive
Senior Executive
Mark Patterson
Senior Executive
Jim McPhillimy 3
Senior Executive
Paul Smith 4
Senior Executive
Member since
Attended/
scheduled
2011
2013
2016
2016
2016
2013
2008
2008
3/3
3/3
3/3
2/2
2/2
3/3
1/1
-/-
1 All non-Executive Directors are considered to be independent by the Board.
2 Colin Nicol and Jim Smith joined the SHEAC on 31 May 2016.
3
4 Paul Smith retried from SSE and as a member of the SHEAC on 31 May 2016.
Jim McPhillimy retried from SSE and as a member of the SHEAC on 31 October 2016.
Dear Shareholder,
On behalf of the Board, I am pleased to
present the report from the Safety, Health
and Environment Advisory Committee
(SHEAC).
During this reporting year, members of the
SHEAC have taken the opportunity to visit
various operational sites throughout the
UK and Ireland, which has allowed us to
meet a number of front-line employees,
and gain insight into the culture relating
to safety, heath and environment across
SSE’s businesses.
These meetings and visits have provided
a backdrop for our increased focus on the
unique challenges facing each of SSE’s
business areas through the framework of
the Enduring Goals. The Enduring Goals
were rolled out in 2015/16 and subsequently
updated in 2016/17. They are designed to
improve safety, health and environmental
performance across the Group and I am
pleased to report that overall performance
has improved during 2016/17.
Looking forward over the next 12 months,
the SHEAC have agreed to continue
work in this area, through the review
and implementation of, existing and new
initiatives to drive improvements in the
following Enduring Goals: Contractor Safety;
Safety Family; Operational Safety; and
Occupational Health and Well-being.
I hope you find the report that follows an
interesting explanation of our work and
SHE performance during the year.
Jeremy Beeton CB
Chairman of the SHEAC
16 May 2017
78 SSE plc Annual Report 2017
78 SSE plc Annual Report 2017
Directors’ Report – Corporate governance Role
The SHEAC advises the Board on matters
relating to safety, health and environment.
The remit of the SHEAC is set out in its terms
of reference which were updated during the
year, and include responsibility for:
– ensuring adherence to SSE’s safety,
health and environmental policies;
– setting Group targets and monitoring
performance against these targets;
– developing strategy to drive
improvements in performance;
– promoting a culture, and enhancing
the awareness, of safety, health and
environmental management; and
– making recommendations to the Board
where action or improvement is needed.
Composition
The membership of the SHEAC currently
comprises three non-Executive Directors, two
Senior Managers with significant operational
responsibilities in Wholesale and Networks
and the Group Safety, Health and
Environment Manager. Members of the
SHEAC are appointed by the Board following
recommendation by the Nomination
Committee. During the year, Colin Nicol and
Jim Smith were appointed to the SHEAC and
replaced Jim McPhillimy and Paul Smith, both
of whom retried from SSE. The Chief Executive
routinely attends meetings and the Deputy
Company Secretary is Secretary to the SHEAC.
The SHEAC provides a leadership forum
for the non-Executive Directors to share
their knowledge and expertise with senior
management. 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 brings a wealth of knowledge from her
career in the energy industry.
Meetings and activities in 2016/17
During the year, the SHEAC had three
meetings, with one of these being held
at Clyde Windfarm. The SHEAC has
an annual work plan with standing items
covering safety, health and environmental:
performance; incidents and trends; risks and
priorities. Other matters which the SHEAC
has focused on during the year include:
strategy to improve SSE’s SHE performance
over multiple years; contractor safety;
decommissioning and demolition; driving;
and SHE-related training. The Board and
Committee evaluation process which was
carried out during the year confirmed that
the SHEAC continued to operate effectively.
Performance in 2016/17
Safety
SSE’s overall safety goal is 100% injury free
working by those working for and on behalf
of SSE. SSE’s total recordable injury rate for
SSE and Contractors was 0.22 per 100,000
hours worked in 2016/17, compared to 0.23
in 2015/16.
way, helping employees make a speedy
return to health and to work. During 2016/17,
the average number of days of sickness
absence from work was 9.8 days per person.
In this financial year there have been 102
incidents that have harmed individuals and
most tragically this includes a fatality on
one of our major construction projects.
This compares to 113 incidents for the
same period in 2015/16. On balance, this
performance shows some progress; but it
also still represents a significant number of
incidents and accidents.
One area of continuing concern is the number
of serious incidents involving company
vehicles with 19 Class 1 Road Traffic Collision
Accountable incidents in 2016/17, compared
with 29 in the previous year. Following on from
the successful implementation of Project Drive
in 2015/16 SSE has continued to improve the
management of road risk in 2016/17. This has
had a positive impact on driving related safety
and the management of road risk will continue
to be a key area of focus going forward.
Health
SSE’s Health and Well-Being Action Plan
provides the basis for workplace health
programmes and initiatives, all designed to
help promote the physical and mental health
of employees. SSE deals with sickness
absence in a sympathetic and constructive
Environment
Developing and upgrading the energy
infrastructure in the UK is an essential part of
providing the energy people need. With the
transition towards a low carbon economy, it is
increasingly important that this infrastructure
has sufficient capacity to deliver ‘greener’
energy. Developing, building, owning and
operating this infrastructure can have both
positive and negative impacts on people’s
lives. It is therefore important to develop these
projects responsibly, listening to stakeholders
and responding in a balanced way.
SSE’s main environmental impact arises from
emissions of CO2 associated with electricity
generation, and the reporting of greenhouse
gas emissions is set out on pages 18 and 19.
SSE’s focus remains on minimising the
impact of operations and adhering to
environmental based permit conditions
associated with its operations and minimising
the impact of operations and projects.
Further information relating to safety, health
and environmental performance during
2016/17 is contained on pages 1 to 53 and
also included in SSE’s Sustainability Report
which is available on the SSE website.
The Enduring Goals
SSE’s first priority in everything it does is 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, this core Safety value is supported by a set of Enduring Goals, which
provide a framework for each business to focus attention on its unique safety, health and
environmental challenges. The work of the SHEAC is designed around these Enduring
Goals which are set out below.
1
Safety Family
Being our brother’s keeper with everyone
working to high standards.
2 Driving
Creating a company of lower risk drivers.
3
Process Safety
Carrying out our duty of care diligently
and preventing major incidents.
4 Contractor Safety
Working with our contractors
to be ‘best in class’ on Safety.
5
Occupational Health
and Well-being
Protecting our team’s health and promoting
their well-being.
6 Environment
Protecting the environment and operating
in a sustainable way.
7
Crisis Management
Staying well prepared and responding
brilliantly when things go wrong.
8 Operational Safety
Ensuring a robust safe system of work.
79
3.2. Directors’ Report1. Remuneration
Remuneration Committee Report
Members and meetings
Member
Position
Member since
Katie Bickerstaffe
Non-Executive Director ¹
Jeremy Beeton
Non-Executive Director ¹
Crawford Gillies
SID
Richard Gillingwater CBE Chairman of the Board
2011
2014
2015
2007
1 All non-Executive Directors are considered to be independent by the Board.
Attended/
scheduled
3/3
3/3
3/3
3/3
80 SSE plc Annual Report 2017
80 SSE plc Annual Report 2017
In this section:
Chairman’s Statement
A snapshot of SSE’s approach to pay
Annual report on remuneration
Single total figure of remuneration
2016/17 AIP
2014/17 PSP
Other remuneration disclosures
Pay ratio
Governance
Implementation for 2017/18
Summary of remuneration policy
80
82
86
86
87
89
89
91
94
95
96
Dear Shareholder,
The objective of the Directors’ Remuneration
Report for 2016/17 is to set out in a simple and
transparent way how SSE pays its Directors
(executive and non-executive); the decisions
made on their pay and how much they
received in relation to 2016/17 performance.
The report also describes how this links to
the Company’s purpose and strategy; how
the Remuneration Committee works, and
how it has given due consideration to the
perspectives of SSE’s stakeholders.
Linking Executive Directors’
remuneration with SSE’s
purpose and strategy
It is key that our overall remuneration policy
is aligned to SSE’s core purpose of providing
energy in a reliable and sustainable way;
energy is a long-term business requiring
effective stewardship. It must also be
aligned to SSE’s strategy of efficient
operations and disciplined investment,
which requires genuine customer focus
and strong delivery capability, across a
balanced range of energy businesses. In
addition, it must be consistent with SSE’s
wider commitment to being a responsible
company, which, in remuneration terms,
means a policy characterised by simplicity
to enable effective stakeholder scrutiny and
balance to take account of a broad range of
considerations. Finally, remuneration policy
must be characterised by fairness: fair to the
Executive Directors themselves; fair relative
to the rest of the SSE team; fair in terms of
the value delivered to SSE’s investors by its
Executive team; and fair in terms of SSE’s
contribution to society as a whole.
Together, stewardship, customer focus,
Directors’ Report – Corporate governance delivery, simplicity, balance and fairness
provide the pillars of our overall
remuneration policy.
The Committee is very mindful of the public
debate on executive pay and the Company
as a whole has sought to maintain a clear
and consistent approach to pay, with simple,
transparent arrangements which are easily
understood and consistent with SSE’s
commitment to being a responsible employer.
We are also aware of employees’ views on
executive pay and general employment
issues. As part of this process the HR Director
and Head of Reward meet with recognised
employee representatives annually and
provide feedback to the Committee following
the meeting. It is my intention over the next
12 months that I will meet directly with the
employee representatives.
The extent and impact of their responsibilities
means Executive Directors are well-paid;
the remuneration policy of SSE is designed,
amongst other things, to ensure they are
fairly paid but not overpaid.
As part of our commitment to transparency,
we have again voluntarily disclosed a
CEO pay ratio (see page 91). We have also
provided detailed disclosure on the gender
pay gap (see our Sustainability Report) and
the measures we are taking as a Company
to understand and address it over the long
term. Using these additional reference points
and taking a broader view of pay and
employment conditions is as important to
us as the use of external benchmark data
when setting executive pay levels.
As part of its responsibilities, the
Remuneration Committee regularly reviews
the remuneration policy to ensure it remains
appropriate for the business and is at the
forefront of developments in good corporate
governance. The Committee has been
following the wide range of investor
guidance that has been released in the last 12
months and the consultation process for the
UK Government’s Green Paper on Corporate
Governance. We accept that this may have
an impact on UK market practice over time.
Where relevant, we have implemented a
number of these suggestions on a voluntary
basis. However, the Committee does not
believe it is appropriate to make material
changes to the policy only a year into the
current policy period, although this is an area
which will be kept under review to ensure we
are best supporting the long-term interests
of the business, applying a consistent
approach across the senior executive team
and developing and retaining the best talent.
Performance related pay
out-turns in 2016/17
In a difficult trading environment SSE
performed robustly against its key metrics
with DPS, Adjusted PBT, Adjusted EPS,
customer performance and cashflow all
at or ahead of expectations as shown on
page 83.
