SSE Plc (SSE) - Preliminary results for year ended 31 March 2012 RNS Number : 4217D SSE PLC 16 May 2012 SSE plc's financial report for the year to 31 March 2012 16 May 2012 Mar 2012 Mar 2011 Change Mar 2010 Total Recordable Injury Rate^1 0.11 0.12 - 8% 0.14 Working days lost through injuries 53 171 - 118 days 73 Full-Year Dividend 80.1p 75.0p + 6.8% 70.0p Adjusted Profit Before Tax* £1,335.7m £1,310.1m + 2.0% £1,290.1m Adjusted Profit After Tax* £1,122.3m £1,041.9m + 7.7% £1,016.0m Adjusted Earnings Per Share* 112.7p 112.3p + 0.4% 110.2p Investment and Capital Expenditure £1,706.9m £1,443.7m + 18.2% £1,315.2m Customer Minutes Lost (SHEPD) 73 78 - 5 mins 74 Customer Minutes Lost (SEPD) 60 64 - 4 mins 65 Energy Supply Customers (GB and Ire) 9.55m 9.65m - 1% 9.35m GB customer complaints to third 896 1,161 - 23% 1,231 parties Power Station Availability (Gas) 94% 88% + 7% 94% Power Station Availability (Coal) 89% 84% + 6% 92% Capacity for Renewable Energy^2 3,020MW 2,450MW + 570MW 2,370MW ^ ^1Per 100,000 hours worked ^2Including pumped storage Lord Smith of Kelvin, Chairman of SSE, said: "There are three issues over which SSE has no control but which in one way or another touched every part of its business in 2011/12 - upheaval in global energy markets, widespread economic uncertainty and the weather. Higher wholesale gas prices, falling demand for energy and a succession of winter storms presented major challenges for the wholesale, retail and networks parts of SSE. "The fact that, despite all of this, SSE has again delivered increases in the full-year dividend and in adjusted profit before tax* demonstrates the resilience inherent in its balanced model of market-based and economically-regulated businesses, and the robustness of its strategy of focusing on operations and investment in each of those businesses. It also demonstrates the commitment and professionalism of the people who work for SSE throughout the UK and Ireland. "For some people, 'profit' and 'dividend' are contentious words when it comes to energy, but profit and dividend allow SSE to employ people, pay tax, make investments that keep the lights on and provide an income return that shareholders like pension funds need. "At the same time, SSE recognises that it must continually earn the right to make a profit and pay dividends, so 2012/13 and beyond will be about continuing the work to earn the trust of customers in retail and business markets, meeting the needs of energy network customers and investing in assets to support secure and lower carbon supplies of energy in the future. If this is achieved, there can be every confidence that SSE will extend further its record of annual above-inflation dividend growth, with an increase of at least 2% more than inflation for 2012/13." * In line with SSE's approach since September 2005, this financial report describes adjusted operating profit before exceptional items, remeasurements arising from IAS 39, and after the removal of taxation and interest on profits from jointly controlled entities and associates, unless otherwise stated. In addition, it describes adjusted profit before tax before exceptional items, remeasurements arising from IAS 39 and after the removal of taxation on profits from jointly-controlled entities and associates. It also describes adjusted earnings and earnings per share before exceptional items, remeasurements arising from IAS 39, deferred tax and hybrid coupon payments. DELIVERING THE DIVIDEND Operating Profit* by Segment Mar 12 - £ Mar 12 - % split Mar 11 - £ Change - £ Networks £737.1m 44% £690.5m + £46.6m Retail £321.6m 19% £400.5m - £78.9m Wholesale £607.9m 37% £571.5m + £36.4m STRATEGY Delivering sustained real growth in the dividend · Full-year dividend up 6.8% to 80.1p per share · Dividend covered 1.41 times by adjusted earnings per share* · Thirteenth successive full-year dividend increase · Targeting full-year dividend increase of at least RPI inflation +2% in 2012/13 · Targeting annual dividend increases above RPI inflation in 2013/14 and beyond FINANCE Sticking to well-established financial principles · Adjusted profit before tax* up 2.0% to £1,335.7m · Thirteenth successive increase in adjusted profit before tax* · Capital and investment expenditure up 18.2% to £1,706.9m · Adjusted net debt and hybrid capital up 14.7% to £6.76bn · Average debt maturity of 9.3 years NETWORKS Keeping the lights on and supporting growth · Operating profit* up 6.7% to £737.1m · Capital investment in electricity networks up 48.5% to £489.0m · Electricity transmission Regulated Asset Value up 37.5% to £770m · Total network RAV (inc share of SGN) up 9.3% to £5.86bn · 'Fast track' for Electricity Transmission Price Control RETAIL Earning the right to make a profit · Operating profit* down 19.7% to £321.6m · All 10 Building Trust commitments delivered; further commitments made · Total energy customer accounts (GB and Ire) down 100,000 to 9.55 million · Agreement to acquire 130,000 customers in NI from Phoenix Holdings Limited · GB gas consumption (ave) down 19.9%; electricity consumption (ave) down 6.9% WHOLESALE Securing the energy people and businesses need · Operating profit* up 6.4% to £607.9m · 570MW (net) of additional capacity for renewable energy operational · Output from gas-fired power stations down 26%; from coal-fired stations up 24% · Output of renewable energy (hydro and wind) up 73% · £42.6m operating profit* from Gas Production (£4.6m from two months in 2010/11) STRATEGY Continuing strategy for dividend growth SSE's core purpose is to provide the energy people need in a reliable and sustainable way. In fulfilling this purpose, SSE requires the support of the shareholders who have invested in its shares, and it continues to believe their investment should be remunerated through the payment of dividends, for four key reasons: · receiving and reinvesting dividends is the biggest source of an investor's return over the long term; · dividends provide income for those investors who do not wish to reinvest them; · dividend targets provide a transparent means with which to hold management to account; and · a long-term commitment to dividend growth demands a disciplined, consistent and long-term approach to operations, investments and acquisitions. As a result of this, SSE's strategy remains the delivery of sustained real growth in the dividend payable to shareholders through the efficient operation of, and investment in, a balanced range of economically-regulated and market-based businesses in energy production, storage, distribution, supply and related services, mainly in the UK and Ireland. The objective of delivering annual above-inflation increases in the dividend paid to shareholders means SSE has a clear, measurable and practical goal which sets the long-term financial context for its operational and investment decisions. Sticking to financial principles to underpin dividend growth The requirement on SSE to maintain a disciplined, consistent and long-term approach to the management of business activities is underpinned by a series of long-standing financial principles: · strength: maintenance of a strong balance sheet, evidenced by commitment to the criteria for a single A credit rating; · rigour: rigorous analysis to ensure investments are well-founded and achieve returns greater than the cost of capital; · discipline: deployment of a selective and disciplined approach to acquisitions, which should enhance earnings per share over the medium and long term; and · measurement: use of the economics of purchasing the company's own shares in the market as the first measurement against which financial decisions are taken. The application of these principles supports the fulfilment of SSE's first financial responsibility to shareholders: the delivery of sustained real dividend growth. Delivering dividend growth for a thirteenth successive year For 2011/12, the Board is recommending a final dividend of 56.1p per share, making a full-year dividend of 80.1p, an increase of 6.8% on the previous year. The full-year dividend is: · covered 1.41 times by SSE's adjusted earnings per share*; · more than three times the first full-year dividend paid by SSE, in 1999; and · more than twice the full-year dividend paid eight years ago, in 2004. The recommended full-year dividend increase of 6.8% represents the thirteenth successive above-inflation dividend increase since SSE paid its first full-year dividend in 1999. SSE is now one of just five continuing FTSE 100 companies to have delivered better-than-inflation dividend growth every year during this period, and ranks third amongst that group in terms of compound annual growth rate. Of the 48 companies which have been FTSE 100 constituents since 1998, when SSE joined the Index, SSE is ranked10th for Total Shareholder Return. Targeting sustained dividend growth over the long term As Capita Registrars Dividend Monitor, published in February 2012, stated, a 'company's value depends, most fundamentally, on the ability of the firm to make money and return it to shareholders. Ultimately, dividends are the principal way in which corporate profits are distributed.' It is in recognition of this that SSE's key financial objective is the delivery of annual above-inflation increases in the dividend paid to shareholders, and its targets are to deliver: · a full-year dividend increase of at least 2% more than RPI inflation for 2012/13; and · annual above-RPI inflation dividend increases from 2013/14 onwards. In this context, inflation is defined as the average annual rate across each of the 12 months to March. SSE's policy is that dividend targets should be: · set in a way which is consistent with SSE's financial principles (see above); · realistic and attainable, so there can be the fullest possible confidence in their achievability; and · consistent with maintaining dividend cover over the medium term within a range around 1.5 times, which is close to the average dividend cover which SSE has achieved in the most recent four years. Maintaining a balanced range of energy businesses through which to achieve dividend growth SSE has adopted new reportable segments covering Networks, Retail and Wholesale businesses and is the only company listed on the London Stock Exchange which owns, operates and invests in such a balanced group of economically-regulated energy businesses, such as electricity networks, and market-based energy businesses, such as energy supply and electricity generation. The balance between these activities means that: · while energy is at their core, SSE has a diverse range of businesses; · within those businesses, SSE has a diverse range of assets; and · to add to those assets, SSE has a diverse range of investment options. This balance, diversity, growing asset base and range of investment options means that SSE has a broad platform from which to deliver the levels of profitability and the long term value required to support sustained real dividend growth. In addition, the risks to the achievement of that growth are contained by that balance and by the diversity of SSE's businesses, assets and investment options. Moreover, the fact those businesses, assets and investment options are almost entirely in Great Britain, Northern Ireland and the Republic of Ireland means that SSE is able to combine diversity with a depth of experience, knowledge and understanding of the markets in which it operates. Sustaining dividend growth through a period of change Energy markets in Great Britain and Ireland are increasingly shaped by the EU Climate Change and Renewable Energy Package, which aims to achieve by 2020: · a reduction of at least 20% in the levels of greenhouse gas emissions across the EU, compared with 1990 levels; and · an increase to at least 20% of all energy consumption being generated from renewable sources. In addition, the EU has a non-binding target to achieve a 20% reduction in energy consumption by 2020 through improvements in energy efficiency and in June 2011 the European Commission proposed an Energy Efficiency Directive. The proposed Directive is broad in scope and would replace a number of existing Directives. The EU Package provides the context for four major developments which are under way in public policy and regulation and which will affect SSE's operations and investments for years to come: · Ofgem's new 'RIIO' model for the economic regulation of energy networks in Great Britain is now going through the key tests of actual Price Control Reviews; · the Retail Market Review in Great Britain, being undertaken by Ofgem, is designed to deliver improvements in the operation of the retail markets for electricity and gas; · the UK Government's White Paper, Planning our electric future, sets out a series of proposed reforms to the market arrangements for electricity generation in Great Britain; and · energy markets on the island of Ireland are undergoing a process of harmonisation to support further the development of competition, for the benefit of customers. At the heart of these developments is the energy 'trilemma' - the need for supplies of energy that are secure, sustainable and affordable. There are three other significant factors with which energy companies such as SSE have to deal: · as the decline of oil and gas production from the UK Continental Shelf continues, there is a continuing integration of UK energy prices into the wider global market, which means macro economic and geopolitical factors are important; · demand for energy in the UK and Ireland is, rightly, on a downward trend through the effects of investment in, and greater awareness of, energy efficiency measures, more efficient appliances and price sensitivity on the part of customers; and · the expectation that the decarbonisation of the economies in the UK and Ireland will present opportunities for flexible and skilled employment that is sustainable in every sense. As well as dealing with geopolitical, macro economic and energy-specific issues, SSE acknowledged, in a submission to the UK and Scottish Governments in February 2012, that it would have to decide whether the additional risk of regulatory and legislative change with regard to Scotland, raised by the forthcoming referendum on its future, means it should apply a risk premium to any investment proposal in Scotland and assess the impact of such a premium on whether or not to proceed with the proposed investment. Setting the right long-term priorities to achieve dividend growth SSE has identified five long-term priorities across its balanced range of businesses which reflect, and are consistent with, the changes under way at global, EU and UK and Irish levels and with addressing the energy 'trilemma'. The long-term priorities are: · efficiency, responsiveness and innovation in energy networks; · gaining and retaining the trust of a growing number of household energy customers; · breadth and depth in the provision of energy-related services to businesses and other organisations; · competitive and sustainable energy procurement; and · flexible and 'greener' electricity production. In focusing on these priorities, SSE will maintain a strong emphasis on its six core values, the 'SSE SET' of Safety, Service, Efficiency, Sustainability, Excellence and Teamwork. It believes these values are especially significant because energy is something which people need rather than want and so the highest possible standards in its operations and investments are essential. This means that safety must come first. SSE believes that the effective management of safety issues is