SSE plc
Interim results for the six months ended 30 September 2019

13 November 2019

Headlines

Headline half year results exclude SSE Energy Services and Gas Production assets held for sale:

The results below reflect the reinstatement of the Capacity Market following approval by the European Commission and therefore include c.£110m of GB Capacity Market payments in respect of the period from the date of its suspension to 30 September 2019; £8m of which is included in exceptional items.

Headline results in line with Pre-Close Statement of 26 September and exclude SSE Energy Services and Gas Production assets:

·     Adjusted operating profit on continuing operations: £491.9m, up 14%

·     Reported operating profit/(loss) on continuing operations: £347.5m, versus £(184.6)m last year

·     Adjusted profit before tax on continuing operations: £263.4m, up 15%

·     Reported profit/(loss) before tax on continuing operations: £128.9m, versus £(284.6)m last year

·     Adjusted earnings per share on continuing operations: 18.0p, up 10%

·     Reported earnings/(loss) per share on continuing operations: 6.2p, versus (26.4p) last year

Interim dividend in line with five-year dividend plan to 2023:

·     Interim dividend: 24 pence, down 18% reflecting dividend policy outlined in May 2018

·     Intention to recommend full-year dividend of 80 pence, with annual RPI growth in the three subsequent years

Investment and capital expenditure in line with plan to 2023:

·     Capital and investment expenditure: £638.2m, down 19%

·     Includes £446.2m invested in regulated electricity networks and renewable energy

·     Full-year capital and investment expenditure is now expected to be around £1.4bn

·     Adjusted net debt and hybrid capital: £10.3bn

Positive updates to financial outlook for 2019/20:

·     In September 2019, SSE's forecast full year adjusted earnings per share was around 80p-85p, taking into account the impact of holding its interest in Gas Production for sale.

·     Gas production interests comprise assets and hedging contracts.  The structure of the proposed disposal means the hedging contracts will be retained and are not accounted for as held for sale.  It is estimated this will add around 3 pence to SSE's previous forecast for adjusted EPS for FY 19/20 taking it to around 83p-88p.

·     European Commission green light for Capacity Market means forecast adjusted EPS is no longer subject to receipt of suspended Capacity Market payments.

·     Full-year adjusted EPS is always subject to hydro and wind assets benefiting from normal weather conditions.  Generally wet and windy weather since September means, as at early November, renewable output for the year to date is slightly ahead of plan.

Results of discontinued operations

At 30 September 2019, SSE Energy Services continues to be classified as held for sale and the Group's investment in Gas Production has also been classified as held for sale. Adjusted operating losses of the discontinued operations for the six months are £22.7m; reported operating losses are £511.8m (including £489.1m of impairment charges relating to SSE Energy Services);  and the adjusted loss per share of the discontinued operations is 1.6p.  

Delivery against strategic priorities continuing:

·     Agreement to sell SSE Energy Services to OVO Energy Limited on course for completion in early 2020, subject to the necessary regulatory approvals

·     Strong, stakeholder-led RIIO T2 business plan to be submitted to Ofgem for close to £2.4bn totex investment in north of Scotland that could contribute to a Transmission RAV of around £5bn by 2026

·     SSE Renewables' development capability confirmed by securing contracts for 2.2GW (SSE share) in CfD Allocation Round

·     Transition to lower carbon electricity generation confirmed by decision to close SSE's last remaining coal-fired generation plant at Fiddler's Ferry by March 2020.

·     Updated capital and investment expenditure plan to be set out by May 2020.

Richard Gillingwater, Chair of SSE, said:

"SSE is progressing well in the execution of its low-carbon strategy with the sale of SSE Energy Services leading to group more focussed on renewable energy and regulated electricity networks.  

"SSE Renewables has an enviable development pipeline bolstered by recent success in securing valuable Contracts for Difference and we have strong business plans for the upcoming Transmission price control. Our growth is aligned to net zero emissions and looking ahead to COP 26 in Glasgow next year, we will be encouraging even faster decarbonisation.

"Clearly some headwinds remain in the sector with political uncertainty and aspects of UK government policy being subject to judicial process, however, we have strong optionality to create value through the low carbon transition and deliver our dividend commitments."

SSE's financial performance at a glance for six months to 30 September 2019

At 30 September 2019 SSE Energy Services is held for sale 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. Details of SSE Energy Services performance can be found in the Group Financial Overview. 

In addition, SSE's interests in Gas Production assets are also held for sale at 30 September 2019 and therefore results relating to these assets have been excluded from the profit and loss metrics in the tables below.

*Restated to exclude the contribution of SSE Energy Services and Gas Production assets which have been presented as discontinued operations (see note 5(b) to the Summary Financial Statements).

Notes:

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.

Renewable generation excludes SSE's small biomass capability which is now managed by SSE's Enterprise business.

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 interim results for the six months ended 30 September 2019 on Wednesday 13 November.  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/mmc/p/geoyxfdz .      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 and you can register for RNS news alerts using the following link: https://sse.com/investors/regulatorynews/rns-alerts/ .  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 six months to 30 September 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

On 13 September 2019, SSE announced that it had entered into an agreement to sell its SSE Energy Services business to OVO Energy Limited.  Therefore, SSE Energy Services will continue to be presented in these financial statements as 'held for sale' with assets and liabilities of that business as held for sale and the business activity as discontinued (see note 9 of the Summary Financial Statements).  This means the results of SSE Energy Services have been excluded from the profit and loss metrics.  The transaction has received FCA approval, awaits CMA approval and is expected to complete early 2020.

Important note: Gas Production

At 30 September 2019 SSE has assessed that it is highly probable that SSE's investment in Gas Production assets will be sold and has presented the assets and liabilities of that business as held for disposal and the business activity as discontinued (see note 9 of the Summary Financial Statements). Therefore, the results of SSE's investments in Gas Production assets have been excluded from the profit and loss metrics. As the Group continues to fund this investment, and will do so until completion of the transaction, the capital expenditure and debt related metrics presented include the activity of that business.  While the assets of this business are held for sale, the benefit of an internal gas hedge is being retained within the SSE Group due to the structure of the proposed disposal.

Impact of planned sales on the Group's APMs

The following metrics have been adjusted in all periods presented to exclude the contribution of SSE Energy Services and SSE's investment in Gas Production assets, which have been presented as discontinued operations as at 30 September 2019:

Adjusted EBITDA;

Adjusted operating profit:

Adjusted profit before tax;

Adjusted current tax charge; and

Adjusted earnings per share.

Strategic Overview

Creating value through the transition to net zero emissions

Since the start of this financial year, there has been encouraging progress in relation to SSE's strategy to create value for shareholders and society from developing, operating and owning energy-related infrastructure and services in a sustainable way.

Whilst the imperative to tackle climate change creates a tailwind behind SSE's strategy, exemplified by the UK Parliament legislating for net zero emissions by 2050, the energy sector continues to face a complex and challenging operating environment.  This is illustrated by the uncertainty arising from the UK general election, the Labour Party campaign for sector nationalisation and public policy outcomes becoming the subject of judicial processes. 

Each of these matters has to be dealt with in a pragmatic and progressive way, guided by the concerns of shareholders and other stakeholders and underpinned by a commitment to do the right thing in the fight against climate change.  This commitment is illustrated by SSE's four business goals to 2030, aligned to the UN Sustainable Development Goals and covering climate action; affordable and clean energy; industry, innovation and infrastructure; and decent work and economic growth.

Executing SSE's low-carbon strategy

Material progress continues to be made on execution of a strategy that puts SSE at the centre of efforts to decarbonise the UK and Irish economies. Key to this is our clear focus on regulated electricity networks and renewable energy. That focus has been sharpened by the recent progress made on the planned sale of SSE Energy Services to OVO Energy and the measures taken to prepare for the proposed divestment of gas production assets.

Within the core businesses, SSEN Transmission's strong, stakeholder-led business plan for 2021-26, A Network for Net Zero, represents a blueprint for continued investment in a modern electricity transmission network to help decarbonise the economy.  SSEN Distribution continues to make positive strides towards becoming a Distribution System Operator but we have more work to do on regulatory incentives where we are focusing heavily on improvement. The completion of the Beatrice offshore wind farm and the success of SSE Renewables-backed projects in the recent Contracts for Difference auction demonstrates what SSE can achieve as a leading developer, operator and owner working with like-minded partners.

