SSE plc
Preliminary results for the year ended 31 March 2019

22 May 2019

Headlines

Financial performance in 2018/19 in line with Notification of Close Period Statement on 28 March:

·    Final dividend of 68.2 pence, making full-year dividend of 97.5 pence, in line with five-year dividend plan.

·    Headline results reflect £284.9m adjusted operating loss previously forecast in Energy Portfolio Management (EPM):

o  Adjusted earnings per share* of 67.1 pence, down 32%; and

o  Adjusted profit before tax* of £725.7m, down 38%.

·    Reported results reflect the EPM loss and the impact of £1,096.9m exceptional gains and fair value uplift from asset sales:

o  Reported earnings per share* of 135.2 pence, up 110%; and

o  Reported profit before tax* of £1,370.6m, up 59%.

·    Adjusted EBITDA^# total for the core businesses of Electricity Networks and Renewables was over £1.5bn, 83% of SSE Group* total.   

·    Value creating disposals in the year delivered:

o  over £1bn of cash proceeds;

o  £608.4m of exceptional gains on sale; and

o  £488.5m of exceptional unrealised fair value uplift (reflecting revaluation of retained stakes).

·    Investment and capital expenditure of £1.42bn includes over £1bn investment in regulated electricity networks and renewable energy but excludes £195m investment in assets subsequently divested in the year.

·    Adjusted net debt and hybrid capital of £9.39bn.

·    Total GDP contribution to UK economy of £8.9bn and to Irish economy of €689m as a result of direct and supply chain activities. This supported an estimated 105,000 jobs across both countries.

Note: percentage comparisons relate to year to 31 March 2018

*Excludes SSE Energy Services, which remains held for disposal

^# EBITDA - adjusted earnings before interest, tax, depreciation and amortisation

Delivery against strategic priorities continuing:

·    £1bn Caithness-Moray transmission link (SSE's first major HVDC project) completed on time and below budget, helping take Transmission RAV to over £3.25bn.

·    All 84 turbines at the 588MW Beatrice offshore wind farm commissioned, with this £2.6bn project being delivered on time and below budget, (SSE share: 40%)

·    Stronelairg onshore wind farm (228MW) completed six months early and on budget.

·    Development and operation of renewable energy assets brought together under new SSE Renewables management team as part of wider refocusing of SSE's businesses

·    New approach to hedging commodity price exposures, outlined in November 2018, on course to be fully in place from 2020/21, with 'SSE's Approach to Hedging: May 2019 Update' published today on sse.com.

·    Four business goals for 2030 adopted to tackle climate change and support global goals for sustainable development.

·    Disposal of 50% stake in SSE Enterprise Telecoms for up to £380m; process to prepare for disposal of investments in gas production under way.

·    Katie Bickerstaffe appointed Executive Chair of SSE Energy Services with mandate to secure the best future for the business outside SSE.

Outlook for 2019/20

·    Intention to recommend a full-year dividend of 80 pence per share, in line with five-year dividend plan.

·    Adjusted investment and capital expenditure expected to be around £1.5bn, including almost £1.0bn investment in regulated electricity networks and renewable energy.

·    Group adjusted operating profit improving but likely to be negatively impacted by expected phasing of profits in regulated Electricity Networks and by Renewable output for 19/20 being hedged at less than current market prices. For more detail see the Group Financial Review section of this statement.

·    Share buy back plans include:

o  programme of £200m announced in February with share buy backs totalling £50m so far completed at an average market price per share of 1,149p; and

o  intention to buy-back shares if Scrip take-up of full year dividend exceeds 20%.

·    Adjusted net debt forecast to be around £10bn at 31 March 2020.

Developing key future opportunities for long-term business through low-carbon transition:

·    Over 8GW of on- and off-shore wind farm pipeline developments for SSE Renewables in GB and Ireland, capable of doubling renewable energy output to over 20TWh by 2025.

·    Powerful case for investment in north of Scotland that could contribute to a Transmission RAV of around £5bn by 2026, up from around £3.3bn at March 2019.

·    Opportunity to support the UK's decarbonisation objectives through evolution to Distributed System Operators, including industry-first smart grid trial in Oxfordshire.

Richard Gillingwater, Chair of SSE, said:

"While our financial results clearly fell well short of what we hoped to achieve at the start of the year, we've made significant progress towards our ambition to be a leading energy company in a low-carbon world. 

"We have continued to develop our core businesses of regulated energy networks and renewables; demonstrated our ability to create and unlock value from developing and operating, as well as owning, assets; and adopted clear long-term goals as we set up the business for long-term success.

"The fundamental strengths of our business and the strategic opportunities afforded by the transition to a low-carbon economy will support the delivery of our five-year dividend plan and creation of value for society as a whole."

SSE's financial performance in 2018/19 at-a-glance

At 31 March 2019 SSE Energy Services is held for disposal and has been accounted for as a discontinued operation. Therefore, the results of SSE Energy Services have been excluded from the profit and loss metrics in the tables below. However, as the SSE Group continues to fund SSE Energy Services, and will do so until completion of the transaction, the capital expenditure and debt related metrics presented below include the activity of that business. Details of SSE Energy Services performance can be found in the Group Financial Overview.

*Restated to exclude the contribution of SSE Energy Services, which has been presented as a discontinued operation (see note 5.1(ii) to the Summary Financial Statements). Certain adjusted performance measures have also been restated to exclude the impact of depreciation on fair value uplifts (see note 4.1 to the Summary Financial Statements). In addition, the Group's adjusted EBITDA metric has been restated for the years ended 31 March 2018 and 31 March 2017 to be prepared on a consistent basis, following an adjustment on adoption of IFRS 15 on 1 April 2018.

Note:  The definitions SSE uses for adjusted measures are consistently applied and are explained in the Alternative Performance Measures section of this document, before the Summary Financial Statements.  Throughout this document losses are shown in brackets.

SSE's 2030 carbon intensity target is based on generation emissions only. To track progress against this target, previous years' intensity ratios have been restated to only cover electricity generation emissions rather than total scope 1 emissions.

Further Information

Webcast facility

SSE will present its preliminary results for the year ended 31 March 2019 on Wednesday 22 May.  You can join the webcast by visiting www.sse.com and following the links on either the homepage or investor pages; or directly using https://edge.media-server.com/m6/p/af8fo3e2.  This will also be available as a teleconference, details below.  Both facilities will be available to replay.

Online information

News releases and announcements are made available on SSE's website at www.sse.com.  You can also follow the latest news from SSE at www.twitter.com/sse.

Disclaimer

This financial report contains forward-looking statements about financial and operational matters.  Because they relate to future events and are subject to future circumstances, these forward-looking statements are subject to risks, uncertainties and other factors.  As a result, actual financial results, operational performance and other future developments could differ materially from those envisaged by the forward-looking statements.

SSE plc gives no express or implied warranty as to the impartiality, accuracy, completeness or correctness of the information, opinions or statements expressed herein.  Neither SSE plc nor its affiliates assume liability of any kind for any damage or loss arising from any use of this document or its contents.

This document does not constitute an offer or invitation to underwrite, subscribe for, or otherwise acquire or dispose of any SSE shares or other securities and the information contained herein cannot be relied upon as a guide to future performance.

Definitions

These financial results for the twelve months to 31 March 2019 are reported under IFRS (International Financial Reporting Standards), as adopted by the EU.

In order to present the financial results and performance of the Group in a consistent and meaningful way, SSE applies a number of adjusted accounting measures throughout this financial report.  These adjusted measures are used for internal management reporting purposes and are believed to present the underlying performance of the Group in the most useful manner for ordinary shareholders and other stakeholders.

The definitions SSE uses for adjusted measures are consistently applied and are explained in the Alternative Performance Measures section before the Summary Financial Statements.

In preparing this financial report SSE has been mindful of the commentary issued in May 2016 by the Financial Reporting Council on the European Securities and Markets Authority's Guidelines on Alternative Performance Measures.  SSE will monitor developing practice in the use of Alternative Performance Measures and will continue to prioritise this, ensuring the financial information in its results statements is clear, consistent and relevant to the users of those statements.

Important note: SSE Energy Services

At 31 March 2019, SSE has assessed that it is highly probable that SSE Energy Services will be disposed and has presented the assets and liabilities of that business as held for disposal and the business activity as discontinued (see note 4.2. (i) of the Summary Financial Statements). 'Held for disposal', as presented throughout this statement may be either 'held for sale' or 'held for distribution' as defined by IFRS 5. Therefore, the results of SSE Energy Services have been excluded from the profit and loss metrics. As the Group continues to fund SSE Energy Services, and will do so until completion of the transaction, the capital expenditure and debt related metrics presented include the activity of that business.

Impact of the Retail demerger on the Group's APMs

The following metrics have been adjusted in all periods presented to exclude the contribution of SSE Energy Services, which has been presented as a discontinued operation as at 31 March 2019:

·      Adjusted EBITDA;

·      Adjusted operating profit:

·      Adjusted profit before tax;

·      Adjusted current tax charge; and

·      Adjusted earnings per share.

'Adjusted net debt and hybrid capital', and 'investment and capital expenditure' have not been adjusted as the Group continues to fund SSE Energy Services and will continue to do so until the date of disposal. SSE Energy Services has no external debt and all intercompany funding to the disposal group continues to eliminate on consolidation, therefore no adjustments are required to the Group's 'adjusted net finance cost' measure.

Strategic Overview

Making progress in executing strategy 

The energy sector continues to be characterised by significant regulatory and political developments and uncertainty, including the UK's future relationship with the EU, which require extensive stakeholder engagement; but SSE is a fundamentally resilient and robust group of businesses.

Material progress continues to be made in executing the strategy to position SSE as a leading energy company in a low-carbon world, with a focus on creating value from regulated energy networks and renewables.  It is energy networks and renewable energy which constitute most of the value in SSE, and which have the greatest opportunity to contribute to the 'net zero' emissions target advocated by SSE and recommended by the Committee on Climate Change in May 2019. 

Throughout 2018/19, SSE achieved major milestones in its programme of investment in networks and renewable energy, and in flexible thermal generation, underlining its core strengths as a developer and operator of energy assets, through which significant value continues to be created. 