a barometer of effective management of all operational and investment-related activities. In 2011/12, its Total Recordable Injury Rate per 100,000 hours worked was 0.11, compared with 0.12 in 2010/11 and 0.14 in 2009/10. The total number of working days lost in SSE as a result of injuries occurring during the year was 53, compared with 171 in the previous year. The Total Recordable Injury Rate and total number of working days lost as a result of injuries occuring during 2011/12 were the lowest that SSE has had. In addition, and in keeping with its commitment to sustainability, SSE's target for every year is zero environmental incidents which result in it being served with an enforcement notice or prosecution by a government-sponsored environment protection agency. There were no such incidents during 2011/12, the second successive year in which this was achieved. The prospects for dividend growth in 2012/13 and beyond The economic outlook for the UK and Ireland in 2012/13 continues to be uncertain, and the global nature of energy markets means that SSE, like every other company in the sector, has to be prepared to manage the energy consequences of exceptional and unpredictable macro-economic, geopolitical or other events of potentially global significance. Against this uncertain background, and with its strategic focus on efficiency in operations and investment, SSE's core operational priorities during 2012/13 are to: · carry out all work in a safe and responsible manner, with a lower Total Recordable Injury Rate; · maintain strong cost control throughout all business activities; · distribute electricity and (through Scotia Gas Networks) gas with the minimum possible interruptions to supplies; · demonstrate responsiveness and innovation in the management of electricity and gas networks; · develop and sustain long-term partnerships and contracts with business customers and other large organisations; · improve the standards of service delivered to energy supply customers and continue the drive to build trust in it as an energy supplier; · work with the UK government and Ofgem to secure a stable and competitive framework for electricity generation and energy supply in Great Britain; · optimise the management of its portfolio of energy assets and contracts and of its energy procurement; and · ensure power stations maintain a high level of flexibility and fuel efficiency to generate electricity in response to customers' needs and market conditions. . SSE's main investment priorities are to support sustainable earnings and dividend growth by: · making significant progress in its programme of capital investment in electricity and (through Scotia Gas Networks) gas networks, including electricity transmission; · commissioning assets in renewable energy, including completion of the wind farm development at Clyde; · meeting development and construction goals in its investment programme, including identifying opportunities for possible new fuel-efficent gas-fired power stations; and · improving the flexibility and efficiency of its existing fleet of thermal power stations and maintaining options for future development. The delivery of a strong operational performance and the achievement of its investment priorities should enable SSE to discharge its first financial responsibility to shareholders in 2012/13: an increase of at least 2% more than RPI inflation in the full-year dividend. It should also put SSE in a good position to deliver dividend increases that are greater than RPI inflation from 2013/14 onwards. FINANCE Changing Reportable Segments In its Annual Report 2011, SSE said that its reporting requirements may evolve and during 2011/12 it completed a review of the reportable segments contained within its financial statements. The review was undertaken following the creation of SSE's Management Board in January 2011 and resulting changes in the way that SSE manages, reviews and reports internally its businesses. The previous segments - Energy Networks, Generation and Supply and Other Energy and Utility Services - have been replaced with the following: · Networks - the economically-regulated transmission and distribution of electricity and gas and other related networks; · Retail - the supply of electricity, gas and other services to household and business customers; and · Wholesale - the production, storage and generation of energy and energy portfolio management. These are consistent with the principle that components of a business qualify as separate reporting segments if they are capable of earning revenue and incurring expenses in their own right. SSE believes that the adoption of these segments will add further transparency to its business and to the financial performance of each part of it. In particular, the new segments are consistent with SSE's continuing work to build customers' trust in energy supply, where there will now be separate reporting of profit. Increasing Adjusted Profit Before Tax* These financial results for the year to 31 March 2012 are reported under International Financial Reporting Standards, as adopted by the EU. SSE's focus has consistently been, and remains, on profit before tax before exceptional items, remeasurements arising from IAS 39, and after the removal of taxation on profits from jointly controlled entities and associates. This 'adjusted profit before tax'* was first adopted as a key performance indicator by SSE in 2005/06 and it: · reflects the underlying profits of SSE's business; · reflects the basis on which the business is managed; and · avoids the volatility that arises from IAS 39. The tables below reconcile SSE's adjusted profit before tax* to its reported profit before tax and set out the position after tax and in respect of adjusted earnings per share*. The volatility that arises from IAS 39 is also demonstrated. Mar 12 Mar 11 Mar 10 Mar 09 £m £m £m £m Adjusted Profit before Tax* 1,335.7 1,310.1 1,290.1 1,253.7 Movement on derivatives (IAS 39) (509.0) 1,423.3 399.8 (1,262.1) Exceptional items (551.6) (625.0) - 102.7 Tax on JCEs and Associates (6.6) 3.3 (51.3) (40.4) Interest on convertible debt - - - (0.6) Reported Profit before Tax* 268.5 2,111.7 1,638.6 53.3 Adjusted Profit before Tax* 1,335.7 1,310.1 1,290.1 1,253.7 Adjusted current tax charge (213.4) (268.2) (274.1) (300.4) Adjusted Profit after Tax* 1,122.3 1,041.9 1,016.0 953.3 Reported Profit after Tax^1 197.8 1,504.5 1,235.5 112.3 Number of shares for basic and adjusted 937.8 927.6 921.9 883.0 EPS (million) Adjusted EPS*^1 112.7p 112.3p 110.2p 108.0p Basic EPS 21.1p 162.2p 134.0p 12.7p ^1Includes a deduction for hybrid debt coupon payment of £65.5m in the year to March 2012. Factors affecting Adjusted Profit before Tax* in 2011/12 Adjusted profit before tax* rose by 2.0%, from £1,310.1m to £1,335.7m in the year to 31 March 2012. The level of adjusted profit before tax* was constrained by four main factors (comparisons with the year to 31 March 2011 unless otherwise stated): · the wholesale cost of gas, which was typically around 20% higher; · 'spark' spreads (the difference between the cost of gas and the price of the electricity produced from it), which were around 75% lower; · the decision to shield household customers from rising wholesale energy prices for as long as practical before eventually implementing a price increase in September; and · the actual reduction in average consumption of both electricity (6.9%) and gas (19.9%) by household customers in the GB market. In addition, there was a 5.4% reduction in operating profit* in Electricity Distribution due to the timing of revenue recovery. Despite these factors, growth in adjusted profit before tax* was still achieved, for four main reasons: · a significant rise (73%) in the output of renewable energy (hydro and wind), reflecting more favourable weather conditions and an increase in the amount of on- and offshore wind farm capacity which SSE has in operation; · operating profit of £42.6m from the gas production assets acquired by SSE towards the end of 2010/11; · an increase of 54.5% in the operating profit* of Electricity Transmission, reflecting the increase in its asset base resulting from capital invested; and · greater allowed revenue in Scotia Gas Networks, supporting an increase of 43.5% in that business' contribution to adjusted profit before tax*. All of this illustrates that SSE continues to benefit from maintaining a balance between economically-regulated and market-based businesses because it is able to continue to deliver increases in adjusted profit before tax* even when, as in 2011/12, there are significant issues to be managed within individual businesses. It also illustrates that major benefits from SSE's programme of investment in new assets are now emerging and making a positive contribution to sustaining growth in adjusted profit before tax*. Impact of the movement on derivatives (IAS 39) At 31 March 2012, there was a net derivative financial liability in SSE's balance sheet arising from IAS 39 of £17.6m, before tax, compared with a net asset of £438.8m, before tax, at 31 March 2011. This consists of: · a liability following the valuation of financial instruments used by SSE to hedge its exposure to financial risks such as interest rates; and · an asset relating to the forward commodity purchase contracts for gas, coal, oil, carbon and wholesale electricity that SSE, like all major energy suppliers, has to enter into to ensure that the future requirements of its customers are met. IAS 39 requires SSE to record these contracts at their 'fair value' at each balance sheet date. This involves comparing the contractual price for commodities against the prevailing forward market price at 31 March. On that date this year, the average contractual price was lower than the market price (in other words, the contracts were 'in the money'). The actual value of the contracts will be determined as the relevant commodity is delivered to meet customers' energy needs. For around 70% of the total energy volume, this will be over the next 12 months. As a result, SSE believes the movement in fair value of the contracts is not relevant to the underlying performance in 2011/12. The movement on derivatives under IAS 39 of £509m shown in the table above and on the face of the Income Statement is primarily due to the change in the commodity contract position between the 'in the money' positions on 31 March 2011 and 31 March 2012, when the average contractual price continued to be lower than the prevailing forward market price, but not as much as previously. SSE sets out these movements in fair value separately, as re-measurements, as the extent of the actual profit or loss arising over the life of the contracts giving rise to this liability will not be determined until they unwind. Exceptional items The pre-tax exceptional items totalling £551.6m relate to the Wholesale (£491.6m) and Retail (£60.0m) segments and are mainly non-cash. In the Wholesale segment, changing market conditions have resulted in impairment and other charges being made against the value of some electricity generation plant, CO emissions allowances, goodwill relating to gas storage assets and gas and oil production prospects. In particular, following a sustained period of low 'spark' spreads, SSE decided to undertake a comprehensive programme of maintenance and upgrade work to support more flexible operations at Keadby and Medway power stations from 2013 onwards. This means the way in which the stations will operate and be remunerated in the future will change. Other issues include a small write down at Ferrybridge power station, due to the early use of allowed running hours under the Industrial Emissions Directive, and a write-down in the value of on- and offshore wind assets in continental Europe In the Retail segment, restructuring and related costs arising from SSE's decision to stop all of its doorstep sales operations in Great Britain have been recognised as exceptional. The value of some Metering assets has also been impaired in anticipation of the expected introduction of smart meters. Delivering Adjusted Profit Before Tax* in 2012/13 Adjusted profit before tax* is an important measure of performance in any given year, but it is not an end in itself. SSE does not have the goal of maximising profit in any single year or over any particular period. It takes a longer-term view, believing that profit is a means to an end: sustained real growth in the dividend, the delivery of which is its first financial responsibility to shareholders. At the same time, SSE has delivered 13 successive increases in adjusted profit before tax* since it first reported full-year results in 1999. As in any other year, SSE's adjusted profit before tax* for 2012/13 as a whole will be determined by issues such as: · the management of the overall energy portfolio, in the context of geopolitical and macro-economic issues; · the interaction between wholesale prices for energy and fuel and the prices for the electricity and gas charged to customers; · the availability of its operating thermal power stations to generate electricity; · the output of renewable energy from its hydro electric stations and wind farms; and · the actual and underlying level of customers' energy consumption. In terms of 2012/13, SSE continues to believe that its balanced range of market-based and economically-regulated energy businesses, and the diversity of opportunities within those businesses, should enable it to deliver a level of adjusted profit before tax* capable of supporting the achievement of its principal financial objective, a full-year dividend increase of at least 2% more than RPI inflation, while maintaining dividend cover in a range around 1.5 times. SSE will provide an update on its financial, operational and investment progress during 2012/13 when it presents its results for the six months to 30 September 2012. Its expectation at the start of each financial year is that it will not provide an outlook for adjusted profit before tax* before the publication of its fourth quarter Interim Management Statement, not least because its principal financial objective is dividend growth, and that remains the case for 2012/13. Monitoring Adjusted Earnings Per Share* To monitor financial performance over the medium term, SSE continues to focus on adjusted earnings per share* because it has the straightforward benefit of defining the amount of profit after tax that has been earned for each Ordinary Share and so reflects a clear view of underlying financial performance. In 2011/12, SSE's adjusted earnings per share were 112.7p, based on 937.8 million shares, compared with 112.3p, based on 927.6 million shares, in the previous year. As stated in SSE's Annual Report 2011, the charge for the hybrid debt coupon is presented within dividends and reflected within adjusted earnings per share*. Dividend Increasing the Dividend for 2011/12 SSE's first financial responsibility to its shareholders is to remunerate their investment through the delivery of sustained, above-inflation increases in the dividend. The Board is recommending a final dividend of 56.1p, compared with 52.6p in the previous year, an increase of 6.7%. This will make a full-year dividend of 80.1p, which is: · an increase of 6.8% compared with 2010/11; · a real terms increase of 2%, based on the average annual rate of RPI inflation in the UK between April 2011 and March 2012, which meets the target set for the year; · the thirteenth successive above-inflation dividend increase since the first full-year dividend paid by