The PBT target was adjusted to remove
the impact of SGN earnings after the
part-disposal earlier in the year to ensure
consistency of measurement.
– Annual Incentive Plan (AIP): The out-turn
under the AIP was determined against a
range of financial, strategic and personal
targets set at the beginning of the year.
This resulted in an outcome of 72% of the
maximum opportunity. We have set out
details of SSE’s performance against the
AIP measures and targets on page 87.
– Performance Share Plan (PSP): For PSP
awards granted in 2014, which were
due to vest following the end of the
2016/17 financial year, measurement of
performance over the three year period
resulted in a 45.5% out-turn against the
PSP measures and targets on page 89.
This is the first vesting of the PSP,
including revised measures from 2014.
For both plans the Committee considered
in detail, whether any adjustments were
merited and decided, taking into account
overall performance, to make a downward
adjustment to the AIP total, reducing the
overall pay out for both Executive Directors
from 76% to 72%. The Committee decided to
leave the PSP performance unadjusted.
Improved performance under both the
AIP and PSP means that the level of total
remuneration earned by the Chief Executive
has increased significantly, by 72% year-on-
year. This increase also includes the PSP
vesting for the first time in three years
together with last year’s approval by
shareholders to increase the maximum
opportunity under the AIP. To put this into
context, however, total remuneration in
2015/16 decreased compared with the
previous year, which demonstrates that
there is a clear link between business
performance and remuneration out-turn
in any given year.
Implementation for 2017/18
The current Directors’ Remuneration Policy
was approved with 99% of votes cast in
favour at the 2016 AGM. During the year
the Committee reviewed the policy and
determined that it remained appropriately
aligned to SSE’s strategy.
The Committee agreed to base salary
increases for the Executive Directors of
2.4% which are in line with those provided
to the wider SSE workforce.
Next steps
In light of the continuing debate on
executive pay and our desire to enhance
the effectiveness of pay in support of SSE’s
strategy, the Committee intends to spend
time during 2017/18 considering how we
can operate the policy more effectively,
which will include amongst other things:
– The operation of the PSP and alignment
of approach with below board participants
to ensure consistency of approach.
– Moving the primary AIP financial measure
from Adjusted PBT to Adjusted EPS to
align with the key measure and general
approach SSE take when issuing financial
performance guidance.
Finally, it is worth noting from SSE’s
preliminary results statement in May 2017
and from this Annual Report that SSE
expects this to be a challenging year.
Taking this into account it is the role of the
Committee to continue to set challenging
but fair performance measures and targets
that incentivise strong performance and
delivery by the Executive Directors and the
wider SSE team.
As always, I appreciate any feedback or
comments on this Report. We will endeavour
to report remuneration matters with clarity
and transparency and welcome any
suggestions on how we can improve this.
Katie Bickerstaffe
Chairman of the Remuneration Committee
Summary of activities
during the year
– Setting of performance metrics
for 2016/17
– Review of Committee advisors
– Review of performance
– Analysis of proposed governance
reforms
81
3.2. Directors’ Report1. Remuneration continued
A snapshot of SSE’s approach to pay
Remuneration principles and strategy
Simplicity
Pay comprises just
four elements –
base salary, benefits
(including 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 is
covered.
Delivery
Dividends and
Total Shareholder
Return (TSR)
measures align
Executive
Directors’ interests
with those of
shareholders.
Stewardship
Executive Directors
are expected to
look to the long
term and build and
maintain significant
personal
shareholdings
in the business even
after they retire.
Fairness
Our transparent
approach to
setting and
reporting pay
levels which
takes into account
a range of
stakeholder views.
A summary of our pay policy in action
Element
Salary
Fixed
pay
Benefits
Pension
Variable pay
– at risk
Annual
Incentive Plan
(AIP)
Additional
governance
Performance
Share Plan
(PSP)
Share
ownership
requirement
Recovery and
withholding
Post-
employment
82 SSE plc Annual Report 2017
Max
2016/17
2017/18
2020/21
2022/23
Salary paid
Benefits paid
Pension
accrual
Increases
normally
limited to
those of wider
employee
base
Market
competitive
Final salary
and top
up (with
pensionable
pay increases
capped at
RPI+1%)
CEO 150%
of salary
FD 130%
of salary
67% cash/33%
career shares
CEO 200%
of salary
FD 175%
of salary
2 Year holding
period
AIP cash
paid
AIP career
share award
granted
PSP awards
granted
Award vests
PSP awards
vests
Holding
period ends
200% of salary Share ownership requirement
All incentives
Clawback: misstatement, serious misconduct, error in calculation
Malus: misstatement, misconduct, serious reputational damage,
error in calculation
Career shares Holding requirement for career shares until one year after cessation
of employment
Directors’ Report – Corporate governance Link between strategy, KPIs and incentive performance measures
TSR
DPS
Cashflow
Adjusted EPS
Adjusted PBT
Customer
Teamwork
Personal
SSE’s performance in 2016/17
Adjusted EPS
Adjusted PBT
125.7p
+5.2%
Total Recordable
Injury Rate
0.22
-4.4%
£1,545.9m
+2.1%
Strong performance in the
Citizens Advice Energy Supplier
Performance Report
Ranked 2 out of 22 suppliers
Total shareholder return over the last three years
Providing the energy people need in a reliable sustainable way
Financial objectives
Consistent strategy
Long-term focus
ü
ü
ü
ü
ü
ü
ü
ü
ü
ü
ü
ü
Adjusted capital and
investment expenditure
£1,726.2m
+6.6%
Contribution to UK economy
£9.3bn
+5%
Electricity networks estimated
incentive performance
Total carbon emissions
(000's tonnes)
£19.52m
19,395
-14%
130
120
110
100
90
80
70
Mar 14
Sep 14
Mar 15
Sep 14
Mar 15
Sep 15
Mar 16
Sep 16
Mar 17
Source: Datastream (Thomson Reuters).
SSE
FTSE 100
MSCI Europe
Utilities
83
3.2. Directors’ Report1.
Remuneration continued
Performance against AIP targets
Performance against PSP targets (2014-17)
Adjusted PBT (30%)
Actual
£1.546m
(62% out-turn)
Relative TSR 1 (20%)
V FTSE100
Actual
Ranking at median
(27% of max)
Threshold
£1.449m
Target
£1.526m
Max
£1.604m
Threshold
Median Ranking
Max
Upper Quartile Ranking
DPS growth (10%)
Actual
RPI
(50% out-turn)
Threshold
Growth at RPI
Relative TSR 2 (20%)
V MSCI Europe (24)
Actual
Ranking above median
(51% of max)
Max
RPI + 2%
Threshold
Median Ranking
Max
Upper Quartile Ranking
Retained cash-flow/debt (10%)
Adjusted EPS Growth (20%)
Actual
15.7%
(100% out-turn)
Actual
< RPI
(0% of max)
Threshold
13%
Target
13.5%
Max
14%
Threshold
(25%) – RPI+2%
Max
– RPI+10%
Non-financial (50%)
Actual
84%
DPS Growth (20%)
Actual
RPI
(50% of max)
Threshold
50%
Max
100%
Threshold
(50%) – RPI
Customer (20%)
Threshold
(rank 2) – 50%
Max
RPI+5%
Actual
rank 1
(100% of max)
Max
rank 1
84 SSE plc Annual Report 2017
Directors’ Report – Corporate governance Executive Directors’ Remuneration for 2016/17
The chart below shows the total remuneration received for 2016/17. 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
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
43%
27%
22%
31%
33%
21%
47%
46%
30%
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
42%
26%
32%
23%
28%
49%
31%
20%
49%
Minimum Actual
Target
Maximum
Minimum
Target
Actual
Maximum
PSP
AIP
Base salary, benefits, pension
The charts above are based on the current Executive Directors’ packages and show the amount of remuneration payable in four scenarios;
1) minimum performance where only base salary, benefits and pension is payable, 2) target performance, 3) maximum performance and
4) actual performance.
Underlying assumptions
Minimum performance
Only the fixed pay elements are included i.e. base salary, benefits and pension calculated as:
– Base salary effective from 1 April 2016.
– Benefits represent those shown in the single figure table on page 86.
– Pension is the annual value shown in the single figure table on page 86.
Chief Executive
Finance Director
Base salary
£
844,104
652,424
Benefits
£
24,752
21,135
Pension
£
501,600
397,600
Total
£
1,370,856
1,061,559
Target performance
This is what the Executive Director would receive in addition to the minimum performance elements, if the Committee agreed that target
level performance had been achieved:
– AIP would be 50% of maximum opportunity.
– PSP would be 50% of maximum opportunity and dividends would accrue at the rate of the 2014-17 PSP.
Maximum performance
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 would be 150% of base salary for the CEO and 130% for the FD.
– PSP would be 200% of base salary for the CEO and 175% for the FD and dividends would accrue at the rate of the 2014-17 PSP.
Notes:
The AIP figures are the gross value of awards before 33% is converted into deferred career shares.
The PSP awards do not include any assumptions for share price growth.
85
3.2. Directors’ Report1.
Remuneration continued
Annual report on remuneration
1. Single total figure of remuneration (audited)
Single total figure of remuneration for each director for financial years ending 31 March 2016 and 2017 :
Base salary/fees ⁵
£000s
Benefits ⁶
£000s
AIP ⁷
£000s
PSP⁸
£000s
Pension⁹
£000s
Total 10
£000s
Executive Directors
Alistair Phillips-Davies
Gregor Alexander
Non-Executive Directors
Jeremy Beeton
Katie Bickerstaffe
Sue Bruce
Crawford Gillies 1
Richard Gillingwater CBE 2
Peter Lynas
Helen Mahy 3
Lord Smith of Kelvin 4
2017
844
652
74
78
63
76
369
79
63
35
2016
824
637
71
69
60
47
275
75
5
117
2017
2016
25
21
24
21
2017
910
610
2016
445
344
2017
644
498
2016
0
0
2017
502
388
2016
403
286
2017
2016
2,925
2,169
1,696
1,288
Total
5,094
2,984
74
78
63
76
369
79
63
35
71
69
60
47
275
75
5
117
Overall Total
5,931
3,703
Notes:
1 Crawford Gillies was appointed to the Board on 1 August 2015.
2 Richard Gillingham CBE was appointed as Chairman on 23 July 2015.
3 Helen Mahy was appointed to the Board on 1 March 2016.
4
Lord Smith of Kelvin stepped down as Chairman on 23 July 2015 and was retained by SSE’s Executive Committee for a further year to provide advice and counsel on key business
issues relating to Scotland.
SSE offers all staff a range of voluntary benefits some of which operate under a salary sacrifice arrangement. The salaries shown above is reported before any such adjustments are made.
5
6 Benefits relate to company car, Share Incentive Plan company contributions and medical benefits. These benefits are non-pensionable.