The progress made by our complementary businesses should not be overlooked.  In particular, our thermal generation business has a key role to play in the transition to a decarbonised energy system and SSE is this month publishing Transition to net zero: The role of gas, a report analysing the resilience of SSE's gas assets to different climate change scenarios.

Delivering on the five-year dividend plan

It is SSE's core businesses that will be at the heart of SSE in the years to come, creating options, opportunities and value through the low carbon transition and earning returns for shareholders in a sustainable way.  Value creation will be underpinned by returns shaped through regulatory or public policy processes and earned through efficient operation and development (including construction) of low-carbon assets. These core businesses and assets underpin SSE's first financial commitment, which is to fairly remunerate shareholders' investment through dividends. The interim dividend of 24 pence is in line with the 80 pence per share that is expected to be recommended at year-end and is consistent with the five-year plan announced in May 2018, to which SSE remains fully committed.

Focusing on future opportunities

The refocused SSE group of businesses is delivering on a clearly-defined strategy to create value from developing, operating and owning energy-related infrastructure in a sustainable way. In doing so it is realising a vision to be a leading energy company in a low-carbon world. There are complex issues to navigate, but there has been encouraging progress SSE since the start of the financial year.  SSE has put the fight against climate change at the heart of its business, and it is for this reason that our advocacy in the year ahead will be focused on encouraging governments attending the UN Climate Change Conference in Glasgow next year to go further and faster in decarbonisation. As the progress in this financial year has shown, SSE is very well-placed to seize the opportunities on offer from the transition to a net zero economy and in doing to create sustainable value for shareholders and society in the years to come. 

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 and SSE's investment in gas production assets have been presented as discontinued operations in the Summary Financial Statements, and therefore have been excluded from profit and loss based measures in the tables below in the current and comparative periods.

Segmental EBITDA results are included in note 5 (c) to the Summary Financial Statements.  

Operating profit

*Reflects fair value depreciation restatement September 2018 of £2.3m 

A reconciliation of adjusted operating profit by segment to reported operating profit by segment can be found in Note 5 (b) to the Summary Financial Statements.

Operating profit

Adjusted  and reported operating profit/losses in SSE's business segments for the six months to 30 September 2019 are as set out below; comparisons are with the same six months in 2018 unless otherwise stated:

SSEN Transmission: adjusted and reported operating profit was £110.1m compared to £127.4m, mainly due to the phasing of allowed revenue, along with increased depreciation relating to on-going capital expenditure.

SSEN Distribution: adjusted and reported operating profit was £150.8m compared to £166.9m, mainly due to higher costs associated with supplying Shetland, increased fault costs and slightly lower Distribution Use of System electricity volumes.

Investment in SGN: adjusted operating profit was £102.1m compared to £85.4m, mainly due to the phasing of allowed revenue and an increase in other income.

Reported operating profit was £54.5m compared to £38.6m, due to the factors above, offset by slightly higher interest and tax charges.

SSE Renewables: adjusted operating profit was £149.9m compared to £78.4m mainly due to a net increase in wind energy capacity in operation over the period, along with more favourable weather conditions for renewable electricity output compared with the same period in 2018.  HY19/20 also includes around £18m of GB Capacity Market payments in respect of the period from the date of its suspension to 30 September 2019; compared to HY18/19 which included under £3m.  Following a technical review, SSE has changed the estimated useful life of its onshore windfarms from 20 to 25 years. The financial impact of this extension is to increase adjusted and reported profit before tax by £14.5m in HY19/20.

Reported operating profit was £106.4m compared to £151.1m. The factors outlined above were outweighed by year on year movements in exceptional items.  In the six months to 30 September 2018 reported operating profit included exceptional gains of £88.4m compared to a net exceptional and one-off financing cost charge of £5.9m in the same period this year.

Thermal Generation: adjusted operating profit was £57.8m compared to an adjusted operating loss of £3.5m, mainly due to the reinstatement of the Capacity Market, meaning HY19/20 includes over £80m of GB Capacity Market payments in respect of the period from the date of its suspension to 30 September 2019.  A further £8m of capacity payments are also included in exceptional items in relation to Fiddlers Ferry coal station. This compares to £11m of Capacity Market payments which were received in the six months to 30 September 2018.  The additional income in HY19/20 was partly offset by lower plant availability over the summer of 2019 compared with the summer of 2018. 

Reported operating loss at 30 September 2019 is £53.3m compared to an operating loss of £12.8m in prior year. The factors outlined above were outweighed in HY19/20 by the net exceptional charge including impairments of Fiddler's Ferry coal station of £98.7m;  following the announcement to close the station by March 2020.

Gas Storage adjusted and reported operating loss was £20.7m compared to £3.7m, reflecting the fact that this year's auction of storage capacity resulted in no contracted sales. SSE will operate the plant on a merchant basis, with its businesses using this capacity over the forthcoming winter and Gas Storage is expected to return to a small profit for the full year.

SSE Business Energy: adjusted and reported operating profit was £2.9m compared to £41.6m, as a result of reduced volumes of energy sold, industry mutualisation, disposals last year and increased bad debt.  This reflects challenging market conditions for this business, but profitability is expected to improve in the rest of the financial year.

SSE Airtricity: adjusted and reported operating profit was £16.4m compared to £12.0m reflecting improved margins earned by the business.

Energy Portfolio Management (EPM):  adjusted operating loss was £113.1m compared to an adjusted operating loss of £85.9m. The full year adjusted operating loss for FY2019/20 is now expected to be between £125m and £130m. The Annual Report 2019 contains information to relating to the financial performance of EPM in 2018/19 and 2019/20.

Reported operating profit for EPM in the six months to 30 September 2019 was £41.5m compared to a loss of £651.3m in prior year due to remeasurement gains on unsettled derivative contracts of £154.6m in the current period, compared to losses of £565.4m in prior year.

As previously stated, following changes to the operations of the EPM business, from FY20/21 EPM is expected to earn a small adjusted operating profit through service provision.

Investment in Gas Production: while the assets of this business are held for sale, the benefit of an internal gas hedge is being retained within the SSE Group due to the structure of the proposed disposal. This internal gas hedge has resulted in a HY19/20 adjusted and reported operating profit of £31.9m.  In addition, the assets held for sale have resulted in a reported operating loss of £15.3.m which is excluded from SSE's adjusted results. If reported together, the assets and the internal gas hedge would show a total operating profit of £16.6m; compared to an adjusted and reported operating profit of £19.3m in the same period in 2018.   

Enterprise: adjusted operating profit was £8.2m compared to £13.7m, reflecting the reduction in SSE's share of Telecoms' profits following the sale of 50% of the business in March 2019 as well as additional costs relating to development spend.

Reported operating profit was £5.1m in the current year versus £13.1m in prior year due to interest and tax costs of SSE Telecommunications.

Corporate Unallocated: adjusted operating loss of £4.4m compared to £1.0m.

Reported operating loss is £98.1m in HY19/20 compared to a reported operating loss of £68.1m in HY18/19. Both periods include charges related to the disposal of SSE Energy Services of (£52.5m in HY19/20 compared to £67.1m in HY18/19). In addition, in HY19/20, the Group also incurred exceptional IT write-offs and redundancy provisions totalling £41.2m.   

SSE Energy Services (discontinued operations)

SSE Energy Services (Energy Supply (households in GB) and Energy Related Services): adjusted operating loss was £7.4m, compared to £62.1m.  The higher loss in HY18/19 reflects a delay in passing through cost increases to customers in that period and in addition HY19/20 excludes depreciation as a result of the business being presented as held for sale.

An exceptional charge of £489.1m has been recognised in the period as an impairment to the carrying value of the SSE Energy Services assets held for sale at 30 September 2019 which resulted in a reported operating loss of £496.5m. This impairment is reflective of the transaction price agreed with OVO and includes an estimate of total transaction fees to be incurred.
 