The adjusted operating loss incurred in relation to Energy Portfolio Management was clearly significant and regrettable, but the response to it was decisive. The adoption of a new, more transparent approach to managing SSE's energy portfolio means earnings from its businesses exposed to energy-related commodities, and the volatility associated with this, become more visible. 

The energy sector as a whole remains under significant scrutiny, including from the Labour Party, which advocates nationalisation of energy networks.  SSE maintains an open dialogue with the party's representatives, to better understand its proposals and to seek to demonstrate that nationalisation is not the way to achieve its wider energy policy goals in relation to a decarbonised and decentralised energy system, and in fact would be most likely to jeopardise them.

In all of this, there is a huge degree of uncertainty, including: uncertainty about what the final form of Labour's policy will be  in a general election; uncertainty about whether that general election will result in a Labour government with a sufficient majority and capacity to pass the necessary legislation in Parliament; uncertainty about the final content of any legislation; and uncertainty about how and when any legislation would be implemented.  Nevertheless, SSE has in place an established programme of work to ensure that the interests of customers, shareholders and other stakeholders in relation to this matter are safeguarded as far as possible.

Keeping people safe

The safety of the people who work on behalf of SSE is the company's first priority. SSE's Total Recordable Injury Rate for employees and employees of other companies working on SSE sites was 0.16 per 100,000 hours worked in 2018/19, compared to 0.20 for the previous year. This means 2018/19 was a good year for safety performance, but SSE continues to pursue an ultimate goal of injury-free working, supported by a licence for everyone working on its behalf: If it's not safe, we don't do it. 

Focusing on delivery of the five-year dividend plan

The energy sector continues to be characterised by a highly complex and challenging operating environment. However, creating value from the development and operation, as well as ownership, of world-class assets that support the global trends towards decarbonisation and electrification is central to SSE's focus on delivering its five-year dividend plan to March 2023, starting with the recommended full-year dividend of 97.5 pence per share for financial year 2018/19.  SSE's plan for the dividend for the five years to March 2023 is as set out in May 2018 and is detailed within the Group Financial Review section of this statement.

Across its activities, SSE maintains an agile approach to value creation, seeking to create and recognise optimal opportunities where the premium associated with its skills in asset development and operation can be crystallised, while remaining an owner of an extensive portfolio of high-quality assets that deliver the earnings that underpin SSE's dividend commitments. 

A number of successful transactions in 2018/19 resulted in receipt of cash proceeds of over £1bn, which are reflected in substantial exceptional gains for the year.  In addition to reinforcing SSE's capacity to pay dividends, this agile approach to creating and unlocking value reflects changing capital markets, along with creating other options, including recycling capital for future investment, reducing adjusted net debt and undertaking discretionary share buy-backs.

SSE continues to develop significant opportunities for investment in energy networks, renewables and flexible thermal generation to support future earnings and dividends. Excluding onshore wind and telecoms divestments built within the year, capital investment in 2018/19 totalled £1.4bn.  £1bn was in renewable energy and regulated electricity networks and is part of a wider investment and capital expenditure programme of around £6bn for the five years to 2023. 

Looking to the long-term

A sustainable company is one that provides commercial solutions to the world's problems. Through its goals for 2030, the United Nations has created a blueprint for a sustainable world that is now central to SSE's business objectives. SSE's strategy for the long-term is founded on four of the UN's Sustainable Development Goals: 
 

·    Climate action: Reduce the carbon intensity of electricity generated by 50% by 2030, compared to 2018 levels, to around 150g/kWh.

·    Affordable and clean energy: Develop and build enough renewable energy by 2030 to treble output to 30TWh per annum.  

·    Industry, innovation and infrastructure: Build electricity network flexibility and infrastructure that helps accommodate 10m electric vehicles in GB by 2030. 

·    Decent work and economic growth: Be the leading company in the UK and Ireland championing Fair Tax and a real Living Wage.

In focusing on these long-term goals, and on the opportunities afforded by the global trends towards decarbonisation and electrification, SSE believes it will create sustainable value for shareholders, while also supporting broader societal objectives.

Setting SSE's businesses up for success

SSE is committed to giving greater visibility of assets and earnings for investors and building stronger platforms for success for each of its businesses while also supporting financial and strategic partnering.  During 2018/19 there took place a wide ranging review of how SSE is organised, with the support of external consultants, to help maximise individual businesses' contribution towards both SSE's long-term goals and, more immediately, the five-year dividend plan.

In line with this, SSE Renewables has brought together the development and operation of all of SSE's renewable energy assets under a single management team, creating the leading renewable energy company across the UK and Ireland, with ambitions beyond those two countries. This will allow greater focus, specialisation and innovation in a distinct and fast-growing part of the energy sector, in which SSE has a large pipeline of opportunities. A Thermal Energy business is also being created.  In addition, the Distribution and Transmission businesses are continuing to evolve, including a significant reinforcement of their capability in regulatory engagement as the vital RIIO-2 Price Control process gathers momentum.

The principles of focus, specialisation and innovation have also been applied to SSE's considerations around the future of SSE Energy Services. In line with this, Katie Bickerstaffe has been appointed Executive Chair of the business, with a mandate to deliver a new future for it outside of the SSE group in the form of a listing or new, alternative ownership by the second half of 2020. She will take up the new role on 23 June 2019 alongside Gordon Boyd, who joins as Interim Chief Financial Officer, and will work closely with joint Managing Directors Stephen Forbes and Tony Keeling in the delivery of their strategy. Further progress has been made on the structural separation of this business from the group, and the creation of a new, dedicated SSE Energy Services Board and Executive Committee will enable it to operate with further autonomy and become more agile and responsive to customer needs.

This emphasises that SSE's focus is on core businesses of renewable energy and regulated networks, as do the active steps we are taking to prepare for the disposal of our investments in gas production.

Creating value and benefiting society

In what is a complex and challenging operating environment, SSE believes that its strategy is the best way to create sustainable value from the long-term trends of decarbonisation and electrification that were set out in its Business Update in May 2018.

SSE has the quality assets and proven skills and experience to seize the sizable opportunities presented by decarbonisation and electrification. It has made long-term decisions in the past 12 months that have built a platform for delivery of a strategy that creates value for shareholders using its extensive portfolio of high quality assets to deliver earnings, support the five-year dividend plan and benefit society as a whole through a continuing sustainable economic contribution.

Alistair Phillips-Davies

Chief Executive

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 Summary Financial Statements.

SSE Energy Services has been presented as a discontinued operation in the Summary Financial Statements, and therefore has been excluded from profit and loss based measures in the tables below in the current and comparative periods. As the Group continues to fund the business, the assets and liabilities held for disposal have been included in adjusted capex and adjusted net debt measures.

A reconciliation of adjusted operating profit by segment to reported operating profit by segment can be found in Note 6 (ii) to the Summary Financial Statements.

During the year the SSE Group finalised the triennial valuation of the Scottish Hydro Electric Pension Scheme which resulted in a net surplus on the scheme at 31 March 2019 of £537.7m on an IAS 19 basis. Together with the deficit in the Southern Electric scheme this results in the net surplus of £287.1m for both schemes shown in the table above. The Group recognised a £9.3m exceptional charge in relation to the equalisation of guaranteed minimum pension payments, following the High Court ruling in the Lloyds Banking Group Pensions Trustees Limited vs. Lloyds Bank plc case.  

Additional information on employee pension schemes can be found in Note 15 to the Summary Financial Statements.

Group Financial Review

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

Adjusted operating profit

Adjusted operating profits/(losses) in SSE's business segments for the year to 31 March 2019 are as set out below; comparisons are with the same twelve months to 31 March 2018 unless otherwise stated:

WHOLESALE BUSINESSES

Electricity Generation - Thermal: an adjusted operating loss of £(22.3)m was recorded, compared with an adjusted operating profit of £107.8m, mainly reflecting a combination of cessation of Power Purchase Agreements (PPAs), losses at SSE's remaining coal-fired power station at Fiddler's Ferry and an outage at Great Island CCGT.

In 2019/20, subject to plant performance and the impact of the renewable energy output on the electricity system, thermal generation is currently expected to earn adjusted operating profit of around £150m, including £122m of suspended Capacity Market payments relating to contracts for the period after suspension in 2018/19 and all of 2019/20. 

Electricity Generation - Renewables: Volumes of electricity increased following the commissioning of new capacity, however renewables adjusted operating profit decreased to £455.9m from £475.9m mainly due to the fact that renewable output in 2018/19 was sold at a lower achieved price than in the previous year.

In 2019/20, subject to the impact of the weather on output of renewable energy and plant performance, renewable generation is expected to earn adjusted operating profit of around £525m, including £26m of suspended Capacity Market payments relating to contracts for the period after suspension in 2018/19 and all of 2019/20.  This is based on SSE's renewable capacity at c.4GW (including Beatrice) with an expected average annual electricity output of around 11.5TWh, based on normal weather.  

Additional information on SSE's hedging approach can be found in 'SSE'S Approach To Hedging: May Update' published on sse.com.

The reported operating profit for Electricity Generation as a whole was £1,192.3m compared to £523.4m.  The increase is primarily due to exceptional gains on sale (including fair value uplift) resulting from: the part disposals of Stronelairg and Dunmaglass (£733.0m); Clyde (£74.2m); and the Seagreen impairment reversal of (£14.2m); partly offset by the impact of a lower achieved price for renewable output in 2018/19.  

Energy Portfolio Management: an adjusted operating loss of £(284.9)m compares to an adjusted operating profit of £46.0m in the previous year, but is slightly lower than the forecast adjusted operating loss of around £(300)m set out in November 2018.  

The reported operating loss was £613.1m compared to a loss of £43.1m in prior year.  The reported operating loss increased in the year due to losses on settled derivatives as noted above, as well as mark-to-market losses on unsettled derivatives of £328.2m, compared to a mark-to-market loss of £89.1m in prior year.

In 2019/20 EPM still expects to report an adjusted operating loss of around £115m, but with the potential variation around this now reduced to +/- £15m.  Losses in both years are primarily due to the negative impact of persistently high gas prices on SSE's energy position. From 2020/21, EPM is expected to earn a small adjusted operating profit through service provision.