7 The AIP figures above show the full value of the award before 33% was deferred in shares.
8 The PSP awards due to vest in 2016 lapsed in full. The estimated value shown in the table above is based on the average share price in the three months to 31 March 2017 of £15.19p,
as is required by the reporting regulations. The awards remain subject to service until May 2017 and so the prior year comparative will be restated in next year’s report to show the
actual value on vesting, as is required by the regulations.
9 The pension value represents the cash value of pension accrued over 1 year x a multiple of 20 (less director contributions) in line with statutory reporting requirements.
10 Directors have not received any other items in the nature of remuneration other than as disclosed in the table.
Rationale for 2017 single total figure
As indicated on page 83 and shown in specific detail in the following sections, the financial and operational performance of the business
has been strong in the context of the overall market conditions. As a result of this and the increases agreed to maximum AIP levels in 2016,
the year-on-year increases in the above table are significant. This corporate performance is also reflected in the pay outcomes for wider
employees with the average annual incentive paid increasing by around 11% compared to last year. In this context, the Committee is satisfied
that the total single figure outcomes are appropriate and not excessive.
Salary
The salaries shown in the table reflect a 2016/17 salary, effective from 1 April 2016 to 31 March 2017, of £844,104 for the Chief Executive
and £652,424 for the Finance Director. This represented an increase of 2.4% from the previous year, which was in line with the average
performance-based salary increase for the wider SSE employee population.
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
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 had they not been subject to the salary cap. From 1 April 2017
pensionable earnings will be capped at RPI +1%. These are legacy arrangements and would not be used for any new external appointments.
The Executive Directors, in common with all other employees who joined at the same time, have the following pension provisions relating
to leaving the Company: 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 on an unreduced basis.
86 SSE plc Annual Report 2017
Directors’ Report – Corporate governance
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 will limit SSE’s liability, taking into account valuations provided by independent actuarial advisors,
and will be calculated on what was judged to be a cost neutral basis to SSE.
Alistair Phillips-Davies
Gregor Alexander
Accrued
pension as at
31 March 2017
£000s
Accrued
pension as at
31 March 2016
£000s
381
356
354
335
2016/17 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.
Financial (50%)
Adjusted PBT
DPS Growth
Cashflow
(Retained cashflow/net debt)
Total
Weighting
Threshold
Target
Maximum Actual outcome
% Out-turn
£1,449m
£1,526m
£1,604
rpi + 2%
£1,546m
rpi
62%
50%
rpi
30%
10%
10%
rpi
13%
13.5%
14%
15.7%
100%
Total
19%
5%
10%
34%
Adjusted
to 30%
The financial performance targets were set at the start of the financial year taking into account internal financial plans, external consensus
where it exists and the expected impact of identified opportunities and threats to the business in the context of wider economic conditions.
The performance target range is set on a realistic basis but requiring true outperformance for Executive Directors to achieve the maximum.
The Remuneration Committee has a history of setting challenging targets, evidenced by the average AIP payout over the previous five years
of 41% (with a maximum achieved of 64%).
While the committee measured overall financial performance at 34% it decided to exercise its discretion to make a downward adjustment to
30% taking into account factors influencing some of the exceptional charges during 2016/17.
Non-financial (50%)
When setting non-financial targets, the Committee ensures they are specific, measurable, attainable, realistic and timely (“SMART” objectives).
By their nature, some objectives require a more subjective assessment than others and this is completed by the Committee following the
input from the wider Board and other Board Committees as appropriate. The Committee is committed to providing as much retrospective
detail of the measures as possible, setting out clearly the decision making process and the levels of attainment achieved, but mindful that
we cannot disclose any information which could be considered commercially sensitive.
Customer (15%)
Performance is assessed using a selection of internal and external surveys including the Citizen’s Advice Bureau’s Energy Supplier Complaints
league table, the Institute of Customer Service, the National Customer Satisfaction Index UK, Ofgem Customer Satisfaction measure and
other trusted third party customer satisfaction surveys. For Network customer performance the Committee considers the wide range of
Ofgem metrics that are used to determine incentives and penalties for that part of the business. The Committee takes a broad view of
performance against each measure before approving the overall performance outcome.
Retail customer service performance – A strong year for customer service in Retail. SSE was the leading
large energy supplier as measured in the quarterly Citizens Advice Energy Supplier Performance Report
throughout 2016/17. A new company record score was achieved twice during the year. SSE continues to
have the lowest Ombudsman complaints in the industry with fewer than five complaints accepted per
100,000 customers in every quarter of 2016/17 (compared with an average of between 19 and 23 for the
industry as a whole).
Networks customer service performance – Customer interruption performance in Distribution, measured
through an Ofgem scheme, delivered incentive earnings of almost £13.9m and performance against
Ofgem’s customer service satisfaction measure saw the incentive award increasing significantly to almost
£2.8m, reflecting measures to improve customer contact and engagement. Customer complaints
performance has also improved, with 78% of all complaints resolved during 2016/17 within 24 hours an
increase from 65%.
Total
88%
80%
84%
13%
87
3.2. Directors’ Report1. Remuneration continued
Teamworking (20%)
This section is based upon an assessment of the SSESET of values. The Committee assesses each one individually before reaching an overall
conclusion on the performance outturn.
Safety – Performance was overshadowed by the tragic death of a contractor colleague on an SSE
construction site. The number of SSE employees injured in the 12 month period reduced from 57 to 47 and
there was a slight improvement in the 12 month rolling combined Total Recordable Injury Rate (0.22) and a
slight decrease in Accident Frequency Rate to (0.11). There was a concerted focus in the year on further
developing SSE’s safety culture, managing process safety risks , ensuring appropriate authorisation
processes and improving employee wellbeing. Taking everything into account, however, overall
performance was adjusted down.
Service – Strong performance with Retail retaining a leading position in the Citizens’ Advice Energy Supplier
Performance Report; and with Networks securing incentive earnings relating to customer interruption
performance, customer contact and engagement (Distribution) and strong performance in a survey of
stakeholder satisfaction (Transmission). See also page 87.
Efficiency – excellent progress in bearing down on controllable costs, including sustainable savings of
£50m realised against an original target of £30m and detailed plans in place to deliver further controllable
savings in 2017/18. In 2016, SSE announced the disposal of a partial stake of SGN, with the price secured
confirming SSE’s ability to deliver value for shareholders. Strong performance in refinancing with debt
replaced at lower like for like costs.
Sustainability – Strong progress was made in this area. Achieved an ‘A-‘ rating in the annual CDP (formerly
Carbon Disclosure Project) assessment. Enhanced tax disclosure was delivered through the Talking tax 2016
report and retention of Fair Tax Mark accreditation. Achieved British Standard for inclusive service provision
for its Networks business and committed to securing the Standard for its Retail business. A new partnership
was developed with the Institute of Business Ethics in support of implementing a revised and robust code of
ethical business practice.
Excellence – Significant progress made with a number of key capital projects progressing well, including
the completion of the Beauly-Denny transmission line. Strong progress was also made in delivering
renewable energy projects in Scotland and Ireland. Excellence in large capital project delivery was also
recognised with SSE winning the Excellence in Sustainability in Irish Construction Awards 2016. Early
disclosure on gender pay contributed to SSE securing the Building Public Trust in Corporate Reporting
Award for people reporting in the FTSE 100.
Teamworking – Good progress with the review of the Executive-level governance framework to ensure
decisions are made at the right level, and good progress with the review of organisational design to improve
the effectiveness of organisational structures in SSE’s businesses. Detailed structural changes made with
people and business impact well managed. Continued focus in support of the inclusion and diversity
agenda with each business developing specific action plans.
65%
85%
90%
85%
85%
79%
Total
82%
16%
Personal (15%)
Personal performance measures are intended to focus executive directors on the key operational and strategic objectives which support the
longer-term performance of the business. Some objectives are consistent across all members of the senior management team, but others
are personal to the individual reflecting the key responsibilities of their role. Some goals have quantifiable targets, but others require a more
subjective assessment. The Committee considers performance against each measure before determining an aggregate outcome for this
element of the AIP.
Alistair Phillips-Davies – Delivered a very strong business performance against a challenging backdrop.
A clear focus on simplifying the SSE group and delivering strong controllable cost savings through
increased efficiency and review of organisational design. Led an effective strategy and future growth
review for the Board. A strong focus on stakeholder engagement, with the approach of having the
customer at the forefront of SSE’s thinking. Continues to focus on moving SSE forward as a responsibly-
minded organisation that delivers value for shareholders. All objectives met or exceeded.
Gregor Alexander – Delivered very strong business results, supporting a strong financial performance
with effective management of debt costs and cashflow. Effective delivery of the SGN sell down and strong
performance in system delivery and across the wider corporate service arena. Effective interaction with a wide
range of stakeholders with strong and effective relationships maintained. All objectives met or exceeded.
86%
86%
Total
Overall total (including downward adjustment)
Both Alistair Phillips-Davies and Gregor Alexander
88 SSE plc Annual Report 2017
86%
13%
72%
Directors’ Report – Corporate governance Alistair Phillips-Davies
Gregor Alexander
Maximum
potential
(% of salary)
150%
130%
AIP earned
£910,366
£609,821
AIP cash
AIP deferred 1
£609,945
£408,580
£300,421
£201,241
Note:
1
33% of AIP is deferred into shares for three years which are then retained until a year after stepping down from the Board. Both the cash and deferred element remain subject to
clawback provisions.
The Remuneration Committee believes that the range of measures used in the AIP ensures that performance is assessed using a balanced
approach, without undue focus on a single metric which could be achieved at the expense of wider initiatives. Given the performance noted
above and wider operational achievements noted in the Strategic Report on page 16 the Committee is comfortable that the AIP outcomes
represent a fair reward for performance delivered.
PSP awards vesting in the year (2014-2017)
PSP awards granted during the 2014/15 financial year, have three-year performance periods which ended on 31 March 2017. Performance
was assessed against the targets as set out in the table below:
Performance condition
Measure
Weight
Threshold
Maximum
Outcome
Relative TSR
Financial/Share-Based
v FTSE 100
v MSCI
EPS
DPS
20%
20%
20%
20%
Median
Median
Rpi
Rpi
Rpi + 10%
Rpi + 4%
Upper Quartile
47th out of 94
Upper Quartile
10th out of 23
Customer
Total
Consumer Futures
ranking
20%
Rank 2
Rank 1
10% of trade receivables. The biggest customer balance, due from
a wholesale customer (also a wholesale supplier), is 9% (2016 – 8%) 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
2017
£m
2016
£m
2,374.6
1,690.2
133.8
49.4
160.8
2,718.6
(120.0)
2,598.6
156.3
59.2
208.6
2,114.3
(147.5)
1,966.8
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 £16.6m (2016 – £23.7m).
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
2017
£m
147.5
21.7
(49.2)
120.0
2016
£m
154.3
54.3
(61.1)
147.5
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.