Investment and Capital Expenditure

* In the period the Group incurred £53m of capital expenditure within its Energy Services business, mainly related 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. However, this capital expenditure has been excluded from SSE's adjusted Investment and Capital Expenditure, as the Group incurred an exceptional impairment in the business related to the proposed OVO transaction.

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

During the six months to 30 September 2019, SSE's investment and capital expenditure (excluding SSE Energy Services but including Gas Production) totalled £638.2m, including £446.2m investment in renewable energy and regulated electricity networks. Total investment and capital expenditure over the period included the following:

·     A major investment programme in electricity networks totalling £321m (50% of SSE's total investment and capital expenditure).

-        Electricity Transmission investment and capital expenditure of £169m included work on the 275kV line between Knocknagael and a new substation at Tomatin plus the construction of new substations at Fort Augustus, Rothienorman and New Deer, to enable renewable energy projects to connect to the network.

-        Electricity Distribution investment and capital expenditure of £152m consisted primarily of asset replacement and reinforcement projects, including the replacement of subsea cables and several overhead line circuits.

·     Further investment in renewable energy in GB and Ireland totalling £125m (20% of the total), £104m of which relates to SSE's equity share of the Beatrice offshore windfarm. Beatrice, which was officially opened on 28 June, is project-financed and SSE's equity share is 235MW (40%).

·     SSE's flexible thermal gas-fired power stations will play a key part in the transition to a low-carbon economy and investment in thermal generation totalled £108m (17% of the total) in the period, including the Keadby 2 and Ferrybridge Multifuel 2 project (combined £100m), along with development spend on the Slough Multi-fuel project.

·     A total of £25m was invested in Enterprise, predominantly comprising spend in Telecoms, and £36m in SSE group services, which was mainly on shared IT.

Updating plans and investing efficiently in energy assets that the UK and Ireland need

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.

Since setting out its plan in May 2018 for total investment and capital expenditure of around £6bn across the five years to March 2023, SSE has been successful in securing CfDs for 2.2GW (net) of offshore wind generation capacity.  SSE's successful projects are Seagreen (454MW out of a project total of 1,075MW secured a contract, currently 100% owned by SSE) and Dogger Bank (three projects totalling 3,600MW, SSE share 50% or 1,800MW).  The CfD auction is currently the subject of a Judicial Review which has introduced some uncertainty for project owners but, subject to progress of this legal process, SSE plans to sell down stakes so its equity share in each CfD project is less than 50% and to project finance them off its balance sheet.  SSE's equity investment in these projects, net of such sell-downs and project finance is currently expected to total between £1.0bn and £1.5bn in the period to March 2026, although the phasing of this is currently uncertain.

SSE expects that 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.

By their very nature long term financial plans evolve.  While SSE's May 2018 plan for total investment and capital expenditure included an assumed 1GW of CfD projects and continued investment by SSEN Transmission, the assumptions require to be updated to reflect the opportunities identified in both areas as well as the normal evolving nature of long-term investment plans in the wider SSE Group.  SSE expects to set out updated capex plans by May 2020 and will continue with its disciplined approach to investment and focus on balance sheet strength. 

SSE's Hedging Position at 30 September

SSE published 'SSE's Approach to Hedging: May 2019 Update' on 25 May 2019*.  This document included SSE's Hedge Position in relation to its Wind and Hydro generation as at 31 March 2019.  The following table includes an update as at 30 September 2019 showing the hedge position for full years 2020/21 and 2021/22. To aid understanding, this table should be read in conjunction with the full 'Approach to Hedging' document. 

*https://sse.com/investors/reportsandresults/media/t14jx1up/sse-approach-to-hedging-may2019-update.pdf

Adoption of IFRS 16

The Group adopted IFRS 16 "Leases" with effect from 1 April 2019, applying the "modified retrospective" approach whereby comparative figures are not restated. In adopting this approach, the results for the six months ended 30 September 2019 are not directly comparable with those reported in the prior period under the previous applicable accounting standard IAS 17 "Leases". 

For the Adoption impact, the disclosures given in the notes to the financial statements are:

Adoption of IFRS 16 (including SSE's share of joint ventures) resulted in adjusted operating profit for the six months to 30 September 2019 increasing by £8.7m, offset by increased adjusted interest costs of £8.5m, resulting in a £0.2m net improvement in adjusted profit before tax.

At 30 September 2019, including additions during that period, the net value of additional right-of-use assets under IFRS 16 totalled £206.6m with a corresponding lease liability of £238.7m.

The revised presentation of lease payments under IFRS 16 results in a £24.9m improvement in net cash flows from operating activities and a corresponding deterioration in net cash flows from financing activities. There is no impact on total cash and cash equivalents.

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.

SSE's adjusted EPS measure provides an important and meaningful measure of underlying financial performance.  In adjusting for depreciation on fair value adjustments, non-recurring joint venture refinancing costs, 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 six months to 30 September 2019, SSE's adjusted earnings per share on continuing operations was 18.0 pence, compared to 16.4 pence for the six months to 30 September 2018.  This reflects the movements in adjusted operating profit outlined in the section above, offset by higher adjusted net finance costs and a higher tax charge reflecting the effective current tax rate increasing from 6.9% to 12.0% as explained in the Taxation section below.

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 30 September 2019 is expected to be in the next 18 months.

The £154.6m IFRS 9 positive movement on operating derivatives in the six months to 30 September 2019 arose mainly from an improvement in the 'out of the money' fair value of forward gas contracts.

Financing derivatives

In addition to the profit recognised on operating derivatives, there were losses of £69.9m recognised on the remeasurement of financing derivatives at 30 September 2019.  This loss is predominately due to lower interest rates on long term interest rate swaps, partially offset by lower exchange rates on cross currency swaps and FX contracts due to weaker Sterling against the Euro and dollar. 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 six months to 30 September 2019, SSE recognised a net exceptional charge of £675.1m before tax.  The following table provides a summary of the key components making up the net charge position:

The Group recorded an exceptional impairment of £489.1m on its SSE Energy Services business which reflects an adjustment to the carrying value of the assets, to reflect the agreement of the sale of the business to OVO. The impairment includes costs expected to be incurred to complete the disposal of the business.

For a full description of the net exceptional credit see note 6 of the Summary Financial Statements.

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

Reported results for the year to 30 September 2019 are significantly higher than those for the same period last year; mainly due the £154.6m IFRS 9 positive movement on operating derivatives in the six months to 30 September 2019 compared to the negative £565.4m movement for the same period in 2018.   This arose mainly from an improvement in the fair value of forward gas contracts.

Dividend

Remunerating shareholders' investment through payment of dividends

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. 

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 remainder of its five- year dividend plan to March 2023 as set out in May 2018 is as follows:

·     For 2019/20, SSE's intention is to recommend a full-year dividend of 80 pence per share, with an interim dividend of 24 pence per share to be paid on 13 March 2020; and

·     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. 

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 over £2.5bn as at 30 September 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 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. 

In September 2019, both Moody's and Standard and Poor's affirmed SSE's credit rating:

·     Moody's - Baa1 stable outlook, consistent with guideline RCF/Net debt ratio of around 11% in 2018/19 and 2019/20 and thereafter trending towards the low teens in percentage terms; and

·     Standard and Poors - BBB+ outlook stable, consistent with guideline FFO/Net debt ratio of about 18%

SSE's current credit ratings are still amongst the strongest held by private sector utilities across Europe. With a high-quality portfolio of assets, an increasing focus on renewable sources of energy and regulated electricity networks, and a wide variety of options for the future, SSE is confident it can maintain credit rating metrics that are sustainable and consistent with an ability to secure funding from debt investors at competitive rates; and will remain focused on them as it develops its updated plans for investment following the CfD auctions.

Adjusted net debt and hybrid capital

SSE's adjusted net debt and hybrid capital was £10.3bn at 30 September 2019, up from £9.4bn at March 2019, reflecting the on-going capital investment programme, share buybacks and debt revaluations adjustments partially offset by shareholder loans and dividends received following the refinancing of the Beatrice offshore windfarm.