SSE, for 1998/99; · more than three times the first full-year dividend paid by SSE, for 1998/99; and · covered 1.41 times by SSE's adjusted earnings per share*. SSE is now one of just five companies to have delivered better-than-inflation dividend growth every year since 1999, while remaining part of the FTSE 100 for at least 50% of that time, and ranks third amongst that group in terms of compound annual growth rate over that time. Targeting further dividend increases in 2012/13 and beyond SSE's key financial objective will remain the delivery of increases in the dividend paid to shareholders, and its targets are to deliver: · a full-year dividend increase of at least 2% more than RPI inflation for 2012/13; and · annual dividend increases from 2013/14 onwards which are greater than RPI inflation. Scrip Dividend Scheme option for shareholders In 2010, SSE's shareholders approved for five years the provision of a Scrip Dividend Scheme, to give them the option to receive new fully paid ordinary shares in the company in place of their cash dividend payments. Scrip dividend take-up was as follows: · September 2011: A total of 30,397 shareholders elected to receive the final dividend of 52.6p per ordinary share in respect of 22.6 million ordinary shares in the form of Scrip dividend. This resulted in the issue of 0.9 million new ordinary shares, fully paid, an increase of 0.1% on the issued share capital at the dividend record date of 29 July 2011. · March 2012: A total of 30,504 shareholders elected to receive the interim dividend of 24.0p per ordinary share in respect of 318 million ordinary shares in the form of Scrip dividend. This resulted in the issue of 6.27 million new ordinary shares, fully, paid, an increase of 0.67% on the issued share capital at the dividend record date of 27 January 2012. This had the effect of reducing by £88.2m the amount of dividends paid in cash during 2011/12. The total number of shares in issue at 31 March 2012 was 944.7 million. Investment and Capital Expenditure Investment and Capex Summary Mar 12 Mar 11 £m £m Electricity Transmission 228.7 117.4 Electricity Distribution 260.3 211.9 Other Networks 48.0 55.0 Total Networks 537.0 384.3 Total Retail 78.5 27.9 Thermal Generation 129.7 129.8 Renewable Generation 852.3 813.8 Gas Storage and Gas Production 57.1 52.6 Total Wholesale 1,039.1 996.2 Other 52.3 35.3 Total investment and capital expenditure 1,706.9 1,443.7 50% of SGN capital/replacement expenditure 202.2 199.7 Investing for sustained dividend growth In November 2010, SSE said that it expected its investment and capital expenditure would be in the range of £1.5bn to £1.7bn in each of the five years to March 2015. In 2011/12, its capital and investment expenditure totalled £1,706.9m, compared with £1,443.7m in the previous year. During the year there was investment of: · £228.7m in electricity transmission, of which £126.3m was spent on the work to replace SSE's section of the Beauly-Denny line; · £260.3m in electricity distribution, the majority of which was spent on system upgrades; · £129.7m in thermal generation, the majority of which was for maintenance and early development of future projects; · £852.3m in renewable generation, the larger part of which was invested in the Clyde, Griffin and Gordonbush onshore wind farms; and · £57.1m in gas storage and gas production, including investment in the new facility at Aldbrough, which is nearing completion. Including investment of £134.2m in 2011/12, SSE's cumulative investment in the Greater Gabbard offshore wind farm is now £672.2m, excluding costs associated with the construction of the offshore transmission line. Delivering an expanded asset base In the five years to March 2012, SSE's investment and capital expenditure totalled just over £6.5bn. This has resulted in a significantly expanded asset base for SSE, including: · completion of the 840MW Marchwood Power Station (SSE share - 50%); · an increase of around 1,500MW in its capacity for generating electricity from wind farms (which produced around 3.2TWh of electricity in 2011/12); · near-completion of the Aldbrough gas storage facility (SSE share - two thirds); and · an increase of over £1bn in the RAV of its electricity networks. The 100MW Glendoe hydro electric scheme was also commissioned during this period, in early 2009. It operated for less than a year before a tunnel blockage resulted in electricity generation being stopped. The progress of repair work means electricity generation is expected to resume this summer. SSE remains committed to constructing robust assets, from which revenue can be generated on a reliable, long-term basis and which deliver profit to support future dividend growth. This entails rigorous scrutiny and control of the costs of large capital projects and a clear focus on the return which completed projects should generate. In line with this, SSE keeps the economic evaluation of its investment programme under close scrutiny to ensure that it continues to make the right investment decisions. It continues to be confident that an enhanced asset base and significant value are being created from its capital and investment expenditure programme as a whole, based on actual delivery of the projects within it and on the most up-to-date costs and schedules for projects. Investing in gas distribution through Scotia Gas Networks (SGN) In addition to its own capital and investment expenditure programme, SSE effectively has a 50% interest in SGN's capital and replacement expenditure, through its 50% equity share in that business. SGN is self-financing and all debt relating to it is separate from SSE's balance sheet. Nevertheless, it is a very substantial business which gives SSE, through its 50% stake, a major interest in gas distribution. In 2011/12, a 50% share of SGN's capital and replacement expenditure was £202.2m, compared with £199.7m in the previous year. Delivering investment efficiently Central to SSE's strategy is 'efficient' investment in a balanced range of economically-regulated and market-based energy businesses. This means that investments should be: · consistent with SSE's financial principles and so should achieve returns which are greater than the cost of capital (with an appropriate risk premium applied to the expected rate of return from individual projects where appropriate), enhance earnings and contribute to dividend growth; and · governed, developed, approved and executed in an effective manner, consistent with SSE's Large Capital Project Governance Framework which is, in itself, regularly updated. The premium is applied to reflect any risk associated with asset construction, market dynamics, new technologies or regulatory or legislative change. There are four main categories in SSE's investment and capital expenditure plans to March 2015: · economically-regulated expenditure on electricity transmission upgrades; · economically-regulated electricity distribution expenditure plus essential maintenance of other assets; · expenditure that is already committed to development of new assets such as wind farms; and · expenditure that is not yet committed but which could be incurred to support the development of new assets. Decisions on whether to proceed with individual projects are made: · in line with SSE's financial principles; · in the context of SSE's commitment to maintaining a diverse range of assets within its economically-regulated and market-based businesses; · in the light of developments in public policy and regulation; and · on the basis of the experience and skills available to SSE. SSE believes that its pipeline of development opportunities means that it will be able to focus uncommitted spend on projects with the strongest potential to achieve returns well in excess of its cost of capital, enhance earnings and contribute to dividend growth. In particular, a disciplined programme with the principles, shape and scale described above is designed to allow SSE to maintain the development of a balanced and diverse range of assets to support sustained, above-inflation dividend growth while remaining consistent with the criteria for a single A credit rating without the need to issue new shares. It will deliver: · further significant enhancements to the asset base in key businesses, including economically-regulated electricity networks; · a continuing increase in fuel for electricity in the form of renewable sources of energy, supporting a reduction in the CO intensity of electricity generated; and · additional cashflows and profits to support continuing dividend growth. During the same period SGN, in which SSE has a 50% stake, will also be making a significant investment in economically-regulated gas distribution networks. Financial management and balance sheet Key Performance Indicators Mar 12 Mar 11 Mar 10 Adjusted net debt and hybrid capital (£bn) 6.76 5.89 5.29 Average debt maturity (years) 9.3 10.6 11.0 Adjusted interest cover^1 (excluding SGN) 5.9 7.3 6.3 Shares in issue at 31 March (m) 944.7 936.9 923.1 Shares in issue (weighted average) (m) 937.8 927.6 921.9 ^1 including hybrid coupon Maintaining a prudent treasury policy SSE's operations and investments are generally financed by a combination of: · retained profits; · bank borrowings; · bond issuance; and · commercial paper. As a matter of policy, a minimum of 50% of SSE's debt is subject to fixed, or inflation-linked, rates of interest. Within this policy framework, SSE borrows as required on different interest bases, with derivatives and forward rate agreements being used to achieve the desired out-turn interest rate profile. At 31 March 2012, after taking account of interest rate swaps, 77.4% of SSE's borrowings were at fixed rates. Borrowings are mainly made in Sterling and Euro to reflect the underlying currency denomination of assets and cashflows within SSE. All other foreign currency borrowings are swapped back into Sterling. The United Kingdom remains SSE's main area of operation, although business activities in the Republic of Ireland are also substantial. Transactional foreign exchange risk arises in respect of: · procurement contracts; · fuel and carbon purchasing; · commodity hedging and energy trading operations; and · long-term service agreements for plant. SSE's policy is to hedge all material transactional foreign exchange exposures through the use of forward currency purchases and/or derivative instruments. Translational foreign exchange risk arises in respect of overseas investments, and hedging in respect of such exposures is determined as appropriate to the circumstances on a case-by-case basis. Managing net debt and maintaining cash flow SSE's adjusted net debt and hybrid capital was £6.76bn at 31 March 2012, compared with £5.89bn at 31 March 2011. Fundamentally, this increase reflects: · the quantum and phasing of capital and investment projects to support sustained real dividend growth; and · the decision to delay the increase in household energy prices until September 2011, which meant some additional revenue would not be collected until the new financial year. In addition, significant coal stocks have been acquired in anticipation of the fuel requirements at SSE's coal-fired power stations during 2012/13. As the table below sets out, adjusted net debt excludes finance leases and includes outstanding liquid funds that relate to wholesale energy transactions. Hybrid capital is accounted for as equity within the Financial Statements but has been included within SSE's 'Adjusted net debt and hybrid capital' to aid comparability. Adjusted Net Debt and Hybrid Capital Mar 12 Mar 11 £m £m Adjusted Net Debt and hybrid capital (6,755.8) (5,890.6) Less: hybrid capital 1,161.4 1,161.4 Adjusted Net Debt (5,594.4) (4,729.2) Add: Outstanding Liquid Funds (119.9) (28.1) Add: Finance Leases (342.1) (372.2) Unadjusted Net Debt (6,056.4) (5,129.5) A strong debt structure through medium- and long-term borrowings SSE's objective is to maintain a balance between continuity of funding and flexibility, with debt maturities set across a broad range of dates. Its average debt maturity as at 31 March 2012 was 9.3 years, compared with 10.6 years at 31 March 2011. The completion of the private placement (see 'Ensuring SSE is well-financed' below) means that SSE's average debt maturity was 9.6 years at 30 April 2012. SSE's debt structure remains strong, with around £5.1bn of medium- to long-term borrowings in the form of issued bonds, European Investment Bank debt and long-term project finance and other loans. The table above also includes the issue by SSE, in September 2010, of hybrid capital of £1.16bn. The balance of SSE's adjusted net debt is financed with short-term commercial paper and bank debt. SSE's adjusted net debt includes cash and cash equivalents totalling £189.2m. Around £100m of medium-to-long-term borrowings will mature during 2012/13. Ensuring SSE is well-financed SSE believes that maintaining a strong balance sheet, evidenced by a commitment to the criteria for a single A credit rating, is a key financial principle. Its corporate credit ratings are currently: · 'A-', with a 'stable' outlook (Standard & Poors); and · 'A3' with a 'stable' outlook (Moody's). SSE is committed to maintaining financial diversity and will move quickly to take the right financing options, including issuing new bonds and loans. In line with that it: · successfully re-opened the European corporate bond market in September 2011 with the issuance of a £300m bond with a 4.25% coupon and a 10-year maturity. As Lloyds Bank Corporate Markets stated, the strength of the order book was testament to SSE's attractions to investors; · secured in October 2011 a JPY15bn (equivalent to around £125m) seven-year loan with an effective interest rate of 3.52%; and · undertook in February 2012 a private placement of senior notes with 22 US-based investors for a total consideration of US$700m (equivalent to around £450m). The senior notes consist of four tranches with a weighted average maturity of 10.3 years and an all-in funding cost of around 4.25% once swapped to Sterling. Following the issue of hybrid capital in 2010/11, the private placement was a further example of SSE diversifying its funding sources and putting in place funding at attractive rates. The placement was formally completed in April 2012. The net proceeds will be used to refinance short term debt and to support SSE's programme of large capital projects. With regard to shorter-term funding, SSE's core revolving credit facilities of £900m are, and are expected to remain, undrawn. The facilities are the subject of an agreement with banks which runs to 2015. In addition to these facilities, SSE has a committed bilateral facility of £100m with one other bank. SSE believes that it has sufficient financial flexibility to pursue the best opportunities to provide the means with which to increase dividends. At the same time, it also believes that history - including shocks and uncertainties seen in the financial markets in recent years - demonstrates how companies with a commitment to the long term must be disciplined when managing their balance sheets and cautious in financing their activities. Net Finance Costs The table below reconciles reported net finance costs to adjusted net finance costs, which SSE believes is a more meaningful measure. In line with this, SSE's adjusted net finance costs during 2011/12 were £322.1m, compared with £342.8m in the previous year. Mar 12 Mar 11 £m £m Adjusted net finance costs 322.1 342.8 add/(less): Movement on derivatives 89.5 44.4 Exceptional