178 SSE plc Annual Report 2017
Financial Statements A6. Financial risk management continued
A6.3 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 21. In addition to the borrowing facilities listed at Note 21.2, the Group has
£150m of uncommitted bank lines and a £15m overdraft facility.
The refinancing requirement in the 17/18 financial year is the intended redemption of £1.03bn of NC5 hybrids issued in 2012, the Group has
already successfully issued a dual tranche hybrid debt in March 2017 in order to cover this refinancing. This dual tranche issue comprises
£300m with a coupon of 3.625% and $900m with a coupon of 4.75%. The $900m tranche has been swapped back to both Euros and Sterling,
bringing the all-in rate down to 2.72% and resulting in an all-in funding cost for both tranches to SSE of 3.02% per annum which compares
favourably to the all-in funding cost of 4.02% achieved on SSE’s most recent hybrid equity securities issued in 2015. The Group has also signed a
new £200m facility (£100m for SSE plc and £100m for Scottish Hydro Electric Transmission plc) with the European Investment Bank which will
be drawn during 2017 at which point it will become a 10 year term loan. As a consequence, 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 equity since February 2012, and the Group’s
credit rating. The statement of going concern is included in the Directors’ Corporate Governance report on page 72.
Treasury also manage the Group’s interaction with its relationship banks (defined as those banks that support the Group’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 2017, the value of outstanding cash collateral in respect of mark-to-market related margin calls on exchange traded positions
was £105.2m (2016 – £78.3m).
The contractual cash flows shown in the following tables are the contractual undiscounted cash flows under the relevant financial instruments.
Where the contractual cash flows are variable based on a price, foreign exchange rate or index in the future, the contractual cash flows 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 cash flows 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 cash flows 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.
The numbers in the following tables have been included in the Group’s cash flow forecasts for the purposes of considering Liquidity Risk
as noted above.
179
3. Financial Statements2.1. Accompanying information continued
A6. Financial risk management continued
A6.3 Liquidity risk and going concern continued
The following are the undiscounted contractual maturities of financial liabilities, including interest and excluding the impact of
netting agreements:
2017
2016
Carrying
value
£m
Contractual
cash flows
£m
0-12
months
£m
1-2 years
£m
2-5 years
£m
> 5 years
£m
Carrying
value
£m
Contractual
cash flows
£m
0-12
months
£m
1-2 years
£m
2-5 years
£m
> 5 years
£m
–
556.2
1,783.7
–
(576.9)
(2,332.0)
–
(111.7)
(72.5)
5,208.2
–
257.4
(7,674.8)
–
–
(220.9)
–
–
–
(4.8)
(186.5)
(726.5)
–
–
–
(460.4)
(322.3)
198.8
–
– 1,256.0
991.8
(1,750.7)
(1,821.1) (4,906.3) 4,138.9
200.7
81.8
–
–
–
–
(198.8)
(1,292.1)
(1,352.0)
(6,521.2)
(487.4)
–
(198.8)
(710.2)
(38.2)
(183.6)
(22.8)
–
–
(113.2)
(50.7)
–
(317.6)
(392.2)
–
(151.1)
(870.9)
(183.6)
(22.4)
–
(1,000.8)
(67.0)
–
(5,175.2)
(375.2)
–
7,805.5
(10,583.7)
(405.1)
(917.8)
(2,603.8)
(6,657.0) 6,868.0
(9,851.5)
(1,153.6)
(369.9)
(1,777.6)
(6,550.4)
276.9
(439.1)
(55.5)
(53.3)
(153.0)
(177.3)
300.8
(494.9)
(53.9)
(55.2)
(160.0)
(225.8)
8,082.4 (11,022.8)
(460.6)
(971.1)
(2,756.8)
(6,834.3)
7,168.8
(10,346.4)
(1,207.5)
(425.1)
(1,937.6)
(6,776.2)
1,443.1
250.3
820.6
(509.9)
(60.4)
–
2,218.3
5,667.0
4,645.5
951.4
70.1
–
40.9
(40.9)
(17.4)
(11.0)
(9.2)
(3.3)
58.4
(58.4)
(19.7)
(19.7)
(16.6)
(2.4)
362.6
(362.6)
(22.2)
(21.1)
(58.6)
(260.7)
357.1
(357.1)
(20.1)
(19.9)
(54.7)
(262.4)
9.8
(538.6)
(538.6)
–
–
–
–
–
–
–
–
–
7.4
(180.3)
(89.9)
(90.1)
(0.3)
0.1
(0.1)
(0.1)
–
–
–
–
1,856.4
(691.8)
242.4
(542.0)
(128.2)
(264.0) 2,641.3
5,071.1
4,515.7
821.7
(1.5)
(264.8)
Liquidity risk
Financial liabilities
Loans and borrowings
Commercial paper
and cash advances
Loans – floating
Loans – fixed
Unsecured bonds –
fixed
Non-recourse funding
Fair value adjustment
Finance lease
obligations
Derivative financial
liabilities
Operating derivatives
designated at
fair value
Interest rate swaps
used for hedging
Interest rate swaps
designated at fair
value
Forward exchange
contracts held for
hedging
Forward exchange
contracts designated
at fair value
Other financial
liabilities
Trade payables
2,606.7
(2,606.7)
(2,606.7)
2,606.7
(2,606.7)
(2,606.7)
–
–
–
–
– 1,868.3
(1,868.3)
(1,868.3)
– 1,868.3
(1,868.3)
(1,868.3)
–
–
–
–
–
–
Total
12,545.5
(14,321.3)
(2,824.9)
(1,513.1) (2,885.0)
(7,098.3) 11,678.4
(7,143.6)
1,439.9
396.6
(1,939.1)
(7,041.0)
Derivative financial
assets
Financing derivatives
Operating derivatives
designated at
fair value
(518.0)
86.2
(63.0)
(46.8)
134.5
61.5
(298.7)
(512.7)
(519.6)
(69.2)
37.6
38.5
(1,279.8)
(1,487.5)
(1,027.9)
(410.3)
(49.3)
– (1,854.0)
(5,146.1)
(4,082.9)
(950.6)
(112.6)
–
(1,797.8)
(1,401.3)
(1,090.9)
(457.1)
85.2
61.5
(2,152.7)
(5,658.8)
(4,602.5)
(1,019.8)
(75.0)
38.5
Net total (i)
10,747.7
(15,722.6)
(3,915.8)
(1,970.2)
(2,799.8)
(7,036.8) 9,525.7
(12,802.4)
(3,162.6)
(623.2)
(2,014.1)
(7,002.5)
(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.
180 SSE plc Annual Report 2017
Financial Statements A6. Financial risk management continued
A6.4 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 Committees of Retail and Wholesale. Exposures are reported to the Committees 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.
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 Committees of Retail and Wholesale. The Group’s exposure to Commodity risk is subsequently
reported to and monitored by the relevant Risk Committees 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.
181
3. Financial Statements2.1. Accompanying information continued
A6. Financial risk management continued
A6.4 Commodity risk continued
Commodity prices
UK gas (p/therm)
UK power (£/MWh)
UK coal (US$/tonne)
UK emissions (€/tonne)
UK oil (US$/bbl)
2017
2016
Reasonably
possible increase/
decrease in
variable
Base price (i)
Reasonably
possible increase/
decrease in
variable
Base price (i)
43
40
65
5
54
+/-11
+/-10
+/-10
+/-2
+/-9
33
33
42
5
49
+/-4
+/-5
+/-4
+/-1
+/-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
2017
Impact on profit
and equity (£m)
2016
Impact on profit
and equity (£m)
(239.0)
239.0
77.6
(77.6)
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.
A6.5 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
2017
£m
2016
£m
2,580.2
2,783.8
182 SSE plc Annual Report 2017
Financial Statements A6. Financial risk management continued
A6.5 Currency risk continued
The Group’s exposure to foreign currency risk was as follows:
2017
2016
DKK
(million)
SEK
(million)
¥m
€m
$m
NOK
(million)
CHF
(million)
DKK
(million)
SEK
(million)
¥m
€m
$m
NOK
(million)
CHF
(million)
Loans and
15,000.0
–
– 2,375.3 1,994.0
borrowings
Purchase and
commodity
contract
commitments
390.1
Gross exposure 15,000.0 390.1
–
–
–
360.2
(843.2)
540.2
360.2 2,915.5 1,150.8
–
–
–
Forward
exchange/
swap
contracts
Net exposure
(in currency)
Net exposure
(in £m)
15,000.0 390.1
360.2 1,700.3 1,144.0
–
–
–
–
– 1,215.2
– 1,036.5
6.8
5.4
–
–
–
–
–
–
–
– 15,000.0
–
– 2,063.3
850.0
–
–
–
41.8
41.8 15,000.0
982.1
982.1
1,105.9
1,105.9
453.9
2,517.2
377.5
1,227.5
23.9
23.9
34.6
34.6
–
41.8 15,000.0
982.1
1,105.9 2,029.1
1,239.0
23.9
34.6
–
–
–
–
–
–
–
–
488.1
(11.5)
386.0
(8.0)
–
–
–
–
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.
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
2017
£m
At 31 March
2016
£m
At 31 March
2017
£m
At 31 March
2016
£m
–
87.1
–
–
–
–
–
87.1
–
43.2
–
–
–
–
–
43.2
(0.5)
6.2
–
–
–
–
–
5.7
0.7
(8.1)
–
–
–
–
–
(7.4)
The impact of a decrease in rates would be an identical reduction in the annual charge.
A6.6 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).
183
3. Financial Statements2.1. Accompanying information continued
A6. Financial risk management continued
A6.6 Interest rate risk continued
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 assets/(liabilities)
Loans and borrowings
Finance lease obligations
2017
Carrying
amount
£m
(7,529.7)
942.6
(6,587.1)
1,427.0
68.3
(7,805.5)
(276.9)
(6,587.1)
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)
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.
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
2017
£m
4.9
4.9
2016
£m
14.3
14.3
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.