Gas Production: adjusted operating profit increased to £48.9m compared to £34.0m, mostly due to lower depreciation, higher achieved price and the absence of exploratory write-offs, partially offset by lower volumes in the period.

The reported operating profit was £78.6m compared to a reported operating loss of (£70.7m) due to impairment reversals versus impairment charges the previous year, reflecting the annual revision of reserve estimates. 

Gas Storage: market conditions remain challenging and an adjusted and reported operating loss of £(5.7)m was recorded, compared to an adjusted and reported operating loss of £(6.5)m. 

NETWORKS BUSINESSES

Electricity Transmission: adjusted and reported operating profit increased to £252.1m compared to £195.6m, mainly due to the phasing of income recovery including a one off payment relating to Beauly-Denny.  In 2019/20, Transmission's adjusted operating profit is expected to be lower, at just over £200m, partly because the increase in 2018/19 included the one-off payment.

Electricity Distribution: adjusted and reported operating profit of £401.3m was broadly in line with that reported in the previous year of £402.2m, with lower volumes distributed offset by lower non-controllable costs.  In 2019/20, Distribution's adjusted operating profit is again expected to be around £400m.

SGN: adjusted operating profit increased to £176.8m compared to £165.3m mainly due to an expected increase in regulatory income.  In 2019/20, SSE expects to derive adjusted operating profit from SGN that is closer to £200m.  The reported operating profit was £85.1m compared to £71.8m due to the expected increase in regulatory income. 

RETAIL BUSINESSES

Energy Supply (SSE Business Energy): adjusted and reported operating profit reduced to £51.6m from £64.2m, mostly due to a combination of lower volumes and higher costs including Supplier of Last Resort (SoLR) mutualisation charges.

SSE Airtricity: adjusted and reported operating profit increased to £38.6m from £33.0m adjusted operating profit (£26.9m reported), mainly due to better performance on bad debts and overheads.

SSE Enterprise: adjusted operating profit increased to £31.8m from £26.9m mainly due to improved performance in Contracting and Telecoms. Reported operating profit increased from £15.1m to £31.8m due to one off exceptional charges for onerous contracts in the prior year.  

CORPORATE UNALLOCATED

An adjusted operating loss of £(6.5)m was recorded compared to an adjusted operating profit of £10.4m due to Group restructuring costs and investment write-offs.  A reported operating profit of £179.6m was recorded due to an exceptional credit of £189.9m including the gain on sale of SSE Telecommunications of £235.4m and an exceptional receipt from the sale of Indigo Pipelines of £54.3m offset by exceptional impairment charges, compared to a reported operating loss of £(21.5m) in the prior year which included exceptional charges of £30.6m.

DISCONTINUED OPERATIONS - SSE Energy Services

SSE Energy Services - Energy Supply (households in GB): adjusted operating profit fell to £84.0m from £260.4m, mainly due to the decision to shield customers from wholesale price increases during 2018, together with the impact of the Default Tariff Cap between January and March 2019 and lower customer numbers, partially offset by the expiry of a Power Purchase Agreement (PPA). 

The reported operating profit was £29.7m, compared to £203.5m, due to the reasons outlined above, in addition to current year impairments of IT systems totalling £54.3m versus exceptional impairment charges of £56.9m in the prior year.

SSE Energy Services - Energy-related Services: adjusted and reported operating profit fell to £5.6m compared to £18.3m, mainly due to reduced profits in metering and retail telecoms.

Adoption of IFRS 15

On 1 April 2018 the SSE Group adopted International Financial Reporting Standard 15 (IFRS 15) 'Revenue from Contracts with Customers' which increased the Group's opening reserves by £2.5m and reduced operating profit on continuing operations by £4.5m in the year ended 31 March 2019. The adoption of the standard resulted in a significant presentational adjustment to the income statement, as the SSE Group now presents optimisation purchase and sale transactions of commodities net in the income statement. This adjustment, while having no impact on operating profit, reduced the Group's turnover and cost of sales in the year by £18,808.7m.

Earnings

Adjusted earnings per share

To monitor its financial performance over the medium term, SSE reports on its adjusted earnings per share measure.  This measure is calculated by excluding the charge for deferred tax, interest costs on net pension liabilities, exceptional items, depreciation on fair value adjustments and the impact of certain re-measurements. The SSE Group has included an adjustment to exclude depreciation on fair value uplifts in the year following the part disposals of Stronelairg and Dunmaglass windfarms and SSE Telecommunications. This adjustment has been made to exclude the recurring expense arising on significant one-off gains, which are treated as exceptional when recognised.

SSE's adjusted EPS measure provides an important and meaningful measure of underlying financial performance.  In adjusting for depreciation on fair value adjustments, exceptional items and certain re-measurements, adjusted EPS reflects SSE's internal performance management, avoids the volatility associated with mark-to-market IFRS 9 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 Adjusted Performance Measures section of this report.

In the twelve months to 31 March 2019, SSE's adjusted earnings per share on continuing operations was 67.1 pence, compared to 98.8 pence for the twelve months to 31 March 2018.  As expected, it reflects the impact of the issues set out in SSE's Trading Statement on 12 September 2018, mainly the loss incurred in Energy Portfolio Management. 

Summarising the impact of Movements on Derivatives

Operating derivatives

SSE enters into forward purchase contracts (for power, gas and other commodities) to meet the future demands of its energy supply businesses and to optimise the value of its Generation assets and its investments in Gas Production. Some of these contracts are determined to be derivative financial instruments under IFRS 9 and as such are required to be recorded at their fair value as at the date of the financial statements.

SSE shows the change in the fair value of these forward contracts separately as this mark-to-market movement does not reflect the realised operating performance of the businesses.  The underlying value of these contracts is recognised as the relevant commodity is delivered, which for the large majority of the position at 31 March 2019 is expected to be in the next 12 to 24 months.

The £328.2m IFRS 9 adverse movement on operating derivatives in the year to 31 March 2019 arose mainly from a deterioration in the fair value of forward gas contracts. While indicative of a direction of travel there are limitations to the IFRS 9 measure if using it to assess SSE's commodity exposure, namely:

• The IFRS 9 values do not reflect all contracts but only those designated as 'held for trading'; and

• The IFRS 9 movement in operating derivatives represents the position up to 31 March 2019 and does not reflect price movements and actions taken since that date.

The SSE Group has assessed its exposure to counterparty credit risk on derivative contracts due to the size of the derivative portfolio. Following that review, which considered factors such as the credit rating of its counterparties and Master Netting Agreements in place, the Group assessed there is no material increase in credit risk.

Financing derivatives

In addition to the losses recognised on operating derivatives, there were losses of £44.8m recognised on the remeasurement of financing derivatives at 31 March 2019.  These are primarily due to the impact of weak Sterling and Euro against the Dollar on cross currency swaps and hybrid debt, partially offset by the impact of Sterling strength against the Euro and lower interest rates on bond cross currency and interest rate swaps. These remeasurements are also presented separately as they do not represent underlying business performance in the period. The result on financing derivatives will be recognised in adjusted profit before tax when the derivatives are settled.

Exceptional Items

In the year to 31 March 2019, SSE recognised a net exceptional credit of £1,039.9m before tax.  The following table provides a summary of the key components making up the net credit position:

In addition to the above, SSE Energy Services recognised exceptional charges of £54.3m in relation to discontinued marketing and customer data management software assets.

For a full description of the net exceptional credit see note 7 of the Summary Financial Statements.

Reported Profit/(Loss) Before Tax and Earnings Per Share

Reported results for the year to 31 March 2019 are significantly higher than those for the previous year; mainly due to the impact of the exceptional gains on disposal recognised in the year.

The re-measurement loss and the gains on disposals are explained in the more detail in the relevant sections throughout this report and are the main driver for:

-      A reported profit before tax on continuing operations of £1,370.6m being recorded for the year to 31 March 2019 compared to a reported profit before tax on continuing operations of £864.4m for the previous year; and

-      A reported profit per share on continuing operations of 135.2p being recorded for the year to 31 March 2019 compared to a reported profit per share of 64.3p for the previous year;

Dividend

Remunerating shareholders' investment through payment of dividends

SSE's strategy, set out in May 2018, is to create value for shareholders and society from developing, operating and owning energy and related infrastructure and services in a sustainable way. 

The first financial objective of this strategy is to remunerate shareholders' investment through the payment of dividends. SSE believes that its dividends should be sustainable, based on the quality and nature of its assets and operations, the earnings derived and the value created from them and the longer-term financial outlook. 

In line with this and reflecting the underlying quality and value of its assets and earnings, the cash flows they deliver and the value that can be created from them, SSE's plan for the dividend for the five years to 2023 is as set out in May 2018:

o  For 2018/19, SSE is recommending a full-year dividend of 97.5 pence per share with the final dividend related to this of 68.2 pence per share. 

o  For 2019/20, SSE intends to recommend a full-year dividend for 2019/20 of 80 pence per share.   This provides a sustainable basis for future dividend growth and will not be affected by the final option selected for the future of SSE Energy Services.

o  For 2020/21, 2021/22 and 2022/23 SSE is targeting annual increases in the full-year dividend that at least keep pace with RPI inflation.  This reflects SSE's confidence in the quality and value of its assets and earnings and cash flows they deliver.

Investment and Capital Expenditure

Central to SSE's strategic framework is efficient and disciplined investment in developing and building assets, mainly in economically-regulated energy networks and renewable sources of energy. In practice, this means that investment should be in line with SSE's commitment to strong financial management, consistent with the goals for 2030 adopted in March 2019 and, consistent with its vision of being a leading energy company in a low-carbon world and consistent with its targets for 2030 adopted in March 2019.

Investing efficiently in energy assets that the UK and Ireland need in 2018/19

During the year to 31 March 2019, SSE's investment and capital expenditure (including SSE Energy Services) totalled over £1.42bn, including over £1bn investment in renewable energy and regulated electricity networks. This is lower than the £1.7bn total investment previously indicated as it excludes £195m of investment in onshore wind and telecoms assets which were subsequently disposed of within the year. The remaining investment and capital expenditure included the following:

·    A major investment programme in electricity networks totalling over £680m (48% of SSE's total investment and capital expenditure).