Adjusted net debt is expected to be around £10.4bn at March 2020; reflecting the cash inflow from the sale of Energy Services to OVO and some proceeds from the sale of a stake in Seagreen but excluding the proceeds from the planned sale of gas production assets.   

As SSE have previously outlined, opportunism and agility will continue to be important and investment expenditure and net debt can always be impacted if there are opportunities to create value from disposing of assets, or from further investments or acquisitions. 

The debt revaluation adjustment, of £311.4m as at 30 September 2019 (up from £139.1m at 31 March 2019) relates to marked-to-market movements on cross-currency swaps and floating rate swaps that are classed as hedges under IAS39.  The debt revaluation increase was driven by both Sterling and Euro weakness against the US Dollar partially offset by lower interest rates during the half year to 30 September 2019. The hedges ensure that any movement in the value of net debt is predominately offset by a movement in the derivative position. 

The debt revaluation increase was driven by both Sterling and Euro weakness against the US Dollar partially offset by lower interest rates during the half year to 30 September 2019. The hedges ensure that any movement in the fair value of net debt is predominately offset by a movement in the derivative position. 

Adjusted net debt excludes finance leases and includes outstanding liquid funds that relate to wholesale energy transactions.  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.  

Hybrid Bonds summary as at 30 September 2019

Further details on each hybrid bond can be found in notes 13 & 14 to the Summary Financial Statements and a table noting the amounts, timing and accounting treatment of coupon payments is shown below.

SSE's 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, are therefore debt accounted and included within Loans and Other Borrowings; and are already part of SSE's adjusted net debt and hybrid capital.

The coupon payments relating to the 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 £228.5m in the six months to 30 September 2019, compared to £201.9m for the same period in 2018. This reflected higher net debt during the year and higher JV interest costs.

Reported net finance costs were £218.6m, compared to £100.0m, reflecting a mark-to-market loss on financing derivatives of £69.9m in the period compared to a gain of £39.6m in the prior period 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 30 September 2019, SSE's adjusted net debt included cash and cash equivalents of £0.2bn, down from £0.5bn at March 2019.

Since 31 March 2019, the cash collateral value has decreased by £106.2m to £238.0m at 30 September 2019. The decrease relates to the unwind of 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 £75.0m 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 2019/20

In September 2019, Scottish Hydro Electric Transmission plc (which trades as SSEN Transmission) successfully issued its inaugural Green Bond, a 16 year/£350m euro bond maturing September 2035 with a coupon of 2.25% and an all-in funding cost of 2.39%. This bond was the SSE group's third Green Bond in three years, affirming SSE as the largest issuer of Green Bonds from the UK corporate sector.  In addition, SSE is the only UK corporate to offer up multiple benchmark sized tranches in the Sterling and Euro markets. This 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.

In October 2019 SSE completed the refinancing of the £200m Bank of China facility to bring it line with the £1.3bn RCF that was refinanced in March.  The facility was extended to 2024 with two one-year extension options and the margin was reduced from 50bps to 35bps, which saves £100k in commitment fees annually.  Both facilities are now classified as sustainable facilities with interest rate and fees paid dependant on SSE's performance in environmental, social and governance matters, as assessed independently by Vigeo Eiris. In September 2019 Vigeo Eiris published their updated ESG Score for SSE, which has improved significantly to 62, from 51 the previous year, which resulted in the sustainability clauses on the refinanced £1.3bn RCF and £200m Bank of China facilities being triggered, reducing the margin on both by 2.5bps.

Refinancing over the medium term

Following the debt issued in September 2019 (referenced above) SSE's next significant potential refinancing milestones are:

·     £492m of short-term Commercial Paper due to mature by March 2020 which SSE intends to keep at similar levels on a rolling basis

·     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 30 September 2019, 89% 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.

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 £6.2bn and SSE's objective is to maintain a reasonable range of debt maturities. Its average debt maturity, excluding hybrid securities, at 30 September 2019 was 7.0 years, unchanged since March 2019. This 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 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. The Scrip Dividend Scheme gives the Company greater flexibility in managing its capital resources by retaining cash within the business.

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.  

Taking account of subscription to the Scrip dividend over both the interim and final dividends, uptake of the 2018/19 dividend was 35%, made up of:

·     47% for the 2018/19 interim dividend; and

·     30% for the 2018/19 final dividend.

SSE therefore, on 27 August 2019, announced its intention to initiate a share buyback, in the period following the final dividend payment for the year ended 31 March 2019.  The number of ordinary shares to be purchased will not exceed 13,420,470 ordinary shares, and the maximum pecuniary amount allocated to the Scrip buy-back is £150m.  SSE has commenced this buy-back which it intends to complete by 31 March 2020 and as at 6 November 2019, 4.7m shares had been repurchased.

SSE believes limiting the dilutive effect of the Scrip in this way 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 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 was the first 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 always to operate within both the letter and spirit of the law .

For reasons already stated above, SSE's focus is on adjusted profit before tax, and in line with that, SSE believes that the adjusted current tax charge on that profit is the tax measure that best reflects underlying performance. SSE's adjusted current tax rate for FY 2019/20, based on adjusted profit before tax, is forecast to be 12.0%, as compared with 1.1% in FY 2018/19 on the same basis, and after prior period adjustments.

In 2018/19, SSE had prior period tax credits - through the carry back of tax losses and truing up of earlier year tax returns - totalling £106.9m, which exceeded the tax charge in the year.  The adjusted current tax charge and prior period tax credits for 2019/20 are expected to be more in line with previous years.

SSE expects to be accredited with the Fair Tax Mark for the sixth consecutive year in the coming weeks and will also publish its fourth Talking Tax booklet outlining what tax is paid, and where.

Pensions

During the period the Group began the triennial valuation of the Southern Electric Pension Scheme which is expected to be complete by 31 March 2020. At 30 September 2019 the Scottish Hydro Electric Pension Scheme is in surplus on an IAS 19 basis by £587.1m. Together with the deficit in the Southern Electric scheme of £183.2m this results in the net surplus of £403.9m for both schemes shown in the table above. From 1 October 2019 the Group has agreed with the Trustees of the Scottish Hydro Electric Pension Scheme to cease funding contributions for a period until the surplus on a funding basis is negative for two successive quarters. The Group also converted a longevity swap covering c.£800m of liabilities of 2,235 pensioners and dependents to a buy-in contract. The buy-in contract removes the Group's exposure to volatility in the liabilities of these members as future benefit payments will be funded by the third-party re-insurer.

Additional information on employee pension schemes can be found in Note 17 to the Summary Financial Statements.

SSEN TRANSMISSION

SSEN Transmission key performance indicators

SSEN Transmission overview

SSEN Transmission, 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. Ofgem sets price controls (which in future will be for five-year periods) under the RIIO (Revenue = Incentives + Innovation + Outputs) framework for electricity transmission companies.  The RIIO T1 price control will end in 2021, to be followed by a new, RIIO T2 price control.

Since the start of the eight-year RIIO-T1 price control in 2013, investment and capital expenditure by SSEN Transmission has totalled around £2.8bn, including £168.6m in the six months to 30 September 2019. This investment plays a pivotal role in providing the critical national infrastructure required to facilitate the transition to a decarbonised energy system.

In the remaining 18 months of RIIO-T1, total planned investment of over £500m means the business is on track to increase its RAV to around £3.6bn by 2021. 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). Anticipated totex savings over the course of RIIO-T1 will be shared equally between SSEN Transmission, supporting future earnings, and electricity customers, through lower charges than would otherwise have been the case.

Maintaining network reliability  

In the six months to 30 September 2019, SSEN Transmission continued to maintain an impressive network reliability of over 99.9%, with faults that impacted end users resulting in a loss of demand totalling just 1.15MWh. This was largely due to a lightning strike that affected around 5,000 demand customers in Dounreay, with all supplies restored within around one hour.

SSEN Transmission therefore remains firmly on track to perform well in relation to the Energy Not Supplied (ENS) Incentive, which provides a financial reward to companies, 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 120MWh.  If faults result in annual losses of demand over 120MWh, a financial penalty will be applied.  The outcome of the ENS Incentive, reward or penalty, will impact on earnings in 2021/22.