184 SSE plc Annual Report 2017
Financial Statements A7. Fair value of financial instruments
A7.1 Fair value of financial instruments within the group
The fair values of the primary financial assets and liabilities of the Group together with their carrying values are as follows:
2017
2016
Amortised
cost or other
(i)
£m
Classified
as trading
(ii)
£m
Total
carrying
value
£m
Amortised
cost or other
(i)
£m
Classified
as trading
(ii)
£m
Total
carrying
value
£m
Fair value
£m
Fair value
£m
Financial assets
Current
Trade receivables
Other receivables
Cash collateral and other short-term loans
Cash and cash equivalents
Derivative financial assets
2,598.6
16.6
105.2
1,427.0
–
–
–
–
–
1,269.5
2,598.6
16.6
105.2
1,427.0
1,269.5
2,598.6
16.6
105.2
1,427.0
1,269.5
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
4,147.4
1,269.5
5,416.9
5,416.9
2,472.5
1,615.0
4,087.5
4,087.5
Non-current
Unquoted equity investments
Loans to associates and jointly
controlled entities
Derivative financial assets
Financial liabilities
Current
Trade payables
Bank loans, commercial paper and
overdrafts
Finance lease liabilities
Derivative financial liabilities
Non-current
Loans and borrowings (iii)
Finance lease liabilities
Derivative financial liabilities
9.6
–
9.6
9.6
9.9
–
9.9
9.9
788.4
–
798.0
–
528.3
528.3
788.4
528.3
788.4
528.3
1,326.3
1,326.3
591.6
–
601.5
–
537.7
537.7
591.6
537.7
591.6
537.7
1,139.2
1,139.2
4,945.4
1,797.8
6,743.2
6,743.2
3,074.0
2,152.7
5,226.7
5,226.7
(2,606.7)
–
(2,606.7)
(2,606.7)
(1,868.3)
–
(1,868.3)
(1,868.3)
(118.8)
(23.6)
–
–
–
(1,153.2)
(118.8)
(23.6)
(1,153.2)
(122.3)
(23.6)
(1,153.2)
(898.8)
(24.5)
–
–
–
(1,783.8)
(898.8)
(24.5)
(1,783.8)
(900.6)
(24.5)
(1,783.8)
(2,749.1)
(1,153.2)
(3,902.3)
(3,905.8)
(2,791.6)
(1,783.8)
(4,575.4)
(4,577.2)
(7,429.3)
(253.3)
–
(257.4)
–
(703.2)
(7,686.7)
(253.3)
(703.2)
(8,876.5)
(253.3)
(703.2)
(5,887.4)
(276.3)
–
(81.8)
–
(857.5)
(5,969.2)
(276.3)
(857.5)
(6,889.9)
(276.3)
(857.5)
(7,682.6)
(960.6)
(8,643.2)
(9,833.0)
(6,163.7)
(939.3)
(7,103.0)
(8,023.7)
(10,431.7)
(2,113.8)
(12,545.5)
(13,738.8)
(8,955.3)
(2,723.1)
(11,678.4)
(12,600.9)
Net financial liabilities
(5,486.3)
(316.0)
(5,802.3)
(6,995.6)
(5,881.3)
(570.4)
(6,451.7)
(7,374.2)
(i) Recorded at amortised cost or loans and receivables.
(ii)
(iii) Includes non-recourse borrowings.
IAS 39 financial instruments.
A7.1.1 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.
185
3. Financial Statements2.1. Accompanying information continued
A7. Fair value of financial instruments continued
A7.2 Fair value hierarchy
The following table provides an analysis of financial instruments that are measured subsequent to initial recognition at fair value, grouped
into Levels 1 to 3 based on the degree to which the fair value is observable.
– Level 1 fair value measurements are those derived from unadjusted quoted market prices for identical assets or liabilities.
– Level 2 fair value measurements are those derived from inputs other than quoted prices included within level 1 that are observable for the
asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices).
– Level 3 fair value measurements are those derived from valuation techniques that include inputs for the asset or liability that are not
based on observable market data.
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
335.9
–
–
–
335.9
(341.9)
–
–
–
(341.9)
Level 2
£m
943.9
471.8
46.2
12.5
1,474.4
(1,101.2)
(403.5)
(9.8)
257.4
(1,257.1)
Level 3
£m
Total
£m
–
–
–
–
–
–
–
–
–
–
1,279.8
471.8
46.2
12.5
1,810.3
(1,443.1)
(403.5)
(9.8)
257.4
(1,599.0)
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 2017.
A8. Hedge accounting
A8.1 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
2017
Carrying
amount
2017
Expected
cash
flows
2017
0-12
months
2017
1-2 years
2017
2-5 years
2017
> 5 years
2016
Carrying
amount
2016
Expected
cash
flows
2016
0-12
months
2016
1-2 years
2016
2-5 years
2016
> 5 years
1.8
(4.0)
(2.2)
1.8
(4.0)
(2.2)
0.2
(0.4)
(0.2)
0.2
(0.4)
(0.2)
0.5
(1.2)
(0.7)
0.9
(2.0)
(1.1)
0.4
(0.1)
0.3
0.4
(0.1)
0.3
–
–
–
0.1
–
0.1
0.1
–
0.1
42.2
(9.8)
(474.0)
(538.6)
(321.2)
(538.6)
(122.1)
–
(30.7)
–
32.4 (1,012.6)
(859.8)
(122.1)
(30.7)
–
–
–
36.5
(7.4)
(631.9)
(180.3)
(460.5)
(89.9)
(130.3)
(90.1)
29.1
(812.2)
(550.4)
(220.4)
(41.2)
(0.3)
(41.5)
0.2
(0.1)
0.1
–
–
–
A8.2 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
(2017 – £22.5m loss, 2016 – £33.4m loss). Gains and losses on the ineffective portion of the hedge are recognised immediately in the income
statement (2017 – £nil, 2016 – £nil).
186 SSE plc Annual Report 2017
Financial Statements Company balance sheet
as at 31 March 2017
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
Trade and other receivables
Cash and cash equivalents
Derivative financial assets
Current assets
Total assets
Liabilities
Loans and other borrowings
Trade and other payables
Current tax liabilities
Derivative financial liabilities
Current liabilities
Loans and other borrowings
Deferred tax liabilities
Derivative financial liabilities
Non-current liabilities
Total liabilities
Net assets
Equity:
Share capital
Share premium
Capital redemption reserve
Hedge reserve
Retained earnings
Equity attributable to ordinary shareholders of the parent
Hybrid equity
Total equity
Note
2017
£m
2016
£m
3
3
3
4
5
7
11
10
5
8
11
8
6
7
11
8
7
11
9
9
126.5
439.0
2.9
2,817.9
9,124.8
–
287.7
525.4
13,324.2
4,364.8
1,250.7
194.8
5,810.3
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
19,134.5
13,731.5
118.8
7,271.4
17.6
48.3
7,456.1
6,107.7
132.2
347.5
6,587.4
14,043.5
5,091.0
507.8
885.7
26.5
15.6
1,445.7
2,881.3
2,209.7
5,091.0
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
These financial statements were approved by the Board of Directors on 16 May 2017 and signed on their behalf by
Gregor Alexander
Finance Director
Richard Gillingwater
Chairman
SSE plc Registered No: SC117119
187
3. Financial Statements2.1.
Company statement of changes in equity
for the year ended 31 March 2017
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 2016
503.8
880.4
22.0
14.2
901.0
2,321.4
2,209.7
4,531.1
Total comprehensive income for the year
Dividends to shareholders
Scrip dividend related share issue
Distributions to hybrid equity holders
Issue of shares
Share repurchase
Credit in respect of employee share awards
Investment in own shares
–
–
7.9
–
0.6
(4.5)
–
–
–
–
(7.9)
–
13.2
–
–
–
–
–
–
–
–
4.5
–
–
1.4
–
–
–
–
–
–
–
1,344.4
(906.6)
237.9
–
–
(131.5)
13.1
(12.6)
1,345.8
(906.6)
237.9
–
13.8
(131.5)
13.1
(12.6)
119.3
–
–
(119.3)
–
–
–
–
1,465.1
(906.6)
237.9
(119.3)
13.8
(131.5)
13.1
(12.6)
At 31 March 2017
507.8
885.7
26.5
15.6
1,445.7
2,881.3
2,209.7
5,091.0
At 1 April 2015
Total comprehensive income for the year
Dividends to shareholders
Scrip dividend related share issue
Distributions to hybrid equity holders
Issue of shares
Redemption of hybrid equity
Credit in respect of employee share awards
Investment in own shares
At 31 March 2016
Share
capital
£m
496.5
–
–
5.9
–
1.4
–
–
–
503.8
Share
premium
account
£m
Capital
redemption
reserve
£m
862.7
–
–
(5.9)
–
23.6
–
–
–
880.4
22.0
–
–
–
–
–
–
–
–
22.0
Total
attributable
to ordinary
shareholders
£m
1,693.0
1,317.7
(884.0)
175.8
–
25.0
(8.5)
13.5
(11.1)
Retained
earnings
£m
324.6
1,290.7
(884.0)
175.8
–
–
(8.5)
13.5
(11.1)
Hybrid
capital
£m
3,371.1
124.6
–
–
(124.6)
–
(1,161.4)
–
–
Total
£m
5,064.1
1,442.3
(884.0)
175.8
(124.6)
25.0
(1,169.9)
13.5
(11.1)
901.0
2,321.4
2,209.7
4,531.1
Hedge
reserve
£m
(12.8)
27.0
–
–
–
–
–
–
–
14.2
188 SSE plc Annual Report 2017
Financial Statements Notes to the Company financial statements
1. Principal accounting policies
SSE plc (the Company) is a company domiciled in Scotland. The address of the registered office is given on the back cover. The Company
financial statements present information about the Company as a separate entity and not about the Group.
Basis of preparation
The financial statements have been prepared in accordance with FRS 101 (Reduced Disclosures) (‘FRS 101’) and its interpretations as issued
by the International Accounting Standards Board (‘IASB’) and adopted by the European Union (‘adopted IFRS’). This represents a change in
accounting standards adopted as the Company previously adopted IFRS, as a result of the change no transitional adjustments were identified.
Under section 408 of the Companies Act 2006 the Company is exempt from the requirement to present its own income statement and
related notes.
It has also taken advantage of the following disclosure exemptions available under FRS 101:
– A Cash flow statement and related notes;
– Related party disclosures;
– Disclosures in respect of capital management; and
– The effects of new but not yet effective IFRSs.
As the consolidated financial statements of SSE plc include the equivalent disclosure, the Company has also taken advantage of the exemptions,
under FRS 101, available in respect of the following disclosure:
– Certain disclosures required by IFRS 13 Fair value measurement and the disclosures required by IFRS 7 Financial instrument disclosures.
– Share-based payments required by paragraphs 45(b) and 46 to 52 of IFRS 2 Share-based Payment.
Going concern
The Directors consider that the Company has adequate resources to continue in operational existence for the foreseeable future.
The financial statements are therefore prepared on a going concern basis.
Basis of measurement
The financial statements of the Company are prepared on the historical cost basis except for derivative financial instruments, available-for-
sale financial assets and assets of the Company pension scheme which are stated at their fair value, and liabilities of the Company pension
scheme 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 Company are presented in pounds sterling.
Critical accounting judgements and estimation uncertainty
In the process of applying the Company’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 in Note 4.1 of the
consolidated financial statements, with the most significant financial judgement areas as specifically discussed by the Audit Committee
being highlighted separately.
Significant accounting policies
The significant accounting policies applied in the preparation of these individual financial statements are set out below. These policies have
been applied consistently to all the years presented, unless otherwise stated.
Investments
In the Company, investments in subsidiaries are carried at cost less any impairment charges.
Interests in joint arrangements and associates
Associates are those investments over which the Company has significant influence but neither control nor joint control.
The Company’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 Company’s share of the revenue will be eliminated as it relates to its purchased share of the output
from the arrangement.