·    This includes the completion, commissioning and energisation of the Caithness-Moray electricity transmission link. With an agreed allowance of £1.1bn, Caithness-Moray has been the largest single investment undertaken by the SSE Group to date.  Transmission investment and capital expenditure also included work on the Knocknagael-Tomatin and Beauly-Keith reinforcements, and the Fort Augustus - Fort William upgrade. Together with Caithness-Moray, these four projects made up around half of Transmission's £344m investment and capital expenditure in the year.

·    Electricity Distribution investment and capital expenditure makes up the other half of the network spend and consists primarily of asset replacement and reinforcement projects including the replacement of subsea cables and several overhead line circuits in Scotland and Central Southern England.  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.

·    Further investment in renewable energy in GB and Ireland totalling £326m (23% of the total). The vast majority of this spend relates to SSE's equity share of the Beatrice offshore windfarm, the final turbine of which was completed in May 2019.  SSE's share of this project-financed windfarm is 235MW (40%).  Total renewable investment and capital expenditure in the year excludes the spend associated with Stronelairg (288MW) onshore wind farm which was partly disposed of in the year.

·    SSE's flexible thermal gas-fired power stations will play a key part in the transition to a low-carbon economy.  Investment in complementary flexible thermal generation totalled £188m (13% of the total) during 2018/19, including the Keadby 2 and Ferrybridge Multifuel 2 projects, along with development spend on the Slough Multi-fuel project.

·    SSE Energy Services investment of £103m mainly relates to infrastructure to support SSE Energy Services' regulatory obligation to install smart meters for its energy supply customers as part of the UK's Smart Metering rollout. At 31 March 2019, SSE had well over one million smart meters on supply in customers' homes. Post installation, SSE's meters transfer to a contracted Meter Asset Provider and SSE's investment and capital expenditure excludes the capital cost of installation and meter assets.

·    In addition, £20m was invested in Enterprise, mainly supporting Utility Solutions projects and £72m in Corporate Services, which was mainly on IT.

Investing efficiently in energy assets that the UK and Ireland need - a five-year plan

SSE's strategy is to create value for shareholders and society from developing, operating and owning energy and related infrastructure and services in a sustainable way. Central to this is investing in assets for which returns are expected to be clearly greater than the cost of capital. New assets should complement SSE's existing portfolio of assets and their development and construction should be governed and executed in an efficient manner and in line with SSE's commitment to strong financial management.

SSE is now one year into its plan for total investment and capital expenditure of around £6bn across the five years to March 2023. Economically-regulated electricity networks and renewable sources of energy are expected to account for around 70% of this. As is to be expected, the investment is weighted more towards the first half of the five-year period than the second; with £1.4bn incurred in 2018/19 plus £138m in relation to Stronelairg and £57m relating to Telecoms and around £1.5bn currently planned for 2019/20.

Around 85% of the £6bn is either already spent or committed. It includes around £3bn of investment in electricity networks, which should support further growth in the RAV of SSE's energy networks businesses to around £10bn in 2023 (this includes SSE's stake in SGN). It also includes investment in electricity generation such as a new £350m highly efficient and flexible gas-fired power station at Keadby 2 in Lincolnshire, an additional multi-fuel plant at Slough and potential investment in offshore wind farms.

Final investment decisions will be determined by the need to secure returns that are clearly greater than the cost of capital, enhance earnings and support the delivery of dividend commitments. Indeed, SSE believes that strict financial discipline is more important than ever as auctions become an increasing feature of energy infrastructure provision, and it will not resort to taking on inappropriate risks or accepting returns on investment that are financially unsustainable.

SSE's principal joint ventures and associates

SSE's financial results include contributions from equity interests in joint ventures ("JVs") and associates, all of which are equity accounted. The details of the most significant of these are included in the table below. This table also highlights SSE's share of off-balance sheet debt associated with its equity interests in JVs, which, including SGN, is just under £2.3bn as at 31 March 2019.  

Greater Gabbard, a 504MW offshore windfarm (SSE share 50%) is proportionally consolidated and is reported as a Joint Operation with no loans outstanding.

SSE's share of Seagreen Wind Energy Ltd (Phase 1 up to 1,050MW) increased to 100% in September 2018. SSE paid Fluor Ltd. £118m in October 2018 for its 50% share, taking 100% ownership of the company and consolidating it into the Group balance sheet. It is therefore no longer a JV and so is not shown in the table above. 

SSE's share of Clyde windfarm reduced to 50.1% from 65% in May 2018.

SSE's share of Cloosh windfarms reduced to 25% from 50% in March 2019.

SSE's share of SSE Telecoms reduced to 50% in March 2019.

SSE's share of Stronelairg and Dunmaglass windfarms reduced to 50.1% in March 2019

Financial management and balance sheet

Maintaining a strong balance sheet

As a long-term business, SSE believes it should maintain a strong balance sheet, illustrated by its commitment to robust ratios for both Retained Cash Flow (RCF)/Net debt and Funds From Operations (FFO)/Net 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. 

While the A3 / A- ratings helped illustrate the quality and resilience of the SSE group of businesses, they were not fundamental to it and in December 2018, both Moody's and Standard and Poor's downgraded SSE's credit rating one notch following completion of both agencies' reviews which had been announced in September 2018.

With its high-quality portfolio of assets and increasing focus on regulated energy networks and renewable sources of energy, SSE believes its new credit rating metrics are sustainable and consistent with an ability to secure funding from debt investors at competitive and efficient rates.

Moody's rating

SSE's rating moved from 'A3 review for downgrade' to 'Baa1 stable outlook' consistent with the following guideline credit metrics:

•             a RCF/Net debt metrics of around 11% in 2018/19 and 2019/20, trending toward the low teens in percentage terms; and 

•             a FFO/Net debt ratio of around 20%.

Standard and Poor's rating

SSE's rating moved from 'A-negative watch' to 'BBB+ outlook stable' consistent with the following guideline credit metric:

•             a FFO/Net debt ratio of about 18%.

Adjusted net debt and hybrid capital

SSE's adjusted net debt and hybrid capital was £9.4bn at 31 March 2019, slightly lower than expected reflecting the interim dividend Scrip uptake of almost 47% and year end fair value adjustments. The overall level of net debt and hybrid capital largely reflects SSE's ongoing investment programme.

Opportunism and agility will continue to be important and investment expenditure and future net debt could be impacted if there were opportunities to create value from disposing of assets, or from further investments or acquisitions.  Financial results also have an impact on net debt; and management of net debt will be one of the options for using proceeds from any future disposals of businesses, assets or investments.

Adjusted net debt excludes finance leases and includes outstanding liquid funds that relate to wholesale energy transactions.  Adjusted net debt at 31 March 2019 also includes an accounting increase of £139.1m as a result of fair value adjustments.

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 in the Alternative Performance Measures section of this statement.  

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 IAS39.  The hedges ensure that any movement in the fair value of net debt is offset by an equivalent movement in the derivative position.

The fair value increase in net debt was driven by both Sterling and Euro weakness against the US Dollar partially offset by lower interest rates during the year to 31 March 2019. This benefit is offset by an equivalent increase to the 'in the money' derivative position of SSE's fair value hedges.

Hybrid Bonds summary

Further details on each hybrid bond can be found in note 14 to the Summary Financial Statements.

The proceeds from March 2017 £1.0bn Hybrid Bonds, all in rate 3.02%, were used on 2 October 2017 to redeem the Hybrid Bonds issued in 2012, at an all-in rate of 5.6%.  The additional costs of carrying additional hybrids for six months was outweighed by the savings realised over the life of the new hybrid.

Equity hybrid coupon payments reduced to £46.6m in 2018/2019 compared to £98.5m for the same period in the previous year reflecting the full benefit of the replacement hybrid's lower coupon rate.  A table noting the amounts, timing and accounting treatment of coupon payments is shown below.

SSE's September 2012 and March 2015 Hybrid Bonds are perpetual instruments and are therefore accounted for as part of equity within the Financial Statements but, as in previous years, have been included within SSE's 'Adjusted net debt and hybrid capital' to aid comparability.

The March 2017 Hybrid Bonds have a fixed redemption date and are therefore debt accounted and included within Loans and Other Borrowings.

The coupon payments relating to the September 2012 and March 2015 equity accounted hybrid bonds are presented as distributions to other equity holders and are reflected within adjusted earnings per share when paid.  The coupon payments on the March 2017 debt accounted hybrid bonds are treated as finance costs under IFRS.

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.

Managing net finance costs

SSE's adjusted net finance costs, including interest on debt accounted hybrid bonds but not equity accounted hybrid bonds, were £411.9m in the year to 31 March 2019, compared to £375.5m for the previous year. This reflected higher net debt during the year and higher JV interest costs. 

Reported net finance costs were £321.6m, compared to £293.0m, reflecting an increase in both the mark-to-market loss on financing derivatives and increased underlying interest costs due to higher net debt.

Excluding the impact of IFRS 16 (accounting for leases), adjusted net finance costs in 2019/20 are expected to increase to just over £450m reflecting: additional JV interest costs from Beatrice; and lower capitalised interest.

Summarising cash and cash equivalents

At 31 March 2019, SSE's adjusted net debt included cash and cash equivalents of £0.5bn, up from £0.2bn at March 2018. Medium term borrowings reaching maturity in 2019/20 total £0.2bn, comprising USPP (£67m) and Term Loan (£107m) while there is also £497m of short-term Commercial Paper due to mature in 2019/20.

The cash collateral value increased by £269.1m in the year and totalled £344.2m at 31 March 2019. The increase relates to collateral required to cover out of the money commodity positions.

The cash and cash equivalents total presented on the consolidated balance sheet does not include £95.2m relating to the SSE Energy Service Group which is presented within assets held for disposal within the Summary Financial Statements.

Focusing on effective financial management: debt issuance and treasury facilities in 2018/19

During the year to 31 March 2019, SSE successfully issued its second Green Bond - a €650m, nine year bond with a coupon of 1.375% which has been fully swapped to Sterling giving an all-in rate of 2.58%. This followed the €600m 0.875%, seven-year Green Bond SSE issued in September 2017; and will continue to help SSE to take a leading role in supporting the transition towards a low-carbon future, through its plans to continue to invest in renewable energy and reaffirm its position as a leader in renewable sources of energy.