charges - 8.8 Share of JCE^1/Associate interest (146.5) (139.9) Reported net finance costs 265.1 256.1 Adjusted net finance costs 322.1 342.8 Return on pension scheme assets 147.4 141.9 Interest on pension scheme liabilities (149.8) (150.2) Finance lease interest (38.4) (39.7) Notional interest arising on discounted provisions (7.8) (4.3) Hybrid coupon payment 65.5 - Adjusted interest costs for interest cover calculation 339.0 290.5 ^1Jointly Controlled Entities The charge for hybrid debt is presented within dividends and reflected within adjusted earnings per share*. The average interest rate for SSE, excluding JCE/Associate interest, during 2011/12 was 5.06%, compared with 5.43% for the previous year. Based on adjusted interest costs, SSE's adjusted interest cover (including the hybrid coupon) was (previous year's comparison in brackets): · 5.9 times, excluding interest related to SGN (7.3 times); and · 4.9 times, including interest related to SGN (5.7 times). Excluding shareholder loans, SGN's net debt at 31 March 2012 was £3.27bn, and within the adjusted net finance costs of £322.1m, the element relating to SGN's net finance costs was £96.5m (compared with £90.4m in the previous year), after netting loan stock interest payable to SSE. Its contribution to SSE's adjusted profit before tax* was £138.3m, compared with £96.4m in 2010/11. Contributing to employees' pension schemes In line with the IAS 19 treatment of pension scheme assets, liabilities and costs, pension scheme liabilities of £731.9m are recognised in the balance sheet at 31 March 2012, before deferred tax. This compares to a liability of £668.6m at 31 March 2011. During the year to March 2012, employer cash contributions amounted to: · £47.9m for the Scottish Hydro Electric scheme, including deficit repair contributions of £29.5m; and · £90.1m for the Southern Electric scheme, including deficit repair contributions of £67.2m. As part of the electricity Distribution Price Control for 2010-15, it was agreed that allowances equivalent to economically-regulated businesses' share of deficit repair contributions in respect of the Southern Electric and Scottish Hydro Electric schemes would be included in price controlled revenue, with an incentive around ongoing pension costs. Tax Being a responsible tax payer Central to SSE's approach to tax is that it should be regarded as a responsible tax payer. As a consequence, SSE maintains a good relationship with HM Revenue & Customs, based on trust and cooperation. SSE strives to manage efficiently its total tax liability, and this is achieved through operating within the framework of legislative reliefs. SSE does not take an aggressive stance in its interpretation of tax legislation, or use so-called 'tax havens' as a means of reducing its tax liability. SSE's tax policy is to operate within both the letter and spirit of the law at all times. SSE's tax paid to the Government in the UK, including Corporation Tax, Employers' National Insurance Contributions and Business Rates, totalled £396.4m during the year to 31 March 2012, compared with £343.8m in the previous year. SSE also pays taxes in the Republic of Ireland, in relation to its operations there, and indirectly contributed £59.5m to UK government tax revenues through its significant investment in joint ventures and associates (as compared with £69.9m in the previous year). As a member of the Hundred Group of Finance Directors, SSE contributes to its annual Total Tax Contribution survey. SSE ranked 23^rd in the 2011 survey, both in terms of tax paid and total tax contribution. Setting out SSE's tax position To assist the understanding of SSE's tax position, the adjusted current tax charge is presented as follows: Mar 12 Mar 11 £m £m Adjusted current tax charge 213.4 268.2 Add/less Share of JCE/Associate tax (6.6) 3.3 Deferred tax 118.0 83.3 Tax on exceptional items/certain remeasurements (319.6) 252.4 Reported tax charge 5.2 607.2 The effective adjusted current tax rate, based on adjusted profit before tax*, was 16%, compared with 20.5% in 2010/11, on the same basis. The impact of SSE's higher capital expenditure programme and the changes introduced in Budget 2007 and subsequently have had, and will continue to have, a positive impact on the effective current tax rate. The Budgets in June 2010, March 2011 and March 2012 have announced a series of annual reductions in the UK Corporation Tax rate for future years. The deferred tax balance has been remeasured to reflect the latest of these enacted rate reductions (from 26% to 24%) and the effect of this has been disclosed as an exceptional item. The deferred tax balances for future years will continue to be remeasured as each subsequent rate reduction is enacted. The reported tax charge for 2011/12 is £5.2m, compared with a tax charge of £607.2m in the previous year. This reflects a large exceptional credit in 2011/12 compared to a large exceptional charge in 2010/11. Further information 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. Investor Timetable Remuneration Report 2012 on sse.com/investors 16 May 2012 Annual Report 2012 on sse.com/investors 18 June 2012 Ex-dividend date 25 July 2012 AGM (Bournemouth) and IMS 26 July 2012 Record date 27 July 2012 Final date for Scrip elections 24 August 2012 Payment date 21 September 2012 Interim results (provisional) 14 November 2012 Enquiries SSE plc Alan Young - Managing Director, Corporate Affairs + 44 (0)845 0760 530 Sally Fairbairn - Head of Investor Relations + 44 (0)845 0760 530 Justyn Smith - Head of Corporate Communications + 44 (0)845 0760 530 Website sse.com Twitter @sse Analysts' presentation Start: 0900 (BST) Location: The Lincoln Centre, 18 Lincoln's Inn Fields, London WC2A 3ED Webcast facility You can join the webcast by visiting www.sse.com and following the link on the homepage. Conference call UK 020 3450 9987 US +1 646 254 3367 When asked please provide conference number 7060470. Online information News releases and announcements are made available on SSE's website at www.sse.com. You can also follow the latest news from SSE through Twitter at www.twitter.com/sse. NETWORKS Networks Key Performance Indicators Mar 12 Mar 11 ELECTRICITY TRANSMISSION Operating profit* - £m 73.7 47.7 Regulated Asset Value (RAV) - £m 770 560 Capital expenditure - £m 228.7 117.4 ELECTRICITY DISTRIBUTION Operating profit* - £m 396.5 418.9 Regulated Asset Value (RAV) - £m 2,840 2,687 Capital expenditure - £m 260.3 211.9 Customer minutes lost (North) 73 78 Customer minutes lost (South) 60 64 Performance-based revenue - £m 11.4 8.5 SCOTIA GAS NETWORKS Operating profit* (SSE's share) - £m 234.8 186.8 Regulated Asset Value (SSE's share) - £m 2,270 2,150 Capital and replacement expenditure (SSE's share)- £m 202.2 199.7 Uncontrolled gas escapes attended within one hour % 98.7 97.2 SGN gas mains replaced - km 1,202 1,102 OTHER NETWORKS Operating profit* - £m 32.1 37.1 Capital expenditure - £m 48.0 55.0 Lighting Services maintenance contracts (GB and Ire) 52 52 Lighting Services PFI contracts 11 10 Utility Solutions electricity networks in operation 118 74 Utility Solutions new gas connections 13,850 11,120 Telecoms network - km 11,200 11,200 Owning, operating and investing in Networks In previous years, SSE reported the performance of its electricity networks on a geographical basis (i.e. the north of Scotland and central southern England). In terms of regulation, process, customers and service, it is now more relevant to report performance of electricity networks by activity (i.e. transmission and distribution) rather than geography and so from 2011/12 onwards SSE is adopting this approach. The performance of the economically-regulated SGN will continue to be reported within Networks. In addition, market-based activities of Lighting Services, Utility Solutions and Telecoms are also network-based and have, therefore, been included within SSE's Networks segment as Other Networks. Economically-regulated network companies with a growing Regulatory Asset Value SSE has an ownership interest in five economically-regulated energy network companies: · Scottish Hydro Electric Transmission (100%); · Scottish Hydro Electric Power Distribution (100%); · Southern Electric Power Distribution (100%); · Scotland Gas Networks (50%); and · Southern Gas Networks (50%). SSE's electricity networks transmit and distribute electricity to around 3.7 million businesses, offices and homes via around130,000km of overhead lines and underground cables and SGN's gas networks distribute gas to around 5.7 million homes, offices and businesses via 75,000km of gas mains. SSE estimates that the total Regulatory Asset Value (RAV) of its economically-regulated 'natural monopoly' businesses is now £5.88bn, up from £4.2bn five years ago, comprising: · £770m for electricity transmission; · £2.84bn for electricity distribution; and · £2.27bn for gas distribution (i.e. 50% of the business' total RAV of £4.54bn). SSE is the only energy company in the UK to be involved in electricity transmission, electricity distribution and gas distribution. Through Price Controls, Ofgem sets the index-linked revenue the network companies can earn through charges levied on their users to cover their costs and earn a return on their regulated assets. These lower-risk economically-regulated natural monopoly businesses provide a financial backbone and operational focus for SSE and balance its activities in the competitive Wholesale and Retail markets. They are core to SSE, to its strategy in the short, medium and long term and to its ability to deliver sustained real dividend growth. Developing market-based networks businesses In addition to its economically-regulated network companies, SSE owns and operates three other networks businesses, which are market-based: · Lighting Services, maintaining and replacing street and highway lighting; · Utility Solutions, designing, building, owning and operating networks for electricity, gas, water and heat; and · Telecoms, providing network capacity, bandwidth and data centre services. As with economically-regulated networks, they have made significant progress in the past five years, in terms of assets, contracts and operating profit. Financial performance in Networks Operating profit* in Networks increased by 6.7%, from £690.5m to £737.1m, contributing 44.5% of SSE's total operating profit*. This comprised (comparisons with the previous year): · £73.7m in electricity transmission, compared with £47.7m; · £396.5m in electricity distribution, compared with £418.9m; · £234.8m representing SSE's share of the operating profit* for SGN, compared with £186.8m; and · £32.1m in other network businesses, compared with £37.1m. Electricity Transmission Performance in Scottish Hydro Electric Transmission Ltd (SHETL) In SHETL, operating profit* increased by 54.5% from £47.7m to £73.7m. This reflected the increase in its asset base following on from the ongoing increase in capital invested. During 2011/12, a total of £228.7m was invested by SHETL in its networks, up from £117.4m in the previous year, taking its total Regulated Asset Value from £560m to £770m. Upgrading Scotland's electricity transmission network SHETL is responsible for maintaining and investing in the transmission network in its area, which comprises almost 5,300km of high voltage overhead lines and underground cables and which serves around 70% of the land mass of Scotland. As the licensed transmission company for the area, SHETL has to ensure there is sufficient network capacity for those within it seeking to generate electricity from renewable and other sources. A series of major developments is under way which is transforming the scale and scope of SHETL: · Knocknagael Substation: Ofgem authorised £43.8m of investment in this project (at 2009/10 prices) and all major construction works relating to the substation and related overhead lines and underground cables have been completed. The successful completion of the project has increased by 125MW the amount of electricity that can be exported from the north of Scotland. · Beauly-Blackhillock-Kintore: Work on replacing the conductors of the 275kV transmission lines between Beauly and Blackhillock and Blackhillock and Kintore, to allow an increase in the capacity of the network to transmit electricity, is well under way and is expected to be finished in 2015. Ofgem has authorised investment of £81m (at 2009/10 prices) for this development. · Dounreay-Beauly: Work on upgrading and reinforcing the transmission network between Dounreay and Beauly is continuing, including the installation of a second set of conductors to create a double circuit line and development of new and upgraded substations. Ofgem has authorised investment of £73.5m (at 2009/10 prices) for this programme, which should be completed in 2013. · Beauly-Denny: Following consultation, Ofgem approved, in September 2011, an asset value adjusting event submitted by SHETL to recover additional forecast construction costs arising from the replacement of its part of the line, from Beauly to Wharry Burn, taking the total to £539m (at 2009/10 prices). Full construction work on the replacement line is now under way, including the erection of the first of the new pylons. The replacement line should be completed in 2014. A total of £173m was invested in these four projects during 2011/12 and their completion is expected to take SHETL's RAV from £770m as at 31 March 2012 to over £1bn by March 2013 and around £1.6bn in March 2015. In 2012/13 SHETL expects to incur capital expenditure of over £350m. In addition, in January 2012, SHETL submitted to Scottish Ministers an application to construct a replacement 132kV transmission line between Beauly and Mossford to accommodate a higher capacity. Work on a new substation is getting under way. Based on current estimates, the two parts of the project are likely to require total investment of around £45m. Achieving a 'fast track' to Price Control agreement In January 2012 Ofgem announced that it was recommending that SHETL be 'fast tracked' under the RIIO T1 (Revenue = Incentives + Innovation + Outputs) process for the eight-year transmission Price Control period from April 2013. This was on the basis of the business plan submitted by SHETL, Keeping the lights on and supporting growth, which set three key objectives for the next decade: · keep the lights on for customers; · invest for a greener future; and · minimise as far as possible the impact on the environment. Ofgem said the business plan provided good evidence of how significant benefits will be delivered to consumers through 'greater efficiency, enhanced consumer engagement and investment'. Ofgem adopted the new RIIO framework during 2011, and it is designed to incentivise companies to deliver investment while providing value for money for customers. RIIO T1 is the first Price Control to be conducted under the new process. As Ofgem stated, fast-tracked companies, such as SHETL, can 'benefit from the swiftness of the process and concentrate on delivering efficient network improvements for consumers'. Following consultation, Ofgem published Final Proposals for RIIO T1 in April 2012 featuring: · an allowed cost of equity of 7.0%; · a new index for determining companies' debt costs; · depreciation based on 20 years for existing assets; and · depreciation for new assets (except Beauly-Denny) moving to 45 years over the course of two Price Control periods. SHETL is now developing a full implementation plan for the new Price Control period, which will be shared with stakeholders later this