The Company’s joint ventures and associates are accounted for using the equity method of accounting where the joint venture and
associate investments are carried at historical cost plus the Company’s share of post-acquisition results, less any impairment in value.
The Company recognises its share of the results of these equity-accounted operations after tax and interest in the income statement.
Applicable Group accounting policies
The following significant accounting policies are consistent with those applied for the Group consolidated financial statements:
– Equity and equity-related compensation benefits (Supplementary information A1.2, page 165).
– Defined benefit pension scheme (Supplementary information A1.2, page 165).
– Taxation (Supplementary information A1.2, page 160).
– Financial instruments (Supplementary information A1 and A6, pages 165 and 177).
189
3. Financial Statements2.1. Notes to the Company financial statements continued
2. Supplementary financial information
2.1 Result for the year
The profit for the year attributable to ordinary shareholders dealt with in the financial statements of the Company was £1,144.3m
(2016 – £1,182.2m).
2.2 Auditor remuneration
The amounts paid to the Company’s Auditor in respect of the audit of these financial statements was £0.3m (2016 – £0.3m).
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.
2.3 Employee numbers
The average number of people employed by the Company (including Executive Directors) during the year was 2 (2016 – 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.
2.4 Directors’ remuneration and interests
Information concerning Directors’ remuneration, shareholdings, options, long-term incentive schemes and pensions is shown in the
Remuneration Report on pages 80 to 97. 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.
3. Investments
3.1 Associates and joint ventures
Share of net assets/cost
At 31 March 2015
Increase in shareholder loans
Repayment of shareholder loans
Transfer of loan to subsidiary
At 31 March 2016
Increase in shareholder loans
Repayment of shareholder loans
Disposal
Transfer of loans to subsidiary
At 31 March 2017
At 31 March 2015
Revaluation through other comprehensive income/(loss)
At 31 March 2016
Disposals in the year
At 31 March 2017
Equity
Other
JCEs and
associates
£m
–
–
–
–
–
–
–
–
–
–
SGN
£m
190.0
–
–
–
190.0
–
–
(63.5)
–
126.5
Equity
total
£m
190.0
–
–
–
190.0
–
–
(63.5)
–
126.5
Loans
Other
JCEs and
associates
£m
277.5
30.6
(13.4)
(22.7)
272.0
155.1
(14.3)
(1.2)
(150.4)
261.2
SGN
£m
266.9
–
–
–
266.9
–
–
(89.1)
–
177.8
Loans
total
£m
544.4
30.6
(13.4)
(22.7)
538.9
155.1
(14.3)
(90.3)
(150.4)
Total
£m
734.4
30.6
(13.4)
(22.7)
728.9
155.1
(14.3)
(153.8)
(150.4)
439.0
565.5
Faroe
Petroleum
£m
15.2
(8.4)
6.8
(3.9)
2.9
On 26 October 2016, the Group completed the disposal of a 16.7% equity stake in Scotia Gas Networks (SGN) to wholly owned subsidiaries
of the Abu Dhabi Investment Authority (ADIA). After transaction costs and adjustments, cash consideration received was £615.1m and an
exceptional gain on sale of £462.9m was recognised on disposal. Following the divestment, the Group will retain a 33.3% equity stake in
SGN. These assets were not held for sale at 31 March 2016.
190 SSE plc Annual Report 2017
Financial Statements 4. Subsidiary undertakings
Details of the Company’s subsidiary undertakings are disclosed in the Accompanying Information Section (A3) on page 170.
Investment in subsidiaries
At 31 March 2016
Increase in existing investments (i)
At 31 March 2017
Total
£m
2,728.8
89.1
2,817.9
(i) The increase in existing investments held by the Company relates to the capitalisation 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 (2017 – £16.2m; 2016 – £16.5m (both before tax)).
5. Trade and other receivables
All current and non-current trade and other receivable balances in the current and prior financial year represent amounts owed by
subsidiary undertakings.
6. Trade and other payables
All current and non-current trade and other payable balances in the current and prior financial year represent amounts due to
subsidiary undertakings.
7. Taxation
Current tax liabilities
Corporation tax
2017
£m
17.6
2016
£m
21.9
Deferred taxation
The following are the deferred tax liabilities and assets recognised by the Company and movements thereon during the current and prior
reporting periods:
At 31 March 2015
Charge/(credit) to Income Statement
Charge/(credit) to equity
At 31 March 2016
Charge/(credit) to income statement
Charge/(credit) to equity
At 31 March 2017
Fair value
gains/(losses)
on derivatives
£m
Retirement
benefit
obligations
£m
(47.2)
5.1
5.0
(37.1)
10.0
(2.1)
(29.2)
(26.1)
(0.4)
28.3
1.8
3.4
178.7
183.9
Other
£m
(14.6)
(6.5)
–
(21.1)
(4.4)
3.0
(22.5)
Total
£m
(87.9)
(1.8)
33.3
(56.4)
9.0
179.6
132.2
191
3. Financial Statements2.1. Notes to the Company financial statements continued
7. Taxation continued
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)
2017
£m
132.2
–
132.2
2016
£m
–
(56.4)
(56.4)
The deferred tax liabilities/assets disclosed include the deferred tax relating to the Company’s pension scheme liabilities.
8. Loans and borrowings
Current
Other short-term loans
Non-current
Loans
Total loans and borrowings
Cash and cash equivalents
Unadjusted net debt
Add/(less):
Hybrid equity (Note 9)
Adjusted net debt and hybrids
2017
£m
118.8
118.8
6,107.7
6,107.7
6,226.5
(1,250.7)
4,975.8
2,209.7
7,185.5
2016
£m
898.8
898.8
4,494.4
4,494.4
5,393.2
(155.9)
5,237.3
2,209.7
7,447.0
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.
8.1 Borrowing facilities
The Company 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 2017 no commercial paper was outstanding (2016 – £198.8m). During the year the Company extended its existing
£1.5bn of revolving credit and bilateral facilities by invoking the one year extension options with the facilities now maturing in August 2021
(£1.3bn) and November 2021 (£0.2bn). These facilities continue to provide back up to the commercial paper programme and, as at 31 March
2017 they were undrawn. The Company has a further £200m facility available with the European Investment Bank which will be fully drawn
during 2017 when it will become a 10 year term loan.
192 SSE plc Annual Report 2017
Financial Statements 8. Loans and borrowings continued
8.1 Borrowing facilities continued
Analysis of borrowings
Current
Commercial paper and cash advances
Bank loans – non-amortising (i)
US Private Placement 16 April 2017
Total current
Non-current
Bank loans – non-amortising (i)
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
4.25% Eurobond repayable
14 September 2021
2.375% €500m Eurobond repayable
10 February 2022
2017
Weighted
average
interest rate
(iii)
2017
Face value
2017
Fair value
2016
Weighted
average
interest rate
(iii)
2017
Carrying
amount
2016
Face value
£m
2016
Fair value
£m
–
1.8%
3.2%
–
2.1%
5.0%
–
3.7%
–
106.0
12.8
118.8
526.6
500.0
–
67.0
–
106.1
16.2
122.3
558.2
530.0
–
86.4
–
106.0
12.8
118.8
526.6
499.2
–
66.9
0.9%
1.0%
–
–
2.1%
5.0%
3.2%
3.7%
198.8
700.0
–
898.8
632.6
500.0
12.8
67.0
199.0
701.6
–
900.6
683.4
542.2
14.2
75.7
2016
Carrying
amount
£m
198.8
700.0
–
898.8
632.6
498.6
12.7
66.9
2.0%
511.8
540.1
509.4
2.0%
474.4
498.8
471.3
4.3%
300.0
339.2
298.2
2.4%
415.0
453.8
414.5
–
–
–
–
–
–
–
–
Between two and five years
–
2,320.4
2,507.7
2,314.8
1,686.8
1,814.3
1,682.1
US Private Placement 16 April 2022
US Private Placement 28 April 2023
US Private Placement 6 September 2023
US Private Placement 16 April 2024
US Private Placement 8 June 2026
US Private Placement 6 September 2026
US Private Placement 6 September 2027
8.375% Eurobond repayable on
20 November 2028
6.25% Eurobond repayable on
27 August 2038
4.25% Eurobond repayable
14 September 2021
2.375% €500m Eurobond repayable
10 February 2022 (iv)
5.875% Eurobond repayable
22 September 2022
1.75% €700m Eurobond repayable
8 September 2023 (v)
4.75% $900 NC5.5 hybrid maturing
16 September 2077 (vi)
3.625% NC5.5 hybrid maturing
16 September 2077
Over five years
Fair value adjustment (ii)
Total non-current
Total
4.3%
2.8%
2.9%
4.4%
3.1%
3.2%
3.2%
162.7
35.0
120.0
204.1
64.0
247.1
35.0
213.8
36.6
124.8
268.0
68.0
270.7
37.4
162.4
34.3
117.1
203.7
62.5
241.2
34.2
4.3%
–
–
4.4%
–
–
–
162.7
–
–
204.1
–
–
–
187.8
–
–
235.8
–
–
–
162.3
–
–
203.6
–
–
–
8.4%
500.0
800.9
495.1
8.4%
500.0
752.2
494.7
6.3%
350.0
536.5
346.6
6.3%
350.0
465.1
346.4
–
–
–
–
–
–
–
–
4.3%
300.0
331.7
297.9
2.4%
415.0
446.9
414.4
5.9%
300.0
368.9
298.5
5.9%
300.0
361.3
298.2
1.8%
514.6
544.7
513.2
1.8%
514.6
533.0
513.0
4.8%
730.9
734.0
727.9
3.6%
300.0
300.0
298.8
–
–
–
–
–
–
–
–
3,563.4
4,304.3
3,535.5
2,746.4
3,313.8
2,730.5
–
–
257.4
–
–
81.8
5,883.8
6,812.0
6,107.7
4,433.2
5,128.1
4,494.4
6,002.6
6,934.3
6,226.5
5,332.1
6,028.7
5,393.2
(i) Balances include term loans and EIB debt and is a mixture of fixed and floating rate debt.
(ii) 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.
(iii) The weighted average interest rates (including the effect of interest rate swaps) for the year ended 31 March 2017 was 3.66% (2016 – 3.73%).
(iv) The 2.375% €500m Eurobond maturing 10 February 2022 has been swapped to Sterling giving an effective interest rate of 3.53%.
(v) The 1.75% €700m Eurobond maturing 8 September 2023 has been swapped to Sterling giving an effective interest rate of 3.16%.
(vi) The 4.75% $900m NC5.5 hybrid maturing 16 September 2077 has been swapped to Euros ($605m) and Sterling ($295m) giving an effective interest rate of 2.25% and 3.29% respectively.