During October 2018 SSE also issued a €200m two-year Floating Rate Note that was fully swapped back to Sterling giving an all-in floating rate of GBP Libor plus 50.5bps.

In March 2019, SSE refinanced its £1.3bn Revolving Credit Facility (RCF) to have an extended maturity date of March 2024 with an option to extend by two years to 2026.  This is now classified as a Sustainable RCF with interest rate and fees paid dependant on SSE's performance in environmental, social and governance matters, as assessed independently by Vigeo Eiris.

Refinancing over the medium term

Following the debt that matured in October 2018 (referenced above) SSE's next significant potential refinancing milestones are:

·    June 2020 when it will redeem its €600m/2% coupon bond; and

·    September 2020 which is the first call date for the £750m/3.875% coupon equity accounted Hybrid.

Maintaining a prudent Treasury policy

SSE's treasury policy is designed to be prudent and flexible. In line with that, cash from operations is first used to finance regulatory and maintenance capital expenditure and then dividend payments, with capital and investment expenditure for growth 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 2019, 88% of SSE's borrowings were at fixed rates.

Borrowings are mainly in Sterling and Euros to reflect the underlying currency denomination of assets and cash flows 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. 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 UK's EU Referendum in June 2016, it has so far identified no need for change.

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

Ability to raise funds at competitive rates is fundamental to investment. SSE's fund-raising over the last five years, including hybrid capital and term loans, now totals £5.8bn and SSE's objective is to maintain a reasonable range of debt maturities. Its average debt maturity, excluding hybrid securities, at 31 March 2019 was 7.0 years, compared with 7.9 years at 31 March 2018. The reduction in debt maturity reflects SSE's recent debt issuance which has taken advantage of the best value on the maturity curve; and SSE's average cost of debt is now 3.7%.

SSE's debt structure remains strong, and on 31 March 2019 it had around £9.5bn of medium/long term borrowings in the form of issued bonds, European Investment Bank debt, hybrid securities and other loans.

Going concern

The Directors regularly review the Group's funding structure and have assessed that the Summary Financial Statements should be prepared on a going concern basis. The Directors regularly review the SSE Group's funding structure and have assessed that the Summary Financial Statements should be prepared on a going concern basis. In making their assessment the Directors have assessed the forecast future cashflows of the SSE Group taking account of the expectation of continued available liquidity in the commercial paper market. In addition, the SSE Group still has significant headroom on its committed borrowing facilities while the next significant refinancing of external debt is not due until 2020.

Operating a Scrip Dividend Scheme

The renewal of SSE's Scrip Dividend Scheme was approved by shareholders at its 2018 AGM. The Scrip Dividend Scheme 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 average Scrip dividend take-up since 2010 is 25%.  The Scrip dividend uptake during financial year 2018/19 was:

o  21% for the 2017/18 final dividend; and

o  47% for the 2018/19 interim dividend.

In May 2018 SSE announced that, if Scrip take-up of the full-year dividend exceeded 20%, it intended to buy back shares so that its dilutive effect is not excessive, starting with the 2018/19 full year dividend. SSE believes this strikes the right balance in terms of giving shareholders choice, potentially securing cash dividend payment savings and managing the number of additional shares issued.

Taxation

SSE is one of the UK's biggest taxpayers, and in the survey published in December 2018 was ranked 14th out of the 100 Group of Companies in 2018 in terms of taxes borne (those which represent a cost to the company and which are reflected in its financial results).

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.

In October 2018, SSE published Talking Tax 2018: Being transparent about tax.  It did this because it believes building trust with stakeholders on issues relating to tax is important to the long-term sustainability of the business.

In the year to 31 March 2019, SSE paid £403.6m of taxes on profits, property taxes, environmental taxes, and employment taxes in the UK, compared with £484.1m in the previous year.  The decrease in total taxes paid in 2018/19 compared with the previous year was primarily due to a reduction in corporation tax paid, this being driven by two factors: 

·    Corporation tax is a tax on the profit companies make. After a challenging year for its business, SSE's underlying profits fell substantially in 2018/19 compared to 2017/18, and a tax refund was received from HMRC as a result of surrendering losses from SSE's E&P business against non-E&P profits.  SSE also made significant gains during 2018/19 on the sale of shares in group companies, those gains qualifying for Substantial Shareholdings Exemption and not therefore being taxable.

·    The UK and Irish Governments encourage companies to invest in capital projects because it is good for the economy and good for jobs. One way they do that is incentivising this business behaviour with tax relief by way of capital allowances. SSE continued to invest significantly in major projects throughout 2018/19, obtaining capital allowances on both that spend and amounts invested in earlier years.

In 2017/18 SSE also paid €14.6m of taxes in Ireland, compared to €22.6m the previous year. Ireland  is the only country outside the UK in which it has any trading operations.

As with other key financial indicators, 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 (0.9%), as compared with 9.0% in 2017/18 on the same basis.  The reduction is primarily due to the lower corporation tax charge for the year on SSE's reduced underlying profits, being more than eliminated by tax credits from earlier years.  As SSE has continued to invest heavily in capital projects, at a time when profits are reduced, the capital allowances obtained on that expenditure also has a more significant impact on SSE's adjusted current tax rate for the year.

WHOLESALE

Wholesale Key Performance Indicators

Introduction to the Wholesale businesses

SSE's Wholesale businesses are involved in electricity generation (from renewable and thermal sources), energy portfolio management, gas production, and gas storage.  They operate in the UK and Ireland.

Renewable Energy (to become known as SSE Renewables)

Renewable energy is one of the primary routes for achieving decarbonisation in the UK, Ireland and further afield. Correspondingly, renewables are a core business area for SSE and a key part of its future growth plans. Further decarbonisation of electricity, heat and transport - on the scale envisaged by the UK Committee on Climate Change's May 2019 report, will all lead to further opportunities.

In November 2018, SSE announced its plans to consolidate its renewable energy assets in the UK and Ireland under the banner of a new business to be known as SSE Renewables. The new business is led by Managing Director, Jim Smith, and is bringing together SSE's existing operational assets and those under development and construction in onshore wind, offshore wind, flexible hydro electricity, run-of-river hydro electricity and pumped storage.

Renewable energy capacity and output

Output from renewable sources, including pumped storage, increased in 2018/19 compared to the previous year (9.8TWh compared with 9.4TWh) which is mainly driven by an increase in average generation capacity during the year as Stronelairg and Beatrice began to generate. Net capacity at 31 March 2019 reflects the value creating divestments at Clyde, Stronelairg, Dunmaglass and Cloosh.  SSE's overall renewable capacity increased to 4,002MW in May 2019 with the delivery of the Beatrice offshore windfarm.

Onshore wind

Stronelairg (228MW), SSE's last wind farm to be accredited under the Renewables Obligation, was completed in December 2018.  In March 2019, stakes in Stronelairg and Dunmaglass, totalling 161MW secured an average sale price of just under £4m/MW, demonstrating the value that can be created through the development of high-quality assets.

In March 2019, SSE also sold 27MW of the Cloosh Valley Wind Farm part of the Galway Wind Park, Ireland's largest wind farm; taking its share of the overall site to 93MW.

SSE Renewables will continue to operate the three wind farms and to offtake the power. These divestments were part of SSE's strategy to create value from development and operation, as well as ownership, of assets. Like other leading energy companies, SSE is likely to continue to operate in this way, effectively continuing to seek a developer and operator premium, whilst acknowledging the increased appetite that potential financial partners have for working with leading developers and operators like SSE.

SSE's onshore wind farm development pipeline consists of over 1GW of potential new build projects. This includes around 475MW of capacity with consent for development, some of which SSE is seeking to optimise through planning amendments to accommodate more advanced turbine technology. The current focus is on the joint venture Viking Wind Farm (up to 457MW - SSE share 50%), located on Shetland, Strathy South (133MW), Gordonbush Extension (38MW), Tangy re-power (up to 49MW), and on others requiring consent, such as Doraville (139MW) in Northern Ireland.

SSE continues to take forward development options for new onshore wind farms and extensions to existing wind farms and is well placed to take advantage of any future opportunities as they emerge. This includes exploring merchant opportunities for onshore wind and considering corporate power purchase agreements to deliver additional renewables.

Offshore wind

The Beatrice offshore wind farm (588MW - SSE share 40%) was completed in May. Phase 1 CfD payments started on 6 November 2018 and Phase 2 on 28 April 2019. SSE Renewables will operate and maintain the entire asset on behalf of the Joint Venture, Beatrice Offshore Windfarm Ltd, once complete.

CfD Allocation Round 3 (AR3) will commence on 29 May 2019. The Department for Business, Energy and Industrial Strategy has confirmed the overall budget available, the administrative strike prices for each eligible technology, and the 'references prices' (a measure of the average GB market price for electricity used to calculate the budgetary impact of each bid during an Allocation Round).

SSE Renewables is actively involved in two offshore prospects which are expected to be eligible to enter AR3. (Viking Wind Farm will also be eligible to complete in AR3 as 'remote island wind'.)

·    Seagreen Phase 1 (up to 1,050MW), consists of the Alpha and Bravo projects. Seagreen is wholly owned by SSE following its acquisition of Fluor Ltd.'s 50% share of the joint venture in September 2018.

·    Dogger Bank (up to 3.6GW), is a 50:50 joint venture with Equinor to develop three projects in the Dogger Bank zone - Creyke Beck A, Creyke Beck B and Teesside A. The projects are being progressed in preparation for the CfD auction.

SSE Renewables also has interests in the following further offshore projects in development:

·    Seagreen Phases 2 & 3 (up to 3,200MW)

·    Greater Gabbard Extension (up to 504MW - SSE share 50%)

·    Arklow Bank Wind Park in Ireland (800MW)

This means that, overall, SSE has an on- and offshore wind development pipeline of over 8GW at varying stages of development.

SSE continues to engage with the Crown Estate and Crown Estate Scotland on their leasing processes for new seabed to maintain a pipeline of offshore projects through to the late 2020s and beyond.