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. 

Delivering the transition to net zero 

SSEN Transmission's north of Scotland operating area is expected to play a critical role in the transition to net zero, with the region home to some of the UK's greatest resources of renewable electricity. Renewable electricity generation capacity connected to SSEN Transmission's network has grown from 3.3GW at the start of RIIO-ET1 price to over 6GW today and it is on track to grow to over 6.5GW by the end of RIIO-T1 in 2021. 

In the six months to 30 September 2019, SSEN connected around 40MW of new renewable electricity generation, with a further 100MW due to connect in the second half of the year.

While a relative slowdown in the connections in the remaining years of RIIO-T1 is expected, SSEN Transmission expects the installed renewable capacity in the north of Scotland to increase to at least 10GW in RIIO T2, the equivalent of powering 10 million homes and playing a pivotal role in UK net zero targets, as well as supporting future earnings and RAV growth.

SSEN Transmission will continue to work collaboratively with its customers to deliver timely and efficient connections to its network, supported by its new stakeholder engagement strategy and connections policy, which will drive more focus on innovative and flexible connections, delivered in greater collaboration with customers and other stakeholders.

Delivering a programme of capital investment

In the six months to 30 September 2019, SSEN Transmission completed the Fort Augustus to Fort William overhead line refurbishment on time and on budget securing future electricity supplies in the area as well as increasing the capacity of the line to support the growth in renewables. SSEN Transmission also completed the 275kV line between Knocknagael and a new substation at Tomatin enable renewable energy projects to connect to the network.

SSEN Transmission continues to have a healthy pipeline of capital investment programmes for the remaining 18 months of RIIO-T1. With a total planned investment of £500m in the remaining years of RIIO-T1, the delivery of SSEN Transmission's capital investment programme will support future earnings and RAV growth.  This includes the following projects which are on track to be delivered in the remaining years of RIIO-T1.

SSEN continues to make good progress with the new 400kV substation at Fort Augustus, a key component to support the growth in renewables unlocked by the Beauly to Denny line that was completed in 2015.

Construction of new substations at New Deer and Rothienorman are also under way, supporting the forecast growth in offshore wind in the north east of Scotland. Both substations will initially operate at 275kV, increasing to 400kV as part of the wider east coast onshore reinforcements that are scheduled for RIIO-T2.

In July 2019, planning consent was granted for the Inveraray to Crossaig transmission line in Argyll. This replacement of the existing transmission line is essential to maintaining security of supply in the area.  Construction of the first phase of this project, which will run from Inveraray to Port Ann, is under way, with the second phase, from Port Ann to Crossaig, to be delivered in RIIO-T2.

Being ready to connect Scotland's island groups  

SSEN Transmission 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 schemes. Together, the three links could provide an investment opportunity of around £1.5bn for SSEN Transmission.

In September 2019, Ofgem approved SSEN Transmission's Needs Case for the Orkney link, subject to Orkney renewable developers meeting a number of conditions no later than December 2021.

In October 2019, Ofgem published an update on both the Shetland and Western Isles Needs Cases, in which it has requested additional information to enable it to make a decision. This includes provision of alternative evidence to demonstrate generator commitment in the absence of sufficient generation securing a CfD.  SSEN Transmission will now work with all parties to provide Ofgem the information it requires to make a timely decision on both Needs Cases.

SSEN Transmission 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. 

Addressing concerns about competition in transmission 

SSEN continues to deliver 'native' competition through the highly competitive tendering of all major supply chain works associated with SSEN Transmission's projects, ensuring the continued economic and efficient delivery of SSEN's capital investment programme.

SSEN Transmission is committed to working constructively with the Electricity System Operator (ESO), and other stakeholders as part of the ESO's development of competition for the RIIO-T2 price control period.  As part of this, SSEN continues to believe that any further extension of competition in onshore transmission should be underpinned by legislation and should only be considered where it can be clearly demonstrated that it does not compromise the security and operation of GB's critical national electricity infrastructure and provides better value to consumers.

In October 2019, Ofgem published a consultation setting out its updated minded-to position not to apply its Competition Proxy Model to National Grid Electricity Transmission's Hinkley-Seabank (HSB) project.

Making a strong, stakeholder-led case for A Network for Net Zero

In June SSEN Transmission published its draft business plan for the RIIO-T2 price control, A Network for Net Zero. It details a 'Certain View' which set out that a minimum total expenditure of £2.2bn is required over the five-year price control period to maintain and grow the north of Scotland transmission network to meet the needs of current and future electricity generators and customers.  Following consultation with stakeholders, this is now set to be closer to £2.4bn.This could see the Regulatory Asset Value of SSEN Transmission increase to over £5bn by 2026, excluding any contribution from island links. 

A significant proportion of the investments planned in the RIIO-T2 price control period are to grow the network to accommodate forecast growth in electricity generation in the north east of Scotland, particularly from offshore wind. This is expected to contribute to an increase in the installed capacity of renewable electricity generation in the north of Scotland to at least 10GW by the end of RIIO-T2.

SSEN Transmission has worked closely with stakeholders in developing its plan and welcomes the strong support reflected by stakeholders for its June draft Business Plan.  SSEN Transmission is now preparing to submit its final business plan to Ofgem in December 2019, which will reflect all feedback received from this extensive programme of consultation, as well as refinements on costs, projects in SSEN's 'Certain View' and wider industry and regulatory changes.  In summary, SSEN Transmission continues to believe there is a strong case for its plan for A Network for Net Zero.

SSEN DISTRIBUTION

SSEN Distribution key performance indicators

SSEN Distribution overview

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

Ofgem sets price controls (which in future will be for five-year periods) under the RIIO (Revenue = Incentives + Innovations + Outputs) framework for electricity distribution companies.  The RIIO ED1 price control runs until 2023; the RIIO ED2 price control will run from 2023 to 2028.

Prioritising delivery in the regulatory framework

SSEN Distribution aims to be as efficient and effective as possible and earn returns that are fair to customers and shareholders alike.  In line with the regulatory framework, the business continues to target a leading position in the delivery of outputs against its RIIO-ED1 business plan and performance against the key areas of the RIIO ED1 incentive framework.

Financial performance in the first half of 2019/20 represents a mixed picture for SSEN Distribution.  Although performance against RIIO-ED1 incentives was improved in key areas and will flow through into future years, adjusted operating profit for the first six months of 2019/20 was down compared with the same period in 2018/19. 

SSEN Distribution continues to pursue measures to improve its business performance, including the introduction of a revised internal operating model to deliver performance improvements within the current price control and set the business up for success in RIIO-ED2.  This new model allows for greater focus on front-line activity, including improved response to customer supply interruptions and reductions in the duration and costs of network faults.   It will also drive efficient delivery of the Capex programme and targeting of investment to maximise both network and financial performance.

Improvements in Interruptions Incentive Scheme (IIS) performance

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.  These incentives will typically be collected two years after they are earned.

An investment in technology and a focus on fault response has driven significant improvements in SSEN Distribution's performance against the IIS in the first six months of the financial year with fewer customers interrupted due to the roll out of additional network automation schemes and efforts to sectionalise the network.  

In the SHEPD region, the level of Customer Interruptions (CI) fell to 27.9 (a 23% improvement on 2018/19) and Customer Minutes Lost (CML) fell to 26.0 (an 11% improvement on 2018/19). In the SEPD region, IIS performance is also ahead of regulatory targets, with a CI performance of 24.3 (13% improvement on 2018/19) and CML performance of 23.2 (14% improvement on 2018/19).

This improved position was aided by the ongoing implementation of the new regional operating model that is centred around improvements to operational efficiency and an increased focus on fault response.  This new model will be implemented in all SEPD and SHEPD regions during the remainder of 2019/20.

Prioritising delivery for customers and stakeholders

SSEN is incentivised on its customer performance under the 'Broader Measure' customer satisfaction incentive and on the timeliness of its delivery for connections customers. These incentives will typically be collected two years after they are earned.