193
3. Financial Statements2.1. Notes to the Company financial statements continued
8. Loans and borrowings continued
8.1 Borrowing facilities continued
Hybrid debt
During the year SSE successfully issued £1.0bn of new debt accounted hybrids with the intent of using the proceeds to replace SSE’s hybrid
issued in 2012 (at an all-in rate of 5.6%), which has an issuer first call date on 1 October 2017. This dual tranche issue comprises £300m with
a coupon of 3.625% and $900m with a coupon of 4.75%. The $900m tranche has been swapped back to both Euros and Sterling, bringing the
all-in rate down to 2.72% and resulting in an all-in funding cost for both tranches to SSE of 3.02% per annum which compares favourably to the
all-in funding cost of 4.02% achieved on SSE’s most recent hybrid equity securities issued in 2015. Due to the hybrids having a fixed redemption
date, they have been accounted for as a debt item and included within “Loans” in Loans and Borrowings above, this is in contrast to the previous
hybrid issues which have no fixed redemption date and are accounted as Equity, see Note 9.
9. Equity
Share capital
Allotted, called up and fully paid:
At 1 April 2016
Issue of shares (i)
Share repurchases (ii)
At 31 March 2017
Number
(millions)
1,007.6
16.9
(8.9)
1,015.6
£m
503.8
8.5
(4.5)
507.8
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 62.5p per ordinary share (in relation to year ended 31 March 2016) and the interim dividend
of 27.4p (in relation to the current year) under the terms of the Company’s scrip dividend scheme. This resulted in the issue of 9,395,092 and 6,324,986 new fully paid ordinary shares
respectively (2016 – 10,600,639 and 1,172,973). In addition, the Company issued 1.2m (2016 – 2.8m) shares during the year under the savings-related share option schemes for a
consideration of £13.8m (2016 – £25.0m).
(ii) During the current financial year the Company began a programme of share repurchases. During the year to 31 March 2017 8.9m shares were repurchased for total consideration
of £131.5m. The programme was enacted in December 2016 and the group plan to continue this activity until December 2017. The nominal value of share capital repurchased and
cancelled is transferred out of share capital and into the capital redemption reserve.
During the year, on behalf of the Company, the employee share trust purchased 0.8m shares for a total consideration of £12.6m (2016 –
0.8m shares, consideration of £11.1m). At 31 March 2017, the trust held 2.9m shares (2016 – 3.0m) which had a market value of £42.5m
(2016 – £45.5m).
Capital redemption reserve
The capital redemption reserve comprises the value of shares redeemed or purchased by the Company from distributable profits.
Hedge reserve
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.
Hybrid equity
USD 700m 5.625% perpetual subordinated capital securities
EUR 750m 5.625% perpetual subordinated capital securities
GBP 750m 3.875% perpetual subordinated capital securities
EUR 600m 2.375% perpetual subordinated capital securities
2017
£m
427.2
598.2
748.3
436.0
2016
£m
427.2
598.2
748.3
436.0
2,209.7
2,209.7
194 SSE plc Annual Report 2017
Financial Statements 10. Retirement benefit obligations
Defined benefit scheme
The Company has a funded final salary pension scheme which provides defined benefits based on final pensionable pay. The scheme is
subject to an independent valuation 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 scheme operated by the Company the Scottish Hydro Electric scheme.
Pension summary:
Scottish Hydro Electric
IFRIC 14 movement
Net actuarial gain and movement in IFRIC 14 liability
Scheme type
Defined benefit
Net actuarial gain/(loss) recognised in
respect of the pension asset in the
statement of comprehensive income
Net pension asset
2017
£m
235.4
262.7
498.1
2016
£m
191.3
(49.5)
141.8
2017
£m
525.4
–
525.4
2016
£m
272.7
(262.7)
10.0
IFRIC 14
During the financial year the Scottish Hydro Electric pension scheme amend the rules of its scheme in order to be clear of the rights to
a surplus upon final winding up of the scheme. This current year amendment presented a change in circumstance that has meant the
Company now believes that is nor longer required to apply IFRIC 14 to the Scottish Hydro Electric pension scheme surplus or liability
in the current year or in the future, this has the effect of no longer restricting the pension scheme assets from the current financial year
onwards. The net pension asset of the Scottish Hydro Electric Scheme at 31 March 2017 was equal to £525.4m (2016 – net asset of £10.0m
presented after an IFRIC 14 minimum funding requirement of £262.7m).
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
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%
10.1 Pension scheme assumptions
The scheme has been updated to 31 March 2017 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 the scheme were:
Rate of increase in pensionable salaries
Rate of increase in pension payments
Discount rate
Inflation rate
At 31 March
2017
At 31 March
2016
4.3%
3.3%
2.7%
3.3%
4.1%
3.1%
3.6%
3.1%
The assumptions relating to longevity underlying the pension liabilities at 31 March 2017 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 2017
Male
At 31 March 2017
Female
At 31 March 2016
Male
At 31 March 2016
Female
23
25
24
28
26
29
26
29
195
3. Financial Statements2.1. Notes to the Company financial statements continued
10. Retirement benefit obligations continued
10.1 Pension scheme assumptions continued
The impact on the scheme’s liabilities of changing certain of the major assumptions is as follows:
Pensionable salaries
Pension payments
Discount rate
Longevity
At 31 March 2017
At 31 March 2016
Increase/
decrease in
assumption
0.1%
0.1%
0.1%
1 year
Effect on
scheme
liabilities
+/- 0.2%
+/- 1.2%
+/- 2.2%
+/- 4.5%
Increase/
decrease in
assumption
0.1%
0.1%
0.1%
1 year
Effect on
scheme
liabilities
+/- 0.2%
+/- 1.6%
+/- 2.0%
+/- 2.9%
These assumptions are considered to have the most significant impact on the scheme valuations.
10.2 Valuation of pension scheme
Equities
Government bonds
Corporate bonds
Insurance contracts
Other investments
Quoted
£m
513.8
752.0
645.0
–
118.5
Total fair value of plan assets
Present value of defined benefit obligation
2,029.3
Pension asset (pre-IFRIC 14)
IFRIC 14 liability (i)
Surplus in the scheme
Deferred tax thereon
Net pension asset
Unquoted
£m
–
–
–
221.3
–
221.3
Value at
31 March
2017
£m
513.8
752.0
645.0
221.3
118.5
2,250.6
(1,725.2)
525.4
–
525.4
(183.9)
341.5
Long-term
rate of return
expected at
31 March
2017
%
5.5
–
2.7
2.7
3.4
Quoted
£m
509.2
784.1
488.9
–
98.7
1,880.9
Unquoted
£m
–
–
–
–
–
–
Value at
31 March
2016
£m
5.6
1.2
3.0
–
3.8
Value at
31 March
2016
£m
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, application of this standard was changed within the current year.
196 SSE plc Annual Report 2017
Financial Statements 10. Retirement benefit obligations continued
10.3 Movements in the defined benefit asset obligations and assets during the year
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
Benefits paid
2017
Assets
£m
Obligations (i)
£m
1,880.9
(1,608.2)
–
–
65.9
65.9
–
–
–
396.6
396.6
36.2
(129.0)
(92.8)
(25.4)
(3.4)
(56.0)
(84.8)
174.7
(341.5)
5.6
–
(161.2)
–
129.0
129.0
Total
£m
272.7
(25.4)
(3.4)
9.9
(18.9)
174.7
(341.5)
5.6
396.6
235.4
36.2
–
36.2
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
Balance at 31 March
2,250.6
(1,725.2)
525.4
1,880.9
(1,608.2)
(i) The retirement benefit obligations are stated before IFRIC 14 liabilities, application of this standard was amended within the current year.
10.4 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:
Return/(loss) on pension scheme assets
2017
£m
28.8
28.8
(65.9)
56.0
–
(9.9)
2017
£m
462.5
Total
£m
75.4
(30.7)
–
3.0
(27.7)
56.3
129.0
73.9
(67.9)
191.3
33.7
–
33.7
272.7
2016
£m
29.9
29.9
(61.8)
58.8
6.7
3.7
2016
£m
(6.1)
Employer financed retirement benefit (EFRB) pension costs
The increase in the year in relation EFRB was £5.4m (2016 – £0.7m decrease). This is included in other provisions.
Further discussion of the pension scheme assets, liabilities, polices, risk and strategy can be found on page 141 of the Group consolidated
financial statements.
197
3. Financial Statements2.1.
Notes to the Company financial statements continued
11. Financial instruments
For financial reporting purposes, the Company has classified derivative financial instruments as financing derivatives. 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 derivative financial assets and (liabilities) are represented as follows:
Derivative financial assets
Non-current
Current
Derivative liabilities
Non-current
Current
Total derivative liabilities
Net asset/(liability)
2017
£m
287.7
194.8
482.5
(347.5)
(48.3)
(395.8)
86.7
2016
£m
537.7
1,615.0
2,152.7
(857.5)
(1,783.8)
(2,641.3)
(488.6)
Information on the Group’s financial risk management and the fair value of financial instruments is available at A6 and A7.
12. Commitments and contingencies
Guarantees, indemnities and other contingent liabilities
SSE plc has provided guarantees on behalf of subsidiary, joint venture and associated undertakings as follows:
2017
2016
Bank borrowing
Performance of contracts
Purchase of gas
SSE on behalf
of subsidiary
£m
SSE on behalf of
joint operations
and ventures
£m
SSE on behalf
of partnerships
£m
654.4
1,526.6
10.0
–
258.0
–
–
0.7
–
Subsidiaries have provided guarantees on behalf of the Company as follows:
Bank borrowing
Total
£m
654.4
1,785.3
10.0
2017
£m
1,773.9
Total
£m
352.2
1,357.6
10.0
2016
£m
1,971.1
In the year to 31 March 2017, the Group had drawn down £50m from it’s European Investment Bank facility. SSE Plc had entered into a guarantee
with the European Investment Bank in relation to this facility to guarantee the obligations of Scottish Hydro Electric Transmission Plc. In relation
to bank borrowings the guarantee amounts outlined 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, has provided a guarantee to Tay Street Lighting (Leeds) Ltd, Tay Valley Lighting (Newcastle &
North Tayside) Ltd and Tay Valley Lighting (Stroke on Trent) Ltd in respect of provision and maintenance of public street lighting and illuminated
traffic signage. 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. Scottish Hydro Electric Transmission Plc, 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.
198 SSE plc Annual Report 2017
Financial Statements Independent Auditor’s Report
to the members of SSE plc only
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 2017 set out on pages 106 to 198. In our opinion:
– 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 2017 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;
– the parent company financial statements have been properly prepared in accordance with UK Accounting Standards, including FRS 101
Reduced Disclosure Framework; 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.
Overview
Materiality:
Group financial statements as a whole
Coverage
Risks of material misstatement
£75m (2016 – £75m)
5% (2016 – 5%) of profit before tax before exceptional
items and before certain remeasurements
99% (2016 – 99%) of group profit before tax
vs 2016
Recurring risks
Carrying value of certain non current assets
Accounting for estimated revenue
Recoverability of GB retail receivables
Group pension obligation
2. 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 (unchanged from 2016):
The risk
Our response
Carrying value of
certain non-current
assets and inventories
(£13.4bn; 2016 –
£13.6bn)
Refer to page 72 (Audit
Committee Report),
pages 114, 161 and 162
(accounting policy)
and page 139 (financial
disclosures).