Arklow Bank Wind Park has a lease but is awaiting details regarding the auction processes in Ireland where the new Renewable Electricity Support Scheme (RESS) is awaiting State Aid approval. SSE believes offshore wind has real opportunities from the second RESS auction, indicatively scheduled for 2020, with further auctions signalled for 2021, 2023, and 2025.

Hydro

SSE's fleet of hydro electric assets continues to deliver low-carbon power to respond to the needs of the GB electricity system. The focus continues to be on ensuring the fleet is as operationally efficient and flexible as possible. Whilst SSE has some development assets, in the form of pumped storage, there is not yet a clear route forward for commercially realising the system value that these assets could provide.

International

Extending SSE Renewables core competencies in renewable energy to other technologies and geographies presents significant potential to add to future growth opportunities. SSE is actively exploring opportunities and assessing whether the right risk/reward balance can be achieved. With a wealth of opportunities to pursue in the UK and Ireland, SSE will take time to evaluate all opportunities carefully, and strict capital discipline will be a feature of any decisions. 

Flexible Thermal Generation

SSE's thermal fleet fulfils an important function within the wider electricity market by providing reliable capacity at scale in response to market changes and events, for example, unplanned nuclear outages and periods of low rain or wind.

SSE's CCGTs are among the most flexible on the GB and Irish electricity systems and have increasingly created value from their intra-day flexibility. This flexibility is important in supporting the transition to a low-carbon electricity system.

The UK Capacity Market is currently suspended pending the outcome of a European Commission investigation into the legality of the Capacity Market payments under state aid rules. During this standstill, participants with Capacity Market obligations cannot receive payments, nor will there be mandatory collection of payments from suppliers. If the European Commission reaches a positive decision on state aid, the payments will be reinstated and paid retrospectively provided capacity obligations have been met. Capacity Market obligations for future delivery years would also be upheld.

The UK Government has confirmed that an auction will take place 11-12 June for delivery in 2019/20, replacing the T-1 auction originally scheduled for January 2019. The Government also intends to run a T-3 auction in January to replace the T-4 auction originally scheduled for February 2019. These auction results and subsequent payments would be contingent on the outcome of the European Commission's investigation. 

SSE has submitted evidence to the European Commission supporting the UK Government's position that the Capacity Market, as designed, continues to be the best tool to ensure security of electricity supply at lowest cost to the customer.

SSE's thermal assets have been awarded the following capacity contracts in the GB and Ireland through competitive auctions:

In March 2019, SSE announced the closure of Unit 1 (495MW) at what is now its only coal-fired power station at Fiddler's Ferry (now 1510MW). The remaining three units have capacity obligations until September 2019 and continue to operate as normal. The UK Government has committed to phasing out coal-fired power stations by 2025. SSE continues to review all commercial options for the station with no decision yet made. Preparation for the safe demolition of the Ferrybridge 'C' coal-fired power station is also under way.

Future development

Construction of Ferrybridge Multifuel 2 (69MW - SSE share 50%) is on track for completion by the end of 2019. SSE is also carrying out site preparation work for a potential new multifuel plant (up to 50MW) at Slough.

Construction of SSE's £350m, 840MW CCGT at Keadby 2 in Lincolnshire, is under way and is expected to be delivered by early 2022. The project, which is adjacent to the existing Keadby CCGT, will introduce Siemens' first-of-a-kind, high efficiency, gas-fired generation technology to the UK. SSE intends to participate in future capacity market auctions to secure an agreement for Keadby 2.

Should market conditions warrant further investment in high efficiency gas-fired generation during the transition to a low-carbon electricity system, SSE has opportunities to develop further CCGTs and there is also considerable value in the optionality of the existing sites at Ferrybridge and Fiddler's Ferry.  SSE also remains very interested in the long-term potential of Carbon Capture and Storage.

Energy Portfolio Management

In November, SSE published a statement on its approach to hedging with a view to providing enhanced clarity and transparency to shareholders and investors. EPM has made significant progress regarding the new hedging approach. SSE now generally seeks to hedge its exposure at least 12 months in advance of delivery and remains on track to have this approach fully in place from the start of the next financial year.  The Board-level Energy Markets Risk Committee, chaired by Tony Cocker, is overseeing implementation of the new approach.  For more information see SSE's updated statement published on sse.com - SSE's Approach to Hedging: May 2019 Update.

 Gas Production

SSE has a diverse equity share in over 15 producing fields across 25 licences in three regions of the UK Continental Shelf: the Easington Catchment Area, the Bacton Area and Greater Laggan Area.

The Glendronach gas discovery last year was clearly a positive development and SSE is working with its partners to extract full value from the discovery. In terms of the future of the business, in November 2018, SSE stated that Gas Production is a non-core activity that is ultimately inconsistent with its focus on decarbonisation and it is taking active steps to prepare for its disposal of investments in this activity. However, SSE will only complete a sale of its equity interests when it is in the interests of shareholders and other stakeholders to do so. 

Gas Storage

The economic conditions of gas storage have been challenging in recent years however SSE believes its assets can play an important role during the energy transition.

Following the closure of Rough capacity, SSE now holds around 40% of the UK's conventional underground gas storage capacity, and the overall UK storage duration curve has shrunk to around 16 days.

This loss of energy storage will be further exacerbated with the UK's continuing shift away from coal-fired generation, taking with it the storage inherent in coal stocks. Although the UK has access to diverse gas supply sources, such as interconnection and LNG, gas storage will play an important role in safeguarding the UK's gas and electricity security of supply.

SSE's gas storage assets are well-placed to provide this service to energy users; however, in recent years the market has undervalued this service, making it challenging to cover the cost of maintaining and operating these assets. SSE believes that the economics are improving slightly, and it is expected to return to profit in 2019/20, although SSE remains committed to working with UK Government departments and Ofgem to ensure that the critical role of UK storage in relation to security of supply and stability of gas price is properly rewarded.

NETWORKS

Networks Key Performance Indicators

Introduction to the Networks businesses

SSE is the only energy company in the UK to be involved in economically regulated electricity transmission, electricity distribution and gas distribution. Its electricity networks businesses are collectively known as Scottish and Southern Electricity Networks (SSEN) and it owns a one-third stake in the gas distribution company SGN. The net Regulatory Asset Value (RAV) of SSE's energy networks businesses is on course to reach £10bn by 2023.

Ofgem sets price controls (which in the future will be five year price controls) under the RIIO (Revenue = Incentives + Innovation + Outputs) framework through which energy network companies earn index-linked revenue through charges levied on customers set at a level to cover costs and earn a reasonable return, subject to delivering value for customers, being efficient and achieving targets set by Ofgem.

As part of setting price controls, Ofgem defines total expenditure (totex) allowances for each of the economically-regulated networks, which is designed to encourage them to deliver their outputs at the lowest total cost, without preferring operational expenditure or capital expenditure.  Totex underspends are shared between the companies and their customers.  Ofgem also uses the price control process to incentivise companies to deliver defined outputs for customers.  If companies deliver, they can earn additional incentive income; if not, they will suffer a financial penalty.  SSEN's performance in relation to these incentives is set out in the relevant parts of the report that follows.

Electricity Transmission

SSEN, operating as Scottish Hydro Electric Transmission plc, owns, operates and develops the high voltage electricity transmission system in the north of Scotland and remote islands.

Since the start of the eight-year RIIO-T1 Price Control in 2013, capital investment in Transmission has totalled around £2.7bn, with this investment playing a pivotal role in providing the critical national infrastructure required to facilitate the transition to a decarbonised energy system.

As noted above, in addition to the base rate of return on the RAV of SSEN's transmission assets, RIIO-T1 allows additional revenue to be earned through financial incentives based on efficient use of total expenditure (totex).

The outcome of totex efficiency savings is dependent on the successful completion of large-scale projects and the successful close out of RIIO-T1 after 2021. SSEN expects it will deliver totex savings over the course of RIIO-T1 which will be shared equally between SSEN, supporting future earnings, and electricity customers, through lower charges than would otherwise have been the case.

Maintaining network reliability

Despite the current period of rapid growth in transmission development, SSEN continues to maintain a reliability of over 99.9%. 

During 2018/19, SSEN earned the maximum reward of £1.2m through the Energy Not Supplied (ENS) Incentive.  The ENS Incentive provides a financial reward, on a sliding scale, if the volume of energy not supplied to customers due to faults is below a pre-determined annual target, which for SSEN Transmission is 120MW.  If the target is exceeded, a financial penalty is applied.

As its transmission assets reach the end of their operational life, SSEN has an ongoing programme of maintenance and refurbishment to ensure its critical, national infrastructure assets continue to deliver for electricity customers, generators and wider society.

Successfully energising the Caithness-Moray transmission link

In December 2018, SSEN successfully energised the Caithness-Moray subsea transmission link, which remains the largest single investment ever undertaken by the SSE Group.

Total spend for the project is forecast to be around £970m against an allowance of £1,062m, net of £55m of allowance already returned through the Price Control (all in 2013/14 prices).  SSEN's efficient delivery of the Caithness-Moray link will result in efficiency savings through the totex mechanism, supporting future earnings.

Delivering the transition to a low-carbon economy

During 2018/19, SSEN increased the renewables capacity supported by its network by over 1GW, in what was another record year for renewable connections to SSEN's transmission network. 

This means the installed renewable electricity generation capacity connected to SSEN's transmission network has grown from 3.3GW at the start of the RIIO-ET1 price control in April 2013 to over 6GW and is forecast to grow to over 6.5GW by the end of the current price control period in 2021. SSEN will continue to work collaboratively with its connection customers to deliver timely and efficient connections to its network.

In the remaining years of the RIIO-T1 Price Control, SSEN has a healthy pipeline of transmission projects. With a total planned investment of over £600m, the transmission business remains on track to increase its RAV to around £3.6bn by 2021.

Ready to connect Scotland's island groups

SSEN continues to work with stakeholders across the three Scottish island groups to take forward proposals to provide transmission connections to enable the connection of renewable electricity generation. Together, the three links could provide an investment opportunity of around £1.5bn for SSEN.

With all three island link Needs Cases with Ofgem for consideration and the project development for each island link at an advanced stage, SSEN will continue to engage constructively to take forward its proposals in a timely manner, as soon as developer commitment and all necessary regulatory and planning approvals are confirmed.