SSEN Distribution has performed strongly against its customer satisfaction incentive target in the first six months of the financial year. Through improvements to regional customer service delivery and the introduction of 'customer first' engagement approach, it is on target to deliver an increased incentive reward in relation to FY19/20.

Delivery for connections customers also remains on track. Despite a planned toughening of regulatory incentive targets for 2019/20, performance against the Time to Quote (TTQ) and Time to Connect (TTC) has improved and incentives remain in line with the good performance in 2018/19.

SSEN continues to place customer and stakeholders at the heart of its decision making, ensuring they play a pivotal role in informing and influencing SSEN's strategy, activities and policies.

In October 2019, Ofgem announced its decision not to penalise SSEN Distribution under the penalty only Incentive on Connections Engagement (ICE). This is the fourth consecutive year SSEN has avoided a penalty since its introduction at the beginning of the RIIO ED1 Price Control period.

This followed confirmation in July that SSEN Distribution will gain no financial reward from the Stakeholder Engagement and Customer Vulnerability (SECV) Incentive. Improvement against this incentive is a priority as SSEN prepares for the next assessment period in April 2020.

Delivering a major programme of capital investment

SSEN Distribution continues to undertake a major capital investment delivery programme across both of its networks, which will deliver significant improvements for customers, and increased RAV on which to earn fair returns.

In the six months to 30 September 2019, SSEN Distribution invested a total of £152.4m, bringing the total invested since the beginning of the RIIO-ED1 Price Control to over £1.3bn.  This is part of a forecast investment of £2.6bn throughout the RIIO ED1 period, supporting future earnings through RAV growth.

Securing additional allowances for subsea cables and rail electrification

SSEN Distribution successfully applied for additional allowances for maintenance and replacement of subsea cable assets, receiving confirmation from Ofgem in September 2019 that it will receive an extra £45.2m (2012/13 prices). This 'reopener' will allow the business to recover additional submarine cable costs in the north of Scotland, predominantly during the 2021/22 financial year.  

In October 2019, Ofgem confirmed that SHEPD would not receive the additional £30.0m allowance in (in 2012/13 prices) that it applied for under the High Value Project uncertainty mechanism. The additional allowances had been requested to fund the replacement of the existing Pentland Firth East subsea cable. Although SSEN Distribution remains disappointed with this decision, it is wholly committed to maintaining security of supply on Orkney and will explore all available regulatory mechanisms to fund the cable replacement.

Ofgem also confirmed it would grant SEPD an allowance adjustment of £16.0m (2012/13 prices) on its application under the Rail Electrification Costs reopener submitted to recover costs associated with the electrification of the Great Western Railway. This benefit of this adjustment will flow through from the 2021/22 financial year.

A whole system recommendation for Shetland

SSEN Distribution is awaiting a formal response from Ofgem on its proposal to share the cost of the transmission link to Shetland, which is required to meet the islands' energy needs. Ofgem has indicated its decision will be announced in November 2019 and if the proposal is accepted, SSEN Distribution will contribute £251m towards the link, based upon the value of services it would provide to its local distribution network across the Shetland Islands.  If the recommendation is not accepted an alternative, and most likely much more expensive, solution will be required.

Making progress on the flexibility transition

SSEN Distribution has made significant progress in the transition to a smart, flexible electricity system through trialling innovative technologies and alternative network solutions. The business is investing in the Distribution System Operator (DSO) model which is key to electrification of transport and heat, and which offers RAV growth over the long term.  

Progress with Project Local Energy Oxfordshire (LEO), one of the most wide-ranging, innovative, and holistic smart grid trials ever conducted in the UK, has been welcomed by Innovate UK in its 2nd quarterly review. Innovate UK manages the UK's Industrial Strategy Fund, from which LEO received £13.8m of funding. The project, which has a total value of £40m, will run until 2022.

The award-winning Solent Achieving Value from Efficiency (SAVE) project concluded in June 2019 and demonstrated how customer engagement and energy efficiency interventions can provide cost-effective flexibility to the system and support an equitable transition to DSO. The learnings from SAVE have led to the creation of Social Constraint Managed Zones (SCMZ) to add to the existing suite of Constraint Managed Zone (CMZ) tenders that SSEN offers, allowing energy efficiency programmes to compete against other flexible solutions.

These tenders provide opportunities for smart energy technology to compete with traditional forms of network management. In October, SSEN took an important step in the flexibility transition placing its first economically viable CMZ contracts for a total of 6MW worth of services on the Isle of Islay.

Accelerating preparations for the electrification of transport

In September 2019, SSEN Distribution entered into £7.5m strategic partnership with the Scottish Government and Scottish Power Energy Networks to help plan and develop the infrastructure required for the electrification of transport in Scotland. 

As part of the partnership, SSEN will lead an E-Tourism project, that seeks to understand how the infrastructure for areas that experience seasonal fluctuations in population can cost-efficiently accommodate these changing demands in EV charging in the future.

SSEN will continue to use these partnerships and associated trials to help the regulator and government ensure that electricity network infrastructure keeps pace with growing electrification.  Central to this will be to the need for anticipatory investment in the network, based on robust evidence and modelling.  SSEN will continue to make the case for changes to the regulatory framework to allow for this critical early investment.

Preparing for RIIO-ED2

SSEN Distribution continues to prepare for the next price control period (RIIO ED2), responding to Ofgem's Open Letter RIIO ED2 Consultation in October 2019. In its response, SSEN stated the next price control must reflect the central role that DNOs will have in facilitating the transition to a low-carbon economy while highlighting the need for strategic investment to prepare for the extensive electrification of transport, and heat. SSEN is calling for a balanced price control where the financial parameters under which networks operate are based on evidence and represent a fair package for current and future customers.

In July 2019, SSEN Distribution appointed Tracey Matthews as the chair of its ED2 Customer Engagement Group (CEG). The purpose of the CEG is to challenge SSEN through the ED2 planning process, providing an opportunity for SSEN to respond, before the group submits a report to Ofgem on SSEN's performance. The CEG will meet quarterly and comprises a cross section of representatives to provide a balanced and accurate reflection of the differing views and priorities that SSEN's ED2 plans must address.

SSEN Distribution continues to engage constructively with Ofgem and remains optimistic that a package that is fair to customers, investors and all other stakeholders, is possible.

INVESTMENT IN SCOTIA GAS NETWORKS (SGN)

SGN key performance indicators

SGN overview

SSE owns a 33% investment stake in SGN, the gas distribution company that serves 5.9m homes and businesses in Scotland, the south of England and Northern Ireland. SGN is widely recognised as the best gas network on customer service and a leader on innovation and new technologies. Providing a safe and reliable supply is a key priority for the company and in the first half of this financial year 98% of uncontrolled gas escapes were attended in under an hour.

As well as having the highest levels of customer satisfaction among its peers, customer complaints have fallen drastically, by 76% since 2013.  In the six months to 30 September the company delivered 8,528 new connections, including 1,403 assisted connections as part of efforts to help those in fuel poverty. 

The sector expects far-reaching decisions to be made on future heat policy in the next few years and SGN's research along with the development and demonstrations of greener gas projects will provide the vital evidence needed to help support these complex decisions and help resolve any uncertainty about the future of the UK's gas networks.

Preparing for RIIO-GD2

SGN is currently developing its business plan for the RIIO-GD2 gas distribution price control which begins on 1 April 2021. This ambitious plan is built on extensive stakeholder engagement and commits SGN to making a positive impact on society, delivering a safe and efficient service and contributing to net zero goals by accelerating decarbonised solutions and minimising environmental impact.

SSE RENEWABLES

SSE Renewables key performance indicators

SSE Renewables overview

On 1 April 2019, SSE consolidated all its renewable energy assets in the UK and Ireland under the single banner of SSE Renewables. The business is led by Managing Director, Jim Smith, and has brought together SSE's existing operational assets and those under development in onshore wind, offshore wind, flexible hydro electricity, run-of-river hydro electricity and pumped storage.