year, much earlier in the process than would have been possible had it not been 'fast tracked'. This should be of benefit to SHETL and its stakeholders. Keeping the lights on and supporting growth in the long term The central case of SHETL's business plan is a £1.1bn capital investment programme, with flexibility to increase this by up to a further £4bn if required, to upgrade the transmission network during 2013-21. Projects currently being developed and which could be constructed during the period include: · Western Isles: In October 2010, SHETL concluded that the lack of financial underwriting from electricity generators (attributed to the level of transmission charges) relating to the proposed link from the Western Isles to the mainland meant it would not be able to conclude a contract for the supply of the necessary electricity cable. As a result, it withdrew its request to Ofgem for authorisation to make the investment. Developers of wind farms on the Western Isles are now conveying greater confidence about the deliverability of their projects, which means that the case for the Western Isles link has been renewed and submitted to Ofgem. Detailed work is being undertaken to ensure that the final scheme design for the link meets the needs of the developers and, over the coming months, work will resume on placing the relevant contracts and undertaking environmental and other studies. · Caithness to Moray: SHETL is now planning to develop a subsea electricity cable between Caithness, where consent has been secured for a new substation at Spittal, and Moray, where it is proposed to upgrade the existing substation at Blackhillock, to transmit the large volume of existing and planned electricity from renewable sources in the north of Scotland. The cable will be capable of transmitting around 1,200MW of electricity. This proposal to develop a subsea cable retains the flexibility to accommodate generation developments in the north of Scotland as and when the need to do so arises. An investment case will be submitted to Ofgem shortly. · Shetland: SHETL has now secured consent for converter stations associated with the proposed subsea/onshore underground high voltage direct current (HVDC) transmission link between the Shetland Islands and the Scottish mainland to accommodate renewable energy developments in Shetland. The link would also connect properties in Shetland to the mainland electricity network for the first time and could be installed in the second half of this decade. Based on current estimates (although these will inevitably be revised) these developments could require investment of around £1.4bn and would form part of the £4bn investment programme that is additional to the £1.1bn central case of SHETL's business plan. In May 2012, Ofgem set out plans to change the charging arrangements for electricity transmission networks, with greater account being taken of the type of electricity generator seeking to use the networks. This will require the Investment Cost Related Pricing (ICRP) methodology to be improved. Once this is completed, Ofgem will consider the final form of the ICRP and make a final decision on its modification. The impact of the planned changes will have a bearing on the amount of electricity from renewable sources that is developed in Scotland and, therefore, on the way in which the transmission network is upgraded. Electricity Transmission Priorities for 2012/13 and Beyond SHETL is SSE's fastest-growing and fastest-changing business, where the core activity for much of the next decade will be construction. Against this background, its priorities for 2012/13 and beyond are to: · complete successfully the remaining stages of the RIIO T1 price control process; · meet key milestones in projects under construction, in a way that is consistent with all safety and environmental requirements; · make progress with projects in development; and · ensure it has the people, skills, resources, supply chain and stakeholder relationships that will be necessary to support growth on a significant scale. Electricity Distribution Performance in Southern Electric Power Distribution and Scottish Hydro Electric Power Distribution The performance of SSE's two electricity distribution companies during 2011/12 was as follows (comparisons with previous years): · operating profit* decreased by 5.3% to £396.5m; · electricity distributed fell by 1.4TWh to 40.7TWh; · the average number of minutes of lost supply per customer was 73 in the north (78) and 60 in the south (64); · the number of supply interruptions per 100 customers was 71 in the north (74) and 70 in the south (64); and · performance-based additional incentive income and allowances (excluding losses) of £11.4m is expected to be earned, compared with the final out-turn of £8.5m in the previous year. The decrease in operating profit principally reflects the timing of recovery of allowed income. Performance in respect of both minutes lost and interruptions was ahead of the targets set by Ofgem under its Interruptions Incentive Scheme (IIS), which gives financial benefits to distribution network operators that deliver good performance for customers. The number of minutes lost in the South was the lowest ever. Performance-based income covers a number of issues, including the quality of service provided to customers and innovation. Volume of electricity distributed The total volume of electricity distributed by the two distribution companies during 2011/12 was 40.7TWh, compared with 42.1TWh in the previous year. Under the electricity Distribution Price Control for 2010-15, the volume of electricity distributed no longer affects companies' overall allowed revenue (although it does have an impact on the timing of revenue). This has further reduced the level of risk associated with energy networks businesses. Earning revenue by delivering a good quality of service As a result of their operational performance during 2011/12 SSE's two electricity distribution companies expect to earn additional incentive income and allowances of £11.4m (2010/11: £8.5m) including additional incentive income of £4.5m (2010/11: £3.4m). This reflects effective investment in the automation of the networks and effective operational responses to electricity supply interruptions. Responding to the effects of severe weather In the winter of 2011/12, SSE's electricity networks were subjected to the effects of severe weather on an unusually large number of occasions, including the 3 January storm affecting the north of Scotland. This weather event alone, featuring exceptional low altitude wind speeds of over 90 miles per hour, resulted in 600 separate faults and over 1,000 points of damage on the network and the loss of power to around 40,000 households. The equivalent of three months of fault repair work was carried out in four days (with very high winds also occurring on 4 January) and was marked by the commitment of SSE employees and the patience on the part of affected communities. The efforts of SSE and other service providers were praised by the Scottish Government. The 3 January storm and a number of other weather events were treated as exceptional by Ofgem, meaning that they are excluded from the calculation of performance measures such as customer minutes lost. Operating electricity networks efficiently Efficiency is one of SSE's core values and amongst Ofgem's explicit purposes in setting Price Controls is to keep as low as possible the costs of providing secure and reliable networks. SSE has a straightforward operating model, under which the vast majority of activities are in-house. Under this model: · customer-facing activities, such as restoring power supplies or providing new connections, are managed from a network of 14 depots in communities throughout central, southern England and the north of Scotland; and · network management activities, such as inspections, maintenance and investment, are carried out in Operational Production Groups. This model gives SSE a strong oversight of operations and investment, allows flexibility in responding to changed circumstances and supports a culture of efficiency, teamwork and excellence, including innovation. Investing in electricity networks and securing growth in their RAV 2011/12 was the second year of the electricity Distribution Price Control for 2010-15. The Price Control changed the framework for operating and capital expenditure to remove the perceived bias in favour of the latter and to ensure the delivery of not only the investment itself but of agreed outputs from it. The most successful electricity distribution companies, therefore, will be those that apply efficiency and innovation to maximise outputs from agreed expenditure. In response to this, SSE has identified a number of solutions and interventions for wider deployment in 2010-15 to ensure its success throughout the Price Control period. This means SSE has robust and cost efficient network investment processes that deliver real value for customers. It has also identified a number of important innovations and new technologies that are delivering cost savings and minimising disruption. For example, in rural areas, use of the Ordnance Survey's Imagery database of aerial photography has provided a simple and effective way of surveying thousands of kilometres of overhead lines for potential risk of tree damage. In urban areas, SSE has used directional drill technology, which creates minimum disturbance to the highway and thereby reduces disruption to the public and the cost of reinstatement, to install - for example - new 66kW circuits in west London. The deployment of innovations and technologies such as these, plus good performance in response to Ofgem's enhanced incentive mechanisms in areas such as customer service should enable SSE to continue to achieve the post-tax real return in excess of 5% which it is targeting in electricity distribution. Against this background, capital expenditure in electricity distribution networks was £260.3m in 2011/12. The need for further significant investment in Great Britain's electricity distribution networks, to maintain and/or replace ageing assets or to provide additional capacity, is likely to mean SSE will invest around £275m in 2012/13, taking the total for the first three years of the 2010-15 Price Control to around £750m. As a result, the RAV of SSE's two electricity distribution networks should increase to over £2.9bn over the course of the year. Significant developments include a £30m project to install new 132kV plant at Bracknell and Camberley substations and new 132kV under ground cables between the substations. The project will help to meet demand for electricity in a key area between the M3 and M4 motorways. The cabling works should be finished in the autumn of this year and the final substation work should be completed in 2013. In Scotland, plans have been made to invest in the resilience of the electricity network in Argyll and Bute, which was particularly affected by the storms of 2011/12, including provision of underground cables in Dunoon and of large-scale mobile generation connection points for Bute. Making electricity networks smart Although there is no standard definition, the European Technology Platform for the Electricity Networks of the Future defines smart grids as 'electricity networks that can intelligently integrate the behaviour and actions of all users connected to it - generators, consumers and those that do both - in order to efficiently deliver sustainable, economic and secure electricity supplies'. The next decade promises major technological change for electricity distribution networks as a result of things like micro generation, the growth of electricity as a source of heating and electric vehicles. All of this will change the traditional flows of electricity, which means smarter, more dynamic networks will be required. SSE, with Smarter Grid Solutions Ltd, an associate company, 'switched on' the UK's first commercial smart grid technology on its power distribution network on Orkney in 2009. This has since allowed 20MW of additional capacity for generating electricity to be connected to the network, at a small fraction of the cost that would have been required had traditional means been adopted. Two other major 'smart' projects, with total funding of £64m, are being led by SSE's electricity distribution businesses: · Northern Isles New Energy Solutions (NINES) in Shetland: NINES is a pilot project representing the first stage of the Integrated Plan for managing electricity supply and demand on Shetland, which Scottish Hydro Electric Power Distribution is required by Ofgem to present in 2013. It features the use of heat and electricity storage to manage intelligently the impact of movements in demand on electricity generation in Shetland, which could allow more renewable energy to be connected to the network. It also features new active network management solutions. In September 2011, Ofgem announced that the NINES should be funded as part of the Integrated Plan, with 85% of its expenditure included in SHEPD's RAV and the remaining 15% included in SHEPD's allowed revenue. This confirmed that NINES is not just a 'smart' programme but a comprehensive and sustainable solution to the energy challenges on Shetland which is designed to meet the needs and aspirations of the community. · New Thames Valley Vision (NTVV) in and around Bracknell: NTVV aims to demonstrate that applying new technologies to Bracknell's network will provide a lower cost alternative to redeveloping the substation to meet increasing electricity demand, with the potential to reduce significantly costs to customers. NTVV involves monitoring and predicting electricity demand and usage patterns and using a range of innovative technologies, including network automation, energy storage and automated demand response, to manage the network flows predicted by the modelling. In November 2011, Ofgem announced that NTVV should secure funding totalling £30m under its Low Carbon Networks Fund and, as a result, NTVV will lead to the creation of one of the UK's first 'intelligent' distribution networks. Supporting deployment of electric vehicles Electric vehicles (EVs) will be an essential part of the move towards a low-carbon transport infrastructure. Current predictions suggest that EVs could account for as many as 10% of new car sales by 2020. The challenge for electricity distribution companies is to prepare their networks for the likely upswing in demand arising from EVs and SSE was a full participant in two EV projects, both supported by the Technology Strategy Board - the MINI E and the Ford Transit Connect consortia. These have helped to demonstrate that up to one in four homes will be able to have an EV without it having a significant impact on the electricity network. Nevertheless, other issues - such as the need to schedule re-charging effectively and to develop new control systems - require significant attention and SSE is carrying out further work to understand the requirements of so-called "smart charging" to maximise use of the existing infrastructure. In March 2012, SSE opened in Glasgow the UK's first dedicated free EV charging, hiring and parking facility. The facility features six charging car park spaces and electric car hire from Europcar and Peugeot as well as an electric car available for test drives. Electricity Distribution priorities in 2012/13 and beyond During 2012/13 and beyond SSE's priorities in Electricity Distribution are to: · comply fully with all safety