Highlighting concerns about implementation of competition in Transmission

SSEN continues to have a number of significant concerns about Ofgem's implementation of competition in transmission, particularly the Competition Proxy Model (CPM) and Special Purpose Vehicle (SPV) delivery models currently in development.

SSEN believes Ofgem's current proposals effectively reopen the RIIO-T1 Price Control; are justified on unproven customer benefits; are not underpinned by legislation or a regulatory framework; and risk delays to the delivery of well-established and advanced projects. SSEN is also increasingly concerned that the introduction of competition in the way envisaged will result in a fragmentation of responsibility, risking network reliability and introducing safety concerns.

Whilst SSEN will continue to engage constructively with Ofgem and other stakeholders as part of this process, it will also consider all options available to ensure the integrity of the Price Control is maintained and the development of existing projects continues, including the potential for legal challenge.

Contributing to the development of RIIO-2

In December, Ofgem published its RIIO2 Sector Specific Methodology consultation for electricity transmission. 

SSEN remains concerned that Ofgem has failed to give appropriate weight to benefits delivered to customers and stakeholders during RIIO1 and has instead proposed a RIIO-2 framework which blunts existing efficiency incentives in a desire to secure a predictable outcome. In its response to the consultation, SSEN has set out a number of areas the regulatory mechanisms of RIIO-1 which have delivered material stakeholder benefits, encouraging Ofgem to ensure these remain in place. These mechanisms are:

·    an output incentive package large enough to allow a high performing network to reach the upper return range;

·    a strong Totex incentive, to ensure networks continue to drive efficiency;

·    a strong and equitable business plan incentive that allows networks to reveal potential in the knowledge that they will share in the benefits;

·    an innovation stimulus which supports solutions to current as well as future network challenges; and

·    a fair financial package for investors that recognises current and future risk.

SSEN will continue to advocate constructively for a regulatory framework that strikes the right balance between driving efficiency and maintaining a stable investment climate that continues to deliver improvements in network reliability, innovation and customer service and pave the way for the further decarbonisation of the energy system.

Preparing the first RIIO-T2 draft business plan

SSEN's draft RIIO-T2 business plan, which will inform business delivery from April 2021, is now in the final stages of development. In February 2019, informed by extensive stakeholder engagement over the previous 18 months, SSEN published its 'Emerging Thinking' paper which sets out SSEN's understanding of what electricity customers, local communities and wider stakeholders require from the electricity transmission network in the first half of the next decade. 

The 'Emerging Thinking' paper and subsequent stakeholder feedback will form the basis of SSEN's first draft business plan, which will be published for consultation by 1 July 2019. As part of the development of this business plan, SSEN sees a powerful case for investment which could contribute to a Transmission RAV of around £5bn by the end of RIIO-T2 in 2026, excluding any contribution from island links.

Electricity Distribution

SSEN, operating under licence as Scottish Hydro Electric Power Distribution plc (SHEPD) and Southern Electric Power Distribution plc (SEPD), is responsible for maintaining the electricity distribution networks supplying over 3.8 million homes and businesses across central southern England and north of the central belt of Scotland.

Delivering for customers and investors under the incentive-based framework

SSEN is now at the mid-point of the RIIO-ED1 Price Control, and has delivered significant changes to its operations, processes and standards to ensure the needs of its customers remain at the forefront of decision making. It aims to be as efficient and effective as possible and earn returns that are fair to customers and shareholders alike, focusing on four key areas:

•             Good performance in relation to incentives available within RIIO-ED1;
•             Efficient delivery of capital investment;
•             Focused delivery of regulatory outputs; and
•             Maintaining a leadership position in innovation.

Incentive performance for SSEN's Distribution business is expected to be £11m in 2018/19 (including an estimated £1m for Stakeholder Engagement and Consumer Vulnerability), compared to £12.6m in 2017/18, with a reduction in the return from the Interruptions Incentive Scheme (IIS) offsetting marked improvements in connections and customer service incentive performance. Typically, incentive income is collected two years after the performance year.

Targeting performance in interruption incentives

Under the IIS, SSEN is incentivised on its performance against the loss of electricity supply through the recording of Customer Interruptions (CI) and Customers Minutes Lost (CML), which include both planned and unplanned supply interruptions.

After a challenging first six months of the year, due in part to the sustained summer heatwave impacting on low voltage network equipment, an improved performance in the second half of the year helped deliver an incentive reward for 2018/19 of £2.5m (£6.8m last year).

Delivering for customers and stakeholders

In 2018/19, SSEN's focus on continual improvements in customer service resulted in a total incentive reward of £4.7m against the Customer Satisfaction (or Broad) Measure Incentive, up significantly from £2.7m last year. 

SSEN's commitment to customer service is reflected in its membership of the Institute of Customer Service and performance in UKCSI survey, where it achieved a score of 89.4%, comparing favourably to the member average of 78.1% and the Utilities average of 74.4%. SSEN also achieved compliance with the BSI Inclusive Service Provision standard for the fourth year running, recognising that its policies, procedures and services are accessible and fair to all customers.

Under the Stakeholder Engagement and Consumer Vulnerability Incentive, SSEN was awarded £1.2m for 2017/18, up from £0.8m in 2016/17.  The outcome of the SECV incentive for 2018/19 will not be known until the second half of 2018.

Driving value from connections

In recent years, SSEN has made significant changes and process improvements in its connections business, informed by the needs and expectations of its customers.  This progress is reflected by a near-maximum award of £2.8m under the Average Time to Connect (TTC) Incentive for 2018/19, up from £1.8m the previous year. 

In October 2018, Ofgem announced its decision not to penalise SSEN under the penalty only Incentive on Connections Engagement (ICE). This is the third consecutive year SSEN has avoided a penalty since its introduction at the beginning of the RIIO-ED1 Price Control period.

In line with the RIIO-ED1 regulatory settlement, incentive targets will become harder to achieve in the second half of the price control, but SSEN remains confident that it will deliver sustained incentive performance in this area.

Delivering a major programme of capital investment

SSEN continues to undertake a major capital investment delivery programme across both its distribution licenced networks which will deliver significant improvements for its customers as well as contributing to sustained and fair returns and increased RAV.

During 2018/19, SSEN invested a total of £340.7m in its electricity distribution networks, bringing the total invested since the beginning of the RIIO-ED1 Price Control to over £1.2bn - which is part of a forecast investment of £2.4bn throughout the RIIO-ED1 period, supporting future earnings through RAV growth.

Responding to change in marine planning policy with subsea cable reopener

Following a change in Scottish Marine Planning policy, the costs associated with the ongoing maintenance and replacement of SSEN's subsea cable assets have increased and SSEN submitted a 'reopener' to Ofgem for the additional allowance required to support its subsea cable replacement programme.

SSEN has requested an additional £59m (in 2012/13 prices) over the RIIO-ED1 period to manage the increased associated costs.  These include the requirements for additional surveys, cable protection and decommissioning.  Subject to regulatory approval, the responsible and evidenced based approach SSEN has adopted to inform its subsea cable replacement programme will deliver RAV growth, whilst minimising the cost impact to its customers.

Progressing a whole system recommendation for Shetland

In November 2018, SSEN submitted to Ofgem a 'whole system' recommendation for Shetland's future energy needs through the sharing of, and financial contribution towards, the proposed transmission link to Shetland.  SSEN has proposed making a financial contribution of £251m towards the transmission link, which is based on the value of services the link would provide to its local distribution network.  A formal response from Ofgem to SSEN's proposal is expected shortly.

Leading the way in the flexibility transition

SSEN is playing a leading role in the transition from a Distribution Network Operator (DNO) to a Distribution Systems Operator (DSO).

In December 2018, SSEN adopted a 'Flexibility First Commitment' setting out that SSEN Distribution will consider flexible solutions in all scenarios where traditional network reinforcement may have been required. This commitment, which is now hard-coded into SSEN's connection process, has been supported by a partnering with Piclo, a flexibility platform provider, to seek to register and procure flexibility across its distribution areas, ahead of potential network constraints.

In March 2019 it was confirmed that SSEN's Project Local Energy Oxfordshire (LEO) will receive £13.8m of funding from the UK Government's Industrial Strategy Challenge fund. LEO will explore how the growth in local renewables, electric vehicles (EVs), battery storage, vehicle-to-grid (V2G) technology and demand side response can be supported by a local, flexible, and responsive electricity grid.   Project LEO will run concurrently with Project TRANSITION, funded by £11m Ofgem grant, which will replicate and trial one of the elements of one of the proposed DSO models.

Understanding the impact of electrification

SSEN expects electrification of heat and transport to lead to an increased role for the electricity networks.  As well as playing a key role in developing its networks to support an increased load in the future, SSEN's Electric Vehicle Strategy is built on a proactive 'readiness' approach with informed anticipative investment where the evidence, network characteristics and stakeholder engagement show it is required.   This focus on enabling electric vehicles is in line with the goals for 2030 adopted by SSE in March 2019. In early 2019, SSEN worked with leading energy consultants, Regen, to develop scenarios for the growth of new sources of demand and distributed generation in its licence area in central southern England for 2018 to 2032 and plans to replicate this study in its Scottish licence area later this year.

Scotia Gas Networks (SGN)

Covering Scotland, the south of England and areas of Northern Ireland, SGN distributes natural and 'green' hydrogen gas to 5.9m homes and businesses, serving people through a network of 74,000km of gas mains and services. SGN's vision is to keep its customers safe and warm while at the same time lead the way in energy delivery. Safety therefore will remain a key priority for the company with a focus on keeping its people, customers and the public safe around its activities.

SGN had a good year across its operational activities, exceeding its 97% emergency response target and achieving its GB gas mains replacement targets, with 999km delivered across the Scotland and south networks. During the year a further 200km of pipeline was constructed on SGN's third distribution network in the west of Northern Ireland.

Its Scotland network has consistently led the sector for customer satisfaction making SGN the overall No 1 gas network company for customer service. It is also greatly improving support for people in vulnerable circumstances, providing new gas connections to over 2,900 customers in fuel poverty

With two years left of the current eight-year price control (RIIO-GD1), SGN remains committed to meeting all Ofgem outputs as well as ensuring it maximises its regulatory incentives. Consultation is now on developing its business plan for the next five-year price control (RIIO-GD2), which will take effect from April 2021.