Renewable energy is one of the primary routes for achieving decarbonisation across energy, transport and heat in the UK, Ireland and further afield. SSE Renewables is a core part of the SSE group and central to its future growth plans. By 2030, SSE Renewables aim to develop and build enough renewable energy capacity to treble annual output of renewable electricity to 30TWh. Further decarbonisation of electricity, heat and transport - on the scale envisaged by the UK Committee on Climate Change's May 2019 report - relies on a significant scaling up of renewable sources of electricity, which SSE Renewables is well equipped to play a key part in delivering.

Onshore wind  

SSE Renewables' onshore wind capacity stands at 1,955MW. Its onshore development pipeline consists of over 1GW of potential new build projects. This includes around 700MW of capacity with consent for development, some of which it is seeking to optimise through planning amendments to accommodate more advanced turbine technology. The current focus is on Gordonbush Extension (38MW), which received revised consent from Scottish Ministers in November 2019. The revised consent will see enable SSE Renewables to maximise the energy generation potential and efficiency of the site, improving the project's economics. SSE Renewables will now consider the options for a route to market for the project - including the viability of building the project subsidy-free - ahead of taking a final investment decision. 

Other priority onshore projects include Strathy South (133MW), Tangy re-power (up to 49MW), and on others requiring consent, such as Doraville (139MW) in Northern Ireland.  

With no current policy support mechanism in place in the UK, the aim is to attempt to deliver into operation new onshore wind farms without subsidy, where it is possible to do so. With the volume of onshore wind envisioned to meet the UK's net zero targets, it is unlikely that merchant projects alone will be able to deliver at this scale; therefore, some form of policy support will need to be re-introduced in the medium to long term.

Viking Wind Farm (up to 457MW), located on Shetland, was unsuccessful in the UK Government's Contracts for Difference Allocation Round 3 (CfD AR3), the results of which were announced in September 2019. Viking is an important project that will ultimately contribute to Scottish and UK net zero goals and will also underpin a new transmission link to the remote islands, providing security of clean energy supply and transformative economic benefits to island communities. Despite the CfD result, SSE Renewables remains committed to progressing Viking.

SSE Renewables noted the update published by Ofgem on 23 October 2019 setting out its intention to consider a revised needs case for the new transmission link for Shetland. A timely final decision from Ofgem on Scottish Hydro Electric Power Distribution's proposed contribution towards the new transmission link for Shetland is critical for Viking to progress to a final investment decision.

In Ireland, the Department of Communication, Climate Action and Environment has confirmed that it intends to run the first auction under the new Renewable Electricity Support Scheme (RESS) in June 2020. The auction pre-qualification process is expected to begin in December 2019. Successful projects are expected to be awarded contracts for up to 15 years of support. SSE Renewables is considering which of its projects might be eligible to participate in the auction.

Offshore wind

The Beatrice offshore wind farm (588MW - SSE Renewables' share 40%) reached full operation in May 2019. Phase 1 CfD payments started on 6 November 2018 and Phase 2 on 28 April 2019. SSE Renewables operates and maintains the entire asset on behalf of the joint venture, Beatrice Offshore Windfarm Ltd.

All the eligible offshore projects in which SSE Renewables has an interest, shown in the table below, were awarded 15-year contracts in CfD AR3. Outside the 15-year CfD period, the successful offshore wind projects will be important assets with significant earnings capacity anticipated over their operational lifetimes.

Dogger Bank Wind Farms, located off the North East coast of England, is a joint venture with Equinor in which SSE Renewables has a 50% stake. The three successful Dogger Bank projects are each expected to generate over 5,000GWh of electricity annually. Following the outcome in the auction, the JV will now progress towards a final investment decision for all three projects by late 2020. SSE Renewables will lead the development and construction phases of the Dogger Bank Wind Farm project(s) and Equinor will lead on operations.

The following preferred suppliers for Dogger Bank Creyke Beck A and B have been announced:

Seagreen Phase 1, located in the Firth of Forth off the Scottish coast, has a total capacity of 1,075MW across its 'Alpha' and 'Bravo' projects and is expected to generate around 5,000GWh of electricity annually. The CfD contract represents 42% of the total project capacity, although SSE Renewables is planning to build out the project to 1,075MW capacity. Currently wholly-owned by SSE Renewables, Seagreen Phase 1 is at an advanced stage of development and securing a CfD is a significant step in taking the project forward. Plans are in place to progress financing and an equity stake sell-down to move towards a final investment in 2020. SSE Renewables will set out a further project timeline in due course.

The following preferred suppliers for Seagreen have been announced to date:

SSE Renewables organised Meet the Buyer events in Aberdeen, Inverness and Dundee in early November. These events were aimed at facilitating engagement between companies operating in Scotland and the appointed Tier 1 suppliers to enable businesses to understand the opportunities on offer and prepare to bid for contracts.

SSE Renewables acknowledges that an application has been made by a third party against the Department for Business, Energy and Industrial Strategy (BEIS) for a judicial review in relation to the CfD auction process. BEIS has publicly stated that it will defend the claim. SSE Renewables is in regular dialogue with the UK Government and the Low Carbon Contracts Company in relation to this challenge and believes that they are committed to securing a positive resolution to this issue. SSE Renewables continues to monitor the situation closely.

The Crown Estate's Leasing Round 4 opened in October and will offer seabed rights for at least 7GW of new offshore wind projects in the waters around England and Wales. The pre-qualification process runs until January 2020 with the invitation to tender stages to follow throughout 2020 and agreements for leases with successful bidders announced by Autumn 2021. The Crown Estate Scotland's ScotWind leasing process is expected to launch after the publication of Marine Scotland's draft Sectoral Marine Plan, which is expected in Autumn 2019. SSE Renewables is reviewing its options for participating in both processes.

SSE Renewables welcomed the announcement of a Q2 2021 offshore auction amongst other commitments within the Irish Government's Climate Action Plan designed to achieve 1GW of offshore wind by 2025 and 3.5GW by 2030. SSE Renewables believes offshore wind must play a significant role in enabling Ireland to meet its 70% renewable electricity target by 2030 and in Arklow Bank has a high-quality project capable of helping Ireland achieve its ambitions in offshore wind.

SSE Renewables' operational offshore portfolio consists of:

SSE Renewables' future offshore development pipeline consists of:

Hydro

SSE Renewables owns and operates the largest energy storage capacity in the UK, comprising 750MW of flexible hydro and 300MW of pumped storage, as well as 400MW of run-of-river hydro. Its hydro fleet is uniquely placed in the GB system to deliver large-scale power that is both flexible and zero-carbon. Optimising and enhancing this hydro resource is critical to supporting the electricity market and to enabling the transition to a net zero world by supporting the integration of high levels of renewables onto the electricity grid.

Hydro's performance continues to be supported by additional focus on using the inherent flexibility of the assets to provide support to the grid during low periods and a higher utilisation of the storage and catchment within hydro.

SSE Renewables' hydro assets also provide a valuable option to the System Operator, which can take advantage of hydro's flexibility to meet system requirements. Additional revenue opportunities for hydro come from providing these grid services.

The hydro fleet has high levels of availability and continues to perform reliably and efficiently with relatively low levels of operational expenditure supported by a proactive, long-term capital investment programme. These investments are being made across the hydro fleet through SSE Renewables' capital governance programme to ensure these assets continue to endure over the coming decades. Deanie (38MW) was recently completed (£16m capex) and Grudie Bridge (18.7MW) is currently undergoing overhaul (£16m capex). This work will extend their operational life beyond a further 30 years and improve the reliability and efficiency of the station. Following the completion of these works, SSE Renewables will shift its focus to refurbishing the large-scale cascade hydro stations. This will increase their flexibility allowing SSE Renewables to capture more energy from the available water and secure significant long-term returns. 

SSE Renewables' currently has consent for 600MW of pumped storage at Coire Glas and is awaiting a decision on increasing this capacity up to 1,500MW. With no other bulk seasonal storage solution available, pumped storage looks primed to play an important role in the electricity system in the 2030s and beyond. As such, SSE Renewables continues to explore the business case for taking forward Coire Glas.

International

As stated in May 2019, extending SSE Renewables core competencies in renewable energy to other technologies and geographies may present significant potential to add to future growth opportunities. SSE Renewables continues to actively explore 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. 