standards and environmental requirements; · ensure that the networks are managed as efficiently as possible, delivering required outputs while maintaining tight controls over operational expenditure; · put responsiveness at the heart of day-to-day operations, so that the number and duration of power cuts experienced by customers is kept to a minimum; · ensure there is adequate capacity to meet changing demands on the electricity system; · deliver excellent service to customers, which responds effectively to their needs during supply interruptions and in 'business-as-usual' situations; and · make progress on the deployment of innovative investment in smart grids. With such significant changes required over the next few years, not least in adapting the networks to accommodate changes in production and consumption, the scope for additional incremental growth in electricity distribution networks is clear. Gas Distribution Performance in SGN SSE receives 50% of the distributable earnings from Scotia Gas Networks (SGN), in line with its equity holding, and also provides it with corporate and management services. In SGN in 2011/12 (comparisons with the previous year): · SSE's share of operating profit* was £234.8m, compared with £186.8m; · gas transported fell by 22.8TWh to 143.4TWh; and · 98.7% of uncontrolled gas escapes were attended within one hour of notification, compared with 97.2% in 2010/11 and the standard of 97%. The increase in operating profit* for SGN is primarily due to three things: · the impact of the price changes agreed as part of the five-year gas Distribution Price Control to March 2013; · underlying operational efficiencies achieved during the year; and · income from 2010/11 not recovered during that financial year but subsequently received. Only 3.5% of SGN's transportation income is volume-related; the remaining 96.5% is related to the maximum capacity requirements of its customers. A small part of SGN's operating profit is derived from the non-regulated activities of its contracting, connections and commercial services operations. Operating gas networks efficiently When SGN acquired its networks in June 2005, National Grid was contracted to provide it with services with a total value of £30m per annum. In following years, services were brought within SGN, and SGN's remaining service contracts with National Grid totalled £7m per annum by the end of 2010/11. These Managed Services Agreement contracts covered transmission services, control and IT services and emergency call handling, and the process of bringing them within SGN is continuing. In June 2011, SGN stopped using National Grid's Gas Transportation Management System and replaced it with its new Distribution Network Control System and in September 2011 it replaced a National Grid system with a new application called Demand Management System. This means that SGN's remaining contracts with National Grid now total £4.5m per annum. Investing in gas networks and securing growth in their RAV The five-year gas Distribution Price Control, which began in April 2008, provides the opportunity for SGN to increase significantly investment in its gas distribution networks, thereby reinforcing their safety and reliability and securing another significant increase in their RAV. By the end of 2012/13, SGN estimates that its total RAV will be around £4.8bn. During 2011/12, SGN invested £404.3m in capital expenditure and mains and services replacement projects, compared with £399.3m in the previous year, including: · The £21m replacement of the under-sea gas main between the south coast of England and the Isle of Wight was completed during the year. The project involved connecting Lepe and Gurnard through the longest directional drill ever undertaken (2.9km). Tunnels were bored from each direction, meeting around 40 metres below the seabed, to take the two 12 inch diameter pipes. · The majority of the mains replacement expenditure was incurred under the 30:30 mains replacement programme which was started in 2002. This requires that all iron gas mains within 30 metres of homes and premises must be replaced over a 30-year period. During 2011/12, SGN replaced 1,202km of its metallic gas mains with modern polyethylene pipes. · SGN is also committed to making new gas connections to existing homes that are not on mains gas as affordable as possible, and is running a new Assisted Connections scheme, under which 19,456 properties were connected to its networks during 2011/12. A further 19,500 properties are expected to be connected in 2012/13. Investment will continue to be a top priority for SGN and, in line with that, it expects to invest around £400m in capital expenditure and mains and service replacement projects during 2012/13. Earning financial rewards for corporate responsibility In July 2011, SGN was awarded £1.3m under Ofgem's Discretionary Reward Scheme which rewards companies for developing and adopting best practice in serving the interests of customers, society and the environment. This was the third successive year in which SGN secured the highest award under the scheme, and it recognised SGN's work on its environmental impact, fuel poverty and safety. The Scheme, which is judged by a panel of industry experts, was established as part of Ofgem's gas Distribution Price Control 2008-13. Making gas networks more sustainable In March 2011, the UK government launched the Renewable Heat Incentive 'to revolutionise the way heat is generated and used in buildings'. It will support emerging technologies and is designed to reduce dependence on heating from fossil fuels. SGN has long recognised that renewable heat is an untapped resource. Working with a water company and a gas supplier, it began the delivery and supply of biomethane to 200 homes in Oxfordshire. Under the scheme, the first of its kind in Britain, sludge is subjected to the process of anaerobic digestion to create biogas which, after the removal of impurities, is fed into the gas distribution network. It has since begun participation in the first commercial biomass upgrading system in England, near Poundbury in the Duchy of Cornwall. Biogas produced from green waste and chicken manure will be upgraded to natural gas quality and fed into SGN's gas network to supply green gas to almost 4,000 homes. It is estimated that biomethane could account for up to 15% of domestic gas needs in the UK in 2020. SGN is now developing this technology so that larger volumes of biomethane at other sites can be commissioned into the network and is carrying out feasibility studies on a further six proposals for biomethane network entry points from anaerobic digestion and landfill gas projects in Scotland and southern England. Preparing for the new gas Distribution Price Control As with electricity transmission, a new eight-year Price Control will be introduced for gas distribution from 1 April 2013 - RIIO-GD1. SGN has undertaken extensive consultations with stakeholders to help determine what should be included in its business plan for the new Price Control. In October 2011, SGN completed a public consultation on its proposed business plan for RIIO-GD1 and submitted it to Ofgem in November 2011. The plan set out four key themes and related measures of progress: · acting safely, through reducing risk and protecting the public and employees; · providing excellent service through maintaining gas supplies, providing timely information and listening to customers; · being good neighbours by reducing environmental impact and removing assets that affect local communities; and · being a business for the future by helping to mitigate and adapt to climate change and keeping costs down. In February 2012, Ofgem set out its initial assessment of gas distribution networks' business plans. Overall, it decided not to retain SGN (or any other company) within the 'fast track' process because of the number of issues that would have had to be resolved in a compressed timetable. SGN submitted a revised business plan in April 2012 which it is hoped Ofgem will adopt as the basis for its Initial Proposals document on the gas distribution Price Control in July 2012. Gas Distribution priorities in 2012/13 and beyond During 2012/13, SGN's priorities are to: · deliver a safe and secure gas supply to customers; · deliver to time and budget the 2012/13 mains replacement and capital works programmes; · continue to work with stakeholders to secure an acceptable outcome to the new gas Distribution Price Control; and · support sustainable developments in gas distribution. Other Networks Performance in Other Networks SSE's 'Other Networks' businesses - Lighting Services, Utility Solutions and Telecoms - are relatively small when compared with its energy networks, and they operate in tough and competitive markets. As a result of difficult economic circumstances, their contribution to SSE's operating profit* fell, from £37.1m in 2010/11 to £32.1m, in 2011/12. Maintaining leadership in lighting services provision SSE remains the UK's and Ireland's leading street-lighting contractor. It has: · 24 contracts with local authorities in England, Wales and Scotland to maintain over 630,000 lighting units; · 28 contracts with local authorities in the Republic of Ireland to maintain over 240,000 lighting units, through Airtricity Utility Solutions; and · 11 contracts with 12 local authorities, under the Private Finance Initiative, to replace and maintain over 610,000 lighting units. The PFI contracts include the 25-year contract awarded by Knowsley Metropolitan Borough Council for the maintenance of over 24,000 lighting columns, traffic bollards and traffic signs and for the replacement of more than 70% of these during the initial four-year investment period which began in August 2011. It includes the deployment of SSE's Mayflower technology which offers customers variable light control, monitoring, fault detection and energy consumption measurement - all undertaken from a central location. Lighting Services fits well within SSE's business model and, as in electricity distribution, future success will be based on effective and efficient customer service and successful deployment of new technology. Providing comprehensive Utility Solutions SSE provides a comprehensive range of 'utility solutions'. It designs, builds, owns, operates and maintains cable and pipe networks for delivering electricity, gas, water, heat and telecommunications to existing and new commercial and residential developments in England, Wales and Scotland. It is, therefore, able to provide a one-stop solution for multi-utility infrastructure requirements to customers in the development and construction sectors. · Electricity Networks: SSE now owns and operates 118 embedded energised electricity networks outside the areas served by its economically-regulated subsidiaries Scottish Hydro Electric Power Distribution and Southern Electric Power Distribution. A further 43 are under construction and contracts have been signed for the development of an additional 5, taking the total to 166 - up from 117 at the end of 2010/11. In total, SSE has 825MW of network capacity, including 476MW of existing demand and 349MW of connections to be completed. · Gas Pipelines: SSE is also a licensed gas transporter, installing, owning and operating gas mains and services on new housing and commercial developments throughout the UK. The total number of new premises connected to its gas networks has continued to grow, and during 2011/12 it connected a further 13,853 premises, taking the total number of connections to over 92,000. Contracts have been signed for a further 60,000 connections to be completed. · Water: Through SSE Water (SSEW) SSE is able to install, own, operate and supply water and sewerage services alongside its existing electricity and gas services. An 'inset' appointment is the route by which one company replaces another as the appointed water and/or sewerage company for a specified area. SSEW now has 15 such appointments and provides, or has secured contracts to provide, water and sewerage services to over 21,000 properties in England and Wales. · Heat: SSE uses a range of sustainable technical solutions, including Combined Heat and Power (CHP) generation, biomass boilers and ground- and air-source heat pumps and combines these with community heating schemes where appropriate. There are currently seven heat networks in operation and five further schemes where SSE is the preferred bidder. Of the four areas that Utility Solutions operates in, Heat is the least developed but has significant potential as a result of the planning requirements placed on developers and the introduction of the Renewable Heat Incentive. That, allied to continuing focus on safety, customer service and value across all activities and an ability to offer a true multi-utility solution to customers, means that Utility Solutions should continue to increase its already prominent market presence. Operating a national telecoms network SSE's Telecoms business operates in two different markets. It owns and operates the UK's fourth largest fibre and microwave network offering carrier standard connectivity to external customers and providing SSE's internal managed voice and data services. The origins of this business lie in the installation, a decade ago, of fibre on SSE's electricity network, and the telecoms network now comprises: · fibre optic cabling which SSE owns (5,000km); · leased lit fibre (2,600km); and · microwave radio (3,600km). To complement its core telecoms network business, SSE's Fareham-based data centre provides capacity for more than 1,200 racks for the co-location of IT services within the 80,000 square feet secure site and 10MW of power in a resilient and energy efficient environment. Despite gaining some large, high-profile technology companies as clients, the year was characterised by a challenging environment for sales in respect of the network, which made tight control on operating costs especially important. To support the business in the future, there will be a focus on development of its network and products in what remains a very fast-developing sector. Other Networks priorities in 2012/13 and beyond Lighting Services, Utility Solutions and Telecoms have specific priorities for 2012/13, but across all of them there is a continuing need for: · efficiency and customer service; · effective product development; and · technological change and innovation. Conclusion Through efficiency, responsiveness and innovation, SSE aims to expand significantly its Networks businesses in the coming years and they will play a significant part in helping it to meet its financial objective of sustained real dividend growth. RETAIL Retail Key Performance Indicators Mar 12 Mar 11 ENERGY SUPPLY Operating profit* - £m 271.7 347.7 Electricity customer accounts (GB domestic) - m 5.04 5.16 Gas customer accounts (GB domestic) - m 3.48 3.57 Energy customers (GB business sites) - m 0.41 0.43 All-Island Energy Market customers (Ire) - m 0.62 0.49 Total energy customer accounts (GB, Ire) - m 9.55 9.65 Electricity supplied household average (GB) - kWh 4,104 4,408 Gas supplied household average (GB) - kWh 451 563 Household/small business aged debt (GB, Ire) - £m 88.3 89.2 Customer complaints to third parties (GB)* 896 1,161 * Energy Ombudsman, Consumer Focus and Consumer Direct ENERGY-RELATED SERVICES Operating profit* - £m 49.9 52.8 Home Services customer accounts (GB) - m 0.41 0.42 Meters read - m 15.0 13.8 SSE Contracting Order Book - £m 78 67 Improving transparency in competitive