RETAIL

Retail Key Performance Indicators

Introduction to the Retail businesses

SSE's retail businesses offer a route to market for energy and related infrastructure services.  Business Energy supplies energy in commercial and public sector markets; SSE Airtricity remains the only domestic energy supplier in all markets across the island of Ireland; and Enterprise has an important part of play in helping SSE's meet its low-carbon ambitions

SSE Business Energy

SSE Business Energy supplies energy to business and public sector customers throughout Great Britain, to a market which consumes a total of around 180TWh of electricity and 8billion therms of gas annually. It complements SSE's interests in renewables and flexible thermal generation, providing a route to markets for electricity output through standard contracts and power purchase agreements.

SSE Business Energy  performed well against expectations for all segments. Its strong position is built on solid core competencies in meeting business customers' energy needs. SSE Business Energy continues to focus on its core market segments, whilst broadening into related services such as energy optimisation and demand side response where there is an opportunity to use data and technology to improve outcomes for customers.

SSE Enterprise

The role of Enterprise within SSE Group is to seek out new opportunities in areas that complement the Group's core energy portfolio and 2018/19 represented a year of growth. SSE Enterprise focuses on distributed energy, telecoms and also undertakes M&E Contracting work in both its Contracting and Rail businesses.

Enterprise continues to develop in core markets as well as seek out opportunities to meet the evolving needs of its customers. This year it brought together its existing multi-utility and energy management capabilities into one Distributed Energy business division. Technological advances in flexible energy generation and storage, energy consumption, digital platforms and energy management are creating a growing need for local and flexible energy services. To meet that need, this new division will develop further its capability to provide such services as electric vehicle infrastructure, intelligent energy and information monitoring; as well as district heating schemes.

December 2018 saw Infracapital enter into an agreement with SSE plc to buy a 50% stake in SSE Enterprise Telecoms for a total consideration of up to £380m. An initial £215m (less a small adjustment for working capital) was received at completion in March 2019 and a further £165m will be paid in a series of instalments - subject to future performance. The deal supports accelerated growth in the fibre connectivity sector for the company which will be governed by a composite board structure. High-speed broadband connectivity remains vital to the economic prosperity of the UK - and SSE Enterprise Telecoms is well placed to support growth in this critical sector. In order to further consolidate the spread of its portfolio of Enterprise businesses, SSE completed the sale of its share of its gas transportation networks, Indigo Pipelines to Arjun Infrastructure Partners (AIP); and announced the sale of its Water business to Leep NAV Networks - a joint venture between Ancala and the Peel Group, which is due for completion at the end of May.

SSE Airtricity

SSE's retail arm in Ireland, SSE Airtricity, is the only retail energy brand that operates in all market areas across the island. Combining power production and energy supply to households and businesses continues to deliver commercial advantage to energy customers in Ireland. This has been recently demonstrated by 'Generation Green', a consumer brand campaign that combines SSE Airtricity's leadership in renewable energy with a customer proposition based on helping customers decarbonise.

At 31 March 2019, SSE Airtricity supplied electricity and natural gas to 0.7 million household and business customer accounts in the Republic of Ireland (ROI) and Northern Ireland (NI), making it the second-largest provider of energy and related services in the combined market.

In Home Energy the launch of new value-based propositions, including a 'connected home' product partnership with Amazon, boosted sales, rising to one-third of all sales by year end. For the third year running SSE Airtricity was also named Best for Customer Service by internet comparison site Bonkers.ie, and overall Best Consumer Brand.

In February 2019, the Commission for the Regulation of Utilities (CRU) confirmed that SSE Airtricity is now the largest supplier by MWh of electricity to commercial customers in Ireland's 'Large Energy User' market, becoming the first supplier to overtake the incumbent in this market.

SSE Airtricity continues to focus on helping customers reduce their carbon output and save on energy costs, and this year completed a number of acquisitions and collaborations with specialist energy ancillary service providers to expand in this sector.

SSE Energy Services (Held for disposal)

Creating a more independent energy and services business in GB

SSE Energy Services, comprising SSE's domestic energy supply and energy-related services businesses in Great Britain, is the third-largest supplier in the GB energy market. Since it stepped away from a planned merger with npower in December 2018, SSE has been actively progressing a range of options for the future of SSE Energy Services, including a possible sale, alternative transaction or standalone listing. In these considerations, the interests of customers, employees and shareholders have been paramount. Although SSE Energy Services remains a separate entity within the group for the immediate future, SSE is still of the view that the best long-term future for the business lies outside of the SSE group and is therefore continuing with steps to increase its autonomy and independence.

To that end, SSE has appointed Katie Bickerstaffe as Executive Chair of the SSE Energy Services business. Katie will take up the new role on 23 June 2019, alongside Gordon Boyd, who joins as Interim Chief Financial Officer, with a mandate to deliver a new future for it outside the SSE group and continue progress towards a listing or new, alternative ownership by the second half of 2020. She will form a new, dedicated SSE Energy Services Board, which is expected to have both executive and non-executive representation from the SSE Group, as well as an independent non-executive director. The business will therefore be able to operate with greater day-to-day autonomy and independence, while still being subject to oversight by the SSE plc Board while it remains within the group. 

Katie and Gordon will work closely with Stephen Forbes and Tony Keeling, who, having run the business since 2017 as Co-Heads, are confirmed as Managing Directors and will join the new Board as well as being key members of a new Executive Committee. Their priority will be to ensure the business has the strongest possible track record as it approaches a future outside the group.  

Following its update on 28 March 2019, SSE has also held further positive discussions with third parties about the provision of collateral and trading services for SSE Energy Services. Such a deal would further increase SSE Energy Services' independence from the SSE group by enabling it to trade and operate on a standalone basis as required. It currently relies on the SSE group's credit rating and procures energy through SSE's Energy Portfolio Management division.  

As outlined in SSE's notification of close period statement, SSE Energy Services was profitable and cashflow positive in 2018/19 and is expected to be so again in 2019/20. However, it made an adjusted operating margin of 2.4% compared with 6.8% in the previous year.  This reflects the decision to shield customers from wholesale price increases during 2018, together with the impact of the Default Tariff Cap between January and March 2019 and lower customer numbers, only partially offset by the expiry of a Power Purchase Agreement (PPA).

Operating margin is expected to be further restricted in 2019/20, and is likely to fall below 2% due to the full-year impact of the Default Tariff Cap; however, SSE Energy Services is in the process of transforming its business to:

·    reduce its operating costs;

·    stabilise customer numbers; and

·    deliver the benefits of smart metering for both customers and the business.

Reducing operating costs

SSE Energy Services has continued to drive efficiencies across its business in 2018/19. However, to have a sustainable and competitive business under a tight price cap, it must go further and fundamentally transform its operating model to regain its cost leadership position and offer more value to customers. As well as simplifying business processes and right-sizing to reflect customer demand, SSE expects to drive additional efficiencies by: investing in digital to increase the proportion of customer service transactions completed online; automation of back-office processes, and growth of its data and analytics capability to provide smarter, tailored and more cost-effective solutions for customers.

In 2018/19 SSE continued to perform strongly in a range of external service league tables. It was named best large supplier in the uSwitch Customer Satisfaction Awards and was consistently highly ranked in the Citizens Advice Energy Supplier Performance report, most recently outperforming large and small competitors alike to rank second of 34 suppliers assessed. As a responsible essential services provider, SSE is also committed to meeting the needs of vulnerable customers and in May 2018 achieved the British Standard for Inclusive Service Provision, the gold standard for any company looking to embed flexible customer service practices and means SSE can identify vulnerability in different forms and adapt its service accordingly.

Stabilising customer numbers

As of 31 March 2019, SSE Energy Services had 5.78m gas and electricity customer accounts and 0.47m energy related services customer accounts. Throughout the year, a number of strategic partnerships were secured with trusted brands including Dixons Carphone Warehouse and Leaders Romans Group, which are helping to reach and attract new customers. Non-energy performance was also strong with the number of sales of phone and broadband packages doubling in 2018/19.

Despite the high levels of competition seen in the market, there are early indications that the market is beginning to consolidate. In part, this is due to an increase in non-cost reflective tariffs and unsustainable business models operating in the GB energy market. During 2018/19, 12 suppliers ceased trading, activating Ofgem's 'Supplier of Last Resort' process. SSE Energy Services was pleased to be appointed by Ofgem as the new energy supplier for Brilliant Energy's 28,000 customer accounts.

Looking ahead to 2019/20, SSE Energy Services aims to stabilise its overall customer base to help facilitate longer term growth. Key to this will be leveraging its broad product offering encompassing energy, broadband and boiler care by offering bespoke, value-adding propositions and bundled services, supported by targeted investment in marketing and incentives. This will be supported by ongoing improvements to digital channels that will make it easier for customers to sign up for products and manage their accounts online. At the same time, SSE Energy Services is building its data and analytics capability, enabling it to improve customer segmentation, price more intelligently, and better tailor products and services to customers' changing needs.

Delivering the benefits of smart metering

The smart meter roll-out is more than just a regulatory obligation; it represents an opportunity to transform the relationship between customers, their energy supplier and the energy they consume. As of 31 March 2019, SSE Energy Services had over 1.2m smart meters on supply in customers' homes and had made good progress in successfully transitioning to the new SMETS2 generation of smart meters, which bring fuller functionality to customers. Throughout 2019/20, SSE Energy Services will look to seize the opportunities presented by smart meters by harnessing smart data to engage and empower customers while also launching new, smart-enabled services and propositions.

While there were many achievements in 2018, including meeting its Ofgem interim milestone target for electric, SSE Energy Services was disappointed to have fallen slightly short on meeting its interim milestone target for gas. SSE Energy Services worked with Ofgem to resolve this matter as quickly as possible and a payment of £700,000 was made to Ofgem's Voluntary Redress Fund in March 2019. The shortfall was quickly recovered during February 2019 and good progress is being made against the 2019 plan. Despite ongoing challenges associated with the availability of key enabling technology and low customer demand, the business remains committed on meeting its obligation in a way which is safe, cost-effective and maximises the benefits to customers.