THERMAL GENERATION

Thermal Generation key performance indicators

Thermal Generation overview

SSE owns and operates conventional thermal generation and energy from waste facilities in the UK and Ireland.

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

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.  Demonstrating flexibility in National Grid's Balancing Mechanism to support the electricity system will remain an important complementary earnings stream, which varies from year to year but for SSE's thermal plant can exceed £50m per annum.  This flexibility is important in supporting the transition to a low-carbon electricity system whilst ensuring security of supply.

Capacity Market

On 24 October 2019 the European Commission confirmed approval under EU State Aid rules the Capacity Market scheme introduced in 2014 to safeguard security of electricity supplies. Following this positive decision payments will be reinstated and paid retrospectively provided capacity obligations have been met. Capacity Market obligations for future delivery years will also be upheld.

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

Bringing an end to coal-fired generation

SSE has announced the closure of its last remaining operational coal-fired generation units (1,510MW), at Fiddler's Ferry, by 31 March 2020. SSE is committed to reducing by at least 50% the carbon intensity of the electricity it generates between 2018 and 2030. The UK Government has committed to phasing out coal-fired power stations by 2025 and the economics of coal-fired stations have become increasingly challenged. Demolition of the Ferrybridge 'C' coal-fired power station is underway and is expected to be complete in 2021; decommissioning of Fiddler's Ferry will commence following closure.

Developing opportunities for the future

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

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.

SSE has opportunities to develop further thermal power stations, but these will be consistent with SSE achieving another 50% reduction in carbon intensity by 2030.  Further development options will be progressed where they have a clear low carbon pathway; SSE is exploring opportunities and is committed to the medium-term potential of pre- and post-combustion Carbon Capture, Use and Storage and Hydrogen to decarbonise flexible thermal generation.

GAS STORAGE

Gas Storage key performance indicators

Gas Storage overview

The economic conditions of gas storage remain challenging however SSE believes its assets can play an important role during the energy transition. SSE holds around 40% of the UK's conventional underground gas storage capacity.

Gas storage has increasing importance for security of supply with the UK's continuing shift away from coal-fired generation, taking with it the storage inherent in coal stocks.

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. 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.

These assets may also prove useful in the longer-term decarbonisation of our energy system, potentially able to be repurposed for other lower carbon gases in the future.

SSE BUSINESS ENERGY

Business Energy key performance indicators

SSE Business Energy overview

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 8bn therms of gas annually. It complements SSE's interests in renewables and flexible thermal generation, providing a route to market for electricity output through standard contracts and power purchase agreements.

SSE Business Energy is now part of the SSE Customer Solutions Business with new leadership in place. 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.

It is responding to regulatory requirements to install smart meters in order to better serve customers in the future.

SSE AIRTRICITY

SSE Airtricity key performance indicators

SSE Airtricity overview

SSE's retail arm in Ireland, SSE Airtricity, is the only retail energy brand that operates in all markets across the island of Ireland. Combining power production and energy supply to households and businesses continues to deliver commercial advantage to energy customers in Ireland and is a feature of the Irish market. 

At 30 September 2019, SSE Airtricity supplied electricity and natural gas to over 0.7m 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 the first 6 months SSE Airtricity enjoyed success with its new multi-award-winning campaign "This is Generation Green". The campaign speaks to SSE's on-going commitment to working with its customers to support their decarbonisation journey whether through lower carbon energy supply, smart technology products or investment in energy efficiency. This has led to SSE Airtricity's lowest domestic customer losses.  Meanwhile, SSE Airtricity's Energy Services business continues to perform strongly securing government funding contributions towards projects with which have a total value of €4.3m for the retrofit of local authority owned social housing, private domestic customers and businesses. In August, Airtricity Home Energy announced an increase of its NI electricity price of 6.9% in response to external costs.

SSE Airtricity continues to focus on helping customers reduce their carbon output and save on energy costs, offering a range of energy efficiency and microgeneration products, including the FarmGen solar microgeneration product in association with Glanbia.

ENERGY PORTFOLIO MANAGEMENT

EPM key performance Indicators

EPM overview

In Energy Portfolio Management, although the new hedging approach is now well-established, we saw the continued losses from last year coming through, with an adjusted operating loss for the half-year of £113.1m.  This is consistent with the adjusted operating loss of between £125m and £130m that we expect for the full year.

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.

GAS PRODUCTION (Held for sale)

Gas Production key performance indicators

Gas Production overview

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 in 2018 was clearly a positive development and SSE is working with its partners to extract full value from the discovery.

Investment in gas production assets is however no longer consistent with SSE's strategy and focus on decarbonisation, and these assets are accounted for as held for sale.  SSE is hopeful of a sale in the first half of 2020, leading to removal of significant decommissioning liabilities, but will only complete a sale if it is believed to be the right outcome for shareholders.

ENTERPRISE

Enterprise key performance indicators

SSE Enterprise overview

The role of Enterprise within SSE Group is to seek out new opportunities in areas that complement the group's core energy portfolio, for example EV infrastructure, energy monitoring and district heating. Enterprise is divided into three business divisions: Distributed Energy, Telecoms and Contracting & Rail.

Enterprise has brought together its existing multi-utility and energy management capabilities into one Distributed Energy business division to best serve the evolving needs of its customers. For example, as part of its ambitions in the smart city space, SSE Enterprise recently announced a partnership with global clean energy software company Smarter Grid Solutions to develop its innovative 'Energy as a Service' platform.

There is now a growing need for local energy generation where Enterprise has corresponding capabilities in flexible generation and storage, energy consumption, digital platforms and energy management.  This shift in focus within Enterprise towards local assets and infrastructure is clearly a key priority for the division.

While the SSE group's strategic focus is increasingly on decarbonising the energy system, Enterprise's Contracting division has seen a continued improvement in performance, and in Rail work has begun on the early CP6 work tendered.

SSE Enterprise Telecoms

SSE Enterprise Telecoms continues to grow its network and customer base after the unbundling of a further 93 BT exchanges as well as five new commercial data centres. At the end of 2018, Infracapital entered into an agreement with SSE plc to buy a 50% stake in SSE Enterprise Telecoms for a total consideration of up to £380m. This partnership supports SSE Enterprise Telecoms' commitment to innovation and puts the business in an ideal position to propel forward its existing projects and partnerships in areas such as 5G, SD-WAN and smart cities; and in doing so help the UK realise its digital ambitions.

SSE ENERGY SERVICES (Held for sale)

SSE Energy Services key performance indicators

SSE Energy Services summary

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.

SSE Energy Services operating margin is being further restricted in 2019/20, and as previously indicated across the year is likely to be below 2% due to the impact of the Default Tariff Cap and intense competition.

On 13 September2019, SSE entered into an agreement to sell SSE Energy Services to OVO Energy Limited, a wholly owned subsidiary of OVO Group Limited, at an enterprise value of £500m comprising £400m cash and £100m in loan notes.

On 24 October the Competition and Markets Authority commenced Phase 1 of its investigation into the OVO transaction with a statutory deadline of 40 working days to reach a decision on whether to clear the deal or refer it to a Phase 2 investigation. On this basis, and assuming there is no Phase 2 referral, completion of the OVO transaction is expected in early 2020.  The sale is in line with SSE's long-held view that the best future for Energy Services lies outside the SSE group and SSE is confident that this is the best outcome for the business.

The proposed transaction builds on further steps taken during the first half of 2019/20 to introduce greater separation and independence for SSE Energy Services while it remains in the SSE group, including the appointment of Katie Bickerstaffe as Executive Chair of the business.

The business is therefore operating with greater day-to-day autonomy while still being subject to oversight by the SSE plc Board for as long as it remains within the group.

The priority for the new management team has been to ensure the business has the strongest possible track record as it approaches a future outside the group, and to that end further progress has been made on the three key goals outlined in May, namely to: reduce its operating costs; stabilise customer numbers; and deliver the benefits of smart metering for both customers and the business.

Against this background, SSE continues to believe that the planned transaction with OVO Group Limited will ultimately best serve customers, employees and shareholders.