customer-facing businesses In previous years, SSE reported performance relating to its energy supply activities as part of a Generation and Supply segment and SSE continues to believe that its involvement in the Retail activity of energy supply and the Wholesale activities of energy production and portfolio management means it has a well-balanced portfolio of customers, assets and contracts for purchasing gas and power purchase agreements. In October 2009, Ofgem introduced the requirement to report details of SSE's Generation and Supply results in a Consolidated Segmental Statement (CSS). Ofgem commissioned an independent review of suppliers' segmental statements by BDO LLP and in January 2012 announced that while BDO had recommended several changes to the way suppliers prepare their statements to improve transparency and cross-company comparability the fact it 'found suppliers' financial information to be fair and appropriate and should also give consumers a degree of reassurance.' Therefore, in relation to Generation and Supply, SSE was already publishing information to help to improve the transparency of its financial reporting. Following changes to SSE's management structure in 2011 and in the interests of further transparency, it has concluded that this should be extended to its financial statements. The second biggest energy supplier across the Great Britain and Ireland markets SSE is the second biggest energy retailer across the competitive markets in Great Britain and Ireland. It supplies electricity and gas to more than 9.5 million household and business accounts under brands such as SSE, Scottish Hydro, Southern Electric, SWALEC and Atlantic in the Great Britain market and Airtricity in the markets on the island of Ireland. The key responsibilities of the Energy Supply business are to: · ensure it secures enough electricity and gas to meet customers' needs; · arrange for electricity and gas to be distributed to customers' premises through the relevant networks; · provide customers with necessary associated services such as metering and billing; and · meet obligations in respect of energy efficiency and any related social or environmental schemes promoted by government. It must do so while being mindful of the fact that its core products - electricity and gas - are something which people need to buy rather than choose to buy, which means there is legitimate and significant political and regulatory interest in energy supply markets. In Great Britain, for example, energy supply has been the subject of a Retail Market Review announced by Ofgem in November 2010, which is supposed to make energy retail markets work more effectively in the interests of customers. A significant provider of energy-related services SSE provides other energy-related goods and services to customers, covering three principal areas: · retailing of 'home services' such as gas boiler, central heating and wiring maintenance and installation, telephone line rental, calls and broadband services and microgeneration; · supplying, installing, maintaining and reading meters in the household, commercial, industrial and generation sectors in Great Britain; and · domestic, commercial and industrial mechanical and electrical contracting and electrical and instrumentation engineering. SSE's contracting business is the second largest mechanical and electrical contracting business in the UK. Its metering business became national in Great Britain in 2010 after it completed a programme of in-sourcing of activities. 'Home services' were supplied to over 400,000 customer accounts as at 31 March 2012. SSE's activities in home services, metering and electrical and mechanical contracting are all customer-facing and have, therefore, been included in the Retail segment. Financial performance in Retail Operating profit* in Retail fell by 19.7%, from £400.5m to £321.6m, contributing 19% of SSE's total operating profit*. This comprised (comparisons with the previous year): · £271.7m in Energy Supply, compared with £347.7m; and · £49.9m in Energy-Related Services, compared with £52.8m. Energy Supply Performance in Energy Supply SSE's Energy Supply business buys the electricity and gas it needs through SSE's Energy Portfolio Management and Generation divisions. The associated cost to the Energy Supply business comprises: · the weighted average cost of electricity, made up of fuel used in generation plus associated costs of CO emissions, power purchase agreements and direct bilateral electricity contracts; and · the weighted average cost of gas, made up of gas purchase contracts and direct bilateral gas contracts and gas storage. It therefore carries risks associated with energy procurement. In addition the Energy Supply business has to meet costs associated with the transmission and distribution of energy, customer service and government-sponsored social and environmental obligations. Operating profit* in Energy Supply in 2011/12 fell by 21.9% to £271.7m, and comprised 16.4% of SSE's total operating profit. Within this, SSE's operating profit from supplying energy to a household account in Great Britain in 2011/12 was an average of around £30. Operating profit in Energy Supply reflects the higher wholesale gas costs and the delay to September 2011 in implementing an increase in household energy prices and falling energy consumption. There was, however: · a reduction in overheads associated with the doorstep sales operation as a result of its closure in July 2011; and · success in managing, with customers, the level of aged debt. Expected profitability in Energy Supply Electricity and gas are things which people need to buy rather than choose to buy (unless they are used inefficiently), so SSE recognises that it would not be acceptable for it to achieve an excessive level of profitability in Energy Supply. At the same time, a reasonable and sustainable level of profitability is necessary to ensure that the risks associated with energy procurement can be remunerated in a way that will sustain investment and to ensure that investment can also be made in the services and systems that customers will need in the future. SSE expects that its profit margin (i.e. adjusted operating profit* as a percentage of revenue) in Energy Supply will average around 5% over the medium term (i.e. three to five years). In 2011/12, it was 3.5%. On this basis, SSE hopes to demonstrate that the prices it charges for, and any profit it makes in, supplying electricity and gas are fair. It also hopes to give further momentum to its efforts to build trust in energy supply. Building trust in energy supply In October 2011, SSE published a document, Building Trust: SSE's proposals to build customers' trust in energy supply in Great Britain. It set out 10 measures to: · restore simplicity, including reducing the number of tariffs from over 60 to four core products; · enhance transparency, including improving wholesale electricity market liquidity; · improve customer service, including retrospective introduction of a Sales Guarantee; and · ensure fairness for all customers, including ensuring all customers have the opportunity to access all tariffs. In line with the fairness principle, SSE has made a clear commitment never to engage in any form of unfair pricing. As the Institute for Public Policy Research stated in February 2012, 'customers are being overcharged to subsidise cheap offers for customers who switch suppliers in the more competitive end of the market'. An effect of this practice is to make entry in to the energy supply market in Great Britain more difficult for new suppliers, and that is another reason why the practice should be stamped out. In April 2012, SSE confirmed that the 10 measures had been completed, including two that had been successfully piloted and would go forward to full implementation. It also set out a number of other measures to maintain the momentum, including steps to simplify energy bills, tackle estimated bills and to enable prepayment meter customers get on to the best tariff. As part of its Retail Market Review, Ofgem has completed consultations on possible interventions in areas such as pricing structures, tariff comparability and customer communications. Ofgem has said it would prefer to implement reform wherever appropriate with the co-operation of energy supply companies but will consider a referral to the Competition Commission if necessary. SSE accepts the challenge posed by Ofgem but believes it is moving faster, and further, to meet customers' needs in a way that a regulator-determined approach would not be able to achieve. Indeed, the quick way in which SSE was able, in April 2012, to enter into an agreement with the UK government on measures to help improve the quality and relevance of the information available to customers demonstrates that speed of response and innovation are most likely to sustain and build customers' trust in energy supply. Energy supply markets in Ireland are at a different stage of development; indeed, since 2009, Ireland has experienced the EU's highest levels of customers switching between suppliers. Nevertheless, after a period of rapid growth in customer numbers, SSE is committed to ensuring that the principles of Building Trust are also applied on the island of Ireland, and its Customer Charter for household customers in the Republic of Ireland reflects that commitment. SSE's approach to retaining and gaining customers Long-term success in Energy Supply depends on the supplier's ability to retain and gain customers. SSE aims to do this by: · offering consistently competitive prices over the medium term; · providing a straightforward range of products that are easy to assess; and · delivering the highest possible quality of service. In summary, its proposition to customers is based on fair pricing, simple products and excellent service. At the same time, SSE believes that, because the products it supplies are fundamental to the functioning of modern life and so are not discretionary, it has a responsibility to earn and retain the trust of customers. Supplying energy to customers in GB and Ireland During 2011/12, SSE's energy customer accounts in Great Britain and Ireland fell slightly, to 9.55 million from 9.65 million in March 2011. Customer accounts at March 2012 comprised: · 8.52 million household electricity and gas accounts in GB; · 407,000 business electricity and gas sites in GB; and · 621,000 electricity and gas customer accounts in Northern Ireland and the Republic of Ireland (91% household and 9% business). The reduction in customer account numbers in GB was, therefore, offset somewhat by success in the Irish markets, where there was a net customer gain of 130,000. In contrast, there was a reduction of 230,000 in customer numbers in Great Britain, reflecting the highly competitive market conditions. Of this net reduction, most accounts were lost in the six months between July and December 2011. This was the period following SSE's decision to stop selling energy on the doorstep in Great Britain and the announcement of increases in household gas and electricity prices. Customer account numbers do not tell the whole story, however. Within the overall total, 2.5 million customer accounts in Great Britain are for loyalty products such as: · energyplus Argos, which rewards customers with money-off discount vouchers; · energyplus Pulse, under which customers are able to support the British Heart Foundation (which received £133,000 from SSE in respect of energyplus Pulse customers during 2011/12, taking the total since the product was launched to £1.5m); and · M&S Energy, available to customers through Marks & Spencer's stores and website. In May 2012 SSE has announced its intention to acquire Phoenix Supply Limited, a regulated supplier of natural gas to 130,000 customers in Northern Ireland. The acquisition also includes a small number of customers in ROI's deregulated commercial supply market. The acquisition is subject to approval by the Irish Competition Authority and SSE expects to complete the purchase during the summer. Selling energy in the right way In July 2011, SSE became the first of the leading suppliers in the Great Britain market to stop commission-based doorstep selling. The decision was taken because confidence in the way energy was being sold on the doorstep and in the way in which salespeople were being remunerated had become low. This was followed in December 2011 by SSE's decision to implement its Sales Guarantee for household energy customers and to apply the guarantee to any household energy sales made by it since October 2009, when Ofgem placed new obligations on energy suppliers to make sure sales activities are conducted in a fair and professional manner. Under the guarantee, devised as part of SSE's Building Trust initiative, any customer who shows that they switched their energy supply to SSE after being given inaccurate information or being misled will have any resulting financial loss made good. Since it was launched, SSE has contacted customers about the guarantee and so far settled over 3,000 claims. It expects that the retrospective implementation of the guarantee could cost up to £5m. The application of the guarantee is being independently assured and extended to all energy products. In May 2012, SSE was fined £1.25m after being found guilty, at Guildford Crown Court, on two counts (out of seven) relating to the use of direct sales aids in February 2009. SSE recognises that a company of its standing and with its values should not have found itself in this position and various steps - of which the Sales Guarantee is one - have been taken to ensure that it does not do so again. Meanwhile, SSE is continuing to co-operate with Ofgem's investigation into whether it complied with the new licence conditions to govern sales processes introduced in 2009. SSE aims to gain customers through venue, telephone, online and direct mail sales and through customer advice activities; through extending its range of affinity partnerships, of which M&S Energy is one example; and through a series of commercially-focused sponsorships. It is also planning to launch later this year pilot networks of appointment-only and salary-based 'smart energy advisers', starting in Wales and Scotland and trained to an externally-accredited standard. The advisers will draw on SSE's experience in the Energy Demand Research Project carried out in North Leigh, Oxfordshire, between 2007 and 2010, during which a locally-based energy adviser employed by SSE engaged with local people to secure a 10% reduction in household energy consumption. According to the Independent Project Final Analysis, published in June 2011, the adviser was 'able to work very well within the community and was very well received by them'. Customers' use of energy is continuing to decline SSE household customers have continued to reduce their use of energy, and on an actual basis in 2011/12 SSE household customers used, on average: · 451 therms of gas, compared with 563 therms in the previous year; and · 4,104kWh of electricity, compared with 4,408kWh in the previous year. On a weather-corrected basis, average household consumption of gas by SSE's customers has fallen by 21.5% in the five years since 2007 and consumption of electricity has fallen by 16.7%. The decline in energy consumption is expected to continue for the next few years. Falling consumption presents short term issues in relation to the revenue that companies are able to earn from supplying energy and in relation to the operation and