Forecast-based valuation
Certain non-current assets (tangible and intangible)
significant and at risk of impairment due to a number
of global and national factors including low commodity
prices, the type of plant owned, poor operating
returns for thermal plant, the unpredictability of
reserves in relation to exploration and production
assets. The estimated recoverable amount is
subjective due to the inherent uncertainty involved
in forecasting and discounting future cash flows.
Subjective estimate
There are significant trade receivables with customers
in GB with the risk of customer default remaining high,
due to continued economic uncertainty and the fact
that for domestic customers, gas and electricity bills
can be a large part of income, resulting in significant
judgement being applied in the Group’s assessment of
the recoverability of these receivables.
Provision for GB retail
receivables
(£0.1bn; 2016 –
£0.1bn)
Refer to page 72 (Audit
Committee Report),
pages 115 and 166
(accounting policy)
and page 145 (financial
disclosures).
Our procedures included:
– Assessing methodology: Assessing the principles
and integrity of the cash flow model and agreeing
certain of the inputs to source documents;
– Our sector experience: Evaluating assumptions used,
in particular those relating to future commodity prices
using our industry knowledge;
– Benchmarking assumptions: Comparing the group’s
assumptions to externally derived data in relation to
key inputs such as future commodity prices, discount
rates or to historical data (as a guide to expected
future outcomes);
– Comparing valuations: Comparing the sum of
the discounted cash flows to the group’s market
capitalisation to assess the reasonableness of
those cash flows; and
– Assessing transparency: Assessing 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 non-current assets and inventory.
Our procedures included:
– Test of detail: Assessing and challenging the Directors’
assumptions behind the provision against experience
of cash collection during the year and subsequent to
the year end in relation to significant elements of the
receivables balance. Ensuring the provision has been
accurately and consistently calculated;
– Our sector experience: Assessing the Directors’
assumptions behind the provision against trade
receivables against our own knowledge of bad
debts experience by the group; and
– Assessing transparency: Assessing the adequacy
of the group’s disclosures about the degree of
estimation involved in arriving at the provision.
199
3. Financial Statements2.1. Independent Auditor’s Report continued
The risk
Our response
Accounting for
estimated revenue
(£0.8bn; 2016 –
£0.9bn)
Refer to page 72 (Audit
Committee Report),
pages 114 and 159
(accounting policy)
and page 145 (financial
disclosures).
Subjective estimate
Certain of the Group’s energy sales revenues,
where no bill has been issued at the year end date, 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’).
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 principal
adjustments made for gas or electricity distributed
to customers (as identified from the industry wide
settlements system), and gas or electricity billed
to customers (as identified from the group’s
billing system); and
2. assess the value to be ascribed to that volume
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.
Subjective valuation
Small changes in the assumptions and estimates
used to value the group’s pension obligation (before
deducting scheme assets) would have a significant
effect on the group’s net pension surplus/deficit.
Group pension
obligation
(£0.1bn surplus;
2016 – £0.4bn deficit)
Refer to page 72 (Audit
Committee Report),
page 114 and 165
(accounting policy)
and page 152 (financial
disclosures).
Our procedures included:
– Benchmarking assumptions: we challenged the
group’s assumptions relating to volume and price
used in determining the level of estimated revenue,
as follows:
Underlying assumption on volume
We compared volume data to the external settlements
systems and internal billing systems, having performed
testing of the controls over new customer
authorisations, pricing calculations, billing exceptions,
interfaces with the general ledger and price updates.
To further corroborate the volumes used, we
compared the estimated volume determined by the
Group with benchmarks that the Group has developed
over a number of years using internal and external
information and analysed and sought and assessed
explanations for variances from that.
Underlying assumptions on price
We challenged the assumptions of price per unit
by comparing the price applied with current actual
billing internal trends and data. Further, we assessed
the overall consistency period on period of the
assumptions and of the inputs to the calculation
of estimated value of revenue;
– Analytical procedures: We set expectations as to
the likely level of total revenue and compared this
with the Group’s estimate, obtaining explanations for
significant differences. We assess processes and
controls giving rise to the Group’s revenue as part
of these procedures; and
– Assessing transparency: Assessing the adequacy of
the group’s disclosures about the degree of estimation
involved in arriving at the estimated revenue.
Our procedures included:
– Benchmarking assumptions: We assessed the
independence and competence of the Group’s
external actuaries challenging, with the support of our
own actuarial specialists, the key assumptions applied,
being the discount rate, mortality and inflation rate
against externally derived data, In order to assess the
reasonableness of these assumptions, we performed
a benchmarking exercise against other companies’
assumptions; and
– Assessing transparency: Considering the adequacy
of the group’s disclosures in respect of the sensitivity
of the deficit to these assumptions.
3. Our application of materiality and an overview of the scope of our audit
Materiality for the Group financial statements as a whole was set at £75 million (2016 – £75 million), determined with reference to a
benchmark of group profit before taxation, excluding exceptional items and certain remeasurements (mainly fair value movements on
derivatives) as disclosed on the face of the income statement, of which it represents 5% (2016 – 5%).
We reported to the Audit Committee any corrected or uncorrected identified misstatements exceeding £3 million (2016 – £3 million)
in addition to other identified misstatements that warranted reporting on qualitative grounds.
Of the group’s 232 (2016 – 224) reporting components, audits for group reporting purposes were performed at 115 (2016 – 127) components
in the UK and Ireland. These represent all components that we considered to be individually financially significant. These audits accounted for
the following percentages of the group’s results: 97% (2016 – 98%) of Group revenue, 99% (2016 – 98%) of Group profit before tax; and 98%
(2016 – 98%) of Group net assets. Specified risk-focused audit procedures were performed in relation to 12 (2016 – 7) components which
accounted for 2% (2016 – 1%) of revenue and nil% (2016 – 1%) of group profit before tax and 1% (2016 – 1%) of group net assets. The latter were
200 SSE plc Annual Report 2017
Financial Statements not individually financially significant enough to require an audit for group reporting purposes but did present individual risks that needed to be
addressed. 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 £8 million to £30 million, having
regard to the mix of size and risk profile of the Group across the components. The work on 10 (2016 – 10) of the components was performed
by component auditors (including the auditor of SGN, the group’s most significant joint venture) and the rest by the Group team. The Group
team issued reporting instructions to the component auditors as to the significant areas to be covered during their audit. The group team
performed procedures on the items excluded from normalised group profit before tax.
Telephone calls were held with the component auditors (including with the partner of the component auditor in respect of the audit of SGN)
as part of the assessment of the audit risk and strategy. As part of the close out process further calls were held with component auditors and 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 auditors.
Profit before tax and before exceptional
items and certain remeasurements
£1,510m (2016 – £1,451m)
Materiality
£75m (2016 – £75m)
£75m
Whole financial statements materiality(2016 – £75m)
Profit before tax and before
exceptional items and
certain remeasurements
Group materiality
£30m
Range of materiality at 115 components (£8m – £30m) (2016 – £10m to £25m)
£3m
Misstatements reported to the audit committee (2016 – £3m)
Group revenue – 99% (2016 – 99%)
Group profit before tax – 99% (2016 – 99%)
2%
1%
1%
98%
97%
98%
99%
Group net assets – 98% (2016 – 98%)
Group profit before exceptional items
and taxation – 99% (2016 – 99%)
1%
1%
1%
1%
98%
98%
98%
98%
Full scope for group audit purposes 2017
Specified risk-focused audit procedures 2017
Full scope for group audit purposes 2016
Specified risk-focused audit procedures 2016
Residual components
201
3. Financial Statements2.1.
Independent Auditor’s Report continued
4. Our opinion on other matters prescribed by the Companies Act 2006 is unmodified
In our opinion:
– 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 is consistent with the financial statements.
Based solely on the work required to be undertaken in the course of the audit of the financial statements and from reading the Strategic
Report and the Directors’ Report:
– we have not identified material misstatements in those reports; and
– in our opinion, those reports have been prepared in accordance with the Companies Act 2006.
5. 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:
– the directors’ statement on longer-term viability on pages 24 to 27, concerning the principal risks, their management, and, based
on that, the directors’ assessment and expectations of the group’s continuing in operation over the 3 years to 2020; or
– the disclosures in Note 1 of the financial statements concerning the use of the going concern basis of accounting.
6. 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 Report of the Audit Committee does not appropriately address matters communicated by us to the audit committee.
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 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:
– the Directors’ Statement, set out on pages 72 and 27 respectively, in relation to going concern and longer-term viability; and
– the part of the Corporate Governance Statement on pages 54 to 97 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 100, 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
319 St Vincent Street
Glasgow, G2 5AS
16 May 2017
202 SSE plc Annual Report 2017
Financial Statements Notes
203
3. Financial Statements2.1. Notes
204 SSE plc Annual Report 2017
Financial Statements Manage your shares online/
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Shareholder information
Shareholder enquiries
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Registrar, Capita Asset Services. Shareholders with queries relating
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Financial calendar
Publication of Annual Report
AGM (Perth) and Trading Statement
Ex-dividend date for final dividend
Record Date for final dividend
Final date for Scrip elections
Payment date
Notification of Close Period by
16 June 2017
20 July 2017
27 July 2017
28 July 2017
25 August 2017
22 September 2017
30 September 2017
Results for six months to 30 September
08 November 2017
Website
SSE’s website, sse.com, contains a wide range of information
including a dedicated investors section where you can find further
information about shareholder services including:
– share price information;
– dividend history and trading graphs
– the Scrip Dividend Scheme;
– telephone and internet share dealing; and
– downloadable shareholder forms.
Digital news
SSE use a dedicated news and views website (available at
www.sse.com/newsandviews) and Twitter (www.twitter.com/sse)
to keep shareholders, investors, journalists, employees and other
interested parties up-to-date with news from the Company.
Dividends
The Company typically pays dividends twice yearly. Interim
dividends, are paid in March, and final dividends are paid in
September once approved by shareholders at the AGM. SSE
encourages its shareholders to have dividends paid directly into
their bank/building society account, to ensure secure payment
of funds on payment date whilst reducing the environmental
impact through reduced print and paper use. Shareholders who
elect to receive their dividend payment in this way will only receive
an annual dividend confirmation at the end of each financial year.
Any shareholder who requires a separate dividend confirmation for
each dividend payment should contact Capita Asset Services.
For further information about SSE,
please contact:
SSE plc
Corporate Affairs
Inveralmond House
200 Dunkeld Road
Perth PH1 3AQ
UK
Tel: +44 (0)1738 456000
Email: info@sse.com
Registered in Scotland No. 117119
sse.com
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on Twitter at: www.twitter.com/sse
@SSE
STOCK CODE 008229
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