development of plant for generating electricity. Nevertheless, as a result of the underlying fall in energy consumption, households are less exposed to the impact of high unit prices than they otherwise would be and the overall sustainability of supplies of gas and electricity is improved. These are very positive trends, which SSE welcomes. Helping customers use less energy in the future As an energy supplier, SSE has obligations under the Carbon Emissions Reduction Target (CERT) 2008-12 scheme to deliver energy efficiency measures to households throughout Great Britain that deliver savings in CO emissions, and in 2011/12 it funded the installation of cavity wall insulation in over 125,000 homes and loft insulation in over 190,000 homes (excluding DIY insulation), an increase of over 60% on last year. In August 2011, Ofgem published its Annual Report on suppliers' progress towards CERT targets for 2008-12. It reported that SSE had achieved 64% of its obligation by the end of the third year of CERT; this increases to 71% when the innovation features of CERT are taken into account. The delivery of CERT and, in particular, of the requirement to ensure that 15% of the CO savings are achieved in a subset of low income households considered to be at high risk of fuel poverty (the Super Priority Group) has proved to be very challenging, not least because of difficulties associated with identifying, and then collecting the information required to verify, a customer as being within the Super Priority Group. Complementing CERT, the Community Energy Savings Programme (CESP) is an obligation placed on energy suppliers and electricity generators to make savings in customers' homes by helping to install energy efficiency measures. The programme is designed to ensure that suppliers work in the lower income areas and to incentivise a 'whole house' approach to energy savings. While delivering CESP is challenging, SSE now has 33 CESP agreements in place for locations throughout England, Scotland and Wales. CERT and CESP will be superseded by the Green Deal and Energy Company Obligation (ECO) when they are introduced following the passage of the Energy Act 2011: · the Green Deal is a new financing mechanism for customers seeking to install energy saving measures, featuring a 'Golden Rule' under which the expected financial savings arising from the measures must be equal to or greater than the costs attached to the energy bill; and · the ECO will replace the obligations arising from CERT and CESP, with suppliers expected to focus assistance on the poorest and most vulnerable households and the hardest-to-treat properties, which may not be able to take advantage of the Green Deal. In April 2012, SSE was one of 22 organisations to sign an agreement with the UK government to work to become one of the first Green Deal providers, offering energy efficiency packages to consumers when the scheme launches later this year. The UK government has emphasised the importance of a 'good customer experience from day one' of the Green Deal, a point which SSE strongly endorses. Energy efficiency is also a key issue in Ireland and 2013 will see the introduction there of an energy company-administered Pay As You Save programme. Helping vulnerable customers In March 2012 Professor John Hills published the final report following his review of the fuel poverty definition and target commissioned by the Secretary of State for Energy and Climate Change. Under the existing definition, a household is classed as being in 'fuel poverty' if it would need to spend more than 10% of its income on fuel to keep its home warm enough. Hills has proposed an alternative measurement framework focused directly on the overlap of high energy costs and low income. Hills believes that the new framework will show that interventions targeted at the core of the problem - especially energy efficiency policies focused on low income households - can make a substantial difference. Following Hills' final report, the UK government has committed to the adoption of a revised approach to measuring fuel poverty by the end of the year. SSE agrees with Hills' assessment of the importance of energy efficiency and the successful deployment of measures under schemes like CERT and CESP is an important priority for it. In addition, SSE fulfils three other key responsibilities in order to help those of its customers who struggle to pay for their basic energy needs: · giving financial assistance with energy bills, helping over 400,000 customers with a total of £46m in 2011/12; · providing tailor-made payment arrangements, helping over 300,000 customers who may be experiencing hardship and having difficulty in paying their energy bills; and · contacting more than 60,000 potentially vulnerable customers, helping them with practical advice and support. As in Great Britain, greater energy efficiency is seen as the most sustainable solution to issues relating to energy affordability in Ireland. Retail energy bills in Great Britain SSE increased its prices for household gas supply by 18% and household electricity supply by 11% (average) on 14 September 2011. That was the first increase in household electricity prices for three years. SSE was able to cut the unit price of gas for household customers by 4.5% on 26 March 2012. There are three upward pressures on household energy bills: · the cost of using energy networks to distribute electricity and gas to customers' homes; · the cost of mandatory environmental and social schemes that energy suppliers are required to fund; and · the wholesale cost of energy. The decline in actual average consumption of electricity and gas by SSE's household customers in Great Britain in 2011/12, compared with 2010/11, means that - despite the price increase on 14 September - a typical household customer of SSE paid £1,118 for electricity and gas in the year to 31 March 2012 (excluding VAT), down from £1,137 in the previous year. This illustrates the distinction between the price of a unit of energy and the amount customers pay for heating and powering their homes. According to the UK government's statement of Energy Trends in March 2012, for the period July to December 2011, prices (including tax) paid by medium domestic gas and electricity customers in the UK were the lowest and fourth lowest in the EU15 respectively. A typical SSE dual fuel bill is made up of: · distribution costs - 23%; · metering and customer service costs - 8%; · mandatory social and environmental costs - 9%; · VAT - 5%; and · Energy costs - 50%. This leaves SSE with a profit of around 5%. As recently as 2008, energy costs accounted for 55% of a typical dual fuel bill. The fall to 50% in 2012 shows the impact of distribution, environmental and social costs on household energy bills. The bills issued by SSE now contain this breakdown. SSE will not implement an increase in the price of household electricity or gas before October 2012 at the earliest. Beyond that, energy prices for household customers will ultimately depend on what happens in wholesale electricity and gas markets, with public policy and regulatory decisions on energy production, distribution and consumption also having a significant impact. As part of its Building Trust initiative, SSE publishes an online 'tracker' showing the relationship between the different components of a typical dual fuel energy bill. The tracker shows the changing components of bills with the aim of explaining the rationale for pricing decisions. How people pay their energy bills A total of 61% of SSE's domestic electricity and gas accounts across Great Britain and Ireland are paid by direct debit or standing order. A further 12% are paid through pay-as-you-go (or pre-payment) meters in Great Britain and the balance are on credit terms and settled by cheque or other such payment methods. Keeping customers' energy debt under control As at 31 March 2012, the total aged debt (i.e. debt that is overdue by more than six months) of SSE's domestic and small business electricity and gas customers in Great Britain and Ireland was £88.3m, compared with £89.2m in March 2011. A bad debt-related charge to profits of £40.5m has been made. This compares with a charge of £47.4m in the previous year. The general economic climate means there are significant debt management challenges, with the volume of work in this area for SSE's Customer Service division again increasing. SSE has office- and field-based employees who work with customers to resolve debt issues. They aim to help customers by identifying as early as is practical when their payments are in arrears and contacting them as soon as possible to discuss the options available to them. This makes the situation easier from both SSE's point of view and that of the customer and the benefit can be seen in the fact that debt which is less than three months old was 16.5% lower on 31 March 2012 than the year before and debt overdue by four-to-six months was 6.3% lower. Providing sector-leading service to customers SSE continues to be independently and consistently recognised as the customer service benchmark for the leading energy suppliers in Great Britain. To provide customers with the best possible value for money, SSE believes that it needs to provide excellent service, simple products and fair prices. SSE's position as the customer service benchmark for the rest of the energy supply industry in Great Britain is illustrated by: · the UK Customer Satisfaction Index, published in July 2011, in which SSE achieved the top ranking in the utility sector for the fourth consecutive year; · the uSwitch.com Energy Customer Satisfaction Awards, announced in November 2011, in which SSE won the Overall Customer Satisfaction category for the eighth time in a row. Altogether, SSE won eight of the 11 categories; · the J.D. Power and Associates 2011 UK Electricity and Gas Supplier Customer Satisfaction Study, in which SSE brands topped both the electricity and gas supplier rankings; and · the energy complaints league table, published by Consumer Focus in March 2012, in which SSE achieved a five star rating with the lowest number of customer complaints to Ombudsman Services: Energy, Consumer Direct and contacts with Consumer Focus' Extra Help Unit. SSE is the only company to achieve a five star rating and has topped the league table since it began in April 2010. During 2011/12, there were 896 SSE-related complaints to the following third party organisations: the Ombudsman Services: Energy, Consumer Focus and Consumer Direct. This was a reduction from the 1,161 complaints in the previous year and the 1,231 complaints in 2009/10. Although SSE maintained its best-in-sector position in customer service during 2011/12, it was a year in which the profile of the energy supply sector remained very high. In total, SSE's energy supply customers in Great Britain made almost 16 million calls (excluding calls handled by automated services) to its teams in Basingstoke, Cardiff, Cumbernauld, Havant and Perth during the year. These conversations allow SSE to assess, consider and respond to customers' concerns and, over time, adapt the services and products it provides accordingly. The same applies to markets in Ireland and SSE is planning further investment in customer services and training to deliver sector leadership there also. Making services available digitally Web and email are now firmly established as the second most common means of communication with the company used by SSE's customers. Around 26% of SSE's transactions with customers now take place using digital channels. Moreover, SSE's customers in the Great Britain and Ireland markets now have 1.7 million digitally billed accounts, up from 1.3 million in the year before. Such customers can view their account and payment history, submit meter readings and receive an up-to-date balance on their account, make secure payments on their account and other such services. The popularity of e-services such as paperless billing is likely to continue to increase rapidly over the next few years. Enabling customers to carry out more transactions using digital channels if they so choose is now one of SSE's top customer service priorities and significant investment is being made in this and in services to customers generally. In this context, the development of mobile apps and social media such as Twitter and Facebook mean the ways in which customers engage with SSE is undergoing further change and responding to this is a key priority for 2012/13 and beyond. At the same time, the charges SSE makes for energy will always be cost-reflective. This means that any differences between prices available online and prices available through other channels will reflect only the different cost of the transactions. Among leading energy suppliers, SSE has had the lowest differential between its online and standard credit prices. In line with its Building Trust commitments, SSE has gone one step further and in October 2011 removed all differentials between its tariffs online and offline. This means that a customer of SSE will have the same price for their energy, regardless of the sign-up method used. SSE will continue to offer a 1% discount to all customers who choose paperless billing, which reflects the lower cost of providing this option. SSE believes that its approach helps make tariffs simpler and energy prices across all of its customers fairer. It continues to believe the much larger differentials maintained by other suppliers should be the subject of the most detailed investigation by Ofgem. Developing new energy products and services The competitive energy supply market in Great Britain spurred companies to develop and deploy an ever-increasing number of features and options around the core commodities of electricity and gas. This led critics to say that customers had become 'bamboozled' by the complexities that resulted from this. As part of its Building Trust initiative, SSE responded to this by introducing, in February 2012, a dramatically-simplified range of energy tariffs which meet the needs of the vast majority of customers featuring: · four core products - two with a variable price and two with a fixed price; · five simple questions to enable customers to find the best deal; · a new price comparison metric to enable customers to see the relative cost of each tariff; and · the same availability online, face-to-face or over the telephone. This fulfils two key principles: simplicity for the customer who is concerned only or mainly about price; and choice for the customer who is more concerned about features and products. To achieve this simplification, SSE removed the 'no standing charge' option from all of its products, with all new customers being placed on a tariff consisting of: · a standing charge which, covers a proportion of the fixed costs; and · a single unit price for all units consumed. In response to SSE's tariff simplification, uSwitch.com said: 'Yet again SSE is setting the pace for the rest of the industry, this time unveiling its plans to simplify its products and prices while Ofgem is still consulting on its own proposals.' Preparing for the roll-out of smart meters Energy supply in Great Britain is expected be transformed by the installation of around 53 million smart energy meters in around 30 million homes and businesses. They will enable the quantity and value of electricity and gas us The story has been truncated, [TRUNCATED]
SSE Plc SSE Preliminary results for year ended 31 March 2012
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